Incurred Cost Audits The Process, What to Expect, & How to Survive Presented by Norman J. Lorch, CPA Norman J, Lorch, Copyright Notice The materials presented in this handbook and all of the slides are subject to the Copyright Laws of the United States of America. Reproduction of any of these materials or their use in any presentation without the prior express written permission of the author and Norman J. Lorch, is prohibited. Course Layout & Presentation The Requirement for Submission of Indirect Rates The Indirect Cost Rate Proposal Allowable & Unallowable Costs The Audit Process From The Entrance Conference/Walkthrough to The Audit Sensitive Accounts Document Requests The entire Audit of an Incurred Cost Submission Resolution of Audit Exceptions Contracting Officer Courts Adjustment Billings Page 1 of 29 1
The Requirement for The Proposal/Incurred Cost Submissions Objectives Understand The Requirement Know to Whom & Where to Send the Proposal Know When to Make the Submission Determine Which Contracts Require the Submission The Relationship of the Submission to the Coming Audit The Requirement Required Under Cost Reimbursable Contracts CPFF, CPIF By Allowable Cost and Payment Clause FAR 52.216-7 (which is required by FAR 16.216-7) Under Time & Material/Labor Hour Contracts Payment Clause FAR 52.232-7 (B)(2) The Requirement (Continued) When Must be Submitted Within 6 Months after the End of the Contractor s Accounting Year Where To the ACO Administrative Contracting Officer or The Contracting Officer Copy to the Cognizant Auditor Page 2 of 29 2
The Requirement (Continued) Extensions In Exceptional Circumstances ONLY Penalties None Required by Existing Regulations Except Under the DoD Business Systems Rule Could Discontinue Processing Vouchers Comment Adversely on Contractor s Performance Disallow all Overhead/G&A Costs Will Disallow 20% of all Direct and Indirect Costs Determine the Accounting System to Be Inadequate under the DoD Business Systems Rule & Withhold up to 10% of all Payments The Requirement (Continued) Required to Submit Final Vouchers Within 120 Days After the Settlement of The Final Indirect Cost Rates Incentives to File Timely Allows the Reduction of Fee Withholding by 75% to 90% Begins the Audit Process and Gets the Audit Agency to Program the Audit The Requirement (Continued) Relieves Internal Pressures and Prodding by DCAA and the Contracting Office Allows for Collection of All Fee Withheld for Contract Completed During the Year Once the Audit Is Completed Allows Contractors to Bill for Differences Between Provisional Rates and Final Proposed Rates Eliminates the Threat of A Determination that the Accounting System is Inadequate Due to a Delinquent Submission Page 3 of 29 3
The Requirement (Continued) Reduce Fee Withholding from 15% to 1.5% to 3.75% Use of the Quick Close Out Procedure FAR 42.708 Will Get the Virtually Unavoidable Audit Programmed/Scheduled The Submission Objectives To Familiarize the Participants with The Schedules and Other Items Composing The Submission The Schedules The Interrelationships of the Schedules Purpose of Each Schedule or Attachment The Format of the Submission Formal Requirement Found in FAR 52.216-7(d)(2)(iii) Electronic Format Found at www.dcaa.mil Incurred Cost Electronically If You Use This Check Annually for Changes Requires the Completion 15 Schedules, plus An Additional 14 Suggested Attachments & Contract Briefs Page 4 of 29 4
