New Government Policies and Procedures for Billing Oversight - Part 4

This is the fourth and final installment in our series on the new procedures for performing audit oversight of contractor billings under cost-type contracts. Until 2012, DCAA (Defense Contract Audit Agency) reviewed and approved all public vouchers (i.e. billings submitted for reimbursement of costs under cost-type contracts) unless a contractor wanted to go through the laborious process of qualifying for the Direct Billing Initiative. Beginning in 2012, the Department of Defense decided that the audit process was not adding enough value for the cost involved so it made direct billing available to all contractors. In place of the requirement to review every public voucher, the Department came up with a risk assessment approach to reviewing vouchers. This entailed segregating contractors into high risk and low risk categories according to the criteria we discussed in an earlier post on this subject. For low risk contractors, a "sampling" table is loaded up into the WAWF (Wide Area Workflow) system and the system automatically selects a few vouchers for audit review. The system also identifies vouchers that are significantly above the norm and selects those for audit as well. For example, if a contractor has been submitting monthly vouchers for a contract in the $100 - $200 thousand range and all of a sudden submits one for $1 million, the system would probably flag it and send it over to the auditors for a look-see.

For high risk contractors, the auditors must perform a risk-assessment and develop a sampling plan that is unique to each contractor. This risk assessment is updated each year. Auditors are directed to consider the following risk factors:

• Specific concerns of the ACO, the PCO, and the COR (administrative contracting officer, procurement contracting officer and contracting officer's representative)
• Reported accounting or billing system deficiencies.
• Audit leads or other significant risk factors identified in the permanent files within the past two years.
• Improper payments identified in previous reviews of public vouchers.
• Significant number of previously rejected public vouchers attributable to a situation that has not been fixed (e.g. a certain contractor employee that makes lots of mistakes).

After completing the risk assessment, the auditor must then devise a sampling plan. If there are no identified risk factors, the auditor could, presumably, rely on the table used for low-risk contractors. If there are identifiable risk factors, the auditor will need to sample more vouchers than would be required for low-risk contractors.

Contractors should know when one of their public vouchers have been selected for review because one of the review steps requires the auditor to trace the amount claimed back to the contractors accounting records. Unless they have on-line access to the job cost ledgers, the auditors will be knocking at the door. 

It is very important for contractors to accommodate auditor requests to trace billings back to accounting records very quickly. As we mentioned before, the auditors have only five days to perform their voucher reviews. If contractors don't make time available within these five days to accommodate this comparison, the auditor will, in all likelihood, reject the billing. Then it becomes necessary to resubmit the voucher and that will unnecessarily extend the time it takes to receive payment.

The text of the revised procedures can be read or downloaded here.

Previous posts in this series:
     Part 1
     Part 2
     Part 3

New Government Policies and Procedures for Billing Oversight - Part 3

This is the third in our series on the new policies and procedures brought about when DoD eliminated the need for contractors to obtain DCAA's (Defense Contract Audit Agency) provisional approval of billings before they could be submitted for payment. This change occurred in 2012, was long overdue, and there were many both inside and outside of DCAA who questioned whether the audit agency was providing any real value to the process. Under cost-reimbursable contracts, all costs are subject to final audit so the only risk to the Government was the time-value of money on possible overpayments. It was "interesting" and sometimes humorous to watch auditors quibble over a point or two on a provisional indirect billing rate as if they had better insight than the contractor as to what the final rate would be for the year. It was also frustrating as well because billings were sometimes held up pending resolution/agreement of those provisional billing rates.

Even though DCAA has been taken out of the billing loop, so to speak, there is still a need for audit oversight. DCAA has devised a risk-based approach to rendering that oversight. Essentially, it divides contractors into high-risk/low-risk. High risk contractors are those that bill for more than $250 million per year and those that have had questioned costs in previous incurred cost audits (those questioned costs must meet certain percentage thresholds as we explained yesterday). Billings from low-risk contractors are randomly selected for a pre-payment review. For high-risk contractors, billings are also sampled but the process is a bit more complex and there will probably be more billings (percentage-wise) selected at high-risk than at low-risk contractors.

Once an interim public voucher (i.e. a billing or an invoice) is selected, the auditor has only five days to make an evaluation. The steps involved in that evaluation include:

• Does the voucher have the correct contract number and CAGE code?
• Do the contract number, voucher number, and dollar amount on the voucher agree with the attached supporting documentation?
• Are billed costs with the period of performance?
• Does the voucher include current and cumulative billed amounts?
• Does the Contracting Officer or the Contracting Officer's representative have any specific concerns related to the contract or voucher?
• Are costs/fee billed in accordance with contract provisions?
• Did the contractor use appropriate billing rates?
• Do the current and cumulative billed costs reconcile to the contractor's accounting records?
• If the voucher contains significant subcontract or supplies and service costs, are they in accordance with the requirement that the be paid within the terms and conditions of the subcontract or invoice (normally within 30 days)?
• Are the fees and costs claimed within the contract funded and/or ceiling amounts?

From the preceding listing, you can see that there is only one step that involves the contractor;  Do costs reconcile to the contractor's accounting records. Everything else should be on-file in the audit office, including a provisional billing rate approval letter. So that's the substance of the auditors' reviews. Contractors with a single contract that bill monthly can expect one of its public vouchers to be reviewed under this new procedures. That could add up to five days from the time the voucher is submitted to the time it is paid. However, it is also likely that it will not add any time to the process because the five day audit cycle is normally built into the 30 day period in which the Government must pay.

Click here to read Part 4.

Previous posts in this series:
     Part 1
     Part 2

Provisional Billing Rates - Recent Audit Guidance

Reasonably accurate provisional billing rates are important for both the Government and contractors. Rates that are too high harm the Government. Rates that are too low, negatively impact a contractors cash flow. Whether too high or too low, its difficult to derive an accurate projection of costs and to comply with other contractual provisions such as limitation of costs or limitation of payments.

FAR 42.704 lays out the requirement for establishing provisional billing rates. It states, in part, that the contracting officer or auditor shall establish billing rates on the basis of information from recent reviews, previous rate audits or experience, or similar reliable data or experience of other contracting activities. Additionally, those rates should be as close as possible to the final indirect cost rates anticipated for the fiscal year.

The key point from FAR 42.704 is that the Government is going to establish provisional billing rates, with or without contractor input. It is almost a certainty that if the Government establishes the rates, it will include some form of decrement to reflect potential unallowable costs. It is always better for the contractor to propose provisional billing rates because the contractor will have the best information on factors that will affect future rates.

DCAA (Defense Contract Audit Agency) recently issued new audit guidance for reviewing provisional billing rates. First of all, the Agency states that the development of provisional billing rates is not an audit. That should help expedite DCAA's role in establishing rates and/or reviewing contractor provisional rate proposals. Further, the steps to reviewing rates consist of the following:

1. Notify the contractor and ask whether the contractor wishes to provide any input.
2. Review past audit files for relevant information.
3. Review incurred cost audits and ascertain trends. Although not stated in the guidance, the audit should review unaudited incurred cost submissions as well.
4. Compare prior year billing rates with actual year end rates to see how close the contractors' estimates compare to actuals.
5. Ask for a walk-through of any data submitted by the contractor.
6. Summarize and come up with an estimate.

These are fairly straight-forward tasks and should not cause any undue grief. From the Government's standpoint, provisional billing rates are low risk because the rates will be trued-up at the end of the year after contractors submit their final indirect rate proposals.