Overview
This section prescribes policies and procedures for assessing financial penalties against contractors who include expressly unallowable indirect costs in their final rate proposals or fixed-price incentive contract cost statements. It serves as a deterrent to ensure contractors exercise due diligence in scrubbing unallowable costs from their overhead submissions.
Key Rules
- Applicability: Applies to contracts exceeding $1 million, excluding firm-fixed-price contracts without cost incentives and any firm-fixed-price contracts for commercial products or services.
- Level 1 Penalty (Expressly Unallowable): If a cost is expressly unallowable under FAR cost principles, the penalty equals the disallowed cost allocated to the covered contracts plus interest on any paid portion.
- Level 2 Penalty (Previously Determined): If a cost was determined unallowable for that specific contractor prior to the proposal submission (e.g., via a previous DCAA Form 1, CO final decision, or court ruling), the penalty is two times the amount of the disallowed cost.
- Interest Calculation: Interest is generally computed from the midpoint of the contractor’s fiscal year using Treasury-specified rates until the date of the demand letter.
- Waiver Criteria: The Contracting Officer (CO) must waive penalties if the contractor withdraws the proposal before an audit begins, if the penalized cost is $10,000 or less, or if the contractor demonstrates robust internal controls and the error was inadvertent.
- Reporting: Evidence of "knowing" submissions of unallowable costs must be referred to appropriate criminal investigative organizations.
Practical Implications
- Stringent Internal Controls: Contractors must maintain rigorous internal review systems and training programs to identify and exclude unallowable costs, as the "due care" defense for a waiver requires proof of such systems.
- Financial Risk: Because penalties apply even if the unallowable costs have not yet been paid, contractors face significant financial liability simply by submitting an inaccurate proposal.
- Audit Readiness: The "point of no return" for a voluntary withdrawal waiver is the formal initiation of an audit (e.g., an entrance conference), making it critical for contractors to perform "scrubs" before the DCAA arrives.