2025-001 Internal Control and Compliance Finding Related to 48 CFR 9904.409, Depreciation of Tangible Capital Assets, and FAR 31.205-11(a), Depreciation a. Condition Our review of compliance and internal control testing in accordance with OMB Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles identified a noncompliance related to the depreciation of tangible assets as reported in DCAA Audit Report No. 03441-2022S19404001, dated January 23, 2023. SRC claimed depreciation expenses exceeding the appropriate allocation for FY 2025. Our review of SRC's depreciation costs identified the following noncompliance with specific requirements of 48 CFR 9904.409 and FAR 31.205-11, Depreciation: • SRC does not document their analysis of historical asset service life in support of its estimated useful lives utilized as part of its depreciation calculation, which is in noncompliance with 48 CFR 9904.409-50(e)(1) and 48 CFR 9904.409-50(e)(2). SRC does not maintain records to support useful lives on its useful life matrix. The actual lives are longer than the estimated useful lives utilized, resulting in understated useful lives and overstated depreciation expense in the estimated useful life years. • SRC does not estimate residual values; therefore, residual value in excess of ten percent is not considered in calculating the depreciable costs, which is in noncompliance with 48 CFR 9904.409-50(a)(1), 48 CFR 9904.409-50(h), FAR 31.205-11, and the contractor’s written capital asset policy. The system automatically sets up residual value at zero percent. This results in overstated depreciation expense. The resolution of the CAS noncompliance is being handled through the resolution process specified in FAR 30.605, Processing Noncompliances. On January 31, 2023, the Administrative Contracting Officer issued an initial determination of noncompliance with 48 CFR 9904.404 and 48 CFR 9904.409. Therefore, we have not qualified our audit results or questioned any indirect costs. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria We examined 48 CFR 9904.409-50(a)(1) which states: The depreciable cost of a tangible capital asset shall be its capitalized cost less its estimated residual value. We examined 48 CFR 9904.409-50(e)(1) and (e)(2) which states: (1) The expected actual periods of usefulness shall be those periods which are supported by records of either past retirements or, where available, withdrawals from active use (and retention for standby or incidental use) for like assets (or groups of assets) used in similar circumstances appropriately modified for specifically identified factors expected to influence future lives. (2) Supporting records shall be maintained which are adequate to show the age at retirement or if the contractor so chooses, at withdrawal from active use (and retention for standby or incidental use) for a sample of assets for each significant category. Whether assets are accounted for individually or by groups, the basis for estimating service lives shall be predicated on supporting records of experienced lives for either individual assets or any reasonable grouping of assets as long as that basis is consistently used. We examined 48 CFR 9904.409-50(h) which states: Estimated residual values shall be determined for all tangible capital assets (or groups of assets). For tangible personal property, only estimated residual values which exceed ten percent of the capitalized cost of the asset (or group of assets) need to be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used consistent with the provisions of this Standard, the residual value need not be deducted from capitalized costs to determine depreciable costs. No depreciation cost shall be charged which would significantly reduce book value of a tangible capital asset (or group of assets) below its residual value. In addition, we examined FAR 31.205-11(a) which states: a) Depreciation on a contractor’s plant, equipment, and other capital facilities is an allowable contract cost, subject to the limitations contained in this cost principle. For tangible personal property, only estimated residual values that exceed 10 percent of the capitalized cost of the asset need be used in establishing depreciable costs. Where either the declining balance method of depreciation or the class life asset depreciation range system is used, the residual value need not be deducted from capitalized cost to determine depreciable costs. Depreciation cost that would significantly reduce the book value of a tangible capital asset below its residual value is unallowable. We also examined SRC's Capital Asset Policy which states in part: Salvage (Residual) Value - Assets placed in service will follow FAR 31.205-11 whereby residual value will be used ONLY when it exceeds 10% of the capitalized cost of the asset. Otherwise, no salvage (residual) value will be assumed. Land: Capitalized at original cost including readying the land for use. All assets (except Land) will be depreciated monthly on the straight-line basis over the appropriate useful life. The Facilities/Property department is responsible for ensuring all capital assets are properly identified and tagged. The Company shall take all reasonable precautions to ensure that capital assets are properly maintained and kept in good, safe working order, are kept physically secure, and properly identified with a Company tag. c. Recommendation SRC should comply with 48 CFR 9904.409 and FAR 31.205.11 regarding useful lives and residual value. Training should be provided to responsible employees to ensure compliance with 48 CFR 9904.409, and FAR 31.205-11. For full details, see recommendations included in DCAA Audit Report No. 03441-2022S19404001. d. Contractor Response SRC concurs with our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2025-002 Internal Control and Compliance Finding Related to DFARS 252.242-7006(c)(1), Accounting System Administration, Sound Internal Control Environment a. Condition Our review of compliance and internal controls testing in accordance with OMB 2025 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency relating to the timely replacement of interim timesheet signatures and approvals. The contractor’s policy does not establish a required timeframe for employees or supervisors to replace interim signatures made by payroll/accounting personnel, leading