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Incurred Cost AuditsThe Process, What to Expect, & How to Survive
Presented by Norman J. Lorch, CPA
Norman J, Lorch, Chartered© Copyright Norman J. Lorch, Chartered
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, Chartered is prohibited.
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
Page 1 of 29
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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
© Copyright Norman J. Lorch, Chartered
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)
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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
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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© Copyright Norman J. Lorch,
Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
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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
© Copyright Norman J. Lorch, Chartered
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 SettledMeaning That Over & Under Billings must be
corrected to reflect the Settled Rates & Any Audit Adjustments to Direct Costs Billed
© Copyright Norman J. Lorch, Chartered
Page 7 of 29
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
Page 8 of 29
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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
© Copyright Norman J. Lorch, Chartered
Cost Principles
• Allowability– Reasonableness– Allocability– CAS– GAAP– Contract Terms– Part 31 of the FAR
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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Specifically Unallowable Costs
• Public Relations and Advertising• Bad Debts• Contingencies• Contributions and Donations• Entertainment• Fines, Penalties and Mischarging Costs• Interest
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Specifically Unallowable Costs (Continued)
• Losses on Other Contracts• Organization Costs• Goodwill• Alcoholic Beverages• Costs resulting from a “Step-up” in Basis
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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© Copyright Norman J. Lorch,
Chartered
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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
© Copyright Norman J. Lorch, Chartered
Partially Unallowable Cost (Continued)
• Rental Costs• Taxes
– Fines and penalties– Federal Income Taxes– Deferred Tax Expense– Allowable include
• State Income Tax
• Travel (Next Screen)© Copyright Norman J. Lorch,
Chartered
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
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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)© Copyright Norman J. Lorch,
Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
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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
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And the Walk-Through Continues
• CAS Compliance– If CAS Covered
• Full Coverage– Disclosure Statement
• Modified Coverage
– If, Not, Why Not?• Exempt Small Business
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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© Copyright Norman J. Lorch,
Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
The Sensitive Accounts
• Direct & Indirect Labor• Executive Compensation• Business Development• Marketing• Travel• Professional Development/Business Conferences• Consulting• Legal & Professional Fees
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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SCHEDULE B
ICE (version 2.0.1c)
General and Administrative (G&A) Expenses (Final Indirect Cost Pool)
RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULETOTAL PER G/L,
F/SACCOUNT
NUMBER DESCRIPTION Amount & TRIAL BAL. ADJUSTMENT CLAIMED NOTES ReferenceAcct Balances
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
HIGH TECH JAMS, INC. OWINGS MILLS, MD
General and Administrative (G&A) Expenses Fiscal Year End - 12/31/2013
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 BOfficer Compensation 952,652 952,652
6030 Advertising 53,567 53,567 53,567 -6040 Advertising - Help Wanted 3,987 3,987 - 3,9876050 Amortization of Goodwill 8,400 8,400 8,400 -6060 Auto & Delivery 18,762 18,762 2,500 16,2626070 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 15,4886120 Consultants 10,876 10,876 10,8766130 Contributions 5,500 5,500 5,500 -6140 Depreciation 727,626 727,626 727,6266160 Dues & Subscriptions 11,828 11,828 1,250 10,5786165 Employment Agency Fees 15,890 15,890 15,8906175 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
SCHEDULE B
ICE (version 2.0.1c)
General and Administrative (G&A) Expenses (Final Indirect Cost Pool)
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
HIGH TECH JAMS, INC. OWINGS MILLS, MD
General and Administrative (G&A) Expenses Fiscal Year End - 12/31/2013
IR & D Labor (Sum SCH H)
RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE ACCOUNTAcct Balances TOTAL PER G/L, F/S
NUMBER DESCRIPTION Amount & TRIAL BAL. ADJUSTMENT CLAIMED NOTES Reference
6275 Insurance 65,098 65,098 65,0986285 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 37,9086320 Permits & Licenses 4,500 4,500 4,5006325 Professional Seminars & Conventions 35,433 35,433 35,4336330 Trade Shows & Training - Domestic 100,000 100,000 35,000 65,0006331 Trade Shows & Training - Foreign 65,000 65,000 - 65,0006335 Property Taxes 36,120 36,120 36,1206340 Rent 66,390 66,390 66,3906350 Resort Vacation House For Employees / G 5,500 5,500 5,500 -6375 Telephone 40,577 40,577 5,000 35,5776385 Employee Awards 21,877 21,877 - 21,8776395 Travel 32,680 32,680 32,6806405 Travel - Executive Travel Expenses 125,253 125,253 125,2536430 Utilities 12,805 12,805 12,8056455 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
Intermediate Allocations: ADD: Fringe Allocation Fringe
SUBTOTALIR & D Mat'l,Trvl,ODC(Sum SCH H)
D
IR & D Overhead(Sum SCH H & SCH E) B & P Mat'l,Trvl, ODC(Sum SCH H)
1
B & P Labor (Sum SCH H)B & P Overhead(Sum SCH H & SCH E)
1
TOTAL G & A EXPENSE POOL
814,175 (11,564) 802,612
5,635,428 6,449,603 530,052 5,896,424- -
375,833 375,833204,002 (8,118) 195,884
- -177,530 177,530
96,363 (3,834) 92,529-
7,303,331 518,100 6,738,200
SUM SCHE
SUM SCHE D
SUM SCHE DSCHED
SUM SCHE D
SUM SCHE D
SUM SCHE DSCHED
ACCOUNT Acct Balances TOTAL PER G/LNUMBER DESCRIPTION Amount & TRIAL BAL/FSADJUSTMENTS CLAIMED Notes Ref.
