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How long should you keep records to be ready for a government contract audit?

Have you been notified that the Defense Contract Audit Agency auditor or other contract auditor will be knocking on your door one of these days, asking some hard questions about your government contract and wanting to see your records? If you follow some simple guidelines, you can feel confident that you will have the records that the auditor will request.

As a former Defense Contract Audit Agency auditor, I sat on the other side of the table asking hard questions and asking for the records to back up the contractor’s answers. DCAA and auditors for other contracting agencies perform all needed contract audits through evaluation of contractor records. Often I was not asking for records readily on hand for this year, but for records from past years.

Now I sit across from the auditor who is asking those questions and wanting our records. But how long must a company keep records from the past? Is two years, ten years, or twenty years long enough?

Fortunately, the Federal Acquisition Regulations (FAR) provides guidelines for most aspects of government contracting, and FAR Subpart 4.7 generally describes records retention requirements.

FAR Subpart 4.7 applies to records generated under contracts that contain one of the following clauses:

(1) Audit and Records-Sealed Bidding (52.214-26).
(2) Audit and Records-Negotiation (52.215-2).

Subpart 4.7 requires contractors to make available records, which includes books, documents, accounting procedures and practices, and other data, regardless of type and regardless of whether such items are in written form, in the form of computer data, or in any other form, and other supporting evidence to satisfy contract negotiation, administration, and audit requirements of the contracting agencies and the Comptroller General.

It is not complicated to figure out how long you must retain our records. You just need to know a few rules and use the specific records’ guidelines below. Basically, 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.

  1. If a specific record contains a series of entries, the retention period is calculated from the end of the contractor’s fiscal year in which the final entry is made.
  2. The contractor should cut off the records in annual blocks and retain them for block disposal under the prescribed retention periods.
  3. When records generated during a prior contract are relied upon by a contractor for certified cost or pricing data in negotiating a succeeding contract, the prescribed periods shall run from the date of the succeeding contract.
  4. If two or more of the record categories described below are interfiled and screening for disposal is not practical, the contractor shall retain the entire record series for the longest period prescribed for any category of records.

Records are identified in terms of their purpose or use and not by specific name or form number. These identifications apply to all contractor records that come within the description.

Financial and cost accounting records

  • Accounts receivable invoices, adjustments to the accounts, invoice registers, carrier freight bills, shipping orders, and other documents that detail the material or services billed on the related invoices: Retain 4 years.
  • Material, work order, or service order files, consisting of purchase requisitions or purchase orders for material or services, or orders for transfer of material or supplies: Retain 4 years.
  • Cash advance recapitulations, prepared as posting entries to accounts receivable ledgers for amounts of expense vouchers prepared for employees’ travel and related expenses: Retain 4 years.
  • Paid, canceled, and voided checks, other than those issued for the payment of salary and wages: Retain 4 years.
  • Accounts payable records to support disbursements of funds for materials, equipment, supplies, and services, containing originals or copies of the following and related documents: remittance advices and statements, vendors’ invoices, invoice audits and distribution slips, receiving and inspection reports or comparable certifications of receipt and inspection of material or services, and debit and credit memoranda: Retain 4 years.
  • Labor cost distribution cards or equivalent documents (may be called Timesheets): Retain 2 years.
  • Petty cash records showing description of expenditures, to whom paid, name of person authorizing payment, and date, including copies of vouchers and other supporting documents: Retain 2 years.

Pay administration records

  • Payroll sheets, registers, or their equivalent, of salaries and wages paid to individual employees for each payroll period; change slips; and tax withholding statements: Retain 4 years.
  • Clock cards or other time and attendance cards (may be called Timesheets): Retain 2 years.
  • Paid checks, receipts for wages paid in cash, or other evidence of payments for services rendered by employees: Retain 2 years.

Acquisition and supply records

  • Store requisitions for materials, supplies, equipment, and services: Retain 2 years.
  • Work orders for maintenance and other services: Retain 4 years.
  • Equipment records, consisting of equipment usage and status reports and equipment repair orders: Retain 4 years.
  • Expendable property records, reflecting accountability for the receipt and use of material in the performance of a contract: Retain 4 years.
  • Receiving and inspection report records, consisting of reports reflecting receipt and inspection of supplies, equipment, and materials: Retain 4 years.
  • Purchase order files for supplies, equipment, material, or services used in the performance of a contract; supporting documentation and backup files including, but not limited to, invoices, and memoranda; e.g., memoranda of negotiations showing the principal elements of subcontract price negotiations (see 52.244-2): Retain 4 years.
  • Production records of quality control, reliability, and inspection: Retain 4 years.

Following these rules and guidelines to retain your company’s records should keep you prepared to support your next government contract audit.

Please share your questions, comments, or experiences about government contract audits.

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