Some New Year's Advice

Decrement Factors

The term "decrement" as used in Government contracting refers to the amount of a reduction or price reduction. It is most commonly used as an estimating technique for subcontract costs. For example, a decrement factor may represent a percentage by which a subcontractor has agreed to past quoted prices. When estimating subcontract costs, contractors apply the decrement factor to subcontractor quotations or proposals because they know, based on historical experience, that the final subcontract price is always lower than the proposed price.

While decrement factors are common in estimating procedures, it is not the preferable method of evaluating subcontract costs. Prime contractors are required to perform cost or price analysis of subcontract costs included in their proposals. Sometimes situations arise that make it difficult or impossible for contractors to complete their cost or price analysis by the time it is needed to negotiate the prime contract. In those cases, decrement factors might be a viable option.

DCAA (Defense Contract Audit Agency) guidance directs auditors to review the methodologies used by contractors in arriving at subcontractor price reductions, to ensure that the data used for decrements were reasonably accurate, current, and representative. The guidance explains that information concerning patterns of reductions from quotes to actual prices paid may be useful in evaluating a cost estimate.

When developing decrement factors, some contractors calculate decrements for each subcontractor. Others pool their subcontractor history and calculate a factor to be used across the board. If you plan to use decrement factors in your estimating system, be prepared to justify your methodology.

Subcontract Price/Cost Analysis

When Government contractors (or prospective Government contractors) include subcontracts as part of their proposal, they have an affirmative duty to ensure that the proposed subcontract prices are fair and reasonable. This usually means that the contractor will perform some kind of cost or price analysis of the subcontractor proposal. The Government has a pretty good idea of what it takes to perform adequate subcontractor cost/price analyses - they perform them all the time at the prime contract level. There is a general expectation that prime contractors will apply the same procedures in evaluating subcontract prices as the Government does when evaluating prime contract prices.

An adequate estimating system will include policies and procedures related to subcontract cost/price analyses. In assessing adequacy of those policies and procedures, the Government will look for requirements to

• conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices
• include the results of these analyses in its own price proposal
• when required in accordance with FAR 15-404-3(c), submit subcontractor cost or pricing data to the Government as part of its own cost or pricing data.

Adequate and timely subcontract cost/price analysis is critical to the negotiation of fair and reasonable prime contract prices. For this reason, the contractor should have policies and procedures in place to accomplish such analyses prior to the submission of its own cost or pricing data.

Due to time and other constraints, the contractor may be unable to perform a detailed price/cost analysis prior to submission of its own cost or pricing data. In these instances, the contractor's policies and procedures should require that a plan be in place to complete the required analysis and provide it to the Government negotiator prior to negotiation of the prime contract price.

In some exceptional cases, the contractor may be unable to obtain adequate cost or pricing data and/or perform the required analysis prior to negotiation of the prime contract price. Regardless of the circumstances, the prime contract still has the responsibility for demonstrating fair and reasonable subcontract pricing. The contractor's policies and procedures should provide for the timely identification f such circumstances and submission of a request, to the contracting officer, to be excused from the submission of subcontractor cost or pricing data and related analysis. This request should be supported by

• the explanation as to why the data and analysis cannot be submitted in a timely manner, and
• an alternate analysis such as application of a negotiation reduction factor based on the historical difference between the initial subcontractor proposed amount and the ultimate negotiated amount.

Difference Between Statutory, Regulatory, and Contract Requirements

We often throw around terms like "statutory requirements", "regulatory requirements", and "contract requirements". Often times, these terms are used interchangeably and sometimes imprecisely.

The fundamental difference is that statutes are enacted by Congress and signed into law by the President whereas regulations are issued by executive agencies in order to implement statutes enacted by Congress. An example of a statute would be Public Law 87-653, The Truth in Negotiations Act. An example of a regulation would be FAR Part 31 Cost Principles. Regulations must be consistent with the enabling statute and the agency must follow the rule making process of the Administrative Procedures Act (i.e. publication of proposed regulation, public comment, final regulation). Regulations have the "force and effect of law" meaning they are just as enforceable as statutes.

From a practical matter then, it makes no difference to a Government contractor whether a requirement flows directly from a statute or whether it flows from a regulation implementing a statute. The contractor must comply either way.

