Monday, June 18, 2012

We Were Auditors Once, and .... (Part 1)

As many readers of this blog know, we spent a considerable number of  years as contract auditors before venturing out and forming this consulting firm. Our experience gives us a little insight into the mindset and guiding philosophy of an auditor. Although the organization we worked for, Defense Contract Audit Agency (DCAA) has changed a lot during the ensuing years, the organization's focus has not. The focus has been, is now, and probably always will be saving money for the taxpayer. Over the next few days, we want to provide you a glimpse into the thinking of auditors as they go about their business. Obviously, these are going to be generalized statements and we're certain that many Government contractors have had experiences that diverge widely from what we're about to describe. Nevertheless, here's Part 1

We were auditors once and we had absolutely no concern about a contractor's cash flow. The only time cash flow entered our vernacular was when we were judging a contractor's financial capability for performing a prospective contract. Requests for expediting a provisional payment request or approving revised billing rates fell on deaf ears.We felt that cash flow was the contractors problem, not an audit issue. Many in the Government, not just the contract auditors, feel that contractors are morally obligated to invest some financial resource into the contract commensurate with the potential rewards (fee or profit) and the investment of working capital is a financial commitment.

We also did not care that a contractor might have to go out and borrow money for working capital. After all, interest on those borrowings are unallowable anyway so there's no cost to the Government if a contractor must borrow money to perform under the contract.

We knew then and we know much better now that companies live and die by their cash flow. A disruption of  planned cash flows for even a few days can cost contractors money and that money comes out of profit. Disruption could result in interest on borrowing for cash flow needs, lost cash discounts on material purchases, delays in paying subcontractors, and even the ability to meet a timely payroll date.

The Prompt Payment Act has given contractors some relief - contractors are entitled to interest on payments not made with 30 days of a request. However, there is a significant difference between five days and 30 days. Contractors accustomed to five days from request to payment will complain if elapsed days extends much further.

So what do you think? Let us know.

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