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"Donated" Services?

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I apologize in advance for not having all the facts, but the following is all I know at this point.

My client, a service provider, was asked by (apparently) non-authorized Government employees to provide services to start up a Federal project that would involve hosting the public. In return for its services provided on a gratis basis, the entity was "promised" a contract for operations/maintenance of the public hosting function after start up. Surprising no one on this forum, the entity never received any award, and now it is stuck with some costs it incurred, and has asked me for accounting advice as to how to recoup such costs.

My first thought is that there is no way a Government employee could "promise" my client any contract. My second thought is that there is now way such a "quid pro quo" agreement would stand up in court. My client should have known better, period.

Nonetheless, the Government received benefit from the services provided, and my client incurred some costs. I'm thinking that the costs might be classified as marketing/selling expenses and recovered via G&A (in the indirect rates charged to its other Government clients). However, I'm troubled by a couple of worries. (1) Could these be considered pre-contract costs and thus, a contract loss (costs incurred without being able to bill)? If so, the entity should not put the costs in G&A. (2) Could these be considered some sort of unlawful gratuity or similar attempt to influence a Government official? If so, the entity needs to make the costs unallowable and perhaps consider self-reporting the transactions to appropriate officials.

This is a bit out of my league, and I'll take whatever insights you offer.

Thanks!

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The way I see it, there was no contract between the Government and your client so there could be no pre-contract costs. Legally, I believe you will need to go after the individual who "promised" the contract and obtained the services. You may also go after the organization that obtained the benefits as well.

How it will be pursued is a big question, as no price was agreed upon for the hosting the pubic according to your scenario, other than a contract that the individual had no authority to award. With that, I tend to believe Government ethics regulations do prohibit that conduct from a Government employee, so you may be successful in your legal action.

I am not a lawyer, so you would be well advised to speak to a lawyer who is familiar with U.S. Government regulations, contract laws and the FAR.

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The way I see it, there was no contract between the Government and your client so there could be no pre-contract costs. Legally, I believe you will need to go after the individual who "promised" the contract and obtained the services. You may also go after the organization that obtained the benefits as well.

How it will be pursued is a big question, as no price was agreed upon for the hosting the pubic according to your scenario, other than a contract that the individual had no authority to award. With that, I tend to believe Government ethics regulations do prohibit that conduct from a Government employee, so you may be successful in your legal action.

I am not a lawyer, so you would be well advised to speak to a lawyer who is familiar with U.S. Government regulations, contract laws and the FAR.

Thanks, dwgerard. I'm not a lawyer either. The ironic part is that I'm being asked about the proper accounting treatment of costs incurred ... by a lawyer.

I have advised my client (the attorney) that such "promises" as were described are prohibited, and that the Government is generally prohibited from accepting such "donated" services (particulary in some sort of quid pro quo arrangement). I have cited to the GAO red book for my position(s). I have further advised my client that it may want to consider an internal investigation and possible self-reporting of the matter to the appropriate IG. As for the treatment of the costs, I have advised my client that there as almost certainly no contract, and thus these are not direct contract costs, making them indirect costs. Whether allowable or unallowable will depend on the outcome of the client's internal investigation and whether such costs may be tainted by the nature of the transaction.

That was about as helpful as I felt I could be, given the legal implications.

Thanks again!

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