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  • Question

    Does an audit increase rates on past year billings? What FAR/DFAR etc. sections should I look into?


    Answer

    The determination of what amount of indirect costs will be paid for a specific contract/order progresses from a prospective/forward estimate, through a more accurate billing review, finally resulting in much more accurate final rates using audited final indirect costs and final audited total costs of the contractor.

    1.  Using predicted total indirect costs and the predicted total cost of all contracts or amount of business the contractor expects to have in a future year, forward or prospective rates are calculated. Projected indirect costs are included in the estimated contract cost for cost-plus-fixed-fee contracts and orders based on these prospective rates.

    2.  As work on the contract or task proceeds, the contractor vouchers as an interim billing process. These vouchers include the actual direct labor costs (based in part on precisely how many hours of what employee) and updated indirect rates. These interim indirect rates are reviewed by an administrative contracting officer and/or auditor before payment of the voucher is approved.

    3.  After the conclusion of an accounting year of the contractor, auditors review total incurred indirect costs of the company and total amount of contract costs to determine final incurred indirect rates. These final rates are retroactively applied to completed contracts/orders prior to closeout to determine if the contractor or Government owes either party money. Sometimes this reconciliation occurs many years after work is complete.
     
    I would suggest asking your contracting officer what type of audit resulted in a change to the overhead costs for your order. It’s not surprising that the actual cost to the government is ending up different than initially estimated. It might be worth your while to ask when final total cost will be determined so that you can plan for any change to your projected budgetary requirements.
     
    Enclosure 5 of DCAA Manual No. 7641.90 gives the tedious details surrounding DCAA responsibilities and procedures for contract financing and interim and final vouchers. 
     
    FAR subpart 42.7 speaks to indirect cost rates in general. FAR 42.704 and FAR 42.705 cover the details of billing rates and final indirect cost rates. The 
     
    Corresponding portions of the DFARS and DFARS PGI give a small amount of supplemental guidance.
     

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