Charles Stark Draper Laboratory, Inc.Non-Profit

2022-001. Depreciation of Atrium Construction Costs ? Unreasonable a. Condition: This finding is a continuation of audit findings 2020-001 and 2021-001 from the Draper FY 2020 and 2021 Uniform Guidance audits, which questioned the reasonableness of constructing an Atrium to the front of Draper?s Duffy Building. For a complete understanding of this audit issue, we recommend that you review audit findings 2020-001 and 2021-001. However, as a quick overview, in September of 2017, Draper completed construction of a $54,785,170 six story open space atrium as an addition to its Duffy Building. This atrium serves as the new entrance to Draper?s main building and it contains a lobby, building security areas, information technology (service desk), meeting areas, a food court and a presentation area. The atrium also results in the addition of 23,640 square feet to the contractor?s facility with the vast majority being comprised of open space. Although the building of this atrium provides additional square footage to Draper?s facilities, we found that Draper is utilizing only a 15-year period to depreciate construction costs starting with FY 2018. For the first two years of this period, FY 2018 and FY 2019, Draper decided to not request nor claim any depreciation costs from the Federal Government. Draper?s forward pricing rate submission, dated May 20, 2019, also excluded these depreciation costs from forecasted expenses for FY 2020 through FY 2023. On October 24, 2022, Draper provided us an additional analysis for the purpose of demonstrating that a majority of the atrium project costs were competitively bid. It is Draper?s position that since the general contractor for this project received competitive bids for the subcontract work, which represented a significant portion of the project, then the cost associated with the overall project is reasonable. This analysis included all the competitive quotes that the General Contractor obtained before awarding each of the subcontracts. Our review of these documents did demonstrate that seventy-seven percent of the total project costs were competitively bid as the General Contractor chose the low bid subcontractor, in all cases, when awarding the work. This addresses only part of Draper's responsibility for justifying the reasonableness of the project. To be reasonable, Draper must also demonstrate that this type of cost was ordinary and necessary for the conduct of Draper's business or the contract performance. To address the need and business case for the atrium, Draper provided a presentation to DCAA and its DCMA Administrating Contracting Officer (ACO) on April 28, 2022. As of the date of this report, no official determination has been made on whether Draper?s presentation adequately addressed the requirements of FAR 31.201-3(a) and (b)(1). As a result, we will continue to question the depreciation costs associated with the Atrium project, which totaled $3,652,353 for FY 2022, in accordance with FAR 31.201-3(a) and (b)(1), Determining Reasonableness. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. We do not consider the questioned depreciation costs subject to penalties in accordance with FAR 42.709. b. Criteria: Per FAR 31.201-3, Determining reasonableness, (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer?s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable. (b) What is reasonable depends upon a variety of considerations and circumstances, including- (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor?s business or the contract performance; (2) Generally accepted sound business practices, arm?s-length bargaining, and Federal and State laws and regulations; (3) The contractor?s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor?s established practices. c. Recommendation: Draper still needs to address why this project was ordinary and necessary for the conduct of Draper?s business or the contract performance and whether or not Draper considered less costly options that would meet its needs. d. Draper?s Reaction: Draper?s reaction follows verbatim. Draper does not concur with DCAA?s finding that the atrium depreciation expense is unreasonable. As DCAA points out, Draper provided a reasonableness presentation to address the business need for the atrium on April 28, 2022 and provided additional analyses and evidence (October 2022) proving all subcontractors utilized on the project were competitively awarded, which establishes those costs were awarded at a fair and reasonable price. Draper reserves the right to negotiate this issue with the ACO. Draper has, and continues to support the Government?s requests in regards to the reasonableness of the atrium. Issue Coordinator: Jamie Pereira, Director, Government Accounting & Compliance Est. Completion Date: Pending DCMA Resolution e. Auditor?s Response: We will provide any audit support requested by the ACO during negotiations.

2022-002 Special Retirement Payment ? Supplemental Retirement Plan for Corporate Officers a. Condition: We questioned the $160,960 special retirement payment to an executive of Draper on the basis that the costs did not conform to the terms and conditions of Draper?s Supplemental Retirement Plan for Corporate Officers (SRPCO). As a result, Draper did not meet the requirements of FAR 31.205-6(a)(3) for these costs to be considered allowable. The costs result from a one-time payment to an executive of $160,960 as a result of Draper?s termination of the SRPCO. Since this executive was previously $26,689 over the Bipartisan Budget Act of 2013 compensation cap, Draper properly classified it as unallowable, we upwardly adjusted the overhead pool to reflect the fact that this executive will now be under the compensation cap. Draper established the SRPCO to assure that certain key Corporate Officers received a reasonable level of retirement compensation in relation to their level of compensation and length of service at the laboratory. On January 19, 2022 the Draper Human Resources & Compensation Policy Committee voted to terminate the SRPCO and replace it with the Long Term Incentive Plan (LTIP) for executives. As of January 19, 2022, only one employee was eligible for the SRPCO although that employee was not vested in the plan. The questioned costs relate to a one-time payment to this employee as consideration to release Draper from all lawsuits, torts, damages and liabilities, and any and all other claims related to the employees? participation in the SRPCO. The SRPCO contains criteria required for an employee to receive a supplemental retirement payment under the plan, including eligibility and vesting. The plan defines vesting as ?an Eligible Employee's having a nonforfeitable right to receive a Supplemental Retirement Payment, as provided in Section 7.? Section 7 of the plan identifies specific events that are required to occur in order for an eligible employee to become vested in their right to receive a supplemental retirement payment under the plan. The specific events include: remaining an employee until mandatory retirement date; becoming permanently and totally disabled; and being involuntarily terminated without cause (prior to mandatory retirement date, but on or after age fifty-five with at least ten years of employment with the laboratory). We determined none of these specific events occurred for this employee and therefore, the employee is not vested. The plan also includes terms regarding the timing of the Supplemental Retirement Payment and states that an eligible employee will be paid as soon as practical after the employee becomes vested. It specifically states: ?The Supplemental Retirement Payment shall be paid by the Laboratory to the Eligible Employee as a lump sum as soon as practicable after the Eligible Employee becomes Vested, subject to applicable tax and other withholdings?. As discussed above, the plan includes specific events that must occur for an employee to become vested in their right to receive a Supplemental Retirement Payment under the plan ? all of which include the employee no longer being employed by the laboratory. Because the plan was established to provide retirement compensation for certain corporate officers and all events necessary for an employee to become vested in the plan require the employee to no longer be employed by Draper, we determined that payment to a current employee is not consistent with the terms and conditions of the plan. In addition, we also reviewed Draper?s April 5, 2022 agreement letter to the employee, which states the following: ?Draper has the authority to terminate the SRPCO at any time with no obligation to pay out plan participants who have not otherwise vested in the plan. You further acknowledge and agree that as of January 19, 2022 you were not vested in the SRPCO. In consideration for the one-time payment for which you are otherwise not entitled, you agree to release Draper and all of its past, present and future officers, directors, trustees, agents, employees, consultants, attorneys, and insurers (collectively the ?Related Parties?), from all demands causes of action, lawsuits, torts, contracts, agreements, promises, statutory violations, costs, attorneys? fees, damages and liabilities, and any and all other claims of every kind, nature and description, both in law and in equity, which you may now have, or have ever head at any time against the Released Parties as it relates to your participation in the SRPCO.? As noted in the letter, the employee was not vested in the SRPCO plan nor was she even entitled to payment under the plan. As a result, these costs do not meet the requirements of FAR 31.205-6(a)(3), which states that compensation for personal services is allowable if the compensation is based upon and conform to the terms and conditions of the contractor?s established compensation plan or practice. Based on our discussions with Draper, we determined that the employee is eligible for the Long Term Incentive Plan (LTIP), which was recently approved by Draper?s Board of Directors. As discussed above, the LTIP is the replacement plan for the SRPCO. Because the LTIP is a replacement plan for the SRPCO and the employee is eligible for the LTIP, we do not consider it to be reasonable for the employee to benefit from both of these plans. The cause for these questioned expenses results from Draper?s decision to ignore the criteria that was stated in its Supplemental Retirement Plan for Corporate Officers (SRPCO) and pay this employee even though she was not vested in the plan. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. We do not consider the questioned Supplemental Retirement Plan for Corporate Officer costs to be subject to penalties in accordance with FAR 42.709. a. Criteria FAR 31.205-6(a)(3) ? Compensation for Personal Services (a) General. Compensation for personal services is allowable subject to the following general criteria and additional requirements contained in other parts of this cost principle: (3) The compensation must be based upon and conform to the terms and conditions of the contractor's established compensation plan or practice followed so consistently as to imply, in effect, an agreement to make the payment. b. Recommendation: We recommend that Draper perform a more thorough analysis of its claimed compensation costs in order to ensure that only allowable compensation is claimed. c. Draper?s Reaction: Draper?s reaction follows verbatim. Draper concurs with DCAA?s finding and will ensure that only allowable compensation costs are claimed in the future by performing an additional review of claimed compensation costs prior to submittal of the annual Uniform Guidance submission. Issue Coordinator: Jamie Pereira, Director, Government Accounting & Compliance Est. Completion Date: November 2023 d. Auditor?s Response We do not take any exceptions with Draper?s corrective action.

