New Documentary on Hanford

A new 1 hour documentary on Hanford is now available for viewing here. This documentary was first broadcast over Oregon Public Broadcasting on September 16th and traces the history of America's nuclear production from World War II to the present day.

In 1943, as World War II raged in Europe and the Pacific, thousands of men and women from across the United States began arriving in a remote part of south-central Washington state. They knew very little about why the U.S. government had hired them - only that it was an important project to support the war effort. It was a project that would change the world forever.

Although production ceased under President Johnson, the Department of Energy still spends billions every year to clean up the waste legacy left over from the cold war.

Watch the documentary here.

Detecting Instances of Fraud

Yesterday we alerted you to a recent DCAA policy shift that requires auditors to query contractors about whether they are aware of any fraud or allegations of fraud. We stated that we were unaware of any regulatory, statutory, or contractual requirement that required contractors to respond to that line of questioning and also recommended that contractors pursue legal counsel before doing so.

We now have an example where auditors have taken this to a new level. One office (at least) has prepared a representation letter for contractors to sign and return. This particular example reads as follows:

From:
To [Auditor, DCAA Branch Manager]

We are providing this letter in connection with your audit of the Forward Pricing Rate Proposal (FPRP) Submission for 2013 - 2015 of Company (Co.) as of September 4, 2013 for the purpose of expressing an opinion as to whether the aforementioned proposal and supporting data complies, in all material respects, with the applicable requirements in the Federal Acquisition Regulations (FAR). We confirm that we are responsible for the fair presentation in the Forward Pricing Rates Proposal (FPRP) Submission for 2013 - 2015 of Company (Co.) as of September 4, 2013 in conformity with generally accepted accounting principles.

Certain representations in this letter are described as being limited to matters that are material. Items are considered material, regardless of size, if they involve an omission or misstatement of accounting information that, in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would be changed or influenced by the omission or misstatement.

We confirm, to the best of our knowledge and belief, as of September 4, 2013 the following representations made to you during your audit.
1. The proposal referred to above is fairly presented in compliance with the FAR.
2. We have made available to you all financial records and related data.
3. There have been no additional communications concerning noncompliance with or deficiencies with FAR, DFARS and CAS.
4. There are no material transactions that have not been properly recorded in the accounting records.
5. We acknowledge our responsibility for the design and implementation of programs and controls to prevent and detect fraud.
6. We have no knowledge of any fraud or suspected fraud affecting the entity involving—

• Management,
• Employees who have significant roles in internal control, or
• Others where the fraud could have a material effect.

7. We have no knowledge of any allegations of fraud or suspected fraud affecting the entity (that have not been previously discussed) received in communications from employees, former employees, analysts, regulators or others.
8. The company has complied with all aspects of contractual agreements that would have a material effect on claimed contract costs in the event of noncompliance.

To the best of our knowledge and belief, no events have occurred subsequent to the through the date of this letter that would require adjustment to or disclosure in the aforementioned assertion.

The auditors are expecting this representation letter to be signed by both the controller and the CFO (Chief Financial Officer).

As we stated yesterday, there is no FAR requirement that contractors prepare and issue such a representation letter and we caution all contractors to seek counsel on the advisability of doing so.

The Auditors are Starting to Ask Contractors Whether They Have Engaged in Fraudulent Activity

In a policy memorandum issued late July, DCAA announced a major policy shift in detecting and reporting fraud. GAGAS (Generally Accepted Government Auditing Standards) have long required auditors to consider the risk of fraud when designing audit steps. DCAA made it a little more formal about a year ago when it made a policy to require team-planning meetings to discuss the risk of fraud and other noncompliances with applicable laws and regulations that could have a material effect on the audit. Now, DCAA is expanding on its previous efforts to provide, what the Agency terms, a comprehensive approach to detecting and responding to the risk of fraud.

This new guidance is already controversial and you will be hearing a lot about it in the coming months as contractors assess what is being asked and determining whether they will or should respond. Here's the controversial matter:

The audit team should make the following inquiries of contractor management responsible for the subject matter under audit:

• Whether management has knowledge of any fraud or suspected fraud affecting the subject matter under audit;

• Whether management is aware of allegations of fraud or suspected fraud affecting the subject matter under audit, for example, received in communications from employees, former employees, regulators, or others;

• Management’s understanding about the risks of fraud relevant to the subject matter under audit, including any specific fraud risks the contractor has identified or account balances or classes of transactions for which a risk of fraud may be likely to exist.

The audit team should make these inquiries in every audit. The audit team should use information obtained at annual planning meetings about the contractor’s programs and controls that mitigate fraud risk in order to facilitate additional inquiries related to the subject matter under audit. When possible, the audit team should conduct inquiries as part of face-to-face discussions. 

