Before discussing the audit process of commercial contracts by the DCAA, it is essential to first understand the role of this organization that is playing a vital part in the contracting function for the Department of Defense (DoD), known as the Defense Contract Audit Agency (DCAA).
The mission of the DCAA is to examine and offer financial advisory services to federal entities, including the DoD, that are responsible for acquisition and contract administration. Moreover, it oversees the financial status of businesses seeking government and commercial contracts prior to signing awards.
It is the duty of the DoD to acquire contracts that offer the best value, which is why it conducts an extensive evaluation of the business through a DCAA audit. Let’s dive in:
DCAA Audits For Commercial Contractors
Where commercial agreements are concerned, DCAA provides a wide range of audits and targeted information assisting audit issues to include whether the commercial business complies with Generally Accepted Accounting Principles for financial reporting purposes. However, a Procuring Contract Officer (PCO) or Administrative Contracting Officer (ACO) can request a specialized audit by the DCAA.
DCAA usually only oversees the compliance of government contracts. It can also perform an audit of civilian contracts awarded by the EPA, DHS, NASA and the DoE, especially when the government observes an increase in financial risk. Audits may also become a requirement if the contractor is unknown or new to this particular market, the contract itself is considerably large or it involves variables such as progress payment, cost reimbursable, etc.
The purpose of commercial contract auditing is to assist in the evaluation of a contractor’s policies, controls, procedures and actual performance. The audit follows a documented written program which specifies the audit process in depth.
To meet its mission, it offers the following types of assessments for commercial concerns:
The most common type of audit is a pre-award audit. Although it is not as detailed as other audit reports, it focuses on examining the accounting system of the contractor. It inspects the financial transactions to ensure the company has the capability to meet the Acceptable Accounting System requirements of the FAR and DFARS.
The first and foremost step is to complete a standard form called the SF-1408, followed by a review of the accounting system and checking features and capabilities to meet DFARS and FAR requirements. It never inspects the specific records, so it doesn’t take very long to complete this type of audit.
Additionally, the DCAA reports their findings and the given grade to the Contracting Officer after reviewing.
Price Proposal Audit
The Contracting Officer (CO) is responsible for ensuring contract pricing is fair and reasonable, and therefore has the right to request an audit of the pricing. The price proposal audit consists of an assessment and evaluation of proposal products, an inspection of costs and expenses, urgency of the procurement, ability of the requesting agency to arrange for adequate, timely contract audit service and compliance with the Truth In Negotiations Act (TINA).
In case the contract exceeds the Truth In Negotiations Act (TINA) threshold of $2 million, the contractor is required to submit pricing information with the proposal. However, the CO can request additional information and an audit. In this instance, the DCAA requests additional information to support the proposal pricing claims, also referred to as Basis of Estimate (BOE).
Contract Cost Audit And Billing System
In the case when the contract is cost-based such as a cost reimbursable contract or a contract containing cost-based progress payments, the vouchers submitted must undergo periodic audits. Here the DCAA verifies whether these costs accurately meet the value of the recorded vouchers that have been presented in the proposal.
Incurred Cost Proposal Audit
When it comes to cost reimbursable award contracts, the contractor must submit an annual reconciliation of their annual financial transactions, including actual and indirect costs. This is known as the contractor’s incurred cost submission. This is typically due 6 months after the end of the contractor’s fiscal year and allows the government to pay the actual costs incurred, not the predicted costs.
Accounting System Audit
This is a detailed, in-depth evaluation of the contractor’s accounting system designed to verify that they have an acceptable financial system by assessing a representative sample of records. It is generally a Phase II SCIT/STTR where the contractor can only view these audits during the performance.
DCAA conducts an announced visit to inspect the workstation of several employees to verify the utilization of proper labor recording and timesheets. The employees are selected randomly in order to validate the labor recording procedures and processes.
Need Help Securing Commercial Contracts? Call Diener & Associates!
The key to success in the contracting industry is to ensure your business meets the generally accepted accounting and financial principles. Contractors must operate the business in a manner which meets DCAA requirements from the beginning.
This requires a proactive approach that usually involves working with consultants specializing in DCAA compliance and regulatory issues for commercial businesses. Diener & Associates are professionals with years of relevant industry experience offering premium business consulting and advisory services to ensure acceptance of contracts.
Diener & Associates has earned a reputation for providing the best outsourced accounting services, such as cash disbursement, bookkeeping, financial planning, payroll services, financial reporting and outsourced accounting.
Contact our qualified team to take your commercial contracts to the next level.