The Format of the Submission (Continued) Schedule A - Summary of Claimed Indirect Expense Rates Schedule B - General and Administrative (G&A) Expenses (Final Indirect Cost Pool) Schedule C - Overhead Expenses (Final Indirect Cost Pool) Schedule D - Occupancy Expenses (Intermediate Indirect Cost Pool) Schedule E - Claimed Allocation Bases The Format of the Submission (Continued) Schedule F - Facilities Capital Cost of Money Factors Computation Schedule G - Reconciliation of Books of Account and Claimed Direct Costs Schedule H - Schedule of Direct Costs by Contract/Subcontract and Indirect Expense Applied At Claimed Rates Schedule H-1 - Government Participation in Indirect Expense Pools The Format of the Submission (Continued) Schedule I - Schedule of Cumulative Direct and Indirect Costs Claimed and Billed (This Schedule MUST be Updated within 60 days of the date that the rates are settled) Schedule J - Subcontract Information Schedule K - Summary of Hours and Amounts on T&M/Labor Hour Contracts Schedule L - Reconciliation of Total Payroll to Total Labor Costs Distribution Page 5 of 29 5
The Format of the Submission (Continued) Schedule M - Listing of Decisions/ Agreements/ Approvals and Description of Accounting/ Organizational Changes Schedule N - Certificate of Final Indirect Costs Schedule O - Contract Closing Information for Contracts Completed in this Fiscal Year The Format Attachments Data to be Provided At Time of Audit Comparative Analysis of Indirect Expense By Account With the Prior Fiscal Year Executive Compensation For The Top Five Executives Information on Prime Contracts Under Which Effort is Performed as a Subcontractor The Format Attachments (Continued) Description of the Accounting System (Unless A CAS Disclosure Statement has Been Completed) Procedures for Identifying and Recording Unallowable Costs Certified or Other Financial Statements Management Letter from Outside CPAs Concerning Internal Control Weaknesses Corrective Actions Implemented or to be Implemented to Correct Internal Control Weaknesses Page 6 of 29 6
The Format Attachments (Continued) List of Internal Audit Reports Issued During the Year. Listing of Scheduled Internal Audits for the Year Federal and State Income Tax Returns Securities and Exchange Commission 10-K Annual Report The Format Attachments (Continued) Minutes from Board of Directors meetings Listing of Delay and Disruptions and Termination Claims Submitted Which Contain Costs Relating to the Subject Fiscal Year. Contract Briefs Once Rates Are Finalized FAR 52.216-7(d)(2)(v) Requires Schedule of Cumulative Allowable Direct and Indirect Costs Claimed and Billed (Schedule I) Must Be Updated Within 60 Days after Rates are Settled Meaning That Over & Under Billings must be corrected to reflect the Settled Rates & Any Audit Adjustments to Direct Costs Billed Page 7 of 29 7
A Sample Submission Using the DCAA ICE Model Refer to the Submission Provided to You Key Schedules & Their Purpose Schedule A Rate Summary Schedule B G&A Expense Pool Schedule C Overhead Expense Pool Fringe Pool Schedule E Claimed Allocation Bases Schedule H & H-1 Costs By Contract & Participation The Sample Submission Discussion of Other Schedules Purpose Auditor Contractor Perspective Please Refer to the Sample Submission Provided to you We will use it later to Discuss the Audit Process Allowable and Unallowable Costs Objectives Provide the background to Account for Allowable and Unallowable Costs To Delete Unallowable Costs From ICE Submission Be able to prepare the Incurred Cost Submission and to Support and Survive the Audit of the Submission and Sign the Required Certification Page 8 of 29 8
The Accounting Regulations Found in the Federal Acquisition Regulations or FAR Part 30 - Cost Accounting Standards Part 31 - Contract Cost Principles and Procedures Appendix B - Actual Cost Accounting Standards on CAS Available at www.arnet.gov/far Cost Principles Allowability Reasonableness Allocability CAS GAAP Contract Terms Part 31 of the FAR Accounting for Unallowable Costs Items requiring Special Handling Credits Directly Associated Costs Penalties for Claiming Unallowable Costs Up to 300% of the amount that would have been allocated to cost reimbursable contracts or recovered against those contracts Page 9 of 29 9