2021-001 Depreciation of Atrium Construction Costs-Unreasonable a. Condition: This finding is a continuation of audit finding 2020-001 from the Draper FY 2020 Uniform Guidance audit, which questioned the reasonableness of constructing an Atrium to the front of Draper's Duffy Building. Draper is currently preparing a presentation for its DCMA Administrative Contracting Officer (ACO) for the purpose of trying to demonstrate the reasonableness of this project. Since that presentation will not be available to us until after the issuance of this audit report, we will continue to question the depreciation costs associated with this project, which represents $3,652,345 for FY 2021. For a complete understanding of this audit issue, we recommend that you review audit finding 2020-001 from the FY 2020 Uniform Guidance audit report. However, as a quick overview, in September of 2017, Draper completed construction of a $54,785,170 six story open space atrium as an addition to its Duffy Building. This atrium serves as the new entrance to Draper's main building and it contains a lobby, building security areas, information technology (service desk), meeting areas, a food court and a presentation area. The atrium also results in the addition of 493,000 square feet to the contractor's facility with the vast majority being comprised of open space. Although the building of this atrium provides additional square footage to Draper's facilities, we found that Draper is utilizing only a 15-year period to depreciate construction costs starting with FY 2018. For the first two years of this period, FY 2018 and FY 2019, Draper decided to not request nor claim any depreciation costs from the Federal Government. Draper's forward pricing rate submission, dated May 20, 2019, also excluded these depreciation costs from forecasted expenses for FY 2020 through FY 2023. Although Draper informed us that its presentation to its DCMA ACO would not be available to us in time for the issuance of this audit report, we requested Draper to provide us with additional information that was not made available to us in the previous audit relating to supporting the reasonableness of this project. Draper did supply us with additional information; however, we determined that it was still not sufficient to demonstrate the reasonableness of the Atrium project nor support Draper's use of a 15-year life to depreciate the Atrium's construction costs. Draper's Capitalization and Depreciation of Property Plant and Equipment policies and procedures specifically states that building improvements should be depreciated over a period of 39 years. No explanation has been provided by Draper as to how they arrived at an accelerated depreciation period for the Atrium costs. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper's R&D program. We do not consider the questioned depreciation costs subject to penalties in accordance with FAR 42.709. b. Criteria: Per FAR 31.201-3, Determining reasonableness, (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer's representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable. (b) What is reasonable depends upon a variety of considerations and circumstances, including- (]) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor's business or the contract performance; (2) Generally accepted sound business practices, arm's-length bargaining, and Federal and State laws and regulations; (3) The contractor's responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor's established practices. c. Recommendation: We would like to be included in the meeting that Draper plans to have with its DCMA ACO regarding the presentation of why the construction of this Atrium is reasonable. Hopefully this presentation will provide additional information that will demonstrate that the proposed depreciation and overall construction costs and the atrium project itself are reasonable and allowable in accordance with the requirements of FAR 31.201-3, Determining Reasonableness. In addition, this presentation should also address why Draper did not follow its policies and procedures for determining the useful life of capital assets. d. Draper's Reaction: Draper's reaction follows verbatim. Draper does not concur with DCAA 's finding that the atrium depreciation expense is unreasonable and reserves the right to negotiate this issue with the ACO. As requested, Draper will provide a reasonableness presentation to the Government in support of negotiations and will ensure that DCAA is in attendance. Issue Coordinator: Jamie Pereira, Director, Government Accounting & Compliance Est. Completion Date: Pending DCMA Resolution e. Auditor's Response: We look forward to reviewing any additional information that Draper provides during the presentation to Draper's DCMA Administrative Contracting Officer.

2020-001. Depreciation of Atrium Construction Costs ? Unreasonable a. Condition: We evaluated proposed depreciation expenses of $3,668,301 concerning an atrium constructed at Draper?s Cambridge Massachusetts facility and have questioned the entire amount proposed based on FAR 31.201-3(a), Determining Reasonableness. Although FAR 31.201 3(a) specifies that ?the burden of proof shall be upon the contractor? to demonstrate that costs are reasonable, Draper did not provide enough support to demonstrate that total construction costs of $54,785,170 and associated depreciation are reasonable in total, in part, or at all. As a result, we concluded that the proposed costs are questionable in their entirety. Additional information on the construction project and our evaluation follow: In September of 2017, Draper Lab completed construction of a $54,785,170 six story open space atrium as an addition to its Duffy Building. This atrium serves as the new entrance to Draper?s main building and it contains a lobby, building security areas, meeting areas, a food court and a presentation area. The atrium also results in the addition of 493,000 square feet to the contractor?s facility with the vast majority being comprised of open space. Although the building of this atrium provides additional square footage to Draper?s facilities, we found that Draper is utilizing only a 15 year period to depreciate construction costs starting with FY 2018. However, for the first two years of this period, FY 2018 and FY 2019, Draper decided to not request nor claim any depreciation costs from the Federal Government. Draper?s forward pricing rate submission, dated May 20, 2019, also excluded these depreciation costs from forecasted expenses for FY 2020 through FY 2023. Because Draper first proposed depreciation for the atrium in its FY 2020 submission, it became necessary to evaluate both the allowability of costs proposed and the allocability of these costs over a 15 year period. FAR 31.201-3(a), Determining Reasonableness, specifies that ?a cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business?. FAR 31.201-3(a) further specifies that ?if an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer?s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable?. We found from an initial review that 1) Draper reversed prior intentions and actions by claiming these costs in its FY 2020 submission, 2) the construction of a glass atrium itself is unusual, 3) the atrium is primarily comprised of open space, six stories at its highest point, with only partial floor space on the second and third levels above ground level, and 4) the depreciation period appeared inconsistent with established practices. We requested Draper to support the reasonableness of proposed depreciation costs including information and analyses that would demonstrate that the atrium and its costs are ordinary and necessary for the conduct of the Draper?s business or the contract performance, Draper?s actions reflect accepted sound business practices, arm?s-length bargaining, and Federal and State laws and regulations; and an explanation for any significant deviations from its established practices. As of the date of this report, Draper has not provided enough documentation to demonstrate the reasonableness of the depreciation costs proposed, overall construction costs incurred, and the addition of the atrium itself. Draper has provided power point presentations about this project, support that the Board of Directors gave approval, a listing of historical office building sales in Boston and Cambridge, a copy of a brief email that stated a 15 year period should be used to depreciate the construction costs, and work in progress documents relating to the construction of the atrium. The work in progress documents described how the project progressed, but they didn?t include any documentation as to whether it was reasonable to proceed with the construction of the atrium itself. We have not received support that would demonstrate that Draper?s large open-space atrium should be recognized as ordinary to Draper?s operations nor that the construction of this Atrium itself was necessary. Draper?s listing of historical building sales did not yield much information on their compatibility with Draper?s needs and operations, overall condition of the facilities in comparison to Draper?s building and planned floor renovations and atrium addition. Draper provided no insight nor support for limiting facility options to locations in Boston and Cambridge rather than other lower-cost areas. Draper did not provide adequate support for selection of the general contractor without competition. Concerning the depreciation period of 15 years, Draper is not depreciating the Atrium?s constructions costs in accordance with its policies and procedures. Draper is currently depreciating the Atrium costs over a 15 year period, while its Capitalization and Depreciation of Property Plant and Equipment policies and procedures states that building improvements should be depreciated over a period of 39 years. No explanation has been provided by Draper as to how they arrived at an accelerated deprecation period for the Atrium costs. Based on the facts above, we are questioning the $3,668,301 in depreciation costs claimed by Draper for the Atrium in its FY 20 plant overhead pool based on FAR 31.201-3, Determining Reasonableness. It is our position that the above issues and cost exception are directly related to Draper?s original intention to not claim the costs associated with the construction of its Atrium to the Federal Government. In this regard, we believe that Draper itself originally concluded the costs were unreasonable and should not be claimed and/or that minimal support for internally approving the project was necessary or retained because Draper?s intention not to claim the cost of the atrium meant the reasonableness of costs could not be challenged nor would be of concern to the Government or any other parties. