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.

Cuts Coming in Management Support Service Contracts

Last summer, the OMB (Office of Management and Budget) announced a goal of reducing spending on management support service contracts across all agencies by 15 percent. Until recently however, we didn't know what this meant in terms of absolute dollars. Earlier this month, OMB provided that information.

According to OMB, the Federal Government spends about $44 billion a year on management support services such as engineering and technical services, acquisition planning, information technology services, and program management. Ten years ago, that figure was only $11 billion. Many of these contracts are awarded on a "time-and-material" basis which OMB believes put agencies at greater cost risk than when fixed price contracting is used. Also, OMB believes that magnitude of these contracted services creates a potential risk of overreliance on contractors for critical activities related to agencies' missions and operations. By September 30, 2012, OMB wants to reduce spending in this area by $6.7 billion.

To achieve this goal, OMB is requiring agencies justify in writing that their support service contracts are essential and the justification must be accompanied by "high level" approval. Agencies will also need to justify the contracting type used, if not firm-fixed price.

These reductions, if they actually happen, will have a significant and direct impact on many Government contractors, including small businesses who have benefited from support service contracting over the years.

Federal Government Wants to Improve Suspension and Debarment Procedures

The Federal Government pays over a trillion dollars a year to contractors and grantees, and has an ongoing fiduciary responsibility to protect American taxpayer resources and the integrity of the processes for Federal acquisition and for discretionary assistance, loan, and benefit programs.

The suspension and debarment remedy is one of the tools available for protecting taxpayer resources and the integrity of these processes from those contractors and recipients who are "non-responsible" (i.e. who lack business integrity because they have engaged in dishonest or illegal conduct or are otherwise unable to satisfactorily perform their responsibilities. The basic policies and procedures governing suspension and debarment in FAR 9.4 and are well-established and generally sound.

Suspension and debarment are similar but the time periods during which contractors are not eligible to contract with the Government differ. Suspension typically lasts twelve to 18 months. Debarment lasts up to three years. For more information on suspension and debarment, read our 4-part series from last July (Part I, Part II, Part III, and Part IV).

Some Federal agencies have long-standing and robust suspension and debarment programs. However, according to the Office of Management and Budget (OMB), many have failed to adequately use the suspension and debarment tools at their disposal or have failed even to maintain the most basic program capabilities required to suspend or debar non-responsible parties. A recent report by GAO found that fifty percent of agencies reviewed lacked the characteristics common among active and effective suspension and debarment programs; dedicated staff resources, well developed internal guidance, and processes for referring cases to officials for action. The OMB believes these deficiencies have put taxpayer resources at unnecessary risk of waste, fraud, and abuse.

To remedy this situation, OMB, this month, directed every Federal agency to take a series of actions including the appointment of a senior official to oversee the program, beef up internal policies and procedures, make sure contracting officers are reviewing relevant suspension and debarment databases before making awards, and fixing the things that don't work.

Late Proposal Submissions

When submitting proposals to the Government, it is absolutely imperative that offerors follow the solicitation instructions. Submissions arriving after the cut-off date, are rejected from consideration (see FAR 15.208). Additionally, it has been firmly and consistently established through numerous bid protests that it is the offeror's responsibility to deliver its proposal at the proper place and the proper time.

If a Government agency/organization/employee somehow contributes to the delay, there may be a basis for accepting a late bid. However, even in cases where the late receipt may have been caused, in part, by erroneous government action, a late proposal should not be considered if the offeror significantly contributed to the late receipt by not acting reasonably in fulfilling its responsibility (O.S. Sys., Inc., B=292827, Nov. 17, 2003).

In a recent bid protest decision involving an offeror whose proposal was rejected because it was late, the Comptroller General sided with the Air Force. An offeror delivered its proposal to a commercial carrier for delivery to the Air Force. The commercial carrier arrived at the gate in sufficient time to deliver the proposal to the proper place at the proper time, but chose not to enter the base at that time to avoid waiting in a long line. The GAO ruled that the paramount cause for the late delivery was not improper government action.

Offerors should always allow for delays, disruptions, and other encumbrances in their timeline and submission schedules. The Government is very unforgiving of late submissions.

To read the full decision discussed above, click here.

Forward Pricing Rates

Last January, DoD issued a memo that discussed the realignment of work between DCMA (Defense Contract Management Agency) and DCAA (Defense Contract Audit Agency). You can read more about that memo here. In a follow-up memo issued November 16, 2011, DoD adds clarification to its policy regarding forward pricing rates.

Back in January, DoD shifted responsibility for establishing forward pricing rates (indirect rates used by contractors and the Government to negotiate contracts) from DCAA to DCMA. The initial wording caused some confusion however by permitting contracting officers to use DCAA forward pricing rate audit recommendations as a basis for indirect rate recommendations provided to contracting officers (e.g. why would DCAA have rate recommendations when it is no longer in the business of auditing indirect rates?).

