Wednesday, June 30, 2010

The Prompt Payment Act

Contractors are entitled to prompt payment on their properly submitted invoices, public vouchers and progress payment requests. If the Government does not make a payment within 30 calendar days of receipt, it is required by law and regulation to include interest in its remittance to the Contractor. In other words, Agencies must pay interest regardless of whether the business concert requested payment of interest. The Secretary of the Treasury sets the interest rate ever six months. From July 1 to December 31, 2010, the rate is 3 1/8 percent. If Agencies do not automatically calculate and include interest on late payments, contractors can pursue it on their own. The Treasury Department impractically suggests that contractors consult with legal counsel to pursue recovery. Obviously, the interest in question would need to be very significant before one could make a business case for retaining counsel in such a matter.

Under cost-reimbursable contracts, most contractors submit electronic copies of their billings (SF 1034s, 1035s, and supplementary data) through the Government’s WAWF (Wide Area Workflow) system. The billings are routed through a number of reviewers until it reaches the disbursement office. Typically, the first level of review is the Defense Contract Audit Agency (DCAA). The DCAA Contract Audit Manual acknowledges that Contractors are generally dependent upon prompt receipt of interim payments under cost-reimbursement type contracts to maintain a satisfactory financial position. Therefore, as an objective, interim vouchers will be reviewed and either approved and forwarded to the disbursing officer or returned to the contractor for correction as quickly as possible but not later than five working days after receipt.(see CAM 6-1008). If DCAA takes more than five days to reject a voucher, those extra days, are factored into the calculation of interest. Note, when the regulation gives seven days to approve or reject a payment request, it is referring to calendar days. DCAA’s five day criteria refers to work days.

At one time, payments under the WAWF system were being processed very quickly. We heard examples where payments were received within a week after submitting a payment request. However, someone in the Government figured out that this was not wise cash management and policies were implemented to stretch payments out to 30 days or so.

The regulation and associated guidance do not address payment requests that are improperly rejected by the Government. We know of several cases where DCAA improperly rejected payments requests. Once a payment request is rejected in the WAWF system, it cannot be “unrejected”. Contractors must resubmit the payment request. This adds additional days to the billing process, for which, in our opinion, contractors should be compensated. If contractors encounter this situation, we recommend they correspond with the Government disbursing office, state their case and request interest for the period caused by the improper rejection.

Tuesday, June 29, 2010

We've Moved

Starting tody, we're operating out of our new offices. We're still located in the West Valley Business Park -but in a different building. We were not looking to move but the tenant next to us wanted to expand and the landlord made us a pretty good deal. The move didn't go perfectly (what move does?). We are still without Internet service and some of our phones do not work. Our new address is:

Pacific Northwest Consultants, LLC
19428 66th Ave S., Suite Q-106
Kent, WA 98032

Monday, June 28, 2010

Impact of "Negative" Reviews

Last Friday's news illustrates the importance of good internal control systems and strong ethical values.

Last Thursday, AeroViromment, a predominantly Government contractor in Southern California, disclosed in its 10-K filing with the SEC that it had been under investigation by the Department of Justice over its billing practices since February. Friday morning, its share prices immediately took a 10 percent hit and caused the company to expend considerable resources to prepare statements, press releases, and answer questions from reporters, stock analysts, and others. Its amazing that one tiny footnote can cause so much chaos and have such a financial impact.
The statement implies that AeroVironment was somewhat in the dark themselves over what might have triggered the DOJ investigation. It states that the investiagtion "may" have resulted from DCAA audit activity but they were not certain. 
“We are currently cooperating with this investigation, which we believe may be the result of prior DCAA [Defense Contract Audit Agency] audit activity. An unfavorable outcome to such an audit or investigation by the DCAA, DOJ or other government agency, could materially adversely affect our competitive position, affect our ability to obtain the maximum price for our products and services, and result in a substantial reduction of our revenue.”
AeroVironment must have spent most of Friday in damage control. In one of its clarifying statements, it stated that the investigation focuses on three areas:

  • The appropriateness of certain expenses included in the company’s fiscal year 2006 Incurred Indirect Cost Claim (reconciliation of projected rates to actual rates.)
  • Billing labor rates associated with time and materials government contracts.
  • Billing rates for Small Unmanned Aircraft Systems maintenance and repair contracts.

Trying to downplay the 10-K disclosure, the company also stated that it does not believe the probe will have a material impact on its business, and so far has not had an impact on the company’s ability to receive government contracts. AeroVironment said it believes most of the issues have been previously addressed in the DCAA audit processes, and that time and materials government contracts have accounted for less than 1% of the company’s revenue over the last 6 years. The company said it is cooperating with the investigation, and that no claim has been filed against AeroVironment to date.

