New FAR Definitions for Emergency and Major Disasters

The FAR (Federal Acquisition Councils) recently published a proposed regulation designed to expand special emergency procurement authorities for acquisitions of supplies or services that facilitate defense against or recovery from cyber attack, provide international disaster assistance under the Foreign Assistance Act of 1961, or support response to an emergency of major disasters. This regulation is needed to implement provisions of the 2017 NDAA (National Defense Authorization Act).

Essentially, the regulation will allow for higher micro-purchase and simplified acquisition thresholds for acquisitions of supplies or services that facilitate defense against or recovery from cyber attack.

One of the key features of the new regulation is new definitions for "Emergency" and "Major Disaster". Although those terms have been intuitively understood, the definitions will help everyone to be act with more precision when higher purchasing threshholds are appropriate.

Emergency means any occasion or instance for which, in the determination of the President, Federal assistance is needed to supplement State and local efforts and capabilities to save lives and to protect property and public health and safety, or to lessen or avert the threat of a catastrophe in any part of the United States.

Major disaster means any natural catastrophe (including any hurricane, tornado, storm, high water, wind-driven water, tidal wave, tsunami, earthquake, volcanic eruption, landslide, mudslide, snowstorm, or drought), or regardless of cause, any fire, flood, or explosion, in any part of the United States, which, in the determination of the President, causes damage of sufficient severity and magnitude to warrant major disaster assistance under the Stafford Act to supplement the efforts and available resources of States, local governments, and disaster relief organizations in alleviating the damage, loss, hardship, or suffering caused thereby.

The increased thresholds are $20,000 and $750,000 for micro purchases and simplified acquisitions respectively. The amounts are higher than these if performed outside the U.S.

Solicitations and Offers

Here's a short primer on two terms - "solicitation" and "offer" - as used in Government procurement. Certain terms have specific meaning but are often used interchangeably and/or incorrectly.

The term "solicitation" in the context of Government procurement is a generic term that is used to describe requests to submit offers or quotations to the Government.

• Solicitations under Simplified Acquisition Procedures are called RFQs (Request for Quotation).
• Solicitations under Sealed Bid procedures are called IFBs (Invitation for Bid).
• Solicitations under competitive or negotiated procedures are called RFPs (Request for Proposal)

The term "offer" means a response to a solication that, if accepted, would bind the offeror to perform the resultant contract.

• Responses to RFQs are called "quotations".
• Responses to IFBs are called "bids" or "sealed bids"
• Responses to RFPs are called "proposals"

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On a related note, if you ever need to look up a military acronym or definition, one of the best websites we have found for that purpose is military-dictionary.org.

Auditor Jargon Part 6 - Material and Immaterial

The terms "material" and "immaterial" are part of the accounting lexicon. Accountants and auditors use these terms with hardly a passing thought but in a way that is readily understood among themselves. The terms represent well established concepts used to assess the significance of whatever cost is being examined at a particular moment. Materiality enters into risk assessments, in deciding whether to pursue a "finding", or whether to report an internal control deficiency. If something is determined to be immaterial, its not going to be pursued, quantified, or reported upon.

To illustrate, suppose you buy a $10 waste basket that will last 10 years. The accounting matching principle requires that you record the asset and depreciate it over those 10 years at $1 per year. The materiality principle allows you to expense the entire $10 in the year it is purchased. No one is going to get excited about $1 per year. Likewise, an auditor reviewing costs charged to Government contracts will focus on large dollar items because low cost resistors, capacitors, machine screws, or lubricating oil isn't going to significantly affect costs charged to the Government.

In financial reporting (e.g. a company's audited financial statements) the auditor issues an opinion on the financial statements as a whole. The opinion does not state that the financial statements are accurate down to the nickle. The opinion states that the financial statements present fairly in all material respects the financial position of the company. Determining what is material or immaterial therefore requires the exercise of professional judgment.

While the Financial Accounting Standards Board (FASB) and the Cost Accounting Standards Board (CASB) have refrained from giving quantitative guidelines for determining materiality, a few common standards have developed in the accounting industry and public accounting practice. One of those is the five percent rule; an error or misstatement equal to 5 percent of pretax net income or gross profit, or amount proposed.

