Overview - Paul, I am an audit consultant doing some benchmarking. I came across your web site via a web search. You have a lot of useful information on your site. Might you be able to provide some guidance on the following 5 queries?
1. Query: When the DCAA reviews a contractor’s financial system on a pre-award basis, do they general review all modules of the system, i.e., everything from A to Z (Accounts Payable, Payroll, GL, Fixed assets, Timekeeping, etc.) or just segments thereof?
Response: The areas of focus by the DCAA vary depending on the government procuring office or a prime contractor’s request. The pre-award audit can be a general overview of the accounting system to determine if the prospective contractor can track, record, and invoice at the level of detail required for a “specific contract”.
It can also be a detailed review of the same accounting system and/or a financial capability review. A financial capability review is to provide the government a comfort level that the prospective contractor is not heading toward serious financial difficulty and therefore minimizes the exposure of loss to the government.
There are other types of pre-award as well as post-award reviews that can be requested. But the Accounting System and Financial Capability are the two that are typically requested of small businesses, with the former being the most requested.
You can browse through our online community to find out more on this through various articles. For a more in-depth review of these pre-award audits/review you can also look at the “Information for Government Contractors” pamphlet (see “Recommended Links” on our online VIP community website homepage and click on DCAA).
2. Query: For such pre-award reviews, what is the range of time (total hours) that the DCAA expends?
Response: Again, the time can vary widely depending on the request and the condition of a contractors records and documented policies. I can say that for an accounting system basic review there may be a goal of 24-30 hours to begin. If adequate records or policies are not in place, an auditor may decide to so report the condition and not proceed with the planned review/audit until adequate information/records are available.
3. Query: In preparation for a pre-award review, how much time might the contractor’s Internal Audit people expend reviewing the system (to find deficiencies/exceptions before the DCAA does)?
Response: I must be honest here also. It depends! There are some basic guidelines that can be followed internally to minimize DCAA concerns and to improve chance of passing the review/audit with an acceptable accounting system. A basic understanding of the “Concepts” is critical and required by an internal or external audit/accounting person to minimize time, confusion, frustration and cost. Next, the condition of the contractors’ current accounting system and documented policies will determine the time/effort required to move the firm to meeting the requirements.
The encouraging news? Understanding the “Concepts” is doable! That has been and continues to be why I stress the concepts in our classes and why I produced a 4 set DVD of the Live Training Class.
So that anybody, and I mean anybody, that is serious about government contracting, can have at their disposal some of the most effective, high quality training and tools available to them, affordably.
4. Query: During the pre-award review, how much time might the contractors Accounting, IT, Purchasing or other staff people be called upon to support the DCAA auditors, i.e., gather documents, run reports, respond to queries?
Response: See item discussion above. You see, in many small firms, the functional activities you describe are often performed by the same people. In larger established small firms where there is the luxury of having separate people perform these functions, it is important that they all meet and understand/discuss the requirements and determine where they are at and where they “Need to Be” to meet expectations. I touch on this in my classes and on DVD under the “Psychology of Success” section.
5. Query: For all the above, would the quantity of time be proportion to auditable dollar volume (ADV)?
Response: It could be. But it could depend on a contracting officer or prime contractors comfort level and/or experience with the contractor. Although ADV is a strong consideration it is not the only one. It could depend on the experience of the auditor themselves. Generally, the higher the ADV the greater the risk to the government or prime.
However, lower ADV can be just as dangerous. For example: A contractor may bid and win on many small ADV opportunities. By themselves they may seem small, but together the potential exposure could be large.
That is why I encourage all contractors (Primes and any lower tier subcontractors) to move toward understanding the “concepts” required for meeting the guidelines for an acceptable accounting system and financial capability. Even if they do not feel they need it at this time.
It can be daunting, frustrating, and costly if/when the time comes that these things are needed and a small contractor is not prepared, or has no idea what is going on. Such as when a contractor is asked to submit a copy of their cost and accounting policies or describe how they developed their indirect rates.
This does not have to be! And it all starts with the “Right Training” and the “Right Tools”. And they are readily available to all on our website.
Well, I hope this helps as you move toward providing strong, realistic, practical support to others.
Paul Sr.