Closeout Contract

Audit Responsibilities
And
Contract Closeout
A Self-Study on Contract
and Financial Assistance
Closeout and Audit Responsibilities
U.S. Department of Energy
Prepared for the

Chief Financial Officer
Financial Management
Development Program
Table of Contents
1. Introduction
About This Self-Study Guide

Target Audience
Prerequisite Knowledge and Skills
Structure
Instructions
2. Module 1 – Audit Process Cycle, Types of Awards, and Audit Requirements
Objectives
Estimate Completion Time
The Audit Process and Audit Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Audit Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Audit Cycle. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Types of Audits. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
The Site Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Defense Contract Audit Agency. . . . . . . . . . . . . . . . . . . . . . . . .5
Desk Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Types of Awards and Audit Requirements. . . . . . . . . . . . . . . . . . . . . .7
Time and Materials and Labor Hour Contracts. . . . . . . . . . . . . 7

Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Audit Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Cost Reimbursement Contracts . . . . . . . . . . . . . . . . . . . . . . . .8

Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Audit Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Fixed-Price Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Auditing Responsibilities . . . . . . . . . . . . . . . . . . . . . . . 10
Financial Assistance Awards . . . . . . . . . . . . . . . . . . . . . . . . . .10

Description. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .10
Audit Responsibility. . . . . . . . . . . . . . . . . . . . . . . . . . . .11
Other Areas of Audit Consideration. . . . . . . . . . . . . . . . . . . . .12

Fixed Obligation Awards. . . . . . . . . . . . . . . . . . . . . . . .12
Cost Sharing or Matching. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Description . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .12
Audit Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Cost Sharing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13
In-Kind Contributions . . . . . . . . . . . . . . . . . . . . . . . . . .14
Self-Test - Questions . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16
Self-Test - Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18
3. Module 2 – Cost Principles
Objectives
Estimated Completion Time
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Cost Principles. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Commercial Entities. . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Non-Profit Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .22
Educational Institutions . . . . . . . . . . . . . . . . . . . . . . . . .23
State and Local Governments. . . . . . . . . . . . . . . . . . . . .24
Cost Principle Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Senior Executive Compensation. . . . . . . . . . . . . . . . . . .25
Indirect Rate Certification and Penalties . . . . . . . . . . . .25
Patent Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25
Travel Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Retirement Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Training Resources. . . . . . . . . . . . . . . . . . . . . . . . . . . . .27
Self-Test – Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28
Self-Test – Answers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
4. Module 3 – Indirect Rates
Objectives
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .31
Definition.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Indirect Pools. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Pool Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Base Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Indirect Rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Components . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .35
Indirect Rate Components.. . . . . . . . . . . . . . . . . . . . . . .36
Indirect Pools . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
Fringe Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Overhead . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
General and Administrative . . . . . . . . . . . . . . . . . . . . . 36
Allocation Bases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Commercial Entities . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Educational Institutions and Other Non-Profit Entities.37
State of Local Governments. . . . . . . . . . . . . . . . . . . . . .38
Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
Negotiation Responsibility. . . . . . . . . . . . . . . . . . . . . . .39
Self-Test – Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Self-Test – Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

5. Module 4 – Closeout
Objectives
Contract Closeout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45
Contract Closeout Process . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Prepare an Analysis of the Contract. . . . . . . . . . . . . . . .47
Prepare a Voucher Schedule. . . . . . . . . . . . . . . . . . . . . .48
Prepare a Closing Statement. . . . . . . . . . . . . . . . . . . . . .49
Level of Effort Clauses. . . . . . . . . . . . . . . . . . . . . . . . . .50
Task Order Type Contracts . . . . . . . . . . . . . . . . . . . . . .50
Quick Closeout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Definition. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Requirements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .52
Quick-Closeout Process. . . . . . . . . . . . . . . . . . . . . . . . .52
Closeout of Financial Assistance Awards . . . . . . . . . . . . . . . .55

Background. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .55
Financial Assistance Closeout Process –
Commercial Entities. . . . . . . . . . . . . . . . . . . . .55
Financial Assistance Closeout Process – Non-
Profit Entities. . . . . . . . . . . . . . . . . . . . . . . . . .56
Financial Assistance Closeout Process –
Educational Institutions and Government
Entities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .56
Self-Test – Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58
Self-Test – Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

Introduction
About This Self-Study Guide
This self-study guide is designed to assist Department of Energy

(DOE) financial management and procurement personnel in
understanding the audit and closeout requirements for the various
DOE procurement instruments.
This self-study guide is intended to assist the reader in understanding

the following processes:
• Audit process and audit cycle.
• Different types of awards and their individual audit

requirements.
• Different types of entities, including their individual structure,

applicable cost principles, and audit requirements.
• Application of indirect rates, including what they are, how they

are computed, audited, and negotiated.
• Award closeout processes.
Target Audience
• Accountants and Financial Review Personnel.
• Reviewers.
• Procurement Personnel.
Prerequisite Knowledge and Skills
• A general knowledge of accounting and auditing practices and

procedures.
• A general knowledge of procurement practices and procedures.

Structure
This guide consists of four modules covering the following topics:
• Audit process cycle, types of awards, and audit requirements.
• Types of entities and their applicable cost principles and

requirements.
• Indirect rates.
• Closeout.
Instructions
This self-study guide should be completed in sequence starting with

the Module 1. Begin each module by reading the objectives and
proceeding with the subject matter presented. Although the training
does not require an exam, we invite you to complete the self-test at the
end of each module to evaluate your understanding of each subject.
An answer key is also provided at the end of each self-test.
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Module 1
Audit Process Cycle, Types of Awards, and

Audit Requirements
Objectives
Upon completion of this module, you should be able to do the

following:
• Understand the audit process cycle.
• Identify the different types of awards.
• Understand the audit requirements.
2 hours
The Audit Process and Audit Cycle
Audit Process
The audit process is a cyclical event that begins at contract award and
ends 2-5 years after expiration of the award. Most awards, whether a
contract or financial assistance and whether with a commercial entity
or a non-profit entity, require some form of audit. The audit cycle
includes an annual audit of direct and indirect costs plus some type of
final audit or final reconciliation of costs.
An audit is necessary for the Government to have some assurance that

the price is reasonable or that the costs are allowable, allocable, and
reasonable. The type of audit depends on the type of award. For
example, noncompetitive fixed-price contracts, time and material, and
labor hour contracts generally require audits during the pre-award
phase. Any post-award audits of these contracts would be very
limited, such as the verification of payments made to contract terms for
price, negotiated changes, labor rates, etc.
On the other hand, significant post-award audit effort is required for

cost reimbursement contracts, grants, and cooperative agreements prior
to the acceptance of the costs. These types of awards require annual
negotiation of final indirect rates and annual audits of costs incurred.
Also, it should be noted that some award recipients are required to
have a certified public accountant (CPA) financial audit. However, the
CPA audit is different from a cost reimbursement audit in that its
purpose is to certify to the fair presentation of the financial statements
and the cost reimbursement audit is to determine the allowability,
allocability, and reasonableness of costs charged to the Government.
The remainder of this section deals with the audit cycle relating to cost
reimbursement and financial assistance awards.
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Audit Cycle
Audits cover the awardee’s fiscal year (FY) cycle and not the funding
year or the Government’s FY. The timeliness of the audit is dependent
on the cooperation of all parties involved. The audit cycle is as
follows:
Fiscal Final Indirect Indirect Proposal

Rate Proposal Transmitted For
Year Submitted
End Audit
Final Audit
Adjustment of Costs Indirect
from Provisional to Performed and
Rates Report Issued
Actual Rates Negotiated
The number of audits conducted will depend on the length of the

award. A 5-year award will need 5 years of audits. Additionally, after
the indirect rates have been audited and negotiated for all years of the
award, a final audit is required.
The final audit process is initiated after the final voucher is received.
The final voucher represents the total claim against the Government.
The final audit is a compilation of all the previous years’ audits and a
reconciliation of billed costs to the final recommended costs (based on
the audit reports). The Contract Closeout process is discussed in detail
in Module 4.
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Types of Audits
Generally, there are two types of audits, the site audit and the desk
audit. The decision to use either type depends on the following factors:
• Prior audit history of the entity.
• The size of the award.
• Whether the entity has other Federal awards.
• The timing of the audit cycle.
• Cost benefit of obtaining an outside audit.
Generally, smaller awards (less than $1,000,000 or $500,000 annually)

are audited by a desk review rather than a site audit. Another factor to
consider is whether other Federal audits are being performed at the
recipient’s location. In which case, it may be more cost effective to the
Government to request a site audit on the smaller awards. On the other
hand, if the award is small and there is no other Federal audit presence,
it is generally more cost effective to perform a desk review.
The Site Audit

The DOE Inspector General (IG) has responsibility for all audit
activities within the DOE. However, in order to focus its resources on
areas other than costs, the IG made a decision that it would not perform
cost reimbursement audits. DOE Headquarters (HQ), therefore,
entered into a memorandum of understanding (MOU) with various
Federal audit entities, including the Defense Contract Audit Agency
(DCAA), Department of Health and Human Services (DHHS) and the
Environmental Protection Agency (EPA) to perform the cost
reimbursement audits for the department. DOE reimburses these audit
entities for their audit services, therefore, consideration should be
given to the cost of the site audit in relation to the benefits to be
derived from the audit.
If a decision is made to request a site audit, the first step is to

determine which audit agency has audit cognizance. Generally the
12
DCAA will have audit cognizance for commercial entities and the
DHHS will have cognizance for educational institutions and some non-
profit entities. It may not, however, be necessary to request an audit
for the educational institutions and non-profit entities because, under
Office of Management and Budget (OMB) Circular A-133, they are
required to obtain their own audits.
In special circumstances, there may be other agencies that have

cognizance over an entity. In cases where another agency has audit
cognizance and there is no MOU with that agency, DOE HQ, Office of
Procurement and Assistance Policy should be contacted for assistance.
Defense Contract Audit Agency

