MILTON H. HARVEY Adequacy of 69//9cf Contractors' C(ost Records GAO's study o/ the /easibiliey oJ cstablbshing and applying cost accounting Standards in the negotiahion and administration ol dejense contracts, as required by Public Law 90-370, was described in the GAO Review, Spring 1970. In connection s;ith this study, 15 0AO regional of/ices made a special inquiry into the nature and extent oJ cost accounting systems and related records maintcined by selected contractors. A provision of ilte Armed Services small contractors engaged In both Gov. Procurement Act, as revised in 1956, ernment and'commercial work on a (10 U.S.C. 2313(b) ), sets toith that: wide variety of products, Of these con. * * * each contract negotlated under this tractors, 18 bahz total annual sales of chapter *hall provido that the Comptroller more than $50 million; 14 had annual Central and his representatives artc entitled, sales ranging between $!5 million and until the expiratlon of three years after final $50 million; and 13 h'td annual sales of payment, to examine any books, documents less than $15 mIllion. papers, or records of the cordractor, or any E of ha wubcontuactors, that directly pertain to, fforts were directed toward ascer aud Involve transactlons gelating to, the con taining whether contractor cost ac. tract or subcontract. counting records and the records used liao approach taken in making this to support price proposals for negoti. review was to gather information on tlia ated tonttracts were generally ade. characteristics of cost records main. quate; in particular, liae purpose of the tainej by defensm contractors and study was to find out: evaluute their usefulnem for specific -Whether tho accounting system purpose. 1 1io cost accounting records provided sufficient data to deter. of 45 contractors were examined. The mine tho cost of performing given selectiou included large, medium, and contracts. lir. Harney Is an aulstant regional mcnager In the Philadelphia Reginnal Office. le has been witIA GAL mince 1957. lie Is a CPA (Pennsylvania and Nrw Jersey) and a member of the American Tntiltutd of CPA., the Pennsylvania Institute of CPA., the N7tiapal Auociltlor. of Accountant; and bho Federal Government Accountants Association. 17 18 CONTRACTORS COST RECORDS -Whether the accounting records As shown below. Wwecral types of cost permitted p r I c I n g evaluation systems were found among the 45 reviews. contractors; . iero usoful for other ~~~~~~~~~~~~rnf -Whether they St a~o a1yten,^,,t, - :1 eyaluution reviews such as those Job order .. , . . . . , . 35 for terminations, delay claims, or Process . .. . . . . . . . . 2 ehange-order prictng. Prtoduet . . . Departmental I............... A byptoduct of this inquiry was the job order/process .... . . . . I Information it provided on the extent Job order/product . . . . . . . . I of similarity and/or uniformity of cost None . . . . , 2 rcords presently prepared by dofense 45 contractors. This information should be useful to the Cost Accounting Stand. There was litth relationship lbetweenthe ardu Board, type of cost accounting system and the typo of summary or report-typo records Rdsults of Survey available, During the survey emphasis was di- nTe survey showed that supposing rececd to the following; documentation was maintained by all -Adequacy of contractor cost ac- contractors for basic accounting trans- counting records for the calcula- actions, Material costs, both direct and tion of cost of performance. indirect, and regardless of the typo of -Identification of costs by contract, accounting system, were supported by line Item, and change order. records such as purchase orders, in. -Inclusion in contactor records of voices, receiving reports, voucheri, 'cnd the infornation required for pric. paid checks. Similarly, labor costs, both Ing reviews. direct and indirect, were supported by -Comparability of proposal costs some form of labor timecard or Job with incurred costs. ticket and other payroll and payment Each of these points is commented upon records.' To this extent the survey below. showed a general imiformity in types of cost records in use by contractors. CRlcdatfon of Cost of Performance 'The area in which contractors cost records were found to differ was in the From the results of our inquiries, we summary records prepared from the classified the adequacy of contractor above source 'locumelis. Reports, for cost accounting records for the calcula. management summariret material, la. tiot of cost performance. (See the table bor, and overhead costs in mniay forms. on the following page.) ror example, labor costs were summa- Noteworthy is tie fact that the con. rized by contract, work package, labor tractois whose records were inadequat' classification, or whatever other form were in the lower sales volume groups was required by managen.tnt or the andl that more than half In the third customer. group were inadequate. CONTRACTORS' COST RECORDS 19 Nwhn ol Head eocdne Assuas eahn yolum* eccIracla" - dqasIsrUI Ahdquaia inaetqusi. Over $50 inill., .......... . ..... . .. . , 18 18 .......... *1l to $5 muilon ............... ,. 14 11 3or 21% Under $15 mWiou ........... , 13 6 7or54% Total ........................I . 