The new guidance makes it very clear that contracting officers are to obtain their indirect rate recommendations directly from DCMA. If new information comes along that suggests the rate recommendations require modification, the contracting officer should coordinate with DCMA - not DCAA - as to the impact on indirect rates.

Forward pricing rates was once one of the core competencies of DCAA. Unfortunately, organizational paralysis set in and DCAA is no longer able to provide timely and responsive audits to support contract negotiations. If this trend continues, DCAA will soon be relegated to the "dustbin of history".

Today is This Blog's Second Anniversary

Well, we made it through another year. Today we celebrate the second anniversary of this blog. Every working day for the past two years we have posted news and information pertaining to Government contracting. As an organization, PNWC's focus is to help government contractors (and potential government contractors) grow their business, increase profits, and comply with Government contracting rules and regulations. Readership (as measured by the number of "page views") has increased more than 50 percent from a year ago. We thank everyone for taking time to read our blog and for your comments as well. Suggestions are always welcome and if you are interested in a particular topic, feel free to suggest it. If we feel qualified to write on it, we will.

DoD Issues Final Rule on Accelerating Payments to Small Businesses

On November 18th, DoD amended its FAR Supplement by inserting a provision that formalizes its intention to accelerate payments to small business concerns (see DFARS 232.903). The provision does not specify a particular number of days. It merely states:

DoD policy is to assist small business concerns by paying them as quickly as possible after invoices and all proper documentation, including acceptance, are received and before normal payment due dates established in the contract.

Normal due dates are typically 30 days after receipt so small business concerns should expect to see reimbursements and payments in less than 30 days, and hopefully, significantly less than 30 days. The new rule did not change the interest provision on delinquent payments. Interest on late payments still begin after 30 days.

If you are a small business and payments are not received any sooner than they were in the past, you should contact your contracting officer for assistance.

New Representation Required for DoD Contracts

There are a number of statutory restrictions concerning post-Government employment for DoD officials after leaving Government employment. Mostly, these restrictions deal with improper business practices and personal conflicts of interest (see FAR 3.104, DFARS 203.104, and DFARS 203.171-3 for example).


DoD has just amended ifs FAR supplement to require companies submitting bids (including commercial items) to "represent" whether former DoD officials who are employees of the offeror are in compliance with these post-employment restrictions. The exact representation reads:

By submission of this offer, the offeror represents, to the best of its knowledge and belief, that all covered DoD officials employed by or otherwise receiving compensation from the offeror, and who are expected to undertake activities on behalf of the offeror for any resulting contract, are presently in compliance with all post-employment restrictions covered by .....

This rule implements a recommendation from GAO and requires offerors to complete and provide as part of each proposal, including proposals for commercial items, this representation. DoD elected to employ a "representation" rather than a "certification". The representation will be required one time (for each proposal) rather than continuously throughout contract performance. The provision will not be included in the annual representations and certifications.

Directly Associated Costs - Part II

Yesterday, we defined "directly associated costs" and described how directly associated costs related to unallowable costs, are also unallowable, if material (or significant). FAR provides some general criteria for assessing significance but a lot of judgment is still required in assessing materiality.

Contractors should be aware of and concerned that the Government's bent is to set the materiality threshold as low as possible so that they can disallow more costs thereby reducing the costs charged to Government contracts. Often times, the Government's position is not defensible in view of the FAR criteria. We know of cases where auditors positions relative to directly associated costs have not sustained by contracting officers (remember, auditors are advisory only and the contracting officer makes the final decisions).

As a general practice, contractors should review their unallowable costs from time to time and brainstorm for potential directly associated costs. Any costs directly associated with unallowable costs or activities should be set aside and charged to an "unallowable" account. However, remember the "but for" rule - the costs would not have been incurred had the other cost not been incurred. This suggests that fixed costs (as differentiated from variable costs) will seldom meet the definition of directly associated costs. And even if a particular fixed cost did meet that definition, it is unlikely that it would be material in amount.

Directly Associated Costs

Directly associated costs means any cost which is generated solely as a result of the incurrence of another cost, and which would not have been incurred had the other cost not been incurred (FAR 31.001).

Directly associated costs can relate to both allowable and unallowable costs (or activities). If related to unallowable costs, "directly associated costs" are also unallowable if material (i.e. significant) in amount (FAR 31.201-6). The concept of "materiality" often requires the exercise of judgment. In exercising this judgment, contractors must consider

• the actual dollar amount
• the cumulative effect of all directly associated costs in a cost pool, and
• the ultimate effect on the cost of Government contracts.

