Audits of Direct Costs - Material

Most Government contractors are familiar with the FAR (Federal Acquisition Regulations) requirement to submit annual incurred cost submissions. These submissions set forth contractors' calculations of final indirect expense rates (e.g. fringe benefits, overhead, General and Administrative, etc) as well as tabulate direct costs by contract. During the audit of incurred cost submisisons, auditors are testing for allowability, allocability, and reasonableness of both direct and indirect costs. This sometimes surprises contractors, especially because so much of the focus of the submission is on indirect costs. However, at the conclusion of the audit, the auditor is attesting to the propriety of both direct and indirect costs incurred during the fiscal year under audit.

The auditor's examination of transactions and procedures in reviews of material costs charged to cost-reimbursable contracts must be sufficient to support an opinion on the allowability, allocability, and reasonableness of those costs. In performing the overall testing, the auditor will likely consider the following with respect to material costs:

• Was it needed for the contract?
• Was it charged and billed in a reasonable relationship to its use in the manufacturing process.
• Was it considered properly for make or buy
• Was it purchased in reasonable quantity
• Was it purchased at a reasonable price?
• Was it used on the contract?
• If contract subject to CAS (Cost Accounting Standards), were the charges in compliance with CAS.
• Was it accounted for properly as to initial charge, transfer in or out, and residual value.

Additionally, audit guidance also instructs auditors to be alert for purchases from "related" suppliers or subcontractors, preferential treatment, and unwarranted sole-source purchases.