McNew & Associates, Inc. Blog

DCAA Changes Impacting Federal Contractors
April 25, 2012, 7:02 PM
Filed under: Uncategorized

DCAA Changes Impacting Federal Contractors

Everyone seems to roll their eyes back in their heads these days when you start talking about the Defense Contract Audit Agency (DCAA) and the changes that are “forthcoming” as a result of the latest push for DoD to get a handle on contract audits.  Resist the urge to do this — DCAA is continuing down the “reform highway” with some major undertakings that have the potential to impact company cash flows & competitive standing in obtaining DoD contracts.  Contractors across the spectrum of Federal acquisition truly need to be prepared & aware -read on to take a quick look at the top five DCAA changes impacting a contract you may own or support!

#1 Incurred Cost Audits

* Outstanding Audit Catch-Up:  Years 2007 & below targeted for completion by end of 2012.

According to discussions with DCAA, they are establishing a slew of new virtual incurred cost teams charged with ensuring that all outstanding years 2007 & below incurred cost audits are completed by the end of 2012.  Regardless of business size, contractors must prepare to support timely responses to due dates for reports on the older outstanding audits.  These will be monitored by DCAA and supporting contractors will be at an added associated risk for time & resource demands – posture now!

*Increasing Incurred Cost Proposal Scope & Adequacy: Increase scope of walkthrough, strict requirements for format/inclusions areas, improved audit steps, enhanced risk assessment, & new DCAA Guide for Determining Adequacy of Contractor Incurred Cost Proposal.

DCAA will also be increasing the scope of the walkthrough of the Incurred Cost Submission (ICS) in order to ensure compliance with the criteria of FAR 42.703 ( Indirect Cost Rates – General) and FAR 52.216-7 (Allowable Cost & Payment). For contractors, this will drive a comprehensive response of more detailed requirements to support all facets of the process surrounding the incurred cost submission & audit process. DCAA’s Incurred Cost Electronically (ICE) Model (contractors can access this on DCAA’s site, under DCAA publications) is “recommended” for use, & offers an electronic medium to capture ICS in the correct format.  Regardless of whether contractors are using the ICE or their own model, contractors must follow the format & include the areas identified in the Information for Contractors Pamphlet incurred cost submission as these are required for an adequate incurred cost audit ICE package (see FAR 52.216-7).

Companies preparing the ICS should also read and heed the highlights of the November 2011, DCAA issued Audit Guidance Memorandum 11-PPD-020(R), Revised Audit Program for Major Incurred Cost Audits and Guide for Determining Adequacy of Incurred Cost Proposal.  It provides for:

-Improved detailed audit steps covering areas such as direct labor costs, contractor compensation costs, & excessive pass-through costs.
-Expanded risk assessment procedures to include a step to obtain a walk-through of the incurred cost proposal with the contractor to facilitate the process for the auditor to gain an understanding of the basis of the claimed costs & related supporting documentation, significant controls, & the relevant policies/procedures & processes related to significant cost elements.
-Revised the Guide for Determining Adequacy of Contractor Incurred Cost Proposal to use in determining the adequacy of final indirect cost rate proposals at both major & non-major contractors.
valuation of the incurred cost proposal for adequacy upon receipt & immediate notification to the contracting officer, and contractor, in writing, of significant inadequacies.

*Sample Items for Compliant Audit Examination: Certain sample areas require more detail.

In the past few years, the DoD Inspector General has identified deficiencies with DCAA’s  sampling applications. This included deficiencies in documentation & clarity in sampling plans, in addition to calling for increased detail in audit reports. Other issues centered on sample sizes & sampling reliability parameters used in sampling applications. In response, DCAA has instituted significant increases to the number of sample items required to support a compliant audit examination.  The three sampling areas impacted are: (1) establishing sample size, (2) evaluating sample results, and (3) reporting sample results in audit reports.  For contractors, this drives more attention to the areas that are highlighted below.  Contractor will need to satisfy data requirements that are more significant & equate to more time/effort. (See DCAA 11-OTS-001, Guidance on Variable Sampling Policy)