For example, FAR 31.201-6(e)(2) states that salary expenses of employees who participate in activities that generate unallowable costs shall be treated as directly associated costs to the extent of the time spent on the proscribed activity, provided the costs are material (except when such salary expenses are, themselves, unallowable). The time spent in proscribed activities should be compared to total time spent on compay activities to determine if the costs are material. That same FAR reference however cautions that time spent by employees outside the normal working hours should not be considered except when it is evident that an employee engages so frequently in company activities during periods outside normal working hours as to indicate that such activities are a part of the employee's regular duties.

Other examples of directly associated unallowable costs include:

1. Bad debts. Actual or estimated losses arising from uncollectible accounts receivable due from customers and other claims and any directly associated costs i.e., collection fees and/or legal costs associated with collection efforts are unallowable (see FAR 31.205.3).
2. Entertainment costs. FAR 31.205-14 states that cost of amusement, diversion, social activities, and any directly associated costs such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities are unallowable.
3. Lobbying costs. Pursuant to FAR 31.205-22, costs incurred in attempting to improperly influence (see FAR 3.401), either directly or indirectly, an employee or officer of the executive branch of the Federal Government to give consideration or to act regarding a regulatory or contract matter are unallowable. Employee(s) travel and/or administrative support costs directly associated with unallowable lobbying effort are also unallowable .

The Importance of Adequate Proposal Submissions

The following information has been extracted from the instructions that DCAA (Defense Contract Audit Agency) provides to contracting officers on the proper procedure for requesting audits. It is instructive for contractors (and prospective contractors) because essentially, DCAA will not audit a proposal that has inadequacies. DCAA would prefer that contracting officers first determine whether contractor proposals are adequate before they send out a request for audit. Offerors could find themselves out of a job if they don't pay attention to the fundamental requirements of FAR Part 15.

Before requesting an audit, offerors/contractors’ proposals, claims, or other submissions should be adequately supported. It is in the buying commands best interest to obtain adequate proposals and submissions in order to fully protect the Government’s interests, to ensure receipt of timely and effective audit services, and to assist in performing the necessary cost or pricing analysis required to attain a fair and reasonable contract price. It is in the contractor’s best interest to provide adequate proposals and submissions in order to obtain timely contract awards, ensure funding is not lost or transferred elsewhere, and to help adhere to applicable regulatory requirements. DCAA auditors are required to obtain adequate proposals/submissions prior to starting an audit. FAR 15.403-4 sets forth those circumstances in which contractors are required to submit certified cost or pricing data. FAR 15.408, Table 15-2 provides instructions for submitting cost/price proposals when cost or pricing data are required. The DCAA Forward Pricing Adequacy Checklist (located at http://www.dcaa.mil) is a valuable tool in assessing the adequacy of all types of offeror/contractor submissions.

Sleeter Group's Awesome QuickBooks Add-ons

If your company does not use QuickBooks Accounting Software, you can skip this post. If you're one of the thousands of Government contractors who use QuickBooks, the following may be of interest to you.

The Sleeter Group is the preeminent provider of technical reference materials, software expertise, and QuickBooks training materials for accounting solutions consultants. It has trained over 30 thousand accounting professionals in accounting software solutions. Each year for the past seven years, the Sleeter group culls through dozens of QuickBooks add-ons to select a few that rise above the others. The add-ons must be developed and sold by solid companys with reputations for outstanding customer support and the product must have the following attributes:

• Must be fully released and shipping in the US by August 1, 2011
• Must conform to good accounting principles and operating standards
• Should use appropriate transaction types and field population for recording data into QuickBooks and/or other accounting software packages so as to preserve and/or enhance the standard reporting features.

As consultants with many clients on QuickBooks, we are always interested in any improvements to the basic platform as well as through third-party add-ons. With the hundreds of add-ons available however, it is difficult to assess which ones are worthwhile and which should be avoided. Having an independent (and reputable) organization do a lot of the groundwork certainly helps.

None of the "awesome" add-ons for 2012 are specific to Government contracting. You won't find any add-on that calculates indirect expense rates or can upload billings directly into WAWF (Wide Area Workflow). The Sleeter Group's selections probably need to appeal to a broad market and Government contracting is probably too much of a niche. However, this is not to imply that the winners would not be of interest to Government contractors.

The winners for 2012 can be accessed here. In addition, this web page has links back to winners from previous years.

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Related Posts

2011 Awesome "Add-On" Winners
2010 Awesome "Add-On" Winners

Proposal Preparation Costs - Direct or Indirect?

