DCAA Relations, Incurred Cost Proposals

Confusing Adequacy and Audit – Incurred Cost Proposal Fiction and Reality Part Two – Good Intentions and an Honest Effort to Avoid Work

DCAA will often assert that the ICE (Incurred Costs Electronically) and an ICP (Incurred Cost Proposal) are the same thing. They simply are not. This is true by regulation and by DCAA’s own guidance (Information for Contractors has an entire section acknowledging that they cannot require electronic submissions (p73)).

“Let’s step back for a moment and look the DCAA Model ICE as a whole. First let us look at a couple of facts, absolute facts.

  1. DCAA created the Model ICE in the 90’s to provide an example to contractors on what DCAA thought a good incurred cost submission would look like.
  2. There is no requirement to use DCAA’s Model ICE, if there was, it would be an approved government form subject to GSA and OMB standards, to include the Paperwork Reduction Act.
  3. There is no requirement to submit an incurred cost proposal in Microsoft Excel. There is no requirement to submit an incurred cost proposal electronically.
  4. The government finally adopted a regulation that paralleled the general description of the ICE — FAR 52.216-7(d) – Allowable Cost and Payment. The final regulation did not adopt the requirements found in the DCAA Model ICE even though the Model preceded the regulation.
  5. The government can only reject a cost proposal based on adequacy[1]”.

If you are a conscientious government employee and realize, for whatever reason, that there is not going to be a lot of audit work done in the foreseeable future, you might get a bit worried about simply accepting a contractor’s incurred cost proposal and recommending payment of a check to them on their rate variances. Honestly, taxpayers might thank you for that; but while this might provide aid and comfort to DCAA, it is not audit. These ‘questions’ follow none of the rules of audit or even, often, DCAA’s own written orders (“guidance”).

If you take the “A” is for Audit out of DCAA then you must rely on what little interaction you have with the contractor via the incurred cost proposal the contractor submits and certifies each year.

This is an extremely generous and positive view of why DCAA undertook what I am calling the “ICE Wars”.

There is no doubt that a standardized incurred cost proposal model would make DCAA’s work easier in the same manner that the IRS Form 1040 makes the work easier for the government.

Unfortunately, there is a major difference between the Model ICE and the IRS Form 1040, one of them is formally approved by the government regulators (Form 1040) and the other is not (DCAA Model ICE). As noted above, regulators rejected the ICE when adopting the regulations about submission.

One of the reasons the regulators rejected the ICE was its constant changing nature. Here are two examples, one benefits contractors and the other does not.

Section J

FAR 52.216-7(d) – Allowable Cost and Payment (2)(iii)(J) reads as follows:

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contract information).

A careful reading of the regulation could support the position that contractors are required to report the above information on all subcontractors to include those working on prime fixed price contracts and even commercial work.

This was the position many DCAA auditors took at the time the government adopted the regulation. They argued that the complete data was necessary in order to evaluate the contractor’s purchasing systems and subcontractor management. I even had one client with no government participation where DCAA demanded an audit of them as a subcontractor on a prime with government participation.

Over time, many DCAA auditors moved away from this position and now the Model ICE focuses the reporting on those contracts with government participation. The current ICE Model Manuals reads:

“Subcontract number, prime contractor number, subcontract point of contact and phone number, subcontract value, costs incurred in FY, and award type.  The schedule provides identification of subcontracts awarded to companies where the contractor is the prime or upper-tier contractor, including inter-divisional effort.  This information is required at the pricing action level (e.g. delivery order, CLIN) for all subcontract awards (e.g. cost-type, incentive contracts, T&M/LH, FFP, etc.) issued under flexibly-priced and IDIQ prime contracts.” (p27) (emphasis added).

A client and I actually panicked a couple of weeks ago when a DCAA supervisor took the original position. I could not argue with the auditor’s original interpretation of the regulation, but, fortunately, the auditor changed their mind before we could respond.

NOTE: Notice how DCAA got the regulation to match up with the Model ICE schedule titles. That was largely the extent of their success.

Executive Compensation

(iv) The following supplemental information is not required to determine if a proposal is adequate, but may be required during the audit process:

   (A) Comparative analysis of indirect expense pools detailed by account to prior fiscal year and budgetary data.

   (B) General Organizational information and Executive compensation for the five most highly compensated executives. See 31.205-6(p). Additional salary reference information is available at http://www.whitehouse.gov/omb/procurement_index_exec_comp/ .

