Cuts Coming in Management Support Service Contracts

Last summer, the OMB (Office of Management and Budget) announced a goal of reducing spending on management support service contracts across all agencies by 15 percent. Until recently however, we didn't know what this meant in terms of absolute dollars. Earlier this month, OMB provided that information.

According to OMB, the Federal Government spends about $44 billion a year on management support services such as engineering and technical services, acquisition planning, information technology services, and program management. Ten years ago, that figure was only $11 billion. Many of these contracts are awarded on a "time-and-material" basis which OMB believes put agencies at greater cost risk than when fixed price contracting is used. Also, OMB believes that magnitude of these contracted services creates a potential risk of overreliance on contractors for critical activities related to agencies' missions and operations. By September 30, 2012, OMB wants to reduce spending in this area by $6.7 billion.

To achieve this goal, OMB is requiring agencies justify in writing that their support service contracts are essential and the justification must be accompanied by "high level" approval. Agencies will also need to justify the contracting type used, if not firm-fixed price.

These reductions, if they actually happen, will have a significant and direct impact on many Government contractors, including small businesses who have benefited from support service contracting over the years.

Federal Government Wants to Improve Suspension and Debarment Procedures

The Federal Government pays over a trillion dollars a year to contractors and grantees, and has an ongoing fiduciary responsibility to protect American taxpayer resources and the integrity of the processes for Federal acquisition and for discretionary assistance, loan, and benefit programs.

The suspension and debarment remedy is one of the tools available for protecting taxpayer resources and the integrity of these processes from those contractors and recipients who are "non-responsible" (i.e. who lack business integrity because they have engaged in dishonest or illegal conduct or are otherwise unable to satisfactorily perform their responsibilities. The basic policies and procedures governing suspension and debarment in FAR 9.4 and are well-established and generally sound.

Suspension and debarment are similar but the time periods during which contractors are not eligible to contract with the Government differ. Suspension typically lasts twelve to 18 months. Debarment lasts up to three years. For more information on suspension and debarment, read our 4-part series from last July (Part I, Part II, Part III, and Part IV).

Some Federal agencies have long-standing and robust suspension and debarment programs. However, according to the Office of Management and Budget (OMB), many have failed to adequately use the suspension and debarment tools at their disposal or have failed even to maintain the most basic program capabilities required to suspend or debar non-responsible parties. A recent report by GAO found that fifty percent of agencies reviewed lacked the characteristics common among active and effective suspension and debarment programs; dedicated staff resources, well developed internal guidance, and processes for referring cases to officials for action. The OMB believes these deficiencies have put taxpayer resources at unnecessary risk of waste, fraud, and abuse.

To remedy this situation, OMB, this month, directed every Federal agency to take a series of actions including the appointment of a senior official to oversee the program, beef up internal policies and procedures, make sure contracting officers are reviewing relevant suspension and debarment databases before making awards, and fixing the things that don't work.

Late Proposal Submissions

When submitting proposals to the Government, it is absolutely imperative that offerors follow the solicitation instructions. Submissions arriving after the cut-off date, are rejected from consideration (see FAR 15.208). Additionally, it has been firmly and consistently established through numerous bid protests that it is the offeror's responsibility to deliver its proposal at the proper place and the proper time.

If a Government agency/organization/employee somehow contributes to the delay, there may be a basis for accepting a late bid. However, even in cases where the late receipt may have been caused, in part, by erroneous government action, a late proposal should not be considered if the offeror significantly contributed to the late receipt by not acting reasonably in fulfilling its responsibility (O.S. Sys., Inc., B=292827, Nov. 17, 2003).

In a recent bid protest decision involving an offeror whose proposal was rejected because it was late, the Comptroller General sided with the Air Force. An offeror delivered its proposal to a commercial carrier for delivery to the Air Force. The commercial carrier arrived at the gate in sufficient time to deliver the proposal to the proper place at the proper time, but chose not to enter the base at that time to avoid waiting in a long line. The GAO ruled that the paramount cause for the late delivery was not improper government action.

Offerors should always allow for delays, disruptions, and other encumbrances in their timeline and submission schedules. The Government is very unforgiving of late submissions.

To read the full decision discussed above, click here.

Forward Pricing Rates

Last January, DoD issued a memo that discussed the realignment of work between DCMA (Defense Contract Management Agency) and DCAA (Defense Contract Audit Agency). You can read more about that memo here. In a follow-up memo issued November 16, 2011, DoD adds clarification to its policy regarding forward pricing rates.

