PNWC's Government Contracting Update

Performance-Based Payments - DoD Implementation

2012-02-02T06:00:00.000-08:00

DoD is proposing to require the use of its performance-based payments (PBP) analysis tool whenever contracts are awarded using PBPs as a financing mechanism. The PBP analysis tool is a cash-flow model for evaluating alternative financing arrangements.

As with all contract financing, the purpose of PBP is to assist the contractor in the payment of costs incurred during the performance of the contract. Therefore interim payments should never exceed total cost incurred at any point during the contract. The Government has found itself in many situations where PBP to contractors have exceed their costs. It gets really sticky when there is a contract termination or some other contract dispute.

Under DoD's proposed regulations, prior to using PBPs, the contracting officer must agree with the offeror on a price using customary progress payments before negotiation begins on the use of PBPs. Then the contracting officer must analyze the PBP schedule using the PBP analysis tool. This tool is an Excel-based model and is available on the DPAP website. Contractors contemplating a PBP arrangement should download and become familiar with this tool. Contracting officers will need your help to ensure the accuracy of the data needed to accurately populate the model.

If performance-based payments are desired, the contractor must submit a proposed PBP payment schedule which includes all performance-based payments events, completion criteria, and event values, along with the expected expenditure profile. If PBP are deemed practical, the Government will evaluate, and negotiate the details of the PBP schedule.

Here's the incentive for the Government. If, based on the PBP analysis tool, the payment schedule will be more favorable to the contractor than customary progress payments, the Government will expect some consideration in return. This is typically a reduction in the profit percentage that was negotiated without concern for PBP payments. DoD calls this a "win-win" situation. On its previously linked website, DoD states the following:

PBPs offer a unique opportunity for a real "Win-Win" financial arrangement for the Government and the contractor. This opportunity presents itself due to the Government and the contractor having differing views of the time-vale of money. The "Win" for the contractor is better cash flow resulting in a more favorable financial outcome as measured by the IRR (internal rate of return) and the NPV (net present value) of the cash flows at a reduced contract price.

The "Win" for the Government is a lower contract price that more than offsets the additional financing costs of providing a better cash flow to the contract. The PBP Analysis Tool employs a discounted cash flow analysis to help the contracting officer to determine the Win-Win financial solution for any PBP arrangement. The tool provides a unique and simple to use "what if" feature on the timing of PBP event completin and payment that enables both sides to objectively assess the ptential risk of PBPs in determining the Win-Win solution.

Allowability of IR&D Costs Now Contingent Upon Reporting

2012-02-01T06:00:00.000-08:00

The Department of Defense has amended its FAR Supplement (DFARS) to require that "major" contractors report their IR&D (Independent Research and Development) projects to the Defense Technical Information Center (DTIC) in order for those costs to be allowable.

Specifically, DFARS 231.205-18(c)(iii)(C) now states:

For a contractor'sannual IR&D costs to be allowable, the IR&D projects generating the costs must be reported to the DefenseTechnical Information Center (DTIC) using the DTIC's on-line input form and instructions at http://www.dtic.mil/ird/dticdb/index.html. The inputs must be updated at least annually and when the project is completed. Copies of the input and updates must be made available for reviewby the cognizant administrative contracting officer (ACO) and the cognizant Defense Contract Audit Agency (DCAA) auditor to support the allowability of the costs. Contractors that do not meet thethreshold as a major contractor are encouraged to use the DTIC on-line inputform to report IR&D projects to provide DoD with visibility intothe technical content of the contractors' IR&D activities.

Major contractors are defined as contractors (including all segments) that allocated more than $11 million in IR&D/B&P costs to contracts during their previous fiscal year. That threshold should eliminate most small businesses however contractors under the threshold are still encouraged to report.

Making the inputs available to the ACO and DCAA to support the allowability of costs is a mechanism to enforce compliance. DCAA would not necessarily have the expertise to evaluate whether costs are for projects of potential interest to DoD (another requirement of the DFARS cost principle), but they can certainly check to see if the projects for which contractors are claiming costs have been reported to DTIC.

The effective date of this change is January 30, 2012.

When "Adequate" is the Best that You Can Be

2012-01-31T06:00:00.000-08:00

The following is a slightly edited version of an article we published in our June 2007 Government Contracting Update newsletter. We discontinued the newsletter format in 2009 in favor of this blog.

Many times during our years as Government auditors,we would sit down with contractors at the conclusion of an audit of one or more oftheir internal control systems and proclaim that their system was “adequate”.

“Adequate, only adequate?” they would ask. “We’ve done this and we’ve donethat, we have great policies and procedures, we have superb internal controls, we test for compliance and we have other checks and balances. How can you say our system is onlyadequate?”

Wewould then explain that “adequate” was as good as it gets. Under Generally AcceptedGovernment Auditing Standards (GAGAS), an internal control system is declaredadequate when no significant deficiencies are found. The only other reporting option is that the system is "inadequate".

An "inadequate" opinion arises whenever a significant deficiency or material weakness is disclosed by the audit. A significant deficiency is a control deficiency, or combination of deficiencies, that adversely affects the company's ability to initiate, authorize, record, process, or report Government contract costs in accordance with applicable Government contract laws and regulations, results in a reasonable possibility that unallowable costs will be charged to the Government, and the potential unallowable cost is not clearly immaterial. A material weakness is a significant deficiency, or combination of significant deficiencies that results in more than a remote likelihood that unallowable costs will be charged to the Government.

Sometimes audits disclose conditions that do notmaterially affect the adequacy of the system but if corrected, would enhancethe system of internal controls. Until 2008, these would have been reported as “Suggestions toImprove the System” rather than deficiencies and would not have affected the overall audit opinion. In 2008, DCAA discontinued its practice of reporting "Suggestions to Improve the System" since such reporting was not required by GAGAS.

Someinternal control audits are required by FAR (e.g. purchasing system and estimating system) while others are based on perceived risk to the Government (e.g. accounting systemand labor system). Generally, contractors should not fear internal controlaudits. Fundamentally, the goals and objectives for both contractors and theGovernment are the same. Good internal controls are fundamental to good businesspractices and provide the government with some assurances that its procurementdollars are well spent.

The audit programs that DCAA and other governmentalaudit agencies use to assess the adequacy of contractor internal controls areavailable on DCAA’s website,

"DCAA Approved" Timekeeping Systems

2012-01-30T07:46:00.000-08:00

We read about them, we hear about them, we see the advertising and press releases, many we've seen in practice and we're frequently asked advice about them. We saw another new one advertised just last week. What are we talking about? We're talking about vendors who are promoting "DCAA approved timekeeping systems" or DCAA compliant timekeeping systems. There are at least a couple dozen competing products out there, probably many more. One thing they all have in common however, is that none of them have been "approved" by DCAA (Defense Contract Audit Agency). DCAA does not "approve" commercial timekeeping software/systems. (The same goes for commercial accounting software). DCAA is a Federal Government audit organization and follows strict guidelines (i.e.Generally Accepted Government Auditing Standards) for maintaining their independence in fact as well as appearance. The Agency does not endorse products.

So what's going on here? What are all these claims touting DCAA's approval? At best, these electronic or web-based timekeeping systems have been bought, installed, and used at one or more Government contractors who, after an audit by DCAA of their timekeeping system, received an audit opinion that their timekeeping system was "adequate" (By the way, "adequate" is as good as it gets when it comes to audit opinions. There is no higher rating than that). So these vendors can claim that since no deficiencies were found during the audit, their systems must be good enough for Government work. Or perhaps vendors compared the features of their product to DCAA audit guidance (see DCAA Contract Audit Manual 5-909.2) on what to look for in an electronic timekeeping system and were able to self-assess the sufficiency of their product.

In reality, the software used to collect employee hours is only part of a timekeeping system - usually the simplest part. Most of these electronic timekeeping systems are very similar in the way they work. They are very simple databases with a user interface. The employee logs on with a user ID and password and enters his/her time for the day. Later, supervisors review and approve the employees' electronic timesheets. Then the hours are tallied according to the needs of the organization (usually by project, work order, task, etc). Most of these products include an audit trail so that one can determine who made entries and whether any changes were made and by who and for what reason.

But, as we stated, the software component is only one part of the timekeeping system. The most significant part of the system and the most difficult to implement is the policies, procedures, and practices and the internal controls. Perhaps the most difficult aspect of all is getting employees to record their hours on a timely basis (daily, according to DCAA). This requires policies, procedures, training, compliance reviews, and reporting. It probably necessitates some form of disciplinary action when employees do not comply (e.g. progressive from oral reprimand all the way to removal). It requires a genuine commitment from management who must set the "tone at the top".

We know of contractors who have implemented these so-called DCAA approved software products yet have failed audits of their timekeeping systems, not because of the software but because the implementation was not adequate or was adequate but compliance was not sufficient. Do not be misled by the claims of software publishers. Do not become complacent in thinking that your timekeeping systems is fine just because you have purchased or licensed a product that claims to be "audit proof".

"Fatally Flawed" Compensation Audit - Part 2

2012-01-27T06:00:00.000-08:00

Yesterday, we reported on a recent ASBCA decision that calls into question the methodology used by the Government to assess the reasonableness of contractor compensation levels. The Government of course could appeal that decision. But in the meantime, we have a new methodology, accepted by the ASBCA, for determining "reasonable" compensation levels. The Board's methodology generally results in higher benchmark compensation level when compared to the Government's methodology, We recommend you use it. The methodology is somewhat technical and beyond the scope of this blog but if you are in a situation where your compensation levels are being reviewed and/or questioned, we recommend you seek out expert help in that field.

Compensation for each employee or job class of employees must be reasonable for the work performed. Compensation is reasonable if the aggregate of each measurable and allowable element sums to a reasonable total. In determining the reasonableness of total compensation, contractors must consider factors determined by the contracting officer (who has the ultimate responsibility for deciding whether compensation is reasonable) to be relevant. According to FAR 31.206.b.(2), this would usually entail a comparison with compensation practices of other firms of the same size, in the same industry, in the same geographic area, and engaged in similar non-Government work under comparable circumstances. Making such comparisons, indeed finding the raw data with which to make such comparisons is very difficult. Such work has often been called an "art" rather than science or analysis.

There are a few, benchmarking surveys on the market. Their cost however is often prohibitive for small contractors. Even though the Government relies on them to perform benchmarking studies, these surveys have limitations because its often difficult to find enough companies of the same size, industry, geographical area, doing commercial work under comparable circumstances to make meaningful comparisons. Also keep in mind that there is no FAR requirement for contractors to purchase these surveys, even though the Government often tries to push them into doing so.

"Fatally Flawed" Compensation Audit

2012-01-26T08:10:00.000-08:00

In a decision likely to affect the methodology by which the Government assesses the reasonableness of contractor compensation levels in the future, the ASBCA (Armed Services Board of Contract Appeals) issued a decision last week stating that the methodology used by DCAA (Defense Contract Audit Agency) to assess the reasonableness of compensation was "fatally flawed statistically and therefore unreasonable". The methodology that DCAA used in this case followed the guidance in its Contract Audit Manual (Chapter 5) and the same one used in thousands of compensation reviews over the years. If you have ever had employee compensation questioned by the Government, you will want to read this decision.

