of the dollar amount involved. Finally, it provides that only the auditor shall have general access to the contractor's financial books and records for this purpose. The NAVPRO/SUPSHIP will utilize the auditor's services whenever such expertise is needed; particularly in regard to the contractor's financial management reports, books, and records. The auditor will be responsible for reviewing the financial and accounting aspects of the contrator's budgetary system.

(3) Differences. The finding, conclusions, and recommendations resulting from joint reviews shall be mutually agreed upon by the NAVPRO or SUPSHIP and the Resident Auditor. In those instances where Navy and DCAA field personnel are unable to resolve, among themselves, differences of opinion on significant joint report findings, conclusions, and recommendations, report copies with pertinent explanation shall be forwarded simultaneously to NAVMAT and DCAA Headquarters, via channels, for advice.

(4) Exit conference with contractor. During the course of the review there may be several information briefings with contractor management personnel to exchange information. Every opportunity should be afforded each party, to either update the information provided or to conduct additional reviews to preclude misconception that could develop as a result of obtaining incomplete or inaccurate data. An exit conference with contractor management personnel provides the opportunity to explain NAVPRO/ SUPSHIP and DCAA findings, conclusions, and recommendations.

(5) Reports on joint reviews. Reports on joint reviews of contractor's operations shall be prepared for submission to the contractor by the DCAA auditor and the NAVPRO or SUPSHIP and signed by the heads of both offices. Joint review reports shall be submitted to the contractor by an accompanying transmittal letter signed by the Head of the NAVPRO/SUPSHIP. To the maximum practical extent, the report will be prepared in the following format:

Cover page.

Table of contents.

Summary (see (A) below).

Background of operational area reviewed. Purpose of review.

Scope of review.

Summary evaluation.

Statement of conditions and recommenda

tions (see (B) below).

Status of corrective action taken regarding prior recommendations (see (C) below). Concluding remarks (see (D)).

Exhibits and schedules (see (E) below).

(a) Summary-(i) Background of operational area reviewed. The background paragraph should provide information regarding the area under review. It should indicate the overall significance of the area and the related government participation or interest therein, a mission statement where appropriate, and any other background data which may impact the review, such as recent contractor reorganizations in the area being reviewed, major changes in operating procedures, major changes in volume or mix of business, major contract awards or terminations affecting the area, observations or disclosures from other reviews, and other similar background data as appropriate.

(ii) Purpose of review. The purpose paragraph will clearly identify the particular area reviewed, the purpose, and the period reviewed. This paragraph will also include the following restriction on report release: "This report may not be released to any Federal agency outside the Department of Defense without prior approval of the signatories except where an agency requests the report in connection with the negotiation or administration of a contract by the agency."

(iii) Scope of review. The scope paragraph should normally include a standard phrase such as the following: "The financial aspects of this joint review were performed in accordance with generally accepted auditing standards and included such tests of accounting records and other auditing procedures as were considered necessary in the circumstances. In addition, the scope of the technical review should also be stated. Where pertinent, the paragraph may also identify any relevant contractor records, documents, policies, and procedures examined, and special techniques used such as: statistical sampling, regression analysis, ration delay, etc. Any factors which restricted the scope of the review should also be clearly stated.

(iv) Summary evaluation. One of the principal objectives of the report is to adequately expose any significant adverse conditions found during the review to insure that necessary corrective action is taken. Accordingly, the summary evaluation should include a brief, pointed statement on the overall results of the evaluation. Specific favorable internal controls or contractor procedures should be recognized but particular empha

sis should be placed on those conditions where improvement is needed. This paragraph should also include a brief summary of the effect (dollar or other) of the conditions and their underlying causes. The summary conclusions should relate to and be consistent to have, at the same time, a long list of significant deficiences and an overall favorable conclusion. The summary evaluation should be presented in clear, concise, and specific terms so that the reader will not have to make arbitrary, possibly erroneous, deductions or assumptions, about the conclusions.

(B) Statement of conditions and recommendations. A comprehensive statement of conditions and recommendations for corrective action is required for each deficiency or weakness found and should be presented as follows:

TITLE OF SUBJECT/AREA TO BE DISCUSSED

(i) Statement of condition. The conditions found during the review should be clearly described. Specific examples of adverse conditions should be included. The scope of the examination and the result of any tests made should be described in sufficiently precise terms. Time periods of the tests should be highlighted if deficiences are more prevalent during certain timeframes. The criteria that the receiver used as a basis for comparison with the actual condition should be described sufficiently to permit the reader to grasp the significance of finding. The cause or the underlying reasons for the conditions should be explained as specifically as possible.