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. We do not consider the questioned depreciation costs subject to penalties in accordance with FAR 42.709. b. Criteria: Per FAR 31.201-3, Determining reasonableness, (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer?s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable. (b) What is reasonable depends upon a variety of considerations and circumstances, including- (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor?s business or the contract performance; (2) Generally accepted sound business practices, arm?s-length bargaining, and Federal and State laws and regulations; (3) The contractor?s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor?s established practices. c. Recommendation: We recommend that Draper provide support that demonstrates that the proposed depreciation and overall construction costs and the atrium project itself are reasonable and allowable in accordance with the requirements of FAR 31.201-3, Determining Reasonableness. In addition, we request that Draper provide its analysis and support for not depreciating the building addition consistent with its policies and procedures for determining the useful life of capital assets. d. Draper?s Reaction: Draper?s reaction follows verbatim. DCAA has questioned the entirety of Draper?s $3,668,301 expense for depreciation of the Atrium in Draper?s headquarters at the Duffy Building in Cambridge, Massachusetts. DCAA asserts that the depreciation expense is unallowable, because the cost of the Atrium is unreasonable under FAR 31.201-3(a). Specifically, DCAA challenges the cost because: 1) Draper reversed prior intentions and actions by claiming these costs in its FY 2020 submission, 2) the construction of a glass atrium itself is unusual, 3) the atrium is primarily comprised of open space, six stories at its highest point, with only partial floor space on the second and third levels above ground level, and 4) the depreciation period appeared inconsistent with established practices. In essence, DCAA challenges the reasonableness of the Atrium expense because it disagrees with the fundamental aesthetic of an atrium. But, DCAA?s disagreement with a commonplace architectural style is not a basis to render costs unreasonable and hence, unallowable. Draper initially stated that it did not intend to include the depreciation expense for the Atrium in its incurred cost submissions, and Draper did not include these costs in its Fiscal Year (?FY?) 2018 and 2019 submissions. However, a reversal of intent does not render the costs unallowable. Over the last few years Draper has informed the Government on various occasions that a determination will be made annually on whether Draper would claim the Atrium. Historically, Draper has voluntarily chosen to subsidize its costs to maintain competitive rates and chooses year over year what costs, if any, to subsidize. In FY2018 and FY2019, Draper voluntarily excluded more than $70 million dollars in costs to maintain its wrap rate, of which less than 10% was related to the atrium depreciation (~$6.5 million). As Draper has grown, it has reduced the voluntary subsidy overall and the Atrium costs were part of numerous costs previously voluntarily omitted and now included for reimbursement. This was a business decision, not evidence, as DCAA suggests, that Draper ?itself originally concluded the costs were unreasonable.? Depreciation of a corporate headquarters, by its nature, is expressly allowable. It seems DCAA?s determination of reasonableness of expense is that the Atrium is a large open space constructed of glass. By definition, an atrium is ?a very large room, often with glass walls or roof, especially in the middle of a large shop or office building.? (Cambridge Dictionary.) It is a common architectural design. To the extent that DCAA is implying that an atrium is not the type of expense that a prudent business person would incur, per FAR 31.201-3(a), we offer the following examples of federal government office buildings that contain an atrium; ? The General Services Administration headquarters has a multi-story, glass atrium as its lobby. ? The National Geospatial Intelligence Agency?s headquarters has an atrium at the center of the building that is 500 feet long and 120 feet wide, and has been described as ?large enough to house the Statue of Liberty.? (Federal News Network (Sept. 27, 2011).) ? Several government buildings at Ft. Belvoir (the location of DCAA Headquarters) have multi-story glass atriums. If it is reasonable for the federal government to spend taxpayer money on atriums of that magnitude, there is no question that Draper?s choice to construct a multi-story glass atrium for its headquarters is a reasonable expense. Draper provided supporting documentation that showed Draper explored the material composition of the Atrium. Included in the supporting documentation, Draper demonstrated that it evaluated multiple options for construction of the Atrium, along with studies that detail HVAC design process, displacement ventilation, daylight simulation, wind tunnel ramifications, and snow/ice guard. Draper also provided an analysis between the costs of construction and potential relocation, e.g., selling the Draper facility or adding the Atrium and retrofitting the Duffy Building. Draper also supplied analyses that showed alternative options such as rebuilding at the current location or selling the existing campus and relocating the Draper facility, which would have presented an additional $30M to $50M in estimated risk. During the audit, DCAA inquired about the necessity for an atrium. Draper provided support showing that it created the Atrium to bring the building up to code, increase security, recruit and retain talent, enhance collaboration and connections, increase real estate efficiency, and provide additional meeting space for Draper employees as well as for potential customers or consumers. Included in the support that Draper provided was evidence showing the Duffy building was 40 years behind current safe building code including asbestos, fireproofing, ADA, emergency generator, and more. It is a common and reasonable practice for businesses to implement up-to-date building practices, and the provided documentation demonstrates that Draper took these steps during Atrium construction. The Atrium contains 3 conference rooms that seat up to 4 people each, a larger conference room that seats up to 8, and several additional meeting spaces above and in front of the cafeteria. On a daily basis, Draper uses the additional space the Atrium provides for a multitude of reasons, including significant facility support for a variety of government programs and customers. With Draper?s growth, this extra meeting space was necessary to support federal contracts and meetings with federal customers. This is a significant benefit for employees as well, providing increased meeting space, an area to eat and have working lunches, and increased innovation and collaboration. Additionally, the Atrium is used for the company- wide or departmental meetings. Previously, Draper had to rent additional space at the MIT Kresge auditorium when larger spaces were needed to accommodate large Draper staff meetings. Another feature is the amphitheater, which seats over 20 people, and is used for multiple purposes, including onboarding of new employees, larger departmental meetings, and customer interactions. The building of the Atrium also enabled Draper to update the building's physical security, which includes a new security scanner, and 5 security gates, which deny access to anyone lacking credentials to enter the Duffy Building. Since the amphitheater, the large conference room, and other collaboration space in front of the security gates, this permits Draper to conduct certain business meetings without guests having to enter the more secure area of the facility. On DCAA?s fourth enumerated point, DCAA states that ?Draper is currently depreciating the Atrium costs over a 15 year period, while its Capitalization and Depreciation of Property Plant and Equipment policies and procedures states that building improvements should be depreciated over a period of 39 years? and that Draper has done so without explanation. This assertion does not fully reflect Draper?s consistent practice. Part V of Draper?s Disclosure Statement provides that, for building improvements, the useful life is ?A. Replacement experience adjusted by expected changes in periods of usefulness.? Draper has followed this practice consistently. Draper also believes that the 15-year useful life was reasonable and not a deviation from Draper?s Fixed Asset Handbook. For any given Construction in Process (CIP) project, while the handbook has guidelines for useful life, there is also a note stating: ?Useful lives are reviewed for CIP projects.? Draper determined the useful life to be 15 years in this case, for purposes of depreciation. Finally, DCAA challenges the evidence Draper provided as insufficient, to demonstrate considerations set forth in FAR 31.201-3(b), including: ? PowerPoints on the project ? Board of Director approval -- indicating consideration by the Board that has fiduciary responsibilities on such expenditures and sound practice ? Historical office building sales in Boston and Cambridge, which goes to the core of generally recognized expense and sound practice ? A statement regarding an adjustment for the expected period of usefulness consistent with Draper practice ? Work in progress documentation Despite the array of support Draper provided, DCAA returns to its true objection to a large open-space atrium constructed of glass. Draper, accordingly, has demonstrated that the costs are reasonable, and has depreciated consistent with its disclosed and established practice. DCAA?s fundamental basis of challenge is unfounded. Draper was responsive with DCAA?s requests and reviewed hundreds of documents to provide DCAA with support to their questions. At no point during the audit did DCAA request a comprehensive reasonableness presentation or analysis. Draper will continue to review the Atrium Depreciation and like items each fiscal year and determine whether the costs will be claimed. Issue Coordinator: Jamie Pereira, Assoc. Director, Accounting & Government Compliance Estimated Completion Date: Pending DCMA Resolution e. Auditor?s Response: Draper is incorrect in its statement that we disagree with the fundamental aesthetic of an atrium. This audit finding is not about the aesthetics of the atrium nor was this ever discussed as a concern. We have consistently indicated that Draper has not demonstrated the reasonableness of the proposed atrium costs. Although Draper asserts that it has ?reviewed hundreds of documents? in response to our requests, it is apparent that selected items of support have been provided for review. FAR 31.201-3(a) contains various considerations for the reasonableness of costs proposed. In order for a project of this magnitude to proceed, we believe a coordinated effort must have occurred with involvement by various individuals within and outside of the company leading to the decision to proceed and available information that Draper can use to provide support for the reasonableness of costs proposed or as Draper states ?a comprehensive reasonableness presentation or analysis?. Several questions come to mind. We do not know if the project germinated from an idea from the CEO, employee surveys or from other sources. Verbal statements have been made that the condition of Draper?s facilities led to hiring difficulties, however, we do not have any specific information on this point and believe that Draper has been able to retain adequate staffing to perform on its contracts. After deciding to proceed with this project, how did Draper proceed to establish the size and magnitude of it? We would anticipate that an ad-hoc committee would have been established to investigate and report on options over a period of time. We have no information on how Draper came to determine that construction of 493,000 square feet of primarily open space was the right size project to undertake. Were projects smaller in scope recommended but overruled by senior management? Draper obtained a listing of other building sales in Boston and Cambridge. How are prior sales relevant to current available properties and why are only these two cities identified as options? Did Draper visit any available facilities to assess their suitability? Draper decided to use a single sole-source general contractor for the project. What is the formal justification/analysis for the sole source determination? Is there an analysis or negotiation document that led to the establishment of the total construction amount? Other an email message, how was 15 years established as the appropriate period to depreciate the costs of the atrium? We believe that many decisions had to be made from a determination that Draper will proceed with the addition of an atrium through to the final design and cost of the atrium. All of this effort should entail a lot more than a couple of power point presentations that didn?t include verifiable data. In addition, most of what Draper has provided for support was after Draper made the decision to go forward with this project. We would also like to point out that Draper?s comments relating to bringing the building up to code pertains to its main building as opposed to the atrium. Those building deficiencies were not resolved by the construction of its atrium. The building deficiencies were being addressed as a separate renovation project, which Draper had to stop due to funding issues. The planned renovation of the Duffy building is still on hold. We are uncertain why the addition of the atrium took precedence over addressing building deficiencies. Based on the information provided, Draper has not supported the reasonableness of the $55 million expended on the addition of the atrium and the associated proposed depreciation for FY 2020. Draper also has not supported that any other, lower amount is reasonable and has left us with only the option of questioning proposed costs in their entirety and addressing this further after report issuance.

