Senate Bill to Rescind the Davis-Bacon Act

Every Government contractor is probably aware of the Davis-Bacon Act (DBA) and the Service Contracting Act (SCA). The Davis-Bacon Act (DBA) applies to contractors and subcontractors performing on federally funded contracts for the construction, alteration, or repair of public buildings or public works projects. DBA requires that contractors (and subcontractors) pay their laborers and mechanics employed under the contract no less than the locally prevailing wages and fringe benefits for corresponding work on similar projects in the area. The prevailing wage rates are determined by the Department of Labor and updated frequently. The Service Contracting Act (SCA) is very similar but applies to contractors and subcontractors providing "services" to the Government.

Earlier this month, Senator Mike Lee (Utah) introduced a bill that would repeal the Davis-Bacon Act (its called the Davis-Bacon Repeal Act). According to the Senator, the bill will

... drive down the inflated costs of federally funded construction projects on our nation's infrastructure and make it easier for federal contractors to train and employ workers of all skill levels. The ... Act would also save the American people billions of dollars in wasted taxpayer money and diminish the power of the cronyist alliance between big government and big labor unions.

Continuing on, Senator Lee's press release states:

The Davis-Bacon Act exemplifies how big government hurts the people it purports to help, gives unfair advantages to favored special interests, and squeezes the middle class. It crowds out low-skilled workers in the construction industry, preventing them from getting a fair shot at a job, and funnels taxpayer money to prop up big labor unions, which accrue windfall profits as Davis-Bacon removes the incentive for federal contractors to hire unskilled, non-unionized workers.

Forcing the American citizens to subsidize labor unions in this way artificially inflates the costs of construction projects to repair and improve our national infrastructure. This is unfair, and unsustainable, and costing taxpayers billions of dollars every year.

Davis-Bacon certainly increases costs to the Government. We've witnessed situations where workers have walked off a non-DBA (and non-union) job to take a DBA job in the same area where in one case, a worker told us he would be making three times what he was currently making. We suspect that this new bill has little chance of passing.

DCAA Revises its Procedures for Auditing CAS Compliance

Late last month, DCAA (Defense Contract Audit Agency) issued guidance which effectively changes the way in which it audits contractor compliance with CAS (Cost Accounting Standards). The new guidance can be accessed here. Actually, this revised guidance is a little confusing so stay with us.

Heretofore, there have been two aspects to auditing CAS Disclosure Statements (DS); adequacy and compliance. The adequacy review focused on whether the DS adequately describes the contractor's current cost accounting practices. The compliance review deals with whether those cost accounting practices are consistent and compliant with applicable CAS standards.

Under the new guidance, auditors will review Disclosure Statements for adequacy prior to deciding whether to accept an engagement to audit for compliance. The "adequacy" review is no longer considered an audit (which is a good thing, in our opinion) so that fact alone improves the chances that reports on adequacy can be issued in a timely manner.

According to the guidance, there are three steps to determining adequacy.

1. Determine whether the contractor followed the Disclosure Statement form instructions. DCAA has a "tool" for this task that is not available to the public).
2. Determine whether contractor disclosures are consistent (evidently DCAA has another "tool" for this task.
3. Gain a thorough understanding of the basis of the described practices, usually during the contractor's walk through of the submission (DCAA is really big on "walk-throughs" these days).

Based on this information, the auditor will assess whether the disclosed practices are current, complete, and accurate (this is a new use of the term "current, complete, and accurate". In FAR, it is used in the context of cost or pricing data). DCAA's definition of current, complete and accurate is as follows:

• Current - disclosed practices are consistent with the contractor's intended practice described during the walk through.
• Complete - contractor completed all items on the form in accordance with the instructions
• Accurate - disclosed practices are consistent with the policies and procedures provided during the walk through.

Once this assessment is complete, the auditor advises the contracting officer who is responsible for making a decision on adequacy. If the contracting officer agrees with the auditor and issues a determination to that effect, the auditor can go ahead and audit the Disclosure Statement for "compliance".

Provisional Billing Rates - Recent Audit Guidance

Reasonably accurate provisional billing rates are important for both the Government and contractors. Rates that are too high harm the Government. Rates that are too low, negatively impact a contractors cash flow. Whether too high or too low, its difficult to derive an accurate projection of costs and to comply with other contractual provisions such as limitation of costs or limitation of payments.

