Monday, December 31, 2012

"Floorchecking" Employees Who Work Out of Their Homes

Last Friday, we discussed the importance of internal controls for contractor Work-at-Home (WAH) programs. It is the Government's belief that only a subset of employees can effectively work out of their homes and for those who do work out of their homes, supervision, work assessments, and timekeeping become very important.

DCAA (Defense Contract Audit Agency) and other contract auditors routinely conduct floorcheck audits. These unannounced employee interviews are designed to ensure the propriety of labor charges to Government contracts. Typically, the auditor has already made a selection of individuals he/she wants to interview prior to the unannounced visit. What happens when one or more of these individuals are working at home?

Current audit guidance states that when an employee selected to be floor checked is not present at the normal work-site due to a work at home program, the auditor should interview the supervisor. Discussions with the supervisor should concentrate on

  • obtaining evidence of the employee's work
  • documented evidence of supervisory control over the employee's WAH schedule

After interviewing the supervisor, the auditor should also communicate with the employee by phone to

  • determine if the employee has knowledge of WAH procedures
  • discuss the specific type of work being performed along with the related labor charge numbers

Finally, the employees employment should be verified to the payroll/personnel records.

One question frequently asked by employees contemplating a WAH schedule is the likelihood of a home visit by a Government auditor. That would be weird and extremely unlikely. Nowhere in the audit guidance is there a requirement that the auditor visit the employee at his/her home.

Friday, December 28, 2012

Work-at-Home (WAH) Programs

Many Government contractors have programs that allow employees to perform their work from home or from an alternative work site. There are advantages to such programs, reduced commuting time, less stress, and for the contractor, reduced overhead (assuming they can jettison some of their facilities). But with these WAH programs, comes a real need for internal controls to determine whether the program is effective. Government auditors are always concerned about potential abuse under WAH programs - many of them do it themselves and so, have first hand knowledge of potential risks, ineffective controls, and abuses.

Good internal controls over WAH programs should, at a minimum, address the following:
  • Eligibility and Status - Adequate policies should include a description of the type of work that may be performed at home. For example, work that must be closely supervised, requires access to non-portable equipment or depends on the frequent interaction with others, cannot be performed at home. Policies should also include the status of employees working at home (e.g. full time, part-time, temporary, etc.) and the employees' eligibility for benefits such as insurance and leave.
  • Approval policy, employee performance, work schedule and attendance. Contractor policies and procedures should require
    • proper advance approval by appropriate management officials,
    • continuing evaluation of the participating employee's performance in completing assigned tasks,
    • written documentation of the specific tasks to be performed along with the expected completion dates
    • that WAH employees attend periodic meetings at the contractor's work site to allow the employee and supervisor to discuss work progress, assign new tasks, and evaluate work performed, and
    • that WAH employees work a mutually agreeable set of core hours to allow management to have access to the WAH employee at designated times.
  • Timekeeping requirements - WAH employees hshould be required to submit timecards in accordance with the company-wide timekeeping system.

Contractors without the foregoing minimum controls will undoubtedly be cited for an accounting system deficiency with the potential for billing withholds.

Thursday, December 27, 2012

Multiple Award Schedules - Pricing Expectations

The GSA Multiple Award Schedule (MAS) program provides companies the opportunity to sell their products to Government customers. It has been a very successful program for both the Government and companies seeking to sell goods and services. It streamlines the entire procurement process, saving significant resources from the proposal prep and negotiation phases of contracting. Contractors, for their part, must agree to provide the Government the prices afforded their most favored customers, no exceptions.

The Department of Justice just announced a $70 million settlement after GSA auditors found that a company failed to disclose "most favored" prices during the negotiation of an MAS contract and as a result, the Government paid more than it should have for the products it purchased. Like many settlements, the contractor did not admit to guilt but, bottom line, it had to pay the Government the $70 million.

The $70 million settlement resolved issues discovered during a GSA post-award audit. The audit disclosed that the MAS contractor failed to meet its contractual obligations to provide the GSA with current, complete, and accurate information about its commercial sales practices, including discounts afforded to non-Governmental customers. As a result, Government customers who purchased items under the MAS contract paid higher prices than they should have.