Executive Compensation is defined by statute, but DCAA asserts the right to ‘improve’ on the statute by claiming auditing the costs under the reasonable and prudent regulation “31.201-3 Determining reasonableness”[2].

As DCAA continues to lose many of these cases concerning compensation before the appeal board[3], they appear to be looking for a magic bullet to help with this issue, mainly via the supplemental form B, formerly form T. This form continues to grow with each version of the Model ICE. The latest version adds numerous new data collection points to the previous versions (MODEL ICE 2.01g):

“Basis of Contractor’s Compensation:  Below, please check the box next to the item or items which describe the contractor’s basis for the proposed compensation costs, i.e. how the compensation levels were established in accordance with any existing policies and procedures.  Also, did the contractor consider whether the proposed compensation was reasonable in accordance with FAR 31.205-6(b)?  If so, include any reasonableness analysis, including all assumptions, data relied upon, compensation surveys and/or any other data.   Include any attachments (survey data, comp plan/policy, etc.) separately.                                                                                                                                                                                        

Market Pricing Data (Compensation Surveys)              

Prior DCAA Audit of Compensation Reasonableness                                                                              

Written Compensation Plan/Policy                                                                             

3rd Party (Consultant) Compensation Analysis                                                                                        

Management Judgment (No written plan/policy)                                                                                       

Other — ________________________________________                                                                                   

Determined by Board of Directors                                                                                                                            

                                                                                                                       

(1) Indicate if Job Descriptions are available:                                              YES ___               NO ___                                                                                                                         

*Written description Other compensation:                                                                                                                                                                                          

*Breakdown of Other compensation by cost element: “              

This new version of the form reminds me of Admiral Ackbar’s line from “Return of the Jedi” – It’s a trap!” (https://www.youtube.com/watch?v=4F4qzPbcFiA).

This potentially turns a monstrous one page form into a  monstrous form with a thousand page attachment. Sort makes you wish they were getting these forms approved and following the Paperwork Reduction Act.

To Form or Nor to Form

I agree with the FAR Council, which when adopting the regulation promised contractors they would not be required to use the DCAA Model. In the adoption of the regulation, the FAR Council brought up the DCAA Model ICE five (5) times and each time rejected its adoption:

“Comments: Two respondents submitted comments in regard to formatting. One respondent states that DCAA’s insistence that data be converted into other formats (such as spreadsheets using DCAA’s ICE Model) is in direct contradiction of FAR 52.215-2(d)(2) that access to records “may not be construed to require the contractor or subcontractor to create or maintain any record that the contractor or Comments: Two respondents submitted comments in regard to formatting. One respondent states that DCAA’s insistence that data be converted into other formats (such as spreadsheets using DCAA’s ICE Model) is in direct contradiction of FAR 52.215-2(d)(2) that access to records “may not be construed to require the contractor or subcontractor to create or maintain any record that the contractor or subcontractor does not maintain in the ordinary course of business or pursuant to a provision of law.” The other respondent suggests that the proposed revision at FAR 42.705-1(b)(1) eliminates the suggestion in the current rule that contractors can use the DCAA model incurred cost rate proposal and supporting data for guidance on what constitutes an adequate final indirect cost rate proposal. According to the respondent, this proposed revision also refers the definition of adequacy to the revised clause at FAR 52.216-7(d)(2), which makes mandatory specific schedules and data requirements taken almost verbatim from the DCAA ICE Model.

 Response: The information required from the contractor for an adequate indirect cost rate proposal is not new. No specific format is prescribed for the submission. This information should be readily available in the contractor’s books, records, and systems.”

 Federal Register, Volume 76 Issue 104 (Tuesday, May 31, 2011)

 

Notice the wonderful reference to FAR 52.215-2(d)(2), but we all benefit if we follow the general outline of a universal submission as adopted by the FAR Council while ignoring the parts of the DCAA Model ICE that concern us or exceeds their regulatory authority.

This is especially true when we confuse Adequacy with Audit.

 

Next :Adequecy

[1]“Schedule I: :The Truth and Nothing but the Truth, at Least How I See it”    https://dcaacompliance.wordpress.com/2016/03/11/schedule-ithe-truth-and-nothing-but-the-truth-at-least-how-i-see-it/

 

[2] See my previous article  “Burden of Proof” at https://dcaacompliance.wordpress.com/2015/10/21/burden-of-proof/

 

[3] Metron for example: http://www.asbca.mil/Decisions/2012/56624,%2056751,%2056752%20Metron,%20Inc.%206.4.12%20PUBLISHED.pdf

 

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Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Confusing Adequacy and Audit – Incurred Cost Proposal Fiction and Reality Part One – A Messy History

FAR 52.216-7(d) – Allowable Cost and Payment

“2(i) The Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.”

