Throughout the eight + years of this blog's life, we've discussed, in various fashions, the critical importance of timekeeping systems as well as contract auditors' floorchecks and labor interviews used to test the adequacy of those systems. An adequate timekeeping system is perhaps the most important system of internal controls for a contractor with cost-type contracts. One could argue that an accounting system is more important but an accounting system can be recreated whereas a timekeeping system which captures employee time charges contemporaneously with the work performed, cannot be accurately recreated.
The first thing a contract auditor needs to do when performing floorchecks and other timekeeping reviews is to develop an understanding of the system as it currently exists. To do this, contract auditors will gather a lot of information. This data gathering phase helps them to establish their audit scope; obviously, more robust controls will require less transaction testing. This series of "determinations" include the following:
1. Determine how attendance is controlled; through electronic systems, clock cards, timecards, or other suitable time and attendance records.
2. Identify the process for controlling employee time records at each timekeeping station or the electronic timekeeping input and related records. Electronic timekeeping should include procedures to ensure that employees do not share their access credentials.
3. Determine the procedures for notifying the employee of the assigned job number and whether the procedures provide that all changes are properly initialed/approved by the employee and the designated approving supervisor. This is extremely important to ensure that labor charges get tot he proper cost objective.
4. Determine whether hours shown on the timecards or input electronically are reconciled periodically with hours recorded on attendance and payroll records. Many contractors fail to include this reconciliation.
5. Determine whether there is a division of responsibility within the company between personnel responsible for the preparation and or approval of time and attendance records and those responsible for the preparation and distribution of payroll.
6. Determine whether there is a division of responsibility
between personnel having a part in the preparation and/or
approval of time and attendance records and those
responsible for operating within budgets. If a division of
responsibility does not exist, the risk increases for affecting
payroll in proportion to the number of personnel the
employee/manager can influence.
7. Determine whether procedures have been established for
coding and recording idle time. The Government will insist that idle time be prorated among all work.
8. Determine whether records of piece work and work
performed under wage incentive plans are checked and
controlled independently from production counts, approvals
for allowances, and other operations.
At this point, the contract auditor is only gathering information and not making any assessments as to the adequacy and sufficiency of a timekeeping system. That comes later in the audit. Contractors can use this listing however to identify where weaknesses might exist in their own timekeeping system.
Tuesday, July 31, 2018
Monday, July 30, 2018
SBA's Surety Bond Guarantee Program
Under the SBA's Surety Bond Guarantee (SBG) Program, the SBA guarantees bid, payment and performance bonds for small and emerging contractors who caqnnot obtain surety bonds through regular commercial channels.
SBA's guarantee gives Sureties an incentive to provide bonding for small businesses and thereby, assists small businesses in obtaining greater access to contracting opportunities. SBA's guarantee is an agreement between a Surety and SBA that SBA will assume a certain percentage of the Surety's loss should a contractor default on the underlying contract.
Pursuant to its statutory authority "to establish such fee or fees for small business concerns and premium or premiums for sureties as it deems reasonable and necessary", and to administer the SBG Program on a prudent and economically justifiable basis, SBA assess a guarantee fee against both the small business concern and the Surety and deposits these fees into a revolving fund to cover the program's liabilities and certain program expense.
Since 2006, the fee charged to the Sureties has been 26 percent of the bond premium and the fee charged to small businesses has been $7.29 per thousand dollars of the contract amount. Prior to that, the fees were less but the SBA determined that the program's revolving fund was insufficient to cover projected, unfunded liabilities.
Since the last fee increase in 2006, the fees have been more than sufficient to support the program and as a result, a surplus has accumulated in the fund. This means that the SBA can lower its fees until the surplus is depleted. Beginning in October, the Surety fee will decrease from 26 percent to 20 percent of the bond premium and the small business fee will decrease from $7.29 to $6.00 per thousand dollars of the contract amount.
This decrease will remain in effect for at least one year. During the year, SBA will study and analyze whether the lowered fees can be sustained. If not, the fees will revert to the previous schedules.
Good news for small businesses.
SBA's guarantee gives Sureties an incentive to provide bonding for small businesses and thereby, assists small businesses in obtaining greater access to contracting opportunities. SBA's guarantee is an agreement between a Surety and SBA that SBA will assume a certain percentage of the Surety's loss should a contractor default on the underlying contract.
Pursuant to its statutory authority "to establish such fee or fees for small business concerns and premium or premiums for sureties as it deems reasonable and necessary", and to administer the SBG Program on a prudent and economically justifiable basis, SBA assess a guarantee fee against both the small business concern and the Surety and deposits these fees into a revolving fund to cover the program's liabilities and certain program expense.
Since 2006, the fee charged to the Sureties has been 26 percent of the bond premium and the fee charged to small businesses has been $7.29 per thousand dollars of the contract amount. Prior to that, the fees were less but the SBA determined that the program's revolving fund was insufficient to cover projected, unfunded liabilities.