The Department of Defense recently issued a reminder to its acquisition personnel regarding the proper charging of proposal preparation costs. Proposal preparation (and negotiation support) costs not specifically funded by a grant or required by a contract are B&P costs (Bid and Proposal, see FAR 31.205-18) and must be charged to contracts through an indirect cost pool (usually the General and Administrative cost pool). If there is a specific requirement in an existing contract to submit one or more proposals, costs of preparing those proposals are allocable only to the contract requiring the proposal preparation.

When proposal and negotiation costs are chargeable direct to contracts, the requirement to do so will be specifically called out in the contract, such as in a funded line item. As a matter of policy however, DoD has told its contracting officers to minimize the situations where a contractor will be contractually required to prepare proposals for new requirements or to definitize unpriced contractual actions.

According to Cost Accounting Standards (CAS) and FAR, if B&P costs are incurred without a contractual requirement, those costs can never be re-characterized as direct costs of any contract since they were independent B&P costs at the time they were incurred. Likewise, if there is a specific requirement for submission of a proposal in a contract, the proposal and negotiation costs are direct costs of that contract and cannot be transferred to another contract. This is especially relevant to the situation where a contract requires a proposal be prepared for new requirements or a follow-on contract and then the contractor or contracting officer improperly attempts to transfer the proposal and negotiation costs to the new contract resulting from the proposal.

Follow-on work does not automatically qualify to be charged directly to a contract merely because there is an assumption that the contractor will submit a proposal as part of a continuing program. For the costs to be charged directly to a contract there must be a specific requirement. If a contracting officer requires a proposal for a follow-on contract or for new requirements, or determines it is necessary to award undefinitized contractual actions, the Department will often be placed in the position of paying for the proposal and negotiation costs on a reimbursable basis with little or no competitive control over the costs incurred. DoD is warning its Contracting officers to avoid placing the Government in that position.

Some Relief for Prime Contractors

FAR (Federal Acquisition Regulations) has been amended effective November 2nd to allow subcontractors to "self-represent" their small disadvantaged business (SDB) status to prime contractors in good faith when seeking Federal subcontracting opportunities.

Previously under the FAR, Federal prime contractors were required to confirm that subcontractors representing themselves as small disadvantaged businesses were certified by the SBA (Small Business Administration) as SDB firms.

There is one caveat. The precise wording in FAR 52.219-25 allows prime contractors to accept the subcontractor's written self-representation unless the prime contractor has reason to question the self-representation.

There are a number of reviews going on right now addressing the perceived abuse by contractors (and subcontractors) that misrepresent their small business size status in order to win contracts. We recommend, notwithstanding this easing of the burden of verifying small business status, that contractors make more than a token effort to ensure the veracity of subcontractor assertions and representations.

Labor Relations Costs - Revised Cost Principle

The FAR Councils recently amended FAR 31.205-21, Labor Relations Costs, making the costs of certain activities unallowable.

Until now, FAR 31.205-21 was very succinct. It read, "Costs incurred in maintaining satisfactory relations between the contractor and its employees, including costs of shop stewards, labor management committees, employee publications, and other related activities, are allowable."

The revised cost principle adds a prohibition on certain activities as follows.

As required by Executive Order 13494, Economy in Government Contracting, costs of any activities undertaken to persuade employees, of any entity, to exercise or not to exercise, or concerning the manner of exercising, the right to organize and bargain collectively through representatives of the employees' own choosing are unallowable. Examples of unallowable costs under this paragraph include, but are not limited to, the costs of
   (1) Preparing and distributing materials;
   (2) Hiring or consulting legal counsel or consultants;
   (3) Meetings (including paying the salaries of the attendees at meetings held for this purpose); and
   (4) Planning or conducting activities by managers, supervisors, or union representatives during work hours.

This new rule addresses "persuader" activities - either for or against collective bargaining. It seems unlikely to us that a contractor is going to try to "persuade" its employees to unionize so this change effectively amounts to a prohibition against contractors resisting workforce unionization.

Employee Rights under Federal Labor Laws

The FAR councils published a final rule that implements Executive Order (EO) 13496, Notification of Employee Rights Under Federal Laws. The EO requires contractors to display a notice for employees of their rights under Federal labor laws. The Department of Labor determined that the notice must also include employee rights under the National Labor Relations Act (NRLA). The NRLA encourages collective bargaining and protects the exercise by employees of their freedom to associate, to self organize and to designate representatives of their own choosing for the purpose of negotiating the terms and conditions of their employment.

The physical posting of the notice must be in conspicuous places in and about the plants and offices of contractors and subcontracts, in the languages employees speak, so that the notice is prominent and readily seen by employees who are covered by the National Labor Relations Act and engage in the activities related to the performance of the contract. Contractor's who use a website to communicate with employees are also encouraged (perhaps required, depending on how you interpret the regulations) to post notices there as well.

