Monday, November 30, 2009

Bio on DCAA's Fitzgerald

Noel Brinkerhoff over at has a biography on the new DCAA Director. Click here to read it.

Friday, November 27, 2009

Excessive Pass-Through Costs

Last month, the FAR councils published an interim rule that limits excessive pass-through costs charged to Government contracts. The limit on excessive pass-through costs has applied to DoD contracts since 2007. The new interim rule covers all Government contracts.

 We will discuss how the new rule works, but first, some definitions.
  • Pass-through costs are defined as indirect costs and profit or fee.
  • Excessive pass-through costs arise when a contractor (or a higher-tier subcontractor) subcontracts out all or a substantial portion of the work and adds no or negligible value to contract performance. Excessive pass-through indirect costs are unallowable.
  • No or negligible value means that the contractor cannot demonstrate to the contracting officer that its effort added value to the contract in accomplishing the work performed under the contract.
  • Added value means that the contractor performs subcontract management functions that the contracting officer determines are a benefit to the Government (e.g. processing orders of parts or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, and performing quality assurance functions.
For DoD contracts, this regulation applies to negotiated cost-type and fixed price contracts greater than $650 thousand (cost or pricing data threshold). For civilian agencies, it apples to cost-type contracts over $100 thousand (simplified acquisition threshold).

The interim rule includes requirements for both offerors/contractors and Government contracting officers.

Proposal preparation phase:
  1. Offerors must identify the total cost of the work to be performed by the offer and the total cost of the work to be performed by each subcontractor.
  2. If the offeror intends to subcontract more than 70 percent of the total cost of work to be performed under the contract, the offeror shall identify
    • the amount of indirect costs and profit/fee applicable to the work to be performed by subcontractors
    • a description of the added value provided by the offeror as related to the work to be performed by the subcontractors
Negotiation and award phase:
  • If the offeror intends to subcontract more than 70 percent of the cost of work to be performed, the contracting officer must make an affirmative determination that pass-through costs are not excessive.
After contract award phase:
  1. Contractor must notify the contracting officer (in writing) if it changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of work to be performed.
    • must identify the revised cost of the subcontract effort.
    • must include verification that the contractor will provide added value
  2. If the contracting officer determines that excessive pass-through charges, the Government can recover.
    • for cost-type contracts - unallowable for reimbursement
    • for fixed price contracts - contract price reduction
  3. Contracting officer or authorized representative (e.g. DCAA) has right to examine and audit contractor records necessary to determine whether the contractor proposed, billed, or claimed excessive pass-through charges.
PNWC observations.

  1. A contractor's G&A base will influence whether indirect pass-through costs are excessive. The three most common G&A allocation bases are total cost input (TCI), modified TCI (excludes subcontract costs) and single-element (usually direct labor costs). Modified TCI and single-element allocation bases already exclude subcontract costs which means that subcontract costs are not burdened with G&A and therefore could not have excessive pass-through indirect costs.
  2. Profit/Fee percentages might already reflect the anticipated level of subcontracting. When the Government uses the weighted guidelines method to establish negotiation targets for profit or fee (most of the time), it assigns weights to various risk factors. One of those factors is the degree of management effort necessary to ensure that contract requirements are met. Many contracting officers weight this element lower when the offeror has proposed significant subcontract costs.
  3. Subjectivity of the contracting officer determination: The determination of whether contractor activities benefit the Government include an assessment of such things as processing orders of parts or services, maintaining inventory, reducing delivery lead times, managing multiple sources for contract requirements, coordinating deliveries, performing quality assurance functions. This is a very subjective assessment and contractors should not underestimate the benefit of "good writing" when describing the value it intends to add to the subcontracted effort. 
  4. GAO Review: The GAO reviewed DoD implementation of the earlier interim regulation (see GAO-08-269, Contract Risk a Key Factor in Assessing Excessive Pass-Through Charges). The GAO stated that contracting officers needed guidance in how to assess whether proposed pass-through costs are reasonable for the work performed. Additionally, they should obtain DCMA and DCAA input. DoD responded that it willl issue guidance once the regulation becomes final.

Wednesday, November 25, 2009

The Myth of DCAA Approved Accounting Software - Part II

In Part I of this series, we warned against buying in to the myth that there are accounting software applications that have been approved by the Government for Government contracting purposes. The Government does not approve accounting software. Nearly every appplication available can be used for Government contracting. If you are satisfied with your current accounting software, you should stick with it. While the Government neither approves or disapproves specific software applications, it is interested in making sure that contractor accounting systems are capable of recording, accumulating, and reporting costs in a manner consistent with contract terms. In this part, we discuss the characteristics of what the Government looks for in an accounting system.

