Proposal Audit Program

Proposal Audit Program

Adapted from DCAA’s Audit Program for Price Proposals [www.dcaa.mil]

Purpose

The purpose of this audit is to evaluate proposals for compliance with USG regulations (FAR Part 15 and 31, as well as applicable CAS provisions) and for commercial pricing actions which are not subject to USG requirements.

Areas of Risk

USG Compliance Risk

• Commercial Pricing – FAR 12 Procurements

We price a proposal under FAR 12 asserting commerciality, but cannot demonstrate commerciality. The risk is the procurement may be deemed FAR 15 after pricing has occurred, but before contract award.

• Cost and Pricing Data – FAR 15 Procurements

USG Compliance risks relate to the pricing of proposal whereas the proposal falls under cost and pricing data requirements. Risk for these types of proposals are:

1. Truth In Negotiations Act, (Defective Pricing)

2. False Claims Act

3. Cost Accounting Standards (CAS)

Risk in these procurements is that pricing is inaccurate, and we have overpriced the proposal, causing harm to the USG. In summary, pricing our products too high.

Commercial Pricing – Non-USG

The risk for commercial pricing is that we have not captured all costs, such as using USG rates to price Non-USG rates. USG rates exclude unallowable costs (per FAR 31) which are not applicable to commercial contracts. Another area is not applying Facilities Cost of Capital to commercial contracts as this is a USG concept, but one in which allows for a cost of money factor, which may not be included in commercial, non-USG pricing actions. The risk is pricing products too cheaply.

The purpose of this audit is to evaluate proposals for compliance with USG regulations (FAR Part 15 and 31, as well as applicable CAS provisions) and for commercial pricing actions which are not subject to USG requirements.

Planning/Desktop Audit Process

1. Determine the cost estimating risk of inaccurate, incomplete, or defective proposals on the USG.

a.What type of procurement is this? Competitive, Sole Source

b.What type of contract is this? Cost, Fixed Price

c.Is this a TINA or CAS Covered Contract?

d.Confirm that this proposal (to-be contract) would include the DFARS 252.215-7002 contract clause—See Appendix A.

2. Request the following items for preliminary desktop review:

a.Evaluate the company’s Disclosure Statement (for full-CAS covered entities) items to become familiar with the disclosed accounting practices.

b.Obtain and evaluate recent forward pricing rate agreements/recommendations or government audited rates.

c.Obtain and review the most recent incurred cost submission, or year-end actual rates.

d.Obtain the proposal log for the last 2 years, including history of proposals won.

e.Request and review any written estimating and accounting system manuals/control documentation.

f.Request and review the trial balance for prior 2 calendar years.

g.Request and review all proposal deficiencies noted by DCAA, DCMA, or other auditing bodies.

3. Once the above documents are received and reviewed, select a proposal [/sample of proposals] to review against the audit steps on the following pages.

a.Samples should be stratified in homogeneous procurement and contract types.

4. After sample selection, request additional supporting data.

a.RFP for the proposal

b.Proposal package, including all supporting data available

c.Negotiation summary (if applicable)

d.Contract award (if applicable)

5. Arrange a conference call to obtain an understanding of the BU’s proposal processes and its internal control structure.

6. Plan an onsite review to substantively test the audit steps on the following pages that cannot be performed remotely.

Procedures

The detailed audit steps are outlined on the pages to follow.

