Over the last few years many government contractors have been evaluating and adjusting their office footprint as a result of increased remote work. During this time many have been wondering when the Defense Contract Audit Agency (“DCAA”) would shift their focus to idle facilities and how they would evaluate the allowability of facilities costs under applicable regulations. During and after COVID, DCAA was generally not focused on this area; however, now they are taking a closer look at facility costs as contractors are beginning to receive questions and document requests. Auditors are looking to understand what the contractor has done to manage its facilities, utilization, and related costs. For example, DCAA may request attendance records for a particular facility to assess the use of that facility.
If a contractor has not been considering regulatory requirements like FAR part 31.205-17 – Idle facilities and idle capacity costs and relevant case law, or formally documenting efforts to manage and reduce their facility footprint, now is a good time to do so. Contractors may be putting significant effort into managing their idle facilities/capacity. However, if these efforts are not well documented it will likely impact how the government evaluates the company’s initiative to use/dispose of their idle facilities. This will ultimately impact the assessment of potential allowability for any related costs, especially if the facilities/capacity is idle for longer than a year.
It is important for contractors to ensure they properly document actions taken to use, sublease, or dispose of their facilities and the timing of those actions. Contractors may also want to consider developing a plan for managing their facilities and their use of them. A well-developed plan could be used as a basis for monitoring and documenting their efforts to reduce their facility footprint going forward and will likely be helpful during a DCAA audit. Contractors may be able to leverage plans and documentation retained by their accounting organization for purposes of GAAP treatment for disposed facilities and terminated leases.
Our team of professionals has extensive experience dealing with FAR and cost allowability, as well as related GAAP implications. Please reach out to us if you have any questions or need any assistance.