- What techniques are used to monitor individual costs?
- What are the criteria for determining when payments to the contractor are allowable under a contract?
- Why is it important to track planned or budgeted expenses?
- What documents can be consulted when monitoring total costs in a cost-type contract?
- Financial Monitoring
- What is financial monitoring?
- When does the government initiate financial monitoring?
- What steps are involved in monitoring financial conditions?
What techniques are used to monitor individual costs?
Techniques used to monitor individual costs include:
Reliance on the contractor's financial (accounting) system
Analysis of the backup information (substantiation) to vouchers (e.g., employee time records, material purchase orders)
Periodic analysis of data obtained from the contractor, government reports, and government site visits
Reliance on scheduled audits
Analysis of costs through specific audit requests.
Techniques used to monitor individual costs and typical problems encountered in doing so are outlined in Figure 6-2.
What are the criteria for determining when payments to the contractor are allowable under a contract?
For such payments to be proper (i.e., allowable under a contract), the costs must be:
Reasonable: Not exceeding that which would be incurred by a prudent person in the conduct of competitive business
Allocable: Properly assigned to one or more cost objectives under the contract
Consistent with applicable accounting standards and prohibitions on the allowability of certain costs.
FIGURE 6-2. Individual Costs: Monitoring Techniques
Why is it important to track planned or budgeted expenses?
Cost monitoring involves tracking and analyzing the overall rate of contract expenditures to determine whether the contract will be completed within budget and according to schedule.
If expenses are considered . . .
Contract funds may not be sufficient to complete the work.
Performance may be falling behind schedule.
What documents can be consulted when monitoring total costs in a cost-type contract?
Various documents can be referenced when monitoring the total cost of a cost reimbursement contract or other cost-type contract. These documents include:
The contractor's cost proposal
Reports required by the contract
Contract terms in accordance with FAR text and clauses that address cost and cost monitoring, such as:
- Award and incentive fee contract provisions
- Labor-hour contract provisions
Prior acquisition histories.
Figure 6-3 provides further guidance on monitoring total costs.
What is financial monitoring?
Financial monitoring means detecting changes in a contractor's financial condition that have the potential to endanger a contract's performance, then taking the appropriate actions to preserve performance.
When does the government initiate financial monitoring?
Three events must take place before the decision is made to monitor a contractor's financial condition:
1. A surety or financial institution involved with the contractor indicates to the government that the contractor is in financial trouble.
FIGURE 6-3. Monitoring Total Costs
2. A determination is made that the government would be harmed by the contractor's financial difficulties.
3. A determination is made that the government could take positive steps to protect its interests.
The government's interest is not always in jeopardy as a result of a contractor's failing financial condition. For example, contractor financial problems on service contracts with monthly payment terms and no up-front materials costs should not cause substantial concern; service workers are typically not paid until after the service is provided, which means that the government is not at risk even if the contractor is in financial difficulty.
What steps are involved in monitoring financial conditions?
Four steps are involved in monitoring financial conditions:
1. Determining whether to monitor financial conditions when alerted to circumstances that might endanger government interests
2. Protecting the government's interest if a lien is placed against a contractor's inventory
3. Protecting the government's interest if the contractor is facing bankruptcy
4. Furnishing information to interested parties upon request.
The CO or the agency's financial advisors should be notified when financial conditions may warrant intervention by the government.