We have no insight beyond what has been reported. However, in our experience, there is more to this than what AeroVironment wishes. If the "audit issues" were previously addressed, there would be no need for a DOJ investigation. Additionally, while any auditor can report a SIC (Suspected Irregular Conduct), most of them are administratively closed because there is no merit to the allegation or the impact is so insignificant as to not warrent further investigation. Therefore, in the rare case that DOJ intervenes in the case, there is probably some fire with that smoke. We haven't heard the end of this story.

Friday, June 25, 2010

Whistleblower Protections under Government Contracts

FAR contains a policy on whistleblower protection that applies to all Government contracts, regardless of size and type and regardless of contractor status (e.g. small business, minority-owned business, etc.). The policy simply states that government contractors shall not discharge, demote or otherwise discriminate against an employee as a reprisal for disclosing certain information to
  • a Member of Congress, or
  • an authorized official of an agency or
  • an authorized official of the Department of Justice,
The type of information covered by this prohibition includes that relating to a substantial violation of law related to a contract (including the competition for a negotiation of a contract). Note that actions such as disclosing information to the press is not covered under whistleblower protections.

Any employee who believes that he or she has been discharged, demoted, or otherwise discriminated against contrary to this policy may file a complaint with the Inspector General of the agency that awarded the contract. The complaint must meet certain criteria. It must include the violation of law giving rise to the disclosure, the nature of the disclosure giving rise to the discriminatory act, and the specific nature and date of the reprisal.

Once the Inspector General receives the complaint, they will make a preliminary inquiry to ensure that the complaint is not frivolous or for other reasons does not merit further investigation. The IG can kill it right there and then or decide to investigate. Ultimately, the IG will report on the findings of its investigation. Copies will go to the complainant, the contractor, and the head of the contracting activity. The contractor gets 30 days to prepare and submit a response to the the IG report.

Ultimately, the head of the contracting activity makes the final decision on the IG's recommendations. If he/she finds that the contractor has subjected an employee to a reprisal, he/she can take one or more of the following actions:
  • Order the contractor to take affirmative action to abate the reprisal
  • Order the contractor to reinstate the person to the position that the person held before the reprisal, together with the compensation, employment benefits, and other terms and conditions of employment that would apply to the person in that position if the reprisal had not been taken
  • Order the contractor to pay the complainant an amount equal to the aggregate amount of all costs and expenses (including attorney fees and expert witnesses' fees) that were reasonably incurred by the complainant for, or in connection with, bringing the complaint regarding the reprisal.

If a contractor fails to comply with the contracting activities orders, the contracting activity is required to have the Department of Justice file an action for enforcement of such order in the US District Court.

The goal of contractors, of course, is to have strong internal controls and ethical behavior to preclude reprisals from happening. We've discussed contractor codes of ethics/conduct previously and will continue to do so as the regulations requiring contractors to have formalized plans continue to evolve. The best advice we can give to contractors is to resolve issues internally and quickly and provide on-going status reports and feedback to aggrieved parties. If as a result of internal reviews you find that the Government has been harmed, seek legal counsel on how best to voluntarily notify the Government and to help develop strategies to make things whole.

Thursday, June 24, 2010

New DCAA Western Regional Director Announced

For those of you who like to stay up to date on significant DCAA personnel changes, DCAA just announced its new Director for its Western Region. DCAA's Western Region covers Washington, Oregon, California, Idaho, Montanta, Alaska, Hawaii, and most of Asia. The formal announcement is reproduced below.  It looks like DCAA's New Director, Patrick Fitzgerald, is beginning to put his personal touch on the organization. The selection of Don Mullinax is the first time a Regional Director has come from outside the DCAA ranks. Like the Director, Mr. Mullinax has previous Army Audit experience. Perhaps the two men have worked together before.

It is my great pleasure to announce the appointment of Mr. Donald L. Mullinax to the position of Regional Director, Western, in the Senior Executive Service, effective June 28, 2010.

 Don Mullinax has three decades of experience leading and conducting contract, forensic, and performance audits; fraud and misconduct investigations; and anti-fraud consulting engagements across a variety of industries, including aviation, construction, consumer goods, defense, education, health care, and retail. He also has advised members of Congress, presidential appointees, mayors, city councils, and school boards, as well as some of the most senior executives of private sector firms on audit, fraud, and ethics-related matters.

