Installment Payments - Part 2

Yesterday we alerted you to a program within the DoD finance office to allow contractors to refund amounts owed the Government on an installment payment basis. If you missed that, read it here. The only problem with this installment payment program is that it requires contractors to open up the financial records to Government auditors and to have a good story as to why they didn't just repay the amount overpaid right away. If a contractor maintains that it didn't know that it had been overpaid, it sort of implies that their billing system is not up to par. That would open another can of worms. But, if the installment payment approach is the best way to pay down this liability, DoD will first send in its auditors to determine whether the contractor has the "ability to repay" the debt. This is called a financial capability audit. Before the auditors begin the review, here is a likely list of documents that they will request.

• financial statements for the last three years
• a 12 month cash flow forecast reflecting the proposed installment amounts
• written confirmation that the financial statements disclose all off-balance sheet arrangements and related party transactions.
• any inquiries from their IPA (independent public accounting) firm related to off-balance sheet arrangements and related party transactions and their responses.
• the results and reports of any internal audits, reviews or other analyses of off-balance sheet arrangements and related party transactions.
• any analyses it has performed to assess its current and future financial conditions.
• details on prior, current, and forecasted events that have had or are forecasted to have a favorable or unfavorable impact on its financial condition
• written policies and procedures that require
• evaluation of current financial conditions in order to anticipate and avoid unfavorable or adverse conditions
• periodic assessments of accounts payable and accounts receivable, including analysis of accounts payable aging and the collectability of accounts receivable
• periodic assessments to ensure compliance with any loan covenants and debt payment schedules
• preparation of cash flow forecasts, including reasonable and supported assumptions
• monitoring, analyzing and managing its cash flow
• periodic assessments of contract cost performance.

This listing is only the beginning. The auditor will likely spend at least a couple of days analyzing the data and reaching conclusion about the contractors financial viability.

Installment Payments

From time to time, organizations find themselves in situations where they owe the Government money. Most often, this involves income tax and payroll tax liabilities but it can also result from instances where contractors have received overpayments on contracts. Contract overpayments can occur because of billing system inadequacies, payment mistakes (e.g. duplicate payments) or because of contract administration adjustments. Of course, as soon as an overpayment is discovered, contractors should immediately refund the amount of the overpayment back to the Government. Contractors that do not refund overpayments in a timely manner, do so at their own peril. We know of an instance where a Federal Government investigative organization opened a criminal investigation on one such case.

There may be cases however, where contractors are financially strapped and cannot repay the overpayment right away. If the overpayment involves a DoD contract, there may be some relief. The DoD Financial Management Regulation, Volume 10, Chapter 18 allows for a series of installment payments under certain circumstances. When a debtor to the U.S. Government can establish sufficient justification, a series of installment payments may be approved by DFAS (Defense Finance and Accounting Service) in amounts that will ensure liquidation of the debt within a reasonable time frame.

Prior to approving the installment agreement, DFAS will ask the contracting officer to perform a financial capability analysis, taking into consideration the proposed installment payments to ensure that the contractor has the financial capability to make the installment payments. In addition to determining the contractor's ability to repay, the contracting officer will also determine

• what the contractor did with the overpayment and
• why it is not currently in a position to return the overpayment to the Government.

Needless to say, contractors that embark down this road must have strong rationale to support its case and must expect and be prepared to have auditors poking around in their financials. Tomorrow, we will look at some of the specific things that the Government will request when performing its review.

Go to Part 2

Thinking Abount Hiring Former Government Employees?

The Department of Defense is proposing to amend its FAR supplement to require that any company bidding on one of their solicitations certify that all former DoD officials employed by the company are in compliance with post-employment restrictions.

There are several statutory and regulatory restrictions concerning post-government employment for DoD and other Federal employees after leaving Government service. 18 U.S.C. 207 prohibits an individual from representing a contractor to their former agency on particular matters involving specific parties that they handled while working for the Federal Government for defined cooling-off periods that vary according to the former officials involvement and position. 41 U.S.C. 2104 prohibits DoD and other Government acquisition officials from accepting compensation from a defense contractor during a one year cooling-off period if the official performed certain duties at DoD involving the contractor and a contract valued in excess of $10 million. Section 847 requires that senior DoD officials who have been personally and substantially involved in contracts over $10 million request a written post-employment ethics opinion before receiving compensation from a contractor.

These Statutes were implemented into the FAR and DFARS (Federal Acquisition Regulation and DoD FAR Supplement, respectively) at FAR 3.104 and DFARS 203.104. However in 2008, the GAO reported that government contractors had under reported by half, the number of former DoD officials they had employed and that some of those had performed services under the same contract for which they had prior program responsibility.

