Conditions Influencing Contractor Labor Charging Practices - Part 1

Over the next few days, we are going to be discussing a number of factors that DCAA (Defense Contract Audit Agency) calls "conditions influencing contractor labor charging practices". That's just a nice way of saying "labor charging fraud". In deciding whether to continue, expand, or terminate reviews of labor costs, auditors consider a number of factors that may influence management decisions. None of these factors are conclusive individually but taken as a whole, help auditors understand the risks associated with recorded labor costs.

In reviewing labor costs, auditors are directed to consider a number of factors in developing a risk profile of the contractor. Evaluation of these factors may identify areas where the potential for labor mischarging is high. When the risk is high, the auditor is also tuned into the possibility of fraud, and should be conducting audit tests accordingly.

DCAA has identified 15 risk factors that auditors should consider in developing audit procedures for review of labor costs. Today we will cover the first two; contract mix and overrun contracts

Mix of Contracts

Auditors should determine the Government contract mix (cost vs. fixed-price/commercial). A contrac­
tor whose contracts are all fixed-price or all cost-type would have relatively little incentive to mischarge between contracts. On the other hand, a contractor with a mix of cost-type and fixed-price/commercial work would generally have a much greater motivation to charge effort allocable to fixed-price or commercial work to a cost-reimbursable contract.

Overrun Contracts 

When contract costs have exceeded or are projected to exceed contract value, contractors may divert these excess costs to other cost objectives such as indirect labor, overhead accounts, other contracts, etc. The auditors may request contractors provide them a listing of all contracts that are currently in an overrun position or projected to be in an overrun position. The auditors might also request this information from the ACO, particularly when they feel the contractor is not as forthcoming as it should.