In the present case, the contractor challenged DCAA's methodology for determining reasonable executive compensation based on four discrete arguments. The first argument contended that the Government's methodology was fatally flawed as a matter of basic statistical analysis. The Board found that the contractor's first argument was sufficient to prove its case so it did not need to address the contractor's other arguments.

The Government didn't help itself in this case either. In its decision, the Board wrote:

The government made no effort at the hearing or in its brief, to respond to the statistical arguments made by appellant and thus we are left with unrebutted evidence that the methodology used by DCAA was fatally flawed statistically and therefore unreasonable. Moreover, the government effort to support its own methodology was supplanted by an expert witness of questionable judgment. Consequently, we conclude that there are statistical flaws in the government methodology for determining reasonable compensation and that the computations performed by (the contractor's expert) to overcome those flaws are reasonable.

Order of Precedence - Contract Modifications

2012-01-25T06:00:00.000-08:00

The Department of Defense is proposing to amend its FAR supplement (the DFARS) to establish an order for application of contract modifications to resolve any potential conflicts that may arise from multiple modifications with the same effective date. Although it does not happen frequently, there are enough cases involving contract modifications with conflicting contract provisions that have the same effective date, to make such a regulation desirable.

Currently there are no rules to describe in what order to apply modifications to determine the actual content of a resulting modified contract. In order to determine the sequence of modifications to a contract or order, a method for determining the order or application for modifications will resolve any conflict arising from multiple modifications with the same effective date.

Under the new regulations, modifications will be applied in the following order:

Modifications will be applied in order of the effective date on the modification.
In the event of two or more modifications with the same effective date, modifications will be applied in signature date order.
In the event or two or more modifications with the same effective date and the same signature date, procuring contracting office modifications (contract modifications beginning with the letter "P") will be applied in numeric order, followed by contract administration office modifications (contract modifications beginning the the letter "A") in numeric order.

Proposed Change to Definition of Cost or Pricing Data

2012-01-24T06:00:00.000-08:00

DoD is moving to replace all references to "Cost or Pricing Data" to "Certified Cost or Pricing Data in its FAR Supplement (DFARS). This is not a significant change to the procurement regulations but it should clear up some confusion by making it clear when cost or pricing data submitted in response to a Government solicitation must be certified. The change should also improve consistency between DFARS and FAR. FAR was amended several months ago to add the word "certified" to the definitions of Cost or Pricing Data.

Under existing regulations, contracting based on the submission of certified cost or pricing data is considered a last resort. If there is adequate price competition, if prices are set by law or regulations, or if acquiring commercial items, etc, contracting officers are precluded from requiring certified cost or pricing data. The contracting officer can however request "information other than cost or pricing data" necessary to make a determination that proposed prices are reasonable. Sometimes this "information other than cost or pricing data" is required to be submitted in a format and detail that looks just like regular cost or pricing data. And that's where the confusion set in. There was anecdotal evidence that contracting officers were requiring prospective contractors to certify the "information other than cost or pricing data.

By the way, the threshold for requiring certified cost or pricing data (FAR 15.403-4) remains at $700 thousand.

Proposal to Streamline Submission of Interim Vouchers

2012-01-23T06:00:00.000-08:00

The Department of Defense is proposing to make a significant revision to its procedures for processing interim vouchers by taking away the Defense Contract Audit Agency's (DCAA's) authority to approve contractors for direct billing. Under current regulations (DoD FAR Supplement 242.803), DCAA can authorize contractors to directly submit their vouchers for provisional payment to the disbursing office when DCAA is satisfied that the contractor's billing system is adequate. For contractors without approved billing systems, interim vouchers must first go through DCAA for review and approval. Contractors that are able to submit interim vouchers directly Government paying offices, can often significantly reduce the cycle time between voucher submission and payment and that means faster cash flows.

Under the proposal published January 19, 2012, every contractor is automatically approved for direct billing. DCAA has no say in the matter. The only interim vouchers that DCAA can review prior to payment are those "selected using sampling methodologies". This proposal represents a significant diminution of DCAA's authority and responsibility and is yet another example of how DoD is systematically dismantling its auditing arm or, as some have called "its first line of defense" against contract irregularities.

You can read the entire proposal here.

Any comments received by March 19, 2012 will be consider in the formation of the final rule.

Improving Job Opportunities for Individuals with Disabilities - Part 4

2012-01-20T06:00:00.000-08:00

Today we conclude this series on the Labor Department's proposed rules to enhance the requirements for contractors to take affirmative action to employ, advance in employment, and otherwise treat qualified individuals without discrimination on the basis of disability in all employment practices. Today we will discuss the Office of Federal Contract Compliance Program's (OFCCP's) compliance evaluations and the sanctions and penalties available to it to enforce the new regulations.

Under the proposed regulations, the OFCCP may conduct compliance evaluations to determine whether the contractor is taking affirmative action to employ individuals with disabilities. Compliance evaluations may consist of any one or any combination of the following investigative procedures.

1. Compliance review. A comprehensive analysis and evaluation of the firing and employment practices of the contractor, the written affirmative action program, and the results of the affirmative action efforts undertaken by the contractor.

2. Off-site review of records. An analysis and evaluation of the affirmative action program (or any part thereof) and supporting documentation, and other documents related to the contractor's personnel policies and employment actions that may be relevant to a determination of whether the contractor has complied with the requirements of section 503 and its regulations.

3. Compliance check. A determination of whether the contractor has maintained records consistent with the new regulations. OFCCP may request the documents be provided either on-site or off-site.

4. Focused review. A review restricted to one or more components of the contractor's organization or one or more aspects of the contractor's employment practices.

In addition, for contracts and subcontracts expected to exceed $10 million, the new regulations require the contracting officer to request a pre-award compliance evaluation. The pre-award evaluation would focus on the contractors policies, procedures, and practices. The OFCCP has only 30 days to perform the pre-award evaluation. After that, the awarding agency is allowed to proceed with the award.

The proposed regulations provide for penalties and sanctions for contractors that are not in compliant with the rules or for violations of the requirements as when someone files a complaint. There is a due process afforded contractors within the proposed regulations but assuming fault, there are a number of actions the Government may take against a contractor to enforce the rules. These are:

Withholding progress payment
Terminating the contract, and
Debarment from receiving future contracts for six months to three years.

If you wish to read the full text of the proposed regulation, click here. This link also provides information on how to submit comments, if you're so inclined.

Improving Job Opportunities for Individuals with Disabilities - Part 3

2012-01-19T06:00:00.000-08:00

For the past two days, we have been discussing the proposed rules published by the Department of Labor that will require Government contractors to significantly alter the policies, procedures, and practices regarding the recruitment of individuals with disabilities. Here are some of those added requirements:

Data collection - The proposed rule requires contractors collect and maintain several measurements and comparisons related to individuals with disabilities, including the

number of individuals with disabilities referred to them by employment agencies
number of individuals with disabilities referred to them by other entities, groups or organizations with which the contractor has a linkage agreement
number of individuals with disabilities that applied for positions with the contractor; and
number of individuals with disabilities hired by the contractor.

Compliance reviews - to improve the Office of Federal Contract Comploance Program's (OFCCP's) efficiency in conducting compliance evaluations, the proposed rule permits OFCCP to review contractor records for compliance checks and focused reviews wither on-site or off-site, at OFCCPs discretion. The proposed rule also allows OFCCP to perform pre-award compliance evaluations.

Mandatory job listing requirement - The proposed rule requires contractors to list all job openings with the nearest "One-Stop Career Center". One-Stop Career Centers provide job seekers with a full range of assistance under one roof. One-Stops operate in all 50 states and offer training referrals, career counseling, job listings, and similar employment-related services. This rule is designed to benefit both the contractor and the disability community by improving the contractor's ability to attract qualified applicants with disabilities.

Reasonable accommodation. The proposed rules require that contractors develop and implement specific written procedures for processing requests for reasonable accommodation, and details the minimum elements the procedures must include. Having these written procedures will assist the contractor in consistently satisfying its reasonable accommodation obligation by serving as a blueprint for the prompt handling of reasonable accommodation requests. The maintenance and dissemination of these procedures will also ensure that applicants and employees know how to request a reasonable accommodation, who is responsible for handling accommodation requests, and the maximum amount of time within which the contractor must complete the processing of an accommodation request.

Improving Job Opportunities for Individuals with Disabilities - Part 2

2012-01-18T06:00:00.000-08:00

Yesterday we discussed the Labor Department's proposed rules for Government contractors designed to improve job opportunities for individuals with disabilities. These rules will require federal contractors and subcontractors to set a hiring goal of having seven percent of their workforces be people with disabilities, among other requirements.

These proposed rules would strengthen the affirmative action requirements established in Section 503 of the Rehabilitation Act of 1973 obligating federal contractors and subcontractors to ensure equal employment opportunities for qualified workers with disabilities. The proposed regulatory changes detail specific actions contractors must take in the areas of recruitment, training, record-keeping and policy dissemination - similar to those that have long been required to promote workplace equality for women and minorities.

According to Secretary of Labor, Hilda L. Solis, "This proposed rule represents one of the most significant advances in protecting the civil rights of workers with disabilities since the passage of the Americans with Disabilities Act". We would add that the proposed rules will significantly increase the administrative and reporting burdens on government contractors.

Highlights of the proposed rule include:

Goals: Establish, for the first time, a single, national utilization goal for individuals with disabilities. Federal contractors and subcontractors would be required to set a hiring goal of having 7 percent of their employees be workers with disabilities in each job group of the contractors’ workforce.
Data Collection: Improve collection of data on employment of people with disabilities by modifying the invitation for workers to self-identify by requiring that contractors invite all applicants to voluntarily self-identify as an “individual with a disability” at the pre-offer stage of the hiring process. Contractors also will be required to invite post-offer voluntary self-identification and to survey all employees annually in order to invite their self-identification in an anonymous manner.
Record-Keeping: Require that contractors maintain records on the number of individuals with disabilities applying for positions and the number of individuals with disabilities hired.
Accommodation Requests: Require, for the first time, that contractors develop and implement written procedures for processing requests for reasonable accommodation.
Outreach: Require that contractors engage in a minimum of three specific types of outreach and recruitment efforts to recruit individuals with disabilities.
Job Listings: Require that contractors list job openings with One-Stop Career Centers or other appropriate employment delivery systems.
Annual Reviews: Require previously recommended steps contractors must take to review their personnel processes, as well as their physical and mental job qualifications.

Most Government contractors and subcontractors will recognize a large gap between these rules and their current practices.

Improving Job Opportunities for Individuals with Disabilities at Government Contractors

2012-01-17T14:15:00.000-08:00

Government contractors, when entering into contracts subject to Section 503 of the Rehabilitation Act of 1973 (which are all contracts greater than $10,000 unless a waiver is granted), are required to take affirmative action to employ, and advance in employment, qualified individuals with disabilities, without discrimination based on their physical or mental disability. The specific procedures are laid out in 41 CFR Part 60-741 and incorporated into contracts by 48 CFR 52.222.36.

These rules have bee in place for nearly 40 years and require contractors to make a good faith effort to recruit and hire people with disabilities. However, according to the Labor Department's Office of Federal Contract Compliance Programs (OFCCP), the existing rules are not working. The current unemployment rate for people with disabilities is 13 percent, significantly higher than the rate of those without disabilities. Additionally, data recently published by the Bureau of Labor Statistics show disparities facing working-age individuals with disabilities, with 79.2 percent outside the labor force altogether, compared to 30.5 percent of those without disabilities.

