Finding Text
2 022-004 Internal Control and Compliance Finding Related to FAR 52.216-7. Allowable C ost and Payment a. Condition: Our review of compliance and internal control testing in accordance with OMB 2022 Compliance Supplement for Part A. Activities Allowed or Unallowed; Part B. Allowable Cost/Cost Principles; and Part H. Period of Performance identified a noncompliance with FAR 52.216-7 and written policies and procedures. During the reconciliation of the SRC's incurred cost submission, we identified projects which were marked as ready to close in FY 2020 and prior fiscal years, however, there were credit and debit amounts claimed in FY 2022. We reviewed the claimed debit amounts for three projects. We identified one contract where SRC did not submit a voucher for over one hundred twenty days for the physically completed contract due to a lagging subcontractor invoice. The period of performance ended September 1, 2018 for project GR054.01. We found one subcontract invoice that was not submitted or received until January 2022, which is over one hundred twenty days after the settlement of applicable final annual indirect for physically completed contracts per FAR and longer than thirty-six months as outlined in the auditee's SPP 5.3, Closing Procurement Contracts, procedure. SRC?s SPP 5.1, Subcontract Management, procedure requires review and approval of invoices, monitoring of costs, monitoring of timely rate adjustment invoices, and closing of cost reimbursable subcontracts within thirty-six months after physical completion. The program manager is responsible to review monthly subcontract status updates and review and approve subcontract invoices. The financial analyst is responsible for monitoring and reporting on financial aspects of the subcontract and review and approval of subcontract invoices. Based on the testing performed, we concluded that the subcontract costs are not continually monitored to close out subcontracts in a timely manner. When an invoice is not received timely, there is a risk costs are charged to contract outside of the period of performance and SRC not being able to close out the contracts in a timely manner. SRC has procedures in which costs are reviewed on a regular basis, by the program managers and financial analysts, and monthly by management at varies levels. Therefore, inadequate monitoring of its subcontract costs has led to a FAR 52.216-7 noncompliance. This noncompliance pertains to all Federal Contracts under SRC's R&D cluster. b. Criteria OMB 2022 Compliance Supplement, dated April 2022, for the requirements of Part A., Activities Allowed or Unallowed; Part B., Allowable Costs/Cost Principles; and Part H. Period of Performance requires us to plan and perform tests of internal control including: information and communication which requires the organization to provide accurate and complete information to appropriate individuals on a timely basis; and monitoring to assess the quality of performance over time and promptly resolve findings. We performed testing to determine if: Reconciliations and reviews ensure accuracy of reports. Information is appropriately communicated timely between the pass-through entity and sub recipients. Actions are taken as a result of communications received. Ongoing monitoring is build-in through independent reconciliations, staff meetings, feedback, rotating staff, supervisory review and management review of reports. In addition, we evaluated the claimed costs with the criteria of FAR 31.201-2(d), Determining Allowability, which states: A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. FAR 52.216-7 under (d) Final indirect costs rates includes the following: (5) Within 120 days (or longer period if approved in writing by the Contracting Officer) after settlement of the final annual indirect cost rates for all years of a physically complete contract, the Contractor shall submit a completion invoice or voucher to reflect the settled amounts and rates. The completion invoice or voucher shall include settled subcontract amounts and rates. The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice or voucher and providing status of subcontractor audits to the contracting officer upon request. (6) (i) If the Contractor fails to submit a completion invoice or voucher within the time specified in paragraph (d)(5) of this clause, the Contracting Officer may- (A) Determine the amounts due to the Contractor under the contract; and (B) Record this determination in a unilateral modification to the contract. (ii) This determination constitutes the final decision of the Contracting Officer in accordance with the Disputes clause. We examined Subcontract Management SPP 5.1, revision dated April 4, 2019, which state and include in part under subcontractor invoices: Under Cost-Type subcontracts, the Subcontracts group will need to monitor the timely submission of rate adjustment invoices. During the first quarter of each calendar year Subcontracts shall contact each subcontractor that has performed work under a Cost- Type subcontract in the previous fiscal year using SPP 5.1_B ? Rate Adjustment Letter to request that the subcontractor submit rate adjustment invoices within 120 days after the settlement of the annual rates or at subcontract closeout. The submission of adjustment invoices by subcontractors helps ensure that only allowable costs are billed under federal awards. Submission of annual adjustment invoices amends costs after applicable annual audits to account for unallowable direct or indirect costs, while submission at close-out ensures that any remaining unallowable costs or unreconciled costs are corrected prior to closing out federal awards. We examined item 4.0 Closing a Cost Type or Fixed-Priced Incentive Contract in the Closing Procurement Contracts SPP 5.3, revision dated February 23, 2012, which state and include in part: A contract which is cost type or fixed-price incentive, and requires settlement of indirect cost rates should be closed within thirty-six (36) months after receiving evidence of physical completion or within a reasonable time after final audit. c. Recommendation SRC should strengthen its internal controls to ensure contract costs are liquidated within the requirements of FAR 52.216-7 for physically completed contracts. SRC should evaluate its process for monitoring subcontract costs to ensure related invoices are processed in a timely manner to meet the FAR 52.216-7 requirements and comply with its written procedure. We recommend that the auditee train appropriate employees on monitoring subcontract costs to ensure compliance. d. Contractor Response SRC concurs to our findings. SRC?s complete response is included in the Corrective Action Plan for Current Year Findings in Appendix 3.