(ii) Cost impact. The effect of the adverse conditions on government contracts in terms of dollar amounts should be shown whenever possible. It is recognized that there may be times when dollar impacts are not discernible. When actual dollar amounts are not available, the reasons for such unavailability should be explained, and reasonable estimates should be used wherever possible. In brief, the report should indicate clearly and specifically what the reviewer considers the effect to be in the circumstances.

(iii) Recommendations addressed to the contractor. The recommendations should be a natural and logical fallout of the preceding paragraphs. Recommendations should be constructive in nature and as definitive as the situation warrants. The reviewer need not solve all procedural or functional problems but should indicate at least the framework for resolving the deficiency. It may be appropriate in certain complex situations to recommend that the contractor, with its resources, undertake a study directed toward remedying the deficiency.

(iv) Contractor's reaction. The contractor's reaction, as obtained during interim

discussions or the exit conference (d)(4), should be noted as well as whether the contractor has agreed to undertake appropriate corrective measures. If the contractor is not prepared to furnish authoritative comments on the review findings at the time of the exit conference, it is considered appropriate to furnish a preliminary draft copy of the report to the contractor in order for him to fully understand the findings and recommendations. A reasonable timeframe (usually 2 weeks to 30 days) should be established for the contractor's reply. Reports should not be held beyond the agreed-to deadline for receipt of the contractor's reaction.

(v) Reviewer's rejoinder. Any factual matters raised by the contractor's comments or reply should be included in the statement of condition. The extent to which the contractor concurs with the findings and recommendations and the contractors proposed action should also be discussed.

(C) Status of corrective action taken on prior recommendations. This paragraph should show the status of corrective action taken by the contractor on recommendations made in prior reports on the same functional area. The paragraph should include a determination by the reviewer as to whether the corrective action taken is adequate. If corrective action is inadequate or has not been taken, the recommendation should be restated or a reference made to the updated discussion of the matter in the present report.

(D) Concluding remarks. This paragraph should be used to suggest specific time periods for corrective action on any report recommendations or other comments as appropriate. The report should be signed at the end of the narrative section of the report by both the Head of the NAVPRO/SUPSHIP and the head of the local DCAA Resident Office.

(E) Exhibits and schedules. Reports should contain any exhibits and supporting schedules necessary for adequate support of the review findings and a clear understanding of the recommendations. The contractor's operating and financial statements and pertinent excerpts from the contractor's policies and procedures may be included as exhibits in those circumstances where they will contribute to an understanding of the report.

(e) Reports issued by NAVPROS or SUPSHIPS. Reports issued solely by the NAVPRO/SUPSHIP will be prepared generally in accordance with paragraph (d)(5) above except when regulations provide otherwise.

(f) Recommendations to Government activities. NAVPRO/SUPSHIP findings resulting in recommendations to named government activities will be the subject of a separate report signed by the Head of the NAVPRO/SUPSHIP and forwarded

through channels to the activities addressed in the recommendation.

[41 FR 55517, Dec. 21, 1976]

§ 737.20-702-6 Responsibilities of NAVPROS and SUPSHIPS for allowability of costs under cost-reimbursement type contracts.

(a) The cognizant NAVPRO (Naval Plant Representative Office) or SUP SHIP (Supervisor of Shipbuilding, Conversion and Repair), assisted by the DCAA (Defense Contract Audit Agency) auditor, has final responsibility for determining whether costs incurred under cost-reimbursement type contracts are reasonable, allocable, and otherwise allowable.

(b) § 3.809(c) designates the auditor as the authorized representative of the contracting officer for examining contract costs for the purpose of determining allowable direct and indirect costs under Part 15, Contract Cost Principles and Procedures, except for negotiated overhead rates (§ 3.700). During performance of the contract, the auditor processes vouchers for provisional payment subject to final audit. At completion of the contract, the auditor forwards the completion voucher to the NAVPRO/SUPSHIP accompanied by the final audit report which summarizes all costs incurred and considered allowable from the inception to the completion of the contract. The NAVPRO/SUPSHIP shall approve the final voucher for the final payment after assuring that the contractor has fully complied with all provisions of the contract.

