June 05, 2013

Relative determinations of accounting system adequacy

I get a lot of questions from contractors preparing for DCMA review regarding determining accounting system adequacy "to CPSR standards" for Other-Than-FFP awards to individuals and small businesses that have not gone through DCAA audit. It can be a difficult issue to administer especially on quick turnaround efforts which include subcontractors who lack demonstrable corporate-level sophistication with financial aspects of government contracting.

I suggest that there are two main things to keep in mind when determining accounting system adequacy:

1. Contract type dictates accounting system requirements. The farther you deviate from FFP, the more robust the subcontractor's accounting system must be to properly administer the award. As a result, LH subcontracts require the least other-than-FFP accounting system adequacy evidence and Cost Plus require the most.

2. Exposed Indirects Equal Higher Demonstrations of Accounting System Adequacy. If indirects are fixed, the main accounting system adequacy requirements necessarily relate to time keeping and billing. Exposed indirects, on the "M" of T&M contracts or anything in a CR contract, require additional levels of accounting system adequacy in accordance with DCAA audit standards. In other words, the higher the likelihood of subcontractor Incurred Cost Proposals and Rate Variance requests, the more robust the accounting system generating those documents. I would argue that accounting system adequacy on LH and T&M contracts where ODCs are billed at actual cost is documented when: (a) 52.232-7 (for LH and T&M) and 52.216-7 (T&M only) are flowdowns; and invoices require (b) certified time sheets; and (c) receipts for ODCs for payment.

For Part 2 of this discussion, I'd like to open a discussion regarding potential options for meeting the accounting system adequacy documentation requirement when a DCAA audit report is not available.