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Blog | 01.20.20

Want to Do Business with the Government? Be Ready for Audits

Most companies are familiar with – even prepared for – IRS audits. That is not the only government agency that may want a peek at your books or business practices, though. Any organization that maintains a contract with a federal, state or local agency could be subject to scrutiny, for a number of reasons.

Cost-Reimbursement Contract

If you have a cost-reimbursement contract, you have to prove through best effort that you’re trying to accomplish the customer’s end goal on time and on budget. These contracts will typically require you to have the appropriate government-certified accounting system (CAS) so officials can easily audit your expenses, and you can prove that you are meeting project goals within a reasonable cost framework.

Large Value Contracts

All activity related to large value contracts (i.e. multi-million and multi-billion-dollar contracts) are closely monitored by the government to ensure maximum efficiency is being applied during R&D, testing and deployment. For example, DCAA provides oversight for DoD contracts. Check with your customer to understand their monitoring and auditing procedures.

Incentive Contracts

Incentive contracts reward contractors/suppliers for their time and cost efficiencies based on a pre-negotiated scale.  This requires extensive performance monitoring and detailed reporting/auditing to prove that the goal was reached to receive the incentive. For example, a dry-cleaning company may be rewarded for having no more than five complaints in a month.

Construction and Services Contracts 

Construction and services contracts require strict compliance with labor laws, among a host of other safety, quality and cost management requirements. (Turn to the Service Contract Act (SCA) and Davis-Bacon Act for assistance with wage determinations for each contract action so you know minimum wage levels required for various types of workers.)

NOTE: Many federal contracting officials have to proactively conduct labor checks at least one a month for construction projects. Then, every two weeks, they have to compare contractors’ payroll against those on-site labor checks to ensure pay levels align with skill set (i.e. electrician should be paid as skilled contractor, not a laborer). If a violation is identified, compensation may be required and contracts could be suspended either immediately. Some contractors lose eligibility to compete in the future.  

Compliance with Federal, State and Local Rules and Regulations

Compliance with federal, state and local rules and regulations covers a host of potential audit triggers, but the most common one again is tied to labor laws. Anyone working on a jobsite – employee, subcontractor, etc. is technically considered an “employee” of the prime contractor. They all have equal labor/pay rights, and many are eligible for fringe benefits. The government has to ensure that you are abiding by Department of Labor pay and benefits structures defined at the time of contract execution. The exception is services contracts, which require an annual update based on current labor laws.

Quality Control

Are the goods and services meeting customer standards as promised in the proposal and made binding in the contract.

Disadvantaged Business Advantages and Environmentally Preferred Products

If a contract was awarded based on set-aside criteria or other preferential vendor classifications – small business, woman-owned business, veteran-owned business, minority-owned business, green/sustainable business, etc. – then the government must ensure the vendor meets strict qualification criteria throughout the duration of the contract.

Did You Know?

Worker complaints are one of the primary triggers for government audits of contractors’ pay and benefit structures. In many cases, the agency will initiate an investigation and then forward the findings up to the Department of Labor for follow-up actions.

In other words, it is essential to keep your records in order so that you can respond to an audit request at any time, and without exhausting resources. A proper accounting system will enable you to manage, and monitor, operational data. It will also ensure the following types of information are easily accessible:

  • Certifications, including those that give your disadvantaged business an advantage as well as proof of certified green/environmentally sustainable practices and products
  • Timesheets detailing the hours spent by your employees and subcontractors on projects from inception. This includes any time spent on design, engineering, materials sourcing and delivery and/or construction, inspection, meetings, etc.
  • Detailed payroll records, including payments to subcontractors and benefits program offerings
  • Performance records, including issue resolution efforts
  • Quality control efforts, including material inspections during production and prior to shipment
  • Direct and indirect costs for every aspect of the project, goods or services provided; overall operating expenses; and any other financial information that must be disclosed per standard government contracting laws or your specific contract terms

Not all accounting systems may be approved for use by government contractors. Many federal contracts stipulate that your system be “in accord with Generally Accepted Accounting Principles applicable in the circumstances.” That means that it must meet the basic requirements defined by GSA SF 1408 or the specialized requirements defined in your contract clauses. If your customer’s accounting system and audit compliance requirements are unclear in the contract terms – or you need to confirm which government rules, regulations and laws apply to your particular business based on the type of contract, project, or service – contact the contracting official or customer POC to verify ASAP. 

Final Note:

Many businesses are weary of being audited by the government. However, contractors/suppliers are not in a position to decline a government inspection of accounting systems, production facilities, job sites or other operational assets. If you want to do business with the government, you are expected to be transparent about your business practices. Just be prepared and the auditing process will be painless.