This annex supersedes Annex VI entered into between the governments of the Kingdom of the Netherlands and the United States, dated April 18, 1985, concerning Principles Governing Defense Contract Audit Services and sets forth the terms, conditions and procedures under which the participating governments will provide one another with defense contract audit services upon request in support of defense contracts, subcontracts, and Foreign Military Sales (FMS) Letters of Offer and Acceptance contemplated or executed under the Memorandum of Understanding (MOU).
II. General Principles
The objective of this annex is to improve the effectiveness and efficiency of audit services available to the participating governments. Either government may request audit services from the other government. Both governments agree to perform the audits requested by the other government or otherwise required by this audit annex. In the event conflicts arise between any aspect of this annex and the laws of either participating government, the laws shall prevail. With notice to the other participating government, the purchasing government may elect to perform a specific audit in unusual circumstances, such as when the performing government can not satisfy an unusually short due date for an audit report.
Contract audit reports shall be advisory. The purchasing government shall retain authority and responsibility for negotiating acceptable prices and contract settlements with contractors. Purchases by the Netherlands under the FMS Program will be handled under the U.S. FMS procedures in existence at the time of acceptance of the FMS agreement.
When performing an audit for the U.S., the Netherlands agrees to use current U.S. cost principles and applicable cost accounting standards. The Netherlands also agrees that the U.S. will use its own cost principles when performing an audit for the Netherlands. All audit reports will be written in English. Consistent with U.S. cost principles and applicable cost accounting standards, the performing government may use the same audit methods it customarily uses for its own contracts, and shall determine the organizations and personnel to be involved.
Neither participating government shall duplicate or review the work of the other. The governments shall hold periodic discussions to evaluate the operational effectiveness of the reciprocal agreement. In addition, each government agrees that compliance with this audit annex will be evaluated at least once every three years by its own appropriate review and oversight organization. A copy of the results of such reviews shall be provided to the other government.
Solicitations, contracts, and subcontracts shall contain suitable provisions to enable the participating governments to act for and on behalf of one another under this annex and shall authorize access to contractor facilities and records as necessary. Nothing in this annex is to be construed to limit a purchasing government’s rights or remedies, including access to contractors records, as may be authorized by contract or the laws of the purchasing government.
III. Scope of Audit Annex
This annex encompasses audits in support of contracts and subcontracts for defense equipment and services contemplated or executed under the MOU and FMS letters of offer and acceptance. It does not cover audits for architecture and engineering, construction, base support, operation and maintenance, or banking services, nor does it cover audits of universities, and contractors solely in the business of supporting the U.S. presence in the Netherlands. For purposes of this annex, defense contract audit services shall include the following types of audits:
Forward Pricing Audits: Review of proposals submitted in contemplation of a contract award or a contract modification, to determine the allowability, allocability, and reasonableness of each proposed cost element.
Accounting System Audits: Review of contractor accounting records, procedures, and systems to determine their accuracy, currency, completeness, and compliance with contract requirements.
Estimating System Audit: Evaluation of cost estimating systems.
Post Award Audits: Verify after contract award the currency, accuracy, and completeness of cost or pricing data submitted to the purchasing government as of the completion of negotiations. Post award audits shall be automatically performed; that is, without a request, by both governments whenever a contract or contract modification has been awarded that exceeds the then current U.S. threshold for mandatory post award audits (the current threshold is $ 50,000,000) and the purchasing government relied upon certified cost or pricing data submitted by a contractor. For contract awards less than this threshold, in which the purchasing government relied upon certified cost or pricing data submitted by a contractor, post award audits will be performed based upon a sampling approach devised by the performing government or whenever there are indications that a post award audit is appropriate based on prior experience with a contractor. In addition, other post award audits will be performed upon request of the purchasing government.
Reimbursement Vouchers Audits: Verify payment vouchers submitted under cost reimbursement contracts or other contracts with cost reimbursement features (e.g. material reimbursement) and recommend cost disallowances when appropriate.
Audits of Disclosed Accounting Practices: Verify contractor compliance with disclosed accounting practices and contractual accounting requirements.
Overhead Cost Audits: Evaluate overhead cost records prior to overhead settlements.
Termination Audits: Evaluate proposed termination costs and contract cost records prior to termination settlements.
Final Pricing Audits: Review and verify actual costs incurred in the performance of cost reimbursement and fixed price incentive contracts for purposes of establishing the final cost or price.
Other: Audit services considered necessary and requested by contracting country.
