Attachment_6__DCAA_Pamphlet_7641.90.pdf

PPS June 26, 2012

DCAA MANUAL

NO. 7641.90

INFORMATION FOR CONTRACTORS

1. PURPOSE. This manual supersedes DCAA Pamphlet 7641.90, Information for Contractors, dated January 2005. The manual is designed to assist contractors in understanding applicable requirements and to help ease the contract audit process. It describes what contractors should expect when doing business with the U.S. Government and interacting with DCAA auditors.

The examples in this manual are presented to illustrate some of the more frequent requirements that contractors encounter when working with DCAA auditors, and in responding to the Government procurement and administrative process. These examples are intended solely to provide better insight into the procurement process and should not be construed as uniform guides. Nor should this manual be considered a substitute for the applicable rules and regulations, as not all requirements are contained herein. Each contractor must tailor its responses to its individual situation.

2. APPLICABILITY. This manual applies to all contractors interacting with DCAA auditors, as a result of doing business with the U.S. Government.

3. PROCEDURES. See Enclosure 1 through Enclosure 6.

4. RELEASABILITY. Unlimited. This manual is approved for public release and is available on the Internet from the DCAA’s web site at www.dcaa.mil.

DEFENSE CONTRACT AUDIT AGENCY

8725 JOHN J. KINGMAN ROAD, SUITE 2135

FORT BELVOIR, VA 22060-6219

http://www.dcaa.mil/

DCAAM 7641.90

5. EFFECTIVE DATE. This manual is effective immediately.

/s/ Patrick J. Fitzgerald Director, Defense Contract Audit Agency

Enclosures

1. Introduction to the Defense Contract Audit Agency (DCAA)

2. Preaward Surveys of Prospective Contractor Accounting Systems

3. Price Proposals

4. Cost Accounting Standards

5. Contract Financing and Interim and Final Vouchers

6. Incurred Cost Proposals Glossary

3 CONTENTS

TABLE OF CONTENTS

ENCLOSURE 1: INTRODUCTION TO THE DEFENSE CONTRACT AUDIT AGENCY

(DCAA) 6

DCAA HISTORY 6

DCAA ORGANIZATION 6

DCAA RESPONSIBILITIES AND DUTIES 7

DCAA GENERAL AUDIT INTERESTS 8

DCAA MAJOR AREAS OF EMPHASIS 8

CONTRACTOR RECORDS RETENTION 8

OTHER INFORMATION 9

ENCLOSURE 2: PREAWARD SURVEYS OF PROSPECTIVE CONTRACTOR

ACCOUNTING SYSTEMS 12

PREAWARD SURVEY OVERVIEW 12

FINANCIAL CONDITION RISK ASSESSMENTS 12

ACCOUNTING SYSTEM 12

LABOR CHARGING SYSTEM 15

ENCLOSURE 3: PRICE PROPOSALS 20

REQUIREMENTS FOR SUBMISSION 20

DCAA FORWARD PRICING SERVICES 21

DCAA AUDIT 21

EXAMPLES OF DATA THAT DCAA MAY REQUEST 22

MODEL PROPOSAL - ADVANCED TANK TECHNOLOGIES (ATT) 24

NEGOTIATIONS 33

TRUTH IN NEGOTIATIONS ACT (TINA) 34

ENCLOSURE 4: COST ACCOUNTING STANDARDS 35

COST ACCOUNTING STANDARDS (PL 100-679) 35

COST ACCOUNTING STANDARDS (CAS) APPLICABILITY 35

CAS EXEMPTIONS 37

FLOWDOWN OF CAS CLAUSES (FAR 52.230-2 3 AND 4) 38

SUBMISSION OF DISCLOSURE STATEMENT FORM NO. CASB DS-1 (48 CFR

9903.202) 38

ADJUSTMENT OF CONTRACTS 38

DCAA AUDIT RESPONSIBILITY 39

ENCLOSURE 5: CONTRACT FINANCING AND INTERIM AND FINAL VOUCHERS 40

INTRODUCTION 40

PUBLIC VOUCHERS UNDER COST-TYPE CONTRACTS - RESPONSIBILITY FOR

PREPARATION 41

PROVISIONAL BILLING RATES 41

ELECTRONIC SUBMISSION OF INTERIM VOUCHERS 42

GUIDANCE FOR PREPARING INTERIM PUBLIC VOUCHERS (SF 1034) 42

4 CONTENTS

GUIDANCE FOR PREPARING SF 1035 46

COMPLETION VOUCHER 53

SUBMISSION REQUIREMENTS 58

REQUIREMENTS FOR SUPPORTING FEE CLAIMS 60

RESUBMISSION OF COSTS PREVIOUSLY SUSPENDED OR DISAPPROVED 60

MAINTENANCE OF REIMBURSEMENT CLAIM DATA 60

WITHHOLDING AND RELEASE OF CONTRACT RESERVES 60

PROGRESS PAYMENTS BASED ON COSTS - GENERAL (FAR 32.5) 60

PROCESSING PROGRESS PAYMENTS 60

TREATMENT OF CONTRACT OVERRUNS ON PROGRESS PAYMENTS 61

PERFORMANCE-BASED PAYMENTS – GENERAL 64

PROCESSING PERFORMANCE-BASED PAYMENTS 65

ENCLOSURE 6: INCURRED COST PROPOSALS 66

INTRODUCTION 66

CONTRACTOR PROPOSAL 66

PENALTIES FOR MISCHARGING 67

AUDIT EVALUATION 68

CONTRACT COSTS 69

DIRECT COSTS 69

RESPONSIBILITY OF PRIME CONTRACTORS OVER SUBCONTRACTS 70

INDIRECT COSTS 70

OVERHEAD COSTS 71

G&A EXPENSES 71

FACILITIES CAPITAL COST OF MONEY (FAR 31.205-10) 72

MODEL INCURRED COST PROPOSAL 72

CUMULATIVE ALLOWABLE COST WORKSHEET (CACWS) 74

GLOSSARY 99

ABBREVIATIONS AND ACRONYMS 99

TABLES

1. Regional Telephone Numbers 9

2. Information Required on Interim Vouchers 44

2. Information Required on Interim Vouchers 44

