Continuation of Essential Contractor Services

DoD has amended the DFARS (the DoD FAR Supplement) to require contractors, that provide essential contractor services (as determined by the requiring activity) be prepared to continue such services during periods of crisis. The requirement will be mandatory in contracts awarded after October 29, 2010 but can be added to existing contracts with "appropriate consideration".

This rule is necessary to ensure that essential contractor services are not interrupted. According to DoD, the current changing threat environment, particularly under the additional challenges caused by such potential crises as destructive weather, earthquakes, or pandemic disease, has increased the need for continuity of operations capabilities and plans that enable agencies to continue their essential functions during a broad range of emergencies and crises.

DoD established this requirement for contractors to submit their plans to ensure continuation of essential contractor services that support mission-essential functions during a crisis situation. As a general rule, the designation of services as essential contractor services will not apply to an entire contract but will apply only to those service function(s) that have been specifically identified as essential contractor services by the functional commander or civilian equivalent.

DFARS 252.237-7024, Notice of Continuation of Essential Contractor Services, to require the submission of the plan as part of the offeror's proposal. The associate provision prescription is added at 237.7603. The contractor's continuity of essential services plan shall be considered and evaluated as part of the technical evaluation of offers. The functional managers of the services will most likely be consulted to determine the sufficiency of these plans. The contractor's Mission-Essential Contractor Services Plan, in the resultant contract, will remain active in accordance with the clause at DFARS 252.237-7023, Continuation of Essential Contractor Services.

Equitable Adjustment. If costs increase due to the continuation of services during an event that would create an excusable delay, contractors should be entitled to an equitable adjustment to the terms of the contract.

Pending Legislation Affecting Alaska Native Corporations

Indian Country Today has a story on Sen. McCaskill's (Missouri) renewed effort to bring changes to the manner in which the Government contracts with ANCs (Alaska Native Corporations). Earlier this month, Sen McCaskil announced that she will be continuing her efforts to crack down on waste and abuse in contracting by introducing legislation to eliminate the unique government contracting preferences and loopholes for ANCs. This announcement followed a September article from the Washington Post that listed a number of alleged improprieties surrounding ANC contracts.  If you read the Washington Post chronology however, you will realize that the so-called improprieties are not because of actions by the ANCs themselves but more an issue with the contracting community using ANCs to ease their own administrative processes. To a lesser extent, there is some concern that the contracting preferences afforded to ANCs is not delivering sufficient social benefits back to Alaska natives.

McCaskill’s office said the Post’s reports were an impetus for her legislation, which has the following goals:

• Eliminate the ability of ANCs to receive sole-source contracts exceeding the caps applicable for other 8(a) participants of $3.5 million for services or $5.5 million for goods;
• Eliminate the automatic designation of ANCs as socially disadvantaged business enterprises, requiring ANCs to demonstrate their social disadvantage by providing evidence of “racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups;”
• Eliminate the automatic designation of ANCs as economically disadvantaged, requiring any ANC seeking to participate in the 8(a) program to demonstrate that corporation’s economic disadvantage upon entering the program;
• Require ANCs to count all affiliates and subsidiaries in size determinations for 8(a) eligibility, which shall be limited to no longer than nine years, as is required for other 8(a) participants;
• Require ANCs who choose to participate in the 8(a) program to own a majority interest in only one 8(a) subsidiary at any one time;
• Require ANCs who choose to participate in the 8(a) program to be managed by individuals who qualify as socially and economically disadvantaged under the program, as other 8(a) participants must do; and
• Prohibit ANCs who chose to participate in the 8(a) program from operating as pass-throughs to non-Native companies that do not qualify under the 8(a) program.

Indirect Cost Allocation Bases

This will be of interest to publicly held Government contractors. DCAA recently revised its guidance concerning audit review of indirect cost allocation bases. Auditors are now required to review the applicable portions of SEC filings to determine if off-balance sheet arrangements or related party transactions exist.

If any off-balance sheet arrangements or related party transactions exist and receive benefits of the parent company, or a segment, the auditor must determine that those entities are included in the appropriate allocation bases for an equitable share of indirect costs.