Now as far as we know, there is no contractual or regulatory requirement that contractors respond to these kinds of questions. Our sense is that DCAA is out-of-line in making such requests. It wouldn't surprise us if DCAA will have to retract it sooner rather than later. In the meantime, we suggest you consult with counsel as to the advisability of responding to these series of questions.

Don't Just Pick on Contractors - Look at Military and Civilians as Well

The Professional Services Council (PSC), an industry organization representing service contractors, wrote a letter last week to Senate Committee on Homeland Security and Governmental Affairs, urging them not to focus only on the security clearance practices for contractors but also for military and civilian employees. The PSC noted that the process is the same for contractor, military, and civilian employees and any Congressional investigations into security clearance lapses should not be limited to contractor employees.

In the wake of the Snowden/NSA leak and more recently the Alexis/NAVSEA incident, DoD and other organizations are examining their procedures for granting security clearances. Also, Congress is set to hold hearings on the subject. PSC is trying to preempt Congress from beating up on contractors when the issue is more widespread.

There's plenty of blame to go around. The Navy itself may be a major contributor to the problem. While in the Navy, Alexis shot out the tires of a car belonging to construction workers who were parked next door to the house he was living. The Navy investigated and their report removed any reference to him using a gun. It merely stated that Alexis "deflated the tires on a construction worker's vehicle". Based on that characterization, the Navy granted Alexis a secret clearance. Later, he shot a gun into a upstairs apartment and by that time, the Navy had had enough. They released him. However, the Navy gave him an honorable discharge and the highest possible re-enlistment code.

About 75 percent of security clearances are issued to military and civilian employees of the U.S. Government. Only 25 percent are issued to contractor employees. Whatever gaps there are in the process of granting security clearances are equally applicable to all individuals seeking to obtain or retain a clearance.

Defective Pricing - Postal Service Style

The U.S. Postal Service (USPS) does not require its contractors to certify that cost or pricing data is current, complete and accurate. The USPS reasons that if it required contractors to certify their cost or pricing data, contract costs will increase and that increase will be passed on to the Service.

The USPS Office of Inspector General (IG) doesn't think too highly of that policy. The IG wants the Service to change its policy to require supplies to certify their cost or pricing data when submitting proposals.

Prior to 2005, the USPS did require certification. In May of that year, the Postal Service replaced its Purchasing Manual, which had the effect of law, with the Supplying Principles and Practices, which are nonbinding guidelines intended for internal use. Because the guidelines are nonbinding, the Christian Doctrine does not apply. The Christian Doctrine only apples to laws that are required to be followed. The Christian Doctrine states that a mandatory clause involving important public policy will be read into a Government contract by operation of law even if the clause is left out of the contract.

The IG found that the Services purchasing policies have negatively impacted the prosecution of defective pricing cases. The IG noted that the U.S. Attorney's offices did not criminally prosecute supplies for submitting defective cost or pricing data in contracting actions valued at about $36 million and Special Agents within its own department did not pursue litigation for a supplier with an average annual spend of $122 million. Because of the lack of certification, prosecutors have a harder time proving fraud when defective data are knowingly submitted by a supplier.

As stated earlier, the IG recommended that the USPS begin requiring certification. The USPS disagreed stating that its interests are fully protected under existing policies and procedures. We probably have not heard the end of this matter.

Congress Wants Contractors to Share the Pain - If There's a Government Shutdown

What is becoming a perennial event, the Government shutdown, is back in the news. As we watch the saga play out yet again, we can only guess what the outcome will be. This time, the shutdown threat is linked to funding the Affordable Healthcare Act. What usually happens in these shutdown situations is that Government employees are told to stay home, Congress and the President reach an budget agreement, Government workers come back and get paid for the days they didn't work. This year, there's some talk that Government workers will not be receiving pay for the days not worked. Between shutdowns and sequestrations, we genuinely wonder how the Government can attract and more importantly, retain good workers.

Earlier this month, the House Committee on Appropriations sent a letter to Defense Secretary Hagel expressing its concerns with the a recent review that recommended a 20 percent cut to the Office of the Secretary of Defense (OSD) staff in order to meet funding possible limitations. The main thrust of the letter, though not explicitly so, is that cuts, if any, should not only be made to the civilian workforce but also include contractors who perform services for the department. The memo states:

We believe that the total workforce should be considered, to include the size and cost of contractor workforce.

Additionally, the Committee wants DoD to review whether contractors are performing inherently Government functions. The memo states:

Both the Congress and the Administration have recently identified instances in which contractor personnel are inappropriately performing functions that are inherently governmental and critical. We recommend that the Review consider instances in which contractor personnel in the management headquarters workforce should be reduced because they are illegally performing inherently governmental functions.