3. Information Required on SF 1035 for Cost Plus Fixed Fee Contract 47

3. Information Required on SF 1035 for Cost Plus Fixed Fee Contract 47

4. Information Required on SF 1035 for Cost Sharing No-Fee Contracts 51

4. Information Required on SF 1035 for Cost Sharing No-Fee Contracts 51

5. Information Required on Final Voucher (SF1034) 54

6. Information Required on Final Voucher (SF1035) 56

6. Information Required on Final Vouchers (SF1035) 56

FIGURES

1. Regional Boundaries 10

2. Defense Contract Audit Agency Organizational Chart 11

5 CONTENTS

3. Preaward Survey of Prospective Contractor Accounting System (SF 1408) 18

4. Model Proposal 25

5. CAS Coverage and Disclosure Statement Determination 36

6. Sample of SF 1034 Interim Voucher 45

7. Sample of SF1035 Interim Voucher 49

8. Sample of SF 1035 Interim Voucher 52

9. Sample of SF 1035 Completion Voucher 57

10. Sample Standard Form 1443 62

11. Loss Ratio Factor Analysis 64

12. Model Incurred Cost Proposal 75

6 ENCLOSURE 1

ENCLOSURE 1

INTRODUCTION TO THE DEFENSE CONTRACT AUDIT AGENCY (DCAA)

1. DCAA History. In December 1964, then Secretary of Defense Robert S. McNamara decided that DoD contract audits would be more effective and efficient if performed by a single organization. Accordingly, the Defense Contract Audit Agency (DCAA) was established as a separate Agency of the Department of Defense, effective July 1965.

2. DCAA Organization.

a. DCAA Organizational Overview.

(1) The Agency operates under the direction, authority, and control of the Under Secretary of Defense (Comptroller) (USD(C))/Chief Financial Officer (CFO). The DCAA Director is a civilian selected by the Secretary of Defense. Organizationally, DCAA includes a Headquarters, Field Detachment, and five regions: Central, Eastern, Mid-Atlantic, Northeastern, and Western (refer to Figure 1 for Regional Boundaries). Within each region are resident and branch offices (refer to Figure 2 for DCAA organization chart). Resident offices are established at large defense contractor locations, and branches are established in major metropolitan areas to audit all other contractors on a mobile basis. Suboffices may be established at a geographic location distant from the main resident or branch office if a concentrated workload of audits exists.

(2) The DCAA Contract Audit Manual (DCAAM 7640.1), referred to as the "CAM,” prescribes auditing policies and procedures for personnel engaged in the performance of the DCAA mission. The electronic version of the CAM is updated on a continual basis and represents the most current version. Printed editions of the CAM are published once a year.

Copies of the printed edition of the CAM are available for purchase from the Superintendent of Documents, U.S. Government Printing Office (GPO), P.O. Box 979050, St. Louis, MO 63197- 9000. Refer to Order Processing Code *3509, Stock Number 708-077-00000-3, ISBN 0-16- 010384-3. The electronic version of the CAM and other DCAA documents are located under Publications at www.dcaa.mil.

(3) Current audit guidance (not incorporated into CAM) are available on DCAA’s web site at www.dcaa.mil.

(4) Other acquisition reference materials can be found on the Defense Acquisition University’s (DAU’s) Acquisition, Technology and Logistics’ Knowledge Sharing System (AKSS) web site at https://dap.dau.mil/Pages/Default.aspx.

b. Field Audit Office Organization.

https://dap.dau.mil/Pages/Default.aspx

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(1) Whether the Field Audit Office (FAO) is a resident or branch, with or without suboffices, the office is led by a manager and the office is organized into teams. Each team is led by a supervisory auditor who supervises a number of auditors. Field audit offices may also have one or several assigned technical specialists. Technical specialists are subject matter experts available to assist the audit teams as the need arises. A contractor will most likely have direct contact primarily with the audit team. Should questions arise during the audit, the contractor may elevate its concerns to the FAO manager, Regional Audit Manager (RAM), or Deputy Regional Director (DRD).

(2) A supervisor’s responsibilities may be assigned on the basis of: (1) contractor, (2) location, or (3) audit function (i.e., one supervisor may be responsible for evaluating all proposals for several contractors). This means that a contractor may see one or several auditors, depending upon the timing and/or type of audit(s) being conducted.

