Contract Closeouts - How Indirect Rates Are Determined Without An Audit

Having the ability and opportunity to close out contracts without having to wait several years until the contract auditors get around to auditing your incurred cost submissions is a great benefit for contractors and the Government as well. Though there are certain risks, there are benefits for both parties. For the Government, the risk of losing expiring funds is reduced. Contractors get whatever monies have been withheld (typically a percentage of the fee) and then they reduce the records retention bulge. The risks to both parties lie with the indirect rates used to close out the contracts. The final audited rates could be higher than the closeout rates (good for the Government) or lower (good for the Contractor). Whether higher or lower, no one is going to reopen those quick-closed contract. The parties have to live with whatever they agreed to.

With that in mind, the ACO will explore various alternatives for establishing indirect rates for quick closeout purposes and there are several alternatives they can consider. These include:

1. Obtain assistance from DCAA. The cognizant DCAA office should have already been contacted during the earlier stage of determining whether quick closeout is feasible with each individual contractor. For some of the larger Government contracts, there may be quick-closeout rates already established which could be confirmed with DCAA. Even if no such rates exist, DCAA can frequently recommend quick-closeout rates based on their knowledge of the contractor. DCAA may also be able to provide information as to whether there are any outstanding audit issues that could have a significant impact on contract closeout.

For medium and small contractors, DCAA might be able to conduct a desk review of the contractor's unaudited indirect cost proposals for the years being reviewed. This process is especially helpful in cases where a contractor has no other Government contract work other than the contract that is being closed. The purpose of the desk review is to ensure cost incurred during the contract's fiscal years have been properly allocated and are allowable. This desk review should identify any indirect cost adjustments that will impact the indirect rates.

In practice, DCAA will usually knock a little bit off of the contractor submitted indirect rates just to be on the "safe" side - assuming that there will be some unallowables found during the audit.

2. Using the contractor's prior years' audit history is another alternative for establishing indirect rates for the final years of the contract. The final rates for the immediate previous year or an average of final rates from the past several years may be used. As long as there is consistency in the indirect rates from year-to=year, after taking into account unallowable costs, the Government's risk of over reimbursing costs for the unaudited years is limited.

3. Any other reasonable means. The ACO has the option of using any other reasonable options for determining indirect rates, as long as the ACO can fully justify and document its methodology for establishing the rates and such methodology has been approved through the management chain. DoD guidance suggests that when using alternate means, the ACO coordinate with DCAA and ask for any input they may have.

Tomorrow we will discuss some strategies that might help contractors get the rates they want.