Chapter 58 – Professional and Consultant Service

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Authoritative Sources

FAR 31.205-33 Professional

and Consultant Service

Professional and consultant service costs represent

expenses for 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.

Examples include those services acquired by contractors to enhance their legal,

economic, financial, or technical position including outside accountants, lawyers,

actuaries, and marketing consultants.

General Audit Guidelines

The cost principle covering outside professional and consultant service is

contained primarily in FAR 31.205-33, Professional and consultant service costs. When

evaluating the nature of the services for allowability the audit team should consider the

unallowable activities identified in FAR 31.205-33(c) as well as the provisions of other

cost principles as applicable.

The audit team’s assessment of the underlying nature of the claimed costs

determines whether FAR 31.205-33 is applicable and not the contractor’s accounting

classification. For instance, contractors may record expenses for purchased labor (e.g.,

janitorial, clerical, security) in a “Consultant” or “Professional Services” account; this

does not make these costs subject to the requirements of FAR 31.205-33. Likewise,

costs recorded in other accounts may be professional and consultant service costs and

the auditor should evaluate the costs using the criteria of FAR 31.205-33. The

Frequently Asked Questions (FAQs) provided at the end of this chapter provide several

scenarios to assist in implementing this guidance. FAQs 1 through 5 deal specifically

with determining if FAR 31.205-33 applies.

FAR 31.205-33(f) contains specific documentation requirements to ensure that

professional and consultant service costs can be determined allowable. Auditor

judgment is critically important in determining whether the totality of the evidence

demonstrates the nature and scope of the services provided.

This chapter addresses the following topics:

58-1 Documentation Requirements and Audit Evidence

58-2 Unallowable Costs under FAR 31.205-33 and Other Cost Principles to

Consider

58-3 Factors to Consider in Determining Allowability

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58-4 Retainer Fees

58-1 Documentation Requirements and Audit Evidence

FAR 31.205-33(f) contains three documentation requirements to ensure that

professional and consultant service costs can be determined allowable: (1) details of all

agreements; (2) invoices or billings; and (3) consultant work product and related

documents.

AUDIT GUIDELINES:

We have to assure ourselves that there is an agreement between the contractor

and the consultant, we have to see the invoices, and be able to determine the work

product from the consultant to assess the propriety and legality (i.e., allowability) of the

consultant services. The type of evidence satisfying the documentation requirements

will vary significantly based on the type of consulting effort and from contractor to

contractor. Therefore, it is important for the audit team to understand that the evidence

required from the contractor is essentially the following:

1. An agreement that explains what the consultant will be doing for the

contractor;

2. A copy of the bill for the actual services rendered. This should include

sufficient evidence as to the time expended and nature of the services

provided to determine what was done in exchange for the payment

requested, and that the terms of the agreement were met. This

documentation does not need to be included on the actual invoice and can be

supported by other evidence provided by the contractor; and

3. Explanation of what the consultant accomplished for the fees paid – this could

be information on the invoice, a drawing, a power point presentation, or some

other evidence of the service provided.

The claimed costs are unallowable without evidence of an agreement, an invoice,

and what work the consultant actually performed. It is important to clarify that the audit

team is looking for evidence to satisfy these three areas and not a specific set of

documents. Therefore, auditor judgment will be the determining factor on the type and

sufficiency of evidence required to satisfy these requirements.

The third category of evidence (work product) provides support for the work

actually performed by the consultant (in contrast to the first category of evidence

regarding the work planned). Although a work product usually satisfies this requirement,

other evidence may also suffice. If the contractor provides sufficient evidence

demonstrating the nature and scope of the actual work performed, the FAR 31.205-

33(f)(3) requirements are met even if the actual work product (for example, an

attorney’s written advice to the contractor) is not provided. The auditor should not insist

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on a work product if other evidence provided is sufficient to determine the nature and

scope of the actual work performed.

FAQs 6 through 10 provide various scenarios to assist audit teams in applying

this guidance.

In cases where the audit team cannot gather sufficient documentation to support

the evidence requirements of FAR 31.205-33(f), but other evidence leads the team to

conclude the activity is an otherwise allowable activity and reasonable in amount, the

team should cite the FAR 31.205-33(f) non-compliance and question the cost. In the

audit report note, the team should include a discussion of the evidence supporting why

the activity is otherwise allowable and reasonable in amount, so that the contracting

officer can make a fully informed business decision.