Specifically Unallowable Costs Public Relations and Advertising Bad Debts Contingencies Contributions and Donations Entertainment Fines, Penalties and Mischarging Costs Interest Specifically Unallowable Costs (Continued) Losses on Other Contracts Organization Costs Goodwill Alcoholic Beverages Costs resulting from a Step-up in Basis Partially Unallowable Cost Compensation Executive Compensation in Excess of $952,309 for 2012 & Beyond (Reg. Issued 12/4/13) Except Compensation for ALL employees Limited to $487,000 After June 24, 2014 $763,029 for 2011 $693,951 for 2010 $684.161 for 2009 Idle Facilities Employee morale, health, welfare, food service, dormitory costs and credits IR&D and B&P Cost Labor Relations Costs - Costs Related to Collective Bargaining, Training, Organization Are Unallowable Relocation Cost Page 10 of 29 10
Partially Unallowable Costs (Continued) Depreciation Limited to the Amount Used for Financial Statement Purposes Consistent With Non-Government Related Business Ignore Residual Values of 10% or Less Depreciation on Assets Acquired from the Government at No Cost is Unallowable May Adopt CAS 409 Must reflect the expected useful life account for salvage value If in Excess of 10% Lives should reflect historical experience Partially Unallowable Cost (Continued) Rental Costs Taxes Fines and penalties Federal Income Taxes Deferred Tax Expense Allowable include State Income Tax Travel (Next Screen) Partially Unallowable Costs (Continued) Travel Air Fares Per Diem Rates FAR Limits JTR Limits Only if Specifically Required by The Contract) Specific Contract Limits Receipt Requirements Page 11 of 29 11
Partially Unallowable Cost (Continued) Mileage Rates Changed to $0.55 per mile for 2014 Not Effective for Government Contract Costs until Adopted by GSA Usually a 30 day delay Defense of Fraud Proceedings Pre-contract costs Defense of Fraud Proceedings Pre-contract costs Other Unallowable Costs Additional Costs Resulting from the Late Funding of Defined Benefit Pension Plans Plan Must Be Funded Quarterly If not Funded The Cost is Unallowable Until it is Funded Costs Associated With Merger/Acquisition Activities Special Rules in the DFARS Recapture of Gains from Pension Plan Terminations More Cost Limitations Limitations on Pass Through Charges Must Disclose % of Work to be Subcontracted When in Excess of 70% provide Information on indirect costs and fee attributable to the pass through subcontracted effort Justification and explanation of the benefits to the Government for the pass trough arrangement Now Required on all Government Contracts Previously limited to DoD, NASA and Coast Guard Contracts Page 12 of 29 12
The Government Audit Process Objectives Understand The Government s Incurred Cost Submission Audit Process How it Starts How It Ends The Use of Key Schedules in the Submission Sensitive Account Review Your Records What to Have How Much The Process Beginning to End The Audit Process-Getting Started Usually initiated by the Government Auditor Without a Request from the Contracting Officer Usually Scheduled by the Audit Agency For the GFY after the receipt of the Proposal or Later Final Indirect Rate Submission and the Final Incurred Cost Submission are the Same Currently DCAA is behind 5 to 8 years in completing Indirect Rate Audits The Audit Process Getting Started DCAA will call to set up a time The Audit May Not Get Started Until 5 Years after the Submission or Longer To Meet at the Contractor s Office Will arrange for an Entrance Conference This will be attended by The Auditor or Auditors Assigned to The Audit The Audit Supervisor The Administrative Contracting Officer (ACO) or the CO (Invited) Page 13 of 29 13
