GCS-224: Surviving DCAA Audits with GCS Premier
Presented by:
Nicole Mitchell, Aronson & Company
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Agenda
• Government Contract Audits and the Role of DCAA and DCMA
• Basic Attributes of a Government Approved Accounting System
• Overview of Indirect Rates
Government Contract Audits and the Role of DCAA and DCMA
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Defense Contract Audit Agency (DCAA)
• Defense Contract Audit Agency
– Consists of approximately 4,000 people located at more than 300 field audit
offices throughout the United States, Europe, and in the Pacific.
– Provides standardized contract audit services for the Department of Defense,
as well as accounting and financial advisory services regarding contracts and
subcontracts to all DoD Components responsible for procurement and
contract administration.
– Services are provided in connection with negotiation, administration, and
settlement of contracts and subcontracts.
– DCAA also provides contract audit services to some other Government
Agencies.
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Defense Contract Management Agency (DCMA)
• DCMA – “Your indispensable Acquisition Partner”
• The Defense Contract Management Agency (DCMA) is the Department
of Defense (DoD) component that works directly with Defense suppliers
to help ensure that DoD, Federal, and allied government supplies and
services are delivered on time, at projected cost, and meet all
performance requirements. DCMA directly contributes to the military
readiness of the United States and its allies, and helps preserve the
nation's freedom.
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Defense Contract Management Agency (DCMA)
• DCMA professionals serve as "information brokers" and in-plant
representatives for military, Federal, and allied government buying agencies --
both during the initial stages of the acquisition cycle and throughout the life of
the resulting contracts.
• Before contract award, DCMA provides advice and services to help construct
effective solicitations, identify potential risks, select the most capable
contractors, and write contracts that meet the needs of our customers in DoD,
Federal and allied government agencies.
• After contract award, DCMA monitors contractors' performance and
management systems to ensure that cost, product performance, and delivery
schedules are in compliance with the terms and conditions of the contracts.
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• The specific types and reasons for audits are numerous, but non-major contractors will generally be limited to the following audits:
– Pre-award
– Forward Pricing
– Indirect Cost Rate
– Labor Cost
– Cost Accounting Standards Compliance
– Billing
– Defective Pricing
– Business System Reviews
Government Contract Audits
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Key Business Systems
DCAA DCMA
• Accounting
• Compensation
• Labor & Timekeeping
• Indirect & Other Direct costs
• Billing
• Purchasing
• Material Management & Accounting
• Estimating
• Planning & Budgeting
• Information Technology
• Accounting
• Estimating
• Purchasing
• Earned Value Management
• Material Management and
Accounting
• Property
• DFARS Case 2009-D038 new ruling
identifying systems
Basic Attributes of a Government Approved Accounting System
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What is an Approved Accounting System?
A government contractor’s accounting system that:
– Is adequate for accumulating and billing costs on Government
contracts
• This requirement varies based on the type of contract work is performed under (ie,
FFP, T&M, CPFF)
– Can record, process, summarize and report in a manner consistent
with Government contract laws and regulations
• In accordance with Federal Acquisition Regulations, DFARS, Cost Accounting
Standards
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• Typically the initial review, this may not encompass the entire accounting system,
but does incorporate the requirement of the contract triggering the review.
• Used to determine compliance with cost principles and accuracy of
underlying data used to estimate cost and contractor’s ability to perform
under the proposed contract
– In many cases the contractor will be required to certify that it has disclosed current,
accurate, and complete cost and pricing data.
– May not only focus on the ability of the accounting system, but also be expanded to
verify financial capabilities of the contractor
• Standard Form 1408 is used for the pre-award survey
– Link to the Standard Form 1408
http://acquisition.gov/far/current/html/FormsStandard41.html
Pre-Award Survey of a Prospective Contractors Accounting System
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• Segregation of direct costs from indirect costs
• Identification and accumulation of direct costs by contract
• A logical and consistent method for the allocation of indirect costs to
intermediate and final cost objectives
• Accumulation of costs under general ledger control
• A timekeeping system that identifies employee labor by intermediate or
final cost objectives
• Interim (at least monthly) determination of costs charged to a contract
through routine postings of books of accounting
Basic Attributes of a Contractor’s Accounting System
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• Exclusion from costs charged to government contracts which are not allowable
in terms of FAR 31, Contract Cost Principles and Procedures, or other contract
provisions
• Identifications of costs by contract line item and by unit, if required by the
proposed contract
• Segregation of pre-production costs from production costs including estimating
• Accounting systems must be able to provide financial information:
– Required by contract clauses concerning limitation of cost or limitation on
payment.
– Required to support requests for progress payments.
Basic Attributes of a Contractor’s Accounting System
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Segregation of Costs – Establishment of a Chart of Accounts
Account Numbers Account Type
• Sequence XXXX-XXX-XX
• Initial for numbers is the base
account.
