Government Responsibilities Under the Guidance

Whereas the recent DCAA guideline alludes to the FAR and DFARS sections identified above, it addresses additional responsibilities of government. In many procurements, the prime contractor may receive subcontract pricing proposals before it even completes its own. Under these circumstances, the guidance notes that COs often request that a subcontract audit begin prior to the prime contractor’s proposal being completed in order to expedite negotiation and the award process.

The guidance also adds two more conditions to the four illustrations above where audit assistance by the government may be necessary:

5. The contractor has been cited for having significant estimating system deficiencies in the area of subcontract pricing, especially the failure to perform adequate cost analyses of proposed subcontract costs or to perform subcontract analyses prior to the negotiation of the prime contract with the government; or

6. A lower tier subcontractor has been cited as having significant estimating system deficiencies.

The guidance addresses several other responsibilities of the prime contractor auditor, most of which addresses what the auditor should do if the Prime did not adequately conduct a cost or price analysis.

a. They should assist the CO in coordinating overall audit effort relating to significant subcontract pricing actions at the prime contractor. They will decide on the need for the assist audit depending on the six factors listed above.
b. They should determine whether the Prime completed the required cost or price analysis of its subcontractors and review the adequacy of the analysis.
c. The audit report should identify subcontracts for which the Prime did not complete the required analysis and the proposed subcontract costs should be reported as unsupported.
d. The auditor will have the discretion to initiate its own audit of subcontractor costs and where if it does conduct the audit, the results of the subcontract audit will be incorporated into the prime contractor audit report. If the audit is not conducted and the Prime did not conduct an adequate cost or price analysis, the proposed subcontract costs will remain unsupported.

Finally the guidance does state that auditors should not perform audits of subcontract proposals where the prime contract is a firm-fixed price contract and has already been negotiated. However, if the fixed price contract does contain a price adjustment clause providing for a price reduction if the proposal is found to be misstated then an audit may be appropriate.

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