Mr. Mullinax has held a number of executive positions in both the private and public sectors, including a Shareholder at Forensic/Strategic Solutions, PC; a Principal at Deloitte Financial Advisory Services LLP; Inspector General of the Los Angeles Unified School District; Chief Investigator of the U.S. Senate's Permanent Subcommittee on Investigations; and Associate Director with the U.S. Army Audit Agency.

Mr. Mullinax graduated from Georgia College and State University with a Bachelor's degree in accounting. He also earned a Master's degree in Business Management from Central Michigan University, Mr. Mullinax has a number of professional certifications, including Certified Internal Auditor, Certified Government Auditing Professional, Certified Government Financial Manager, Certified Fraud Examiner, and Certified Inspector General, Mr. Mullinax is a Regent Emeritus of the Association of Certified Fraud Examiners (ACFE), former Chairman of the ACFE's Board of Regents, and currently serves as the Chairman of the ACFE's Board of Review. Mr. Mullinax is a nationally-recognized speaker and presented over 200 lectures on a variety of subjects to academic, government, business and civic groups.

Mr. Mullinax has received numerous awards and recognitions for performance excellence throughout his career, including a U.S. Senate Outstanding Service Award, a U.S. Senate Resolution for Faithful and exemplary Service, and Appreciation Awards from the Inspectors General of the U.S. Department of Transportation and U.S. Department of Health and Human Services.

Wednesday, June 23, 2010

Allowability of Backpay

Sometimes, contractors have temporarily reduced employee salaries because they are experiencing temporary cash-flow issues, with a promise (sometimes written, sometimes not) to "make it up to them" when things get better. When things do get better the following year, contractors do make up the difference. This is an example of backpay. The precise FAR definition of backpay is "a retroactive adjustment of prior years' salaries or wages." (see FAR 31.205-6(h)).

Backpay is unallowable under Government contracting except under very limited circumstances. None of these circumstances allow contractor discretion to pay or not to pay. Those circumstances include:
  • The payments result from underpaid work that was actually performed and the payments are required by a negotiated settlement, order, or court decree.
  • The payments are to union employees for the difference in their past and current wage rates for working without a contract or labor agreement during labor management negotiations.
  • The payments are to nonunion employees that are based on the results of union agreement negotiations, only if:
    • A formal agreement or understanding exists between management and the employees concerning these payments, or
    • An established policy or practice exists and is followed by the contractor so consistently as to imply, in effect, an agreement to make such payments.




Tuesday, June 22, 2010


FAR defines "contingencies" as a possible future event or condition arising from presently known or unknown causes, the outcome of which is indeterminable at the present time. 

For historical costing purposes, costs for contingencies are generally unallowable because such costing deals with costs incurred and recorded in the contractor's books and records. However, in some cases (e.g. contract terminations) a contingency factor may be recognized when it is applicable to a past period to give recognition to minor unsettled factors in the interest of expediting settlement.

Contingencies included in estimates of future costs, on the other hand, are allowable under limited conditions. To be allowable, the contingency must meet both of the following criteria
  • based on current conditions and
  • the impact is foreseeable within reasonable limits
An example of an allowable contingency in pricing would be scrap and rework factors.

If the contingency is based on known or unknown conditions and the impact cannot be measured accurately enough to provide equitable results to the contractor and to the Government, the costs are unallowable. An example of this kind of contingency might be pending litigation.


Monday, June 21, 2010

Idle Facilities

When auditors enter your plant to review a proposal, assess the adequacy of your accounting system, or perform a floorcheck, he/she is trained to be observant about a lot of other things besides the task at hand. If a contractor does not offer the auditor a plant tour, the auditor will often request one. On the tour, the auditor will be making some sweeping assessments as to how much the facility is being used. Observations of significant unused or underutilized facilities will inevitably lead to auditor questions about your plans for those facilities. If you don't have good answers, you could find yourselves studying FAR 31.205-17, Idle Facilities and Idle Capacity.

Idle facilities are completely unused facilities that are excess to the contractor’s current needs. Idle capacity is the unused capacity of partially used facilities. It is the difference between that which a facility could achieve under 100 percent operating time on a one-shift basis, less normal interruptions, and the extent to which the facility was actually used to meet demands in the accounting period.

Idle facility costs are unallowable unless they are necessary to meet fluctuations in workload, or were necessary when acquired and are now idle because of changes in requirements, production economies, reorganization, termination, or other causes which could not have been reasonably foreseen. The allowability for the cost of idle facilities is generally limited to 1 year but this is one area where FAR specifically suggests that contractor's pursue an advance agreement with the contracting officer (see FAR 31.109).

