McNew & Associates, Inc. Blog

To our valued clients:

In an effort to keep everyone apprised of the most recent information regarding:

Incurred Cost Audits

DCAA is establishing new virtual incurred cost teams managed by a new virtual branch manager (Denver Vicki Deleon) that will assure that all incurred costs though 2007 will be completed by the end of 2012. This may or may not be successful since there are a lot of audit compliance efforts required by DCAA to perform incurred cost audits.  However, DCAA has established this as a primary audit goal.  Due dates for reports must now be met and will be monitored.  DCAA is putting itself under the gun and therefore, the contractor will be at added risk and time demands

One area of increased scope appears to be a walkthrough of the incurred cost submission to assure compliance with the criteria of FAR 42.703 and 52.216-7.  The requirement for the ICE shows each area included in the Information for Contractors Pamphlet incurred cost submission as a requirement for an adequate incurred cost audit ICE package under 52.216-7 — Allowable Cost and Payment.  The November 4, 2011 11-PPD-020(R) requires:

The most significant changes to the audit program include improved detailed audit steps covering areas such as direct labor costs, contractor compensation costs, and excessive pass-through costs. In addition, the risk assessment procedures have been expanded to better assist in establishing the audit scope and designing the required audit procedures. The risk assessment includes 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 and related supporting documentation, significant controls, and the relevant policies/procedures and processes related to significant cost elements.

Policy also has revised the Guide for Determining Adequacy of Contractor Incurred Cost Proposal to provide a more comprehensive guide for use in determining the adequacy of final indirect cost rate proposals at both major and non-major contractors (Enclosure). The auditors must evaluate the contractor’s incurred cost proposal for adequacy upon receipt and immediately notify the contracting officer and contractor, in writing, of significant inadequacies.

This requirement will make the process more detailed.

In addition, DCAA has established significant increases to the number of sample items required to allow a compliant audit examination.  These requirements significantly take more time and effort to provide support data.

Highlights of costs under added scrutiny include:

• Air Travel
• Lobbying
• Subcontract Costs
• Labor & Materials if no concurrent MAAR was accomplished

Subcontract surveillance after award is a critical effort.  DCAA is looking for prime assurance the subcontract billings received are verified prior to passing the billings to the Government.  Prime contractors should maintain subcontractor briefing, FAR 31 testing, and proper admin of subcontract.  Subcontract costs are now getting extensive scrutiny and the adequacy of the subcontract ICE is critical.    Consultants must have adequate support for costs.  Time cards will be a very good idea for consultants and evidence of prime monitoring.  Demonstrating that the prime has evaluated its subcontract costs will be a future emphasis.  Possible solutions for prime contractors include engaging with third-party audit firms to support auditing of subcontractor proprietary cost information prior to incurred cost submissions.

Reconciliation of labor/payroll to 941s now will not be overlooked or minimized.

Pricing Proposals and FPRAs

DCAA audit effort will be expanded on proposal effort over $10 million FFP and $100 million cost type.  Pre audit “walk though” of pricing proposals is required and causes added burden on the contractor to have an adequate package.  The support of subcontracts on major proposals is a significant audit issue that is causing issues for proposal activity.  Review of prime responsibility for subcontract cost or pricing data is now extensive.  The prime must assess all subcontractors to ensure the sub is responsible and that the price is reasonable.  In general, unless DCAA has current incurred costs audits it will audit prior costs to assure reasonableness of the accounts used for proposal purposes.  FPRAs will require testing back to actual costs as well.  Direct trace to the internal budget for FPRA will be more detailed.  Added internal reviews for DCAA internal compliance will mandate added time and effort.  Due dates for audit service is now at a premium again.  Due dates for DCAA to its customer will put added stress on timely support and submittal of documents.

Denial of Access

This is still a big DCAA concern and push.  Access to records is a continuing big issue.  Generally, documentation supporting the contractor’s assertion (e.g., the contractor’s proposal or other submission) should be readily available. Therefore, 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. For example, support for proposed labor hours should be provided the same day requested, given the information would have been generated by the contractor prior to submitting the bid proposal.

Systems Audits

New DFARS rules for systems now exists for accounting systems, estimating systems, purchasing systems, earned value management systems (EVMS), material management and accounting systems (MMAS), and property management systems.  DCAA has started its new systems audits on large contractors with the kick off of its new billing and accounting system audits.  The pilot programs for billing and accounting have been slow to implement and the data required is extensive.  The accounting system pilot is difficult to demonstrate.   These are complex and have been very painful for the major contractors.  DCAA is looking for real time system demonstrations.  Example, show how the billing (voucher) actually gets produced, reviewed, entered, etc on a real time basis.  Old system reviews are very outdated and now DCAA is attempting to update new reviews.