Vendor stated that under a time and materials contract, unlike a cost type contract, they di dnot have to be audited by e.g. DCAA nor did they have to provide and breakdown of cost elements. In addition, they stated that they did not have to have an approved accounting system
Please tell me what the requiremnts are under time and materials versus/and cost contracts when it comes to an approved accounting systems and audits?
If I might re-phrase your question, your contractor is suggesting that only cost reimbursable contracts require an approved accounting system. While it is absolutely true that cost reimbursable contracts do require an approved accounting system, FAR 16.301-3(a)(3), these are not the only contract types that require an approved accounting system.
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If there were one contract type which could absolutely NOT require an approved accounting system it would be firm-fixed-price contracts. See, for example, FAR 7.105(b)(3), 16.103(d) and 16.104(i) requiring an assessment for an approved accounting system for "other than firm-fixed-price" contracts. But even if you have a firm-fixed-price contract, you may still need to have an approved accounting system if the contractor expects features such as progress payments based on cost to be operative. See, for example, FAR 32.503-3. Thus there exists a need for an approved accounting system for many other contract applications other than cost reimbursable contracts.
For time and materials (T&M) contracts, the material portion of that contract will get paid according to the Allowable Cost and Payments clause of the contract, FAR 52.216-7. As prescribed in 16.307(a) this clause is to be required for both cost reimbursable and time and materials contracts and an approved accounting system is required for the operation of the clause. One feature of an "approved" accounting system is that it must identify and automatically exclude any and all "un-allowable" costs from any billings to the Government.
Another basic feature of any approved accounting system is that it must be able to segregate and accumulate cost separately for any and all various contracts and projects that the contractor might be working on. For the labor portion of your T&M contract you would want to be assured that the labor hours submitted for billings were adequately segregated and accumulated only for performance of your contract. Thus you may indeed need to have an approved accounting system to provide this assurance if you did not otherwise have other satisfactory administrative oversight and controls to validate the hours were indeed performed just on your contract.
Your contractor's argument is that you do not need to see the cost breakdown for the time or labor portion of the contract since that portion is payable by multiplying the allowable hours by the "hourly rate" already stipulated in the contract. It is true that FAR 52.232-7(a) of the "Payments under Time-and-Materials and Labor-Hour Contracts" clause does indeed provide for payments at the stipulated "hourly rate" as your contractor might be contending. But this is not an argument tantamount to doing away with the need for an "approved" accounting system for the reasons already discussed. Nor does it do away with the Government's right to audit since FAR 52.232-7(f) of the same "Payments" clause specifically provides for the Government's audit rights under the contract.