Firm Fixed Price Contracts and the DCAA

There is, understandably, a lot of confusion surrounding firm-fixed-price (FFP) contracts and the expected interaction with the Defense Contract Audit Agency (DCAA). We regularly receive questions surrounding the DCAA’s cognizance over specific contracts and what that cognizance means in terms of when and if to expect an audit or review of any kind.

Here we will dive into some basics on contracting with the Federal Government and the requirements for audit, as outlined in applicable regulation. Please note, the primary focus of this discussion is the Federal Acquisition Regulation (FAR). We will focus on the FAR, as this is the written set of regulations that guides the majority of Federal contracts. This is due to two factors:

1. FAR is required to be used negotiate and govern contracts entered by all federal executive agencies (ex. Department of Defense, Department of Energy, Department of Treasury, Department of Education, etc.) utilizing appropriated funds i.e. funding controlled by Congressional budget authority.

2. Other agencies and other non-appropriated funds contracts can, and often do, still negotiate around FAR citations due to familiarity and the breath and scope of which the FAR covers. Why reinvent the wheel when there is already one available, as issued by DoD, NASA, and the Coast Guard! Additionally, it is important to note that DCAA is only required to be the standard agency utilized to review DoD contracts. Other agencies can engage DCAA to perform audits and reviews for them, but it is not required.

To start, FAR 16.202-1 describes a FFP contract as,

“A firm-fixed-price contract provides for a price that is not subject to any adjustment on the basis of the contractor’s cost experience in performing the contract. This contract type places upon the contractor maximum risk and full responsibility for all costs and resulting profit or loss. It provides maximum incentive for the contractor to control costs and perform effectively and imposes a minimum administrative burden upon the contracting parties.”

Now, what does this gibberish mean? Well, in short, FFP contracts are entered into based on a pre-determined dollar amount for a pre-determined product or service. And while there are some rare exceptions, under most circumstances there is no adjustment to the pre-determined amount that will be paid to the contractor. As a result, FFP contracts decrease the inherent risk to the federal government and place the majority of the risk of financial loss on the contractor. This verbiage also makes it clear that poor cost management and low profit margin is not an acceptable reason to change the pre-determined amount. Depending on your budgeting and spending practices, the ideal scenario is when a contractor provides an accurate and honest bid to the government and then operates under the conditions of the contract in a way that results in a profitable position. As a result of the risk aversion created by an FFP contract type, the benefit to the contractor is less oversight in the form of required financial reporting, which means less potential for meetings with DCAA auditors.

The DCAA offers several resources on their public website, which are intended to provide audit context to contractors and assist businesses, primarily small businesses, in knowing what they need to do to prepare for potential audits and DCAA interaction. They also provide some information that helps explain when and why a contractor can expect to receive communication from the DCAA. The primary document available for business to gain insight is titled “Information for Contractors” and is available under the broader topic of “Audit Process Overview” on the DCAA public website. This document is a treasure trove of information for government contractors by way of preparing them for how the audit oversight portion of government contracting is handled. Within the “Information for Contractors” document, DCAA states:

“The extent of DCAA’s involvement is determined by the type of contract that will be awarded. Generally, most DCAA efforts on firm-fixed price type contracts take place during the proposal stage rather than in the incurred cost stage. The reverse is true for cost reimbursable contracts.”

This is consistent with the decreased risk FFP contracts generate for the federal government, but let’s continue exploring what this means in practice. As we will see, there are some specific thresholds to note when considering the DCAA’s likelihood of knocking on the proverbial door of the contractor.  

1. Pre-Award Survey of Prospective Contractor Accounting System. The review is also sometimes referred to as a 1408, although this is just in reference to the Standard Form required to be used by contracting officers. Nonetheless, many contractors are under the impression that this will inevitably be your first encounter with DCAA. Often, that is true. However, contrary to what some believe, a pre-award survey is not required and not always necessary. FAR 9-106 requires a pre-award accounting system survey only when the information necessary to make a determination regarding contractor responsibility (i.e. financial/accounting) is insufficient. Additionally, we know there are some firm exceptions eliminating the need for a pre-award survey 1. The purchase of commercial products/services, or 2. FFP awards with a total value under the simplified acquisition threshold.

There are also ways to mitigate DCAA activity by opting to outsource system reviews to third party CPA firms. Thanks to the NDAA, contractors are now eligible to hire their own CPA firms to assess the acceptability of the company’s accounting system, as well as some other systems less common to small business contractors in particular. This is, of course, a more costly endeavor, as this places the expense of the review on the shoulders of the contractor, opposed to the government. However, this also provides much more flexibility to the contractor, relieves some strain on resources for the government, and provides a method for hopefully relieving the requirement for DCAA to review the accounting system. Please note, the presence of an FFP contract type does not automatically alleviate the request by a contracting officer, procurement agency, etc. for DCAA to review the accounting system, unless it is under the simplified acquisition threshold, as mentioned above.

• Additionally, the Defense Federal Acquisition Regulation Supplement (DFARS) companion resource, Procedures, Guidance, and Information (PGI), limits COs to only requesting DCAA audit assistance for FFP proposal in excess of $10M, except in cases of exceptional circumstances. This rule also applies for cost-type proposals in excess of $100M; the higher threshold, of course, being due to the fact that cost-reimbursable contract types are more heavily audited after costs are incurred to ensure what is being billed to the government accurately reflects the costs the contractor is experiencing. This is great news for small businesses because this means, unless there are some extreme issues going on (e.g. something that points to the need for a pre-award survey for a contract with a value between the simplified acquisition threshold and the PGI threshold of $10M), DCAA will not be knocking on your door to audit FFP contracts valued at less than $10M at all. Please note, thresholds are determined by estimating the value of the entire period of performance, not individual years, CLINs, task orders, etc. There are some exceptions to calculating contract value, such as IDIQ (indefinite delivery, indefinite quantity) contracts, which are a beast of their own, but in typical circumstances you want to consider the value of the entire period of performance.

• More good news, FFP contracts have multiple potential exceptions from Cost Accounting Standards (CAS), in their entirety! For example, one exemption from CAS is a FFP contract for commercial products/services. This may sound familiar, as it was one of the exceptions to a potential pre-award survey being required, as discussed above. However, this isn’t a repeat. This is a completely separate exception to a completely separate area of potential oversight and audit interaction. If your company receives a FFP award for commercial products/services, there is no concern for pre-award survey from DCAA and there is no concern of CAS coverage, which eliminates a slew of potential DCAA. Additionally, FFP contracts that do not require certified cost/price data (CCPD) are also exempt from CAS, and all the potential DCAA audits that come with CAS requirements.

In summary, this blog was written in an effort to hopefully dispel some of the confusion and questions around when to expect DCAA with regard to FFP contracts. It is important to take away from this that there are almost always exceptions or loopholes that allow for contracting agencies to get DCAA in the door if they really see fit and/or really want to “check that box” as a form of mitigating the buying command’s risk. However, we want to keep contractors informed so that they know what to expect and when, even if there are very limited instances where they may be able to control the reviews and audits that are completed. But such are the terms when agreeing to contract with the federal government.

As always, the biggest take away is to stay informed and up to date with regulation, complete rigorous contract briefs to ensure full understanding of contractual obligations, and always be prepared to support your organization, your proposals, and your costs incurred with adequate and compliant systems.

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