by-Norman McCord, CPA, MSA
Director, Capital Edge Consulting
In a recent Capital Edge “Ask an Expert” series, we noted that the Defense Contract Audit Agency (DCAA) recently issued a Memorandum for Regional Directors (MRD), instructing its staff on the treatment of delinquent final indirect rate proposals (ICS). Largely summarizing the MRD guidance, DCAA will 1) close assignments established to audit ICS’s that are 12 months overdue, and 2) recommend the contracting officer (ACO) establish unilaterally determined final contract costs “…as authorized in FAR 42.703-2(c)(1) and FAR 42.705(c)(1)…” This last action can have Draconian results; without sufficient prior audit experience with the delinquent contractor, the DCAA’s policy is to recommend to the ACO, a 16.2% decrement on total contract cost.
Curiously, the above-referenced MRD is no longer available; it was removed from the DCAA website.
shortly after it was published. We suspect that the reason for its retraction was that it was never intended to be released externally. It included an Excel attachment which identified roughly 700 delinquent contractors by name…which probably resulting in some edgy phone calls to the DCAA Headquarters. Regardless of its retraction, we believe its existence underscores the DCAA’s intent to assume a hard line on overdue ICS’s.
A couple of quick additional notes related to DCAA’s position on overdue ICS’s:
- We believe the MRD direction is partially intended to relieve some of the DCAA’s ICS audit backlog (I.E., ICS’s which are 12 months overdue). The DCAA’s policy on overdue ICS’s continues to be that it will recommend a decrement to arrive at unilaterally determined final contract cost to the ACO when a contractor is 6 months overdue.
- An ICS submitted by the due date (6 months after the close of a contractor’s fiscal year), but determined to be inadequate by DCAA, is considered by the DCAA to be “overdue,” and potentially subject to the same 16.2% decrement to arrive at unilaterally determined contract cost.
There are additional potential consequences for a contractor who lands in the category of “overdue.”
- In September, 2014, the DCAA issued an MRD addressing its intention to increase surveillance (on-site testing) of paid vouchers. Selecting contractors for testing will be based to some extent on a sampling approach. However, contractors determined to be “high risk” will be subject to increased surveillance. In that MRD the DCAA instructed its staff that overdue (and inadequate) ICS’s are a basis for considering a contractor to be “high risk.”
- Although Contract Briefs are not a required form for an ICS to be considered adequate, their existence and use are considered by the DCAA to be a significant internal control. When they do not exist, or are not adequate (updated), a contractor can expect increased transaction testing during an ICS audit, likely increased post payment voucher reviews, and the DCAA will probably revisit whether or not a contractor’s billing system is reliable.
So, in summary, for companies whose fiscal year ends on 12/31, the June 30, 2015 deadline to submit the company’s incurred cost submission (ICS) in accordance with the requirements of FAR 52.216-7, Allowable Cost & Payment, is very near. Capital Edge has considerable expertise and depth within our staff to successfully assist our clients through the ICS process, including initial construction, remediation, or reviews for adequacy.
For more information on indirect rate proposals (ICS) or to speak to a consultant, call us 1+ 855-CAPEDGE (227-3343)