Here's some good news for small business subcontractors. The FAR committees have issued their final rule regarding the acceleration of payments from prime contractors to small business subcontractors. Its been almost a year since the proposed rule was published - about time, no? This new rule applies to all contracts, even those for commercial items.
The new clause requires that prime contractors, upon receipt of accelerated payments from the Government, to make accelerated payments to small business subcontractors, to the maximum extent practicable, after receipt of a proper invoice and all proper documentation from small business subcontractors. This new provision does not provide any new rights under the Prompt Payment Act (still 30 days).
Maximum extent practicable - what does this really mean? What if the prime contractor doesn't have sufficient resources to process expedited subcontractor payments? What if the accounts payable system requires extensive modification?
After receipt of "all proper documentation" - Any business, if that is their bent, can find ways to prolong the period in which they make payments.
With this in mind, the question arises as who will enforce the new rule. There is nothing in it that provides a Government party to address the prime's failure to accelerate payments to small business subcontractors. There is no penalty, there is not "audit" to ensure compliance, nor are there any performance standards to which prime contractors will be held.
There is some remedy available under FAR 32.112, Subcontractor assertions of nonpayment. That clause provides two remedies: i) the contracting officer will "encourage" the prime to pay its bills and ii) the Government may withhold payments from the prime. Well, that's weak and ineffectual and never happens. Or, the Government could discontinue accelerated payments to the prime contractor. That remedy doesn't help anyone.
So, suffice to say that small business subcontractors suffer at the mercy of their primes.
Have you ever prepared an email message with something like "please see attached" but then forget to attach the document before hitting the send button? Pretty soon you get a reply asking where the attachment is. Frustrating, perhaps a little embarrassing but not really a big deal, right?
For one potential Government contractor it was a big deal. They sent a proposal by email and forgot to attach the proposal. They didn't get the contract. They also lost their appeal to the GAO.
A company submitted a bid to the Naval Facilities Engineering Command for custodial and maintenance services at a Naval facility in Italy. The cutoff date was 3 p.m on July 8th. This company sent two email messages. The first advised that it would be sending its proposal in two separate messages - the first message a technical proposal and the second message the price proposal. The first message had the technical proposal attached but the second message omitted the attachment.
The next day, the contract specialist began opening the emailed proposals. She opened email 1 of 2 and acknowledged it. She opened email 2 of 2 and found no attachment. She did not acknowledge the second one. She contacted the contracting officer to see whether he had received an attachment with the second email. He hadn't received one either.
On July 10th, the contractor realized its mistake and sent the missing price proposal under a third email. However, because it was received after the cutoff date, the contracting officer considered it untimely.The prospective contractor appealed on the basis that the Navy was on notice of a delivery problem and should have inquired as to the status.
The GAO ruled that the protester's argument was without merit. The protestor bore the burden of ensuring the timely receipt of its proposal, not the Navy. So there. Don't forget your attachments. As a matter of practice, it is always a good idea to confirm reciept of any proposal submitted to the Government.
Happy Thanksgiving Everyone. Back on Friday.
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.
1. Is the system in accord with GAAP (Generally Accepted Accounting Standards)? 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.
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.
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.
Did the contractor fulfill commitments to correct deficiencies, as proposed on previous surveys wen awarded that contract.
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.
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.
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.
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.
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.
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.
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.
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..
Government contractors are among those that have significant interactions with Government employees. Contractors rely on those employees a lot to ensure effective, economical and efficient operations and ultimately their own financial health and viability. Most contractors will tell you that their interactions with Government employees are positive but most contractors will also have a war story or two how a few employees and/or the systems they support have cost them money. Contractors understand that everyone has a job and responsibilities sometimes employees can go beyond those duties and cause a lot of delays, disruptions, and other encumbrances. Sometimes someone just has to throw wrenches into the works for whatever reason.
Contractors know the importance of maintaining an effective, cohesive, motivated, and happy workforce. The Government knows that as well, but we dare say, the Government, with a workforce of 4.4 million probably has more HR challenges than the typical Government contractor.
The Government's HR department, the Office of Personnel Management (OPM) just released the results of its 2013 Federal Employee Viewpoint Survey where 376 thousand federal employees provided responses to a "climate" survey. According to OPM, there was good news and bad news. First the good news. 90 percent of federal employees look for ways to do their job better and feel their work is important. That's good news? That means there are 440,000 (10% of the 4.4 million federal workforce) employees running around who don't want to do their job better and don't feel their work is important. Really? Get rid of them and hire some that care and need work.