58-2 Unallowable Costs under FAR 31.205-33 and Other Cost

Principles to Consider

Audit teams should consider the unallowable activities specified in FAR 31.205-

33, as well as the provisions in other cost principles in determining the allowability of

professional and consultant service costs.

AUDIT GUIDELINES:

FAR 31.205-33 identifies certain consultant costs and activities as unallowable.

For instance, consultant costs contingent upon recovery from the Government are

unallowable under FAR 31.205-33(b). In addition, audit teams should consider the

unallowable activities specified in FAR 31.205-33(c):

(1) Services to improperly obtain, distribute, or use information or data protected

by law or regulation (e.g., 52.215-1(e), Restriction on Disclosure and Use of

Data) – FAR 31.205-33(c)(1)).

(2) Services that are intended to improperly influence the contents of

solicitations, the evaluation of proposals or quotations, or the selection of sources

for contract award, whether award is by the Government, or by a prime

contractor or subcontractor – FAR 31.205-33(c)(2)).

(3) Any other services obtained, performed, or otherwise resulting in violation of

any statute or regulation prohibiting improper business practices or conflicts of

interest – FAR 31.205-33(c)(3)).

(4) Services performed which are not consistent with the purpose and scope of

the services contracted for or agreed to – FAR 31.205-33(c)(4)).

Audit teams should also consider whether claimed professional and

consultant service costs may be unallowable under the provisions of other cost

principles.

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If the audit team obtains only part of the evidence required by FAR 31.205-33(f),

but the audit team determines from the evidence that the activity performed by the

consultant is unallowable based on another provision of FAR, the audit team should

question the cost – citing the specific provision first (e.g., FAR 31.205-1, Public

Relations and Advertising Costs) – followed by a discussion of how the requirements of

FAR 31.205-33(f) were not met.

In cases where the FAR 31.205-33(f) documentation requirements are met, but

the consultant costs are unallowable based on another provision of FAR, the costs

should be questioned by citing just the specific provision (e.g., FAR 31.205-1, Public

Relations and Advertising Costs), and not citing FAR 31.205-33(f). Refer to FAQ 11 for

a scenario illustrating the application of this guidance.

58-3 Factors to Consider in Determining Allowability

FAR 31.205-33 provides factors for consideration in determining the allowability

of professional and consultant service costs.

AUDIT GUIDELINES:

The factors identified in FAR 31.205-33(d) for consideration in determining

allowability are:

(1) The nature and scope of the service rendered in relation to the service

required.

(2) The necessity of contracting for the service, considering the contractor’s

capability in the particular area.

(3) The past pattern of acquiring such services and their costs, particularly in the

years prior to the award of Government contracts.

(4) The impact of Government contracts on the contractor’s business.

(5) 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.

(6) Whether the service can be performed more economically by employment

rather than by contracting.

(7) The qualifications of the individual or concern rendering the service and the

customary fee charged, especially on non-Government contracts.

(8) Adequacy of the contractual agreement for the service (e.g., description of the

service, estimate of time required, rate of compensation, termination provisions).

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In assessing allowability, no single factor or any special combination of factors

is determinative. Also, this is not an all-encompassing list – other factors may also

be appropriate for consideration in determining allowability.

58-4 Retainer Fees

Contractors may engage outside professionals and consultants on a retainer-fee

basis.

AUDIT GUIDELINES:

For retainer fees to be allowable, FAR 31.205-33(e) requires that contractors

maintain documentation to support the following:

(1) the services covered are necessary and customary,

(2) the fee is reasonable in comparison with maintaining an in-house capability,

and

(3) the level of past services justifies the amount of the retainer fees.

Circumstances where consultants do not render services do not automatically

make retainer fees unallowable.

Frequently Asked Questions

Question 1: A contractor uses a temporary accounting service to perform bookkeeping

activities. The accounting service provided several individuals to input vendor invoices

into the contractor’s accounts payable system after the buyers approved them for

payment. Are these costs professional and consultant services?

Answer: No. Accounting, by any reasonable interpretation, is a profession under the

FAR 31.205-33(a) definition. However, the type and nature of the work performed in

this example represents clerical effort that is not a professional and consultant service.

Accordingly, it would not be appropriate to evaluate these costs using FAR 31.205-33

criteria.