While avoiding definitive guidelines, the Government, through the CAS Board, has issued some guidelines for assessing materiality (see CAS 9903.305)

In determining whether amounts of cost are material or immaterial, the following criteria shall be considered where appropriate; no one criterion is necessarily determinative:

• The absolute dollar amount involved. The larger the dollar amount, the more likely that it will be material.
• The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost, the more likely it is to be material.
• The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect costs, will normally have more impact than the same amount of indirect costs.
• The impact on Government funding. Change3s in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.
• The cumulative impact of individually immaterial items. It is appropriate to consider whether such impacts:
• Tend to offset one another, or
• Tend to be in the same direction and hence to accumulate into a material amount.
•  The cost of administrative processing of the price adjustment modification shall be considered. If the cost to process exceeds the amount to be recovered, it is less likely the amount will be material.

Auditor Jargon Part 5 - SIC

Today we conclude our week-long series on helping you understand some of the terminology used by auditors, particularly Government contract auditors. Today's word is really an acronym but it has evolved into a word through common usage. If you hear the word "SIC" your antennas should go up.

Suspected Irregular Conduct (SIC) is the auditor's euphemism for potential fraud, waste or abuse.  All auditors, not just Government auditors, are required by professional standards to consider the existence of fraud in all engagements. It is not their primary job to ferret out fraud, waste, and abuse, but they do need to consider conditions or internal control weaknesses that could make a company susceptible to fraud.

Until a year or so ago, whenever Government auditors had a suspicion that fraud, waste, or abuse had occurred, they referred the matter to a manager for review. If the manager agreed with the auditor's concern, the matter would be referred for investigation. Most of these referrals never made it past the manager's desk because they did not rise to the definitional level of fraud, waste or abuse. Many were based on auditor inexperience, incompetence, or emotion. Adding review steps to the process allowed common sense to prevail most of the time.

About a year ago, after some well-publicized stories about management inappropriately refusing to refer suspicions for investigation, the Government changed its policy to allows auditors to submit their allegations directly to one of the Government's investigative agencies. We don't know how this is working out. It probably increases the investigators workload somewhat. From a contractor perspective however, these referrals could complicate life immeasurably if the investigators come knocking. If you hear the word "SIC" bandied about, be wary and ask questions.

Auditor Jargon Part 4 - Uniformity and Consistency

Today we continue our week-long series on helping you understand some of the terminology used by auditors, particularly Government contract auditors. These auditors, like any profession, have their own manner of specialized speaking. Today we look at the terms "Uniformity" and "Consistency".

At first blush, it seems like the words uniformity and consistency are synonyms. They could be under some circumstances but these terms have very precise meanings when it comes to cost accounting.

Uniformity relates to comparison of two or more accounting entities. The FAR Councils' and the CAS Board's objective in this respect is to achieve comparability of results of entities operating under like circumstances. While everyone recognizes the impracticality of defining or attaining absolute uniformity, largely because of the problems related to defining like circumstances, the Government will nonetheless, seek ways to attain a practical degree of uniformity in cost accounting practices. This is evidenced in practices related to depreciation or pension plan valuations.

Consistency pertains to the use by one accounting entity of compatible cost accounting practices which permit comparability of contract results under similar circumstances over periods of time. Essentially, consistency relates to the allocation of costs, both direct and indirect, and to the treatment of cost with respect to individual cost objectives as well as among cost objectives in like circumstances. Auditors typically pick up inconsistencies in cost accounting practices within an organization very quickly and when they do, they will make an assessment as to whether the Government's interests are harmed as a result.

Auditor Jargon Part 3 - Full Costing

We have been discussing some of the more unusual terms that auditors tend to throw out there and expect everyone to understand what they're talking about. Auditors, like any profession, have their own manner of specialized speaking. Today we look at the phrase "full costing".