#	Area	Audit Steps	Audit Activity/Notes
1	Preliminary Steps	Review the Request for Proposal (RFP): a. Determine the company’s proposal responsiveness to the RFP (e.g. is the proposal for the supplies or services requested and does the company’s proposed quantity match the RFP requirements, etc.?) b. Identify the type of data required (i.e., certified cost or pricing data or data other than certified cost or pricing data). Determine whether the DFARS 252.215-7009(Proposal Adequacy Checklist – See Appendix 2) solicitation provision was included in the RFP to establish requirements for an adequate proposal. Section L of the RFP should provide instruction on how to submit proposals and information on a specific format to facilitate evaluation. FAR 15.403-5(b) provides that the contracting officer may require the proposal in the format of Table 15-2 of FAR 15.408, specify an alternative format, or permit submission in the company’s format. c. Identify and document any special requirements or provisions (i.e., limitations on pass-through charges, established rates, hours, time-phasing, material quantities, etc.).
2	Preliminary Steps	Verify that the proposal was approved at an appropriate level of management. If so, review the proposal package for adequacy based on the criteria established in the RFP. If the DFARS 252.215-7009 solicitation provision was included in the RFP, the company is required to provide the contracting officer with a completed DFARS Proposal Adequacy Checklist with its proposal submission. Review the checklist to assess and document conclusions about the proposal adequacy (CAM 9-103.1b).
3	Preliminary Steps	Obtain a walk-through of the proposal to gain an understanding of the basis of each cost element of the proposal, the related supporting documentation, and the relevant policies/procedures and processes related to significant cost elements. As part of this walk-through, require management to identify: a. Significant subcontracts and the status of its cost or pricing analyses. b. Significant interdivisional work and its basis for estimate. c. The “added value” provided by the company related to the subcontracted effort, when proposed subcontracted costs exceed 70 percent of the total cost of the work to be performed.
4	Preliminary Steps	Assess Materiality. Document the understanding of the proposed basis of each cost element for each significant cost element of the proposal. Identify those cost elements that significantly contribute to the total proposed value.
5	Preliminary Steps	When ICAPS or Cobham certification/self-assessment have not been completed (e.g. non-major contractor) or are not current (e.g. the system has not been audited in the last 4 years or there have been significant changes to the system since the last audit) and if the evidence to be obtained during the audit is dependent on computerized information systems, document the audit work performed that supports reliance on the computer-based evidence. Specifically, document or reference one or more of the following: a. The audit assignment(s) where the reliability of the data was sufficiently established in other DCAA audits, b. The procedures/tests that will be performed in this audit to evaluate the subject matter in this audit that will also support reliance on the evidence, and/or c. The tests that will be performed in this audit that will be specifically designed to test the reliability of the computer-based data
6	Preliminary Steps	Gain an understanding of the product/service being acquired and related company processes to manufacture the product or deliver the service. Identify any significant changes in the company’s processes that have taken place and consider the potential impact on the proposal and planned audit procedures.	Example
7	Preliminary Steps	Determine whether there are any outstanding FAR, other Agency Supplements or CAS noncompliances, key prior findings or audit leads affecting the proposal. If there are applicable noncompliances, findings or leads, determine how they will affect the audit scope.
8	Preliminary Steps	Obtain and document the understanding of the relevant company internal controls related to the company’s proposal using the framework (e.g., estimating, accounting). The documentation should be used in the walk-through of the company’s proposal to the extent possible.
9	Preliminary Steps	Conduct an entrance conference. Confirm the team’s understanding of how the proposal values were calculated and discuss the availability of required data and personnel necessary to timely support the audit.
10	1 - Direct Labor Rates - Established Rates by FPRA_FPRR	Trace proposed labor rates to the rates specified in the applicable FPRA/FPRR and verify proper application of the rates. If the RFP requires the company to bid labor categories other than those established, determine if this results in a potential CAS 401 noncompliance. Determine if any conditions (e.g., expansion of workforce) exist under which the established forward pricing labor rates should be modified (CAM 9-505.7). Note if conclusions differ from any significant rates in the FPRA/FPRR. Document the conclusions, basis of proposed cost and audit evaluation.
11	2 - Direct Labor Rates - Audited Rates	If the RFP requires the company to bid labor categories other than the rates that were audited, determine if this results in a potential CAS 401 noncompliance. Determine if any conditions (e.g., expansion of workforce) exist under which the audited forward pricing labor rates should be modified (CAM 9-505.7). If the adjustments to the originally audited rates are significant, these should be noted. Calculate the questioned rates, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
