excluded. The scope of audit and the supporting data on which the rate recommendations are based will have to be determined by the auditor on a case-by-case basis. However, the following steps should be considered:
(1) Advise the contractor in writing that its uncertified proposal cannot be used to establish rates, and that a detailed account-by-account analysis is required to be submitted identifying all unallowable costs.
(2) Review historical audited cost to determine if it is representative of allowable cost for the period being audited. Give consideration in this assessment to the degree that organizational, procedural, programmatic, or business volume changes may have affected either the incurred expenses, allocation bases, or nature or level of unallowable costs.
(3) If the contractor does not submit the detailed expense account analysis, which identifies all unallowable costs, and historical audited cost data does not appear to be repre
sentative, notify the contracting officer that no audit means exist to advise him/her on what unilateral rates should be established. Provide whatever information the auditor has devel
oped on prior audit history, including why it is not considered representative of allowable cost for the period being audited.
(4) In no case should the auditor develop an alternative contractor proposal or com
plete an audit of the contractor's incurred cost when the contractor has not submitted a properly certified proposal. Either action would relieve the contractor of its contractual re
quirement to submit a proper proposal that excludes all unallowable cost. As described in 6
706.2 however, certain MAARs can be performed before submission of the certified pro
posal.
(5) If requested by the contracting officer, prepare an advisory audit report on the auditor's rate recommendations and attach Forms 1 as appropriate. Although the rates for the fiscal year involved may be subject to audit determination, the auditor is not required to enter into the resolution process with the contractor. Upon receipt of the audit report, the contract
ing officer will issue a unilateral decision. At this point, the contractor may choose to pro
ceed in accordance with the disputes clause.
d. In the event a contractor withdraws or indicates it will withdraw its proposal, consider discontinuing the audit effort, request that the contractor explain why the proposal is being withdrawn, and promptly notify the ACO in writing of the situation. Also, when applicable, advise the ACO that the contractor's proposal was initially submitted late, the withdrawal will delay the audit and settlement of indirect expense rates, and that the withdrawal may result in the loss of appropriated funds. You should seek assistance from the ACO to estab
lish a firm date for the contractor's resubmittal of the proposal. If the contractor refuses to resubmit a certified proposal in a timely manner, the FAO should follow the procedures out
lined in 6-706.1c and d. A model pro forma memorandum addressed to the ACO is shown in Figure 6-7-1. Modify it as appropriate to suit each situation.
6-706.2 Performance of MAARs Without a Certified Proposal
a. Auditors should exercise their judgment when there is an opportunity to perform cer
tain MAARs and they have not received a certified proposal. Factors that the auditor should consider include:
(1) The MAAR must be performed on a real-time (concurrent) basis before the certi
fied proposal is submitted or the opportunity to perform that MAAR is lost.
(2) MAARs relating to the audit of indirect expenses are generally not performed prior to the receipt of a certified proposal because the contractor usually concentrates on reviewing indirect expense accounts and eliminating unallowable costs prior to certifying the proposal.
(3) The contractor has good internal controls related to the audit area covered by the MAAR and there is very little probability that unallowable costs will be found.
(4) Audit techniques such as multi-year auditing can be used to more efficiently ac
complish the MAAR for more than one year in the same audit.
b. Generally, the MAARs that can be performed without a proposal relate to internal control and risk assessment steps, certain reconciliations, concurrent audits of labor and ma
terial costs, requests for assist audits, and tests of adjusting entries. The MAARs that would not normally be performed are the MAARs related to determining the allowability and rea
sonableness of indirect costs and those reconciliation steps which require a submission.
In most cases, the timing on the accomplishment of the MAARs can be categorized as follows:
(1) Proposal not needed to perform:
MAAR No.
1. Internal Control Audit Planning Summary and/or Internal Control Questionnaire (ICQ)
3. Permanent Files
4. Tax Returns and Financial Statements
5. General Ledger, Trial Balance, Income, and/or Credit Adjustments*
6. Labor Floor Checks or Interviews 7. Changes in Direct/Indirect Charging
8. Comparative Analysis-Sensitive Labor Accounts 9. Payroll/Labor Distribution Reconciliation and Tracing 10. Adjusting Entries and Exception Reports*
12. Auditable Subcontracts/Assist Audits 13. Purchases Existence and Consumption
15. Indirect Cost Comparison with Prior Years and Budgets
*If these MAARs were accomplished before the certified proposal is provided, supple
mental audit work would need to be performed after the proposal is received to deter
mine if additional adjusting entries were made during the preparation of the proposal.
(2) Proposal needed to perform:
MAAR No.
2. Contract Cost Analysis and Reconciliation to Books 14. Pools/Bases Reconciliation to Books
16. Indirect Account Analysis 18. Indirect Allocation Bases 19. Indirect Rate Computations
6-706.3 Corporate, Group, or Home Office Expenses
a. The certification requirement is predicated on the idea of a knowledgeable corpo
rate official accepting individual responsibility for the allowability and allocability of costs included in indirect cost proposals. All corporate indirect cost submissions used to allo
cate costs to divisions for establishment of final overhead rates must be certified at the
corpo-6-707 rate level. These costs need not be certified again at the division level, and the divisional certifi
cation would only cover indirect costs arising from that division. This requirement is based on a clarification memorandum issued by the Deputy Assistant Secretary of Defense for Procure
ment in January 1990. This memorandum emphasized the DFAR 242.770 requirement, which subsequently was removed and incorporated into FAR 42.703-2. That memoran
dum is available on the Policy Programs Division website for incurred cost audits under Reference Materials.
b. If a contractor refuses to certify a proposal made at this level, the FAO should follow the procedures outlined in 6-706.1c.