"Contract Requirements" can be statutory, regulatory, or something else. Government contracts are full of regulatory and statutory requirements as well as requirements that are specific or unique to the particular contract. For example, a contract might require contractors to advise the contracting officer when making key personnel moves. Such a requirement has no basis in statute or regulation but is no less enforceable under the contract.

"Close of Business" Means 4:30 p.m. Local Time

Offerors are responsible for submitting proposals, and any modifications or revisions, so as to reach the Government office designated in the solicitation by the time specified in the solicitation. The Government is usually consistent and quite firm in rejecting late bids. While application of the late proposal rules may sometimes seem harsh, the rules are aimed at ensuring equal treatment of all offerors, and promoting confidence in the competitive system, thereby protecting the integrity of the procurement process. The rationale underlying strict application of the late proposal rules is to prevent even the slightest possibility of any offeror gaining an unfair competitive advantage by being able to make material changes in its offer after the cutoff date and time.

When the solicitation does not specify a specific time, FAR 52.215-1(c)(3) specifies that the time for receipt is 4:30 p.m. local time for the designated Government office on the date that proposal or revision is due.

In a recent bid protest, a losing bidder appealed the Government's award to a competing offeror whose bid was received after 4:30 p.m. but before the office closed for the day at 5:00 p.m.. The solicitation did not specify a certain time, only that offers be received by close of business. Since a specific time was not specified in the solicitation, the provisions of FAR 52.215-1(c)(3) applied - 4:30 p.m. The bid protest was sustained.

In this case, the contracting officer had sent an e-mail to the eventual winning bidder authorizing the firm to submit up to 5:00 p.m. GAO ruled that the contracting officer's e-mail, which was sent only to one offeror, cannot be considered an amendment to the solicitation's due date and the offeror acted unreasonably when it relied on the informal advice of a contracting officer, rather than following the solicitation's instructions. The contracting office lacked the authority to accept the late proposal. Offerors who rely on such informal advice do so at their own risk.

Merry Christmas from Pacific Northwest Consultants

To all of our readers and clients, we wish you a very Merry Christmas.



Bill, Paul, Ron, and Terry

CAS Board Makes Threshold Rule Final

The CAS Board (Cost Accounting Standards) published a final rule today that revises the threshold for the application of CAS from $650 thousand to "the Truth in Negotiation Act (TINA) threshold. The change is being made because the CAS applicability threshold is statutorily tied to the TINA threshold. So, whenever the TINA threshold changed, the CAS Board would have to initiate a rule making process to change the CAS applicability threshold. Now, by replacing specific dollar amounts from the CAS regulations (48 CFR Part 99) with a reference to the TINA threshold (41 USC 1908 and 41 USC 1502(b)(1)(B)), the CAS Board will greatly reduce the need for future revisions to its rules.

The TINA threshold is currently set at $700 thousand.

Push to Ensure Contractor Performance Data is Posted in a Timely Manner

This week we have been discussing provisions in the 2012 NDAA (National Defense Authorization Act) that recently passed both Houses of Congress and is expected to be signed by the President. On Monday, we discussed the extension of the compensation cap to all contractor employees and on Tuesday, we discussed the new requirement for DCAA to report on "significant problems, abuses, and deficiencies". Today we are going to look at contractor performance data.

For a long time, there has been concern over the presumption (perhaps factual) that contractor performance data is either not prepared or not entered into databases that the Government uses to make source selection decisions. The 2012 NDAA will require that DoD develop a strategy for ensuring that timely, accurate, and complete information on contractor performance is included in past performance databases used for making source selection decisions.

The strategy required by the NDAA must, at a minimum,

1. establish standards for the timeliness and completeness of part performance submissions,
2. assign responsibility and management accountability for the completeness of past performance submissions for such purposes, and
3. ensure that past performance submissions are consistent with award fee evaluations in cses where such evaluations have been conducted.

The Act directs DoD to amend the FAR (Federal Acquisition Regulations) to require:

1. that affected contractors are provided, in a timely manner, information on contractor performance to be included in past performance databases
2. that such contractors are afforded up to 14 days to respond
3. that agency evaluations are included in the relevant past performance databases within 14 days after that.

