Contractors might wonder how the particular employees were selected. Auditors tend to be circumspect and might respond that they were randomly selected. The next question a contractor should ask is, randomly selected from what universe? You see, before the auditor shows up, he has undoubtedly performed some kind of risk assessment based on analysis of historical data and trends. Selections are not made haphazardly. Selections of employees to interview are usually made because the auditor wants to focus on a particular contract, or department, or charging practice.
Here are a few things that go on behind the scenes before an auditor shows up to conduct a floorcheck.
- Trend analysis - the auditor will perform trend analyses to disclose an significant increases in the ration of direct to indirect labor accounts. According to DCAA, significant fluctuations in the ratio of direct to indirect costs should be explained. If there is no apparent explanation, this are should be further evaluated to ensure that the contractor is not misclassifying direct contract costs to selling and marketing costs or to IR&D/B&P costs).
- Comparative analysis - the auditor will perform a comparative analysis of sensitive labor accounts and request contractors to explain significant fluctuations. The auditors are instructed to be alert to situations where labor is being excluded from overhead allocation bases or transferred from the allocation base to the indirect cost pool. Both situations would increase indirect rates.
- Overrun contracts - the auditor will determine contracts that are currently in an overrun position or projected to be in an overrun position. According to DCAA, labor effort associated with contracts at or near an overrun position is more likely to be mischaged.
- Funding - Like overrun contracts, the unavailability of funding may cause the contractor to divert costs that are over the contract funds or budget to other cost objectives.
These are just a few of the factors an auditor will consider in making his selection of employees to floorcheck. An appreciation of these factors should help contractors better understand the auditors' focus when conducting floorchecks.