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MEMORANDUM FOR REGIONAL DIRECTORS: Audit Guidance on Using Materiality in Incurred Cost Audits

Newly released MRD: materiality thresholds in conjunction with incurred cost proposal audits. This is new, i.e., objective calculations for materiality determinations, and is the result of 2018 NDAA provisions. 

The revised audit program and CAM Chapter 6 are not clear – but lean towards the exclusion of amounts under the threshold from the application of audit procedures.  However, these same amounts may nevertheless be included based on consideration of qualitative risk factors or history.

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This memorandum establishes audit policy for applying materiality in incurred cost audits. The newly implemented materiality guidance applies to incurred cost audits that are initiated after the date of this memorandum, and can be found at CAM 6-107. The incurred cost audit programs have also been updated to reflect the materiality guidance. The new guidance will ensure materiality concepts are consistently applied across the Agency.

Background

The policy complies with Section 803 of the fiscal year (FY) 2018 National Defense Authorization Act (NDAA), which requires the Agency to adopt commercially accepted standards of materiality for incurred cost audits.

Calculating the Quantitative Materiality Threshold

The use of a quantified materiality threshold is intended to facilitate a consistent approach that helps an auditor determine the nature, timing, and extent of audit procedures on those cost elements and accounts that are significant, or material, to the audit opinion.

To calculate the quantitative materiality threshold, the auditor should first determine the total subject matter of audit. The total subject matter of audit represents the information on which the auditor provides an opinion (i.e., assurance). The total subject matter of audit is generally Auditable Dollar Volume (ADV), plus amounts associated with assist audits (see CAM 6-107.2 for additional consideration when determining the total subject matter of audit).

The auditor should then calculate quantified materiality using one of the following formulas:

For Incurred Cost Proposal Audit Subject Matter from $1 to $1,000,000,000 use the following formula:

  • Materiality Threshold = $5,000 x ((Total Subject Matter / $100,000) .75)

For Incurred Cost Proposal Audit Subject Matter greater than $1,000,000,000 use the following formula:

  • Materiality Threshold percentage of 0.50 percent

SUBJECT: Audit Guidance on Using Materiality in Incurred Cost Audits 2

Note: when entering the formula in Microsoft Excel, the quantified materiality formula for an audit with a $1,000,000 total subject matter of audit appears as follows:

=5,000*((1,000,000/100,000)^.75)

The quantified materiality threshold in this example is $28,117. See the enclosure for a worksheet that demonstrates the quantified materiality calculation above.

The following table depicts quantified materiality thresholds (both dollar amounts and percentages) at various subject matter amounts:

Quantified Materiality Thresholds for Incurred Cost Audits

Chart Audit Guidance on Using Materiality in Incurred Cost Audits

Calculating Adjusted Materiality

Materiality requires the use of two separate thresholds: quantified materiality to identify significant cost elements, and adjusted materiality to identify significant accounts recorded in the significant cost elements. Adjusted materiality is less than quantified materiality and is applied to accounts within a cost element. For purposes of selecting accounts for audit testing, adjusted materiality can be stated as a reduction of the quantified materiality threshold by 20 percent to 80 percent based on auditor judgment.

Other Considerations

It is important to remember to use professional judgment when applying materiality concepts. Materiality considers both qualitative factors (e.g., customer concerns, prior findings, etc.) and quantitative factors. The relative importance of qualitative and quantitative factors when considering materiality in a particular engagement is a matter of the auditor’s professional judgment. The auditor should document the justification for deviating from the numeric materiality thresholds.

Available Training

DCAI and Policy developed a new E-Learning Course, AUD112E – Materiality in Audits of Incurred Costs, which became available July 19, 2019. All auditors should take the course prior to beginning an incurred cost audit. Policy is working with DCAI to ensure that other course materials are updated accordingly.

Additional Questions

FAO personnel with questions regarding this memorandum should contact their regional or CAD offices. Regional/CAD personnel with questions regarding this memorandum should contact to Auditing Standards Division, at (703) 767-3274, or by e-mail to DCAA-PAS@dcaa.mil.

To read this MRD online visit: https://www.dcaa.mil/content/Documents/mmr/19-PAS-003.pdf

 

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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2018 Government Contract Accounting and Regulatory Update October 17-18, 2018

The Capital Edge Team invites you to the 2 for 1 Registration – 2018 Government Contract Accounting and Regulatory Update October 17-18. Register online and bring a colleague free. Reference promo code 2FOR1ARU2018. 

October 17-18, 2018
The Westin Washington D.C. City Center
Washington, DC
$495 for two registrations!!!!
*Register now and bring a colleague at no charge. Reference promo code 2FOR1ARU2018. 

A professional seminar on government contractor finance management, contracting accounting and audit issue year in review and outlook.

This 1.5-day conference will address the emerging issues related to government contract finance, accounting, compliance, and regulations.  You will have the opportunity to hear from leading financial executives, Defense Contract Audit Agency representatives, Defense Contract Management Agency representatives, practicing attorneys and consultants. Topics will include:

  • Cost, accounting, pricing, estimate audit and regulatory issues
  • Update on Section 809 Panel related to CAS
  • Cybersecurity regulations – current state and how companies address the compliance strategies
  • M&A and due diligence
  • Government contract ERP issues
  • Legal issues and case law updates (CAS, cost allowability, statute of limitation, and more)
  • DCMA review update
  • Third party audits
  • Federal Supply Schedule (GSA Schedule) update
  • DCAA Matters (presented by representatives from DCAA HQ)
  • and much more.