-Air Travel: FAR 31.205-46(b) and (c) limit allowable costs to “the lowest airfare available to the contractor.”  In support, DCAA is analyzing costs of airfare to determine if contractors have negotiated directly with airlines/travel agents for lower priced fares in support of the contract.  Contractors will need to demonstrate advance planning & consideration of nonrefundable fares, unless citing one of the exceptions in FAR 31.205-46(b).  (See DCAA 10-PAC-010, Audit Guidance on Revision to FAR –

31.205-46(b) and (c) – Limiting Airfare to the Lowest Airfare Available to the Contractor)

 -Lobbying:  FAR 31.205-22 and FAR 52.203-12 provides that the costs of lobbying activities, as well as any directly associated costs, are unallowable. DCAA is reviewing contractor proposals to determine if these costs have been identified & accounted for appropriately. Because of the potential for contractors to have costs tied to the time & effort spent securing earmarks, DCAA is validating that the contractor’s procedures for properly identifying and accounting for costs associated with lobbying activities are separately identified in the indirect rate submissions, and to maintain adequate records to support their certification.  Inadequate contractor procedures can cause systems to be deemed inadequate. See DCAA 11-PAC-015, Audit Guidance on Lobbying Costs Related to Legislative Earmarks.

Subcontract Costs: Because subcontract surveillance after award is a critical effort, DCAA is looking for prime assurance that the subcontract billings received are verified prior to passing billings to the Government.  To support this assessment, prime contractors should maintain the subcontractor briefing, FAR 31 testing, & administration of subcontract. Remember, because subcontract costs are now getting extensive scrutiny, this also includes the adequacy of the subcontract ICE.  Primes must also ensure consultants have adequate support for costs. Possible solutions for prime contractors in support of these more rigorous reviews include engaging with third-party audit firms to support auditing of subcontractor proprietary cost information prior to incurred cost submissions. Primes might want to consider using time cards for consultants, along with evidence of prime monitoring activities. Regardless, primes must ensure they can demonstrate compliance with FAR 9.103 (Responsible Prospective Contractors – Policy), FAR 15.404-3 (Subcontracting Pricing Considerations), and FAR 31 (Contract Cost Principles & Procedures). (See DCAA 11-PSP-003, Audit Guidance on Limitations on Pass-Through Changes FAR 52.215-22, 52.215-23, 31.203(i))

-Labor & Material (if no concurrent Mandatory Annual Audit Requirement or MAAR was accomplished): This is another area that DCAA is behind in performing.  As such, if MAAR 6 (labor floor checks) & 13 (material reviews) haven’t been accomplished, DCAA is working hard to get years 2005-2007 accomplished.  Most small contractors will be hit hardest in supporting these due to their respective smaller resource pools.  In addition, DCAA is taking hard look at the reconciliation process supporting Federal Form 941s (Employers Quarterly Federal Tax Return).  Be prepared! 

#2 Targeted Audit Efforts:  Focused DCAA resources on smaller audit population encompassing contracts at $10 million (Firm Fixed Price) & $100 million (Cost Plus).

In the fall of 2010, in response to DCAA’s backlog of audits, dwindling resources, & cries from the acquisition community, DCAA’s audit responsibility was redirected to focus on high risk audits across DoD.  Subsequently, the Defense Federal Acquisition Regulation (DFAR) was revised to to narrow DCAA’s auditing efforts to a smaller population encompassing contracts at $10 million (Firm Fixed Price contracts) & $100 million (Cost Plus contracts).  In response, contractors with these dollar value contracts are seeing a reinvigorated DCAA focus on adequate audit packages.  This impacts those contractors pricing proposals, in these dollar thresholds.  For those contractors with smaller dollar contracts, be prepared for a little chaos as the lower dollar contract audits have been divested to the Defense Contract Management Agency (DCMA).  While simultaneously working within the parameters of their new area of responsibility, DCMA is hiring & training pricing/auditing as fast as they can!  Standing up Pricing Centers of Expertise is one of the mechanisms they are using to support this new found responsibility. How does this translate to contractors?  Know your thresholds, identify which agency you will be dealing with, and work within their established processes!  (See DCAA 10-PPS-030, Increased Thresholds for Price Proposal Audits)

#3 Denial of Access:  DCAA needs access to contractor documentation & personnel to conduct efficient audit.