Auditors, of course, have always tested to determine whether the indirect cost allocation bases are proper for the computation of indirect rates. Now however, they have another source or reference point to help make those determinations.

Travel Costs ....... Again.

At the risk of beating this subject to death, we present, yet again, another discussion on travel costs. Travel costs, though not always significant in the scheme of things, is an area that Government auditors find low hanging fruit - a high probability of finding unallowable costs. Within the general cost category of travel, there are several cost limitations that contractors without a good set of travel policies, procedures, and practices, can easily exceed. Today we will cover the types of costs that are included in the maximum per diem rates.

Maximum per diem rates are based on one of three sources depending on destination. For the continental U.S., FAR prescribes the use of the FTRs (Federal Travel Regulations). For Alaska, Hawaii, and "outlying areas" FAR requires that JTR (Joint Travel Regulations) rates be used. And, for international travel, the State Department rates (Department of State Standardized Regulations) are to be used. However, the rates from these sources have different compositions. Under FTR, taxes on hotel rooms and laundry/dry cleaning can be charged separately whereas under the State Department, these costs are included in the rate and may not be billed separately. Under the JTR, hotel tax is separately billable but laundry and dry cleaning are included. Confusing? You can incorporate the following table in your policy and procedure manual to help you avoid unallowable costs.

All of these rates include the following "incidental expenses": fees and tips to waiters and porters; transportation between places of lodging or business and places where meals are taken, if suitable meals cannot be obtained at the TDY site; and mailing costs associated with filing travel vouchers and payment of Government-sponsored charge card billings.

As we stated earlier, this is a prime area for contract auditors to review, especially during their audits of incurred cost. Contractors without intricate knowledge of the travel regulations are at risk for noncompliance.

International Air Travel and the "Fly America Act"

The "Fly America Act" requires that Government contractors traveling internationally on contract related business, fly on U.S. flag carriers. FAR 47.4 implements the Fly America Act and requires the contract clause at FAR 47.403-1 be included in contracts where international travel is anticipated. In practicality, this clause is routinely included in contracts, whether international travel is contemplated, or not. You should check your contracts to determine whether it has been included.

FAR 47.403-1, Availability and unavailability of U.S.-flag air carrier service, provides detailed requirements for determining the availability of U.S.-flag carrier service, as well as guidelines that must be followed to ensure that U.S.-flag carriers are used to the greatest extent possible. Contractors are required to use U.S.-flag carriers when they are available, even though a foreign carrier may offer lower fares for the same flight or flight segment. Contractors that frequently travel abroad should have processes and procedures in place to ensure compliance with the Fly America Act.

Although FAR 47.403 provides detailed implementation requirements of the Fly America Act, the regulations do not address code share carrier agreements. Code share carrier agreements are commonplace in the air transportation industry and involve arrangements between carriers where one carrier will book and provide air travel transportation services aboard another carrier’s aircraft. The Comptroller General’s Decision, B-240956, dated September 25, 1991, views code share arrangements between a U.S.-flag carrier and a foreign carrier as simply a lease of the seats and its crew aboard the aircraft, and as such, the U.S. carrier is responsible for the transportation service for passengers in the leased seats. Based on the Comptroller General’s decision, contractors are required under the Fly America Act to use U.S.-flag carriers, or foreign carriers under a code share arrangement with the U.S.-flag carrier, whenever available, unless the contractor can provide adequate justification and supporting documentation, as required by FAR 47.403-1.

To the extent that a U.S.-flag carrier, including code share flights booked through the U.S.-flag carrier, is not used for international air travel funded by the U.S. Government, FAR 47.403-3(a) provides that Agencies shall disallow the costs associated with the air transportation on the foreign air carrier unless adequate justification is attached to the voucher, which notes that a U.S.-flag carrier was unavailable.

When the travel is by indirect route or the traveler otherwise fails to use available U.S.-flag air carrier service, the amount to be disallowed is based on the loss of revenues suffered by U.S.-flag air carriers, determined by the formula provided in FAR 47.403-1. However, based on the Comptroller General’s decision, 56 Comp. Gen. 209, dated January 3, 1977, the disallowed amount shall not exceed the fare of the segment improperly traveled.