3. DCAA Responsibilities and Duties.

a. While serving the public interest as its primary customer, DCAA performs all necessary contract audits for the Department of Defense and provides accounting and financial advisory services regarding contracts and subcontracts to all DoD Components responsible for procurement and contract administration. DCAA provides these services in connection with negotiation, administration, and settlement of contracts and subcontracts to ensure taxpayer dollars are spent on fair and reasonable contract prices. DCAA also provides contract audit services to other Federal agencies as appropriate

b. DCAA furnishes professional accounting and financial advice to Government procurement personnel at all points of the procurement process including: (1) pre-negotiation,

(2) negotiation, (3) administration, and (4) settlement (contract closing).

c. By Reference, DoD Instruction 7600.2, Audit Policies, incorporates the Generally Accepted Government Auditing Standards (GAGAS). These standards, commonly referred to as the “Yellow Book” are developed and published by the Comptroller General and incorporate certain standards from the American Institute of Certified Public Accountants (AICPA). For the attestation engagements DCAA performs, GAGAS incorporates the general standards on criteria, fieldwork and reporting standards and the related Statement on Standards for Attestation Engagements. These standards and guidance are applicable to DCAA for all audits of funds received by contractors, nonprofit organizations, and other external organizations.

d. The Federal Acquisition Regulation (FAR) is the primary regulation for use by most Federal agencies in their acquisition of supplies and services with appropriated funds. The FAR, together with agency supplemental regulations (e.g., the Department of Defense Federal Acquisition Regulation Supplement [DFARS], which applies to all Defense components), Cost Accounting Standards (CAS), as well as specific contractual provisions, should be the primary guidelines for contractors’ conduct in administering contracts. The FAR, DFARS and other agency supplements, and CAS can be found in Title 48 of the Code of Federal Regulations

8 ENCLOSURE 1

(CFR) which is normally available in the reference section of most major public libraries. FAR and DFARS can also be found on the DAU’s AKSS at https://dap.dau.mil/Pages/Default.aspx.

4. DCAA General Audit Interests.

a. DCAA is concerned with identifying and evaluating all activities that either contribute to, or have an impact on, proposed or incurred costs of Government contracts.

b. DCAA evaluates contractors' financial policies, procedures, and internal controls.

c. DCAA also performs audits that identify opportunities for contractors to reduce or avoid costs (operations audits).

5. DCAA Major Areas of Emphasis.

a. DCAA's major areas of emphasis include: (1) business systems, (2) management policies and procedures, (3) accuracy and reasonableness of contractors’ forward pricing and incurred cost representations, (4) adequacy and reliability of records and accounting systems, and (5) contractor compliance with contractual provisions having accounting or financial significance such as the Cost Principles (FAR Part 31), the Cost Accounting Standards (CAS) Clause (FAR 52.230-2), and the clauses pertaining to the Truth in Negotiations Act (TINA) (FAR 52.215-10, - 11, -12, and -13).

b. DCAA’s audits are generally limited to pricing actions and contracts that fall under FAR Part 15, Contracting by Negotiation. The extent of DCAA's involvement is determined by the type of contract that will be awarded. Generally, most DCAA efforts on firm-fixed price type contracts take place during the proposal stage rather than in the incurred cost stage. The reverse is true for cost reimbursable contracts. The allowable costs properly included in the final pricing of flexibly priced contracts are generally determined after they are incurred and audited. For additional details on the types of Government contracts reference FAR Part 16.

6. Contractor Records Retention.

a. DCAA performs all needed contract audits through evaluation of contractor records. FAR Subpart 4.7 generally describes records retention requirements. Specific retention periods for the differing types of records are addressed as well as how to calculate the retention periods. The full text of the Federal Acquisition Regulation (FAR) and Defense Federal Acquisition Regulation Supplement (DFARS) is available on the Defense Acquisition University’s Acquisition Knowledge Sharing System at https://dap.dau.mil/Pages/Default.aspx

b. Subpart 4.7 requires contractors to make available records, which includes books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any

9 ENCLOSURE 1

other form, and other supporting evidence to satisfy contract negotiation, administration, and audit requirements of the contracting agencies and the Comptroller General.

c. This subpart applies to records generated under contracts that contain one of the following clauses:

(1) Audit and Records-Sealed Bidding (52.214-26).

(2) Audit and Records-Negotiation (52.215-2).

7. Other Information.

a. The Department of Defense has mandated that defense agencies move towards a paperless environment (Management Reform Memorandum #2, dated May 21, 1997). Accordingly, DCAA auditors are required to obtain and develop their audit documentation electronically in order to capture the efficiencies that Information Technology (IT)offers us. This necessitates obtaining source information in an electronic format. Therefore, contractors are encouraged to submit information electronically. Submitting information electronically will aid in reducing disruption to your staff during the audit, allow you to transmit information instantaneously, increase the accuracy of submissions and updates, automatically record events for later retrieval, and increase the overall productivity of all involved in the procurement cycle.

b. All inquiries for additional information should be directed to the local DCAA field audit office, the address and telephone number of which can be found using the Audit Office Locator on the DCAA public web site at http://www.dcaa.mil. The contractor’s business location where the accounting records are maintained should be used for determining the appropriate DCAA office. If assistance is needed in determining the cognizant DCAA office, contractors may call DCAA Headquarters at (703) 767-3274.

c. Individuals having concerns or suggestions about the contract audit process should first bring these to local DCAA management's attention. Concerns not resolved at the local level should be elevated to the DCAA regional office. Each Deputy Regional Director (DRD) serves as the DCAA Director's primary regional point of contact to work with a company in resolving issues that cannot be settled at the local level. The DRDs may be contacted at the following numbers:

Table 1. Regional Telephone Numbers.

