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    Can the contractor claim the cost of the items that was not used on the contract? One of the attributes is to ensure the item was needed for the contract and used for the contract. The contractor could not tell us what was done with the items that was delivered. Can the contractor claim the cost of obsolete material?


    Answer

    1. The reference quoted below in pertinent part is applicable to this response.

    DCAA Contract Audit Manual
    Chapter 6 - Incurred Costs Audit Procedures
    Section 6-307.3 - Audit Guidelines-Excess and Obsolete Materials
    a. Excess or obsolete items may be from purchased material or parts, or manufactured parts. Evaluate the contractor's policy for recording and recovering obsolescence costs and evaluate the causes that generated the obsolete items. In addition, be alert to those situations in which the contractor:
      (1) is reimbursed for the cost of obsolete items but subsequently sells them to a subsidiary or affiliate at significantly reduced prices,
      (2)  uses the items as a no-cost component on the contractor's commercial work or in performing a firm-fixed-price or incentive contract for the Government, or
      (3) scraps items and then buys similar items from surplus or salvage dealers. Practices of this nature should be reported to the contracting officer and should also be considered for possible reporting under 4-700 or 4-800.

    b. The contractor's procedures and practices for using or disposing of excess or obsolete items should be evaluated, including:
      (1) Screening procedures adopted in order to determine whether parts produced under, but no longer needed for, a particular contract can be used on other contracts. These items should be transferred for use without charge to the Government.
      (2) Procedures for obtaining the highest possible prices on items sold or scrapped.
      (3) Procedures for ensuring that the Government receives proper credit for proceeds of items sold or scrapped. Related adjusting entries should be evaluated for appropriateness (as required by mandatory annual audit requirement No. 10 (see 6-305.3).

    2. The DCAA Contract Audit Manual procedures as described above should be utilized to determine whether or not the obsolete material costs in question “claimed” by the contractor for reimbursement should be disallowed and ultimately not payable by the Government under the contract.



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