Congress is expecting DoD to share the results of its review.

CAS Index Updated

We have updated our CAS Index to include the recently completed series on the CAS Working Group Guidance Papers. Click on the index link and we've listed them at the end.

CAS Working Group Guidance - Accounting Changes - Income Recognition Method

Today we finish up our series on the CAS Working Group Guidance Papers. These Guidance Papers were issued between 1975 and 1981 by a group of CAS experts with the Department of Defense whose job it was to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply new CAS rules and regulations being promulgated by the CAS Board. This was a very active period for the CAS Board. By 1981, most, perhaps all, of the 19 CAS Standards had been issued and the newness and often times complexities of those standards raised a lot of questions. Although these were issued as "interim" guidance and labeled as such, 20 of the 25 Guidance Papers remain current more than 30 years later. The final Working Group Guidance Paper covers a topic that has no applicability to most Government contractors; what to do when you change your reporting of income from a percent of completion method (PCM) to a completed contract method (CCM).

WG 81-25 - Change in Cost Accounting Practice for State Income and Franchise Taxes as a Result of Change in Method of Reporting Income From Long-Term Contracts

State tax regulations usually permit taxpayers to select one of several acceptable methods of stating the elements that determine taxable income and later, under specified conditions, to change from the initial selection to another acceptable method.

According to CAS Regulation 331.20(h), a "cost accounting practice" is any accounting method or technique which is used for measurement of costs, assignment of costs to cost accounting periods, or allocation of cost to cost objectives. According to CAS 331.20(i), a change to either a disclosed cost accounting practice or an established cost accounting practice is any alteration in a cost accounting practice as defined in (h).

If a contractor changes its method of reporting income for long-term contracts from PCM to CCM, it will impact the years that state income taxes are imposed. Changing from a PCM to a CCM method will result in lower income taxes in the year of the change and the years shortly thereafter. When this occurs, the amount of state tax cost allocated to contracts will generally be lower than the amount projected to be allocated to the contracts at the time they were negotiated.

According to this guidance, a change from PCM to CCM (or, for that matter, vice versa), is a change in cost accounting practice because it alters the mearsurement and assignment of State tax costs. Consequently, if the cost impact is material, the Government will adjust contract prices as required by CAS.

By the way, this would be a legitimate reason for auditors to request copies of state income tax returns - to determine whether a change in the method for recognizing income, has been made.

CAS Working Group Guidance - Part XIX

We are coming to the end of our series on the CAS Working Group Guidance Papers. By tomorrow we will have covered all twenty of the current "interim" guidance papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss a particular issue related to CAS 410, the propriety of allocation G&A to facilities contracts.

WG 79-24 - Allocation of Business Unit General and Administrative (G&A) Expense to Facilities Contracts

Contractors' normal operations consist of the production of goods and services, such as aircraft or weapons systems. Contractors may, however, also receive Government facilities contracts which require the acquisition of significant amounts of facilities. These purchases are made at the direction of the Government and, in some cases, no profit is granted to the contractor for making the acquisitions.

CAS 410 provides that the cost input based used to allocate the G&A expense pool shall include all significant elements of that cost input which represents the total activity of the business unit. Specific criteria are provided for three bases for allocating G&A expense; total cost input, value-added, and single element. The standard also permits a special allocation of G&A expense to a particular final cost objective, if that objective receives significantly more or less benefit from G&A expense than would be reflected by the allocation of such expense using the contractor's normal allocation base. The special allocation provides a means for accounting for aberrations of normal business activity that could involve more than one final cost objective.

Facilities acquisition contracts may be one of these "aberrations". Normally, they do not require the same level of contractor risk and associated management attention as contracts which provide for the delivery of regular goods and services. As a result, a full allocation of a contractor's management or G&A expense to such contracts would generally not be equitable. An exception to this would be the rare circumstance when the preponderance of the contractor's activity is acquiring facilities as a service for the Government.

The guidance offered here is that when it is determined that facilities acquisition contracts will not receive an appropriate allocation of G&A expense by participating in the contractor's selected G&AS expense allocation base, a special G&A expense allocation under the provisions of CAS 410.50(j) shall be required.

Although this guidance applies specifically to facilities contracts, it is equally applicable to any activity that meets the "special allocation" requirement of CAS 410. We've seen many cases over the years where special allocations of G&A expenses are required in order to achieve equity in allocating G&A expenses.

CAS Working Group Guidance - Part XVIII

We are in the final week of our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss accounting changes and the need for equitable adjustments.


