Column: GSA Audits -- Expect and Prepare By Michael A. Smigocki, CPA, CVA GSA Schedules have transformed the way the government does business with the contracting community. The growth and popularity of these vehicles seems to have no end. The schedules have also transformed government audits of contractors. Previously, most government procurements utilized a “cost-based” approach. The government felt that it was the only customer purchasing various goods and services so, in order to determine whether it was receiving a fair and reasonable price, it needed insight into a company’s cost structure. The GSA Schedule is decidedly different in that it is based on a “market-priced” approach. No longer does the government require insights into the costing structure, but asks what prices you have charged for doing similar types of work for various customers. Even though the use of GSA schedules has greatly decreased the amount of procurement dollars subject to cost-based audits, this does not mean that the contractor has totally escaped government audit and oversight. In fact, the inspector general’s office at GSA, the group that has audit responsibility for the agency, has a 250% increase in its budget for 2006 to perform audit and oversight functions. Since many contractors have not experienced the various types of audits that GSA might undertake, this article is meant to educate and prepare the government contractor. Types of Audits You could expect the following types of audits from GSA: •Pre-award •Price Adjustment •Price Reduction •Other Post-Award Audits Each one of these audits takes a different approach, but the overall purpose is to ensure that the government is receiving the proper pricing for goods and services and is your most-favored customer. Pre-Award Audit When negotiating a GSA schedule, the government’s objective is to become the company’s most favored customer. Thus, the purpose of a pre-award audit is to identify pricing issues and to translate this analysis into objectives for price negotiations. Factors such as the following will be considered: •anticipated volume of sales under the schedule contract; •any differences between the government and the customers that are identified as the basis for award; and •the sales practices and pricing utilized by the company. The government feels that getting knowledge of your pricing practices will ensure it a successful negotiation. Price Adjustment Audit GSAR 552.215-72 enables the government to obtain a price reduction or contract modification if it is determined after award that the contractor failed to: •provide information required by the solicitation; •submit information that was current, accurate and complete; •disclose any changes in the commercial price list or discounts. This type of audit (also known as defective pricing) is always very difficult for the contractor as the government is armed with dated documentation of the contractor and with hindsight. If it is found that the contractor did not disclose all that it should during negotiations, the government can request a price reduction on all billings received under the schedule contract. Price Reduction Audit This type of audit will analyze the sales and pricing practices of the company after the award of the schedule contract for the category of customer that was the basis of award. If this category of customer was offered price reductions better than what was offered to the government in the original award, other than a spot-type discount, it can trigger a price reduction on any future purchases under the schedule contract. Many contractors are currently at risk for this because they offered aggressive pricing under potential contracts (for various reasons) without realizing this may trigger the price reduction clause. Contractors need a person who has knowledge of GSA pricing and negotiations to be privy to contract pricing practices on new contract opportunities. Other Post-Award Audits The government also has the right to examine all records of the company for up to three years after the final payment under the contract. Typically, the other items the government is looking for include: •overbillings under the contract; •other billing errors; •compliance with the Industrial Funding Fee clause. Complete and accurate accounting records are the best tool for the contractor to withstand these post-award audits. Conclusion As if Defense Contract Audit Agency audits were not enough, along comes GSA with its aggressive audit schedule. Just as with DCAA audits, knowledge of the purpose and the process for the audits, as well as maintaining complete and accurate accounting and reporting records should aid the contractor with any GSA audits it may encounter. (Michael Smigocki, CPA, CVA, is the senior managing director of Federal Strategies Group LLC. He provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. He can be reached at MikeS@FedStrat.com.)