In short, the "full costing" concept requires that you leave "unallowable" costs in the base for computing indirect rates - you don't remove unallowable costs first. Both FAR and CAS requires that when developing indirect rates, you identify a base that best expresses a causal and/or beneficial relationship between the costs being allocated and the base over which the allocation is made. Once you identify the appropriate bases, it would be inappropriate to remove part of the base, such as removing unallowable costs, because then the base is no longer the best expression of that relationship.

Here's the CAS Board's position on Full Costing.

Under the full costing concept, all costs initially allocated to intermediate cost objectives must be subsequently reallocated to final cost objectives. For this purpose, a final cost objective may be established to include unreasonable costs or costs unallowable for other reasons. The bases selected for allocating costs from intermediate cost objectives to final cost objectives are the devices used to associate costs with final cost objectives. If the base selected is a reasonable measure of the relationship between the cost and the cost objectives, the cost will be reasonably allocated to such cost objectives. The Board has referred to this conceptual relationship in the Standards as the beneficial or causal relationship between costs and cost objectives. In addition to the expression of this concept, the Cost Accounting Standards define in appropriate circumstances what criteria should be used to select the allocation base that best expresses this conceptual relationship.

Auditor Jargon Part 2 - Defensible

We are spending a few days discussing some of the more unusual terms that auditors tend to throw out there and expect everyone to understand what they're talking about. Auditors, probably as in any profession, have their own manner of specialized speaking. Today's word is "defensible".

This word is used to describe a particular position taken on a cost item. Very often, a contractor's position or an auditor's position vis-a-vis certain costs are based on a combination of facts and judgment. An auditor reviewing all the underlying data, logic, and rationale on a particular cost will make a judgment about the reasonableness of that position. If the position is reasonable the auditor might say that it is "defensible". It is also used among auditors to assess whether their own contrary position might be reasonable. In discussing the merits of their position, auditors will ask whether it is defensible, meaning would it withstand the scrutiny of an independent outside party looking at the same set of facts and assumptions? When both the contractor and the auditor have ostensibly "defensible" positions, arguments arise over whose position is most defensible.

Suppose you're estimating costs and you know that the project you're bidding on is slightly more difficult than previous projects. You need to add a factor to historical costs to account for the higher complexity. But how do you estimate that? You could add 10% based on some kind of judgmental estimate but the Government would probably term that position as indefensible - there is nothing to support that factor. That doesn't mean you won't win the Government over to your position during negotiations. It simply means that the auditors will unsupport the cost because it is not defensible - there is no support for it.

Auditor Jargon Part 1 - Verifability

If you have been around Government auditors for any amount of time, you probably noticed that they have their own manner of specialized speaking - auditor parlance or auditor slang, whatever you want to call it. For example, "current, complete, and accurate" has a precise meaning when used in context of determining the adequacy of cost or pricing data. And, the terms "allowable, allocable, and reasonable" have a precise meaning when used in determining the propriety of costs charged to Government contracts. These phrases/terms are common enough and not exclusive to the audit profession. But there are others where the meanings are not so obvious. For the next few days, we will unpack the meaning of some of these. Today's word is "verifiability".

Contract cost accounting systems should provide for verifiability to the greatest extent practical. In other words, contract costs should be auditable by examination of appropriate data and documents supporting whatever costs are being reviewed, or by reference to the facts and assumptions used to allocate the costs to the contract (e.g. bases and pools for determining and allocating indirect costs). Verifiability is generally accepted as an important goal for information used in cost accounting. When auditors use the term verifiability, they are usually assessing whether a certain cost can be traced back through the cost accounting system to original source documents.

As far as we know, the term "verifiability" is not in the FAR. However, the Cost Accounting Standards Board (CASB) discusses it in its "Statement of Objectives" -  "...only such detail of cost allocation and record keeping should be required as is necessary to provide the verifiability that is needed to satisfy regulatory contract cost audit requirements and that detailed contractor accounting records of contract costs should be reconcilable with the general books of account.

So, an auditor testing for "verifiability" is simply making sure that you are able to trace those costs back to your formal cost accounting system.
but there are others that you probably heard some words and terms