Monday, February 28, 2011

March 4th - What's At Stake for Contractors

The possibility of a Government shutdown on Friday (March 4th) has significant ramifications for Government contractors. If the shutdown happens, the Government will scale back to performing only "essential" operations (each Federal Agency defines its own essential operations). The last time something like this happened was in 1996 (Clinton Administration). Non-essential services that time included national parks, museums, toxic cleanup, passport applications, and many other activities. It also included most Government procurement, contract administration and audit activity. During those 21 days, contracting essentially halted as thousands of government employees were put on furlough. Government contractors were affected once they expended the funds authorized under their contracts or even earlier in the case of those working on Government installations.

If you have active contracts and have not already done so, you need to engage your contracting officer(s) right away to determine how your contracts will be affected by a Government shutdown. Contracts most likely to be affected are cost reimbursable and T&M contracts. These have limitation of funds clauses which cannot be breached. And, unless your contract is considered essential (e.g. ammo for Afghanistan) it is not likely that additional funds will be forthcoming during a shutdown. Without funding, contractors will have to find other ways of meeting payroll and other fixed expenses. Contractors need to think about mitigating costs. Forcing employees to take leave or catch up on mandatory training are a couple of ideas used previously.

If a shutdown occurs, contractors should not expect to be compensated. Most were not the last time a shutdown occurred and shouldn't expect it this time either.

Friday, February 25, 2011

Supplemental Reservist Payments

Here's a timely reminder for contractors with military reservists being called up to active duty. Many companies choose to continue certain fringe benefits, such as health insurance, for employees who have been called to military duty. In addition, many companies pay these individuals the difference between their civilian and military salaries in an effort to help mitigate the hardships that those called to active military duty will experience. For the past 10 years, DoD's official policy has been that those types of supplemental benefits for extended military leave are to be considered allowable costs pursuant to FAR 31.205-6 (Compensation).

There are some limitations however. Allowable amounts are limited to the lessor of:
  • the contractor's extended military leave benefits plus active duty pay, or
  • the total compensation of an employee at the time of entry into active military duty.
For purposes of computing this limitation, active duty pay includes basic pay, all specialty pay, and all allowances, except for subsistence, travel, and uniform allowances. Contractor policies for administering this benefit will necessarily require reservists to submit their military pay records.

Thursday, February 24, 2011

Reducing non-Value-added Requirements

Last week, the Department of Defense announced the next phase of its goal to reform some of its cost-inflating practices. DoD understands that contractors expend costs and other resources on mandates, reporting requirements, and other acquisition practices that do not add value added to systems and services delivered to DoD. The Department is now asking contractors to identify those issues and back them up with specific, credible, convincing data.

During the summer of 2010, industry voluntarily furnished nearly 500 suggestions to the Department of Defense. Some suggestions were adopted right away but many others involved changes that can only be made over the longer term or require additional follow-up data before they are ready for possible action. DoD is hoping that its new request for comments will yield the additional data that it needs along with information about some additional areas of non-value-added cost.

DoD plans to use these submissions as part of its internal deliberations and expects to seek further industry comment at a public meeting where industry experts in contract management and finance will offer comments on the topic areas raised to ensuring that the results are not idiosyncratic or overly influenced by particular companies' cost structures.

This is a great opportunity for contractors to participate in the development of procurement policies and procedures.

Wednesday, February 23, 2011

CAS 415 - Accounting for the Cost of Deferred Compensation

CAS 415 - Accounting for the Cost of Deferred Compensation. The purpose of CAS 415 is to provide criteria for measuring deferred compensation costs and assigning those costs to cost accounting periods. This standard applies to all deferred compensation costs except for compensated absences and pension costs covered in CAS 408 and 412 respectively.
This is one of the CAS standards that have been incorporated into the FAR. FAR 31.205.6(k) makes CAS 415 applicable to all contracts, even those that are not CAS covered or those that are modified coverage.

Deferred compensation is an award made by an employer to compensate an employee in a future cost accounting period for services rendered prior to receipt of compensation. It does not include the normal year-end salary, wage or bonus accruals.

To measure deferred compensation, you have to get out your present value calculator. The amount that contractors can claim on Government contracts is the present value of future benefits to be paid. These future payments must meet other criteria as well.
  • The contractor cannot unilaterally avoid the payment.
  • The award is to be paid in money, other assets, or stock (cannot be time-off)
  • The future payment can be measured reasonably accurately (sometimes challenging)
  • Events entitling an employee to receive an award have a reasonable probability of occurrence.
  • Where compensation is to be paid in stock, there is reasonable probability that stock options will be exercised (also sometimes difficult to support).