The last decade proved largely unkind to DCAA as it received constant criticism from Congress, other government auditors (GAO, DOD OIG), other areas of Government (DOD, DOE, NASA, GSA, etc.) and the occasional contractor.

A great deal of the criticism, and two ACTS OF CONGRESS, focused on DCAA’s simple inability to complete audits and address contractor costs through timely audit of contractor’s incurred cost proposals (ICPs). An ICP is a contractor annual report accounting for the money spent and allocated to a government contract.

DCAA’s primary defenses are the increase in work due to almost two decades of war, a recent focus on more complex audits, and inadequate staffing.

Over the years I employed one simple breakdown to illustrate DCAA’s work efforts. According to DCAA’s own Report to Congress, DCAA employed 4,167 auditors. According to the same report, DCAA completed 3,581 audits in 2017. This works out to less than one audit per year per auditor (.86 audits per auditor). In the 2011 report (the oldest on DCAA’s website), the number of auditors was higher at 4,225 and the number of completed audits stood at 7,390 for a ratio of 1,75 audits per year per auditor.

Apparently 58 more auditors made a huge difference.

Skewing this analysis is the number of incurred cost proposals DCAA closes without audit. In 2107, DCAA closed 22.5% of their incurred cost proposal by audit (1,527 out of 6,786). What happened to the other 5,259 contractor ICPs? The government accepted the contractor’s proposed rates without audit.

Yes, the vast majority of work the AUDIT Agency does each year is not audit.

DCAA often justifies this lack of audit by comparing itself to the IRS and the IRS’s procedures[1]. The IRS does not audit most taxpayers, so why should DCAA?

I do not agree with the comparison for several reasons. I believe such comparisons are like comparing oranges and Italian race cars.

One simple reason is that the IRS is in possession of enormous amounts of collateral data on taxpayers. A huge advantage not enjoyed by DCAA. The IRS receives a copy of your W2 from your employer, your interest income from your bank, even information on your health insurance. The collateral information for businesses is even larger to include payroll tax filings, SEC reports, and more.

In other words, when the IRS gambles on taxpayer cheating, they know a great deal more information then DCAA does when they gamble on contractors with taxpayer’s money.

I realize that the majority of contractors rose up and began dancing behind their desks at the idea that there is about a one-five chance of DCAA showing up to audit your incurred cost proposal.

While I do not wish to throw any contractor in front of the bus filled with DCAA auditors, I believe we are all better off with an active viable DCAA audit function. The friction of the audit process helps both contractors and the government. Contractors gain wisdom about compliance, the ability to make audits smoother and when to draw the line on ridiculous and even unlawful auditor requests, such as copies of employee’s birth certificates. The government gets practice at their job and, hopefully, learn not to make ridiculous and even unlawful requests[2].

A viable active DCAA audit effort also helps keep the government out of mischief. The decline of the audit function and the resulting backlog of incurred cost proposals reaching monstrous numbers, has resulted in some changes in DCAA methods that I will categorize as mischief: 1) DCAA expanding their ‘model’ (in their minds) incurred cost electronically and; 2) DCAA confusing adequacy and audit.

NEXT – “Good Intentions and an Honest Effort to Avoid Work”.

 

 

[1]DCAA Director Bales’ testimony before Congress on Apr 6, 2017 (page r) https://docs.house.gov/meetings/AS/AS06/20170406/105777/HHRG-115-AS06-Wstate-BalesA-20170406.pdf

 

[2] I received my second request from different audit offices for contractor’s home addresses this morning. The previous request was a couple of years ago.

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DCAA Relations, Incurred Cost Proposals

Survivors of the 2008 DCAA Crisis are Now Supervisors…..

A DCAA auditor recently contacted a client with a concern about their incurred cost submission for 2014, The auditor asked the following (contract information redacted):

“Inquiries:
1) In comparing on Schedule I to Schedule H, Schedule I, cell G30 ($38,287) and Schedule H, cell P36 ($34,579) are both values for FYE 2014 Costs, Subcontract XXXXXXXXXX. What accounts for the difference between these two numbers?”

