Revised Treatment of Incomplete or Inadequate Prime Contractor Cost

January 15, 2019

The Defense Contract Audit Agency (“DCAA”) issued revised guidance on the treatment of incomplete or inadequate prime or higher-tier (hereinafter referred to as “prime”) contractor cost or price analyses during a forward pricing proposal audit. This new guidance, effective immediately, cancels the previous guidance established in 2009 and in 2017.

Federal Acquisition Regulation (“FAR”) 15.404-3(b) requires the prime or higher-tier contractor to conduct cost or pricing analyses to establish reasonableness of the proposed subcontractor costs. Under the previous guidance, if the prime contractor did not complete and submit the required subcontractor cost or price analyses with its own proposal, DCAA classified those subcontractor costs as unsupported. The new guidance now requires DCAA to perform alternative procedures on these associated costs previously classified as unsupported if the prime/higher-tier contractor has not completed the required cost or price analyses, or if the completed cost or price analyses are inadequate. The Memorandum for Regional Directors (“MRD”), issued November 27, 2018, suggests the following alternative procedures be used by the auditor to analyze associated costs:

  • Create a decrement based on purchase order history;
  • Create 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
  • Coordinate with the subcontract audit team and request a DCAA assist audit based on the prime/higher-tier audit team’s risk assessment.

The MRD cautions auditors to use professional judgment and consider the overall risk and materiality when establishing alternative procedures. If, and only if, the auditor is unable to establish sufficient appropriate evidence through performing alternative procedures will the costs be classified as unsupported.

In addition to the alternative procedures, the prime contractor should notify the Contractor Officer or requestor of the FAR non-compliance as soon as possible. Failure of the prime contractor to comply with the requirements of FAR 15.404-3(b) will result in a material estimating deficiency report and possibly other adverse action.

The MRD includes three pages of frequently asked questions (“FAQs”). Cherry Bekaert will take a deeper dive into this new guidance, including discussion of the FAQs, in our next GovTract eNewsletter.