Back in January, DoD shifted responsibility for establishing forward pricing rates (indirect rates used by contractors and the Government to negotiate contracts) from DCAA to DCMA. The initial wording caused some confusion however by permitting contracting officers to use DCAA forward pricing rate audit recommendations as a basis for indirect rate recommendations provided to contracting officers (e.g. why would DCAA have rate recommendations when it is no longer in the business of auditing indirect rates?).

The new guidance makes it very clear that contracting officers are to obtain their indirect rate recommendations directly from DCMA. If new information comes along that suggests the rate recommendations require modification, the contracting officer should coordinate with DCMA - not DCAA - as to the impact on indirect rates.

Forward pricing rates was once one of the core competencies of DCAA. Unfortunately, organizational paralysis set in and DCAA is no longer able to provide timely and responsive audits to support contract negotiations. If this trend continues, DCAA will soon be relegated to the "dustbin of history".

Today is This Blog's Second Anniversary

Well, we made it through another year. Today we celebrate the second anniversary of this blog. Every working day for the past two years we have posted news and information pertaining to Government contracting. As an organization, PNWC's focus is to help government contractors (and potential government contractors) grow their business, increase profits, and comply with Government contracting rules and regulations. Readership (as measured by the number of "page views") has increased more than 50 percent from a year ago. We thank everyone for taking time to read our blog and for your comments as well. Suggestions are always welcome and if you are interested in a particular topic, feel free to suggest it. If we feel qualified to write on it, we will.

DoD Issues Final Rule on Accelerating Payments to Small Businesses

On November 18th, DoD amended its FAR Supplement by inserting a provision that formalizes its intention to accelerate payments to small business concerns (see DFARS 232.903). The provision does not specify a particular number of days. It merely states:

DoD policy is to assist small business concerns by paying them as quickly as possible after invoices and all proper documentation, including acceptance, are received and before normal payment due dates established in the contract.

Normal due dates are typically 30 days after receipt so small business concerns should expect to see reimbursements and payments in less than 30 days, and hopefully, significantly less than 30 days. The new rule did not change the interest provision on delinquent payments. Interest on late payments still begin after 30 days.

If you are a small business and payments are not received any sooner than they were in the past, you should contact your contracting officer for assistance.

New Representation Required for DoD Contracts

There are a number of statutory restrictions concerning post-Government employment for DoD officials after leaving Government employment. Mostly, these restrictions deal with improper business practices and personal conflicts of interest (see FAR 3.104, DFARS 203.104, and DFARS 203.171-3 for example).


DoD has just amended ifs FAR supplement to require companies submitting bids (including commercial items) to "represent" whether former DoD officials who are employees of the offeror are in compliance with these post-employment restrictions. The exact representation reads:

By submission of this offer, the offeror represents, to the best of its knowledge and belief, that all covered DoD officials employed by or otherwise receiving compensation from the offeror, and who are expected to undertake activities on behalf of the offeror for any resulting contract, are presently in compliance with all post-employment restrictions covered by .....

This rule implements a recommendation from GAO and requires offerors to complete and provide as part of each proposal, including proposals for commercial items, this representation. DoD elected to employ a "representation" rather than a "certification". The representation will be required one time (for each proposal) rather than continuously throughout contract performance. The provision will not be included in the annual representations and certifications.

Directly Associated Costs - Part II

Yesterday, we defined "directly associated costs" and described how directly associated costs related to unallowable costs, are also unallowable, if material (or significant). FAR provides some general criteria for assessing significance but a lot of judgment is still required in assessing materiality.

Contractors should be aware of and concerned that the Government's bent is to set the materiality threshold as low as possible so that they can disallow more costs thereby reducing the costs charged to Government contracts. Often times, the Government's position is not defensible in view of the FAR criteria. We know of cases where auditors positions relative to directly associated costs have not sustained by contracting officers (remember, auditors are advisory only and the contracting officer makes the final decisions).

As a general practice, contractors should review their unallowable costs from time to time and brainstorm for potential directly associated costs. Any costs directly associated with unallowable costs or activities should be set aside and charged to an "unallowable" account. However, remember the "but for" rule - the costs would not have been incurred had the other cost not been incurred. This suggests that fixed costs (as differentiated from variable costs) will seldom meet the definition of directly associated costs. And even if a particular fixed cost did meet that definition, it is unlikely that it would be material in amount.