If you could not guess, this was the T&M section of the Schedule I. This section of the Schedule I records the government’s costs while the section referred to in the Schedule H records the contractor’s costs. Under any reasonable circumstances they should not tie. A careful reading of DCAA’s own adequacy checklist confirms this (link to Schedule K not H).

Answering this type of question is a conversation I try to have over the telephone or in person. I avoid putting our response in writing due to the fear of focusing the adequacy discussion on the government and not the contractor.

I telephoned the auditor and she immediately agreed with my response but insisted that I reply in writing to provide a record of the response. This is when I guessed that the question originated with her supervisor and not herself. Apparently, a supervisor who survived the DCAA Internal 2008 Adequacy Crisis and is now a supervisor.

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Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Thank You DCAA for New Adequacy Guidance.

I can take this one of two ways:

  1. DCAA now agrees that adequacy is defined by the regulation and should not be subject to individual auditor whims.
  2.   Doing the right thing means doing less work upfront as they probably will not audit anyway.

The following is from the New ICE Manual .

“The following Schedules and information are not required for submittal of an adequate proposal; however, the information will be required to complete the audit.  ICE contains Supplemental Schedules A-1, A-2, A-3, A-4, B, C, and O that can be utilized by the contractor to provide information as noted below:

SUPPLEMENTAL MODEL INCURRED COST PROPOSAL INFORMATION

  1. Comparative analysis of indirect expense pools detailed by account to prior fiscal year and budgetary data can be provided on the following schedules:
  2. Supplemental Schedule A-1 – Overhead
  3. Supplemental Schedule A-2 – G&A
  4. Supplemental Schedule A-3 – Intermediate Pool Costs
  5. Supplemental Schedule A-4 – Direct Costs

These schedules may be used for comparison of prior year actual costs; however comparative analysis of budgetary data will also be required by the auditor.

  1. Supplemental Schedule B – Compensation for Certain Contractor Employees per FAR 31.205-6(p).
  2. Supplemental Schedule C – Prime Contracts Under Which the Contractor Performs as a Subcontractor.
  3. Supplemental Schedule O – Contract Briefs.
  4. List of ACOs and PCOs for each flexibly priced contract.
  5. Identification of and information on prime contracts under which the contractor performs flexibly priced effort as a subcontractor.
  6. List of work sites and the number of employees assigned to each site.
  7. Description of accounting system.
  8. Procedures for identifying and handling unallowable costs.
  9. Certified financial statements or other financial data (e.g., trial balance, compilation, review, etc.).
  10. Management letter from outside CPAs concerning any internal control weaknesses.
  11. Actions that have been and/or will be implemented to correct the weaknesses described in number 11 above.
  12. List of internal audits or other types of audits or studies performed by other than DCAA in this fiscal year.
  13. Annual internal audit plan of scheduled in process but not issued audits in this FY.
  14. Federal and state income tax returns (Schedule R).
  15. SEC 10-K report.
  16. Minutes from Board of Directors meetings.
  17. Listing of Delay and Disruptions and Termination Claims submitted which contain costs relating to the subject fiscal year.
  18. Contract Briefings – (Schedule S) Contract briefings generally include a synopsis of all pertinent contract provisions, such as, contract type, contract amount, product or service(s) to be provided, applicable Cost Principles, contract performance period, rate ceilings, advance approval requirements, precontract cost allowability limitations, contract limitations, and billing limitations. A typical format for the briefings is shown on Schedule S.  A contractor need not use the example form if the information is already generated and available within its automated accounting or billing systems.”
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Accounting System, Cost And Accounting, DCAA Relations, Incurred Cost Proposals, Running Your Business

I Will Pay You on Tuesday Out of My Award

 Let us finish my look at the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

  1. Supporting Material Overhead rate
  2. DCAA auditor independence
  3. DCAA’s right to change their mind in subsequent audits
  4. Tax vs. Book on depreciation issues
  5. Bonuses
  6. Accrued costs crossing fiscal year
  7. Unapproved subcontractors
  8. An excellent example of DCAA properly developing findings.
  9. Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to look at the last two areas, “Accrued costs crossing the fiscal year” and “Bonuses”. Again, I am not a lawyer and this is not legal advice. I am an accountant and there may be some accounting advice.

Accrued Costs Across Fiscal Years.

