There are a number of accounting software packages available to government contractors. Generally, we don’t care which one our clients use.

We’ve noticed that smaller entities tend to use the entry-level packages, which is of course just fine. As entities grow and become more sophisticated, so does their accounting software. Companies move from Quickbooks to CostPoint or to Jamis or whatever. That’s the normal evolution of things.

And when companies grow larger, then tend to embrace “enterprise-wide” systems such as Oracle, Peoplesoft, or SAP. Those systems tend to be complex and require quite a bit of budget to implement and maintain. Accordingly, they tend to be used only by the largest and most complex of government contractors.

This article is written for those large contractors that use SAP. Actually it’s written for that small group of large contractors that use the “Grouping, Pegging and Distribution” (GPD) function of SAP.

You may be in for a rough ride from your DCAA auditors.

We know this because we just read the audit guidance covering SAP GPD.

The GPD function of SAP “is an automated inventory process where parts and their associated costs move between contracts.” As we understand it, GPD “pegs” material parts and other inventory to contracts based on scheduling need loaded into the MRP system. Should the project schedule need dates change, the parts/inventory might be “repegged” to another project with an earlier need date. What’s relevant here is that material costs move along with the parts, so today’s project’s material cost need not be tomorrow’s project’s material cost.

DCAA may have a problem with that feature.

According to the audit guidance, potential audit concerns may include—

• Premature Billing of Material Costs – GPD configuration and controls do not prohibit the billing of parts in advance of use in the production process.

• Billing Material in Excess of Contract Requirements – GPD may assign parts to contracts in excess of bill of material (BOM) requirements, which allows the contractor to bill for material in excess of contract requirements.

• Material Title Passed to Government – When material title passes to the Government, the contracting officer must approve transfer of material between contracts; however, GPD automatically reassigns material and costs between contracts without the required authorizations.

• Audit Trail – Due to the continual cost shifting of the GPD processes, there is a limited audit trail that allows for tracing costs from the contractor’s book and records to supporting documents (i.e., purchase requests, invoices, and receiving reports).

• Costs Assigned to Closed Work Orders – the GPD process continues to allocate costs for a production part even after shipment of the part. Therefore, closed work orders used for estimating costs in forward pricing are not reliable.

Importantly, the audit guidance implies that these issues may impact the adequacy of a contractor’s Material Management and Accounting System (MMAS). Astute readers may recall that the MMAS is one of the six DFARS Business Systems. Consequently, any finding that a contractor’s MMAS has Significant Deficiencies may lead to payment withholds.

The good news, of course, is that DCAA has de-emphasized performance of Business System reviews so that it can focus on catching up on its ginormous backlog of incurred cost audits. Thus, it’s likely that by the time DCAA gets around to auditing your SAP GPD system as part of a MMAS review, you will have implemented a new MRP system that the audit agency has never heard of.

But if you are one of the small group of unlucky contractors that has SAP GPD functionality and a MMAS Business System and an active DCAA Field Audit Office, then we suggest you might want to be a tad concerned about this audit guidance.