Tuesday, February 22, 2011

2011 Alliance NW Conference

The 2011 Alliance NW Conference, Opportunities for Small Business Conference & Trade Show is coming up on March 10, 2011 at the Puyallup Fair and Events Center.

This trade show is led by the Washington State PTAC (Procurement Technical Assistance Center) with the support of federal agencies and state offices. This event provides businesses with a single day of networking and procurement training opportunities.

Admission gets you a continental breakfast, lunch, and access to many exhibitors, workshops and speakers. There are sessions specifically targeted for contractors that are new to federal contracting, for established firms, and for advanced firms with a strong grasp of the basics of federal contracting.
For more information, visit the Alliance website.

We'll be there. Come visit us in Booth 109.

Monday, February 21, 2011

State and Local Taxes

Federal income taxes are unallowable under FAR 31.205-41 while state and local taxes, including property, frnachise, and income taxes are allowable contract costs according to the same cost principle. This is a fairly straight-forward cost principle except when it is applied to Subchapter S Corporations, LLCs, or LLPs.

Contractors that elect one of these "pass-through" entities are not taxed at the corporation level and thus are not normally required to pay state or local income taxes. Instead, the corporate income passes through to the shareholders and is taxed on the shareholders' personal income tax returns. The Department of Defense has taken the position, that state and local taxes that are passed through to the shareholders are not expenses of the contractor and as a result, not allowable costs under Government contracts.

Auditors are being instructed to ensure that these contractors are claiming only those taxes which are required to be paid or accrued by the contractor. Individual shareholder state and local income taxes claimed by the contractor on their pass-trhough income to the shareholders are unallowable and should be questioned.

This might not seem fair to "pass-through" entities but there you have it. Of course the FAR cost principle doesn't really come out and state the DoD position. Possible they are relying on the FAR provision that state and local income taxes must be paid or accured in accordance with GAAP (generally accepted accounting principles) to be allowable. Under GAAP, taxes on pass-through income is not recorded in GAAP compliant accounting records.

Friday, February 18, 2011

More Auditors means More Auditing

Earlier this month, the Senate Committee on Homeland Security and Governmental Affairs, Subcommittee on Contracting Oversight, held a hearing on how to improve Federal contract auditing. This hearing focused on the role played by DCAA in performing contract audits for agencies other than the Defense Department. For many of these agencies, there is no significant role because either i) those agencies do not feel audits are necessary or ii) have contracted audit services by outside firms. A video archive of the hearing as well as copies of the prepared testimonies by witnesses are available online.

In his prepared comments, DCAA Director Patrick Fitzgerald indicated that the audit agency has added 500 new audit positions in the past two years, representing a 12 percent increase in professional staffing. Senator Brown expressed incredulity that this hiring binge was going to improve contract audits. He stated that 500 more auditors was an indication that "something is broken". He asked why can't we hire 500 new workers, construction workers or regular private sector employees instead?

So, we ask, what do 500 more auditors mean to Government contractors? Couple this significant staffing increase with the diminishing role of DCAA in pricing, forward pricing indirect rates, purchasing system reviews, and financial capability reviews (see our earlier post on the new Defense policy for shifting work from DCAA to DCAA) and there will be more auditors performing fewer audits meaning, they'll be spending more time per audit.

DCAA audits will become more in-depth that what contractor's might be accustomed to. The trend over the past few years to more "desk" audits will reverse itself and auditors will spend more time at contractor locations and less time at their desks. There is already a marked increase in the level of testing being performed on contractor assertions and representations. There has always been a requirement for auditors to gather sufficient, competent, evidential matter to support his/her conclusions and recommendations but auditors will be taking fewer risks and instead of taking things at face value, will dig deeper and probably look at corroborating data (do employee timesheets agree with the stated purpose of a trip?) There will certainly be more attention focused on contractor internal control systems based on the premise that good internal control systems will reduce the chance that unallowable, unallocable, or unreasonable costs get charged to Government contracts.