Who Should Attend?
This seminar is intended for professionals from large, medium and small government contractors, financial and consulting organizations, federal agencies and non-profits:

  • CFOs/CEOs/Presidents
  • VPs of Finance, Accounting, Compliance
  • Directors of Finance, Compliance, Business
  • Development, Procurement & Acquisitions
  • Financial Analysts & Accounting Professionals
  • Legal Professionals

The 2018 Government Contract Accounting and Regulatory Update is co-chaired and sponsored by Capital Edge Consulting.

Capital Edge consultants combine their unique backgrounds and experience in consulting, public accounting, industry, and DCAA to provide you with unmatched government contracting expertise. Learn more at capitaledgeconsulting.com.

 

GovCon Compliance Outlook: Sponsored Lunch and Learn Series

Join the Capital Edge Consulting GovCon Experts for the JAMIS Software sponsored GovCon Lunch and Learn Series.

Participants will explore current regulatory updates and challenges confronting government contractors.

With a new year and administration, come new opportunities as well as challenges. In the government contract regulatory compliance environment, transparency of the contracting process has gained considerable importance and visibility. Join Industry experts from Capital Edge Consulting, Inc. as they review the compliance changes and obstacles that could directly affect government contractors’ compliance programs which may impact multiple areas of the business, including:

  • Cost accounting and allocation practices
  • Determination of allowable costs
  • Estimating and pricing practices
  • Business systems documentation and internal controls
  • Purchasing and supply chain management practices
  • Contract administration and financial reporting practices

This Seminar is intended for professionals in the areas of: 

  • Accounting or Finance
  • Compliance or Internal Audit
  • Program or Contract Management
  • In-house Counsel

Following the compliance and regulatory update, will be a live demo of JAMIS Prime ERP. During this demo, you will learn more about a system designed specifically for service-based government contractors. Prime ERP is proven to help even the most complex organizations comply with the time-consuming process of a DCAA audit.

Agenda

  • Complimentary Lunch
  • Introductions
  • Compliance Overview
  • JAMIS Prime ERP Demo
  • Q&A
  • Closing Remarks

Register for one of the JAMIS Software upcoming events by clicking the links below:

This seminar is part of an ongoing Lunch & Learn series provided to you by JAMIS Software and is eligible for CPE credits. 

JAMIS Software Partners with Capital Edge Consulting to Bring Complimentary GovCon Lunch and Learn Events to the Greater Boston and New York Areas

JAMIS Software and Capital Edge Consulting partner to bring Federal Contracting lunch and learn series to the greater Boston and New York areas on May 23 and 25

The May lunch and learn series will explore current DCAA audit updates and regulatory changes directly affecting the government contracting industry. Attendees will receive a complimentary lunch, while they hear from industry experts and sit in on an educational discussion of recent legislative, regulatory and DCAA audit guidance actions affecting compliance. Upon completion of this seminar, all participants will be eligible to earn CPE credits.

Managing Director at Capital Edge Consulting, Inc., Bill Keating will be presenting at the May events in Boston and New York.

Bill’s areas of expertise include the Cost Accounting Standards (CAS), Federal Acquisition Regulations (FAR), agency supplement regulations, contractor accounting, purchasing, estimating, MMAS and EVM Business Systems, Truth in Negotiations Act, government accounting requirements, incurred cost submissions (ICS), DCAA Audits support and preparation, other regulatory non-compliance support, terminations, requests for equitable adjustment (REA), ERP systems and risk mitigation.

Seminar participants will also have an opportunity network with each other and learn more about an ERP system designed specifically for service-based government contractors and federally funded not-for-profit enterprises. JAMIS Prime ERP system is proven to help even the most complex organizations comply with the time-consuming process of a DCAA audit.

“Establishing best-of-breed business practices and processes requires a highly specialized and productive software,” said Steve Brander, VP of Sales and Business Development, JAMIS Software. “Our goal is to educate attendees on the complexities of DCAA requirements and provide them with a solution that will ensure they can conquer an audit with ease.”

JAMIS’s lunch and learn events are hosted across the country and explore a wide variety of educational topics as well as provide expert insights into the government contracting industry best practices. Additionally, these events will provide networking opportunities for attendees and a chance to talk directly with industry experts. To learn more about lunch and learn events coming to your area, visit our website at: https://jamis.com/govcon-events/

About Capital Edge Consulting

Capital Edge Consulting combines unique backgrounds and experience in consulting, public accounting, industry, DCAA and DCMA to provide clients with unmatched government contracting expertise. This breadth of specialized experience enables them to provide the exact services and level of expertise federal government contractors need to succeed. Capital Edge Consulting provides custom-tailored consulting solutions to government contractors ranging in size from startup to Fortune 100 companies in industries such as manufacturing, nuclear energy, professional services, biotech/pharmaceuticals, defense, and information technology. To learn more about Capital Edge Consulting, please visit: http://www.CapitalEdgeConsulting.com

About JAMIS Software Corporation
JAMIS Software Corporation is a leading provider of ERP software solutions designed specifically for government contractors and other project-focused organizations. JAMIS delivers comprehensive, intuitive, innovative, and cost-effective solutions for the most respected names in government contracting. Companies large and small rely on JAMIS to provide detailed visibility into all of their projects, as well as provide the foundation for DCAA and other regulatory compliance. JAMIS helps companies connect with customers, partners, and employees in entirely new ways to foster new levels of collaboration and drive profitability and growth.