The Entrance Conference Proposal Walk-Through Explanation of Audit Purpose & Scope Time Frame for The Audit Expectations for Support and Furnishing Documents Possible Disclosure of Completion Date Discussion of the Audit Scope The Entrance Conference Proposal Walk-Through (Continued) The Walk-Through Overview of the Organization Contractor Will Go Thru the Submission Explaining Each Schedule Source of the Costs Presented Job Cost Reports The Accounting System and Software Platform The Cost Allocation Scheme and Rate Structure The Entrance Conference Proposal Walk-Through (Continued) Location of the Records If in Storage You will need to Explain Location Retrieval Time Requirement Identification of The Contractor Personnel Coordinating the Audit Their Authority Location of Office Space for Use of the Auditor (s) Operating Hours Page 14 of 29 14
And the Walk-Through Continues Discussion of Policies and Procedures Which Will Include Accounting Labor Accounting Time Recording & Reporting Payroll Preparation Purchasing & Procurement Recording Unallowable Costs And the Walk-Through Continues CAS Compliance If CAS Covered Full Coverage Disclosure Statement Modified Coverage If, Not, Why Not? Exempt Small Business And the Walk-Through Continues Format of Source Documentation Paper Electronic May Require The Auditor to Evaluate the Policies, Procedures & Practices For Creation of Electronic Documents Discussion of Billing Procedures for Cost Plus Contracts Labor Hour/T&M Contracts Discussion of The Organization Divisions Locations # of Employees Page 15 of 29 15
Let the Audit Begin The Audit Once the Walk-Through is Over The Auditor Will Return and Begin to Request Documents Chart of Accounts Trial Balance Detail General Ledger May be too large to provide Profit & Loss and Balance Sheets Copies of Policies & Procedures Board of Directors Minutes Recommend you limit this to access More Document Requests Copies of Federal & State Income Tax Returns Detail Listing of Transactions by Account May hold this request until the auditor selects specific accounts for review Labor Distribution Reports Employee Roster, by location More Document Requests Adjusting Journal Entries For Moving Labor Charges Adjustments Between Contracts and Task Orders Adjustments between Expense Pools or Between Direct and Indirect Expenses Page 16 of 29 16
Now the Field Work Begins Reconciliations Job Costs and the General Ledger Labor Claimed to IRS Form 941 Labor Distribution Reports Schedule H to Job Cost Control Accounts and the General Ledger Gross Profit Analysis on Labor Hour/T&M Contracts The Sensitive Accounts Direct & Indirect Labor Executive Compensation Business Development Marketing Travel Professional Development/Business Conferences Consulting Legal & Professional Fees The Sensitive Accounts (Continued) Let look at the Key Schedules in the Submission Schedule B Schedule C Fringe Schedule Schedule H-1 Government Participation Schedule I Page 17 of 29 17
Schedule B is linked to the following schedules: Sched D (x), Intermediate Allocations Sched E, Bases Sched H, Contract Costs Summary Sch H Sched P, IR&D/B&P ICE MANUAL Schedule B is linked to the following schedules: Sched D (x), Intermediate Allocations Sched E, Bases Sched H, Contract Costs Summary Sch H Sched P, IR&D/B&P ICE MANUAL RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE ACCOUNT Acct Balances TOTAL PER G/L, F/S HIGH TECH JAMS, INC. OWINGS MILLS, MD General and Administrative (G&A) Expenses Fiscal Year End - 12/31/2013 HIGH TECH JAMS, INC. OWINGS MILLS, MD General and Administrative (G&A) Expenses Fiscal Year End - 12/31/2013 TOTAL PER G/L, F/S NUMBER DESCRIPTION Amount & TRIAL BAL. ADJUSTMENT CLAIMED NOTES Reference ACCOUNT Acct Balances TOTAL PER G/L NUMBER DESCRIPTION Amount & TRIAL BAL/FSADJUSTMENTS CLAIMED Notes Ref. General and Administrative (G&A) Expenses (Final Indirect Cost Pool) SCHEDULE B ICE (version 2.0.1c) RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE ACCOUNT Acct