2020-002. Outside Counsel Costs ? Management Decisions a. Condition: We questioned $715,586 of outside counsel costs on the basis that Draper did not provide adequate supporting documentation to determine the impact of the legal firm?s conclusions regarding an engagement initiated by the Board of Directors related to concerns about certain management decisions and practices. As a result, Draper did not meet the requirements of FAR 31.201-2(d) and FAR 31.205-33(f). We requested unredacted supporting evidence, including vendor invoices, a statement of work and a final report to determine the allowability of claimed outside counsel costs and whether any findings or conclusions impact other elements of cost claimed by Draper. Draper stated that: ?Due to attorney-client privilege, Draper?s legal department has advised that Draper cannot provide unredacted invoice line items or final reports in relation to these invoices?. Instead, we were provided the overall engagement letter that documents the overall terms and conditions upon which the legal firm would be providing legal services (not specific to any support), a heavily redacted invoice from the legal firm and a power point presentation that summarized the legal firm?s conclusions. Overall the legal firm found no violation of law, regulation, internal practices or internal controls. However, the legal firm did confirm/identify several areas of concern about certain aspects of management conduct, decisions, and practices. Without a detailed agreement concerning the engagement with outside counsel, access to an unredacted invoice, and details behind the legal firm?s conclusions, we are unable to determine the risk and severity of concerns identified by the outside counsel on Federal Government contracts. FAR 31.201-2(d) specifies that ?a contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles?. Furthermore, FAR 31.205-33(f), Professional and Consultant Service Costs, states that fees for services rendered are allowable only when supported by ?(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed; (2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and (3) Consultants' work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports?. It is our conclusion that the supporting documentation provided by Draper did not meet either one of these FAR requirements. The cause for these questioned legal expenses results from Draper?s decision to invoke attorney-client privilege and not share additional information. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. We do not consider the questioned outside counsel costs subject to penalties in accordance with FAR 42.709. b. Criteria: The following Criteria apply: FAR 31.201-2 Determining allowability (d) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 31.205-33(f) - Professional and consultant service costs states (f) Fees for services rendered are allowable only when supported by evidence of the nature and scope of the service furnished (see also 31.205-38(c)). However, retainer agreements generally are not based on specific statements of work. Evidence necessary to determine that work performed is proper and does not violate law or regulation shall include? 1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed; 2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and 3) Consultants' work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports. c. Recommendation: We recommend that Draper allow us to review an unredacted version of the legal firm?s invoice and provide us with more details regarding the legal firm?s conclusions. This will enable us to determine if there are any impact on Draper?s Federal contracts. d. Draper?s Reaction: Draper?s reaction follows verbatim. DCAA has questioned the entirety of Draper?s $715,586 expense for outside counsel costs Draper incurred when the Board of Directors initiated an investigation into certain management decisions and practices. Specifically, DCAA takes issue with Draper?s assertion of attorney-client privilege over certain language in the supporting documentation submitted for DCAA review and requests ?un-redacted supporting evidence, including vendor invoices, a statement of work and report to determine the allowability of claimed outside counsel costs.? For this assertion, DCAA cites FAR 31.201-2(d) and FAR 31.205-33(f). Neither provision supports DCAA?s request for un-redacted supporting evidence. Draper has maintained ?supporting documentation? regarding these outside counsel costs under FAR 31.201-2(d) and ?evidence of the nature of scope of the service furnished? under FAR 31.205-33(f). In connection with these costs, Draper submitted to DCAA its outside counsel engagement letter, Board of Directors minutes outlaying the statement of work, a full invoice (redacted only to protect the company?s attorney-client privilege), Accounts Payable Invoice, an outside counsel out briefing presentation (also redacted only to protect the company?s attorney-client privilege), and evidence of payment. Moreover, Draper did not submit a ?final report? because outside counsel presented any findings to the Board in a briefing, which DCAA has already reviewed and which established a direct link to the statement of work agreed to by the Board of Directors. Draper provided these Board of Directors minutes, that detailed the request of this investigation, along with the decision by the General Counsel to use a specific law firm. The DCAA Selected Area of Cost Guidebook (?Guidebook?) reflects the government?s understanding that ?the type of evidence satisfying the documentation requirements will vary significantly based on the type of consulting effort [engagement of outside counsel] and from contractor to contractor.? (Guidebook, Chapter 58 (Professional and Consultant Services).) As the Guidebook makes clear, when DCAA is assessing the allowability of professional and consultant service costs, the audit team is not looking for ?a specific set of documents,? but rather, evidence generally of the engagement, the bill for services rendered (which can be augmented by ?other evidence provided by the contractor?), and a general explanation of what was accomplished for the fees paid. This guidance confirms that the materials Draper has provided to date are more than sufficient to satisfy the FAR requirements. Additionally, the FAQs accompanying the Guidance contains various examples of how the audit team can consider a variety of documentation to assess allowability -- including that the auditors should not ?automatically question the consultant costs simply because the invoice does not detail the time expended? or because the contractor does not have a copy of the work product generated by a consultant. The documentation Draper submitted well exceeds this baseline. Regarding DCAA?s challenge to redactions based on attorney-client privilege, case law establishes that Draper is well within its right to assert attorney-client privilege over confidential communications -- including where the requester of that material is the government. See, e.g., Parsons-UXB Joint Venture, ASBCA No. 56481, 11-2 BCA ? 34806. The government is not entitled to attorney-client privileged information, nor can it assert that basis to challenge the allowability of the outside counsel fees. Finally, despite that Draper has satisfied the cited FAR requirements, DCAA questions the outside counsel costs because the audit team was ?unable to determine the risk and severity of concerns identified by outside counsel on Federal government contracts.? As Draper already reported to DCAA, the investigation found no violation of law, regulation, internal policies or internal controls. The allowability of the outside counsel costs do not turn on DCAA?s ability to independently assess the ?risk and severity? of any ?concerns? associated with an investigation. For these reasons, Draper disagrees with DCAA?s recommendation to question the outside counsel costs. Draper will continue to review outside counsel costs to determine allowability, as is the current practice. Issue Coordinator: Jamie Pereira, Assoc. Director, Accounting & Government Compliance Estimated Completion Date: Pending DCMA Resolution e. Auditor Response: Draper has to meet the criteria within the cited FAR references for these costs to be allowable. Contractors should not selectively decide what they will and will not provide to support its claimed costs. If the cited FAR criteria are not met, then it is very clear that the costs are unallowable. To date, Draper has not met those requirements. The engagement letter that Draper referred to is a general overall agreement between Draper and the legal firm for any services that the legal firm may be involved in for Draper. It is not a specific engagement letter for this investigation. In addition, the Board of Directors minutes that Draper referred to only contained five bullets of some areas that they wanted the lawyers to investigate and did not contain any information as to why they wanted those areas investigated. The ?full invoice? that Draper referred to was a heavily redacted document that didn?t leave any information for evaluation. Additionally, the redacted power point presentation only provided a summary of the investigation, which left us with considerable questions regarding the details behind the investigation as well as its impact on Draper. Draper?s citation of our guidance interestingly enough omits the most important section of our guidance which states: 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. Therefore, if in our judgment the totality of evidence does not demonstrate that the costs are allowable, then the contractor has not met the requirements of FAR 31.205-33(f). Based on the information provided to date, it is our judgment that Draper has not met the requirements of FAR 31.205-33(f). Furthermore, requirements of FAR 31.201-2(d), Determining Allowability, are also relevant. It specifies that: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. We have been advised that the legal firm found no violation of law, regulation, internal practices or internal controls. We also have not been advised of any associated litigation or related on-going legal matters. With this context, we believe that the legal firm?s role is more appropriately considered to be a business advisor for the Board of Directors and that there is no reason to withhold any information nor true basis to assert attorney-client privilege. Withholding information and redacting documents has resulted in the costs questioned and concerns about the impact to the Government on management decisions investigated. Based on the limited support to date, it is our judgment that Draper has not provide adequate supporting documentation to demonstrate the costs claimed comply with applicable cost principles. Therefore, our positon is unchanged.

