Thought Leadership

5 Ways to Prep for the Audit While Preparing the Incurred Cost Proposal

5 Ways to Prep for the Audit While Preparing the Incurred Cost Proposal

Jennifer Rettelle, Director of Operations | Capital Edge Consulting, Inc.

The requirement to submit a final indirect cost rate proposal, more commonly referred to as the Incurred Cost Proposal or Incurred Cost Submission (ICS) is contained in FAR clause 52.216-7(d)(2)(i) – Allowable Cost and Payment which states: “The contractor shall submit an adequate final indirect cost rate proposal to the contracting officer (or cognizant federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.”

Are you ready for your incurred cost audit? One of the major historical audit challenges is the delay, sometimes many years, between timely submission under FAR 52.216-7 and the actual audit. DCAA is now required to audit adequate final indirect cost rate proposals within one year, but only time will tell if they can meet that lofty goal. To help eliminate the future audit risk, Capital Edge has identified five ways to start preparing for the audit, while preparing the current annual incurred cost submission.

Document, Document, Document!

This point cannot be stressed enough. The backlog in incurred cost audits only further solidifies the likelihood that the people preparing the Incurred Cost Submission may not be available to support an audit or the data needed to support the audit is difficult to find. The likelihood of an ICS audit year occurring years after submission has historically been high. Be sure to document as much as possible in a way that someone unfamiliar with your organization will understand since you may be long gone by the time an auditor shows up.

  • While preparing the current ICS or in the course of performing your regular duties, you may receive information which impacts future incurred cost submissions.

For example:

  • Do you have new intermediate cost pools this year (i.e. new fringe, IT, facilities, etc.)?
  • Did the basis for the allocation of any of your cost pools change?
  • Are you aware of potential changes to home office allocations which could impact the current fiscal year or future years?
  • Is your company still able to track all data metrics needed for allocation (i.e. number of user licenses, headcount, square footage, etc.)?

We recommend keeping a list of these items so that the preparer of the next incurred cost submission has a head start. Maintaining such a record can also expedite the timeline for incorporating these changes into current or future submissions and provide some, if not all, of the information needed to document the change(s) in preparation for an audit. In addition, these changes may likely be considered a change in cost accounting practice, which has other compliance implications for CAS covered contracts that we won’t delve into here.

  • Did the purpose of a specific account change from the prior year? Are the costs previously accumulated in one account now captured in multiple accounts? Did the purpose of a particular cost center or department change? Be sure to keep clear notes on these changes year after year, as they may prove invaluable during an audit.
  • Save yourself the headache of scrambling to answer an auditor’s questions and be sure to keep all files used in the preparation of the ICS in a storage repository that is shared with multiple people and is routinely backed up. Keep the file structure simple and organized so that someone who is less familiar with the process can find documentation needed to support an audit.
  • Keep the original source data, including the trial balance, project ledgers, 941s, Statement of Indirect Expenses, contract list, invoices, and all other information used to populate and calculate the final rates in the ICS. Having a single and organized place to find this data will save time, effort, and sanity when the auditor is asking questions.
  • Were any assumptions, adjustments, or other information used to prepare the ICS? Be sure to document all of these including any applicable rationale that was used. This information can go a long way to support costs that are questioned by an auditor.

Spread the Knowledge Wealth

We recommend that contractors are careful to spread the wealth of knowledge of the inner workings of their Incurred Cost Submission and preparation methodology with others in the finance or accounting department. Such steps will reduce the risk of substantial knowledge loss in the event employees with major roles in the ICS preparation process move on to other positions before the audit occurs.

Prepare all the Supplemental Schedules

Although supplemental schedules are not required to be included with the ICS for adequacy determination purposes, they will likely be some of the first items requested at the beginning of an audit. The process to complete these schedules is more efficient when completed as part of the original ICS preparation and can help identify items which may be questioned by an auditor.

In addition, some of the supplemental schedules have other valuable uses to the company and to the ICS preparation process. For example, the set of Supplement Schedule A’s can be used to evaluate the year after year change in costs by account.

Large fluctuations in costs identified in these schedules can indicate a preparation error in the ICS or simply changes in company spending. These schedules can be used by management to see what is driving the change in rates for a deeper understanding of their business and they can also be used to identify areas where DCAA may focus their audits, especially if certain high-risk accounts such as travel, executive compensation, legal, consulting, etc. have increased significantly year after year.

Keep a “Working Copy” and a “Final Submission” version of the ICS

We recommend maintaining two copies of the ICS when it is completed:

  • The “Working Copy” includes all links to supporting schedules and workpapers so that each value on every schedule is easily traceable. The details in the working copy will significantly reduce the time spent answering questions during an audit and will also help those new to preparing an ICS understand the source of the amounts claimed and how the rates are calculated.
  • The “Final Submission” version contains only the schedules required for submission and contains no supporting schedules or links to supporting schedules or source data. This is the file which is submitted to the government.

These two files should be marked as FINAL and WORKING COPY in the file name and stored in a properly labeled folder.

Understand Audit Expectations

Understanding the expectations of your auditor will help facilitate a working relationship during the course of the audit. An auditor is likely to expect a turnaround time of three days or less for documentation and answers to questions. It is critical to set a clear understanding with DCAA of when you will be able to provide data and set yourself up for success by under-promising and over-delivering. Additionally, be sure to take a look at the supporting data that DCAA typically reviews and be sure it can be available upon audit initiation.

For many contractors, the deadline for the next Incurred Cost Proposal is June 30th. We recommend getting started soon to be sure that you have adequate time to prepare the submission. Capital Edge has a wealth of resources available to support contractors with preparation and review of their ICS. Whether your organization is large, small, or somewhere in between, we can help take the stress out of this requirement.

The requirement to submit a final indirect cost rate proposal, more commonly referred to as the Incurred Cost Proposal or Incurred Cost Submission (ICS) is contained in FAR clause 52.216-7(d)(2)(i) – Allowable Cost and Payment which states: “The contractor shall submit an adequate final indirect cost rate proposal to the contracting officer (or cognizant federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.”

Are you ready for your incurred cost audit? One of the major historical audit challenges is the delay, sometimes many years, between timely submission under FAR 52.216-7 and the actual audit. DCAA is now required to audit adequate final indirect cost rate proposals within one year, but only time will tell if they can meet that lofty goal. To help eliminate the future audit risk, Capital Edge has identified five ways to start preparing for the audit, while preparing the current annual incurred cost submission.

Download your copy of 5 Ways to Prep for the Audit While Preparing the Incurred Cost Proposal below:

 

DCAA Audits of Government Contractor Business Systems

DCAA Audits of Government Contractor Business Systems – Key Risk Mitigation Strategies to Promote an Adequacy Determination

Craig Stetson, Partner | Capital Edge Consulting, Inc.

The Defense Contract Audit Agency (DCAA) recently indicated as a 2019 agency initiative a significant increase in their 2019 audit efforts around contractor business systems. The DCAA’s renewed focus on performing contractor business system audits, is largely the result of the DCAA’s recent reduction in its prior and long-standing backlog of incurred cost proposal audits. The DCAA is responsible for oversight of three of the six contractor business systems, including accounting, estimating, and material management and accounting. Under this 2019 initiative, the accounting system will be the primary focus with a planned audit activity of nearly 1,000 audits. Estimating and material management and accounting system audits also are planned to increase significantly from the 2018 activity, however, nothing near the planned accounting system amount noted prior.

The DCAA’s 2019 plan to significantly increase their audits of contractor business systems appears aggressive (considering the level of effort required to perform these audits and the level of available DCAA resources). Contractors should take seriously potential or pending business system audits by the DCAA as the consequences for a determination of inadequacy by the government may be significant and include – i) monetary withholds pursuant to DFARS clause 252.242-7005, ii) loss or delay of contract awards, iii) reduced proposal evaluation scores in accordance with solicitation evaluation criteria (for example, Request for Proposal Section M), iv) increased government oversight across multiple fronts, and v) government CPARS (Contractor Performance Assessment Reporting System) recording of detrimental past performance ratings.

The following five key strategies are critical risk mitigation measures to enhance the likelihood of the government determining contractors’ business systems adequate and reduce contractors’ related compliance risks.