Balances NUMBER DESCRIPTION Amount & TRIAL BAL. ADJUSTMENT CLAIMED NOTES Reference 6010 Accounting/Legal 55,300 55,300 10,500 44,800 6020 Administrative Labor 1,606,962 1,606,962 30,343 2,529,271 Attachment B Officer Compensation 952,652 952,652 6030 Advertising 53,567 53,567 53,567-6040 Advertising - Help Wanted 3,987 3,987-3,987 6050 Amortization of Goodwill 8,400 8,400 8,400-6060 Auto & Delivery 18,762 18,762 2,500 16,262 6070 Bad Debt Expense 4,575 4,575 4,575-6080 Business Interruption Insurance (Covers C 22,500 22,500 22,500 6110 Computer Supplies 15,488 15,488 15,488 6120 Consultants 10,876 10,876 10,876 6130 Contributions 5,500 5,500 5,500-6140 Depreciation 727,626 727,626 727,626 6160 Dues & Subscriptions 11,828 11,828 1,250 10,578 6165 Employment Agency Fees 15,890 15,890 15,890 6175 Entertainment 32,039 32,039 32,039-6235 Executive Travel 45,793 45,793 45,793-6245 Fines & Penalties 5,095 5,095 5,095-6255 Business Development & Strategic Planni 40,000 40,000 5,000 35,000 6265 Indirect B&P Expenses 7,893 7,893 7,893 General and Administrative (G&A) Expenses (Final Indirect Cost Pool) SCHEDULE B ICE (version 2.0.1c) 6275 Insurance 65,098 65,098 65,098 6285 Interest 15,771 15,771 15,771-6295 Congressional & Other Legislative Relatio 25,783 25,783 25,783-6305 Office Supplies 37,908 37,908 37,908 6320 Permits & Licenses 4,500 4,500 4,500 6325 Professional Seminars & Conventions 35,433 35,433 35,433 6330 Trade Shows & Training - Domestic 100,000 100,000 35,000 65,000 6331 Trade Shows & Training - Foreign 65,000 65,000-65,000 6335 Property Taxes 36,120 36,120 36,120 6340 Rent 66,390 66,390 66,390 6350 Resort Vacation House For Employees / G 5,500 5,500 5,500-6375 Telephone 40,577 40,577 5,000 35,577 6385 Employee Awards 21,877 21,877-21,877 6395 Travel 32,680 32,680 32,680 6405 Travel - Executive Travel Expenses 125,253 125,253 125,253 6430 Utilities 12,805 12,805 12,805 6455 Income Taxes 1,300,000 1,300,000 250,000 1,050,000 - SUBTOTAL 5,635,428 5,635,428 541,616 5,093,812 814,175 (11,564) 802,612 Intermediate Allocations: ADD: Fringe Allocation - Fringe 5,635,428 6,449,603 530,052 5,896,424 - - SUBTOTAL IR & D Labor (Sum SCH H) 375,833 375,833 IR & D Mat'l,Trvl,ODC(Sum SCH H) 204,002 (8,118) 195,884 IR & D Overhead(Sum SCH H & SCH E) B & P Mat'l,Trvl, ODC(Sum SCH - - H) 177,530 177,530 96,363 (3,834) 92,529 B & P Labor (Sum SCH H) - B & P Overhead(Sum SCH H & SCH E) 7,303,331 518,100 6,738,200 TOTAL G & A EXPENSE POOL SUM SCHE SUM SCHE SUM SCHE 1 SUM SCHE SUM SCHE 1 SUM SCHE D DSCHED D D DSCHED Schedule C is linked to the following schedules: Schedule D(x) HIGH TECH JAMS, INC. OWINGS MILLS, MD SCHEDULE C (1) ICE (version 2.0.1c) ICE MANUAL Overhead Expenses (final indirect cost pool) LABOR OVERHEAD Fiscal Year End - 12/31/2013 RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE 5010 Advertising - Help Wanted 23,534 23,534 23,534 5030 Auto & Delivery 19,788 19,788 19,788 5040 Computer Supplies 32,333 32,333 32,333 5050 Consultants 82,500 82,500 82,500 5060 Depreciation 125,473 125,473 125,473 5080 Dues & Subscriptions 4,500 4,500 4,500 5140 Employment Agency Fees 3,500 3,500 3,500 5150 Entertainment 15,549 15,549 15,549-5160 Fines & Penalties 7,235 7,235 7,235-5170 Indirect Labor 1,670,882 1,670,882-1,670,882 5190 Insurance 38,756 38,756 38,756 5200 Interest 33,503 33,503 33,503-5210 Office Supplies 13,658 13,658 13,658 5220 Overhead B&P Expenses 22,456 22,456 22,456 5230 Relocation Expenses 24,000 24,000 12,000 12,000 5240 Rent 337,550 337,550 127,466 210,084 5250 Telephone 67,112 67,112 5,000 62,112 5260 Tickets for Sporting Events 31,190 31,190 31,190-5270 Travel 125,690 125,690 125,690 5280 Utilities 68,343 68,343 68,343 - - Subtotal 2,747,552 2,747,552 231,943 2,515,609 ADD: Fringe Allocation Total Overhead Pool 4,758,380 (67,584) 4,690,796 7,505,932 164,359 7,206,405 Fringe Page 18 of 29 18