Region Telephone Number Central Region (Irving, TX) (972) 652-3600 Eastern Region (Smyrna, GA) (770) 319-4400 Mid-Atlantic Region (Philadelphia, PA) (215) 597-7453 Northeastern Region (Lowell, MA) (978) 551-9710 Western Region (La Mirada, CA) (714) 228-7003

10 ENCLOSURE 1

d. DCAA encourages the use of this manual by all individuals interested in increasing their knowledge of audits by the Defense Contract Audit Agency. User comments and suggestions are welcome. All such correspondence should be addressed to:

Defense Contract Audit Agency ATTN: Publications and Systems Division (PPS)

8725 John J. Kingman Rd., Suite 2135 Fort Belvoir, VA 22060-6219

(703) 767-3234 (FAX)

e-mail: DCAA-PPS@dcaa.mil

Figure 1. Regional Boundaries.

Western Region includes Alaska, Hawaii, the Pacific and the Far East Eastern Region includes the Caribbean, Central and South America Northeast Region includes Africa, Europe, the Middle East, and Afghanistan

11 ENCLOSURE 1

Figure 2. Defense Contract Audit Agency Organizational Chart.

12 ENCLOSURE 2

ENCLOSURE 2

PREAWARD SURVEYS OF PROSPECTIVE CONTRACTOR ACCOUNTING SYSTEMS

1. Preaward Survey Overview. A preaward survey is an evaluation, usually made by the cognizant contract administration office, of a prospective contractor's ability to perform a proposed contract. Such surveys may cover technical, production, quality assurance, financial capability, accounting system, and other considerations. Normally, DCAA may be requested to furnish information regarding the adequacy of the contractor’s accounting system to accumulate the type of cost information required by the contract.

2. Financial Condition Risk Assessments. Financial condition risk assessments or financial capability audits are performed to determine if the contractor is financially capable of performing on Government contracts. These risk assessments/analysis are generally conducted by the Defense Contract Management Agency (DCMA). DCAA may perform these services at the request of DCMA when there are unique circumstances requiring DCAA audit assistance.

However, DCAA will, in all audit situations, be alert to conditions which may indicate unfavorable or adverse financial conditions or other circumstances which could impede a contractor’s ability to perform on Government contracts. If indicators of financial distress are identified, the auditor will inform the Contracting Officer (CO) immediately.

3. Accounting System.

a. Accounting System Surveys – General.

(1) Prior to the contracting officer requesting a DCAA audit of your accounting system, the contracting officer will ask you to complete the “Preaward Survey of Prospective Accounting System Checklist” (http://www.dcaa.mil/Preaward_Survey_of_Prospective_Contractor_Accounting_System_Check list.pdf). The checklist provides documentation to the auditor on how your accounting system meets the criteria in the SF 1408, Preaward Survey of Prospective Contractor Accounting System. The contracting officer will provide the checklist to DCAA when they request an audit of your accounting system.

(2) The preaward accounting system survey is an examination before contract award to determine the acceptability of a contractor's accounting system for accumulating costs under a prospective Government contract. The audit scope should be limited to obtaining an understanding of the design of the prospective accounting system so as to appropriately complete the SF 1408, “Preaward Survey of Prospective Contractor Accounting System” (see Figure 3 and refer to paragraph b below for additional discussion), and those procedures essential to reach an informed opinion as to whether or not the design of the prospective accounting system is acceptable for accumulating costs under a Government contract and has the ability to generate the specific cost information required under the anticipated contract.

http://www.dcaa.mil/Preaward_Survey_of_Prospective_Contractor_Accounting_System_Checklist.pdf http://www.dcaa.mil/Preaward_Survey_of_Prospective_Contractor_Accounting_System_Checklist.pdf

13 ENCLOSURE 2

(3) Contractors should recognize that an operable accounting system that is under general ledger control is of paramount importance when performing Government contracts.

However, prospective contractors may have no work that requires the same type of accounting system required for Government work. A prospective contractor may not want to install a new, more detailed accounting system unless awarded a contract. In this case, if the potential Government contractor anticipates a contract award, it must have developed a system that is operable, though not necessarily in use. It must be in a position to demonstrate this new system to the auditor and be ready to implement the system prior to incurring any costs on the Government contract.

(4) If the auditor determines the accounting system is not acceptable for accumulating costs under a prospective Government contract, the auditor will promptly notify both the contractor and the procurement official of the deficiencies, and will usually identify recommendations for correcting the deficiencies. DCAA will not develop the new system, since this is the contractor's responsibility. Once the required corrective actions have been taken by the contractor to correct the deficiencies, DCAA, if requested by the CO, will perform a follow-up audit of the revised system and/or corrected deficiencies.

(5) An accounting system audit may be performed after contract award. The major objective is to determine if the contractor’s accounting system is adequate for accumulating and billing costs on Government contracts. It is usually performed at the request of the CO when (1) a follow-up to a preaward survey is recommended, or (2) a preaward survey was not conducted prior to contract award, and the CO determines that an audit is now required to support contract requirements. Auditors may self-initiate a post contract award accounting system audit based on audit risk at a contractor location.

b. Detailed Provisions of SF 1408 (Reference Figure 3, Page 2 of 2).

