Most Common Findings in an Estimating System Audit

If you have an upcoming Defense Federal Acquisition Regulation Supplement (DFARS) estimating system audit, you need to plan for it, and the sooner, the better. Don't wait until the Defense Contract Audit Agency (DCAA) begins sending you its requests for information. But how do you prepare? Perhaps a place to start is first understanding what this audit entails and knowing what DCAA may cite as common findings.

What is an Estimating System, and Why is it Important?

First, What is an Estimating System?

Well, DFARS 252.215-7002, Cost Estimating System Requirements, defines it as "…the Contractor's policies, procedures, and practices for budgeting and planning controls, and generating estimates of costs and other data included in proposals submitted to customers in the expectation of receiving [Government] contract awards…."

Secondly, Why is it Important?

The estimating system is essential because when the DFARS 252.215-7002 contract clause is placed in your contract, you are then required to comply with the 17, yes, 17 criteria contained in this clause. What if you have a significant DCAA audit finding or deficiency and do not comply? Failure to comply could result in a contracting officer's decision to disapprove the estimating system, resulting in further testing (scrutiny) of your proposals for new business or even contract cost withholdings on existing contracts up to 5% of contract costs subject to the DFARS estimating system compliance. So, the estimating system is essential since system deficiencies can result in difficulty obtaining additional contracts or further business and impacts your cash flows if the Government applies withholding contract payments in accordance with DFARS 252.242-7005(e), Contractor Business Systems.

What is a DCAA Audit Finding?

DCAA's Contract Audit Manual (CAM) lists three types of findings:

• DFARS Significant Deficiency – generally results in an adverse audit opinion on compliance with the 17 DFARS estimating system criteria (this is the most severe and the one that you do not want);
• DFARS Less Severe Significant Deficiency – generally resulting in a qualified audit opinion on the compliance with the 17 DFARS estimating system criteria (not as large a problem, but still one that you do not want); and
• Less than Material Noncompliance that Warrants Attention of the Contracting Officer – generally resulting in an unqualified audit opinion on the compliance with the 17 DFARS estimating system criteria (not as severe as the prior two above, but still may result in you having to make some changes or "corrective actions").

DCAA issues an advisory audit report to the contracting officer for their determination on approval or disapproval of your estimating system taken as a whole. DCAA does not "approve" your cost estimating system; a contracting officer makes the estimating system approval/disapproval, and they can consider more than just the DCAA advisory report, but the DCAA advisory report will factor in significantly in their approval decision. The DFARS 252.242-7005 (b) defines a significant deficiency as "…a shortcoming in the system that materially affects [emphasis added] the ability of officials of the Department of Defense to rely upon data and information produced by the system that is needed for management purposes."

What are Common DCAA Findings?

It Starts with the Foundation

What written policies and procedures is your estimating system built upon? It is a DFARS requirement to have written policies and procedures. These policies and procedures are not just something printed and placed on a shelf to gather dust. This is your management's authority on preparing, supervising, and approving cost estimates on government contracts and subcontracts. DCAA will look at these closely, determine compliance with the 17 DFARS estimating criteria, and look for how cost estimates are prepared, supervised, and approved. Do you have clear lines of preparation of estimates with review and subsequent approval? How do you have this documented? Will reviews and approvals be able to disclose duplicate estimates and lead to timely detection and corrections of errors discovered?

Auditors will look for evidence (documentation) of the preparation, supervision, and approvals and how it is performed and documented in current operations. Be prepared to have DCAA review this in recent proposals selected for review. If your policies and procedures are not current or do not demonstrate compliance with the 17 estimating system criteria, then expect that DCAA will cite this in its audit report.

Does your Staff Understand Their Role in the Estimating Process, and are They Trained?

This is a big one. You can have great policies and procedures, but this is not where it ends; your staff must be able to operate within the policies and procedures, know their roles, be trained, understand your estimating system, and provide consistent estimates.

Further, does your staff and your estimating system demonstrate compliance with FAR Parts 15 (Contracting by Negotiation) and 31 (Contract Cost Principles and Procedures) and understand their roles in complying with FAR? Does your estimating system training include not only regulatory guidance but also guidance and practical direction on how to operate your estimating system? Does your system comply with this, and how does your staff and system demonstrate their FAR understanding and implement it into the system's operations? For the specific contracting agency, such as the Department of Defense, does your staff have knowledge and experience with the DFARS?

Lastly, does your staff identify sources of data, estimating methods, and budgets and document its compliance with your policy and regulations? This is very big since if there is no documentation or audit trail, how will you demonstrate the work was performed? Inadequate documentation can be interpreted as an estimating system weakness, which surely would be a DCAA finding.

Is Your Staff Able to Integrate Information from Other Parts of Your Company?

This entails getting information from throughout your company, such as overhead and labor rates from the Finance Department; actual labor hours from the accounting system; current information on vendor quotations from the Purchasing Department; and other departments, such as, Engineering Department, for estimates and even updated estimates whether it be labor hours or materials and making that available to Government negotiators at contract negotiations.

This is necessary for not only preparing initial pricing proposals but also being able to update it for negotiations and complying with the Truthful Cost or Pricing Data (Truth in Negotiations) Act (10 USC Ch 271), often referred to as "TINA" or even "defective pricing." This requires signing a certificate of accurate, complete, and current cost or pricing data (essentially verifiable information defined in FAR Part 2.101, Definitions) certificate as part of the negotiation process. A weakness here may be an indication of an estimating problem and lead to future DCAA defective pricing audits.

Do You Have a Feedback Loop?

This is one that is overlooked. Comparing your estimates for labor and materials against actuals can improve your future estimates by providing "feedback" on how good the original estimates were. A feedback loop is also an independent management review that provides input on how the estimating system works and whether areas warrant management attention. This can also provide DCAA evidence of compliance with the estimating system criteria. If you had a prior DCAA estimating system audit or had an internal review, be prepared to show not only those findings but also what was done to correct them.

Next Steps

Awareness of the estimating system requirements, what a DCAA audit addresses and common DCAA audit findings will help your staff focus on the important issues in demonstrating system compliance. Knowing these is an excellent first step in your preparation for the DCAA audit and journey to an acceptable estimating system.

Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government's expectations and supporting contractors with the process of establishing and revising provisional billing rates and preparing adjustment vouchers. We would be happy to be part of your team.