Companies pursuing MAS contracts are expected to disclose all sales information to the Government. Omitting sales information because it is considered outdated or not pertinent, opens the door for the Government to later charge defective pricing. It is better to provide the information to the Government during negotiations and then explain it's non-relevance than to withhold it and risk subsequent allegations.

You can read DoJ's press release on this settlement here.

Wednesday, December 26, 2012

What are "CD" Contracts and What Are the Risks?

Contract Definition (CD) contracts are the kind that are awarded to multiple contractors who will ultimately compete for a major follow-on prime contract. They are usually short-duration contracts. Most of the time they are fixed-price.

Upon completion, the procurement activity (contracting officer) will use the results delivered under the CD contracts to help define exactly what it wants in the prime contract. After that determination, it will then issue an informative RFP.

The Government (specifically DCAA or Defense Contract Audit Agency) considers these type of contracts to be "risky" in terms of the potential for labor mischarging. Their audit guidance in CAM (Contract Audit Manual) 6-404(b)(8) states the following:

Since the contractor's performance on the CD contract will have a direct bearing on its chance of winning the prime, there may be a tendency to spend more than the established contract value. Therefore CD contracts are highly susceptible to labor mischarging and the auditor should evaluate to make sure all allocable effort is being charged.

Similarly, DCAA's audit program for labor floorchecks (where the Agency conducts unannounced interviews of contractor employees) provides for the following:

Identify all CD contracts. These contracts are high-risk contracts and, therefore, should be evaluated to make sure all allocable effort is being charged.

With these risk factors in mind, the auditors will specifically target any CD contracts to ensure that contractors are not off-loading some of the effort onto other direct or indirect projects/contracts.

Monday, December 24, 2012

Small-Business Contracting Goals - Will Remain the Same

This is our third and final posting on the 2013 National Defense Authorization Act (NDAA) that was released from conference committee last week. This Act has yet to pass the full House and Senate but from all accounts, it will. Previously we reported on two provisions in the Senate's version that did not make it out of committee, the arbitrary caps on employee compensation and the unlimited access to internal audit reports by Government auditors.

One of the provisions that did not make the final cut was to increase the small-business contracting goal from 23 to 25 percent. Section 1631 of the Senate's version included a provision that allowed the President to set small-business contracting goals at whatever he wanted but not less than 25 percent. Every year, it seems, small-business advocates try to increase the statutory goals for awarding contracts and subcontracts to small businesses. And, each year the provisions get pulled.

Of course, goals are goals and the real measure of success is ascertaining how well the Government is doing in achieving those goals. So far, the Government has never met the old goal of 23 percent so what is the point in increasing a percentage that cannot be met? OMB (Office of Management and Budget) recently announced an initiative to help Government agencies meet those goals. You can read about that initiative here.

Friday, December 21, 2012

DCAA Access to Contractor Internal Audit Reports

Yesterday we wrote about how the conference committee eliminated a provision in the Senate's version of the 2013 National Defense Authorization Act (NDAA) that would limit the reimbursement of compensation paid to contractor employees to that of the US Vice President. Today we want to highlight another change the conference committee made to the NDAA. This one involves access to contractor internal audit reports.

Under the Senate's version of the 2013 NDAA, contractors would have been required to grant access to internal audit reports and failure to do so, could render a particular business system deficient and subject the contractor to billing withholds.

Under the conference committee's version (expected to pass), the requirement to provide internal audits has been eliminated. Instead, the Act will require that if DCAA needs internal audits, it will request them, document the request, and document the contractors' response to the request. That's it. End of story. If the contractor denies access, there are no ramifications.

If the contractor does provide access, the internal audit reports can only be used by DCAA to evaluate the efficacy of contractor internal controls and the reliability of associated contractor business systems. A determination by DCAA that a contractor has a sound system of internal controls shall provide the basis for increased reliance on contractor business systems or a reduced level of testing with regard to specific audits, as appropriate. Internal audit reports provided by a contractor pursuant to this section may be considered in determining whether or not a contractor has a sound system of internal controls, but shall not be the sole basis for such a determination. This also means that the reports cannot be used as a basis for withholding billings.

