Over the years I have encountered many instances of DCAA auditors finding significant deficiencies of small businesses as it pertains to written policies, procedures, and practices. The following sample of a typical standard wording in an audit report of finding is presented for your understanding. Remember, being prepared is better than hoping issues won't apply to you.
Auditor Condition Finding: Contractors cost accounting systems written policies, procedures and practices have significant deficiencies which do not meet the requirements of FAR 53.301-1408. The policies and procedures do not identify exclusion of unallowable costs (FAR 31.201-6) and the proper segregation of direct costs from indirect costs (FAR 31.203(c)). Further, written policies and procedures do not document the composition of its indirect expense pools and the allocation bases. Adequately written policies and procedures are necessary to provide clear directive, reliance, and consistency.
Auditor Recommendations: Contractor must have all policies and procedures in written format. In addition, contractor should become familiar with FAR Part 31 expressly unallowable costs as identified in FAR Part 31.205 and identify, segregate and exclude unallowable costs. The policies and procedures must require that transactions are screened for allowability at the time of original entry into the accounting records. Contractor must also create accounts for accumulating indirect expenses to ensure compliance with the requirements of FAR Part 31.203(c), and must establish written policies and procedures documenting the composition of its indirect expense pools and allocation bases.
All of the above are the very issues we cover in our workshop, DVD, and policy manual template. These are practical, applicable, and meaningful tools critical to small business contractors.