FAQs on Revised Treatment of Incomplete or Inadequate Prime Contractor Cost

March 1, 2019

By: Eric Poppe, Senior Manager

On January 15, 2019, we posted a blog titled “Revised Treatment of Incomplete or Inadequate Prime Contractor Cost”. The blog discussed the new guidance detailed in the Memorandum for Regional Directors (“MRD”) issued on November 27, 2018. Effective immediately, Defense Contract Audit Agency (“DCAA”) auditors must perform ‘alternative procedures’ on subcontractor costs included in proposals when the cost or pricing analysis completed by the prime contractor has not been completed or deemed inadequate. As we outlined in the blog, those alternative procedures could include:

  • Creating a decrement based on purchase order history;
  • Creating a decrement based on other relevant information (e.g., comparisons of prior subcontract proposals to historical cost or price analyses or negotiated amounts); and/or
  • Coordinating with the subcontract audit team and request a DCAA assist audit based on the prime/higher-tier audit team’s risk assessment.

Also included in the MRD were three pages of frequently asked questions. A majority of the questions relate to requesting an assist audit, considerations for an assist audit, and guidance to the prime/higher-tier DCAA audit team on how to present the assist audit, or lack of cost or pricing analysis, in their audit report.

In our review of the MRD, three questions jumped out at us. The first was whether the performance of alternative procedures or an assist audit (both performed by DCAA) relieve the prime/higher-tier contractor from its responsibility to perform cost or price analyses of the subcontract proposal? This MRD details guidance that states the prime is still responsible for working to perform cost and pricing analysis. Sadly, alternative procedures is not a “get out of jail free” card.

In the MRD, DCAA stated the following regarding the topic: “The performance of alternative procedures or an assist audit of the subcontract proposal does not relieve the prime/higher-tier contractor of its responsibilities. FAR 15.404-3(3 (b), Subcontract pricing considerations, requires prime contractors and higher-tier subcontractors to conduct appropriate cost or price analyses to establish the reasonableness of the proposed subcontract prices. It also requires the prime/higher-tier contractor to include the results of these analyses in its price proposal. Therefore, the audit team should include amounts associated with incomplete or inadequate cost or price analyses as a material noncompliance (i.e., noncompliance with FAR 15.404-3(b)) in the audit report.

The second question that grabbed our attention was whether any analysis of the subcontractor’s proposal is required to be performed by the prime/higher-tier contractor if access to the cost data is denied. DCAA responded that the prime contractor should document its efforts to perform cost and pricing analysis, and coordinate with the government for an assist audit as soon as possible.

Finally, the third question details the conditions that should be present for the prime/higher-tier DCAA audit team to consider an assist audit of the subcontractor. Most of the conditions listed related to lack of analysis performed, the prime contractor having inadequate policies and procedures, and lack of access to subcontractor cost data.

The key takeaway for a contractor is to be proactive requesting and trying to perform cost and pricing analysis on lower tier subcontractors and document the process. In the event there is an issue, a prime contractor should understand their responsibilities and know how or when to push their DCAA auditors to request an assist audit.

For more information on subcontractor monitoring, feel free to reach out to Cherry Bekaert’s Government Contractor Services Group.