Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Thank You DCAA for New Adequacy Guidance.

I can take this one of two ways:

  1. DCAA now agrees that adequacy is defined by the regulation and should not be subject to individual auditor whims.
  2.   Doing the right thing means doing less work upfront as they probably will not audit anyway.

The following is from the New ICE Manual .

“The following Schedules and information are not required for submittal of an adequate proposal; however, the information will be required to complete the audit.  ICE contains Supplemental Schedules A-1, A-2, A-3, A-4, B, C, and O that can be utilized by the contractor to provide information as noted below:

SUPPLEMENTAL MODEL INCURRED COST PROPOSAL INFORMATION

  1. Comparative analysis of indirect expense pools detailed by account to prior fiscal year and budgetary data can be provided on the following schedules:
  2. Supplemental Schedule A-1 – Overhead
  3. Supplemental Schedule A-2 – G&A
  4. Supplemental Schedule A-3 – Intermediate Pool Costs
  5. Supplemental Schedule A-4 – Direct Costs

These schedules may be used for comparison of prior year actual costs; however comparative analysis of budgetary data will also be required by the auditor.

  1. Supplemental Schedule B – Compensation for Certain Contractor Employees per FAR 31.205-6(p).
  2. Supplemental Schedule C – Prime Contracts Under Which the Contractor Performs as a Subcontractor.
  3. Supplemental Schedule O – Contract Briefs.
  4. List of ACOs and PCOs for each flexibly priced contract.
  5. Identification of and information on prime contracts under which the contractor performs flexibly priced effort as a subcontractor.
  6. List of work sites and the number of employees assigned to each site.
  7. Description of accounting system.
  8. Procedures for identifying and handling unallowable costs.
  9. Certified financial statements or other financial data (e.g., trial balance, compilation, review, etc.).
  10. Management letter from outside CPAs concerning any internal control weaknesses.
  11. Actions that have been and/or will be implemented to correct the weaknesses described in number 11 above.
  12. List of internal audits or other types of audits or studies performed by other than DCAA in this fiscal year.
  13. Annual internal audit plan of scheduled in process but not issued audits in this FY.
  14. Federal and state income tax returns (Schedule R).
  15. SEC 10-K report.
  16. Minutes from Board of Directors meetings.
  17. Listing of Delay and Disruptions and Termination Claims submitted which contain costs relating to the subject fiscal year.
  18. Contract Briefings – (Schedule S) Contract briefings generally include a synopsis of all pertinent contract provisions, such as, contract type, contract amount, product or service(s) to be provided, applicable Cost Principles, contract performance period, rate ceilings, advance approval requirements, precontract cost allowability limitations, contract limitations, and billing limitations. A typical format for the briefings is shown on Schedule S.  A contractor need not use the example form if the information is already generated and available within its automated accounting or billing systems.”
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DCAA Relations, Department of Defense News

The Good News — DCAA Gets A New External Peer Review Opinion. The Bad News — Qualified with Deficiencies (Again). DOD OIG identified 25 Deficiencies

DCAA receives it overdue external peer review from DOD OIG. Unfortunately, it is not the stellar report we hoped for.

https://media.defense.gov/2017/Nov/22/2001847672/-1/-1/1/DODIG-2018-028.PDF

 

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www.dcaacompliance.com

 

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Accounting System, Cost And Accounting, DCAA Relations, Running Your Business

How to LOSE Those PROFITS (What DCAA and the Government Will Do to You)

In the current crisis surrounding DCAA, it is possible to receive a cost type contract requiring an approved accounting system without actually having anyone from the government look at your accounting system.

This may sound like a gift from heaven but it is not. All it does is transfer the risk off the government’s back and onto yours.  Under this increasingly common scenario the contractor assumes the following risks:

The government can come in at any time and evaluate your accounting system with disastrous results to include: suspension of full payments and even contract termination (the latter is extremely rare).

The government can suddenly withhold all or part of your payments until they now decide your accounting system is adequate.  They may even expect you to continue working while the mess is sorted out.

This withhold is now actually part of the Department of Defense regulations and the subject of a recent DOD OIG audit. This audit criticized DCMA for not withholding 5% of total payments after an accounting system was found inadequate.[1]

This is not the 15% of your fee or profit you may have heard about. This is up to 5% of your total billing. Remember, profits on cost type contracts usually average 5% to 7% of costs billed. If the government refuses to pay 5% of your total billing they just eliminated the vast majority of your profits.[2]

Oh, and it can get worse. Applied Physical Sciences, a small contractor, went to the Armed Services Board of Contract Appeals (ASBCA) claiming the government failed to reimburse over a million dollars. The government simply refused to pay them based on an inadequate accounting system, arguing that the inadequacy made it impossible to determine if any of the costs claimed were actually associated with government work. Applied Physical Sciences actually raised the inadequate accounting system as a defense, asserting the government should not have awarded them a cost contract. Alas (or not), the government won.[3]

The lesson is ‘crystal clear’. The government awarded the contract in complete disregard of the government’s own standards and the contractor paid for it.

The lesson is ‘crystal clear’. The government awarded the contract in complete disregard of the government’s own standards and the contractor paid for it. The contractor paid for it not because of the government’s failure to approve the accounting system, but because there was no adequate accounting system to support the contractor’s claimed costs.

They can also hold up any future contracts awaiting the now necessary approval.

Even as the government has lost in way in how to enforce compliance, contractors need to understand the importance of excellent accounting systems to the government.

