Checklist for Adequate Forward Pricing Proposals
(Editor’s Note. The startling shift of most proposal audits and certain systems audits from DCAA to DCMA has made the remaining audit areas subject to even greater audit scrutiny. One of these areas is forward pricing audits so we decided to summarize new guidance DCAA has issued to its auditors last September in the form of an Adequacy Checklist.)
Before an actual audit occurs, DCAA is tasked with making an initial assessment of adequacy as soon as possible after receipt of the submittal. Since time is often very tight between submittal of a proposal and an award, it is important that the submittal be right in the first place. We recommend contractors use this checklist as a QA device to ensure the proposal meets these criteria so as to avoid return of the proposal and delay.
Auditors are told to request a walkthrough with the contractor to obtain a better understanding of the submission, estimating methodology, location of cost or pricing data and relevant policies and procedures. During this walkthrough auditors are encouraged to discuss any concerns they have. DCAA states that most of the criteria for adequacy found on the checklist are included in the FAR and DFARS where such areas are referenced but states some criteria not referenced were added by DCAA to “help the negotiation and review process.” Additional items may also be added if required by the CO. Finally, the adequacy of supporting data may not be realized until way into the audit so the initial assessment of adequacy can change once the audit has started.
The 29 checklist items are broken down into general requirements, direct labor costs, indirect costs (e.g.overhead, G&A, fringe benefits) and facilities cost of money. For each item, auditors are to say “Yes”, “No” or “N/A” and provide comments and references to their work papers.
General Requirements
- Properly completed first page or summary page prescribed by FAR Table 15.2.1.
- An index identifying and referencing all supporting data accompanying or identified in the proposal. The checklist states supporting data should be included in the proposal or be readily available. If not included in the proposal, the basis of estimate should include the location of the data and a contact person with phone number and email address.
- If the submission is a revision or update of a previously submitted proposal, the revision should include an explanation for the update and identify changes made.
- Is the proposal mathematically correct and does it reconcile to the referenced supporting data.
- Is the proposal internally consistent. For example, is the directly labor base used to calculate overhead the same as the labor base included in the G&A allocation base.
- Do the proposed costs based on judgmental factors include an explanation of the estimating processes and methods used including, when relevant, projections from known data.
- Was trend and budgetary data provided? If so, was an adequate explanation of how it was used provided, including adjustments to the data.
- Does the submission include a comparison of prior forecasted to actual costs and if so, are they in the same format as the proposal with an explanation or analysis for differences. (Editor’s Note. Though occasionally asked for during an audit, the addition of this comparison is new and we shall have to see how insistent DCAA is in having it either included in a proposal or readily available.)
- Was any known changes to business activities or processes disclosed that were not previously known. The checklist provides several examples such as cost reduction initiatives, changes in company objectives in the light of new business conditions, changes in accounting practices (e.g. reclassifying direct versus indirect costs, new methods of allocating indirect costs and their impact), advance agreements, acquisitions or divestments, shutdown of facilities, changes in business volume and/or contract mix).
- Direct Labor Rates
- Basis of estimate identified that includes an explanation of the methodology used to calculate direct rates.
- Is the location of data (e.g. payroll) identified.
- Are escalation factors identified for out years, which costs are the factors applied to and the basis for the factors used.
- Are planned or anticipated factors that can change rates identified such as composition of labor rates, labor categories, union agreement and headcount.
- Indirect Cost Rates
- Basis of estimate includes an identification of the methodology used to develop the rates.
- Is the location of supporting documents specified.
- Are indirect expenses identified by burden center, by cost element, by year and is this presentation consistent with the accounting system used to accumulate actual costs.
- Are significant contingencies shown.
- Are significant planned or anticipated changes in the nature, type or level of indirect expenses identified, including fringe benefits.
- Are allocated costs from home offices, shared services, etc. shown with a contact person identified.
- Are intermediate cost pools identified and a reconciliation of these costs to show how they were allocated.
- Are escalation factors for out years identified, what costs were they applied to and the source for the factors.
- Is there adequate detail for the allocation base.
- Was supporting detail for the proposed allocation base identified such as budgets, other proposals, contract values, etc.
- Did the proposal show how it was reconciled with long range plans, strategic plans, sales forecasts, operating budgets, etc.
- Cost of Money
- Was a cost of money computation based on CASBCMF provided. If so:
- Was a summary of net book value of assets provided, both distributed and non-distributed.
- Were the underlying records to support the net book value provided.
- Was the treasury rate identified.
Once the checklist is completed, a determination of “Adequate” or “Inadequate” along with comments is made. Identified inadequacies should be discussed with the contractor and CO during the walkthrough and if the proposal is “so deficient that an examination cannot be performed” DCAA is to recommend to the requestor that an audit cannot be made. A written summary of the inadequacies should be prepared to give the CO an understanding of them and corrective action needed. Finally, auditors are told, for significant deficiencies, a flash report should be considered. (Editor’s Note. There is no guidance on what constitutes “adequate” or “inadequate” so there is a great deal of auditor discretion here resulting in inconsistent findings throughout the agency. Also, though the guidance indicates inadequacies should be pretty bad to recommend stopping the audit and issuing a flash report, we often find that any determination of “inadequate” no matter how minor the deficiencies is used to return the proposal and that estimating system flash reports are becoming very common.)