This is a fairly tight timeline and does not afford contractors much time to prepare responses to any "negative" past performance determinations.

Defense Contract Audit Agency's Annual Report

Yesterday we discussed a provision included in the 2012 NDAA (National Defense Authorization Act) that extended the compensation cap from the top five senior executives to all contractor employees. There is another provision that will be of interest to Government contractors - one that requires DCAA to prepare an annual report of the activities of the Agency during the previous fiscal year.

The annual report must include, at a minimum,

• a description of significant problems, abuses, and deficiencies encountered during the conduct of contractor audits:
• statistical tables showing the total number of audit reports completed and pending, the priority given to each type of audit, the length of time taken for each type of audit, the total dollar value of questioned costs, and an assessment of the number and types of audits pending for a period longer than allowed pursuant to Agency guidance.
• a summary of any recommendations of actions or resources needed to improve the audit process
• any other matters considered appropriate.

The report must be submitted within six months after the close of the fiscal year and must be made public within 60 days after that.

Its is the first bullet that should concern contractors because it will require the exercise of judgment in determining "significance" and some definitions for "problems", "abuses", and "deficiencies". Although we don't expect that contractors will be specifically named in the report, the names of miscreants tend to somehow become public anyway. It is also more likely than not that this information will be included in the Government's past performance databases for source selection decisions.

Compensation Limits on Senior Executives will be Extended to All Contractor Employees

The 2012 National Defense Authorization Act (NDAA) which has passed both Houses of Congress and is expected to be signed by the President, contains a provision that will extend the applicability of the senior executive benchmark compensation amount from the top five senior executives to "any contractor employee". The compensation cap is currently set at $700 thousand. This new provision is effective on compensation incurred after January 1, 2012 for contracts entered into "before, on, or after the date of the enactment of this Act".

This new statute applies only to DoD contracts so its possible that contractors with both DoD and non-DoD contracts could have different indirect rates for different contracts.

Some contractors have argued that such limitations will impair their ability to attract and retain qualified individuals. In response to this concern, Congress added a provision that allows the Secretary of Defense to establish one or more narrowly targeted exceptions for scientists and engineers upon a determination that such exceptions are needed to ensure that the DoD has continued access to needed skills and capabilities.

Updated Checklist for Determining Adequacy of Incurred Cost Proposal

DCAA (Defense Contract Audit Agency) recently updated its checklist for determining the adequacy of contractors' annual incurred cost proposals. This represents a major and more comprehensive update to the previous checklist and the first revision since FAR 52.216-7 was revised last June. That particular FAR revision was the first time that "adequacy" was defined in Regulations.

It will be interesting to see how auditors use this checklist to determine adequacy. Although the checklist cautions auditors to use "professional judgment in determining whether any specific missing/inadequate data or combination of missing/inadequate data is sufficient enough to warrant the submission as inadequate", there are many elements of the checklist that are not required by regulation. For example, checklist item E concerning indirect cost allocation bases (first bullet) states "Ensure an explanation of each base is included." The Regulation does not require "explanations" of bases and pools in order for an incurred cost proposal to be considered adequate. Or item M concerning decisions, agreements, approvals, and descriptions of accounting/organizational changes, the checklist states that contractors are required to provide a negative response if not applicable. The Regulations however, make no such requirement.

All things considered however, contractors preparing annual incurred cost proposals would do well to use this revised checklist to perform its own self-assessment prior to submission. It should help reduce the number of instances proposals are returned as inadequate.

Thursday Morning Humor

Complying with EEO Requirements

For the past few days, we have been discussing the basic EEO requirements for small Government contractors.  It is important for contractors to be aware of the requirements and to implement policies, procedures, and practices that will reduce the risk of noncompliance. There are a number of actions a contractor might take to ensure that its employment practices are not limiting the employment opportunities of the members of any gender, race, or ethnic group. Here are two such practices.

Recruit to Attract Qualified Candidates. Government contractors must ensure that its recruiting efforts reach all qualified applicants. To do this, companies need to identify as many "recruitment sources" as possible, especially those for women and minorities. After identifying these sources, call or send letters telling them about job openings and invite them to send qualified applicants your way. Then, monitor those sources to determine whether they, in fact, sent any applicants for your job opening(s).

