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Government Contractors

Guidance Issued on Treatment of “Blended” Compensation Caps in Incurred Cost Submissions

On June 30, 2016, the Defense Contract Audit Agency (“DCAA”) issued Memorandum for Regional Directors (“MRD”) 16-PSP-007(R), Audit Alert on Handling Incurred Cost Proposals Using a Blending Approach of Compensation Caps. In this memo, the DCAA discusses how auditors are to treat new and existing incurred cost submissions (“ICS”) that include blended compensation caps, in the absence of an advance agreement.

One of the key points of the memorandum is that DCAA should not delay the adequacy review of an ICS if an advance agreement is not present. The audit team must continue with the adequacy review.

During the adequacy review, DCAA should engage with the Administrative Contracting Officer (“ACO”), if they have not already, to coordinate on the absence of the advance agreement for the blended compensation cap. DCAA should communicate to the ACO that an advance agreement is needed, in accordance with the DDP Memorandum issued in October 2014. DCAA should offer to perform a non-audit service to support the execution of the advance agreement for the ACO.

If the ICS is not adequate, then the guidance states that DCAA should include a statement that the ICS should not be resubmitted until an advance agreement is executed for the blended compensation cap approach. If a contractor is using a blended cap approach, any inadequacy of the ICS could significantly delay review beyond what most companies are already seeing.

If your company is using a blended compensation cap in a prior year or upcoming year ICS, we strongly encourage you to ensure that the ICS is adequate in accordance with the DCAA checklist. Consider having a few separate reviews (preferably by someone who has not seen the submission) to this checklist to ensure that there is nothing significant that could be missed, and ultimately create substantial delays for you and your company in the ICS process.

If you have any questions or concerns regarding the blended compensation caps in your incurred cost submissions or forward pricing proposals, please do not hesitate to contact one of our experienced GovCon professionals for assistance.


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