Unallowable Proposal and Compliance Costs After Non‑Compliance Findings
Definition
Non‑compliance with DFARS, FAR cost principles, or accounting standards causes certain internal costs (including rework on proposals, legal defense, and penalty‑related work) to become unallowable, meaning the contractor must absorb them instead of billing the government. FAR 31.205‑15 explicitly makes costs of fines, penalties, and defense of certain fraud proceedings unallowable, and Deloitte notes that non‑compliance can lead to withholding of payments and inability to bill costs.
Key Findings
- Financial Impact: $500k–$10M+ per major investigation or adverse audit in unallowable internal labor, consulting, and legal spend; ongoing lost recoveries on indirect rates
- Frequency: Quarterly to annually for mid‑to‑large defense manufacturers with active DCAA/DCMA oversight
- Root Cause: Poor integration between proposal management, cost accounting, and compliance functions, leading to bid practices (e.g., unsupported indirect rates, misallocated bid & proposal (B&P) costs) that are later challenged by auditors, forcing contractors to reclassify and eat large swaths of cost.
Why This Matters
This pain point represents a significant opportunity for B2B solutions targeting Defense and Space Manufacturing.
Affected Stakeholders
CFO, Controller, Government Compliance Manager, Proposal Cost Volume Lead, Program Accounting, Internal Audit
Deep Analysis (Premium)
Financial Impact
$1,500,000 - $3,500,000 in disallowed internal labor (proposal rework, legal defense hours, fines research); lost indirect rate recovery on 2-3 year lookback; payment withholding during NASA audit resolution • $1.1M–$4.5M in non-billable legal defense, investigation, proposal rework, and compliance remediation when FMS export control violations are discovered • $1.2M–$4.5M in unallowable labor rework, legal defense, audit response costs, withheld payments, lost G&A recovery
Current Workarounds
Configuration Manager maintains Word documents and manual change logs; cost codes assigned via email coordination with Finance; no audit trail linking configuration changes to FAR cost principles; WhatsApp/Slack messages discussing allowability • Configuration Manager uses email and phone to track configuration baselines; manual version control; spreadsheet-based change logs; no centralized CUI protection controls • Contracts Administrator maintains classified and unclassified cost compliance matrices in separate systems; email coordination with cleared Cost Accountant
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Methodology & Sources
Data collected via OSINT from regulatory filings, industry audits, and verified case studies.
Related Business Risks
Proposal Quality Defects Driving Rework and Lost Awards
Loss of Current and Future Contract Revenue from Cyber / DFARS Non‑Compliance in Bid Phase
Treble‑Damages and Disallowance of Billed Amounts Under the False Claims Act
Withheld Progress Payments and Cash‑Flow Delays from DFARS Cyber Non‑Compliance
Bid Capacity Lost to Manual, Compliance‑Heavy Proposal Processes
Direct Financial Penalties, Terminations, and Debarment from DFARS / CMMC Breaches
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