 

1.Knowledge of Business System Requirements and DCAA Audit Objectives (Pre-audit phase)

The DCAA conducts business system audits utilizing specific standard audit programs and detailed audit guidance and procedures incorporated in their internal DCAA Contract Audit Manual (DCAM). The three business system specific standard audit programs and the DCAM are available for review on the DCAA website (www.dcaa.mil). The DCAA audit objectives, guidance, and corresponding procedures were developed for the purpose of a DCAA evaluation and corresponding audit opinion of a contractor’s compliance with the specific business system adequacy criteria incorporated in each of the applicable DFARS business system clauses – accounting (252.242-7006), estimating (252.215-7002), and material management and accounting (252.242-7004). A clean audit opinion will simply designate the contractor’s business system as adequate.

Contractors that do not perform under Department of Defense (DoD) contracts or do perform under DoD contracts not subject to the DFARS clauses noted above, are not contractually required to comply with the specific DFARS business system adequacy criteria. However, for business system audit purposes, the DCAA will nevertheless use these adequacy criteria as the baseline for their business system audit scope, objectives, and procedures. Simply stated, contractors are required to demonstrate and maintain compliance with the adequacy criteria and requirements of these clauses – whether or not the subject clauses actually are incorporated in contracts.

It is very important to understand the applicable audit scope, objectives and procedures that the DCAA will use to conduct their audit. Further, it is equally or more important for contractors to clearly identify and articulate their specific key internal controls that satisfy the corresponding audit objectives and procedures. Understanding the overall audit expectations and responsibilities, as well as existing internal business process capabilities will greatly assist with critical audit preparation, identification of required functional personnel, and gathering of applicable supporting information and documentation. Further, an adequate and working level understanding of the audit process should enhance its efficiency and effectiveness, while mitigating contractors’ compliance risk, potential misunderstandings with the DCAA and incorrect or inaccurate audit conclusions.

2. Due Diligence and Self-Assessment (Pre-audit phase)

Contractors are strongly encouraged to perform due diligence procedures in advance of a DCAA business system audit. The due diligence is commonly performed as an audit readiness measure and in the form of a business system self-assessment. This frequently is the most important aspect of the entire audit.

A meaningful self-assessment (mock audit) of a contractor’s business system entails a detailed analysis of the DCAA audit objectives and related business system adequacy criteria compared to the contractor’s current business system structure and capabilities. This two-phase (Phase I – adequacy of business system design; Phase II – business system operating effectiveness) gap analysis is critical for contractors to understand and identify potential compliance risks and areas of audit findings due to deficiencies noted related to the adequacy of the business system design and/or its operating effectiveness. A risk assessment approach may also be used where known elements of potential compliance risk may receive additional focus during the self-assessment.

The self-assessment approach and procedures should closely align with the actual DCAA audit. Contractors should utilize the DCAA audit program as a starting point for purposes of identifying required written documentation and existing key internal controls that will be required during the course of the audit. Another useful tool during the self-assessment phase are the business system specific internal control matrices. The DCAA created these matrices years ago and they provide a thorough analysis of the business system control objectives and anticipated DCAA audit procedures. These matrices are no longer posted on the DCAA’s website; however, are still around and are very useful for purposes of mapping written policy and procedure documentation and internal controls to the corresponding business system requirements and related control objectives. The overall self-assessment process should be clearly documented with i) an audit trail of the written internal control and business process mappings to the business system requirements (Phase I); and, ii) the scope and results of detailed transaction test plans or file reviews (Phase II). Deficiencies noted during the self-assessment should be reported to management and corrected and required and missing written policy and procedure documentation developed to demonstrate to the government that the contractor maintains an effective monitoring process as required in all the business systems.

Contractors should invest in the resources required to adequately perform the self-assessment and use the completed and documented self-assessment for business system demonstration purposes to the government.

3. Business System Demonstration (Audit planning and risk assessment phase)

The business system demonstration phase is another critical element of the overall audit process as it provides contractors an opportunity to communicate to the government the adequacy and operating effectiveness of their business systems. A well conducted demonstration should leave the government with a sense of confidence regarding a contractor’s overall state of compliance around the business system. This, in turn, may result in reduced audit scope or the government’s decision not to perform the audit at all, if the government determines the contractor to be low risk from an audit perspective.

During the demonstration, contractors should present a thorough overview of the applicable business system capabilities, relevant written policy and procedure documentation, key internal controls and business process flows. Furthermore, contractors should demonstrate effective and ongoing monitoring of programs as well as employee training requirements and initiatives.

Effective documents used during the demonstration should include:

  • An overview of the relevant business system written documentation; including policies, procedures, and process flows
  • A complete mapping of the contractor’s written internal controls and business processes to the DFARS business system clause requirements and the corresponding DCAA standard audit program (frequently included in and presented through a well documented internal control matrix)
  • Evidence of ongoing monitoring activities (transaction testing or file reviews) and corresponding corrective actions and reporting to management, as applicable

Contractors should invest in the time required to gather the critical documents to be used during the business system demonstration and allow adequate preparation to enhance the likelihood of an effective outcome.

4. Documentation and Access to Records (Audit fieldwork phase)

Sufficient documentation is the single most important factor for contractors to achieve an adequate business system determination from the government. Sufficient documentation comes in two forms – i) written internal controls and business processes (policies and procedures) and ii) audit evidence related to transaction testing or file reviews.

Use of electronic formats of original documents for record keeping and audit purposes is an acceptable procedure provided certain document imaging requirements are adhered to in accordance with Federal Acquisition Regulation (FAR) Part 4.

Contractors should maintain a complete list of requested and provided documents throughout the audit. This list should also describe, in adequate detail, the nature and content of what was requested and provided, who provided it, and when. Likely, this list would be maintained by the contractor’s designated internal point of contact. This procedure is important for obvious reasons, however, should during the course of the audit, the DCAA challenge the sufficiency or completeness of the documentation provided it will be helpful to review this list to demonstrate to the DCAA that the documentation was provided and is adequate. Additionally, a complete list of interviews or discussions between the government and contractor personnel should be maintained – again, likely by the internal point of contact.

Contractors should ensure during the due diligence and self-assessment phase that sufficient documentation exists to support an audit. Simple verbal acknowledgement during an audit that a procedure was performed, for example, likely will not be deemed as adequate to the DCAA and may result in adverse audit conclusions or noted deficiencies in the business system.

5. Communication Protocols (Pre-audit, audit, and post-audit phases)

A DCAA business system audit is frequently intense and of an extended duration. These audits may be active for a few months to more than one year. Effective communication is critical during these audits to minimize misunderstandings and inaccurate audit conclusions.

Unfavorable or inaccurate audit conclusions are frequently the result of poor communication between the DCAA and the contractor. To reduce the risk of information being  “lost in translation”, it is highly recommended that communication procedures and schedules (at least in a tentative sense) be developed where both parties can actively and effectively communicate audit objectives, challenges, progress and results. Participation in these communications and status briefings should be agreed upon up front and adhered to by both parties. The DCAA is required to conduct an entrance conference and are also encouraged to provide interim and exit conferences pursuant to their audit guidance (DCAM 4-300). If effective communication protocols are enacted, the likelihood of audit “surprise findings” should be greatly reduced or become nonexistent.

  • Entrance Conference – Contractors should insist on a thorough entrance conference to obtain an understanding of the audit objectives, scope and procedures; anticipated timeline; internal resources required; types of data and information required; and any foreseen challenges known at that time e.g., unavailable personnel, remote site access or visits, availability and retrieval of records, etc. The audit scope and focus areas should be clearly identified with discrete elements or items for which the DCAA will have access and the contractor responsibility to support.
  • Interim Conferences – Interim conferences are also very important as they provide an exchange of information between the DCAA and the contractor regarding progress of the audit, problems or challenges encountered, findings and issues, open items, and remaining effort and completion requirements. The DCAA should provide initial audit findings and contractors should be privy to the DCAA’s rationale to allow internal assessment as to the merit of the findings.
  • Exit Conference – Contractors should insist on a thorough exit conference to discuss and understand all audit findings. Contractor management and applicable functional personnel and the DCAA supervisor should attend the exit conference. Prior to the meeting, contractors should carefully review the draft report and seek clarifications or corrections as needed.

To reduce the risk of misunderstanding, misinterpretation, and memory loss it is very important to document all formal communications, status meetings, conferences, etc. This documentation should be developed by a single source within the contractor and summarized in a meeting minutes format and subsequently provided to all in attendance.

