We've warned quite often that Government contractors should never presume that when an auditor enters their facilities, that he/she is limiting his/her purpose to the audit at hand. The good ones, and yes, most of them are very good, will be observing things and making casual seemingly innocuous inquiries. One of the things that they are trying to assess is whether there is idle capacity, idle facilities, or poor labor utilization that may result in increased costs charged to Government contracts. Any hint of these inefficiencies are then documented in "audit lead sheets" and contractors might find the auditors coming back to follow up on those leads. Large contractors are more susceptible to these reviews than small contractors based primarily on risk to the Government.
There is a particular type of review that auditors can perform when inefficiencies are noted - Labor Utilization Audit. The basic objectives of a labor utilization audit are;
- to evaluate the internal controls instituted to assure prudent utilization of staffing in the performance of Government contracts,
- to determine whether the costs are commensurate with the benefits derived, and
- to determine the reasonableness and efficiency of the labor utilization.
The auditor has an array of specific procedures he/she can deploy in meeting these objectives. Some of them include:
- Ascertain whether the work performed by the contractor is required by the terms of the contract, properly authorized, and directed to the appropriate operational unit
- Determine whether there are unwarranted variations between staffing budgets allocated by upper management and staffing budgets actually used by operating or middle management.
- Determine whether the contractor maintains adequate control over the expenditure of the technical effort to assure maximum productivity, whether this control includes the evaluation of actual work assignments and target completion dates, and whether comparisons are made with staffing budgets and staffing tables approved by management.
- Evaluate the contractor's personnel practices during start-up and phase out periods to determine whether the cost of excess personnel is charged to Government contracts in the build-up period and whether the Government contracts are unduly burdened with the retention of unnecessary personnel in the phase out period.
- Evaluate the contractor's basis for assigning and phasing out technical personnel for both Government production and commercial operations. Audit emphasis should be accorded the phase out portion of the contract to determine the reasons for retaining certain classes of technical personnel to complete the contract. the auditor should also determine whether the contractor is assigning technical personnel in accordance with their skills. The use of highly trained personnel to perform routine work which could be performed by lower paid personnel is not economical. The use of less than qualified personnel to perform difficult work may result in higher costs to the Government because more time and greater supervision may be required. The type of contract should be a guide to the auditor in determining the extent of verification in these areas.
- Examine the contractor's staffing and labor control practices to determine the effectiveness of controlling idle time. If unreasonable idle time is perceived or controls are judged to be inadequate, conduct a preliminary work sampling (probe).
- Compare labor classifications charged to the contract with those proposed to ascertain whether the contractor is utilizing the type of personnel for which the Government has contracted.
There have been many cases over the years where challenges to a contractor's labor utilization practices have been sustained resulting in significant cost disallowances. Some of the procedures listed above could turn in to investigative referrals if an auditor determines (or suspects) that there has been intentional mischarging to Government contracts.
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