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Incurred Cost Submissions: What does DCAA look for?

Jul 25, 2013

The year is over, books are closed, tax data has been sent to the CPAs and you’re ready to start a new year.  That’s when you receive the letter from DCAA reminding you Incurred Cost is due in less than six months.  What does DCAA want from your incurred cost proposal other than for you to slice, dice and reconcile your annual costs on more schedules than you’ve ever seen in your life?

DCAA uses incurred cost submissions to assist in determining the audit oversight of contractors.  They do this, in part, by calculating Auditable Dollar Volume (ADV) of each contractor’s incurred cost submission.   ADV is the cost of flexibly priced Government contracts a company incurs during their fiscal year.  (Flexibly priced contracts are those other than firm-fixed-price, time-and-materials, or labor-hour contracts.)  It’s the flexibly priced contracts where DCAA can save the Government money after contract award.

Put another way, DCAA’s mission is to ensure the Government is purchasing services and items at a fair price.  When determining what companies to audit, they want to get as much bang for their buck as they can.  If a company has many Government contracts and a history of not following the rules (high risk), DCAA will assign more audit hours there than at the company with only one small Government contract and a good history of following the rules (low risk).  

There are 2 ways DCAA looks at ADV:  1) Dollar Volume and 2) % ADV to Total Costs Incurred.  A company’s combined ADV and audit risk helps DCAA determine if their proposal will be audited or just be subject to a desk review.  Any company with a minimum ADV of $250M or one that is considered high risk is subject to audit.  Other factors, including prior years’ questioned costs, audit history and random sampling, are used to determine if companies with less than $250M ADV are audited.

Higher % of ADV to Total Costs incurred means that each $1 questioned will have a larger impact on indirect rates.  Following is a comparison of 2 companies with flexibly priced Government contracts.  Both companies have the same annual costs, including direct and indirect costs, but differ in ADV.

 

Company A

Company B

Total Annual Costs

$500M

$500M

Total Flexibly Priced Contracts

$500M

$100M

Direct Costs

$200M

  $40M

Indirect Costs

$300M

  $60M

ADV

$500M

$100M

ADV to Total Costs

100%

20%

Company A has $500M ADV with 100% ADV to total costs.  Every $1 DCAA questions as not being reimbursable by the Government will be a $1 saved.  It makes no difference what the ratio of indirect to direct costs is because the company’s ADV to total costs is 100% ($500M/$500M). 

Company B has $100M ADV with only 20% ADV ($100M/$500M).  A questioned direct cost will be a $1 for $1 cost savings but a questioned indirect cost will only be a $.12 savings to the Government ($60K/$500K).  If $25M in indirect costs was questioned in Company A, to achieve the same results in Company B, $125M ($25M/20%) would need to be questioned which exceeds the total value of their flexibly priced contracts.

Getting back to how DCAA uses ADV to determine audit oversight, it should now be easier to understand that when audit risk is the same, DCAA will spend more time at companies with higher ADV and a higher % ADV to Total Cost.  Company A clearly has higher ADV, making it easy to identify as requiring more oversight than Company B. 

Questions about incurred cost submissions? Leave your thoughts below.


Written by: Diana Snyder

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