Look for more floorchecks. In the past few years, the frequencies of floorchecks and numbers of employees interviewed have fallen to laughably low levels. Many contractors do not even consider floorchecks to be a likely occurrence except when the auditor is performing another type of audit. However, there is a renewed realization and understanding that a contractor's timekeeping system is the primary "source document" for one of the largest cost elements charged to contracts. We've heard of instances where auditors have conducted employees interviews like an inquisition.
Many contractors have been complaining to their elected officials, contracting officers, trade group representatives, and anyone else that will listen about DCAA's inability to complete incurred cost audits in a timely manner, and the resulting impact on their cash flows. As a stop-gap measure, DCAA is increasing its efforts to ensure that contractor provisional billing rates are appropriate. One method of doing this is to ensure the timeliness of contractor incurred cost submissions. Although on one hand it is bemusing to watch the ferocity with which DCAA goes after contractors who are late in submitting their incurred cost claims, knowing they won't be audited for several years, the claims do provide a level of assurance as to the propriety of the provisional billing rates. Once those submissions are turned in, contractors can "true up" their billings for that year. In theory, under cost type contracts, contractors should recover all of the costs that are booked to the contract(s), no more and no less.
While on one hand, the types of audits that DCAA performs are fewer, the ones that remain will be more in-depth than they were in the past. The most significant audit activities in the coming months will be on incurred cost audits and internal control reviews.

Thursday, February 17, 2011

New GAAP References in FAR

Now a little something for our "accountant" readers.

There is a new proposal to amend the FAR to update references to authoritative accounting standards owing to the FASB's (Financial Accounting Standards Board's) Accounting Standards Codification (ASC) of Generally Accepted Accounting Principles (GAAP).

In June of 2009, the FASB announced, in its Statement Number 168, that effective for financial statements issued for interim and annual periods ending after September 15, 2009, the FASB ASC would become the source of authoritative U.S. GAAP recognized by the FASB to be applied by nongovernmental entities. The FASB stated that this codification supersedes existing references in U.S. GAAP. Consequently, FAR needs to be updated for the superseded references in three FAR sections with the GAAP Codification references. The revisions to the three FAR sections are intended to have no effect other than to simply replace the superseded references with updated references.

This change will update most but not all references to GAAP contained in the FAR. The notable exception is FAR 31.205-6(o)(2)(iii)(A)(1) which discusses post retirement benefits other than pensions and provides that costs in excess of that computed in accordance with FASB 106 is unallowable. The FAR Councils have promised that this will be handled in a separate FAR case which makes us believe that there is something more substantial coming then just a mere change to a GAAP reference.

Specific changes include:

31.205-11 Depreciation.

(h) A ``capital lease,'' as defined in Financial Accounting Standards Board's Accounting Standards Codification (FASB ASC) 840, Leases, is subject to the requirements of this cost principle. (See 31.205-36 for Operating Leases.) FASB ASC 840 requires that capital leases be treated as purchased assets, i.e., be capitalized, and the capitalized value of such assets be distributed over their useful lives as depreciation charges or over the leased life as amortization charges, as appropriate, except that--

31.205-36 Rental costs.

(a) This section is applicable to the cost of renting or leasing real or personal property acquired under ``operating leases'' as defined in Financial Accounting Standards Board's Accounting Standards Codification (FASB ASC) 840, Leases. (See 31.205-11 for Capital Leases.)

52.204-10 Reporting Executive Compensation and First-Tier Subcontract

(2) Awards of stock, stock options, and stock appreciation rights. Use the dollar amount recognized for financial statement reporting purposes with respect to the fiscal year in accordance with the Financial Accounting Standards Board's Accounting Standards Codification (FASB ASC) 718, Compensation-Stock Compensation.

Wednesday, February 16, 2011

DCMA and DCAA Cost Recovery Initiative

Last October, DCMA (Defense Contract Management Agency) and DCAA (Defense Contract Audit Agency) announced a joint Cost Recovery Initiative (CRI) to pursue a significant number of CAS cost impact issues requiring ACO dispositions and/or resolutions. The backlog of open CAS issues is significant by any measure. There are over 450 reportable CAS audits (meaning the audits are being tracked in someones database) waiting resolution and about 300 DCAA Form 1s (Notice of Costs Suspended and/or Disapproved) where the Government has reduced contractor billings.

DCMA and DCAA have now launched their joint agency CRI to proactively address these outstanding audit issues, making resolution of these issues one of their highest priorities. Most of these outstanding non-compliance issues were initiated by DCAA but require ACO action to resolve. When contractors make accounting changes or are found in noncompliance with a CAS standard, they are required by the terms of their contracts to prepare and submit a cost impact statement. When those cost impact statements are not submitted, the contracting officer has a difficult time assessing the materiality of the issues and ultimately resolving them.