to significant delays in proper timesheet certification. In our analysis of FY2025 interim signature reports, we found that required signature replacements were outstanding for more than 30 days in 33 mid-year instances and 29 year-end instances. While the policy requires replacement, its failure to define "timely" leaves the process open-ended, which weakens the control over labor reporting. This condition occurred due to a lack of management review over timekeeping procedures and an oversight during the creation of the labor policy. Management failed to recognize that omitting a strict deadline for replacing interim signatures would leave the control process incomplete and unenforceable. As a result of this control deficiency, there is an increased risk to the Government of inaccurate labor distribution and unapproved time being billed to Government contracts. This creates a vulnerability for potential mischarging, which could result in unallowable costs being claimed. b. Criteria We examined DFARS 252.242-7006(c)(1), Accounting System Administration, which states the following requirements: “The contractor's accounting system shall provide for: (1) A sound internal control environment, accounting framework, and organizational structure.” Additionally, the contractor is failing to adequately define and enforce their own internal control processes. SRC’s Labor Recording Policy establishes the baseline requirement for these signatures but lacks the necessary timeframes to make the controls effective. The policy states: (1) For employees with interim signatures: “Upon return to the office, or when there is access to the timekeeping system via the internet, the employee must review the timesheet for accuracy; complete any changes; and re-sign. (2) For supervisors if accounting personnel provide an interim approval: “This is considered an interim approval that the 1st level or backup supervisor needs to re-approve.” c. Recommendation The auditee should revise its Labor Recording Policy to establish and enforce a specific timeframe for the replacement of all interim employee signatures and supervisory approvals. Furthermore, the auditee should strengthen its internal controls related to the interim signature replacement and the monitoring process. d. Contractor Response SRC concurs with our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.
2025-003 Internal Control and Compliance Finding Related to FAR 15.404-1(b)(2)(ii)(A), Contracting by Negotiation, Proposal analysis a. Condition Our review of compliance and internal controls testing in accordance with OMB 2025 Compliance Supplement for Part A. Activities Allowed or Unallowed; and Part B. Allowable Cost/Cost Principles; identified an internal control deficiency related to the preparation of adequate price analyses. The contractor failed to perform and document adequate price analyses because buyers did not support that the historical basis prices were fair and reasonable prior to using them as a comparison. Under the contractor’s internal policy, SPP 3.2, historical comparisons may only be made to procurements executed within the prior two years, and the baseline historical price must be documented as reasonable. During our testing of Engineering Management Overhead indirect software purchases from FY2025 we found the contractor did not perform adequate price analysis on thirteen out of fifteen transactions tested. The contractor did not properly retain supporting price documentation to justify price reasonableness. The contractor solely relied on prior purchase order prices that were not adequately documented to be fair and reasonable. This condition occurred due to buyers not following the contractor's Price Analysis policy. We noted multiple instances where the contractor did not retain all pricing documentation. In addition, for historical price comparisons, the buyers only compared current quotes to the prior purchase orders from the same vendor over several years and did not obtain quotes from competitive vendors. Per discussions with SRC Purchasing staff, SRC has utilized the selected software for several years and did not obtain quotes from competitive vendors as the cost to change vendors would be greater than continuing to use the same software vendor. However, the contractor failed to document the cost comparison to change vendors. As a result of this control deficiency, there is an increased risk for the Government as the contractor does not properly maintain supporting documentation and does not establish historical prices as reasonable based on competition in a timely manner. This could lead to potential overpayment, or unreasonable costs being charged to federal awards, and the risk of non-compliance with federal award criteria. b. Criteria We examined FAR 15.404-1(b)(2)(ii)(A), Contracting by Negotiation, Proposal analysis, which states the following requirements: "The prior price must be a valid basis for comparison. If there has been a significant time lapse between the last acquisition and the present one, if the terms and conditions of the acquisition are significantly different, or if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison." Additionally, the contractor is failing to follow its internal Policy SPP 3.2 Performing a Price Analysis. The policy states: "Procurements for indirect goods and services do not require utilization of the Price Analysis Model; a written historical price comparison may be conducted against procurements placed within 2 years" and “For a comparison to be valid, the Buyer must be able to identify and consider any item or market differences that might significantly affect contract price. If the Buyer determines the previously paid price to be fair and reasonable, they must reconcile any differences (i.e. quantity, currency, etc.), and compare the prior price with the new price to determine whether it is also fair and reasonable." c. Recommendation The auditee should reinforce its price analysis internal controls by providing staff additional training of policy, SPP 3.2, Performing a Price Analysis, and strengthen its internal controls to ensure proper price analyses are performed for all purchases in accordance with FAR 15.404-1(b)(2)(ii)(A). d. Contractor Response SRC concurs with our findings. SRC’s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.