Yesterday we identified the two types of accounting system audits/reviews that the Government might perform at a given contractor location (click here to read the posting). Essentially, you could categorize them as pre-award and post-award. The post-award accounting system audit is more robust than the pre-award and some contractors who have sailed through the pre-award audit, have been challenged over the adequacy of their accounting system during a post-award audit. We mentioned yesterday that among the eighteen criteria for an adequate accounting system, some seem to be more problematic than others. We are going to look at a few of those today and in the coming days. These criterion are found in the DoD FAR Supplement (DFARS 252.242-7006) so technically apply only to DoD contractors. However, other Agencies have been know to adopt the same standards for their contractors. While FAR requires contractors to maintain "adequate" accounting systems, only the DoD has attempted to define specific standards for adequacy.
Standard No. 15 requires accounting systems to be able to provide cost accounting information as required by contract clauses concerning limitation of cost (FAR 52.232-20), and limitation of funds (FAR 52.232-22). Essentially, these clauses require contractors to notify the Government whenever it is approaching estimated costs or funds allotted to the contract. In the -20 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the estimated cost specified in the schedule. In the -22 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the total amount so far allotted to the contract by the Government.
To meet these requirements, contractors will need to know two things; their historical costs and an estimate of the costs that it will incur in the next 60 days (often referred to as the "burn rate"). An accounting system records historical costs. It doesn't project future costs. Projections of future costs might be included in a budgeting system or some other kind of system but it is not found in a record of historical costs, i.e. an accounting system. Its possible that historical accounting data can be used to project costs to be incurred in the next 60 days, but not necessarily and that is not what accounting systems are designed to do.
Contractor accounting systems that meet the other adequacy criteria will automatically be able to produce historical costs. But what the auditors are looking for here is additional tracking and analysis apart from the accounting system. Auditors are looking to see if contractors have a system of estimating their burn rate by month, that they add these projections of future costs to historical costs and compare them with contractual cost estimates or fund limitations, and notify the Government when it hits the 75 percent threshold. Most auditors will ask for policies and procedures that apply to this requirement (most Government contractors do not have them). Then, the auditors will test for compliance with those policies and procedures (most Government contractors do not get concerned about these clauses until they get pretty far down the contract performance line). Realistically, its a meaningless exercise until expenditures approach the 75 percent of cost or amount funded levels. Many auditors don't deal in practicalities however - they want to see a system in place and actively monitored on day one.
Many contractors have successfully met this criteria with a simple written policy and Excel.