Posters may be downloaded from the Department of Labor's website. They are available in English, Spanish, Mandarin, Hmong, Laotian, and Vietnamese. Contractors are not required to use the DOL posters. They can create their own if they choose.

Mandatory Annual Audit Requirements (MAARs) - Part VI

Today we conclude our discussion (at least for awhile) on MAARs, Mandatory Annual Audit Requirements. MAARs are minimum audit procedures that must be applied to reviews of contractors' annual incurred cost submissions in order for the review to be considered compliant with GAGAS (Generally Accepted Government Auditing Standards). Audit working papers usually contain checklists to ensure that each and every applicable MAAR was covered, either in that particular review or in another audit. The first five parts in this series can be read here:

• Part I - Introduction
• Part II - Timing
• Part III - MAARs #1 - 4
• Part IV - MAARs #5 - 8
• Part V - MAARs #9 - 13

MAAR #14 - Pools/Base Reconciliation to Books. The purpose of this procedure is to determine that the claimed indirect cost pools and allocation bases under Government contracts reconcile to amounts in the contractor's official books and records. This is why auditors will often request the "trail balance" when determining adequacy of an annual submission.

MAAR #15 - Indirect cost comparison with prior years and budgets. The purpose of this procedure is to identify changes in cost accounting practices, reclassification of costs, and areas with substantial increases or decreases in costs that require further audit analysis and/or explanation. Auditors will often ask contractors to prepare a comparison showing current year and prior year's costs by account. Significant changes either up or down will prompt at least a query.

MAAR #16 - Indirect account analysis. This is likely the area that an auditor will spend the most time during an audit of incurred costs. The auditor needs to obtain sufficient evidence to support an opinion on the allowability, allocability, and reasonableness of the costs. The auditor will concentrate on sensitive accounts, new accounts and accounts with large variances.

MAAR #17 - Reserved. Initially, this MAAR involved IR&D/B&P computations. At one time, there were limits to how much a contractor could claim on Government contracts and this involved formulas and comparisons with prior years. After those limits were eliminated in the FAR cost principles, this MAAR was dropped.

MAAR #18 - Indirect allocation bases. The purpose of this MAAR is to assure that allocation bases are equitable for allocation of indirect costs to intermediate and final cost objectives. The focus here is on whether indirect costs are allocated to cost objectives on a "causal and beneficial" basis.

MAAR #19 - Indirect rate computations. The purpose here is to confirm that the contractor's rate computations are accurate for distributing indirect costs to Government contracts. Most contractors use Excel-based models to submit their annual incurred cost claims. These models are moderately complex and errors commonly occur.

MAAR #20 - Reserved. At one time, this MAAR required auditors to review adjusting journal entries that involve indirect expenses. It has now been merged into MAAR #10 which requires auditors to review all adjusting journal entries.

The MAARs provide auditors a kind of road map on how to approach their audits of incurred costs. Knowing the various MAARs should aid contractors in preparing for an audit.

Mandatory Annual Audit Requirements (MAARs) - Part V

Today we continue our discussion on MAARs, Mandatory Annual Audit Requirements. MAARs are minimum audit procedures that must be applied to reviews of contractors' annual incurred cost submissions. Anything short of these would render the audit non compliant with GAGAS (Generally Accepted Government Auditing Standards). If you missed any of the first four parts, you can read them here:

• Part I - Introduction
• Part II - Timing
• Part III - MAARs #1 - 4
• Part IV - MAARs #5 - 8

MAAR #9 - Payroll/Labor Distribution Reconciliation and Tracing. The purpose of this MAAR is to test the overall integrity of labor cost records at the general ledger and cost ledger levels, and to reconcile payroll accruals and disbursements to ensure that distribution entries trace to and from the cost accumulation records. Or, to put it another way, how does an hour charged on a timesheet, convert to dollars on a bill to the Government.

MAAR #10 - Adjusting entries and exception reports. The purpose of this MAAR is to identify adjustments and/or exceptions that require further audit analysis and explanation. The audit will evaluate the propriety of adjusting journal entries and exception reports for both direct and indirect costs.

MAAR #11 - Reserved. (At one time, MAAR #10 pertained to labor adjusting journal entries and MAAR #11 pertained to materials adjusting journal entries. These were combined into a single MAAR.

MAAR #12 - Auditable subcontracts/assist audits. The purpose of this procedure is to identify and request assist audits on "auditable" subcontracts. "Auditable" subcontracts are flexibly priced subcontracts awarded under flexibly priced prime contracts. It is the prime contractor's responsibility to perform subcontract audits but its the auditor's responsibility to ensure that those audits are adequately performed.

