Friday, December 10, 2010

Revised Rule on Contractor Business Systems - Part V

Today we are conclude (at least temporarily) our discussion on DoD’s revised proposed regulation that requires defense contractors to maintain adequate business systems or face Government withholds of their billings. The revised regulation maintains the core requirements of the earlier one – maintain adequate business systems or face withholds. One positive change, from contractors’ perspective, is the reduction in the maximum amount of withhold. Perhaps the most significant change to the revised proposal is its organization. Compared to the initial proposal’s slap-dash construction, the revised proposal is significantly better organized and internal inconsistencies have been fixed. It now lists, in appropriate context, the various criteria that each of the six systems must meet in order for that system to be considered adequate.

There are two systems that apply to most every Government contractor; the accounting system and the purchasing system. The other business systems such as Government Property, Material Management and Accounting Systems, and Earned Value Management Systems apply only in limited situations. So we will take a look at the fundamental requirements of accounting and purchasing systems.

Accounting System

In order for your accounting system to be considered “adequate”, it must provide for the following (note, you might recognize most of these attributes from the SF Form 1408, Preaward Survey of Prospective Contractor’s Accounting System):

1. A sound internal control environment and accounting framework and organizational structure that is adequate for producing accounting data that is reliable and costs that are recorded, accumulated, and billed on Government contracts in accordance with contract terms;

2. Proper segregation of direct costs from indirect costs;

3. Identification and accumulation of direct costs by contract;

4. A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;

5. Accumulation of costs under general ledger control;

6. Reconciliation of subsidiary cost ledgers and cost objectives to general ledger;

7. Approval and documentation of adjusting entries;

8. Periodic monitoring of the system;

9. A timekeeping system that identifies employees' labor by intermediate or final cost objectives;

10. A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;

11. Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account;

12. Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions;

13. Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract;

14. Segregation of preproduction costs from production costs, as applicable;

15. Cost accounting information, as required--

(i) By contract clauses concerning limitation of cost (FAR 52.232-20), limitation on payments (FAR 52.216-16), or allowable cost and payment (FAR 52.216-7); and

(ii) To readily calculate indirect cost rates from the books of accounts;

16. Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms;

17. Adequate, reliable data for use in pricing follow-on acquisitions; and

18. Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.

Purchasing System

A purchasing system is the contractor’s system or systems for purchasing and subcontracting, including make or buy decisions, the selection of vendors, analysis of quoted prices, negotiation of prices with vendors, placing and administering of orders, and expediting delivery of materials. The purchasing system must:

1. Have an adequate system description including policies, procedures, and purchasing practices that comply with the Federal Acquisition Regulation (FAR) and the Defense FAR Supplement (DFARS);

2. Ensure that all applicable purchase orders and subcontracts contain all flow-down clauses, including terms and conditions and any other clauses needed to carry out the requirements of the prime contract;

3. Maintain an organization plan that establishes clear lines of authority and responsibility;

4. Ensure all purchase orders are based on authorized requisitions and include a complete and accurate history of purchase transactions to support vendor selected, price paid, and document the subcontract/purchase order files which are subject to Government review;

5. Establish and maintain adequate documentation to provide a complete and accurate history of purchase transactions to support vendors selected and prices paid;

6. Apply a consistent make-or-buy policy that is in the best interest of the Government;

7. Use competitive sourcing to the maximum extent practicable, and ensure debarred or suspended contractors are properly excluded from contract award;

8. Evaluate price, quality, delivery, technical capabilities, and financial capabilities of competing vendors to ensure fair and reasonable prices;

9. Require management level justification and adequate cost or price analysis, as applicable, for any sole or single source award;

10. Perform adequate cost or price analysis and technical evaluation for each subcontractor and supplier proposal or quote to ensure fair and reasonable subcontract prices;

11. Document negotiations in accordance with FAR 15.406-3;

12. Seek, take, and document economically feasible purchase discounts, including cash discounts, trade discounts, quantity discounts, rebates, freight allowances, and company-wide volume discounts;

13. Ensure proper type of contract selection and prohibit issuance of cost-plus-a-percentage-of-cost subcontracts;

14. Maintain subcontract surveillance to ensure timely delivery of an acceptable product and procedures to notify the Government of potential subcontract problems that may impact delivery, quantity, or price;

15. Document and justify reasons for subcontract changes that affect cost or price;

16. Notify the Government of the award of all subcontracts that contain the FAR and DFARS flow-down clauses that allow for Government audit of those subcontracts, and ensure the performance of audits of those subcontracts;

17. Enforce adequate policies on conflict of interest, gifts, and gratuities, including the requirements of the Anti-Kickback Act;

18. Perform internal audits or management reviews, training, and maintain policies and procedures for the purchasing department to ensure the integrity of the purchasing system;

19. Establish and maintain policies and procedures to ensure purchase orders and subcontracts contain mandatory and applicable flow-down clauses, as required by the FAR and DFARS, including terms and conditions required by the prime contract and any clauses required to carry out the requirements of the prime contract;

20. Provide for an organizational and administrative structure that ensures effective and efficient procurement of required quality materials and parts at the best value from responsible and reliable sources;

21. Establish and maintain selection processes to ensure the most responsive and responsible sources for furnishing required quality parts and materials and to promote competitive sourcing among dependable suppliers so that purchases are reasonably priced and from sources that meet contractor quality requirements;

22. Ensure performance of adequate price or cost analysis on purchasing actions; and

23. Establish and maintain procedures to ensure that proper types of subcontracts are selected, and that there are controls over subcontracting, including oversight and surveillance of subcontracted effort.

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