FAR 42.704 lays out the requirement for establishing provisional billing rates. It states, in part, that the contracting officer or auditor shall establish billing rates on the basis of information from recent reviews, previous rate audits or experience, or similar reliable data or experience of other contracting activities. Additionally, those rates should be as close as possible to the final indirect cost rates anticipated for the fiscal year.

The key point from FAR 42.704 is that the Government is going to establish provisional billing rates, with or without contractor input. It is almost a certainty that if the Government establishes the rates, it will include some form of decrement to reflect potential unallowable costs. It is always better for the contractor to propose provisional billing rates because the contractor will have the best information on factors that will affect future rates.

DCAA (Defense Contract Audit Agency) recently issued new audit guidance for reviewing provisional billing rates. First of all, the Agency states that the development of provisional billing rates is not an audit. That should help expedite DCAA's role in establishing rates and/or reviewing contractor provisional rate proposals. Further, the steps to reviewing rates consist of the following:

1. Notify the contractor and ask whether the contractor wishes to provide any input.
2. Review past audit files for relevant information.
3. Review incurred cost audits and ascertain trends. Although not stated in the guidance, the audit should review unaudited incurred cost submissions as well.
4. Compare prior year billing rates with actual year end rates to see how close the contractors' estimates compare to actuals.
5. Ask for a walk-through of any data submitted by the contractor.
6. Summarize and come up with an estimate.

These are fairly straight-forward tasks and should not cause any undue grief. From the Government's standpoint, provisional billing rates are low risk because the rates will be trued-up at the end of the year after contractors submit their final indirect rate proposals.

Independent Audits of Contractor Business Systems - Part 6

We've been discussing DoD's recent proposal to require contractors to perform annual self-assessments of certain of their business systems and to have those systems audited by a CPA firm every three years. If you haven't been with us for the entire series, it would be a good idea to start at the beginning:

     Part 1
     Part 2
     Part 3
     Part 4

     Part 5

The proposed rule, according to DoD, will have no impact on small businesses. That's because the Department has set the applicability at a pretty high level. For estimating systems, the criteria applies to contractors that had negotiated contracts of $50 million or more in their previous fiscal year. That doesn't necessarily exclude small businesses as we've seen contracts awarded to small businesses that exceed that amount. But, that threshold would certainly exclude most small businesses. For MMAS (Material Management Accounting Systems), the annual assessment and audit requirements specifically excludes small businesses and applies to contractors with qualifying sales to the Government of $50 million or more and an affirmative determination by the ACO that an MMAS review is needed (based on various risk factors). For Accounting Systems, the requirement applies to CAS-covered contractors (Cost Accounting Standards). (For CAS coverage requirements, click here).

The system criteria for these business systems are not changed by this proposed regulation nor are the penalties (billing withholds) for having a system that does not comply with the stated criteria.

There are several aspects of this new regulation that we believe will become problematic during implementation.

• Cost - these self-assessments and independent audits will cost contractors dollars that they wouldn't have otherwise incurred.
• Cost allocation - the cost will need to be allocated somewhere. Contractors will make the case that since these costs are required by contract, they are allocable to those contracts and not to commercial work. The Government will probably try to make the case that these internal control systems benefit all the work of the contractor and should be allocated broadly.
• Timeliness - there doesn't seem to be any penalty for failing to meet the annual assessments or triennial audit requirements. 
• Timeliness of Government Involvement - The proposed regulations require that the Government be afforded the opportunity to review the CPA risk assessment and audit planning documents. The Government does not have a good track record of turning out responses in a timely manner. This could impede the efficient and effective accomplishment of the CPA's efforts.
• Resolving disagreements - while the proposed regulation contains processes to resolve deficiencies raised as a result of assessments and audits, it does not cover disagreements that might arise between the CPA and the auditor who will be overseeing the CPA effort. This could become a contentious area.

There is more to this proposal than we've covered in these blog posts. The proposal itself takes up nearly 14 Federal Register pages - a laborious read to say the least. Most likely, this will not be a case were the proposed rule is adopted as final, without change. A change of this magnitude will undergo significant revision before adoption - perhaps even a second draft for public comment.

If you care to provide comments to this proposed regulation, you have until September 15th to do so. You can submit those comments electronically to regulations.gov. So far, not too many comments have been submitted.

Click here to read Part 7 in this series.