To rectify this situation, the U.S. Department of Labor is proposing new rules that would require federal contractors and subcontractors to set a hiring goal of having 7 percent of their work forces be people with disabilities, among other requirements. The proposed rules were published last December and the period for public comment closes on February 7, 2012.

These new rules are designed to strengthen the affirmative action requirements established by the Rehabilitation Act of 1973. The proposed regulatory changes detail specific actions contractors must take in the areas of recruitment, training, record keeping and policy dissemination - similar to those that have long been required to promote workplace equality for women and minorities. In additions, the rule would clarify expectations for contractors by providing specific guidance on how to comply with the law.

Establishing a 7 percent hiring goal for the employment of individuals with disabilities would be a tool for contractors to measure the effectiveness of their affirmative action efforts and thereby inform their decision-making. The proposed rule also would enhance data collection and record-keeping requirements - including for documentation and processing of requests for reasonable accommodation - in order to improve accountability. Additionally, it would ensure annual self-reviews of employers' recruitment and outreach efforts, and add a new requirement for contractors to list job openings to increase their pools of qualified applicants.

These new rules, if adopted, will significantly increase the administrative and reporting burdens of Government contractors. Tomorrow, we will look more specifically at the new requirements to be imposed on Government contractors.

Bonuses and Incentive Compensation

2012-01-16T08:38:00.000-08:00

Bonuses and incentive compensation are integral to companies compensation systems. These benefits are structured in many different ways. They can be based on production, cost reduction, efficient performance, a combination of all these factors, or any of a myriad of other factors.

Bonuses and incentive compensation fall under the Compensation cost principle (FAR 31.205-6) which means that to be allowable under Government contracts, the costs, when added to all other forms of compensation (including fringe benefits), must be "reasonable for the work performed". However, when it comes to bonuses and incentive compensation, there are a couple of other criteria that contractors must meet if they want to claim the costs on their Government contracts. These are;

The awards must paid or accrued under an agreement entered into in good faith between the contractor and the employees before the services are rendered or pursuant to an established plan or policy followed by the contractor so consistently as to imply, in effect, an agreement to make such payment; and
The basis for the award is supported.

The most frequent challenge to bonus and incentive compensation costs come from auditor assertions that the costs were not paid pursuant to an agreement entered into before the services were performed. Careful planning and structuring of bonus plans should help avoid such challenges. Contractors need to avoid situations where they come to the end of the year, find they have some extra cash, and in a spate of goodwill, distribute bonuses to its employees.

A couple of things to keep in mind based on prior ASBCA (Armed Services Board of Contract Appeals). First, employees need not have had a right to receive the bonus, provided there was a reasonable expectation that the bonus would be paid. Secondly, some management discretion in making payments is permissible ("That is presumably what top management is for, and one of the requirements for the attainment of such a position is the ability to bear such responsibility and to make the decisions which grow out of it").

Time and Material Contracts - Be Careful How You Bill

2012-01-13T08:34:00.000-08:00

Under Time and Material (T&M) contracts, the Government pays contractors based on fixed hourly rates plus the cost of any materials used. The fixed hourly rates are fully loaded rates and include fringe benefits, indirect expense allocations, and profit. The final price of a T&M contract is tied to the actual hours a contractor works. The Government considers the T&M contract to be one of the riskiest contract types because there is really no positive profit incentive for cost control or labor efficiency. Not surprisingly, there are a number of FAR provisions that require to Government to prepare solid justification whenever a T&M contract is contemplated.

T&M contracts typically include hourly rates for various labor classifications. Thus, a senior engineer would carry a different (and higher) rate than a technician. The rates are based on specific qualifications for the each particular labor category. The qualifications might be educational, certifications, years of experience, or any number of knowledge, skill, and ability criteria. When the Government "buys" labor under a T&M contract, it usually specifies the labor category it wants to "buy" as well as the number of hours needed.

Contractors are expected to assign employees to the contract that meet the requisite qualifications of the contracted position. If, for example, a Sr. Engineer required a Bachelor's degree in electrical engineering plus ten years of experience, the employees assigned to perform the contracted work, must possess those qualifications. It does not matter that an employee not meeting those qualifications can perform as well as or better than one that does meet those qualifications. The Government contracted for a particular qualification and expects that employees assigned to perform the work meet those qualifications.

Because T&M contracts are considered high risk, the Government performs increased oversight on those contracts. After contract award, the contracting officer establishes a surveillance plan that includes floorchecks and other oversight activities. Most likely, the contracting officer will require the contractor to demonstrate that it is performing efficiently and using effective cost control measures. Floorchecks are used to ensure that the employees assigned to specific job categories meet the qualifications of those positions. And, herein lies our advice. Be certain that you are not billing for time when the positions are filled by those who do not possess the requisite qualifications. Many contractors have had to compensate the Government when they were found to billed for work performed by under-qualified individuals. Some have even faced civil and criminal penalties.

A recent settlement announced by the Department of Justice illustrates the importance of this advice. A contractor agreed to pay $700 thousand to settle allegations that it overbilled for labor on a T&M contract. The Government claimed that during the performance of an army contract, the company falsely billed the government for labor performed by employees who lacked the qualifications specified by the contract for the rates billed to the Government.

In this case, however, it wasn't Government oversight that disclosed the fraud. It was an employee of the company that blew the whistle and filed a "qui tam" action under the False Claims Act. The qui tam provision permits private parties to file actions on behalf of the US and receive a portion of the recovery if the Government takes over the case and reaches a monetary settlement with the defendant.

GAO Revises "Yellow Book" Auditing Standards

2012-01-12T06:00:00.000-08:00

Late last year, the U.S. Government Accountability Office (GAO) published an update to Government Auditing Standards. This version, called the "2011 Revision", replaces the 2007 Revision. Government auditors are required to adhere to these standards (usually referred to as Generally Accepted Government Auditing Standards or GAGAS) whenever they perform audits or attestation engagements. If you've ever looked at a Government audit, you would see something like the following: "This audit was performed in accordance with GAGAS..."

From a Government contractor's perspective, there should be little, if any impact from this new revision. There are some major changes involving the independence of the auditor and the audit organization to the entity under audit. The added concepts address personal, external, and organizational impairments to independence. This reminds us of an incident that happened a number of years ago. A Government contractor notified an audit agency performing audits at their plant that the auditor assigned to the engagement had a close relative employed by the contractor. The audit agency swiftly reassigned that particular auditor so as to avoid any real or perceived independence issues.

The new revision contains requirements for the audit agencies to assess whether management possesses suitable skills, knowledge, and experience for a particular audit. Sometimes it seems that auditors are in over their heads on certain audits. Often this is due to a lack of experience, training and/or supervision. The revision requires auditors to now document this determination.

Another change to the 2011 revision involves the reporting requirement for fraud. The GAO is trying to put it into perspective by restricting reports to only those occurrences that are significant within the context of the audit objectives. Evidently, the previous requirement did not allow judgment or common sense and investigative agencies were flooded with immaterial and trivial reports of "suspected" fraud.

Auditing Compliance with CAS and FAR

2012-01-11T06:00:00.000-08:00

The cognizant contract auditor (e.g. Defense Contract Audit Agency for DoD contracts) is responsible for conducting audits to ascertain whether a contractor's actual cost accounting practices comply with Cost Accounting Standards (CAS) and the Federal Acquisition Regulations (FAR) Part 31 Cost Principles.

In practice however, contract auditors do not typically initiate stand-alone audits to test contractors' compliance with FAR Part 31 and CAS. Rather, auditors are instructed to make compliance determinations an inherent part of ever audit performed, whether it is evaluating pricing proposals, examining incurred costs, or testing internal control systems. To do this effectively, auditors are expected to be knowledgeable of FAR Part 31 cost principles and CAS requirements.

Under this practice, it is not expected that the auditor will perform every step of a given CAS or FAR compliance audit, but rather, only those steps associated with costs that are material to the subject matter of the audit. The downside of this practice (or "upside", depending on your point of view), is that testing in this manner is almost haphazard and the potential for significant noncompliances slipping through the cracks is significantly increased.

The point of this post, and its a point we've made in the past, is that contractors should never assume that the contract auditor is narrowly focused on a single purpose. That auditor is observing, listening, probing, and developing audit leads for later. Although the auditor should communicate his/her purposes and objectives, such communication often doesn't take place. If not, contractors have the right to and should question the purpose of any audit procedures that appears beyond the stated scope of audit.

Price Reasonableness vs Price Realism

2012-01-10T06:00:00.000-08:00

Within the context of Government contracting, there are many terms that have very specific meanings. Sometimes, terms are used interchangeably when they have very different meanings. Such is the case of "price reasonableness" and "price realism".

Price reasonableness looks at the price to be paid for goods and services. At its root, the Government performs price reasonableness analyses to ensure that it is not paying too much. When there is full and open competition for a fixed-price contract, the purpose of price reasonableness is to determine whether the price is too high.

Price realism on the other hand looks at the risk of low-balling, buying-in, or misunderstanding the requirements. Is the offeror's price overly optimistic or impractically low? Is the offeror asking too little? In a fixed-price environment, price realism is primarily focused on whether a contractor understands the requirements. Assuming the contractor understands the requirements, it is okay for it to choose to buy-in to win the competition. (This would be different if the solicitation were for a cost-type contract. Under cost-type solicitations, the Government would be performing "cost realism" as opposed to "price realism" and "buying-in" is often rejected).

The solicitation will specify whether price reasonableness, price realism, or both will be performed. Recently, a company protested the award of a contract to a competitor who, in their opinion, offered an unrealistically low price. The appellant argued that the Government did not perform an adequate price realism analysis. GAO rejected the appeal on the bases that the solicitation did not include a requirement for a price realism evaluation. GAO stated that the appellant's argument reflected a lack of understanding as to the distinction between price reasonableness and price realsim (see GAO B-405724).

Standard Automobile Mileage Rates for 2012

2012-01-09T06:00:00.000-08:00

The IRS standard mileage rate for 2012 remains at 55.5 cents per mile - the same as the last six months of 2011. The standard GSA (General Services Administration) mileage rate for 2012 remains at 51 cents per mile, the same as 2011. Concerning the difference in the rates, GSA stated:

The IRS recently announced its standard automobile mileage rate of 55.5 cents will not change effective January 1, 2012. Although the results of our internal evaluation indicate no change in the Federal privately owned automobile, airplane and motorcycle mileage rates beginning January 1, 2012, we will continue to monitor the fuel costs and will adjust these rates if warranted. Any adjustments will be posted in the Federal Register and on this web site. Note: IRS and GSA do NOT necessarily have the same rate.

This distinction is important for contractors who have tied their reimbursement policies into one or the other's rates. See our posting from last July for more information as to why this distinction is important.

Conditions That May Indicate Significant Estimating System Deficiencies

2012-01-06T06:00:00.000-08:00

The Government loves to devise lists of things that might be indicative of other things. The Inspector Generals of the Executive Agencies (Defense, Energy, Interior, Commerce, Homeland Security, etc), for example, have "fraud" indicators meaning that if one or more of the indicators are present, there could be a chance of fraud occurring somewhere in the contractor's organization. The Government has financial capability risk indicators meaning that if one or more of these indicators are present, the contractor may be in dire financial straights and at risk of going bankrupt.

