Firm Fixed Price Contract Audit Exposure

Fixed price awards don’t require cost accounting, you say? Every so often, we'll hear  government contractors provide us with words of wisdom to the effect, “We don’t need cost accounting software; all of our government business is firm fixed price. So we’re not subject to audits.”

While it may generally be true that fixed-price contracts do not require DCAA incurred cost audits, you still must justify your cost structure in a pre-award audit with certain FFP contract types.  When your contract is a fixed price incentive contract, for instance,  FAR 16.4 stipulates, "This contract type may be used only when—(1) The contractor’s accounting system is adequate for providing data to support negotiation of final cost and incentive price revision; and (2) Adequate cost or pricing information for establishing reasonable firm targets is available at the time of initial contract negotiation."

While some FFP contract types (e.g., sealed bid) that are beneath a predetermined dollar threshold may not require supporting cost data, several fixed price contract types do require an adequate accounting system. Besides, don't you think it would be a good idea to have an accurate picture of your cost structure when bidding on any type of contract, be it fixed price or otherwise?

Written by G. Chris Brown

View all posts by: G. Chris Brown

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