45 35 10 The 10 contractors whose jecords the individual contracts may generally were inadequate employed a variety of exempt their records from any critical cost accounting systems ana practices, scutiny to determine the hl for but there was lile correlution of the pricing. type of system with the type of product hae larger defense conlrautors segre- or the volume of Government sales, gate costs in such a manner that sum. Of the 10 inadequate accounting sys. mary data related to overall costs of tems, two did provide for the recording performance iro readily available. They of c03ts by contractor or job order, but maintain not only source documents but neither of the two contractor3 effec. also summaries that identify, in one for. tively administeredits system. For those mat or another, costs associated with contractors who employed other than total contractual effort. However, in a job ordir system, our conclusions only a relatively few cases are contract that sufficient data were not available costs segregated as b'tween basic con. were baaed on overall 'aspects of the tract costs and weparately negotiated systems or practices. For exampje, one modificatlions to the contract. ntese contractor's cobb were recorded by de- contractors, who receive a large per. partment; as a result, coats applicable *-:ntago of the defense procurement to Government work were not identifi. dollars, already have, in effect, stand- able to specific contracts or products. ards of their own for summarizing Two smnall contractors who had no cost costs. systems mnintained only records re Tho reason or reasons for this differ. qtit.ed for basic financial requirements ence In recordkeerIng between large and operating statements. and small contrarsors were not devel- Overall, the survey results suggest oped in depth during this survey. In the that the nonsvallability of sufficient case of the smaller contractor, however, summary data to provide cost of per. it appears that management is more formance by contract may be limited to cloy.ty associated with production and relatively small companis having a low other aspects of operations; thus there volume or percentage of Govormment is less need for records to provide a cost sales. Ilowiver, the aggregate of their control or a reporting system. Con. prime and t.:±bcontract sales to the Govy versely, the larger contractor whose ernment is likely to be quite substantial managernent is possibly three or four even though the relatively small size of echelons removed from operations finds 400 CONTRACTORS' COST RECORDS hL4 a com" r'eienslve reporting system provcdures, Hlowever, from the survev i, essential 'IV the assembly of data for it appears that the problem is not orsy i'niormed decisions, whether records are available by w lfeh A contractor whose involverP'.t is a contractors interpretation of cfet of *aubountial In etbher Government or performance can be evaluated, bit also crcnmercial work, or both, develops end whether the various treatments ein. rpeords shrnificarnt cost Ecouiting data ployed by contractors yielo uniform Irvuwe they arc needed for efflctivo and meaningful cost determinations. t~erations. With respect to Inadequate record., the most critically affected Idmntflauton of cots by Contract, gt:lj1p of Government contractors may Une eRm, *nd Chane Order be Ostpeo to ble Lhosc Who have out. We found that contractors whoa" l ' he snona&isodbuntrol possible accounting records permit a calculation rlran Jl' the am.'il enterprise but have not yetofcsofpfranogealyr. aidopted [iesophlsticatedi reporting of cost of performance generallyr pro. dop~ted (,tho aopitd reporting vide for identification of cost by con. rcspenu!wlity must be delegaled Then tract, The survey, however, Indicated adeorn. ffect on thx contractor will, to instances where adequate determina. Wilaextentalmostalways be passedOn tions of cost of performance could be tobio Goternment, made even though costs were not re. Although summary data related t corded by conract. Typical of such a cost of performanco of the smaller which a contractor Is one in wthution cotlractors may not be available or with a process or product line cost readily asembled, ind the volumi6 of system has records that require only the trmnsecions involved might seem to establishmrent of individual contract lsnxlt tbo significance of thsi problem production cutoff points to Identify the &ar, the facts, if available, might well shop costs related to a contract. Appli. ulow that this is not the casn. ni cable general and administra'ive and G,iple otiler costs could then be allocated. nodeo by the GAO Philad\9rphia Both large and small contrac'ors Regional Office have disclosed indica. tende d tmztn for cos 11ons of significant overpricing which tended ts nisilmise the need for cost were not reported because of the Inad- reporting systems refined to the point e cguc of documcntation available to of associating incurred CostS to lIne GA ofroexisting accounving records, items or change orders. Although the G(AQon be sl ng accounting h rttecords. reasons for minimizing such refine. Din the other hand, we have seen in. ments In their costs systems were not stanices where failure to summarize cost developed as a part of thin survne, we dJat in tIh normal course of operations believe they represent the difference bus caused contractors to be unaware between satisfying the recognized needs of or to oyrrlook costs that would be of company management and the acceptableInpricenegotiations. Government in the Identification of 'With xnpect to contractor records cosb. providing cost of performance, we The identificationof cost by line ilem wade detenninations as to adequacy on or change order is, nevertheless, neces. the basis of contractor definitions and sary In certain instances. For example, cONTRACrTo.1S COST RECORDS 21 contractors' claims against lhe Govean. contractors could not bo made because nent occur with amOrn frequency and a daW related to cost of performance reasonably precise identification of coat were not recorded by co6itract, line Is necmssary If an equitable settlement item, or change order to p"mit com- Is to be achieved. In addition, congres. parison with pricing proposals. As in. sional inquiries regarding contract dicated previously, individual instancee ovejjjuis may request an Identification o( such a condition may not be signifi. of cost not only by contract but also by cant in respect to poaihbe adverse con* itemanprocured under the contract, Al. 