2020-003 Outside Counsel Costs ? Draper Ethics Hotline a. Condition: We questioned $26,497 of outside counsel costs on the basis that Draper did not provide adequate supporting documentation. As a result, Draper did not meet the requirements of FAR 31.201-2(d) and FAR 31.205-33(f) for these costs to be considered allowable. Draper retained the services of an outside legal firm to investigate an ethics complaint it received via its Ethics Hotline. We requested, on separate occasions, the supporting evidence, including statement of work and final report to determine the allowability of the claimed outside counsel. Draper stated that: ?Due to attorney-client privilege, Draper?s legal department has advised that Draper cannot provide final reports in relation to this invoice. To reiterate, this was an outside investigation of ethics complaint received via the Ethics Hotline; found no violation of law, regulation or internal policy.? Although Draper provided an assertion of the conclusions of the engagement, we have not been provided any supporting documentation that supports that there was no violation of law, regulation or internal policy. FAR 31.201-2(d), it states that ?a contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles?. Furthermore, FAR 31.205-33(f), Professional and Consultant Service Costs, states that fees for services rendered are allowable only when supported by ?(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed; (2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and (3) Consultants' work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports?. It is our conclusion that the limited support provided by Draper did not meet either one of these FAR requirements. Therefore, we are unable to determine that the claimed costs are allowable. The cause for these questioned legal expenses results from Draper?s decision to invoke attorney-client privilege and not share additional information. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. We do not consider the questioned outside counsel costs subject to penalties in accordance with FAR 42.709. b. Criteria: The following Criteria apply: FAR 31.201-2 Determining allowability (d) A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 31.205-33(f) - Professional and consultant service costs states (f) Fees for services rendered are allowable only when supported by evidence of the nature and scope of the service furnished (see also 31.205-38(c)). However, retainer agreements generally are not based on specific statements of work. Evidence necessary to determine that work performed is proper and does not violate law or regulation shall include? 1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed; 2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and 3) Consultants' work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports. c. Recommendation: We recommend that Draper only claim outside counsel costs that are fully supported by adequate documentation which demonstrates that costs have been incurred, are allocable to the contract, and comply with applicable cost principles. d. Draper?s Response: Draper?s reaction follows verbatim. DCAA has also questioned the allowability of $26,497 of outside counsel costs to investigate an ethics complaint that Draper received through its Ethics Hotline. Again, DCAA claims that ?Draper did not provide adequate supporting documentation? because Draper has asserted attorney-client privilege over certain language in the corresponding documents. For the same reasons set out above, DCAA cannot compel Draper to waive its privilege for purposes of satisfying the requirements of FAR 31.201-2(d) or FAR 31.205-33(f). As DCAA recognizes, Draper has provided ?an assertion of the conclusions of the engagement,? including that the outside investigation found no violation of law, regulation or internal policy. Therefore, Draper disagrees with DCAA?s recommendation to question the outside counsel costs. Draper will continue to review outside counsel costs to determine allowability, as is the current practice. Issue Coordinator: Jamie Pereira, Assoc. Director, Accounting & Government Compliance Estimated Completion Date: Pending DCMA Resolution e. Auditor?s Response: To date, Draper has not provided any information regarding the reason for the ethics investigation nor has it provided any details of the final results. Draper?s assertion that there was no violation of law, regulation or internal policy was received by email from one of Draper?s employees, not from the legal firm engaged by Draper. Draper chose not to respond to any follow up questions regarding these costs. Therefore, Draper has not met basic requirements to support these costs let alone the requirements of FAR 31.201-2(d) or FAR 31.205-33(f). In addition, we consider FAR 31.201-2(d), Determining Allowability, to be relevant because it requires that: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. We have been advised that the legal firm found no violation of law, regulation, internal practices or internal controls. We also have not been advised of any associated litigation or related on-going legal matters. With this context, we believe that the legal firm?s role is more appropriately considered to be a business advisor for the Board of Directors and that there is no reason to withhold any information nor true basis to assert attorney-client privilege. Withholding information has resulted in the costs questioned. Based on the limited support to date, it is our judgment that Draper has not provide adequate supporting documentation to demonstrate the costs claimed comply with applicable cost principles. Therefore, our positon is unchanged.

2020-004 Executive Compensation - Unreasonable a. Condition: We have questioned $337,500 of compensation costs that exceed the limitation set forth in FAR 31.205-(6)(p). The costs result from personal legal counsel obtained by one Draper?s executives that Draper elected to pay, resulting in additional employee compensation. Draper claimed this additional compensation despite the entire amount resulting in claimed compensation over the limitation set forth by FAR 31.205-(6)(p). We determined that the claimed cost represents a reimbursement of a legal fees paid on behalf of a former Draper senior executive as part of his separation pay agreement. Within that agreement, Draper agreed to pay his personal legal expenses in addition to his severance pay and then issue an IRS Form 1099, MISC ? Miscellaneous Income, to both the legal firm and the senior executive. As such, Draper appropriately recognized that the $337,500 paid represented compensation. As part of our evaluation, we reviewed the executive?s total compensation for FY 20 including base salary, bonus, 401k, severance, other payments and the amount of compensation withdrawn over the FAR 31.205-(6)(p) compensation limit. Based on our analysis, we noted that the additional $337,500 of compensation exceeded the FAR 31.205 6(p) compensation cap and is therefore unallowable. Within Draper?s submission, the claimed costs were reflected within a legal expense account. We also noted during our evaluation that Draper did not provide support required by FAR 31.205-33(f) including (1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed; (2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and (3) Consultants' work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes. None of this information was provided for our evaluation. We believe that this questioned amount was caused from a combination of various factors including the compensation not originally being planned by Draper, the costs being recorded as legal expenses, and the nature of the costs being closely held within the company because they were part of a separation agreement. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. Because the claimed amount represent employee compensation costs over the limitation set for by FAR 31.205-(6)(p), we consider the costs expressly unallowable and subject to penalties in accordance with FAR 42.709. This audit finding does not pertain to any prior year audit finding. b. Criteria FAR 31.205-6(p)(4) states a limit on allowable compensation. It specifically states the following: (4) All employee compensation limit for contracts awarded on or after June 24, 2014. (i) Applicability. This paragraph (p)(4) applies to all executive agency contracts awarded on or after June 24, 2014, and any subcontracts thereunder. (ii) Costs incurred on or after June 24, 2014, for the compensation of all employees in excess of the benchmark compensation amount determined applicable for the contractor fiscal year by the Administrator, Office of Federal Procurement Policy (OFPP) are unallowable under 10 U.S.C. 2324(e)(1)(P) and 41 U.S.C. 4304(a)(16), as in effect on or after June 24, 2014, pursuant to section 702 of Public Law 113-67. This limitation is the sole statutory limitation on allowable employee compensation costs incurred on or after June 24, 2014, under contracts awarded on or after June 24, 2014. See https://www.whitehouse.gov/wp-content/uploads/2017/11/ContractorCompensationCapContractsAwardedafterJune24.pdf. In regards to this FAR reference, compensation means the total amount of wages, salary, bonuses, deferred compensation, severance costs and employer contributions to defined contribution pension plans, for the fiscal year, whether paid, earned, or otherwise accruing, as recorded in the contractor's cost accounting records for the fiscal year. c. Recommendation: We recommend that Draper perform a more thorough analysis of its claimed compensation costs such that only allowable compensation is claimed. Terms of separation agreements should be made available to individuals responsible for screening unallowable costs and preparing Draper?s annual submission. Furthermore, because Draper?s submission identified these costs as legal expenses, we recommend that Draper undertake actions to ensure it has all the support required by FAR before being claimed in future submissions. d. Draper?s Reaction: Draper?s reaction follows verbatim. DCAA questioned the allowability of $337,500 in a separation agreement as reimbursement for outside counsel fees by attempting to treat the cost as compensation for purposes of assessing allowability. Case law has already addressed and rejected the theory that DCAA applies in the Draft Audit Report. A former senior executive elected to retain personal outside legal counsel involving a matter arising from the course of his work for Draper. As set out in the terms of the separation agreement, Draper agreed to pay for the senior executive's outside counsel expenses. Rather than treat the outside counsel cost as an ordinary expense in a separation agreement, DCAA elected to alter the fundamental nature of the expense and treat it as compensation. Under DCAA?s theory, because the senior executive was highly-compensated and subject to the cap for compensation under FAR 31.205-6(p), DCAA disallowed the entirety of the outside counsel expense as exceeding the cap. To justify this approach, DCAA relies on Draper?s characterization of the entire severance payment as Miscellaneous Income on an IRS Form 1099. In addition DCAA recommends penalties for unallowable costs. The ASBCA, however, expressly rejected this approach to analyzing cost allowability. Because the case law is contrary to DCAA?s position, the government cannot carry that burden of proving that the cost is unallowable. In Raytheon Co., ASBCA No. 57576, 15-1 BCA 36043, the ASBCA held that a contractor?s characterization of a cost ?does not trump the plain language? of the cost principle. Id. at n.4 (holding bonus and incentive compensation costs are not fringe benefits, because they do not meet the plain language of the FAR definition of fringe). Even more to the point, in DynCorp Int?l LLC, ASBCA No. 61950, 20-1 BCA 37703, the Board specifically held that severance payments are not compensation. In a case identical to the approach DCAA took here, the government argued that severance payments constituted compensation, and that, because the total, including severance, exceeded the cap on compensation under FAR 31.205-6(p), the severance was unallowable. The ASBCA rejected this argument. The ASBCA looked at the plain language of the definition of compensation at both FAR 31.001 and FAR 31.205-6(p) and concluded that severance does not meet the definition, because it is not a type of expense that is for ?services rendered.? The ASBCA also rejected the government?s argument that the definition of severance under FAR 31.205-6(g) indicated that it was just another type of compensation other than ?regular? salaries and wages. The ASBCA definitively held: ?Severance pay is not compensation.? And certainly, considering that the underlying costs here are for outside counsel fees, they are even further removed. Because the costs are not unallowable, they cannot be expressly unallowable. FAR 31.001 defines an expressly unallowable cost as ?a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract is specifically named and stated to be unallowable.? The analysis requires a review of the ?plain wording of the ... cost principle? to determine whether the item of cost or type of cost is specifically named and stated as unallowable.? Raytheon Co., ASBCA No. 57576, 15-1 BCA ? 