Contractor Insurance/Pension Reviews (CIPR) - Risk Assessments

Last week we discussed a new provision that was added to the DoD FAR Supplement (DFARS) that required the Department to conduct CIPRs (Contractor Insurance/Pension Reviews) for contractors that had $50 million in qualifying sales in the previous year and where there is high risk to the Government. We stated then that we would continue the discussion with some of the factors that the Government considers in determining the level of risk. You can read our previous post here.

No set of canned risk assessment procedures or factors will be sufficient to assess the level of risk. The CIPR team must exercise a certain amount of judgment and common sense. The risk factors discussed below are like any other checklist - they are merely indicators that should be considered in assessing the overall risk and a tool in determining whether a CIPR is warranted. These risk factors were gleaned from information published by DCMA, the Executive Agency for conducting CIPRs.

High Risk

A high risk exists when there is a large likelihood that a significant cost is unallowable. This rating is appropriate where, for example:

• Segment Closing, Plan Merger or Spin-Off is anticipated or has occurred and the contractor maintains a defined benefit pension plan, self-insurance, and/or a reserve for a Post Retirement Benefit (PRB) plan;
• Forward Pricing Proposal has been submitted which includes a defined benefit pension plan, self-insurance or PRB plan;
• an Incurred Cost Audit is scheduled and the contractor has a defined benefit pension plan that is not fully funded;
• an Incurred Cost Audit is scheduled and the contractor maintains a reserve for funding a PRB plan;
• an Indemnification Agreement is to be reviewed and validated;
• the Qualifying Sales of a new or existing contractor reaches the $50 million threshold.
• A material change has occurred in the contractor's ratio for its Government-to-Commercial workload.

Moderate Risk

A moderate risk exists where there is medium likelihood that a significant cost is unallowable. This rating is appropriate where, for example:

• Forward Pricing Proposal has been submitted by a medium-size contractor with a fully funded defined benefit pension plan, or self-insurance, and the contractor also has been cited for minor non-compliances in the past;
• Forward Pricing Proposal has been submitted by a contractor with a defined benefit pension plan that is in full funding or is forecasted to reach full funding during the proposal period.
• an Incurred Cost Audit is scheduled for a contractor that maintains fully funded defined benefit pension plan; and
• a contractor maintains a self-insurance program that is experience rated.

 Low Risk

A low risk situation is one in which all costs and actions are likely to be allowable or, if they are unallowable, result in a minimal cost impact to the Government. This rating is appropriate where, for example:

• Forward Pricing Proposal has been submitted by a contractor that maintains only a defined contribution pension plan;
• Segment Closing has occurred and a contractor maintains only a defined contribution pension plan;
• an Incurred Cost Audit is scheduled and the contractor maintains only a defined contribution pension plan;
• a contractor does not sponsor a funded PRB plan; and
• contractor has relatively low incurred costs, does not maintain a defined benefit pension plan or self-insurance, and has not been previously cited for any non-compliances.  

Frequency of Risk Assessments

 

Guidance requires that risk assessments be performed at least once every other year. In practice, its not performed that frequently but may in the future given that the DoD Inspector General is monitoring this area more closely. Guidance also allows the Government to release the results of the risk assessments to contractors upon request. We recommend that contractors routinely request Government prepared risk assessments. We've seen cases where the Governmet's assessment was based on outdated and inaccurate data or faulty assumptions or other mis-used information.  Bringing that to the Government's attention could change the risk assessment rating.