Audit Finds $134 Million in Unsupported Subcontract Costs

A recent audit report underscores the importance for contractors to adequately support incurred costs.

The Special Inspector general for Afghanistan Reconstruction (SIGAR) recently issued an audit report on costs incurred by a contractor providing highly specialized counterinsurgency intelligence exerts to mentor and train Afghan National Security Forces, to provide for hiring bilingual cultural advisers, and developing Afghanistan-specific instruction in counterinsurgency operations to strengthen Afghanistan's capacity to combat terrorist and insurgent networks.

The audit identified two material weaknesses, one significant deficiency, and three instances of noncompliance with the terms and conditions of the contract. Specifically, the contractor did  not retain sufficient supporting documentation for a subcontractor's costs. As a result, the auditors were unable to determine whether the subcontract costs were incurred, allocable, and complied with the appropriate cost principles.

Additionally, the contractor did not compile  with federal procurement policies in that it did not provide support for a competitive procurement process for three subcontracts totaling almost $5 million. As a result, the contractor was unable to demonstrate that these costs were reasonable. Finally, the contractor improperly billed the U.S. government for fixed fees beyond the amount authorized by the contract. Although the contractor ultimately refunded the excess fees, the Government lost $36 thousand in interest.

As a result of all of these deficiencies, the auditor found that $134 million was not supported with adequate documentation. The contractor disagreed with the audit findings of course and the auditors, in turn, disagreed with the contractor's disagreement. Because there is an impasse, the auditor decided to do more work to determine the allowability of and recover, as appropriate, $134 million in unsupported costs.

This thing has turned into a real mess which could have been avoided had the contractor simply done a better job in documenting its costs.