Pre-Award Survey Failures
As a government contractor, you are all too familiar with the importance of being compliant. One of the many requirements, you face is to have an accounting system that complies with Federal Acquisition Regulation (FAR). This is especially true if you want to bid on cost reimbursable or T&M contracts. How do you determine if your system is compliant though? Passing a pre-award survey indicates that your accounting system is compliant.
What is a Pre-Award Survey
The pre-award accounting system survey or audit (pre-award survey) evaluates a prospective government contractor’s accounting system. It determines if an accounting system can adequately accumulate contract costs. The survey uses the Standard Form (SF) 1408 for the assessment. To pass the survey, all the questions on the SF 1408 must have YES responses. If there are any NO responses, this indicates that there is a deficiency in your accounting system. Failing a pre-award survey can halt your progress on a contract.
Passing the pre-award survey is important. One of the first steps to passing is having the knowledge of what not to do. Below are five of the most common causes of pre-award survey failures.
GAAP Financial Reporting
The first question on the SF 1408 asks if the accounting system is in accordance with generally accepted accounting principles (GAAP). Essentially, to have a compliant accounting system a contractor must use the accrual basis of accounting. Many contractors prefer to use the cash basis of accounting because it is easier. However, accrual basis accounting accrues expenses as a contractor incurs them. This is important because it helps to stabilize indirect costs rates throughout the fiscal year. Ultimately, helping to better manage over-billings of the government.
Labor allocation is another common cause of a pre-award survey failure. Over billings are a major concern of the government. It is important that contractors record all their, and their employees, work hours. This includes hours on contracts and non-contracts, as well as during hours outside the normal workday. Not recording all hours can cause over billings on indirect rates.
Segregation of Costs
Segregating of costs is imperative to passing a pre-award survey. It is so important that the FAR has an entire section about contract cost principles and procedures. Also, there are multiple questions on the SF 1408 that surround this topic. One specifically asking if the accounting system provides for ‘proper segregation of direct costs from indirect costs.’
Contractors usually have no problem delineating between direct and indirect costs. However, segregating indirect costs seems to be more difficult. It is important to classify these costs regarding their ‘cost benefit analysis.’ Costs that benefit multiple contracts should be overhead, whereas costs that exist without contracts should be G&A.
The segregation of unallowable expenses is important as well. Costs that do not meet the criteria of FAR 31 are unallowable. Contractors cannot bill the government for these costs and must exclude them. Excluding these costs reduces the billings of indirect costs to the government.
Indirect Cost Rates
Government contractors must be able to determine and monitor their indirect cost rates regularly. Monitoring indirect cost rates ensures a contractor bills the government accurately. A deficiency in the accounting system results when a contractor is unable to ensure that costs do not exceed contract limitations. Many of the questions on the SF 1408 go hand in hand. For example, a contractor should be able to calculate and monitor indirect cost rates by following GAAP and segregating costs.
Policies and Procedures
Although, there is not a question on the SF 1408 about policies and procedures, they are still important to have. Having these in place provides evidence as to how the contractor manages each question on the checklist. Also, understanding the difference between accounting processes and internal controls is important. Accounting processes do not provide any proof of important activities such as fraud prevention. Proper policies and procedures help to regulate internal controls, as well as provide necessary documentation. Many internal control procedures are detrimental to the passing of the pre-award survey.
A government contractor passes the pre-award survey once their accounting system is deemed acceptable. Passing of the survey requires expertise in many areas such as GAAP financial reporting and government regulations. This may seem like a daunting task, but it does not have to be. Having a team with these specialties makes all the difference.
Originally written by Cheryl Jefferson Cooke, CPA/CFF
Updated and additional content provided by Elizabeth Partlow