To learn more about JAMIS, visit JAMIS.com

Report-10 Fastest Growing Areas in Government Contracting

Leading commerce intelligence in business-to-government (B2G) Onvia, released the third edition of its annual “10 Hotspots in Government Contracting” research ranking the fastest areas of growth in government contracting.

Key Drivers: Efficiency, Safety, Functionality and Compliance Stimulate Demand

Within the dynamic $2 trillion B2G marketplace, spending from state, local and education (SLED) agencies reaches around $1.5 trillion annually – providing tremendous opportunity for vendors in a diverse range of industries to grow their public sector sales. As Onvia’s research reveals, the fastest growing Hotspots in government contracting for 2017 include:

  • Growing school bus services
  • Providing clean water
  • Serving those with disabilities
  • Preparing sites for construction
  • Strengthening disaster services
  • Upgrading to smart lighting
  • Enabling government with IT
  • Expanding connectivity
  • Innovating education
  • Improving medical equipment

These purchasing areas are representative of the diverse sectors in which government agencies choose to invest their money. Purchasing decisions driving growth in each of this year’s segments were found to be influenced by the following common themes:

  • Efficiency: Government decision-makers are focused on saving money and improving processes
  • Safety: Public safety concerns are a key driver of demand
  • Functionality: Taxpayers and buyers are looking for more features and functionality
  • Compliance: Rules and standards are driving contracts and affecting what is purchased
  • Opportunity: Small to mid-size businesses, as well as large enterprise vendors all have a significant opportunity in government

This year’s results reveal the current mentality of government buyers,” said B2G Market Analyst Paul Irby. “It’s simply a myth that public procurement professionals are motivated to only award the lowest bidder. With a better understanding of buyer needs, motivations and purchasing habits, vendors can set their firm up to earn more revenue from government contracts.”

The 2017 Hotspots in Government Contracting Offer a Wide Range of Opportunity

This report equips readers with useful insights for each Hotspot including the context and background driving growth, year-over-year growth analysis in published bids and RFPs and analysis on which states publish the most competitive contracting opportunities.

Looking at more than 4,000 unique industry tags, the analysis uses data from Onvia’s B2GIS to reveal the 10 fastest growing areas in B2G so marketplace participants can gain a better understanding of what’s driving government buying decisions in 2017.

Request a complimentary copy of the report here.

CPSR 360: Part One of a Two-Part Series 

CPSR 360: Two-Part Series  –  Part One – Insights from Our Recent CPSR ExperiencesPDF Download for CEC

Part Two (Coming Soon!) – Other Newsworthy CPSR Updates

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

The Defense Contract Management Agency’s (DCMA) Contractor Purchasing System Review (CPSR) Group continues to remain highly active in their ongoing pursuit of evaluating the efficiency and effectiveness of contractors’ purchasing practices, and compliance with applicable laws, regulations and contract requirements. According to DCMA, the CPSR Group scheduled 134 CPSRs in the government fiscal year 2015 (ending September 30) and completed 121. In October 2016, DCMA released the following list of the most common areas of purchasing system deficiencies (based on DCMA-issued CPSR Reports) from fiscal year 2015:

  • Debarment
  • Payments to Influence
  • Price Analysis
  • Defense Priority and Allocation System (DPAS)
  • Flow Downs
  • Sole Source Selection Justification
  • Policy and Procedure Manual
  • Documentation
  • Truthful Cost or Pricing Data (formerly known as TINA)
  • Negotiations
  • Cost Accounting Standards
  • Internal Reviews

In government fiscal year 2016 (just ended on September 30), DCMA scheduled 133 CPSRs and completed 126. Although DCMA has not published the most common purchasing system areas of deficiencies from fiscal year 2016, this article summarizes many of our experiences in working with our clients over the past year. In Part Two of this series, we will explore some recent noteworthy changes concerning the CPSR Group and our observations about the current CPSR environment.

Recent (Calendar Year 2016) CPSR Trends from the Trenches

  • Non-compliance with federal requirements regarding Debarment, Payments to Influence and DPAS continue to be a recurring issue for many contractors. Specifically, it seems that securing the timely written disclosure regarding Debarment, the written certification required of Payments to Influence, and documented acceptance of DPAS rated orders, continue to generate the majority of contractors’ noncompliance with these three public laws. We recommend inserting a signature-block certification into your procurement-instrument templates addressing these public laws and then ensuring subcontractors return a signed copy within the regulatory-required timeframe.
  • The Federal Funding Accountability and Transparency Act (FFATA) requirements are still causing trouble for many contractors. Beyond the policy and procedure requirement, the most critical step to compliance with this public law is to ensure you have reported the appropriate information into the Government’s database (fsrs.gov) within the regulatory-required time period and that you can demonstrate that timely reporting when the CPSR team visits. We recommend retaining FFATA reports in the procurement file and including a screenshot containing the date of report submission or other date-and-time stamped record to demonstrate compliance with the timing element of this public law.