Idle capacity costs are allowable provided the capacity is necessary or was originally reasonable and is not subject to reduction or elimination by subletting, renting, or sale, in accordance with sound business, economics, or security practices.

Be careful however. FAR states that widespread idle capacity throughout an entire plant or among a group of assets having substantially the same function may be the same thing as idle facilities. If so, the costs may be unallowable after a reasonable period (typically one year) in which to dispose of them.

Friday, June 18, 2010

What Takes Precedence - Contract Terms or FAR?

From time to time, we encounter situations where contract terms and the Federal Acquisition Regulation conflict with one another. When these conflicts involve costs charged or allocated to Government contracts, it becomes necessary to determine which document takes precedence.

The general rule is that the contract takes precedence if it is more restrictive than the FAR. If the contract is less restrictive, FAR takes precedence. In other words, the contract terms cannot allow a cost that is:

  • Unreasonable;
  • Improperly measured, assigned and allocated to the contract; or
  • Unallowable in accordance with specific cost principles.

A recent case involved a contract that restricted certain kinds of insurance that the Government would reimburse. That particular insurance was allowable under FAR cost principles but since the contract contained the prohibition on reimbursement, the contractor voluntarily deleted it from its pool of G&A costs.



Thursday, June 17, 2010

Cost Reasonableness

Costs proposed on or charged to Government contracts must be allocable, allowable, and reasonableness. Of these three fundamental tenets governing the propriety of costs, the one that requires us to exercise a lot of judgment is reasonableness. FAR 31.201-3 lays out the "prudent persone" test. FAR considers a cost to be reasonable if in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. But what exactly is a prudent person?

To help you apply the prudent person test, there are four questions that you can ask yourselves. These questions have evolved over the years, sometimes as a result of litigation. Of course, no test can address every conceivable situation but if you can answer "yes" to these four questions, you should have a good shot at supporting a cost's reasonableness.

  1. Is the type of cost generally recognized as necessary in conducting business?
  2. Is the cost consistent with sound business practice, law, and regulation, and are purchases conducted on an "arm’s-length" basis?
  3. Does your action reflect a responsible attitude toward the Government, other customers, the owners of the business, the employees, and the taxpayer?
  4. Is it consistent with established practices?

Wednesday, June 16, 2010

Government Property

The idea of obtaining Government property when performing a contract is attractive to some contractors, especially if it reduces the amount of capital a company needs to invest. However, Government property does come at a cost - added administrative work mainly - and contractors need to consider those costs.

Government property as used in FAR Part 45 means all property, both real and personal. It includes facilities, material, special tooling, special test equipment, and agency-peculiar property. Government property includes both Government-furnished property and contractor-acquired property.

Contractors are required to establish and maintain a property system that will control, protect, preserve, and maintain all Government property because the contractor is responsible and accountable for all Government property under the provisions of the contract including property located with subcontractors. Does that sound simple? Well, here are some of the specific provisions included in FAR Part 45


  1. FAR 45.606-1 requires a contractor to submit inventory schedules.
  2. FAR 45.606-3(a) requires a contractor to correct and resubmit inventory schedules as necessary.
  3. FAR 52.245-1(f)(1)(ii) requires contractors to receive, record, identify and manage Government property.
  4. FAR 52.245-1(f)(1)(iii) requires contractors to create and maintain records of all Government property accountable to the contract.
  5. FAR 52.245-1(f)(1)(iv) requires contractors to periodically perform, record, and report physical inventories during contract performance.
  6. FAR 52.245-1(f)(1)(vi) requires contractors to have a process to create and provide reports.
  7. FAR 52.245-1(f)(1)(viii) requires contractors to promptly disclose and report Government Property in its possession that is excess to contract performance.
  8. FAR 52.245-1(f)(1)(ix) requires contractors to disclose and report to the Property Administrator the need for replacement and/or capital rehabilitation.
  9. FAR 52.245-1(f)(1)(x) requires contractors to perform and report to the Property Administrator contract property closeout.
  10. FAR 52.245-1(f)(2) requires contractors to establish and maintain source data, particularly in the areas of recognition of acquisitions and dispositions of material and equipment.
  11. FAR 52.245-1(j)(4) requires contractors to submit inventory disposal schedules to the Plant Clearance Officer.
  12. FAR 52.245-9(d) requires a contractor to identify the property for which rental is requested.



