RGCI - DCAA Issues Real-Time (Labor & Material) Audit Guidance – Good News or Not so Good News

On August 9, 2023, DCAA issued guidance to its auditors revising the real-time labor and material testing requirements. DCAA historically referred to these procedures as Mandatory Annual Audit Requirements (MAARs) 6 and 13. DCAA states in its guidance what its auditors need to know is that “[l]abor and material are two of the most significant cost elements billed under government contracts. As such, one of the primary reasons … [DCAA] audit[s] labor and material costs incurred is to determine the accuracy of the charges. The real-time verification of these costs as they are incurred provides valuable confirmation of the accuracy of the charges and can only be accomplished during the accounting period to which they apply.” I cannot really argue with this statement.

I would also think these real-time audit procedures provide the backbone to support DCAA’s low-risk sampling of incurred cost submissions. It appears I was wrong in thinking that as this guidance provides that based on the lessons learned by DCAA during the pandemic, real-time testing is no longer mandatory – I guess it is DCAA’s deep-down trust of all contractors that support low-risk sampling.

Key Takeaways from the Guidance

  • Real-time audit procedures of labor and material are no longer mandatory;
  • If and when to perform procedures should be a risk-based decision;
  • Make sure the contractor’s business systems are considered in the risk-based decision;
  • If performed, the procedures can be scheduled with the contractor;
  • Contacting the employee by phone or video is just as good as in-person and
  • The lack of real-time procedures does not automatically require a scope limitation in the report, and alternative post-period procedures can support an unqualified opinion.

Well, it is about time that the auditors performing the audits determine whether or not to qualify their audit opinion and not the DCAA Policy division. The guidance makes the point that the change was to allow greater risk-based flexibilities to the auditors in the field. Back in the day, Branch Managers had that flexibility even under the prior guidance.

The Good News

DCAA will likely be performing even fewer audit procedures, especially related to small businesses. When real-time testing is performed, the auditors can work out a schedule with the contractor, and the auditors do not necessarily have to be face-to-face with the employee.

The Not-so-Good News

If DCAA gets a call from a contracting officer performing a responsibility determination to award a new contract to a small business, the contracting officer is likely to hear that DCAA cannot help as they have not done any work at that contractor in years.

DCAA auditors do not trust the previous auditors who did the real-time testing and have added extensive additional post-year-end audit procedures. So now that no real-time testing will likely be performed – what kind of tail-chasing work can we look forward to when the audit is performed after year-end?

If, at some point, DCAA does perform an incurred cost audit and questions costs, what creative methods will be applied to try and reach back into closed years they did not audit – CAS 405 or False Claims Act (FCA)? Let’s hope not.

DCAA struggled with relying on contractor historical data to perform its limited forward pricing proposal audits in the past – will we see even more historical data testing during forward pricing?

What is DCAA Doing?

So now that DCAA is down to issuing less than one report per auditor per year – what are our friendly auditors doing?

Over the years, I have questioned many things DCAA has done; however, I have never questioned the value of having an engaged and functioning audit agency.

DCAA’s Testing of Paid Vouchers audit program (Version 8.0, dated Jan 2023) states, “[p]ost-payment testing will be performed on at least one interim voucher per year for non-major contractors, and at least one interim voucher per quarter for major contractors.” We have had several clients state that these reviews are not being performed. We believe it is essential that DCAA have some level of regular engagement with all contractors with cost-reimbursement contracts.

Redstone Government Consulting assists contractors throughout the U.S. and internationally with understanding the Government’s requirements and assisting contractors with DCAA audits. We would be happy to be part of your team.

Learn More About our DCAA  Audit Support Services

Written by John C. Shire, CPA

John C. Shire, CPA John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: Compliant Accounting Infrastructure, Small Business Compliance, Contracts & Subcontracts Administration, Government Compliance Training, DCAA Audit Support, Human Resources