 

  • Higher rates of competition improve the likelihood of CPSR success. We see a direct correlation between a contractor with a high competition metric (e.g. 50-75%+ of the procurements in the DCMA-selected purchase order sample) and fewer deficiencies in a CPSR. It makes sense – competition neutralizes applicability of several CPSR requirements (e.g. TINA) and also enables more streamlined compliance with several other CPSR requirements (e.g. price analysis, source selection, etc.).

 

  • Like competition, a strong internal review program pays major dividends in your purchasing system compliance efforts. A thorough pre-award review program should detect potential non-compliances with CPSR requirements before the non-compliance occurs. This affords the contractor the opportunity to immediately correct the issue prior to award of the subcontract. Further, a post-award review program is also valuable to the contractor in that systemic non-compliances can be identified and prospectively addressed. In such event, the contractor should plan and undertake corrective action – this may include file remediation/enrichment, targeted training, forms and checklist development, and policy and procedure enhancement to mitigate the risk of continuation of the recurring shortcoming identified via post-award review.

 

  • The DCMA CPSR teams continue to closely scrutinize contractors’ commercial item determinations (CID) with specific emphasis on the adequacy of the supporting documentation used to make the determination. This level of scrutiny is expected since commercial item procurements may be exempt from several CPSR requirements (e.g. TINA, CAS, etc.) and, typically, reduce flow down requirements. As a result, DCMA is committed to ensuring that contractor commerciality determinations, within the DCMA-selected purchase order sample, are in fact commercial items as defined at FAR 2.101. The CPSR teams expect each procurement file associated with commercial item(s) purchases to contain a well-supported CID to include the supporting market research or other detail and data used in making the determination.

 

Additionally, DCMA is in the process of updating its procedures and practices related to contractors’ CIDs to include the following:

  • The CPSR Group is currently updating the CPSR Guidebook Job Aid and Report template to enhance the procedures applicable to CID requirements, the supporting market research and content, and to support price reasonableness determinations.
  • The Commercial Items Group within the DCMA Pricing Center is expected to augment the CPSR teams in fiscal year 2017.

 

In summary, the DCMA CPSR Group remains heavily focused on the adequacy of procurement file documentation and compliance with public laws. When determining steps to take to ensure a successful CPSR experience, we recommend targeting documentation of compliance with public laws, including any exemptions (e.g. competition, commercial item, etc.), first and foremost. Public law noncompliance will lead to a painful CPSR experience, but it is also critically important to properly document your evaluation and source selection decisions (e.g. price analysis, non-competitive justifications, trade-off analysis, etc.).

Stay tuned for the next segment of this CPSR 360 series where we will explore the latest from DCMA’s CPSR Group, including the current CPSR policy and procedure requirements, DCMA’s change to the CPSR corrective action request process, and the government’s progress in revising the FAR Part 44 CPSR dollar threshold, among several other timely and relevant realities contractors are facing

 

Get your copy of Part One – Insights from Our Recent CPSR Experiences below!

10 Regulatory Compliance and DCAA Guidance Updates to be Aware of Now and Heading into 2017

What Government Contractors Should Know – 10 Regulatory Compliance and DCAA Guidance Updates to be Aware of Now and Heading into 2017PDF Download for CEC

Craig Stetson, Managing Director, Capital Edge Consulting, Inc.

The government has been busy in 2016 issuing final and proposed rules related to an array of regulatory compliance requirements associated with U.S. federal government contracts. Specifically, 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), plus, the Department of Labor (DOL), the DoD, the GSA, and the Small Business Administration (SBA) all have issued specific Agency rules pertaining to performance and compliance under government contracts.

Additionally, the Defense Contract Audit Agency (DCAA) has issued recent internal guidance in 2016 that contractors should be knowledgeable of as well.

Further discussion of 10 recent and noteworthy government contract compliance requirements and guidance items are summarized below.

  1. Fair Pay and Safe Workplaces Executive Order

Synopsis – The FAR Council and the DOL issued a final rule August 25, 2016, effective October 25, 2016, implementing Executive Order 13673.  The final rule requires, among other things, for contractors to report to the government labor law violations under 14 specific labor laws.  Key provisions of this final rule include:

  • Applicability limited to the legal entity responsible for performing the contract
  • Effective dates to be on a phased-in schedule starting October 25, 2016 and initially limited to a one-year look back
  • For the one-year period beginning October 25, 2016, disclosures of labor law violations will be required only for prime contractors – subcontractor disclosures will not be required until October 25, 2017 and subcontractors are obligated to report directly to the DOL, not the prime contractor
  • For the first six months after October 25, 2016, the requirement for prime contractors to disclose labor law violations will apply only under solicitations valued at $50 million or more; starting April 25, 2017, solicitations valued at or above $500,000 will be covered
  • Starting September 12, 2016, the DOL will offer a “pre-assessment” process, which will allow contractors to come forward to the DOL “to discuss their history of compliance with labor laws” and secure guidance on whether “additional compliance measures are necessary.”

As a result of a lawsuit filed October 7, 2016 by the Associated Builders and Contractors of Southeast Texas, a federal judge sitting in the U.S. District Court for the Eastern District of Texas issued a preliminary (not permanent) injunction October 24, 2016, one day before the effective date of the related final rule, staying implementation of most of the requirements contained in the Executive Order. The only portion of the Executive Order that was not enjoined by the government and was allowed to proceed relates to the paycheck transparency provisions.