MAAR #13 - Purchases existence and consumption. The purpose of this MAAR is to test that materials were in fact received (exist or were consumed) and that services were in fact performed. The auditor will make physical observations and/or inquiries on a concurrent basis in addition to documentation verification of contract charges for purchased materials and services.

Tomorrow we will conclude this series by discussing the remaining MAARs.

Mandatory Annual Audit Requirements (MAARs) - Part IV

We're continuing our discussion on Mandatory Annual Audit Requirements (MAARs): minimum audit procedures before completing reviews of contractor incurred cost proposals. If you're jumping into this discussion for the first time, you might want to go back and read the first three posts in this series:

• Part I
• Part II
• Part III

Today we will be discussing MAARs 5 through 8.

MAARs #5 - General ledger, trial balance, income and/or credit adjustments. The purpose of this procedure is to help identify any income and credits which the Government may be entitled to obtain or share, and to evaluate the exclusion of any adjustments not reflected by the contractor in Government contract costs. It is not uncommon nor is it contrary to generally accepted accounting principles (GAAS) to book miscellaneous income "below the line" to an income statement section reserved for non-operating income and expenses. However, sometimes the Government is entitled to share in these non-operating transactions (e.g. rebates). Additionally, contractors have been known to hide expenses in these sections in order to reduce their indirect expense rate allocation bases thereby increasing their indirect rates (hint: don't do that).

MAARs #6 - Labor floorchecks or interviews - We've covered this area extensively in our blog. The purpose of this procedure is to test the reliability of employee time records, that employees are actually at work (difficult for "work-at-home" employees), that they are performing in assigned job classifications, and that time is charged to the proper cost objective. This is one of the two MAARs that must be performed in the year the costs are incurred (the other is MAAR #13). After the fact, there is no way to determine that time charges correspond to the work actually being performed.

MAARs #7 - Changes in charging direct/indirect costs. The purpose of this procedure is to verify that changes in charging direct/indirect cost do not have the effect of improperly shifting costs among cost objectives or circumventing costs targets or ceilings of certain contracts or other significant cost categories. The auditor will evaluate changes in procedures and practices for charging direct/indirect cost for consistency with generally accepted accounting principles, the applicable cost principles per contracts, and any applicable CAS requirements.

MAARs #8 - Comparative analysis -sensitive labor accounts. The purpose of this procedure is to identify for further examination any sensitive labor charges (for example, indirect charging by direct labor employees) that vary significantly from the prior period and/or budgetary estimates. Lately, DCAA has been requesting contractors to prepare two or three year comparisons of costs by account. It saves time for the auditor however there is no contractual requirement that contractors do so.

Mandatory Annual Audit Requirements (MAARs) - Part III

Mandatory Annual Audit Requirements (MAARs) are procedures that auditors apply when auditing contractor annual incurred cost proposals. These procedures are considered absolutely essential in order to comply with generally accepted government auditing standards when performing the audit. Contractors submitting incurred cost proposals can expect auditors to delve into these areas at some point before issuing an audit report on the results of their review. There are seventeen of them and beginning today, we will begin a discussion on the objectives and purpose of each MAARs. This will take several posts to cover them all.

MAAR #1 - Internal Control Audit Planning and/or Internal Control Questionnaire: The purpose of this requirement is to determine the extent of reliance that can be placed on the internal controls for contract costs and the need for and extent of substantive testing that may be required based on the observed strengths or weaknesses of contractor systems. Essentially, the better a contractors internal control systems, the less auditing will be required. If the auditor can relay on internal control systems to "catch" potentially unallowable costs, he/she can reduce audit testing.

MAAR #2 - Contract Cost Analysis and Reconciliation to Books: This provides the auditor (i) an overview and order-of-magnitude frame of reference for direction of audit effort and other audit planning/performance considerations, and (ii) to verify that the auditable costs claimed or to be claimed on Government contracts tie in to the amounts produced by the accounting system in the contractor's official books and records. Auditors will evaluate summaries of the contractor's total annual contract costs by major cost element (material, subcontracts, intra-company charges, and credits,etc), and verify that the auditable contract costs reconcile to contractor accounting records by cost element.

MAAR #3 - Permanent Files: Permanent files provide an efficient and effective repository of current audit information. Permanent file maintenance should help identify the need for further audit and analysis, and help in determining the accounting methods that influence the nature, level, and extent of further testing required in specific cost accounts, functions, operations, and departments. Permanent files are updated for new or changed contractor organizations, operations, policies, procedures, internal controls, software programs, and accounting methods that influence the nature, level, and accounting treatment of costs being charged to Government contracts.

