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The federal government is the largest purchaser of supplies and services in the world. Its not surprising that many companies want to work with the United States Federal Government. According to GAO, in fiscal year 2021, the federal government spent approximately $637 billion on contracts. This is why many company executives and management teams view federal contract procurement as a potential revenue stream to grow their business. These same management teams must consider and be cognizant in the regulations, requirements, and oversight that come with this source of potential revenue. This blog provides a summary of the types of oversight a contractor can expect when doing business with the federal government.
Government Agencies that Perform Audits
There are three primary agencies that define the regulations and requirements that govern how contractors must do business with the federal government. These include:
DCAA: Defense Contract Audit Agency provides financial and accounting advisory services for the Department of Defense (DoD) in connection with the negotiation, administration and settlement of contracts and subcontracts. DCAA will perform an audit/review of a contractor's Accounting System.
DCMA: Defense Contract Management Agency provides contract administration services for the Department of Defense, other federal organizations and international partners, and is an essential part of the acquisition process from pre-award to sustainment. DCMA will perform an audit/review of a contractor's Purchasing System.
DOL OFCCP: Department of Labor - Office of Federal Contract Compliance Programs (OFCCP), is charged with protecting workers, promoting diversity and enforcing the labor laws. OFCCP holds those who do business with the federal government (contractors and subcontractors) responsible for complying with the legal requirement to take affirmative action and not discriminate on the basis of race, color, sex, sexual orientation, gender identity, religion, national origin, disability, or status as a protected veteran. In addition, contractors and subcontractors are prohibited from discharging or otherwise discriminating against applicants or employees who inquire about, discuss or disclose their compensation or that of others, subject to certain limitations. OFCCP will perform an audit/review of the contractor's HR systems, including employment practices, regulations regarding hourly and SCA workers as well as equal employment opportunities (EEOC).
DOL W&HD: Department of Labor - Wage and Hour Division is responsible for planning, directing, and administering programs dealing with a variety of Federal labor legislation. These programs are designed to protect low-wage incomes; safeguard the health and welfare of workers by discouraging excessively long work hours; safeguard the health and well-being of minors; prevent curtailment of employment and earnings for students, trainees, and handicapped workers; minimize losses of income and job rights caused by indebtedness; and direct a program of farm labor contractor registration designed to protect the health, safety, and welfare of migrant and seasonal agricultural workers. W&HD will perform an audit/review of the contractor's HR employment practices regarding low-wage employees, such as, hourly and Service Contract Act (SCA) workers.
Being DCAA, DCMA or DOL compliant means following the agency's recommendations and guidance so that you remain compliant with federal law and are prepared for audits. It also means that your policies, procedures, practices, processes and business systems are compliant with the agencies' requirements.
DCAA Accounting System Audits
DCAA is a very vital part of the acquisition process for the DoD as well as other agencies. Their charter is to make sure that the taxpayers' money is spent responsibly and ethically by conducting audits that ensure the validity of costs throughout the acquisition process. They have a tremendous amount of influence because they communicate with the Contracting Officer (CO) and make recommendations that have an impact on contract negotiations. The recommendations help the CO understand what the price of the contract should be. Historically the relationship between the government contracting community and DCAA has been strained. DCAA is making a concerted effort to improve overall relationships with government contractors by improving communication and coordination.
There are quite a few DCAA reviews, and we'd like to help you understand the more important ones, including Accounting System Reviews, Labor Evaluation Audits, Incurred Cost Audits, and a few more. And although these are the most common, you'll see that there's a DCAA audit for almost every accounting situation.
We can't stress enough the importance of a well-designed and accurate accounting system for government contractors. Before approving any funding, government agencies prioritize appropriate accounting processes and verify that a government contractor follows them to a T. After a request from a contracting officer, the DCAA confirms proper accounting practices with two primary accounting system reviews:
What is the Pre-Award Audit?
