Keeping Auditors On Course

When it comes to estimating indirect rates for proposal pricing purposes, contractors utilize many methodologies, techniques, data and resources. Estimates can be based on historical data, regression analysis, projections of future sales, parametric estimates, and many others and a combination of all the above.

While evaluating contractor estimates of forward pricing rates, auditors have an innate desire to try and come up with their own estimates. Coming up with independent estimates is not auditing of course, the auditor is not attesting to and reporting on contractors' assertions. Nevertheless, auditors do it anyway - they will try to find a way to justify lowering indirect rates.

It is extremely important for contractors therefore to help auditors remain focused on evaluating the proposed bases of estimates. Contractors should be assertive in explaining their methodology and why they have determined it is an acceptable basis or even the best basis for estimating indirect rates for that particular pricing action. Contractors should also be prepared to answer what alternative methods were considered and why they were discounted.

We'll give you an example. If indirect rates are based on historical data, contractors must be prepared to show why that particular data will provide a reasonable basis for estimating future costs. If the rates are based on six months of history and the auditor asks for eight months of history, contractors must be prepared to explain why eight months of history is not necessarily applicable. Perhaps the additional two months of data has not been validated. Perhaps a contractor accrues depreciation and other expenses (insurance, pension contributions, etc) on a quarterly basis so that eight months of actual costs would not be representative.

Contractors must maintain an awareness of the trajectory of an audit. Its much more efficient to address methods, judgments, and assumptions during an audit than to do so after a report is issued.