Schedule I is linked to the following schedules: Schedule H, Contract Costs Schedule K, T&M ICE MANUAL Contract No. Subcontract # Order No. Subject To Penalty Clause Note (2) Settled Total Costs Note (3) SCHED K Time & Material F33657-09-C-1458 0020 Yes 6,500,000 18,238,087 57 12/31/2013 18,185,129 (52,958 ) settlement proposal which is expressly unallowable. See Far 42.709 for applicability. M0065-11-C-0028 0001 Yes 2,535,333 5,944,749 25 12/31/2013 5,894,451 (50,298 Indicate a "Yes" in this column if the penalty clause is applicable to this contract. ) 3.These totals, by contract, should be computed using the negotiation or rate agreement document. - - 4.These totals, by contract, should be the same as shown in the incurred cost proposal using the claimed indirect rates. - - 5.Contract limitations include costs incurred that are included in the column entitled " Total Cumulative Settled or Claimed" and are either (i) in excess of contract ceiling rates, (ii) unallowable per contract terms, - - (iii) outside the period of performance, or (iv) in excess of contract ceiling amounts, 24,079,580 (103,256) 6.The cumulative amounts in this column should not exceed the contract ceiling. If amounts exceeding the ceiling are in dispute, or if you have requested that the contracting agency increase the contract ceiling, please include the amounts in the " Contract Limitations" column and provide an explanation in a footnote. 7.Indicate those contracts for which work effort was physically completed during the fiscal year claimed. (Complete Schedule O for these contracts.) Shortly after the final agreement on rates, you will need to submit final vouchers on these completed contracts. 8.Hidden rows have been inserted that will allow for automatic adjustment of the column totals when additional rows are inserted. 9.LINK CONTRACT DATA FROM SCHEDULES H & K TO THIS SCHEDULE Linked to Other Worksheet Current Year Contract Costs, Schedule H and K Cell Contains a Formula Formulas calculate Total and Net Cumulative Claimed and or Settled Amounts Cell Contains a Formula With Links None Prior Years HIGH TECH JAMS, INC. OWINGS MILLS, MD Schedule of Cumulative Direct and Indirect Costs Claimed and Billed by Contract and Subcontract Fiscal Year End - 12/31/2013 Unsettled/Claimed Direct And Indirect Costs Using Claimed Total Less Prior Year Current Year Cumulative Contract Costs Costs FYE Settled or Limitations FYE Note (4) Claimed Note (4) Note (5) Net Cumulative Settled or Claimed Note (6) PV No. RECHECK FORMULAS Cumulative Billed (Manual Entry) Date Cost Billed Amount Through 4,258,035 9,324,982 SCHED H SCHED H Cost Type & Flexibly Priced: 8,898,748 10,372,105 (note 1) 23,783 7,124,538 N00600-09-C-9899 57133 Yes 1,533,370 3,533,577-9,324,982 35 12/31/2013 9,105,770 (219,212 ) 10,078 10,078 N02300-10-C-1234 57144 Yes - 1,473,357 10,372,105 48 12/31/2013 9,973,544 (398,561 ) - - DAA36-08-C-1389 57203 Yes 2,350,755 4,750,000 26,831,703 7,124,538 108 6/30/2013 6,933,590 (190,948 11,738,087 18,238,087 ) UNALLOWALE TRAVEL 57000 Yes 3,409,416 5,944,749 SCHED K 10,078 (10,078 ) - - - - - - Subtotal-Time Subtotal-Cost & Flexibly Material Contracts - - 24,182,836 26,831,703 26,012,904 (818,799) Priced Contracts 24,182,836 Total- Cost/Flexibly Priced and Time & Material Contracts 51,014,539 51,014,539 50,092,484 (922,055) PREPARATION NOTES: 1. Cost and flexibly priced contracts should be sorted and subtotaled by Federal Agency if you perform work for both DoD and Over (Under) Billing SCHEDULE I ICE (version 2.0.1c) Rebates/Cre dits other non-dod (civilian) agencies. Provide details in the same level for billing costs (e.g. by delivery order, etc.). 2.FAR 42.709 implements 10 USC 2324(a) - (d) and 41 U.S.C. 256(a) through (d) which requires that penalties be assessed if a contractor claims a cost in an indirect cost Page 19 of 29 19
