United States: Federal Supply Schedule Contracts: Show and Tell

This last article in a series of four articles on Federal Supply Schedule ("FSS") contracts is by no means the least. A contractor may comply in spades with the contract requirements, but if the contractor is unable to prove such compliance in an audit, the contractor may be subject to unwarranted liability. This article provides a broad overview of the audit and record retention requirements of FSS contracts. 

The government is very active in pursuing audits of FSS contractors. An FSS-specific record retention policy allows a company to not only avoid unnecessary liability, but also to respond to audit requests in a complete and timely manner. Many audits can take months to complete, tying up valuable company resources responding to audit requests. The absence of records can significantly prolong audits.

The specific record retention requirements are set forth in the FSS contract and are tied to the government’s audit rights. The record retention and audit clauses have been revised over time and may vary from contract to contract. Generally, however, the government has a right to audit a contractor’s compliance with its disclosure requirements for up to two years after contract award (or a modification). This means that the contractor must retain all documents and records to evidence that all commercial pricing lower than the pricing offered to the government was disclosed as part of the pricing negotiations.

The government also has the right to audit a contractor’s compliance with the other contract requirements, including the Price Reductions and Industrial Funding Fee clauses, for three years after final payment under the contract. For a 10-year FSS contract, that may require the contractor to retain records for up to 13 years. The contractor must maintain not only government sales records (to support that the government was charged according to the contract terms and that IFF was appropriately paid), but also commercial sales records for the tracking customer, or category of customers. This includes written contracts and electronic transactional data.

If a government audit has been instituted or there is litigation related to a government contract, all records related to that contract must be kept until the completion of the audit or final resolution of the litigation, even if it is past the official record retention period.

In addition to external audits initiated by the Department of Veterans Affairs or the General Services Administration, a company should periodically conduct its own internal audits. If an internal audit reveals the need for a price adjustment, the company can voluntarily disclose the need for the price Federal Supply Schedule Contracts: Show and Tell (Part IV in a four part series on FSS Contracting)–continued from page 1 adjustment to the government. While GSA and DVA do not guarantee leniency as a result of a voluntary disclosure, they do encourage companies to submit them. With an effective record retention policy in place, a company’s internal audits can be accomplished accurately and efficiently.

Documents should be retained and organized to ensure that the documents that an auditor would want to review are easily retrievable. If an auditor is unable to easily locate particular documents, the auditor is likely to request tangential documents and make unfavorable assumptions. In addition, a gap in the records is generally construed against the contractor. Conversely, if a contractor can quickly respond to an auditor’s requests, it will reduce the resources needed for the audit and instill confidence in the auditors that the contractor understands the contract requirements.

Documents may be transferred to an electronic medium that accurately reflects the original. Documents should be indexed to allow quick and easy access. Draft documents never made final should be discarded, as they are subject to misinterpretation. Duplicates need not be retained if the record copy contains all of the relevant information. Documents containing original signatures should be retained.

The company’s legal department should be notified of the audit prior to any communications with the auditors. The contractor should identify a single contact person knowledgeable with the contract and the company’s procedures to coordinate all audit requests and responses. The contractor should gather all files and documents regarding the contract at issue into a central location. All auditor contacts should be reported to the law department.

While a company should cooperate with auditors and not take any steps that might hinder the auditors’ ability to perform the audit, it is also important that the company understand the scope of the audit rights and insist that the audit not go beyond those contractual rights. Thus, after receiving an audit notice, a contractor should immediately consult the contract to determine the government’s audit rights. If a government auditor requests documents outside the scope of the contractual audit rights, the contractor is under no obligation to comply.

The company should provide the auditors workspace and not allow the auditors to roam beyond the designated area. Any documents that the auditors need should be brought to them in their workspace. The company should coordinate all document production and personnel interviews with the law department.

The company must not destroy any documents relating to the contract(s) at issue, even if their destruction arises in the course of the company’s standard record retention policy. A notice should be issued to appropriate personnel to ensure that relevant documents are retained.

On the flip side, the company is not required to create any documents for the auditors. Any documents created for internal use related to the audit should be coordinated with the law department to allow protection under the work product or attorney-client privileges.

The company should maintain a copy of all documents provided to the auditors.

Employees should be provided notice that there is an audit underway and that they may be contacted by the auditors regarding the audit. While the auditors may contact employees or former employees to request information or an interview, they do not possess subpoena power or have other legal authority to compel employees to speak with them or to submit to an interview. Employees have the right to speak with the auditors and they also have the right to decline to be interviewed. It is improper for investigators to resort to threats or intimidation, whether express or implied, in order to obtain an interview.

Employees should report any contacts made by auditors or others to the company’s law department.

The results of an audit span the spectrum from no results, meaning the auditors simply disappear and they are never heard from again, to the issuance of an audit report stating any liability found during the course of the audit, to a referral to the Justice Department when the government suspects fraudulent behavior. While having a valid contract compliance plan, including a comprehensive record retention policy, is no guarantee of the first result, it will make the process less arduous.

This article is presented for informational purposes only and is not intended to constitute legal advice.