Tuesday, June 15, 2010

Organizational Conflicts of Interst (OCI)

Last December, we reported on proposed regulations from DoD regarding Personnel Conflicts of Interest (PCI). DoD is also proposing revised regulations regarding Organizational Conflicts of Interest (OCI). The comment period for responding to these proposed regulations was recently extended to July 21, 2010. The Weapons System Acquisition Reform Act of 2009 requires DoD to revise its regulations to provide uniform guidance and tighten existing requirements for OCIs by contractors in major defense acquisition programs. The law set out situations that must be addressed and allows DoD to establish some "exceptions" to ensure that it has continued access to advice on systems architecture and systems engineering matters from highly qualified contractors, while ensuring that such advice comes from sources that are objective and unbiased. This seems like a very tall order.

Under the proposed regulations, there are three types of OCI
  • Impaired objectivity
  • Unfair access to non-public information
  • Biased ground rules
In the solicitation phase of the procurement process, contracting officers must examine the nature of the work to determine whether it may create a conflict. The contracting officer will obtain the assistance of the program office, appropriate technical specialists and legal counsel to identify potential conflicts of interest. His determination must be written and included as part of the contract file. The guidance also cautions the contracting officer from relying only on information provided by the contractor. The regulations provide a listing of other sources of information.

If there is a determination of a potential conflict of interest, things get interesting from a contractor's perspective. The contractor must come up with a formal mitigation plan and submit it for approval to the contracting officer. A mitigation plan could include any number of actions including firewalls that prevent contractor personnel knowing what other contractor personnel are doing to an agreement to limit contracting for some future period. Given the well documented cases of OCIs, we suspect that review and approval of mitigation plans will be anything but perfunctory.

Monday, June 14, 2010

Advance Agreements on Costs

FAR contains a nice little provision tucked away in 31.109 - Advance Agreements. FAR provides for the use of advance agreements to address the reasonableness, allocability, and allowability of costs. It acknowledges that the propriety of some costs may be difficult to determine under certain circumstances and to avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability, contracting officers and contractors should seek advance agrement on the treatment of special or unusual costs. If you have special or unusual circumstances surrounding the costs you intend to allocate to Government contracts, you should pursue an advance agreement with your contracting officer. It is important for contractors to take the initiative here.

Advance agreements may be negotiated either before or during a contract but should be negotiated before incurring the costs. Agreements must be in writing and signed off by both parties. The agreement must include a statement of its applicability and duration.

An advance agreement cannot make costs that are otherwise unallowable, to become allowable. The contracting officer is not authorized to agree to a treatment of costs inconsistent with FAR Part 31. For example, an advance agreement may not provide that interest expense suddenly becomes allowable.

FAR provides several examples for which advance agreements may be particularly important:
  • Compensation for personal services including allowances for off site pay, incentive pay, location allowances, hardship pay, and cost of living differential
  • Use charges for fully depreciated assets
  • Deferred maintenance costs
  • Precontract costs
  • Royalties and other costs for use of patents
  • Selling and distribution costs
  • Travel and relocation costs as related to special or mass personnel movements
  • Costs of idle facilities and idle capacity
  • Plant reconversion
  • Professional services
  • Public relations and advertising
  • Training and education

It is somewhat rare to find advance agreements at smaller contractors. However, more and more contractors are discovering that by availing themselves of the provision, they can preclude disputes over costs later on. We know of one contractor that has more than 100 advance agreements in place.

Friday, June 11, 2010

Contractor Insurance/Pension Reviews (CIPR)

The DoD FAR Supplement (DFASR 242.7301) includes coverage for Contractor Insurance/Pension Reviews (CIPRs) when the contracting officer determines the need for one. Until 2003, the "need" was neatly defined as a contractor with $50 million in sales to the Government under negotiated contracts. In 2003, the particular threshold requirement was removed from the DFARS and placed into "guidance". By moving it from "regulatory" to "guidance", the need for CIPR reviews could be conveniently ignored. The DoD Inspector General looked at how the Government was fulfilling its responsibility and determined that it wasn't. It found $100 billion in pension funds that was being ignored and untold self-insurance and other insurance costs receiving inadequate oversight. Even when the Government took issue with one or more aspects of pension and insurance plans, the IG found that the Government did not effectively followup on those issues to ensure the Government's interests were protected.

Today, DoD issued a proposed regulation to move the threshold requirement back into the DFARS along with some other considerations. Specifically, the proposed regulations require an "in-depth" CIPR when a contractor has $50 million in (qualifying) sales to the Government in its preceding fiscal year and the ACO, with advice from pension/insurance specialists from DCMA and auditors from DCAA determines that a CIPR is needed based on a risk assessment of a contractor's past experience and current vulnerability. When DCAA or DCMA believe that a review should be performed, they advise the ACO. If the ACO concurs, a review should be initiated as soon as possible.

