Thirsty for a DCAA Audit Update? Hydration is a No-Go

Despite ongoing clarification updates, the task of sorting allowable/unallowable costs continues to be a tricky navigation for government contractors subject to Defense Contract Audit Agency (DCAA) accounting rules under Federal Acquisition Regulation (FAR) 31.

DCAA is responsible for reviewing Govcon’s accounting systems, policies, and procedures to ensure the government pays a reasonable price when procuring goods and services. The primary aim of these reviews is to ensure that contractors have an accurate and consistent method of tracking costs throughout the acquisition process.

The government will not reimburse Govcons for certain types of costs, generally referred to as unallowable costs. Contractors are prohibited from any billing, proposal, or claim that includes these costs. Auditors can assess penalties against a Govcon that knowingly or unknowingly passes unallowable costs on to a government client.

Incurred Cost Audit Drinking Water Determination Leaves Client High and Dry on Compliance

Compliance is not an easy task, however. A case in point: A CAVU client recently won the DCAA Incurred Cost Audit audit lottery and got a visit to review a 2017 Incurred Cost Submission. The auditor’s conclusion about hydration on the job caught the client by surprise. DCAA flagged the Govcon’s invoices related to a water filtration system used to provide staff with potable drinking water, including workers who were sometimes on a 24/7 clock. 

In its exit report, DCAA cited FAR 31.205-13(d)(1)(i) as the basis for the claim. This FAR clause states:

“The allowability of food and dormitory losses are determined by the following factors:

(i) Losses from operating food and dormitory services are allowable only if the contractor’s objective is to operate such services on a break-even basis.”

This FAR clause applies to any cantina-type accommodation provided to employees. A Govcon must have a pay-as-you-go type arrangement where there is no additional cost burden to the government.

This is not the only instance CAVU has had a client run into a similar situation. In another case, a client was supplying water to their technicians who were out on an asphalt tarmac in Arizona in the middle of the summer. In the eyes of the client, hydration was a must to ensure the safety of their employees. In the eyes of the auditor, this was not considered critical and was disallowed as part of their incurred cost audit. 

CAVU’s conclusion: Drinking water is apparently classified as a “food” item where a Govcon has two choices:

  1. Code the water as an unallowable cost or
  2. Charge workers some type of fee to fill up their water bottles.

Note, this conclusion applies to coffee and other beverages as well. 

Agency Rulings May Conflict—Clarify Your Contracts

A cautionary note: While DCAA takes this tack with drinking water, it is no guarantee that a Govcon will not run into conflicting interpretations from other Government agencies. Your company may be able to avoid misclassifications by carefully reading and clarifying both prime and subcontract terms with the contract’s governing agency. 

DCAA compliance is a notoriously complex accounting task. CAVU specialists have exceptional breadth and depth of expertise based on real-world experience to help you create and maintain a compliant accounting system, answer your questions, and devise practical solutions.


We’re ready to lead you into the future