Recently, DCAA was taking exception to rental costs of a small business contractor, claiming the cost was a related party transaction as an owner was the lessor or leasing the facility to the contractor. Truth was the lessor was a minority (less than 50% owner). DCAA claimed that since the owner of the building was also an owner of the the company it qualified as a related party transaction and that the FAR limited allowable costs to ownership costs, depreciation, insurance, taxes and insurance. This was a large disallowance to the contractor.

Well, the truth is, that is not what the FAR says. The FAR (FAR 31-205-36) states allowable costs are limited to ownership costs provided the there is “common control” between the contractor owner and the building owner. The DCAA’s own audit guidance states the same concept. Well there was not any common ownership. the primary or majority owner of the contractor did not have any ownership in the building and the owner of the building was a minority (less than 50% ownership) in the contractor. So in this case the allowable costs were not limited to ownership costs. The full value of rental costs, provided they were reasonable, was allowable.

We prevailed on the issue and the contract in question was re-negotiated to the contractor’s satisfaction.

This situation is common in small businesses. I advise against it for this very reason, DCAA questioning costs without getting all the facts and not applying the regulations or their own audit guidance properly. Best not to open the door to the possibility of questioned costs. But if you are in this situation, just keep in mind the limitation on allowable costs (the ownership cost rule) only applies where there is common control between organizations.