Voluntary Management Reductions

Voluntary Management Reductions

Contractors with weak or ineffective controls to separately identify and exclude unallowable costs frequently attempt to reduce their risk of noncompliance by using alternative procedures. The most common procedure is the application of bottom line reductions to estimate the amount of unallowable costs. These reductions, generally referred to as voluntary management reductions, are often unsupported estimates and do not identify specific unallowable costs. The use of this type of reduction is not an acceptable alternative to an effective system of controls. Cost Accounting Standard 405 and FAR 31.201-6 (accounting for unallowable costs) require contractors to specifically identify and exclude unallowable costs from incurred cost proposals submitted to the Government. The auditor should not offset any unallowable costs found during the audit with unsupported voluntary management reductions. Since the auditor does not audit all transactions, the probability exists when contractors have ineffective controls that the actual amount of unallowable costs may exceed the management reduction.

The auditor should evaluate the contractor's reasons for using a management reduction factor and determine if any weaknesses exist in the contractor's internal control screening process, including the failure to provide for the identification of directly associated unallowable costs (see 8-405.1). The auditor should also prepare appropriate CAS/FAR noncompliance and internal control deficiency reports when the contractor uses management reductions in lieu of having adequate controls to identify and segregate unallowable costs