One question we are frequently asked concerns the need to include T&M (Time and Material) contracts in an annual incurred cost submission. Contractors sometimes reason that the since rates are fixed, what is there to audit? The rates are already fully burdened and with indirect costs and profit. That's true, there will be no audit of the fixed rates. However, the contract auditor is concerned primarily with two things, the number of hours claimed or billed and the whether the the people working the job had the requisite skills and qualifications.
Hours claimed under T&M contracts must be supported by evidence of work performed - timesheets. Timesheets must be part of an overall timekeeping system that satisfies the basic requirements for Government contracting; recording all hours worked no less than daily, reviewed and approved by supervision, documented changes, etc. Hours that cannot be traced back to timesheets will be questioned and referred to the contracting officer for resolution. Normally, that doesn't end well for the contractor.
Auditors are also interested in the qualifications of the employees billed under the various skill codes specified in the contract. For example, a T&M contract might spell out rates for Senior Engineer, Junior Engineer, and Technician. The auditor will want to ensure that the contractor is not billing a Junior Engineer at a Senior Engineer rate. That is why auditors sometimes request HR information related to employees charging T&M contracts. It doesn't matter nor will the contractor be able to assert that the Junior Engineer was better qualified than the Senior Engineer for the job. If the Government called for a Senior Engineer and paid the rate for a Senior Engineer, it should get the services of a Senior Engineer. Any evidence that the contractor is using lower priced employees will get referred to the contracting officer.
Auditors will also examine the extent, if any, to which billed hours duplicate costs in the indirect portion of the T&M labor rate. The time of partners, officers, or supervisors is not generally acceptable as direct labor unless specifically authorized in the contract. Cost for this type of labor is generally part of the indirect expense rate that was calculated and included in the original negotiation.
Finally, we should mention overtime. Overtime hours cannot be converted to a larger number of regular hours to compensate for any overtime premium payments, nor will the rates charged for overtime be increased unless the contract so provides. Ideally, if any overtime is contemplated, it is already factored into the negotiated fixed hourly rates.