6-707 Audits of Indirect Cost
6-707.1 Submission of Indirect Cost Proposal
a. The contractor is to submit (within the six-month period after the end of the applica
ble fiscal year) its final indirect cost rate proposal with supporting incurred cost data (re
quired by FAR 52.216-7) to the ACO and the auditor. The submission must include an executed Certificate of Final Indirect Costs (required per FAR 42.703-2; a copy of the certificate is shown at FAR 52.242-4). This certificate, signed by no lower than a contrac
tor vice president or chief financial officer, is required for all final indirect rate submis
sions, except CAS 414 (cost of money) factors, regardless of whether the rates will be established by auditor determination or contracting officer negotiation. For multidivisional contractors, the proposal for each segment is to be submitted to the divisional ACO and the auditor responsible for conducting audits of that division, with a copy to the corporate auditor and ACO. The submission time limit does not preclude the auditor from receiving elements of incurred cost data or supplemental information from the contractor as it be
comes available. (See 6-706.2 for the types of data that can be used in performing MAARs without a certified proposal.)
b. Auditors should evaluate a contractor’s incurred cost proposal upon receipt and pro
vide a written description to the contracting officer and contractor of any inadequacies as required by FAR 42.705-1(b). If there are inadequacies, the auditor should pursue the ap
propriate course of action. If the auditor and contractor are unable to resolve the pro
posal’s inadequacies identified by the auditor, the auditor will elevate the issue to the con
tracting office to resolve the inadequacies per FAR 42.705-1(b)(1)(iii)(B).
c. An adequate final indirect cost rate proposal will include the proposed rates and supporting incurred cost data as specified in FAR 52.216-7(d)(2). If the extent of some supporting incurred cost data makes it impractical to include, its location should be identi
fied in writing. In the case of new contractors or contractors where we have experienced past problems with inadequate submissions, the auditor should coordinate with the con
tractor and contracting officer as early as practical to discuss the supporting cost data re
quired for the final indirect cost rate proposal. While the required schedules and supple
mental data is provided in FAR 52.216-7(d)(2), it is suggested that the auditor provide a copy of DCAAP 7641.90 “Information for Contractors” and request the contractor submit the final indirect cost rate proposal in that format to expedite the audit. During the course of the typical audit, the contractor will be called upon to submit additional data to support various elements of the proposal. Contractors should be encouraged to submit pertinent portions of their final indirect cost rate proposals and supporting cost data in compatible electronic media whenever possible. Variations in the size of the firm, type of business,
accounting systems, and auditing procedures mandate judgment and flexibility in require
ments for form, format, and contents of proposal components.
d. Delinquent submission of a final indirect cost proposal may be an indication of weaknesses in the contractor’s accounting system and controls. If an audit confirms sys
temic problems, the auditor should report them to the contractor and the ACO for correc
tive action. (See 5-110, 10-200, and 10-400 for reporting on internal controls relative to the contractor’s accounting and management systems).
6-707.2 Obtaining Indirect Cost Proposals
a. The contracting officer is responsible for obtaining an adequate final indirect rate proposal from the contractor within the six-month period after the end of its fiscal year.
Audit teams should assist the contracting officer by:
(1) Educating the contractor of its contractual requirement to submit a Final Indi
rect Rate Proposal as part of the audit team’s on-going interaction with the contractor, and by attending meetings, as necessary, to obtain an adequate proposal;
(2) Referring contractor management to the following resources located on the DCAA public website (http://www.dcaa.mil):
(a) Help for Small Business, including Information for Contractors Manual (DCAAM 7641.90), Enclosure 6;
(b) ICE (Incurred Cost Electronically) Model;
(c) Incurred Cost Submission Adequacy Checklist.
(3) Notifying the contractor in writing, when a proposal becomes 30 days overdue, notwithstanding the contracting officer's written extension (a sample letter is available on the intranet); and by
(4) Supporting the contracting officer in calculating a unilateral contract cost dec
rement based on history, when the contracting officer cannot obtain a proposal.
b. Headquarters Policy is responsible for coordinating directly with DCMA, and other administrative Agencies, to help identify significantly delinquent contractors that require administrative action. Administrative actions are at the discretion of the contracting of
ficer, and may include further coordination with the contractor in cooperation with the audit team, and applying a unilateral contract cost decrement.
Relevant History Exists
Audit teams should provide the contracting officer with all information that is relevant to the contractor’s delinquent CFY, including billing deficiencies and incurred cost audit experience, etc. Upon request, audit teams may offer for the ACO’s consideration a calcu
lated unilateral contract cost decrement based on relevant historical questioned costs.
Relevant History Does Not Exist
Headquarters Policy has furnished DCMA, and is working with furnishing other Adminis
trative Agencies, with a decrement that the contracting officer may consider as a last re
sort. Policy will provide guidance on this decrement factor periodically, and will provide the factor, along with a listing of the submissions that are overdue, to DCMA and other Administrative Agencies.
c. To permit proper inter-Agency coordination, audit teams must maintain accurate DMIS information. Audit teams must:
(1) Create timely incurred cost inventory records;
6-708