DATE: May 13, 2003

SUBJECT: Office of Management and Budget (OMB); Allowability of Contingency Fee Contracts for Recovery Audits

SOURCE: OMB Memorandum dated May 8, 2003


ACTION: Notice

SYNOPSIS: OMB is announcing that the costs of contingency fee contracts incurred by state and local governments for the recovery of erroneous payments charged against federal programs are allowable costs under OMB Circular A-87, Cost Principles for State, Local and Indian Tribal Governments.

EFFECTIVE DATE: May 8, 2003.

FOR FURTHER INFORMATION CONTACT: Joseph L. Kull, Deputy Controller, Office of Financial Management, 202-395-3993.

SUPPLEMENTAL INFORMATION: On May 8, OMB Controller Linda Springer issued a memorandum to the heads of departments and agencies clarifying the allowability of contingency fee contracts for recovery audits that identify and recover erroneous payments made under federal programs.

OMB Circular A-87, Attachment B, Section 33(a), Professional Services, states that the cost of professional and consultant services are allowable "when reasonable in relation to the services rendered and when not contingent upon the recovery of the costs from the federal government." Some federal officials have interpreted this provision to disallow any contract costs where the fees are based on a percentage of the recoveries. As a result, some states have instructed contractors not to recover any erroneous payments on federal programs.

"This interpretation presents a disincentive for state and local governments to collect erroneous or fraudulent claims that would be returned to the federal government," states Ms. Springer in the memorandum. "The A-87 provision does not prohibit such contingency fee contracts for recovery audits."

The memorandum goes on to state, "State and local governments may use a portion of recovered erroneous or fraudulent payments from federal programs to pay for recovery contracts. The portion used to pay for such contingency fees should be claimed as administrative costs."

FOR FURTHER INFORMATION CONTACT: Panoptic Enterprises at 703-451-5953 or by e-mail to Panoptic@FedGovContracts.com.

Copyright 2003 by Panoptic Enterprises. All Rights Reserved.

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