Under the new initiative, where the contractor has not submitted a cost impact statement, DCMA will ask the DCAA to prepare a "rough order of magnitude" cost impact. The ROM is a high level estimate of the cost impact of the accounting change or noncompliant practice and would not be at the level of detail required of a contractor-prepared cost impact. The ROM will be used by the ACO to initiate a 10 percent withhold authorized by FAR Part 30. Although the ROM will be a good faith estimate based on available data, there is no expectation that the government will be "conservative" in its calculations. Additionally, it is only a stop-gap measure to protect the government's interest until the contractor prepares its own cost impact proposal.

Tuesday, February 15, 2011

CAS 408 - Accounting for the Cost of Compensated Personal Absence

CAS 408 - Accounting for the Cost of Compensated Personal Absence. Compensated personal absences are absences from work for reasons such as illness, vacation, holidays, jury duty, military training, or personal activities, for which an employer pays compensation directly to an employee. The purpose of Cost Accounting Standard 408 is to require contractors to accrue the costs of compensated personal absences into the accounting period when earned. Prior to CAS 408, many contractors booked the costs when the leave was taken, not when it was earned. Today, many contractors that are not CAS covered, still do. CAS 408 also requires that the costs for an entire cost accounting period be allocated pro-rata on an annual basis among the final cost objectives of that period. That means that contractors cannot allocate monthly increments.

This might sound simple but it can be complex to implement. In order to accurately accrue an expense and related liability for compensated personal absences, contractors must consider and estimate, among other things, forfeitures when employees leave the company, use or lose rules, payouts for unused vacations, continuity of workforce, disciplinary termination, and severance payments.  The standard allows the use of either the earned wage rates or anticipated wage rates, so long as consistency is maintained.

The term "entitlement" has a specific meaning for this standard. Entitlement means "an employees right, whether conditional or unconditional, to receive a determinable amount of compensated personal absence, or pay in lieu thereof". The standard provides clarifying comments however.
  • If the employer's plan or custom provides that a new employee must complete a probationary period before the employer is liable to pay the employee for compensated personal absence, such service may be treated as creating entitlement, provided the con-tractor does so consistently.
  • If the employer's plan or custom provides that entitlement is to be determined on the first calendar day or the first business day of a cost accounting period, entitlement will be considered earned in the preceding cost accounting period.

If a government auditor comes in to your facility to test your compliance with CAS 408, be prepared to provide the following:
  • Written policies and procedures. If there are no written policies and procedures the auditor will evaluate the "custom" of the employer for paying compensation for personal absences
  • Personal records and memorandum
  • Corporate minutes relating to costs of personal absences
  • Financial statements and accounts relating to compensation for personal absence
  • Journal entries supporting the books of account
For contractors not subject to CAS 408, it is "good accounting" to accrue a liability for compensated personal absences. We recommend the practice although it may not be necessary to be as precise in estimating the liability as CAS 408 requires.

Monday, February 14, 2011

DoD Changes "Award Fee" Payout Provisions

DoD issued a final rule today affecting award-fee contracts. Specifically, (i) 40 percent of the award fee pool must now be reserved until the final award fee determination period and (ii) the Government can no longer make "provisional award-fee payments. Contractors entering into award-fee type contracts need to be aware of these measures because of the likely impact on their cash flows.

According to DoD, the purpose of making 40 percent of the award-fee pool available under the final evaluation period is to set aside a sufficient amount to protect the taxpayer's interest in the event a contractor fails to meet contractual obligations.

Contractors will continue to be paid incurred costs on cost-type contracts, completed work under fixed-price contracts with progress payments, or milestones achieved under fixed-price contracts with performance-based payments. However 40 percent of the anticipated fee could be significant and contractors should factor this into their cash flow projections.

The new rule also prohibits the prepayment of award fee prior to the end of an award-fee period. DoD believes that prepayments are inappropriate since the contractor's performance has not been evaluated and the contractor may not earn that paid award fee during that period.

The new clause does contain a provision to reduce the amount of fee reserved for the final award fee determination period from 40 to 20 percent when approved by the head of a contracting activity. Don't count on that happening.

Friday, February 11, 2011

NASA Proposes to Remove EVMS Requirements from Firm Fixed Price Contracts

Here's something very rare - the Government is proposing to remove a regulation.

On February 9, 2011, NASA issued a proposed rule (with request for comment) that would eliminate the mandatory requirement for contractors to establish and maintain an Earned Value Management System (EVMS) for firm-fixed-price (FFP) contracts. NASA has finally recognized the inherently low risk to the Government associated with FFP contracts and intends to relieve contractors from unnecessary reporting burdens and unnecessary cost. We can only hope that other agencies take note and do likewise. This proposed rule would not affect cost-reimbursable or fixed-price-incentive contracts.