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Compliance Roundup – What Government Contractors Should Know – Compliance Updates to be aware of now and through 2018

Compliance Roundup – What Government Contractors Should Know – Compliance Updates to be aware of now and through 2018

Craig Stetson, Partner with Capital Edge Consulting, Inc.

Various federal agencies during the first half of 2018 have issued final and proposed rules or agency direction related to regulatory compliance requirements associated with U.S. federal government contracts. Specifically, the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA), the General Services Administration (GSA), and the Office of Federal Procurement Policy (OFPP) have all issued specific Agency rules pertaining to performance and compliance under government contracts.

Further discussion of recent and noteworthy government contract compliance requirements are summarized below.

  1. Cost Accounting Standards Exemption for Acquisition of Commercial Items

Synopsis – The OFPP, Cost Accounting Standards Board, issued a final rule July 17, 2018, effective August 16, 2018, clarifying that all contracts for the acquisition of commercial items are exempt from coverage under the Cost Accounting Standards (CAS). The final rule seeks to harmonize and eliminate inconsistencies regarding the specific types of commercial item contracts referenced in Federal Acquisition Regulation (FAR) 12.207 and 48 CFR 9903.201-1(b)(6). Key provisions of this final rule include:

  • Reference to include as commercial item time-and-material and labor-hour contracts in accordance with previous regulatory revisions;
  • Reference to include as commercial item certain firm fixed-price incentive (performance or delivery) contracts in accordance with previous regulatory provisions;
  • Acknowledgement, in response to public comments received regarding CAS applicability under hybrid and indefinite-delivery-indefinite-quantity type contracts, albeit outside the scope of this final rule-making process, by the CAS Board its intention to further review these contract types to determine if clarifying language is required for implementation into the CAS rules – (it’s about time).

Takeaway – Contractors should identify now outstanding proposals in response to solicitations received regarding acquisition of commercial items under any contract type meeting the FAR 12.207 commercial item definition. Solicitations containing any CAS clauses should be identified and addressed with the issuer of the solicitation for removal. Existing contracts awarded prior to August 16, 2018 will retain their CAS-coverage status at the time of initial award. Contracts awarded on or after August 16, 2018 are exempt.

  1. Cost Accounting Standards and Certified Cost or Pricing Data Thresholds

Synopsis – The DoD, GSA, and NASA separately issued agency class deviations on May 31, 2018, May 3, 2018, and July 1, 2018, respectively, directing agency contracting officers to use the $2,000,000 threshold as mandated by Section 811 of the National Defense Authorization Act (NDAA) for fiscal year 2018, in all applicable contracts awarded on or after July 1, 2018. Key provisions of these agency class deviations include:

  • Prime contracts awarded prior to July 1, 2018, remain at the prior threshold of $750,000;
  • Subcontracts awarded on or after July 1, 2018 under prime contracts awarded prior to July 1, 2018, remain at $750,000 however, the prime contractor must request from the government a contract modification to incorporate the FAR clauses that deal with subcontractor certified cost or pricing data requirements (52.215-12 or 52.215-13);
  • The $2,000,000 threshold also applies for CAS-coverage purposes, as pursuant to the OFPP June 14, 2007, final rule. The thresholds for both CAS-coverage and submission of certified cost or pricing data are the same.

Takeaway – Contractors should assess now potential purchasing system implications and subcontractor flow-down requirements resulting from the revised $2,000,000 threshold. When appropriate, prime contractors may seek contract modifications (contracts awarded prior to July 1, 2018) to incorporate the increased threshold applicable to future subcontract awards.

  1. Definition of Adequate Price Competition

Synopsis – The DoD, GSA, and NASA issued a proposed rule June 12, 2018, to amend the FAR at 15.403-1(c)(1) to add a separate standard redefining adequate price competition. The proposed revised definition, arising from Section 822 of the NDAA for fiscal year 2017, would apply to the DoD, GSA, and Coast Guard. Public comments were due August 13, 2018. Key provisions of this proposed rule include:

  • Elimination of the longstanding reasonable expectation standard;
  • For adequacy purposes – i.e., was there adequate price competition and thus, an exemption to submission of certified cost or pricing data? – at least two responsive and viable bids must be received;
  • If at least two responsive and viable bids are not received the competition is deemed not adequate and requires submission of certified cost or pricing data.

Takeaway – Contractors should be aware and ready to provide certified cost data related to price proposals that traditionally would be exempt in a public solicitation situation. That is, an additional layer of price and cost diligence may be prudent to avoid surprises when a specific contractor ends up as the sole offeror. Similar procedures may be necessary when analyzing subcontractor price proposals received to avoid potential downstream purchasing system deficiencies.

  1. Voluntary Disclosure of Post-Award Defective Pricing

Synopsis – The DoD issued a final rule May 4, 2018, effective same date, to amend the Defense Federal Acquisition Regulation Supplement (DFARS) at 215.407-1(c)(i) to eliminate the requirement that all contractor voluntary defective pricing disclosures are subject to audit. Rather, in the interests of promoting contractor voluntary disclosure, contracting officers now have discretion to seek a Defense Contract Audit Agency (DCAA) audit. Key provisions of this final rule include:

  • Requirement for contracting officers to discuss with the DCAA contractor voluntary defective pricing disclosures;
  • DCAA discussions shall focus on the completeness and accuracy of the contractor voluntary disclosure as well as the potential impact on other contracts, task, or delivery orders, and outstanding price proposals;
  • DCAA discussions may be used to determine the DCAA’s involvement including, a limited-scope audit, a full-scope audit, or technical assistance.

Takeaway – Contractors should assess and coordinate with legal counsel the nature of potential voluntary defective pricing matters. Attention should be focused on the type of cost(s) subject to the possible defective pricing disclosure as well as the relevant fact pattern(s) associated with the initial pricing.

Consideration of existing contractor – government relationships should be addressed to assess the likelihood of a favorable outcome.

  1. Miscellany

Synopsis – The DoD issued two class deviations during the second quarter – both effective on the date issued – and the OFPP revised the executive compensation limits:

  • Micro-purchase and Simplified Acquisition Thresholds (April 13, 2018)
    • Micro-purchase – generally $5,000; exceptions apply to limited situations;
    • Simplified acquisition – generally $250,000; exceptions apply to limited situations.
  • Contract close-outs (May 4, 2018)
    • Accelerated close-out of selected completed contracts entered into at least 17 years prior to the current fiscal year and not otherwise subject to traditional reconciliation procedures.
  • Executive compensation limits
    • Calendar year 2016 – $500,000
    • Calendar year 2017 – $512,000
    • Calendar year 2018 – $525,000

 

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12 Essentials to a Successful DCMA Contractor Purchasing System Review

12 Essentials to a Successful DCMA Contractor Purchasing System ReviewPDF Download for CECBy Stephen ‘Chase’ Kunk, J.D. – Vice President, Contracts & Procurement

The Defense Contract Management Agency (DCMA) has defined the Contractor Purchasing System Review (CPSR) Group’s mission – “Ensure that [Government] suppliers’ have purchasing systems in place that contribute to effective subcontract management. Effective subcontract management includes development of, as well as performance to internal policy and procedures, public law and adequacy of cost and prices analyses performed on subcontractors.” Consistent with this mission statement, the Federal Acquisition Regulation (FAR) CPSR objective in  Subpart 44.3, Contractors’ Purchasing System Reviews, states that the “objective of a contractor purchasing system review (CPSR) is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when subcontracting….”

Understanding DCMA’s CPSR mission and objective, contractors must realistically evaluate their current purchasing system. As part of this evaluation, contractors should use the primary authoritative regulations and DCMA guidance around the CPSR, including, without limitation:

  • DFARS 252.244-7001, Contractor Purchasing System Administration
  • FAR Subpart 44.3, Contractors’ Purchasing System Reviews
  • DCMA Instruction 109 – Contractor Purchasing System Reviews
  • DCMA CPSR Policies and Procedures Checklist
  • DCMA CPSR Guidebook

Capital Edge continually supports contractors through the CPSR process.  In doing so, we have identified 12 purchasing system essentials that every company must consider as they assess their system and prepare for their next CPSR.