Goodwill

If you go out and buy a company (or part of a company) but pay more for it than the fair value of assets (less liabilities), the excess is charged to an account called Goodwill. Goodwill is an intangible asset as differentiated from tangible assets. Tangible assets include property, plant, and equipment. Tangible assets have underlying substance to the costs paid and recorded in the accounting records. Intangible assets do not.

According to FAR 31.205-49, any costs associated with Goodwill on a Government contract is unallowable. This includes amortization, expensing, write-off, or write-down of goodwill (however represented). Some contractors forget to exclude Goodwill from the "facilities capital employed" base when calculating cost of money. FAR 31.205-10(b)(2) requires that Goodwill be excluded from FCCM (facilities capital cost of money) calculations as well.

CAS Board Proposes to End "Overseas" Exemption

The CAS (Cost Accounting Standards) Board released a Notice of Proposed Rule (NPR) to eliminate the exemption from CAS for contracts executed and performed entirely outside the US, its territories and possessions. The purpose of an NPR is to obtain input on whether to retain, revise, or eliminate a particular rule or regulation.

This overseas exemption goes back to 1973 when the CAS Board was first established. In 2005, the Board published a Staff Discussion Paper discussing whether to retain the exemption. There were only three comments submitted, all in favor of retaining the exemption. As a result, the Board decided to retain the exemption.

In 2009, based on provisions in the National Defense Authorization Act, the CAS Board once again asked for public comment on the matter of whether the overseas exemption should be retained. This time, there was considerably more public interest and this time, the Board proposed to eliminate the exemption. The Boards proposal is based on the following rationale:

1. The statutory basis that was used to justify the overseas exemption when it was first promulgated no longer exists.
2. There is no accounting basis for the overseas exemption. The place of contract execution and performance is not germane to the fundamental principles and methods used to account for the costs of contract performance. The exemption does not help to achieve consistency and uniformity in the cost accounting practices used by Government contractors in the measurement, assignment and allocation of costs to Government contracts, the primary objective of the CAS.
3. Based on the data submitted in response to its request for information, the Board projects the volume of affected contractors and subcontractors to be relatively small.

EVMS Compliance - What's Going On?

Last week there was a flurry of news articles concerning the decertification of Lockheed's EVMS system. EVMS (Earned Value Management System) is a standard used by contractors to provide data on the progress of large Government contracts. In 2007, the Defense Contract Management Agency (DCMA) reviewed Lockheed's EVMS system and found it deficient in more than half of the 32 EVMS standards. In a recent followup review, DCMA found that Lockheed had not made sufficient progress on its corrective action plan, hence the decertification.

In today's news, another defense contractor has been found to have EVMS issues. DCMA is on the verge of issuing a report citing Northrop Grumman of significant deficiencies in a number of EVMS standards.

There is obviously a renewed emphasis on EVMS. DCMA (as well as DCAA) is focusing a lot of resources these days to ensure that these systems are functioning properly and provide valid, accurate, and current information on the status of major programs. This would be a good time for contractors to assess the adequacy of their own EVMS implementations - before the Government arrives.

Communications with Auditors - The Exit Conference

Interaction with auditors is unavoidable if you have any kind of Government contract. There are many audits that need to be performed, especially pertaining to cost-reimbursement contracts. Before contract award, there might be a preaward accounting system audit, a financial capability audit and of course, evaluation of the proposal you submitted. During contract performance, there could be floorchecks, billing rate, public voucher, progress payment, and EVMS-type audits. After contract completion, there is likely an incurred cost audit and final closing audit. Peppered throughout these periodic reviews might be a defective pricing review, other internal control adequacy reviews, and CAS compliance reviews.

When auditors perform these audits, they are required by Generally Accepted Government Auditing Standards (GAGAS) to communicate throughout the review with the contractor. Yesterday we discussed communications that occur during the entrance conference and throughout the fieldwork stages. Today we will discuss the communication that occurs once the audit is complete. This is called the exit conference.

