This is the third in a series of articles regarding what we believe to be an attack on government investigations and audits of COVID relief funds and contracts. Previously, we identified likely categories of programs, contracts, and businesses that the government could investigate or audit. Below, we discuss the current direction, interests and initiatives of the Defense Contract Audit Agency (“DCAA”) related to the receipt by contractors of COVID relief funds and the impact that a business environment has uncertain may have on the pricing of government contracts and cost forecasts.
COVID Relief Fund
The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) funding opportunities come with unique government contract compliance and financial reporting requirements. . Funding is not “free” and can have financial consequences for unwary entrepreneurs. DCAA knows this and will conduct audits to test contractors’ compliance with the unique requirements of the relief funds. Entrepreneurs unfamiliar with these accounting and reporting requirements risk questioning or denying DCAA costs.
In January 2021, DCAA issued an audit alert to its regional offices regarding COVID relief legislation and regulations. The audit alert includes Frequently Asked Questions and Answers (“FAQs”) regarding contractors’ request or receipt of COVID relief funding. Originally published last summer, the FAQs have been revised and extended several times. The FAQ telegraphs DCAA’s position on various instances where funding for COVID relief intersects or impacts the accounting and cost compliance of government contracts.
It is clear that the audit procedures related to COVID will now be included in the routine annual audits of the incurred cost proposals. Contractors are contractually bound to submit to DCAA proposals for costs incurred in conjunction with the execution of cost reimbursement contracts. Specifically, two funding opportunities related to COVID will be included in the audits of the cost proposals incurred by DCAA: (i) loans received and canceled under the Paycheck Protection Program (“PPP”); and (ii) reimbursements requested under Article 3610 of the CARES Act.
Canceled PPP loans: The Department of Defense and DCAA consider canceled PPP loans to be credits under Federal Acquisition Regulation (“FAR”) 31.201-5, Credits. Thus, part or all of the forgiven amount may be owed to the government in the form of a cost reduction or a cash refund if the loan proceeds were used to pay eligible costs incurred by a contractor who have reimbursed by the government under a flexible price contract.
DCAA will likely inquire about the status of entrepreneurs’ PPP loans when performing cost proposal audits. If the loan has been canceled, a contractor will need to demonstrate how the loan proceeds were used and whether any of the costs paid with the proceeds are attributable to government flex-price contracts. If the use of the product matches the costs attributable to a government contract, DCAA may question the costs in its audit report and recommend reimbursement to the government. A contractor would then be required to accept or reject the DCAA’s audit findings and negotiate a resolution and settlement with their contracting officer. Contractors must be aware and able to demonstrate the use of these funds to determine whether the government is entitled to potential credits under applicable contracts.
Section 3610 Refund requests: Contractors can claim reimbursement under section 3610 of the CARES Act for costs incurred related to paid time off for employees who could not get to work or work remotely. Typically, contractors will request reimbursement through a Fair Adjustment Request (“REA”). When requesting reimbursement under Section 3610, a contractor will need to report these costs and potential REAs in their annual cost incurred proposal. The form in which these costs are to be reported is not discreetly defined and is subject to discussion and agreement with the contracting officer.
DCAA will likely ask questions regarding the REA and request explanations and documentation to determine whether these costs have been accrued and accounted for in accordance with the government’s detailed proposal submission and cost accounting requirements. DCAA will likely address (i) the initial determination by the contracting officer of the contractor’s “affected contractor” status; (ii) discrete entry of specific costs and separate reports on contract items; (iii) full justification and clear arguments regarding entitlement to paid leave; (iv) various representations regarding notifying the government if funds are received in the future; and (v) review and advice on the adequacy and compliance of the REAs received from the subcontractors. These are only examples ; other reporting requirements exist and may be the subject of audit procedures carried out by the DCAA.
Contractors seeking reimbursement under Section 3610, whether for fixed price contracts or reimbursement of costs, should understand the reporting and accounting requirements. The first step towards a favorable settlement with the government is a successful DCAA audit. The government has a wide discretion to pay the costs claimed under section 3610, but it is not obligated to pay anything. Be proactive, communicate frequently with your contracting officer and DCAA. Thoroughly document all aspects of DCAA claims and maintain contemporary, clear and appropriate supporting documents to maximize the likelihood of a favorable resolution.
Price and cost forecasts
DCAA will also review forward price proposals or other similar arrangements to determine if revisions to these forecasts can be recommended due to various circumstances arising from COVID. Examples of COVID-related factors that may impact financial forecasting include fluctuating sales volumes due to changes in customer demands, headcount and resource availability, changes in overall budgets and business models. expenses and ongoing disruptions generally related to performance and performance as planned.
The results of a DCAA audit of forward-looking financial models may lead negotiating agents to ask contractors to revise pending proposals or renegotiate existing agreements to incorporate the estimated financial effects of the current and short-term business environment. term. Outstanding price proposals submitted for the submission of certified cost or price data should be reviewed to determine whether applicable government disclosures are necessary to avoid or mitigate the risk of faulty pricing. The ultimate effect of these types of DCAA audits is unlikely to result in questioning or denying the costs incurred; rather, the most likely outcome will be a change in the estimate of future costs.
*Craig stetson is a partner of Capital Edge Consulting where he focuses on assisting entrepreneurs to interpret and apply accounting and regulatory compliance requirements associated with federal government contracts. Craig regularly deals with a wide range of compliance issues related to accounting, pricing, contract administration, business systems, financial reporting and the interpretation of Federal Acquisition Regulation (“FAR”) requirements and of Cost Accounting Standards (“CAS”). Craig speaks and writes frequently on a wide variety of government procurement compliance issues, regulatory updates and news.
 See MRD 20-PIC-006 (R) Revised here.  Note: Entrepreneurs are only eligible to receive PPP loans if certain small business size standards are met; conversely, large companies should not have received PPP loans.