Monday, August 18, 2014

Annual Incurred Cost Submissions - Optional Items - Part 1

Every contractor (with a cost-type contract) is well aware of the requirement to submit annual incurred cost submissions. The requirement to submit is found in FAR 52.216-7(d)(2)(iii) which lists 15 schedules that must be included in the submission to make it adequate. There are 15 additional items listed in FAR 52.216-7(d)(2)(iv) which, although not required to determine if a proposal is adequate, may be required during the audit process. We call these the optional items.

Unfortunately, for contractors that use DCAA's (Defense Contract Audit Agency) ICE (Incurred Cost Electronically) - basically some Excel sheets with a few links) - the model does not list these as optional. Similarly, many DCAA offices have requested this "optional" information in order to determine whether the contractor's submission is adequate. According to FAR, these optional items are not required for an adequacy determination. Over the next few days, we will discuss each of the 15 optional items and give you our opinion of whether they should be provided.

Comparative analysis of indirect expense pools detailed by account to prior fiscal year and budgetary data. When we were auditors, comparative analysis was always an auditor's task and we never had any expectations that contractors would do it for us. The comparative analysis is used primarily to identify accounts that change significantly from one year to another (either up or down). Significant changes then can be used to identify potential risk areas to be further investigated. If contractors already have this information, it should not be a problem to provide it. However, it does require extra work to compile and is not necessary to the preparation of an adequate submission. So we say, let the auditors do it.

Many small companies do not prepare budgets so the comparison of budget with actual is not possible. Don't try to make up a budget just to comply. There is no FAR requirement that contractors prepare budgets (though it is probably a good idea). If you have a budget that allows for a ready comparison with actual costs, its fine to provide it. However, like the comparison of actuals between years, let the auditor do the analysis.

General organizational information and limitation on allowability of compensation for certain contractor personnel. Don't waste your time here. The auditor is going to request you to complete its "Internal Control Questionnaire" (ICQ) when he begins his audit and that will give him all the organizational information he needs. If you decide to do one at the time of submission, the auditor will also request that you submit another one three or four or five years later whenever he gets around to auditing the submission. If you want to see what an ICQ looks like, send us an email and we'll send you a copy.

As far as compensation goes, the contract auditor (especially DCAA) is going to do what they want to do concerning executive compensation. You may have the greatest justification to support the reasonableness of your executive compensation but DCAA is going to send the data off to their Mid-Atlantic Region experts so they can compare it with the average of two or three (sometimes four) commercial benchmarking surveys that no small contractor can afford to purchase.

As a precaution, just make certain that the compensation amounts do not exceed the statutory maximums according to FAR 31.205-6(p). For a listing of these statutory maximums, see the OFPP website. Most small businesses do not come anywhere near these maximums.

Continue on to Part 2 - Subcontracts, Accounting System Description, Procedures for Unallowables

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