Professional and consultant services are described 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.” Under this definition most professionals such as attorneys, accountants, etc. would fall under this classification.
In order to be reimbursable expenses for a Government Contract, a company’s expenses are separated into allowable and unallowable categories. Only allowable expenses can be reimbursed. There are several rules that determine allowability. Generally the costs of professional and consultant services are allowable when they are deemed reasonable in relation to the services rendered and not contingent upon recovery of the costs from the Government.
The regulations are very specific and include eight factors that are considered when determining whether an expense is allowed. They are:
- The nature and scope of the service rendered in relation to the service required.
- The necessity of contracting for the service, considering the contractor’s capability in the particular area.
- The past pattern of acquiring such services and their costs, particularly in the years prior to the award of Government contracts.
- The impact of Government contracts on the contractor’s business.
- Whether the proportion of Government work to the contractor’s total business is such as to influence the contractor in favor of incurring the cost, particularly when the services rendered are not of a continuing nature and have little relationship to work under Government contracts.
- Whether the service can be performed more economically by employment rather than by contracting.
- The qualifications of the individual or concern rendering the service and the customary fee charged, especially on nongovernment contracts.
- Adequacy of the contractual agreement for the service (e.g., description of the service, estimate of time required, rate of compensation, termination provisions).
In addition, there are specific documentation requirements: The agreement should detail the scope of work to be performed, the compensation rates and the nature and amount of any other expenses. The invoices should be descriptive of the services being performed and how much time was spent and be timely and systematic. The consultant’s work products should indicate who attended, what was discussed, where it took place and how long it lasted should be part of the documentation. All of this is required documentation.
Examples of Allowable Professional Fees:
- Outsourcing the accounting function when there is no qualified staff on site and the expense of hiring sufficient expertise is cost prohibitive (i.e. hiring TGG Accounting to staff on a part time basis which allows wide coverage over several different levels of expertise).
- Hiring a professional architect to draft documents.
Examples of Unallowable expenses:
- Contracting with the President’s wife who is an attorney when experienced legal counsel is already on staff.
- Professional Services that are agreed to with a handshake.
- Contracting with the CEO’s son who just graduated from college with a degree in fashion design.
- A consultant whose compensation is a % of the total invoice billed to the government.
Many government contractors require the use of professional consultants. Keep the eight factors above in mind when determining whether your consulting agreements are allowable costs on your contract.Written by: Nancy Brzezniak TGG Accounting