  1. Document, Document, Document – Documentation is critical. This theme is a common thread throughout the CPSR, but everything starts with the purchasing policies and procedures. Not only do you have to comply with the FAR, DFARS, public laws and the expectations of the DCMA CPSR Policies and Procedures Checklist and Guidebook, but you also must make sure you actually do what you say you do.  Based on our experience, a lot easier said than done. Further, we estimate that at least 75% of the risk to the contractor in a CPSR is directly associated with what is in the procurement file – the existence and adequacy of the documentation.
  2. Compete, Compete, Compete – You must select subcontractors on a competitive basis to the maximum practical extent, consistent with the objectives and requirements of the contract. A systemic lack of competition, which can be a CPSR finding, only raises red flags and increases the CPSR Team’s scrutiny, potentially exposing you to a variety of consequential findings in a CPSR (e.g. insufficient file documentation, inadequate source justifications, price analyses and negotiation memoranda, and Truth-In-Negotiations Act and Cost Accounting Standards non-compliance).
  3. Increase your company’s competition metrics by documenting fair and reasonable price based on a competitive price analysis technique and avoid the risk of those consequential findings mentioned above (FAR 15.403-1(c)(1), FAR 15.404-1(b)(2) and FAR 44.303(b)).
  4. Support your single or sole source justifications with “valid” rationale, compelling evidence, and reasoning. The classic “directed by the PM or COTR” or emergency procurements resulting from your company’s failure to advance plan aren’t going to fly.
  5. Be cautious in how you employ (and document!) comparison to historical prices paid and competitively published pricelist techniques (FAR 15.404-1(b)(2)(ii) and (iv)). Comparing the subcontractor’s proposed price to historical prices paid by your company for the same or similar service or item provides the CPSR Team the opportunity to dig into the historical price paid files and poke at the validity of the basis of comparison. As for pricelist comparisons, be aware of the FAR 8.404(d) class deviation which has been adopted as a directive to not merely rely on a General Administration Services Schedule contract published prices as a comparison, but to instead engage in further, independent price analysis to determine price reasonableness.
  6. At a minimum, engage in and document price negotiations if your initial price analysis does not justifiably demonstrate fair and reasonable price. Further, in a non-competitive procurement, the CPSR Team historically expected you to conduct price negotiations as a means to further buttress the price reasonableness determination. It also helps if the processes utilized and the documentation generated aligns with what you say you do in Number 1 above!
  7. Develop, document and support your commercial item (and service) determinations based on the plain language in the FAR 2.101 Commercial Item definitions. Merely checking a box in a commercial item determination form followed by a conclusory statement of commerciality will not pass muster. Also, remain cognizant of the “technical analysis” expectations with “of a type” and minor modifications to commercial items.
  8. Successful purchasing systems have established internal procurement file compliance reviews, which are typically based on predetermined risk factors in pre-and-post award phases. If you can show DCMA you are monitoring the system effectively, identifying issues and implementing corrective actions, you immediately establish more credibility with the CPSR Team, while also improving your file documentation and complying with the DFARS internal review requirement.
  9. Train, Train, Train Your Staff! Train the new hires, the entire department and any other functional areas involved in the purchasing system annually. Hold recurrent training when your internal compliance reviews identify any issues. Also, hold training on changing regulations, laws and Government expectations related to your purchasing system. Knowledge is power. And remember – The ability to demonstrate occurrence of training is critical; therefore, retention of training records (e.g. training schedules, sign-in sheets, etc.) is essential.
  10. The former Excluded Parties List System (EPLS) pre-award 3-check approach is no longer acceptable to satisfy the FAR 52.209-6 debarment requirement. When applicable, ensure you are securing time of award debarment disclosures from the subcontractors . DCMA is accepting several options in documenting this time of award requirement.
  11. The procurement file should be the central repository for all procedural, FAR, DFARS and public law file documentation requirements. We’ve seen clients unknowingly violate a public law reporting requirement dozens of times when the failure to report and resultant violations could have been avoided had the procurement professional simply been required to retain record of the report in the procurement file.
  12. Contractors oftentimes get the CPSR off on the wrong foot because they are unable to provide accurate data and/or define the subcontract/purchase order universe in response to the CPSR Data Call. If you can’t identify reliable data and the proper universe of files for your response, it certainly doesn’t instill much confidence in the Government’s ability to rely on your system and increases their sensitivity during the review.  To the extent possible, make sure your system(s) is configured appropriately and robust enough to track, segregate and report the data required (e.g. award value, current value, contract and subcontract type, etc.) in the CPSR Data Call. Otherwise, you should expect to undertake a painful manual review and sorting of data generated within the CPSR Team’s aggressive response timeframe.

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Common Preparation Pitfalls with the Final Indirect Cost Rate Proposal

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Common Preparation Pitfalls with the Final Indirect Cost Rate Proposal

Each year, Capital Edge works with numerous companies either developing, assisting with, or reviewing their final indirect cost rate proposals. The requirement to submit a final indirect cost rate proposal, more commonly referred to as the “ Incurred Cost Proposal or Incurred Cost Submission (ICS) is contained in FAR clause 52.216-7(d)(2)(i) – Allowable Cost and Payment, which states, “The contractor shall submit an adequate final indirect cost rate proposal to the contracting officer (or cognizant federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.” Are you ready? Capital Edge has identified the major preparation pitfalls contractors face when developing their annual Incurred Cost Submission (ICS).

Getting a late start.  Depending on the size of the organization, incurred cost submissions may take a long time to prepare. If the submission is drafted in-house, the finance or accounting staff responsible with preparation have other daily and monthly responsibilities which require their attention in addition to this submission. Plan ahead and get an early start! Extra preparation time means more time to research issues or resolve challenges which may arise. Remember, the ICS requires input from various groups within an organization and is not a “pure” accounting and finance responsibility.

Using a format which does not reflect the FAR requirements or auditor expectations.  FAR 52.216-7(d)(2)(iii) specifically identifies all the information required. In addition, DCAA regularly updates their Incurred Cost Electronic (ICE) Model, as well as the Adequacy Checklist, and these items should be reviewed as part of the preparation process to ensure the submission will meet auditor expectations. Keep in mind that utilizing the “ICE” model is not required, but the content of the individual schedules are required by 52.216-7. The ICE model has a number of limitations related to the number of intermediate and final overhead pools that the model can support, so it is imperative that you understand whether your business may be too complex for ICE. We don’t like the model, but it may work well for you.

Not having current and accurate contract briefs.  Contract briefs identify items such as contract type, indirect rate caps, funding ceilings, or other contractual limitations that need to be accounted for in the submission. Briefs should be updated as contract modifications are issued which change funding, add CLINs, modify contract terms and conditions, etc.

Inaccurate identification of contract types.  Many contractors struggle with having full, accurate, and complete contract lists with accurate contract types. Contracts may be entered into the accounting system and identified with a contract type other than what the contract specifies due to accounting system limitations or unique contract requirements. Not having an accurate identification of contract type for each contract or task can cause numerous challenges when preparing the ICS, including the misidentification of contracts in the actual submission.

Incorrect contract billings.  Contractors sometimes realize that a contract or task has been billed incorrectly. For example, when a cost-reimbursable contract is billed as a time-and-material contract, or cost reimbursement CLINs within FFP contracts are not appropriately identified. These types of errors cause major headaches when preparing the ICS and can lead to large over/under billings and/or additional audits. Properly identifying the contract type in a contract billing brief, contracts list, and the accounting system is essential. Most important, getting an early start provides adequate time to resolve these issues rather than trying to make these decisions at the last minute.

Identifying and removing unallowable costs.  Unallowable costs need to be excluded from claimed costs in the ICS and that is, in fact, the intent of the certification ensuring you have excluded all expressly unallowable costs. Explanatory notes should be utilized to reference the specific FAR clause which is applicable (31.205 – Selected Costs) and special care should be given to review accounts considered high-risk for inclusion of expressly unallowable costs that would be subject to Penalties under the provisions of FAR 42.709 Penalties for Unallowable Cost.

Involving key players too late in the process.  To provide timely information required for submission, it is important to involve key players early in the preparation process. For example, contracts/subcontracts personnel are routinely tasked with providing information on subcontract agreements very late in the preparation process, which oftentimes leaves contractors scrambling to finalize the proposal.

Performing a thorough review.  Each ICS should receive a thorough review ideally by individuals not directly involved in the detailed preparation. This review should include checking all formulas, links, ensuring the costs captured reconcile to the trial balance, and that the final submission complies with DCAA’s adequacy checklist.

Maintaining supporting documentation and work papers.  Preparation of the Incurred Cost Submission often requires input from various personnel across a wide range of functional areas. Employee turnover and the lapse of time between submission and audit can often lead to gaps in information and historical knowledge required to support claimed costs during an audit. Whenever possible, we recommend creating a repository for work papers and supporting documentation to memorialize knowledge gained during preparation of the submission and to assist in meeting the requirements of FAR 31.201-2(d) Determining Allowability.

