Wednesday, September 12, 2018

What are "Purchase Existence and Consumption" Audits?

This is an update to a posting we wrote more than six years ago. We are doing so because we just learned that DCAA (Defense Contract Audit Agency), the Pentagon's contract auditors have initiated "Purchase Existence and Consumption" audits some small business Government contractors. We don't know why. Perhaps the auditors have identified some "risk factors" in a contractor's material purchases. In one case, that wouldn't make sense because the contractor does research and buys very few materials. Perhaps the auditors just need something to do - its a pretty boring life out there for most contract auditors. You can read our earlier posting on the subject here.

PEC reviews (Purchasing Existence and Consumption) are not CPSRs (Contractor Purchasing System Reviews). CPSRs, performed by DCMA (Defense Contract Management Agency), not DCAA, are focused on internal controls over purchasing, especially subcontracting. A PEC review is focused on the specific materials purchased for a specific contract.

The purpose of a PEC review is to verify that purchased direct materials and services were, in fact received and (i) needed for the contract, (ii) purchased in reasonable quantities, (iii) purchased at prudent prices, (iv) used on the contract, and (v) properly accounted for as to initial charge, transfer in or out, and residual value.

Purchased materials are raw materials, purchased parts, sub assemblies, etc., which are physically incorporated into an end product. Equipment purchased for the Government's use on a flow-through basis, such as computer hardware, or commercially available items for the contractor's use in performing the contract such as trucks and other equipment, are not deemed to be incorporated in the end product.

Purchased services may include the performance of certain contract tasks by non-company personnel under the direction of the contractor or replacing entire functions within the contractor's organization. Services provided include purchased direct labor personnel to meet temporary requirements, who are supervised by the contractor, or purchasing specific types of services , such as engineers, technical writers and craftsmen, on a regular basis to perform contract requirements.

One unique aspect of PEC reviews is the request to physically locate all sampled material items. You can imagine that this might sometimes pose a problem. For example, how would you show the auditor an electronic component that has been assembled and sealed into a some kind of case? Or how do you prove to an auditor that a particular service was actually performed? There is no requirement for a work product in this case.

If you care to read DCAA's audit program for PEC audits, click here.

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