Cost Allowability Follow Up

[Deathdealer]

"That is not a true statement either.  Remember, unallowable base costs are to be included in the base for calculation of indirect cost rates.  Therefore, if overhead is a part of the G&A base, unallowable overhead costs are to be included in the overhead pool for calculation of the G&A rate.  However, unallowable overhead costs are to be excluded from the overhead pool for calculation of the overhead rate. 

On another note, many people I have spoken with mistakenly believe that unallowable G&A costs can be included in the G&A base.  That is incorrect.  As H2H mentioned earlier, G&A costs remain G&A costs whether they are allowable or not.  Unallowable G&A costs are to be accumulated in a separate pool, then allocated to contracts using the G&A base.  See, FAR 31.201-6 and CAS 405.  The fact that a cost is not allowable, does not mean that it is not allocable to contracts.  See, FAR 31.201-1."

 

The above is a post from the thread named "Cost Allowability".  It was a clarification posted by H2H based on another thread. The above was posted by Retreadfed. 

I have a question...

"unallowable base costs are to be included in the base for calculation of indirect cost rates."-This is so the receive their share of the pool costs, correct?

"if overhead is a part of the G&A base"-This would be the case in a TCI base, correct?

"unallowable overhead costs are to be included in the overhead pool for calculation of the G&A rate"-This has me confused. 

"However, unallowable overhead costs are to be excluded from the overhead pool for calculation of the overhead rate."-This is so direct projects do not receive a portion of the unallowable costs.

 

[here_2_help]

There are a few cases (e.g., Martin Marietta) that discuss this issue. Fundamentally, when calculating an indirect cost rate, unallowable costs are subtracted from the cost pool but remain in the cost allocation base, so that unallowable costs receive their fair share of indirect costs. Overhead costs are part of all G&A allocation bases except for single element bases; thus Overhead is part of the G&A base for both TCI and Value-Added bases. If there are unallowable costs in the overhead pool, they stay in that pool when calculating the correct G&A allocation base; however when calculating the allowable Overhead indirect cost rate, the unallowable Overhead costs are removed from the Overhead pool.

Quote

9904.405-40 Fundamental requirement.

(a) Costs expressly unallowable or mutually agreed to be unallowable, including costs mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract.

(b) Costs which specifically become designated as unallowable as a result of a written decision furnished by a contracting officer pursuant to contract disputes procedures shall be identified if included in or used in the computation of any billing, claim, or proposal applicable to a Government contract. This identification requirement applies also to any costs incurred for the same purpose under like circumstances as the costs specifically identified as unallowable under either this paragraph or paragraph (a) of this subsection.

(c) Costs which, in a contracting officer's written decision furnished pursuant to contract disputes procedures, are designated as unallowable directly associated costs of unallowable costs covered by either paragraph (a) or (b) of this subsection shall be accorded the identification required by paragraph (b) of this subsection.

(d) The costs of any work project not contractually authorized, whether or not related to performance of a proposed or existing contract, shall be accounted for, to the extent appropriate, in a manner which permits ready separation from the costs of authorized work projects.

(e) All unallowable costs covered by paragraphs (a) through (d) of this subsection shall be subject to the same cost accounting principles governing cost allocability as allowable costs. In circumstances where these unallowable costs normally would be part of a regular indirect-cost allocation base or bases, they shall remain in such base or bases. Where a directly associated cost is part of a category of costs normally included in an indirect-cost pool that will be allocated over a base containing the unallowable cost with which it is associated, such a directly associated cost shall be retained in the indirect-cost pool and be allocated through the regular allocation process.

Emphasis added.

[Retreadfed]

2 hours ago, Deathdealer said:

I have a question...

"unallowable base costs are to be included in the base for calculation of indirect cost rates."-This is so the receive their share of the pool costs, correct?

Incorrect.  Unallowable base costs are to be allocated to cost objectives (contracts) although they may not be recoverable on those contracts.  Despite what FAR 31.203(d) states, indirect costs are allocated to contracts, not base costs, based on the amount of base costs allocated to those contracts.  See, Rice v. Martin Marietta, 13 F.3d 1563 (Fed. Cir. 1993) for a discussion of how 31.203(d) works.

 

3 hours ago, Deathdealer said:

"if overhead is a part of the G&A base"-This would be the case in a TCI base, correct?

Yes, but that is not the only G&A base where that would be true.

 

3 hours ago, Deathdealer said:

"However, unallowable overhead costs are to be excluded from the overhead pool for calculation of the overhead rate."-This is so direct projects do not receive a portion of the unallowable costs.

I don't know what you mean by "direct projects."  Despite being unallowable, unallowable costs are allocated to contracts.  See FAR 32.202-1, 201-6 and CAS 405.  The reason for excluding unallowable pool costs from an indirect cost pool is to ensure that unallowable costs are not billed to the government on contracts subject to the cost principles and/or CAS 405.  

2 hours ago, Deathdealer said:

"unallowable overhead costs are to be included in the overhead pool for calculation of the G&A rate"-This has me confused. 

This may be poorly worded.  Perhaps a better statement would be that unallowable overhead costs are to be included in the G&A base for calculation of the G&A rate.