As incurred cost audits are becoming more prevalent and voucher audits are taking off like wildfire, there is emphasis placed on the use of work authorizations by government contractors. There is no specific regulatory authority that can be cited which requires work authorizations as a part of a contractor’s Labor/Timekeeping System. This argument, although accurate, is not the rationale which will be used by a DCAA auditor when “disclosing” deficiencies in a contractor’s labor system and ultimately rendering an inadequate opinion with respect to the accounting system, when the work authorization process is absent.
The auditor will cite DFARS 252.242-7006(c)(1) which states “The contractor’s system will provide for a sound internal control environment, accounting framework, and organizational structure.” You may (and probably will) ask “Where is there a mention of work authorizations anywhere in DFARS 252.242-7006 Accounting System Administration?” The short answer is: there isn’t. The DCAA answer is that the regulation it cites does not have to specifically address work authorizations, but a link can be drawn that, by inference, it is applicable.
The CAM (Contract Audit Manual)
DCAA’s Contract Audit Manual (CAM) is not regulatory authority and its requirements are not binding to government contractors. In fact, DCAA stopped updating the CAM several years ago in favor of audit guides; however, they have not published an audit guide related to labor accounting on their website. That being said, DCAA’s standard audit program for activity code 13010, version 9.6 dated November 2017 ‘Accounting and Control of Labor Costs’ still includes steps implying a requirement for work authorizations. Therefore, we believe the language in the CAM, as previously issued, is still the current guidance for DCAA auditors. However, it is not the only guidance to a DCAA auditor, but it is directive as to actions which must be taken by the auditor. CAM section 5-908 Labor System Authorization/Approvals states “The contractor should have procedures to facilitate the accumulation and recording of labor costs to cost objectives for the purpose of determining proper cost reimbursement on Government contracts. These procedures should address the control and issuance of work authorizations (emphasis added), as well as the detail descriptions required for labor documentation. When evaluating the contractor's policies for labor authorizations/approvals, the auditor should consider whether the policies and organizational structure provide for adequate control over work authorizations (emphasis added) to assure the integrity of labor recording.” CAM section 5-902(b)(3) states “To assess control risk on the labor system as low...the contractor’s system should have effective procedures for labor authorizations/approvals to facilitate the proper accumulation and recording of labor costs to cost objectives.” Furthermore, all throughout CAM section 6 (which governs the audits of incurred costs), there are references to work authorization and job authorization procedures to assist an auditor in determining the reliability of labor related supporting documentation.
Work Authorization=Adequacy?
DCAA’s labor related audit programs which are also prescriptive to the auditor include steps to determine the existence of work authorizations and their appropriateness with respect to proper labor charging. In fact, the audit program for labor floor checks or interviews uses a required questionnaire setting forth many questions asking that work authorizations be provided. The lack of a work authorization in some form may not, in and of itself, be the basis for an inadequacy assertion. However, it most likely will.
Auditor Assertions
Carried to its conclusion, the DCAA auditor, by asserting that the internal controls over the labor system are inadequate because of a lack of work authorizations, must also assert that since the labor system is a fundamental part of the accounting system, then the internal controls over the accounting system are inadequate citing non-compliance with DFARS 252.242-7006(c)(1). Further, DCAA will ignore certain other facts such as a company may not have any contracts which include the DFARS Business System Rule clause, or that CAS coverage may be required for negative Government actions against a contractor. DCAA will most likely still render an inadequate opinion and although Contracting Officer concurrence is not required, it is expected.
Just Get a Work Authorization
This can then become an utter nightmare for any company that finds itself in a predicament where the Contracting Officer (for whatever reason) agrees with DCAA. Under certain circumstances the Government can withhold payments on applicable contracts. At the very least, a company could lose future work because its accounting system has been deemed unreliable for Government contracting purposes. Yes, a company can push back and possibly even litigate against this requirement. But in this writer’s opinion, the cost of “pushing back” or litigating would far exceed the cost of merely instituting a work authorization system that can be as simple as email messages to employees directing them to work on a specific project or cost objective. The auditor should not be looking for a detailed authorization directing effort to a specific number of hours. Rather, they should use the work authorization to determine if the employee interviewed is working on their prescribed project.