• SFX Contracts, Direct Costs
• 0500 Fringe
• 0600 Overhead
• 0700 G&A
• 0800 Service Center
• 0900 Unallowable accounts
• C – Contract, Direct Cost
• I – Indirect Cost, Excluding Labor
• L – Indirect Labor, excluding B&P
and IR&D
• P – Bid & Proposal Costs
• R – Independent Research &
Development
• U – Unallowable
• S – Service Center
• O - Other
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Segregation of Unallowable Costs
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Accumulation of Direct Costs by Contract
• Reports to provide information and details as required by the contract
• Contract Revenue Summary
• Contract Cost Summary
• Job Status Report
• Labor Detail
• ODC Detail
• The contract costs must be captured at the same level of detail proposed
in the contract and required for progress payments
• Open new tasks to separate option periods
• Set up contracts to track limitations
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Tracking of Limitation of Costs
Tracking Ceiling on Indirect Rates
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• Employees must be properly trained and informed on how to fill out their
timesheets.
• Every employee must know their Labor Codes and Project Numbers to
charge both direct and indirect.
• Record time daily.
• Employees must properly document any changes.
• Timesheets - completed & signed by the employee.
• An approval system must be in place.
• Employers should perform internal checks to ensure the timesheets are
being completed properly.
Timekeeping
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Timekeeping Controls
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Indirect Rates
Calculate Indirect Rates
• A logical consistent method for the allocation of indirect costs to
contracts
• An indirect cost rate percentage is calculated using the pools and
bases calculated
– Indirect Cost Pool – A grouping of costs incurred with multiple cost
objectives. (numerator)
– Indirect Cost Basis of Allocation – The factor used to allocate or divide up
the indirect costs. (denominator)
• POOL divided by the BASE = percentage
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Indirect Cost Pools
FRINGE
• Fringe expense is either statutory (FICA, FUTA, SUTA, Workers'
Compensation, etc.) or discretionary (insurance, holiday, sick, etc.)
benefits paid on behalf of employees and are generally a percentage
of wages or some fixed amount. Currently leave, FICA and 401K
contributions are the significant costs in the pool. Fringe is computed
as a percentage of all labor both direct and indirect.
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Indirect Cost Pools
• OVERHEAD
• Overhead pool is composed of costs that support the contract
personnel that are assigned to contracts and are not directly billed. The
significant cost in this pool is the facilities allocation, which is comprised
of rent expense, office supplies/expenses. The overhead labor and
performance based bonus for direct and overhead personnel are the
other predominate costs in this pool. The base of the Overhead pool is
Direct Labor and the related fringe in addition to the B&P labor and
fringe.
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Indirect Cost Pools
• GENERAL AND ADMINISTRATIVE
• G&A expenses are indirect expenses that can not be attributed to any specific
contract or division but are for the general benefit of all contracts. Expenses for
general accounting, finance, benefit administration, business development, and
general management that can not be directed traced to a given contract are
collected in the G&A pool.
• Bid and Proposal costs are considered G&A costs because they will benefit the over
all business and increase the G&A base, if awarded. Because persons that would
normally be charging direct labor on contracts often work on proposal efforts, the
B&P labor is burdened with local overhead so as to not effectively raise the overhead
rate charged against their contract because of the loss of direct labor.
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Indirect Cost Pools
• General and Administrative (continued)
• G&A expenses are typically allocated to contracts as a percentage of
total cost and the base consists of direct labor and it’s associated fringe
and overhead allocation, subcontractors, equipment & software, and
other direct costs.
• Direct Labor
– Labor cost specifically identified to a contract.
• Indirect Labor
– Overhead
• Labor of employees, who normally charge direct on a contract, incurred for non-
direct functions, such as a company meeting or training.
– General & Administrative
• Contract Administration
• Accounting & Human Resources
• Executive Management
Direct vs. Indirect (Labor Example)
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• Indirect costs Allocation (benefit)
– Fringe – Total Labor
– Overhead – Direct Labor
– G&A – Total Costs
•Descriptions of the contents of pools and bases should be documented
•See the Attached Company-wide Statement of Indirect Rates
Allocation of Indirect Costs
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Indirect Cost Allocation Considerations
• Does the allocation result in a reasonable proportion of the costs to
each division/to the government?
• Do the calculations appear accurate?
• Do the rates calculation account for all allowable costs of the
organization?
• Are the allocations consistent?
• Is your budget consistent with the results of the allocation?
• Do you have a system in place to automatically update the rate
calculations?
• Do the rates calculations have limitations?
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• Submit budget with proposed provisional rates
• Receive provisional indirect rate letter
• Prepare invoice using provisional rates
• Submit incurred cost submission
• DCAA Audit
• Submit final billing using actual audited rates
Indirect Rate Reimbursement Process
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Questions?
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