The DCAA and You

Question: Where is the best place to get an overview of the DCAA audit process and a general understanding of the submissions that I will need to prepare?  

Answer: The Audit Process Overview—Information for Contractors Manual under the Guidance tab on DCAA’s website is a good place to start. The Manual provides an introduction to DCAA, describes the attributes of an adequate labor and accounting system, price proposals, Cost Accounting Standards, contract financing and interim and final vouchers, and incurred cost proposals. 

Inquiry: Paul, I just reviewed part of your presentation to the audience at the American Legion.  I have a concern.  Your Indirect Costs include Fringe Benefits and Payroll Taxes.  In my experience, I assign them differently.  Is there a problem?

Response: Either way could be okay, as long as the method results in a fair and reasonable assignment of the costs to final cost objectives (contracts) AND the method is consistently used.  But let's look a bit deeper......

I get frequent calls from companies that never thought they would be audited or just did not expect an audit at the time. So what do you do when you get the call? Well first, don't panic. The government or your prime contractor is just following protocol to ensure they are either getting...

Inquiry: Hi Paul, At the present time DCAA is in the process of auditing our G&A and in directs.   If you have any examples of how we calculate fringes, it would be helpful.  They seem to think we are low on our fringes.

Response: We do have an electronic file (e-file) that should help you.  Many others have used it as a template to get a quick look at "what might be".  They replaced the sample numbers with their own and the spreadsheet calculated their rates.  It is very inexpensive!  Here is where to go.....

INQUIRY: Hi Paul,  Can you explain the difference of putting travel and client expenses into B&P versus G/A?  RESPONSE: B&P (Bid and Proposal) expenses are typically for costs incurred during the Proposal Phase while similar type costs would typically go into G&A when they are incurred for the General and Administrative activities of the company, but not for B&P purposes. Lets look closer....

Are you a Prime or Subcontract doing business or hoping to do business with the government?

Well, there are several important checklists you should have in your Tool Chest, alongside the tools we provide.  There are others, but we must start somewhere.  And they’re free!   

Really Free? Well, since your tax dollars paid for them, “technically” they aren’t free!

Inquiry: Any subcontract costs we incur will be a part of our G&A base, so my question would be is there anything in FAR 52-232-7 that precludes us from adding G&A on top of these subcontract costs?

Response: Let me answer in the Affirmative Tense: The simple answer is Generally Yes; you can add G&A to subcontract costs.   FAR 52.232-7 clearly lists Subcontracts under Materials and allows for adding Indirect costs to these.

However, your inquiry is much more in-depth than first meets the eye, and it should be.  So let’s look beyond the obvious...

Audit Alert on Allowability of Lodging, Meals and Incidental Expenses under FAR 31.205-46, Travel Costs

The Government travel regulations provide for two ceiling amounts: one for lodging and one for meals and incidental expenses. However, as provided in CAM 7-1002.3c(2), contractors are subject to only one ceiling,

The DDP memorandum states that costs incurred for ineligible dependent health care are unallowable under FAR 31.201-3 and violate the selected cost principle at FAR 31.205-6(m);

However, these unallowable costs are not expressly unallowable. Therefore, auditors should not pursue application of penalties under FAR 42.709 to the questioned ineligible dependent health care benefit costs. Accordingly, auditors also should not cite contractors that fail to exclude these costs from Government contracts for noncompliance with CAS 405.

Inquiry: So Paul, are government accounting system requirements only applicable for Cost Reimbursement Type Contracts?  Response: This is a widely misunderstood concept. Many contractors feel that they do not have to worry about audits since they do not have any cost plus fixed fee (CPFF) type contracts. Others feel that since their contract(s) are small they are okay. Boy do they find out the hard way that this is not true. Let me tell you how it generally works.  Hold on to your hats' because this is High Value guidance coming, and it's free...

Paul, in setting up accounting systems, I always recommend that the company have a lag between the timesheet cutoff date and the payday, so that the employee’s hours can be collected and paid based on timesheets.  However, if a company chooses to keeps its payday, and if all their employees are salaried, are they technically forecasting time.  Example, they have to send payroll data on Friday, August 10 for hours thru August 15th.  So to me, they are forecasting Monday Aug 13 to Wednesday August 15.

Paul, can you address the impact on our contractor work force of the Executive Order issued on 21 Dec which I believe declared the 24th of December a National Holiday. Government was very unclear and fractious on how contractor work force and contractors should deal with this "holiday."

For several years now, many contractors have objected to the DCAA requiring the use of the Incurred Cost Electronic (ICE) model to submit what the DCAA considered an adequate incurred cost submission (ICS). Those complaints can now be directed towards the FAR Councils because, in FAC 2005-52, effective June 11, 2011, they have incorporated the ICE model into the Allowable Cost and Payment clause, FAR 52.216-7

Before discussing the changes made by the FAC, a few words about 52.216-7 are in order. That clause is the only FAR clause that requires submission of an ICS. Thus, if 52.216-7, or a non-standard clause requiring the submission of an ICS, is not in a contract, the contractor has no obligation to submit an ICS.

What one disabled veteran wanted to say about the DVD and how it helped him and his firm.

When I was looking at my Indirect and G&A rates and looked at your notebook I did not see an example of when a company uses Direct Labor hours instead of Direct Labor dollars as the base. 

Inquiry: In contracting and coming up with the bases for estimates, and taking into consideration competitiveness. What does a company need to be aware of when contracting out 1099 vs employees.

Response: When you develop your indirect rates, you should review the level of Fringe Benefits provided 1099 employees versus regular employees. You must ensure (to the best of your knowledge and ability) that according to.............

Although there are many types of Unallowable Costs, there are certain types that are Declared Expressly Unallowable by Federal statute or regulations. These type carry with them a higher incidence of fines, penalties, and interest if they are not excluded, or if they are included but not specifically identified, from billings, claims, proposals, or other types of data submitted to the government where the date could be used in decision making of any kind by the government.

Can we propose lower indirect rates than our projected rates and how would we go about doing it?

RESPONSE: Generally YES. There are important issues and guidance you should be aware of and follow as applicable. Understanding these guidelines will minimize questions and concerns later on. 

The very first issue to consider is the financial impact on your bottom line of making such a choice.  But there is valuable guidance as follows......

Things to consider when deciding what to include in the Handling Pool and the type of Base to use.

The term "Comp Time" is often overused and can mean different things to different people. When DCAA uses the term comp time, they are referring to the excess hours

Most contractors follow total time accounting but even with total time accounting the contractor can institute a compensatory time policy whereby exempt employees can accumulate excess worked hours and use these hours in the future as additional time off.

A total time accounting system that accurately reports hours will generate the proper amount of revenue for contractors on each of their labor-hour and time-and-material contracts. Cost reimbursable contracts have an added twist. Many cost reimbursable contractors who report total time use a diluted hourly rate approach for distributing labor costs to projects. For example, if an employee is paid $1,000 per week and works 40 hours, the projects are charged $25 per hour. If the same employee works 50 hours the following week, the hourly rate is diluted and projects are charged $20 per hour. In this example the contractor gets no additional revenue for the extra 10 hours of effort - they are provided free of charge to the Government. 

Fortunately, acceptable standard cost approaches will negate this windfall to the Government and still allow the contractor to take advantage of uncompensated overtime. The most common of these approaches involves.......