Contract Exception Reviews
The purpose of contract exceptions review is to assist in achieving prudent contracting by providing those responsible for Government procurement with financial information and advice relating to contractual matters and the effectiveness, efficiency, and economy of contractors’ operations. Contract audit activities include providing professional advice on accounting and financial matters to assist in the negotiation, award, administration, repricing and settlement of contracts. Audit interest encompasses the totality of the contractor’s operations. Audits are performed to assure the existence of adequate controls which will prevent or avoid wasteful, careless, and inefficient practices by contractors. These audits include the evaluation of a contractor’s policies, procedures, controls and actual performance, identifying and evaluating all activities which contribute to, or have an impact on, proposed or incurred costs of Government contracts.
Areas of concern include the adequacy of contractor’s policies, procedures, practices, and internal controls relating to accounting, estimating, and procurement; the evaluation of contractors’ management policies and decisions affecting costs; the accuracy and reasonableness of contractors’ cost representations; the adequacy and reliability of contractors’ records for Government-owned property; the financial capabilities of the contractor; and the appropriateness of contractual provisions having accounting or financial significance.
Contract exception reviews include evaluations of contractors’ statements of costs to be incurred (cost estimates) or statements of cost actually incurred to the extent deemed appropriate by the auditors in the light of their experience with the contractors and relying upon their appraisals of the effectiveness of the contractors’ policies, procedures, controls, and practices. Such evaluations may consist of test checks of a limited number of transactions or in-depth examinations at the discretion of the auditor.
a. To accomplish the objective of contract exceptions review, one must examine or develop sufficient evidence to support a valid opinion of the extent to which costs or estimates contained in a contractor’s claim or proposal are:
(1) reasonable as to nature and amount,
(2) allocable, and measurable by the application of duly promulgated cost accounting standards,
(3) generally accepted accounting principles and practices appropriate to the particular circumstances; and
(4) in accordance with applicable cost limitations or exclusions as stated in the contract or in FAR.
The contract exception review may include a review the contractor’s accounting processes and financial statements and the actual nature of the expenditures charged to the various accounts and classifications. This knowledge is best gained by selective testing of transactions recorded in the various accounts.
b. In performing normal exception procedures in connection with an examination, we are alert for indications of excessive contract prices or profits and for evidence of overcharges, suspected fraud of defective pricing practices, together with other contractual errors or omissions.
Defective pricing clauses may create a contractual basis for reducing the contract price under certain conditions. When, after contract execution, it is learned that the contract price was negotiated based on certified cost or pricing data furnished by the contractor that was incomplete, inaccurate or not current, a business may want to pursue available remedies.