Contractor's can breathe easier, for awhile. They will not be required to turn over internal audits if they so choose.

Thursday, December 20, 2012

NDAA Provision to Lower Compensation Caps Eliminated

Here's some good news for contractors. The 2013 National Defense Authorization Act (NDAA) emerged from a congressional conference committee on Tuesday missing a few provisions that contractors were opposing including caps on compensation that would limit amounts to the Vice President's salary. In lieu of this provision, the committee recommended further study on the matter.

The conference committee version of the 2013 NDAA orders up a GAO (General Accountability Office) review of the effect of reducing the allowable costs of contractor compensation. The report must include at a minimum, the following:

  1. An estimate of the total number of contractor employees whose allowable costs of compensation in each of fiscal years 2010 through 2012 would have exceeded the amount of allowable costs if those costs were capped at the President's and another study if the costs were capped at the Vice President's salary.
  2. An estimate of the total number of contractor employees in fiscal year 2012 that could have been characterized as falling within a narrowly targeted exception established by the Secretary of Defense (scientists and computer guys), a description of their duties and services, and their compensation.
  3. An assessment of the extent to which contractor employees received compensation in the form of vested or unvested stock options
  4. An assessment of the potential impact on the DoD, contractors of the DoD, and employees of such contractors of reducing the amount of allowable compensation.

The GAO report is due within 120 days of enactment of this bill.

Wednesday, December 19, 2012

GAO Report on DoD Initiative to Reduce Audit Backlog

The GAO (Government Accountability Office) issued a report yesterday to the Senate Committee on Armed Services that looked at DoD's initiative to address the backlog of incurred cost audits and closing out old contracts. The entire report can be found here.

To reduce the backlog of incurred cost audits, DCAA implemented an initiative to focus its resources on auditing incurred cost proposals that involve high dollar values or are otherwise determined to be high risk. Under this initiative,

  • DCAA raised the dollar threshold that triggers an automatic audit on a contractor's incurred cost proposal from $15 million to $250 million, 
  • revised the criteria used to determine a proposal's risk level and 
  • significantly reduced the number of low risk audits that will be randomly sampled.

The GAO reported that DCAA's new initiative "appears promising" but DCAA has not developed measures by which it will assess whether the initiative reduces the backlog in a manner that protects the taxpayers' interests. Specifically, the GAO found that DCAA does not have a plan for how it will determine whether key features of the initiative, such as the revised risk criteria and the revised sampling percentages, should be adjusted in the future.

Already, the number of proposals determined to be high risk is 250% higher than anticipated. That means more audits and more audits is going to jeopardized DCAA's ability to eliminate the incurred cost backlog by 2016.

Reducing the backlog of incurred cost audits will ease one obstacle to closing old contracts. The Army recently announced a goal of closing over 475 thousand contracts by September 2014. Unless it can quick-close some of those, it will need DCAA's audits to achieve that goal. The GAO report was somewhat critical of the Navy and Air Force for not establishing similar goals.

Tuesday, December 18, 2012

Notification of Ownership Changes

This is an edited version of a post from 2010 but we are posting it again because of a recent situation where a company, in the process of purchasing a Government contractor, had to scale back its offer when it determined that the fair market value of the assets could not be depreciated under Government contracts.

When a contractor becomes aware that a change in its ownership has occurred (or is certain to occur) that could result in changes in the valuation of its capitalized assets in the accounting records, it must notify the ACO (Administrative Contracting Officer) within 30 days.

Additionally, the contractor must notify the ACO within 30 days whenever changes to asset valuations or any other cost changes have occurred or are certain to occur as a result of a change in ownership.

This requirement applies to negotiated contracts or for which any preward or postaward cost determinations will be subject to the FAR cost principles in Part 31 (see FAR 15.408(k)). To find out whether it applies to your contract(s), look for the contract clause 52.215-19.