Upon completion of the field work, the auditor will discuss the audit results and obtain the contractor’s views concerning the findings, conclusions, and recommendations for inclusion in the audit report as required by GAGAS. For other than audits involving forecasted costs subject to negotiations, the auditor will provide the contractor a copy of the draft report, or at a minimum, the results of audit section of the draft report (including the opinion and any exhibits and notes, or statement of conditions and recommendations). To facilitate the discussion of the audit results and obtaining the contractor’s views of the results, this information is sometimes provided prior to the exit conference.

If the audit report includes forecasted costs that are subject to negotiations, such as forward pricing audits the auditor will not provide the contractor a copy of the draft report or results and will limit the discussion to factual matters/differences. Auditors should not disclose conclusions or recommendations on projected costs or rates. For example, the auditor would discuss with the contractor why a proposed raw material factor was based on history from the development phase of a particular contract when the contractor has more current and relevant history from follow-on production contracts. In this case, the auditor would not disclose the audit conclusion (e.g., that audit results were based on the history for the follow-on productions contracts) or the overall questioned cost, the questioned cost by cost element, or how much of a specific rate/factor was questioned unless specifically directed to do so by the requestor.

Communications with Auditors - What to Expect

Generally Accepted Government Auditing Standards (GAGAS) require auditors to communicate with the entity under audit. If your company is about to undergo an audit by a Governmental audit organization, you can expect communication at the entrance conference, during the audit, and the exit conference. We will discuss communications during the entrance conference and during the audit today, while reserving exit conference communications for tomorrow.

Entrance Conference


The auditor should explain the purpose and overall plan for performance of the audit at the entrance conference while also discussing the types of books, records, and other data the auditor will need. The auditor should also ascertain the nature and location of supporting data. It is also appropriate to discuss other matters during the entrance conference. For example, the auditor may need to follow-up on items discussed at a separate walk-through meeting or arrange for temporary space at the contractor’s facility in close proximity to the contractor’s representatives with whom he/she will be working so that those representatives are readily available.
Communication with the Contractor During the Audit

Through-out the audit, the auditor should discuss matters with the contractor as needed to obtain a full understanding of the contractor’s basis for each item in the submission, or each aspect of the area subject to audit. The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential FAR/CAS noncompliances, etc.) with the contractor to ensure conclusions are based on a complete understanding of all pertinent facts. These types of discussions do not impair auditor independence and are generally necessary to obtain sufficient evidence to support audit conclusions. Discussions of the preliminary audit issues should be limited to factual matters when the audit is of forecasted costs that will be subject to negotiations.

How to "Plug" Data Holes

"Data Hole" is a term used to describe financial information for which source documentation is missing. This could be a vendor invoice, a timecard, electronic media, or any of a host of other source documents. Data Holes are seemingly unavoidable and occur within any organization, regardless of size. Yesterday we discussed how Government auditor's might view claimed costs for which there is no tangible supporting documentation. Government auditors have different objectives and lower materiality thresholds than would your IPA (Independent Public Accountant) auditing your financial statements. They also have FAR 31.201-2(d) to buoy their case. See yesterday's post for further discussion. Today we want to provide some tips for dealing with the absence of supporting documentation.

First, you need to know where your "data holes" are. In preparing for an audit, you need to take inventory of what is likely to be requested by the auditor and ensure that it is complete, up-to-date, and accurate. It is usually unsettling when you cannot find data that has been requested.

Once you know your data holes, you can begin developing alternative documentation that might satisfy the reasonableness test. Reasonableness is very subjective however and even Government auditors will disagree on what constitutes reasonable support under the circumstances.  Whether the Government auditor will accept your alternative supporting documentation is problematic but you need to be looking ahead to possible appeal processes. You can always appeal to the contracting officer and if the costs are significant enough, you can appeal to the ASBCA or higher courts.