WG 79-23 - Administration of Equitable Adjustments for Accounting Changes not Required by New Cost Accounting Standards

CAS 331.50(a)(4)(C) permits the use of equitable adjustment procedures in connection with the cost impact of any accounting change which the contracting officer determines to be desirable and not detrimental to the interest of the Government.

This guidance addresses a number of questions concerning that provision. The most significant question is that of what criteria should be used in determining whether an accounting change is desirable and not detrimental to the interest of the Government? This is an important question as contracting officers must deal with it all of the time when contractors make voluntary accounting changes. Some contractors make accounting changes an annual event.

According to the guidance, the "desirable" encompasses the tests of being appropriate, warranted, equitable, fair or reasonable. The contracting officer's finding shall not be made solely because of the financial impact of the proposed change on the contractor's current CAS-covered contracts. A change may be desirable and not detrimental to the interest of the Government even though costs increase.

Remember, the overriding criteria for allocating indirect costs to intermediate and final cost objectives (as well as shared services that might be direct) is that it result in a fair and reasonable, causal/beneficial allocation. Changes that increase costs to the Government are not necessarily bad. It could be that the previous allocation methodology did not result in an equitable allocation of costs to Government contracts.

Notwithstanding the logic or reasoning behind accounting changes, contractors can expect a high level of Government scrutiny whenever accounting changes are proposed.

CAS Working Group Guidance - Part XVII

We are in the final week of our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss CAS 409, Depreciation of Tangible Capital Assets.


WG 78-22 - CAS 409 and the Development of Asset Service Lives


"Part time" usage is not the same as "Standby".


In describing criteria for estimating service lives for tangible capital assets, CAS 409 states that the estimate of the expected actual period of usefulness need not include the additional period tangible capital assets are retained for standby or incidental use where adequate records are maintained which reflect the withdrawal from active use. Supporting records shall be maintained which are adequate to show the age at retirement or, if the contractor so chooses, at withdrawal from active use for a sample of assets for each significant category.


The CAS 409 provision for adjusting service lives to reflect standby or incidental usage provides the contractor an opportunity to prevent having longer lives applied in the depreciation process merely because an asset is not disposed of when withdrawn from active use. To take advantage of this opportunity, the contractor must maintain a record supporting the status of assets.


Standby status exists when the asset is withdrawn from regular usage with no definite plans for continuing its use. The asset is retained merely for possible temporary replacement during repair of a productive asset, emergency, or other unusual usage. Diminishing the usage to a part-time basis does not constitute "standby" status.


Contractors should be required to provide sufficient detail in records of asset lives or other documentation to support that assets retained for standby or incidental use were withdrawn from service. As indicated in CAS 409.50(e)(2), the records may be for a sample of assets for each significant category. These records are required only when asset lives are adjusted for standby or incidental use.

CAS Working Group Guidance - Part XVI

Today begins the final week of our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of so-called CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss several issues related to CAS 410.

WG 78-21 - Implementation of CAS 410, Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives.

This Guidance Paper, using a question and answer format, deals with eleven separate issues that arose during the development of contractor implementation proposals. Following is a brief explanation of each topic. If any of these pertain to your situation, we recommend you read the full six-page guidance memo. By the way, this guidance memo makes a reference to WG 77-11. Be careful how you use 77-11; it is one of the Working Group Guidance Papers that DoD considers no longer current.

1. It is not appropriate to include functional costs, such as program management, procurement in the G&A pool unless the costs are insignificant.
2. Regardless of examples given in CAS or in prefatory/promulgation comments, the fundamental requirement of CAS 410 is to distribute costs on a causal/beneficial relationship. If any allocation results in an inequity, contractors must determine a separate allocation base for those costs.
3. CAS 410 states that the cost input based may be total cost input (TCI), value-added, or single element. The TCI allocation base is preferred. When circumstances exist where TCI is not an appropriate measure of total activity, other bases should be considered.
4. Interdivisional transfers should be included in the TCI base, unless it would result in an equitable distribution of G&A costs.
5. Several examples are provided where the use of a value-added allocation base is more appropriate than a TCI base.
6. If using a value-added cost input base, only exclude the direct materials and subcontracts. Do not exclude indirect materials and subcontracts.
7. A single-element cost input base may be used when a contractor can demonstrate that it best represents the total activity of a business unit and produces equitable results.
8. The "special allocation" described in CAS 410.50(j) only applies in situations where a particular final cost objective is an exception to the contractor's normal operation.
9. A "special allocation" under CAS 410.50(j) must be described in the Disclosure Statement.
10. Allocations of home office centralized service functions, staff management of specific activities of segments, and central payments or accruals must identify the allocation base and the components of the expense pool.
11. Facilities contracts must be included in the total cost input base unless an allocation inequity occurs.