Besides the notification requirements, the clause also requires that contractors;

  1. Maintain current, accurate, and complete inventory records of assets and their costs
  2. Provide the ACO or designated representative ready access to the records upon request
  3. Ensure that all individual and grouped assets, their capitalized values, accumulated depreciation, and remaining useful lives are identified accurately before and after each ownership change
  4. Retain and continue to maintain depreciation and amortization schedules based on the asset records maintained before the ownership changed
Obviously, the Government does not want to pay for assets again and again. Some business combinations result in assets being "written up" to their fair market value (purchase method, for example) and there have been cases (prior to the implementation of FAR 31.205-52) where the Government paid for assets again after it had paid for the assets, through depreciation, to the predecessor company.

This requirement also applies to negotiated subcontracts..

Monday, December 17, 2012

Compensation - Part 17 - ESOPs

Finally, we bring to a close our series on compensation costs. The FAR (Federal Acquisition Regulation) cost principle governing compensation is by far the longest and most complex of all the cost principles. Compensation costs often represent the most significant cost element in contract pricing and incurred costs. As far as the Government is concerned, compensation represents one of, if not the area of greatest risk.

An Employee Stock Ownership Plan (ESOP) is a stock bonus plan designed to invest primarily in the stock of the employer corporation. The contractor's contribution to an ESOP is made with cash, stock, or other property. It is difficult to find someone in the acquisition field that is familiar with ESOPs. Most auditors and contract administrators will spend an entire career without ever having to learn about ESOPs much less having to make recommendations or decisions.

As a general rule, the costs of ESOPs are allowable but there are a few conditions. Some ESOPs meet the definition of a pension plan. Costs of those ESOPs must comply with CAS 412 (compensation and measurement of pension costs). ESOPs that are not pensions, must comply with CAS 415 (deferred compensation). Additionally, contributions in any one year that exceed the deductibility limits of the IRS Code are unallowable.

When ESOP contributions are made with company stock, the value of the stock is limited to the fair market value of the stock on the date that title is effectively transferred to the trust. When the contribution is in the form of cash, stock purchases by the trust in excess of the fair market value are unallowable. Determining fair market value of publicly traded companies is easy. However, in the case of a closely held corporation, the fair market value is not readily determinable so this regulation requires that the valuation be made on a case-by-case basis taking into consideration the guidelines for valuation used by the IRS. As many closely-held companies know, valuation is more art than science and the true value of a company is the price that a willing buyer and seller agree upon. Closely held companies that produce a valuation to support ESOP contributions can expect close scrutiny by the Government.

Friday, December 14, 2012

Compensation - Part 16 - Compensation Caps

This section of the FAR cost principle on compensation addresses statutory limitations on the overall compensation for certain contractor personnel. These compensation caps have been around since 1995. Initially, they applied to DoD contracts only but starting in 1998, the caps were extended to all Government contracts.

In 1995, the compensation cap was $250 thousand. By 2011, the cap had risen to $763,029. The most recent cap (i.e. $763 thousand for 2011) stays in effect until revised by the Office of Management and Budget (OMB). They cannot be escalated for future years.

Compensation, as defined under this cap includes only wages, salaries, bonuses, deferred compensation and employer contributions to a defined contribution pension plan. It does not include other elements of compensation such as severance pay, early retirement incentive pay, etc.

Since 1999, the cap applies to the five most highly compensated employees in management positions at each home office and each segment of the contractor, whether or not the home office or segment reports directly to the contractor's headquarters.

Beginning in 2012, the cap was extended to all employees under DoD, NASA, and Coast Guard contracts (see Section 803 of the 2012 NDAA).

Next: Section (q) - Employee stock ownership plans (ESOP)

Thursday, December 13, 2012

Audit Review Process

Have you ever wondered why it takes such a long time for DCAA (Defense Contract Audit Agency) to issue an audit report? If you've had recent experience with DCAA, you probably have wondered. There are multiple factors but one of the biggest factors is the inscrutable review process.

Before an audit begins, the auditor must hold a planning meeting with his/her supervisor, office manager, and regional audit manager to discuss the risk of fraud and noncompliances with applicable laws and regulations that could have a material effect on whatever system is being audited. They discuss prior audit experience, the contractor's environment, and more.