We found another list the other day. This one pertains to contractors' estimating system. As you know from previous postings, the estimating system is one of the six business systems that if found deficient, will result in payment withholds.

Here's the list. The following have been identified by the DoD as conditions that may indicate potentially significant estimating deficiencies and excessive costs to the Government.

Failure to ensure that historical data on the same or similar work are available to and utilized by cost estimators where appropriate.
Continuing failure to analyze material costs or failure to perform subcontractor cost reviews as required.
Consistent absence of analytical support for significant proposed costs.
Excessive reliance on individual personal judgment where historical experience or commonly used standards are available.
Recurring significant defective pricing findings within the same cost element(s).
Failure to integrate relevant parts of other management systems (e.g., production or cost accounting) with the estimating system so that the ability to generate reliable cost estimates is impaired.
Failure to provide established policies, procedures, and practices to persons responsible for preparing and supporting estimates.
Management information that does not match the data in proposals.
Standards for labor and material costs that are not current.
Changes in make-or-buy decisions not disclosed.
Inappropriate or misleading sampling techniques.

Contractors might want to use this listing to perform their own self-assessments.

Government Approach to Profit/Fee Analysis

2012-01-05T06:00:00.000-08:00

We've discussed profit and fee several times in this blog but it is worth repeating because we continue to hear of situations where the Government attempts to coerce prospective contractors into accepting paltry profit and fee amounts during negotiations. This aggressiveness may well be contrary to Government policy.

The underlying assumption behind Government approaches to profit/fee analysis is the belief that contractors are motivated by profit/fee (see FAR 15.404-4(a)). The Government is required to use a structured approach (usually the weighted-guidelines method) which provides a disciplined approach for ensuring that all relevant factors are considered in developing Government profit/fee negotiation objectives.

It is in the Government's best interest to offer contractor's opportunities for financial rewards sufficient to

Stimulate efficient contract performance;
Attract the best capabilities of qualified large and small business concerns to Government contracts; and
Maintain a viable industrial base to meet public needs.

If the Government is to use profit/fee to motivate contractor performance and achieve the above goals, practices primarily intended to reduce profit/fee or diminish the impact of profit/fee analysis are not in the Government's best interest (see FAR 15.404-4(a)(3)).

Negotiations aimed at reducing prices by reducing profit/fee without proper consideration of the profit function.
Negotiation of extremely low profits/fees
Use of historical average profit/fee rates without regard to the unique circumstances of the immediate negotiation
Automatically applying predetermined profit/fee percentages without regard to the unique circumstances of the immediate negotiation.

While profit/fee calculations must consider the unique circumstances of the immediate negotiation, contract fee cannot exceed statutory limits that apply to cost-plus-fixded-fee contracts;

15% for experimental, development, or research work
10% for all other cost-plus-fixed-fee contracts.

Alaska Native Corporations (ANCs)

2012-01-04T06:00:00.000-08:00

If you've been around Government contracting for any length of time, you've no double heard the term ANCs or Alaska Native Corporations. They're in the news a lot and its usually not positive coverage. For example, Eyaktek, an ANC, made the news recently when one of its employees was involved in an allegedly conspiracy to defraud taxpayers by $20 million under a U.S. Army Corps of Engineers contract. Senator McCaskill and other less vocal senators have railed for several years against the contracting preferences granted to ANCs. DoD is performing a comprehensive analysis to determine just how much money is going to ANCs through its contracts.

For the most part, ANCs try to take advantage of the opportunities afforded to them through legislation passed by Congress and signed into law by the President. And, why not? Its the smart thing to do and it makes good business sense. Many non-ANCs however would prefer a more level playing field. That's a reasonable position as well. However, as long as the laws stay on the books, ANCs will continue to avail themselves of the contracting preferences.

In our discussions with clients who are not ANCs, we find that there is a significant lack of knowledge as to what the ANC preferences are. There is also a lot of misinformation out there as well. So, to help elucidate the matter, we offer this brief explanation of ANC preferences.

In 1971, Congress passed the Alaska Native Claims Settlement Act which created thirteen regional Alaska Native Corporations (ANCs) and approximately 200 local village ANCs to stimulate Alaska's economy and settle land disputes between the United States Government and Alaskan natives.

In 1986 (fifteen years later), Congress authorized regional and village ANCs to be included in the SBA 8(a) program. The SBA is authorized by law to develop a program and promulgate regulations to assist socially and economically disadvantaged small businesses. The SBA's Section 8(a) program, the "Business Development Program" provids business development assistance to socially and economically disadvantaged small businesses, including help in obtaining federal contracts.

When Congress authorized ANCs to be included in the SBA 8(a) program, they also granted unique procurement advantages beyond those available to other Section 8(a) participants, including the following exemptions:

ANCs were eligible to receive sole source 8(a) contracts regardless of dollar size, with no upper limit, while all other 8(a) firms could not receive sole source contracts in excess of $3 million for services and $5 million for manufacturing.
The Alaska Native Claims Settlement Act automatically conferred "economically disadvantaged" status upon ANCs, while other 8(a) firms had to be managed by economically and minority disadvantaged owners.

Because of these preferences, ANCs are often awarded very large sole-source contracts. The contract between Eyatek and the Corps of Engineers discussed above for example, had the potential of reaching $780 million over a five year period.

Purchase, Existence, and Consumption

2012-01-03T06:00:00.000-08:00

Material costs are usually significant for any production type contract. Contract auditors have a special review they perform annually whenever material costs are significant on cost-type contracts. This is a mandatory review as well, meaning that the auditor must perform the review before approving final costs on a contract. It is also required to be performed annually. The purpose of the special evaluation is to verify that purchased direct materials were in fact received and ascertain that they were

needed for the contract
purchased in reasonable quantities
purchased at prudent prices
used on the contract, and
properly accounted for as to initial charge, transfer in or out, and residual value.

These reviews are a bit different from traditional audits in that the auditor will draw a sample of materials charged to Government contracts and then physically locate all items in the sample. The auditors will also obtain purchase orders for the sampled items and trace those purchase orders to receiving reports. Contractors that cannot physically locate sampled material items are at risk for internal control deficiencies and perhaps having some billings temporarily suspended.

To determine whether the item was needed for the contract, the auditor will compare purchase requisitions or purchase orders to contract requirements and/or bills of materials. Good internal controls would have all three of these documents (purchase requisitions, purchase orders, and receiving reports) prepared by different personnel.

Purchases should be made at optimum quantity levels. Contractors should not buy too few at a time and lose out on quantity discounts. On the other hand, sometimes, buying too many of a quantity will result in lower prices based on available quantity discounts.

When materials used on a contract come from inventory (as differentiated from purchasing directly for the contract) the auditor will be very interested in inventory valuation methodologies.

Prompt Payment Interest Rate Drops to 2%

2012-01-02T06:00:00.000-08:00

The prompt payment interest rate dropped again for the sixth consecutive semi-annual period. The new rate for the period January 1, 2012 through June 30, 2012 is a flat two percent. This is down from 2.5 percent from the previous six month period.

Any Governmental agency that has acquired property or services from a business concern and has failed to pay for the complete delivery of property or service b the required payment date must pay the business an interest penalty. This applies to public vouchers under cost-type contracts, progress payments under fixed price, as well as many other payment methods.

Under the prompt payment act, if an interest penalty is owed to a business concern, the penalty shall be paid regardless of whether the business concern requested payment of interest. Agencies calculate interest penalty with the interest rate in effect at the time the agency accrues the obligation to pay a late payment interest penalty.The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made.

Some New Year's Advice

2011-12-30T11:26:00.000-08:00

Decrement Factors

2011-12-30T06:00:00.000-08:00

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

2011-12-29T06:00:00.000-08:00

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

2011-12-28T08:50:00.000-08:00

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

2011-12-27T09:37:00.000-08:00

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

2011-12-23T06:00:00.000-08:00

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

2011-12-22T07:17:00.000-08:00

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

2011-12-21T06:00:00.000-08:00

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,

establish standards for the timeliness and completeness of part performance submissions,
assign responsibility and management accountability for the completeness of past performance submissions for such purposes, and
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:

that affected contractors are provided, in a timely manner, information on contractor performance to be included in past performance databases
that such contractors are afforded up to 14 days to respond
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

2011-12-20T06:00:00.000-08:00

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

2011-12-19T06:00:00.000-08:00

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

2011-12-16T08:13:00.000-08:00

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

2011-12-15T08:00:00.000-08:00

Complying with EEO Requirements

2011-12-15T06:00:00.000-08:00

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:

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.
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.
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

2011-12-14T07:00:00.000-08:00

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

2011-12-14T06:00:00.000-08:00

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

2011-12-13T07:30:00.000-08:00

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

2011-12-12T06:00:00.000-08:00

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

2011-12-09T06:00:00.000-08:00

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

2011-12-08T06:00:00.000-08:00

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"

________________________________________________________

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)

2011-12-06T21:44:00.001-08:00

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

2011-12-06T06:00:00.000-08:00

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

2011-12-05T06:00:00.000-08:00

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:

General instructions
Materials and services
Subcontracts
Commercial item determinations
Adequate price competition
Interorganizational transfers
Direct labor
Indirect costs
Other costs
Formats for submission of line item summaries
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

2011-12-02T07:54:00.001-08:00

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

2011-12-01T06:00:00.000-08:00

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

2011-11-30T06:00:00.000-08:00

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

2011-11-29T06:00:00.000-08:00

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

2011-11-28T06:00:00.000-08:00

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

2011-11-25T08:18:00.001-08:00

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

2011-11-23T06:00:00.000-08:00

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

2011-11-22T06:00:00.000-08:00

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

2011-11-21T09:14:00.001-08:00

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

2011-11-18T06:00:00.000-08:00

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

2011-11-17T06:00:00.000-08:00

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:

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).
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.
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

2011-11-16T06:00:00.000-08:00

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

2011-11-15T06:00:00.000-08:00

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.

-----------------------

Related Posts

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

Proposal Preparation Costs - Direct or Indirect?

2011-11-13T21:08:00.001-08:00

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

2011-11-11T06:00:00.000-08:00

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

2011-11-10T07:10:00.001-08:00

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

2011-11-09T07:25:00.000-08:00

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

2011-11-08T08:27:00.000-08:00

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

2011-11-07T07:36:00.000-08:00

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

2011-11-04T08:20:00.000-07:00

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:

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

2011-11-03T06:00:00.000-07:00

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

2011-11-02T06:00:00.000-07:00

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

2011-11-01T14:01:00.000-07:00

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

2011-10-31T08:24:00.000-07:00

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

2011-10-28T08:10:00.000-07:00

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

This particular AL provides guidance to DoE contracting officerswho need to make decisions on the allowability of costs charged to Governmentcontracts. It first distinguishes between explicitly unallowable costs asdefined in the FAR Part 31.205 and costs that are not explicitly unallowablebut may not necessarily be reasonable. Determining whether costs are reasonablerequires contractors and contracting officer to exercise judgment. According tothe AL, contractor “errors” could fall into the “reasonableness” arena.

The example given in the AL is a situation where a contractoremployee rents a car and inadvertently, but contrary to company policy, failedto decline the optional insurance. The cost of the extra insurance would be anallowable cost according to DoE.