Directly Associated Costs

Directly associated costs means any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred (FAR 31.001).

Directly associated costs can relate to both allowable and unallowable costs (or activities). If related to unallowable costs, "directly associated costs" are also unallowable if material (i.e. significant) in amount (FAR 31.201-6). The concept of "materiality" often requires the exercise of judgment. In exercising this judgment, contractors must consider

• the actual dollar amount
• the cumulative effect of all directly associated costs in a cost pool, and
• the ultimate effect on the cost of Government contracts.

For example, FAR 31.201-6(e)(2) states that salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on compay activities to determine if the costs are material. That same FAR reference however cautions that time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee's regular duties.

Other examples of directly associated unallowable costs include:

1. Bad debts. Actual or estimated losses arising from uncollectible accounts receivable due from customers and other claims and any directly associated costs i.e., collection fees and/or legal costs associated with collection efforts are unallowable (see FAR 31.205.3).
2. Entertainment costs. FAR 31.205-14 states that cost of amusement, diversion, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable.
3. Lobbying costs. Pursuant to FAR 31.205-22, costs incurred in attempting to improperly influence (see FAR 3.401), either directly or indirectly, an employee or officer of the executive branch of the Federal Government to give consideration or to act regarding a regulatory or contract matter are unallowable. Employee(s) travel and/or administrative support costs directly associated with unallowable lobbying effort are also unallowable .

The Importance of Adequate Proposal Submissions

The following information has been extracted from the instructions that DCAA (Defense Contract Audit Agency) provides to contracting officers on the proper procedure for requesting audits. It is instructive for contractors (and prospective contractors) because essentially, DCAA will not audit a proposal that has inadequacies. DCAA would prefer that contracting officers first determine whether contractor proposals are adequate before they send out a request for audit. Offerors could find themselves out of a job if they don't pay attention to the fundamental requirements of FAR Part 15.

Before requesting an audit, offerors/contractors’ proposals, claims, or other submissions should be adequately supported. It is in the buying commands best interest to obtain adequate proposals and submissions in order to fully protect the Government’s interests, to ensure receipt of timely and effective audit services, and to assist in performing the necessary cost or pricing analysis required to attain a fair and reasonable contract price. It is in the contractor’s best interest to provide adequate proposals and submissions in order to obtain timely contract awards, ensure funding is not lost or transferred elsewhere, and to help adhere to applicable regulatory requirements. DCAA auditors are required to obtain adequate proposals/submissions prior to starting an audit. FAR 15.403-4 sets forth those circumstances in which contractors are required to submit certified cost or pricing data. FAR 15.408, Table 15-2 provides instructions for submitting cost/price proposals when cost or pricing data are required. The DCAA Forward Pricing Adequacy Checklist (located at http://www.dcaa.mil) is a valuable tool in assessing the adequacy of all types of offeror/contractor submissions.

Sleeter Group's Awesome QuickBooks Add-ons

If your company does not use QuickBooks Accounting Software, you can skip this post. If you're one of the thousands of Government contractors who use QuickBooks, the following may be of interest to you.

The Sleeter Group is the preeminent provider of technical reference materials, software expertise, and QuickBooks training materials for accounting solutions consultants. It has trained over 30 thousand accounting professionals in accounting software solutions. Each year for the past seven years, the Sleeter group culls through dozens of QuickBooks add-ons to select a few that rise above the others. The add-ons must be developed and sold by solid companys with reputations for outstanding customer support and the product must have the following attributes:

• Must be fully released and shipping in the US by August 1, 2011
• Must conform to good accounting principles and operating standards
• Should use appropriate transaction types and field population for recording data into QuickBooks and/or other accounting software packages so as to preserve and/or enhance the standard reporting features.

As consultants with many clients on QuickBooks, we are always interested in any improvements to the basic platform as well as through third-party add-ons. With the hundreds of add-ons available however, it is difficult to assess which ones are worthwhile and which should be avoided. Having an independent (and reputable) organization do a lot of the groundwork certainly helps.

None of the "awesome" add-ons for 2012 are specific to Government contracting. You won't find any add-on that calculates indirect expense rates or can upload billings directly into WAWF (Wide Area Workflow). The Sleeter Group's selections probably need to appeal to a broad market and Government contracting is probably too much of a niche. However, this is not to imply that the winners would not be of interest to Government contractors.