For many contractors, the deadline for the next Incurred Cost Proposal is June 30th. We recommend getting started soon, to be sure that you have adequate time to prepare the submission. Capital Edge has a wealth of resources available to support contractors with preparation and review of their ICS. Whether your organization is large, small, or somewhere in between, we can help take the stress out of this requirement.

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FY 2018 NDAA – House Section 874 (Engrossed)

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FY 2018 NDAA – House Section 874 (Engrossed)

Craig Stetson, Managing Director, CPA & Paul M. Bailey, Managing Director, CPA | Capital Edge Consulting, Inc. 

The House version of the National Defense Authorization Act (NDAA) for fiscal year 2018 contains a provision (Section 874) to repeal contractors’ ability to utilize commercial auditors for purposes of auditing their annual incurred cost proposals.  Specifically, Section 874 of the 2018 NDAA would strike in its entirety subsection (f) of Section 820 of the 2017 NDAA previously passed by Congress and signed by the President.

Subsection (f) states:

“(f) Section 820 Auditing Requirements.—(1)   Notwithstanding any other provision of law, contractors with the Department of Defense may present, and the Defense Contract Audit Agency shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if—

            “(A) the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs of the contractor; and

            “(B) such audit was performed using relevant commercial accounting standards (such as Generally Accepted Accounting Principles) and relevant commercial auditing standards established by the commercial auditing industry for the relevant accounting period.

“(2) The Defense Contract Audit Agency may audit direct costs of Department of Defense cost contracts and shall rely on commercial audits of indirect costs without performing additional audits, except that in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, the Defense Contract Audit Agency may audit both direct and indirect costs.”

Section 820 of the 2017 NDAA is simply the law formed by the Act.  No implementing regulations, proposed rules, public comments or other industry experience is currently available to allow an objective assessment of the effectiveness of accomplishing the intent of Section 820.  Therefore, it doesn’t appear prudent to repeal this provision prior to its implementation, or, at a minimum, the issuance of applicable proposed rules and review of corresponding public comments.

Section 874 was added to the 2018 HASC NDAA (Engrossed) version on July 14th subsequent to publishing the July 6th version and Report by House Committee:

Floor # 058, Rules # 368 offered by Mr. Conaway of Texas (R).  Revised Repeals subsection 190(f) of title 10, United States Code, to ensure a consistent approach is used to determine when qualified private auditors should conduct incurred cost audits for Department of Defense contracts.   Floor action, EB3 Adopted, Voice Vote.

It is unfortunate that Section 874 strikes the third-party auditing of incurred cost proposals to the detriment of the DoD.  Section 820 was set to take effect on October 1, 2018, whereas Section 802 of the FY 2018 NDAA will not take effect until October 1, 2019.  There is no benefit of audit consistency, audit oversight or reduction of incurred cost audit backlog realized by striking Section 820:

  • Section 874 would remove an important reform added in the FY 2017 NDAA, a reform that allowed predominantly commercial companies to rely on third-party auditors for their incurred cost audits.
  • Section 874, unfortunately, strips away the common-sense authority allowing predominantly commercial contractors to use third-party auditors to opine on their incurred cost proposals. Section 802 of the FY 2018 NDAA does not add back this ability of commercial contractors to engage third-party auditors in opining on and clearing the incurred cost backlog.  This would represent a serious expansion of unnecessary bureaucratic requirements imposed on commercial contractors compared to existing law – just at a time when the Pentagon professes a desire to do more business with commercial companies.
  • Section 802 is not inconsistent with Section 820. Section 802 as reported by the HASC would build upon the provisions of Section 820, allowing the Defense Contract Management Agency to now rely on audits from qualified public auditors for those companies not covered by the FY 2017 provision.
  • By repealing Section 820, DCAA resources are constrained with smaller commercial contractors and audits that would otherwise allow DCAA to focus on larger contractors and forward pricing audits where they declare higher value returns.

The implementing regulation for Section 802 will take time to develop.  Valuable knowledge and experience would be gained from Section 820 incurred cost audits in defining the criteria for which DoD will outsource audits and conduct oversight.  There has not been any outreach, public comment period or input from the AICPA on implementing Section 820.  We believe it is premature to strike this FY 2017 NDAA provision prior to evaluating its effectiveness in reducing incurred cost audit backlog and increasing the quality and efficiency of audits performed by the DoD.

Further, implementing regulation for Section 820 as contemplated by the 114th Congress would facilitate public comment, industry association and AICPA participation in crafting regulation for Section 802.  We recommend the elimination of Section 874 of the FY 2018 NDAA during the reconciliation process.

Industry associations have drafted language and position papers seeking to dissuade the politicians from furthering this initiative to eliminate Section 820, subsection (f) language noted above through the 2018 NDAA.  However, with a focus on the budget and major weapons programs, Section 874 and its negative impact may be overlooked.  Contractors and interested parties may want to support these initiatives as effective implementation of the intent of the 2017 NDAA Section 820 could be beneficial to both government and industry.  We would urge those who desire to retain Section 820 as written and strike the House Section 874 to contact a Member of the reconciliation committee and express their views:

Senate: McCain; Inhofe; Wicker; Fischer; Cotton; Rounds; Ernst; Tillis; Sullivan; Perdue; Cruz; Graham; Sasse; Strange; Reed; Nelson; McCaskill; Shaheen; Gillibrand; Blumenthal; Donnelly; Hirono; Kaine; King; Heinrich; Warren; Peters

House: Committee on Armed Services for consideration of the House bill and the Senate amendment, and modifications committed to conference: Thornberry, Wilson (SC), LoBiondo, Bishop (UT), Turner, Rogers (AL), Franks (AZ), Shuster, Conaway, Lamborn, Wittman, Coffman, Hartzler, Scott, Austin, Cook, Stefanik, Knight, Bacon, Smith (WA), Brady (PA), Davis (CA), Langevin, Larsen (WA), Cooper, Bordallo, Courtney, Tsongas, Garamendi, Speier, Veasey, and Gabbar

 

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FY 2018 NDAA – Title VIII — Acquisition Policy, Acquisition Management, and Related Matters

FY 2018 NDAA – Title VIII — Acquisition Policy, Acquisition Management, and Related MattersPDF Download for CEC

by Craig Stetson, Managing Director, CPA | Capital Edge Consulting, Inc.

December 12, 2017 President Trump signed the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2018. This signed legislation contains several notable provisions to introduce new or modify existing U.S. federal government contracting compliance requirements. Summarized below are some of the pertinent compliance requirements anticipated for change in the near term:

Performance of Incurred Cost Audits (SEC. 803) – Directs the Department of Defense (DoD) to use qualified private auditors to perform a sufficient number of incurred cost audits to eliminate by October 1, 2020 any backlog of such audits of the Defense Contract Audit Agency (DCAA), and complete audits no later than one year from receipt of a qualified incurred cost proposal. Further provisions and DoD directions include:

  • Submission by October 1, 2018 to congressional defense committees a plan to implement the audit requirements noted above, including an update to the plan by October 1, 2019;
  • Award not later than October 1, 2019 contracts or task orders under existing contracts to two or more qualified, private auditors to perform the incurred cost audits;
  • Submission by October 1, 2019 to congressional defense committees a report on proposed numeric materiality standards to be used in conjunction with performance of the incurred cost audits, including prior coordination with the private auditor and Section 809 advisory panel to establish the standards;
  • Implementation by October 1, 2020 of numeric materiality standards consistent with “commercially accepted standards of risk and materiality”; and
  • Submission by October 1, 2019 to the committees on Armed Services of the Senate and House of Representatives an update on the process of selecting a commercial auditor to perform peer reviews of the DCAA in conjunction with the DCAA’s issuance of unqualified (clean) audit opinions, effective October 1, 2022.

Repeal of Certain Auditing Requirements (SEC. 804) – Strikes the FY 2017 NDAA language allowing contractors to select their private auditors. Private auditors under the FY 2018 NDAA SEC. 803 requirements are to be selected by the DoD.

Increased Simplified Acquisition Threshold (SEC. 805) – Increases the simplified acquisition threshold to $250,000. No effective date was noted.

