Recent guidance indicates that increased audit scrutiny can be expected in reconciling labor cost reports to timekeeping data, verifying labor charges on T&M contracts and  internal controls adequacy.  The guidance is in response to a President’s Council on Integrity and Efficiency review that cited “systematic non-compliances” in DCAA’s incurred cost audits.  The review stated there was a lack of evidence that (1) incurred labor costs were verified (2) claimed costs in time-and-material contracts were verified against contract terms and claimed labor hours (3) internal controls at low-risk non-major contractors were sufficient and (4) supervisors were reviewing workpapers and reports.  The guidance for correcting these non-compliances include:

1.  Audit of labor costs.  DCAA auditors should inquire to determine whether there were sufficient  verifications of labor distribution reports reconciling with timekeeping records and if not, auditors are told to select a sample of transactions from labor distribution reports and trace them to “source documents” (e.g. timesheets).

2.  Audit of claimed T&M contracts.  Audits under T&M contracts need to include sample test of amounts to verify (a) claimed labor rates and related labor categories tie to contract rate provisions (b) claimed labor hours tie to labor distribution reports and (c) claimed reimbursable amounts tie to job cost ledgers and supporting documentation.

3.  Documenting an understanding of internal controls.  For nonmajor contractors with auditable dollar volume greater than $15 million, auditors must be assured that DCAA’s Internal Control Questionaire discussed in the DCAA Contract Audit Manual 5-111.1 is completed.    

4.  Indirect rate letter execution.  There should be no indirect rate agreement letter executed without a prior supervisor and field audit office manager’s review of audit working papers and draft report (05PQA-045(R).

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