Documentation! Documentation! Documentation! What’s a Government Contractor to Do?!

Whether you are new to government contracting or have been “in the game” forever, it’s not unusual for employees to get caught up in the events of the day and overlook the importance of obtaining and maintaining adequate supporting documentation in the support of pricing proposals (pre-contract award) and actual costs – both direct and indirect (post-contract award).  In a perfect world, employees are properly trained on adequate supporting documentation and documenting the appropriate files accordingly. But we aren’t living in a perfect world, and we even debate over what adequate supporting documentation entails.

There are several Federal Acquisition Regulation (FAR) contract clauses included in flexibly priced contracts which incorporate a number of documentation-related requirements:

• FAR 52.215-2, Audits and Records — Negotiation, cost-reimbursement, incentive, time-and-materials, labor-hour, or price re-determinable contracts, or any combination of these, allows the government the right to examine and audit all records and other evidence sufficient to reflect all costs properly claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of this contract.

• FAR 52.216-7 Allowable Cost and Payment, is a contract clause included in cost reimbursable and time and materials contracts. This clause requires that costs reimbursable under the contract must be allowable as determined in accordance with Federal Acquisition Regulation (FAR) Subpart 31.2.

• FAR 31.201-2 Determining Allowability, indicates that contractors are responsible for accounting for costs appropriately, and for maintaining records. This includes keeping supporting documentation that is adequate to demonstrate that costs claimed:
  • Have been incurred,
  • Are allocable to the contract, and
  • Comply with applicable cost principles in FAR Subpart 31.2.

Contractors should develop policies and procedures that define required documentation to support costs and all transactions within a company’s respective business systems. Proper training and consistency is a key to being a successful government contractor. In addition, management should support policies and procedures and documentation requirements to avoid unallowable costs and inadequate systems due to significant deficiencies (departures from company policies can be an issue in and of itself).

The FAR discusses what adequate documentation should be, but many clients often ask, “what pieces of paper should we have in our files?” All too often costs are questioned due to lack of, or poor, documentation requirements by organizations. The following is a guideline for adequate supporting documentation of some of the common cost categories incurred by contractors that DCAA should accept during an audit.

1. Pricing Proposals – (Pre-Contract) – Estimating System

The government will review proposals for technical and price. How detailed the government will be in their review of the pricing may vary based on the detail and complexity of the pricing proposal. Contractors should always ensure they submit an adequate proposal and refer to and review the DFARS 252.215-7009 – Proposal Adequacy Checklist.

Pricing a proposal should not be based on “guess work” or a business development employee’s “price to win” prediction. When preparing a price proposal, each cost element should be supported as follows:

Labor Rates

• Offer letters – some companies will provide contingent offer letters to prospective employees should they win the contract. These offer letters should be maintained in the file as support for the labor rate.
• Labor surveys/manuals mapping labor descriptions and labor categories

Labor Hours

• Basis of estimate of hours – historical records, including hours of production for similar work, staff -loading charts or management assumptions and rationale for labor hours required for performing each task.

Materials

• Vendor invoice (for similar items – ensure invoice is relatively current: 30 days, but should not typically exceed 90 days).
• Vendor quote (quote obtained for proposal or a quote for same item(s) obtained – quotes typically 30 – 90 days).
• Catalog pricing – if commercial items

Subcontractor

• Subcontractor quote
• Historical pricing from similar subcontract services (typically within the last year obtaining quotes is the preferred method)

*It is not uncommon for vendors/subcontractors who have not been awarded work from a company to refuse to provide a quote. The government is about “competition” and this issue would be “resolved” for most contractors if they would compete and try to spread award around.

Travel

• Per diem rates for lodging and meals based on the respective travel regulation:
  • Federal Travel Regulations (FTR) – continental US 48 States - rates available on GSA website gsa.gov.
  • Joint Travel Regulations (JTR) – travel in the Alaska, Hawaii, Commonwealth of Puerto Rico and territories and possessions of the US.
  • Department of State Standardized Regulations (DSSR) – Section 925, Maximum Per Diem Allowances for foreign areas (countries).

• Airfare – recent quotes from airlines (internet can be utilized) – airfare changes frequently, so contractors should utilize their best quote (lowest available airfare may not be reasonable and an average of fares either obtained through the airlines).
• Car Rental – recent quotes from car rental companies (internet pricing).

Other Direct Costs

• Vendor quotes (30 – 90 days)
• Vendor invoices (same item/similar quantities within the past 30 – 90 days)
• Catalog pricing

Indirect Rates

• Forward Pricing Rate Agreement (most recent)
• Budgets and projections of indirect rates based on the budgets and reasonable assumptions

2. Actual Costs – Direct and Indirect (Post Contract Award)

As long as you have some cost-type contracts, your policies (applicable to all contract types) will be subjected to the same compliance (DCAA) expectations. Therefore, a prudent government contractor will be able to support the following costs that will likely be subject to audit.

Labor

• Timesheet (manual or electronic) – timesheets should have proper charge codes that map to project costs and overall general ledger codes that classify labor as either a direct or indirect cost, be signed by employee, and approved by their supervisor.
• Work code authorizations – this can be formal or informal – how does your company and an employee’s supervisor notify an employee of the labor/charge codes the employee is authorized to charge?

Materials/Subcontract Costs (Accounting and Purchasing Systems)

• Approved Vendor Invoice (accounting cost incurred) – invoice should be detailed (labor pricing and scope of work) and pricing (such as labor) should tie to the subcontract.

Purchasing System* - This is ONLY the cost/price part of the purchase file, documentation for purchasing files has more detailed rule, regulations and requirements.

• Purchase requisition with appropriate approvals
• Vendor acknowledgment of order
• Vendor Quotes (evidence of competition)
• Sole source justification – approved my management
• Price/Cost analysis (competitive quotes helps tremendously)
• Vendor receipt

Travel

• Properly completed expense report signed by employee and approved by supervisor including the following: name and title of employee, date and place (location), business purpose of trip
• Lodging costs – hotel invoice (FTR/JTR per diem lodging rates)
• Meals – likely subject to FTR/JTR appropriate per diem rates (location)
• Airfare – airfare receipt, itinerary (to/from destination) and support for lowest available airfare obtained at the time of booking and in the normal course of business hours. What supports lowest available airfare? Document any quotes, negotiations or discussions with travel agencies/airlines, etc. Many travel agencies will document on itinerary that this was the lowest available airfare at the time of booking.
• Mileage – document to/from address (specific addresses are best), document number of miles, use current IRS allowable mileage rate at time of travel.
• Rental car – rental agreement/invoice. Rental rates should be “reasonable”; a cost is considered reasonable, if “…in nature and amount, it does not exceed that which a “prudent” person would incur in a competitive business environment.”

Business Meals/Meetings and Conferences

• The date and location of the meeting, including the name of the establishment
• The names of ALL employees and guests in attendance
• The business purpose of the meeting
• Meeting agenda (if any meals were provided; if so, the respective per diem should be backed out of the employee’s per diem rate claimed on that day they received the meal.)
• The itemized bill (yes – each item, including alcohol - total signed receipt)
• Supervisor approval via expense report

These are just the “basics” of documentation auditors expect to see for support of the costs your organization incurs. Employees should be held accountable for supplying the required documentation for proper processing. So what will your company’s response be next time an employee says “My dog ate my receipt?”