Audits of Contractor Overpayments - Part II

Yesterday we discussed DCAA's response to OMB's (Office of Management and Budget) "Payment Recapture Audit" initiative. DCAA rolled out a program specifically designed to test contractor billing policies and procedures for ensuring overpayments do not occur or if they do, are quickly repaid. Or, to state it more formally, to verify that the contractor's billing system procedures and internal controls are in place to assure timely identification and resolution of contract overpayments. We then listed the nine objectives of these audits. If you missed that posting, you may read it here.

Contract overpayments are payments that the contractor receives that are in excess of billed amounts. Usually overpayments occur because of contractor internal control weaknesses or paying office errors but could also occur because of contract administration adjustments. Contract administration adjustments include payments the contractor received in accordance with contract provisions which need to be reduced because of subsequent events or actions. Examples include progress payment adjustments due to a contract loss position, changes in contract billing prices, liquidation rates, and foreign exchange rates, quarterly limitation of payment adjustments, government withholds as a result of contract performance problems and settlement of final indirect rates, CAS noncompliances or postaward audits.

When the audit is initiated, the auditors will hold an entrance conference with the contractor and ask for quite a lot of information. For example, auditors are instructed to request a comparison of billed and paid amounts and then have the contractor explain its procedures for comparing amounts billed to amounts received at the invoice level, its accounting procedures for applying progress payment liquidations on delivery invoices and recording the net delivery invoice amount in the accounts receivable records for comparison to amounts received, and the process for resolving payment variances (including notifying the Government or prime contractor when overpayments are identified and retuning the overpayments). Additionally, the auditor is instructed to request a listing of all current outstanding payment variances, current accounts receivable and accounts payable aging reports.
 
Other information that will be requested include

• Listing of contract administration adjustments processed over the last 12 months (with explanations)
• Demand letters (Demand letters are letters issued by the paying office or contracting officer demandi9ng payment of specified amounts by the contractor. The demand letter notifies the contractor that amounts not paid with 30 days of the demand letter shall bear interest).
• Subcontractor billings
• Offsets (An offset is a reduction applied to an invoice submitted to the paying office as a means of resolving payments issues such as overpayments, contract administration adjustments, and paying office/contractor errors).
• Refunds (checks submitted to the Government).

Tomorrow we will continue this theme by detailing some of the specific steps that auditors might take once they obtain this initial information.