Records Retention for Government Contracts

When one of our clients goes through an incurred cost audit with DCAA, I find that many times records retention is the most problematic area. FAR 31.201-2 Determining allowability, states:

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.

The pending question is: For how long must the contractor maintain these records? FAR 4.705 provides the answer.

  • Contractors are required to retain financial and accounting records and acquisition and supply records for four years.
  • However, the specified retention period for time cards and evidence of payment for services rendered by employees is two years.
  • Whereas the retention period is four years for payroll sheets, registers of salaries and wages paid to individual employees, and tax withholding statements.

Why the difference? In the case: JANA, Inc. vs. U.S., “The court reasoned that reading the two retention periods “together suggests the logic between them: While a shorter retention period is imposed on voluminous records, like individual employee time cards, a longer period is required for records of a more summary nature, e.g., the labor recap sheets.”

In general, the retention periods are calculated from the end of the contractor’s fiscal year in which an entry is made charging or allocating a cost to a government contract or subcontract. Of course there are notable exceptions to the retention periods; where the periods can be longer:

  • A retention period longer than that cited in 703(a) is specified in any contract clause; or
  • The contractor, for its own purposes, retains the foregoing records and supporting evidence for a longer period. Under this circumstance, the retention period shall be the period of the contractor’s retention or 3 years after final payment, whichever period expires first; or
  • The contractor does not meet the original due date for submission of final indirect cost rate proposals specified in paragraph (d)(2) of the clause at 216-7, Allowable Cost and Payment. Under these circumstances, the retention periods in 4.705 shall be automatically extended one day for each day the proposal is not submitted after the original due date.
  • If a record contains a series of entries, the retention period is calculated from the end of the fiscal year in which the final entry was made.
  • If the contractor relies on records generated during one contract as certified cost or pricing data in negotiating another contract, the retention period runs from the date of the latter contract.
  • If two or more of the record categories described in FAR 4.705 are interfiled and it is impractical to screen the records for disposal, the entire record series must be retained for the longest period prescribed for any of the categories.

Also note that “supporting documentation” may be more extensive than you may imagine. Each time a client goes through an incurred cost audit, I am reminded of this. In general, supporting documentation encompasses the entire audit trail; from the time that you are considering buying something or hiring somebody through to termination of the agreement. This would include, but not limited to:

  1. Memoranda of negotiations
  2. Purchase agreements (signed by both parties)
  3. Hiring agreements (signed by both parties)
  4. Consulting and subcontract agreements (signed by both parties)
  5. Timesheets, payroll records
  6. Employee evaluations
  7. Modifications to subcontract and/or consulting agreements
  8. Notices of termination
  9. Employee benefits policy
  10. Bonus policy

In any of the documents are not fully executed, costs may be disallowed. If the contractor’s practice is not consistent with the agreement and/or policy, cost may be disallowed.

Takeaways

  • Be diligent, methodical, about the agreements relative to expenditures of costs under Government Contracts.
  • Be diligent, methodical, about retention of records within the parameters of FAR 4.7.
  • Do not maintain records for periods longer that you are required to under FAR 4.7.
  • If you have a requirement to submit an incurred cost submission under FAR 52.216-7, do so on time. If you don’t, your records retention requirement extends indefinitely.
  • If DCAA conducts an incurred cost audit after the specified retention periods have expired, the contractor’s costs cannot be disallowed based solely on the failure to retain adequate supporting documentation when the contractor is in accordance with FAR 31.201-2(d). At the very least, contractors may rely on alternative evidence.

Be sure to also check out this excellent article on the subject and contact us today for help with your records retention.

KDuncan & Company is dedicated to providing knowledge and support for small government contractors about concerns regarding government contracting. For questions on areas such as as cost proposals, accounting systems, DCAA compliance, and incurred cost audits, reach out to KDuncan & Company.

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