The winners for 2012 can be accessed here. In addition, this web page has links back to winners from previous years.

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Related Posts

2011 Awesome "Add-On" Winners
2010 Awesome "Add-On" Winners

Proposal Preparation Costs - Direct or Indirect?

The Department of Defense recently issued a reminder to its acquisition personnel regarding the proper charging of proposal preparation costs. Proposal preparation (and negotiation support) costs not specifically funded by a grant or required by a contract are B&P costs (Bid and Proposal, see FAR 31.205-18) and must be charged to contracts through an indirect cost pool (usually the General and Administrative cost pool). If there is a specific requirement in an existing contract to submit one or more proposals, costs of preparing those proposals are allocable only to the contract requiring the proposal preparation.

When proposal and negotiation costs are chargeable direct to contracts, the requirement to do so will be specifically called out in the contract, such as in a funded line item. As a matter of policy however, DoD has told its contracting officers to minimize the situations where a contractor will be contractually required to prepare proposals for new requirements or to definitize unpriced contractual actions.

According to Cost Accounting Standards (CAS) and FAR, if B&P costs are incurred without a contractual requirement, those costs can never be re-characterized as direct costs of any contract since they were independent B&P costs at the time they were incurred. Likewise, if there is a specific requirement for submission of a proposal in a contract, the proposal and negotiation costs are direct costs of that contract and cannot be transferred to another contract. This is especially relevant to the situation where a contract requires a proposal be prepared for new requirements or a follow-on contract and then the contractor or contracting officer improperly attempts to transfer the proposal and negotiation costs to the new contract resulting from the proposal.

Follow-on work does not automatically qualify to be charged directly to a contract merely because there is an assumption that the contractor will submit a proposal as part of a continuing program. For the costs to be charged directly to a contract there must be a specific requirement. If a contracting officer requires a proposal for a follow-on contract or for new requirements, or determines it is necessary to award undefinitized contractual actions, the Department will often be placed in the position of paying for the proposal and negotiation costs on a reimbursable basis with little or no competitive control over the costs incurred. DoD is warning its Contracting officers to avoid placing the Government in that position.

Some Relief for Prime Contractors

FAR (Federal Acquisition Regulations) has been amended effective November 2nd to allow subcontractors to "self-represent" their small disadvantaged business (SDB) status to prime contractors in good faith when seeking Federal subcontracting opportunities.

Previously under the FAR, Federal prime contractors were required to confirm that subcontractors representing themselves as small disadvantaged businesses were certified by the SBA (Small Business Administration) as SDB firms.

There is one caveat. The precise wording in FAR 52.219-25 allows prime contractors to accept the subcontractor's written self-representation unless the prime contractor has reason to question the self-representation.

There are a number of reviews going on right now addressing the perceived abuse by contractors (and subcontractors) that misrepresent their small business size status in order to win contracts. We recommend, notwithstanding this easing of the burden of verifying small business status, that contractors make more than a token effort to ensure the veracity of subcontractor assertions and representations.

Labor Relations Costs - Revised Cost Principle

The FAR Councils recently amended FAR 31.205-21, Labor Relations Costs, making the costs of certain activities unallowable.

Until now, FAR 31.205-21 was very succinct. It read, "Costs incurred in maintaining satisfactory relations between the contractor and its employees, including costs of shop stewards, labor management committees, employee publications, and other related activities, are allowable."

The revised cost principle adds a prohibition on certain activities as follows.

As required by Executive Order 13494, Economy in Government Contracting, costs of any activities undertaken to persuade employees, of any entity, to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively through representatives of the employees' own choosing are unallowable. Examples of unallowable costs under this paragraph include, but are not limited to, the costs of
   (1) Preparing and distributing materials;
   (2) Hiring or consulting legal counsel or consultants;
   (3) Meetings (including paying the salaries of the attendees at meetings held for this purpose); and
   (4) Planning or conducting activities by managers, supervisors, or union representatives during work hours.

This new rule addresses "persuader" activities - either for or against collective bargaining. It seems unlikely to us that a contractor is going to try to "persuade" its employees to unionize so this change effectively amounts to a prohibition against contractors resisting workforce unionization.

