Contractor Insurance/Pension Reviews (CIPR) - Risk Assessments

Last week we discussed a new provision that was added to the DoD FAR Supplement (DFARS) that required the Department to conduct CIPRs (Contractor Insurance/Pension Reviews) for contractors that had $50 million in qualifying sales in the previous year and where there is high risk to the Government. We stated then that we would continue the discussion with some of the factors that the Government considers in determining the level of risk. You can read our previous post here.

No set of canned risk assessment procedures or factors will be sufficient to assess the level of risk. The CIPR team must exercise a certain amount of judgment and common sense. The risk factors discussed below are like any other checklist - they are merely indicators that should be considered in assessing the overall risk and a tool in determining whether a CIPR is warranted. These risk factors were gleaned from information published by DCMA, the Executive Agency for conducting CIPRs.

High Risk

A high risk exists when there is a large likelihood that a significant cost is unallowable. This rating is appropriate where, for example:

• Segment Closing, Plan Merger or Spin-Off is anticipated or has occurred and the contractor maintains a defined benefit pension plan, self-insurance, and/or a reserve for a Post Retirement Benefit (PRB) plan;
• Forward Pricing Proposal has been submitted which includes a defined benefit pension plan, self-insurance or PRB plan;
• an Incurred Cost Audit is scheduled and the contractor has a defined benefit pension plan that is not fully funded;
• an Incurred Cost Audit is scheduled and the contractor maintains a reserve for funding a PRB plan;
• an Indemnification Agreement is to be reviewed and validated;
• the Qualifying Sales of a new or existing contractor reaches the $50 million threshold.
• A material change has occurred in the contractor's ratio for its Government-to-Commercial workload.

Moderate Risk

A moderate risk exists where there is medium likelihood that a significant cost is unallowable. This rating is appropriate where, for example:

• Forward Pricing Proposal has been submitted by a medium-size contractor with a fully funded defined benefit pension plan, or self-insurance, and the contractor also has been cited for minor non-compliances in the past;
• Forward Pricing Proposal has been submitted by a contractor with a defined benefit pension plan that is in full funding or is forecasted to reach full funding during the proposal period.
• an Incurred Cost Audit is scheduled for a contractor that maintains fully funded defined benefit pension plan; and
• a contractor maintains a self-insurance program that is experience rated.

 Low Risk

A low risk situation is one in which all costs and actions are likely to be allowable or, if they are unallowable, result in a minimal cost impact to the Government. This rating is appropriate where, for example:

• Forward Pricing Proposal has been submitted by a contractor that maintains only a defined contribution pension plan;
• Segment Closing has occurred and a contractor maintains only a defined contribution pension plan;
• an Incurred Cost Audit is scheduled and the contractor maintains only a defined contribution pension plan;
• a contractor does not sponsor a funded PRB plan; and
• contractor has relatively low incurred costs, does not maintain a defined benefit pension plan or self-insurance, and has not been previously cited for any non-compliances.  

Frequency of Risk Assessments

 

Guidance requires that risk assessments be performed at least once every other year. In practice, its not performed that frequently but may in the future given that the DoD Inspector General is monitoring this area more closely. Guidance also allows the Government to release the results of the risk assessments to contractors upon request. We recommend that contractors routinely request Government prepared risk assessments. We've seen cases where the Governmet's assessment was based on outdated and inaccurate data or faulty assumptions or other mis-used information.  Bringing that to the Government's attention could change the risk assessment rating.

 

Contractor Insurance/Pension Reviews (CIPR)

Back in June, we reported on a DoD proposal to move the requirement to perform CIPRs (Contractor Insurance/Pension Reviews) from Guidance to Regulation. You can read that posting here for details and background on the reason for the change (the DoD Inspector General found that guidance was ignored in a lot of cases and recommended that the requirement be upgraded from "guidance" to "regulation" to increase the liklihood that the Government would better assess risks in this area.

On November 24, 2010, the propsed rule became a final rule with essentially no changes. Here's a rundown on the requirements.

A CIPR is a DCMA/DCAA joint review that provides in-depth evaluation of a contractor's insurance programs, pension plans, deferred compensation plans, and all of the related policies, procedures, practices, and costs.

The administrative contracting officer (ACO) is responsible for determining the allowability of insurance/pension costs in Government contracts and therefore is responsible for determining the need for a Contractor/Insurance Pension Review (CIPR). DCMA is the DoD Executive Agency for the performance of all CIPRs. Because of the technical nature of these costs, DCMA has specialists in these areas. DCAA is the DoD agency designated for the performance of contract audit responsibilities related to Cost Accounting Standards administration as they relate to a contractor’s insurance programs, pension plans, and other deferred compensation plans.

An in-depth CIPR is conducted only when a contractor has $50 million of qualifying sales (essentially qualifying sales are negotiated contracts and subcontracts) to the Government during its preceeding fiscal year and the ACO (relying on advice from the DCMA insurance/pension specialists and DCAA auditors) determines that a CIPR is needed based on a risk assessment of the contractor's past experience and current vulnerability. Risk areas include such things as information that reveals a deficiency in the contractor's insurance/pension program and contractor proposals to implement changes to its insurance, pension, or deferred compensation plans.

Next week, we will look at the ACO's risk assessment procedures in more detail in order to identify some of the factors that weigh into his/her decision to proceed with a CIPR.

Contractor Insurance/Pension Reviews (CIPR)

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

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

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