Throughout the audit, the auditor is conferring with his/her supervisor. After the audit, the fun begins. There is an entire infrastructure in DoD dedicated to ensuring the audit is perfect. The audit working papers and the audit report is subjected to the most of the following (and all of the following for some audits):

  • First level supervisory review
  • Branch manager (or resident auditor) review
  • Technical specialist review
  • Regional audit manager review
  • Peer review
  • Independent reference review
  • Quality review
  • CICGIE (Council of the Inspector General on Integrity and Efficiency)

Sometimes, you just have to pity the poor auditor.

Wednesday, December 12, 2012

Compensation Plan Requirements for Service Contracts

The Service Contract Act of 1965 was enacted to ensure that Government contractors compensate their blue-collar service workers and some white-collar service workers fairly, but it does not cover bona fide executive, administrative, or professional employees. That omission is covered in FAR 22.1103.

The Government is concerned with the quality and stability of the work force to be employed on its service contracts. Professional compensation that is unrealistically low or not in reasonable relationship to the various job categories may impair a contractor's ability to attract and retain conpetent professional service employees. Recompetition of service contracts may in some cases result in lowering the compensation (salaries and fringe benefits) paid or furnished professional employees. This lowering can be detrimental in obtaining the quality of professional services needed for adequate contract performance. Therefore, it is in the Government's best interest that professorial employees be properly and fairly compensated.

FAR 22.1103 requires that solicitations for negotiated service contracts, when the anticipated contract amount is greater than $650 thousand, and the service to be provided will require meaningful numbers of professional employees, include a requirement to submit, for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees working on the contract. Supporting information is also required and should include data such as recognized national and regional compensation surveys and studies of professional, public and private organizations, used in establishing the total compensation structure.

FAR 52.222-46 cautions that "low-balling" may be viewed as evidence of failure to comprehend the complexity of the contract requirements and failure to provide a compensation plan may constitute sufficient cause to justify rejection of a proposal.

Tuesday, December 11, 2012

Lobbying Costs - Government Joins a Whistleblower Suit

Last month, the Government intervened in a lawsuit against Fluor Hanford Inc. and its parent company, Fluor Corporation (collectively Fluor).  The False Claims Act lawsuit was originally filed by a whistleblower  who was also a former employee of Fluor.  

Between 1999 and 2008, Fluor had a prime contract with the Department of Energy (DOE) to provide a wide variety of security, maintenance and operational services at the DOE’s Hanford Nuclear Site in southeastern Washington State.   As part of its contract, Fluor was responsible for managing and operating a federally-funded facility to train Hanford site workers as well as first responders and law enforcement personnel.  
The whistleblower complaint alleges that, as a condition of receiving its DOE contract, Fluor was required to certify that it would not use federal funds for lobbying activities.   The complaint further alleges that between 2005 and 2008, Fluor ignored these restrictions and used DOE funding to lobby Congress and executive branch officials for more funding for the training facility.   The complaint alleges that Fluor, and two lobbying firms hired by Fluor and paid using DOE funds, Secure Horizons LLC and Congressional Strategies LLC, lobbied members of Congress and executive branch agencies to include additional funds for the training facility in agency appropriations.  The United States intervened in the lawsuit.

 This is a significant development. Usually, these types of costs, if not excluded by contractors as part of their normal scrubbing of costs for unallowables, are flagged during the audit process and questioned. This new lawsuit by the Department of Justice takes the inclusion of unallowable lobbying costs  to an entirely new level, a False-Claims Act (FCA) action. FCA  carries significantly more liabilities than the penalties for unallowable costs provisions in FAR, including treble damages and civil penalties

Monday, December 10, 2012

Annual Audit Planning Meetings with Contractors

At contractor locations with a significant amount of planned audit activity, the Defense Contract Audit Agency (DCAA) conducts what they term, "Annual Audit Planning and Requirements Planning Meetings" with contractor representatives and contracting officers.