Employee Rights under Federal Labor Laws

The FAR councils published a final rule that implements Executive Order (EO) 13496, Notification of Employee Rights Under Federal Laws. The EO requires contractors to display a notice for employees of their rights under Federal labor laws. The Department of Labor determined that the notice must also include employee rights under the National Labor Relations Act (NRLA). The NRLA encourages collective bargaining and protects the exercise by employees of their freedom to associate, to self organize and to designate representatives of their own choosing for the purpose of negotiating the terms and conditions of their employment.

The physical posting of the notice must be in conspicuous places in and about the plants and offices of contractors and subcontracts, in the languages employees speak, so that the notice is prominent and readily seen by employees who are covered by the National Labor Relations Act and engage in the activities related to the performance of the contract. Contractor's who use a website to communicate with employees are also encouraged (perhaps required, depending on how you interpret the regulations) to post notices there as well.

Posters may be downloaded from the Department of Labor's website. They are available in English, Spanish, Mandarin, Hmong, Laotian, and Vietnamese. Contractors are not required to use the DOL posters. They can create their own if they choose.

Mandatory Annual Audit Requirements (MAARs) - Part VI

Today we conclude our discussion (at least for awhile) on MAARs, Mandatory Annual Audit Requirements. MAARs are minimum audit procedures that must be applied to reviews of contractors' annual incurred cost submissions in order for the review to be considered compliant with GAGAS (Generally Accepted Government Auditing Standards). Audit working papers usually contain checklists to ensure that each and every applicable MAAR was covered, either in that particular review or in another audit. The first five parts in this series can be read here:

• Part I - Introduction
• Part II - Timing
• Part III - MAARs #1 - 4
• Part IV - MAARs #5 - 8
• Part V - MAARs #9 - 13

MAAR #14 - Pools/Base Reconciliation to Books. The purpose of this procedure is to determine that the claimed indirect cost pools and allocation bases under Government contracts reconcile to amounts in the contractor's official books and records. This is why auditors will often request the "trail balance" when determining adequacy of an annual submission.

MAAR #15 - Indirect cost comparison with prior years and budgets. The purpose of this procedure is to identify changes in cost accounting practices, reclassification of costs, and areas with substantial increases or decreases in costs that require further audit analysis and/or explanation. Auditors will often ask contractors to prepare a comparison showing current year and prior year's costs by account. Significant changes either up or down will prompt at least a query.

MAAR #16 - Indirect account analysis. This is likely the area that an auditor will spend the most time during an audit of incurred costs. The auditor needs to obtain sufficient evidence to support an opinion on the allowability, allocability, and reasonableness of the costs. The auditor will concentrate on sensitive accounts, new accounts and accounts with large variances.

MAAR #17 - Reserved. Initially, this MAAR involved IR&D/B&P computations. At one time, there were limits to how much a contractor could claim on Government contracts and this involved formulas and comparisons with prior years. After those limits were eliminated in the FAR cost principles, this MAAR was dropped.

MAAR #18 - Indirect allocation bases. The purpose of this MAAR is to assure that allocation bases are equitable for allocation of indirect costs to intermediate and final cost objectives. The focus here is on whether indirect costs are allocated to cost objectives on a "causal and beneficial" basis.

MAAR #19 - Indirect rate computations. The purpose here is to confirm that the contractor's rate computations are accurate for distributing indirect costs to Government contracts. Most contractors use Excel-based models to submit their annual incurred cost claims. These models are moderately complex and errors commonly occur.

MAAR #20 - Reserved. At one time, this MAAR required auditors to review adjusting journal entries that involve indirect expenses. It has now been merged into MAAR #10 which requires auditors to review all adjusting journal entries.

The MAARs provide auditors a kind of road map on how to approach their audits of incurred costs. Knowing the various MAARs should aid contractors in preparing for an audit.

Mandatory Annual Audit Requirements (MAARs) - Part V

Today we continue our discussion on MAARs, Mandatory Annual Audit Requirements. MAARs are minimum audit procedures that must be applied to reviews of contractors' annual incurred cost submissions. Anything short of these would render the audit non compliant with GAGAS (Generally Accepted Government Auditing Standards). If you missed any of the first four parts, you can read them here:

• Part I - Introduction
• Part II - Timing
• Part III - MAARs #1 - 4
• Part IV - MAARs #5 - 8

MAAR #9 - Payroll/Labor Distribution Reconciliation and Tracing. The purpose of this MAAR is to test the overall integrity of labor cost records at the general ledger and cost ledger levels, and to reconcile payroll accruals and disbursements to ensure that distribution entries trace to and from the cost accumulation records. Or, to put it another way, how does an hour charged on a timesheet, convert to dollars on a bill to the Government.

