We were recently reminded of the myriad contract compliance issues associated with the use of outside consultants by Government contractors.  (Disclaimer:  Apogee Consulting, Inc. is one.)  First, most companies have difficulty identifying who is (and who is not) a consultant.  The DCAA Contract Audit Manual (CAM) defines consulting services as “services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. Such costs include those of outside accountants, lawyers, actuaries, and marketing consultants.”  The applicable FAR cost principle (discussed below) adds, “Professional and consultant services are generally acquired to obtain information, advice, opinions, alternatives, conclusions, recommendations, training, or direct assistance, such as studies, analyses, evaluations, liaison with Government officials, or other forms of representation.”  Those definitions may or may not work for you; but it’s critical that some “command media” somewhere in your company define the term, else you may run afoul of one of the aforementioned contract compliance issues.

Next, the form of the consulting agreement will create some problems for many contractors (and for the consultants too).  For example, some consultants are hired to address specific program-related technical issues and the resulting costs will be treated as direct costs of the benefitting contract.  Does that make the consultants “subcontractors” as that term is used in FAR Part 44, and thus require advance contracting officer consent as well as inclusion of company-standard terms and prime contract flow-down clauses into the executed consulting agreement?  Maybe—depending on how the contractor worded its purchasing system policies and procedures.  If not, does the company then issue a Purchase Order to the consultant?  Can the consultant insist that its “standard” contract be used?  Who decides?

More likely, consulting costs will be indirect costs—but that doesn’t really address the questions we raised above.  As you read this article, consider how your company contracts with its consultants, what terms and conditions it incorporates into its agreements, and how it assures that its consultants are performing in a compliant manner.  As importantly, consider what detail you expect the consultants to provide in their billings, in order to maximize the amount of allowable costs you incur.  For example, how will your consultants support billings for out-of-pocket costs such as travel-related and/or miscellaneous expenses?  Will you require copies of detailed receipts, copies of credit card statements, or other supporting documentation?  Why or why not?  Who decides?

Use of consultants is subject to special cost allowability rules found at the cost principle 31.205-33.  Generally, costs of consultants are allowable where costs are “reasonable in relation to the services rendered and when not contingent upon recovery of the costs from the Government.”  But the cost principle also defines several circumstances where consultant costs are unallowable. 

For example, the following consulting services are unallowable.

(1) Services to improperly obtain, distribute, or use information or data protected by law or regulation (e.g., 52.215-1(e), Restriction on Disclosure and Use of Data).

(2) Services that are intended to improperly influence the contents of solicitations, the evaluation of proposals or quotations, or the selection of sources for contract award, whether award is by the Government, or by a prime contractor or subcontractor.

(3) Any other services obtained, performed, or otherwise resulting in violation of any statute or regulation prohibiting improper business practices or conflicts of interest.

(4) Services performed which are not consistent with the purpose and scope of the services contracted for or otherwise agreed to.

In addition to the foregoing, the DCAA CAM also notes that consultant costs may be made unallowable under the provisions of other cost principles, and lists seven specific situations (e.g., costs related to legal or other proceedings) and two generic situations (e.g., reasonableness or allocability).  Contractors should be sensitive to those areas in addition to the four situations listed above.

The cost principle also requires that, in order to be allowable, “Fees for services rendered [must be] supported by evidence of the nature and scope of the service furnished.”  Contractors must provide “evidence necessary to determine that work performed is proper and does not violate law or regulation,” including—

(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;

(2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and

(3) Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

The DCAA CAM provides additional details regarding the third evidentiary prong above (i.e., the need to provide evidence of work performed).  The CAM says that the third prong “is intended to provide support for the work actually performed by the consultant (in contrast to the first category of evidence regarding the work planned to be performed). Although a work product usually satisfies this requirement, other evidence may also suffice. If the contractor provides sufficient evidence demonstrating the nature and scope of the actual work performed, the … requirements are met even if the actual work product (for example, an attorney’s written advice to the contractor) is not provided. The auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.”

The CAM also notes that “The contractor is responsible for producing adequate evidential matter to support the claimed costs.”  Accordingly it is important to come to an agreement with the consultant—before the first invoice is submitted—regarding what support will need to be provided, whether work product or other evidentiary matter will be included with each invoice, who at the company will review and approve the invoices, and how such documentation will be retained to support future DCAA audits.

Also, don’t forget to establish the consultant in your vendor master file to speed payment processing.  Trust us—your consultant will thank you for that….

That addresses cost allowability, but there are other matters to consider as well.  In the March 2010 issue of National Defense magazine, two attorneys from The Boeing Company address some of the ethical issues associated use of consultants.  As they note, “consultant missteps may be grounds for civil and criminal liability, organizational conflicts of interest, and reputational damage.”  Following are some of the thorny scenarios listed in the article—

• A company’s consultant also advises the DOD and has access to source selection information for a contract your company wants to bid on.
• A consultant who is not a registered lobbyist meets with a lawmaker regarding your company’s program.  Does this meeting need to be reported under the Lobbying Disclosure Act?
• Your consultant also has a consulting contract with your biggest competitor, and has access to your proprietary information.
• A consultant meets a foreign government official on behalf of your company and gifts are exchanged.  Did you just violate the Foreign Corrupt Practices Act?
• Your consultant just hired a former DOD official who resigned a couple of months ago and will be providing advice to you on an upcoming bid.  Are there any post-employment restrictions on that consultant?  How do you know?

The fact of the matter is that your company will very likely be held responsible for the actions of your consultants.  Doing sufficient due diligence before executing the agreement is of paramount importance, as is staying aware of all activities the consultant is performing on your behalf.  The article’s authors recommend “use of express contractual provisions spelling out the consultant’s responsibilities for legal and ethical compliance” to address some of the risks listed above.

The article ends with a nice axiom:  “The bottom line is to recognize the compliance risks that accompany [use of] consultants.”  We couldn’t agree more.