Friday, February 24, 2017

Contract Close-Out Process - Part 5

This week we've been discussing the process for closing out Government cost-type (or flexibly-priced) contracts. If you've missed any of this series, you can follow these links:
    Part 1 - Describes tasks that must be completed to close out a contract.
    Part 2 - The Contractor Prepared "Completion Voucher"
    Part 3 - Defense Contract Audit Agency's (DCAA's) Involvement in the Process
    Part 4 - How Contractors Can Expedite the Process

The close-out process is not quick under even the best of circumstances. It can easily take a couple of years once a contract is physically completed. In the year a contract is physically completed, contractors must finalize applicable indirect rates. Contractors have six months after fiscal year end to submit their final rates. Then they need to be audited and that can, according to a recent published timeline, from 12 to 24 months. Once the audit is completed, negotiations begin if there are any audit exceptions to negotiate. Then, as we mentioned in an earlier post, contractors have up to four months to prepare their final voucher. After receiving the final voucher, the ACO reviews and processes it and sends it off to a Government finance office (DFAS in the case of DoD contracts) for payment. DFAS sometimes takes a long time themselves - especially on old contracts with expired funds.

One aspect of contract closing that has been getting a lot of attention lately is subcontract costs. Subcontracts must be "closed" before a prime contract is closed and contractors must develop internal procedures to do that. Many contract clauses are required to be flowed down to subcontracts so in the abstract, contractors must follow the same administrative procedures for their subcontractors as the ACOs (Administrative Contracting Officers) do to the primes. Nowhere have we seen as robust a process as what the Government employs - contractors would probably go broke if they tried. But, there has to be some form of assurance as to the propriety of costs claimed by the subcontractor and the prime contractors must also obtain the certifications and assurances relative to classified information, government property in the possession of the subcontractors, patents, assignment of refunds and rebates, etc for their own protections.

Contractors who do not perform the closeout process on their subcontractors may find it difficult to closeout the prime contract. Remember, it is the responsibility of the prime contractor to "administer" its subcontracts and while there is great flexibility given, there will be some expectation that something will be done.

T&M (Time and Materials) are a special class of flexibly priced contracts that we should mention. Although the labor rates are fixed, the labor hours are not. So, the Government needs to ensure that the hours claimed can be supported by timekeeping records and other evidential matter. Recently, auditors have begun making inquiries into the skill level of the person billed under specific categories. For example, if the contract calls for a Sr. Engineer and a Sr. Engineer is one defined as a Bachelor's Degree with ten years of experience in a particular field, contract auditors have been known to request personnel records to ensure that the person being billed meets the qualifications of that position. We have reported on criminal cases where contractors have provided staff that don't meet the requisite qualifications of the position yet billed at the higher rates.

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