MAAR #10 - Adjusting entries and exception reports. The purpose of this MAAR is to identify adjustments and/or exceptions that require further audit analysis and explanation. The audit will evaluate the propriety of adjusting journal entries and exception reports for both direct and indirect costs.

MAAR #11 - Reserved. (At one time, MAAR #10 pertained to labor adjusting journal entries and MAAR #11 pertained to materials adjusting journal entries. These were combined into a single MAAR.

MAAR #12 - Auditable subcontracts/assist audits. The purpose of this procedure is to identify and request assist audits on "auditable" subcontracts. "Auditable" subcontracts are flexibly priced subcontracts awarded under flexibly priced prime contracts. It is the prime contractor's responsibility to perform subcontract audits but its the auditor's responsibility to ensure that those audits are adequately performed.

MAAR #13 - Purchases existence and consumption. The purpose of this MAAR is to test that materials were in fact received (exist or were consumed) and that services were in fact performed. The auditor will make physical observations and/or inquiries on a concurrent basis in addition to documentation verification of contract charges for purchased materials and services.

Tomorrow we will conclude this series by discussing the remaining MAARs.

Mandatory Annual Audit Requirements (MAARs) - Part IV

We're continuing our discussion on Mandatory Annual Audit Requirements (MAARs): minimum audit procedures before completing reviews of contractor incurred cost proposals. If you're jumping into this discussion for the first time, you might want to go back and read the first three posts in this series:

• Part I
• Part II
• Part III

Today we will be discussing MAARs 5 through 8.

MAARs #5 - General ledger, trial balance, income and/or credit adjustments. The purpose of this procedure is to help identify any income and credits which the Government may be entitled to obtain or share, and to evaluate the exclusion of any adjustments not reflected by the contractor in Government contract costs. It is not uncommon nor is it contrary to generally accepted accounting principles (GAAS) to book miscellaneous income "below the line" to an income statement section reserved for non-operating income and expenses. However, sometimes the Government is entitled to share in these non-operating transactions (e.g. rebates). Additionally, contractors have been known to hide expenses in these sections in order to reduce their indirect expense rate allocation bases thereby increasing their indirect rates (hint: don't do that).

MAARs #6 - Labor floorchecks or interviews - We've covered this area extensively in our blog. The purpose of this procedure is to test the reliability of employee time records, that employees are actually at work (difficult for "work-at-home" employees), that they are performing in assigned job classifications, and that time is charged to the proper cost objective. This is one of the two MAARs that must be performed in the year the costs are incurred (the other is MAAR #13). After the fact, there is no way to determine that time charges correspond to the work actually being performed.

MAARs #7 - Changes in charging direct/indirect costs. The purpose of this procedure is to verify that changes in charging direct/indirect cost do not have the effect of improperly shifting costs among cost objectives or circumventing costs targets or ceilings of certain contracts or other significant cost categories. The auditor will evaluate changes in procedures and practices for charging direct/indirect cost for consistency with generally accepted accounting principles, the applicable cost principles per contracts, and any applicable CAS requirements.

MAARs #8 - Comparative analysis -sensitive labor accounts. The purpose of this procedure is to identify for further examination any sensitive labor charges (for example, indirect charging by direct labor employees) that vary significantly from the prior period and/or budgetary estimates. Lately, DCAA has been requesting contractors to prepare two or three year comparisons of costs by account. It saves time for the auditor however there is no contractual requirement that contractors do so.

Mandatory Annual Audit Requirements (MAARs) - Part III

Mandatory Annual Audit Requirements (MAARs) are procedures that auditors apply when auditing contractor annual incurred cost proposals. These procedures are considered absolutely essential in order to comply with generally accepted government auditing standards when performing the audit. Contractors submitting incurred cost proposals can expect auditors to delve into these areas at some point before issuing an audit report on the results of their review. There are seventeen of them and beginning today, we will begin a discussion on the objectives and purpose of each MAARs. This will take several posts to cover them all.

MAAR #1 - Internal Control Audit Planning and/or Internal Control Questionnaire: The purpose of this requirement is to determine the extent of reliance that can be placed on the internal controls for contract costs and the need for and extent of substantive testing that may be required based on the observed strengths or weaknesses of contractor systems. Essentially, the better a contractors internal control systems, the less auditing will be required. If the auditor can relay on internal control systems to "catch" potentially unallowable costs, he/she can reduce audit testing.