That was the good news. Now the bad. "...the 2013 responses demonstrate a significant drop in employee satisfaction and continue last year's declines..." There is decreased satisfaction with pay, an increase in the number of employees lacking the resources to get their jobs done, and a significant drop-off in the number of employees who would recommend their organization as a good place to work. That should alarm any employer.
Factors such as an unprecedented 3 year pay freeze, automatic reductions from the sequester that included furloughs for hundreds of thousands of employees, and reductions in training and other areas are clearly taking their toll on the Federal workforce - and this survey was administered prior to the recent Government shutdown. The survey results serve as an important warning about the long-term consequences of the sequestration and budget uncertainty. Without a more predictable and responsible budget situation, we risk losing our most talented employees, as well as hurting our ability to recruit top talent for the future.
The next time you encounter a grumpy Government employee, you'll know why he/she is grumpy.
Yesterday we discussed the various methods and alternatives that the Government has at its disposal for estimating indirect rates to use for quick closeout purposes. The primary rationale to use quick closeout procedures is to close contracts prior to the audit of the indirect rates. The ACO is in charge of developing quick close rates and they usually ask for DCAA's input. DCAA will typically take rates from the unaudited incurred cost submissions and reduce them by a judgmental amount (a few tenths of a point perhaps) in order to "protect the Government's interest" in the event that a subsequent audit will result in unallowable costs.
Contractors then, in turn must decide whether to accept the decremented rates in the interest of closing out the contract(s) sooner rather than later. Where these decrements result in significant cost reductions, the decision is not so easy. Is it better to forgo some costs and get the rest of the fee now, or wait a few years and get more? Sometimes its a tough call. If a contract is in overrun status and there is no chance that the Government will fund the overrun, a few points off the rates isn't going to make any difference unless that decrement brings contract costs below the ceiling.
It is important to provide your position when DCAA is advising the ACO on quick close rates. If you have good internal controls over timekeeping and for identifying and excluding unallowable costs from any proposal, claim, or billing to the Government, you should let the Government know. If you have a history of no audit exceptions taken to your final indirect expense rates, you should let the Government know. If the contract(s) under consideration for quick close is already in overrun status and you have no plans to pursue additional funding from the procurement office, you should let the Government know. If your proposed final rates are capped (either voluntarily or by contract), you should let the Government know. Any kind of input that will support the reasonableness of your proposed final rates should be provided. Don't expect the Government to take the time to think through all of these factors. And, if DCAA won't listen to you, go directly to the ACO.
The quick closeout process can be beneficial but you don't want to get caught up in the thrill of closing out contracts at the expense of your bottom line.
Having the ability and opportunity to close out contracts without having to wait several years until the contract auditors get around to auditing your incurred cost submissions is a great benefit for contractors and the Government as well. Though there are certain risks, there are benefits for both parties. For the Government, the risk of losing expiring funds is reduced. Contractors get whatever monies have been withheld (typically a percentage of the fee) and then they reduce the records retention bulge. The risks to both parties lie with the indirect rates used to close out the contracts. The final audited rates could be higher than the closeout rates (good for the Government) or lower (good for the Contractor). Whether higher or lower, no one is going to reopen those quick-closed contract. The parties have to live with whatever they agreed to.
1. Obtain assistance from DCAA. The cognizant DCAA office should have already been contacted during the earlier stage of determining whether quick closeout is feasible with each individual contractor. For some of the larger Government contracts, there may be quick-closeout rates already established which could be confirmed with DCAA. Even if no such rates exist, DCAA can frequently recommend quick-closeout rates based on their knowledge of the contractor. DCAA may also be able to provide information as to whether there are any outstanding audit issues that could have a significant impact on contract closeout.
For medium and small contractors, DCAA might be able to conduct a desk review of the contractor's unaudited indirect cost proposals for the years being reviewed. This process is especially helpful in cases where a contractor has no other Government contract work other than the contract that is being closed. The purpose of the desk review is to ensure cost incurred during the contract's fiscal years have been properly allocated and are allowable. This desk review should identify any indirect cost adjustments that will impact the indirect rates.
In practice, DCAA will usually knock a little bit off of the contractor submitted indirect rates just to be on the "safe" side - assuming that there will be some unallowables found during the audit.
2. Using the contractor's prior years' audit history is another alternative for establishing indirect rates for the final years of the contract. The final rates for the immediate previous year or an average of final rates from the past several years may be used. As long as there is consistency in the indirect rates from year-to=year, after taking into account unallowable costs, the Government's risk of over reimbursing costs for the unaudited years is limited.
