Identifying Allowable And Unallowable Legal Costs

DCAA Compliance News

December 15, 2022
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Does DCAA Allow Legal Costs?
(FAR 31.205)

This cost principle is complicated because some legal proceedings are always unallowable, while some are allowable subject to a ceiling if the contractor prevails in an action, and others may be allowable and not subject to a ceiling if the contractor prevails in the proceeding.

The simplest circumstance for allowability is when the legal cost is incurred as a requirement of the terms of a government contract, at the direction of the contracting officer. Make sure you have this order in writing. A contractor will not be allowed to claim costs related to defense of actions of Federal, State, local, or foreign governments when the contractor is at fault.

Also, costs incurred for defense against government claims or appeals, or the prosecution of claims or appeals against the government, defense of antitrust suits, organization, and reorganization or resisting reorganization, mergers, and acquisition cost are all unallowable.

Unfortunately, legal proceedings can take years to resolve. The temporary solution is to segregate these costs in a “suspense” account (not claimed in the period). If the contractor wins the case, these costs then become allowable. If the government prevails, the costs will be unallowable. Also, the government can agree to reimburse legal costs (as a percentage of legal costs incurred) on a contingent basis pending final resolution of the case. However, you will have to reimburse these expenses if the government prevails in the case.

In addition, FAR 31.205-33 Professional and Consultant Service Costs will allow for legal expenses incurred for outside legal counsel. There are many cases in which you may seek legal advice on specific circumstances covered by other FAR Cost Principles as well, such as fines and penalties (FAR 31.205-15), organizational costs (FAR 31.205-27), patent cost (FAR 31.205-30), and taxes (FAR 31.205-41).

As with all costs, they must pass the tests for being reasonable, allocable, and allowable. Legal cost allowability must be determined on a case-by-case basis. Realize that for certain circumstances, not all costs are allowable nor unallowable.

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