Independent Audits of Contractor Business Systems - Part 5

For the past few days, we've been discussing DoD's proposed rule that would require contractors to perform their own self-assessments of compliance with DoD's business system criteria and a further requirement that contractors commission an audit every three years by an independent CPA to test the contractors compliance with those system criteria. The proposed rule affects three of the six business systems covered in the DFARS (DoD FAR Supplement); estimating, accounting, and material management and accounting systems. It applies primarily to larger contractors, small businesses being exempt. If you're just joining this series, you may want to start at the beginning and read forward.
     Part 1
     Part 2
     Part 3
     Part 4

As discussed, the new rule would require contractors to provide the CPA's audit strategy, risk assessment, and audit plan to the Government auditor for review. Presumably, the Government auditor render his assessment, saying it is adequate or it needs refinement. Once the CPA's audit is finished, the contractor must maintain and make the CPA's working papers available to the Government auditor for review. This will be interesting to watch - it seems to us that a lot of CPA firms will be reluctant to expose their working papers to Government review and oversight (second-guessing). In any event, the way that this new rule works, is that the Government auditor will review the CPA's audit report and working papers and advise the contracting officer on what it thinks.

The contracting officer then must make a decision as to the acceptability of the estimating, accounting, and/or MMAS systems for Government contracting purposes. In evaluating the acceptability of these systems, the contracting officer, in consultation with the Government auditor or functional specialist, shall determine whether the contractor's system complies with the DFARS system criteria. In making that determination , the contracting officer shall consider;

• the contractor's annual report and the CPA audit.
• any other findings and recommendations reported by the Government auditor including the assessment of the contractor's CPA audit report and related documentation.

To summarize, the contractor's documentation requirements include:

1. Documentation to provide reasonable support for its annual assessment. 
2. Information considered in the selection of a CPA
3. Arrange for Government access to the working papers supporting the CPA audit reports

Click here to read Part 6 in this series where we discuss a few miscellaneous items included in the proposed regulation.

Independent Audits of Contractor Business Systems - Part 4

We're in the midst of a discussion on DoD's new proposal that will require contractors to perform their own self-assessments of compliance with the standards for business systems and to have a full CPA audit performed every three years on those systems. This proposed rule was published in the Federal Register on July 15th and applies to large DoD contractors. If you haven't read the previous postings, it would be a good idea to start from the beginning:
     Part 1
     Part 2
     Part 3

Yesterday we discussed the hoops that contractors will have to jump through just to get a CPA firm on board. The contractor is going to have to assess the CPA's independence, objectivity, and qualifications. Not only will the contractor have to make those assessments, but will need to be prepared to turn over its assessments for Government review. But what is to happen after that is perhaps more insidious (in a way).

What follows might seem arcane to non-CPAs but it is a big deal. When undertaking any audit, CPAs must plan out their strategy. They have to understand the objective of the audit, the criteria against which performance is to be assessed, the inherent risks associated with the audit engagement, considerations of fraud, and a step-by-step program for accomplishing the audit. These are often referred to as the planning and risk assessment phases of the audit. Often, hours associated with these activities represent a significant portion of audit engagements. These activities must be completed before field work (e.g. testing) begins.

DoD's proposed regulations will require that these preliminary documents be provided to the Government:

The Contractor shall provide the Contractor's CPA's audit strategy, risk assessment, and audit plan (program), upon completion ... to the cognizant contracting officer and Government auditor.

What is the contracting officer and Government auditor supposed to do with the CPA's audit strategy, risk assessment, and audit program? According to the proposed rule, the contracting officer must,

Upon receipt of the contractor's CPA's audit strategy, risk assessment, and audit plan (program), request a review from the Government auditor, and notify the contractor of any potential issues identified by the Government auditor regarding their reasonableness. Early notification of potential issues may decrease the likelihood of the contractor incurring unreasonable costs. However, review of the contractor's CPA's audit strategy, risk assessment, and audit plan (program) does not constitute the contracting officer's approval.

So here you have it. The Government auditor (DCAA), the same organization that cannot find the time and resources to audit contractor compliance with DoD's business systems criteria, and whose abject performance in this area led to this new regulation in the first place, is now tasked with overseeing the strategy,  risk assessment, and audit plans of the contractors' CPAs. What's more, DCAA is expected to turn around its assessment in a timely manner in order to reduce the likelihood that the CPA will become inefficient in its work. We see this as a major stumbling-block to efficient and effective execution of audits and we know of no other instances where such a requirement is imposed on the performance of audits conducted in accordance with GAGAS (Generally Accepted Government Auditing Standards).

Click here to read Part 5 in this series.