MAAR #4 - Tax Returns and Financial Statements. The purpose of this step is to highlight possible areas to reduce the extent of audit effort that might otherwise be required. The evaluation of a contractor's financial statements, corporate minutes, tax returns, reports filed with regulatory bodies (e.g. SEC) and data available on the corporate web site will assist the auditor in planning the audit more effectively. Generally, greater weight is placed on corporate reports to regulatory bodies with reporting requirements.

Mandatory Annual Audit Requirements (MAARs) - Part II

Yesterday we began a discussion on mandatory annual audit procedures that auditors must apply during audits of contractors' incurred cost submissions in order to comply with GAGAS (generally accepted government auditing standards). We did not list the seventeen MAARs so here they are:

MAARs are performed before, during, and after the fiscal year when the costs are incurred. Ultimately, the auditor must cover each "applicable" MAARs before issuing his/her audit report.

• MAARs 1, 3, and 7 are typically accomplished on a continuous basis as audits are performed and are not necessarily associated with a single contractor fiscal year or exclusively with the incurred cost audit. 
• MAARs 2, 4, 9, 14, 15, and 19 are "reconciliation" procedures and are usually performed as preliminary steps in the audit of incurred costs.
• MAARs 10 and 16 are historical transaction testing and performed during the incurred cost audit.
• MAARs 6 and 13 are concurrent procedures and must be performed during the fiscal year being audited.
• Finally MAARs 5, 8, 12, and 18 are typically performed during annual incurred cost audits but may also be performed in advance of the fiscal year being audited.

Tomorrow we will begin digging deeper into the purpose and objective of each of these seventeen Mandatory Annual Audit Requirements.

Mandatory Annual Audit Requirements (MAARs) - Part I

Today we start a series that goes into more detail that we usually include in this blog. Often we are asked about the propriety of a particular request from an auditor. Most of the time, we know and understand what the auditor is intending to accomplish by the request. Sometimes, the requests are a bit obscure. When it comes to audits of incurred costs, auditors must comply with Mandatory Annual Audit Requirements (MAARs). MAARs are minimum audit procedures necessary to comply with generally accepted government auditing standards (GAGAS) when performing incurred cost audits. We thought it would be useful and educational to describe each of the MAARs to help you appreciate why auditors ask what they ask and do what they do.

The MAARs vary greatly in purpose, type of transaction being evaluated, and time frame of accomplishment. MAARs are performed at all major contractors (those with $100 million or more in costs booked to flexibly-priced contracts such as CPFF, CPIF, FPI, and T&M) unless such work would fulfill no useful current or future need or the contractor has no costs claimed in one or more cost elements related to a specific MAAR.

Some MAARs must be performed during the fiscal year under audit. MAAR #6 for example requires auditors to review compliance with timekeeping policies and procedures (i.e. floorchecks). Other MAARs are performed during the incurred cost audit, even if that is several years after the fact. Some are accomplished on a continuous basis.

Currently, there are seventeen MAARs. These requirements are tweaked periodically and some have actually been dropped. At one time there were twenty MAARs.

Over the next few days, we will be describing the purpose and objective of each of the seventeen MAARs. Although, as we mentioned above, they are applicable to "major" contractors, the essence of these audit requirements are performed at non-major contractors as well. So this series should be useful to contractors of all sizes who desire to gain some insight on why auditors do what they do.

Another One Bites the Dust

Companies that wish to enter the Government contracting arena and companies who wish to continue working in that arena, must ensure that they have internal control systems in place that meet basic Government expectations. We frequently discuss these requirements in this blog - especially requirements for accounting systems. Contractors need to establish adequate accounting systems to obtain a contract and they need to maintain those systems to receive future awards. This fact is illustrated (yet once again) in a Comptroller General's "bid protest" decision handed down last month (KMS Solutions, LLC, B-405323.2; B-405323.3, October 6, 2011).


A Government solicitation provided that "[a]n offeror's accounting system shall be adequate for determining costs applicable to the contract," and directed each offeror to "provide evidence of their accounting system being adequate in accordance with FAR and in compliance with FAR [Part] 31, Contract Cost Principles and Procedures." 

In responding to these solicitation provisions, KMS's proposal directed the agency's attention to a Defense Contract Audit Agency (DCAA) audit, performed in September 2006, which had concluded that KMS's cost accounting system was adequate for performing cost reimbursement contracts. The problem here, as the contracting office found out when it contacted DCAA for an update on the 2006 audit report, was that DCAA had performed a subsequent audit in 2010 that concluded just the opposite - that there were significant deficiencies  that are considered to be material weaknesses in the contractors system that could result in misstated costs. The audit stated that the accounting and billing systems were inadequate and went further by recommending suspension of progress payments and billings under cost reimbursable contracts. 
KMS's proposal made no reference to any subsequent DCAA audit.

