Accounting System, Cost And Accounting, DCAA Relations, Incurred Cost Proposals, Running Your Business

DCAA Demands AP Aging Reports before Approving Invoices

Certain DCAA offices are beginning to request or demand copies of contractor AP aging records before approving a contractor’s invoice.

This is a great example of no good deed goes unpunished as the effort on DCAA’s part probably arose out of the government’s desire to protect subcontractors, especially small business contractors, from prime contractor’s  slow payments, as directed in the FAR 52.232-40 and in accordance to a White House memorandum (M-12-16 – Providing Prompt Payment to Small Business Contractors).

It is unfortunately common for small business subcontractors to wait on average, as long as ninety days before receiving payment. There are numerous cases where the prime (often another small business) bills the government for the subcontractor’s work and NEVER pays the subcontractor.

This leads us to DCAA requesting (demanding) a copy of the AR aging to insure the subcontractors are being paid in a timely manner. Some contractors and consultants are arguing about DCAA’s right to demand the documentation and objecting to the fact that DCAA is demanding instant turn around (more about that later).

I am forced, with reluctance, to come down on DCAA’s side on their right to request the information. I believe the FAR and invoicing history gives them the right to reasonable requests for documentation to support an invoice. The contractor’s intelligent objection rests on DCAA connecting the AP report directly to supporting the submitted invoice, especially when DCAA’s own guidance emphasize that invoice review is not an AUDIT function.

My objection is based on what DCAA does with the information.

Over the years I informed clients that just as the Devil can quote Scripture, others can quote the FAR and interpret the regulations in strange and mysterious ways.  The FAR section involved reads as follows (FAR 52.216-7  Allowable Cost and Payment):

(b) Reimbursing costs.

(1) For the purpose of reimbursing allowable costs (except as provided in paragraph (b)(2) of this clause, with respect to pension, deferred profit sharing, and employee stock ownership plan contributions), the term “costs” includes only—

(i) Those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract;

(ii) When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid, for—

(A) Supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made—

(1) In accordance with the terms and conditions of a subcontract or invoice; and

(2) Ordinarily within 30 days of the submission of the Contractor’s payment request to the Government;

Time and again DCAA auditors I work with ignore the word “Ordinarily” and require contractors to pay all accounts payable “within 30 days” and tell me, quite accurately, that those are the very words within the FAR. They also require the contractor’s policies and procedures to reflect this.

Let’s put aside what the FAR actually says for a moment and look at the reality of accounts payable.

Example

Jill the subcontractor bills you on March 8th for services for February with an invoice she has marked as February 28th. Not an uncommon practice given Jill’s requirements to comply with GAAP and match revenue to expenses. She could make some journal entries and there are actually a couple of expensive accounting packages that handle this automatically, but it is just easer to date the invoice for February.

When you get Jill’s invoice on March 8th you need to enter it into your accounts payable (assuming there are no problems with the invoice). If you have not closed your books and billed the government you will probably enter the invoice for the date Jill used, February 28th, and include it in your billing.

Depending on how your AP reports are set up (by reporting period or by invoice date) your AP reports may already show Jill’s invoice on the 30-60 day range (although this varies among software programs).

Let’s say it shows it as current and there is no problem.

You bill the government for Jill’s work on March 15th after going through the extensive billing procedures DCAA demanded you institute.

Simple fact – If everything goes well the government does not have to pay you for thirty days. Come April 15th when the government may pay you, Jill’s invoice is recorded as 45 days old and is actually 37 days old.

To any DCAA auditor who responds by saying that they ordinarily pay in less than 30 days, I respond with “Ordinarily, what a great term! Is that what they meant in the FAR?”

The very reason why small business contractors are allowed to bill costs on an accrued basis (billing for Jill’s work before you actually pay her) is because the government recognizes the cash flow issues involved in government contracting. Apparently many of these enlightened government employees are not working at DCAA.  Most contracts actually have clauses that require payment within 15 or 30 days AFTER the government pays.

Another piece of information about DCAA that I remind my clients about is the assurance that the vast majority of DCAA auditors have never spent a day doing what a contractor does. They have never run a payroll, never invoiced anyone, and never managed accounts payable.

This lack of practical experience on the auditor’s part means you should take responsibility and educate them on the issue. Feel free to provide them with a copy of this article. Tell them they can even call me.

Contractor Solutions

The FAR says “Ordinarily” not “absolutely”. The regulation acknowledges that the 30 days is not an absolute. I have responded to this with DCAA with a couple of different approaches:

  1. I point them out to the extensive polices and procedures that monitor subcontractor prompt payment and methods of monthly review to insure compliance. My book has a couple of sections and examples in accounts payable, monthly reporting, and invoicing.
  2. After I check the numbers (ALWAYS CHECK THE NUMBERS FIRST), I point out that the word “ordinarily” infers an average or a mode. The contractor’s AP average is _______ and/or the mode is ________.
  3. As to DCAA’s demands for instant turnaround, this arises out of their position that invoice review is not an audit and their own polices that provides only five days to reject an invoice. Rejecting an invoice is a pain, although not as great as it was, and DCAA likes to avoid this paperwork so they use the request to stop the clock on the five days. This is something you can remind them of when they make the request. Give it to them quickly and remind them of the deadline.
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