If the decision is made to request a site audit and the DCAA is the
cognizant audit agency, the initial request for audit should be transmitted
to the cognizant DCAA branch office as soon as possible so they can
properly plan for the audit. The DCAA is divided into five regions, each
of which has numerous branch offices. The DCAA issues a directory,
which contains the address and telephone number of the various DCAA
regional, branch, and suboffices. Audit entities are assigned to the
various DCAA offices by the entity ZIP Code. The DCAA directory is
also available at the DCAA Internet site located at
http://www.dcaa.mil/organization.htm .
Any special circumstances or concerns about the audit entity should be

transmitted to the DCAA at the time of the request. It is also a good
idea to talk with the DCAA auditor in charge to discuss special issues
that you want the auditor to review. Additionally, audit requests
should be tracked to ensure receipt of the audit reports.
In addition to the initial request, a copy of the final indirect rate

proposal, along with a request for audit, should be transmitted to
DCAA when the final indirect rate proposal is received. It should be
noted that DCAA will track the receipt of the yearly indirect proposal
for the larger companies and entities that have a constant DCAA
presence. Many times the DCAA will receive the indirect proposal
directly from the entity. Therefore, you should contact the appropriate
DCAA office to determine if they have the proposals prior to sending
them to DCAA.
13
Desk Audit
The desk audit or desk review is a true audit and should be performed
by someone who has auditing knowledge. The only difference
between a desk review and a site audit is the location at which the audit
is performed. The desk review or audit should follow a written audit
program, and the DCAA contract audit manual is a good resource to
use in developing contract audit programs. The DCAA Internet site
(http://www.dcaa.mil/cam.htm ) provides general and specific
information and sample audit programs for various areas of contract
audit. Since most desk reviews are performed on smaller dollar
awards, the sample standard audit programs will generally have to be
modified.
In planning for the audit, the reviewer should obtain a sample of

supporting documentation of costs incurred (such as labor distribution
worksheets, timesheets, invoices from subcontractors or for equipment
purchases, etc.) for verification. Also, costs billed should be reviewed
for allowability, allocability, and reasonableness. The following
actions are necessary to complete the review:
• Schedule vouchers by cost element and the entity’s FY.
• Obtain copies of the annual final indirect rate proposal, annual

Federal tax return, and annual CPA financial audit (if available).
• Reconcile the indirect rate proposal to the entity’s Federal tax

return, CPA financial audit, or general ledger.
• Perform review.
• Write and issue report.
Caution: If you find significant issues and problems while performing

a desk review, you should either expand your sample or, if the issues
are serious, stop the desk review and request DCAA to perform an
audit. DCAA should be informed of your issues, and you should
specifically address any concerns in the request for audit.
14
Types of Awards and Audit Requirements
The type of audit depends on the type of award. Each type of award
has its special circumstances and must be audited differently. Also,
each type of entity (commercial organization, non-profit, educational
institute, or state and local government) has different cost principles
regarding the allowability of cost. A discussion of the types of awards
and applicable audit requirements follow (the types of entities and
varying cost principles will be addressed in Module 2).
Time and Material and Labor Hour Contracts
Description
Time and material and labor hour contracts are used to buy time at a
fixed and specified hourly rate that includes direct labor, indirect costs,
and profit. Also, the actual costs of material purchases are allowed
under time and material contracts. Labor hour contracts are the same
as time and material except that materials are not supplied by the
contractor and are not reimbursed.
Audit Responsibility
Most of the audit work is performed during the pre-award stage of the
contract in order to establish the fixed hourly rates (which include
labor, indirect costs, and profit). However, time and material or labor
hour contracts have specific concerns that require some post-award
audit review. The following areas of the contracts require post-award
audit:
• Other Direct Costs and Materials – Under time and material

contracts, other direct costs (if allowed by contract) and
materials are reimbursed at cost in accordance with the
applicable cost principles. Therefore, some audit in these areas
is necessary prior to final acceptance of costs.
• Labor – Although time and material contracts and labor hour

contracts provide fixed labor rates, audit is necessary in order to
ensure the following:
15
− Hours billed agree with the contractor’s time recording
records.
− Labor categories billed agree with the labor position used

for the work. Special emphasis should be made to ensure
that the contractor does not “switch” labor qualifications
by billing a higher labor category than was actually used.
• Defective Pricing – Since the labor hours are fixed based on cost
and pricing data submitted by the contractor prior to award (and
relied on for negotiations), time and material and labor hour
contracts are subject to defective pricing.
Cost Reimbursement Contracts
Description
Cost reimbursement contracts provide an array of flexible financial
arrangements that are essential to afford the contractor a guarantee of
some degree of cost reimbursement when they agree to undertake work
where the scope of the work cannot be estimated accurately. The cost
reimbursement contract takes on many different forms as highlighted
below:
• Cost Contract – This is the simplest form of cost reimbursement

contract. The contractor receives reimbursement for its costs,
but no fee is provided. This type of arrangement is generally
used for educational institutions and other non-profit entities.
• Cost-Participation Contract – This contract provides for the

Government to reimburse the contractor a portion of allowable
costs. It is also sometimes termed a cost-sharing contract. Fee
is generally not allowed under this type of arrangement since the
contractor is “contributing” to the overall scope of work.
Attention to the contract terms and the contract language is

essential in these arrangements since the type of “sharing” may
be costs, in-kind contributions, cost matching, cost limitation, or
16
other arrangements. (See the discussion on Cooperative
Agreements regarding cost sharing and in-kind contributions).
• Cost Plus Fixed-Fee Contract – This contract provides for

reimbursement of actual allowable and allocable costs of
performing the contract plus a fixed fee.
The recommendation of fixed fee is generally outside the assist

audit scope of work. The contractor is entitled to the fee stated
in the contract. The only exception is for level of effort
contracts that have specific terms and conditions that require an
adjustment of fee. The general conditions require an adjustment
of fee should the contractor under run or over run the number of
direct productive labor hours by 10 percent or more. Care
should be taken when analyzing a level of effort contract for
these fee terms.
• Cost Plus Incentive Fee Contract – This contract provides for

reimbursement of actual allowable and allocable costs of
performing the contract plus an incentive fee arrangement. In an
incentive fee contract, the contractor is provided an additional
incentive to accomplish an established objective. The fee
schedule is established to provide for a maximum and minimum
fee that is due the contractor depending on the objective. The
contracting officer may request assistance in computing the fee
based on the objectives. However, as stated above, fee is
generally outside the assist audit review scope. The contracting
officer, in the case of incentive fee contracts, is looking toward
the analyst to provide data regarding the allowability and
allocability of the costs.
• Cost Plus Award Fee – Most cost plus award fee contracts are
management and operating contracts that are not covered in this
study guide.
Cost type contracts require considerable audit effort since total costs
(direct and indirect) claimed must be audited for allowability,
allocability, and reasonableness.
17
Fixed-Price Contracts
Description
A fixed-price contract is an agreement by the contractor to furnish
specified supplies or services at a stipulated price. This type of
contract places the risk for performance solely on the contractor.
These types of contracts are not subject to adjustment for over or under
estimating price.
Auditing Responsibilities
Post award auditing of fixed-price contracts is limited to changes due
to the nature and scope of the work contracted for and/or suspected
defective pricing. Defective pricing occurs when a fixed-price contract
is awarded based on negotiations and the data provided by the
contractor, which was “relied” upon by the Government during
negotiations, is false. In these instances, the Government is allowed to
request reimbursement for the difference between what the price would
have been had the information been accurate. There are special
circumstances following defective pricing which will not be discussed
in this study guide. Generally, the DCAA is requested to perform a
defective pricing audit.
Fixed-price contract changes are usually negotiated and as such are

generally treated similar to “cost-type contracts.” Equitable
adjustments due to a contract change may or may not be audited. The
decision for audit is the responsibility of the contracting officer.
Financial Assistance Awards
Description
Financial assistance awards include grants and cooperative agreements.
Financial assistance awards differ from contracts in the amount of
administration, reporting requirements, and other “contractual”
requirements. The basic philosophy behind financial assistance is to
provide a means of contributing financial resources without the
administrative burden (both from the recipient and the Government’s
standpoint) that is required under contracting.
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A grant places DOE in the position of a “patron” for stimulating or
providing financial assistance in supporting an organization with
minimal DOE involvement. Although DOE receives benefit, the
overall purpose of a grant is to benefit the public.
A cooperative agreement on the other hand is viewed as placing DOE

in the position of a “partner” in the financial assistance relationship.
The major difference between a grant and a cooperative agreement is
the fact that under a cooperative agreement, DOE is “substantially
involved” whereas DOE is not in a grant. Cooperative agreements
generally involve cost sharing which is discussed later in this section.
The following are some helpful web sites for financial assistance
awards:
Description Web Site

DOE Guide to Financial www.management.energy.gov/documents
Assistance
10 CFR 600 www.management.energy.gov/documents

DOE Financial Assistance www.management.energy.gov/policy_guidance
Page
Grants Web Page http://grants.gov
The audit responsibility is the same for financial assistance as for
contracts. The type of entity that receives the award determines what
type of audit responsibility is required. Educational institutions, non-
profit entities, and state or local governments all follow OMB Circular
A-133 audit requirements. As stated above, OMB Circular A-133
requires that the entity engage an outside audit of the financial award.
The outside audit is generally either performed by a CPA firm or by a
state auditor’s office. Financial assistance awards to commercial
entities require governmental audit, which is generally DCAA.
Note: There is a perception that OMB Circular A-133 requirements

and Federal regulations prevent additional auditing of financial
assistance agreements with educational institutions, other non-profit
19
entities, and state or local governments. 10 CFR 600 does allow
additional audit effort of entities covered by OMB Circular A-133
when the contracting officer deems it necessary. However, under the
single audit act, any additional auditing should compliment the OMB
Circular A-133 report. There should not be duplicated audit effort in
the rare cases when additional audit effort is requested.
Other Areas of Audit Consideration
Fixed Obligation Awards

