What is the Focus of a Billing System Audit Coverage?

Back in the days of DCAA ICAPS audits, the billing system was a standalone audit program.  Even DCAA’s first pass at auditing for compliance with DFARS 252.242-7006 provided a standalone sub-assignment for the coverage of contractor billing systems.

The DCAA Audit Activity Code 11010, Version 1.14. dated November 2015, audit program was 31 pages and provided specific sections for each type of billing:

• Vouchers on Cost Type Contracts
• Vouchers on Time and Material (T&M) or Labor Hour (LH) Contracts
• Progress Billings Based on Cost
• Performance-Based Payments

In addition, the audit program provided extensive guidance on:

• Reconciliation of Costs Billed on Contracts
• Contract Debts, Demand Letters, and Refunds
• Prime Contractor Monitoring of Subcontracts
• DD250 Delivery Orders or WAWF Receiving Reports

DCAA Audit Guidance Today

DCAA’s current audit guidance on contractor billing systems is included in Audit Activity Code 11070, Version 1.2, dated August 2019. This document is only 34 pages and covers the entire contractor accounting system compliance with DFARS 252.242-7006, while the billing system is limited to a single section (D), totaling only 6 pages.  While sometimes the removal of audit guidance is a good thing, we are not so sure on this count.  Many of our clients have experienced auditors firing off extensive email requests for policies and procedures or unspecified documentation showing compliance of a vague requirement set out in an audit step.  Many of these emails simply quote verbatim audit steps.  When requested to explain what they are trying to accomplish or how they understand the contractor’s system, the auditors have replied by email that if the contractor does not understand the email request, there must be a significant non-compliance.  This does not help build a working relationship between the auditor and the contractor to accomplish the task at hand – documenting the contractor’s compliance or identifying areas where improvements could be made.  As a result of the lack of DCAA auditor preparedness for the return to system audits, we have seen numerous system audits started, but few completed.

Auditor Approach to Risk Assessment

Additionally, approximately 10 pages of the current audit program are still dedicated to risk assessment.  While every audit requires a risk assessment, we have seen very few risk assessments result in an auditor’s articulate, documented understanding of the contractor’s system.  The walk-through of the system with the full participation of both the auditor and the contractor is the appropriate time to ensure a consistent understanding of the system by all parties.  In several cases, during the walk-through, the auditor is focused on what they believe the system does not do rather than understanding how the contractor is explaining what the system does.  Some auditors appear to have the mindset that there is only one way to implement a compliant system and if they don’t hear what they want to hear, they stop listening – a bad thing when you are trying to understand, rather than change, the system.  Accounting systems are like pieces of abstract art, no two are the same, but they are all works of art.

DCAA Limiting Audit Effort

That said, the billing system is one area where DCAA should be able to significantly limit its system-specific audit effort based on its ongoing understanding of the system and its normal portfolio of work.  DCAA’s oversight of contractor billings include:

• Prepayment review of vouchers
• Post-payment review of selected vouchers
• Progress payment reviews/audits
• Cumulative allowable cost worksheets
• Incurred cost proposal reviews/audits
• Real-time procedures on labor and material

DCAA’s own guidance provides for the review of a sample, in most cases, of cost type and time & material type vouchers prior to payment.  The sampling is processed through Wide-Area Work Flow (WAWF).

Non-Compliance Choices

We know the prepayment reviews are taking place as any rate changes are resulting in the rejection of vouchers rather than inquiring as to why the contractor needed to adjust its provisional billing rates.  This is one of the Government’s best catch 22s.  The August 2019 audit program Section D Step 6 directs the auditor to test to ensure vouchers are using current approved provisional billing rates., while Step 15 of the same section has the auditor test for overpayments.  So, if your approved provisional rates are resulting in the overpayments, you must choose which area you want to be in potential non-compliance with.  FAR 52.232-7(e) requires the contractor to adjust its billing rates to prevent substantial over or underpayment.  The catch is that supporting the “mutual agreement” part of the requirement to adjust billing rates is the lowest of low priority work for both auditors and administrative contracting officers.

Voucher Reviews

DCAA also has guidance to review, on a post-payment basis, one paid voucher for smaller contractors per year and one per quarter for larger contractors.  We have noticed several DCAA offices getting back to these assignments.  However, we have found some DCAA offices start the assignments – have an entrance conference and request supporting data – then the auditor goes missing, and communication stops. Unfortunately, we have not seen or heard of DCAA auditors engaging in too many progress payments.

Incurred Cost Backlog Gone—What Changes has DCAA Made

Now that DCAA has the incurred cost backlog behind it and has the support of Independent Public Accountants to stay current, cumulative allowable cost worksheets and incurred cost proposals should be a well-covered area which DCAA should rely on for purposes of auditing contractor systems.

Additionally, many contractors are starting to see DCAA get back into completing its normal mandatory annual audit requirements (MAARs).  These include labor floor checks (MAAR 6) and direct material testing (MAAR 13).  While you may find these procedures time consuming, they are your opportunity to demonstrate to DCAA that you are low risk and do not require an audit each year.  But, if you are subject to audit, these procedures should be relied on by DCAA to help gauge risk for the audit and limit direct cost testing to be performed.

DCAA Internal Issues

However, based on the auditor requests for extensive write-ups by the contractor currently under-going accounting system audits, DCAA is apparently turning its back on what it already knows about the contractor and procedures that have already been performed.  An auditor trusting the work of even another DCAA auditor has never been a pillar of the DCAA culture.  Regrettably, there could be more behind this. DCAA has often assigned these procedures to new auditors, or less capable auditors, which may create a level of doubt in the mind of the auditor that needs to rely on the procedures.  This should not be the case as the auditing standards require adequate supervision of all audit procedures.

Policies and Procedures Areas of Focus

To help ensure the billing proportion of your accounting system complies with the very wide net cast by DCAA testing to determine compliance with DFARS 252.2427006(c)(1), (15i) and/or (16), we recommend your policies and procedures focused on the following areas:

• Contract Briefs, especially highlighting ceiling rates, contract-specific cost limitation clauses, and funding;
• Notification requirements of FAR 52.232-20, limitation of costs, and FAR 52.232- 22, limitation of funds;
• Handling of fixed fee and cost withhold requirements;
• Ensuring no unallowable direct cost or unbillable cost is billed;
• Updating and monitoring provisional billing rates;
• Ensuring billing rates include no unallowable cost;
• Reconciliation of billed to booked;
• Hours, including subcontractor hours, billed on T&M contracts meet labor requirements for rates billed;
• Monitoring and inclusion of subcontractor costs – documenting need for Government involvement when access denied;
• Payment of billed cost in the normal course of business – within 30 days;
• Monitoring and repayment of overpayments;
• FAR 52.216-7, allowable cost and payment – Final rate requirements;
• Adjustment vouchers for final rates;
• Contract closeout; and
• If Progress payments, timing, and process for an estimate to complete.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractor through DCAA audits, as well as, developing accounting policies and procedures that comply with DFAR 252.242-7006.