The Government's Contractor Responsibility Determination Process

To protect the Government’s interest and to ensure timely delivery of whatever quantities the Government needs, contracting officers, prior to award, must make an affirmative determination that the prospective contractor is "responsible" i.e..is capable of performing the contract.

Before making that determination, the contracting officer must have in his possession or must obtain information sufficient to satisfy himself that the prospective contractor

• has adequate financial resources or the ability to obtain such resources
• is able to comply with required delivery schedule
• has a satisfactory record of performance
• has a satisfactory record of integrity, and
• is otherwise qualified and eligible to receive an award under appropriate laws and regulations.

If the foregoing information is not already in the contracting officer's possession, he/she must obtain it through preaward surveys conducted by the contract administration office or contract audit office responsible for the plant or geographic area where the plant is located.

The necessary data is collected by contract administration personnel from available data or through plant visits, phone calls, and correspondence. This data is entered on Standard Forms 1403 (General Information), 1404 (Technical), 1405 (Production), 1406 (Quality Assurance), 1407 (Financial Capability), and 1408 (Accounting System) in detail commensurate with the dollar value and complexity of the procurement.

Although these forms are intended to be completed by the contracting administration folks, they are, in practice, often forwarded to the contractor (or prospective contractor) to complete. The Government then needs only to take minimal steps to validate the information or to somehow gain some assurance that the information is reasonably sufficient.

There is preparation costs associated with each of these Standard Forms. The Government estimates that it takes an average of 24 hours to complete each of the six forms. In our experience - primarily with the SF 1408 (Accounting System) this estimate is understated. Any contractor undergoing a preaward accounting system assessment by a contract audit organization will spend considerably more than 24 hours interacting and responding to auditors. The good news is that contractors must endure such reviews infrequently - once the Government has the information necessary to make a responsibility assessment on their own, there is no longer a need to have contractors furnish the same information every time it bids on a contract.

About three years ago, we presented a series detailing each of the preaward Standard Forms. You can read these posts by clicking on the following links.

     SF 1403 - General
     SF 1404 - Technical
     SF 1405 -  Production
     SF 1406 - Quality Assurance
     SF 1407 - Financial Capability
     SF 1408 - Accounting System

DCAA's Preaward Survey of Prospective Contractor Accounting System Checklist

DCAA (Defense Contract Audit Agency) publishes a number of checklists that can be used by contractors and prospective contractors to ensure compliance with procurement rules and regulations. We've highlighted and linked to a number of these over the years; forward pricing proposal adequacy, forward pricing rate proposal adequacy, and incurred costs proposal adequacy are a few that come to mind.

DCAA has published another checklist for determining the adequacy of a prospective contractors account system. You can download it by clicking here. DCAA recommends that prospective contractors (and subcontractors) complete this checklist and provide it to their contracting officers as soon as possible. The contracting officer may use the information in deciding whether to request a DCAA audit of the accounting system.

This checklist, for the most part, mirrors the Standard Form 1408 so familiarity with that form may make the DCAA checklist seem redundant. However, the checklist includes some other elements that may assist the contracting officer in determining whether an audit is needed, such as information on prior accounting system audits (whether by DCAA or someone else), CAS (Cost Accounting Standards) coverage, and an overall assessment as to whether the accounting system is ready for an audit.

Some prospective contractors find it useful to have an independent party perform a "mock audit" of the accounting system to identify any weaknesses or deficiencies that need correcting before the Government comes in and performs its own audit. If you're in that situation, give us a call - we can help.

Preaward Surveys - SF Form 1408 (Accounting System)

This is the seventh and final installment in our series on Preaward Surveys of prospective Government contracts. We know. In our first installment, we said that we wouldn't be reviewing this last preaward survey form, the SF Form 1408, that covers the adequacy of the accounting system because we had discussed in many times before. But then, this series wouldn't be so nice and tidy if one of the survey forms were missing. So, at the risk of sounding like a re-post, we will discuss the basic requirements for accounting systems. There's another reason to bring it up again. This is the preaward survey form that prospective contractors are most likely to encounter in the process of securing a Government contract. This form is generally completed by DCAA (Defense Contract Audit Agency) and they take their job very seriously. There is nothing half-baked about what they do to determine whether a prospective contractor's system will do the job it needs to do. The Agency has developed an entire audit program around this form and the guidance for performing preaward accounting system reviews takes up a big chunk of Chapter 5 in their audit manual (DCAA Contract Audit Manual, or CAM). So, lets get started, shall we.