Fixed obligation awards are financial assistance awards, generally
grants, which are similar to fixed-price contracts. In a fixed obligation
award, funds are issued in support of a project without a requirement
for Federal monitoring of actual costs subsequently incurred.
However, under Small Business Innovative Research (SBIR) awards
for Phase I, any monies greater than $500 not expended at the end of
the financial assistance term must be returned to the Government.
There are no audit requirements for post-award closeout of fixed

obligation awards.
Cost Sharing or Matching
Description
Cost sharing or matching either by cash contribution or in-kind
contribution requires that the contractor or recipient contribute to the
project through either cash matching (contribute a proportion of total
allowable costs) or by in-kind contribution (contributions other than
cash). Cost sharing may be dictated by program responsibilities or by
statute.
Cost sharing can be found in either contracts or financial assistance

awards. However, most current cost sharing is associated with
financial assistance awards.
Generally, cost sharing is required when a project’s ultimate goal is

commercialization and utilization of technology by the private sector
when there is reasonable expectation that the recipient will receive
significant present or future economic benefit. Particular attention
20
should be paid to the wording of the cost sharing terminology in the
award document (whether contract or financial assistant award).
Audit Responsibilities
Cost Sharing
Cost Sharing requires a determination of total allowable costs
(generally by audit) since the majority of cost sharing agreements
requires that the cost sharing be a percentage of total allowable costs.
Unallowable costs are excluded when determining the Government’s
share.
The audit requirements for cost sharing agreements are the same as
discussed above. The type of audit is again dependent on the type of
entity the cost sharing arrangement is with.
In addition to being allowable under the applicable cost principles, 10

CFR 600.123 also requires the following criteria be considered when
reviewing a cost sharing agreement:
• Contributions are verifiable from the recipient’s records.
• Contributions are not included as contributions for any other

Federally assisted project or program.
• Contributions are necessary and reasonable for proper and

efficient accomplishment of project or program objectives.
• Contributions are not paid by the Federal Government under

another award, except where authorized by Federal statute to be
used for cost sharing or matching.
• Contributions are provided for in the approved budget.
Contributions of unrecovered indirect costs may be included as part of

cost sharing or matching.
21
In-Kind Contributions
There is a special challenge when determining the actual value of in-
kind contributions. In-kind contributions can be donated equipment,
property, supplies, donated services, volunteer services, or any other
“valuable” that is agreed upon in the award instrument. In addition to
the criteria listed above, 10 CFR 600.123 also requires:
• Real property or buildings for construction/facility acquisition

projects or long-term use shall be the lesser of the certified value
of the remaining life of the property recorded in the recipient’s
accounting records at the time of donation or the current fair
market value. DOE can authorize the use of current fair market
value when it exceeds cost when there is sufficient justification.
• The value for volunteer services shall be consistent with those

paid for similar work in the recipient’s organization or in the
labor market in which the recipient competes. Reasonable,
allowable, and allocable paid fringe benefits may be included in
the valuation.
• Services furnished by others (non-recipient) shall be valued at

the employee’s regular rate of pay (plus fringe benefits that are
reasonable, allowable, and allocable, but exclusive of overhead
costs) for the same skill for which the employee is normally
paid.
• Donated supplies shall be reasonable and shall not exceed the

fair market value at the time of the donation.
• The valuation of donated equipment, buildings, and land where

title passes to the recipient is dependent on the purpose of the
award.
− If the purpose is to assist the recipient in the acquisition,

the total value of the donated property may be claimed as
cost sharing or matching.
− If the purpose is to support activities that require the use

of the property, only depreciation or a use charge may be
22
made unless DOE has given specific approval for the use
of the full value.
• The value of donated property shall be determined in accordance

with the usual accounting policies of the recipient. However,
the value of donated land and buildings shall not exceed its fair
market value at the time of the donation to the recipient as
established by an independent appraiser and certified by a
responsible official of the recipient.
• The value of donated equipment shall not exceed the fair market
value of equipment of the same age and condition at the time of
donation.
• The value of donated space shall not exceed the fair rental value
of comparable space as established by an independent appraisal
of comparable space and facilities in a privately owned building
in the same locality.
• The value of loaned equipment shall not exceed its fair rental
value.
The supporting records for contributions from third parties require that
volunteer services be documented in the same method used by the
recipient for its own employees and the basis for determining the
method of valuation is documented.
23
Self-Test - Questions
1. The audit cycle covers the _______________ FY and includes the

submittal, audit, and negotiation of the awardees
__________________________________________.
2. Name some of the factors that should be considered when trying to

determine whether to request a site audit or perform a desk review:
a) ___________________________________
b) ___________________________________
c) ___________________________________
d) ___________________________________
e) ___________________________________
3. The difference between a time and material contract and a labor hour
contract is the inclusion and allowability of ____________________.
4. The difference between the various cost contracts is the presence or

absence of ________________.
5. The post award auditing of fixed-price contracts is limited to

____________ or ______________ _______________.
6. The two major factors which determine whether an award is a contract,

grant, or cooperative agreement are ___________________ and
___________________________________.
7. True or False--A fixed obligation award requires a grantee to follow the

applicable cost principles and return unspent money.
8. True or False--Cost sharing or in-kind contributions are computed on total

costs.
24
9. True or False--In-kind contributions requires the Government to review
and validate the value of the in-kind contribution.
10. True or False—When performing a desk review, in lieu of a DCAA audit,

it is crucial that the indirect rate proposal submitted by the contractor is
reconciled to their Federal tax return, audited financial statements, or
general ledger?
25
Self-Test - Answers
1. The audit cycle covers the awardee’s FY and includes the submittal,
audit, and negotiation of the awardees final indirect rate proposal.
2. Name some of the factors that should be considered when trying to

determine whether to request a site audit or perform a desk review:
a) Prior audit history of the entity.

b) The size of the award.
c) Whether or not the entity has other Federal awards.
d) The timing of the audit cycle.
e) Cost benefit of obtaining an outside audit.
3. The difference between a time and material contract and a labor hour
contract is the inclusion and allowability of materials.
4. The difference between the various cost contracts is the presence or

absence of fee.
5. The post award auditing of fixed-price contracts is limited to changes or

effective pricing.
6. The two major factors which determine whether an award is a contract,

grant, or cooperative agreement are who benefits and the level of
Government participation and involvement.
7. True or False--A fixed obligation award does not require a grantee to

follow the applicable cost principles, but does require the return of
unspent money if greater than $500. False
8. True or False--Cost sharing or in-kind contributions are computed on total

Allowable costs. False
9. True or False--In-kind contributions require the Government to review

and validate the value of the in-kind contribution. True
10. True or False—When performing a desk review, in lieu of a DCAA audit,

it is crucial that the indirect rate proposal submitted by the contractor is
26
reconciled to their Federal tax return, audited financial statements, or
general ledger? True. It is imperative that this step be performed
early during the desk review to ensure costs claimed represent actual
costs incurred by the entity. This can be one of the more difficult
tasks in the desk review process.
27
Module 2
Cost Principles
Objectives
Upon completion of this module, you should be able to do the following:
• Identify the following different cost principles that are applicable:
! Commercial Entities
! Non-Profit Entities
! Educational Institutions
! State and Local Governments
• Understand unallowable costs.
2 hours
28
Introduction
The cost principles that apply to a Federal award depend upon the type
of entity involved. These same cost principles will apply to that entity
irrespective of whether the entity receives a contract or a financial
assistance award.
The cost principles are primarily used in the determination of allowable

costs. The principles stipulate the types of costs that are expressly
unallowable and discuss allocability and the reasonableness of costs
charged to the award.
The cost principles applicable to commercial organizations and non-

profit organizations will most likely be the ones that you should become
familiar with first since the majority of Federal awards are to these
entities. The cost principles for commercial entities are contained in
Federal Acquisition Regulations (FAR) 31. Each set of cost principles is
tailored for the specific entity. For example, educational institutions
incur stipends and typically provide in-kind or donated services. Office
of Management and Budget (OMB) Circular A-21, which contains the
cost principles applicable to these entities, therefore, specifically
addresses stipends and in-kind contributions.
In recent years, efforts have been underway to make all the cost
principles more uniform. For example, both the FAR and OMB
Circulars have been modified and updated to make the cost principles
more uniform.
Cost Principles
Commercial Entities
FAR, Subpart 31.2 establishes cost principles for all commercial entities
under cost reimbursement contracts, changes to fixed-price contracts,
and financial assistance awards. A company’s failure to comply with
these cost principles would obviously result in the disallowance of costs,
but could also result in administrative and criminal penalties. The FAR
is available at several different web sites. A common one maintained by
GSA on behalf of DOE, Department of Defense (DOD), and National
Aeronautics and Space Administration is located at
29
http://www.arnet.gov/far/. The DCAA Contract Audit Manual provides
a useful guide for interpreting the more complicated cost principles
contained in FAR Subpart 31.2. This manual is updated in January and
July of each year. The manual is available to the general public for a
nominal annual subscription by writing to the following address:
Superintendent of Documents
Post Office Box 371954
Pittsburgh, Pennsylvania 15250-7954
Although the established cost principles should suffice in most

contractual situations, under special circumstances it may be beneficial
for the Government to enter into an advance agreement with the
contractor for particular types of costs. When doing so, FAR 31.109
advises:
“Advance agreements may be negotiated

either before or during a contract but should
be negotiated before incurrence of the costs
involved. The agreements must be in
writing, executed by both parties, and
incorporated into applicable current and
future contracts. An advance agreement
shall contain a statement of its applicability
and duration.”
An advance agreement, if negotiated successfully, can make an

otherwise allowable cost unallowable under a contract due to special
circumstances. These costs then become “unbillable.” Alternatively, an
expressly unallowable cost can never be made allowable under a
contract even with an advance agreement, unless a “deviation” is
obtained from HQ.
Non-Profit Entities
OMB Circular A-122 provides the cost principles for determining
allowable costs under contracts, financial assistance, and other types of
awards with non-profit entities. Circular A-122 contains a listing of
expressly unallowable costs. These costs are to be considered
30
unallowable regardless of whether they are classified as direct or
indirect.
For indirect costs, unless different arrangements are agreed to by the

