CHAPTER 19
Record Retention for
Future Audit

Many contracts mention that seller must retain auditable records for a specified period of time after contract completion. The following example is typical verbiage found in contracts addressing record retention:

Seller shall maintain complete and accurate records for a period of five years supporting all services performed, allowances, claims, and costs incurred by seller in support of this contract, including, but not limited to, those factors, which comprise or affect direct labor hours, direct labor rates, material costs, burden rates, and subcontracts. Such records and other physical data, as required, shall be capable of verification through audit and analysis by buyer, and shall be made available to buyer at seller’s facility for examination upon request.

RISK

While requesting that seller’s records be made available for audit purposes is a reasonable request, provision of such data directly to a buyer potentially exposes seller’s proprietary rates to a competitor. It is also costly to maintain records for any length of time.

RESPONSE

A company’s response may differ depending on whether they are involved in commercial or government procurements. Under a government contract, if seller has a government approved accounting system, it is advisable to refer buyer to DCAA or other government agency for an assist audit of any records. This circumvents any potential disclosure of seller’s proprietary rates.

If the audit is for a commercial contract, and seller is unable to convince buyer to omit audit rights in their entirety, soliciting an assist audit from an independent third party is advisable. Under the latter situation, entering into a non-disclosure agreement with the third party is wise because it precludes the third party from divulging seller’s rates to either buyer or an alternate party. If seller must acquiesce to a buyer audit rather than a DCAA or an alternate government agency assist audit, whether the contract is government or commercial in nature, a prudent seller will request that the audit be conducted by an independent, third party. Ensure that a non-disclosure agreement from either buyer or third party, depending on who is conducting the audit, is in place prior to audit commencement. This will help protect seller’s proprietary information and ensure that it is not disseminated to anyone other than the parties who have a need to know.

Many contracts require records retention of five or more years. The FAR requires only three years retention after contract completion. Remember that storing documents is a cost to the company. Unless there is reason to retain documents more than three years, such as awaiting finance to negotiate final rates on cost type contracts, seller may argue that the FAR only requires that records be retained for three years. Try negotiating the minimum number of years for record retention.