If you’re a contractor who has submitted a proposal to work with the Department of Defense (DoD), you will have an audit done by the Defense Contract Audit Agency (DCAA) before the contract is awarded. A Pre-Award Audit typically includes the audit of the pricing in the proposal the contractor submitted as well as a survey of the contractor’s accounting system.
A Pre-Award Survey, which is the part of the audit that specifically reviews the design of the accounting system, is not a true audit. During the survey, an auditor will review the features of the accounting system to determine if the contractor will be able to meet compliance prior to the contract being awarded.
Steps for a Pre-Award Survey
If you’re a new contractor or new to cost-reimbursement contracts with the DoD or another federal entity, you will need a Pre-Award Survey. The auditor won’t be assessing your accounting system’s operational efficacy during this survey—just the design of your accounting system.
For the survey to be completed properly, the contractor must provide the auditor with documentation, including those for policies and procedures, for the accounting system. The contractor will also need to demonstrate the design of the system to the auditor so the auditor can assess if the system can accumulate costs for government contracting purposes.
The contracting officer issues a request for the auditor to perform a Pre-Award Survey, who will then perform the audit in the following steps.
The auditor will first determine if the contractor’s existing account system complies with Generally Accepted Accounting Principles (GAAP). Then, they will determine if the system is able to keep direct cost separate from indirect costs. These costs must be kept separately and be identified with consistent criteria.
After these first two steps, the auditor will assess if the system can produce a subsidiary job cost ledger, which will identify the collection of direct costs according to the contract.
During the fourth step, DCAA will determine if indirect costs are assigned to cost objectives based on relative benefits received. Costs can’t be assigned as indirect costs to a final cost objective if other costs exists for the same reason, but have been identified as direct costs.
In step five, the auditor will assess the ability of the job cost ledger and other accounting books to be merged with the general ledger, so the end result is all costs accumulated under the general ledger. For the accounting system to be in compliance, it must be under control by the general ledger.
Step six will begin with the auditor assessing the contractor’s timekeeping policies. The contractor must have policies in place that require employees to submit timesheets daily and supervisors to approve them daily. The timekeeping system must also identify employee labor by intermediate final cost objective.
Next, step seven allows the auditor to determine if the contractor’s labor distribution system charges direct and indirect labor to the correct cost objectives. Employee time must be segregated and costs attributed to the proper objectives.
In step eight, the auditor will determine if costs are being charged to contracts once a month at the minimum. The accounting system should produce reports that show the results of charges to the contract.
The auditor will then determine if unallowable costs are excluded from costs charged to the contractor. The accounting system must be able to identify and exclude unallowable costs, including costs directly associated with unallowable costs.
In step ten, if required by the proposed contract, DCAA will determine if the accounting system can identify costs by contract line item and units. This level of detail may not be required for all contracts, but if it is, the contractor’s system must be able to comply.
In the last set of steps, the auditor will begin by ensuring the accounting system can separate preproduction costs from production costs, which is relevant for contractors in manufacturing.
Next, the auditor will assess if the system can set limits for costs and billings, which is required when contractors have a limit on costs or billings for the contact.
In some cases, contracts will require billings and payment of these invoices to be based on the meeting of specific objectives. For these cases, the accounting system must account for job performance and goals and bill accordingly to ensure payments correspond with the work that has been done.
During step fourteen, DCAA will assess the design of the accounting system for reliable maintenance of records, which are essential in pricing follow-on acquisitions. The system must reliably provide data for future estimates.
In the last step of the survey, the auditor will determine if the accounting system is fully operable. Although this is not a requirement for the survey, the system must be in operation for the contract to proceed. If the system is not currently operating, the auditor will note if any functions are operating, which are not, which ones the contractor expects to be, and which functions do not exist.
Is Your Accounting System Design Compliant?
The Pre-Award Survey doesn’t require a fully operable accounting system, but the contractor must have evidence of planning and be in compliance with Federal Acquisition Regulation (FAR) standards.
If you’re a contractor preparing for a Pre-Award Survey, you must have an accounting system design that allows for the allocation of direct costs to jobs, especially labor distribution. Your system should also be able to properly charge direct and indirect costs.
Since your accounting system will be crucial to tracking costs and labor for government contracts, it’s essential to have a reliable system in place for compliance. This will allow your firm to have a better chance at being awarded contracts, including flexibly priced ones.
For more information on Pre-Award Surveys and Pre-Award Audits for government contractors, grab a free copy of our eBook, What Government Contractors Need to Know About Common DCAA Contract Audits.