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Service ContractingDCAA Interests & Initiatives March 31, 2008
Discussion Topics
Audits of Billing System Internal ControlsAudits of T&M Labor CostsAudit Guidance on T&M and Labor Hour Contracts
Audits of Billing System Internal Controls
• Assessment• Assurance• Scope of Audit
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PricewaterhouseCoopers
DCAA – Audits of Billing System Internal Controls
Assess adequacy of and contractor compliance with controls• 3 levels of compliance assessment• Assessment level provides for risk documentation / staffing considerations• Consideration of billings process flows T&M / LH vs. cost-type
Assurance that billings:• Prepared in accordance with laws, regulations, and contract terms• Prevented material misstatements or detected and corrected timely
Scope of audit – T&M and LH contracts• Generally require a unique set of billing controls• Common for contracts to specify labor categories which do not coincide with the
contractor established labor classifications• Labor distribution system
- Incurred labor hours input by contract category to billing system- Labor/timekeeping controls preventing misclassification of employees
Audits of T&M and Labor Hour Contracts
• Contract Clauses• Classes of Labor• Overtime• Floor Checks• Material Costs
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PricewaterhouseCoopers
DCAA Audits of T&M and Labor Hour ContractsLaborContract clauses relating to labor and types of operations for contractual rates
Classes of direct labor charged should only include only that which is consistently classified with regularly established practices and consistent with the labor so classified in the proposal• Personnel such as clerks, material handlers, stockroom employees,
janitors, etc. are not acceptable as direct labor unless specifically authorized by the contract
• Partners, officers, supervisors are not acceptable as direct labor unless specifically authorized in contract
• Rates established for various skill levels• Disproportionate use of lower paid employees brought to the attention of
the contracting officer
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PricewaterhouseCoopers
DCAA Audits of T&M and Labor Hour ContractsLabor (con’t)Overtime:• Only hours actually worked are acceptable (whether regular or overtime)• Overtime hours cannot be converted to a larger number of regular hours to
compensate for overtime premium payments• Rates charged for overtime hours not increased unless provided by
contract
Floor Checks:• Floor checks made to determine that direct employees are actually present
and working on the job they are charging time to• Does the contractor’s system of internal control provide for such checks?• Frequency and scope of auditor floorchecks
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PricewaterhouseCoopers
DCAA Audits of T&M and Labor Hour ContractsMaterial CostsTerms of the contract
Methods for determining material costs are consistent with regularly established practices and consistent with material classified in the proposal
Applicable discounts or expense credits included
Subcontract billings do not exceed rates for work regularly agreed upon between the contractor and subcontractor, unless specifically authorized by the contracting officer or terms of the contract
Audit Guidance on T&M and Labor Hours Contracts
• Low Risk T&M and Labor Hour Contract Closeout Initiative• Time and Materials and Labor Hour Contacts• Reporting Questioned Costs on T&M and Labor Hour Contracts
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PricewaterhouseCoopers
Audit Guidance on T&M and Labor Hour ContractsLow Risk T&M/LH Contract Closeout Initiative (05/17/2005)
• Expedited closeout of T&M/LH contracts of $1,000,000 or less
• Coordination with the ACO
• Prior to completion of incurred cost audit and without final voucher audit
• Contractor eligibility criteria; risk assessment checklist:– Adequate systems – accounting, billing, labor accounting– Labor floor checks have been performed - no significant exceptions– Purchase existence and consumption tests performed - no significant
exceptions– No significant exceptions previously taken on final vouchers– No significant impact on T&M contracts of questioned G&A costs from prior
audits
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PricewaterhouseCoopers
Audit Guidance on T&M and Labor Hour ContractsLow Risk T&M/LH Contract Closeout Initiative (05/17/2005) (con’t)• Contractors eligible for expedited closeout are required to submit an
abbreviated final voucher on all completed contracts within a reasonable period (30 days)
• Abbreviated SF 1034 final voucher shows the summary information normally contained on the SF 1035 continuation sheets:
- Total hours - Subcontracts- Total labor dollars - G&A- Material - Total cumulative amount- ODC’s - Total paid-to-date- Travel - Amount due
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PricewaterhouseCoopers
Audit Guidance on T&M and Labor Hour Contracts (07/31/2007)SummaryFAR and DFARS clarifications for T&M and LH contracts awarded after 02/12/2007
Key summary points:
• Subcontract and intercompany labor based on its own rates and not those of the prime contractor; priced and billed using separate rates for each subcontractor and intercompany labor category
• Prime, subcontract, and intercompany rates - separate or blended
• Selective verification that claimed amounts comply with contract terms
• Procedures for reconciling prime, subcontract, and intercompany labor hours to respective source documents
• For awards prior to 02/12/2007 continue to review claimed costs with contract terms; billings and claimed costs reflect subcontract and intercompany labor at cost, unless otherwise specified in contract
• FAR Part 12 revision - commercial services using T&M or LH contracts
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PricewaterhouseCoopers
Audit Guidance on T&M and Labor Hour Contracts (07/31/2007)Incurred Cost Audits/Contractor Billing Reviews• Develop audit procedures for T&M and LH contracts to ensure:
• Claimed costs are in compliance with contract terms
• Payments made in accordance with labor categories specified in the contracts, as previously described under FAR 16.601
• Payments of materials include subcontracts for supplies and incidental services for which there are no labor categories specified
• Payments for materials subject to Allowable Cost and Payment clause
• Audit procedures should include:
• Verifying claimed/billed labor rates to contractual rates by labor category; labor effort meets contractual labor category qualifications
• Selective verification of prime, subcontract, intercompany labor hours supported by timekeeping records/invoices
• Reconcile blended rates for non-DoD competitively awarded contracts
• Claimed/billed material costs - allowability, allocability, reasonableness
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Audit Guidance on T&M and Labor Hour Contracts (07/31/2007)Forward Pricing Audits• Selectively verify that subcontract and intercompany direct labor is proposed and supported using separate hourly labor rate(s) and are not included as part of the prime contractor’s labor
rates
• Subcontract labor rates, separately proposed by the prime contractor, should include the prime’s subcontract costs and applied indirect costs and profit
• Intercompany labor rates shall not include profit of the transferring organization (commercial item exception may apply), but may include profit of prime contractor
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PricewaterhouseCoopers
Audit Guidance on T&M and Labor Hour ContractsReporting Questioned Costs on T&M/LH Contracts (11/26/2007)• Clarifies guidance on reporting questioned labor costs
• Exceptions taken on labor hours billed/claimed when labor hours incurred are not in compliance with contract terms:• Employee does not meet labor qualifications/requirements prescribed in the contract for the labor category• Question hours and related billed/claimed amounts in total
• Reviewing contractor billings or claimed amounts:• Selectively evaluate billed/claimed direct labor hours to ensure employees meet the labor category qualifications specified in the contract• FAR 52.232-7(a)(3) - labor hours incurred for tasks specified in the contract will not be paid for work performed by employees that do not meet qualifications specified in the contract, unless authorized by the Contracting Officer
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