Under the revised rule, cost-reimbursable and fixed-price incentive contracts greater than $50 million must have an adequate EVMS system as determined by the cognizant federal agency (usually the Defense Contract Management Agency or DCMA). Cost-reimbursable and fixed price contracts between $20 and $50 million must have adequate EVMS systems as determined by the contracting officer. Cost-reimbursable and fixed-price-incentive contracts under $20 million need EVMS systems only when the contracting officer determines there is sufficient risk to justify the need. EVMS for fixed-priced contracts of any amount is "discouraged".

Earned Value Management (EVM) is a performance-based tool that gives agency managers an early warning of potential cost overruns and schedule delays during the execution of their investments. EVM requires agencies to integrate information about the scope of work with cost, schedule, and performance information so that they may compare planned spending with actual spending, isolate the source of performance problems, and take corrective actions in a timely manner.

Thursday, February 10, 2011

Political Campaign Activities at Contractor Facilities

This is an audit alert for contractors who might have hosted a political event at their facility or may do so in the future. Costs associated with campaign activities, such as political candidates' appearances and speeches at contractor facilities are unallowable when those activities are clearly an attempt by the contractor to influence the outcome of an election by soliciting votes (see FAR 31.205-22(a)(1)).

Auditors are being instructed to consider (i) how the candidate is portrayed by the contractor and (ii) the subject matter of the candidate's speech in determining whether costs meet the definition of legislative lobbying costs. Any activity that is remotely related to lobbying activities will be questioned and subject to penalty for claiming unallowable costs. If, for some reason, the information to make such a determination is not available or is not made available to the auditor, the auditor may still question the costs as unsupported. Auditors are also being instructed to carefully consider directly associated costs such as protocol activities. Also, employees who attend campaign activities should charge an appropriate indirect and/or unallowable charge code for the time spent at that activity.
Contractors who host political activities at their facilities should make certain that those functions do not constitute unallowable legislative lobbying activities before charging related costs to any indirect cost pool that gets allocated to Government contracts.

Wednesday, February 9, 2011

CAS 411 - Accounting for Acquisition Costs of Material

CAS 411 - Accounting for Acquisition Costs of Material Cost Accounting Standard 411 provides guidance on using inventory costing methods and, according to the Standard itself, improves the measurement and assignment of costs to cost objectives (e.g. contracts). The standard requires contractors to accumulate the cost of material and allocate it to cost objectives according to written statements of accounting policies and practices.

There are two basic methods of charging material costs to Government contracts. One is by direct identification of the material item to a particular contract and the other is through inventory. To allocate a cost directly to a contract, the end use of that material or category of material must be identified at the time of purchase or production. Contractors can allocate a category of material directly even though it maintains an inventory of this material, as long as the cost objective was specifically identified and the cost allocated at the time of purchase or production. This could lead to a situation where material could be allocated at different costs to the same cost objective, one cost by direct identification and one through issuance out of inventory. That would be perfectly acceptable under this Standard.
The contractor's written statements of accounting policies and practices for accumulating and allocating costs of materials must clearly set out
  • the specific conditions under which these costs may be directly allocated to cost objectives and
  • the inventory costing method to be used for allocating material costs issued from inventory.
Materials used solely in performing indirect functions or which are not a significant element of production cost may be allocated to an indirect cost pool. However, when the ending inventory significantly exceeds the beginning inventory the pool should be credited for the unused portion and an asset account established for a like amount. The standard does not require the contractor to take a physical count of the ending inventories for these indirect materials but the method for estimating the cost of unconsumed indirect materials at year end must be reasonable.

All materials, except those directly allocated to final cost objectives and those allocated to an indirect cost pool must be accounted for in material inventory records. "Material inventory record" means any record for accumulating the cost of material for issue to one or more cost objectives.

When issuing material from a company-owned inventory, any of the following inventory costing methods are acceptable, provided the same costing method is consistently used for similar categories of material within the same business unit:

  • The first-in, first-out (FIFO) method
  • The moving average cost method
  • The weighted average cost method
  • The standard cost method
  • The last-in, first-out (LIFO) method
Of the foregoing inventory costing methods, the most commonly used are the FIFO and weighted average methods.
Material cost is the acquisition cost of a category of material. The purchase price must be adjusted by extra charges incurred (e.g. shipping and handling) or discounts and credits earned. These adjustments must be charged or credited to the same cost objective as the material price; when this is not practical, charges or credits may be included in an appropriate indirect cost pool, provided this practice is consistent.