Requests for contract audit services in the Netherlands shall be sent with a copy of the contractor’s proposal (if applicable) by air mail to: Defense Contract Management Command, International Brussels/D APO New York, NY 09667-6207
A copy of each audit request shall be forwarded directly by air mail to:
The Ministry of Defense
Director Audit Agency
2500 ES The Hague
All requests for audits in the Netherlands will also be sent by telephonic facsimile to the following:
DCMR, International – Brussels/D
Facsimile Telephone Number: 32 2 6487401
Ministry of Defense, Director Audit Agency
Facsimile Telephone Number: 31 70 3187596
Requests for contract audit services in the United States shall be sent by telephonic facsimile, followed by written request with a copy of the proposal (if applicable) sent by air mail, to:
Defense Contract Management Area Office, New York
DoD Central Control Point
201 Varick St.
New York, NY 10014-4811
Facsimile Telephone Number(212) 807-3343
Requests for audits shall specify the type of audit services needed, the contractor, the contractor’s address, the subcontractor and address (if applicable), the proposal (if one is to be audited), any items requiring special review, the calendar date (not the number days after receipt of audit request) that the audit is needed by, a point of contact, telephone number, and facsimile telephone number. Acceptance of requests shall be acknowledged by telephonic facsimile by the performing government and a point of contact, telephone number, and facsimile number shall be provided.
Each government agrees to establish a liaison person for this audit annex. The liaison office, liaison person, and telephone number shall be identified in each audit report. The liaison person shall assist in obtaining clarifications of audit requests or audit reports whenever necessary. The liaison person shall also assist in resolving problems with the timeliness, content, or quality of audit reports. If unable to resolve such problems, the issue will be escalated to successive managers (up to, in the Netherlands, the Director, Material Acquisition, Ministry of Defense, or, in the U.S., the Director, Foreign Contracting, Office of the Secretary of Defense).
Each government agrees to provide audit reports in a timely manner. Audit reports submitted in accordance with the requested due dates, which for forward pricing audits is generally 45 days after receipt of request for audit, are timely. If the due date specified by the requesting government cannot be met, the performing government shall contact the point of contact identified in the audit request to explain the reasons for the delay. If the failure to meet the requested due date is caused by external factors, not within the control of the government performing the audit (such as not obtaining necessary cost data from a contractor), the purchasing government shall attempt to assist in resolving the problem and grant reasonable extensions as appropriate. If the inability to meet the requested due date is caused by action or inaction of the performing government, the issue will be escalated to the attention of the audit annex liaison person and to successive managers.
The participating governments shall provide each other with access to all available information concerning contractor cost estimating systems and disclosed accounting practices when needed to support contract negotiations or enforcement. It is expected that contracts requiring the disclosure of accounting practices shall normally authorize contractors to file such disclosures with their own governments. In the United States, the files shall be maintained by the office administering the contract. In the Netherlands, the files shall be maintained by the Director of the Audit Agency.
In order that the equity of this annex may be periodically appraised, information copies of all requests for audit by both countries will be sent to Defense Contract Audit Agency, European Branch office, Lindsey Air Station, APO New York 09633. To facilitate these periodic reviews, both governments agree to maintain a list of all audits performed for each other and the specific office that requested the audit shall be identified in such list.
VI. Content of Audit Reports
All audit reports shall describe the type, scope, depth of the evaluation performed, and a point of contact with a telephone number. The audit reports shall describe what was reviewed or evaluated, the methodology used to perform the review, findings of the review, recommendations of the auditor, and the basis for the recommendations. The audit report shall address any areas that were specifically requested for review. Each audit report shall state that the proposal was audited for unallowable costs and identify any unallowable costs. While audits requested pursuant to this agreement will not encompass investigations, audits shall be performed in a manner that will provide reasonable assurance of detecting errors, irregularities, abuse, or illegal acts that: (1) could have a direct (or indirect) and material effect on contractor financial representations or the results of financial related audits; or (2) significantly affect the audit objectives. The audit report should identify the extent to which issues raised by the auditor were discussed with the contractor. Supporting evaluations by technical and other specialists shall be included in the reports as appropriate. The purchasing government may request additional clarifications or supporting data if necessary, and shall have the final authority to determine when the information provided is adequate for its purposes.
For forward pricing audits, the reports shall, for each element of proposed cost, identify the offeror’s proposed cost, the basis for the proposed cost, how the auditor evaluated it, any recommended exceptions (questioned costs), and rationale supporting the recommended exceptions (questioned costs). The information supplied in the audit report should be sufficiently detailed to permit the purchasing government to develop and justify negotiation position.
VII. Protection of Information
Information obtained through the implementation of this annex shall receive the same protection against unauthorized disclosure as it would normally receive under the laws and rules of the participating government which possesses it.
Services will be provided under this annex without charge for all defense contracts, subcontracts, and FMS Letters of Offer and Acceptance entered into on or after the date of implementation of this annex provided that a joint review of the services being exchanged between the participating governments performed at not less than three year intervals indicates that general reciprocity is being maintained. If after such joint review either government determines that charges will be necessary, they may be imposed after not less than one year advance notice. Should charges by the U.S. Government become necessary, FMS procedures then in effect will apply.
This annex will remain in effect for a period as set forth in Article VII of the MOU and may be terminated under the conditions as set forth in that article.
(sd.) B. J. M. VAN VOORST TOT VOORST
(sd.) D. J. ATWOOD