Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 1 of 3 | January 2018

Contract Compliance and Audit Volume 1

Recommendation 11: Develop a Professional Practice Guide for DoD’s oversight 

of contractor costs and business systems.

Problem

DoD’s oversight functions within DCAA provide professional services and skilled advice to 

contracting officers. The quality and consistency of this advice is highly dependent on the quality and 

consistency of foundational standards that guide the professionals’ work. 

Background

Although professional standards are common in the accounting and auditing profession, none have 

been collaboratively developed or interpreted for the unique purpose of federal government contract

oversight. DCAA’s Contract Audit Manual provides a good foundation, but it lacks the collaborative 

inputs, perspectives, and interpretations of knowledgeable professionals outside DCAA and the 

government. This point is important because IPAs and other qualified professional services firms are 

playing an increasingly important role in the government’s oversight of federal government 

contractors.

Findings

Professional standards represent principles rather than rules and are thus subject to interpretation. 

DoD’s oversight professionals will benefit from a uniform, collaborative interpretation of applicable 

professional standards. Without a Professional Practice Guide, contracting officers will be underserved 

and likely confused by inevitable inconsistencies among audit and advisory reports issued by DCAA, 

DCMA, and IPAs. Professional standards of particular importance that require a collaborative 

interpretation include (among many others) independence, objectivity, materiality, sufficient evidence, 

and reliance on the work of others.

Conclusions

A Professional Practice Guide will clarify the types of engagements (tools in the toolbox) that may be 

performed to accomplish DoD’s contract compliance oversight objectives. Currently, the government’s 

oversight lexicon consists of the term audit to describe nearly every type of oversight activity (see 

Recommendation 7b). DoD does not need this level of assurance in connection with every oversight 

activity. Audits are appropriate in certain circumstances, but other types of advisory engagements 

(which may include other forms of audit) may be better suited to provide the information contracting 

officers need, when they need it (given the nature and extent of potential risks). For DoD’s internal 

controls over contractor costs and business systems to be effective and efficient, DoD’s oversight 

professionals must have more tools in their toolboxes.

Performance audits should be used more extensively to meet the contracting officers’ need for a high 

level of assurance. Performance audits provide oversight professionals with more flexibility and the 

ability to deliver more valuable information without sacrificing the same high level of assurance. 

The Professional Practice Guide should set forth clear materiality guidelines that focus oversight 

professionals on providing the information contracting officers need to make reasonable business 

decisions. What may be material to a particular business decision will be influenced by a variety of 

qualitative and quantitative considerations, recognizing that contracting officers’ role is to manage 
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 1 of 3 | January 2018

Contract Compliance and Audit Volume 1

DoD’s risk (rather than avoid it). The cost of DoD’s oversight, including adverse effects on the 

timeliness of decision-making, must be balanced with expected benefits of that oversight. The CASB’s 

administrative regulations establish a variety of qualitative materiality considerations appropriate for

and applicable to any business decision affecting contract costs/prices.1

For instance, materiality is a well-established concept in the auditing professional standards, and its 

application is well understood in financial statement audits. How the materiality concept applies to 

contract audits, however, has not been thoroughly examined and defined. The materiality concept is 

based on the premise that an amount is material if it would change or influence the view or decision of 

a reasonable person. With respect to contract audits, contracting officers and their teams use the 

audited information as the basis for negotiating contract prices and reimbursing contractors’ costs. 

Thus, to address the user’s needs in this regard, auditors must consider materiality from both qualitative

(nature) and quantitative (dollar amount) perspectives. The considerations at 48 CFR 9903.305 provide a 

sound foundation for assessing qualitative aspects of materiality. Establishing quantitative materiality 

thresholds for audit planning, determining fair and reasonable contract prices, and settling contract 

cost reimbursements would improve the efficiency and effectiveness of the DoD’s oversight function. 

