DCAA’s revised procedures for labor and material audits

Ever heard of a MAAR 6 or MAAR 13? These are the Defense Contract Audit Agency’s (DCAA’s) Mandatory Annual Audit Requirements (MAAR) for labor (MAAR 6) and material (MAAR 13). That’s “DCAA speak” for real-time labor and materials floor checks. Labor and material are two of the most significant cost elements billed on government contracts — and “real-time” verification of these costs as they are incurred helps confirm the accuracy of the charges and can only be accomplished during the accounting period in which they apply.

Of course, labor and materials audits have been around for as long as there have been contracts. Recently, however, the DCAA issued a Memorandum for Regional Directors (MRD) titled “Revised Procedures for Real-Time Audits of Labor and Purchase Existence and Consumption”, addressing revised requirements for labor and material audits. The new MRD allows auditors to use a risk-based approach to determining when to perform these types of audits and also allows auditors to conduct alternative procedures — including virtual testing — to perform their floor checks.

The DCAA issued its MRD because it says that advances in technology and the audit environment have changed dramatically since it developed its original MAAR policies and procedures. Additionally, its auditors identified best practices and lessons learned during the pandemic and gained efficiencies performing these audits and associated audit procedures. So, the DCAA revised its approach and procedures to implement the best practices it identified, create more flexibilities for auditors and align audit resources to appropriate risk levels. Some of the significant changes the DCAA is making include:

• Removing mandatory annual audit requirements from real-time labor audits and purchase existence and consumption audits and establishing procedures for audit teams to determine when to perform these real-time audits using a risk-based approach.
• Creating flexibilities for audit teams to conduct real-time labor audits on a scheduled basis or unannounced basis based on specific risk considerations.
• Establishing best practices for use of alternate interview and floor check techniques, such as telephone or video conferencing to increase efficiency.
• Creating flexibilities for audit teams to conduct real-time audits on an interval basis throughout the year or at a specific point in time based on specific risk considerations.

In addition to the flexibilities offered to DCAA auditors through the revisions outlined in the MRD, the MRD emphasizes that auditors should leverage the results from current accounting system and material management and accounting system audits to increase audit efficiencies. That is a very significant point because it recognizes both the interrelationships between different types of DCAA audits and that efficiencies may be gained by using knowledge and results achieved across the portfolio of DCAA audits.

So, what does this mean to you as a Department of Defense (DoD) contractor? Well, that depends. This MRD is guidance intended for DCAA auditors and therefore discusses the benefits of increased flexibilities and efficiencies for the auditors. However, if you are an established contractor with years of history contracting with the DoD and have established internal controls and processes for recording costs and submitting incurred cost proposals, these revisions will likely also provide flexibilities for you — and possibly even ease the resource burden required of you — to support the auditors. Assuming you have robust systems for labor and payroll and for material management and you have the technology to support the virtual labor and material floor checks, you may not see your auditor in-person as often. But don’t think that you can totally relax. In the MRD, the DCAA reminds it auditors that these revisions are intended to create audit efficiencies, but it emphasizes maintaining a preference for conducting in-person interviews and floor checks to the greatest extent possible.

If you are a new contractor that the DCAA has not yet engaged with, or the DCAA has assessed a higher level of risk associated with your processes or systems for recording labor or materials costs, the DCAA would likely conclude that virtual testing is not appropriate for your current situation. Therefore, you can expect periodic visits — scheduled or unannounced — from your DCAA auditor.

Contact the professionals at Baker Tilly’s government contractor solutions team with your questions about DCAA labor and material audits, or to discuss other ways we can help your company when contracting with the DoD.