Once you have made the decision to become a government contractor it is important that you learn your way around the rules and regulations that will be imposed on you. New acronyms will be thrown at you from every direction i.e. FAR, DFAR, ICE, CAS and these are just the tip of the iceberg. You will need a trusted advisor to help you put in place the right procedures and tools to make your journey a smooth one. The purpose of this paper is to give you an overview of the audit agency and high-level overview of key audits that you will need to prepare for.
DCAA and GAGAS
DCAA – If you are not familiar with this acronym we promise you it will end up etched in your mind. Let’s quickly level set on the mission of the Defense Contract Audit Agency (DCAA). Their primary function is to perform contract and financial audits for agencies that are responsible for acquisition and contract administration for the US Government. DCAA audits ONLY contractors, like you.
They conduct these audits in accordance with the Generally Accepted Government Auditing Standards (GAGAS). The principles that GAGAS embodies are unbiased audit conclusions based on facts. If you are interested there is a library of information on the DCAA website www.dcaa.mil to help you more thoroughly prep for impending audits.
DCAA is a very vital part of the acquistion process for the Department of Defense (DOD) and certain other agencies. Their charter is to make sure that the tax payers’ money is spent responsibly and ethically by conducting audits that assure the validity of costs throughout the acquistion process. They have a tremendous amount of influence because they communicate with the contracting officer (CO) and make recommendations that have an impact on contract negotiations. The recommendations help the CO understand what the price of the contract should be.
In government contracting circles you will hear the words COMPLIANCE and COMPLIANT over and over. So you may be asking, “What Governs Compliance?” There are two major sets of rules that apply: FAR and CAS. The Federal Acquisition Regulation (FAR), is the holy grail of acquisition. It is used to guide agencies when they are buying goods and/or services. Cost Accounting Standards (CAS) were established to drive standards into cost accounting practices. There are three major pillars of CAS that include measurement of cost, cost in the proper accounting period, and proper allocation to cost objectives. These two sets of rules are used by DCAA as the basis for all audits.
Each audit that DCAA completes, whether before or after contract award, supports government officials who negotiate prices and award contracts for major weapons systems, services, and supplies.
Forward pricing audits are conducted on contract proposals, they are related to a specific contract, and they are conducted prior to award (usually during the selection process). The objective of the audit is to assure the government is paying a reasonable price for goods or services. Accurate contract prices are the starting point for fair and reasonable prices throughout the acquisition process.
Pre-Award – Accounting System Survey
The “Pre-Award Survey” is conducted prior to award and is contract specific. It results in an opinion that the system is “acceptable” for use on the contemplated contract. It should be noted that this is NOT an audit because it does not look at any actual costs – only the system capabilities. It is referred to as a “Survey” in the document and it is considered a “review” in auditor terminology. It can, and often is, done on a system that is not yet implemented based on the software capabilities and pro forma company policies and procedures.
The Survey is a Pre-Award Survey known as Standard Form (SF) 1408 which is asking questions about your accounting system. Below are some of the inquiries of the form:
1) Is the accounting system in accordance the GAAP?
2) Accounting System provides for
- Proper segregation of direct and indirect costs
- Method for allocation of indirect costs
- Timekeeping System
- Labor distribution
- Segregation of unallowable costs
- Accumulation of costs under General Ledger Control
3) Accounting System provides financial information
4) Is the accounting designed to have reliable and accurate data?
5) Is the accounting system fully operable?
This overall process can be tricky for new government contracts and it is highly suggested that a process and tool partner be obtained to assure success.
DCAA labor floor checks can be scary for the employees being audited. It is the ONLY audit performed by DCAA that is done on an unannounced basis. It Is suggested that a self-audit procedure is put into place to make sure employees will understand what is expected and to keep them fresh on the timekeeping policies.
The purpose of this audit is to:
- Assure the contractor’s compliance with its timekeeping internal controls and procedures
- Verify the reliability of employee time records
- Verify employees are actually at work
- Verify employees are performing in assigned job classificaions
- Make sure time is charged to the proper cost objective
This audit is required for contracts when the contract amount is not fixed and when the contract contains the Allowable and Payment Clause at FAR 52.216-7 (all cost type and T&M contracts).
The Incurred Cost is a financial representation of the work that you performed as a contractor for a specific period. It is used to make sure that claimed actual cost and billed cost reconcile. The audit regulations are in FAR 52.216-7. The clause addresses two key areas, interim reimbursement of costs and determination of final indirect rates and billing rates. The overall submission (Incurred Cost Electronically – ICE) can be tricky and you must identify items such as your rate structure, direct cost to cost objectives (contracts), and identify both indirect and unallowable costs. The ICE excel format that contains the schedules can be found on www.dcaa.mil.
Unanet Will Enable DCAA Compliance
The accounting, timekeeping, and expense solution you purchase will have a bearing on the success you have in overall compliance today and in the future. Unanet’s integrated and real-time, project-based ERP system in conjunction with your policies, procedures, practices, and qualified personnel will assure that you can meet the CAS and FAR requirements.
Join us at our upcoming GovCon Initiative event, Wednesday, August 30, 2017 at Telos.