36043 (emphasis in original). And, it must be ?unreasonable under all circumstances to conclude that [the costs at issue] are allowable.? Id. (citing General Dynamics Corp., ASBCA No. 49372, 02-2 BCA ? 31888). See also Raytheon Co., 940 F.3d at 1313 (?[c]osts unambiguously falling with a generic description of a `type? of unallowable cost are also `expressly unallowable??) These costs are not expressly unallowable. The type of cost, even if considered severance, are not specifically named and stated to be unallowable. To the contrary, the type of cost is specifically allowable. It is not unreasonable under all circumstances to conclude that the costs are allowable. Draper?s interpretation follows the language of the regulation and is therefore allowable. Draper will continue to review severance costs to determine allowability, as is the current practice. Issue Coordinator: Jamie Pereira, Assoc. Director, Accounting & Government Compliance Estimated Completion Date: Pending DCMA Resolution e. Auditor Response: Draper?s response makes the assertion that these questioned costs are severance costs rather than additional income over the compensation ceiling set forth in FAR 31.205-6(p)(4). Draper?s citations and comments should not be misunderstood nor construed to represent that we questioned these costs as representing severance costs. Severance costs are incurred after employees are involuntarily terminated. In this instance, prior to the employee?s involuntary termination, the employee obtained personal legal representation and incurred personal legal expenses. Without any requirement to do so, Draper elected to reimburse the employee for these costs and paid the employee?s law firm, not the employee. The separation agreement and general release document clearly identified severance paid to the employee and separately identified the additional income that we have questioned. Furthermore, we note that the agreement specifies that it is providing additional compensation to secure additional commitments including two topics/subject areas completely redacted from the agreement provided. Draper has indicated too that the employee retains ownership and attorney-client privilege for his personal legal representation. While unreasonable and unallowable per FAR 31.205-6(p)(4), Draper?s $337,500 reimbursement of its executive?s personal legal costs are also unreasonable per FAR 31.201 3(b)(1). When determining the allowabilty of costs, FAR 31.201-2 states that the reasonableness of costs must be considered. Specifically, FAR 31.201-3 states: What is reasonable depends upon a variety of considerations and circumstances, including- (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor?s business or the contract performance; (2) Generally accepted sound business practices, arm?s-length bargaining, and Federal and State laws and regulations; (3) The contractor?s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and (4) Any significant deviations from the contractor?s established practices. It is our opinion that the reimbursement of this executive?s personal legal expenses does not meet the criteria as a type of cost that is generally recognized as ordinary and necessary for the conduct of the contractor?s business or the contract performance. Therefore, it is our position that the claimed legal costs are unallowable.

2020-005 Public Relation Costs a. Condition We questioned $224,413 of costs relating a lunar landing simulator and walkthrough displays that pertain to Draper?s contribution to the Apollo 11 spaceflight that first landed humans on the moon. Although Draper did not specifically identify these costs to a particular general ledger account in the General Overhead Pool, we concluded that they represent costs relating to corporate image enhancement and public relations costs that are expressly unallowable per FAR 31.205-1(f). July of 2019 represented the 50th anniversary of this Apollo mission. So to celebrate this anniversary Draper created this display as part of spotlighting Draper?s success story with this mission. The centerpiece of this display was a simulator that replicates the last 100 seconds of the lunar lander?s descent, when the astronauts had to physically pilot the craft. In addition, Draper artifacts from this mission were also available to view. The exhibit was available from July of 2019 through October 5, 2019 and was open to the public. Draper also created a website for this event which included the following statement: Be Inspired! Discover how we hacked the moon! Explore the unsung stories of the engineers who guided the Apollo astronauts to the moon and back safely in an interactive multimedia exhibit featuring exclusive interviews, photos and artifacts at Draper. And starting July 20 test your piloting skills in the Lunar Lander Simulator When evaluating these costs, we took into consideration FAR 31.205-1(f), which states that unallowable public relation costs include: (1) All public relations and advertising costs, other than those specified in paragraphs (d) and (e) of this subsection, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line (except for those costs made allowable under 31.205-38(b)(5)), or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company's products or services. (2) All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Government. (3) Costs of sponsoring meetings, conventions, symposia, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production. (4) Costs of ceremonies such as (i) corporate celebrations and (ii) new product announcements. (5) Costs of promotional material, motion pictures, videotapes, brochures, handouts, magazines, and other media that are designed to call favorable attention to the contractor and its activities. Although Draper?s 50th anniversary celebration meets all five of these criteria as unallowable public relations costs, the primary purpose of this exhibit specifically pertains to a corporate celebration of the contribution that Draper made to the Apollo 11 landing. As a result, we have concluded that this would make all costs of promotional material, motion pictures, videotapes, brochures, handouts, magazines, and other media that are designed to call favorable attention to the contractor and its activities unallowable. The questioned costs consist of two payments. The first one was a $111,200 payment to a vendor for the fabrication and installation of Apollo 50th Atrium displays and the other one was a $113,213 payment to a vendor for the cost of the dome and projectors. As stated above, the claimed costs were not claimed in Draper?s submission as a cost recorded within an allowable cost account. These costs are claimed as a result of Draper?s preparation of its FY 2020 submission and a decision to reflect these costs a ?negative? management overhead reduction (MOR). As described, MORs are typically voluntary reductions to claimed amounts rather than additions. We believe that the cause for these unallowable costs is due to Draper interpreting that a compilation of FAR provisions including FAR 31.205-38(5), FAR 31.205-43(c), FAR 31.205-1(e)(4), and FAR 31.205-1(e)(2)(ii) makes the proposed costs allowable. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200, Appendix XI, Compliance Supplement. The questioned costs represent indirect costs, which pertain to all Federal contracts under Draper?s R&D program. We consider the questioned public relation costs subject to penalties in accordance with FAR 42.709. b. Criteria FAR 31.205-1(f) states the following: (f) Unallowable public relations and advertising costs include the following: (1) All public relations and advertising costs, other than those specified in paragraphs (d) and (e) of this subsection, whose primary purpose is to promote the sale of products or services by stimulating interest in a product or product line (except for those costs made allowable under 31.205-38(b)(5)), or by disseminating messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company's products or services. (2) All costs of trade shows and other special events which do not contain a significant effort to promote the export sales of products normally sold to the U.S. Government. (3) Costs of sponsoring meetings, conventions, symposia, seminars, and other special events when the principal purpose of the event is other than dissemination of technical information or stimulation of production. (4) Costs of ceremonies such as (i) corporate celebrations and (ii) new product announcements. (5) Costs of promotional material, motion pictures, videotapes, brochures, handouts, magazines, and other media that are designed to call favorable attention to the contractor and its activities. (6) Costs of souvenirs, models, imprinted clothing, buttons, and other mementos provided to customers or the public. (7) Costs of memberships in civic and community organizations. (8) Costs associated with the donation of excess food to nonprofit organizations in accordance with the Federal Food Donation Act of 2008 (42 U.S.C. 1792, see subpart 26.4). c. Recommendation: We recommend that Draper perform a more thorough analysis of its claimed overhead costs including the intent of costs incurred and the allowability of costs in accordance with requirements of FAR. Draper should also take actions to ensure that unallowable public relation costs are not claimed in future incurred cost submissions. d. Draper?s Reaction: Draper?s reaction follows verbatim. DCAA has questioned $224,413 of costs relating to a lunar landing simulator and walkthrough displays. DCAA has improperly concluded that these expenses represent ?costs relating to corporate image enhancement and public relations costs that are expressly unallowable per FAR 31.205-1(f).? Contrary to DCAA?s findings, these are allowable costs and not subject to expressly unallowable penalties. The costs of the simulator and walkthrough displays qualify as direct selling efforts pursuant to FAR 31.205-38(b)(5), which includes ?such efforts as familiarizing a potential customer with the contractor?s products or services? and ?any other efforts having as their purpose the application or adaptation of the contractor?s products or services for a particular customer?s use.? FAR 31.205-38(b)(5). As Draper explained to DCAA, it used the simulator and displays as part of a multi-month (from July to October) program during which Draper featured information regarding its technology and held meetings with several customers to familiarize them with Draper?s capabilities, including through testing the simulator. Not only were the efforts Draper undertook intended to ?induce particular customers to purchase particular products or services of the contractor? as the FAR contemplates, the efforts were also successful. Potential customers tested the simulator -- the precise sort of ?individual demonstrations? the regulations contemplate. And Draper has received additional contract awards through the simulator and walkthrough