Friday, February 3, 2012

DCAA's Goal to Work Off Incurred Cost Audit Backlog

Although we have not seen anything official, we have heard from a number of sources that DCAA' (Defense Contract Audit Agency) is prioritizing incurred cost audits in Fiscal Year 2012. As many contractors can attest to, the Agency has virtually ignored incurred cost audits at smaller contractors for several years and the backlog has grown accordingly. Many contractors are owed significant sums of money for completed contracts but cannot bill for those costs until the incurred cost audits are completed. DCMA could authorize payment without audit but has been unwilling to do so.

Recently, many contractors have been receiving correspondence from DCAA asking for additional data prior to starting the incurred cost audits. These letters vary according to Region and Field Audit Office but here is a composite of data requests from several of these letters.

  1. Comparative analysis of indirect expense pools with prior years
  2. Executive compensation information for top five executives
  3. List of ACOs and PCOs for each flexibly priced contract
  4. Identification of and information on prime contracts under which the contractor performs flexibly priced effort as a subcontractor.
  5. List of work sites and the number of employees assigned to each site.
  6. Description of accounting system.
  7. Procedures for identifying and handling unallowable costs.
  8. Certified financial statements or other financial data
  9. Management letter from outside CPAs concerning any internal control weaknesses
  10. Actions that have been and/or will be implemented to correct the weaknesses described above
  11. List of internal audit reports issued in the fiscal year
  12. Annual internal audit plan of scheduled audits to be performed in this fiscal year
  13. Federal and state income tax returns
  14. SEC 10-K report
  15. Minutes from Board of Directors meetings
  16. Listing of delay and disruption and termination claims submitted which contain costs relating to this fiscal year.
  17. Contract briefs

Of course, not all of these items will be applicable to most contractors. If you receive one of these letters and you have reservations about one or more of the items requested, you might seek advice from counsel. At a minimum, you should ask the auditor for his/her authority for requesting a particular item, if not obvious. For example, some companies have refused to provide board of directors meetings as there is no clear nexus between those minutes and costs charged to Government contracts. Other contractors have allowed auditors to review the minutes but not take copies.

Many of these items are documents that the auditor will be requesting during the audit. To that extent, providing them ahead of time might facilitate the audit once it begins. We don't recommend that contractors spend a lot of time creating data. For example, there is no contractual requirement for contractors to prepare a comparative analysis of indirect expense pools with prior years. If a contractor has that information readily available, it should be no problems to provide it. On the other hand, if the data is not readily available, let the auditor perform the analysis - its their job.


  1. Well, then who will do all the demand work?

  2. What demand work? Unfortunately, DCAA bailed on performing most of its traditional forward pricing audits.