MAAR #2 - Contract Cost Analysis and Reconciliation to Books: This provides the auditor (i) an overview and order-of-magnitude frame of reference for direction of audit effort and other audit planning/performance considerations, and (ii) to verify that the auditable costs claimed or to be claimed on Government contracts tie in to the amounts produced by the accounting system in the contractor's official books and records. Auditors will evaluate summaries of the contractor's total annual contract costs by major cost element (material, subcontracts, intra-company charges, and credits,etc), and verify that the auditable contract costs reconcile to contractor accounting records by cost element.

MAAR #3 - Permanent Files: Permanent files provide an efficient and effective repository of current audit information. Permanent file maintenance should help identify the need for further audit and analysis, and help in determining the accounting methods that influence the nature, level, and extent of further testing required in specific cost accounts, functions, operations, and departments. Permanent files are updated for new or changed contractor organizations, operations, policies, procedures, internal controls, software programs, and accounting methods that influence the nature, level, and accounting treatment of costs being charged to Government contracts.

MAAR #4 - Tax Returns and Financial Statements. The purpose of this step is to highlight possible areas to reduce the extent of audit effort that might otherwise be required. The evaluation of a contractor's financial statements, corporate minutes, tax returns, reports filed with regulatory bodies (e.g. SEC) and data available on the corporate web site will assist the auditor in planning the audit more effectively. Generally, greater weight is placed on corporate reports to regulatory bodies with reporting requirements.

Mandatory Annual Audit Requirements (MAARs) - Part II

Yesterday we began a discussion on mandatory annual audit procedures that auditors must apply during audits of contractors' incurred cost submissions in order to comply with GAGAS (generally accepted government auditing standards). We did not list the seventeen MAARs so here they are:

MAARs are performed before, during, and after the fiscal year when the costs are incurred. Ultimately, the auditor must cover each "applicable" MAARs before issuing his/her audit report.

• MAARs 1, 3, and 7 are typically accomplished on a continuous basis as audits are performed and are not necessarily associated with a single contractor fiscal year or exclusively with the incurred cost audit. 
• MAARs 2, 4, 9, 14, 15, and 19 are "reconciliation" procedures and are usually performed as preliminary steps in the audit of incurred costs.
• MAARs 10 and 16 are historical transaction testing and performed during the incurred cost audit.
• MAARs 6 and 13 are concurrent procedures and must be performed during the fiscal year being audited.
• Finally MAARs 5, 8, 12, and 18 are typically performed during annual incurred cost audits but may also be performed in advance of the fiscal year being audited.

Tomorrow we will begin digging deeper into the purpose and objective of each of these seventeen Mandatory Annual Audit Requirements.

Mandatory Annual Audit Requirements (MAARs) - Part I

Today we start a series that goes into more detail that we usually include in this blog. Often we are asked about the propriety of a particular request from an auditor. Most of the time, we know and understand what the auditor is intending to accomplish by the request. Sometimes, the requests are a bit obscure. When it comes to audits of incurred costs, auditors must comply with Mandatory Annual Audit Requirements (MAARs). MAARs are minimum audit procedures necessary to comply with generally accepted government auditing standards (GAGAS) when performing incurred cost audits. We thought it would be useful and educational to describe each of the MAARs to help you appreciate why auditors ask what they ask and do what they do.

The MAARs vary greatly in purpose, type of transaction being evaluated, and time frame of accomplishment. MAARs are performed at all major contractors (those with $100 million or more in costs booked to flexibly-priced contracts such as CPFF, CPIF, FPI, and T&M) unless such work would fulfill no useful current or future need or the contractor has no costs claimed in one or more cost elements related to a specific MAAR.

Some MAARs must be performed during the fiscal year under audit. MAAR #6 for example requires auditors to review compliance with timekeeping policies and procedures (i.e. floorchecks). Other MAARs are performed during the incurred cost audit, even if that is several years after the fact. Some are accomplished on a continuous basis.

Currently, there are seventeen MAARs. These requirements are tweaked periodically and some have actually been dropped. At one time there were twenty MAARs.

Over the next few days, we will be describing the purpose and objective of each of the seventeen MAARs. Although, as we mentioned above, they are applicable to "major" contractors, the essence of these audit requirements are performed at non-major contractors as well. So this series should be useful to contractors of all sizes who desire to gain some insight on why auditors do what they do.