The SF Form 1408 lists 15 attributes that an accounting system must be capable of accomplishing in order to be considered adequate. A few of these attributes might apply only to specific types of contracts or contracts with certain provisions or requirements but the majority apply across the board. Here are the 15 attributes:

1. Is the system in accord with GAAP (Generally Accepted Accounting Principles)? This is usually something that is answered in the negative, as in, nothing came to our attention that was contrary to GAAP.
2. Does the accounting system provide for proper segregation of direct costs from indirect costs? First, you will need to define what costs are direct and which are indirect.
3. Dies the accounting system provide for identification and accumulation of direct costs by contract? This requires a job cost system or a system with the capability to accumulate costs by contract. Lots of companies using QuickBooks use the "class" feature for their job costing.
4. Does the accounting system provide for a logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives (a contract is a final cost objective)?
5. Does the accounting system provide for accumulation of costs under general ledger control? Always a 'yes' answer for companies using today's entry-level accounting software on up.
6. Does the accounting system provide for a timekeeping system that identifies employees' labor by intermediate or final cost objective? If you don't have an web-based timekeeping system, get one. They're inexpensive and most of them will satisfy this requirement and DCAA's additional requirements (like an audit trail).
7. Does the accounting system provide for a labor distribution system that charges direct and indirect labor to the appropriate cost objectives? You've got to convert hours on a timesheet to labor dollars so you can charge the appropriate cost objective.
8. Does the accounting system provide for interim (at least monthly) determination of costs charged to a contract through routine posting of books of account. Today's accounting software will handle the reports but its up to your accountants to post the books.
9. Does the accounting system provide for exclusion from costs charged to Government contracts of amounts which are not allowable in terms of FAR 31, Contract Cost Principles and Procedures, or other contract provisions? Most systems can accommodate this but it also requires someone knowledgable with FAR cost principles to make determinations as to what is allowable and what is not.
10. Does the accounting system provide for the identification of costs by contract line item and by units if required by the proposed contract? Again, most of today's accounting software can be set up to account for costs at levels below the contract.
11. Does the accounting system provide for segregation of preproduction costs from production costs?
12. Does the accounting system provide financial information required by contract clauses concerning limitation of cost or limitation on payments? You've got to let the Government know when you are running out of funding.
13. Does the accounting system provide financial information required to support requests for progress payments?
14. Is the accounting system designed and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow-on acquisitions? For example, will your system tell you what the average labor and material cost to build a sub-assembly so that you can use that information as a starting point to price follow-on effort?
15. Finally, is the accounting system currently in full operation? You better hope that it is otherwise it will complicate matters and the contracting officer will send DCAA back in a few months to test whether the system works.

So there you have it. If you want someone to come in and assess whether your accounting system is adequate (a "mock" audit, if you will), give us a call. We'll spend a couple of days, give you our assessment, and maybe even some recommendations.

Preaward Surveys - SF Form 1407 (Financial Capability)

This is the sixth installment in our series on Preaward Surveys of Prospective Government Contractors. Before awarding contracts, the Government must ensure itself that contractors are able to perform the contracts. If the Government has no experience with a particular contractor and has no easy method for finding out information about that contractor, its will order up some preaward surveys of different aspects of the contractor's operations that are applicable to the respective contract. For example, if the Government is contemplating a cost-type contract, it will need to ensure that the prospective contractor has an accounting system that is capable of collecting costs by contract (SF Form 1408). So far, we've looked at technical capability, production, and quality. Today, we will look at financial capability.

Almost every contractor (or prospective contractor) has had to, at one time or another, provided financial statements to the auditors or the contracting organizations. The financial analysts (using the term loosely) take information from the financial statements and run some financial rations (e.g. quick, current, and liabilities to net work) and compare the results to some kind of benchmark. These analysts, usually part of DCMA (Defense Contract Management Agency) have little training in this area and little understanding of what they are doing. Back when DCAA (Defense Contract Audit Agency) was performing financial capability reviews, they focused on cash flow and tried to answer the question of whether the contractor had the financial resources to perform the work. For example, under a cost reimbursable contract, a contractor can bill for costs every 30 days. That means the contractor needs only 60 days or so of working capital. DCAA would determine whether the contractor had 60 days of working capital.

SF Forms 1407 requires a different approach than the cash flow analysis. The form requires financial information from the contractor's most recent balance sheet and income statement, demographic information (type of legal entity, parent company) and sales forecsts for the next six quarters (good luck getting that one). The form also requires narrative responses to "reputation" questions; comments from the bank, comments from creditors, and comments from credit organizations.

After gathering this information, the evaluator makes a judgement giving a thumbs up or thumbs down. There is also a section to provide narrative to support the recommendation. We've seen cases where the evaluator completely missed the boat with regard to contractor's financial capability to perform a prospective contract. As with the other forms in this series, it is important for prospective contractors to ensure that the evaluators are cognizant of all facts relating to financial capability and to demonstrate that it has the financial resources necessary to perform. Contractors should ask to review a draft of the Form 1407 prior to issuance to ensure its accuracy.