agencies concerned, the Federal agency with the largest dollar value of
awards with a non-profit entity will be designated as the cognizant
agency for the negotiation and approval of indirect rates. Non-profit
entities are required to submit an indirect cost proposal to their cognizant
agency within 6 months after each of their fiscal year end (FYE). These
proposals provide the basis for the review and negotiation of indirect
cost rates. The results of each negotiation should be formalized in a
written agreement between the cognizant agency and the non-profit
entity. The cognizant agency will then distribute copies of the rate
agreement to all other agencies that have awards with the non-profit
entity.
All OMB Circulars are available from the White House web site located
at http://www.whitehouse.gov/OMB/circulars/index.html .
Educational Institutions
OMB Circular A-21 contains the cost principles for determining
allowable costs under contracts, financial assistance, and other types of
awards with educational institutions. Circular A-21 includes a listing of
costs considered unallowable and information concerning why these
costs are expressly unallowable.
For indirect costs, the DHHS is the CFA responsible for negotiating and
approving indirect rates with most educational institutions on behalf of
all other Federal agencies. In general, the negotiated rates must be
accepted by the other Federal agencies. Only under special
circumstances, such as when required by law or regulation, may an
agency use a rate different from the negotiated rate.
Public Law 87-638 authorizes the use of predetermined rates with

educational institutions. Predetermined rates are indirect rates
negotiated between the cognizant agency and the institution well in
advance of the FY they pertain to and they may cover multiple years.
Reimbursement of allowable indirect costs is made under contracts and
financial assistance awards using these rates with no subsequent
31
adjustments. The stated objectives of the law authorizing the use of
predetermined rates are to simplify the administration of cost-type
contracts and financial assistance awards and to permit more expeditious
closeout.
A major difference between the cost principals in OMB Circular A-21

and cost principles for other entities is the treatment of Facilities and
Administration (F&A) costs. Such costs, as defined in the Circular, are
limited to 26 percent of the modified total direct cost allocation base.
The CFA is responsible for negotiating this limitation, which only
applies to the F&A cost pool. The educational institution may have
other cost pools that result in an overall rate higher than 26 percent, but
the F&A portion must fall within the limitation.
State and Local Governments

OMB Circular A-87 contains the cost principles for determining
allowable costs under contracts, financial assistance, and any other types
of awards with state and local governments, including Federally
recognized Indian Tribal Governments. The principles and standards in
OMB Circular A-87 provide a uniform approach in determining the
allowability and allocability of costs for state and local governments.
OMB Circular A-87 is similar to OMB Circular A-21 in that it lists and
discusses costs that are expressly unallowable and provides for a CFA
responsible for negotiating and approving indirect rates on behalf of all
other Federal agencies. Predetermined rates are also widely used with
state and local governments.
One difference between OMB Circulars A-87 and A-21 is that the F&A
cost limitation is not included in OMB Circular A-87. Additionally,
OMB Circular A-87 requires state and local governments to submit a
cost allocation plan to the DHHS for approval. These cost allocation
plans stipulate how indirect costs will be claimed and billed under
Federal awards.
32
Cost Principle Highlights
Senior Executive Compensation

A significant change to the FAR cost principles made recently is the
limitation on contractor senior executive compensation. The term
“senior executives” is currently defined in FAR 205-6(p) as the five
most highly compensated employees in management positions for the
contractor at their home office and at each business segment. The
current maximum salary cap is $342,986 per annum effective January 1,
1999, and thereafter. The current definition of what constitutes “senior
executives” and the amount of the salary cap have changed from earlier
years. This cost principle is fairly new so additional changes in its
implementation can be expected.
DOE’s latest implementation guidance is contained in Acquisition Letter

(AL) 99-02, dated March 11, 1999. This AL also contains advance
approval requirements unique to DOE. The AL’s are available at
http://www.pr.doe.gov/acqltr.html.
Indirect Rate Certification and Penalties

FAR 31.110, “Indirect cost rate certification and penalties on
unallowable costs,” was recently changed to allow the Government to
assess penalties and interest against the contractor if unallowable costs
are contained in certified indirect cost rate proposals. FAR 42.709
specifies the administrative procedures regarding the penalty
assessment. Contracts in excess of $500,000, except fixed-price
contracts, are subject to this penalty.
Patent Costs
FAR 31.205-30, 31.205-33 and 31.205-37 address the allowability of
patent costs. Patent costs are generally costed through the entity's
indirect rates since they "benefit" the entity as a whole. Patent costs
such as those associated with preparing invention disclosures, reports
and other documents, or providing general patent counseling services,
are allowable. Other costs, such as those associated with filing and
prosecuting patent applications, are unallowable unless they are incurred
as a requirement of the contract and title or a royalty-free license is
conveyed to the Government. Contracts having a need to file and
prosecute patent applications are extremely rare. If costs associated with
33
filing and prosecuting patent applications are found, these costs should
be examined in detail to determine whether they are allowable under the
contract.
When significant patent costs are encountered during the review, the
organization’s intellectual property counsel (or patent counsel) office
should be consulted. Patent costs involve such a technical area that it is
almost impossible for the reviewer to determine allowability without
input from technically qualified individuals. The allowability of patent
costs is determined on a contract by contract basis. Also, the
allowability of patent costs is determined by whether patenting of
inventions made under the contract is a requirement of an individual
contract and the Government has rights in the subject invention for
which costs are being charged. Therefore, it may be necessary to
"revise" indirect rates established by the CFA if the entity has significant
patent costs that are unallowable in the awards administered by your
office.
Travel Costs
The GSA recently issued new per diem rates that exclude lodging taxes.
Lodging taxes are now claimed as miscellaneous costs. FAR 31.205-46
requires contractors to stay within the per diem rates established by GSA
(the DOD has obtained a class deviation, effective through September
30, 1999, or until FAR 31.205-46(a)(2) is revised). This class deviation
may affect the allowability of travel costs to DOE contracts. Therefore,
during a review of travel costs, it is important to know whether the
contractor accounted for travel in accordance with the revised GSA per
diem rates or in accordance with the DOD deviation.
It is necessary to keep current on this issue since it appears that DOD is

trying to get GSA to revert back to their old way of establishing per
diem or removing the per diem limit from contractors. DOD’s position
is that the defense contractors may “encounter a significant
administrative burden and incur substantial costs in modifying their
systems to comply with this new rule.”
Retirement Costs
DOE has many support service contracts with small businesses. These
small businesses will open offices close to the DOE and maintain a staff
34
for the duration of the contract, which usually runs from 3 to 5 years.
Generally, these small businesses have 401K type retirement systems for
their employees.
Even though not addressed in the FAR, when reviewing retirement costs
the reviewer should ensure that the amount reimbursed by the
Government does not result in a windfall for the contractor. A
determination should be made as to when the employees “vests” in the
retirement system. Note that, upon an employee’s termination or
contract end date, the Government’s contribution should either go with
the employee (“vested”) or be returned (not “vested”).
In a previous case where the contractor closed its site office and
terminated the employees after contract expiration, the Internal Revenue
Service ruled that the “vesting” of an employee occurs either on the
vesting anniversary date or the date of Government contract expiration
when termination occurs, whichever comes first.
Training Resources
Several cost principle resources are available to assist you in reviewing
the allowability of costs. The DCAA provides training for its reviewers
and has available several self-study courses. One specific self-study
course of value to anyone reviewing the allowability of costs is entitled
“Audit Applications of FAR Part 31 Cost Principles”. You can obtain a
copy of the DCAA’s “Catalog of Training Courses” (DCAAP 1421.3)
by writing to the Defense Contract Audit Institute at the following
address:
Defense Contract Audit Institute
Memphis, Tennessee
Sandra Davidson, Training Coordinator
(901) 325-6383
35
1. True or False--The cost principles that will apply to a contractor

depend on what type of contract is being awarded.
2. True or False--There are no cost principles for non-profit entities.
3. True or False--A DOE contracting officer can establish an advance

agreement that is unique to a contract for a particular type of cost.
4. Name the OMB Circular that establishes cost principles for

educational institutions and the OMB Circular that is applicable to
governmental entities.
5. True or False--There are no limitations on the salary levels of DOE

contractors?
36
Self-Test - Answers
1. True or False--The cost principles that will apply to a contractor

depend on what type of contract is being awarded. False. The cost
principles that will apply depend on the type of entity
(commercial, non-profit, educational, or governmental).
2. True or False--There are no cost principles for non-profit entities.