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

If it were possible for acontractor to operate a zero error financial system at no cost, no incurredcost due to error would be allowable because it would be unreasonable. Sincethis is not possible, the cost-reimbursement contractor and the government mustmake prudent business judgments about the benefit versus cost of thecontractor'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 theendless discussions between contractors and auditors/contracting officers aboutwhether certain relatively immaterial costs can be claimed on Government contracts. Although notapplicable to other Governmental agencies, it might nevertheless be useful todrag it out to buoy your position, if you find yourself in this situation.

Limitation of Costs and Limitation of Funds - Part IV

2011-10-27T08:24:00.000-07:00

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".

Limitation of Costs and Limitation of Funds - Part III

2011-10-26T06:00:00.000-07:00

For the past couple of days, we've been discussing the Limitation of Costs and Limitation of Funds clauses that appear in cost reimbursable Government contracts. In Part I, we discussed the fundamental requirements of the two similar clauses. In Part II, we discussed the data and analysis required to comply with clauses. We also indicated that the ability to comply is one of the evaluation factors when the Government comes in to perform a pre-award accounting system survey of your company. Failure to demonstrate the ability to comply can make the difference between winning and losing a bid.

Today we want to address the issue of indirect rates. Indirect rates are used in determining historical costs and in estimating the monthly "spend rate". One question we're asked frequently concerns the appropriate rate to use in these calculations. Contractors typically have different indirect expense rates for different purposes. There's nothing wrong with this practice. It's not like having multiple sets of books. Its simply necessary given the vagaries of Government contracting. For example:

Actual rates - these are the final year-end rates or the rates calculated at some interim period. It could be a monthly, three, six, or nine month period.
Forecasted rates - these are rates used in estimating future contracts. These rates are heavily influenced by the size of a particular bid. A large contract will typically reduces indirect rates. Forecasted rates should not be used to book or bill costs.
Billing rates - these are rates that have been approved by the Government for billing purposes. They should represent the contractors best estimate of the final year-end rates. Contractors have a duty to monitor these rates and revise them as appropriate.
Booking rates - In a perfect world, booking rates and billing rates should be the same. However, the process for adjusting billing rates and obtaining Government approval is cumbersome, time consuming, and subject to the whims of auditors (like when they make arbitrary reductions to "protect the Government's interests"). Sometimes contractors find that the billing rates no longer reflect the best estimate of the final year-end rates but, for various reasons, cannot get the Government to approve revised billing rates. In these cases, contractors must use a more realistic set of rates in order to reasonably estimate contract costs for Limitation of Costs and Limitation of Funds purposes.

There's a certain amount of judgment involved in determining which rates should be used for Limitation of Costs/Limitation of Funds analyses. Commonly for purposes of calculating incurred costs, completed years should be calculated using "actual rates" while current year costs should be calculated using "billing rates" or "booking rates", whichever is the most accurate estimate of the final year end rates. Future year costs should be calculated using "forecasted rates" where the allocation bases can be estimated with a reasonable degree of certainty.

Limitation of Costs and Limitation of Funds - Part II

2011-10-25T09:19:00.000-07:00

In yesterday's posting, we introduced two clauses that appear in cost-type contracts that require contractors to notify the Government as it's actual cost approach the amount that has be funded for work under the contract. Under a cost-reimbursable contract, the Government has no liability to reimburse costs that exceed the amount funded and the contractor has no responsibility to continue performance once contract funds are exhausted.

In order to make meaningful comparisons of actual costs to the amount(s) funded, contractors need systems that can provide that information. The accounting software cannot do it all unless contractors are prepared to shell out big bucks for an "enterprise" system (e.g. Deltek Costpoint). For small contractors however, the cost of those systems is prohibitive. The good news is that most accounting software plus Excel plus discipline will work just fine

Lets take a look at what it takes to meet the requirements of the Limitation of Costs clause. The clause requires that contractors notify the Government 90 days before incurring 75 percent of estimated contract costs. Calculating 75 percent of contract costs is easy. Figuring out when you will arrive at that figure is more challenging. There are a number of approaches one could take. Any approach however requires the following data:

the monthly budget for the contract
incurred cost to date
schedule of commitments (open purchase orders), including subcontracts
future "spend" rate

The purpose of the monthly budget for this analyses is to track "actual" costs against budgeted costs so that variances can be analyzed and corrective actions can be taken if needed. Variances will affect future spending, one way or another.

"Commitments" are often overlooked by contractors. Businesses issue purchase orders for goods and services. The cost of purchases made under those orders however, are not booked until an invoice is received. Therefore, contractors need to factor unfilled orders (or, commitments) into their analyses.

The future spend rate should be calculated by month and reflect management's best estimate of how progress is to proceed on the contract. It is perhaps one of the most challenging aspects of the Limitation of Cost analysis.

Tomorrow we will look at the impact that indirect expense rates have on this analysis.

Limitation of Costs and Limitation of Funds

2011-10-24T07:26:00.000-07:00

All cost-reimbursable contracts contain the Limitation of Costs clause (FAR 52.232-20) or the Limitation of Funds clause (FAR 52.232-22) or usually both clauses. They are similar; the former applies to fully funded contracts and the latter applies to incrementally funded contracts.

Limitation of costs applies to fully funded cost reimbursement contracts. The clause requires a contractor to notify the Government when it expects in the next 60 days to have spent 75 percent of the estimated cost, or expect expenses to be greater or substantially less than previously estimated. The clause allows variations in the number of days, between 30 and 90 days and variations in the percentage between 75 and 85 percent.

Limitation of funds applies to incrementally-funded cost-reimbursement contracts. Contractors must notify the Government that it is coming to the end of obligated funding, and send notification to the contracting officer that obligated funds will be spent within the next 60 days.

In order to comply with these clauses - to know when the specified thresholds have been met - contractors must have an adequate accounting system. An adequate accounting system must meet many criteria but insofar as these clauses are concerned, the accounting data must be current, "booked" indirect expense rates must be reasonably accurate and someone must be monitoring actual costs against estimated costs.

The SF Form 1408, Preaward Survey of Prospective Contractor Accounting System, is used by the Government to assess the adequacy of contractor accounting systems. One of the elements on this form asks whether the accounting system provides the financial information necessary to comply with these clauses. If not, there is a strong likelihood that the contractor will be disqualified from bidding on contracts.

Evaluation Criteria used for Awarding Government Contracts

2011-10-21T07:59:00.000-07:00

When awarding contracts, FAR (Federal Acquisition Regulations) require agencies to consider firms' past performance records to help ensure that taxpayer dollars go to capable contractors. The FAR also provides agencies with broad discretion in deciding how they will consider firms' prior experience. Prior experience refers to whether the firms have done similar work before, and past performance describes how well they have done that work. As firms without prior federal contracting experience seek to gain entry into the federal marketplace, some potential contractors, especially small firms with limited prior experience, consider these factors to be impediments to entering the federal marketplace.

Agencies consider prior experience and past performance during three key phases in the award of contracts:

preparing solicitations
evaluating proposals
making responsibility determinations as to whether firms have the ability and capacity to successfully perform.

Agencies have broad discretion under FAR in deciding the acquisition method, evaluation factors and their relative weights, as well as what prior experience and past performance they will consider relevant.

The GAO (Government Accountability Office) recently published the results of a study they conducted to determine (i) how agencies consider prior experience and past performance in awarding contracts and (ii) the resources available to assist firms in gaining entry to the federal marketplace. The study focused on construction contracts but the findings would also apply more broadly to all federal acquisition.

The GAO study found that the consideration of prior experience and past performance varied by agency. In general, these factors were considered to a greater degree in procurements in which agencies weighed price and nonprice selection factors and to a lesser degree in procurements in which price was the determining selection factor. No surprises there.

The consideration of prior experience and past performance is not limited to work performed under prior contracts with the government. Instead, agencies are to consider work performed on all contracts: federal, state, local, and private sector. GAO did not identify any instances in which an agency limited its evaluation of offerors' experience or past performance to only work performed on prior federal government contracts. The GAO study found that in almost all procurements, contracts were awarded to the offerors that received the highest rating for nonprice factors, such as prior experience or past performance.

The GAO study concluded that consideration of prior experience or past performance is not an impediment to winning government contracts as prospective contractors generally cite their prior work. However, the GAO noted that small firms seeking to win federal contracts face challenges in building up relevant work experience, financial resources, and bonding capacity to compete for large contracts.

Finally, the GAO study listed various resources that are available from federal agencies to help firms without relevant experience or past performance gain entry to the federal marketplace, including outreach and education, subcontracting opportunities, mentor-protege programs, and SBA programs specifically designed to assist small businesses.

The entire GAO report is available on-line. Click here.

Contract Disputes Overview - Part III

2011-10-20T06:00:00.000-07:00

Today we conclude our short overview on contract disputes. It is not our intent here to go into a lot of detail on the processes and procedures available to contractors or the Government when disputes arise. Rather, we are simply informing readers of the methods available to resolve contract disputes. One piece of advice that we can offer based on experience on both sides of disputes is to try and settle disputes quickly and as efficiently as possible, even if it nets results that are less than desired. Protracting the resolution process is very costly in terms of time and resources.

Usually when contract disputes are discussed, it is the contractor disputing a Government position. However, the Government also makes affirmative claims against contractors. These claims include unallowable costs charged to contracts (either directly or indirectly), defective pricing allegations, defective parts, CAS (Cost Accounting Standards) noncompliances, etc. When the Government is making the claim, the demand must be in writing and

state an amount certain
make a demand for payment,
provide an address for payment,
notify the contractor of any deferment processes available to it.

The Government's claim is typically made as soon as the contracting officer has (i) determined that an actual debt is due the Government and (ii) has determined the amount or refund or payment. Often it is not a simple matter to calculate the amount so the contracting officer seeks assistance and advice from auditors and other technical experts. Regardless, the "sum certain" requirement demands that the Government's claim be fairly precise.

Finally, contractors should be aware of the statute of limitations. There is a six-year statute of limitations upon claims by either party for contracts awarded after October 1, 1995 (that should be just about all contracts by now). However, determinations of when a claim accrues can be a very complicated issue of law and we recommend consultation with legal counsel if it appears that a claim is outside the statute of limitations.

Contract Disputes Overview - Part II

2011-10-19T07:37:00.000-07:00

There are several ways of handling contract disputes ranging from the informal and inexpensive (negotiations) to the formal and very expensive (going to court). Naturally, both contractors and the Government want to and generally seek to resolve disputes at the lowest cost possible. However, sometimes the stakes are so great or one side or the other becomes so entrenched that resolution by negotiation or by ADR is not possible. The decision to elevate disputes to the ASBCA or the COFC is largely a business case judgment where one or both of the parties calculate that the potential benefits outweigh the risk (i.e. cost). Yesterday we introduced the subject of contract disputes - today we will focus on the event that occurs when resolution is not possible through negotiations or ADR (Alternative Disputes Resolution) procedures. The first thing that must happen when a dispute is not resolved at the contracting officer level is the preparation of the contracting officer's "final decision".

