DFARS Final Rule Authorizes ACO to Negotiate and Settle Direct Costs Questioned in Incurred Cost Audits

On March 22, 2023, the Department of Defense (DoD) issued a final rule amending the Defense Federal Acquisition Regulation Supplement (DFARS) to allow a procuring contracting officer (PCO) to delegate the authority to the contract administration office (CAO) to negotiate and settle direct costs questioned in an indirect cost rate proposal audit.  After the delegation, the PCO must provide the CAO access to all supporting documentation related to questioned direct costs within 30 days.  After settling the questioned direct costs, the CAO shares the settlement results with the procuring contracting office, which then makes any necessary adjustments to affected contracts.  The delegation authority does not apply to classified contracts.

This final rule seemingly continues a trend to expand the scope of indirect cost rate proposal audits to include direct costs.  By granting the CAO the authority to negotiate and settle direct costs, this rule increases the number of Government personnel authorized to examine a contractor’s direct costs, and de facto alters the purpose of the indirect cost rate proposal audit. 

Some commentators have suggested that this may lead to confusion about when a Government claim for direct costs begins to accrue under the Contract Disputes Act’s six-year statute of limitations.  As in Sparton DeLeon Springs, LLC, ASBCA No. 60416, the Government may be time-barred from questioning a contractor’s previously billed direct costs if the contractor can demonstrate that the Government was on notice that it had a claim for those costs, but waited more than six years after accrual to assert its claim, such as through the indirect cost rate proposal audit process.  Determining when a Government’s claim has accrued depends on the nature of the claim—whether for indirect or direct costs—and the relevant facts.  The final rule does not enlarge or otherwise change the statute of limitations period with respect to any direct cost claims that may be asserted as a result of an indirect cost rate audit.