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Report to Congress on FY 2018 Activities Defense Contract Audit Agency U.S. Department of Defense Released
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NEWS:  The Defense Contract Audit Agency’s  – DCAA – Fiscal Year 2018 Annual Report to Congress, as required by 10 U.S.C. §2313a has been released

DCAA Summary:

This report highlights DCAA’s audit performance, recommendations to improve the audit process, industry outreach activities, and key accomplishments.

As a result of DCAA audits, contract officials saved $3.2 billion in defense spending last year—significant savings that can be reinvested in our warfighters or go back to the treasury.

We examined nearly $409 billion in defense contractor costs, identified over $9.6 billion of audit exceptions across 3,717 audit reports, and supported Contracting Officers with other valuable products and services to help them ensure fair and reasonable contract prices.

Additionally, we continued to improve communication and coordination with our acquisition partners, resulting in responsive approaches that met their needs and timelines.

In FY 2018, DCAA successfully eliminated the incurred cost backlog. This was a significant undertaking by the entire workforce resulting in 8,482 incurred cost years closed with a total dollar value of $392.2 billion.

We also worked with DCMA and industry to lay the groundwork for the use of Independent Private Accountants to conduct select incurred cost audits.

We feel we have laid a solid foundation in this area to ensure they will be prepared and successful. We look forward to continuing this coordination. Our vision, Every audit or service we deliver is on time, on point, and highly valued is demonstrated by our workforce every day. I look forward to working with Congress and other stakeholders to achieve the vision for acquisition reform. I am proud of our workforce and our ability to deliver outstanding audit products and services to the Department in FY 2018.

 

 

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

PDF Download for CEC5 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:

 

GAO Release: Recommendation to monitor and ensure contractor business system reviews are conducted in a timely fashion.

CONTRACTOR BUSINESS SYSTEMS: DOD Needs Better Information to Monitor and Assess Review Process

GAO-19-212: Published: Feb 7, 2019. Publicly Released: Feb 7, 2019.

The U.S. Government Accountability Office (GAO) is an independent, nonpartisan agency that works for Congress. Often called the “congressional watchdog,” GAO examines how taxpayer dollars are spent and provides Congress and federal agencies with objective, reliable information to help the government save money and work more efficiently.

We have written a few times recently on the matter of government contractor business systems.  The government’s (DCAA and DCMA) review of the six contractor business systems is expected to rise significantly in the near term based on information we have received from the DCAA and DCMA.  This GAO report released today adds further reality to this renewed focus on contractor business system reviews.

Contractors are encouraged to take the time and make the investment now to perform proper due diligence to ready themselves for these government reviews.

Fast Facts

The Department of Defense uses data from contractors’ business systems—e.g., accounting or purchasing systems—to guard against fraud, waste, and abuse in DOD contracts. For example, reviewing data from a contractor’s accounting system can help keep the contractor from overcharging.

DOD must review contractors’ business systems to ensure that the data from them can be used. We’ve previously found that it was years behind on some of these reviews.

DOD has an ambitious plan to catch up on these reviews in 3 years but has no way to measure its progress. We recommended that DOD monitor and assess whether it’s completing these reviews as planned.

GAO Findings

Since 2011, the Department of Defense (DOD) has implemented several changes to its processes for reviewing contractor business systems—which include systems such as accounting, estimating, and purchasing. Among other changes, DOD clarified the roles and responsibilities of the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA)—the two agencies that are responsible for conducting the reviews; clarified timeframes for business system reviews and established criteria for business systems; and withheld payments from contractors that were found to have significant deficiencies in their business systems.

DOD does not have a mechanism to monitor and ensure that these reviews are being conducted in a timely manner. For its part, DCAA has conducted few business system audits since 2013, as it focused its efforts on other types of audits. DCAA plans to significantly increase the number of business system audits over the next 4 years, but its success in doing so depends on its ability to shift resources from other audits; to use public accounting firms to conduct other, non-business system audits; and DCAA staff’s ability to execute new audit plans in a timely manner.

GAO Chart Businss System Audit

DCMA relies on the three offices responsible for conducting DCMA-led reviews to manage the reviews, but DCMA does not formally monitor whether these reviews are being conducted consistent with policy nor does it monitor DCAA’s efforts to complete the audits for which it is responsible. DCMA is ultimately responsible for approving a contractor’s business systems. DCMA currently lacks a mechanism based on relevant and reliable information, such as the number of reviews that are outstanding and the resources available to conduct such reviews, to ensure reviews are being completed in a timely fashion. Such information could help inform more strategic oversight on whether the current review process is achieving its intended results, or whether additional changes to the timing of or criteria for conducting reviews are needed.

Why GAO Did This Study

Contractor business systems produce critical data that contracting officers use to help negotiate and manage defense contracts. These systems and their related internal controls act as important safeguards against fraud, waste, and abuse of federal funding. Federal and defense acquisition regulations and DOD policies require that DOD take steps to review the adequacy of certain business systems, but GAO and other oversight entities have raised questions about the sufficiency and consistency of DOD’s review process.

The National Defense Authorization Act for Fiscal Year 2018 contained a provision for GAO to evaluate how DOD implemented legislation intended to improve its business system review process. Among other things, this report examines (1) the changes DOD made to its review process and (2) the extent to which DOD is ensuring timely business system reviews.

GAO analyzed DOD acquisition regulations, policies, and procedures for conducting contractor business system reviews and analyzed data on reviews conducted between fiscal years 2013 and 2018.

Read more on this 

 

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.

Download your copy of Key Risk Mitigation Strategies to Promote an Adequacy Determination below:

 

DoD Class Deviation Issued On Use of Fixed-Price Contracts

SUMMARY: Award of cost-reimbursement contracts exceeding $50M now requires the head of contracting activity approval. Further, this threshold decreases to $25M applicable to contracts awarded on or after October 1, 2019. We would expect further guidance on the implementation as related to options, mods, IDIQ TOs / DOs, etc.