CAS Working Group Guidance - Part XV

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today we will discuss the CAS Disclosure Statement.

WG 77-20 - Policy for Withdrawing Determination of Adequacy of Disclosure Statement
Government contractors and subcontractors are required, as a condition of contracting, to disclose in writing an adequate description of their cost accounting practices. A Disclosure Statement is considered adequate if it is current, accurate and complete. According to the DoD, there was wide confusion as to the right of the Government to withdraw the determination of adequacy when the disclosed practices where no longer considered adequate.

Questions arose as to whether the ACO has a right to withdraw an adequacy determination that was previously given. Any consideration of the factors bearing on this question would indicate that the contracting officer not only has a right but also a duty to take such action if a Disclosure Statement is determined, at any time, to be inadequate. Failure to do so would relieve the contractor of any requirement to maintain the statement in a current, accurate and complete status after the initial determination of adequacy had been given. This would ultimately render the document completely useless.

There is seldom a problem in determining whether a Disclosure Statement is current or accurate. There is a problem in determining whether it is complete. To be complete the statement must contain a level of detail adequate to fuly discuss the accounting practices which the contractor employs. At the same time there is no need for burdening the statement with minuscle descriptions of accounting procedures that will have no discernible effect on the flow of costs even if they are changed from time to time.

A determination that the level of detail in a Disclosure Statement is adequate, is judgmental and thus the detail should be expected to vary from contractor to contractor or even between cost centers of a particular contractor depending upon the volume or mix of business or complexity of the accounting system. As the volume increases the mix changes or accounting procedures become more complex, the Disclosure Statement would be expected to become more detailed.

Materiality appears to be the key word in determining what level of detail should be required. Thus, accounting procedures which, if changed, would not have a material effect on the flow of costs, either now or in the foreseeable future, should probably not be included in the Disclosure Statement.

Guidance: 
Materiality should be a major factor in deciding the level of detail required to be disclosed. A prime consideration should be whether a change in accounting procedure at the level of detail under consideration would have a material effect on the flow of costs, now or in the near future.

The level of detail needed to adequately describe the accounting practices will vary depending upon volume or mix of work in the plant or cost center, or complexity of the accounting system.

Contractors should be advised immediately when a revision to the Disclosure Statement is considered necessary.

ACO's do have authority to withdraw an adequacy determination previously given for a Disclosure Statement, but action to withdraw the determination should not be taken unless the issue is material and the contractor will not make the revision.

CAS Working Group Guidance - Part XIV

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. For those of you who are getting bored with this series, hang on a little longer - we'll be finished after No. 20.

WG 77-19 - Administration of Leased Facilities Under Cost Accounting Standard 414, Cost of Money as an Element of the Cost of Facilities Capital.

This is another guidance paper on CAS 414, Cost of Money. Back when CAS 414 and later CAS 417 (facilities under construction) were being considered, many in the Government contracting community were opposed to it. They felt like is was stacking profit on top of profit and there were even some contracting officers who refused to consider it in negotiations. That was awhile back and contracting officers carried bigger sticks back then.

This particular guidance deals with leases. CAS 414 provides that the cost of money will be computed on the average net book value of facilities, capital items, including certain leased facilities, for which constructive cost of ownership is allowed in lieu of rental costs under Government procurement regulations.

Two issues surfaced when attempting to implement the standard. The first was whether to recognize cost of money as part of constructive ownership cost in determining whether allowable cost will be based on constructive cost of ownership or rental costs. The second issue was when to include the net book value of leased assets on the CASB-CMF form.

Cost of money is a cost which the contractor would be allowed if he had purchased the property. Therefore, it should be included as an ownership cost in making the determination whether allowable cost will be based on constructive cost of ownership or leasing costs. After that determination, cost of money should be allowed as a separate item under FAR 31.205-11 and not included as a constructive ownership cost in determining allowable cost.

Timing for including net book value of leased assets on the CASB-CMF form involves at least two possibilities, at the beginning of the lease term or at the time when cumulative leasing cost exceed cumulative cost of ownership, commonly referred to as the cross-over point.

Guidance

Cost of money should be included as an ownership cost in making the determination whether allowable cost of leased facilities will be based on constructive cost of ownership or leasing costs.

Where it has been determined that to allow leasing costs is more advantageous to the Government, the value of the leased facilities will not be included in the cost of money as a cost of facilities capital computation.

Leased assets for which a decision has been made to limit reimbursement to constructive cost of ownership will be included on CASB-CMF form at their net book value computed at the effective date of the Standard (long since passed) or at the beginning of the term of the lease whichever is later.