Since the last fee increase in 2006, the fees have been more than sufficient to support the program and as a result, a surplus has accumulated in the fund. This means that the SBA can lower its fees until the surplus is depleted. Beginning in October, the Surety fee will decrease from 26 percent to 20 percent of the bond premium and the small business fee will decrease from $7.29 to $6.00 per thousand dollars of the contract amount.
This decrease will remain in effect for at least one year. During the year, SBA will study and analyze whether the lowered fees can be sustained. If not, the fees will revert to the previous schedules.
Good news for small businesses.
Friday, July 27, 2018
3M Sells the Government Defective Earplugs
A whistleblower suit alleged that 3M Company sold defective earplugs to the Defense Department. Apparently, these particular earplugs were too short for proper insertion into users' ears and the plugs could also loosen imperceptibly and cause them to fail. Apparently, 3M Company know about the defects but failed to disclose the design defects to the military.
This is a case where the Government might never have known the earplugs were defective had it not been for the whistleblower who had knowledge of the defective design and also knew that 3M had delivered the earplugs anyway.
3M agreed to pay $9.1 million to resolve the allegations although in doing so, made no concession of liability or admission of guilt. For his (or her) reward for raising the issue, the whistleblower will receive almost $2 million (or whatever is left of the $2 million after the attorneys take their cut).
This is no small matter. Hearing loss from military weapons is painless, permanent, and progressive. But it is also preventable. It has been reported that 52 percent of combat soldiers have moderately severe hearing loss, or worse. Hearing loss and tinnitus (a ringing in the ears) is the single injury that affects military personnel more than any other. In many cases, hearing loss can affect survivability.
3M's deliveries of faulty earplugs to the military could result in more than just hearing loss. It could also affect soldier survivability. Wonder who in the organization thought that company profits were more important than soldier survivability?
This is a case where the Government might never have known the earplugs were defective had it not been for the whistleblower who had knowledge of the defective design and also knew that 3M had delivered the earplugs anyway.
3M agreed to pay $9.1 million to resolve the allegations although in doing so, made no concession of liability or admission of guilt. For his (or her) reward for raising the issue, the whistleblower will receive almost $2 million (or whatever is left of the $2 million after the attorneys take their cut).
This is no small matter. Hearing loss from military weapons is painless, permanent, and progressive. But it is also preventable. It has been reported that 52 percent of combat soldiers have moderately severe hearing loss, or worse. Hearing loss and tinnitus (a ringing in the ears) is the single injury that affects military personnel more than any other. In many cases, hearing loss can affect survivability.
3M's deliveries of faulty earplugs to the military could result in more than just hearing loss. It could also affect soldier survivability. Wonder who in the organization thought that company profits were more important than soldier survivability?
Thursday, July 26, 2018
New Checklists for Termination Settlement Proposals
DCAA (Defense Contract Audit Agency) recently posted several adequacy checklists for termination settlement proposals for cost and fixed priced contracts.
Checklists are useful tools for ensuring that proposals conform to the Government's basic expectations submissions. Some checklists are mandatory such as the DFARS (DoD FAR Supplement) Proposal Adequacy Checklist found at DFARS 252.215-7009. Most, including the termination settlement proposal adequacy checklists linked above and others such as the incurred cost adequacy checklists, are voluntary.
Whether voluntary or mandatory, it seems wise to us for contractors to utilize these checklists during the preparation of whatever submission will be presented to the Government. These checklists inform as to what the Government will be looking at and should reduce the change that submissions will be returned as inadequate.
- Cost type contracts
- Fixed price -inventory basis
- Fixed price - total cost basis (most common form of submission)
Checklists are useful tools for ensuring that proposals conform to the Government's basic expectations submissions. Some checklists are mandatory such as the DFARS (DoD FAR Supplement) Proposal Adequacy Checklist found at DFARS 252.215-7009. Most, including the termination settlement proposal adequacy checklists linked above and others such as the incurred cost adequacy checklists, are voluntary.
Whether voluntary or mandatory, it seems wise to us for contractors to utilize these checklists during the preparation of whatever submission will be presented to the Government. These checklists inform as to what the Government will be looking at and should reduce the change that submissions will be returned as inadequate.
Wednesday, July 25, 2018
Contractor Waives Its Rights to File a Claim
In 2014, the AAFES (Army and Air Force Exchange Service) awarded a contract to Team Hall Venture to operate a frozen yogurt concession at a food court on a military base. The contract period of performance was for up to ten years. The concession opened that November but had to close from time to time due to rodent infestation and flooding. About a year and a half after opening, the concession ceased operations and the contract was terminated.
As part of the termination agreement, Team Hall released AAFES from any and all obligations related to the contract and waived any claim against AAFES for monetary or other relief to the contract including any that may arise in the future.
In September 2015, about two months following termination, Team Hall presented a certified claim for $673 thousand representing lost profits for the eight years remaining on the contract. The contracting officer denied all but $30 thousand of the $673 thousand. Team Hall appealed the contracting officer's final decision to the ASBCA (Armed Services Board of Contract Appeals).