(1) Proper segregation of direct costs from indirect costs. DCAA will review the accounting system to determine if direct costs are segregated from indirect costs. Direct costs are defined in FAR 31.202 as any cost that can be identified specifically with a particular final cost objective (e.g., a contract). An example would be labor specifically identified to the contract or materials purchased specifically for the contract. At times, contractors may find it impractical to identify costs specifically to a contract. FAR 31.202 states that a direct cost can be treated as an indirect cost if the dollar amount is minor, it is treated the same way for all contracts in a contractor's accounting system, and that treatment produces substantially the same results as treating the cost as a direct cost. Indirect costs are defined in FAR 31.203 as any cost not directly identified with a single, final cost objective, but identified with two or more final cost objectives or an intermediate cost objective. An example of an indirect cost would be the lighting in a manufacturing area that houses the work of several contracts. The lighting benefits all contracts, but cannot practically be identified to a specific contract. These types of costs are normally placed in an overhead or General and Administrative (G&A) expense pool and allocated to contracts on some equitable basis. The cost accounting system must identify what costs are considered direct and what costs are considered indirect. Once these criteria are defined, they must be consistently applied.

14 ENCLOSURE 2

(2) Identification and accumulation of direct costs by contract. DCAA will determine if the accounting system can accumulate costs by contract (commonly referred to as a job order cost accounting system).

(3) A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives. DCAA will determine if indirect costs are allocated to cost objectives based upon relative benefits received or other equitable relationship, as required by FAR 31-201- 4, "Determining allocability," and FAR 31-203, "Indirect costs." Fundamentally, this means that a cost may not be allocated as an indirect cost to a final cost objective if other costs incurred for the same purpose have been included as direct costs of that or any other cost objective. For example, if a contractor wishes to perform a contract that requires three firemen on 24-hour duty at a fixed-post to provide protection against damage to highly flammable materials used on the contract, but the contractor already has a firefighting force for general protection of the plant, which is treated as an indirect cost and allocated to all contracts, the contractor may charge the cost of three of the post firemen directly to the particular contract requiring them. In this example, the contractor may also allocate a portion of the remaining cost of the general firefighting force to the same contract only if the separate classes of firemen can be shown to serve different purposes consistently (that is: (a) costs charged directly to the contract are only costs of three contract-required firemen at a fixed post who are protecting contract materials, and

(b) no costs of these firemen are ever included in the indirect cost pool).

(4) Accumulation of costs under general ledger control. DCAA will determine if the job cost ledger and other books of account can be reconciled with the general ledger, and that the company accounting system is controlled by the general ledger.

(5) A timekeeping system that identifies employees' labor by intermediate or final cost objectives. DCAA will determine whether a contractor's timekeeping system has the ability to track employees' time spent on each work activity. (See Note 4. below for further information on timekeeping procedures and controls.)

(6) A labor distribution system that charges direct and indirect labor to the appropriate cost objectives. This is interconnected with the discussion of timekeeping. Once an employee's time is segregated as described below, the costs must be allocated to the appropriate cost objective(s).

(7) Interim (at least monthly) determination of costs charged to a contract through routine posting to books of account. DCAA will determine if the accounting system produces appropriate reports that show the results of charges to contracts. These reports should be produced at least monthly.

(8) Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions. The FAR identifies some costs as expressly unallowable: e.g., bad debts (FAR 31.205-3); contingencies (FAR 31.205-7); contributions or donations (FAR 31-205-8); and entertainment (FAR 31.205-14), and requires that they be excluded from proposals and billings.

15 ENCLOSURE 2

Costs mutually agreed to be unallowable between the contractor and the CO also may not be proposed or billed. DCAA will determine if the accounting system identifies these unallowable costs and segregates them in the books and records (or on some alternate acceptable informal basis that readily reconciles with the books and records). While these costs may be legitimate business expenses, they will not be accepted by the U.S. Government as allowable contract costs.

FAR 42.709 authorizes CO to assess a penalty if a contractor claims an expressly unallowable cost in (1) the final indirect cost rate proposal or (2) the final statement of costs incurred or estimated to be incurred under a fixed-price incentive contract.

(9) Identification of costs by contract line item and units (as if each unit or line item was a separate contract) if required by the proposed contract. Some contracts require that the cost of certain items be readily identifiable. In such cases, DCAA will review a contractor's accounting system to determine if a contractor can comply with such requirements.

(10) Segregation of preproduction costs from production costs. DCAA will review a contractor's accounting system to determine that the costs can be identified in this manner.

4. Labor Charging System.

a. Timekeeping Procedures. Timekeeping procedures and controls on labor charges are areas of utmost concern. Unlike other costs, labor is not supported by external documentation or physical evidence to provide an independent check or balance. The key link in any sound labor time charging system is the individual employee. It is critical to labor charging internal control systems that management indoctrinates employees on their independent responsibility for accurately recording time charges. This is the single most important feature management can emphasize in recognizing its responsibility to owners, creditors, and customers to guard against fraud and waste in the labor charging function. To be effective, the internal controls over labor charging should meet the following criteria:

(1) There should be a segregation of responsibilities for labor-related activities; for example, the responsibility for timekeeping and payroll accounting should be separated. In addition, supervisors who are accountable for meeting contract budgets should not have the opportunity to initiate employee time charges. It is recognized that, for a very small company, this type of segregation may not be possible, whereas for a larger company, this type of segregation would be required in order to have good internal controls over labor costs.