More Special Items Other Income Items on the P&L Statement Rental Income Income From Employee Activities Purchase Discounts Tax Return Schedule M Adjustments Depreciation Differences Non-Deductible Items Officer s Life Insurance The Rest of the Audit - Fieldwork Based on the review of the key submission schedules the auditor will Plan the Audit Getting Supervisory Approval Will provide a listing of Documents to Be Reviewed Invoices, Entries Other Supporting Documentation More Fieldwork Request Detailed Transaction Listings By Account Selected For Review and Then Supporting Documentations for Selected Entries Invoices Purchase & Payment Approvals Purpose of Purchase or Proof of Services Rendered Proof of Payment Cancelled Checks Page 20 of 29 20
More Fieldwork Consulting Agreements Copy of the Consulting Agreement Description of Services Rendered Consultants Work Product Other Proof of Services Rendered Based on a Recent MRD May be Able to Reduce Documentation Required Where Services are Readily Apparent Accounting/Audit Services More Fieldwork Legal Fees Access to Billings Setting Forth Detail of the service Performed Purpose is to Insure Allowability Unallowable Costs Merger & Acquisitions Bid Protests Defense of Fraud Investigations Obtaining Patents Obtaining Lines of Credit More Fieldwork Business Development Potential Unallowable Costs Entertainment Golf & Sporting Events Trade Show Display Fees Undocumented Travel or Business Meals Unsupported Costs Lobbying Advertising Page 21 of 29 21
More Fieldwork Labor Both Direct & Indirect Labor Distribution Reports By Contract /Cost Objective Time Records/Time Sheets Journals Entry Transfers Policies & Procedures Employees Account for All Time Total Time Accounting Paid or Uncompensated Necessary for Equitable Allocation of Labor Cost to Cost Objectives More Fieldwork Labor Costs Selection of Employee s Time From Labor Distribution Report or From Detail Labor from Billing File Trace To Time Sheets or Time Entry in the System To Actual Payroll Journals and Payment Showing Withholdings and Payroll Taxes Check # or Evidence of EFT Payment More Fieldwork Labor Costs More Verification Trace Individual Net Payroll to Proof of Payment Cancelled Check Proof of EFT Possibly to the Bank Statement Employee Proof W-4 Company Picture ID Driver s License Page 22 of 29 22
More Fieldwork Labor Costs Still More Floor-check Discussions with Employee Concerning Work Performed Knowledge of What was Done Relationship to the Job Charged Supervisory Involvement Directed Charge? More Fieldwork Labor Costs Floor-Checks Always Possible at any time When the Auditor is Present for Other Purposes As Part of the Incurred Cost Audit or A Separate Surprise Audit by the Auditor Usually Preceded by a request for Personnel Rooster by Location Auditor will Interview Pre-selected Employees Will Not Provide a List of Employees in Advance More Fieldwork Labor Costs More on the Floor-Check Questions to Employee Concerning Completion of Time Report on Input into System Are Changes Directed by Management/Supervisors Have you Been Requested to Change your Time Entries? By Management Supervisor Did you Charge Time to A Job that You were not working on? Why? Page 23 of 29 23
More Fieldwork Labor Costs Still More on The Floor-Check Auditor Will Request Copies of the Labor Distribution Report for the Period covered By the Floor-Check Will Trace the Time Charge of the Employee Floor- Checked to the Labor Distribution Report Now More Labor Related Items More Fieldwork Labor Costs Testing the System Policies & Procedures How Job Charge Number are Assigned How Payroll Is Processed Instructions to Employees Complete Time Entry At the End of the Day or End of the Job Whichever Comes First Signing or Approval Code Process and Supervisory Approval Employee Handbook Human Relations Policies & Procedures More Fieldwork Labor Costs Compensation How is Reasonableness/Salary Level Determined Special Attention to Owners, Executives Particular Attention to Compliance with Salary Caps Also Applies to ALL Positions (Refer to Discussion Earlier) Are Employees Actually Working Are Salaries Below the Cap Reasonable? Special Analysis of Executive Compensation Reasonableness Page 24 of 29 24