To read the entire proposal, go here. The comment period on this proposed regulation expires on August 10, 2010.

Thursday, June 10, 2010

Resolving Disputes between the Auditor and Contracting Officer

Back on December 10th, we reported on guidance issued by DoD concerning the resolution of significant audit report recommendations when the contracting officer does not agree with the findings and recommendations of the auditor. To read that post, go here.
DCAA has now issued its own guidance on implementing the DoD policy. You can read that guidance in its entirety by going here. Essentially, this guidance deals with internal processes for elevating disagreements to higher and higher levels withing DoD, until it gets to an undersecretary of Defense. It also includes related correspondence from the Army, Navy, Air Force, DLA, and DCMA. These organizations, in turn, issued their own guidance to implement the DoD guidance.

A couple of notes:
  1. The guidance applies only to pricing proposals over $10 million where the contracting officer does not sustain at least 75% of the audit findings in a pre-negotiation objective. A pre-negotiation objective is documentation of what the Government hopes to achieve during negotiation. There is usually a difference between the negotiation objective and the final negotiated price. A contracting officer can easily include the audit findings in his/her negotiation objective with little hope or intent of trying to sustain the finding during negotiations, just to appease the auditor and get around this requirement (we've seen this happen).
  2. The policy does not apply to all of the other kinds of audits that DCAA performs; internal control reviews, incurred cost reviews, defective pricing, CAS compliance, progress payment reviews, paid voucher reviews, and a host of others. The policy is not clear with respect to terminations and claims since those are often referred to as "proposals".
  3. Elevating matters does not necessarily mean that a disagreement will be adjudicated fairly. Ultimately there is a final authority/decision maker and his/her decisions might be influenced by matters not evident to those with vested interests in the outcome (like, "I don't care what it cost, just get that plane up in the air").
  4. This could be a response to a problem that doesn't exist. Recalling our days in the Government, contracting officers were always looking for data that could help them achieve fair and reasonable contract pricing, be it from DCAA or technical reviews. We can't think of many cases where audit findings related to pricing proposal were not incorporated into the pre-negotiation objective. Significant disagreements between the auditor and contracting officer do arise in less quantitative audits like internal control reviews. Internal control reviews are very difficult to resolve because its not easy to show a nexus between the internal control deficiency and risk to the Government. For example, how does one show that failing to have a written policy to cover an event that has never occurred but could conceivably occur at some unspecified future point in time, constitute undue risk to the Government. Yet, that is the position that some auditors have taken. What's a contracting officer to do in that situation? Withhold funds? Disqualify the contractor from future contracts? Or, disposition the audit finding without taking action? 

Wednesday, June 9, 2010

Homeland Security Proposes to Limit Subcontracting

Whenever Homeland Security kicks into action as a result of a natural disaster, man-made disaster, or terrorism, it hires private companies to do whatever work has to be done. In the wake of Hurricane Katrina, Congress heard a lot of testimony on how excessive tiering of subcontractors under disaster recovery cost-reimbursement type contracts led to inflated costs (overhead and fees), and poor prime contractor oversight on subcontractor work. As a result, the Post-Katrina Emergency Management Reform Act was passed to limit the amount of subcontracts under these situations.

Homeland Security has now published a proposed FAR Supplemental regulation to implement this Act. The regulation applies to cost-type contracts (greater than $100 thousand) awarded under emergency situations and restricts the value of subcontracts to 65 percent of direct costs. When bidding on a contract, prospective contractors will be required to submit sufficient evidence to the contracting officer to permit him/her to make a determination that the offeror will or will not award subcontras that exceed 65 percent of the cost (excluding indirect costs and fee) of the contract, or any individual task or delivery order under the contract. The proposed regulation includes a process where the contracting officer can request a waiver from someone higher up in their organization. For contractors, its rarely a good strategy to request and hope for a waiver. If there are competing proposals, the contracting officer will go down the path of least resistence and award to an offeror that is not requesting a waiver.

The comment period for this proposed regulation expires on August 9th.

Tuesday, June 8, 2010

Genuinely Useful Software - Part 2

This is another in the occassional posts on software that we have tried and find very useful. Today's lead comes from the Journal of Accountancy's June 2010 edition.

DeskPins can be used to make any application topmost, that is, to keep it above all other windows. Just grab a pin from the DeskPins icon in the system notification area (a.k.a. taskbar tray) and click on any window. That window will always stay on top. Click on the "red pin" again to deactivate it.

