May 8, 2003
FOR THE HEADS OF DEPARTMENTS AND AGENCIES
of Contingency Fee Contracts for Recovery Audits
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." 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.
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 Government 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.
The A-87 provision does not prohibit such contingency fee contracts
for recovery audits.
Please contact Joseph L. Kull, Deputy Controller, Office of Federal
Financial Management, telephone (202) 395-3993, for any questions regarding