3. Any other reasonable means. The ACO has the option of using any other reasonable options for determining indirect rates, as long as the ACO can fully justify and document its methodology for establishing the rates and such methodology has been approved through the management chain. DoD guidance suggests that when using alternate means, the ACO coordinate with DCAA and ask for any input they may have.
Tomorrow we will discuss some strategies that might help contractors get the rates they want.
The Federal Acquisition Regulations (FAR) provide for "quick closeout" of contracts under limited situations. In theory, the administrative contracting officer (ACO) is the primary person responsible for identifying contract candidates for quick closeout. However, in practice, it is usually the contractor that seeks ACO help in using quick closeout procedures. For contractors preferring immediate settlement and payment rather than expending costly administrative time waiting for the normal closeout process to be completed, quick closeout might be the way to go. Who wouldn't want that. The downside is that in some cases, contractors might need to sacrifice some of their indirect costs.
The Government will not use quick closeout procedures at contractors that have had a history of significant adjustments between allowable and allocable costs reimbursed during contract performance. Nor will they entertain quick closeout if prior audits reflect a history of significant questioned costs. For contractors that pass this barrier, there's hope.
A delay in closing out contracts is usually attributable to delays in finalizing indirect expense rates. Recently, these delays have been the result of DCAA's backlog of incurred cost audits. Sometimes its because the contractor is late in submitting its final indirect expense rate proposal. If the delay is not a result of finalizing the indirect rates, its probably because the contract administration office (e.g. ACO) has a shortage of manpower to devote to the closeout process.
The determination of final indirect costs under the quick closeout procedures are final for the contracts it covers and no adjustments are made to other contracts for over or under recoveries of costs allocated or allocable to those contracts.
Tomorrow we will look at methods for estimating indirect expense rates to be used for quick closeout purposes.
In the past year, DCAA has completed many languishing incurred cost audits and reaching agreement with contractors on final indirect expense rates. Now that the rates are settled, contractors are looking to submit their final billings for costs and to close out many old contracts.
Approval and payment by the Government of a contractor's final voucher under cost-type Government contracts constitutes complete and final payment to the contractor. When you get ready to close out a cost-type contract, there are a few things to keep in mind. First, unless you can "quick-close" the contract, you will need to have your indirect rates settled for all years in which costs were booked to the contract. "Settled" in this case means negotiated or agreed-to between you (the contractor) and the ACO (administrative contracting officer) or, in some cases the auditor.
Next, you will be required to submit a voucher designated as a "completion voucher" or sometime "final voucher". The cumulative costs and fee shown on this voucher should agree with Schedule I of your incurred cost submissions, Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract (see FAR 52.216-7(d)(2)((i)(I)).
There are a lot of differing versions of these documents. Use the ones requested or required by your particular contracting activity. The "release of claims" says that you will not go back and request any more money from the Government for the particular contract. The assignment of refunds, rebates, etc., simply agrees to remit back to the Government any refunds, rebates, credits, and other amounts related to costs that were incurred and paid under the contract. It also requires contractors to cooperate with the Government in any suit to recover such funds.
Over the next few days, we will be discussing various aspects of the contract close-out process to help contractors streamline their practices to make the process as efficient as possible.
In an article published yesterday on DoD's website, Undersecretary of Defense for Acquisition, Technology, and Logistics Frank Kendall was quoted as saying that it is better to focus on acquisition improvement than it is to try and reform the entire system. When people consider "improvements" instead of "reform", it confines their thinking to specific things that they can do that will make a difference. Kendall stated that you can't wave away the entire procurement system, start over, and expect to have something that looks very, very different from what you have today.
People have been talking about acquisition reform for a very long time. Back in 1794 (yes, that's 1794) when the Navy was building six frigates, Congress was alarmed at the cost growth and schedule slips and demanded reform. Ever since, every few years with each succeeding administration, people have wanted to get their arms around the elephant in the room. People within DoD (and probably other Agencies as well) just roll their eyes when the next round of faddish fluff rolls around - nothing significant ever changes.
Kendall believes that there are very simple factors that drive outcomes in acquisition - professionalism on the government and industry sides, as well as leadership and hard work.
Kendall stated that DoD is doing hundreds of things to try and improve its acquisition processes but the article doesn't say too much about what those "things" are. The only example he gave was a statement that "his team" team is working with industry to help reduce overhead which undoubtedly surprised many in the contractor and procurement community who are oblivious to any such activities. He also stated that overhead adds costs but not value, a position disputed by most contractors including Kendall's old bosses at Raytheon.
