Sign In
  • Question

    Where does the FAR specify if fees paid to outside legal counsel by the Government Contractor to help a Government Contractor with contract novation are allowable or unallowable costs? I believe the legal fees would be unallowable but would appreciate confirmation. Thank you.


    Answer

    The allowability of costs for professional and consultant services are covered under FAR 31.205-33 which would include some legal fees.  However, FAR 31.205-27 covers the allowability of organizational costs which would pertain to your novation agreements.  Paragraph (a) states:
    Except as provided in paragraph (b) of this subsection, expenditures in connection with
    (1) planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions,
    (2) resisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business, and
    (3) raising capital (net worth plus long-term liabilities), are unallowable. Such expenditures include but are not limited to incorporation fees and costs of attorneys, accountants, brokers, promoters and organizers, management consultants and investment counselors, whether or not employees of the contractor. Unallowable “reorganization” costs include the cost of any change in the contractor’s financial structure, excluding administrative costs of short-term borrowings for working capital, resulting in alterations in the rights and interests of security holders, whether or not additional capital is raised.


    It would seem that legal costs associated with novation agreements would be “in connection with planning or executing the organization or reorganization of the corporate structure”, as indicated in paragraph (1) above and therefore would be unallowable as stated in (3) above.


    Open full Question Details