Wednesday, November 14, 2018

Double Jeopardy - Incurred Cost Audits

DCAA's (Defense Contract Audit Agency's) policies and procedures for sampling low-risk incurred cost proposals, while certainly helping to reduce the Agency's incurred cost backlog, has not been without its detractors in the contract administration community. There are anecdotal stories out there where contracting officers try to initiate their own reviews of incurred costs after receiving notification from DCAA that a particular contractor submission has been deemed low risk and should be relied upon to close contracts for that year. Contractors were understandably upset because of the apparent "double audit". The problem became significant enough that the Defense Department amended its FAR Supplement (DFARS) to, in effect, tell contracting officers to knock off the second-guessing of audit results.

DFARS 242.705, Final indirect cost rates was added as follows:
DCAA Policy and Procedure for Sampling Low-Risk Incurred Cost Proposals issued on Junly 24, 2012. Effective immediately, for the purposes of satisfying the audit requirements at FAR 4.804-5(a)(12), 42.705-1(b)(2), and 42.705-2(b)(2)(i), Department of Defense contracting officers shall continue to rely on either a DCAA audit report or a DCAA memorandum documenting that, based on a risk assessment and a proposal adequacy evaluation pursuant to FAR 42.705-1(b)(1)(iii), DCAA deemed the incurred cost proposal to be low-risk and did not select it for further audit in accordance with its policy.
This policy certainly doesn't mean that DCAA can make its determination in a vacuum without consulting the contract administration office. Before DCAA makes its high risk/low risk determination on a particular year at a particular contractor, it requests that the contracting officer provide them with a list of any known significant risk factors. The notification typically follows this wording:
Please notify us of any significant risk factors you are aware of that would impact the low-risk determination for the subject contractor and fiscal year. A negative response is requested. We request that you provide a response to our office no later than ten business days from the date of this letter.
Contracting officers are always given the opportunity to weigh in on what they view as risk factors at a particular contractor. And, the contract auditors are obligated to consider these views when assessing whether to perform an audit or to close it out with no audit because the risk factors did not justify a full audit.

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