This is the second part of our series on what contractors can expect after they submit their annual incurred cost claims in to the Government. (the terms "incurred cost claim", "incurred cost proposal", "incurred cost submission", "ICE" are all used interchangeably). Today we want to answer the question as to how deep will DCAA go in their audit. Contractors that have been around awhile have no doubt seen changes in the manner in which DCAA audits. Most contractors do not like the changes.
Incurred cost audits tend to be much more thorough and detailed then they were just a few years ago. That is primarily a result of DCAA's method of assessing risk. Just a few years ago, auditors could assess the overall risk and make judgments about the amount of transactions testing needed to protect the Government's interest. For example, an auditor might see that a contractor has significantly overrun its contract and determine that there was a slim chance that he could find enough unallowable costs to offset the amount of the overrun. Based on that risk assessment, the auditor might not even do an audit. Under the new risk assessment procedures, the ability to make judgments and assess risk on the fly has been taken away from the auditor. Risk is now determined solely by the amount of dollars charged to the Government. The Agency continues to refine and adjust its materiality thresholds - usually resulting in fewer audits.
Because there are fewer audits (and coincidentally, more auditors), three is more focus and emphasis on detailed reviews. For an audit to be an audit, there needs to be some level of transaction testing. Auditors will pull a sample and ask contractors to provide whatever supporting data is available in order to determine whether the cost meet the FAR allowability criteria as well as any peculiarities set forth in the contract (e.g., some contracts limit the amount of overtime a contractor can charge). Contractors are always provided ample opportunity to provide the data requested. Sometimes, as in recent years, the data is so old that is has been archived or shipped off to long-term storage and takes time to find. Contractors are advised to adhere to FAR record retention requirements. Remember, just because the Government's right to audit extends for three years after final payment under the contract, does not mean that contractors are required to keep their records that long. Many companies dispose of their records as soon as legally permissible and this sometimes irritates auditors but there's nothing they can do about it.
Tomorrow - How best to interact with Government auditors and contracting officer personnel.