Net book value for the purpose of computing a contractor's cost of facilities capital on leased assets shall be computed based on the asset's fair value at the beginning of the term of the lease less an amount equal to accumulated depreciation from the beginning of the term of the lease computed in a manner as if the contractor had purchased the asset. The cost of money will not be included in the net book value of leased assets as reflected on the CASB-CMF form.

The cost of money related to leased assets will be allocated to benefiting cost objectives as an integral part of the cost of money factors for all capital assets.

Land will be shown on the CASB-CMF form (at its fair value at the beginning of the term of the lease) for each accounting period it is used in regular business operations.

CAS Working Group Guidance - Part XIII

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. Today, we're going to tackle the longest and most technical of the Working Group papers, WG 77-18.

WG 77-18 - Interim Guidance for Implementation of Cost Accounting Standard 414 - Cost of Money as an Element of the Cost of Facilities.

The cost of money is an imputed cost which is identified with the total facilities capital associated with each indirect cost pool, and is allocated to contracts over the same based used to allocate the other expenses included in the cost pool. In other words, the cost of money may be considered to be an indirect expense associated with an individual cost pool but separately identified. Like all indirect expenses, the cost of money is subject to all the same allocation procedures as any other expense which is allocable to the selected allocation based, and each element of such base, whether allowable or unallowable, should bear its prorata share of the cost of money.

The CAS 414 techniques must be used to compute the cost of money in connection with individual price proposals, forward-pricing rate agreements, and with the establishment of final overhead rates. Facilities capital included in the cost of money computation includes tangible and intangible capital assets that generate allowable depreciation or amortization as well as land which is integral to the regular operation of the business unit, and leased property for which constructive costs of ownership are allowed in lieu or rental costs under Government procurement regulations.

CAS 414 (and FAR 31.205-10) do not apply to facilities where compensation for the use of the facilities is based on use rates or allowances. Also, the asset must be used in the regular business activity which eliminates things like land held for speculation or expansion and idle facilities.

With that background, the guidance addresses three distinct issues

1. The application of cost of money to IR&D/B&P (Independent Research and Development and Bid and Proposal)
2. Impact on CAS Disclosure Statements
3. The application of cost of money to price proposals

Application to IR&D/B&P

The cost of money is allocable to IR&D and B&P projects (or final cost objectives) and the total allocable amount should be accounted for separately and not included in the established ceiling. However there must be an understanding that the cost of money allocable to unallowable IR&D and B&P shall be considered unallowable (you have to remember that this was issued in the days when there were caps on the amount of IR&D/B&P that contractors could charge to Government contracts).

Impact on CAS Disclosure Statements

Under CAS 414, the regular method of computing the cost of money is preferred. The alternate method is available if the contracting parties can agree that the results of either method will be substantially the same. Although a contractor should decide which method it will use, and follow it consistently, a change from one to the other should not have a significant monetary impact and contract adjustments should not be required.

The CAS disclosure statement does not expressly require the disclosure of the practices used by the contractor to determine and assign the cost of money. However, the cost of money calculation is a significant accounting matter, and an adequate description of the practices involved are virtually mandatory to ensure an understanding of the accounting methods relating to this cost element.

Application to price proposals

The fundamental concept of using current, accurate, and complete data in pricing proposals applies equally to data used to compute proposed cost of money. Thus historical or forecasted costs used in pricing cost of money in proposals must represent the best available information. 

The Standard provides that where the cost of money is to be determined on a prospective bases, the cost of money rate shall be based on the latest available rate published by the Secretary of the Treasury. Ordinarily "based on" should be interpreted to mean "the same as". However, the guidance points out that there may be circumstances when it would be better to use a rate other than the latest semi-annual rate. 

The guidance paper offers four points. First, if a contractor does not propose cost of money, the contracting officer should specify in the contract terms that cost of money will not be allowable as an element of cost under the contract. Secondly, when there is no increase in cost paid or to be paid as a result of a noncompliance with CAS 414, a determination of noncompliance need not be issued. Thirdly, a careful review should be made before the historical method is accepted for pricing future work, because the historical method may result in a cost of money factor substantially higher than that which will actually be experienced. Finally, when a new interest rate is determined prior to or during negotiations, the contracting officer should consider recomputing the cost of money amount before finalizing negotiations.

If any of these apply to your situation, you should go back and read the "discussion" section of working group guidance for a more complete understanding of DoD's concerns in this area.

CAS Working Group Guidance - Part XII

Today we continue our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here.

WG 77-17 - Identification of CAS Contract Universe at a Contractor's Plant

Whenever a contractor makes a change to its disclosed or established accounting practices or is determined to be in noncompliance, FAR requires the contractor submit a cost impact proposal. An integral part of the cost impact proposal is the listing of CAS-covered contracts and subcontracts which will be affected by the change or noncompliance.