Tuesday, February 8, 2011

OMB Goes Shopping for a Talented Acquisition Workforce

The Office of Management and Budget (OMB) has just issued a memorandum to Government HR and acquisition folks advising them how to use the many available special hiring authorities to devise "effective hiring strategies" for attracting "talented individuals" to the acquisition profession. An agency's acquisition workforce is critical to ensuring taxpayer dollars are spent wisely. The government relies on its acquisition workforce to negotiate and administer contracts for over $500 billion per year. "Talented individuals", the OMB concludes will allow agencies to achieve cost savings, reduce risk in their contracting practices, and improve acquisition and project management. The OMB also believes that agencies should develop strategies to improve the visibility of acquisition jobs, target specific skill sets, and reduce wherever possible, the administrative burden on the agency and the applicant. Anyone that has ever applied for a Government job will appreciate the latter goal.

OMB is also developing new tools to be used in conjunction with the traditional interview. One of the new tools being developed to help agencies build their workforce is a new online applicant assessment tool. This assessment tool will use state-of-the-art Computer Adaptive Testing which adjusts the level of difficulty of questions based on an applicant's previous responses. Animated situational judgment assessments will present applicants with occupation-specific scenarios and ask them to respond. These tools will measure an a applicant's proficiency in a variety of general competencies, such as interpersonal skills, math, reading comprehension, and logical reasoning. These tools, of course, are being developed under contracts awarded by non-talented acquisition workforce personnel at prices far in excess of their intrinsic value and triple the prices available on the open market. Because of poor and sloppy project management practices, the tools will be rolled out 18 months later than expected and will crash everyone's computer. Well, maybe we're a bit sarcastic here but we want to underscore a very important point. The government acquisition corp is loaded with talented and dedicated individuals who work sacrificially to ensure the government is getting the best prices. Attracting talented individuals to the acquisition workforce is not the problem. Retaining them is the problem. While some leave because they feel uncomfortable in the "system", many gain experience and develop expertise and then leave because contractors offer them financial packages they cannot refuse.

Click here if you would like to read the entire OMB strategy (16 pages).

Monday, February 7, 2011

CAS 407 - Use of Standard Costs for Direct Material and Direct Labor

CAS 407 - Use of Standard Costs for Direct Material and Direct Labor. The purpose of Cost Accounting Standard 407 is to provide some criteria for impacted contractors under which "standard costs" can be used for estimating, accumulating and reporting direct material and direct labor costs. It does not cover standards for overhead, service centers or pre-established measures used solely for estimating.

This standard does not require contractors to establish a standard cost accounting system but if a contractor chooses to cost Government contracts through a standard cost accounting system, and if the contractor is subject to "full CAS coverage", then this particular standard applies.

Now if you do not have a standard cost accounting system, or have plans to implement such a system, you can stop reading. This standard is not for you. If however, you have implemented a standard cost accounting system or are considering such, read on. We do not have data on the number of government contractors subject to CAS 407 but we sense it is pretty low. We know of government auditors who have never encountered a contractor subject to CAS 407 in 30+ years of auditing. Most government contracts do not lend themselves to standard costing system approaches.

There are a number of criteria that a standard cost accounting system must meet in order for it to qualify for use on Government contracts.

  • The standard costs must be entered into the books of account. This should be fairly obvious. If you use them, book them. However, properly computed variances may be allocated by memorandum worksheet adjustments rather than entered in the books of account.
  • The standard costs and related variances must be appropriately accounted for at the level of the production unit.
  • A production unit is "A grouping of activities which either uses homogeneous inputs of direct material and direct labor or yields homogeneous outputs such that the costs or statistics related to these homogeneous inputs or outputs are appropriate as bases for allocating variances." This concept of homogeneity should permit contractors a degree of flexibility in setting and revising standards on the basis of individual needs and circumstances and still provide for the proper cost assignment of variances. Under this concept a single product manufacturer would be permitted to have one labor variance account for the entire plant, while a multi product manufacturer would be required to have a variance account for each product line and/or for the various common part sub product lines.
  • Everything must be in writing. The practices with respect to the setting and revising of standards, use of standard costs, and disposition of variances must be stated in writing and consistently followed.The written statement of practices shall include
    • bases and criteria used in setting and revising standards;
    • the period during which standards are to remain effective;
    • the level, such as ideal or realistic, at which material quantity standards and labor-time standards are set, and
    • conditions, such as those expected to prevail at the beginning of a period which material-price standards and labor-rate standards are designed to reflect.

