Back in the days of DCAA ICAPS audits, the billing system was a standalone audit program. Even DCAA’s first pass at auditing for compliance with DFARS 252.242-7006 provided a standalone sub-assignment for the coverage of contractor billing systems.
The DCAA Audit Activity Code 11010, Version 1.14. dated November 2015, audit program was 31 pages and provided specific sections for each type of billing:
- Vouchers on Cost Type Contracts
- Vouchers on Time and Material (T&M) or Labor Hour (LH) Contracts
- Progress Billings Based on Cost
- Performance-Based Payments
In addition, the audit program provided extensive guidance on:
- Reconciliation of Costs Billed on Contracts
- Contract Debts, Demand Letters, and Refunds
- Prime Contractor Monitoring of Subcontracts
- DD250 Delivery Orders or WAWF Receiving Reports
DCAA Audit Guidance Today
DCAA’s current audit guidance on contractor billing systems is included in Audit Activity Code 11070, Version 1.2, dated August 2019. This document is only 34 pages and covers the entire contractor accounting system compliance with DFARS 252.242-7006, while the billing system is limited to a single section (D), totaling only 6 pages. While sometimes the removal of audit guidance is a good thing, we are not so sure on this count. Many of our clients have experienced auditors firing off extensive email requests for policies and procedures or unspecified documentation showing compliance of a vague requirement set out in an audit step. Many of these emails simply quote verbatim audit steps. When requested to explain what they are trying to accomplish or how they understand the contractor’s system, the auditors have replied by email that if the contractor does not understand the email request, there must be a significant non-compliance. This does not help build a working relationship between the auditor and the contractor to accomplish the task at hand – documenting the contractor’s compliance or identifying areas where improvements could be made. As a result of the lack of DCAA auditor preparedness for the return to system audits, we have seen numerous system audits started, but few completed.
Auditor Approach to Risk Assessment
Additionally, approximately 10 pages of the current audit program are still dedicated to risk assessment. While every audit requires a risk assessment, we have seen very few risk assessments result in an auditor’s articulate, documented understanding of the contractor’s system. The walk-through of the system with the full participation of both the auditor and the contractor is the appropriate time to ensure a consistent understanding of the system by all parties. In several cases, during the walk-through, the auditor is focused on what they believe the system does not do rather than understanding how the contractor is explaining what the system does. Some auditors appear to have the mindset that there is only one way to implement a compliant system and if they don’t hear what they want to hear, they stop listening – a bad thing when you are trying to understand, rather than change, the system. Accounting systems are like pieces of abstract art, no two are the same, but they are all works of art.
DCAA Limiting Audit Effort
That said, the billing system is one area where DCAA should be able to significantly limit its system-specific audit effort based on its ongoing understanding of the system and its normal portfolio of work. DCAA’s oversight of contractor billings include:
- Prepayment review of vouchers
- Post-payment review of selected vouchers
- Progress payment reviews/audits
- Cumulative allowable cost worksheets
- Incurred cost proposal reviews/audits
- Real-time procedures on labor and material
DCAA’s own guidance provides for the review of a sample, in most cases, of cost type and time & material type vouchers prior to payment. The sampling is processed through Wide-Area Work Flow (WAWF).
Non-Compliance Choices
We know the prepayment reviews are taking place as any rate changes are resulting in the rejection of vouchers rather than inquiring as to why the contractor needed to adjust its provisional billing rates. This is one of the Government’s best catch 22s. The August 2019 audit program Section D Step 6 directs the auditor to test to ensure vouchers are using current approved provisional billing rates., while Step 15 of the same section has the auditor test for overpayments. So, if your approved provisional rates are resulting in the overpayments, you must choose which area you want to be in potential non-compliance with. FAR 52.232-7(e) requires the contractor to adjust its billing rates to prevent substantial over or underpayment. The catch is that supporting the “mutual agreement” part of the requirement to adjust billing rates is the lowest of low priority work for both auditors and administrative contracting officers.
Voucher Reviews
DCAA also has guidance to review, on a post-payment basis, one paid voucher for smaller contractors per year and one per quarter for larger contractors. We have noticed several DCAA offices getting back to these assignments. However, we have found some DCAA offices start the assignments – have an entrance conference and request supporting data – then the auditor goes missing, and communication stops. Unfortunately, we have not seen or heard of DCAA auditors engaging in too many progress payments.
Incurred Cost Backlog Gone—What Changes has DCAA Made
Now that DCAA has the incurred cost backlog behind it and has the support of Independent Public Accountants to stay current, cumulative allowable cost worksheets and incurred cost proposals should be a well-covered area which DCAA should rely on for purposes of auditing contractor systems.
Additionally, many contractors are starting to see DCAA get back into completing its normal mandatory annual audit requirements (MAARs). These include labor floor checks (MAAR 6) and direct material testing (MAAR 13). While you may find these procedures time consuming, they are your opportunity to demonstrate to DCAA that you are low risk and do not require an audit each year. But, if you are subject to audit, these procedures should be relied on by DCAA to help gauge risk for the audit and limit direct cost testing to be performed.
DCAA Internal Issues
However, based on the auditor requests for extensive write-ups by the contractor currently under-going accounting system audits, DCAA is apparently turning its back on what it already knows about the contractor and procedures that have already been performed. An auditor trusting the work of even another DCAA auditor has never been a pillar of the DCAA culture. Regrettably, there could be more behind this. DCAA has often assigned these procedures to new auditors, or less capable auditors, which may create a level of doubt in the mind of the auditor that needs to rely on the procedures. This should not be the case as the auditing standards require adequate supervision of all audit procedures.
Policies and Procedures Areas of Focus
To help ensure the billing proportion of your accounting system complies with the very wide net cast by DCAA testing to determine compliance with DFARS 252.2427006(c)(1), (15i) and/or (16), we recommend your policies and procedures focused on the following areas:
- Contract Briefs, especially highlighting ceiling rates, contract-specific cost limitation clauses, and funding;
- Notification requirements of FAR 52.232-20, limitation of costs, and FAR 52.232- 22, limitation of funds;
- Handling of fixed fee and cost withhold requirements;
- Ensuring no unallowable direct cost or unbillable cost is billed;
- Updating and monitoring provisional billing rates;
- Ensuring billing rates include no unallowable cost;
- Reconciliation of billed to booked;
- Hours, including subcontractor hours, billed on T&M contracts meet labor requirements for rates billed;
- Monitoring and inclusion of subcontractor costs – documenting need for Government involvement when access denied;
- Payment of billed cost in the normal course of business – within 30 days;
- Monitoring and repayment of overpayments;
- FAR 52.216-7, allowable cost and payment – Final rate requirements;
- Adjustment vouchers for final rates;
- Contract closeout; and
- If Progress payments, timing, and process for an estimate to complete.
Redstone GCI assists contractors throughout the U.S. and internationally with understanding the Government’s expectations and supporting contractor through DCAA audits, as well as, developing accounting policies and procedures that comply with DFAR 252.242-7006.
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