Audit your Employment Practices to Prevent Discrimination. Employers that periodically perform self-audits of their employment practices are much better able to avoid employment barriers and ensure that they are providing equal opportunity for applicants and employees. There are three kinds of self-audits that small Government contractors can perform:

1. Self-audit before or shortly after you make an employment decision, such as a firing or promotion decision. This audit focuses on employment qualifications or standards used in making various employment decisions and how women and minorities fared in those decisions. This generally involves a comparison of applicants or employees who are competing for a particular job or promotion or to retain a particular job.
2. Self-audit where female and minority workers are or are not within your organization. Review where the female and minority employees work within your organizational structure. A helpful way to do this is to identify the gender, race, and ethnicity of each employee for each job within each department on an organizational chart. Look for concentrations of female or minority employees, especially in lower-paying jobs. Similarly, look for areas where female and minority employees seem to be absent or poorly represented, especially in higher-paying jobs. Also, look at the ways employees are promoted from lower ranking jobs to the higher-ranking jobs.
3. Self-audit the way your personnel decisions, like hiring, have affected women and minorities over a longer period of time (e.g., a quarter or year). This audit uses statistics and works well when you are reviewing a number of employment decisions made over a period of time.

Wednesday Morning Humor

Basic EEO Requirements for Small Businesses with Federal Contracts - Part IV

According to the OFCCP (Office of Federal Compliance Programs) and based on the requirements of Executive Order 11246 (as amended), there are six basic EEO requirements for small businesses with Government contracts. In the first three parts of this series, we discussed five of them - do not discriminate, post EEO posters, add tag lines to employment advertising, keep records, and permit OFCCP access to your books and records, when requested. The sixth item is a requirement to file an annual EEO report.

The Standard Form 100, Employer Identification Report (EEO-1 Report) requires that employers report on the number of employees by race, ethnicity and gender for each of ten job categories. These categories include:

• Executive/Senior level officials and managers
• First/mid-level officials and managers
• Professionals
• Technicians
• Sales workers
• Administrative support workers
• Craft workers
• Operatives
• Laborers and helpers
• Service workers

It is sometimes challenging to figure out which employees go to which category. Most companies now have HR (Human Resources) software that includes fields to collect and report on this information.

The EEO-1 report is filed annually, not later than September 30th.

This report must be files by all private employers that have more than 100 employees. However, for Government contractors, the number of employees drops to 50 employees and a $50 thousand contract.

Basic EEO Requirements for Small Businesses with Federal Contracts - Part III

We're continuing our series on EEO requirements for Small Businesses. These requirements originate from Executive Order (EO) 11246. This EO has been around since 1965 but has also been amended several times. The full EO as amended can be viewed here.

The fourth basic EEO provision for small Government contractors is a requirement to maintain records. These are primarily HR (Human Resources) records and would typically include:

• Job descriptions
• Job postings and advertisements
• Records of job offers
• Applications and resumes
• Interview notes
• Tests and test results
• Written employment policies and procedures
• Personnel files

These records must be maintained for a period of two years after the creation of the record or the personnel action, whichever comes later. Contractors with fewer than 150 employees or a contract of less than $150 thousand have a one-year record retention period.

The fifth basic requirement is perhaps the most obtrusive. Small businesses with Government contracts must permit OFCCP (Office of Federal Compliance Programs) access to books and records during a compliant investigation or compliance evaluation.

Although compliant investigations and compliance evaluations are infrequent, there is always the possibility that your firm could be selected. When a complaint is filed against a Federal contractor, or when a Federal contractor is selected to undergo a compliance evaluation, the contractor is obligated to allow OFCCP access to its premises for the purpose of conducting an on-site investigation. The contractor must permit OFCCP to inspect and copy the books and records that may be relevant to the matter under investigation and pertinent to compliance with the requirements of Executive Order 11246.

Basic EEO Requirements for Small Businesses with Federal Contracts - Part II

Last week we began this short series on EEO for small Government contractors. We listed he six basic EEO requirements and then expanded on the first of those, don't discriminate. Now the discrimination prohibition might seem intuitively obvious to most but its sometimes possible to discriminate without realizing its happening as we discussed in Part I.