Modifications to Cost or Pricing Data and Reporting Requirements (SEC. 811) – Increases the truthful cost or pricing data threshold to $2,000,000 applicable to contracts awarded on or after July 1, 2018.

Also of note, the Cost Accounting Standards (CAS) threshold will as well increase to $2,000,000 as the CAS threshold self-executes to mirror the Truth in Negotiations Act (TINA) threshold as implemented by a 2011 Office of Federal Procurement Policy interim rule.

Enhanced Post-Award Debriefing Rights (SEC. 818) – Provides enhanced rights to offerors (successful and unsuccessful) regarding a post-award debriefing process, including:

  • Disclosure of the agency’s written Source Selection Award determination for contract awards greater than $100,000,000 (redacted to protect confidential information);
  • Disclosure of the agency’s written Source Selection Award determination for contract awards greater than $10,000,000 and not greater than $100,000,000 (redacted to protect confidential information) and made to a small business or nontraditional contractor; and
  • A written or oral debriefing for all contract awards and task or delivery orders valued at $10,000,000 or higher.

Change to Definition of Subcontract in Certain Circumstances (SEC. 820) – Changes the definition of a subcontract to exclude “commodities that are intended for use in the performance of multiple contracts with the Federal Government and other parties and are not identifiable to any particular contract”.

Prohibition on use of Lowest Price Technically Acceptable Source Selection Process for Major Defense Acquisition Programs (SEC. 832) – Prohibits the use of lowest price technically acceptable source selection processes for the engineering and manufacturing development of a major defense acquisition program applicable to programs for which budgetary authority is requested for FY 2019 or subsequent FYs.

Other Transaction Authority for Certain Prototype Projects (SEC. 864) – Increases the threshold to $500,000,000 for certain other Transaction Authority Prototypes. No effective date was noted.

Of the selected FY 2018 NDAA provisions noted above, SECs. 803 and 804 have been and remain the most controversial and present the greatest amount of questions. The use of third-party auditors for performance of audits for the DoD that traditionally are performed by the DCAA has been discussed for a few years and in various means, including prior NDAAs and DoD Proposed Rules and the April 2017 industry and DCAA testimony in front of the House Armed Services Committee.  Contractors should follow the development of forthcoming implementing rules (proposed, interim, or final) to stay informed on the proposed mechanics to address the SEC. 803 requirements. Initial questions that need to be addressed in the implementing rules include:

  • What is a qualified incurred cost proposal and will it differ from established adequacy criteria currently used by the DCAA (proposal adequacy checklist)?
  • Who makes the determination that a proposal is qualified?
  • Will a risk-based audit approach be utilized to recognize low-risk or low dollar value incurred cost proposals?
  • What numeric materiality standards will be developed?
  • Will the selected private auditors be sufficiently knowledgeable in pertinent government contract and cost allowability compliance requirements?
  • How will the one-year audit completion requirement align with the current six-year statute of limitations and related time-barred outcomes? Will audits not completed within one year be time barred?

Other provisions noted above that appear favorable to the industry include SEC. 811, which significantly raises both the TINA and CAS thresholds – thereby reducing overall audit and compliance risk. SEC. 818 adds requirements to allow offerors greater visibility into the government’s source selection procedures and decisions – potentially improving and adding efficiency to the bid protest process. And SEC. 820 also narrows the definition of a subcontract – potentially reducing the number of contractors’, vendors, or supply chain partners from traditional flow down requirements and inclusion in the corresponding contractor purchasing system review universe.

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FY 2018 NDAA Change to Procurement Thresholds

FY 2018 NDAA Change to Procurement ThresholdsPDF Download for CEC

By Paul M. Bailey, CPA, Managing Director and S. Chase Kunk, J.D., Vice President, Contracts & Procurement

On December 12, 2017, the 2018 National Defense Authorization Act (NDAA) was signed into law by President Trump. Title VIII of the NDAA contains many provisions designed to reduce burdensome regulation and improve the procurement process. Section 805, 806, and 811 would increase the Micro-Purchase Threshold (MPT) from $3,500 to $10,000, Simplified Acquisition Threshold (SAT) from $150,000 to $250,000, and Truthful Cost or Pricing Data (aka “TINA”) threshold from $750,000 to $2,000,000. The Cost Accounting Standards (CAS) threshold for contract awards would also increase to $2,000,000 since it is tied to the TINA threshold.

The implementation dates are an important consideration for contractors to maintain compliance with both their Estimating and Purchasing Systems. No date has been established for the MPT or SAT change, and while Congress established July 1, 2018, as the date for the increase in the TINA threshold, the NDAA is not self-implementing. Before the thresholds change/increase, the provisions in the NDAA must be implemented by Regulation.

Implementing Requirements

The FAR Council and Defense Procurement and Acquisition Policy (DPAP) have opened cases to increase the procurement thresholds. A report on the proposed increase to TINA is due to the Defense Acquisition Regulatory Council (DARC) by March 21, 2018.  Following the DARC report, 41 USC § 1707 requires a 60-day public comment period in the Federal Register before an amendment or modification to a regulation can take effect. To further manage expectations across industry, it is worth noting there are open FAR and DFARS cases from over two years ago associated with public laws that have not been effectuated in regulation.

Under President Trump’s Executive Order 13771, Reducing Regulation and Controlling Regulatory Costs, the Office of Information and Regulatory Affairs (OIRA) will need to determine if the amended regulation is significant and subject to the “two-for-one rule” and subsequently value the savings using its new “perpetual time horizon” model. OIRA has up to 90 days to approve/disapprove the proposed regulation. So, an increase to the TINA, SAT, and MPT thresholds could very likely extend sometime beyond July 1, 2018.

All of this could be upended with the issuance of a FAR/DFARS class deviation, or expedited OIRA action as increases in the procurement thresholds may be seen as beneficial to both industry and the government. In the meantime, contractors should continue to follow the promulgated regulation and lower thresholds.

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Q1: Executive Actions and Regulatory Compliance Requirements Update

Quarterly Update – Executive Actions and Regulatory Compliance RequirementsPDF Download for CEC

Craig Stetson, Managing Director | Capital Edge Consulting | March 2017 

The government has issued several rules (final, interim, and proposed) within the last few months, related to a variety of regulatory compliance requirements associated with U.S. federal government contracts. The Federal Acquisition Regulation Council (FAR Council) – defined to include the Department of Defense (DoD), the National Aeronautics and Space Administration (NASA), and the General Services Administration (GSA), issued the majority of these rules. The Department of Homeland Security (DHS), the Small Business Administration (SBA), and the DoD issued rules as well. Lastly, the new administration has issued executive actions that may directly affect government contractors.

Further discussion of recent and noteworthy government contract compliance requirements and guidance items are summarized below.

  1. Freeze on Regulations

Synopsis – The Office of the Press Secretary for the White House issued January 20, 2017 a memorandum to heads of executive agencies and departments directing the freeze of regulations not already in effect as of January 20, 2017. The purpose of this executive action is to provide the new administration time to review the previously published regulations. Regulations arising from court ordered or statutory sources are not subject to this memorandum.

Key provisions of this memorandum include:

  • A 60-day suspension (from January 20th) of published regulations not yet in effect
  • The withdrawal of regulations submitted to the Federal Register that have not yet been published
  • The prohibition of submitting new regulations to the Federal Register, except for matters related to emergencies or urgent situations

Takeaway – It is too early to tell the effect of this directive on contractors as the outcome of these previously proposed regulations is unknown. Subsequent to the 60-day suspension, the applicable regulations may go into effect as is or be subject to further review or possible rescindment. Several regulations proposed towards the end of the previous administration were made effective January 19, 2017 – one day before the freeze was directed. Those regulations are not affected by this memorandum.

  1. Two-for-one

Synopsis – The President issued January 30, 2017 an executive order directing the elimination of two existing regulations for every new regulation proposed or issued. Further, agencies were directed to ensure there would be zero incremental cost.

Key provisions of this executive order include:

  • Applicability only to executive branch agencies – 15 total, including DoD, DOE, HHS, DOT, and DHS
  • Provision for exemptions pertaining to regulations required by law and relating to military, national security, or foreign service
  • Guidance is to be issued by the director of the Office of Management and Budget to address the administration and practical mechanics of implementation, including calculation and measurement of the intended savings

Takeaway – It is too early to tell the effect of this directive on contractors as the implementation and outcome of this executive order is unknown. Also, some of the more relevant provisions are vague or not defined at all, e.g., what regulations actually are or will be included in the military, national security, or foreign service exemption. Regulations typically produce favorable or unfavorable consequences and administrative requirements on contractors. As such, the ultimate effect of the two-for-one order may be good or bad depending on the effect of the related rule and its applicability to certain types of contractors.