Friday, February 4, 2011

Government Procurement wants to Improve Communication with Contractors

Several months ago, the Office of Federal Procurement Policy (OFPP) held a series of outreach sessions with industry representatives, acquisition professionals, agency procurement attorneys, and others to identify and address core misconceptions about communication between the government and industry during the pre-award acquisition process. Coming out of these sessions were a number of misconceptions about vendor engagement that may be unnecessarily hindering agencies' appropriate use of existing flexibilities.

In a February 2, 2011 memorandum to all government acquisition activities, OFPP listed out the top ten misconceptions that came out of these outreach sessions. These misconceptions are ones prevent effective communications between the government and contractors (or potential contractors). The memorandum then tries to dispel the misconceptions by stating the facts as it sees them. It then tasks the agencies to develop "vendor communication plans" and increase employee awareness.

Here then are the top ten misconceptions concerning communications between industry and the government. The OFPP memorandum goes into much more detail on each of these - its 13 pages and can be downloaded here.

1. Misconception – “We can’t meet one-on-one with a potential offeror.”

Fact – Government officials can generally meet one-on-one with potential offerors as long as no vendor receives preferential treatment.

2. Misconception – “Since communication with contractors is like communication with registered lobbyists, and since contact with lobbyists must be disclosed, additional communication with contractors will involve a substantial additional disclosure burden, so we should avoid these meetings.”

Fact – Disclosure is required only in certain circumstances, such as for meetings with registered lobbyists. Many contractors do not fall into this category, and even when disclosure is required, it is normally a minimal burden that should not prevent a useful meeting from taking place.

3. Misconception – “A protest is something to be avoided at all costs - even if it means the government limits conversations with industry.”

Fact – Restricting communication won’t prevent a protest, and limiting communication might actually increase the chance of a protest – in addition to depriving the government of potentially useful information.

4. Misconception – “Conducting discussions/negotiations after receipt of proposals will add too much time to the schedule.”

Fact –Whether discussions should be conducted is a key decision for contracting officers to make. Avoiding discussions solely because of schedule concerns may be counter-productive, and may cause delays and other problems during contract performance.

5. Misconception – “If the government meets with vendors, that may cause them to submit an unsolicited proposal and that will delay the procurement process.”

Fact – Submission of an unsolicited proposal should not affect the schedule. Generally, the unsolicited proposal process is separate from the process for a known agency requirement that can be acquired using competitive methods.

6. Misconception – “When the government awards a task or delivery order using the Federal Supply Schedules, debriefing the offerors isn’t required so it shouldn’t be done.”

Fact – Providing feedback is important, both for offerors and the government, so agencies should generally provide feedback whenever possible.

7. Misconception – “Industry days and similar events attended by multiple vendors are of low value to industry and the government because industry won’t provide useful information in front of competitors, and the government doesn’t release new information.”

Fact – Well-organized industry days, as well as pre-solicitation and pre-proposal conferences, are valuable opportunities for the government and for potential vendors – both prime contractors and subcontractors, many of whom are small businesses.

8. Misconception – “The program manager already talked to industry to develop the technical requirements, so the contracting officer doesn’t need to do anything else before issuing the RFP.”

Fact – The technical requirements are only part of the acquisition; getting feedback on terms and conditions, pricing structure, performance metrics, evaluation criteria, and contract administration matters will improve the award and implementation process.
9. Misconception – “Giving industry only a few days to respond to an RFP is OK since the government has been talking to industry about this procurement for over a year.”

Fact – Providing only short response times may result in the government receiving fewer proposals and the ones received may not be as well-developed - which can lead to a flawed contract. This approach signals that the government isn’t really interested in competition.

10. Misconception – “Getting broad participation by many different vendors is too difficult; we’re better off dealing with the established companies we know.”

Fact – The government loses when we limit ourselves to the companies we already work with. Instead, we need to look for opportunities to increase competition and ensure that all vendors, including small businesses, get fair consideration.

Thursday, February 3, 2011

Extended Travel

Most contractors are well aware of the FAR limitations on lodging and meal reimbursements paid to employees while in travel status (see FAR 31.205-46). These limits are variable based on location and season. They can be exceeded under limited circumstances and must be reduced for first and last day of travel.

Extended travel however gets a little tricky. There are no specific FAR requirements to guide us here – just the overarching “reasonableness” criteria (see FAR 31.201-3). While FAR makes it clear that contractors do not need to follow the JTRs (Joint Travel Regulations) beyond the maximum lodging and MI&E (meals and incidental expenses) rates and the definition of MI&E, those regulations can still be useful in helping contractors develop reasonable policies and procedures to cover long term travel. 

