Conditions Influencing Contractor Labor Charging Practices - Part 6

Today we conclude our series on considerations that impact the scope of an audit of labor costs. These are important facts to consider, not only for the contract auditor, but also for contractor management and supervision as they endeavor to establish controls to ensure the propriety of labor charging practices. Over the years, we have seen many cases where top management was seemingly oblivious to destructive practices going on in their organizations. If projects get completed on time and within budget, everyone is happy. If it happens over and over, everyone is ecstatic and bonuses are free-flowing. But the company should be cognizant of the possibility that someone in their organization might be running a ponzi scheme - borrowing from future contracts to "pay" a current contract.

The final three conditions that might influence contractor labor charging practices are (i) customer mix, (ii) labor charging versus estimating, and (iii) fixed-price sole-source follow-on contracts (wow, three hyphens in the same title).

Customer mix

Many (perhaps most) contractors have both DoD and non-DoD contracts. DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) are primarily interested in DoD contracts. Non DoD agencies often opt out of contract audit and once contractors realize this, might not apply the same rigorous labor charging controls over non DoD contracts as they do with DoD contracts. The contract auditors are guided to coordinate with non DoD agencies to see if they will pay for audit services on a reimbursable basis.

Labor charging versus estimating

Auditors are advised to consider whether an evaluation in this area may reveal that the contractor is charging certain categories of labor directly to Government contracts contrary to the manner in which the cost was
reflected in the bid proposal or the treatment accorded commercial contracts. The auditor is instructed to ascertain the reason for any divergence in policy. Such practices should be further analyzed.

Fixed-price sole-source follow-on contracts

Contractors may be motivated to charge effort allocable to commercial work to their sole-source contracts in order to increase the cost of these contracts, which are then used as a basis for projecting the cost of follow-on work.

Index to previous posts in this series

Part 1 - Contract mix and overrun contracts

Part 2 - Restructuring and significant changes to charging patterns

Part 3 - Reorganizations, adjusting journal entries, and budgetary controls

Part 4 - Contract definition, contract provisions, and funding caps

Part 5 - Related contracts and offsite locations