Managing Your Audit with DCAA
Winning your first Cost-Plus Fixed Fee (CPFF) contract is a major milestone that is both an exciting opportunity and an unfamiliar challenge. If your government contract is cost reimbursable—such as a CPFF arrangement—it opens the door to significant oversight from the Defense Contract Audit Agency (DCAA). Understanding how DCAA audits work is crucial for contractors managing oversight audits.
Understanding When the Government Will Audit Your Contract
A common question from contractors is: Will DCAA audit my contract? The answer depends on two key factors:
- The contract must be a prime and,
- Cost reimbursable, such as a CPFF contract.
DCAA will also require that it be awarded from the Defense Department.
Why Cognizant Agencies or DCAA Might Not Audit Your Annual Indirect Rates
CPFF contracts generally require an Incurred Cost Audit (ICA) to settle your annual indirect rates. However, there are situations where your indirect rates might not be audited. These include cases where:
– You only have subcontracts, or
– Your contracts are only fixed price, Time & Material, or commercial in nature.
Knowing these exceptions can help you assess your audit risk.
Reducing the Possibility of an Incurred Cost Audit
The chances of an incurred cost audit diminish when:
- Minimizing the volume of CPFF contract work,
- Submitting an adequate DCAAA ICE submission, and
- Ensuring little to no disallowed costs from year-to-year.
When these conditions are met, DCAA may place you in a low risk sampling pool, decreasing the chance of an ICA.
You can assess the likelihood of an ICA by understanding one of the schedules in DCAA’s indirect rate template called the Incurred Cost Electronically (ICE) submission available from DCAA’s website. The ICE “Schedule H (Continued)” details your government participation percentages which computes how much DCAA can question cost as cents on the dollar, based on the percentage of cost reimbursable contracts. For those of you familiar with ICE, we provided an example of how this schedule works.
Download Example
Reducing Audit Disallowance of Incurred Costs
To minimize disallowed costs, familiarize yourself with:
– FAR Subpart 31.2 cost principles, and
– DCAA’s Selected Area of Cost Guidebook: FAR 31.205.
These resources clarify which expenses are allowable which will align your policies with government expectations.
Improving Communication with DCAA Auditors
Effective communication with auditors is vital to avoid misunderstandings. For example, a contractor once asked DCAA if they should submit an annual indirect rate submission despite having all subcontracts. DCAA advised submitting them annually, but that contractor’s indirect rates were never audited. This issue has since been resolved with DCAA’s Contractor Submission Portal (CSP), which only accepts DOD, CPFF, and prime contracts. The DCAA CSP does not permit a submission that only has subcontracts.
DCAA Communications with Auditees
DCAA emphasizes the importance of clear communication. Early identification of audit issues, immediate resolution of potential problems, and better understanding of audit processes, results and conclusions are key benefits of effective auditor-to- contractor communication.
Avoiding Misunderstandings with DCAA
Stay in communication with DCAA throughout the audit process:
– Use entrance conferences to discuss the purpose of the audit, time frame, due dates, and auditor expectations.
– Hold interim conferences to resolve issues as they arise.
– Participate in exit conferences to understand audit findings and disallowed costs.
These checkpoints help ensure that DCAA is on the same page throughout the audit process to obtain the best outcome.
The Role of IPAs performing DCAA Incurred Cost Audits
Independent Public Accountants (IPAs) play a significant role in performing DCAA incurred cost audits. Their professional approach is without drama and ensures a smooth audit process. However, it is important to provide IPAs with the necessary information in a timely manner to avoid unsupported and questioned costs because the IPA has contract deadlines to complete the audit for DCAA.
In an incurred cost audit, non-labor sampling may exceed 100 transactions. Employing accounts payable software that retains supporting documents within the general ledger, including the GSA meals and lodging per diems for a particular location for a given year, can save the contractor countless hours and meet the IPA’s document submission deadlines. Small businesses can face challenges with unrealistic risk assessment questionnaires that are lengthy and complex (such as fourteen pages with fifty control items). Despite these challenges, the IPA may provide a clean audit if questioned costs are immaterial.
Key Takeaways
If you’re new to cost reimbursement contracts, the audit process can be intimidating—but manageable with preparation.
- Understand what triggers DCAA as it pertains to CPFF contracts.
- Being able to reduce disallowed cost and possibly eliminate the requirement for an incurred cost audit.
- Consider the use of Unanet software to manager your A/P document retention.
- As a minimum, understand the underlying forces that impact cost reimbursable contracts.
GRF offers a deep bench of expertise in the government contracting sector. With subject matter experts addressing all aspects of DCAA-FAR-CAS regulatory and oversight compliance, GRF provides tailored audit, tax and advisory services that address the unique challenges and opportunities faced by contractors.
Our team of seasoned professionals is committed to delivering comprehensive solutions. By leveraging GRF’s experience and local market knowledge, government contractors can confidently navigate the complexities of the acquisition process and achieve their strategic goals. Choose GRF to guide you on your path to becoming an attractive, acquisition-ready enterprise.