When a claim cannot be satisfied or settled by mutual agreement and a decision upon the claim is necessary, the Contracting Officer must prepare a final decision (see FAR 33.211). A final decision represents the independent decision and determination of the ACO (or TCO). This decision may be based on information and assistance of auditors and technical specialists but the ultimate decision is that of the contracting officer after thoroughly reviewing all facts and recommendations (see FAR 33.211). The actual final decision document may contain copious information and legal jargon but must, at a minimum,

Contain a describe the claim or dispute
Refer to the pertinent contract terms
State the factual areas of agreement and disagreement
Set forth the contracting officer’s decision (along with supporting rationale).
Notify the contractor of its right to appeal to the ASBCA within 90 days or the Court of Federal Claims within 12 months.

For claims of $100 or less, the contracting officer must issue a final decision within a reasonable time (see FAR 33.211(c)(1)). For claims greater than $100 thousand, contracting officers must issue a final decision within 60 days or provide written notification within 60 days or provide written notification with 60 days as to when such a decision will be issued. Even if the 60 day target cannot be met, contracting officers are still required to issue a final decision in a "reasonable time". Reasonable time is not defined and we have seen situations where final decisions can take a year or longer to issue.

Contract Disputes Overview - Part I

2011-10-18T08:21:00.000-07:00

A dispute between the Government and contractor may arise in a variety of situations. These include, but are not limited to:

Inability to agree upon an equitable adjustment
Inability to agree upon the amount due following a contract termination
Disallowance of costs
Noncompliance with Cost Accounting Standards (CAS)

There are three principal means of disputes resolution between contractors and the contracting officer. These are

Unassisted negotiation
Alternative Dispute Resolution (ADR), and
Appeal of a contracting officer final decision to the

ASBCA (Armed Services Board of Contract Appeals) or
United States Court of Federal Claims (COFC)

The Government's policy is to try to resolve all contractual issues in controversy by mutual agreement at the contracting officer's level (see FAR 33.204). Both parties are encouraged to make reasonable efforts to resolve controversies prior to the contractor submitting a claim. Agencies are encouraged to use ADR procedures to the maximum extent practicable. Certain factors, however, may make the use of ADR inappropriate. For example agencies are encouraged to avoid ADR when

a definitive or authoritative resolution of the matter is required for precedential value and such a proceeding is not likely to be accepted generally as an authoritative precedent
the matter involves or may bear upon significant questions of Government policy that require additional procedures before a final resolution may be and, and such a proceeding would not likely serve to develop a recommended policy for the agency
maintaining established policies is of special importance, so that variations among individual decisions are not increased and such a proceeding would not likely reach consistent results among individual decisions
the matter significantly affects persons or organizations who are not parties to the proceeding
a full public record of the proceeding is important, and a dispute resolution proceeding cannot provide such a record
the agency must maintain continuing jurisdiction over the matter with authority to alter the disposition of the matter in the light of changed circumstances, and a dispute resolution proceeding would interfere with the agency's fulfilling that requirement.

When resolution cannot be accomplished by negotiation or by ADR proceedings, contractors may file a formal claim. The claim must be in writing (see FAR 33.206(a)). It must request a "sum certain" or a decision concerning contract terms. In addition, contractors must certify claims over $100 thousand (see FAR 33.207). Uncertified claims will be rejected and returned to contractors.

To be continued...

Contract Line Item Pricing

2011-10-17T08:46:00.000-07:00

The Department of Defense has issued instructions to its acquisition personnel regarding the integrity of contract line item pricing. This was prompted by a recent review that found during the first five months of fiscal year 2011, about 38 percent (1.7 million out of 4.4 million line items) of contract line items contracted for, had no unit of measure or used "lump sum" as the unit of measure. According to DoD, contracts must define clear requirements that reflect supplies and services acquired in order to enable accurate contract completion and payment. Historically, analysis of what the Government is actually buying has been hampered because too many supplies and services lack any unit of measure that corresponds to the quantity required.

DoD has now mandated that no contract action can be issued using "lump sum" or "dollars" as a unit of measure. Contract pricing arrangements should ensure prices are proportional to work performed and that actual deliveries can be traced to the prices.

This change could affect the timing and frequency of contractor reimbursements (e.g. public vouchers and progress payments). Contracting officers (and contractors) often use "lump sum" pricing as a means of aligning reimbursement/payments with work performed. In the futures, reimbursements will need to be more closely aligned with deliverables.

FAR to Require Contractors to Conduct Privacy Training

2011-10-14T06:00:00.000-07:00

The FAR Councils are proposing to amend the Federal Acquisition Regulations (FAR) to add a new section related to privacy training. It will require contractors to identify employees who require access to a Government system of records, handle personally identifiable information, or design, develop, maintain, or operate a system of records on behalf of the Federal Government, and then to ensure that those employees complete privacy training immediately upon award of the procurement and at least annually thereafter. In addition, contractors are required to keep records indicating that employees have completed the required training and, upon request, provide those records to the Government.

The proposal specifies the minimum privacy training coverage as follows:

The protection of privacy, in accordance with the Privacy Act (5 USC 552s)
The handling and safeguarding of personally identifiable information
The authorized and official use of a Government system of records
Restrictions on the use of personally-owned equipment to process, access, or store personally identifiable information
The prohibition against access by unauthorized users, and unauthorized use by authorized users, of personally identifiable information or systems of records on behalf of the Federal Government
Breach notification procedures (i.e., procedures for notifying appropriate individuals when privacy information is lost, stolen, or compromised) to minimize risk and to ensure prompt and appropriate actions are taken should a breach occur
Any agency-specific privacy training requirements.

The FAR councils estimate that this requirement will affect about 1,500 small businesses in additions to an unknown number of other firms but does not expect that impacted contractors will find the requirement burdensome.

How Auditors Assess Internal Controls

2011-10-13T06:00:00.000-07:00

Audits by Governmental Organizations are generally conducted in accordance with Generally Accepted Government Auditing Standards (GAGAS), also known as the GAO Yellow Book. In order to comply with GAGAS, auditors are required to be familiar with these standards and apply them in the particular audit. One of the standards, found in section 601.46 requires auditors to obtain an understanding of the design of specific controls. Suggested methods of satisfying this requirement include;

Question: inquiries of appropriate management, supervisory, and staff personnel
Read: inspection of the contractor's documents
Look: observation of the contractor's activities and operations.

The nature and extent of procedures performed vary from contractor to contractor and are influences by factors such as the following:

the newness and complexity of the specified requirements
the auditor's knowledge of internal control over compliance obtained in previous assignments (e.g. reported deficiencies)
the nature of the specified compliance requirements
an understanding of the industry in which the contractor operates
judgments about materiality

"Materiality" is always a big factor in assessing internal control adequacy.

Any policy and procedure or other internal controls that may have a material impact on the significant elements/areas being audited and the procedures for obtaining an understanding of those will depend on the nature of the elements/areas under audit and the basis for their development. For each element/area selected for evaluation, contractors will be expected to explain the processes and related policies and procedures or other internal controls related to the development of those elements or areas identified for evaluation. For the most part, auditors will try to obtain and document their understanding of those during an initial walk-through (probably as part of an entrance conference).

The auditor's objective is to gain an understanding of the applicable key processes and the related policies and procedures (formal or informal) or other internal controls so that they can be considered in designing/tailoring audit procedures to meet the objectives of the audit. Good internal control systems pay dividends in reduced audit oversight.

Subcontract Costs Based on Commercial Item Pricing

2011-10-12T06:00:00.000-07:00

A couple of weeks ago, we ran a three part series dealing with the Government's purchases of commercial items and some of the factors that the Government considers in determining whether items meet the precise definition of "commercial items". Today we want to focus on prime contractor responsibilities when they include subcontract costs based on commercial item pricing in a proposal or public voucher.

When a prime/higher-tier contractor includes proposed subcontract costs for commercial items in its proposal, the prime/higher-tier contractor is required to make a commercial item determination (CID) and perform the appropriate cost or price analysis to establish a fair and reasonable price, in accordance with Department of Defense FAR Supplement (DFARS) 244.402 and Federal Acquisition Regulation (FAR) 15.404-3. The Government auditor (e.g. DCAA) or the price analyst/contracting officer (e.g. DCMA) will review the adequacy of the prime/higher-tier contractor’s CID and associated cost/price analysis as a basis for opining on the adequacy of the CID and the reasonableness of the proposed subcontract costs included in the prime/higher-tier contractor’s proposal.

Prime contractors and all of their subcontractors are required to purchase supplies and services from responsible sources at fair and reasonable prices, including those determined to be commercial items. DFARS 244.402(a) states "Contractors shall determine whether a particular subcontract item meets the definition of a commercial item.” Prime/higher-tier contractors are expected to exercise reasonable business judgment in making the CID and documenting its determination. In addition, FAR 15.404-3(b) states that the prime contractor shall conduct appropriate cost/price analyses to establish the reasonableness of proposed subcontract prices and include these analyses in its proposal.

An adequate CID clearly identifies and supports how the item meets the commercial item definition in FAR 2.101. Generally, support for a CID would include market analysis and sales history. Failure to include adequate support could result in an estimating system deficiency and possible withholds on billings.

In some cases, the contracting officer may not agree with a prime contractor/higher-tier subcontractor's CID. FAR 15.403-1(c)(3) states in part, “If the contracting officer determines that an item claimed to be commercial is, in fact, not commercial and that no other exception or waiver applies, … the contracting officer shall require submission of certified cost or pricing data.”

DCAA Discontinues Audits of Contractor Purchasing Systems

2011-10-11T06:00:00.000-07:00

On September 30, 2011, DCAA (Defense Contract Audit Agency) instructed its audit staff to no longer initiate audits on contractors' internal controls over purchasing systems. DCAA will continue to audit the costs as part of proposal evaluations and incurred cost audits but will no longer be concerned with "purchasing systems" per se. That responsibility will be turned over to DCMA (Defense Contract Management Agency)

DCAA stated that the switch in policy it part of its "continued effort to identify and eliminate areas of potential overlapping responsibilities, while looking for opportunities to improve efficiencies within DCMA and DCAA to ensure the appropriate use of resources while protecting the taxpayers' interest." DCMA meanwhile, has established a Purchasing System Review Center and will increase both the number of analysts and the number of reviews to be performed.

This is another in a string of audit area that DCAA is abandoning following the appointment of its new Director. Other areas the Agency has abandoned recently include EVMS (Earned Value Management Systems), Financial Capability Reviews, Forward Pricing Indirect Rates, Cost-reimbursable proposals under $100 million, and Fixed-price proposals under $10 million.

Lobbying Costs Related to Legislative Earmarks

2011-10-10T06:00:00.000-07:00

The Defense Contract Audit Agency (DCAA) recently issued guidance to its auditors to be on the lookout for lobbying costs related to legislative earmarks. This guidance from September 2011 is actually a reiteration of guidance first published about three and a half years ago. The new guidance however, adds links to Governmental and non-governmental available sources of information on historical and current lobbying and earmark activities. We recommend that contractors peruse these databases in order to anticipate and prepare for possible auditor queries in this area.

A legislative earmark refers to a Congressional provision directing funds to be spent on specific projects. Typically, a legislator seeks to insert earmarks in spending bills that direct a specified amount of money to a particular contractor, organization, or project in his or her home state or district. Earmarks are still alive and well in D.C. The Office of Management and Budget reported that in the 2010 Defense Appropriations Act alone, there were 1,759 earmarks totaling $4.3 billion.