  1. Fair Pay and Safe Workplaces

Synopsis – The FAR Council issued a final rule December 16, 2016, effective immediately, which implements a Texas court issued preliminary injunction banning most of the original requirements mandated in the executive order. Further, the House of Representatives and Senate voted in February 2017 and March 2017, respectively, in favor of repealing the initial executive order. As Congress has voted to repeal the prior executive order, all that remains to complete its elimination is signature by the president.

Key provisions of this final rule include:

  • Reference to Federal Acquisition Regulatory Council October 25, 2016 memorandum issued to the Chief Acquisition Officers, Senior Procurement Executives, Defense Acquisition Regulations Council, and Civilian Agency Acquisition Council directing development of processes to ensure new solicitations do not contain representations or clauses that would have enforced the enjoined rule, including FAR 52.222-57, FAR 52.222-58, FAR 52.222.59, FAR 52.222-61, and FAR 52.212-3(s)
  • The requirement to remove from and amend prior solicitations released containing the above FAR references
  • A directive restricting the government from taking any action on information that may have been previously submitted by offerors

 Takeaway – Contractors should review recent and future solicitations to ensure such representations or clauses are not included. If such representations or clauses are included in solicitations, request the contracting officer to have them removed.

  1. Privacy Training

Synopsis – The FAR Council issued a final rule December 20, 2016, effective January 19, 2017, requiring contractor employees who have access to personally identifiable information (PII) to receive specific training, both an initial and an annual refresher, to protect the PII under applicable privacy laws. This rule applies to solicitations under the simplified acquisition threshold (currently $150,000) as well as commercial items, including commercially available off-the-shelf (COTS).

Key provisions of this final rule include:

  • Two new FAR references – Subpart 24.3; 52.224-3
  • The requirement for specific elements of training, including – Privacy Act provisions and corresponding penalties, appropriate handling and safeguarding of PII, system or equipment restrictions, and procedures to be followed in the event of a breach
  • The option to choose sources that provide the training, unless government provided training is required
  • The requirement to flow down to applicable subcontractors
  • The requirement to document that applicable employees have received the required training

Takeaway – Contractors should assess current training programs and develop plans or curriculums to address these requirements as well as establish adequate documentation to demonstrate who received what type of training and when. Further, contractors will need to monitor applicability of this final rule across supply chains.

  1. Confidentiality Agreements

Synopsis – The FAR Council issued a final rule January 13, 2017, effective January 19, 2017, prohibiting federal dollars from going to companies that require employees or subcontractors to sign internal confidentiality agreements that restrict employees from reporting suspected waste, fraud, and abuse to the government. This rule applies to solicitations under the simplified acquisition threshold (currently $150,000) as well as commercial items, including COTS. Starting January 19, 2017, this final rule will apply to all solicitations and contracts using fiscal year 2015 funds and subsequent fiscal year funds. Further, contracts existing prior to January 19, 2017 will require modification if these contracts are funded using fiscal year 2015 and beyond funding.

Key provisions of this final rule include:

  • Two new FAR references – 52.203-18(d) and 52.203-19(b)
  • The requirement that offerors on federal contracts certify that they do not utilize such agreements (prospective representation)
  • The requirement to flow down to applicable subcontractors

Takeaway – Contractors should carefully review existing agreements subject to employee, subcontractor, or independent contractor signature to ensure these restrictions do not exist as the real-life effect could be loss of future awards. Further, contractors will need to monitor the applicability of this final rule across supply chains.

  1. Congressional Investigations

Synopsis – The FAR Council issued a final rule January 13, 2017, effective immediately, amending the cost principles to now include as unallowable costs, the costs associated with contractors’ dealings relating to congressional investigations, or inquiries.

Key provisions of this final rule include:

  • New FAR reference – 31.205-47(f)(9)
  • A clarification that GAO investigations or inquiries are outside this specific provision, i.e., 31.205-47(f)(9)
  • A clarification that the investigation or inquiry must be a known event – versus an event that may occur

Takeaway – Contractors should now identify and segregate costs associated with applicable congressional investigations or inquiries. These costs will need to be excluded from applicable billings, cost representations or pricing proposals to the government pending the outcome of the matter.

  1. Late or Reduced Payments to Small Business Subcontractors

Synopsis – The FAR Council issued a final rule December 20, 2016, effective January 19, 2017, requiring prime contractors to report any “untimely” or “reduced” payments made to their small-business subcontractors. Additionally, this final rule requires contracting officers to document for past performance evaluation purposes contractors with a history – defined as a minimum of three reported instances over a 12-month period under a single contract – of late or reduced payments to subcontractors. This rule applies to all prime contracts that require a small business subcontracting plan (currently greater than $700,000 or $1,500,000 for public facility construction).

Key provisions of this final rule include:

  • Several revised FAR references – 52.242-5, 52.212-5, 52.219-9, 42.1502(g), and 19.704
  • The requirement for contractors to report to the ACO within 14 days (FAR 52.242-5)
  • “Untimely” is defined to mean greater than 90 days past due under the terms of payment
  • “Reduced” is defined to mean less than the amount agreed upon
  • The requirement for small business subcontracting plans to contain language regarding assurances to pay the subcontractor as well as notify the government (FAR 52.219-9)

Takeaway – Contractors should assess current supply chain administration and management processes to avoid payment related issues with small business subcontractors. Repeated offenses may negatively affect past performance evaluations and risk future award opportunities.

  1. Lower Tier Subcontracts

Synopsis – The SBA issued a final rule December 23, 2016, effective January 23, 2017, allowing other than small prime contractors (large businesses) to receive small business subcontracting credit for awards made to small businesses at any tier. Small business subcontracting plans are currently required on contracts greater than $700,000 or $1,500,000 for public facility construction.

Key provisions of this final rule include:

  • Applicability to other than small business prime contractors that maintain individual subcontracting plans under prime executive agency contracts
  • The requirement for the prime contractor’s large business subcontractors to include in their small business subcontracting plans the small business subcontracts awarded at a lower tier level
  • The requirement for the applicable size standard to appear in the solicitation for the subcontract
  • The requirement for prime contractors to monitor their subcontractors’ compliance and reporting related to their subcontractor small business subcontracting plans

Takeaway – The government has a recent and increased focus on the inclusion of small businesses of all forms in the federal procurement process. Prime contractors may now have greater ability to meet small business subcontracting goals by receiving credit for small business awards throughout the supply chain and should ensure this data is captured accurately for purposes of documenting if overall goals were met.

  1. Paid Sick Leave

Synopsis – The FAR Council issued an interim rule December 16, 2016, effective January 1, 2017, requiring contractors to provide paid sick leave to eligible employees under covered contracts. This rule applies to solicitations or contracts subject to Construction Wage Rate Requirements or Service Contract Labor Standards statutes, where work is to be performed, in whole or in part, in the United States.

Key provisions of this interim rule include:

  • Two new FAR references – Subpart 22.21; 52.222-62
  • The requirement for contractors to provide a minimum of 56 hours of paid sick leave per year
  • The choice to accrue sick leave hours as earned throughout the fiscal year or provide on a lump sum basis at the beginning of the fiscal year
  • A provision for potential consequences to nonconforming contractors, including suspension, debarment, or termination for default

Takeaway – Adverse cost impacts may arise under applicable contracts covered under the cost accounting standards (CAS) as a change in cost accounting practice may be required to account for these costs. Increased costs associated with applicable CAS-covered contracts may be recoverable through the request for equitable adjustment process as the potential change in cost accounting practice should be deemed by the government as a mandatory change or considered to be costs incurred for the first time, as both allow for the government to pay increased costs under applicable CAS-covered contracts affected by the change in cost accounting practice. Contractors should assess if a change in cost accounting practice is required and notify the contracting officer.

  1. Bid Evaluation for Independent Research and Development (IR&D)

Synopsis – The DoD issued a proposed rule November 4, 2016 seeking to include contractors’ IR&D expenses as an element of the overall evaluated price under competitive procurements. The proposed rule would apply to major defense acquisition programs and major automated information system programs, defined at 10 U.S.C. 2430 and 10 U.S.C. 2445(a), respectively. The subject IR&D expenses would represent ”substantial” (undefined in the proposed rule) expenses to be incurred in future years. The objective of this proposed rule stems from the government’s Better Buying Power 3.0 initiative and seeks to ensure that substantial future IR&D expenses are evaluated in a uniform way during a competitive source selection process. Contracts for the purchase of commercial items, including COTS, are exempt from this rule.

