Friday, September 7, 2012

Adequacy Determinations for Annual Incurred Cost Submissions

Yesterday, we reported on DCAA's new policy with respect to sampling low-risk incurred cost submissions and closing out the rest with a memorandum to the contracting officer. A low-risk submission is one that has been determined to be adequately prepared, and there has been no significant findings in any prior year's incurred cost audits of the particular contractor.

We mentioned DCAA's incurred cost adequacy checklist used to determine whether contractor submissions are adequate. Its a good idea for contractors to use this checklist to self-assess their own submissions prior to formal submission. What bothers us about DCAA's "adequacy" determinations however is that many auditors, when performing adequacy determinations, are requesting data from contractors that is not listed in the checklist and/or schedules that are considered "optional" or "supplemental".

Here are a couple of examples.

1. Schedule L requires contractors to reconcile labor costs to the Forms 941s that are submitted to the IRS. The checklist requires three steps

    • Verify direct labor totals to totals on Schedule H
    • Verify G&A labor totals to totals on Schedule B
    • Verify other indirect pool labor totals to applicable pool schedules.

We have seen numerous cases where DCAA has called and asked for copies of the Forms 941; a request typically reserved for an "audit".

2. Schedule P is an optional schedule according to DCAA's Information for Contractors pamphlet, its Excel-based rendition of an incurred cost claim (ICE), and FAR 52.216-7 and requests contractors provide compensation for the five most highly compensated executives in the company.

We have seen numerous cases where DCAA has requested this schedule as a condition for considering the submission adequate.

3. Schedule S is the contract brief(s) where information from government contracts is listed in a format familiar to auditors. Again, this is an optional schedule but we have seen cases where DCAA's adequacy determination was contingent upon submitting these optional schedules.

So, just because your submission passes DCAA's adequacy checklist, does not necessarily mean that it will be considered adequate by DCAA. You may have to send them a truckload of additional data if you hope to get on their "low risk" list.

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