Do not confuse the terms "accounting software" and "accounting system". The two terms are not synonimous. The term accounting system encompasses all aspects of the accounting function including the software, personnel, management, policies and procedures, data entry, reporting, supporting documentation, and internal controls. When evaluating whether a prospective contractor has an adequate accounting system, the Government utilizes form SF 1408, Preaward Survey of Prospective Contractor Accounting System, a series of yes/no questions asking whether the system can accomplish certain tasks including;
  1. Is the system maintained in accordance with GAAP (Generally Accepted Accounting Procedures)? The main idea here is whether the accounting records are maintained on an "accrual basis". A "cash basis" of accounting is not GAAP.
  2. Does the accounting system provide for proper segregation of direct costs from indirect cost and can direct costs be accumulated by contract? Can direct costs by contract be further broken down by contract line item if required? Can preproduction costs be segregated from product costs?
  3. Are indirect costs allocated to contracts in a logical and consistent manner? FAR 31.203 requires that indirect costs be allocated to contracts on the basis of the benefits accruing to those contracts.
  4. Do all costs roll up to a general ledger? This is an obvious "yes" when using today's accounting software.
  5. Does it include a timekeeping system that identifies labor charges by contract or indirect function?
  6. Does it include a labor distribution system (hours generated by the timekeeping system times labor rates from the payroll system) that charges costs to the appropriate contract or indirect cost pool.
  7. Can it produce monthly (or more frequent) determination of costs by contract? This means that accrued costs must be computed at least monthly.
  8. Are there procedures to identify and exclude FAR Part 31 unallowable costs from billings (see FAR 31.201-6)?
  9. Can the system provide financial information to support public vouchers (cost reimbursable contracts) and progress payments?
  10. Is the system designed and are records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on contracts?
  11. Is the system in full operation?
If your accounting system is capable of accomplishing the foregoing, it is adequate for Government contracting purposes.

Tuesday, November 24, 2009

The Myth of DCAA Approved Accounting Software - Part I

If you've ever "Googled" to find accounting software for your company, you've probably seen targeted advertisements from companies selling accounting software that have been approved by the Defense Contract Audit Agency (DCAA). Don't fall for it. Neither DCAA nor the Government "approves" commercial accounting software packages for Government contracting purposes. In reality, practically every system available is being used somewhere for Government contracting purposes; QuickBooks, Peachtree, MAS 90, 200, and 500, Microsoft Dynamics, ACCPAC, Adagio, Deltek, SAP, Oracle and many others. Quickbooks, because of its immense market share might have the largest installed base. There are many companies offering add-ons for QuickBooks and other packages that enhance their functionality for Government contracting purposes but there are plenty of companies that are successfully using just the basic programs. Don't break the bank to buy lots of bells and whistles. Tomorrow, in Part II, we will describe what an "adequate" accounting system needs to accomplish.

Adequate Contract Pricing Proposals

FAR contains detailed guidelines for preparing and adequately supporting price proposals. Proposals that do not comply with these guidelines are at risk for being returned to the offeror and could easily result in the offeror's disqualification. Someone in the Government will typically perform an adequacy determination. This could be a contracting officer or analyst in the buying command, someone in the administrative contracting office, or an auditor. Most organizations have checklists to help their staff make the adequacy determination. If deficiencies are minor and the Government does not believe that they will significantly impede the negotiation/contract award process, the proposal will be considered adequate. On the other hand, proposals with significant deficiencies significantly slow down the audit, price analysis, negotiation, and contract award process. In order to maximize resources, the Government is becoming less understanding and less tolerant of proposals that do not meet the FAR guidelines.

Specific guidelines for proposal preparation are found in FAR 15.408 and in Table 15-2. Any company preparing proposals for Government contractors should be intimately familiar with these sections.  Following is a listing of the significant proposal elements that, if missing, could result in an inadequacy determination.

  1. Properly completed first page (see Table 15-2, Section I.A).
  2. Index referencing all cost or pricing data and information accompanying or identified in the proposal (see Table 15-2, Section I.B).
  3. Summary of total cost by element cross-referenced to supporting cost or pricing data (see Table 15-2, Sections I.D and I.E.)
  4. Identification of cost or pricing data and an explanation of the estimating process to include judgmental factors and methods used in the estimate, including those used in projecting from known data and the nature and amount of any contingencies (see Table 15-2, Section I.C).
  5. Identification of any incurred costs for work performed before submission of the proposal (see Table 15-2, Section I.F)
  6. Identification and description of any agreements with Government representatives on use of forward pricing rates and factors (see Table 15-2, Section I.G).
  7. Consolidated bill of materials (see Table 15-2, Section II.A).
  8. Price analyses of all subcontract proposals and cost analysis of subcontracts when cost or pricing data is required (see Table 15-2, Section II.A).
  9. Cost analysis of proposed interorganizational transfers (see Table 15-2, Section II.A.(i)).
  10. Time phased breakdown of labor rates and hours by category or skill level and the basis for the estimates (see Table 15-2, Section II.B).
  11. Calculation of indirect rates (see Table 15-2, Section II.C).
  12. Identification of ODCs and basis for pricing (see Table 15-2, Section II.D).
  13. Royalties and license fees (see Table 15-2, Section II.E).
  14. Facilities Capital Cost of Money (see Table 15-2, Section II.F). It is important to note that in order to recover FCCM on a cost type contract, it must have been proposed.
  15. For change orders, modifications, and claims, proposals must include current estimates for deleted and added work (see Table 15-2, Section III.B).
Besides the standard requirements found in FAR 15.408, Agencies often add additional submittal requirements. These additional requirements will be identified in the solicitation (RFQ/RFP) and adherence to these could also become critical to the success of your offer.

