We're down to about two months before annual incurred cost submissions are due for contractors whose accounting period ends December 31st. If you are one of those and you have not started the process, you need to get started. The due date is contractually mandated as is the content and format (see FAR 52.216-7(d) for a list of required "Schedules"). If you want to ensure that your submission is adequate, download and complete DCAA's Incurred Cost Adequacy Checklist by clicking here. It can't hurt. We use it on those incurred cost submissions that we prepare for clients and its the same checklist that the Agency will use to assess the adequacy of your submission.
Today and for the next few postings, we want to get you thinking about the audit process that will occur subsequent to turning in your submission. A lot depends upon whether the submission will be audited or will be dumped into a low risk pool and administratively closed out. Anything over $250 million is high risk and will automatically be audited. Any low risk submission under $1 million has a zero percent chance of being audited. For more on risk assessments, see this previous posting.
One of the most important steps in preparing an incurred cost submission is to ensure that all expressly unallowable costs have been excluded from claimed direct and indirect costs. Expressly unallowable costs are those that are defined in the FAR (Federal Acquisition Regulations) Part 31 Cost Principles. An "adequate" incurred cost submission does not mean that costs have been scrubbed to eliminate any that are unallowable. An adequate submission may still include unallowable costs - that's why they audit.
There are significant penalties for contractors when auditors find unallowable costs. About a year ago, we published a five part series on penalties. Click here and follow the links to read up on penalties. There are level 1 and level 2 penalties Level 1 penalty is equal to the amount of unallowable costs charged to Government contracts. Level 2 penalties are double that. Level 2 penalties are applied when the cost were determined to be unallowable prior to submitting the incurred cost submission. Penalties can add up real quick and non-negotiable for DCAA. Thankfully, DCAA is only advisory and contracting officers can and do exercise a bit of judgment when it comes to whether penalties are applicable.
Tomorrow - How deep will they audit?