This functionality works like the "Always on Top" setting found in some programs but with DeskPins you can add this feature to any program.

With today's large monitors, its possible to have a couple other active applications on the desktop besides the one you're working on and not feel encumbered. For accountants, its nice to have a calculator always available. Or, you might want to stream some (Seattle Mariner) video while working on your latest budgetary forecast in Excel.

Download and try it. Its free and works with just about any Windows version (we use it on Vista).

Monday, June 7, 2010

"Cost of Sales" vs "Total Cost Input"

Indirect costs are those that cannot be specifically identified to a contract or a specific cost objective. FAR requires that indirect costs be allocated on a basis of the benefits accruing to those contracts or specific cost objectives (FAR 31.203). Its up to contractors to decide what base is the best for their particular circumstances. It just needs to represent the total activity of a business unit. Some contractors have a single indirect rate while others have multiple rates. As a general rule, larger contractors need more indirect rates than small contractors in order to best allocate indirect costs. The most common allocation bases are direct labor dollars and total cost input (TCI). Overhead rates are commonly allocated over direct labor dollars while General and Administrative costs are commonly allocated over a TCI base. Contractors with a single rate structure generally use one or the other, depending upon their unique set of circumstances. Contractors subject to Cost Accounting Standards (CAS) must consider the requirements CAS 410 when deciding upon their allocation base for General and Administrative Costs. CAS 410 limits the G&A allocation base to one of three; (i) TCI, (ii) Value-added (which is TCI less materials and subcontracts), or (iii) single element. This is not a hard and fast requirement however. If none of these bases are any good, CAS 410 allows contractors to propose and support something different.

Contractors choosing a TCI base for allocating G&A costs, often assume that Cost of Sales (or Cost of Goods Sold) and Total Cost Input (TCI) are the same. The two figures can be the same, though not necessarily so. And Cost of Sales is not an acceptable base for allocating G&A costs. TCI means the costs (excluding G&A) that are allocable to the production of goods and services during a cost accounting period. It includes all costs incurred during the year. Cost of Sales on the other hand are those costs attributable to sales that are recognized during the year. It is adjusted for inventory, work-in-process, and finished goods that have not been sold. Contractors in manufacturing sectors are the most at risk for having significant differences between TCI and Cost of Sales. Contractors in services sectors, less so. Regardless, it is essential that contractors understand what comprises its Cost of Sales before simply using it as a TCI base.

As a reminder, regardless of which allocation base is used (i.e. TCI, value-added, or single element), any unallowable base costs must remain in the base for calculating indirect rates.

Friday, June 4, 2010

Streamlining the Billing Process - Part II

The blog posts from yesterday and today come courtesy of Jean Carr. Jean worked many years for the Defense Contract Audit Agency in the San Francisco Bay Area. Her responsibilities included reviews of public vouchers to ensure the accuracy, completeness, and propriety of billings (public vouchers) submitted to the Government through WAWF (Wide Area Work Flow). Many contractors, failing to exercise due care with their billings have had unforgettable encounters with Ms. Carr. Jean now consults with Bay Area contractors to help them improve their billing processes and internal controls. She can be reached through us at 866-849-4887, Extension 1. If you missed Part I, go back and read it first.

Now, for ten common mistakes made by contractors when submitting their vouchers:

  1. Using the wrong DCAA DoDACC code. Using the wrong DoDACC code will send the billing to the wrong DCAA office. When that happens, the DCAA office will simply reject the billing and leave it up to the contractor to figure out the correct DoDACC code. Prior to submitting your first voucher under each new contract, I suggest you call the DCAA office that you believe has cognizance of your company. Talk to the person who reviews your public vouchers for adequacy and verify that he/she HAS the contract. (10 percent of the time, DCAA doesn’t have a copy of the contract. 15 percent of the thime the PCO made one of two errors: he/she put the wrong billing DCAA code into the contract or left out the billing requirements (such as, the correct FAR references). Since the DCAA processor is not as committed to getting you paid as you are in getting paid, I suggest that you be proactive with the PCO, ACO and DCAA and do whatever it takes (modifications, explanations in the PV, etc.) to ensure the correct DoDACC codes.
  2.  Submitting vouchers out of numerical sequence.
  3. Billing indirect costs based on provisional billing rates that have not had prior DCAA approval (THIS IS A BIG ONE).
  4. Using expired billing rates (i.e. applying last year's rates to this year's costs).
  5. Failing to submit a request, along with supporting documentation, for new interim billing rates or for temporary adjustment rates (final billing rates are used after DCAA completes its audit of your incurred cost submission and there has been a formal rate agreement. 
  6. Mathematical errors. For example
    • Last cum plus new charges do not equal new cum
    • Backing into the total funded amount rather than showing the actual incurred cost and subtracting the amount in excess of the funding limit.
    • Rate times Base does not equal the amount shown on the public voucher.
  7. Billing costs in excess of the funded amount of the contract.
  8. Billing fee in excess of contractual limitations(some contracts cap fee at 85% until final billing).
  9. If the contract is costed and funded by CLIN/SLIN (Contract Line Item Numbers/Sub Line Item Numbers), the contractor must bill by the CLIN/SLIN. A PCO once complained to me: “I went to all the trouble to set this contract up by line item and funded it by line item and then you let the contractor bill however they wanted to?” Oh, and watch that you don’t go over the period of performance on each individual CLIN?SLIN. 
  10. Submitting incomplete, incorrect, or inadequate detail to support the public voucher.