Some contractors, seeking earmarks, might expend a significant amount of effort including professional services for the purpose of influencing or attempting to influence Government officials in connection with earmarks. Auditors are being instructed to evaluate contractor's procedures for properly identifying and accounting for costs associated with lobbying activities and legislative earmarks. Auditors are being instructed to question these costs under FAR 31.205-22, Lobbying and Political Activity Costs. The new DCAA guidance states that FAR 31.205-22 applies to "... costs incurred associated with any attempt to influence legislation (e.g. earmark) ...". Actually FAR 31.205-22 makes no reference to "earmarks". This is a DCAA editorial insert and we're seen a legal opinion that makes a contrary case that FAR 31.205-22 does not apply to earmarks. A stronger case could be made citing FAR 52.203-12, Limitation on Payments to Influence Certain Federal Transactions, which prohibits the cost of activities to influence the award, the extension, continuation, renewal, amendment or modification of a contract.

Notwithstanding the merits of DCAA's position on this matter, the fact is that most companies already voluntarily remove any costs related to "earmark" activities from any claim for reimbursement from the Government. The costs are usually immaterial in that whether claimed or not, an indirect rate is not significantly affected. And, since immaterial, the risks of becoming embroiled in a dispute with the Government have limited potential payback.

SBA Crackdown on Size/Status Scofflaws

2011-10-07T12:46:00.000-07:00

Congress and the Small Business Administration (SBA) are getting ready to crack down on companies who do not play by the rules when it comes to size and status. In 2010, Congress passed the Small Business Jobs Act of 2010 (Jobs Act). Included in this Act were a number of provisions that pertain to small business size and status integrity.

The Jobs Act provides that if a concern willfully seeks and receives an award by misrepresenting its small business size or other socioeconomic status, there is a presumption of loss to the United States equal to the value of the contract, subcontract, cooperative agreement, cooperative research and development agreement or grant. The Jobs Act also provides that certain actions, such as submitting an offer in response to a solicitation set aside for small business concerns, will be deemed a representation of small business size or status. The Act also requires the signature of an authorized official of a concern making a small business size or status representation in connection with certain actions, such as submitting an offer. The amendments further provide that concerns must update their size and status certifications in ORCA (Online Representations and Certifications Application) at lease annually, or the status will be lost until such time as the update is made.

On October 7, 2011, SBA published the following proposed regulations to implement these provisions of the Jobs Act. SBA is proposing to amend its program regulations to

implement statutory provisions establishing that there is a presumption of loss equal to the value of the contract or other instrument when a concern willfully seeks and receives an award by misrepresentation.
implement statutory provisions that provide that the submission of an offer or application for an award intended for small business concerns will be deemed a size or status certification or representation.
implement statutory provisions that provide that an authorized official must sign in connection with a size or status certification or representation for a contract or other instrument.
implement statutory provisions that provide that concerns that fail to update their size or status in ORCA at least annually shall no longer be identified in the database as a small or some other socioeconomic status, until the representation is updated.
clarify when size is determined for purposes of entry into the 8(a) Business Development and HUMZone programs.

SBA hopes that these regulations will prevent and deter fraud and misrepresentation in small business government contracting and other programs. In fiscal year 2010, SBA found approximately 200 firms to be ineligible for the contract (or other award type) for which they were awarded. There were undoubtedly many others that were not investigated.

Executive Compensation Cap for 2011 - Not Yet

2011-10-06T07:37:00.000-07:00

The allowability of compensation costs for the top five executives of Government contractors is capped by statute (10 USC 2324(e)(1)(p) and 41 USC 256(e)(1)(p)). The benchmark amount does not limit what contractors can pay their executives but only the amount that can be claimed under Government contracts.

The Administrator, Office of Federal Procurement Policy (OFPP) determines the benchmark amount each fiscal year and published in the Federal Register. From 2004 through 2010, these determinations were published as early as March 25th but no later than May 14th. However, the OFPP has not yet published the compensation cap for 2011.

A few senators and congressmen have taken notice of OFPP's inaction on this matter. In a letter last month, Senators Boxer and Grassley and Representative Tonko called on OFPP to issue its determination before the end of the current fiscal year (September 30th). OFPP did not comply.

In 1998, when the statute became effective, the cap was $340,650. In 2010, it was $693,951. According to the aforementioned letter, this cap has grown 53 percent faster than inflation. The letter concludes by stating "The American people deserve to know exactly how much government contractor executives will charge the taxpayer for their salaries this year".

Cost Accounting Standards - Revision to Existing Exemption

2011-10-05T08:22:00.000-07:00

There are ten categories of contracts and subcontracts that are exempt from all CAS (Cost Accounting Standards) requirements. Some of the more common ones include sealed bids, contracts under $700 thousand, and contracts to small businesses. One category, often referred to as the "b15 exemption", exempts Firm fixed price contracts or subcontracts awarded on the basis of adequate price competition without submission of cost or pricing data.

The CAS Board is now proposing to amend the wording of this exemption to include the term "certified" before the phrase "cost or pricing data". The Board believes that a clarification is required because of the Government's emerging use of "data other than certified cost or pricing data" to negotiate contracts is causing some confusion. "Data other than certified costs or pricing data could still be construed as cost or pricing data, just not certified. Thus, some contractors and contracting officers have inappropriately excluded such contracts from CAS requirements.

When the exemption was first drafted in 2000, there was no category called "data other than cost or pricing data" so that the CAS Board believed that "certified" was presumed in the definition.

Cost Realism Reviews

2011-10-04T07:39:00.000-07:00

When the Government evaluates proposals for the award of a cost-reimbursement contract (e.g. CPFF, CPIF, and CPAF), a prospective contractor's proposed estimated cost of contract performance is not considered controlling since, regardless of the costs proposed by the contractor, the Government is bound to pay the contractor its actual costs (as long as those costs are allowable, allocable, and reasonable). Consequently, a cost realism analysis must be performed by the agency awarding the contract to determine the extent to which an offeror's proposed costs represent what the contract costs are likely to be under the offeror's technical approach, assuming reasonable economy and efficiency (see FAR 15.305(a)(1), and (2).

A cost realism analysis is the process of independently reviewing and evaluating specific elements of each offeror's cost estimate to determine whether the estimated proposed cost elements are realistic for the work to be performed, reflect a clear understanding of the requirements, and are consistent with the unique methods of performance and materials described in the offeror's proposal (see FAR 15.404-1(d)(1)).

The Government will adjust an offeror's proposed costs when appropriate based on the results of the cost realism analysis (see FAR 15.404-1(d)(2)(ii)). Herein lies the basis for many bid protests. Sometimes, the Government will increase the estimated cost of an offeror's bid, sending it out of the competitive range. Appeals to the GAO (Government Accountability Office) usually question the propriety of the Government's adjustments by maintaining they were inappropriate, undocumented, or fundamentally changed the proposed technical approach. Most of the time, these appeals are unsuccessful. Because, FAR requires the Government to conduct cost realism reviews and adjust proposed prices if necessary, the GAO limits is review to determining whether the cost analysis was reasonably based and not arbitrary.

For more information on cost realism reviews, see our previous posts on the subject.

Commercial Items - Part III

2011-10-03T05:30:00.000-07:00

In our previous two posts on this subject, we described the Government's penchant for buying goods and services commercially and provided a bit of regulatory guidance on what does and does not constitute commercial items and commercial practices. As we conclude this short series today, we will be discussing some general policies and practices the Government uses to make those purchases.

The basic policies and procedures are contained in FAR Part 12. Most agencies have supplemental regulations. For DoD, its DFARS 212. Additionally, each agency has specific policies and procedures that implement the regulations. For DoD, its PGI 212 (Procedures, Guidance, and Instructions). Fundamentally, commercial item policies and procedures rely heavily on the education, training, and professional expertise of Government acquisition personnel. Government acquisition personnel are trained and instructed to use flexibility and exercise sound business judgment in its interpretations and application of policies and procedures.

The decision to use a commercial item to meet the Government's requirements for a specific acquisition is based on market research and an analysis of the marketplace. Contracting officers must ensure that the contract files fully and adequately document the market research and rationale supporting a conclusion that the commercial item definition (described in Part I) has been satisfied. Failure to do so risks having awards overturned if losing bidders appeal to the GAO (Government Accountability Office). Under DoD rules, commercial items over $1 million must have a written determination that the item(s) satisfy the commercial item definition.

While the documentation requirements on contracting officers are extensive, they are even more cumbersome for determinations involving modifications of a type customarily available in the commercial marketplace and items offered, but not yet sold, leased, or licensed to the general public. In these situations the documentation must clearly detail the particulars of the modifications and sales offers. When such items lack sufficient market pricing information, contracting officers must support determinations that prices are fair and reasonable by other means. The fact that a price is included in a catalog does not necessarily mean that it is fair and reasonable.

If the contracting officer cannot determine whether an offered price is fair and reasonable, even after obtaining additional information from sources other than the offeror, the contracting officer must require the offeror to submit information other than cost or pricing data to support further analysis. In extreme cases, when "other than cost or pricing data" is still not adequate to support the reasonableness of the offered price, certified cost or pricing data may be required.

Contractors who desire to sell commercially, should be prepared to assist the contracting officer in his/her documentation efforts.

Commercial Items - Part II

2011-09-30T06:56:00.000-07:00

We began this series yesterday discussing the Government's preferred method of acquiring goods and services; making every effort to buying commercial items. Beginning with the Federal Acquisition Streamlining Act (FASA) in 1994, the Government signaled a shift from traditional buying of goods and services tailored exclusively for its own use and purposes to buying commercial items and using commercial buying practices. One of the impediments to buying commercial items is deciding what is and is not a commercial item. Obviously COTS (Commercially Available Off-The-Shelf) items are commercial but the Government's definition is much broader.

Items that require modifications of a type customarily available in the commercial marketplace, or require minor Government-unique modifications, can still be considered commercial items. To qualify as a minor modification, of a type on customarily available in the commercial marketplace made to meet Government requirements, the modification must significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process.

The FAR commercial item definition includes many services as well as products. A service is considered a commercial item when it is provided in support of a commercial item. A service is also considered a commercial item when it is of a type offered and sold competitively in substantial quantities in the commercial market on the basis of established catalog r market prices for specific tasks performed under standard commercial terms and conditions.

The phrase "of a type" broadens the definition so that qualifying items do not have to be identical to those in the commercial marketplace. This takes full advantage of the opportunities for modified commercial items.

If a commercial item evolves through technical or performance advances and that is not yet available in the commercial marketplace, it still meets the commercial item definition, as long as it will be available in time to satisfy the Government's requirement (e.g. product updates, model changes, and product improvements).

For minor modifications of a type not customarily available in the commercial marketplace, the Government considers value, size, and comparative value and size of the final product. Dollar value and percentage are used as guideposts, but are not conclusive evidence that a modification is minor.

Commercial Items - Part I

2011-09-29T07:07:00.000-07:00

Over the next few days, we will be discussing "commercial item" procurement; what are commercial items, from the Government's perspective?, the Government's preference for buying commercially, and criteria used in making source selections. Companies that can offer their products and services to the Government as commercial items have a distinct advantage over those who do not.

Since the passage of the Federal Acquisition StreamliningAct of 1994 (FASA), the preference within the Federal Government has shiftedfrom the acquisition of items developed exclusively for the Government to theacquisition of commercial items. Thischange was designed to take advantage of available and evolvingtechnological innovations in the commercial sector.