The second basic requirement involves the EEO poster. Federal contractors are required to post OFCCP's (Office of Federal Compliance Programs) Equal Employment Opportunity Poster in a conspicuous place. A good place to post it is in a locker room, lunch room, or an area where employees take breaks. Its a simple thing to do and doesn't cost the company anything. We know of one case (and there are probably many) where a disgruntled employee reported his employer for failing to display an EEO poster.

You can obtain the EEO poster by contacting your OFCCP office or download one directly at http://www.dol.gov/ofccp/regs/compliance/posters/ofccpost.htm.

The third basic EEO requirement for Government contractors involves employment advertising. Federal contractors are required to state in all solicitations or advertisements for employment that all qualified applicants will receive consideration for employment without regard to race, color, religion, sex, or national origin.

Tomorrow we will continue this series with the record keeping requirement.

Basic EEO Requirements for Small Businesses with Federal Contracts

Executive Order (EO) 11246 prohibits employment discrimination by Federal contractors and subcontractors and federally-assisted construction contractors and subcontractors. It also requires them to take affirmative action to ensure that all individuals have an equal opportunity for employment without regard to race, color, religion, sex, or national origin. Generally, EO 11246 applies to contractors with 50 or more employees and a Government contract or subcontract greater than $50 thousand. The Department of Labor, Office of Federal Contract Compliance Programs (OFCCP) has been tasked to administers and enforce the Executive Order.

The basic EEO requirements of a Federal contractor are these:

• Don't discriminate
• Post EEO posters
• Include EEO tag line in employment advertising
• Keep records
• Permit OFCCP access to books and records during a compliance evaluation or a compliance investigation.
• File an annual EEO-1 report. 

We will look at each of these requirements in more detail over the next few days.

Don't Discriminate: Employment discrimination takes different forms. Employment discrimination is illegal and generally results when a person is treated differently (usually less favorably) because of his or her race, color, religion, sex, or national origin. In addition, employment discrimination can result when a neutral policy or practice has an adverse impact on the members of any race, sex, or ethnic group and the policy or practice is not job related or required by business necessity.

Here's an example where a "neutral policy" resulted in discrimination. Company A needed to hire entry-level laborers. The jobs required heavy lifting and physical exertion, but did not require any technical skill. The company however had a policy that required all employees to have a high school diploma so it automatically excluded applicants who had not finished high school.

The high school diploma requirement however disqualified a greater number of Hispanic candidates for the labor jobs than Non-Hispanic White candidates. According to census data for that particular location, 94 percent of the white population had high school diplomas while only 47 percent of the Hispanic population had completed high school. When Company A could not provide a business justification for using the high school diploma requirement, OFCCP ruled that they had engaged in prohibited discrimination.

Solicitations and Offers

Here's a short primer on two terms - "solicitation" and "offer" - as used in Government procurement. Certain terms have specific meaning but are often used interchangeably and/or incorrectly.

The term "solicitation" in the context of Government procurement is a generic term that is used to describe requests to submit offers or quotations to the Government.

• Solicitations under Simplified Acquisition Procedures are called RFQs (Request for Quotation).
• Solicitations under Sealed Bid procedures are called IFBs (Invitation for Bid).
• Solicitations under competitive or negotiated procedures are called RFPs (Request for Proposal)

The term "offer" means a response to a solication that, if accepted, would bind the offeror to perform the resultant contract.

• Responses to RFQs are called "quotations".
• Responses to IFBs are called "bids" or "sealed bids"
• Responses to RFPs are called "proposals"

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On a related note, if you ever need to look up a military acronym or definition, one of the best websites we have found for that purpose is military-dictionary.org.

Contractor Cost Data Reports (CCDRs)

Most, but not all DoD contracts have specific cost reporting requirements that go beyond the cost summaries submitted with provisional billing and progress payment requests. Generally, the larger the contract, the more likely it is that the Government will required cost data in specific formats. The requirements and formats for this data has evolved over the years. In its current iteration, the collection requirements are known as the CCDRs or Contractor Cost Data Reports.

The purpose of the CCDR system is to serve as the primary cost database for most DoD cost estimating efforts. DoD components use the data collected in the CCDR system to:

• Prepare program cost estimates for major system acquisition programs
• Develop independent Government cost estimates in support of cost and price analyses and to estimate future contract costs; and
• Develop estimates to support long range planning efforts.