False. OMB Circular A-122 provides the cost principles for not-
for-profit entities.
3. True or False--A DOE contracting officer can establish an advance

agreement that is unique to a contract for a particular type of cost.
True. Although the cost principles contained in FAR 31.2 should
suffice in most contractual situations, it may be beneficial for the
Government to enter into an advance agreement with the
contractor for particular types of costs (FAR 31.109).
4. Name the OMB Circular that establishes cost principles for

educational institutions and the OMB Circular that is applicable to
governmental entities. OMB Circular A-21 is for educational
institutions and OMB Circular A-87 is for governmental entities.
5. True or False--There are no limitations on the salary levels of DOE

contractors? False. Beginning in FY 1997, there is a salary cap on
senior executives of DOE contractors. The most recent DOE
Acquisition Letter on this subject should be referred to when
contractor executive compensation is at issue.
37
Module 3
Indirect Rates
Objectives
Upon completion of this module, you should be able to understand the

following:
• Indirect rates and how they are calculated.
• The components of indirect rates.
• The audit responsibility.
• The negotiation process and cognizant agency responsibility.
2 hours
38
Introduction
Indirect rates are one of the most difficult concepts to understand. New
contractors do not understand them, many contracting officers and
technical people do not understand them, CPA’s who have never worked
on Government contracts do not understand them, and most financial
people new to the Government do not understand them.
Indirect costs comprise approximately 50 percent of an award’s costs,

they account for most of the questioned costs, and they hold up the
closeout process. The negotiation of final indirect costs is a requirement
of every cost type contract, grant, and cooperative agreement with every
type of entity (commercial, non-profit, educational, or a state or local
government).
Once you understand the rationale behind why indirect rates are
necessary, it becomes clear why indirect costs under Government
awards are calculated as they are.
First is the concept of “cost” type award (which includes financial

assistance). The Government, under a cost type award, will pay their
“fair share” of total “allowable.” “reasonable,” and “allocable” costs.
Indirect costs have to be allowable under the appropriate cost
principles, they have to be reasonable, and they must be allocable.
Allowable and reasonable are discussed in other modules to this study
guide. This module centers around understanding allocable.
Costs directly incurred specifically for a Government award benefit only

that award and represent the Government’s “fair share.” Costs that
cannot be directly attributed to a specific project (without being
“allocated”) are considered “indirect costs.” The issue becomes how
much is the Governments “fair share.” Thus the concept of calculating
an “indirect rate.” The indirect rate is used to “allocate” the indirect
costs to specific final cost objectives (i.e. projects whether commercial
or Government). If the indirect cost is computed properly and if an
appropriate “base” is used for allocation, then the Government is
ensured that it is only reimbursing its “fair share” of costs.
39
Definition
An indirect cost is any cost not directly identified with a single, final
cost objective, but rather identified with two or more final cost
objectives or an intermediate cost objective.
After direct costs have been determined and charged directly to the
project, indirect costs are those remaining to be allocated to the several
cost objectives. A direct cost is described in the FAR (FAR 31.202) as:
A direct cost is any cost that can be

identified specifically with a particular final
cost objective. No final cost objective shall
have allocated to it as a direct cost any cost,
if other costs incurred for the same purpose
in like circumstances have been included in
any indirect cost pool to be allocated to that
or any other final cost objective. Costs
identified specifically with the contract are
direct costs of the contract and are to be
charged directly to the contract. All costs
specifically identified with other final cost
objectives of the contractor are direct costs
of those cost objectives and are not to be
charged to the contract directly or
indirectly.
For reasons of practicality, any direct cost

of minor dollar amount may be treated as an
indirect cost if the accounting treatment—
(1) is consistently applied to all final cost

objectives; and
(2) produces substantially the same

results as treating the cost as a direct
cost.
40
An indirect cost is described in the FAR as:
An indirect cost is any cost not directly

identified with a single, final cost objective,
but identified with two or more final cost
objectives or an intermediate cost objective.
It is not subject to treatment as a direct cost.
After direct costs have been determined and
charged directly to the contract or other
work, indirect costs are those remaining to
be allocated to the several cost objectives.
An indirect cost shall not be allocated to a
final cost objective if other costs incurred
for the same purpose in like circumstances
have been included as a direct cost of that
or any other final cost objective.
Indirect Pools
The pool represents the logical grouping of indirect costs remaining to
be distributed.
Pool Costs
The pool costs are the indirect costs remaining after all direct costs have
been charged to the appropriate final cost objectives.
Base Costs
The base is an allocation group that in some way relates logically to the
pool groupings. The FAR defines the “base” as:
Indirect costs shall be accumulated by

logical cost groupings with due
consideration of the reasons for incurring
such costs. Each grouping should be
determined so as to permit distribution of
the grouping on the basis of the benefits
accruing to the several cost objectives.
Commonly, manufacturing overhead, selling
expenses, and general and administrative
(G&A) expenses are separately grouped.
41
Similarly, the particular case may require
subdivision of these groupings, e.g., building
occupancy costs might be separable from
those of personnel administration within the
manufacturing overhead group. This
necessitates selecting a distribution base
common to all cost objectives to which the
grouping is to be allocated. The base
should be selected so as to permit allocation
of the grouping on the basis of the benefits
accruing to the several cost objectives….
Once an appropriate base for distributing
indirect costs has been accepted, it shall not
be fragmented by removing individual
elements.
All items properly includable in an indirect

cost base should bear a pro rata share of
indirect costs irrespective of their
acceptance as Government contract costs….
The contractor's method of allocating
indirect costs shall be in accordance with
standards promulgated by the CAS Board, if
applicable to the contract; otherwise, the
method shall be in accordance with
generally accepted accounting principles
which are consistently applied.
It is important to understand the entity being reviewed to ensure that the

allocation base is logical and shows a casual/beneficial relationship
between the indirect cost and the allocation base. Most small businesses
will have anywhere from one to three rates (overhead, G&A, or fringe
benefits). Larger entities may have anywhere from three to hundreds of
indirect cost pools and bases, depending on the size and complexity of
the entity. However, in all cases, there should be some casual/beneficial
relationship between the indirect pool and the base utilized to allocate
the pool.
42
Indirect Rate
The indirect rate is a simple mathematical calculation. The pool costs
are divided by the base costs to derive the indirect rate. The indirect rate
is then “applied” to the individual final cost objective’s base. This
results in the appropriate indirect costs allocable to each final cost
objective.
Components
It is important to understand that what is a direct cost to one entity may
be considered indirect to another entity. How an entity establishes their
indirect allocation method is outside the Government’s responsibility.
The allocation method must be consistently applied within the entity and
the base chosen to allocate indirect costs must demonstrate a
casual/beneficial relationship and results in a fair allocation of indirect
costs. It is for this reason that it is almost impossible to “compare”
indirect rates across entities without reviewing how each entity’s indirect
rate structure is established. It is like comparing apples to oranges.
As an example, most Architecture and Engineering (A&E) firms tend to

have high indirect costs. Why? Because most A&E’s only consider
labor as direct. Almost every other cost is considered indirect.
However, there are some A&E firms that have a very low indirect rate
because almost every cost is charged direct. They have placed their
resources in technology. If you want to make a phone call, you must
“punch in” the project number the call relates to. If you want to make a
copy of something, you must identify the project that the copy relates to.
Therefore, is it better to contract with this entity over another A&E

because their rates are lower than the other? The answer is NO or not
necessarily since this entity’s direct costs and total costs may be higher
than the total costs of other A&E’s.
The point is to not get “wrapped-up” in comparing indirect rates among

entities. Since each entity is unique, a low or high indirect rate does not
necessarily mean more expensive or less expensive. It does not
necessarily mean more cost conscious or efficient or less cost conscious
or efficient. What it means is difference…each entity has established an
indirect rate structure unique to its corporate philosophy. It is this
43
difference which explains why one entity may have one rate, and
another similar size entity may have three rates.
Indirect Rate Components

Although every organization has its own rate structure, we will discuss
the most common indirect cost pools below:
Indirect Pools
Fringe Benefits
Fringe benefits generally represent indirect costs that are attributable to
individual employees. Fringes are generally the employer’s portions of
payroll taxes, insurance, and retirement plans. Since fringe benefits
relate to the employee, the base is generally total labor dollars or total
labor hours (dollars is the most widely used).
Overhead
Many times overhead and fringe benefits are combined into one rate.
Overhead generally relates to “division” or “department” type indirect
costs. Indirect costs such as the division director’s salary, secretarial
salaries, indirect travel, etc. comprise the overhead department costs. In
a service type department which is labor intensive, the general overhead
base is either direct labor dollars or direct labor hours (dollars is the
most widely used). In a manufacturing overhead which is not labor
intensive, the base could be total direct costs or square feet, or number of
pieces manufactured, etc.
General and Administrative

G&A generally represent indirect costs that are attributable to the overall
entity. Costs such as corporate officer’s salaries, corporate secretaries,
facility costs, general legal fees, etc. are considered G&A costs. Since
G&A is a corporate wide pool, it must, per the FAR, be allocated on
either a total cost input or value added base.
The above pools represent the majority of indirect pools that will be
encountered. Larger organizations may also have material handling or
subcontract administration pools.
44
Allocation Bases
Commercial Entities
Most allocation bases with commercial entities are the ones identified
above, direct labor dollars or hours, total labor dollars or hours, or total
cost input or value added. As previously discussed, as long as there is a
casual/beneficial relationship between the pool and the base that results
in a fair allocation of costs, the Government should accept the entity's
method of allocation.
However, a note of caution is advised. Generally, small businesses have

labor as their allocation base. This method is generally acceptable when
the business is still small or doing their predominate business with the
Government. It is important that the mixture between Government and
commercial work be closely monitored. Once a small business begins to
grow and get a different mix of work (Government versus commercial
and cost type work versus fixed-price work), it becomes more critical
that the allocation base be equitable. The majority of small businesses is
forced to adopt a total cost input base as they begin to grow since a
direct labor base allocates costs more inequitable as the mix of work
becomes more pronounced.
Furthermore, there are certain costs that must, by the FAR, be allocated
over either a total cost input base or value added base. Independent
Research and Development and Bid and Proposal Costs must be
allocated over the total entity since these costs benefit the entity as a
whole.
Educational Institutions and Other Non-Profit Entities

The OMB Circular A-122 requires that educational institutions and other
non-profit entities allocate their indirect costs over a “modified total
direct cost input base” (MTDC). Generally, the MTDC consists of total
costs excluding certain costs such as equipment, subcontracts costs over
$25,000, and “pass-through” costs.
The predominant reason that equipment and a portion of subcontract

costs and other such costs are excluded from the base relates back to the
casual/beneficial relationship.
45
State of Local Governments
Most state or local governments allocate their indirect costs on either
total costs or a MTDC base.
Audit
FAR 42.705 contains the information concerning the audit and
negotiation of final indirect rate submissions. Some type of audit is
required of an entities final indirect cost submission. The audit ensures:
• the entities indirect cost allocation methods are logical and result
in a fair allocation of indirect costs;
• the entities indirect cost allocation method is consistently applied;

and
• all known unallowable costs have been removed.
All final indirect cost submissions must be certified per FAR42.703-2.