FASA represented a dramatic shift in acquisition policy for the Federal Government. FASApromoted maximum use of commercial items to meet the government’s needs andstreamlined the process of acquiring such items following commercial marketpractices. Under FASA, the concept of commercial practices is overarching and affects every functional area within the acquisition process. Source selection is made on a "best value" rather than a "cheapest price" basis.

The Government's preference for commercial item pricing is stated right at the beginning of FAR. The "guiding principles" section at FAR 1.102(b) states that Federal Acquisition System will:

Satisfythe customer in terms of cost, quality, and timeliness of the delivered product or service by;

Maximizingthe use of commercial products and services,
Usingcontractors who have a track record of successful past performance or whodemonstrate a current superior ability to perform, and
Promotingcompetition;

Minimizeadministrative operating costs;
Conductbusiness with integrity, fairness, and openness; and
Fulfillpublic policy objectives.

Definition

Commercial items include any item of a type customarily used by the general public, or by nongovernmental entities, for purposes other than governmental purposes that has been sold, leased, or licensed, or offered for sale, lease, or license to the general public (see FAR 2.101). The definition also includes items that are not yet in the commercial marketplace, as long as they will be available in time to satisfy Government requirements.

Commercial items do not necessarily have to be“off-the-shelf”. Items that requiremodifications of a type customarily available in the commercial marketplace, orrequire minor Government-unique modifications, can still be consideredcommercial items. We will go into more detail tomorrow on what constitutes "minor modification".

The "Buy American Act" - Briefly

2011-09-28T08:31:00.000-07:00

Nearly every Government contract that exceeds the micro-purchase threshold (currently set at $3,000) contains the "Buy American Act" clause (FAR 52.225-1). The Act restricts the purchase of supplies, that are not domestic end products, for use within the United States. A foreign end product may be purchased if the contracting officer determines that the price of the lowest domestic offer is unreasonable or if another exception applies. A listing of these exemptions is found in FAR 25.1. The Act also requires the use of only domestic construction materials in contracts for construction in the United States. Here again, there are a few exceptions.

The Buy American Act uses a two-part test to define a domestic end product.

The article must be manufactured in the United States; and
The cost of domestic components must exceed 50 percent of the cost of all the components.

The Act applies to all contractors including small business set-asides.

FAR 52.225-2 requires contractors to certify compliance with the Buy American Act.

Contract Audit Reports

2011-09-27T07:21:00.000-07:00

The DoD Inspector General just issued its semi-annual report to Congress covering the period October 2010 to March 2011. It summarizes not only its own activities but incorporates audits and investigations performed by the military organizations and by DCAA (Defense Contract Audit Agency).

Many people in the contracting community, including Government contractors sense that DCAA is not getting its work done. The reasons probably stem from GAO reporting that cast doubt on the adequacy of their audits and all of the negative fallout that ensued. Many contractors we talk to are frustrated however because they cannot close out old contracts due to DCAA's languishing incurred cost audits. Conversely, some contractors seem pleased because fewer audits mean less disruption. Bottom line however, its difficult to see how the interests of either the Government or its contractors are served by the current state of affairs.

The semi-annual IG reports readily show the precipitous drop off in the number of contract audit reports. During the six month period ended March 2008, DCAA issued 13,807 audit reports. During the six month period ended March 2011, DCAA issued only 3,821 reports, a 72 percent drop from three years earlier. The number of incurred cost audits (audits required before contractors can close out contracts) dropped by 77 percent from 8,689 to 1,974. The amount of dollars audited dropped by 82 percent from 73.1 billion to $12.9 billion.

DCAA audit coverage is falling seriously behind the pace of Government spending. We wonder how long this will be allowed to fester before someone in the administration or Congress takes notice and takes action.

CAS Board Activities

2011-09-26T07:35:00.000-07:00

The CAS (Cost Accounting Standards) Board recently published the minutes of the final two meetings held in 2010. There were four in all; February, August, September, and November. Very little happened during the year. Personnel-wise, a new OFPP Administrator (Daniel Gordon) took over as Chairman and the DoD representative transitioned from April Stephenson to Patrick Fitzgerald. Otherwise, it was a very uneventful year.

February: Staff updated board members on the ongoing project to harmonize the pension standards (CAS 412 and 413) with the Pension Protection Act (PPA) of 2006.

August: Again, the only topic of discussion was the CAS Pension Harmonization.

September: Discussed the pension harmonization again. Also discussed a proposal to tie the CAS applicability threshold to the TINA (Truth in Negotiations Act) threshold (currently set at $700 thousand).

November: Same topics as the September meeting.

DCAA Areas of Focus

2011-09-23T08:46:00.000-07:00

Michael Bame, who works for a defense contractor and blogs about contracting matters, wrote recently that he was briefed by DCAA on areas that the Agency expects to concentrate on in the coming months. On an annual basis, DCAA meets with major contractors (those having more than $100 million in flexibly priced contracts) to discuss audit plans for the upcoming fiscal year. These briefings focus on areas that are somewhat unique to risks associated with the particular contractor being briefed. Most likely, the briefing described by Mr. Bame was tailored for his employer because the Agency has not issued "audit alerts" that correspond to these items. Nevertheless, the areas of emphasis he listed, while not "new", are interesting and informative in a general sense.

Online Source

The areas of identified DCAA focus include the following:

Distinguishing between business development and marketing costs (in general, business development is allowable while marketing costs are not).
More scrutiny in making sure contractors do not exceed the cap on meals, lodging, and incidental expenses (Historically this has not been a high risk area meaning that findings have been rather insignificant. After 15 years, most contractors have this one down pat).
Assessing adequacy of estimating and purchasing policies, procedures, and practices
Making sure that bonuses are paid pursuant to a formal plan
Personal use of company cell phones (We wonder why DCAA would expend resources auditing this area. How significant would any incremental costs be?)
Health insurance paid for nonqualified dependents (this was the subject of an audit alert a few months back).
Making sure contractors retain original documents after scanning (We're not sure what this has to do with audits of costs. Its more a record retention issue under the purview of the contract administrator.)

Defective Pricing Risk Assessments

2011-09-22T07:54:00.000-07:00

The Truth in Negotiations Act (TINA) was enacted to provide the Government with a contract price reduction mechanism if a contractor fails to disclose the most accurate, complete and current data as of the date of agreement on price, and the contract price was increased as a result of that failure. TINA applies to negotiated contracts greater than $700 thousand, regardless of type.

In order to determine whether Government contractors comply with TINA, auditors from various agencies conduct systematic reviews of contracts subject to TINA. The GAO (Government Accountability Office, the various IGs (Inspector Generals') offices, and DCAA (Defense Contract Audit Agency), are among those agencies. As a general rule, the larger the contract, the more likely it is to be audited for compliance with TINA. There is a threshold above which audits are certain. At one time, this threshold was $100 million. There are other factors that affect the number of audits to be conducted at a particular contractor. These include, but are not limited to (i) prior findings, (ii) the adequacy of a contractor's estimating system, and (iii) "audit leads" derived from any number of sources.

Once a contract has been selected for review, the auditor will perform a risk assessment to determine the likelihood that defective pricing occurred. Based on the risk assessment, the auditor will decide whether to continue the review or cancel it. In order to perform the risk assessment, the auditor will, at a minimum, request the following items from the contractor. The Government (the auditor) has a contractual right, affirmed by various courts, to access this data.

Copies of the initial and any revised proposal
Identification of significant subcontract
Identification of significant inter-organizational transfers
Final Certificate of Current Cost or Pricing Data
Identification of all cost or pricing data submitted before or during negotiations
A listing of additional data submitted after date of agreement on price (if any)
Costs incurred to date by cost element and estimates at completion (EAC) by cost element

Recently, the audit program for TINA compliance (i.e. defective pricing) was modified to include a significant new step to the "risk assessment" phase of the audit. This new step, called the "walk-through" is potentially onerous and we advise contractors to prepare ahead of time. This new audit step reads:

Coordinate a date with the contractor to provide a walk-through of its certified position and the major events associated with this pricing action. Invite the Contracting Officer. This should include the following:
a. Highlighting all significant cost or pricing data provided to the contracting officer (e.g., latest certified proposal plus any subsequent cost or pricing data submitted up to the time of price agreement to include sweep data) to include a discussion of the contractor’s documentation of negotiations.
b. A discussion of the contractor’s internal controls in place at the time of negotiations to ensure that the most accurate, complete and current data were disclosed to the Government.
c. Have the contractor identify how the costs were accumulated in the accounting system to facilitate a comparison of the actual costs to the proposed/negotiated costs. For example, if the contractor proposed by WBS, have the contractor identify the charge numbers for each WBS. Another example would be if the actual costs were accumulated in more detail than the proposed costs. In this case, the contractor would need to identify how the actual costs roll up to the proposed costs in order to perform an accurate over/underrun test.

DoD to Increase Usage of Fixed-Price Incentive Contracts

2011-09-21T07:00:00.000-07:00

DoD updated their acquisition regulations to increase the used of fixed-price incentive contracts, especially for acquisitions moving from development to production. The theory is that contracts with incentives will increase productivity and innovation in industry and ultimately reduce costs to the Government.

Under the new provision at DFARS 216.403-1, contracting officers are instructed to "give particular attention" to the use of fixed-price incentive contracts. The default ceiling is 120 percent and the default share ratio is 50/50. Both the ceiling and share ratio can be adjusted when properly justified and documented by the contracting activity.

Contractors who agree to fixed-price incentive contracting must be extremely confident of their estimated costs, including indirect expenses/rates. Volatility and uncertainty of costs can adversely affect a contract's profitability.

Award Fee Reductions or Eliminations

2011-09-20T07:51:00.000-07:00

The Department of Defense issued an interim rule that requires contracting officers to include in the evaluation criteria of any award-fee plan, a review of contractor and subcontractor actions that jeopardized the health or safety of Government personnel (either military or civilian) through gross negligence or reckless disregard for the safety of such personnel.

There was a similar interim rule published last November. That one required conviction in a criminal proceeding, or finding of fault and liability in a civil or administrative proceeding. This one adds contractors and subcontractors that are not under the jurisdiction of the U.S. courts, presumably to include foreign companies that provide support for overseas deployments (Germany, Korea, Japan, Iraq, Afghanistan, etc). For those contractors, a final determination of fault resulting from a DoD investigation is required.

Under the interim rule, the contracting officer shall consider reducing or denying award fees for a period if contractor (or subcontractor) actions caused serious bodily injury or death of civilian or military Government personnel during the period under review. Serious bodily injury is defined as a "grievous physical harm that results in a permanent disability."

In addition, this rule requires that information on the final determination of award fee be entered into the Federal Awardee Performance and Integrity Information System (FAPIIS).

New FAR Cost Principles Guide

2011-09-19T06:15:00.000-07:00

The FAR Cost Principles Guide has now been updated through FAC 2005-52 (June 2011) and is available for download here. The previous update was through FAC 2005-41 (April 2010). This guide keeps track of all changes to cost principles since the FAR was first published in 1984. If there is ever a question over the allowability of costs under a particular contract, this is a great resource for determining the specific regulations in effect at the time of contract award.

A few FAR cost principles have not changed since 1984 (e.g. bad debt expense, alcoholic beverages) but most have. For example, the Compensation cost principle which covers the allowability of compensation costs has changed 30 times. That averages to more than once a year.