Why Unallowable G&A costs, excluded from the G&A Pool, SHOULD NOT be included in the G&A Base 

This issue has been brought to my attention more than once.  Therefore, let’s address it openly, honestly, and with common sense.  It is important for you the contractor to understand the guidance and what you should or should not be forced to do.  As always, using the psychology of success in utilizing tact and diplomacy when getting your point across!

FAR 31.203(d) states: “Once a base for allocating indirect costs has been accepted, the contractor shall not fragment the base by removing individual elements.  All items properly includable in an indirect cost BASE shall bear a pro rate share of indirect costs irrespective of their acceptance as Government contract costs (unallowable).” 

The key here is items properly includable in the BASE.

It goes on to say: “For example, when a cost input base is used for the allocation of G&A costs, typically known as the TCI Base, the contractor shall include in the base all items that would properly be part of the cost input base, whether allowable or unallowable, and these items shall bear their pro rata share of G&A costs.”

So you see, all items that are part of a Total Cost Input Base, do not include unallowable G&A costs.  G&A costs, allowable and unallowable, do not have G&A costs reapplied to them.  There is no pro rata share of G&A costs that are allocated to G&A costs.  It does not make common sense!

For example, if the G&A Base includes Direct Labor and related Fringe Benefits, Overhead, Direct Materials, Direct Travel, and ODC’s, then these are the only costs that are to be included in the G&A Base.  Both the allowable and unallowable costs of these categories should be included so they will bear their pro rata share of allowable G&A costs.

There is nothing in the guidance that indicates Unallowable G&A costs are to be included in the G&A Base.  Period!  It does not even make sense to do this.

Where an issue can arise and a contractor has to be careful is:  The only time I could see this adjustment being made is in the situation where G&A unallowable costs were misclassified.  In other words, some of the unallowable G&A costs should have been classified as Overhead unallowable or Direct unallowable.  That is the only time I see justifying this procedure.  Otherwise, it is just wrong.

Another example, as spelled out in the advanced article I wrote on State Income/Franchise Taxes, showed that these revenue based costs, if material, should not be included in the G&A cost pool.  So, an auditor might request them to be removed and put in the G&A Base.  In this situation, the costs are not unallowable but should be allocated using a different base than that used for G&A costs.  A contract revenue base would be more fair and reasonable.  The guidance as detailed in my article indicates that in this case, and if using the TCI Base for G&A, including State Tax costs in the G&A base would be appropriate.

If an auditor still insists on the incorrect method, I would request the FAR and/or CAS reference that authorizes any method other than the one outlined above as provided under FAR 31.203 Indirect costs.  If necessary, I would request supervisory review of the findings and indicate your findings in writing.

So, that’s my opinion and interpretation of the guidance.  Since interpretations can vary, I welcome any comments and references that would prove otherwise.  Discussions are now open as desired.  Supporting Members can also use the Forum in the online community to post discussions and opinions.

 

Paul Sr.