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    The question is in regards to the cost of CPA services for income tax preparation (employees). Should this be considered part of the Tax Equalization costs (and therefore allowable)? If they are, should they be charged directly to the contract, rather than G&A? It seems like the contractor paid the CPA for this services (employee tax preparation). Should therefore FAR 31-205.33 apply (to determine allowability)?


    1. The FAR and DFARS references quoted below in pertinent part are applicable to this response.

    FAR 31.201-2 -- Determining Allowability
    (a) A cost is allowable only when the cost complies with all of the following requirements:
      (1) Reasonableness  [per FAR 31.201-3 and FAR 31.205-33(b)]
      (2) Allocability  [per FAR 31.201-4]
      (3) Standards promulgated by the CAS Board, if applicable; otherwise, generally accepted accounting principles and practices appropriate to the circumstances
      (4) Terms of the contract
      (5) Any limitations set forth in this subpart [per FAR 31.205-33]

    FAR 31.201-3 -- Determining Reasonableness
    (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. … If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

    (b) What is reasonable depends upon a variety of considerations and circumstances, including --
      (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;
      (2) Generally accepted sound business practices
      (4) Any significant deviations from the contractor’s established practices.

    FAR 31.201-4 -- Determining Allocability
    A cost is allocable if it is assignable or chargeable to one or more cost objectives on the basis of relative benefits received or other equitable relationship. Subject to the foregoing, a cost is allocable to a Government contract if it --
      (a) Is incurred specifically for the contract;
      (b) Benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received;

    FAR 31.205-6 -- Compensation for Personal Services
    (e) Income tax differential pay.
      (1) Differential allowances for additional income taxes resulting from foreign assignments are allowable.

    FAR 31.205-33 -- Professional and Consultant Service Costs
    (a) Definition. “Professional and consultant services”, as used in this subpart, means those services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. … Professional and consultant services are generally acquired to obtain advice.

    (d) In determining the allowability of costs … the contracting officer shall consider the following factors, among others: [Click on link below for details.]

    (f) Fees for services rendered are allowable only when supported by evidence of the nature and scope of the service furnished. [Click on link below for details.]

    DFARS 242.7503 -- Contract clause.
    Use the clause at 252.242-7006, Accounting System Administration, in solicitations and contracts when contemplating— (a)  A cost-reimbursement … contract;

    DFARS 252.242-7006 -- Accounting System Administration
    (a) Definitions.  As used in this clause—
      (2) “Accounting system” means the Contractor’s system or systems for accounting methods, procedures, and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations, and management decisions, and may include subsystems for specific areas such as indirect and other direct costs, compensation, billing, labor, and general information technology.

    (b) General.  The Contractor shall establish and maintain an acceptable accounting system.

    (c) System criteria.  The Contractor’s accounting system shall provide for—
      (2) Proper segregation of direct costs from indirect costs;
      (3) Identification and accumulation of direct costs by contract;
      (4) A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;
      (18) Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.

    2. The first part of this inquiry asks: Should the cost of CPA services for income tax preparation be considered as part of allowable “Tax Equalization costs” (i.e., formally known as “income tax differential pay”)? The answer to this question is “No”, because each of these costs is covered by a separate cost principle under FAR 31.205. FAR 31.205-6(e)(1) specifically applies to income tax differential pay. On the other hand, FAR 31.205-33 would apply to the claimed “CPA services costs” because such costs would generally meet the definition of “Professional and Consultant Service Costs” as set forth in FAR 31.205-33(a). Therefore, the “reasonableness” (i.e., vice the “allowability”) of such claimed costs also would be determined in accordance with the criteria specified in FAR 31.205-33(d) & (f) in this case.

    3. As indicated in FAR 31.201-2(a), there are other elements involved in determining whether a claimed cost is “allowable” besides the “reasonableness” of such cost. As set forth in FAR 31.201-2(a)(2), the claimed cost also must be properly “allocable” as either a direct cost or an indirect cost in accordance with FAR 31.201-4. Furthermore, because CAS does not apply in this case, then the contractor’s accounting system must be found to be in accordance with Generally Accepted Accounting Principles (GAAP) pursuant to FAR 31.201-2(a)(3). Both of these considerations affecting the proper allocability of the claimed CPA services costs will govern whether such costs should be charged directly to the contract or should be charged to the company’s G&A expense pool in this situation.

    4. Based on the above, our response to the final question of this inquiry: “Should the claimed CPA services costs be charged directly to the contract, rather than to G&A?”, the answer would depend upon how the contractor’s approved accounting system normally treats such costs, i.e., as direct costs or as indirect costs. Pursuant to FAR 31.201-4(a), a cost is directly allocable to a Government contract if it is incurred specifically for the contract. Therefore in this case, the professional services of a CPA that are required to calculate the correct amount of income tax differential pay chargeable to the contract could reasonably be considered as an allocable direct cost to the contract. However, pursuant to FAR 31.201-3(b)(4), the allocation of such costs directly to the contract would not be reasonable if such allocation would represent a significant deviation from the contractor’s established and approved cost accounting practices.

    5. Consequently, because the CLIN in question represents a cost-type contract, we presume that pursuant to DFARS 242.7503, that the contract includes clause DFARS 252.242-7006 as being applicable to this CLIN and which requires the contractor to maintain an approved accounting system according the provisions of that clause. Therefore, we recommend that the contracting activity engage the cognizant Contract Administration Office (CAO) for a determination as to whether such CPA services costs required to properly calculate any income tax differential pay chargeable to a contract are normally charged as direct costs or as indirect costs (e.g., to the G&A expense pool) under the contractor’s Government-approved accounting system.

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