Based on this updated information, the Government threw out KMS's bid. KMS protested that the agency's determination of inadequacy was improper for various reasons. The Comptroller General disagreed. One of the challenges had to do with the contractor's stated disagreement with the DCAA position. However, the Comptroller General found that "In pursuing this protest, KMS has not meaningfully challenged the substance of the DCAA's findings of deficiencies and inadequacies." 


Ultimately, the Comptroller General found that the Government reasonably rejected KMS's proposal. 

Allowability of Incurred Costs due to Contractor Errors

The Department of Energy (DoE) issued a new Acquisition Letter (No. AL-2012-03) this week concerning the allowability of incurred costs due to contractor errors. Acquisition Letters (ALs) from DoE are issued to provide specific guidance for implementing FAR and DEAR (the DoE FAR Supplement). AL's from DoE function similar to PPGs (Policies, Procedures, and Guidance) issued by the Department of Defense. 

This particular AL provides guidance to DoE contracting officers who need to make decisions on the allowability of costs charged to Government contracts. It first distinguishes between explicitly unallowable costs as defined in the FAR Part 31.205 and costs that are not explicitly unallowable but may not necessarily be reasonable. Determining whether costs are reasonable requires contractors and contracting officer to exercise judgment. According to the AL, contractor “errors” could fall into the “reasonableness” arena.

The example given in the AL is a situation where a contractor employee rents a car and inadvertently, but contrary to company policy, failed to decline the optional insurance. The cost of the extra insurance would be an allowable cost according to DoE.

The AL also distinguishes between “errors” that happen infrequently and those that happen all the time. If these kinds of errors happen frequently, the cost is no longer reasonable because it is obvious that the contractor does not have an adequate system of internal controls to prevent their occurrence. The AL states:

 If it were possible for a contractor to operate a zero error financial system at no cost, no incurred cost due to error would be allowable because it would be unreasonable. Since this is not possible, the cost-reimbursement contractor and the government must make prudent business judgments about the benefit versus cost of the contractor's financial system. It would not generally be prudent, for example, to spend $100,000 to save $10 in cost.

We believe this is a good policy. It should preclude some of the endless discussions between contractors and auditors/contracting officers about whether certain relatively immaterial costs can be claimed on Government contracts. Although not applicable to other Governmental agencies, it might nevertheless be useful to drag it out to buoy your position, if you find yourself in this situation.

Limitation of Costs and Limitation of Funds - Part IV

Today we finish up our series on Limitation of Costs and Limitation of Funds clauses found in cost-reimbursable contracts. These clauses are more than perfunctory. Contractors that take them lightly or fail to consider them at all are at risk for incurring costs that will not be reimbursed. As we will illustrate in a moment, the courts typically side with the Government in disputes involving the application of these clauses.

The Government is not obligated to reimburse a contractor for any cost in excess of the costs and/or funds allocated to a contract. Nor is the contractor obligated to continue performance or incur any costs in excess of the estimated contract costs and/or funds allocated. The purpose of the Limitation of Costs/Funds clauses are designed to give the Government advance notice of potential cost overruns. Boards of contract appeals as well as the Court of Claims have ruled in numerous cases that an inadequate accounting or management information system is not a valid excuse for not providing the notice required by the clause.

For example, in Datatex Inc., the contractor asserted that it was unaware when contract costs exceeded 75 percent of total estimated costs because actual overhead rates could not be determined until after contract completion and Government audit. No notice was give to the Government until settlement of final overhead rates (10 months after contract completion), at which time the contractor requested a contract modification to fund the contract overrun. The contractor's request was rejected. In concluding that the contractor should have been able to foresee that its costs would exceed the contract ceiling, the ASBCA (Armed Services Board of Contract Appeals) stated that a contractor is obligated to maintain an accounting and financial reporting system adequate to apprise the contractor of a possible overrun before the overrun occurs.

A similar case involved SAI Comsystems who claimed that the Government's failure to make a timely audit excused the contractor's lack of notice and thus obligated the Government to provide additional funding. The Board did not agree, noting that a contractor has a responsibility to maintain reasonable records, in order to be able to ascertain when costs will approach the contract ceiling and to be able to cease performance in an orderly manner prior to reaching that level.

Although these clauses explicitly relieve the Government from any obligation to reimburse costs incurred in excess of the estimated (or funded) cost, that does not mean that such overruns are never paid. The contracting officer has discretionary authority to do so. In cases where the overrun is clearly a result of unforeseen circumstances or the Government has a great need for the "product", contracting officers can sometimes be prevailed upon to add additional funding to the contract. However, this should be considered a "long shot" insofar as seeking funding. In a case involving Research Applications, Inc., the board stated that "it was not the circumstances but appellant's own choice that produced the cost overrun as well as the lack of information on which a proper notice could have been based".