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Breakout Session # 911 Melanie Burgess, Government Contract Consultant

An Introduction to DCAA and its Audit Process. Breakout Session # 911 Melanie Burgess, Government Contract Consultant Cherry, Bekaert, & Holland, L.L.P. April 16, 2008 2:40 - 3:40 pm. When DCAA Calls (or emails)…. Don’t Panic Ask for Details

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Breakout Session # 911 Melanie Burgess, Government Contract Consultant

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  1. An Introduction to DCAA and its Audit Process Breakout Session # 911 Melanie Burgess, Government Contract Consultant Cherry, Bekaert, & Holland, L.L.P. April 16, 2008 2:40 - 3:40 pm

  2. When DCAA Calls (or emails)… • Don’t Panic • Ask for Details • Don’t be afraid to ask for more time to prepare • Don’t create new documents

  3. Defense Contract Audit Agency • The Defense Contract Audit Agency (DCAA) is the largest federal government audit agency • Charter DoDD 5105.36: • Performs DoD and other government agency audits • Provides accounting and financial advisory services

  4. Defense Contract Audit Agency (cont.) • Audit authority is derived from statutes, regulatory provisions, and FAR clauses • 10 U.S.C §2313 states: • The head of an agency, acting through an authorized representative, is authorized to inspect the plant and audit the records of • a contractor and subcontractor performing a cost-reimbursement type, incentive, time-and-materials, labor-hour, or price-redeterminable contract, or any combination of such contracts, made by that agency under this chapter

  5. Defense Contract Audit Agency (cont.) • 10 U.S.C. is implemented by FAR 52.215-2 • DCAA does not have the right to audit a competitive firm fixed price contract or subcontract or any subcontract under a firm-fixed price contract

  6. Audits Performed by DCAA • Pre-Award • Pre-award Accounting System Audit • Financial Capability Audit • Price Proposal Audit • Audit of Forward Pricing Rate Agreement

  7. Audits Performed by DCAA (cont.) • Post-Award • Billing System Audit • Incurred Cost Submissions • Systems and Internal Controls • Timekeeping System (Labor Floor Checks/ Interviews) • Settlements • Contract Closeout • Contract Termination

  8. Major Areas of DCAA Concern • Internal Control Systems • Management Policies • Adequacy and Reliability of Contractor’s Records • Financial Capability • Accuracy and Reasonableness of Costs

  9. Primary Incurred Cost Audit Focus • ALLOWABILITY • Fundamental purpose of government contract audits: • Determine reasonableness • Determine allocability

  10. FAR Part 31 – Cost Principles • Relevant to supplies & services, or experimental, developmental, or research work • Contracts negotiated on the basis of cost must adhere to the cost principles

  11. FAR Part 31 – Cost Principles (cont.) • Compliance with cost principles is mandatory when • Determining reimbursable costs under cost reimbursement contracts • Negotiating rates • Pricing changes in contract modifications

  12. FAR Part 31 – Cost Principles (cont.) • Allowability can be determined by examining reasonableness and allocability • Reasonableness (FAR 31.201-3) • Prudent Person Test • Adherence to generally accepted practices • Incurred in compliance with business practices • Burden of Proof Rests with the Contractor

  13. FAR Part 31 – Cost Principles (cont.) • Allocability • Incurred specifically for the contract • Incurred for more than one contract, but reasonably proportioned according to the benefits received • Necessary in the overall performance of the business • GAAP applies where FAR is silent

  14. FAR Part 31 – Cost Principles • Segregation of Costs • Direct vs. Indirect Costs • FAR 31.202 – direct costs can be identified specifically with a particular cost objective; “but for” test • FAR 31.203 – indirect costs are not directly identified with a single, final cost objective, but identified with 2 or more final cost objectives • Indirect costs generally include: Fringe Benefits, Overhead, Material Handling, and General and Administrative

  15. FAR Part 31 – Cost Principles (cont.) • Unallowable Costs • FAR 31.201-3 – unallowable costs must be excluded from bills, claims, or proposals for a Government contract • FAR 52.242-3 – imposes penalties if indirect rate proposal contains unallowable costs • FAR 52.242-4 – certify indirect rate proposal does not contain unallowable costs

  16. FAR Part 31 – Cost Principles (cont.) • More on Unallowable Costs • Penalties may be up to 2x the amount of the disallowed cost PLUS interest • Penalties could be in addition to any other administrative, civil, and criminal penalties provided by law • It is not necessary for the unallowable costs to have been paid in order to assess a penalty

  17. FAR Part 31 – Cost Principles (cont.) • Examples of Unallowable Costs • FAR 31.205-8 Contributions • FAR 31.205-14 Entertainment • FAR 31.205-20 Interest and other Financial Costs • FAR 31.205-33 Some Professional and Consultant Costs • FAR 31.205-41 Taxes (Federal income taxes & state taxes accrued but not paid)

  18. Limits on DCAA’s Authority • No authority to issue binding procurement regulations • Nothing in the Contract Audit Manual (CAM) is binding on contractors or contracting officers • No authority to demand that a contractor or subcontractor prepare any specific records for the auditor • Can only examine books and records maintained in the ordinary course of business

  19. DCAA Audit Guidance • Adequate Books and Records • FAR 52.215-2 requires that contractors’ normal books and records adequately support the costs claimed • The Defense Contract Audit Manual (CAM) lists and describes all DCAA audits (visit www.dcaa.mil)

  20. DCAA Audit Guidance (cont.) • DCAA will examine the contractor as an entire entity to include • Policies • Procedures • Internal controls

  21. Audit Trends in Questioned Costs • Adequate documentation to establish allowability (FAR 31.202-1(d)) • Consultant costs – adequate documentation (FAR 31.205-33(f)) • Organization costs (FAR 31.205-27) • Travel as an indirect cost (FAR 31.205-47) • Executive Compensation

  22. Audit Trends in Questioned Costs (cont.) • Entertainment (FAR 31.205-14) vs. Employee Morale (FAR 31.205-13) • Entertainment – amusements, social activities and meals • Employee Morale – improve employer-employee relations • Miscellaneous accounts

  23. Audit Trends in Questioned Costs (cont.) • Other Income: • Overpayments (FAR 52.232-25(d)): requires contractors to notify the Government when they receive an overpayment • Credits (FAR 31.201-5): any income, rebate, allowance, or other credit relating to an allowable cost shall be credited to the Government

  24. When DCAA Calls (or emails)… • Don’t Panic • Ask the auditor to clarify what type of audit they will be conducting • Ask the auditor to send you a list of the information they are requesting • Ask the auditor to schedule a date for an entrance conference • Look up the audit program on the DCAA web site • Review audit program for familiarity

  25. When DCAA Calls (or emails)… (cont.) • Ask for more time if needed to gather all information requested • Do not email records to them. Request that the auditor review information at your office • If an Incurred Cost Submission or proposal is being audited, make sure the auditor has a copy of the document • If this is a recurring audit, confirm that the auditor has a copy of the prior report or the permanent file

  26. When DCAA Calls (or emails)… (cont.) • Do not create schedules or work papers for the auditor • Limit the number of people interfacing with the auditor • Request clarification during the audit whenever the auditor asks a question you are unsure of • Do not volunteer information if you are unsure what the auditor is asking • Involve the audit supervisor if you are not comfortable that the auditor understands your position

  27. ANY QUESTIONS?

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