(a) Procedures must be evident, clear-cut, and reasonable so there is no confusion concerning the reason for controls or misunderstanding as to what is and what is not permissible.

(b) Maintenance of controls must be continually verified and violations must be remedied through prompt and effective action, which serves as a deterrent to prospective violations.

(2) Individual employees must be constantly, although unobtrusively, made aware of controls that act as an effective deterrent against violations. Many businesses accomplish this by

16 ENCLOSURE 2

emphasizing the importance of timesheet preparation in staff meetings, employee orientation, and through the posting of signs throughout the workplace that remind employees of the importance of accurate and current timesheets.

b. Timesheet Preparation. Detailed instructions for timesheet preparation should be established through a timekeeping manual and/or company procedure. Those Instructions should indicate that the employee is personally responsible for:

(1) Recording his/her time on a daily basis.

(2) Recording time on the timesheet.

(3) The correct distribution of time by project numbers, contract number or name, or other identifiers for a particular assignment. To ensure accuracy, a listing of project numbers and their descriptions should be provided to the employee and maintained in the work authorization system electronically or in a hard copy for the employee to refer to it as needed.

(4) Changes to the timesheet. Procedures should be in place that identify the original time charge, the corrected time charge, and documentation from the employee indicating his/her concurrence with the change.

(5) Recording all hours worked whether they are paid or not. This is necessary because labor costs and associated overheads are affected by total hours worked, not just paid hours worked. Therefore, labor rate computations and labor overhead costs should reflect all hours worked. Unpaid hours worked are termed "uncompensated overtime." Solicitations over the simplified acquisition threshold contain the provision at FAR 52.237-10, Identification of Uncompensated Overtime, which details disclosure requirements for uncompensated overtime.

(6) Certifying the hours on the timesheet reflect the hours worked and the appropriate cost objective at the end of each work period.

c. Recommended Timekeeping Policy.

(1) The supervisor should approve and cosign, all timesheets.

(2) The supervisor is prohibited from completing an employee's timesheet unless the employee is absent for a prolonged period of time on some form of authorized leave. If the employee is on travel status, the supervisor for the employee may prepare a timesheet. Upon his or her return, the employee should turn in his/her timesheet and attach it to the one prepared by the supervisor.

(3) The guidance should state that the nature of the work determines the proper distribution of time, not availability of funding, type of contract, or other factors.

17 ENCLOSURE 2

(4) The company policy should state that the accurate and complete preparation of timesheet the employee's responsibility. Careless or improper preparation may lead to disciplinary actions under company policies, as well as applicable Federal statutes.

d. Labor Floor Checks or Interviews. DCAA auditors periodically perform physical observations of work areas and interviews of employees to determine if: (1) employees are actually at work, (2) employees are performing in their assigned job classification, and (3) employee time is charged to the appropriate job or indirect account. These types of audits are referred to as labor floor checks or interviews. DCAA will perform unannounced floor checks to determine the adequacy and accuracy of the timekeeping system for reimbursement of labor costs under cost reimbursable, time and material (T&M), and labor hour contracts.

e. Penalties for Labor Mischarging.

(1) The manipulation of charges to a contract may be subject to criminal charges under 18 United States Code (U.S.C.) 1001.

(2) Subject to the facts surrounding participation, the following individuals can be held liable for the violation:

(a) Employees who fill in and sign the timesheets with the false information.

(b) Supervisors who approve the timesheets with the knowledge that they contain the false information.

(c) Managers and officers who know those facts and make the claim anyway by submitting the invoice based upon the false timesheet.

(d) The company, in a case where the falsification is known by individuals who submit or who have authority to submit or disapprove the submission of invoices, or who are of a sufficiently high enough level in the company that the court will impute their knowledge to the corporation.

(3) There does not have to be a direct contractual relationship between the Government and the employee who submitted the false timesheet for the employee to be liable. A person may be liable even though he or she did not submit the fraudulent claim presented to the U.S.

Government.

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Figure 3. Preaward Survey of Prospective Contractor Accounting System (SF 1408).

19 ENCLOSURE 2

Figure 3. Preaward Survey of Prospective Contractor Accounting System (SF 1408), continued.

20 ENCLOSURE 3

ENCLOSURE 3

PRICE PROPOSALS

1. Requirements for Submission.

a. Prior to submitting your proposal to the contracting officer, you should perform a self assessment of the adequacy of your proposal using the Adequacy of a Contractor’s Pricing Proposal Checklist (http://www.dcaa.mil/Adequacy.pdf).

b. Cost or Pricing Data Required: The Truth in Negotiations Act (TINA) requires contractors to submit cost or pricing data if the procurement is above the TINA threshold ($700,000) and none of the exceptions to cost or pricing data requirements applies. Under TINA, the CO obtains accurate, complete and current data from the contractor to establish a fair and reasonable price

(FAR 15.403).

c. C O may require: (1) proposal submission of cost or pricing data in the format prescribed in FAR 15.408, Table 15-2, (2) specify an alternative format, or (3) permit submission in the contractor’s own format. FAR 15.408, Table 15-2, provides instructions on preparing a proposal, the supporting documentation required, and other information when cost or pricing data are required. An example of a completed proposal cover sheet (the first page of the proposal) as required by FAR 15.408, Table 15-2, and the associated proposal support, are found in the price proposal model (Figure 4). It is extremely important to prepare proposals in accordance with these instructions unless the CO specified an alternate format or approved the contractor’s own format. FAR 15.408, Table 15-2, I. General Instructions, requires that specific information appear on the first page of the proposal.

d. Information Other Than Cost or Pricing Data Required: Even when an exception to cost or pricing data applies (FAR 15.403-1), the CO is still required to establish a fair and reasonable price. In order to make this determination the CO may require information other than cost or pricing data, including information related to prices and cost information that would otherwise be defined as cost or pricing data if certified. Obtaining sufficient data or information from the contractor is particularly critical in situations where an item is determined to be a commercial item in accordance with FAR 2.101 and the contract is being awarded on a sole source basis.

