Redstone Government Consulting Blog | DCAA Audit Support (11)

As we outlined in Applicability of DFARS Business System Rules to Small Businesses, small businesses are exempt from Cost Accounting Standards and therefore are not subject to the business system rules, based on the requirements for inclusion in the Business System Clauses as set out in DFARS.  DFARS Case 2009-D038 – Defense Federal Acquisition Regulation Supplement; Business Systems-Definition and Administration, final rule issue February 24, 2013 in the Federal Register specifically stated: “DoD does not expect this rule to have a significant economic impact on a substantial number of small entities within the meaning of the Regulatory Flexibility Act, 5 U.S.C. 601, et seq., because contracts and subcontracts with small businesses are exempt from Cost Accounting Standards (CAS) requirements.”

In 1948 the Armed Services Procurement Regulations (ASPR) was issued as a result of the Armed Services Procurement Act, remaining in place until 1978.  ASPR defined direct cost as “any cost that is specifically identified with a particular final cost objective, but not necessarily limited to items that are incorporated in the end product as material or labor.”  This is a fairly broad definition and clearly establishes that direct cost includes more than direct material and direct labor.  The APSR also discussed Other Direct Costs (ODC), which were costs that were not material nor labor and provided examples, such as “travel and subsistence, consultants, telephone, computer costs and report reproduction.” 

Believe it or not, getting DCAA to show up and complete a “Paid Voucher Review” is “Good News.”

To understand where I’m coming from with this statement, let’s start with a little history.  The way DCAA dug itself out of its incurred cost backlog hole was with low risk sampling, provided for under FAR Class Deviation (2012-O0013) – DCAA Policy and Procedure for Sampling Low-Risk Incurred Cost Proposals, issued July 24, 2012.

After over three years of waiting, on September 24^th, 2019 the Department of Labor released its long-awaited final overtime rule,  increasing the standard salary threshold for exempt status to $684 per week (up from the current $455 per week floor), or $35,568 per year on an annual basis. The new rule takes effect on January 1^st, 2020, providing the first overtime salary adjustment in more than 10 years.

GSA establishes the per diem rates for the lower 48 Continental United States (CONUS), which are the maximum allowances that federal employees are reimbursed for expenses incurred while on official travel.

DCAA’s July 19^th AGM or Audit Guidance Memorandum (19-PAS-003(R)) implemented the Section 803 requirement of the 2018 NDAA (National Defense Authorization Act) that DoD/DCAA adopts commercially accepted standards of materiality (in application) to incurred cost audits.  This requirement is in the broader context of continuing Congressional interest in the incurred cost backlog and performance of incurred cost audits.   More specifically, the subsection which requires commercially accepted standards of materiality is designed to improve the efficiency of the contract auditing process.

As a follow-up to our recent blog post, My CPA Audited My Financial Statements. Does That Mean My Accounting System is Adequate?  where we covered some differences between a financial statement audit and an adequate accounting system, we received several great questions from our readers.  We thought it might be beneficial to address them via a new blog post for the benefit of all our readers.  We welcome discussion on our blogs, though we do so in private via email.  In this case, though, these questions are ones we see frequently and impact all companies doing business with the U.S. Government.

The topic of accounting system adequacy seems to be a recurring issue for many in the government contracting community.  Earlier this month in the ongoing “process of elimination”, GAO weighed in again on what is NOT considered a determination of accounting system adequacy.  In Shivoy B-413104.36, GAO rightfully denied a protest for unequal treatment in eliminating a proposed offeror due to lack of verification of a proposed subcontractor’s accounting system as adequate.

Unless you have undergone a DCAA Accounting System audit under the criteria in DFARS 252.242-7006 (a.k.a. DFARS Accounting System Audit), you do not know what a comprehensive audit is.  To start with there are eighteen criteria, some of which are as broad as “Accounting practices in accordance with standard promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.”  This leaves the door open to pretty much endless questions.  But don’t worry, DCAA has narrowed it down to only 27 questions. 

You now understand a little bit more about provisional billing rates from our first of this two-part series. In this second part of our coverage of provisional billing rates, we delve a little deeper into the purpose behind provisional billing rates as well as how to prepare them and the differences between provisional billing rates and proposal bid rates. Knowing these details will enable you to prepare an accurate DCAA submission.