The pre-award audit lays the groundwork for the DCAA to confirm that an organization has an accounting system that can handle the contracts the contractor is seeking. We've talked about the audit and pre-audit process in previous blogs regarding things like SF 1408 Pre-Award Survey. In this process DCAA will review the contractor's accounting system, their internal financial controls including processes, and practices, and confirm that these are in place and being utilized and followed.What is the Post-Award Audit?
Post-award audits are a little different and happen at a much later time than the Pre-Award Audit. The DCAA conducts Post-Award Audits after the contractor has been working on the awarded contract for roughly three to six months, generally. In many ways, the Post-Award Audit is a sort of check-in from the DCAA to ensure the contractor's accounting system and practices align with the contract's requirements. They do a more thorough job.
What is a Real-Time Labor Evaluation AKA Timekeeping System Audit?
There are times "when the DCAA comes knocking", in other words they just show up without notice to conduct a Labor Evaluation Audit. These audits are performed in real-time with the daunting accountability of a timekeeping system floor check. The DCAA auditor comes in and conducts an in-depth review of the labor processes and documentation around one of the fraudulent areas of government contracting timekeeping.
Because service-oriented contracts have reimbursable labor charges, there's a heightened need for accuracy around timekeeping and time tracking for all employees. In this audit, the DCAA confirms employee hours, time entry data, charge code processes, timesheet creation and submission, the approval process for managers, and a whole lot more. Because the DCAA does these audits unannounced, there's a real importance of time tracking the right way every single day. If another employee can access someone's timesheet (i.e., clock in/out for them), cross-contract charges are inconsistent, there's an abundance of overrides on timesheets or any of the other deficiencies , contractors will see significant penalties.
With Labor Evaluation Audits, it's crucial to do it right the first time. You want to nurture a culture of honesty and consistency with all employees, and if you can succeed in that, these audits will be a breeze.
What is a provisional billing rates audit?If specified in the provisions of a cost-type contract, contractors are allowed to be reimbursed for indirect costs via interim payments as opposed to waiting until the end of the contract. FAR 42.704 governs the procedures and guidance for establishing provisional billing rates, which is the effective way to approximate a contractor's final year-end rates (adjusted for any unallowable). Provisional billing rates pose as an estimation of these final year end rates, which are trued up to actual indirect rates at the end of the contract's fiscal year.
One major criterion for an adequate accounting system is that it provides for billings that can be reconciled to cost accounts for current and cumulative amounts claimed. The auditor is going to check to make sure your system can handle this process during the Accounting System Review audit. However, once approved, the contractor is still going to have to submit provisional billing rates to its DCAA Office or administrating contracting officer every fiscal year included in the contract.
According to DCAA audit requirements, provisional billing rates should be:
- Submitted at the beginning of each fiscal year or when established billing rates are no longer accurate in representing final year rates (unforeseen circumstances)
- Representing a 12-month period (contractor's fiscal year)
- Submitted at least annually and electronically (if possible)
- Provided in an Excel format
According to DCAA audit requirements, provisional billing rates should contain:
- Proposed billing rate calculations (including rationale)
- Prior fiscal year pool and base
- Current fiscal year to date pool and base
- Current fiscal year budget pool and base (if available)
- Comparative analysis with explanation of significant differences (if applicable)
Penalty : If the above measures are not taken, vouchers and progress payments can be withheld/returned until appropriate measures are taken to adjust billing rates. This not only hurts your cash flow but can affect all future invoices!
What is the public voucher audit?
Public vouchers, or "Progress Payments," have a lot of variety, as most contractors tend to define the parameters of what they want in their invoices; however, the DCAA looks for all the same requirements across the board. Billing the government calls for detailed documentation, especially for progress payments where the DCAA looks for consistency in accounting records and billing. Some of the more prevalent items auditors look out for include:
- Accurate projections and invoices for the billed and received costs.
- Invoices are per the contract terms and conditions.
- Uniformity around labor distribution and payments to vendors/subcontractors.
- The full list of requirements can be found here .
What is the Incurred cost submission audit?
