Billing System Adequacy - Part 4

This is our final posting on the attributes that comprise, from the Government's perspective, an adequate billing system. The specific requirements will vary depending upon type of contract but the fundamental requirements are the same, regardless of type of contract. If you missed our other postings on billing systems, it would be useful to read from the start:

• Part 1
• Part 2
• Part 3

Today's postings will cover billing withholds and the necessity for accuracy.

Procedures to ensure that vouchers include appropriate "withholds". There are a number of clauses that may require contractors to voluntarily withhold some of their billings until certain conditions are met. Perhaps the most common one is the 15 percent withhold of fixed fee (up to $100 thousand). The FAR citation for that is found in 52.216-8 which reads:

Payment of the fixed fee shall be made as specified in the Schedule; provided that the Contracting Officer withholds a reserve not to exceed 15 percent of the total fixed fee or $100,000, whichever is less, to protect the Government's interest. The Contracting Officer shall release 75 percent of all fee withholds under this contract after receipt of an adequate certified final indirect cost rate proposal covering the year of physical completion of this contract, provided the contractor has satisfied all other contract terms and conditions, including the submission of the final patent and royalty reports, and is not delinquent in submitting final vouchers on prior years' settlements. The Contracting Officer may release up to 90 percent of the fee withholds under this contract based on the Contractor's past performance related to the submission and settlement of final indirect cost rate proposals.

The key point here in a billing system review is to determine whether a contractor has processes in place to ensure that only 85 percent of fee is claimed (up to the $100 thousand). In practice, most contractors who submit vouchers through DCAA (Defense Contract Audit Agency) are well aware of this requirement because DCAA is well aware of this requirement and will reject any billing that does not factor in the withhold. But, DCAA is not going to know when the $100 thousand cap is reached nor will they voluntarily release 75 or 90 percent of the withholds once the incurred cost submission for the final year of contract has been submitted. For those things to happen, contractors need to establish policies and procedures.

Another common withhold is the 5 percent of billings not to exceed $50 thousand applicable to T&M and labor hour contracts. That clause, found in FAR 52.237.a.(7) reads:

Unless otherwise prescribed in the Schedule (i.e. the Schedule included in the contract), the Contracting Officer may unilaterally issue a contract modification requiring the Contractor to withhold amounts from its billings until a reserve is set aside in an amount that the Contracting Officer considers necessary to protect the Government's interests. The Contracting Officer may require a withhold of 5 percent of the amounts due ... but the total amount withheld for the contract shall not exceed $50,000. The amounts withheld shall be retained until the Contractor executes and delivers the release required by ... this clause.

This clause is different than the withholding clause for cost-type contracts in that it requires an affirmative action by the contracting officer before any withholds are made - a unilateral contract modification. The fee withhold on cost-type contracts is automatic. In practice, this T&M contract withholding clause is used frequently but by no means universally.

For contractors to which this clause applies, policies and procedures to ensure proper withholds are made from billings, is essential to an adequate billing system.

Mathematical accuracy and error free. As a final check of a contractors billing system, the auditor will determine whether the billings are mathematically correct and error free. This would include quantity time price extensions, proper billing rates or T&M rates, proper dates, voucher numbers in sequence, etc. One would think that with modern spreadsheets and other reporting tools that error rates would be insignificant but they're not. This is still a problem area for small contractors especially.

A billing system with reported inadequacies could render a contractor's accounting system inadequate as well and jeopardize its chances of winning contracts. But it doesn't have to come to that. A little thought and attention now can ensure that billings meet the Government's desired attributes.