More Fieldwork Labor Costs Additional Effort on T&M/Labor Hour Contracts Trace Hours Billed By Billing Category To Labor Distribution Reports To Employee Payroll Payment Employee Job Title Function Qualifications Insure Employee Meets the Minimum Qualifications Set Forth In The Contract More Fieldwork Labor Costs Efforts Related to IRS Form 941 Review of The Reconciliation Schedule L Trace Payments of Withholding Taxes Proof of EFT Payment/Deposit Reconciled to Payments Claimed on the 941 Including Tracing to Bank Statement Could be Problematic if Part of Consolidated Single Payer Account Paid as Part of Corporate Wide Payroll Or if Employees are leased Fieldwork on Other Issues Supporting Documentation Must Provide the Auditor With Supporting Documentation Failure to So Do Will Result in Cost Disallowance Never Comment that You Do Not Have Any Documentation Reserve the time to do more searching Copies of Missing Invoices Can Always be Gotten with A Call to the Vendor Don t Give Up Page 25 of 29 25
Fieldwork on Other Issues Healthcare Review of Premium Costs Be Prepared to Demonstrate that Cost for Premium & Benefits for Ineligible Dependents or Others Are excluded from Claimed Costs Field Work Completed Indirect Rates Are Computed Preliminary Audit Findings Are Discussed Workpapers Are Submitted for Internal Review Once Reviewed Exit Conference is Scheduled Government Staff Usually in Attendance Auditor Supervisor Contracting Officer Field Work Completed Contractor Given the opportunity to Provide Written Comments Additional Support Disagree with Proposed Disallowances Providing Support for their Position FAR References Agency FAR Supplement References Case Law Remember Auditors Do Not Negotiate Page 26 of 29 26
Field Work Completed Auditor May Adjust Recommended Rate Issue a Final Rate Determination Letter For Contracts With DoD and Other Agencies Or Some Other Agencies Receive a Report of Recommendations The Agreement is Negotiated with the Contracting Officer But You Don t Agree Now What Rate Agreement or No Rate Agreement Contractor Agrees Sign the Rate Letter Submit a Revised Schedule I Submit Billing Adjustments Within 60 Days Rate Agreement or No Rate Agreement Contractor Disagrees At anytime During the Audit If You Indicate You Disagree, or You Have No Supporting Documentation That the Auditor Considers to Be Adequate DCAA will Issue A DCAA Form 1 Suspending Payment Collecting the Disallowed Cost From You Next Payment, if the Contract is still active If Not Active the ACO may begin the Collection Action Page 27 of 29 27
Rate Agreement or No Rate Agreement But We Don t Agree Hire Legal Counsel Appeal to the Contracting Officer If Unable to Reach A Satisfactory Agreement Turn the Matter Over to Legal Counsel File an Appeal with the Appropriate Board of Contracts Appeals Under the Provisions of the Contract Disputes Act So We Are Done Now What? Penalties May Be Assessed On Claimed Expressly Unallowable Costs At Up to 300% of Unallowable Costs That Would Have Been Recovered On Cost Plus T&M Contracts (G&A) applied to ODC s Fixed Price Incentive Contract After Consideration of Amounts Over Contract Ceilings Almost Done Review Open Unaudited Year s Incurred Cost Proposals For Similar Disallowances If Claimed Withdraw the Proposal Immediately Remove Unallowable Costs & Resubmit Will Avoid Penalties Page 28 of 29 28
Now We Are Done Put Those Files Away Questions??? Go O s & Ravens Page 29 of 29 29