Takeaway– It is too early to tell what the downstream consequences of the preliminary injunction may be. Likely, the government will challenge the judge’s recent decision and further litigation will ensue. Further, contractors should not accept related clauses or representation requirements that may be contained in new solicitations, excluding paycheck transparency requirements.

Nonetheless, contractors should assess now, internal business system processes and capabilities to monitor, track, and report applicable violations. Ideally, other processes or internal controls exist and are operating effectively to avoid a violation to begin with. Some form of supply chain oversight, perhaps a representation from the subcontractor, should also be considered. Labor law compliance and related systems of internal controls currently are, for the moment, outside the DCAA’s purview and are not addressed in related audit programs or internal control matrices. However, that may change. Consequences for violations vary, and may include, adverse FAR Part 9 responsibility determinations, termination of contracts, and suspension or debarment considerations. For now, though, these risks are significantly mitigated based on the October 24, 2016 decision. However, the risk posture may change pending the ultimate resolution of this matter.

  1. Paid Sick Leave

Synopsis – The DOL issued a final rule September 29, 2016 implementing Executive Order 13706. The final rule is applicable to covered solicitations issued on or after January 1, 2017 and entitle applicable employees to accrue one hour of sick leave for every thirty hours worked with a minimum annual accrued amount of 56 hours per calendar year. Specifically, the final rule applies to solicitations and resulting covered contracts defined as follows:

  • Procurement contracts for construction covered by the Davis-Bacon Act
  • Contracts for services covered by the Service Contract Act
  • Contracts for concessions
  • Contracts in connection with federal property or lands and related to offering services for federal employees, their dependents, or the general public

Takeaway– From a cost accounting perspective, implementation of the final rule may result in adverse cost impacts to contractors applicable to certain contracts subject to coverage under the Cost Accounting Standards (CAS).The potential adverse cost impacts, assumed to be the direct result from the implementation of the final rule, will likely require contractors to change their existing cost accounting practices (from cash basis to accrual basis) to conform with the new requirement. The change in cost accounting practices should be deemed by the government as a mandatory change for which increased costs under applicable CAS-covered contracts is permitted.

Contractors should assess now existing cost accounting practices and determine if a change in practice is required. If a change is required, communicate with contracting officers early and notify them of potential requests for equitable adjustment to allow recovery of increased costs due to the mandatory change in cost accounting practice.

  1. Federal Tax Delinquency and Felony Convictions

Synopsis – The FAR Council issued a final rule September 30, 2016, effective immediately. The final rule adds to current FAR Part 9 responsibility criteria and requires any corporation responding to applicable federal solicitations, to make a representation pertaining to unpaid federal tax liabilities and felony convictions for violations of any federal law. Key provisions of this final rule include:

  • Contractor representations whether it has any unpaid federal tax liability that has been assessed and is not being appealed or paid in a timely manner, or a felony conviction for a violation under any federal law within the preceding 24 months
  • These representations are required under all federal solicitations pursuant to FAR 9.104-7(d), including – commercial items, commercially available off-the-shelf items, and procurements under the simplified acquisition threshold (currently $150,000)
  • The final rule and implementing FAR clause are silent on exceptions due to materiality or significance of the unpaid tax liability, so assume there is no exemption for insignificant or immaterial amounts
  • Affirmative contractor responses to either unpaid tax liability or recent felony convictions will require the government to not award a contract to that corporation and notify the agency suspension and debarment official to review the matter and make a determination if further action (suspension or debarment) is necessary to protect the government’s interests.

Takeaway – Contractors should assess now internal business system processes and capabilities, ethics and compliance programs, and disclosure practices to enhance and demonstrate FAR Part 9 responsibility requirements, and engage early with the government to make such demonstrations, when applicable.

  1. Counterfeit Electronic Parts

Synopsis – The DoD issued a final rule August 30, 2016, effective same date, revising the previously issued proposed rule of March 25, 2016. The final rule, to include commercial item acquisitions and procurements less than the simplified acquisition threshold (currently $150,000), clarifies the allowability criteria of costs incurred and associated with counterfeit electronic parts, including suspect counterfeit electronic parts and rework or corrective action required to remedy the use or inclusion of such parts. Initially, these costs were unallowable unless the subject parts were sourced as government furnished property. These costs may now be allowable pursuant to the final rule if the following criteria are met:

  • Contractors maintain an operational system to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts that had been reviewed and approved by the DoD
  • Contractors be made aware of counterfeit electronic parts or suspect counterfeit electronic parts and provide timely (i.e., within 60 days after the contractor becomes aware) notice to the Government.

Takeaway – Contractors that receive and use electronic parts for ultimate sale to the DoD need to maintain robust systems to detect and avoid use of counterfeit parts. Maintenance of adequate and effective business systems will not only limit the risk of not detecting counterfeit parts, but will also be helpful when demonstrating the operational system requirement noted above to support cost recovery opportunities.

Additionally, it is likely only a matter of time before these rules are extended to all, or other, parts and not simply limited to only electronic parts. So, take the time now to assess business systems and supply chain capabilities to reduce procurement risks.

