Limits Placed on Dollars Available for Contracted Services - Part 2

Last Friday, we highlighted a new DoD policy that limits labor rates and overhead rates for service contracts awarded in 2012 and 2013 to those rates in effect under similar contracts in 2010. The Defense Contract Audit Agency (DCAA) has been assigned a role in implementing this new policy. Its not an "audit" role however but a information provider role. DCAA is going to poke around in its files for information from 2010 such as final indirect rates, historical decrements of unallowable costs, and any other information it might have that will help the contracting officer in implementing this new policy. DCAA is also telling its audit staff that it may need to obtain year end direct labor rates from the contractor, if not already int he permanent file.

Its not at all difficult to make accounting changes that make it look like one is holding labor rates and indirect rates to 2010 levels without really doing so. Moving elements of compensation from direct to indirect, changing the number of estimated "work days", increasing the indirect expense allocation bases, are all ways of manipulating rates without changing the underlying costs. DCAA will be on the alert for this risk area. Its guidance states:

Auditors should be alert for accounting changes, subsequent to 2010, that may impact the use of 2010 actual rates. Auditors should explain these changes, and if practical, furnish calculations to make rate information comparable.

This is a polite way of saying that DCAA believes that contractors are going to be tempted to make accounting changes, not to improve the allocation of costs to final cost objectives, but to manipulate data in such a way to show compliance with the new DoD guidance. Although not stated in the guidance, we suspect that if the audit agency uncovers instances where a contractor has made "accounting changes" for the purpose of showing their 2012 and 2013 rates match their 2010 rates, a Form 2000, Suspected Irregular Conduct, may be considered.

This policy is going to be challenging for those service contractors that are affected by it. Contractors should keep those contracting officer lines of communication open. Notify the contracting officer any pending accounting changes, or the planned adoption of new compensation policies/elements.