These meetings are typically held during the first quarter of the Government fiscal year (i.e. October -December time frame). At these meetings, the auditors present the various types of audits they plan to conduct in the current year. Applicable audit guidance also instructs them to solicit contractor and contracting officer input into the planned audit schedule.

Regardless of the meetings' ostensible purpose to solicit input from contractors and contracting officers, by the time the meeting rolls around, the audit plan for the year is very much fixed.. We know of no situation where the audit plan was changed as a result of input from either the contractor or the contracting officer.

Even though contractors have no real input into the annual audit plan, these meetings are informative for learning what the auditor(s) plan to do during the year. It is especially important to know which internal control systems will be audited, which CAS standards will be reviewed for compliance, and which contracts have been selected for defective pricing audits (compliance with TINA, or the Truth in Negotiating Act). Knowing this information will help contractors prepare for the audit and compile information and data that is likely to be required/requested.

Many times, contractors sit passively through these meetings, taking a few notes, and nodding once in awhile.   We think it is much better to use this time to engage the auditor. Once the audits begin, auditors are not likely to be very conversant. Now is the time to ask them why they chose to schedule a particular internal control audit, how they view the existing system, what were the results of audit the last time they audited and whether there are any risk indicators currently. When the discussion turns to defective pricing, be sure to ask them your PASS rating and the objective and subjective elements that made up the rating. Challenge the auditors to explain why particular CAS standards are applicable or not applicable.

Sometimes the auditors want to "call it in" rather than face to face. We don't believe that annual planning meetings make efficient conference calls - its too difficult to have meaningful communications. Have the auditors come out and make their presentations.

Friday, December 7, 2012

Feeling the Pinch Yet?

The Office of Federal Procurement Policy (OFPP), part of the Office of Management and Budget (OMB) announced yesterday that contract spending in fiscal year 2012 fell by $20 billion compared to fiscal year 2011.

According to OFPP, seven of the $20 billion came from reductions in management support services such as information technology systems, development, program management and engineering. Savings were also achieved by agencies pooling their purchases to get the same goods and services at lower prices.

The administration is proud of its accomplishments and last Wednesday, announced a new series of initiatives to continue the trend. The focus of the new initiatives is to drive even better coordination of contracting to achieve more savings in buying computers, IT software, janitorial and sanitation supplies, office furniture, building maintenance and operations services, and other professional technical services.

As almost an afterthought, the new initiatives add "To the maximum extent practicable, all strategic sourcing opportunities shall seek to increase participation by small businesses".

Thursday, December 6, 2012

Access to Internal Audit Reports

Yesterday, we informed you that the Senate unanimously (98-0) passed the fiscal year 2013 National Defense Authorization Act that included caps on employee compensation. That same bill included a provision that will require defense contractors to provide not only their internal audit reports but also the supporting working papers to Government auditors.

Specifically, Section 843 will ensure that the Defense Contract Audit Agency has sufficient access to contractor internal audit reports and supporting materials in order to

  1. evaluate and test the efficacy of contractor internal controls and the reliability of associated contractor business systems, and
  2. assess the amount of risk and level of testing required in connection with specific audits to be conducted by the Agency.

Contractors who fail to provide access, risk having one or more of their business systems determined to be inadequate (or disapproved) and would result in billing withholds.

Last August, we wrote a three-part series on internal audits and their value in reducing the amount of audit testing by DCAA (hint: not much). You can read those postings here: Part I, Part II, and Part III. But, the GAO thinks it is important and DCAA cited the general lack of access as one of the issues causing inefficiencies in its audits.

The Senate bill must be reconciled with the House version. It is unknown whether this provision will survive the conference committee.

Wednesday, December 5, 2012

Compensation Caps

Yesterday evening, the Senate unanimously approved the Fiscal Year 2013 National Defense Authorization Act (NDAA) that includes a provision capping compensation of any contractor employee at $230,000 per year. It will become effective on January 1, 2013 and applies to all contracts including those entered into before, on, or after that date. The House version of the NDAA does not contain the provision. The question now is whether the Conference Committee will leave it in or take it out? Stay tuned.