Preaward Surveys - SF Form 1406 (Quality Assurance)

This is the fifth installment in our series on Preaward Surveys of Prospective Government Contractors. There are six forms (SF Forms 1403 through 1408) the Government uses to provide a structured approach to determining whether prospective contractors are capable of performing whatever work they are bidding on. Not everything is applicable in every case. For example, on a competitive award of a fixed price construction contract with progress payments based on work performed, the Government might be interested in financial capability and bonding capacity. The Government however probably won't be too interested in whether the prospective contractor has an accounting system that is adequate for cost reimbursable contracts.

SF Form 1406 is used to assess a prospective contractor's quality assurance policies, practices and procedures. It applies, as the name suggests to solicitations where quality assurance is required in the contract. It also requires the Government evaluator to contact Quality Assurance personnel within the prospective contractor's organization and assess their personal qualifications.

In all, there's about 26 evaluation requirements. These include:

1. Does the contractor understand exhibits, technical data, drawings, specifications, and approval requirements
2. Has the contractor had satisfactory quality performance record during the past 12 months
3. Did the contractor fulfill commitments to correct deficiencies, as proposed on previous surveys wen awarded that contract.
4. Does the prospective contractor have available and adequate 
• Inspection and test equipment, gauges, and instruments for first article and production
• Calibration/metrology program 
• Quality system procedures and controls
• Control of specifications, drawings, changes and modifications etc.
• System for determining inspection, test and measurement requirements.
• Purchasing process for selecting qualified supplies and assuring the quality of purchased materials.

There are many others but, you get the idea. As with the other preaward survey forms we've discussed so far, it is very important that prospective contractors give complete attention to this form, make certain the Government evaluator learns everything there is to learn about your QC systems and try to review the form before it is submitted, making certain that it accurately reflects your QC system.

Preaward Surveys - SF Form 1405 (Production)

This is the fourth installment in our series on Preaward Surveys of Prospective Government Contractors. There are six forms (SF Forms 1403 through 1408) the Government uses to provide a structured approach to determining whether prospective contractors are capable of performing whatever work they are bidding on. Not everything is applicable in every case. For example, on a competitive award of a fixed price construction contract with progress payments based on work performed, the Government might be interested in financial capability and bonding capacity. The Government however probably won't be too interested in whether the prospective contractor has an accounting system that is adequate for cost reimbursable contracts.

SF Form 1405 is used to assess a prospective contractor's production capabilities and expertise. Obviously, if the contract doesn't require manufacturing, the assessment would not be requested. The 1405 is longer than the others - its four pages and requires quite a bit of detailed information including

• Total manufacturing space
• Space available for offered item
• Total storage space
• Storage for inspection lots
• Storage for shipping quantities
• Storage space available for offered items
• Amount of storage than can be converted for manufacturing, if required
• For each of these, the review must assess whether the square footage is adequate or not.

Section III of the form requires a listing of production equipment; manufacturing, special tooling, and special test. If the equipment is needed but not on hand, the contractor must identify when it will arrrive.

Section IV requires identification of crucial parts, materials, and subcontracts and those with the longest lead times.

Section V requires some demographic information on types of employees and whether they are on-board or need to be hired.

Section VII lists past performance information with quantities and dollar values listed.

Section VIII lists current production.

After all of the information is complete, the reviewer must make a recommendation as to whether the prospective contractor has the production capability and capacity to perform the contract. Contractors that are requested to complete this form or help complete it must ensure its accuracy and where capacity or capability turns up short, to provide a compelling narrative as to how they plan to acquire or hire the shortfalls.

Preaward Surveys - SF Form 1404 (Technical)

This is the third in our series on Preaward Surveys of Prospective Government Contractors. There are six forms (SF Forms 1403 through 1408) the Government uses to provide a structured approach to determining whether prospective contractors are capable of performing whatever work they are bidding on. Not everything is applicable in every case. For example, on a competitive award of a fixed price construction contract with progress payments based on work performed, the Government might be interested in financial capability and bonding capacity. The Government however probably won't be too interested in whether the prospective contractor has an accounting system that is adequate for cost reimbursable contracts.

SF Form 1404 is used to assess a prospective contractor's technical capabilities and expertise. The first part of the form requires narrative answers to three questions:

1. For key personnel who will be involved with the prospective contract, list names, qualifications/experience and length of affiliation with prospective contractor;
2. Evaluate technical capabilities with respect to the requires of the proposal contract or item classifications
3. Description of any technical capabilities which the prospective contractor lacks and any comments of the prospective contractor's efforts to obtain the needed technical capabilities.

