About two and a half years ago, we posted a topic called How Long Should I Keep My Records? It laid out the FAR (Federal Acquisition Regulations) requirements for how long Government contractors were required by regulation, to keep certain books and records. It might be useful to read that posting before proceeding further.
Negotiated contracts have (or should have) the clause at FAR 52.215-2, Audit and Records - Negotiation. This is a lengthy clause but the relevant portion for this discussion is Section (f), Availability. This section states:
The Contractor shall make available at its office at all reasonable times the records, materials, and other evidence described (earlier), for examination, audit, or reproduction, until 3 years after final payment under this contract or for any shorter period specified in Subpart 4.7, Contractor Records Retention, of the Federal Acquisition Regulation (FAR), or for any longer period required by statute or by other clauses of this contract.
So, the basic record retention rule is 3 years after final payment or a shorter period as prescribed by Subpart 4.7.
Note, the three year requirement begins after final payment, not after contract completion. Some contractors mistakenly believe, to their detriment, that the three year period begins after contract completion.
Flipping back to FAR 4.7, you will find the record retention requirements for most types of documentation that might be required in connection with an audit of an annual incurred cost proposal including cost accounting records (4 years), payroll records (4 years), timesheets (2 years), etc. For a full rundown on other record types, refer to FAR 4.7 or read our previous blog post on the subject.
This brings us to the reason we're alerting you to the FAR requirements. As most contractors know, DCAA (Defense Contract Audit Agency) is chronically behind in auditing incurred costs. There are a lot of reviews going on right now covering 2006, 2007, and 2008 and we've seen one audit covering the years 2004 and 2005.
Some contractors are finding it very difficult, and in some cases impossible, to support costs for those years because, in following the FAR 4.7 requirements, did not retain documents beyond the regulatory retention periods. From DCAA's perspective, this is a problem. Without contractor records, the Agency has no basis to render an opinion on the propriety of incurred costs. This lack of documentation however, is not the contractors' problem. It just moves the resolution of final incurred costs from the auditor up to the Contracting Officer level where, they are not bound by audit standards in settling incurred costs.