The GAO (Government Accountability Office) reported that auditors were spending an inordinate amount of time verifying the completeness and accuracy of the lists submitted by contractors. The GAO recommended that DoD develop a procedure for identifying all the CAS-covered contracts and subcontracts at each contractor's (or subcontractor's) facility.

The CAS clause implicitly requires that contractors are responsible for supplying accurate and complete lists of its CAS covered contracts. However, to preclude any misunderstanding and a consequent loss of time, DoD issued the following guidance:

In order to comply with the requirements of the CAS clause, contractors should be required to maintain a system for identifying accurately and completely all contracts and subcontracts which contain the CAS clause. The ACO (Administrative Contracting Officer) should ensure that the contractor has such a system in place and that it is functioning effectively.

Apparently, accurate record keeping was a problem back in 1977 and from our experience, is still a problem today.

CAS Working Group Guidance - Part XI

Today we resume our series on the CAS Working Group Guidance Papers. Between 1975 and 1981, DoD convened a group of CAS "experts" to come up with practical solutions to issues that contracting officers were facing in trying to interpret and apply the (then) new rules and regulations being promulgated by the Cost Accounting Standards Board (CASB). During that time, the Working Group published a total of 25 "interim" guidance papers. According to DoD, twenty of the 25 interim papers are still current. The complete working group guidance papers can be downloaded here. As we noted in our first blog in this series, these are not the best quality but to our knowledge, are the only ones available on the Internet for free.

WG 77-16 - Applicability of CAS to Letter Contracts

The standard CAS clause require CAS Covered contractors to comply with all Cost Accounting Standards in effect on the date of contract award or the date shown on the signed certificate of current cost or pricing data.

This guidance addresses two questions: i) does CAS apply to letter contracts and if so, when? and ii) what significance does definitization of a letter contract have?

CAS is applicable to letter contracts as of the date of award unless it has been determined that the contract is excluded under one of the exemptions from CAS requirements. Definitization of the contract would not trigger any new Standards since definitization is a contract modification rather than a new contract (see Interim Guidance Paper WG 76-2).

Timekeeping Systems - Regulatory Requirements

This isn't exactly a re-post but it might seem like one because we have discussed timekeeping systems many times in this blog. Today we want to answer the question about where, in FAR (Federal Acquisition Regulations), is there a definition of what constitutes an "adequate" timekeeping system for Government contracting purposes.

Well, the short answer is there isn't a definition in FAR. The criteria for what constitutes an adequate timekeeping system has been subordinated to DCAA (Defense Contract Audit Agency). FAR provides kind a generic requirement in FAR 31.201-2(d):

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles."

The Standard Form (SF) 1408, Preaward Survey of Prospective Contractor - Accounting System, used by the Government to assess the adequacy of a contractor's accounting system, provides a little more specificity on what constitutes an adequate timekeeping system:

Does the accounting system provide for a timekeeping system that identifies employees' labor by intermediate or final cost objective?

Still, not too helpful. So, we have to turn to the DCAA Contract Audit Manual (CAM) for the most detailed definition of an adequate timekeeping system. There are standards for manual timekeeping systems and automated timekeeping systems. The automated system is the only way to go, in our opinion. There are so many cost-effective and DCAA compliant systems on the market today that no contractor should be on a manual system. The DCAA standards for automated systems include

• Only the employee uses their labor charging instrument to access the labor system. 
• Employee records his/her time at least once a day.
• Employee and supervisor electronically sign certifying accuracy
• Employee badge issuance is sufficiently controlled so that no number is duplicated and badges are not issued to unauthorized persons. 
• Procedures are in place which require the employee to report lost badges promptly. 
• Changes are initialed, authorized, and dated by the employee and supervisor and include a description of the reason for the change. This may be done electronically. 
• A verifiable audit trail process is in place that collects all initial entries and subsequent 

There are more but these are the main criteria. Since these are not "regulatory" requirements, there is some flexibility on the part of contractors to convince the Government that their particular system can ensure the propriety of labor charges to Government contracts.

Brand Name or Equivalent

DLA (Defense Logistics Agency) issued an RFP (Request for Proposal) for Kyocera printers that use "PRESCRIBE" software. One potential bidder protested, alleging that this specification unduly restricted competition. According to the protestor, there are no equivalent printers on the market and the "PRESCRIBE" software is proprietary and comes only on Kyocera printers. The protestor requested, as relief, that DLA remove the requirement for PRESCRIBE software and reprogram its electronic distribution system to accept any commercial printer and industry standard print software. Doing so, according to the protestor would be more cost effective and more reliable as well.

The GAO (Comptroller General) disagreed and denied the request.

