The Government has procedures for all facets of the procurement process including tracking of employee's time as it is allocated against projects, the estimating process, and having on staff or as an outside consultant, individuals trained to audit the entire process. It is also a good idea to have someone available, when you are able justify it, to have someone in house, who understands general rules of DCAA compliance.
If you are involved in cost reimbursable contracts, you will need to establish different billing systems to track your overhead costs (indirects such as general costs like home office, administration, officers and directors pay, etc.), direct costs (those attributable directly against a project cost (labor and materials, etc.) Generally indirect costs may be charged proportionally over all your direct costs so long as they are both allocable and allowable.
The FAR, or Federal Acquisition Regulation, is the rule book the Government uses to specify how the Government acquire a specific product or service, how to advertise their need, and how to select the best bid once contractors submit their proposal. The FAR is supplemented by various sources depending on Agency such as the Defense FAR or NASA FAR and even service level such as Army FAR or Air Force FAR. Additional guidance is available to explain the process in detail such as the Defense Contract Management Guidance and many others.
The Defense Contract Management Guidance
Pre Award Survey Audits
Pre Award Survey Audits are performed by DCAA and are addressed in Chapter 5 of the DCAA Contract Audit Manual (DAM) on your firm prior to award and examine facets of your company that may include Overall Accounting System (5-300), General IT System (5-400), Budget and Planning System (5-500), Purchasing System (5-600), Material System (5-700), Compensation System (5-800), Labor System (5-900), Indirect and ODC System (5-1000), Billing System (5-1100) and Estimating System (5-1200). Be aware that although DCAA may make a recommendation, the contracting officer makes a decision on the outcome of an audit so far as an award is concerned.
Incurred Cost Audits
The purpose of an incurred costs audit is to review a contractor's costs in either final or interim form and to express an opinion as to their validity (are they reasonable, allocable to the contract, follow GAAP and CAS, and were not prohibited by the contract. These audits typically occur during the close out process or if you are operating without final rates established to determine what rates should be applied to final invoicing and if any adjustments should be made. In the current environment, much overbilling has been detected and the DCAA has been looking harder for unallowable costs.
Rates used prior to establishing a final rate are referred to as provisional billing rates. Since it is often difficult for a contractor to know what their yearly overhead and profit will look like, a provisional rate can be established and a forward pricing rate agreement established with their cognizant auditing agency. The Government will then exercise retention on a certain amount and upon
Audit of Cost Estimates and Price Proposals
Chapter 9 covers proposal audits. These are advisory in nature and performed at the request of the contracting officer or their representative (sometimes referred to as a PCO). The purpose of this type of audit is to review estimates submitted in connection with pricing submitted in connection with fixed price contracts, various adjustable or redeterminable rate changes, various costs associated with Target costs of incentive fee contracts, claims for price adjustments, and prices of spare parts. The result is given to the CO for a determination. No opinion is offered with this type of audit.
Chapter 14 lists numerous other types of audits that the CO can enlist triggered by self explanatory events, as the title of each audit indicates. Post award audits of Contractor Cost or Pricing Data (14-100), Audit of Progress Payments (14-200 - Triggered by a Request for Progress Payment if desired by CO), Contractor Financial Capability Audit (14-300), Government Property Audit (14-400), Operations Audit (14-500), Capital Investment Project Audit (14-600), Project Scheduling and Control Audit (14-700), Advanced Cost and Management Systems Audit (14-800).
Your primary vulnerabilities are in establishing policies and adhering to them. The first place often checked is time cards. It is fast and easy. They may also quiz your employees on time keeping rules and expense reports issues. Allocation of costs is another danger area. Finally your procurement system and record keeping. It is onerous but a necessary and worthwhile endeavor to stay on top of these and document the process and keep organized records.
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