Incurred Cost Proposals - Inadequacy Letters from DCAA

Recently, DCAA offices from around the U.S. that have been assigned the responsibility for clearing out the backlog of incurred cost proposals (ICPs), have been making assessments as to the proposals' adequacy. In many cases, the auditors have identified one or more deficiency and have returned the proposal to the contractor with a punch list of items requiring correction. Here in the Seattle area, DCAA brought the auditors together for what they termed a "get it done" day to review the adequacy of contractor ICPs that have been stacking up. Following are a few comments and observations.

1. Extensions of the requested due date for revising your ICP is usually obtainable. For convenience sake, requests should be addressed to the contracting officer with a copy to the cognizant auditor (see FAR 52.216-7(d)(2)(i)).
2. Most of DCAA's required corrections are understandable to accountants with contract costing experience. However, sometimes, DCAA rationale for calling something a deficiency is not clear at all. Do not hesitate to call the DCAA point of contact  for clarification. Sometimes they are helpful but they can only provide limited explanations before they cross the line and impair their independence. That's where firms like PNWC and other government contracting consulting groups can be helpful. 
3. One common misconception among contractors is to assume the ICP audit is over once DCAA accepts the ICP as meeting the requirements of an adequate submission. This is incorrect. DCAA uses a two-step approach that culminates in a rate agreement letter. The first step is to test the ICP to determine if it is likely to be adequately prepared. The second step is to perform an audit or a review, based on risk assessment. This second step could range from simple "desk" procedures to a full audit. Although the Government reserves the right to subsequently review and question direct costs, it is very rare for them to re-visit or re-audit your claimed incurred costs once both you and DCAA have signed the rate agreement letter. 
4. Sometimes the basis for inadequate claims are without merit. FAR 52.216-7(d)(2)(iii) lays out the data that constitutes an adequate claim; 15 items (and not all of those 15 items will be applicable). If it is not on that list, it cannot be used by DCAA or anyone else to claim that a proposal is inadequate. We saw one letter from DCAA last week claiming that a proposal was inadequate because the contractor did not provide copies of its IRS Forms 941. Those forms are not on the listing of data necessary for an adequate claim.

If you've received one of these letters and would like to talk to someone about it, contact David Koeltzow ("Kelso") at 866-849-4887, extension 6.