Taxes may be less than exciting, but an audit is definitely too stressful. Let’s BOOST your DCAA Compliance before an issue arises.
Last year, we attended a breakfast where DCAA spoke on the upcoming year, current trends, etc. This year, we went for the update. Enter a wittier DCAA Manager with the same mediocre breakfast. Here’s our 2019 blog, with 2020 edits in red. Yup, not a lot of changes. Which has us pondering. More on that in our next blog.
Incurred Costs Proposals
DCAA has been under the gun for the past few years to catch up on their backlog. Their mantra (which may be on numerous internal PowerPoint briefs) is to “eliminate the backlog.” As of now, they report that they are relatively done through 2015.
DCAA has caught up. If you are years behind, you are generally an abnormality.
- My takeaway (not said outright by DCAA) – If you are under $100M, you’re getting a memo. Keep your stuff relatively in order and you should come out relatively ok. Don’t get cute with the costs and try to keep things DCAA compliant.
The above advice still rings true, especially with the following statistics that we learned this year (below).
With no mandatory audit requirements for GovCons under $100M, the odds are slim that you will ever see DCAA on this until you size out.
Revenue Size Odds of Audit
Under $5M .5%(yes, less than 1%)
But here’s the kicker. If you are found as low risk, it could take up to a YEAR to get the letter from DCAA that says your submission was closed out with a low-risk assessment. The priority is on doing the actual audits. Sending you paperwork that says we aren’t auditing is low priority. Unfortunately, that’s the magical letter you want to include in the cost volume of your proposal submissions. Damned if you do, damned if you don’t.
DCAA is often tasked with auditing your rates submitted on a proposal. Given the pressure on margins, I can imagine that there are some “creative” pricing strategies out there. That being said, why it takes so long to audit these things is elusive to me. Some stats:
- The average elapsed days for forward pricing audits:
- FY11 – 120 days
- Fast forward to FY17 – 83 days
- FY18 – 85 days
- FY19 – 82 days
- DCAA’s stated goal is to reduce the time but doesn’t seem to be making much progress. So maybe a little progress in 2019. We’ll say it’s a win.
- Takeaway – have your forward pricing backup ready so you can immediately turn around data calls. Every day you hem and haw over finding that elusive salary survey that you cited (but really used salary.com), is a day you aren’t getting the award. You can’t speed up DCAA but you can speed up your response.
- Make sure your audit backup file documentation is part of your proposal process. Many proposal managers say they will come back to this when the proposal is turned in, but few do. This makes the audit all the more painful. More importantly, there is real money (i.e. a contract award) on the line. Don’t lose because you don’t have your act together.
- And again, the above advice still holds true.
Contractor Common Mistakes
When asked what DCAA sees most often in terms of mistakes, they cited:
- Unsupported costs in the Incurred Cost Proposals
- Fix this by maintaining records of all your costs. Make sure that they are stored on the company’s shared files, not on someone’s laptop somewhere. If your controller leaves the company, you still want to have the backup required to argue for allowability. You could leave money on the table by not having this documentation.
- Schedule H seems to be the biggest issue on Incurred Cost Submissions – specifically not providing enough detail to justify the costs. Putting one line item for a huge IDIQ isn’t going to cut it.
- Supporting the basis of costs in your Forward Pricing Submission
- Again, keep the audit file! If you haven’t done this, start now in 2019 2020. It is good practice and saves headaches in the future. Knowing how you back-of-the-enveloped the number is critical for execution.
- Supporting subcontractor costs as part of your Forward Pricing Submission
- Getting subK costs is like herding cats. You never know what they actually submit to DCAA and if they are actually competent (and compliant!). DCAA has to coordinate between their various offices as one office may be reviewing your proposal, but another office may review your subs.
- Reduce your risk by utilizing an outside pricing SME to evaluate your subs cost proposals. Then you know it’s right.
All still true. Do it.
Reasonableness is the theme here. Reasonable to DCAA may not be reasonable to you, but they don’t care. Your company’s compensation will be compared to a similar-sized company within the same industry. Geography seems not to matter as much (frustrating for those in high salary areas). Best bet – utilize legitimate salary surveys as a backup.
There was no mention of Exec Comp in this briefing which is interesting. I suspect most contractors have flushed through the issues and are just throwing additional comp in unallowable. DCAA is interested in labor costs and whether they are reasonable.
DCAA must provide an adequacy review of Incurred Costs Submissions within 60 days. They are laser-focused on this number. Then they must conduct the audit within a year. So, in theory, all of the backlog will become relatively caught up.
Done and done.
DCAA must also comply with commercially accepted standards of risk and materiality by Oct 1, 2020. What does that mean? No one knows, but DCAA is talking to industry to figure it out. TBD on how that plays out, but fingers crossed it makes contractors’ lives easier.
Still wishy-washy on what this actually means. They don’t seem much closer to figuring it out.
DCAA’s stated focus for this year is:
- Completing all 2017 and earlier Incurred Costs Submission audits
- Reducing the days for forward pricing audits
- Increasing resources (i.e. auditors) in TINA compliance, Real-Time Labor and Material Audits (hello floor checks??) and Business System Audits
- Expect more Accounting System and estimating system audits specifically
Not a lot on this other than more of the same. More audits in other areas as they’ve caught up with Incurred Costs. They keep threatening floor checks, but I don’t know of any <$1B contractor who had one in the last 10 years.
If you need help with any of the above, BOOST makes a living doing this stuff (yes, you can question our sanity). We can do your Incurred Costs Submission, prepare your pricing, audit your subcontractors’ pricing, support forward pricing audits and provide salary information from our over 25 salary surveys. We also can help prepare you for accounting system and estimating system audits.
What we cannot do is explain the rhyme and reason of DCAA. It’s still a bit of a mystery, but hopefully, this summary sheds some light on it. Or saved an hour of your life. 😊
Next blog, we’ll opine on DCAA compliance in general.