Information other than cost or pricing data may be submitted in the offeror’s own format, unless the CO decides that use of a specific format is essential and the format has been described in the solicitation (FAR 15.403-5(b)(2). When DCAA is asked to audit information other than cost or pricing data, the scope of the engagement will vary. DCAA participation and the amount of support provided will be at the discretion of the CO. Since the audit process will vary, it is not practical to describe the possible scenarios. Therefore, a discussion of the audit of cost or pricing data will be used to provide an understanding of the full audit process.

http://www.dcaa.mil/Adequacy.pdf

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2. DCAA Forward Pricing Services. DCAA provides a number of forward pricing services to meet the needs of COs from requests for specific rate and cost data, to a full proposal audit.

When DCAA comes in to audit, the auditor will let the contractor know the scope of their audit.

3. DCAA Audit.

a. The auditor initiates an audit when the Procuring Contracting Officer (PCO) or the Administrative Contracting Officer (ACO) submits a request to the cognizant DCAA office. The auditor will identify the type of data required of the contractor and review the proposal package for adequacy. DCAA will then contact a company representative and coordinate with the contractor to obtain a walk-through of the proposal to gain an understanding of the basis of the proposal and related supporting documentation.

b. The actual audit time at a contractor location will vary depending on the size and complexity of the audit and availability of data. The auditor will first review the contractor's proposal assertions to determine if it has been adequately prepared (in accordance with the instructions in FAR 15.408, Table 15-2 or the format specified by the CO). If the proposal has not been adequately prepared, the auditor will recommend to the PCO/ACO that the proposal be returned to the contractor without audit until such time as an adequate proposal is received. If the proposal is adequate, the auditor will proceed with the audit.

c. The responsibility for providing adequate supporting data lies solely with the contractor.

The contractor bears the burden of proof in establishing reasonableness of proposed costs;

therefore, it is in the contractor’s best interest to submit a fully supportable and well-prepared cost proposal. The basis and rationale for all proposed costs should be provided as part of the proposal so that the government can place reliance on the information as current, complete, and accurate.

d. When an auditor requests supporting documentation from a contractor (either verbally or in writing), the request will clearly state what support is needed and when it should be provided.

The contractor will be provided a reasonable time period to provide the data given the specific circumstances. Generally, documentation supporting the contractor’s assertion (e.g., the contractor’s proposal) should be readily available. Unless the request requires analysis by the contractor or there are extenuating circumstances (e.g., the request is for a voluminous amount of data or for data stored at an offsite location), the contractor should provide the documentation upon request. Support includes access to personnel, in addition to the documentation/data supporting the contractor’s assertion (e.g., cost records, policies and procedures, management reports). Auditors will generally need to obtain supporting documentation directly from the person responsible for the information.

e. If the contractor does not provide the requested information by the requested due date, and the contractor has not provided an appropriate explanation for the delay, the auditor will prepare a formal written request to the appropriate high-level contractor management official stating that the information must be provided by a specific date (not to exceed one week) with a copy to the CO. This written request is normally initiated as soon as the due date is missed. If the

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information, or an appropriate explanation for the delay, is not provided within one week, the auditor will notify the contractor that a formal denial of access to records exists and is being reported to appropriate Government personnel.

f. Also, whenever possible, the proposal and supporting data should be provided in an electronic format unless there are extenuating circumstances, in which case the contractor should explain the reasons that the data cannot be furnished digitally.

g. When the price of a contract or contract modification exceeds $700,000 and is to be negotiated on the basis of cost or pricing data (e.g., historical accounting data, purchase orders, etc.), the contractor is required to certify that the data in support of its proposal are accurate, complete, and current (refer to FAR 15.403-4). In addition, FAR 15.404-1(c)(2)(iv) states that cost analysis also shall include appropriate verification that the offeror's cost submissions are in accordance with contract cost principles and, when applicable, the CAS. FAR 31.201-2 states that the factors to be considered in determining whether a cost is allowable include the following: (i) reasonableness, (ii) allocability, (iii) standards promulgated by the Cost Accounting Standards Board (CASB), if applicable, otherwise, generally accepted accounting principles and practices appropriate to the particular circumstances, (iv) terms of the contract, and (v) any limitations set forth in this subpart of FAR.

h. Upon completion of the audit, the auditor will hold an exit conference with a designated company representative. The exit conference will address all factual aspects of the proposal audit. If exceptions are taken to the judgmental aspects of the proposal, the auditor will not disclose detailed conclusions relative to the reasons or amounts that may be questioned. These judgmental differences are subject to negotiation by the CO.

