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June 05, 2014

Determining Accounting System Adequacy - a Short Primer

Few topics seem more confusing to contractors than determining accounting system adequacy of subcontractors and consultants prior to awarding an Other Than FFP subcontract in a CPSR environment. Here's a short primer that includes relative accounting system requirements for each type of Other Than FFP subcontract:

Cost Reimbursable: These contract types have "unfixed indirects" applied to any line item, including T&M contracts where indirects are applied to ODC costs (e.g. ODCs are not billed at actuals). Because accounting system adequacy includes evaluation of the development of unfixed indirects applied to subcontract costs, an accounting system determined adequate by DCAA is required for award of a CR subcontract. Adequate accounting systems are required because the processes through which the subcontractor calculates indirect cost pools, bills unfixed costs and tracks variances must be verified prior to award to the sub. Because the contractor is unable (or unwilling) to perform the site visits and review records required to support completion of the DCAA accounting system checklist, use of an SF1408 alone to determine accounting system adequacy is not accepted by DCMA during a CPSR. 

Document Requirements: Letter number and date of DCAA accounting system determination; cover letter from DCAA (if available); Other Than FFP memorandum; adequate cost or price analysis.

Required Flowdowns Include: 52.215-2; 52.216-7; 52.232-7 (for T&M)

T&M ("M" billed at actuals) and LH subcontracts: Because these subcontracts are billed at fixed prices with no “exposed” indirect burdens, the accounting system requirements for these contract types are proportionally lax. In other words, once price analysis is complete the subcontractor need only demonstrate an adequate timekeeping system with the ability to segregate and assign time correctly to the prime contract. This can be accomplished via active enforcement of FAR Part 52.232-7 requirements, which includes subcontractor submission of certified time cards and receipts for ODC costs exceeding $75. Consider these contract types for consultants and micro-small businesses – these contractors do not generally have the necessity or ability to burden ODCs in the first place.

Document Requirements: Other Than FFP memorandum; Determination of Accounting System Adequacy Memorandum; adequate cost or price analysis.

Required Flowdowns Include: 52.215-2; 52.232-7