The certification basically states that all known unallowable costs have
been removed from the submission and no unallowable costs have been
charged to the Government. Final indirect cost submissions should not
be accepted unless they have been properly certified and no agreements
for billing or final rates should be made unless the submissions have been
certified. Furthermore, FAR 42.703 and FAR 31.110 require that
penalties be assessed for contractors who falsely certify or include known
unallowable costs in their submissions. FAR 42.709 provides the
information for calculating the penalties.
Note: All entities are required to submit final indirect cost submissions.
However, state and local governments and educational institutions
generally have a “CFA” responsible for negotiation of yearly indirect
rates. You will generally not have to perform negotiation or audit of
these entities. Commercial entities and non-profit entities are the
predominate entities which will require you to obtain the final indirect
submission and either request a site audit (from DCAA) or perform a
desk review.
Care should be taken when reviewing the OMB Circular A-133 audit
reports relating to other non-profit entities. Most OMB Circulars A-133
46
audits do not review or establish the final indirect rates. Generally, you
will need to request the grantee (or contractor) to provide a certified
submission. Once received, a desk review will generally suffice to
establish and audit the indirect rate.
Indirect submissions are due 6 months after the expiration of the

contractor (or awardee) FY. Most of the audit backlog is due to the
entities not providing their submissions on a timely basis. Indirect
submissions should be sent to either the contracting officer or the
cognizant audit agency (generally DCAA).
Negotiation Responsibility
The responsibility for negotiation of indirect rates for all the Federal
Government rests with the CFA. FAR 42.703-1 provides the
requirement for establishing a single responsible agency for negotiation
of indirect rates. The CFA is generally the agency that has the
preponderance of work. When DOE is not the CFA, the Department
will accept and use the indirect cost rates established for the respective
organization by the CFA or another Federal agency, provided any
required adjustments are made to reflect DOE-specific cost principles or
contractual advanced agreements.
When the DOE is the CFA, than the designated Cognizant DOE Office
(CDO) is responsible for negotiation of the indirect rates for all the
Government.
A listing of cognizant agencies for state and local governments and

educational institutions is listed in OMB Circular A-88. Educational
Institution CFA’s is generally either the DHHS or the Office of Navel
Research.
DOD 4105.59-H “Directory of Contract Administration Services

Components” lists the CFA for major defense contractors.
47
Awards Labor ODC Total Fringe G&A
Government - Cost Type
1 100 25 125
2 50 10 60
3 75 15 90
Commercial and fixed price 500 60 560
725 110 835
Fringe Pool G&A Pool

Payroll Tax 25 Indirect Labor 175
Benefits 150 Fringe 34
Total Pool 175 Facility 650
Utility 25
Total 884
Base
Direct Labor 725 Total Cost Base
Indirect Labor 175 Total Direct 835
900 Total Fringe 141
Total 976
Fringe Rate 19.4%
G&A Rate 90.6%
1. How much fringe benefits and G&A should be allocated to each

of the above awards?
2. True or False--An indirect cost is any cost directly identified with

a single, final cost objective.
3. True or False--A base is defined as a logical cost grouping which

is determined based on the benefits accruing to the several cost
objectives.
48
4. True or False--It is the Government’s responsibility to ensure that
a company adopts an indirect rate structure that allocates indirect
costs on a fair and equitable basis.
5. True or False--OMB Circular A-133 audit requirements apply to

educational, non-profit, and commercial entities.
49
Self-Test - Answers
1. How much fringe benefits and G&A should be allocated to each

of the below awards? Fringe benefits - $141 and G&A - $884
Awards Labor ODC Total Fringe G&A

Government - Cost Type
1 100 25 125 19 130
2 50 10 60 10 63
3 75 15 90 15 95
Commercial and fixed price 500 60 560 97 595
725 110 835 141 884
Fringe Pool G&A Pool

Payroll Tax 25 Indirect Labor 175
Benefits 150 Fringe 34 175
Total Pool 175 Facility 650
Utility 25
Total 884
Base
Direct Labor 725 Total Cost Base
Indirect Labor 175 Total Direct 835
900 Total Fringe 141
Total 976
Fringe Rate 19.4%
2. True or False--An indirect cost is any cost directly identified with

a single, final cost objective. False. An indirect cost is any cost
identified with two or more final cost objectives.
3. True or False--A base is defined as a logical cost grouping which

is determined based on the benefits accruing to the several cost
objectives. True and False. Both the pool costs and the base
costs are logical groupings which the pool costs should be
distributed over a base that relates logically and with
casual/beneficial relationship to the pool.
50
4. True or False--It is the Government’s responsibility to ensure that
a company adopts an indirect rate structure that allocates indirect
costs on a fair and equitable basis. False. It is not the
Government’s responsibility to ensure that a company adopts
an equitable indirect rate structure. We should not be
dictating how indirect costs are allocated. It is, however, the
Government’s responsibility to ensure that the method
adopted by an entity results in a fair and equitable allocation
to Government contracts.
5. True or False--OMB Circular A-133 audit requirements apply to

educational, non-profit, and commercial entities. False. OMB
Circular A-133 audit requirements apply to educational and
non-profit institutions and state or local governments.
51
Module 4
Closeout
Objectives
Upon completion of this module, you should be able to do the following
things:
• Explain the process for conducting closeouts on cost reimbursement

types contracts from a financial standpoint.
• Provide a definition of quick-closeout and identify FAR requirements

regarding its use.
• Discuss the process for closing out financial assistance awards.

3 hours
52
Contract Closeout
Background
Chapter 21 of the DOE Accounting Handbook provides the financial
policy for the closeout of contracts. The DOE policy is to closeout
contractual instruments in a timely manner following their physical
completion. This policy states the contracting officer has principal
responsibility for initiating, coordinating, and certifying closeout. The
field CFO Organization is responsible for the financial settlement.
Definition
A cost reimbursement type contract, although physically complete, is not
closed until all administrative and financial actions have been
completed. From a financial standpoint, all indirect rate adjustments
must be made based on final negotiated rates, any disputes settled, final
payment including fee retainage paid, and a final release of claims
against the Government arising out of the contract has been signed by an
officer of the contractor. From a financial management standpoint,
closeout involves settling all financial and accounting matters between
the contractor and DOE.
Requirements
FAR 4.804-5, “Detailed Procedures for Closing Out Contract Files,”
states the following:
The office administering the contract is

responsible for initiating administrative
closeout of the contract after receiving
evidence of its physical completion.
This clause also states that the administrative closeout procedures shall
ensure:
• all interim or disallowed costs are settled;
• prior year indirect cost rates are settled;
• contract audit is completed;

53
• contractor's closing statement is completed;
• contractor's final invoice has been submitted; and
• contract funds review is completed and deobligation of any excess

funds is recommended.
FAR 4.804-1, states, “contracts requiring settlement of indirect cost rates

should be closed within 36 months of the month in which the contracting
officer receives evidence of physical completion.” This time
requirement is not widely adhered to by Federal agencies. With cost
reimbursement type contracts, the process can take longer than 36
months. Coordination among the contracting office, the CFO
organization, the CFA for the contractor, and DCAA helps expedite the
process.
Chapter 21 of the DOE Accounting Handbook requires:
• verification and mutual agreement as to costs incurred and payments

to the contractor;
• confirmation, establishment, and collection of any credits owed to

DOE;
• verification of amounts obligated; and
• verification of final payment to the contractor.
The implications of these requirements are that CFO organizations need

to verify contract documents and payments to the Departmental
Integrated Standardized Core Accounting System (DISCAS) and aid the
contracting officer in arriving at a mutually agreed upon final amount of
allowable costs with the contractor at the time of closeout.
54
Contract Closeout Process
As explained in Module 1, the necessary actions that must be taken

during the course of the contract to aid in its eventual closeout include:
• Requesting DCAA incurred cost audits when the contract is awarded.
• Most importantly, ensuring indirect cost submissions are submitted to

the contracting officer and to DCAA by the contractor at the end of
their FY.
• Negotiating final indirect rates using the audits on the submissions.
• Obtaining and reviewing indirect cost adjustment vouchers based on

the final indirect rates.
From a financial standpoint, the closeout process typically begins with

the receipt of the contractor’s summary settlement statement and final
voucher. The summary settlement statement is a broad compilation of
cumulative direct and indirect costs incurred and the amount of fixed
fee. The final voucher is the contractor’s absolute final claim for cost or
fee under the contract. There will be no more vouchers after this one.
If the indirect rate administration process during the course of the

contract took place correctly, the final voucher would be zero or it would
only be for fee retainage. Often this is not the case, and there are
pending adjustments at the time of closeout that need to be verified. The
following is a process for use on contract closeouts.
Prepare an Analysis of the Contract

The contract and all modifications need to be analyzed to identify the
type of contract, period of performance, total estimated costs, and
amount of fixed fee. A running tally of individual obligations from the
contract and modifications should be made for confirmation of
cumulative obligations as shown in DISCAS. This will provide the
needed verification of cumulative obligations between the actual
contract document and DISCAS.
55
More importantly, the contract and its modifications may contain
advanced understandings regarding costs that must be identified and
considered before final closure. It is also recommended that the contract
correspondence files be reviewed to identify any contracting officer
decisions or any “notice of intent to disallow costs” that were issued.
Prepare a Voucher Schedule