displays, including a contract to build a simulator for a customer in the aerospace industry as well as work supporting a customer?s plan to build a human-capable lunar landing system and bid that system for NASA?s Artemis program. See FAR 31.205-1(d)(2) (allowable advertising costs include the costs of ?activities to promote sales of products normally sold to the U.S. government?). DCAA cites FAR 31.205-1(f)(1) through (5) to assert that these costs are unallowable. DCAA claims that the costs ?meet all five of these criteria as unallowable public relations costs,? but focuses on FAR 31.205-1(f)(4), which renders unallowable costs of ?ceremonies,? such as ?corporate celebrations? and ?new product announcements.? According to DCAA, Draper?s simulator and walkthrough displays constituted a ?corporate celebration? and thus, the costs of materials associated with the display are unallowable. DCAA?s only support for this conclusion is language from a website that Draper created featuring the simulator and walkthrough displays as ?part of spotlighting Draper?s success story? with the Apollo mission on its 50th anniversary. That language does not render the costs unallowable. The company?s strategy to feature its role in the Apollo mission does not bear upon whether, e.g., the simulator and displays demonstrated to potential customers the application of Draper?s technology, as contemplated in FAR 31.205-38(b)(5). As noted above, that strategy was in fact successful in generating the precise sales (including of simulators) that Draper intended. Further, DCAA offers no explanation for how a multi-month sales effort resembles a one-day ?corporate celebration? of the sort that FAR 31.205-1(f)(4) contemplates. FAR 31.204 directs that ?the determination of allowability shall be based on the guidance contained in the subsection [of FAR 31.205] that most specifically deals with, or best captures the essential nature of, the cost at issue.? FAR 31.204(d). DCAA has not demonstrated the costs are unallowable. Further, Draper specifically challenges DCAA?s finding that these costs are expressly unallowable. DCAA?s Draft Audit Report belies a finding that the costs at issue meet this definition. DCAA did not point to a particular FAR provision that renders the costs ?specifically? and ?unambiguously? unallowable, pursuant to the definition of an expressly unallowable cost discussed above. As DCAA acknowledges, Draper has asserted that the costs of its simulator and walkthrough displays are allowable under numerous FAR provisions, several of which overlap with one another. FAR 31.205-38 advises that ?`selling? is a generic term? and that many subsections of FAR 31.205 address ?efforts to market the contractor?s products or services.? One subsection addressing such costs is FAR 31.205-28(b)(5), which treats as allowable any direct selling efforts. As such, the circumstances do not support a finding that these costs are expressly unallowable. Finally, DCAA notes that ?the claimed costs were not claimed in Draper?s submission as a cost recorded within an allowable cost account. These costs are claimed as a result of Draper?s preparation of its FY 2020 submission and a decision to reflect these costs a `negative? management overhead reduction (MOR). As described, MORs are typically voluntary reductions to claimed amounts rather than additions. This point is inconsequential to the allowability of the costs. As DCAA noted, the MOR is Draper?s voluntary reduction in overhead expense. Draper?s practice, as a matter of business decision, is to provide the government the benefit of this reduction. By applying the cost of the simulator and walkthrough displays as a reduction to the MOR, Draper asserted entitlement to an allowable expense. Thus, as with the other questioned costs, the costs associated with the simulator and walkthrough displays are allowable. Draper will continue to review public relations costs to determine allowability, as is the current practice. Issue Coordinator: Jamie Pereira, Assoc. Director, Accounting & Government Compliance Estimated Completion Date: Pending DCMA Resolution * * * For the aforementioned reasons, Draper has demonstrated the allowability of the costs questioned in the Draft Audit Report. Please feel free to contact me with any questions. e. Auditor Response: Draper?s response contradicts statements made by its CEO, information on its own website, Draper?s letterhead, newspaper articles and our own observation of this exhibit. Draper is not in the business of selling simulators nor was that the intent of this exhibit. In addition, this was not a ?multi-month? sales event as argued by Draper and we have not been provided any evidence to support that position. This exhibit was open to the general public (including local schools), it demonstrated technology from fifty years ago (rather than current technology of a Research and Development (R&D) Company) and represented a corporate celebration of Draper?s contribution to the Apollo 11 landing. In addition, Draper was very selective in its response to exclude the statement in the FAR reference, which is very relevant to this issue. The FAR reference states that unallowable public relation costs pertain to costs ?whose primary purpose? is disseminate messages calling favorable attention to the contractor for purposes of enhancing the company image to sell the company?s products or services. Trying to select a couple of areas where it might be allowable does not eclipse the primary intent of this exhibit, which was to celebrate the 50th anniversary of Draper?s contribution to the Apollo mission. Therefore, since the primary purpose of this exhibit was for a corporate celebration, the costs associated with this exhibit are unallowable per FAR 31.205-1(f). This FAR regulation best agrees with Draper?s statement that the FAR that ?most specifically deals with, or best captures the essential nature of, the cost at issue? should be followed. While Draper makes this statement, we note that Draper cites parts of several FAR regulations for its position that the costs should be allowed. Finally, we note that Draper initially set these costs aside but made an upward, manual adjustment to its MOR to claim these amounts in its submission.

2019-001. Unreasonable Compensation a. Condition: We evaluated the total compensation for Draper?s top sixteen highest paid employees and determined that $117,440 of FY 19 claimed indirect compensation is unreasonable in accordance with FAR 31.205-6(b)(2). This amount is comprised of the compensation for two individuals determined to have unreasonable total compensation during the FY 2018 Uniform Guidance audit as well as another employee that exceeded the amount of compensation previously found to be reasonable for her position. For all three positions, we adjusted the FY 2018 compensation data to reflect a reasonable increase in compensation. The questioned costs represent indirect costs, which pertains to all Federal contracts under Draper?s R&D program. Draper?s noncompliance with FAR also results in a noncompliance with Compliance Requirement B (Allowable Cost/Cost Principles) of 2 CFR 200 Appendix XI, Compliance Supplement. We do not consider Draper?s unreasonable compensation to be subject to penalties in accordance with FAR 42.709. b. Criteria: Draper maintains written employee position descriptions for each of its employees. Our evaluation of Draper?s top paid employees for FY 2018 focused on their associated amounts for base salary, bonus, 401k, severance, and other payments less management determined voluntary deletions. We requested information from Draper in order to understand and evaluate the basis of the claimed compensation costs and how the company establishes executive pay levels. This included written employee position descriptions for the executives in our evaluation. Draper asserts that its compensation is based on market pricing data (compensation surveys), 3rd Party (consultant) analysis and management judgement. Draper provided 3rd party compensation analysis performed by Mercer LLC for the top five executives and market pricing survey for other employees. We used the survey data from Mercer LLC for the top five executives in our evaluation; however, we were unable to consider the market pricing survey data for the other employees because the survey is not comparable to Draper. Draper did not assert high performance or any other factor impacting our evaluation. Based on prevalent market and contractor?s practices, we determined the appropriate market percentile for Draper to be the median. Draper did not provide enough supporting documentation to demonstrate the reasonableness of the claimed compensation, including information on management judgments that impacted compensation amounts. We utilized the executive position descriptions and executive titles in order to understand their job content (duties, scope of responsibilities, functions/activities). Based on our evaluation, we determined appropriate survey benchmarks for each position. We compared the claimed cash compensation for the top executives of Draper to amounts represented in the following reputable executive compensation surveys. The surveys used to determine reasonable cash compensation levels were: Economic Research Institute Executive Compensation Assessor; July 2018 Database; 2016 Management Compensation Report for Not-for-Profit Organizations by PRM Consulting Group; and Mercer (Contractor?s 3rd Party Analysis): 2017 Draper Executive Remuneration Review by Mercer LLC. We used the appropriate area, industry, positions, and time frame involved. The recommendations for the executive positions are the average of the reasonable amounts for cash compensation plus a 10% range of reasonableness (RoR) application in accordance with generally accepted compensation practices. We utilized the FY 2018 benchmarks as a basis for determining the reasonableness of the top paid sixteen employees for Draper during FY 2019 total compensation claimed for Draper?s top paid employees. During the FY 2018 audit, we identified eight employees whose total compensation was determined to be unreasonable. For FY 2019, we concluded that the total compensation for only two of those employees still exceeded amounts considered to be reasonable as part of the FY 2018 audit. Therefore, we calculated a decrement factor using last year?s findings and applied it to this year?s total compensation because this approach captures amounts considered to be unallowable and also allows for a reasonable increase in total compensation for FY 2019. In regards to the third employee, we used the FY 2018 survey data for her position and escalated by the percentage the FAR 31.205-6(p)(4) executive compensation cap increased from FY 2018 to FY 2019 to reflect a reasonable compensation level for FY 2019. We then compared her FY 2019 total compensation to this reasonable limit and questioned the difference. We also compared the claimed compensation for the covered executives to the FY 2019 compensation limitation as set forth in FAR 31.205-6(p). No exceptions were noted regarding the comparison of Draper?s executive salaries to the FAR compensation limitation. c. Recommendation: We recommend that Draper reevaluate its process for assessing reasonableness of its employee?s total compensation to ensure that only reasonable compensation amounts are allocated to Federal government contracts. d. Draper?s Reaction: Draper?s reaction follows verbatim. Draper does not concur with DCAA?s finding and reserves the right to negotiate this issue with the ACO. Draper?s DFR2018 final indirect rate proposal has not yet been settled. It is Draper?s position, that has been extensively and repeatedly communicated and documented, that claimed Executive Compensation costs were appropriately classified, allowable, and reasonable per federal regulations. Issue Coordinator: Jamie Pereira, Assoc. Dire., Accounting & Government Compliance Est. Completion Date: Pending DCMA Resolution e. Auditor?s Response: Draper did not provide us any new or additional information to take into consideration. Therefore, our audit position is unchanged.

