Billing System Adequacy - Part 2

The billing system is often considered part of the accounting system. After all, any billing based on incurred costs is derived from the accounting records. The Government usually disaggregates the two systems when reviewing large contractors but reviews them as one system for smaller contractors and for preaward accounting system surveys.

Yesterday, we began a discussion on billing system attributes that the Government considers necessary in order for a billing system to be considered adequate. In Part 1, we discussed the requirements for monitoring actual costs against contract ceilings and for ensuring annual incurred cost submissions are timely submitted. If you missed Part 1 of this series, click here. Today we're going to pick off a few more system attributes.

Billings are submitted using "approved" billing rates and the "approved" billing rates are reasonable. Most contractors know and understand that if the contract auditor will be provisionally approving cost reimbursement vouchers, he will also expect that the contractor submit provisional billing rates for review and approval and once approved, will consistently use the approved rates until circumstances require that they be adjusted (either up or down). One key aspect of this requirement is the need for contractors to monitor their billing rates against the year-to-date rates and their expected or anticipate final year-end rates and adjust them if differences become too great. Sometimes, contractors just assume that once they have approved billing rates, they are free to use those rates for the entire year, regardless of what happens. Failing to monitor rates and/or ignoring significant differences will likely be considered a billing system deficiency.

Billings are reconcilable to accounting records. This should really go without saying but we've seen numerous examples where contractor are preparing billings based on something other then their accounting records. For example, one common deficiency is where billings are based on negotiated labor rates rather than actual labor charged to the contract.

For cost-reimbursable costs, billings are submitted only for paid costs. In cost-type contracts, there is an expectation that the contractor pays employee salaries and pays vendor invoices prior to requesting reimbursement from the Government. There are some exceptions to this. The applicable contract clause, FAR 52.216-7(b)(1) provides the following:

For the purpose of reimbursing allowable costs, the term "costs" include only those recorded costs that, at the time of the request for reimbursement, the Contractor has paid by cash, check, or other form of actual payment for items or services purchased directly for the contract. When the Contractor is not delinquent in paying costs of contract performance in the ordinary course of business, costs incurred, but not necessarily paid for supplies and services purchased directly for the contract and associated financing payments to subcontractors, provided payments determined due will be made in accordance with the terms and conditions of a subcontract or invoice, and ordinarily within 30 days of the submission of the Contractor's payment request to the Government.

We have seen situations where auditors will closely scrutinize vendor payment information to determine whether a contractor has been delinquent in paying for supplies and services. Contractors may be requested to provide an Accounts Payable aging schedule in connection with this audit step.

Next week we will continue our discussion on billing system attributes. Go read Part 3.