(Cost Type) Contractors Must "Audit" Their (Cost Type) Subcontracts

The Government employs hundreds of contractors that perform essential mission work under cost reimbursable contracts. To achieve their missions, these contractors often utilize the services of subcontractors, often on a cost-reimbursable basis.

When subcontracts are structured as cost-type, including T&M (Time and Materials) and cost-reimbursable subcontracts, prime contractors are contractually required to ensure that associated costs incurred are audited to provide assurance that the costs are allowable, allocable to the subcontract, and reasonable.

Prime contractors can use their internal audit staff to conduct these audits, engage outside auditors, or, in some cases, utilize the services of the Defense Contract Audit Agency (DCAA), especially where that Agency already has a presence at the particular subcontractor.

One of the problems that has surfaced recently is that prime contractors are not doing a very good job of auditing their subcontractors. That deficiency lies not with the work that DCAA or another contracted audit organization performs but with work performed by internal staff. Audits must comply with professional standards, e.g. Generally Accepted Government Auditing Standards (GAGAS), or standards promulgated by the Institute of Internal Auditors (IIA), to name two. Reviews by various Inspector General organizations have disclosed serious deficiencies in the conduct of these audits - to the extent that these prime contractors have no idea as to whether their subcontract costs are allowable.

Not everyone in the Government is on board with this concept however. A number of years ago while we were still working for DCAA, we conducted a review to determine how well a large Government contractor managed its subcontractors. DCAA, more than any other organization in the Government, has a pretty good idea of what it takes to evaluate incurred costs. They do it for a living. Applying these same standards to contractor reviews of subcontract costs, we found many areas for improvement. However, the contracting officer (DCMA) did not agree. He thought the contractor had done a bang-up job of reviewing subcontract costs and didn't think that internal contractor staff should be held to professional auditing standards.

While that attitude may persist in some organizations, the various agency IGs are working to change attitudes, ensure compliance, and preserve the integrity of costs charged to Government contracts.