SUBJECT: Class Deviation-Use of Fixed-Price Contracts Effective immediately. contracting officers shall first consider the use of fixed-price contracts. including fixed-price incentive contracts. in the determination of contract type and shall not award the following cost-type contracts unless the contract is approved by the head of the contracting activity:

• Cost-reimbursement contracts in excess of $50 million to be awarded after October I. 2018, and before October l, 2019. • Cost-reimbursement contracts in excess of $25 million to be awarded on or after
October l. 2019.

DETAILS: This class deviation implements section 829 of the National Defense Authorization Act for Fiscal Year 2017 (Pub. L. 114-328). which directs establishment of a preference for fixed­price contracts, including fixed-price incentive contracts. in the determination of contract type and establishes the requirement for higher-level approval for certain cost-type contracts. The Under Secretary of Defense for Acquisition and Sustainment has determined that the use of cost-type contracts is approved for research and development valued in excess of $25
million. if the contracting officer executes a written determination that the level of program risk does not permit realistic pricing and it is not possible to provide an equitable and sensible allocation of program risk between the Government and the contractor. 

Read more: https://lnkd.in/gPm4aYY

 

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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FY 2018 NDAA – House Section 874 (Engrossed)

PDF Download for CEC

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

 

Get your copy of FY 2018 NDAA – House Section 874: Download below!

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.

Read more: get your copy of FY 2018 NDAA Change to Procurement Thresholds: Download below!

DoD issues a final rule relating to commercial item acquisitions

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

DoD issued a final rule, published and effective today, January 31, 2018 to implement sections of the National Defense Authorization Act for Fiscal Years 2013, 2016 and 2018 relating to commercial item acquisitions.

About the proposed rule:

The DoD published a proposed rule in the Federal Register on August 11, 2016, to provide guidance to contracting officers for making price reasonableness determinations, promote consistency in making commercial item determinations, and expand opportunities for nontraditional defense contractors to do business with the DoD.

The final rule amends the DFARS to provide additional guidance to contracting officers and additional details on the types of ‘‘other than certified cost or pricing data’’ that offerors should include in their proposal for the purpose of determining whether proposed prices for commercial items are fair and reasonable.

Who does this affect?

This rule will apply to contractors that compete for contracts being awarded using FAR Part 15 Negotiation procedures that are valued at $750,000 or more.

Overview of the rule:

The final rule prescribes the use of a new DFARS provision 252.215–7010, to be used in lieu of FAR provision 52.215–20, Requirements for Certified Cost or Pricing Data and Data Other Than Certified Cost or Pricing Data. The new DFARS provision includes the existing requirement under FAR provision 52.215–20 for offerors to submit certified cost and pricing data and data other than certified cost or pricing data, as appropriate; further, the new DFARS provision implements a statutory exemption to the requirement for ‘‘certified cost or pricing data’’ for nontraditional defense contractors.

Finally, the rule advises contracting officers that they may presume that a prior commercial item determination made by another DoD component shall serve as a determination for subsequent procurements of such items, unless the contracting officer obtains a determination from the head of the contracting activity that the item is not commercial and the basis for that decision.

The DoD guidebooks

The DoD guidebooks for Commercial Item Determinations (Part A) and Commercial Item Pricing (Part B) were expected to be released concurrent with this final rule. The guidebooks were subject to extensive comments from industry and associations. The final rule indicates these guidebooks will be finalized to provide further guidance to contracting officers.

Executive Order 13771 & Cost Analysis

The final rule is considered to be a deregulatory action and therefore not subject to E.O. 13771, Reducing Regulation and Controlling Regulatory Costs. DoD has estimated the cost savings for this rule which can be accessed at www.regulations.gov, DFARS Case 2016–D006, Supporting Documents. An estimate of hours to prepare Cost or Pricing Data by business type is provided.

More on this rule:

The final rule, including discussion commentary may be accessed at: https://www.gpo.gov/fdsys/pkg/FR-2018-01-31/pdf/2018-01781.pdf?

#DFARS #DoD #NDAA #Commercial_Item_Determinations #Defense _Contractor

Evaluating the Defense Contract Auditing Process

The Director of the DCAA and selected industry representatives testified April 6th in front of the House Armed Services Committee regarding the current state of the DoD contract auditing process, i.e., the DCAA.  Not surprisingly, the views of the DCAA and industry were quite opposing based on a read of the written testimony.  A high-level synopsis of the testimony is as follows:

DCAA

  • Significant focus on the reduction of the incurred cost backlog (about 30% of the written testimony)
  • Primary focus on ROI for Agency performance evaluation purposes
  • Staunch resistance to certain acquisition reform initiatives (use of third-party auditors and CPA requirement for GS-14 level managers)

Industry

  • Return to traditional definition of the DCAA mission, roles and responsibilities – advisors to the acquisition community, not debt collectors, independence not isolation, collaborative not unilateral
  • Broader use of DCAA auditors to address other audit areas valuable to the overall acquisition process
  • Movement away from ROI as the primary focus on measurement of DCAA success
  • Change in auditor behavior to better apply GAGAS principles, including determination of materiality or significance and use of professional judgment
  • Staunch support for use of third-party auditors to compliment the overall contract auditing process

The perspectives of the DCAA and industry are quite different.  The DCAA’s view on the audit quality was narrow and opposed efforts to employ outside reform initiatives that may benefit the acquisition process overall – including the DCAA audit process.  Industry views were broader and addressed several aspects of the overall acquisition and audit processes that, from a holistic approach, may streamline federal procurements and provide better value to both government and contractors.

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