Access to records remains a big issue & concern across DCAA! There has been quite a bit of discussion, policy, reporting, over the years, but generally, documentation supporting the contractor’s assertion (e.g., the cost records, policies and procedures, management reports, contractor’s proposal) should be readily available.  Beyond the documentation, auditors also want access to personnel.  Think about it — unless the request requires analysis by the contractor, or there are extenuating circumstances (e.g., the request is for a voluminous amount of data or for data stored at an off-site location), the contractor should provide the documentation upon request and should allow access to personnel.  In determining the sufficiency of evidence needed, DCAA must consider the audit objective, the risk, and materiality of an error or misstatement in the area being audited and the effect on the audit opinion.  According to DoD guidance, auditors must be prepared to discuss the basis for the request and to explain the underlying audit need.  Simply having DCAA stating “because I want it” is not satisfactory or compliant with DoD guidance. “Unusual or extensive requests,” a term that isn’t defined by DoD or DCAA, must be made in writing by someone higher than the auditor.  Remember, DCAA auditors are not permitted to remove original records from the contractor premises. They can make (or request) copies of pertinent records for working paper documentation. However, auditors should not request contractors to reproduce records so that he/she can work at home (or another worksite).  Contractors that deny proper access will surely cause delays to the audit process, extending lead times for audit & ultimately contract award.  Making sure your team of professionals understands what is reasonable & making that available (reading personnel/systems to be responsive to DCAA’s records access requests) will make great strides in the efficiency of the process. That said, if your company determines there is a need to deny access, make sure you get legal guidance! (DCAA Contract Audit Manual, 1-504.36.a)

#4 Systems Audits & the Pilot Program: Large contractors need to pay attention to the requirements in DFARs.

Changes to the DFARS rules for systems have evolved for accounting systems, estimating systems, purchasing systems, Earned Value Management Systems (EVMS), Material Management & Accounting Systems (MMAS), & property management systems. DCAA has started its pilot program on audits of large contractors, & while DCAA has been slow to implement, the supporting data requirements for contractors are extensive. Contractors have found these systems to be complex and very painful to navigate. Because old system reviews are very outdated, DCAA is attempting to update new reviews. In support of this, DCAA is looking for real time contractor-led system demonstrations (e.g., show how the billing (voucher) actually gets produced, reviewed, entered, etc.).  Because of the division of responsibility for some of these system reviews has DCMA as the lead, this can also contribute to further confusion during the system audits.  Contractors with upcoming system reviews must be mindful of these issues & formulate sound strategies to demonstrate compliance.

#5 Timely Audit Responses & Timelines:  Milestones are important & measured!

Due dates for audit service is now at a premium again!  Because of this renewed emphasis on timely responses & meeting acquisition timelines, the due dates DCAA provides to their customers will leverage added stress on contractors in support. Contractors must be prepared for due dates & more accountability if failing to meet agreed to milestones.  Preparation for supporting audit visits, timely responses to requests for data, & open lines of communication will become paramount.  Failure to recognize DCAA’s seriousness in this area may impact the negotiation schedule & contract award dates. (See DCAA 12-PPS-001, Audit Guidance on Milestone Plans & DCAA 12-PPS-005, Audit Guidance on Agreed-to Dates Performance Measure for Forward Pricing Audits)

Want to Know More and/or Need Help?

Check out the McNew & Associates (MAI) Website where businesses can find “the solution” to all of your DCAA compliance and Government contracting needs. Our goal at MAI is to help Government Contractors navigate their way through the many obstacles found in contract clauses and DCAA audits by providing cost-effective solutions. Our services range from Government Cost Accounting & Bookkeeping to Bid & Proposal Support, Contract Management, and DCAA Audit Support.  Whether you need full time, part time, or less time spent on supporting the wide range of acquisition related functions/activities, MAI offers support when you need it, with the right mix of expertise to fully respond to your needs.

MAI offers a suite of services to support your business needs in complying with all the ever-evolving DCAA requirements – everything from:

a)    Supporting all aspects of DCAA audits including

  • DCAA Audit Support
  • DCAA Mock Audits
  • Internal Control Implementation
  • Cost Accounting Theory Application
  • Indirect Rate Development & Monitoring
  • Policy & Procedure Development
  • CAS, FAR & DFARS Guidance and Interpretation
  • EVMS Setup and Support
  • Project/Program Management Analysis Tools
  • Cost/Price Analysis

b)    Designing surge support when DCAA requests become burdensome to existing personnel expertise depth & breadth


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