Contractors are required to send in all incurred costs and related documentation into the DCAA for review and approval. Once the submission has been processed and accepted, the DCAA will conduct a relatively brief review of the accounting system, running tests, checking direct and incurred costs, and confirming the adequacy of allowable expenses. The findings highlight key components to identify the company's rates, including fringe, overhead, and G&A rates, which then help the DCAA finalize reimbursable contracts (fees are also invoiced and paid after the incurred cost audit). We've talked about the incurred cost submission in previous blogs regarding things like Incurred Cost Submission.
Learn More: What Is the Incurred Cost Submission?
What other types of audits are performed by DCAA?
If a contracting officer is concerned or skeptical about a contractor's accounting system's stability, concerns typically revolve around misallocation of costs or false charges to the government agency. In these circumstances, the DCAA will review the contractor's Cost Accounting Standards (CAS) compliance, business systems, and any other operations related to the Truth in Negotiations (TIN) Act.
COs may also call for an Audit when cost or job adjustments were made to a given contract, or the contract itself was terminated before the completion of said project. These areas are red flag for COs, and the DCAA will be especially cautious as they review the internal documentation and complexity of termination. (For more information on the other types of DCAA Audits, click here .)
DCMA Purchasing Systems Reviews
What is a contractor purchasing systems review (CPSR)?
If you have at least one prime contract containing FAR clause 52.244-2 which reserves the government's right to review your purchasing system, the system may be subject to a review. The Contractor Purchasing System Review (CPSR) Guide provides a comprehensive reference for the requirements for a compliant purchasing system. The CPSR is performed by the Defense Contract Management Agency (DCMA) to evaluate the efficiency and effectiveness with which a contractor spends Government funds and complies with applicable contract terms, regulations, and government policy when subcontracting. The review provides Contracting Officers (COs) with a basis for granting, withholding, or withdrawing approval of the contractor's purchasing system.
A contractor is eligible for a CPSR when sales to the Government are expected to exceed $50 million during the next 12 months (excluding competitively awarded firm-fixed-price contracts awarded with or without an economic price adjustment and sales of commercial items). The CO may determine the need for a CPSR based on, the contractor's past performance, as well as the volume, complexity, and dollar value of subcontracts.
A complete list of CPSR requirements can be found in CPSR Guidebook.
DOL Labor Related Reviews & Audits
What employment related compliance requirements are there for federal contractors with 50 or more employees?
In addition to your nondiscrimination requirements as a Federal contractor or subcontractor, you may also have the responsibility to take proactive "affirmative action" steps to recruit and advance qualified minorities, women, individuals with disabilities, and protected veterans. Whether or not your business is covered by these requirements depends on the type and dollar value of the Federal contract(s) or subcontract(s) you have, as well as the number of people you employ. You must develop an affirmative action program (AAP) if you have 50 or more employees and at least one contract of $50,000 or more, under Executive Order 11246 and Section 503 of the Rehabilitation Act of 1973 . You must also have an AAP under the Vietnam Era Veterans' Readjustment Assistance Act (VEVRAA) if you have 50 or more employees and at least one contract of $150,000 or more.
What is a DOL W&HD service contract act audit?
The Wage and Hour Division conducts investigations of contractors to ascertain compliance with the SCA. The SCA provides authority to withhold contract funds to reimburse underpaid employees, terminate the contract, hold the contractor liable for associated costs to the government, and debar the contractor from future government contracts for a period of three years any persons or firms who have violated the SCA.
Learn More: Managing SCA Contracts - What You Need to Know
What other employment related reviews and audits can be conducted on federal contractors?
The U.S. has numerous federal and state laws and regulations regarding employee rights and employer responsibilities. These laws cover four broad categories:
- Fair pay
- Employee privacy
- Safety in the workplace
Various government agencies enforce these laws including the Equal Employment Opportunity Commission (EEOC), the Department of Justice (DOJ), and the Department of Labor (DOL). Small businesses are exempt from some of these federal laws (see the following page), but as a federal contractor or subcontractor, you must adhere to certain specific laws. In 2018, FDIC, a federal agency, published an excellent guide summarizing the federal contractors employee laws.
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