'tract pricing lHowver, the author be. so, the megrcgation of coat by line item lieves that in the aggregate a significant and/or change order generally pro. number of Government procurements video A better busis fox Identifying pro. and contracting entities -re seldom subs curement and/or production weak. jected to the restraints provided by in. neses, AlR in all, It would seem that such dependent reviewa of pricing and pric. a desirable refinement of coats has de. ing praclices, pended primarily on a company's view For the larger contractors, historical as to whether the value to management cost data were conuidered generally ad. exceeded the added coat. equate for pricing reviews. It was noted Tho Defense Cintract Audit Ajency that contractor records generally were and contrec!.-4 officers are continually relained for a sufficient period to satisfy required to make pricing decisions that any postaward audit requirements. rest on the reasonableness and validity of contract costs. In addition the Armed Comparlson ot Proposed and Services Board of Contract Appeals, Incurred Cost tho GAG, and the Federal courts are * from time to time involved in efforls Not all desirable comparisonxs of pro. which require determination of the posed and incurred costs could be made reasonablenesa or equitability of con- readily for 20 of the 45 contractors tract costs, The fact that such reviews surveyed, For some of these contrac- may be necessary makes difficult any tors, uummarlea of cost of performance persuasive argument for denying the wore not available; for others, certain need for records to be kept in such a comparisons could not be made for manner as to permit Identification, reasons such as the commingling of when necessary, of cost by significant basic contract costs and change order line Item and/or change order, espe. costs. The deficiencies here concerned clally for the larger procurements. the smnallerx,-ontractora thm'e" otatr and contrarts. ndcnrrs We ftel thati close line of reference Information Required for should exist between the classifications Prking R evur of proposed costs and actual costs. The inability to make a reasonable Reviews of pricing proposals could comparison appears to bo the result of not ho effectively performed at the a lack of similarity betweon estimating plants of several relatively small con- and accounting systems. Although such tractors. Comparisons of proposal coats comparisons may not provide a total with costs of performance for these measure of a contractor's erliciency, 22 CONtRACtORS' COST RECORDS reliability, or overall technical capa. Concluding Comments bilily, they do provide a common basis As mentioned previously, the direc. for evaluating the performance of a cols. tract, procurement decisions and/or hIuo taken in this inquiry was to gatiler Ilth efTectiveness of operations by coni Information on thie kinds of records tractor officials as well as by those Gov. kept by defense contractors and the ade, ernment representatives witi related re. quacy of the records for examinations sponsibilltles. made by tile Comptroller General. All Teia degree to which contract costs of the 45 contractors surveyed main. should be segregated depends upon tlhe tamned basic transaction records. From specific circumstances involved. A clear that point their accounting sulnmalions relationship between line item costs oil ranged from simple operating state. a proposal and the costs subsequently mrenis prepared on an enterprise basis recorded for the contract should be to luigly sophisticated statements pre- evident, Where this relationship Is not evident, tle identification of costs by liaret in great detail on a diisIon, contract and cost element should be plant contracttaIsk, product proc the minimum requirement for cost pres or o ther a asiss eltalion. Wit) respect to the recording The existence o( a wide variely of aye of such data, regulations or standards temized cost controls rortainly is no could provide for specific contractual surprise to the accountant with broad agreement on the identification of costs commercial or Government experience, by change order whenever practicable Correspondingly, it should he no great and necessary. In many Instances, the surprise to find Inconsistencies among segregation of change order costs may contraclors as to what should be tile be neither feasible nor economical. In nature of any selected cost accounting such instances, contractors might be principles tu be applied In the Identifi. required to satisfy Government pro- cation9 classification, and coitrol of curement officials, generally In advance costs. Cost control systems, whatever of performance, as to why costs of their form, can be guided by broadly change orders cannot or should not be defined cost accounting standards, when identified. established generally wittout radically Improvement in the auditability of esablishedegenerally ou adically proposals and performance data for chIangingpresent systemsorattempting any desired review, including those for ot introduce uniform systems. Exisilng posiaward audit or contract pricing cost controls provide a valuable fund purposes, depends largely on improve. of information on procedures and sys- ment in estimating and cost accounting tems which could serve as a framework systems and a corresponding improve- for the development and application of ment in the relationship between these sound cost accounting standards that systems. will gain general acceptance.
Adequacy of Contractors' Cost Records
Published by the Government Accountability Office on 1971-01-01.
Below is a raw (and likely hideous) rendition of the original report. (PDF)