Detailed guidance related to CCDRs is contained in DoD Manual 5000.4-M-1, the Contractor Cost Data Reporting (CCDR) Manual.

Specific reporting requirements are based on a contract's designated acquisition program. There are four categories of programs.

• Category I - all major defense acquisition programs that are estimated to require an eventual total research, development, test, and evaluation (RDT&E) expenditure of more than $365 million, or an eventual total procurement expenditure of more than $2.2 billion in constant fiscal year 2000 dollars. Note, these are not annual amounts or contract values. These are total program outlays. Also, the Government can designate other programs as Category I based on "special interest".
• Category IA - all major automated information systems that are estimated by the DoD component head to require program costs (all appropriations) in any single year in excess of $32 million, total program costs in excess of $126 million, as well as other programs designated as Category IA due to special interest.
• Category II  - all major systems not meeting the criteria for Category I, but estimated to require an eventual total expenditure for RDT&E of more than $140 million, or an eventual total procurement expenditure of more than $660 million in constant fiscal year 2000 dollars and other programs designated as Category II due to special interest.
• Category III applies to programs not meeting the criteria for Categories I, IA, or II.

For contracts falling into Category I and IA, CCDRs are required when the contract (or subcontract) value exceeds $50 million in constant fiscal year 2002 dollars, regardless of contract type. CCDR reporting is not required for contracts priced below $20 million in constant fiscal year 2002 dollars. The CCDR requirement on high-risk or high-technically-interest contracts priced between $20 and $50 million in constant fiscal year 2002 dollars is left to the discretion of the Government.

Contracts under Categories II and III acquisition programs, meeting the Category contract dollar thresholds for CCDR reporting, also require CCDR reporting. However, specific program reporting requirements are left to the discretion of the military services. The level of detail and frequency of reporting for Category II and III programs is normally less stringent than the level of detail and frequency required for Category I programs.

DoD's New Proposal Adequacy Checklist - Part II

Yesterday we told you that DoD had published a draft proposal adequacy checklist. This checklist will become  a regulation and part of the DoD FAR Supplement (DFARS), once adopted as final. We also mentioned that the draft checklist is similar, but not identical to, the checklist that DCAA (Defense Contract Audit Agency) has up on its public website. DCAA has been known to use its checklist punitively - if a proposal does not meet each applicable checklist criteria, DCAA sometimes returns the proposal and audit request back to the contracting officer stating that the proposal is unacceptable for audit. Often times, "deficiencies" are in the eyes of the beholder and identification of significant or material deficiencies require exercise of sound judgment. This practice by DCAA has greatly frustrated contracting officers who need to award contracts in a timely manner. By making the checklist a regulation to be completed by contractors (when requested by the contracting officer), DoD is effectively cutting DCAA out of the proposal adequacy determination business. Of course, DCAA could still assess a proposal as inadequate but it would be a much tougher sell to a contracting officer if the offer has previously "self-assessed" its own submission.

We compared the two checklists and noted a few differences. Items appearing in the DoD checklist that do not have a corresponding criteria in the old DCAA checklist include:

• Item #17. Does the proposal include a description of supplies or services and the basis on which the supply or service meets the Government's requirements?
• Item #34. If covered by the Service Contract Labor Standards statute, are the rates in the proposal in compliance with the minimum rates specified in the statute?
• Item #43. Is proposed fee in accordance with statutory guidance?
• Item #45. If the offeror is proposing Performance-Based Payments have they provided an expenditure profile, proposed events and their projected dates, proposed values for each event, completion criteria, and identification of which events are severable or cumulative?

Items appearing in the DCAA checklist that do not have a corresponding criteria in the new DoD checklist include:

• Item #4. Is the proposal mathematically accurate and does the supporting data reconcile to the proposal?
• Item #26. Are the Basis of Estimates (BoEs) included for all labor hours with detailed rationale (i.e. historical experience, engineering estimates, learning curves, basis for cost estimating relationships (CERs)) to support the estimates.
• Item #32. In the case of a letter contract, does the proposal identify actual hours, and cost incurred as well as hours/cost to complete and the time phasing associated with these hours/costs?

