DCAA Memorandum on Government Contractor Labor and Materials Audits
Key Details: The Defense Contract Audit Agency (DCAA) released a memorandum in August 2023 that revises the procedures for real-time audits of labor and purchase existence and consumption. Government contractors with defense contracts accustomed to Mandatory Annual Audit Requirements (MAARs) 6 and 13 are encouraged to thoroughly review the memorandum as the update redefines real-time audits and updates guidance.
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What is MAARs 6 and 13?
MAARs 6 and 13 focus on real-time audits of labor and purchase existence and consumption. The goal of these audits is to ensure accurate charge verification and compliance. MAAR 6 focuses on labor costs (referred to as “floor checks”) while MAAR 13 focuses on materials and services costs. MAAR 6 and MAAR 13 help DCAA identify potential problems and aids in avoiding overpayment for work completed. Contractors can also utilize these audits for planning to avoid any similar errors in future contracts.
Floor Checks (MAAR 6)
During a floor check, DCAA auditors observe employees at work and conduct interviews to verify that employees bill to the correct contract. Auditors also evaluate the company’s timekeeping system and internal control procedures and the accuracy of labor hours charged to a contract. DCAA auditors may also floor check a work site during an unannounced visit. Contractors may begin experiencing more virtual floor checks that would involve digital document retention and submissions. As such, proper retention of digital documents, set up of video conferencing capabilities, and virtual document submission should be implemented by contractors.
Material Cost Audit (MAAR 13)
Material cost audits are a significant procedure in manufacturing, research & development, and production contracts as they require high levels of material and inventory management. Material cost audits are used to determine and verify that materials purchased for a contract were received. Additionally, auditors review these purchases to determine if they were required and used for the contract and that the purchases were made in reasonable quantities and at prudent prices. DCAA auditors also determine if these materials purchases were properly accounted for during the initial charge, the transfer in and out, or any residual value.
Changes in the DCAA’s Memorandum
DCAA notes in the memorandum the importance of these audits as they provide real-time verification of costs incurred and the accuracy of charges. Additionally, these policies have not changed significantly since MAAR 6 and MAAR 13 were introduced. However, due to advances in technology and changes in the audit environment, an improvement was made to these procedures to implement best practices and improve flexibility. Virtual audits may become more prevalent, contractors are encouraged to ensure they have an established system that can support auditors during a virtual audit as in person floor checks may become less frequent.
Key revisions include the following:
- Removal of the mandatory annual audit requirement from real-time labor audits and purchase existence and consumption audits.
- Establishment of a risk-based approach to determine when real-time audits are required.
- Contractors can be subject to both a scheduled audit and an unannounced audit. This is dependent on specific risk levels.
- Establishment of procedures for virtual audits.
- Flexibility for audits to be conducted on an interval basis throughout the year based on risk considerations.
- Emphasis on testing work at home programs.
Planning Steps and Implications
Contractors are encouraged to thoroughly review the memorandum and to internally assess risk factors that may prompt increased unannounced audits. Contractors should also consider following the steps outlined below to align their practices with the new procedures:
- Ensure your company has robust policies and procedures and proper implementation of these policies and procedures.
- Ensure clear communication with the auditing team to help coordinate the audit.
- Review your technology and ensure it can complete remote audits.
- Review your timekeeping system and associated policies and procedures to ensure it is compliant with your contract. Update policies and procedures, as necessary.
- Regularly reconcile employee labor charges from timesheets to payroll reports.
- Ensure employees understand timekeeping requirements and are charging hours to appropriate labor categories and projects.
- Retain documentation regarding material purchases and ensure adequate tracking of all inventories used for a contract.
- Document the need for purchase and why specific materials are required.
- Ensure retention of purchase orders and receiving reports digitally to support virtual audits.
- Internally review purchase orders and compare them to contract requirements.
- Ensure your accounting system can accurately track invoices, purchase orders, and inventories.
- For newer contractors who have not yet engaged with the DCAA, or contractors who have a high level of assessed risk by the DCAA, ensure adequate systems are in place as periodic scheduled or unannounced visits may occur.
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Peter T. Ryan co-founded Ryan & Wetmore in 1988 with business partner Michael J. Wetmore. Peter provides clients with the best strategies for success. His expertise extends across various industries. Peter obtained a Master of Business Administration in Finance from the University of Baltimore and a Bachelor of Arts in Accounting from the Catholic University of America.
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Rosie Cheng is a Finance Consultant at Ryan & Wetmore. She focuses on government contracting services and produces many of the firm’s government contracting newsletters. Rosie graduated from Georgetown University with a Master of Science in Management and from William and Mary with a Bachelor of Business Administration.