Monday, February 24, 2014

Conditions Influencing Contractor Labor Charging Practices - Part 5

This week we're continuing our series on risk factors affecting audits of labor costs faced by contract auditors. These factors are examples of situations that auditors need to be cognizant of when planning their review of labor costs. The existence of these conditions should give an auditor pause to consider whether they need to, perhaps, increase the level of testing over whatever baseline they've established given other risk factors, including "materiality".

Today we will cover (i) related contracts and (ii) offsite locations. Tomorrow we will conclude the series.

Related/Similar Cost-Type and Fixed-Price Procurement

This situation is fairly common and occurs when procuring agencies award contracts for the same or similar items using different contract types. For example, the Government may award a cost type contract for some developmental effort and a fixed price contract for production of the product that is being developed. Is such situations, it is often difficult to determine when development effort ends and production begins. Sometimes development continues well in to the production cycle. From an auditor point of view, it represents a high risk condition and will be closely monitored. This situation can often result in some form of "labor accounting by funding," i.e., labor cost to the contracts involved are charged based on contract funding and ceilings regardless of where they are incurred.

Offsite Locations

Significant amounts of labor costs may be incurred at contractor offsite locations where little or no audit effort has been expended. Auditors are accustomed to working at the contractor facility where the books and records are maintained. Sometimes that facility is where the contract is performed but in many cases, work is performed elsewhere; in remote, offsite, foreign, or military facilities where there is no auditor presence. In such cases, the auditor is required to determine if an assist audit is required based on the level of risk at the offsite location. If the labor at these offsite locations is significant, the auditor will most likely coordinate with an audit office near that offsite location to perform floorchecks or labor interviews. In some complex, sensitive, or high risk situations, it may be more timely, efficient, and effective for the primary site auditors to perform the offsite labor floor checks/interviews. In these situations, teaming among the primary site and offsite auditors should be considered.

As a side note, it is interesting sometimes to wonder about the factors that contribute to determining whether the auditors choose to perform the labor interviews themselves or farm it out to an office in closer proximity to the offsite location. For offsite locations in Hawaii, lower 48 auditors cannot trust the auditors assigned to the office there in Hawaii to perform their high risk labor interviews. On the other hand, auditors in Afghanistan are completely trustworthy.

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