DCAA Updated Audit Guidance on the Treatment of Overdue Indirect Rate Proposals

On February 12, 2015, the Defense Contract Audit Agency (DCAA) issued a Memorandum for Regional Directors (MRD) with new guidance for the DCAA and Defense Contract Management Agency (DCMA) on how to handle the growing backlog of overdue contractor indirect rate proposals (also known as incurred cost submissions or ICSs). In keeping with FAR 42.703-2(c) and FAR 42.705(c), DCMA will start to unilaterally establish contract costs for the overdue fiscal years starting in June 2015.

DCAA MRD 15-PPD-002(R): Updated Audit Guidance on the Treatment of Overdue Indirect Rate Proposals

Attached to the MRD is a list of outstanding indirect rate proposals as of January 5 from contractor fiscal years 2013 and earlier that are considered more than six months overdue. For the submissions on this list, DCMA will either obtain an adequate proposal or unilaterally establish contract costs. The planned audits of the overdue submissions are to be “closed” by DCAA if an adequate submission is not received by June 30, thereby initiating the unilateral rate determination process. Exceptions will be made only if an extension has been granted by the contracting officer or if there is ongoing communication between the two parties about a plan to submit the overdue proposal. Once “closed,” audits may still be reopened at DCMA’s request.

The MRD states that once the June 30 deadline has passed, the contracting officers will make the final determination on whether to unilaterally decrement costs and, if so, how much. DCAA will provide assistance to contracting officers in using historical audit results to determine a reasonable decrement. In the absence of such historical data, DCAA has calculated an average decrement rate of 16.2 percent based on “an Agency-wide analysis” that may be used by the contracting officers as an alternative. It is unclear if the 16.2 percent is based on questioned costs or recovered costs; however, contractors do have the right to dispute such decrements if they believe that their own historical data does not support this level of reduction.

As evidenced by this MRD, overdue indirect rate proposals continue to be a priority for both the DCAA and DCMA. Contractors may want to take this opportunity to review the status of their indirect rate proposals. If any proposals are overdue, extensions should be requested and plans to submit the proposals should be discussed with the contracting officer to avoid the risk of unilateral rate determinations.