As in — “What gives the DCAA the right to take the contractor’s money?”  DCAA would tell you that Form 1s are a long established mechanism for Governmental “self-help” in reclaiming funds from Government contractors.  And based on some recent audit guidance, it looks like Form 1 withholdings are fast becoming the “weapon of choice” for auditors.  But what the DCAA fails to acknowledge in its memoranda is that Form 1 withholdings actually are an illegitimate circumvention of the FAR.

Many contractors will have no doubt noticed that over the last year of so the DCAA has shown a new fondness for issuing Form 1s, which are then used as the basis for withholding interim payments for incurred costs.  Form 1s were the subject of DCAA’s September 7, 2007 Memorandum to Regional Directors (MRD ) 07 – PPD – 031(R), which directed auditors to use then to suspend unsupported costs and to disapprove unallowable costs.  “[W]ith the issuance of a DCAA Form 1, auditors should take the necessary steps to effect the withhold of the appropriate funds identified in the DCAA Form 1 from current payments.”  Moreover, the MRD not so delicately reminded auditors, the issuance of a Form 1 also “may require the contractor’s direct billing authority to be temporarily rescinded.”

And just recently, in a December 19, 2008 MRD regarding the Denial of Access to Records, 08-PAS-042(R), the DCAA again instructed auditors to use Form 1s “to effect a suspension and/or withhold of unsupported costs due to the contractor’s denial of access to records.”  This latest guidance is no idle threat – it says that “support for proposed labor hours should be provided the same day requested.”  In other words, contractors should not necessarily expect to receive the next interim payment if they fail to hand over their time sheets by COB on the day requested by the auditor.

All of this is made possible through the ostensible powers of a Form 1.  Or is it?  Does the DCAA really have the authority, under the current regulatory regime, to withhold payments because an auditor – not a contracting officer — decides that a cost is unsupported or unallowable?

Under the FAR, the mechanism for collecting any payments from contractors is set out in one place – Subpart 32.6.  Revisions to these regulations went into effect on October 17, 2008, and were covered on this blog here.  To recap, FAR 32.6 applies to all contract debts, meaning amounts that “have been paid to a contractor to which the contractor is not currently entitled under the terms and conditions of the contract.” FAR 32.601(a)(1).  The regulation provides a nonexhaustive list of 14 examples of what this definition includes, including reductions for defective cost or pricing data, CAS noncompliances, and “duplicate or erroneous payments.”  FAR 32.601(b).  Unallowable costs, of course, are unallowable because they violate the terms Allowable Cost and Payments Clause.  This makes them costs to which the contractor “is not currently entitled under the terms and conditions of the contract.”  Under the plain language of FAR 32.601, therefore, the collection of monies that are unallowable must be accomplished through the procedures of FAR Subpart 32.6.

Yet nothing in FAR Subpart 32.6 provides for the withholding of current payments because a DCAA auditor decides to issue a Form 1.  Under FAR 32.606, withholding of payments by the payment office is authorized only after the expiration of 30 days after the due date for the payment set out in the demand issued by the Contracting Officer pursuant to FAR 32.604.  The demand, in turn, is based on the debt determination that is made by the Contracting Officer under FAR 32.603.  A Form 1 issued by the auditor is neither a debt determination nor a demand for payment and it is legally incapable of even triggering the 30 day payment term.  Consequently, it would appear that withholding of payments as a result of the issuance of a Form 1 is an illegitimate circumvention of the FAR.  There is a word for people who take money from others without authorization or permission, isn’t there?

Authored by:

John W. Chierichella

(202) 218-6878


Aleksander Lamvol

(202) 218-0006