Most of the time, prospective contractors have their systems in shape before the Government comes in to review. For DoD procurements, these accounting system reviews can be conducted by either DCAA (Defense Contract Audit Agency) or DCMA (Defense Contract Management Agency). For civilian contracts, they are generally conducted by an agency within the respective departments. Generally, those agencies will follow the DCAA practices for auditing contractor accounting systems.
Among the various attributes required for an "adequate" system is that it be able to provide cost accounting information as required by contract clauses concerning limitation of cost (FAR 52.232-20), and limitation of funds (FAR 52.232-22). Essentially, these clauses require contractors to notify the Government whenever it is approaching estimated costs or funds allotted to the contract. In the -20 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days (may vary from 30 to 90 days), when added to all costs previously incurred, will exceed 75 percent (may vary between 75 and 85 percent) of the estimated cost specified in the schedule. In the -22 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the total amount so far allotted to the contract by the Government.
If an accounting system is to fail audit, its often because contractors do not have adequate systems in place to meet the limitation of costs/limitation of funds notification requirements. To meet these requirements, contractors will need a set of tools and be able to demonstrate that they are operational and well understood by management. These tools must provide an estimate of the costs that will be incurred in the next 60 days (often referred to as the "burn rate"). Audit assessments will consider such things as:
- The nature and adequacy of controls which govern the establishment of budgets.
- The procedures for accumulating incurred costs by budget element
- The actual cost compared to budgeted costs
- The means provided for comparing incurred costs to the percentage of contract completion
- The development of estimates to complete (ETCs)
The one question that prospective contractors should ask themselves is whether their accounting system is capable, on a continuous and systematic basis, that it can meet the limitation of costs/limitation of funds reporting requirements - i.e. will the costs expected to be incurred in the next 60 days, when added to costs already incurred, exceed 75 percent of the estimated costs of the contract (or estimated funding on the contract).