Billing System Adequacy

Its been awhile since we specifically addressed billing systems and the criteria that the Government uses to determine whether a particular billing system is adequate for the determining the proper reimbursement amounts for cost-type contracts. We've discussed it in connection with requirements for accounting systems. Recently DCAA (Defense Contract Audit Agency) revised its audit procedures for determining accounting system adequacy and has enhanced the audit requirements specific to billing systems.

By way of background, DFARS (DoD FAR Supplement) 242-7503 requires the contracting officer to include the clause at DFARS 252.242-7006, Accounting System Administration, in solicitations and contracts for cost reimbursement, incentive type, time-and-materials, labor-hour contract or a fixed-price contract with progress payments made on the basis of costs incurred by the contractor or on a percentage or stage of completion. Contracting Officers are required to determine if contractors with the accounting system clause comply with the DFARS accounting system criteria. Contracting officers use this determination to assess whether a contractor is a responsible prospective contractor, as required by FAR Part 9. The contracting officer will base this determination, in part, on advice from DCAA.

The first thing an auditor is directed to assess is whether the contractor monitors contract expenditures against contract limitations on price. This is a requirement of the various limitation of costs clauses at FAR 52.216-5, -6, -7, etc.

Limitation of costs applies to fully funded cost reimbursement contracts. The clause requires a contractor to notify the Government when it expects in the next 60 days to have spent 75 percent of the estimated cost, or expect expenses to be greater or substantially less than previously estimated. The clause allows variations in the number of days, between 30 and 90 days and variations in the percentage between 75 and 85 percent.

This is a process that is fairly simple to set up but surprisingly, many contractors fail to do so. Some high-end government-centric accounting software programs have integrated this capability but even with QuickBooks and Excel, its easy to implement. Contractors just have to make a practice of doing it. Now if you are a very small contractor with one or two contracts, you probably know - you intuitively know how your expenditure burn rate is stacking up against contract ceilings. That's not good enough for the auditors - they want to see a written policy and adherence to that policy.

The next thing the auditor will assess when reviewing a contractor's billing system is to determine whether the contractor is up to date in submitting its annual incurred cost proposals. This is important because the indirect rates used for billing purposes must be adjusted to reflect the final rates from the incurred cost submission. If the final rates are lower than the provisional billing rates, the Government is harmed. If final rates are higher than billing rates, the contractor is harmed. You might think that the Government wouldn't care too much if the contractor were harmed but those rates do impact the limitation of cost monitoring requirements discussed above. The Government really wants to know its true exposure under cost type contracts.

Tomorrow, we will continue our discussion on the criteria that make up an adequate billing system for Government contracts.

Go on to Part 2.