New Proposal Adequacy Checklist Coming from DoD

The Department of Defense just published a proposal adequacy checklist as a proposed rule under its FAR Supplement (DFARS). This checklist supports one of DoD's "Better Buying Power" initiatives by incorporating the requirement for a proposal adequacy checklist into the procurement regulations. As drafted, the proposed rule requires that contractors complete the checklist and submit it together with their proposals whenever cost or pricing data is required and at the discretion of the contracting officer.

The goal in requiring this checklist is to help ensure that offerors submit thorough, accurate, and complete proposals. By completing the new checklist, offerors will be able to self-validate the adequacy of their proposals.

The checklist includes 47 items divided into eleven sections:

1. General instructions
2. Materials and services
3. Subcontracts
4. Commercial item determinations
5. Adequate price competition
6. Interorganizational transfers
7. Direct labor
8. Indirect costs
9. Other costs
10. Formats for submission of line item summaries
11. Other

Many of the checklist items come verbatim from DCAA's proposal adequacy checklist which has been around for some time and which we have recommended contractors follow as part of their own internal controls. However, there are some differences that we will examine tomorrow. 

DoD May Outsource More of DCAA's Work

Last month, the GAO (Government Accountability Office), responding to a request from the Senate Armed Services Committee, issued a report on the effectiveness of DCMA (Defense Contract Management Agency). Based on its review, GAO identified certain on-going challenges that DCMA faces as it performs its mission. One of those challenges is the ability to maintain adequate staffing but the biggest obstacle the Agency faces is DCAA (Defense Contract Audit Agency). Specifically, GAO reported:

One significant source of external risk stems from DCMA's reliance on the Defense Contract Audit Agency (DCAA) to conduct audits of certain contractor business systems. Business systems--such as accounting and estimating systems--are the government's first line of defense against fraud, waste, and abuse. Because of its own workforce struggles, DCAA has lagged in completing a number of such audits and is currently focusing on other high priority areas.

GAO's recommendation to remedy this situation is for DoD to begin using external auditors to get the work done. Specifically, GAO recommended,

The Secretary of Defense should work with DCMA and DCAA to identify and execute options, such as hiring external auditors, to assist in conducting audits of contractor business systems as an interim step until DCAA can build its workforce enough to fulfill this responsibility.

DoD agreed. In its response to the GAO report, DoD stated: 

Concur. The Department will consider alternative approaches to audit contractor business systems.

Something seems amiss. DCAA has more auditors than it has had in a long time. but the DoD continues to realign workload away from DCAA (most proposal evaluations, purchasing systems, financial capability reviews, forward pricing rates, etc). Now, the Department is thinking about outsourcing audits of contractor business systems. The result is more auditors doing fewer audits.

You can read the full GAO report here.

No Word Yet on Executive Compensation Cap for 2011

FAR (Federal Acquisition Regulations) 31.205-6(p) limits the compensation paid to the five most highly compensated employees in management positions at each contractor home office and each segment under a home office. Compensation in this context includes salaries, wages, bonuses, deferred compensation, and company contributions to pension plans. The compensation cap is determined each year by the Office of Federal Procurement Policy (OFPP), a department within the Office of Management and Budget (OMB).

The 2010 ceiling of $694 thousand was posted by OFPP way back in April 2010. OFPP (despite urging from Congress) has not yet posted the ceiling for 2011. Nothing in our research has told us why that is. Most likely, the delay is motivated by political considerations.

In the meantime, there has been a number of other proposals to cap compensation levels. A couple of weeks ago, three Senators introduced legislation to cap compensation at $400 thousand and extend the cap to all employees, not just the top five most highly compensated. A House version set the cap at $700 thousand but also extended it to all employees. Earlier, the Obama Administration proposed a $200 thousand cap for top executives (presumably the five most highly compensated individuals).

Not surprisingly, the AFGE (American Federation of Government Employees) support the lower thresholds while industry trade groups (such as the Professional Services Council) oppose any lowering of the caps.

Government contractors need to watch these developments very carefully. Lowered caps could significantly affect the amounts that contractors can claim under cost-type contracts. If a $200 thousand cap becomes the law, many contractors will find that they must refund money to the Government.

For your information and use, here are the compensation caps since 2004.