Question 2: The contractor enters into an agreement with an individual to perform

program management activities for one of its contracts. In this capacity, the individual

worked directly with contractor employees and contractor management to track and

monitor progress on contract performance. Is this a consultant and should the audit

team require documentation consistent with the FAR 31.205-33(f) criteria?

Answer: No. In this circumstance, the individual is equivalent to a contractor

employee. The contractor integrated the individual as an inherent part of operations

and no single work product exists to demonstrate the effort expended. The individual’s

contribution was to the overall management of contract performance. Accordingly, it

would not be appropriate to evaluate these costs using FAR 31.205-33 criteria.

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Question 3: The contractor hired a thermal engineer to address a program-specific

technical issue. The contractor charges the costs direct to the benefitting CAS-covered

contract. The extent of technical input required was significant and the value of the

agreement is over $1 Million. Should the audit team use the criteria in FAR 31.205-33

to evaluate these costs?

Answer: The individual possesses a specialized skill and provides a service to

enhance the technical capability of the contractor consistent with the FAR 31.205-33(a)

definition. Accordingly, the contractor has appropriately classified the thermal engineer

as a consultant. Whether the contractor charges the costs direct or indirect does not

affect whether the costs meet the FAR 31.205-33(a) definition. In addition to applying

the documentation requirements in FAR 31.205-33(f), the audit team should evaluate

the contractor’s approach for selecting and compensating the consultant to ensure that

the amounts are reasonable. FAR 31.205-33(d) provides considerations for

determining allowability including:

 Qualifications of the individual or concern rendering the service and the

customary fee charged, especially on non-Government contracts.

 Adequacy of the contractual agreement for the service (e.g., description of the

service, estimate of time required, rate of compensation, termination provisions).

Question 5: The contractor uses outside writers to augment their in-house staff in

preparing technical publications and we are unsure whether they are consultants or not.

The contractor’s staff prepares drafts of the manuals focusing on technical content. The

outside writers proofread the drafts and make recommendations to improve readability.

Answer: Since the effort performed by the outside writers does not enhance the

contractor’s legal, economic, financial, or technical position, they do not meet the

definition of a consultant. Since these costs represent purchased labor, the audit team

should consider the guidance relating to purchased labor discussed above.

Question 6: The contractor engages an efficiency engineer to evaluate the design of

the manufacturing process. The contractor classifies the engineer as a consultant and

provided documentation supporting the claimed amounts. Our initial fieldwork found

that both the agreement and the billings submitted by the engineer clearly satisfy the

FAR 31.205-33(f) requirements. However, the documentation for work product is

limited to a single agenda item from an executive meeting where the contractor

contends the engineer verbally presented his recommendations (which the contractor

asserts they adopted). Is this sufficient evidence of work product to accept these costs?

Answer: No, but the audit team should apply other audit procedures to collect

corroborative evidence. One example would be if the contractor demonstrates action

taken to revise the manufacturing process tied directly to the consultant’s

recommendations. Other corroborative evidence may include the auditor’s physical

inspection of the contractor’s manufacturing facility identifying the recommended

improvements, interviews with the contractor employees involved in the manufacturing

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process, and coordination with a DCMA technical specialist or Government program

office technical support staff.

Question 7: The contractor provides an agreement and invoices in support of claimed

consultant costs as part of an incurred cost audit. The contractor does not have

evidence supporting the consultant’s work product, but offers to obtain a letter from the

consultant describing the work performed, which in this case involved attending

technical meetings with Air Force program officials. The contractor further indicates the

same Air Force officials are still on the program and will be visiting next week to discuss

follow-on effort. The contractor offers to set up a meeting with the Air Force officials to

permit the auditors to confirm the consultant’s participation. Should the audit team

consider the consultant letter and meet with the program officials as part of their

determination of the allowability of the consultant costs?

Answer: The audit team should consider the consultant’s testimonial evidence and

should meet with the Air Force program officials. The testimonial evidence provided by

the consultant is similar to a third party confirmation (i.e., evidence from outside the

contractor’s organization). However, since it was prepared several years after-the-fact,

it may not be sufficient on its own. The meeting with the Air Force program officials

corroborates the contractor and consultant assertions and provides an independent

confirmation. In this case, the audit team should consider the sufficiency and

appropriateness of all evidence (contemporaneous and from a later period) in reaching

a conclusion. If the audit team was unable to corroborate the testimonial evidence of

the consultant with the Air Force program officials, they should consider other

appropriate audit procedures, such as having the contractor arrange a meeting with the

consultant to confirm legitimacy (i.e., the consultant actually exists) and to gather

additional evidence regarding the actual work performed by the consultant.