To remedy this, DoD is now proposing to require that all offerors must submit representations at the time of contract award to the effect that all former DoD officials are in compliance with post-employment restrictions in FAR, DFARS, and the aforementioned Statutes. Based on the GAO study, this could affect about 7,500 "covered" officials leaving the Government and going to work for defense contractors each year. A third of these go to work for the top 50 defense contractors, about 50 percent end up a "small business" with the remainder scattered around at other contractors.

Under the proposed regulation, companies are not allowed to submit proposals or make offers if they cannot make a representation similar to the following:

To the best of our knowledge and belief, all covered DoD officials employed by or otherwise receiving compensation from the offeror are presently in compliance with DFARS ......

Defense Department Creates New Position - Director of Pricing

The Defense Department created a new position a few days ago, Director of Defense Pricing. This position falls within the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. Last Tuesday, May 31st, Defense Secretary Robert Gates announced that Shay Assad would fill the position. Previously Mr. Assad was the Director, Defense Procurement and Acquisition Policy.

The creation of this positions, according to the official press release is part of the Pentagon's quest to drive down the cost of weapons at a time when defense budgets are "constricting". Part of the administration's Better Buying Power imitative is to look beyond program cost estimates and determining what a program should cost.

The specific tasking for the new position is to help program managers hit these "should-cost" targets which will be set at levels below official budget estimates. Additionally, Mr. Assad has been tasked with improving the skills of the contracting and pricing work forces. For example, Mr. Assad hopes to transform DCMA (Defense Contract Management Agency) into a value-added resource in contract negotiations. DCMA recently hired 300 price analysts to assist contracting officers during contract negotiations. Mr. Assad estimates that it will take 18 to 24 months to bring this work force "up to speed".

Another of Mr. Assad's initiatives is to help DCMA develop a centralized database of pricing information. The idea is that when contracts are negotiated, detailed information is uploaded into the database so that any contracting officer can see what labor rates, indirect expense rates, and other pricing details  were negotiated previously. This should take some of the tedium out of the process of determining price reasonableness.

Initially, Mr. Assad will be focusing his attention on large procurements like the F-35 program.

Basic Billing System Requirements

Prior to awarding contracts to new contractors (or new to the particular government agency awarding the contract), the Government will perform a "Preaward Survey of Prospective Contractor Accounting System". This survey covers many aspects of the accounting system including questions about the system's capability to produce data to support billings. In general, the accounting system must be capable of producing data to support payment requests when payments to contractors are to be based on progress payments (fixed price contracts) or public vouchers (cost-type contracts).

In assessing the adequacy of a billing system, the Government will perform tests and conduct analyses in order to answer the following three questions.

1. Does the contractor have controls or procedures that would provide that interim billings of direct cost are prepared directly from the books and records, excluding unallowable costs? It continues to surprise us the number of contractors that do not prepare their billing statements based on their accounting records. Often times its because they have no confidence in the accuracy of the accounting data, the data is not up to date and they need to get paid, or the accountants are too "secretive" with their information.

2. Does the contractor have procedures to ensure that subcontractor and vendor costs are only included in billings if payment to the subcontractor or vendor will be made in accordance with the terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor's payment request to the Government? The Government is not in the business of advancing working capital.

3. Can billings be reconciled to the cost accounts for both current and cumulative amounts claimed? It is important to ensure that not only period costs are traceable to the accounting records but cumulative costs are as well. Sometimes adjustments are made to prior periods and these adjustments must be reflected in billings.

Contract Administration Office Functions

After a contract is awarded, it its usually, but not always, assigned for administration to a contract administration office (CAO). For DoD, the CAO is the Defense Contract Management Agency (DCMA).
DCMA maintains the Federal Directory of Contract Administration Services on its website.   If you are unsure as to the organization that administers your contract, you can search this site for that information.

FAR 42.302 contains a listing of 71 functions that the contracting officer (CO) normally delegates to the CAO. (The current versions of FAR list only 70 functions. The 71st fuction is the oversight of contract ethics programs that was added yesterday, May 31st.) The contracting officer may from time to time, retain some of the 71 functions based on different factors. However, three of the 71 functions must be delegated including,

1. negotiating forward pricing indirect expense rates
2. establish final indirect expense rates, and
3. administering Cost Accounting Standards (CAS)

It is beyond the scope of this posting to list the 71 delegable functions however it should be worth your while to peruse it. It would be hard to imagine any contract related matter that is not covered by these duties and responsibilities. It is becasue of the extensiveness of this listing that we usually advise clients to initiate discussions with the CAO (a.k.a. the ACO or Administrative Contracting Officer) for any contract matter.