According to the GAO, contracting agencies have broad discretion in identifying their needs and determining what characteristics will satisfy those needs. The fact that specifications are based upon a particular product is not improper in and of itself nor will an assertion that a specification was written for design features of a particular product provide a basis for protest if the record establishes that the specification is reasonably related to the agency's minimum needs.

DLA maintained that the requirement for Kyocera or equal that use PRESCRIBE software was necessary to meet the agency's needs, that it had evaluated various other options but concluded that configuring its electronic distribution system to accommodate each potential vendor's printing software would not be efficient and could end up costing considerably more in the long run. DLA also found that the PRESCRIBE software was available for other printers.

the GAO concluded that DLA had reasonable concluded that brand name Kyocera printers or equal that use PRESCRIBE software was necessary to meet the agency's needs and denied the protest.

You can read the full text of the decision here.

Accounts Payable Aging Schedules

An accounts payable aging schedule is used for listing the amounts that you owe your vendors and suppliers. Generally, it breaks down accounts payable by what is current, and what is 30, 60, and 90+ days overdue. Obviously, no company wants to be overdue in their payments to vendors. For Government contractors with contracts that are reimbursed based on cost or progress payments, the Government doesn't want the company to be overdue in its payments to vendors either. Yesterday, we discussed the consequences of asking for reimbursement from the Government before paying the expenses for which reimbursement was requested.

Auditors will, from time to time, perform testing to ensure that contractors are making timely payments against their invoices. They have a number of procedures they can perform. One procedure they might perform is to verify that there are no delinquent vendor invoices. An auditor might request accounts payable aging schedules to determine the extent of overdue invoices. The auditor might request several month-end schedules and might also request a current (interim) aging schedule. While aging schedules are inconclusive when it comes to determining whether contractors are complying with the requirement to bill only for expenses that they have already paid or expenses that have been accrued and will be paid in the normal course of business, the schedules can, if showing overdue invoices, lead the auditor to ask more questions.

Auditors have been instructed to be careful when reviewing accounts payable aging schedules. First, the auditor needs to test the reliability of the aging report. In other words, contractors could enter bogus due dates into their accounting systems far into the future and the invoice would not show up as late. In addition, DCAA says that Generally Accepted Accounting Principles (GAAP) allow for the write-off of liabilities. Now this one leaves us puzzled. We cannot think of any situation where GAAP would allow the write-off of accounts payable. If you can think of a situation, please comment to this posting. There could be returns of some items but returns would be reflected on aging schedules.

Contractors should exercise care in entering vendor/supplier invoice due dates into their accounting system. It's important for effective cash management (paying bills on-time but not too early) and for supporting requests for reimbursement.

Pay Your Invoices When Due - Or Else....

DCAA recently issued an audit alert telling its auditors that if a contractor doesn't pay its bills within "... the ordinary course of business (ordinarily within 30 days of the request for payment to the Government)" that auditors should question the amounts and to " ... consider whether this is a fraud risk indicator."

The full text of the 'alert' can be read here.

According to FAR 52.216-7(b)(1), Allowable Cost and Payment, the term "costs" for purposes of reimbursement, includes two things. First, "costs" include recorded costs that, at the time of the request for reimbursement (e.g. a public vouchers and progress payments), the Contractor has paid the bill by cash, check, or other form of actual payment. Secondly, when the contractor is not delinquent in paying its bills in the ordinary course of business, "costs" include those that are incurred but not necessarily paid for supplies and services purchased directly for the contract. In this second case, the payments will be made in accordance with the terms and conditions of a subcontract or invoice, and ordinarily within 30 days of the contractor's payment request to the Government.

Now, DCAA is instructing its auditors to go out and design some audit tests to determine whether contractors are in compliance with FAR 52.216-7(b)(1). And, if the auditors find non-compliance, they are to suspend the costs using the DCAA Form 1 and must consider the likelihood that fraud has occurred. If there is a suspicion, the auditor must refer it up the chain using the DCAA Form 2000.

So here's the problem. Auditors like to focus on the "ordinarily within 30 days" criteria and ignore the first criteria; "payments made in accordance with the terms and conditions of the subcontract or invoice." We have seen quite a number of subcontracts for example that have payment terms of 30 days after the prime contractor has been reimbursed by the Government. Obviously, that's going to stretch out much longer than 30 days after receipt of the subcontractor invoice - we've seen subcontractor payments mad 90 days and longer. Also, not all vendor invoices have terms like "Net 30". Terms are often negotiable and some contractors have negotiated very favorable terms with their vendors.

We recommend that contractors perform a risk assessment to ascertain their level of compliance with this contract provision. Its better to know your vulnerabilities and fix them then to have them discovered by a contract auditor.