Prospective contractors should attempt to review this narrative section prior to the surveyor sending it on to the requester to ensure its accuracy and completeness. Sometimes surveyors don't want to show or disclose it but contractors should try anyway. Their success in getting an award might hinge on this write up.

The form also requires that the surveyor assess whether the prospective contractor understands specifications, drawings, exhibits, and technical data requirements. Here again, it is critically important for the contractor to ensure the accuracy of these assessments.

As you can see, there is a lot of judgement required of the Government surveyor when completing this form and contractors must ensure that whatever judgment is exerted, is based on complete knowledge of the facts.

Finally, the form requires the surveyor to make one of three recommendation; complete award, partial award, or no award.

Tomorrow, SF Form 1405, Production.

Preaward Surveys - SF Form 1403 (General)

This is the second in our series on Preaward Surveys of Prospective Government Contractors. There are six forms (SF Forms 1403 through 1408) in the Government's arsenal that provides a structured approach to determining whether prospective contractors are capable of performing whatever work they are bidding on. Not everything is applicable in every case. For example, on a competitive award of a fixed price construction contract with progress payments based on work performed, the Government might be interested in financial capability and bonding capacity. The Government however probably won't be too interested in whether the prospective contractor has an accounting system that is adequate for cost reimbursable contracts.

The first of the Preaward Survey Forms, SF Form 1403 is essentially a transmittal form for requesting pre-award information. It contains a checklist of "major" and "other" factors that the procurement office wants to have checked out prior to awarding a contract.

Box 19 lists five major factors to be evaluated; technical capability, production capability, quality assurance capability, financial capability, and accounting system. Box 20 contains seven "other" factors that the requester might need addressed: Government property control, transportation, packaging, security, safety, environmental/energy consideration, and flight operations/flight safety.

The five factors in Block 19 generally mean:

Technical capability - an assessment of the prospective contractor's key management personnel to determine if they have the basic technical knowledge, experience, and understanding of the requirements necessary to produce the required product or provide the required service.

Production capability - an evaluation of the prospective contractor's ability to plan, control, and integrate manpower, facilities, and other resources necessary for successful contract completion. This includes an assessment of the prospective contractor's possession of, or the ability to acquire, the necessary facilities, material, equipment, and labor as well as a determination that the prospective contractor's system provides for timely placement of orders and for vendor follow-up and control.

Quality assurance capability - an assessment of the prospective contractor's capability to meet the quality assurance requirements of the proposed contract. It may involve an evaluation of the prospective contractor's quality assurance system, personnel, facilities and equipment.

Financial capability - a determination that the prospective contractor has or can get adequate financial resources to obtain needed facilities, equipment, materials, etc. These determinations were formerly performed by DCAA but have now been subsumed by DCMA (Defense Contract Management Agency).

Accounting system and related internal controls. An assessment by the auditor (e.g. DCAA) of the adequacy of the prospective contractor's accounting system and related internal controls as defined in DFARS 242.7501. Normally a contracting officer will request an accounting system review when soliciting and awarding cost-reimbursement or incentive type contracts, or contracts which provide for progress payments based on costs or on a percentage or state of completion.

Tomorrow, SF Form 1404, Technical

Preaward Surveys - General

To protect the Government's interests and to ensure timely delivery of items of the requisite quality, contracting officers, prior to award, must make an affirmative determination that the prospective contractor is responsible, i.e., capable of performing the contract. Before making such a determination, the contracting officer must have in his or her possession or must obtain information sufficient to be satisfied that the prospective contract

• Has adequate financial resources or the ability to obtain such resources
• is able to comply with the required deliver schedule
• Has a satisfactory record of performance
• Has a satisfactory record of integrity; and
• Is otherwise qualified and eligible to receive an award under appropriate laws and regulations.

If such information is not in the contracting officer's possession, it is obtained through a preaward survey conducted by the contract administration office. The necessary data is collected by contract administration personnel from available data or through plant visits, phone calls, and correspondence. This data is entered on Standard Forms 1403, 1404, 1405, 1406, 1407, and 1408. The detail entered on these forms are typically commensurate with the dollar value and complexity of the procurement.

FAR 9.106-1 requires that preaward surveys be completed only when the information on hand or readily available to the contracting officer, including information from sources other than the offeror, is not sufficient to make a determination regarding responsibility. While not every one of these forms is required in every case, some are required regularly.

Over the next few days, we will be discussing each of these preaward survey forms, explaining the purpose and offering suggestions as to how prospective contractors can best represent themselves when the Government shows up with a sheaf of forms, ready to conduct their survey.

Regular readers of this blog will already be familiar with the SF Form 1408 so we will not be touching on that one again in this series. You can read more about the Form 1408 here and here and here..