Schedule C is linked to the following schedules:
Schedule D(x)
5010 Advertising - Help Wanted 23,534 23,534 23,534
5030 Auto & Delivery 19,788 19,788 19,7885040 Computer Supplies 32,333 32,333 32,333
5050 Consultants 82,500 82,500 82,5005060 Depreciation 125,473 125,473 125,4735080 Dues & Subscriptions 4,500 4,500 4,500
5140 Employment Agency Fees 3,500 3,500 3,5005150 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 13,6585220 Overhead B&P Expenses 22,456 22,456 22,4565230 Relocation Expenses 24,000 24,000 12,000 12,000
5240 Rent 337,550 337,550 127,466 210,0845250 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
SCHEDULE C (1)ICE (version 2.0.1c)
ICE MANUAL
4,758,380 (67,584) 4,690,796
7,505,932 164,359 7,206,405
RECHECK FORMULAS AND LINKS AFTER COMPLETING SCHEDULE
ADD: Fringe Allocation
Total Overhead Pool
Fringe
HIGH TECH JAMS, INC. OWINGS MILLS, MD
LABOR OVERHEADFiscal Year End - 12/31/2013
Overhead Expenses (final indirect cost pool)
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© Copyright Norman J. Lorch, Chartered
© Copyright Norman J. Lorch, Chartered
Less Net
To Penalty ClauseNote (2)
SettledTotalCostsNote (3)
Prior Year Costs FYE
Note (4)
Current Year Costs FYE
Note (4)
Cumulative Settled or Claimed
Contract Limitations
Rebates/Credits
Note (5)
Cumulative Settled or
Claimed Note (6)
Order No.
PV No.
Contract No. Subcontract #
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 settlement proposal which is expressly unallowable. See Far 42.709 for applicability.
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,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
None
Cumulative Billed (Manual Entry)
Schedule I is linked to the following schedules: Schedule H, Contract Costs
Schedule K, T&M
ICE MANUAL
SCHEDULE IICE (version 2.0.1c) RECHECK FORMULAS
Schedule of Cumulative Direct and Indirect Costs Claimed and Billed by Contract and Subcontract
Unsettled/Claimed Direct And Indirect Costs Using
ClaimedPrior YearsSubject Total
Fiscal Year End - 12/31/2013
Cell Contains a Formula With Links
HIGH TECH JAMS, INC. OWINGS MILLS, MD
Date Cost Billed Through
Amount Over (Under) Billing
SCHED H SCHED H
Cost Type & Flexibly Priced:
(note 1)
N00600-09-C-9899 57133 Yes 1,533,370 3,533,577 - 9,324,982 35 12/31/2013 9,105,770 (219,212)
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 7,124,538 108 6/30/2013 6,933,590 (190,948)
UNALLOWALE TRAVEL 57000 Yes 10,078 (10,078)
- -Subtotal-Cost & Flexibly Priced Contracts
26,831,703 26,012,904 (818,799)
SCHED K
Time & MaterialF33657-09-C-1458 0020 Yes 6,500,000 18,238,087 57 12/31/2013 18,185,129 (52,958
)
M0065-11-C-0028 0001 Yes 2,535,333 5,944,749 25 12/31/2013 5,894,451 (50,298)
- -
- -
- -24,079,580 (103,256)
4,258,035 9,324,982
8,898,748 10,372,105
23,783 7,124,538
10,078 10,078
- -26,831,703
SCHED K
11,738,087 18,238,087
3,409,416 5,944,749
- -
- -
- -24,182,836
Subtotal-Time & Material 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
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
More Fieldwork
• Legal Fees– Access to Billings Setting Forth
• Detail of the service Performed• Purpose is to Insure Allowability
– Unallowable CostsMerger & Acquisitions Bid ProtestsDefense of Fraud InvestigationsObtaining PatentsObtaining Lines of Credit
© Copyright Norman J. Lorch, Chartered
More Fieldwork
• Business Development – Potential Unallowable Costs– Entertainment– Golf & Sporting Events– Trade Show Display Fees– Undocumented Travel or Business Meals– Unsupported Costs– Lobbying– Advertising
© Copyright Norman J. Lorch, Chartered
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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© Copyright Norman J. Lorch,
Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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?
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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?
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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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
© Copyright Norman J. Lorch, Chartered
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”
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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Fieldwork on Other Issues
• Healthcare – Review of Premium Costs
• Be Prepared to Demonstrate that– Cost for Premium & Benefits for Ineligible
Dependents orOthers
– Are excluded from Claimed Costs
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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© Copyright Norman J. Lorch,
Chartered
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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
© Copyright Norman J. Lorch, Chartered
Rate Agreement or No Rate Agreement
• Contractor Agrees– Sign the Rate Letter– Submit a Revised Schedule I– Submit Billing Adjustments Within 60 Days
© Copyright Norman J. Lorch, Chartered
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© Copyright Norman J. Lorch,
Chartered
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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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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
© Copyright Norman J. Lorch, Chartered
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