Twice in the ruling the government raises an objection to the allowability of TCI’s costs because TCI accrued them in one year and expensed them in a subsequent year. At least I hope that is the government’s objection as the only reasonable alternative opens up a can of worms that the government would appear blind to.

Here are the two objections:

The ACO also disallowed some of the bonuses because they were paid in March 2008, in the fiscal year after FY 2007, which is the subject of this ICP.

And

According to the COFD, this prohibition prevented TSI from submitting its legal costs contemporaneously with their being incurred, 15 but the reason that TSI gave the DCAA for submitting the costs in the FY 2007 ICP, instead of in 2006 (when it supposedly became aware of the fact that it was cleared of wrongdoing), was that it “forgot” (R4, tab 16 at 260). Mr. Fletcher (with whom DCAA was dealing and would have been the person who DCAA claimed stated that he “forgot” to include the legal fees in FY 2006) denies ever making such a statement to DCAA (tr. 2/212).

For its part, the government does not dispute the fact that the legal fees for the investigation, as subjected to the 20% discount, would otherwise be allowable (see gov’t br. at 62, 64 ), but argues that the fees were expensed to the wrong year (id. at 62-63).

In the first case, the Board ignored the timing argument and disallowed the bonuses for reasons we will discuss later. In the second case, the Board directly rejected the timing argument in reference to the legal fees and allowed the majority of the fees.

Over the years, I encountered this timing argument from only a couple of DCAA auditors. Auditors raised the argument rarely and we addressed it pretty quickly by responding that GAAP required the accruals. The question displays a limited understanding of accrued accounting which is forgivable in a young auditor working through the differences between cost and expense. It is a bit more difficult to understand when the limited understanding rises all the way up DCAA and into an appeal before the Appeals Board. It is disheartening to look at the Appeals Board teaching DCAA GAAP 101.

Let us start with a simple absolute rule: if a cost is properly accrued and recorded, this is only reconsidered if the original entry is invalidated. An example of invalidation would be a subsequent decision not to pay the accrued expense. I would also note that GAAP enjoys extensive procedures for addressing such a subsequent event.

Legal fees present some unique challenges in government contractor accounting. Legal fees are, in my humble opinion, one of the only reasons for suspense accounts, as I go into detail about in this previous article. As I recommend in this article, legal costs where the allowability is unknown at yearend should be capitalized (after being accounted for tax and financial statement purposes) and expensed out as either claimed or unclaimed when their character is recognized. This would be a GAAP compliant policy in keeping with government contracting requirements.

In order for the government’s argument to make sense — that the contractor “forget” (see above) and the contractor expensed them in the wrong year, there are only three reasonable possibilities: 1) the costs were not on the general ledger or 2) the expenses were not recorded properly in the first place (capitalized instead of expensed), or 3) the expenses were capitalized but not expensed properly (the wrong year).

Obviously, the first issue is the can of worms I mentioned earlier and, if true, we would be experiencing a completely different discussion.

The second possibility is one that major publicly traded corporations are often accused of – unnecessary capitalization to control earnings. Not something a tax paying small business if often accused of, and again the argument here would not be timing but why the expense was capitalized.

As noted above, GAAP enjoys extensive rules to address mistakes surrounding the third possibility and DCAA does not appear to raise these, especially in light of both times DCAA raises timing in this case (bonus and legal fees).

No, DCAA seems to object to the fact that the contractor wishes to charge the government in 2007 but not pay it until 2008.

Hm, isn’t that concept enshrined in the FAR at FAR 52.216-7? The one where a few DCAA auditors chastise contractors for not paying accrued expenses fast enough?

Come on DCAA, the real question is if the contractor reversed the accruals in 2008 before paying them or just expensed them again.

Bonuses

Bonuses or Incentive pay, present unique challenges for contractors. The issue is complicated by the specific and narrow regulations found within the FAR.

The Appeals Board quotes FAR 31-205.6(f) in its entirety but also utilized FAR 31-205.6(a)(6) when they refer to profits:

“This determination is buttressed by evidence that Mr. Fletcher considered the bonus pool to effectively come from company profits and the fact its distribution ca at the whim of TSI’s “in” group, justifying “close scrutiny,” Nolan Brothers, 437 F.2d at 1834, which it simply cannot withstand.”.

Every time a DCAA auditor brings up the ‘distribution of profits’ I respond, or am tempted to respond, that the statute defines the 401(k) as a ‘profit sharing’ plan and that is allowable.