Tuesday, December 4, 2012

Continuation of Essential Contractor Services

With all the discussion about sequestration and fiscal cliffs, contractors with DoD contracts might want to check their contracts for the existence of DFARS clause 252.37-7023. DoD Contracting Officers are required to use this clause in solicitations and contracts having essential contractor services. The clause requires the appropriate functional commander or equivalent to specifically identify which functions of a contract are mission essential services. A contractor who provides Government-determined essential contractor services shall have a written plan to ensure the continuation of these services in crisis situations.

“Essential contractor service” means a service provided by a firm or individual under contract to DoD to support mission essential functions, such as support of vital systems, including ships owned, leased, or operated in support of military missions or roles at sea, and associated support activities, including installation, garrison, and base support services. Services are essential if the effectiveness of defense systems or operations may be seriously impaired by the interruption of these services during periods of crisis caused by the changing threat environment, hurricanes, tornados, earthquakes, blizzards, floods, or pandemic influenza, etc.

“Mission-essential functions” means those organizational activities that must be performed under all circumstances to achieve DoD component missions or responsibilities, the failure of which would significantly affect DoD's ability to provide vital services or exercise authority, direction, and control.

When the clause for continuing performance of essential services is incorporated into a contract, the cost of preparing the plan and costs to keep the plan in place, such as potential retainer fees with other service providers and costs related to contracting officer directed training activities associated with testing the effectiveness of the plan, would be valid contract costs subject to the allowability, reason­ableness, and allocability provisions of FAR 31.201 and the cost principles at FAR 31.205.

Since most plans for continuation of essential services will be specific to the contract and contractor, auditors are being instructed to carefully examine the validity of these costs on a case-by-case basis. Most contractors normally allocate the costs of planning for continuing operation of the overall organization as an indirect cost. However, contractors should generally charge planning costs for contractually required continuation of essential contractor services as direct costs. While CAS 402, Consistency in Allocating Costs Incurred for the Same Purpose, requires that each type of cost is allocated only once and on only one basis to any contract, the illustrations at CAS 402-60(b) support that planning for the continuing operations of the overall organization are not incurred for the same purpose in like circumstances as the planning for continuing essential contractor services as required by the contract.

Plan Execution Costs. The contractor is required to segregate and separately identify all costs incurred in continuing performance of essential services in a crisis situation. A contractor has 90 days (longer if approved by the contracting officer) to notify the con­tracting officer of an increase or decrease in costs after he or she has directed continued performance. The parties shall negotiate an equitable adjustment to the contract price as soon as practicable after receipt of the contractor’s proposal. As DFARS 252.237-7023 provides for an equitable adjustment, costs to execute the plan should not be included in price proposals. Auditors are being instructed to question any plan execution costs included in price proposals.

Monday, December 3, 2012

IG Faults DoD Decision to Raise Audit Thresholds

A little more than two years ago (September 2010), the Department of Defense raised the threshold for price proposals requiring audit to $10 million for fixed priced contracts and $100 million for cost-type contracts. Last month, the DoD Inspector General's Office (DoD-IG) issued a scathing report on that decision stating that the Department had not performed a business case analysis to support it.

That decision, according to the DoD-IG will cost taxpayers $249 million per year in lost return on investment from DCAA contract audits.

The audits under the DCAA threshold were given to DCMA (Defense Contract Management Agency) but according to the DoD-IG, DCMA is not prepared to perform contract cost analaysis in place of DCAA and that DCMA cannot reliably report performance. Furthermore, the Department of Defense has no idea whether DCMA has even a remote chance of replicating the $249 million that DCAA could have achieved had the audit thresholds remained at their pre-September 2010 levels. Finally, the DoD-IG found that the Department did not demonstrate why they chose to direct taxpayer resources to DCMA to perform a job that it was not prepared to perform when DCAA had existing infrastructure in place to get the job done.

Perhaps the Department of Defense did not perform a business case analysis for shifting work from DCAA to DCMA but the fact is, DCAA was not getting the job done and their failure was significantly delaying the awards of contracts. The decision was borne more out of frustration than anything else.

The DoD-IG made a number of recommendations including a return to the old audit thresholds. You can read the entire report here.