Key provisions of this proposed rule include:

  • New DFARS reference – 215-70XX, Notification of Inclusion of Evaluation Criteria for Reliance Upon Future Government-Reimbursed Independent Research and Development Investments
  • A mandate that contracting officer upward adjustments to contractors’ proposed prices are for evaluation purposes only
  • The requirement that offerors include with their proposals an amount representing future IR&D investments

Takeaway – It is unclear how proposed rules will proceed considering the current freeze on regulations by the new administration. A fair amount of controversy among industry has developed as future IR&D activity (a good thing for both the government and industry) is now potentially an opposing factor to competitive position and the probability of award for selected procurements. Contractors should review future IR&D activities and initiatives to assess potential effects to their pricing schemes and competitive positions.

  1. Cyber Requirements

Synopsis – The DHS issued three proposed rules January 16, 2017 expanding cyber and privacy requirements under DHS contracts. The proposed rules address; i) expanded safeguarding and handling of controlled unclassified information (CII); ii) training associated with protection of personally identifiable information (PII), and iii) standardization of IT awareness training.

Key provisions of these proposed rules include:

  • CII – expanded contractor requirements related to information handling, incident response and other reporting requirements
  • PII – similar to the recently issued final rule by the FAR Council, this DHS rule requires contractors to receive privacy training and maintain related documentation
  • IT awareness – requires completion of IT awareness training and signing of a Rules of Behavior agreement
  • The requirement to flow down to applicable subcontractors

Takeaway – It is unclear how proposed rules will proceed considering the current freeze on regulations by the new administration. Implementation of these proposed rules is expected to require potentially significant contractor investment and resources to design or revise systems to address these new requirements (especially CII). Hence, a significant amount of public comments are expected. The opportunity to leverage from existing recent FAR Council rules regarding privacy may exist

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CPSR 360: Part Two–Newsworthy CPSR Updates

CPSR 360: Two-Part Series – Part Two –Newsworthy CPSR UpdatesPDF Download for CEC

By: Chase Kunk, Vice President, Contracts & Procurement and Michael Carter, Senior Consultant

In December 2016, we released CPSR 360: Part One – Insights from Our Recent CPSR Experiences, which outlined several high-risk procurement file documentation areas we continue to see are a challenge for contractors. As expected, DCMA CPSR teams have been detecting these same documentation noncompliances in their reviews, capturing these deficiencies in CPSR Reports and ultimately triggering DCMA-issued corrective action requests to contractors.

In Part Two, we are exploring some noteworthy changes out of DCMA’s CPSR Group. These changes have been implemented throughout calendar year 2016, with some being revisited and refined by DCMA, and affect all contractors who may be subject to a CPSR.

 

  1. DCMA CPSR Guidebook

The DCMA CPSR Guidebook is a valuable reference document which provides the reader with detailed background on the CPSR process and delves into the CPSR requirements levied upon contractors. DCMA made multiple updates to the guidebook throughout calendar year 2016–including in April, May, July, October, and most recently on November 30, 2016. The primary purpose of these recent updates is to add appendices, commonly known as “Job Aids”, which summarize the CPSR Group’s expectations and approach to evaluating a contractor’s policy, procedure, practice, and documentation relative to each CPSR requirement. Keep an eye out for additional updates to the guidebook–job aids have not been published for all CPSR requirements and additional updates are anticipated. The current guidebook is available at DCMA’s homepage.

  1. DCMA Policies and Procedures Checklist

The DCMA Policies and Procedures Checklist is an Excel-based document that the assigned CPSR team lead provides the contractor and must be completed and returned prior to the onsite CPSR. Essentially, this checklist outlines the policies and procedures the CPSR Group expects the contractor to maintain. The contractor completes the checklist by cross-walking the CPSR requirement to the contractor’s specific policy and procedure addressing that requirement. Historically, there have been many versions of this checklist floating around in and outside of the Government with each version containing some differing requirements. Good news–from what we are seeing, there is now a single substantive checklist currently in use across the DCMA CPSR Group. The current checklist now contains 29 requirements while 32 requirements were present in the checklist for much of calendar year 2016. With that said, this checklist still does not describe the elements that must be addressed within each policy and procedure to be determined adequate by DCMA. Please contact Capital Edge for a copy of the current checklist.

  1. DCMA CPSR Report

After the onsite CPSR is completed, the CPSR team lead generates a CPSR Report and issues the report to the Administrative Contracting Officer (ACO). The CPSR Group has updated the report template most recently in the last quarter of calendar year 2016. One of the major changes to the CPSR process, and the report, is the reduction and/or consolidation of the CPSR requirements. Similar to the aforementioned policy and procedure checklist, there are now 29 CPSR requirements listed in the report while 34 requirements were present in the report for much of calendar year 2016. As a point of comparison, CPSR reports issued by DCMA in late calendar year 2015-early 2016 contained over 40 requirements.

So what has changed in the report in the last few months? It now includes the section titled “Source Selection” which consolidates the previous sections titled “Competition”, “Sole Source Selection Justification”, and “Best Value.. Further, the report removed “Vendor Rating System” as a standalone section but is now captured as part of the “Supply Chain Management” section.

  1. Handling of Deficiencies (Level II vs. Level III Corrective Action Requests)

In early calendar year 2016, the DCMA CPSR Group formally adopted a significant change to how deficiencies are managed and by whom. Prior to January of 2016, all deficiencies contained in the CPSR Report and the associated Corrective Action Requests (CARs) were handled by the cognizant ACO. Further, all contractor responses (i.e. Corrective Action Plans [CAP]) were reviewed and approved or rejected by the cognizant ACO, and validation that the CAP had been implemented effectively was performed by the ACO and supported by CPSR teams as needed.

Starting in calendar year 2016, all Level II deficiencies (i.e. those that may not rise to the level of “significant”) are now managed by the assigned CPSR Team Lead. After discussions with the ACO, the CPSR Team Lead issues all Level II CARs to the contractor, reviews the contractor’s CAP in response to the CAR(s), accepts or rejects the CAP, and is supported by the ACO’s FAR Part 44-based surveillance to ensure the CAP was successfully implemented. Level III CARs remain the responsibility of the ACO and the CPSR Team Lead supports the ACO in determining the adequacy of the CAP provided in response to a Level III CAR. Of course, when needed, the CPSR Group will perform “follow-up” reviews to validate that the CAP has been implemented effectively to resolve the deficiencies previously identified. Notwithstanding, the ACO remains the cognizant agency official charged with approving or disapproving the system under the DFARS business system rules.

Over the last 12 months, we have seen this new process unfold and it seems to benefit both the Government and the contractor.

  1. CPSR Dollar Threshold Increase

 FAR 44.302(a) establishes the $25M threshold by which the ACO is required to determine whether a CPSR is “needed” for the contractor. The $25M threshold has been in play since the mid-1990s. It is our understanding that, on October 7, 2016, DCMA Director, Lt. Gen. Masiello, signed a memorandum titled “DCMA Class Deviation for Raising the CPSR Threshold”, thereby authorizing the increase of the threshold from $25M to $50M within DCMA. It is also our understanding that the increase was justified based on several considerations including inflation, the Better Buying Power 3.0 directive, and ultimately, a risk analysis performed by the Government. DCMA would like to see the acquisition regulation councils (CAAC and DARC) formally amend FAR 44.302 with the $50M threshold. As DCMA implements this change, we wait with baited breath while some initial questions come to mind:

  • How, if at all, does this affect contractors currently on the CPSR schedule?
  • Will the number of CPSRs performed by DCMA decrease prospectively?
  • Will the CPSR Group’s analysis of purchasing systems change as a result of a smaller pool of contractors subject to CPSRs?
  • Is there a concern that millions of dollars are spent by contractors who fall below the $50M threshold, yet their purchasing systems are likely not to be reviewed until sometime after the threshold is triggered?
  • Will the acquisition regulation councils approve the proposed threshold increase and update FAR 44.302?
  • Will contractors who currently have an approved system but subsequently fall below the $50M threshold continue to be evaluated every three-to-five years? If not, will those contractors retain their approved status indefinitely?

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