I believe it is proper for DCAA, and in this case the Appeals Board, to use the IRS distribution of profits as a method for assessing unclaimed bonuses, I just wish they understood it better. The IRS standard is directed toward ‘C’ corporations that pay out all of the profits at year end as a bonus to avoid the double taxation inherit in ‘C’ corporations. But the rules work as a good method of determining what is a profit and what is earned compensation.

What every small business contractor wants is the right to award employees, at management’s complete discretion, for a job well done. I imagine the employees would like the same.

The regulations take all the fun out. In order to pass muster a bonus plan must be so well written that it is “an agreement to make such payment”. TCI failed this standard even after they thought they received DCAA acceptance.

So what is a poor small business contractor to do? Why the same thing the huge federal government does: avoid the words “bonus” or “incentive pay”.

Remember the GSA bonus scandals a few years ago? When the federal government handed out millions of dollars to employees despite poor performance? Look for the words “bonus” or “incentive pay” in GSA policies.  The word “bonus” is there alongside another program not as extensively defined: “award”.

Contractors are free to develop well written and measurable bonus plans that meet the regulatory requirements. Contractors should also reserve the right to award employees for single or periodic exceptional performance (as does the federal government).

Of course awards are subject to audit and question by DCAA, but under the reasonable and prudent standard plus a possible excessive compensation argument.

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DCAA Relations, Department of Defense News, Incurred Cost Proposals

Bales Testifies Before House, Industry refers to DCAA as a “Collection Agency”

DCAA Director Bales testified yesterday before the House Armed Services Subcommittee On Oversight and Investigations. Here is a link to her written testimony: http://docs.house.gov/meetings/AS/AS06/20170406/105777/HHRG-115-AS06-Wstate-BalesA-20170406.pdf

My Highlights:

  1. The Risk Assessment program for incurred cost proposal audits will continue.
  2. Outside CPA firms doing audits of incurred cost proposals are a bad idea because they are not qualified and lack governmental authority.
  3. She opposes proposed legislation requiring GS-14 managers to be CPAs because CPA skills do not translate to government contracting work (Yes, we are going to have fun with that one).
  4. She opposes proposed legislation requiring incurred costs proposal audits to be completed within one year of adequate submission because this would eliminate the efficiency of doing multiyear audits.

What is not clear is if DCAA is actually caught up. In the era of parsing words within the beltway, she states that there still is a backlog and the hiring freeze makes it impossible for them to catch up.

Best line from the industry testimony so far:

David Berteau, Professional Services Council

“As one of our member companies characterized it, DCAA should focus on being an auditing agency, not a collection agency”

 

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Accounting System, Cost And Accounting, DCAA Relations, Incurred Cost Proposals

The Good and the Bad — All in the Same Audit

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

  1. Supporting Material Overhead rate
  2. DCAA auditor independence
  3. DCAA’s right to change their mind in subsequent audits
  4. Tax vs. Book on depreciation issues
  5. Bonuses
  6. Accrued Costs crossing fiscal year
  7. Unapproved subcontractors
  8. An excellent example of DCAA properly developing findings.
  9. Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about developing findings and documenting consultants’ work products. Again, I am not a lawyer and this is not legal advice.

 

Developing Findings

The fact that I consider this topic worthy of discussion illustrates the reality that the failure of auditors to properly develop findings is an ongoing issue in too many DCAA audits. Way too often, the first time a contractor hears about a proposed finding is when it is proposed.

During a recent DCAA auditor, the auditor thought she could benefit from the research she did on me and my views by announcing her agreement with what she thought was one of my strong assertions:

“Well, we all know that the Contract Audit Manual. is not regulatory and only guidance”.

My response had a visible impact on her: “The CAM is guidance for contractors, but it is your standing orders. I would expect a DCAA auditor to follow those orders.”

Let us see what those standing orders in the CAM say about developing findings:

4-303.1(b) The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential FAR/CAS noncompliances, etc.) with the contractor to ensure conclusions are based on a complete understanding of all pertinent facts. These types of discussions do not impair auditor independence and are generally necessary to obtain sufficient evidence to support audit conclusions.

 

6-708(b). During the course of the audit, significant audit findings should be brought to the attention of, and discussed with, the contractor, and when appropriate with the cognizant principal ACO and CAC, as soon as possible to expedite the resolution process (See 6-902e). The discussions are to ensure that the auditor’s conclusions are based on a proper understanding of the facts and to ascertain whether the contractor/ACO/CAC has any additional information which would support or modify the audit findings. This will enable resolution of the findings to take place prior to the completion of the audit. If agreement on an issue cannot be reached, the contractor should be requested to prepare a rebuttal for inclusion in the audit report. The process outlined above will result in an efficient audit that will conserve both audit and contractor personnel resources.