12	3 - Direct Labor Rates - No Audited Rates	Document your understanding of the basis of the proposed rates. Determine if the proposed direct labor rates are classified consistent with established/disclosed practices (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). Evaluate the company’s method of developing the proposed rates (see CAM 9-505). If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS. Evaluate the proposed base labor rates by comparing with other sources of information (e.g., current payroll data, signed employee agreement, appropriate Wage Determination rates, survey with established reliability). Evaluate the proposed escalation factors with consideration given to escalation history, management approved plans, forecasted economic conditions, etc. Calculate the questioned rates, if applicable. Document the conclusions, basis of proposed cost and audit evaluation. Example || Example
13	Direct Labor Hours	Document your understanding of the basis of the proposed labor hours. Evaluate the company’s method for estimating each significant class of direct labor hours (see CAM 9-502 and D-406): a. Determine the suitability of historical data for making estimates (i.e., accurate, reliable, and representative.) If the company did not identify relevant historical labor hours in its basis of estimate, determine if the labor proposed is identical or similar to a completed or in-process contract. If suitable history is discovered, compare the proposed labor hours with the historical hours taking into consideration the effect of cumulative learning/improvement. b. If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS. The substantive audit procedures may be documented in this assignment or previously completed assignments by reference. c. Determine if the proposed direct labor hours are classified consistent with established/disclosed practices (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). d. Select a representative sample of proposed direct labor hours in the basis of estimate and trace to the underlying data identified by the company. Evaluate the reasonableness of the estimate. Perform analytical procedures to determine if the proposed estimating method has yielded reasonably accurate estimates. e. If appropriate, apply QM techniques, such as improvement curves, trend or regression analysis techniques. f. Compare experienced labor mix and hours with proposed labor mix and hours. Calculate the questioned hours, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
14	Summary of Direct Labor Costs	Summarize audit results of labor rates (steps # _) and labor hours (steps #). Calculate the questioned cost due to rate (Questioned Rate x Proposed Base), then calculate the questioned cost due to base using the audit determined rates not questioned (Questioned Base x Audit Determined Rate).
15	1 - Cost Estimates – Based on Standard Costs	Document your understanding of the basis of the proposed standard cost/hours including the frequency at which standards are adjusted and the task level at which variances are accumulated and how they are distributed. (CAM 9-314, 6-411, 8-407) Evaluate the company’s method for estimating cost based on standards as well as the impact of variances (see CAM Appendix D-407.2h and 8-407.1). a. If variances are relatively significant, assess the risk that standards are set artificially low for some labor tasks, particularly those in which government products or services have little participation (i.e., standards set relatively low for labor tasks predominately used for commercial contracts creating a variance that is shared by all contract types). b. Determine if the proposed direct labor hours are classified consistent with established/disclosed practices (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). c. Trace a representative sample of proposed standards to the underlying reports and records identified by the company (e.g., management-approved published labor standards, routing sheets). Calculate the questioned hours, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
16	2- Cost Estimates - Based on Parametric Cost Estimates	Document your understanding of the basis of the proposed cost. (CAM 9-1000) Obtain and evaluate the analyses on which the company concluded that the CER will produce reliable estimates (see CAM 9-1003). If appropriate, apply QM techniques such as trend or regression analysis techniques to evaluate the estimate. If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS. Calculate the questioned cost/hours, if applicable. Document the conclusions, basis of proposed cost and audit evaluation. Then discuss with your supervisor and obtain approval.
17	Direct Material	Analyze the consolidated bill of material (BOM) that supports the proposal to determine what costs will be covered under the material, subcontract and interdivisional work programs. Document your understanding of the basis of the prices, kinds, and quantities of material underlying the proposed cost. (CAM 9-400) Verify proposed direct materials, including any significant additive factors (e.g., scrap, rework, spoilage), are classified in a manner consistent with established/disclosed practices and no proposed direct cost is also being proposed as an indirect cost (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). Evaluate the support (e.g., history, engineering estimate, etc) for any significant additive factors (e.g., scrap, rework, spoilage), if the rates were not already audited in a rates and factors review. If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS. The substantive audit procedures may be documented in this assignment or previously completed assignments by reference. Trace a representative sample of items of the proposed quantities on the BOM to supporting documents (e.g., RFP, engineering drawings, etc.). Test a representative sample of proposed unit prices listed on the BOM (see CAM 9-404). Verify that proposed unit prices take into account reasonably anticipated discounts, including quantity and prompt payment discounts. Verify proper handling of minimum buys, potential quote decrements (due to potential negotiated reductions), availability of parts in current inventory (inventory price could be lower), adequate competition, and contractor price analysis. Review and evaluate significant make-or-buy decision documentation (CAM 9-405).