Here's an illustration of alternative documentation that might satisfy the reasonableness test. Suppose that one timecard for one employee for one pay period is missing. How do you satisfy the auditor that hours charged to a Government contract by that employee for that pay period was actually worked? You could produce a leave and earnings schedule to show that person did not take vacation, sick or holiday leave. You could peruse travel documentation to show that employee was not traveling somewhere. If you have timeclocks, you can show in and out times. If the incidence was fairly recent, you could have other employees and his supervisor prepare written statements. You could refer to email traffic and note whether he/she sent email during that week related to the Government contract. If he/she were a manufacturing person, there might be travelers, work authorizations, or other documentation that required signatures/initials and dates. Phone records might help.

Now, you might conclude that this is a lot of nonsense for one timecard. You might be tempted just to write the cost off rather than go through the process of generating alternative support. And you might be right. A cost benefit analysis is a good step. However, keep in mind that auditors do not perform 100% reviews of all transactions. They sample items and project the results of the sample to the entire universe. So, a seemingly minor cost can result in significant questioned costs.

What To Do About Data Holes

The term "data hole' is used to describe financial information for which supporting documentation is no longer available. Missing invoices, misplaced time cards, or electronic media that's been wiped out are all examples of data holes. Sometimes data holes can be patched with duplicate sources. Often times, not. The older the information, the less likely it will be to plug those holes. This is no small matter as Government auditors are significantly in arrears in completing required incurred cost reviews. The existence of data holes is nothing new - they've existed forever and affect both small and large companies alike. One would expect that with electronic media that the incidences of missing data would diminish but that is not the current trajectory.

When it comes to financial reporting, data holes are often glossed over without so much as a mention. If a contractor is making monthly payments to lease some equipment and can locate all but one of the monthly invoices but all twelve cancelled checks, a CPA will reasonably conclude that the payment was made. The CPA can review subsequent invoices and see that there are no delinquencies on the account and gain reasonable assurance that the cancelled check did indeed represent the monthly lease payment.

That's not necessarily the case for a Government auditor. A Government auditor must contend with the provisions of FAR 31.201-2(d) which states:

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.

The Government's position is that the contractor bears the burden of documenting its costs. If it cannot do so, then it has failed to meet its burden and the costs are unallowable. Auditors who take such a strict interpretation in all cases, such as the lease payment example mentioned above, have abandoned a key element of auditing, that being "judgment". But, these situations are happening with increasing frequency and will ultimately lead to unnecessary disputes.

Tomorrow we will look at some steps that contractors can take proactively when it discovers data holes in its books and records.

Maximum Allowable Travel Costs

From time to time, we like to remind everyone of the FAR limitations on per diem costs. FAR 31.205-46 generally limits the cost of lodging, meals, and incidental expenses cannot exceed on a daily basis the maximum per diem rates in effect at the time of travel as set forth in the Federal Travel Regulations (for contiguous US) or the Joint Travel Regulations (for Alaska, Hawaii, and foreign countries). Where do you find the FTRs or JTRs? The easiest way is to use various online resources.

FTRs:  (per diem rates for contiguous 48 states), GSA has a nice user-friendly website for FTRs. Use a map of the US where you can drill down until you find the right location. Alternatively, you can find the information by entering city and state or by zip code.

JTRs:  (per diem rates for AK, HI, and foreign travel), refer to DoD's travel website. Its not quite as slick as GSA's but will give you the information nonetheless.

It is important to know that Government contractors are not bound by any of the other regulations found in the FTRs and JTRs. The only thing binding on contractors is the maximum per diem rates.

One cautionary note, travel costs, like any cost, must meet the reasonable test. FAR states that the maximum rates specified in the FTRs and JTRs might not be reasonable when no lodging costs are incurred or for partial travel days (e.g. day of departure and return). Your internal travel policies and procedures should cover these situations.

