Subcontract and consulting services can often represent a significant portion of the budget for a Small Business Innovation Research (SBIR) contract or grant. Therefore it´s critical to understand the requirements for documenting these charges to avoid having these costs disallowed upon audit by DCAA or an independent CPA firm during an OMB A-133 audit
The grantor has a responsibility to review and evaluate the subcontractors prospective and actual cost or pricing data. Further, the Federal Acquisition Regulation (FAR) requires a contractor to “flow down” certain standard contracting clauses in its subcontracts.
Our audit findings show that most grantees do a good job entering into a formal written agreement with subcontract and consortium participants on the technical aspects of their understanding. However, in addition to the negotiated arrangements for meeting the scientific requirement, the grantee also must ensure that administrative, financial, and reporting requirements of the grant as described in the NIH Grants Policy Statement are included as well.
Additionally, FAR 31.205-33 requires that consulting and subcontract charges must be “supported by evidence of the nature and scope of the service furnished”. This evidence shall include:
“(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.”
We recommend that a signed agreement be obtained from any consultant or subcontractor that clearly spells out the scope of work to be performed as well as the financial terms of the agreement. The use of an hourly rate for actual services performed should be included on each invoice.
In a fixed price or retainer based agreement, the invoice should be able to be traced back to an agreement that clearly defines the scope of work to be performed as well as all financial terms and conditions.
For subcontracts, the written agreement should also inform the sub recipient of any applicable pass-through requirements in accordance with the prime contract. Obviously, all services and subcontracts must be reasonably priced given market conditions at the time the agreement is signed in order to comply with SBIR accounting requirements.
In closing, as a way to introduce our firm´s unique services, we are happy to provide the following free of charge:
1. provide benchmarking feedback on your indirect rate projection,
2. assist in the preparation of the financial portion of your government proposal,
3. negotiate your initial provisional indirect rate agreement
Edward G. Jameson, CPA
Subcontracting and Consulting as Unallowable Costs in SBIR/STTR Accounting Under OMB A-133 Audit
November 02, 2009