Thursday, June 3, 2010

Streamlining the Billing Process - Part I

The blog posts for today and tomorrow come courtesy of Jean Carr. Jean Carr graduated from Notre Dame de Namur University in Belmont, CA with a Bachelor of Science in Business Administration and worked many years for the Defense Contract Audit Agency in the San Francisco Bay Area in a variety of audit and administrative positions before retiring in 2009. Among her many duties and responsibilities was to ensure the accuracy, completeness, and propriety of billings (public vouchers) submitted to the Government through WAWF (Wide Area Work Flow) for payment. Many contractors not exercising due care with their billings have had unforgettable encounters with Ms. Carr. Jean now consults with Bay Area contractors endeavoring to improve their billing processes and internal controls. She can be reached through us at 866-849-4887, Extension 1.

And now, here's Jean:

The biggest mistake for a contractor is to believe that whatever they send to DCAA is correct and will be understood and paid. Most DCAA voucher processors could care less if a contractor gets paid or not, much less get paid timely. It's not their responsiblity. If the processor has no personal interest in your company, you’re low on the “totem-pole.” Get to know your processor and develop a positive relationship with him/her. Flattery couldn’t hurt. Why? Because your processor will be more forthcoming with information that (although grudgingly given) you need to get your Public Vouchers processed. Further, if you have a good relationship, the processor will often warn you of impeding payment disaster (i.e., no receipt of billing requests, adjustment voucher received, contract period of performance is almost over or funding limit is imminent.)

Don't expect voucher processors to understand as much as you do. Most voucher processors in DCAA's Western Region are clerical personnel and don’t know what “Fringe” is; even though they get fringe benefits in their paychecks. And base? They think it’s like a BIG standup violin that men play in Jazz trios.

Tomorrow, Jean will continue with her list of the ten most common mistakes that contractors make when submitting payment requests.

Wednesday, June 2, 2010

Public Access to Contracts

In a previous post, we alerted you to the Government's initiative to make Government contracts available on-line for the public to view. You can read that post here.

Now the Federal Times has posted an article on some of the concerns, if not alarm, that contractors are expressing. You can read that article here.

The concerns are two-fold. While the Government is committed to protecting contractors' proprietary, confidential commercial or financial information, no one has yet figured out a way to process contracts in a fair, equitable, cost effective, and efficient manner. Secondly, its not clear who will be responsible for redacting contracts for sensitive information - the Government or contractors or both?. Who will adjudicate is there are disagreements?

This is going to be a real lively debate. Stay tuned.

Tuesday, June 1, 2010

Can't We All Just Get Along

The Defense Contract Audit Agency (DCAA) is the audit arm of the Department of Defense (and for other Executive Agencies). The Defense Contract Management Agency (DCMA) is the Contract Administration arm of the Department of Defense. DCAA issues audit reports to DCMA. DCMA is charged for resolving whatever issues the auditors raise. Sometimes DCAA doesn't like DCMA because the auditors feel that DCMA does not do a good job of sustaining their findings. Sometimes DCMA doesn't like DCAA because they feel the audit findings are not well conceived and therefore unsustainable. There have been several high-profile disagreements between the two organization during Congressional hearings.

On May 7th, 2010, the Directors of DCAA and DCMA jointly issued a memorandum to the employees of both organizations imploring them to get along. This memo has been pejoritively referred to as the Rodney King "Can't We All Just Get Along" memo by some of the staff. Some in DCAA have called the idea that everyone should cooperate at all cost, is a potential encroachment to their independence, a violation of generally accepted Government auditing standards and the kind of situation that the Agency got called out for in recent GAO and OIG audits.

You can download the joint memorandum here.