 |
 |
||
 |
 |
||
|
|||
|
|
Government Contract Consulting Compliance Risk Issues for Calendar Year 2007 The following guide represents high risk issues that, in our opinion, will be of special importance to auditors and other procurement officials during the CY 2007. This high risk issue listing is based on our consulting experience during CY 2006 coupled with trends in the government contracting business that we believe will generate more oversight in a variety of functional and cost arenas. Cost Allowability and Accounting Practices Professional and Consulting Costs – Government audit oversight will continue the task of determining that costs for professional/consulting services are adequately documented. This item was on our high risk listing last year, and remains a likely area of cost that will precipitate audit scrutiny during 2007. The focus will be on determining if contractors are maintaining adequate supporting data to demonstrate purpose and reasonableness of professional fees and that such fees do not contravene law or regulations. Of special concern will be consulting arrangements that retainer agreements, where engagement scopes may be broad in nature, and fixed monthly/annual amounts are paid, rather than amounts calculated on a time and material basis. Because retainer agreements often include lobbying, political, broadly targeted advertising, or other tasks that raise the risk of unallowable costs being charged to government contracts, more emphasis is placed on determining the types of tasks actually performed, and if the contractor has excluded invoiced costs for those unallowable tasks. Contractors should also ensure that adequate documentation is maintained, as specifically required by FAR 31 Cost Principles, to include a consulting agreement, adequately documented invoices, and a work product if applicable. (Ref. FAR 31.205-33). Organization Costs – Because of the on-going American business “hobby” of buying and selling companies, restructuring company ownership, and raising capital for new organization enterprises, auditors will continue to focus on contractor “organization” functions and costs. Costs incurred for these activities are expressly unallowable. Contractors engaged in planning and executing any activity that is designed to change ownership structure should be capturing all costs separately in their cost accounting records. For example, all contractor employees engaged in these functions to record their labor hours to separate accounts/cost codes and to exclude labor and all associated support costs (fringes, facilities, etc.) from billings and bids subject to FAR Part 31 cost principles. It is especially important that personnel extensively involved in these activities, such as executives, financial, human resources, and legal professionals, be made aware of this requirement and avert the specter of penalties for including expressly unallowable costs in final indirect rates. (Ref. FAR 31.205-27). Executive Compensation – Wages and other compensation paid to senior executives was also on our 2006 high risk list, and remains on the 2007 list since auditors continue to aggressively audit reasonableness of executive compensation. Audit emphasis/reviews of executive compensation are not exclusive to large contractors; auditors are also ramping up evaluations of small contractors’ executive compensation, and are questioning these costs based on reasonableness parameters. DCAA utilizes a variety of national salary surveys to gage the allowability of those costs. The best defense to reasonableness challenges is to annually evaluate compensation levels using viable wage survey information of the contractor’s choosing, and to maintain that market survey data as evidence of reasonableness wage-range parameters established for the contractors managers and executives. (Ref. FAR 31.205-6). Establishing a Job Cost System – Many of our clients having a first time experience with government procurement this past year have found that lacking a job cost segregation system in place, or a proposed system ready to go with that first government contract, has created heartaches and headaches. Most of these companies were audited for the first time by DCAA and did not know that a chart of accounts, project cost system, and other supporting systems would, at a minimum, have to be demonstrated before a clean audit report would be issued. We have seen, this past year, no less than ten companies new to the government contracting environment where procurement officials have held up award of contracts until a compliant cost accounting system could be demonstrated. The message here is to be pro-active, rather than reactive, in getting financial and operational systems in place. Consistency in Allocating Direct vs. Indirect Costs – Although a very basic principle, we have seen some companies ignore the requirement for consistently allocating direct and indirect costs, incurred for the same purpose in like circumstances. References to this concept can be found in CAS 402, FAR 31.202(a), and FAR 31.203(b). An example of this requirement would be where contract administrators sometimes charge contract duties as direct contract labor and in other cases charge G&A, when the functions performed in both cases are the same. We believe that there will be more emphasis in compliance with this principle, especially in companies with customer site projects where customers require the charging and billing of certain labor activities as direct labor, when it is the contractor’s ordinary practice to charge such functions as indirect. Statistical Sampling Techniques for Capturing Unallowable Costs – Government contractors are now permitted to use statistical sampling techniques in identifying and segregating unallowable costs, as specified in FAR 31.201-6. Before you abandon your old method of identifying individual transactions as they are posted, you should be aware of a couple of potential problems before employing statistical sampling methods. First, you’ll need to know what you’re doing. Implementing an acceptable sampling technique requires knowledge in sampling methods, software uses that are adaptable to your cost accounting transaction data and competence in how to project sampled results. Second, you must get prior approval from the ACO in the form of an advanced agreement, and DCAA auditors must be afforded the opportunity to review your proposed sampling techniques. Bottom line, you must demonstrate to the government that your statistical sampling method is a technique that will fairly extract unallowable costs, or your proposal will be rejected. We recommend that our small clients stay away from this method and stick with the individual transaction identification process. Pricing Defective Pricing – Continuous emphasis should be given to assure that bid proposal practices are based on sound estimating guidelines, and that those guidelines are consistently applied. Special emphasis is placed on ensuring that proposed costs are consistent with the accounting system; if changes to accounting practices are required due to procurement mandate, potential change should be first discussed with procurement, and if included in proposal, so disclosed. Other Companies with Government Work in Iraq – Any contractor with significant dollars being passed to the government via contracts/subcontracts for work in Iraq will be high on the risk and audit list of government auditors. Congressional leaders and the American news media have, over the past few years, brought several purported billing improprieties by Government contractors to national attention. Because of the high visibility of such reported issues, we believe that auditors will continue to keep all government contractors with work in Iraq on the “high risk” list. Contractors most likely to reap the effects of more in-depth audit testing are those with:
Incurred Cost Submissions – Requirement for timely submission of incurred cost submissions (NLT 6 mos. after FY end) is still high on DCAA radar screen. Contractors should notify, in writing, ACO/DCAA of late submission, and request an extension before the deadline has passed. Auditors want to get these submissions queued up for audit so they can expedite process of timely contract/subcontract closeouts and de-obligation of funding. More emphasis is also placed in providing within the incurred cost submission all the schedules and information listed in the sample DCAA ICES model. If incurred cost submissions are repetitively late, auditors are now more likely, than in years before, to repeal any direct billing privileges and suspend billed costs until corrective action has been taken to ensure these proposals are prepared timely. Policies and Procedures – We continue to emphasize all of our clients, large and small, to have documented policies and procedures that address key government regulatory requirements. Auditors continuously insist that written procedures be in place for certain cost accounting practices. Principle procurement areas for which policies and procedures are a must are:
For more information, please contact us. Also see: |
|
Our Services
___________ |