The ASBCA denied the appeal, noting the plain language of the waiver signed by Team Hall. The ASBCA gave no credence to Team Hall's assertion that the Government slipped the language into the contract modification at a later date.
The ASBCA did not rule on the validity of the claimed amount - i.e. whether lost profits are recoverable under a contract termination. The Board didn't have to as the contractor had waived any rights to additional monies.
The full decision can be read or downloaded here.
As part of the termination agreement, Team Hall released AAFES from any and all obligations related to the contract and waived any claim against AAFES for monetary or other relief to the contract including any that may arise in the future.
In September 2015, about two months following termination, Team Hall presented a certified claim for $673 thousand representing lost profits for the eight years remaining on the contract. The contracting officer denied all but $30 thousand of the $673 thousand. Team Hall appealed the contracting officer's final decision to the ASBCA (Armed Services Board of Contract Appeals).
The ASBCA denied the appeal, noting the plain language of the waiver signed by Team Hall. The ASBCA gave no credence to Team Hall's assertion that the Government slipped the language into the contract modification at a later date.
The ASBCA did not rule on the validity of the claimed amount - i.e. whether lost profits are recoverable under a contract termination. The Board didn't have to as the contractor had waived any rights to additional monies.
The full decision can be read or downloaded here.
Tuesday, July 24, 2018
Paid Voucher Audits
Most Government contractors with cost-type contracts have been subjected to "paid voucher" reviews. These are reviews where contract auditors (usually DCAA or Defense Contract Audit Agency) will take a voucher that has previously been paid in the last year and trace the amounts claimed, billed, and paid to source documents. This is a fairly recent program coming out of DCAA with dubious benefits. One former auditor speculated that after DCAA transitioned most of its important work to DCMA (Defense Contract Management Agency), it has been scrounging around looking for purposeful work. Whether paid voucher reviews provide a benefit to the Government or not, most of the testing steps do not require the skills of professional auditors (Certified Public Accountants). Many "testing" steps are those that anyone, with minimal training, could perform - e.g. did the contractor pay the vendor in 30 days?
The basic audit policy is to review one paid voucher per year at non-major contractors and one voucher per month at major contractors. The distinction between major and non-major is $100 million of costs charged to flexibly priced contracts in a year. Contractors with less than $100 million are considered non-major contractors.
One aspect of these reviews that sometimes becomes contentious concerns T&M (Time and Material) contracts and the requirement to compare employee qualifications to those specified in the contract. This is why auditors request contractors to provide personnel files - to ascertain whether their education, training, and experience qualifies them to perform the function at the level they are billed to the Government. For example, while an apprentice may perform a particular function just fine, the Government, by terms of the contract, wants and is paying for a Senior Engineer. Contractors, if you ever find yourself in a situation where you cannot meet the contractual requirements for a particular skill, contact your contracting officer and let them know the situation. It might require a reduction in a T&M rate but that is much better than finding yourself on the wrong end of an investigation.
Another issue that frequently arises concerns contractor oversight of cost-type subcontractors. For most non-major contractors, this is not a problem because there are no subcontract costs charged to the contract. But where there are subcontract costs, the auditors will want to know what controls are in place to manage those subcontracts and monitoring subcontract billings. Contractors do have the contractual requirement to ensure the propriety of subcontractor submitted costs and where those subcontracts are cost-reimbursable, the Government expects a level of oversight similar to what it performs for the prime contracts.
The DCAA audit program for paid voucher testing can be viewed or downloaded here.
The basic audit policy is to review one paid voucher per year at non-major contractors and one voucher per month at major contractors. The distinction between major and non-major is $100 million of costs charged to flexibly priced contracts in a year. Contractors with less than $100 million are considered non-major contractors.
One aspect of these reviews that sometimes becomes contentious concerns T&M (Time and Material) contracts and the requirement to compare employee qualifications to those specified in the contract. This is why auditors request contractors to provide personnel files - to ascertain whether their education, training, and experience qualifies them to perform the function at the level they are billed to the Government. For example, while an apprentice may perform a particular function just fine, the Government, by terms of the contract, wants and is paying for a Senior Engineer. Contractors, if you ever find yourself in a situation where you cannot meet the contractual requirements for a particular skill, contact your contracting officer and let them know the situation. It might require a reduction in a T&M rate but that is much better than finding yourself on the wrong end of an investigation.
Another issue that frequently arises concerns contractor oversight of cost-type subcontractors. For most non-major contractors, this is not a problem because there are no subcontract costs charged to the contract. But where there are subcontract costs, the auditors will want to know what controls are in place to manage those subcontracts and monitoring subcontract billings. Contractors do have the contractual requirement to ensure the propriety of subcontractor submitted costs and where those subcontracts are cost-reimbursable, the Government expects a level of oversight similar to what it performs for the prime contracts.
The DCAA audit program for paid voucher testing can be viewed or downloaded here.
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