Quantitative materiality thresholds represent a margin of permissible imperfection in the potential 

expenditure of tax dollars. Accordingly, the quantitative materiality thresholds must be calibrated to a 

reasonable users’ expectations concerning the nature and amount of unallowable costs that would 

influence or change their decisions. The Section 809 Panel expects the Professional Practice Group to 

not only establish quantitative thresholds for various contract audit, contract award, and cost 

settlement situations, but also provide guidance and examples on how to apply these thresholds in 

these specific situations consistent with the following examples. For individual contract pricing actions, 

the procuring contracting officer is primarily concerned about the affect unallowable costs may have on 

contract price. Contract type and the degree of competition are also significant considerations bearing 

on cost/price risk. 

Example 1a: Competition is the largest influence in contract price determination. Cost 

allowability is an ongoing requirement for payment during contract performance on costtype contracts. Thus, any unallowable costs that may have been included in the initial 

contract price can be identified and removed at any time prior to contract close-out. Higher 

preaward materiality thresholds do not adversely affect the Government’s ability to 

manage cost risk. An appropriate quantitative materiality threshold could be 10 percent of 

the total proposed contract price.

Example 1b: Negotiation of non-competitive fixed prices represents the highest degree of 

cost risk for contracting officers. Unlike cost type contracts, the Government generally 

cannot detect and remove unallowable costs after contract award. This circumstance 

suggests a progressively lower materiality level is appropriate as contract value increases 

as envisioned below:

 

1 Materiality, 48 CFR 9903.305. 
Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

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Contract Compliance and Audit Volume 1

Up to 

$100k

Up to 

$500k

Up to 

$1m

Up to 

$5m

Up to 

$10m

Up to 

$50m

Up to 

$100m

Up to 

$500m

Over 

$500m

5% 5% 5% 3% 

Stepdown 

0.5% per 

$1m

2.5% 

Stepdown 

0.1% per 

$1m

2% 

Stepdown 

0.1% per 

$10m

1.5% 

Stepdown 

0.1% per 

$10m

1% 

Stepdown 

0.1% per 

$100m

0.5%

Certain contract requirements affect the cost/price of more than one contract. These matters are often 

managed by administrative contracting officers, who are concerned with the total aggregate impact on 

contract costs/prices as well as those of individual contracts. 

Example 2: Potential materiality thresholds for annual final indirect cost rate settlements 

will reflect the effect on total reimbursable contract costs for the contractor’s fiscal year. The 

thresholds should provide a useful point of reference to guide audit planning and the 

nature of final indirect cost rate settlements. A formulaic approach to determine a 

contractor’s annual aggregate materiality level is compatible with, and supportive of, the 

Government's materiality thresholds for contract quick-closeouts (see FAR 42.708). The 

formulaic approach below replicates the quantitative materiality thresholds for ranges of 

reimbursable incurred costs proposed in the House version of the FY 2018 NDAA. 

ADV

Up to 

$100k

Up to 

$500k

Up to 

$1m

Up to 

$5m

Up to 

$10m

Up to 

$50m

Up to 

$100m

Up to 

$500m

Over 

$500m

Materiality Threshold = $5,000 x ((Total ADV/$100,000)^.75)

$5,000 Up to 

$16,719

Up to 

$28,117

Up to 

$94,015

Up to

$158,114

Up to 

$528,686

Up to 

$889,140

Up to 

$2,973,018

Up to

See 

formula

In addition to each of the examples, the Section 809 Panel recognizes and endorses that a different and 

significantly lower planning materiality would be used for expressly unallowable costs and sensitive 

audit areas.

Implementation

Legislative Branch

§ No statutory changes are required.

Executive Branch

§ In accordance with the statutory requirements of DoD and the Section 809 Panel, set forth in 

Section 803 of the FY 2018 NDAA, the Section 809 Panel will establish a team (to include at a 

minimum GAO, DCAA, AICPA, and industry) to develop a Professional Practice Guide, which 

includes materiality standards, for contract auditing to be completed prior to the sunset of the 

Section 809 Panel in January 2019.
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Contract Compliance and Audit Volume 1

§ Require GAO to maintain the Professional Practice Guide, according to best practices. 

Implications for Other Agencies

§ There are no cross-agency implications for this recommendation.