High Risk, Low Risk Incurred Cost Proposals

Yesterday we reported that DCAA (Defense Contract Audit Agency) revised its threshold for identifying low-risk incurred cost proposals. If you missed that, click here to read it. This revision only changed the amount of questioned costs that were present in the last year audited. The other factors that the Agency considers in determining whether a contractor or a proposal is high or low risk, have not changed. These include:

1. Known significant fraud referral (Form 2000) applicable to the proposal fiscal year or the period in which the proposal was prepared. The key to this determination is that there needs to be a nexus between the suspected irregularity and the proposal. If a suspected irregularity involved falsification of test results in five years before the year in question, that would not be sufficient nexus.
2. Preaward accounting system performed that resulted in an opinion of "unacceptable", or no previous experience with the contractor such as voucher processing, forward pricing effort, preaward accounting systems, etc. So here's another good reason to ensure that you accounting systems are adequate. If you want to know how the Government defines "adequate", take a look at the SF 1408. There are some buying commands that bypass DCAA for all contract audit activities except for the incurred cost audit. Those are the contractors where DCAA has no knowledge or previous activity and incurred cost proposals from those companies will not be placed in the low-risk pool.
3. Specific risk with the contractor that has material impact to the incurred cost proposal being assessed (i.e. significant CO/Auditor identified risk). Auditors like to prepare lead sheets. Lead sheets identify existing conditions at a contractor that the auditor wants future auditors to be aware of. For example, an auditor finds that a contractor is purchasing components from a related party and those components are not being charged to the contract at cost but at list prices. The auditor performing the incurred cost audit should check into the matter and see whether the transfer is appropriate. 

So there you have it. You can probably do your own risk assessment to determine whether you're going to get audited, or at least determine your chances of being audited. If your own risk assessment comes out clean and the auditor comes and wants to audit your incurred cost proposal, it is entirely appropriate to ask the risk factors that he/she identified that put you in the high-risk pool.