Thursday, June 19, 2014

Deadline Approaching for Contractors to Enter Independent Research and Development Costs into Government Database

Back in January 2012, the Department of Defense amended its FAR Supplement (DFARS) to require "major" contractor to report their Independent Research and Development costs and information into a Government database, in order for those costs to be allowable. You can read about the change and who it affects by clicking here.

There was a lot of confusion over the implementation of the new rule so in February of this year, the Director of Defense Procurement and Acquisition Policy (DPAP), deferred reporting of 2012 and 2013 costs until the end of contractor fiscal year 2014. Read the DPAP deferral memo here. A key point of this memorandum is the communication that there is no expectation of reconciliation between the cost information in the database and the costs claimed in the incurred cost submission, only that the claimed project was in fact, entered into the database, updated annually, and updated when the project is completed.

DCAA (Defense Contract Audit Agency) recently issued its own guidance on the subject. The memorandum provides guidance to auditors on how they should handle various scenarios when contractors do not comply with the reporting requirement.

For audits of incurred cost, if the contractor fails to input its IR&D information into the Government database, the costs, according to DCAA, are expressly unallowable. Auditors should question whatever IR&D costs have been claimed and go so far as to recommend penalties. Further, if the costs are significant, the auditor should consider citing the contractor for noncompliance with CAS 405, Accounting for unallowable costs.

For internal control reviews such as an audit of the accounting system, the auditor should consider whether the contractor's failure to input IR&D data into the Government database, rises to the level of a system deficiency.

Either one of these possibilities should encourage contractors to comply with the regulations. Remember, contractors have until the end of their fiscal year 2014 to comply. For contractors whose fiscal years end on June 30th, the deadline is just a few days away.

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