Adequacy of Cost or Pricing Data

If you submit a proposal for a contract based on cost or pricing data, chances are good that it will be audited. One of the first things an auditor will do upon receipt of a request to perform an audit is to make an assessment on the Adequacy of the proposal. Previously, we wrote on how the auditors go about making these adequacy determinations. You can read that post here. It is a judgment call of course when an auditor deems the cost or pricing data so deficient that an audit cannot be performed. Depending on the specific circumstances, the auditor must decide whether one item alone or a combination of items justifies a notification to the contracting officer that a proposal is unauditable and therefore not acceptable as a basis negotiating a fair and reasonable contract price. Examples of cost or pricing data deficiencies that would usually be reported to the contracting officer follow:

 

1. Significant amounts of unsupported costs.
2. Significant differences between the proposal and supporting data resulting from the proposal being out of date or available historical data for the same or similar items not being used.
3. Significant differences between the detailed amounts and the summary totals (e.g., the bill of material total does not reconcile with the proposal summary).
4. Materials are a significant portion of the proposal, but the contractor provides no bill of materials or other consolidated listing of the individual material items and quantities being proposed.
5. Failure to list parts, components, assemblies or services that will be performed by subcontractors when significant amounts are involved.
6. Significant differences resulting from unit prices proposed being based on quantities substantially different from the quantities required.
7. Subcontract assist audit reports indicate significant problems with access to records, unsupported costs, and indirect expense rate projections.
8. No explanation or basis for the pricing method used to propose significant interorganizational costs.
9. No time-phased breakdown of labor hours, rates or basis of proposal for significant labor costs.
10. No indication of basis for indirect cost rates when significant costs are involved.
11. The contractor does not have budgets beyond the current year to support indirect expense rates proposed for future years (but see this posting).

Just because the auditor reports these deficiencies, does not mean the audit will be terminated. The contracting officer often requests the auditor to do the best he/she can under the circumstances. The auditor usually will acquiesce to the contracting officer's wishes but will issue a an adverse opinion report (e.g. the proposal is not acceptable as a basis for negotiating a fair and reasonable price).

Additional Data Provided at Negotiations

After submitting a proposal, contractors have a continuing responsibility to provide current, complete, and accurate cost or pricing data right up until the date of agreement on price. Realistically, most of the updated data is provided just before or during contract negotiations rather than piece-mealed. Many things can change between the time the proposal was submitted and when negotiations begin. The pay raise that was projected for proposal purposes might have become historical data by the time of negotiations. Indirect rates could have changed. Perhaps there were some updated vendor quotations or subcontractor estimates. Or perhaps, because of other circumstances, that thing you were going to build in-house must now be outsourced. All of these events are cost or pricing data and must be disclosed to the Government (and certified to) prior to the date of agreement on price.

If the contracting officer requested an audit of your proposal and the audit resulted in significant findings, there is a strong likelihood that the auditor will participate in negotiations to answer questions about audit rationale/computations. Where significant updates were provided after the audit was completed, the contracting officer might also request the auditor to assess the propriety of the additional data provided. This may include, for example, providing advice on the contractor's rationale for a revised estimate, verifying data to the contractor's books and records or other supporting data, or running various Government position scenarios using the data through audit report schedules and underlying spreadsheets, where appropriate.

There is a fine line between supporting the negotiations process and performing additional audit work. The auditor will need to exercise some judgment here and there may be situations where he/she cannot comment on the updated data because of its significance relative to the proposal that was audited. Sometimes the auditor will have to back off and recommend the contracting officer request a supplemental audit.

Sometimes, with particular data, contractors think their chances of explaining its impact are better with the contracting officer then with the auditor so they withhold data from the auditor with the intention of providing it to the contracting officer at negotiations. Don't do that. If an auditor attends negotiations and finds that the contractor furnished data that should have been disclosed during the audit, it will not enhance your position and could very well lead to a referral for investigation.

Auditor Jargon Part 5 - SIC

Today we conclude our week-long series on helping you understand some of the terminology used by auditors, particularly Government contract auditors. Today's word is really an acronym but it has evolved into a word through common usage. If you hear the word "SIC" your antennas should go up.

Suspected Irregular Conduct (SIC) is the auditor's euphemism for potential fraud, waste or abuse.  All auditors, not just Government auditors, are required by professional standards to consider the existence of fraud in all engagements. It is not their primary job to ferret out fraud, waste, and abuse, but they do need to consider conditions or internal control weaknesses that could make a company susceptible to fraud.