Under the JTR, long-term travel for more than 180 days is reimbursed for lodging and M&IE at 55% of the applicable standard lodging and M&IE rate, rounded to the nearest dollar (JTR C4552-1). The actual daily lodging rate is computed by dividing the total lodging cost by the number of days of occupancy in the rental period. Expenses of lodging include the rental cost for a furnished dwelling, or if unfurnished, the cost of appropriate and necessary furniture and appliances, utility connect/disconnect cost, cost of reasonable maid fees and cleaning services, monthly telephone fees, cable TV, etc.

Although not bound by this particular section of the JTR, contractors that do not adjust their reimbursement rates for long-term TDY, risk a “reasonableness” challenge by the government auditors.

Wednesday, February 2, 2011

Accounting for Purchased Labor

Government contractors must be very careful on how they account for the cost of purchased labor. Many contractors obtain engineers, technical writers, technicians, craftsmen and other personnel by subcontract (commonly called "purchased labor") to meet temporary or emergency requirements rather than hiring those skills outright. In most cases, this practice makes perfect business sense but if there is too much of it going on, government auditors may study the situation to determine whether any additional costs resulting from purchased labor is reasonable, necessary, and properly allocable to government contracts.

Once the reasonableness of purchased labor is established, it is necessary to properly account for it. The proper accounting treatment varies depending upon the circumstances under which the costs were incurred. For example, some contractors classify purchased labor as direct labor costs when the work is performed in the contractor’s facilities and under their supervision and otherwise meets the FAR definition of direct costs. These contractors cost such effort using the average labor rate incurred by their own employees for comparable work. Differences between the amounts derived and purchased labor prices are treated as overhead costs and are allocated accordingly. Other contractors classify purchased labor as subcontract costs.

Purchased labor most likely causes no fringe benefits and other employee-related costs to be incurred.  Such costs are generally paid by the entity providing personnel performing the effort.

FAR and CAS require that pooled costs shall be allocated to cost objectives in a reasonable proportion to the causal or beneficial relationship of the pooled costs to cost objectives. Purchased labor must share in an allocation of indirect expenses where there is a causal or beneficial relationship. In some cases, a separate allocation base for purchased labor may be necessary to allocate significant overhead costs to purchased labor such as supervision and occupancy costs, or to eliminate other costs not benefiting purchased labor such as fringe benefits costs.

Where the effort of purchased labor is performed in-house using the contractor's supervision and facilities, overhead exclusive of fringe benefits and other employee related costs, if material in amount, should be allocated to purchased labor. Conversely, where the effort of purchased labor is performed offsite under the supervision and control of an entity other than the contractor, none of the contractor's labor overhead costs may be allocable to purchased labor.

The determination on how best to allocate purchased labor costs on Government contracts must be supported by proper analysis and rationale. Government contractors must be prepared to demonstrate the propriety of the method they choose to use.

Tuesday, February 1, 2011

Estimating Labor Productivity

A common technique for estimating labor hours is to use historical experience from similar work and from prior production runs. Whenever history is used however, it must be adjusted to account for such things as differing conditions, quantities, and improvement curves. When the government evaluates labor hour estimates, it nearly always asserts that contractors show improvement to historical data and patterns. Contractors would do well to also consider improvements to productivity in preparing estimates.

Productivity improvements result from any number of factors. They may be due to the adoption of improved methods and tools or the increased efficiency of the individual worker performing repetitive tasks (e.g. learning curve theory). The amount of improvement per unit of product is generally high during the early part of the production cycle and decreases as production is stabilized, processes are refined and additional experience is gained.

After awhile, the rate of improvement may not be measurable except over a substantial period of time. Where automation is used, the rate of improvement is usually zero. As production nears its end, productivity often decreases. Tooling wears out or the most skilled workers are transferred to other projects. Sometimes, production runs are less than optimal and fixed costs are spread to fewer units.

The government's primary interest in labor productivity is in measuring current productivity and past trends, and determining the causes of past trends so that the likelihood of continuance during the contemplated production period may be assessed. It is important that contractors (or potential contractors) ensure that the government understands all relevant factors in assessing productivity. The government's propensity is to conjure up reasons why contractors should or could be more productive. Sometimes these positions do not consider all relevant facts. Contractors without all the facts, might find themselves agreeing to something during negotiations that could imperil contract performance.