During the course of a contract, the contractor submits vouchers monthly
for reimbursement of costs. A voucher schedule at the closeout stage is
a recap of total costs billed and paid under the contract using any
spreadsheet application. Total payments made under the contract are
scheduled out by cost element (direct labor, overhead, G&A, etc.) and is
subtotaled by the contractor’s FY. The voucher schedule is by the
contractor’s FY, because this is the period of time that indirect rate
adjustments are based on. A grand total of all payments should be
calculated and confirmed with total payments as shown in DISCAS.
Since the voucher schedule will be instrumental in calculating the final
adjustment under the contract, it must agree with DISCAS.
When scheduling the vouchers, it is important to keep track of any cost

disallowances that were made during the course of the contract because
these will likely not be accounted for properly when the incurred cost
submissions are later prepared by the contractor. For example, a
contracting officer may disallow unapproved labor or travel costs and
deduct this from a monthly voucher. These costs will likely continue to
be included in the contractor’s books and records as an allowable cost
attributable to the contract and included as such in the incurred cost
submission. The DCAA reviewers, unaware that these normally
allowable costs were deducted from the monthly vouchers, will not
question them and include the costs in their total allowable cost by
contract schedule contained in their audit report. Any previously
disallowed costs will have to be backed out from the DCAA schedule to
arrive at the final amount of allowable costs incurred reimbursable under
the contract.
Voucher schedules are used to compare costs billed at provisional

indirect rates with allowable costs for each of the contractor’s FY as
disclosed in the DCAA audit reports. This comparison will also show
56
which cost categories the adjustments are being claimed (in direct labor,
overhead, G&A, etc.). Although adjustments in indirect cost categories
should be expected, inquiries to the DCAA reviewers or to the
contractor should be made if there are significant adjustments in the
direct cost categories.
Prepare a Closing Statement

A closing statement should be prepared which brings together the
voucher schedule and the audit results from the DCAA incurred costs
audits. The voucher schedule shows what has already been paid under
the contract. The audit report has a schedule of allowable costs by
contract. The closing statement compares these two amounts for each of
the contractor’s FY and takes into consideration any advanced
understandings in the contract and any previous disallowances that were
made from the contractor’s monthly vouchers. The closing statement
should show what the final cost adjustments are for each year and
provide the total amount of allowable fixed fee.
The final cost adjustments and the amount of fee must be mutually
agreed to by the contracting officer and the contractor. Closing
statements facilitates this process greatly.
When the final amount of cost and fee incurred is determined, it cannot
exceed total estimated costs and fixed fee stated in the contract. The
limitation of funds clause contained in the contracts precludes
reimbursement in excess of these stated amounts. However, the
contracting officer, through negotiation and modification to the contract,
may increase the total estimated costs stated in the contract to allow a
cost overrun in deserving circumstances.
In addition to performing the annual incurred cost audits, DCAA also

performs a “final audit” upon request. This is basically just preparing a
closing statement using the annual incurred cost audits, and no site visit
is even made to the contractor’s location. Requesting DCAA to perform
this is not an efficient use of audit resources and should only be done in
extremely complicated closeouts. Also, when DCAA is asked to prepare
the closing statement, they may not be aware of any advance agreements
in the contract or any previous disallowances that were made.
57
Level of Effort Clauses
An important contract provision that may be in some contracts is the
level of effort clause. This clause could impact the final reimbursement
to the contractor at closeout. This clause is not based on the FAR. It was
developed within DOE and is often used when acquiring services.
Contracts containing this clause include an estimated amount of hours

that will be needed, referred to as Direct Productive Labor Hours
(DPLH). The level of effort clause is then typically worded as follows:
“The fixed fee of this contract is based upon

the contractor furnishing the estimated
DPLH set forth herein. In the event the
contractor is required to provide less than
90 percent of the estimated DPLH, the fixed
fee of this contract shall be reduced as
mutually agreed upon by the parties.”
Additionally, this clause states that if the contractor is required to

provide more than 110 percent of the estimated DPLH, the fixed fee
shall be negotiated upward. This clause applies if the actual amount of
DPLH provided is less than 90 percent or greater than 110 percent. In
this case, the contracting officer will be required to renegotiate the fixed
fee prior to closeout of the contract.
When the level of effort clause applies, the 90 to 110 percent test should
be applied early in the closeout process because the contracting officer
must renegotiate the fixed fee, and the results could have an impact on
the final financial settlement. The actual amount of DPLH provided is
included in the contractor’s monthly vouchers. The DPLH and
associated costs should be entered on the voucher schedule.
Task Order Type Contracts

Task order contracts are similar to delivery order contracts in that
individual orders for services are placed against a single established
contract. Each task order has its own scope of work and a stated “not to
exceed” ceiling for dollars and DPLH incurred under the task. The
different tasks issued under the contract may also have different funding
58
sources. Contractors are required to account for costs incurred under
each task order separately as if they were separate contracts.
When scheduling vouchers for task order contracts, cost and fee should
be recorded separately by individual task order and by contractor FY.
The final voucher from the contractor should similarly be segregated by
task. Also, total contract payments should be calculated and verified to
DISCAS.
Typically, DCAA audit reports will only show total allowable costs for
the entire contract and not for each individual task order. The voucher
schedule, therefore, is crucial in using the final indirect rates for each
year to calculate total allowable costs for each individual task. By
calculating the final amount of cost and fee by individual task, a
determination can be made as to whether the contractor had exceeded
any of the task order ceilings.
The contracting officer may decide to allow overruns at the task order
level. Many times, these overruns are attributable solely to indirect cost
adjustments that would otherwise be reimbursable if not for the task
order ceilings. Even though the contracting officer may decide to allow
the task order ceilings to be exceeded, a calculation of the final
adjustment must be done at the task order level because the different
tasks under the contract will likely have different funding sources.
Quick Closeout
Background
Delays in closing out contracts are primarily attributable to delays in
obtaining final indirect rates for those FY’s closest to the expiration of
the contract. According to a study by the Defense Contract Management
Command, “waiting on final overhead rates” was the most frequently
cited reason for delays in contract closeout, accounting for 26 percent of
all physically completed contracts that are not yet closed.1 Delays are
encountered in (1) waiting on the contractor to complete their incurred
cost submissions, (2) waiting on DCAA to complete audits on the
submissions, and (3) waiting on the CFA to negotiate the rates and issue
final rate agreements.
1
Contract Management Magazine, August 1996
59
With quick-closeout, indirect rate adjustments must still be made but the
adjustments are based on something other than DCAA audits.
Definition
FAR 42.708, “Quick-Closeout Procedures,“ defines quick-closeout as:
“The contracting officer negotiating a

settlement of indirect cost for a specific
contract in advance of final indirect cost
rates….”
The contracting officer and the contractor must bilaterally agree to the
use of quick-closeout. The indirect rates that will be negotiated,
commonly referred to quick-closeout rates, are applicable only to that
particular contract and are in no way binding on any other contract.
Requirements
FAR 42.708 states that quick-closeout can only be used when the
following occurs:
• The contract is physically complete.
• The amount of unsettled indirect costs to be allocated to the contract

does not exceed $1,000,000 per year.
• The amount of unsettled indirect costs to be allocated to the contract

does not exceed 15 percent of total indirect costs of the contractor for
a year.
At one time, DOE had a class deviation from the 15 percent limitation
mentioned above and only the first two limitations applied. However,
this class deviation expired in September 1997. The FAR allows a
contracting officer to waive the 15 percent limitation, but not the first
two. Therefore, as long as the first two limitations are met, the 15
percent limitation would not prevent the use of quick-closeout.
60
Quick-Closeout Process
After the contracting officer and the contractor mutually agree to the use
of quick-closeout, there are several alternatives available for establishing
quick-closeout rates. The contracting officer, or his/her designee (e.g.,
reviewer) should explore these alternatives and use the one that is most
advantageous to the Government, but still be acceptable to the
contractor. In many cases, contractors are willing to accept final indirect
rate adjustments that are less than anticipated from an audit because they
want to get paid for any final adjustments and fee retention as soon as
possible.
As part of the quick-closeout process, the contracting officer will direct

the contractor to submit a quick-closeout proposal. This proposal will
include an explanation as to how the indirect rates will be established for
the contract. In most instances, the establishment of indirect rates has
been previously agreed to through preliminary discussions between the
contracting officer, reviewer, and the contractor.
When exploring the alternatives for establishing the indirect rates, the
first step in the process should be to contact the cognizant DCAA office.
For some of the larger Government contractors, there may be quick-
closeout rates already established which can be confirmed with the
reviewers. Even if no such rates exist, the DCAA reviewers may, on a
case-by-case basis, estimate indirect rates for quick-closeout purposes.
DCAA recognizes the need for expediting the closing of certain low risk
contracts prior to finalizing the indirect rates for the later years of these
contracts. In these cases, DCAA will frequently recommend quick-
closeout rates based on their knowledge of the contractors.2 The DCAA
reviewers may also provide information as to whether there are any
outstanding audit issues that could have a significant impact on contract
closeout. They can also advise as to whether it would be best to wait for
all audits to be completed prior to closing out a contract.
For medium and small contractors, the preferable method of determining

indirect rates is to conduct a desk review of the contractor’s unaudited
indirect cost proposals for the years being reviewed. This is especially
the case with contractors that have no other Government contract work
2
DCAA, Contract Audit Manual, Section 6-1009
61
other than the contract that is being closed. The purpose of the desk
review is to ensure costs incurred during the contractor’s FY’s have been
properly allocated and are allowable. This desk review will identify any
indirect cost adjustments that will impact the indirect rates.
Another alternative for establishing indirect rates for the final years of
the contract involves using the contractor’s prior years’ audit history.
The final rates for the immediate previous year, or an average of final
rates from the past several years may be used. As long as there is
consistency in the indirect rates from year-to-year, after taking into
account unallowable costs, the Government’s risk of over reimbursing
costs for the unaudited years is limited.
After the method for establishing indirect rates for quick-closeout