  1. Transactional Data Reporting under GSA Contracts

Synopsis – The GSA issued a final rule June 23, 2016, effective same date, requiring contractors report transactional data from orders placed against certain Federal Supply Schedule (FSS) contracts, Governmentwide Acquisition Contracts (GWACs), and Governmentwide Indefinite-Delivery, Indefinite-Quantity (IDIQ) contracts. A primary objective of the final rule is to “provide business intelligence to strengthen “best value” decision-making by ordering activities, which will allow customers to take full advantage of the wide variety and complexity of products and services offered by Schedule Partners and pass on savings to the taxpayer”. Key provisions of this final rule include:

  • Mandatory reporting for new offers received after implementation of the final rule and optional for existing schedule holders; i.e., mass contract modifications are anticipated to incorporate these new requirements into existing contracts; however, contractors have the option to accept these modifications
  • Monthly electronic reporting of up to 11 specific transactional sales data items related to applicable contracts
  • Reporting requirements to be implemented on a phased-in approach with a planned start date of August 2016
  • Contract modifications under the new rule will no longer require commercial sales practices (Form CSP-1) reporting nor most favored customer and sales/discounting tracking (formally the Price Reduction clause);
  • Industrial Funding Fee payments will now be received only electronically
  • Schedules and Special Item Numbers affected during the Roll-Out (in order) are – 581, 72, 03FAC, 51V, 75, 73, 70 and 00CORP.

Takeaway – Contractors should assess now existing information system capabilities regarding capture and reporting of up to 11 specific data elements. Contractors should also perform a risk assessment of overall GSA sales and volume as a consideration when deciding to accept the contract modification(s).

Further, as this reporting requirement is new and being implemented on a pilot and phased-in basis, it is unknown how the government will use the data for purposes of subsequent price reasonableness determinations and related negotiations.

  1. SBA Mentor-Protégé Program

Synopsis – The SBA issued a final rule July 25, 2016, effective August 24, 2016, expanding the classes of small businesses eligible to participate in the program. The current program limits mentor protégé arrangements only to certified 8(a) small disadvantaged businesses. The revised plan under the final rule will expand to now include service-disabled veteran owned small businesses (SDVOSB), HUBZone small businesses, women-owned small businesses (WOSB) and small businesses generally. The SBA will begin October 1, 2016 receiving applications from eligible small businesses to participate in the program.

Separately, the SBA issued a proposed rule in September 2016 revising several elements of the current mentor-protégé program. Key provisions of this proposed rule include:

  • Expansion of mentor participation to large businesses not currently operating under an approved subcontracting plan
  • Expansion of protégé participation to include:
    • entities owned and controlled by Native Hawaiian Organizations or Indian tribes
    • non-traditional defense contractors
    • entities providing goods or services in the private sector that are critical to enhancing the capabilities of the defense supplier base
  • Limitation of protégé participation to only one mentor agreement at a time and for five years from initiation of the first agreement
  • Requirement that protégés’ size must be less than half the SBA size limit for the primary NAICS code

Takeaway– Both the proposed and final rules provide increased opportunities for large and small businesses to participate in the mentor-protégé program and further expand opportunities to seek federal government contracts. As always, for contractors new to government contracting, some form of due diligence regarding government contract compliance requirements and corresponding internal capabilities is recommended to limit down-stream risk during performance.

  1. Small Business Subcontracting Plans

Synopsis – The FAR Council issued a final rule July 14, 2016, effective November 1, 2016, adding various criteria and requirements associated with administration of small business subcontracting plans. These statutory amendments will affect prime contractor responsibilities on how they deal with subcontractors and report to the government. Key provisions of this final rule include:

  • Requires prime contractors to make good faith efforts to utilize their proposed small business subcontractors during performance of a contract to the same degree the prime contractor relied on the small business in preparing and submitting its bid or proposal
  • To the extent a prime contractor is unable to make a good faith effort to utilize its small business subcontractors as described above, requires the prime contractor to explain, in writing, within 30 days of contract completion, to the contracting officer the reasons why it was unable to do so
  • Authorizes contracting officers to calculate subcontracting goals in terms of total contract dollars in addition to the required goals in terms of total subcontracted dollars
  • Requires subcontracting plans, including modifications under the subcontracting plan threshold, if said modifications would cause the contract to exceed the plan threshold
  • Requires prime contractors with subcontracting plans on task and delivery order contracts to report order level subcontracting information after November 2017.

Takeaway – Prime contractors should review now existing business system processes and capabilities to address these requirements to avoid potential compliance risks – including, for example, CPSR inadequacy and negative past performance evaluation.

  1. Thresholds and Submission of Certified Cost or Pricing Data

Synopsis – The DoD issued a Defense Procurement and Acquisition Policy (DPAP) memo June 21, 2016 to the Army, Navy, and Air Force encouraging participation in the pilot program allowed under the 2016 National Defense Authorization Act (NDAA) to assess the impacts and risks associated with raising the threshold requiring submission of certified cost or pricing data (commonly known as the Truth in Negotiations Act ([TINA]) on selected procurements from $750,000 to $5,000,000. The DPAP memo requests each of the buying commands to select a candidate acquisition for participation in the pilot program and submit to the Director, DPAP for approval.

