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First-Time Contractor's Guide to Avoiding Common Deficiencies

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Contract work can be very rewarding, but sometimes you can get tangled up while learning the ropes. Learn about the most common deficiencies and how to avoid them so your first contract doesn't end up in "nots."

Proposal Adequacy

Avoiding deficiencies in the process begins before you even apply for the contract. Ensure that your proposal is adequate by spending plenty of time doing your research and analysis before you prepare your proposal. Prepare accordingly and watch out for these common deficiencies:

  • Lack of cost or pricing data
  • Lack of budgetary data
  • Failure to perform subcontract analysis

Accounting System Requirements

One of the most important, if not the most important, aspects of successfully completing government contracts is obtaining and maintaining an adequate accounting system. Failure to properly organize and record costs and billings can result in a tremendous loss of funds, which can be devastating for your small- or medium-sized business. Common deficiencies include:

  • Failure to make interim determination of costs
  • Improper segregation of direct and indirect costs
  • Improper timekeeping procedures
  • Failing to recognize and exclude unallowable costs
  • Ignoring procedures to check subcontractor and vendor costs
  • Failing to include subcontractor and vendor billings in a timely manner

To avoid these deficiencies, ensure that your accounting system or service is compliant with DFARS 252.242-7006 (a)(2). To be compliant, your main accounting system, as well as billing and labor subsystems, should be able to “gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws, regulations and management decisions.” Look for features that allow:

  • Accumulation of costs
  • Reconciliation of costs to each objective
  • Adjustment for approval and documentation
  • Capture of routine entries to determine monthly costs

Provisional Billing Rates

Provisional billing rates are used to establish approximate estimates of total costs at year-end rates. These rates may be adjusted at actual year-end if the rate projections fell short or included unallowable costs. To avoid common deficiencies in provisional billing rates:

  • Remove unallowable costs from the billing rate projections
  • Adjust provisional billing rates based on actual experience 

Adjustments can be made before year end for anticipated significant variances; otherwise, wait until after year-end to make your adjustments using actual rates.

Incurred Cost Submissions

Incurred cost claims are required to be submitted within six months after your company’s fiscal year end. If your submission is delinquent by more than six months, you could lose both your contract and any further contract consideration. Common deficiencies include: 

  • Lack of signed certification
  • Certification included but not signed by a vice president or CFO
  • Lack of subcontractor information
  • Failure to disclose all intermediate allocations
  • Unallowable costs not included in G&A base
  • Physically complete contracts not shown on sch. I & O
  • No calculations for government participation for all final indirect rates

The Defense Contract Audit Agency (DCAA) provides a checklist for you to follow to determine if your incurred cost submission is adequate. Refer to the checklist and other schedule documentation on the DCAA website to help you avoid deficiencies.

Real-Time Labor Evaluations

During work on your contract, you will be audited to verify that claimed labor costs are allowable and accurate. As mentioned above in the accounting systems section, your labor subsystem is required to adequately and appropriately record and calculate labor costs and allocate them to the correct billing objective. The real-time labor evaluation is an unannounced audit to discern the credibility of labor costs. To avoid common deficiencies during these evaluations:

  • Ensure timesheets are always current, even during mid-schedule
  • Train employees in the proper methods for revising timesheets
  • Ensure that all revisions are properly approved by a supervisor
  • Do not allow employees to complete timesheets in advance
  • Ensure that timesheets are representative of the actual work performed

Monitoring Subcontracts

If you employ subcontractors to complete part of the job, you must be able to monitor their costs and billings as well as your own. Ensure that you have access to the subcontractor’s accounting system to stay in compliance with reporting requirements.

The number one deficiency in this area is failure to obtain approval to subcontract. Always contact your contract officer and request approval to subcontract before you agree to any subcontracting contracts. After obtaining approval and entering into agreement with a subcontractor, avoid the most common deficiencies in monitoring your subcontractors by:

  • Verifying that the subcontractor has an adequate accounting system
  • Including the appropriate contract clauses in the agreement with the subcontractor
  • Appropriately monitoring the subcontractor’s effort
  • Ensuring subcontract billings are accurate and compliant with subcontract terms
  • Requesting a denial of access and notifying the contract officer if the subcontractor refuses access to accounting systems
  • Obtaining an adequate incurred cost submission from the subcontractor

In addition to checking for math, allocation and categorization errors, ensuring that you complete every form and schedule accurately and on time takes patience and practice. Keep in close contact with your contract officer and don’t be afraid to ask questions. Chances are good that you can avoid the “nots” with a few simple phone calls or emails and be well on your way to tying up your first contract into an attractively profitable bow.

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