4. Examples of Data That DCAA May Request.

a. In order for DCAA to perform an evaluation, and to provide a timely, adequate, and fair evaluation of the contractor's proposal, the contractor should have available detailed schedules of the labor and overhead rates used in the proposal. The schedules should show computations and tie into the existing accounting system. The schedules should also present the historical data, the rationale used in deriving future projections, and exclude all unallowable costs (refer to FAR

31.201 6). Further, the accounting method used in estimating proposed costs should be the same as the method used to accumulate costs.

b. Examples of the type of data DCAA may request to support the contractor’s assertions in its proposal may include:

(1) The basis of proposed labor rates and classifications including any proposed escalation factors.

(a) DCAA will want to understand how proposed labor rates were estimated and will need to audit any data that support these estimates.

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(b) DCAA will want to understand and evaluate the basis of labor categories (labor grades) proposed and the hours assigned to each labor category.

(2) The basis of proposed labor hours, including staff-loading charts, comparisons of proposed hours to experienced hours for the production of similar items; and any learning curve applications.

(3) The basis of proposed material costs. This support should include a consolidated priced summary of individual material quantities included in the various tasks, orders, or contract line items being proposed and the basis for pricing (vendor quotes, invoice prices, competitive bids, etc.). Include raw materials, parts, components, assemblies, and services to be produced or performed by others. For all items proposed, identify the item and show the source, quantity, and price.

(4) The basis of proposed subcontract costs. Include documented support of the prime contractor’s price analyses of all subcontractor proposals. In addition, if cost or pricing data is required per FAR 15.403-4 and not otherwise exempt, in accordance with FAR 15.403-1(b), submit the subcontractor’s cost or pricing data as part of your own cost or pricing data, as well as your analyses of the subcontractor’s cost or pricing data.

(5) Data showing the degree of competition and the basis for establishing the source and reasonableness of price for acquisitions (such as subcontracts, purchase orders, material order, etc.) exceeding, or expected to exceed, the appropriate threshold set forth at FAR 15.403-4 priced on the basis of adequate price competition.

(6) Explanation of the pricing method for interorganizational transfers priced at other than the cost of comparable competitive commercial work of the division, subsidiary, or affiliate of the contractor.

(7) The basis of the proposed indirect expense rates including overhead, general and administrative, material handling, and fringe benefits. Cost associated with direct and/or indirect rates are generally a very significant portion of the proposal. Required support for all companies is at least the current year detailed operating budget and a long range forecast/strategic plan covering all the periods of performance. The operating budget should be at the departments/pool level with expense item detail supporting anticipated contract performance. The budget should detail indirect expenses and show the relationship of direct labor (or other indirect expense allocation bases) to sales projections. Support also includes comparisons by year of projected overhead expenses by account to prior years’ incurred amounts. Out-year projections should be supported by the contractor’s analysis of the impact on its rates based on its long range forecast/strategic plan.

(8) The contractor is responsible for justifying and fully supporting all items in the proposal so that the audit will not be prolonged or negotiations delayed. All significant problems related to factual aspects of the proposal will be fully discussed with the company's representative. The auditor is required to notify the CO of unsupported costs and to explain what is needed from the contractor to support the costs. Unsupported costs are those items for which

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the contractor does not furnish sufficient documentation to enable the auditor to reach a definitive conclusion. The CO generally will request the contractor to develop appropriate support for any estimates upon which DCAA cannot develop an adequate audit opinion.

(9) Data requested by DCAA to evaluate information other than cost or pricing data will be based on the DCAA assistance requested by the CO and the type of information (other than cost or pricing data) the contractor has submitted. When the CO requests that the auditor perform an examination of a proposal supported by cost information (other than cost or pricing data), then the auditor will request the type of data described in paragraphs a. through e. If the CO has requested that the auditor perform specific procedures on submitted cost information, paragraphs a. through e. above give an idea of the types of data that could be requested on a limited basis depending on the circumstances of the procurement and the cost information submitted by the contractor.

(10) Sometimes, the auditor may be asked to assist the CO in making his/her determination as to whether an item meets the commercial item definition in FAR 2.101 and/or as to whether the price is reasonable. Examples of data that may be requested when assisting a CO in evaluating offered commercial items include:

(a) Source documents supporting sales history, quantities, and prices;

(b) Documents identifying special terms and conditions;

(c) Documents identifying customarily offered discounts for an item;

(d) Sources of financial data such as surveys, financial studies, etc.;

(e) Catalogs and price lists;

(f) Historical data for an item previously not determined commercial that the offeror is now trying to qualify as a commercial item; or

(g) Information other than cost or pricing data as discussed in f. above.

5. Model Proposal - Advanced Tank Technologies (ATT). Background information, similar to the following, should be provided:

a. ATT was incorporated in the State of Maryland in 1985. ATT is a research and development concern specializing in engineering feasibility studies and surface vehicle design.

In 1995, ATT developed a small manufacturing capability that enables it to manufacture prototypes of its basic designs. ATT had to borrow funds from a local lending institution to establish this capability. ATT provides services primarily to major DoD contractors on a firm-fixed price (FFP) basis.

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b. This procurement, solicited by Request for Proposal (RFP) number DAAH01-09-R-0001, calls for the production of 50 prototypes of a new heavy-duty shock absorber. ATT designed this part under another Army contract for the Armored Personnel Carrier Program.

c. The period of performance is February 28, 2010 to September 30, 2012.

Figure 4. Model Proposal.

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Figure 4. Model Proposal, continued.

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2010 2011 2012

Labor Category Rate/Hr…