Our examination disclosed that Draper?s labor charging practice for a Vice President (VP) of a program office is noncompliant with the requirements of FAR 31.202 (direct costs), CAS 402 (Consistency in Allocating Costs Incurred for the Same Purpose), Draper?s CAS Disclosure Statement, and Draper?s Time Reporting Handbook. We identified this issue by analyzing actual labor charges of all four VPs for Draper?s program offices. We found that Draper directly charged 100 percent of a VP?s labor costs, excluding paid time off, to three of forty-four Federal government contracts under his oversight during FY 2019. Conversely, Draper indirectly allocated 100% of the labor costs for three other VPs of program offices despite their positions having similar responsibilities and functions. The following schedule summarizes labor charges by each of the four program office VPs: See Schedule of Findings and Questioned Costs for chart/table The practice of allocating costs differently even though they are incurred for the same purpose, in like circumstances, is not in compliance with the requirements of FAR 31.202, Direct Cost and CAS 402, Consistency in Allocating Costs Incurred for the Same Purpose, which state the following: FAR 31.202(a) - No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective? 48 CFR 9904.402 - Consistency in Allocating Costs Incurred for the Same Purpose - All costs incurred for the same purpose, in like circumstances, are either direct costs only or indirect costs only with respect to final cost objectives. No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective. Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective. These regulations clearly establish that a contractor cannot charge costs for the same purposes, in like circumstances, as both direct and indirect costs. We reviewed the job descriptions of each VP to ensure that they, in fact, perform the same functions. We found that there are no significant differences in the type of work expected to be performed by each VP. We also interviewed the VP in question and a program office VP that charges indirectly and found that their functions were similar and very consistent with their identical job descriptions. In addition, the VP in question acknowledged that the three contracts that he charges 100 percent of his labor to do not specifically require him to directly charge those contracts. We also discussed the practice of charging direct to contracts with the other VP and she stated that she could not ever find a reason to charge direct to a contract. The job descriptions for all of the VP?s are very consistent and entail: ? Providing leadership required to execute the strategy through the program office directors; ? Building a deep understanding of Draper?s capabilities to develop a strategy for identifying and pursuing new customers and sectors; ? Identifying opportunities to create unique capabilities that differentiate Draper in the marketplace and work with Engineering to develop them; ? Executing the vision and goals of the President and CEO while contributing to the formulation of corporate strategies; ? Successfully recruit and retain top technical talent; ? Participating in technical conferences, science board activities, etc. to initiate contacts, confirm technology leadership and build productive relationships; and ? Creating an entrepreneurial, make-it-happen culture The job descriptions specify primary functions that do not include performing directly on contracts under their respective program office. Based on our interviews and the job descriptions for the program office VPs, it is evident that all four VPs perform the same functions. Therefore, the practice of charging the labor associated with one VP direct while charging the labor costs for the other three VPs indirect results in noncompliance with the requirements of FAR 31.202(a) and 48 CFR 9904.402. Furthermore, we reviewed Draper?s Time Reporting Handbook, which specifically states: Draper?s time reporting system is to provide and maintain a systematic means of accurately and consistently charging employee labor hours on a timely basis to all Draper projects (customer-funded and Draper-funded). Because certain VP labor efforts are directly charged to government contracts while similar labor efforts of other VPs are indirectly charged, we have also concluded that Draper is not following its official time reporting policies and procedures. Finally, we reviewed Draper?s current CAS Disclosure Statement, which identifies Draper?s disclosed practices for determining how costs are charged to the federal contracts or similar contracts. Under Item Number 3.1.0 of its Disclosure Statement it states the following: (a) A cost is accounted for as a direct cost and is allocated only to the final cost objective with which it is identified if: (1) The beneficial or causal relationship between the incurrence of the cost and the final cost objective is clear and exclusive; and (2) The amount of the cost identified with a resource used directly on or applied directly to a final cost objective is readily and economically measurable without undue administrative effort; and (3) All other costs incurred for the same purpose in like circumstances and can also be identified specifically with particular final cost objectives and accounted for as direct costs. (b) Costs which do not satisfy the criteria of (a) above are identified and accounted for as indirect costs. Draper?s Disclosed Cost Accounting Practices specify that costs can only be charged directly if all costs incurred for the same purpose in like circumstances can be identified specifically with particular final cost objectives and accounted for as direct costs. As detailed above, Draper?s three other program office VPs do not charge directly to contracts. As a result, Draper?s actual practices are noncompliant with its disclosed cost accounting practices within Item 3.1.0 of its Disclosure Statement. Because of the noncompliances and inconsistencies identified, we have questioned $341,299 of claimed direct labor costs on the three Navy contracts and associated cost allocation bases and have made a corresponding upward adjustment to Draper?s General Overhead Pool. The full impact on the three Navy contracts, including associated indirect expenses, is $765,391. See Section B (Direct Costs Section) for details on the impact of this audit finding for each contract. This audit finding also results in a noncompliance with compliance requirement B (Allowable Cost/Cost Principles) of 2 CFR Part 200 Appendix XI, Compliance Supplement. We do not consider the questioned labor costs to be subject to penalties in accordance with FAR 42.709. b. Criteria: The following criteria apply: FAR 31.202, Direct Costs, 48 CFR 9904.402, Consistency in Allocating Costs Incurred for the Same Purpose, Disclosure Statement, Revision Number 18, Item Number 3.1.0, Draper?s Time Reporting Handbook, and Jobs Descriptions of the VPs for Draper?s Program Offices Requirements for each criteria are included in the Condition note above. c. Recommendation We recommend that Draper establish consistent practices for charging labor costs associated with the VPs of its four Program Offices. Establishing consistency will ensure compliance with the requirements of FAR 31.202 (Direct Costs), CAS 402 (Consistency in Allocating Costs Incurred for the Same Purpose), Draper?s CAS Disclosure Statement, Draper?s Time Reporting Handbook and the functions of program office VPs as described in their job descriptions. d. Draper?s Reaction: Draper?s reaction follows verbatim. Draper disagrees with DCAA?s determination that 100 percent of the Vice President?s questioned labor costs should be classified as indirect. Draper also disagrees with DCAA?s basis for questioning the claimed labor charges, for the following reasons: Draper?s treatment of labor charges is compliant with the fundamental requirements of 48 CFR 9904.402. Due to the nature of its contracts and customers, Draper disagrees that its Vice Presidents always perform the same efforts and for the same purposes. The VP in question generally charges directly to contracts due to the advanced senior level attention required by the contracts as well as to accommodate the customer?s preference for direct attention. The VP?s program office primarily has one long-standing customer, the Navy, which generally requires less administration and more senior level support than other sponsors. The VP supports Navy contracts of vital interest to national security and provides direct, highly attentive, and specialized guidance to this customer regularly. All Draper employees, including the Vice President of this particular program office, charge time in accordance with Draper?s Time Reporting Handbook and practices described in Draper?s CAS Disclosure Statement. If a Vice President performs direct work on a contract, oversees only one contract/customer, or can directly identify their effort to a single final cost objective, then they charge their time directly to that cost objective/contract. DCAA?s claim that 100 percent of the Vice President?s charges are solely indirect charges has not been substantiated using audit evidence from DFY19. Instead, evidence for these claims relies solely on an interview from a Floor Check conducted in DFY18. Draper has held and will continue to provide training on timekeeping requirements for all employees. Draper will re-evaluate its current practices, and will notify the government if and when any changes are implemented. Issue Coordinator: Jamie Pereira, Assoc. Dire., Accounting & Government Compliance Est. Completion Date: Pending DCMA Resolution e. Auditor?s Response: Draper?s labor charging practice (for the VP in question) does not comply with CAS 402. The true impact on these three Navy contracts is not just limited to the VP?s labor and applicable indirect costs. These three Navy contracts are not only paying 100 percent of this VP?s non paid time off labor costs, but are also paying for a share of the other VP?s labor costs through the indirect rates. As a result, the Navy is paying for a disproportionate amount of Draper VP?s

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