purposes is agreed to, the contractor will submit a quick-closeout
proposal with the final adjustment claimed. DOE will issue a written
agreement stating the indirect rates, how they were arrived at, and that
they are to be used solely for closeout of the contract in question. Prior
to final payment, the contractor and contracting officer will sign this
agreement. No adjustment will subsequently be made to other contracts
for over or under recoveries of costs allocated to the contract covered by
the quick-closeout agreement.
As with normal closeouts, the reviewer should ensure costs claimed are
in accordance with any advance agreements in the contract, schedule
vouchers, and prepare a closing statement. Also, when a contract has
been closed using quick-closeout, notification should be sent to the
cognizant DCAA office. DCAA charges DOE for their services based
on the contracts covered in their report. Notifying the DCAA that the
contract has been closed should prevent them from subsequently issuing
an unneeded audit report and charging DOE for audit services.
All our discussions up to this point have focused on when to use the
quick-closeout process. There are also occasions when quick-closeout
should not be used. It should not be used if there has been a history of
significant adjustments between costs billed during the year with costs
claimed by the contractor in their incurred cost submission.
Additionally, quick-closeout should not be used if prior audits reflect a
history of significant questioned costs.
62
Closeout of Financial Assistance Awards
Background
Closeout of financial assistance awards with commercial entities, such
as companies receiving Small Business Innovation Research Grant
awards, can be quite difficult. These awards are frequently thought of as
grants and not requiring the audit coverage afforded other contract types.
However, FAR 31 cost principles apply to these awards. Closeout of
these awards, therefore, requires that audits be conducted, incurred cost
submissions be obtained, and indirect rate adjustments be made.
The closeout process for financial assistance awards to non-profit

entities, educational institutions, and governmental agencies is relatively
easy. The process places heavy reliance on the organizational-wide
audits required by the OMB Circulars. Additionally, DOE does not have
to wait until it receives all the audits covering all years of the financial
assistance award before closing the award. DOE also retains the right to
recover any disallowed costs resulting from a subsequent audit for up to
3 years past final payment.
Requirements
The DOE policies and procedures covering financial assistance awards are
contained in 10 CFR §600. This and other guidance on financial assistance
is available at the DOE, Office of Procurement and Assistance
Management Web Page at http://www.pr.doe.gov/fahome.html.
Closeout requirements applicable to financial assistance awards to

commercial entities, non-profit entities, and educational institutions are
contained in 10 CFR §600.171-173. Closeout requirements for
governmental entities are contained in 10 CFR §600.250-252.
Financial Assistance Closeout Process – Commercial Entities

Closeout of financial assistance awards with commercial entities should
be planned for immediately after the award is made. As mentioned
above, FAR 31 cost principles apply to these awards. Therefore, either
DCAA audits are to be requested or desk reviews are to be completed,
incurred cost submissions are to be obtained from the recipient, indirect
rates are to be negotiated, and indirect cost adjustments are to be made.
63
The difficulty in closing out these awards relates to the payment method.
Although the award is with a commercial entity, the payment methods
for financial assistance awards apply. Recipients of these awards are
paid in advance using electronic funds transfer as opposed to
reimbursement using detailed vouchers. The recipients request
payments by submitting Standard Form (SF) 270, “Request for Advance
or Reimbursement” which does not provide a breakdown of costs. This
standard Treasury Department form only shows the current amount
requested and cumulative amount paid, without regard to the entity’s
FY. Each FY will have a different indirect rate.
The resulting problem for the reviewer is that voucher schedules by the
commercial entity’s FY cannot be prepared and the indirect rate
adjustments cannot be determined by FY. In this situation, the reviewer
typically must resort to verifying cumulative payments as shown on the
final SF-270 to DISCAS and then comparing this to total allowable costs
from all of the annual incurred cost audit reports. This process is
difficult because variances cannot be identified to a particular year or
cost category when attempting to resolve differences with the recipient
in order to mutually agree on the final amount of costs incurred.
Financial Assistance Closeout Process – Non-Profit Entities

The annual organization-wide audit reports on non-profit entities will
contain a CPA’s opinion on the allowability of costs incurred under
major Federal awards. These reports, however, typically do not contain
sufficient information to derive and negotiate indirect rates. Non-profit
entities are required to submit an indirect cost proposal to their CFA
within 6 months after each FY. These proposals provide the information
necessary for reviewing and negotiating indirect cost rates during the
award and establishing final allowable costs incurred.
Financial Assistance Closeout Process – Educational Institutions and

Governmental Entities
The closeout process described in 10 CFR §600.171-173 and 10 CFR
§600.250-252 is similar and is applicable to the closeout of financial
assistance awards with educational institutions, and governmental
entities. These regulations state that the recipients should submit all
financial reports required by the terms and conditions of the award
64
within 90-calendar days after the completion date. DOE can approve
extensions to this reporting requirement when requested by the recipient.
The recipient should pay all outstanding obligations incurred under the
award not later than 90-calendar days after the funding period or the date
of completion stated in the award. A final SF 270 should be submitted
for final payment. At this point, recipients should promptly refund any
balance of unused funds that DOE has advanced. The key to closeout of
financial assistance awards with educational institutions and
Government entities is obtaining any available organization-wide audit
reports. These reports should be read by the reviewer to identify any
findings or questioned costs applicable to DOE awards. Also,
cumulative obligations and payments on the final SF-270 should be
verified to DISCAS and any variances resolved with the recipient.
Failure to receive organization-wide audits for all years of the award,
however, should not preclude its closeout since DOE retains the right to
recover any disallowed costs resulting from a subsequent audit for up to
3 years past final payment. Additionally, should this occur, DOE would
charge interest on the overdue debt in accordance with 4 CFR Chapter
II, “Federal Claims Collection Standards.”
65
1. Briefly describe when a cost reimbursement type contract is

completely closed from a financial standpoint.
2. True or False--It is acceptable for a final voucher from a

contractor to represent only a partial payment because other
adjustments can be paid after the final voucher is processed.
3. What three procedures can reviewers use to verify contract

documents and payments to DISCAS and aid the contracting
officer in arriving at a mutually agreed upon final amount of
allowable costs with the contractor at the time of closeout?
4. True or False--Contractors are usually timely in submitting their

indirect rate proposals 6 months after their FYE as required by the
FAR.
5. True or False--With quick-closeout, no adjustment for indirect

costs needs to be made for the final year(s) of the contract.
66
Self-Test - Answers
1. Briefly describe when a contract is completely closed from a

financial standpoint. A cost reimbursement type contract is not
closed until all administrative and financial actions have been
completed. From a financial standpoint, all indirect rate
adjustments must be made based on final negotiated rates and
any disputes settled. Also, final payment, including fee
retained, must be paid, and a final release of claims against the
Government arising out of the contract must be signed by an
officer of the contractor.
2. True or False--It is acceptable for a final voucher from a

contractor to represent only a partial payment because other
adjustments can be paid after the final voucher is processed.
False. Upon receipt of the release of claims from the
contractor, no further payments will be made for that
contract for any reason.
3. What three procedures can reviewers use to verify contract

documents and payments to DISCAS and aid the contracting
officer in arriving at a mutually agreed upon final amount of
allowable costs with the contractor at the time of closeout?
Prepare analysis of the contract and all modifications, prepare
a voucher schedule, and prepare a closing statement.
4. True or False--Contractors are usually timely in submitting their

indirect rate proposals 6 months after their FYE as required by
the FAR. False. A common misconception is that contract
closeout is delayed due to DCAA not completing the incurred
cost audit timely. In actuality, the contractors are not
preparing acceptable incurred cost submissions on time
usually cause the delay. DCAA’s incurred cost audit cannot
begin until an acceptable submission has been received. It is
imperative that contractors be monitored to ensure these
submissions are received timely.
67
5. True or False--With quick-closeout, no adjustment for indirect
costs needs to be made for the final year(s) of the contract. False.
All indirect cost adjustments are made, they are just based on
something other than a DCAA incurred cost audit.
68

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Audit Responsibilities

U.S. Department of Energy

Prepared for the

About This Self-Study Guide

2. Module 1 – Audit Process Cycle, Types of Awards, and Audit Requirements

Estimate Completion Time

The Audit Process and Audit Cycle . . . . . . . . . . . . . . . . . . . . . . . . . . .2

The Site Audit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4

Types of Awards and Audit Requirements. . . . . . . . . . . . . . . . . . . . . .7

Time and Materials and Labor Hour Contracts. . . . . . . . . . . . . 7

Cost Reimbursement Contracts . . . . . . . . . . . . . . . . . . . . . . . .8

Financial Assistance Awards . . . . . . . . . . . . . . . . . . . . . . . . . .10

Other Areas of Audit Consideration. . . . . . . . . . . . . . . . . . . . .12

Cost Sharing or Matching. . . . . . . . . . . . . . . . . . . . . . . . . . . . .12

Audit Responsibilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .13

Self-Test - Questions . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .16

Self-Test - Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .18

3. Module 2 – Cost Principles

Estimated Completion Time

Cost Principle Highlights . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25

Self-Test – Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .28

Self-Test – Answers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29

4. Module 3 – Indirect Rates

Estimated Completion Time

Self-Test – Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .42

Estimated Completion Time

Contract Closeout . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .45

Contract Closeout Process . . . . . . . . . . . . . . . . . . . . . . . . . . . .47

Closeout of Financial Assistance Awards . . . . . . . . . . . . . . . .55

Self-Test – Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .58

Self-Test – Answers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .59

This self-study guide is designed to assist Department of Energy

This self-study guide is intended to assist the reader in understanding

• Audit process and audit cycle.

• Different types of awards and their individual audit

• Different types of entities, including their individual structure,

• Application of indirect rates, including what they are, how they

• Award closeout processes.

• Accountants and Financial Review Personnel.

Prerequisite Knowledge and Skills

• A general knowledge of accounting and auditing practices and

• A general knowledge of procurement practices and procedures.

This guide consists of four modules covering the following topics:

• Audit process cycle, types of awards, and audit requirements.

• Types of entities and their applicable cost principles and

This self-study guide should be completed in sequence starting with

Audit Process Cycle, Types of Awards, and

Upon completion of this module, you should be able to do the

• Understand the audit process cycle.

• Identify the different types of awards.

• Understand the audit requirements.

Estimated Completion Time

An audit is necessary for the Government to have some assurance that

On the other hand, significant post-award audit effort is required for

Fiscal Final Indirect Indirect Proposal

The number of audits conducted will depend on the length of the

• Prior audit history of the entity.

• The size of the award.

• Whether the entity has other Federal awards.