18	Direct Material (continued)	Identify any significant estimates based on a Long Term Agreement (LTA) and design appropriate evaluation steps (CAM 9-406.3). Consider comparing LTA unit prices to actual unit prices paid during the agreement. When certified cost or pricing data are required/submitted by the vendor determine if the prime contractor obtained and analyzed certified cost or pricing data in accordance with FAR 15.404-3 and FAR 15.408, Table 15-2, II.A. Evaluate the prime contractor’s cost/price analysis. If a required cost or price analysis is inadequate or not available, consider historical decrement factors (CAM 9-404.6) and classify the remaining cost as unsupported. Evaluate proposed escalation with consideration given to escalation history, management-approved plans, forecasted economic conditions, etc. Also, determine that the escalation is calculated in a manner that properly reflects the expected purchase date of the material. Calculate the questioned material costs, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
19	1- Indirect Rates – Established Rates by FPRA_FPRR	Trace proposed indirect rates to the rates specified in the applicable FPRA/FPRR and verify proper application of the rates. If the RFP requires the company to use indirect rates other than those established, determine if this results in a potential CAS 401 noncompliance. Determine if any conditions (e.g., expansion of business base) exist under which the established forward pricing indirect rates should be modified (CAM 9-1206d). Perform testing to ensure that the subject proposal has been considered in the allocation bases. Note if conclusions differ from any significant rates in the FPRA/FPRR. Calculate questioned indirect cost by applying the FPRA\FPRR rate(s) to any questioned base costs. Document the conclusions, basis of proposed cost and audit evaluation. Example || Example
20	2- Indirect Rates –Audited Rates	If the RFP requires the company to use indirect rates other than those that were audited, determine if this results in a potential CAS 401 noncompliance. Determine if any conditions (e.g., expansion of business base) exist under which the audited forward pricing indirect rates should be modified (CAM 9-1206d). Perform testing to ensure that the subject proposal has been considered in the DCAA recommended allocation bases. If the adjustments to the originally audited rates are significant, these should be noted. Calculate the questioned rates and use them to calculate the questioned costs due to rate (Questioned Rate x Proposed Base), then calculate the questioned cost due to base using the rates not questioned (Questioned Base x Rate Not Questioned). Document the conclusions, basis of proposed cost and audit evaluation.
21	3 - Indirect Rates – No Audited Rates	Document your understanding of the basis of the proposed rates. Determine if the proposed indirect rates are consistent with established/disclosed practices (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). Verify that the period for the proposed rates coincides with the company’s fiscal year or historical rate period (CAS 406/FAR 31.203(g)). Determine that the pool expenses and allocation bases are reasonably allocable by complying with FAR 31.201-4 and the applicable CAS (e.g., 403, 410, 418, 420). For significant indirect pools, compare proposed rates to prior year(s) rates and year-to-date experience and analyze major variances. Trace a selection of proposed pool and base amounts to the underlying budgetary data. Determine the suitability of budgetary data (i.e., current, accurate, reliable, and representative). Verify the proposed rates properly reflect anticipated changes to future operations (CAM 9-702.2). Review proposed indirect expense accounts by nomenclature to assess the risk that the estimates include unallowable costs per FAR Part 31. Verify that the estimates exclude unallowable expenses and the deletions are reasonably in line with history. Review selected significant or high risk expense accounts in the pools to evaluate the reasonableness of specific estimates.
22	3 - Indirect Rates – No Audited Rates (continued)	Evaluate the proposed allocation base amounts to determine whether the company is realistic in determining its probability of obtaining additional work including the impact of the subject proposal. If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS. Evaluate the reasonableness of the proposed rates using regression analysis when appropriate. Calculate the questioned rates and use them to calculate the questioned cost due to rate (Questioned Rate x Proposed Base), then calculate the questioned cost due to base amount using the rates not questioned (Questioned Base x Rate Not Questioned). Document the conclusions, basis of proposed cost and audit evaluation.
23	Other Direct Cost	Document your understanding of the basis of the proposed ODCs (estimated cost and quantity/requirements). CAM 9-600 Trace a selection of proposed ODC costs and quantity requirements to the underlying data. Determine if the proposed ODCs are consistent with established/disclosed practices (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). Evaluate the estimated ODCs to determine the amounts are reasonable and allowable per FAR 31. Evaluate significant ODC Requirements, if pertinent historical data is available. CAM 9-605 If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS. Calculate the questioned ODC costs, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
