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Four MRDs issued by DCAA in June 2014

In June, the Defense Contract Audit Agency (“DCAA”) issued four Memoranda for Regional Directors (MRDs) that can be of interest to contractors. Two of the MRDs related to conducting audits under the Defense Federal Acquisition Regulation Supplement (DFARS) business systems rule. The first is MRD 14-PAS-009(R) Audit Guidance on Reporting Business Systems Deficiencies, (June 26, 2014). The primary objective of this MRD was to provide clarifying guidance on how to report shortcomings in a business system that do not rise to the level of a significant deficiency, as defined in the relevant business systems clause. Under the various business systems clauses, a distinct definition is provided of what constitutes a significant deficiency. If a business system has one or more significant deficiencies, the Administrative Contracting Officer (ACO) is authorized to withhold a portion of payments to be made on Cost Accounting Standards (CAS) covered contracts containing the business system clause. If a business system contains deficiencies that are not significant, then withholding is not authorized. This MRD also states that if an auditor finds only deficiencies in a business system, the auditor will not issue an audit report identifying the deficiencies, but will issue a memorandum to the ACO. On the other hand, if the auditor finds both significant deficiencies and deficiencies that are not significant, they will all be identified in an audit report to the ACO.

The second MRD dealing with business systems is MRD 14-PAS-011(R), Audit Guidance on Revisions to Post Award Accounting Systems Audits. (June 26, 2014). This MRD 14-PAS-011(R) states that DCAA will no longer issue audit reports containing an opinion as to whether a contractor’s accounting system is adequate or inadequate for “accumulating and billing costs under Government contracts”, because this statement is not consistent with the criteria of the DFARS accounting system clause. The MRD does not state what, if any, language will be used in place of the deleted language.

Additionally, the MRD says that DCAA is removing its audit program for conducting accounting system audits for Department of Defense time-and-materials /labor hour contracts for commercial items. Although the accounting system clause is required to be included in such contracts, the business systems clause authorizing withholding for significant deficiencies is not authorized for use in such contracts. Given the nature of contracts for commercial items, the reason for including the accounting systems clause in such contracts is not apparent.

The third MRD is 14-PAC-010(R), Audit Guidance on Changes to Cost Accounting Standards Related Audits (June 26, 2014). When a contractor is required to submit a CAS Disclosure Statement (DS), the DCAA performs an adequacy review and a compliance review of the DS. Each review results in a separate audit report. This MRD is revising that process by eliminating the need for an audit report addressing whether the DS is adequate. Now, DCAA will review the DS for adequacy when DCAA is asked to review the DS, but before accepting the assignment. If DCAA determines that the DS is not adequate, it will discuss this determination with the ACO, but will not begin a compliance audit until the contractor has submitted a DS that DCAA determines is adequate. The MRD does not provide any guidance on what steps the auditor is to take if the ACO believes the DS is adequate and requests DCAA to proceed.

The final MRD is 14-PPS-012(R), Guidance on Establishing Provisional Billing Rates, (June 27, 2014). This new guidance should help to ease issues that have arisen between DCAA and contractors regarding a contractor’s obligation to submit a proposal to establish billing rates. In the past, some of our clients have had DCAA auditors cite them for having deficient accounting systems because the contractor did not submit a “timely” proposal to establish billing rates. This was inappropriate because there is no specific requirement in the Federal Acquisition Regulation (“FAR”) for a contractor to submit such a proposal as a matter of course. DCAA has recognized this in the MRD, which explicitly states that “FAR 42.704 does not specifically require contractors to submit a billing rate proposal.” However, it goes on to say that auditors “should encourage contractors to submit a billing rate proposal at the end of the fiscal year so that we can establish the rates early in the new fiscal year.” To do this, the MRD requires auditors to notify the contractor that DCAA is beginning the process to establish billing rates and ask the contractor if it wishes to provide any input into that process, such as providing updated budgets. Auditors are directed not to delay establishment of billing rates waiting for a response from the contractor.