We can't just leave this "fraud" thing alone. We've made a few sporadic posts recently about DCAA's (Defense Contract Audit Agency) increased focus on fraud. This is partly due to the 2011 revision of the "Yellow Book" (i.e. Generally Accepted Government Auditing Standards, specifically GAGAS 6.13) and partly because external reviews of DCAA's performance has found them lacking in this area.
In planning and performing the examination, review the fraud risk indicators specific to the audit. The principal sources for the applicable fraud risk indicators are ... . Document in the working papers any identified fraud risk indicators and your response/actions to the identified risks (either individually or in combination). This should be done at the planning stage of the audit, as well as during the audit, if risk indicators are disclosed. If no risk indicators are identified, document this in the working papers.
Back in our audit days, this step didn't take any time at all. We were somewhat familiar with the fraud indicators (they have been around in their current form since 1993 and in other forms before that. So, we simply initialed the workpaper indicating that we "considered" them, and moved on.
Hold a planning meeting with the audit team (e.g., RAM, Manager, Supervisor, Auditors) to discuss the risk of fraud and other noncompliances with applicable laws and regulations that could have a material effect on the assertion. The discussion should include relevant prior audit experience (e.g. questioned cost, relevant reported estimating or accounting system deficiencies), relevant aspects of the contractor's environment (e.g., the extent of incentives, pressures and opportunities to commit fraud and the propensity to rationalize misstatements), other know risk factors, and the audit team's understanding of relevant internal controls. The team should also review and discuss the general and other relevant sections of the IG Handbook on Fraud Indicators for Contractors as well as the relevant fraud indicators in CAM (the DCAA Contract Audit Manual).
Based on the team discussion and other risk assessment procedures the team should document in the working papers the risk factors/indicators identified and design audit procedures to meet the audit objectives and provide reasonable assurance of detecting fraud and other noncompliances with applicable laws and regulations that could have a material effect on the proposal (GAGAS 6.13(a)).
Its pretty obvious that the auditor cannot simply gloss over the step any longer. There has to be a meeting and a discussion and written documentation. This is why contractors are now seeing increased emphasis on the detection and prevention of fraud. Contractors should ask the DCAA auditor to share the results of its planning meetings.
By the way, this is not unique to Government auditing. Generally Accepted Auditing Standards (GAAS) requires the same level of consideration when it comes to financial statement auditing.
Our last update on employee compensation was back in July so its time for an update.
THE HOUSE: Back in July, the House passed the Fiscal Year 2014 National Defense Authorization Act. That bill included two measures impacting the Government's reimbursement of compensation.
For the top five executives at contractors receiving more than $500 million in contract awards the previous fiscal year (these are called "covered contractors"), no compensation will be allowable under Government contractors. That's correct, zero.
For everyone else, compensation is capped at $763 thousand but will be adjusted annually by changes in BLS's Employment Cost Index. This limit can be exceeded if the Secretary of Defense determines that greater increases for positions in science, technology, engineering, mathematics, medical and manufacturing fields are needed to ensure that DoD has continued access to needed skills and capabilities.
The 1988 NDAA limited the amount of contractor executive compensation allowable for reimbursement under federal contracts to a benchmark based on the median amount of compensation provided to senior executives in large U.S. corporations as calculated by the Office of Federal Procurement Policy (OFPP) - then $340,650.
Since that time, the cap has more than doubled to $763,029 for 2011 and 2012 , and is expected to increase to more than %950,000 in 2013. By contract, if the original cap had been adjusted for inflation it would now be only $487,325. The committee concludes that the growth of the cap by almost $300,000 more than the rate of inflation cannot be justified.
The Administration appreciates the intent of section 813 to reform the cap establishing the reimbursement limit on compensation for contractor employees. However, the Administration urges adoption of its proposal that would tie the cap to the President's salary; this approach is more cost-effective and would achieve a better result for taxpayers than the proposed approach of retaining a high cap based on a flawed formula for most employees while allowing no reimbursement for the contractor's highest paid executives. The Administration looks forward to working with the Congress on adoption of a fiscally responsible cap that ends excessive contractor payments in a fair and effective manner.
With all that's been going on in the Federal Government, sequestration, furloughs, Affordable Care Act, and a few scandals, the Senate has not yet taken the time to consider the 2014 NDAA. Senator Levin was recently quoted as saying they'll do that before year-end.
Why This New Audit Emphasis on Fraud?