Separately, the DoD issued a proposed rule August 30, 2016 to implement provisions of the 2016 National Defense Authorization Act allowing exemptions to submission of certified cost or pricing data related to acquisitions valued at less than $7,500,000 and applicable to small businesses or nontraditional defense contractors responding to solicitations utilizing a technical, merit-based selection procedure (e.g., broad agency announcement) or the Small Business Innovation Research (SBIR) Program.

Takeaway – With the issuance of the DPAP memo and separate proposed DoD rule, three possible thresholds may ultimately exist related to certified cost or pricing data submission requirements. The combined objectives of the pertinent provisions of the 2016 NDAA and the DoD proposed rule appear to focus on streamlining the acquisition process using a risk-based framework and increasing the government’s access to industry’s research and innovation technology capabilities. It is currently unknown how, or if, the pilot program may ultimately affect the current submission requirement threshold of $750,000.

Contractors will now need to understand and document these additional exemptions for purposes of monitoring submission of certified cost or pricing data as well as flow-down requirements to subcontractors. Additionally, it will be confusing as the thresholds for coverage under the CAS no longer align in all situations; i.e., the CAS and TINA requirements may no longer be the same at $750,000.

  1. The DCAA’s Selected Areas of Cost Guidebook

Synopsis – The DCAA released on the DCAA web site (http//dcaa.mil) in September 2016 new internal audit guidance entitled ‘Selected Areas of Cost Guidebook’. The new guidance in not complete and is in process; however, 13 areas of cost have been revised from the prior guidance in Chapter 7 of the DCAA’s Contract Audit Manual (CAM).

The subject guidance replaces Chapter 7 of the CAM and currently is structured to include 75 chapters, many of which will be revised as progress continues on its completion. Many of the chapters are somewhat narrow in focus and address specific elements of cost for which a corresponding cost principle (FAR Subpart 31.2) does not exist; e.g., banked vacations costs, mentor-protégé costs, no cost storage contracts, weather related closure and Workforce Investment Act.

Takeaway – It is too early to assess the effects or implications of this guidance as it is very recent and incomplete. However, as the Guidebook appears to be the new DCAA audit guidance, take the time now during its formation to understand the DCAA audit objectives and areas of focus.

  1. Selected DCAA Memorandums for Regional Directors (MRDs)

Synopsis – The DCAA issued six MRDs on their website thus far in 2016.  MRDs of note include:

  • Audit Guidance on the Impact of the National Defense Authorization Act on DCAA’s Audit Support to Non-Defense Agencies (9/30/16)
  • Audit Guidance on Revised Policy and Procedures for Low-Risk Incurred Cost Proposal Less Than $250 Million in ADV (5/27/16)
  • Audit Alert on DCMA Implementation Guidance on Blended Compensation Caps (2/19/16)
  • Updated Audit Guidance on the Treatment of Overdue Indirect Rate Proposals (2/11/16)

Takeaway – Knowing the DCAA’s internal audit guidance, i.e., MRDs, audit programs, internal control matrices, checklists, and the CAM, is critical to enhance the likelihood of an effective audit and successful outcome. MRDs are issued periodically and several are posted on the DCAA website. Public access to this internal guidance may become scarce though, as the DCAA’s development and use of VIPER (intranet portal not publicly available) progresses.

 

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Federal Contractors Now Subject to “Basic Safeguarding” Cybersecurity Requirements

Cybersecurity Requirements As of June 15, 2016, the US Department of Defense (DoD), General Services Administration (GSA), and National Aeronautics and Space Administration (NASA) will require federal government contractors to apply 15 basic cybersecurity safeguarding requirements and procedures to protect their information systems. These safeguarding requirements are based on the security requirements published by the National Institute of Standards and Technology (NIST) Special Publication (SP) 800-171, “Protecting Controlled Unclassified Information in Nonfederal Information Systems and Organizations.”

Attend the Capital Edge Consulting Sponsored- Cybersecurity Summit for Government Contractors: Hot Topics, Trends and Emerging Issues September 15, 2016 at the Crown Plaza Tysons Corner in McLean, VA.  
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The new provisions cover systems that process, store, or transmit Federal contract information with fifteen basic safeguarding requirements and procedures to protect covered contractor information systems. Requirements and procedures for basic safeguarding of covered contractor information systems shall include, at a minimum, the following security controls “reflective of actions a prudent business person would employ.”  Avoiding a direct reference to any pre-existing NIST standard, the rule’s new clause, at FAR 52.204-21(b), simply mandates a contractor apply the following “minimum” controls:

  1. Limit information system access to authorized users, processes acting on behalf of authorized users, or devices (including other information systems).
  2. Limit information system access to the types of transactions and functions that authorized users are permitted to execute.
  3. Verify and control/limit connections to, and use of, external information systems.
  4. Control information posted or processed on publicly accessible information systems.
  5. Identify information system users, processes acting on behalf of users, or devices.
  6. Authenticate (or verify) the identities of those users, processes, or devices, as a prerequisite to allowing access to organizational information systems.
  7. Sanitize or destroy information system media containing Federal Contract Information before disposal or release for reuse.
  8. Limit physical access to organizational information systems, equipment, and the respective operating environments to authorized individuals.
  9. Escort visitors and monitor visitor activity, maintain audit logs of physical access, and control and manage physical access devices.
  10. Monitor, control, and protect organizational communications (e., information transmitted or received by organizational information systems) at the external boundaries and key internal boundaries of the information systems.
  11. Implement subnetworks for publicly accessible system components that are physically or logically separated from internal networks.
  12. Identify, report, and correct information and information system flaws in a timely manner.
  13. Provide protection from malicious code at appropriate locations within organizational information systems.
  14. Update malicious code protection mechanisms when new releases are available.
  15. Perform periodic scans of the information system and real-time scans of files from external sources as files are downloaded, opened, or executed.

