In most cases, subcontractors’ business costs are considered allowable expenses, according to Federal Acquisition Regulation Cost Principle 31.205-33, Professional and Consultant Services Costs. The regulation addresses the allowability of “services rendered by persons who are members of a particular profession or possess a special skill who are not officers or employees of the contractor.”

Recently, the Defense Contract Audit Agency (DCAA) questioned the allowability of these costs, not based on their reasonableness, but on the contractor’s lack of supporting documentation as defined in the cost principle. There are ways you can protect yourself from the disallowance of these costs but there are steps to follow. Several documents are mandatory to determine the allowability of these professional and consulting service costs.

What are Mandatory Requirements to Determine Professional and Consulting Service Costs?

1. Establish why the effort is being subcontracted as opposed to being performed in-house by employees i.e., is it a lack of internal capacity, resources available to meet performance schedule, cost, etc.

2. Explain how the subcontractor was chosen and what was done to evaluate their qualifications and the reasonableness of their pricing in comparison to other potential subcontractors.

3. Execute a written agreement defining, in detail, the nature and scope of the efforts to be performed by the subcontractor, the required period of performance and the amount to be paid.

4. Require your subcontractor to indicate a detailed explanation on their invoices of what services were performed and during what period of time. The efforts performed and amounts invoiced must correspond to those contained in the written agreement.

Adherence to these four requirements should ensure the recovery of the costs incurred as an allowable direct cost of contract performance or an indirect cost of doing business. Equally important, meeting these conditions should satisfy any questioning by the DCAA. Contact your financial advisor to learn how you can recover the costs you deserve.

Questions? Talk to a government contract accounting and tax specialist to discuss your specific situation.