Until a year or so ago, whenever Government auditors had a suspicion that fraud, waste, or abuse had occurred, they referred the matter to a manager for review. If the manager agreed with the auditor's concern, the matter would be referred for investigation. Most of these referrals never made it past the manager's desk because they did not rise to the definitional level of fraud, waste or abuse. Many were based on auditor inexperience, incompetence, or emotion. Adding review steps to the process allowed common sense to prevail most of the time.

About a year ago, after some well-publicized stories about management inappropriately refusing to refer suspicions for investigation, the Government changed its policy to allows auditors to submit their allegations directly to one of the Government's investigative agencies. We don't know how this is working out. It probably increases the investigators workload somewhat. From a contractor perspective however, these referrals could complicate life immeasurably if the investigators come knocking. If you hear the word "SIC" bandied about, be wary and ask questions.

Auditor Jargon Part 4 - Uniformity and Consistency

Today we continue our week-long series on helping you understand some of the terminology used by auditors, particularly Government contract auditors. These auditors, like any profession, have their own manner of specialized speaking. Today we look at the terms "Uniformity" and "Consistency".

At first blush, it seems like the words uniformity and consistency are synonyms. They could be under some circumstances but these terms have very precise meanings when it comes to cost accounting.

Uniformity relates to comparison of two or more accounting entities. The FAR Councils' and the CAS Board's objective in this respect is to achieve comparability of results of entities operating under like circumstances. While everyone recognizes the impracticality of defining or attaining absolute uniformity, largely because of the problems related to defining like circumstances, the Government will nonetheless, seek ways to attain a practical degree of uniformity in cost accounting practices. This is evidenced in practices related to depreciation or pension plan valuations.

Consistency pertains to the use by one accounting entity of compatible cost accounting practices which permit comparability of contract results under similar circumstances over periods of time. Essentially, consistency relates to the allocation of costs, both direct and indirect, and to the treatment of cost with respect to individual cost objectives as well as among cost objectives in like circumstances. Auditors typically pick up inconsistencies in cost accounting practices within an organization very quickly and when they do, they will make an assessment as to whether the Government's interests are harmed as a result.

Auditor Jargon Part 3 - Full Costing

We have been discussing some of the more unusual terms that auditors tend to throw out there and expect everyone to understand what they're talking about. Auditors, like any profession, have their own manner of specialized speaking. Today we look at the phrase "full costing".

In short, the "full costing" concept requires that you leave "unallowable" costs in the base for computing indirect rates - you don't remove unallowable costs first. Both FAR and CAS requires that when developing indirect rates, you identify a base that best expresses a causal and/or beneficial relationship between the costs being allocated and the base over which the allocation is made. Once you identify the appropriate bases, it would be inappropriate to remove part of the base, such as removing unallowable costs, because then the base is no longer the best expression of that relationship.

Here's the CAS Board's position on Full Costing.

Under the full costing concept, all costs initially allocated to intermediate cost objectives must be subsequently reallocated to final cost objectives. For this purpose, a final cost objective may be established to include unreasonable costs or costs unallowable for other reasons. The bases selected for allocating costs from intermediate cost objectives to final cost objectives are the devices used to associate costs with final cost objectives. If the base selected is a reasonable measure of the relationship between the cost and the cost objectives, the cost will be reasonably allocated to such cost objectives. The Board has referred to this conceptual relationship in the Standards as the beneficial or causal relationship between costs and cost objectives. In addition to the expression of this concept, the Cost Accounting Standards define in appropriate circumstances what criteria should be used to select the allocation base that best expresses this conceptual relationship.

Auditor Jargon Part 2 - Defensible

We are spending a few days discussing some of the more unusual terms that auditors tend to throw out there and expect everyone to understand what they're talking about. Auditors, probably as in any profession, have their own manner of specialized speaking. Today's word is "defensible".