24	Subcontracts	Verify that the proposed subcontracts were priced in compliance with FAR 15 (i.e., a fair and reasonable price and the best value is obtained). Identify any proposed subcontract costs based on a Long Term Agreement (LTA). Consider comparing LTA unit prices to actual unit prices paid during the agreement. When certified cost or pricing data are required by the subcontractor determine if the prime contractor obtained and analyzed certified cost or pricing data in accordance with FAR 15.404-3 and FAR 15.408, Table 15-2, II.A. Evaluate the prime contractor’s cost or price analyses of subcontracts. If a required cost or price analysis is inadequate or not available, consider historical negotiation reduction factors (CAM 9-404.6) and classify the remaining cost as unsupported. For those analyses that are not completed, review the company’s completion schedule. Identify subcontracts for which the prime contractor has not completed the required analyses (CAM 10-308.2). The proposed subcontract costs should be reported as unsupported (CAM 9-104.2d). Review and evaluate significant make-or-buy decision documentation (CAM 9-405). If proposed subcontract costs exceed 70 percent of the total cost of work to be performed, evaluate the company’s (1) description of “added value” related to the subcontracted effort contained in the proposal (2) explanation of “added value” provided during the proposal walk through and (3) supporting documentation to assess whether the company complied with the requirements set forth in FAR 52.215-23 – Limitation on Pass-Through Charges. If determined that no or negligible “added value” was provided, modify the indirect rates to question indirect costs on subcontracted work as excessive pass through charges (FAR 52.215-23 and 31.203(i)).
25	Subcontracts (continued from above)	Incorporate the results of any assist audits received. As stated above, if the prime contractor has not completed its own cost or price analysis, the balance of the proposed subcontract costs should be reported as unsupported. Calculate the questioned subcontract costs, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
26	Interorganizational Work Orders	Determine whether the transfers have been priced based or supported by a separate breakdown of cost elements. 1) Transfers Based on Price – Ensure that the requirements of FAR 31.205-26(e) are met: a. It is the established practice of the transferring organization to price inter-organizational transfers at other than cost; b. The item being transferred qualifies for an exception to the certified cost or pricing data requirement outlined in FAR 15.403-1(b)); and c. The price is fair and reasonable and the best value is obtained. 2) Transfers Based on Cost – Ensure that the data required by the FAR 15.408, Table 15-2, are adequately provided. Review and evaluate significant make-or-buy decision documentation (CAM 9-405). Calculate the questioned Intracompany Work Order costs, if applicable. Document the conclusions, basis of proposed cost and audit evaluation.
27	1 - Cost Of Money (COM) Rates – Established Rates by FPRA_FPRR	Trace proposed COM rates to the rates specified in the applicable FPRA/FPRR and verify proper application of the rates. Review the RFP. If the RFP requires the company to use COM rates other than those established, determine if this results in a potential CAS 401 noncompliance. Determine if any conditions (e.g., expansion of business base, change in asset ownership, etc.) exist under which the established forward pricing COM rates should be modified. Perform testing to ensure that the subject proposal has been considered in the allocation bases. Note if conclusions differ from any significant rates in the FPRA/FPRR. Document the conclusions, basis of proposed cost and audit evaluation.
28	2 - Cost Of Money (COM) Rates – Audited Rates	Review the RFP. If the RFP requires the company to use COM rates other than those audited, determine if this results in a potential CAS 401 noncompliance. Determine if any conditions (e.g., expansion of business base, change in asset ownership, etc.) exist under which the established forward pricing COM rates should be modified. Perform testing to ensure that the subject proposal has been considered in the DCAA recommended allocation bases. If the adjustments to the originally audited rates are significant, these should be noted. Calculate the questioned rates and use them to calculate the questioned cost due to rate (Questioned Rate x Proposed Base), then calculate the questioned cost due to base using the rates not questioned (Questioned Base x Audit Determined Rate). Document the conclusions, basis of proposed cost and audit evaluation.
29	3 - Cost Of Money (COM) Rates – No Audited Rates	Document your understanding of the basis of the proposed rates. Determine if the proposed COM rates are consistent with established/disclosed practices (CAS 401/CAS 402/FAR 31.202 and 31.203(a)). Verify that the period for the proposed rates coincides with the company’s fiscal year or historical rate period (CAS 406/FAR 31.203(g)). For significant COM pools, compare proposed rates to prior year(s) rates and year-to-date experience and analyze major variances. Trace a representative sample of the pool and base amounts to the underlying reports and records (e.g., budgetary data, Asset Ledger) identified by the company. Verify that the interest rate, net book values, and allocation bases are current and properly applied for the computation of the facilities capital cost of money factors in the CASB-CMF (CAS 414). Verify that the proposed cost of money factors and bases are consistent with the CASB-CMF submission and that costs are properly classified for arriving at a profit objective via the Weighted Guidelines method (CAM 9-902). Determine if the COM computations should be revised to reflect any adjustment to bases arising from increased volume and/or pools for any additional assets attributable to award of this proposal. If historical data is used to support the basis of estimate, perform substantive audit procedures to ensure the historical data is in reasonable compliance with FAR Part 31 and, if applicable, CAS.
30	3 - Cost Of Money (COM) Rates – No Audited Rates (continued)	Calculate the questioned rates and use them to calculate the questioned cost due to rate (Questioned Rate x Proposed Base), then calculate the questioned cost due to base using the rates not questioned (Questioned Base x Audit Determined Rate). Document the conclusions, basis of proposed cost and audit evaluation.

Planning/ Desktop Audit Process