(c) The auditor issues DCAA Form 1, Notice of Contract Costs Suspended and/or Disapproved, with a copy to the NAVPRO/SUPSHIP, with respect to costs claimed but not considered allowable. The auditor is required to discuss controversial disallowances with the NAVPRO/SUPSHIP, prior to issuing the DCAA Form 1. § 1.406(c)(iv) requires that the contract administration office determine, upon written appeal by the contractor, the allowability of costs suspended or disapproved by the auditor.

(d) During the period of contract performance, the NAVPRO/SUPSHIP is responsible for the performance of contract administration functions

listed in § 1.406 and § 737.1-406-50. In the day-to-day performance of these functions, NAVPRO/SUPSHIP personnel should be alert to inefficient and uneconomical policies and practices being followed by the contractor that can result in the incurrence of unnecessary costs. If sufficient information is available to indicate that a contractor's practice is causing unnecessary contract costs, the NAVPRO/ SUPSHIP shall direct the issuance of the DCAA Form 1 by the auditor for the suspension or disapproval of costs incurred, as provided by § 3.809(c)(i). Where the NAVPRO/SUPSHIP believes that unnecessary costs are being incurred by a contractor, and requires audit assistance, available information should be coordinated with the auditor, and the NAVPRO/SUPSHIP should request specific audit coverage of the functional area involved.

§ 737.20-702-7 Review

of

contractor's ADP (Automatic Data Processing) operations.

(a) NAVPRO/SUPSHIP responsibility. Each NAVERO (Naval Plant Representative Office) and SUPSHIP (Supervisor of Shipbuilding, Conversion and Repair) administering contracts with contractors expected to have sales to the Government in excess of $5,000,000 during the next 12 months on other than firm fixed-price and fixed-price with escalation contracts shall review the contractor's ADP operations periodically to assure that they are effective and economical. This review should be combined with a review required by §3-1100.2 of this title and shall include a review of the end products of contractor's ADP equipment, and the data that might be produced by such equipment. The plan and schedule for the review must be tailored to the contractor concerned, taking into account the requirements of § 3-1100 of this title, the extent of competition in contracts being performed, the contractor's operating methods, the nature of the work being done, procurement cycle states, types of contracts involved, degree of technical and financial risk, ration of Government/commercial work, and extent that performance efficiencies have been previously demon

strated. The plan should stress the importance of anticipating potential problems and provide a means of calling them to the attention of the contractor at a stage early enough to enable preventive action to be taken. Review teams shall be headed by a representative of the NAVPRO/SUP SHIP and shall include as necessary one or more ADPE specialists provided by the Systems Command, one more DCAA auditors, and appropriate NAVPRO/SUPSHIP personnel.

or

(b) NAVAIR/NAVSEA responsibility. The Commander, Naval Air Systems Command (NAVAIR) and the Commander, Naval Sea Systems Command (NAVSEA) shall provide necessary technical assistance to NAVPROS and/or SUPSHIPS managed by them, to conduct the reviews required by paragraph (a) of this section as well as the review required by § 3-1100.2 of this title applicable to contractor acquisition of ADPE. NAVAIR or NAVSEA shall also provide necessary technical assistance required by § 31100.2(c) of this title to Defense Contract Administration Services activities cognizant of contractors having a preponderance of Navy unexpended contract dollars. The selection of NAVAIR or NAVSEA to provide this service will be determined on the basis of preponderance of unexpended NAVAIR or NAVSEA contract dollars in contracts held by the contractor.

[41 FR 55519, Dec. 21, 1976]

§ 737.20-706 Designation of the disbursing office.

§ 737.20-706-51 Other military department disbursing offices.

Contracts citing appropriations or funds of the Departments of the Army or the Air Force or of other DOD agencies will designate the appropriate finance offices of those Departments as specified in the applicable MIPRS. Contracts chargeable to the appropriations or funds of more than one Military Department will designate a disbursing or financing office of each Department involved to disburse the appropriations of the Department, except that when such contracts are for research and development, a disbursing office of the procuring De

partment may be designated to make all payments.

§ 737.20-706-52 Navy disbursing offices.

