Government Contracts Monitor

DCAA Increases Focus on Costs Associated with Lobbying and Earmarks

March 9, 2012

Contractors who have received legislative earmarks may soon face increased scrutiny of their cost accounting practices from DCAA auditors.  Since 1984, FAR cost principles have declared that costs associated with lobbying efforts are generally unallowable.  See FAR 31.205-22.  In general, DCAA defines lobbying costs as “amounts incurred to influence the outcome of elections, referendums, legislation, and other governmental actions at all levels of Government.”[1]  See DCAA Contract Audit Manual § 7-2116.  Until recently, the DCAA has primarily limited its audit review of costs associated with government affairs personnel and registered lobbyists.  However, DCAA is broadening its examination to cover all direct and indirect costs related to such lobbying efforts, and it is focusing its attention on recipients of legislative earmarks.

 

In two recent internal memoranda,[2]the Defense Contract Audit Agency (DCAA) instructed its auditors to focus more heavily on contractors’ costs associated with lobbying efforts to pursue Congressional earmarks.   The memoranda explain that these efforts can go beyond company executives and hired lobbyists and can come from program management, contracting, public relations, consultants, and technical personnel.  Additionally, there can be associated costs such as travel and conference expenses.  The memoranda instruct auditors to check earmark databases for contractors under their purview and examine the accounting procedures of those contractors who have received significant earmarks paying special attention to all areas of potential lobbying costs.  

Many contractors have already faced such increased scrutiny.  They reported that the audits of lobbying costs are not part of incurred cost or forward pricing audits, but instead have been independent audits.  The auditors have looked at the past five years of costs and have interviewed executives, business development personnel, administrative assistants, and any other personnel DCAA believes may have provided support for lobbying and/or earmark efforts.  The auditors have also reviewed invoices to legal and consulting firms, timesheets, and expense reports.  If there is no reliable explanation of how time is spent, the auditors have questioned 25% of executives’ labor (and support services associated with the executive) as unallowable lobbying costs.  Additionally, the auditors are considering all meetings held at the Pentagon and other government facilities in the Washington, D.C. area as well as meetings with state and local government officials as potential “lobbying” activities. 

To comply with the FAR provisions and the DCAA guidance, a contractor should have in place:

1.  thorough written policies and procedures for identifying and accounting for costs associated with all lobbying efforts, especially costs associated with pursing earmarks;
2. adequate records of all labor and expenses that explain the nature of the costs and, if applicable, provide detailed reasons why the costs associated with lobbying efforts fit under the exceptions for allowable lobbying costs; and
3. procedures for ensuring that all reporting requirements are met (i.e., FAR 52.203-12 OMB Standard Form LLL and Lobbying Disclosure Act requirements, if applicable) and that any reported lobbying costs are reconcilable with the lobbying costs in cost proposals.