Question 8: The contractor hires an international marketing consultant to evaluate and

recommend new areas to promote, sell, and distribute products (market planning

activities). The agreement provides for a $12,000 monthly flat-fee payment. In

submitting invoices, the consultant references the agreement and details the actual

services provided. However, the billings do not include details on the number of hours

worked. Should the audit team question these costs under FAR 31.205-33(f)(2)

because the invoices do not detail the time expended?

Answer: The audit team should not automatically question the consultant costs simply

because the invoice does not detail the time expended. The audit team should first

review the billings in combination with the terms of the agreement. Then meet with the

contractor to ascertain what other evidence the contractor can provide to determine if

the payment is consistent with the services agreed to and provided. Further testing

should determine the nature and scope of the services planned and actually performed

to ensure the allowability of the costs. The auditor also should ensure the amount paid

is reasonable for the services performed and sufficient evidence exists to establish that

the consultant performed the services.

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Question 9: A consultant provided a training course to the contractor’s pricing group

on how to prepare proposals that comply with the requirements of FAR Part 15. The

contractor provided a copy of the agreement and the paid invoice. The contractor also

provided a list of attendees, but the contractor does not have a copy of the training

material used by the consultant to serve as evidence of work product. Should the audit

team question the consultant costs due to lack of documentation?

Answer: Not necessarily. The agreement, paid invoice, and some evidence that the

class was actually given is sufficient to satisfy the FAR 31.205-33(f) requirements. The

audit team could further support that the class occurred by collecting testimonial

evidence through interviews conducted with employees listed as attendees.

Question 10: The contractor engaged a consultant to assist in the preparation of a

major procurement proposal. The contractor provided the consultant agreement which

allowed for billings at a fixed rate per hour and monthly invoices which showed hours

billed by day. The contractor also showed the audit team a copy of the proposal – all

twelve binders – indicating “surely three feet of paper satisfies the work product

requirement.” Should the audit team accept the claimed costs?

Answer: Not based on this evidence alone. While the agreement and invoices satisfy

a portion of the evidence requirements, the proposal by itself does not demonstrate

what work the consultant actually performed. The contractor must provide additional

corroborative evidence that demonstrates the consultant’s connection with the

preparation of the proposal. Examples of evidence that would demonstrate this

connection might be correspondence or emails showing the consultant’s review of draft

sections of the proposal, meeting minutes or lists of attendees for discussions on the

proposal that included the consultant, or documentation of input the consultant provided

that the contractor incorporated into the proposal.

Question 11: The contractor’s incurred cost claim includes expenses paid to a public

relations firm hired to improve the company’s image. The contractor booked the costs

as a consultant and, in support of the claimed amounts, provided an agreement, billings,

and work product. The agreement describes in detail the work requirements, rates of

compensation, etc. The invoice billings include sufficient detail as to the time expended

and the nature of the actual services provided. The work product includes trip reports,

weekly memoranda of activities completed, and a final report. Since the contractor met

all of the documentation requirements, is the claimed cost allowable?

Answer: No. Notwithstanding the meticulous documentation provided by the

contractor for this consultant, the underlying costs are unallowable under FAR 31.205-1,

Public relations and advertising costs. In evaluating the nature of the services for

allowability, the audit team should consider the unallowable activities identified in FAR

31.205-33(c) as well as the provisions of other cost principles, as applicable (e.g., FAR

31.205-22, Lobbying and political activity costs; FAR 31.205-27, Organization costs;

FAR 31.205-47, Costs related to legal and other proceedings; FAR 31.205-38, Selling

costs).

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Callout

Evidence – Possible sources include testimonial evidence, the auditor's physical

inspection of the contractor's facilities and operations, and coordination with other

Government personnel (e.g., ACO and PCO representatives). (Return)

Contractor - The audit team should explain to the contractor that they are looking for

evidence that a prudent person would already possess and should not call for the

creation of documentation. (Return)

Economically - To properly assess, the audit team must make an apples-to-apples

comparison. The consultant expense is likely to be all-inclusive, but in developing the

cost to add an employee, be sure to consider all related costs, such as fringe benefits

and overheads. (Return)

Fee - Cost and level of expertise should be considered. (Return)