(a) General. All contracts citing Navy appropriations which are not assigned to a Defense Contract Administration Services Regional Office for administration shall designate the appropriate Navy disbursing office to make payments against Navy appropriations. Except as otherwise provided in paragraphs (b) through (h) of this section; one of the disbursing offices listed herein shall be designated. In contracts providing for inspection and acceptance of items by the Navy at the contractor's plant, the Navy regional finance center (NRFC) serving the area in which the contractor's plant is located shall be designated as the paying office in the contract. In contracts providing for inspection and acceptance at a point other than the contractor's plant, the Navy regional finance center serving the area in which the receiving activity is located shall be designated as the paying office in the contract; except that if the contract provides for inspection and acceptance at more than one destination point or at a destination point outside the continental United States, the Navy regional finance center serving the area in which the principal office of the contractor (the office to which delivery of the check is to be made) is located shall be designated as the paying office in the contract. See NavCompt Manual, par. 046300. Exceptions to the foregoing are made in the case of certain orders issued by bureaus, systems commands and inventory control points as provided for in NavCompt Manual, par. 064006-3.

NRFC Great Lakes, Ill.

NRFC San Diego, Calif.

Calif.

Delaware, Virginia, except the areas served by the NRFC, Washington, D.C.; West Virginia, North Carolina, South Carolina, Tennessee, Georgia, Florida, Alabama, and Mississippi. North Dakota, South Dakota, Wyoming, Nebraska, Colorado, Kansas, Minnesota, Iowa, Missouri, Wisconsin. Michigan, Illinois, Indiana, Ohio, Kentucky, Arkansas, Louisiana, Oklahoma and Texas. Southern part of California including the Counties of Santa Barbara, Kern and San Bernardino and all counties south thereof, Arizona and New Mexico and Clark County, Nevada.

NRFC San Francisco, Northern part of California, including counties of San Luis Obispo, Kings, Tulare, Invo and all counties north thereof, Utah, Nevada (except Clark County), Washington,

(b) Contracts Citing the Appropriation 17X4912, Navy Industrial Fund. Except as provided in paragraph (c) of this section, when the contract is chargeable to the Navy Industrial Fund, the disbursing office will be the applicable Navy Industrial Fund activity if so cited on the requisition. Otherwise, the appropriate disbursing office listed in paragraph (a) of this section will be designated.

(c) Contracts for Petroleum Products. (1) Except for the Military Sealift Command, Navy Industrial Fund activities regularly paying their own dealers: Bills will designate payment by their own disbursing office. Orders for petroleum for Military Sealift Command vessels will provide for payment by the disbursing office of the Military Sealift Command activity to which the ship is assigned, except that orders for petroleum products used as bunkers on government owned tankers

administratively assigned to the Military Sealift Command and operated under a cost-plus-a-fixed-fee contract will provide for payment by the Commander, Military Sealift Command, Washington, D.C. when the charge is against a Navy Industrial Fund activity not regularly paying its own dealers' bills or against any other Navy appropriation, orders will provide for payment by the appropriate office specified in paragraph (c)(2) of this section.

(2) Except as otherwise provided by amendment to the general provisions for petroleum products, the following paying procedures apply to all deliveries:

(i) The ordering activity will designate NRFC San Francisco as the paying office if delivery is made within Arizona, New Mexico, California, Oregon, Washington, Montana, Idaho, Nevada, Utah, Wyoming or Colorado, or, if the home office of the contractor is located in any such state and deliveries are made in those states, including deliveries outside those states under the same delivery orders.

(ii) The ordering activity will designate NRFC Washington as the paying office for all other deliveries. Contracts for into-plane deliveries will designate payment by Defense Supply Agency Administrative Support Center, DCASC-MF, Cameron Station, Alexandria, VA 22314.

(3) Only one paying office will be designated on each order.

(d) Contracts for Solid Fuels. When coal is procured under contracts specifying delivery direct from designated mines, NRFC Washington will be designated the paying office except when charge is to the Navy Industrial Fund and the disbursing office serving the Navy Industrial Fund activity is designated in the requisition. When coal is procured from retail distributors the disbursing office will be selected in accordance with (a) and (b) above or (g) below as appropriate.

(e) Ship's Store Stock. An east coast and a west coast disbursing office have been assigned the function of payment of dealer's bills for all ship's store