This word is used to describe a particular position taken on a cost item. Very often, a contractor's position or an auditor's position vis-a-vis certain costs are based on a combination of facts and judgment. An auditor reviewing all the underlying data, logic, and rationale on a particular cost will make a judgment about the reasonableness of that position. If the position is reasonable the auditor might say that it is "defensible". It is also used among auditors to assess whether their own contrary position might be reasonable. In discussing the merits of their position, auditors will ask whether it is defensible, meaning would it withstand the scrutiny of an independent outside party looking at the same set of facts and assumptions? When both the contractor and the auditor have ostensibly "defensible" positions, arguments arise over whose position is most defensible.

Suppose you're estimating costs and you know that the project you're bidding on is slightly more difficult than previous projects. You need to add a factor to historical costs to account for the higher complexity. But how do you estimate that? You could add 10% based on some kind of judgmental estimate but the Government would probably term that position as indefensible - there is nothing to support that factor. That doesn't mean you won't win the Government over to your position during negotiations. It simply means that the auditors will unsupport the cost because it is not defensible - there is no support for it.

Auditor Jargon Part 1 - Verifability

If you have been around Government auditors for any amount of time, you probably noticed that they have their own manner of specialized speaking - auditor parlance or auditor slang, whatever you want to call it. For example, "current, complete, and accurate" has a precise meaning when used in context of determining the adequacy of cost or pricing data. And, the terms "allowable, allocable, and reasonable" have a precise meaning when used in determining the propriety of costs charged to Government contracts. These phrases/terms are common enough and not exclusive to the audit profession. But there are others where the meanings are not so obvious. For the next few days, we will unpack the meaning of some of these. Today's word is "verifiability".

Contract cost accounting systems should provide for verifiability to the greatest extent practical. In other words, contract costs should be auditable by examination of appropriate data and documents supporting whatever costs are being reviewed, or by reference to the facts and assumptions used to allocate the costs to the contract (e.g. bases and pools for determining and allocating indirect costs). Verifiability is generally accepted as an important goal for information used in cost accounting. When auditors use the term verifiability, they are usually assessing whether a certain cost can be traced back through the cost accounting system to original source documents.

As far as we know, the term "verifiability" is not in the FAR. However, the Cost Accounting Standards Board (CASB) discusses it in its "Statement of Objectives" -  "...only such detail of cost allocation and record keeping should be required as is necessary to provide the verifiability that is needed to satisfy regulatory contract cost audit requirements and that detailed contractor accounting records of contract costs should be reconcilable with the general books of account.

So, an auditor testing for "verifiability" is simply making sure that you are able to trace those costs back to your formal cost accounting system.
but there are others that you probably heard some words and terms

Can an Item be Charged Both Direct and Indirect?

Conventional wisdom says that you cannot charge a cost both direct and indirect. This is true to a certain extent because that would result in double counting. FAR (Federal Acquisition Regulations) and CAS (Cost Accounting Standards) require that each type of costs be allocated only once on on one basis to contracts and other final cost objectives. So, for example, you wouldn't charge QC labor direct to a Government contract but charge QC labor for commercial contracts to an indirect rate pool because then, the Government contract would be charged twice, once direct and once indirect. Some contractors take this idea a little too far, however, and try to force employee's into either direct or indirect. The requirements focus on "types" of costs, not categories of costs. So, QC labor is different than Management labor and both are different than Bid and Proposal labor. It is common, especially among smaller companies, for employees to wear multiple hats. One employee, in a given day, might charge work to a contract (direct), perform sustaining engineering effort (could be direct or indirect), work on a proposal for new work (indirect) and supervise some staff (indirect). Obviously, a good timekeeping system is necessary to accurately track, accumulate, and distribute these labor costs to the proper direct or indirect bucket.

For CAS covered contractors, these charging practices must be documented in a disclosure statement. But even for non-CAS covered contractors, we recommend documentation. It clarifies things for employees, ensures consistent practices, and will help when supporting incurred cost proposals or forward pricing proposals.

There are other situations, besides labor, where it would be appropriate to charge costs both direct and indirect. CAS gives a good example concerning fire protection. A contractor charges fire protection indirect but a contract requires fire protection services over and above what the contractor normally provides. The "over and above" effort can be charged direct while the normal services continue as an indirect charge. Security guard services is a similar example that we see or hear of quite often - especially in classified contracts.