Monday, November 23, 2009

Sen. McCaskill Rips DCAA

"The top of my head is about to pop off", she tweeted.

Awesome QuickBooks Add-ons for 2010

Each year about this time, we look forward to the latest installment of Sleeter Group’s “Awesome QuickBooks Add-ons”. Sleeter survey’s products in  vertical markets where QuickBooks may not have all the needed features or where users need customized solutions. Products that make the list must be developed and sold by a solid company with a reputation for outstanding customer support, must show superior design, implementation and features, must use appropriate transaction types and field population for recording data so as to preserve and/or enhance the standard reporting features in QuickBooks. And conform to good accounting principles and operating standards.

For QuickBooks users that can’t afford the time and expense of evaluating many competing add-ons, Sleeter has is a very good resource for the decision making process. Here is the list of Awesome QuickBooks Add-ons for 2010. There are also links to prior years’ winners.

Deltek meets Emile Coue'

We were somewhat surprised by the results of a recent survey of Government contractors as reported by The survey of 250 Government contractors conducted by Deltek (a provider of accounting software for Government contractors) found that 83 percent of contractors that were recently audited by DCAA had “good” to “excellent” relationships with that Agency and the preponderance of those thought that relationships with DCAA were improving. Well, that certainly doesn’t jibe with our own experience and with ample anecdotal evidence. It made us think of Emile Coue, the father of autosuggestion whose favorite phrase was “Day by day, in every way, I am getting better and better."

Emile Coue’ was a pharmacist and when he gave medicine to people, he would praise the medicine to some and say nothing about its effectiveness to others. He found that those people who bought the medicine with the added praises, did much better than those who did not receive the added praises. From there, Coue’ discovered the power of imagination and autosuggestion. His methods were based on two principles. First, when willpower and imagination come into conflict, the power of imagination wins out and secondly, imagination can be trained more rapidly than willpower. So, maybe if we keep telling ourselves that relationships with DCAA are getting better and better, we’ll start to believe it – and Deltek can sell more software.

Health Benefit Costs

In recent guidance to its audit staff, DCAA noted that some contractors were inappropriately charging the Government for health benefit costs for dependents that are no longer eligible for those benefits under the terms of the contractors’ health benefit plans. DCAA is claiming that any such costs are specifically unallowable and subject to penalty if disclosed during an audit. While we would be the first to agree that the costs are not allowable under Government contracts, we believe that DCAA’s position that such costs carry a penalty is somewhat far-reaching. As far as we know, DCAA’s position has not yet been tested through the appeals process.

Internal Controls. The guidance further states that a contractor’s failure to exclude ineligible dependents from health benefit coverage is a reportable accounting system internal control deficiency.  We recommend that contractors establish procedures to ensure that ineligible dependents are excluded from coverage. The easiest method for doing this is to make certain that all employees understand the limits on coverage (training), have them certify annually that they comply with the restrictions and limitations, and perform internal audit tests to ensure compliance.

Third-party Service Providers. Some companies utilize outside service providers to perform eligibility reviews. In those cases, DCAA will most likely want to review their work to the same extent they would in situations where contractors utilize in-house personnel. Your third-party service providers need to be aware of this requirement and be prepared to provide appropriate documentation.

Cost. In some cases, health insurance premiums are unaffected by small changes in the number of eligible dependents. Thus, it is not necessarily true that ineligible dependents will automatically increase costs to the Government. Assuming this ever becomes an issue with your company, you need to have a thorough understanding of how your premiums are computed. It may help your defense.

Patrick Fitzgerald – New DCAA Director

In a desire to bring fresh perspective to an organization critical to stemming waste and fraud in military spending, the Department of Defense appointed a new director to head up the Defense Contract Audit Agency (DCAA).

Patrick Fitzgerald has spent his entire professional career (nearly 30 years) with the Army Audit Agency, becoming its director in 2006. His appointment marks the first time since DCAA’s inception that an "outsider” has held the top job. Outgoing director, April Stephenson, has moved to a position with the Defense Finance and Accounting Service (DFAS).