Sometimes, even Government auditors do not know the rules.
Most Government contracts contain one of two "Audit and Records" clauses, depending upon how the contract was awarded. FAR 52.241-26 applies to sealed bids and FAR 52.215-2 applies to negotiated contracts. In either case, the Government has up to three years following final payment under the contract to come in and review books and records or a shorter period specified in FAR 4.7. This is important as auditors often cling to the three year rule and conveniently forget the "shorter period" rules. We'll look at some of these shorter periods but first, we should define "records" as used in these clauses.
The definition of "Records" as used in these clauses is very broad. It includes books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form. While this definition is broad, the records must still pertain to "costs claimed to have been incurred" under a particular contract. Sometimes, auditors tend to broaden the scope of their data requests. When they do, contractors must be prepared to challenge any request that doesn't specifically pertain to the contract under audit.
The "shorter periods" records retention requirements are found in FAR 4.705. These periods are measured from the end of the contractor fiscal year (e.g. calendar year), not from the final payment under the contract. Contractors should be familiar with these regulations when establishing their formal record retention policies and procedures. For example, concerning timekeeping, labor cost distribution, and payroll records, FAR 4.705 provides for the following:
- Labor cost distribution cards or equivalent documents: Retain 2 years (FAR 4.705-1(f).
- Payroll sheets, registers, or their equivalent of salaries and wages paid to individual employees for each payroll period, change slips; and tax withholding statements: Retain 4 years (FAR 4.705-2(a)).
- Clock cards or other time and attendance cards: Retain 2 years (FAR 4.705-2(b)).
- Paid checks, receipts for wages paid in cash, or other evidence of payments for services rendered by employees: Retain 2 years (FAR 4.705-2(c)).
If a contractor is unable to support audit requests for records on a 2006 incurred cost submission, for example, it may be because the contractor was following FAR requirements for record retention periods.