Last September, we reported on DCAA's (Defense Contract Audit Agency) revised policy requiring auditors to question contractors about their knowledge of any fraud occurring at their firms. This policy is becoming highly controversial with some contractors refusing to disclose or discuss any such matters with the auditors. DCAA might be overreaching in this area and we expect the controversy to continue until either DCAA backs down or DoD makes it a DFARS (DoD FAR Supplement) requirement.
The purpose, means, and authority for making these queries is rooted in GAGAS (Generally Accepted Government Auditing Standards or the so-called "Yellow Book"), the DoD-IG's (Inspector General) implementing guidance on the Yellow Book, and DoD Instruction 7600.02, Audit Policies. The auditors are just trying to do their jobs in accordance with GAGAS. The DoD-IG is driving DCAA to improve documentation in this area and these new policies are simply the fallout from that oversight. From our perspective, observations, and interactions with contract auditors, there is not a higher level of mistrust or suspicions. It just seems that way because of these misguided policies.
include information on any potential fraud that might have a material impact on the audited subject matter in the report.
The auditor should design procedures to obtain reasonable assurance of detecting fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, and abuse that could materially affect the audit or examination.
The auditor must perform procedures when they find information or indicators that fraud may have occurred that could materially impact the subject matter under review. In those cases, the auditor should determine whether the fraud was likely to have occurred and, if so, determine the effect on the results of the engagement. GAGAS requires auditors to comply with any legal requirements to report known or likely fraud, noncompliance with provisions of laws, regulations, contracts, or grant agreements, or abuse directly to parties outside the audited entity.
DoDI 7600.02, paragraph 6.3 establishes the requirement that auditors shall refer to the appropriate investigative organization any indications of potential fraud or other criminal acts discovered while performing auditor work.
GSA Schedule Contracts - Teammate or Subcontractor?
Here's something of interest for businesses with GSA Schedule contracts. Many GSA Schedule contractors have subcontractors performing some of the work required under the contract. In some cases, these may be true contractors and in others, they take the form of Contractor Teaming Agreements (CTAs).
The GSA website states that under a CTA, each team member bills the Government based on its own GSA Schedule rates. Of course, that only works when both team members have GSA Schedule rates. If that is not the case, then the relationship must revert to a contractor/subcontractor relationship.
GSA advises that if a prime contractor/subcontractor relationship exists (rather than a CTA), the prime contractor should bill for services (i.e. labor) performed by subcontractors at the prime contractor's GSA Schedule rates, rather than at the subcontractor's rates. However, FAR 52.232-7(b)(4)(ii) (which most GSA Schedule contracts include) specifically limits the reimbursement of costs in connection with subcontracts to the amounts paid by the prime contractor. This contradiction causes uncertainty among contractors as to what rates should be used to reimburse the prime contractor for the effort of the subcontractor.
GSA Schedule contracts constitute acquisition of commercial items and are not subject to audit of contract performance. However, the inclusion of FAR 52.232-7, Payments under Time-and-Material and Labor-Hour contracts, does confer certain audit rights. Contractors with GSA Schedule contracts having a subcontract component, just might find themselves in a situation where the auditors come knocking. One of the first things the auditors will look at is the rates at which subcontractor services are being billed.
If you find yourself in this situation, we recommend that you obtain written authorization from your GSA contracting officer as to how subcontract services should be billed. An advance agreement would be even better. This will preclude later disagreements when the auditors come looking.
The Department of Defense published a final rule earlier this week regarding situations where they receive only one offer or proposal in response to a competitive solicitation. We don't know how often this happens but it must have occurred more than a few times for the Department to see the need for a regulation. You see, whenever the Government awards a contract, they need to ensure that the price is fair and reasonable. Its very difficult to make a fair and reasonable determination unless i) you have more than one qualified bidder or ii) you have other cost or pricing data, market analysis, or other types of evidence.
In the case of competitive awards, there is no requirement that offers submit cost or pricing data or certified cost or pricing data. Under the new regulation, if there is only one bidder, that bidder agrees to provide whatever cost or pricing data is requested by the contracting officer. If the sole bidder refuses to provide such data, the new regulation is clear that an award cannot be made to that bidder (unless the head of an agency determines that an award is in the best interest of the Government). That disqualification makes it unlikely that a contractor can adopt the "take it or leave it" position.
The new regulation has some exceptions for commercial items, prices set by law or regulation, items on a Federal Supply Schedule, and a few others.
Contractors (and prospective contractors) caught in this dilemma need to carefully consider whether they want to bear the added expense of providing certified cost or pricing data or are willing to have the Government poke around in their books and records, if they are not already accustomed to such oversight.
* With apologies to Sam the Sham and the Pharaohs.