For a complete review see federalregister.gov

Nothing on this list stands out as overly excessive, however, the specifics of contractors’ reporting obligations are unclear.  In the list, number 12 directs a contractor to “identify, report, and correct information and information system flaws in a timely manner.” The term “timely manner” is not defined in the Final Rule, but should be considered if the contracting agency does not further define its timeliness expectations.  In this regard, recognize that the Final Rule does not release a contractor of any additional specific safeguarding and reporting requirements specified by Federal agencies and departments (see, e.g., DFARS 252.204-7012) or that apply to systems that contain classified information or Controlled Unclassified Information (“CUI”).

The Final Rule also directs that the new clause found at FAR 52.204-21 be flowed down to all-levels of subcontracts, and is now to be included in the list of clauses found at FAR 52.213-4 Terms and Conditions – Simplified Acquisitions, and FAR 52.244-6, Subcontracts for Commercial Items.  The flow-down, however, only applies to contracts when the subcontractor “may have Federal contract information residing in or transiting through its information system.”

While the new rule has been in the process for quite some time, it should be seen as merely a step in terms of the final word.  The Final Rule actually states that it is “just one step in a series of coordinated regulatory actions being taken or planned to strengthen protections of information systems.”  Any contractors that are affected, should align their systems to meet these fundamental requirements and they should also expect this is just the beginning and prepare process and timeline documentation.

Please note, this final rule does not apply to the acquisition of COTS items because it is unlikely that acquisitions of COTS items will involve Federal contract information residing in or transiting through the contractor information system. Excluding acquisitions of COTS items reduces the number of small entities to which the rule will apply.

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Capital Edge Consulting Obtains Astero Consulting’s Senior Talent in Government Contracts

Industry Experts Bill Keating and John Van Meter Strengthen and Expand One of the Largest Government Contracting Consulting Firms

Reston, VA, August 30, 2016 –Capital Edge Consulting, Inc., a nationwide consulting firm that specializes in helping federal government contractors solve complex business challenges, announces that Astero Consulting’s founders and senior executives, Bill Keating and John Van Meter, have combined their business with Capital Edge Consulting.

Collectively, Bill and John bring nearly seven decades of consulting experience, and previously, each was the Partner-in-Charge of KPMG’s Government Contractor Advisory Services Practice. Both gentlemen bring Government, Commercial and International advisory expertise in business sectors such as aerospace and defense, construction and engineering, and information technology products and services.

Bill and John have significant expertise in the multiple rules of government contracts, including the Federal Acquisition Regulation (FAR), Federal Agency FAR Supplements, Cost Accounting Standards (CAS), and Federal Supply Schedules. They have advised organizations on government audits, procurement and other business systems compliance, claims preparation, contract disputes and investigations. They possess extensive knowledge of cost accounting matters for government contractors, including: systems requirements definitions, indirect rate structures, annual incurred cost submissions, CAS cost impact proposals, and CAS disclosure statements. At Capital Edge Consulting, they will focus on these regulatory and compliance matters for clients seeking to enhance accounting and business practices and manage risk. The two will work out of McLean, VA and San Jose, CA, respectively.

Also joining Capital Edge from Astero is Jean Labadini, a leading expert in Contractor Purchasing System Reviews (CPSR). Jean retired after 35 years with the Defense Contract Management Agency (DCMA) – her last role was as the Director of the CPSR Group. She has also served as an Administrative Contracting Officer (ACO), a Divisional Administrative Contracting Officer (DACO), and a Systems Administrative Contracting Officer (SACO). During her time at DCMA, Jean was a certified DCMA trainer and delivered Agency training on Advance Payments, Progress Payments, Performance Based Payments, Public Vouchers, and Commercial Item Financing. Jean will provide leadership within the Procurement and CPSR Consulting Practice of Capital Edge Consulting.

“Bill, John and Jean have a successful track record of helping clients navigate the complex government contracting environment, enhance their regulatory and compliance capabilities, and improve business performance,” said Chad Braley, CEO of Capital Edge Consulting. “They bring a wealth of knowledge and experience to the team and will help to further expand our capabilities, experience, and market presence. We are proud to welcome them to Capital Edge.” 

About Capital Edge Consulting

Capital Edge Consultants combine their unique backgrounds and experience in consulting, public accounting, industry, and DCAA to provide clients with unmatched government contracting expertise. This breadth of specialized experience enables Capital Edge to provide the exact services and level of expertise federal government contractors need to succeed. Capital Edge has provided custom-tailored consulting solutions to government contractors ranging in size, from startup to Fortune 100 companies in industries such as manufacturing, nuclear energy, professional services, biotech/pharmaceuticals, defense, and software.

To learn more about Capital Edge Consulting, visit www.CapitalEdgeConsulting.com