Rose Report: Issue 28

Minimizing Incurred Cost Proposal Audit Risk

Every government contractor prefers to be in the low-risk pool for being audited—but contractors who are at a lower risk than their competitors can still be selected for an audit by the Defense Contract Audit Agency (DCAA). Company size and its determination of adequacy along with risk play a big factor: large government contractors that exceed $250 million in auditable dollar volume (ADV) will be audited without question, whereas contractors below that threshold may not be. Government contractors should know what guidance the DCAA is following in regards to selecting incurred cost proposals (ICEs) for audit to best prepare their incurred costs and decrease their risk.

The Current Landscape: What the DCAA Looks For

To begin their review, the DCAA uses an adequacy checklist and performs a risk assessment. The DCAA checklist of final direct and indirect incurred costs ensures compliance with the contractual agreements under Federal Acquisition Regulation (FAR). It includes approximately 50 questions, covering general and administrative expenses, overhead expenses—and more—to ensure contractors are readily prepared for an audit.

The overall risk assessment relates back to the company’s overall risk and its general operating environment. The DCAA also takes into account the past history of the company. For example, have there been past incidents within the company that would raise a red flag? Are there any risks related to the company’s operations and internal controls? What were the results of previous audits? The DCAA considers each of these questions and others before making their final determination.

Tips for Government Contractors

Government contractors should keep in mind that if it’s the first time they’ve submitted a proposal, their DCAA audit risk may be higher. It would be wise to invest in making sure that the submission is in good shape. Further, if the DCAA has determined a contractor to be low-risk in the past, that doesn’t necessarily mean the contractor remains a low-risk—even under perfect conditions, after 2 or 3 years, contractors will likely be subject to an audit again.

Because of the DCAA’s risk-based approach, the level of scrutiny is much tighter and stricter than it’s been in the past, meaning submissions have little to no room for error. Last, when reviewing their checklists in ICE submissions, contractors must remember all of the tasks and information are interrelated. If one schedule is neglected, it’s almost guaranteed to pop up somewhere else. Pay close attention to Schedules H, I and K, use proof totals and be sure to check your math!

Before submitting an ICE, government contractors should take advantage of the adequacy checklist on the DCAA website—especially smaller contractors because they tend to have smaller accounting departments dedicated to assessing their risk for audit. This checklist is readily available for contractors to self-check their ICEs. If contractors experience significant issues using the checklist, they can work with an outside party to assist them.

Click here to see the DCAA checklist.


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