6-709(b). During the course of the audit, significant audit findings should be brought to the attention of, and discussed with, the contractor, and, where appropriate, with the principal cognizant ACO and CAC, as soon as possible so as to expedite the resolution process (see 6-902e). The discussions are to ensure that the auditor’s conclusions are based on a proper understanding of the facts and to ascertain whether the contractor/ACO/CAC have any additional information which would support or modify the audit findings

I simply cannot stress how many times simple misunderstandings were cleared up because the DCAA field operator brought it to our attention before taking it to their supervisor, and after that writing it up as a proposed finding. Heading off trouble at the earliest stages is an essential aspect of successful DCAA relationships.

One famous example was a DCAA auditor putting together this extensive spreadsheet that “proved” the contractor was calculating social security taxes incorrectly and that highly compensated employees were not paying their fair share of social security tax. He was still pretty embarrassed, but at least he had not written it up and sent it to his supervisor.

No one likes egg on their face and contractors should avoid watching DCAA auditors make fools of themselves. Sometimes this results a stubborn refusal on the part of some DCAA auditors to admit an error, such as my aggregating “Backspace Key Crisis

In the TSI case, it appears time and time again that both DCAA (at least the second auditor) and DCMA bent over backwards in the attempt to allow the contractor to dispute the findings. Despite this, it appears DCAA and DCMA stuck to their guns only to find the appeals board disagreeing with the auditors on over half of their findings.

Documenting Consultants Work Product.

It is a pure joy to hear the appeals board admonish DCAA with the exact arguments I made time and time again. I will let the judges speak for themselves:

The government labors under the false impression that the FAR requires a consultant to create “work product” merely for the purposes of proving its costs (see R4, tab 16 at 258, 260; gov’t br. at 54-55, 64-66). Though the FAR language in question is not as clear as we might like, it can be read- as we read it here – to impose no such requirement, Moreover, we have factually found the invoices submitted by TSI to be adequate to support a finding that TSI incurred the charged costs for SMI’s marketing activities.

We begin by examining that language of the FAR that the government holds out as requiring the generation and provision of “work product” to entitle recovery of costs for professional and consultant services. FAR 31.205-33, Professional and consultant service costs, provides in relevant part that:

(f) Fees for services rendered are allowable only when supported by evidence of the nature and scope of the service provided. work performed is proper and does not violate law or regulation shall include

(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;

(2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and

(3) Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

The government makes a superficially persuasive argument, that the FAR’s statement that the evidence necessary to determine that the work is proper “shall include … work products” and related documents, makes the provision of such documents mandatory (gov’t hr. at 54). The problem with this interpretation of the FAR is that it does not account for the case in which such documents were never created by the consultant. Moreover, it does not account for the case where, as here, the invoices include the data that the FAR defines as work product, such as persons visited and subjects discussed. We further note, that DCAA’s own audit manual, reflecting the government’s own interpretation of this FAR requirement, provides that, “[t]he auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.” DCAA Manual, at 58-2 – 58-3. Moreover, amongst the “Frequently Asked Questions” in the relevant portions of the audit manual are responses indicating that other additional evidence may be considered to determine whether the services were, indeed, provided and allowable. Id. at 58-7.

Thus, we conclude that FAR 31.205-33(f) may require the provision of a consultant’s work product, if it exists, but is not so rigid as to require its creation when it would not otherwise be necessary for the consultant to perform its duties. To be sure, any lack of work product makes it more difficult for a contractor to prove that it incurred the costs for which it seeks compensation, and the lack of work product in an instance where the consulting work was of such a scale or scope that work product would be expected may properly subject the costs to question. As with most things, the proper amount of documentation and work product to be expected will largely depend on the scope of work performed, and we do not conclude that the FAR 25 intended to impose “make work” upon consultants that would only lead to higher costs to the contractor which would then be imposed upon the taxpayer.

Turning to the facts before us, we have found that the consulting agreements and the invoices provided, combined with the testimony given at the hearing, persuade us that the costs included in TSI’s FY 2007 ICP for SMI’s marketing services were, in fact, for that purpose and are allowable. This portion of the appeal is sustained.

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