 

Time and time again I am surprised by contractors who believe that accounting for government dollars on their part is unnecessary and a waste of time. A few years ago, I declined to work with a government contractor who bragged about getting DCAA to approve his accounting system without a general ledger system and his refusal to comply with the standards (or as he put it: “ridiculous demands”).

He wished to engage me to prepare and submit the billing on a cost type contract based on what he told me to bill. When I declined the ‘opportunity’, he accused me of being scared. When I told a friend about his comments; she teased me, stating that I was ex 82nd Airborne and not scared of anything. “No,” I replied, “I am scared, not of the government, but him”.

Your accounting system is important because the government says so, even if they come back after three years to punish you.

Each year the government spends billions of dollars with contractors providing vital services for our country. All of this money, to include classified work, is ultimately accountable to taxpayers (we all remember the stories about $400 hammers purchased by the Defense Department). The good contractors reading this book have no desire to make the front page of the papers (or worse the bench in front of a federal judge) because of their lack of accountability.

Almost immediately after publishing the new regulations[4] about contractor business systems, DCMA hit Lockheed Martin with a reduction of 5% in payments for the F-35 fighter. Last time I checked the total withholding was over 47 million dollars. If five percent does not seem like a lot, it represents almost all of the profit Lockheed planned on the F-35. Until they get their business systems approved they are working for free.

It is not only the Defense Department that is tightening down on contractor accountability, look at a recent Department of Energy regulation:

Contractor business systems and its internal controls are the first line of defense against waste, fraud, and abuse. Weak control systems increase the risk of unallowable and unreasonable cost on Government contracts. When a contract includes these business systems clauses, it will require the contractor to meet business system criteria for its estimating system, accounting system, earned value management system, purchasing management system, and property management system. When the contractor has acceptable business systems that comply with the terms and conditions of the contract, this will improve contract performance. Under certain conditions, if the business system has significant deficiencies, the contracting officer will be able to withhold a percentage of payments until the significant deficiencies are corrected.

Taxpayers demand accountability and the government will demand accountability from you, not stories, not promises.

[1] Evaluation of Defense Contract Management Agency Actions on Reported DoD Contractor Business System Deficiencies (Project No. D2013-DAPOCF-0201.002) DODIG-2016-001

[2] Lockheed Martin just finished three years of fee withholding for a noncompliant estimating system.

[3] Armed Services Board of Contract Appeals (ASBCA) 56581 and 58038

[4] We will discuss the regulations later in the chapter.

Excerpt from Surviving a DCAA Auditavailable on Amazon

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Accounting System, Running Your Business

The Good Lord Forgive Me, My Favorite Embezzlement Story

http://articles.chicagotribune.com/1995-06-23/news/9506230160_1_arthur-andersen-tax-officials-fraud-and-tax-charges

Audit Firm Victim Of Embezzling

June 23, 1995|By Matt O’Connor , Tribune Staff Writer.

Arthur Andersen & Co., which helps set up internal controls for companies to prevent employee theft and fraud, itself was victimized by a longtime employee who embezzled $2.3 million over five years, authorities alleged Thursday.

During 21 years with the Chicago-based firm, Raymond R. Parcon, 42, of Naperville, rose to become a tax manager in the firm’s U.S. Tax Group, from which position he engineered the clever scheme, according to charges filed in federal court.

Among his duties, Parcon had authority to issue checks to federal and state tax authorities to pay Andersen’s employee tax obligations, prosecutors said.

On repeated occasions between mid-1989 and early 1994, he falsified paperwork to make it appear sizable checks had been sent to the Internal Revenue Service and Illinois tax officials to cover the company’s withholding obligations, prosecutors said.

In reality, Parcon submitted those checks, sometimes for hundreds of thousands of dollars at a time as payments on his personal tax debt, and then claimed huge refunds from the IRS and the Illinois Department of Revenue, the charges alleged.

When the money was refunded to him, Parcon deposited the funds in his personal bank accounts, the government said.

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Accounting System, Cost And Accounting, DCAA Relations, Running Your Business

Your Tax Accountant is Our Friend – A Natural Partnership

We do not

  • Prepare tax returns
  • Audit

We do

  • Government contracting compliance (to include helping with compliance audits)
  • Cost accounting

Often, small business government contractors require all of these services. The written tax code numbers in the thousands of pages as do the laws and regulations relevant to government contracting compliance. Few accountants make the attempt to keep up with both areas and even within larger accounting firms the specialties (tax and government contracting compliance) are split among different practitioners.

One of the many pleasures in our practice is working with the contractor’s tax accountant or bookkeeper. The contractor benefits by having access to two professionals with a bit of crossover for the same price. Two opinions in harmony, most of the time.

An Example

I flew in to support a contractor on an accounting system audit in conjunction with his tax accountant. DCAA showed up and we began one of the strangest audits in the almost thirty years of work in this area. If I told all of the story, DCAA would attempt to send my old unit from the 82nd Airborne after me, but I will tell part of it.

Toward the end of the rather strange audit, the DCAA auditor went on a rampage about small business contractors keeping their books on a cash basis.

This is not an unusual complaint made by some DCAA auditors, but I had never heard contractors referred to as idiots for the practices, especially in front of one of these “idiot” contractors.

I went on my usual contractor defense, explaining to the auditor the history of accrued accounting and the very classical utilization of the GAAP accounting cycle which allowed you to keep the books on a cash basis during the period and make the accruals as part of the closing process.

In this case, as in too many others, my purpose was to remind and educate the auditor not to rush to judgement and to expand their knowledge of the accounting world beyond the limited field of DCAA auditing. I sought to gently argue that the DCAA auditor’s strong comments were not only wrong but displayed a lack of knowledge on how accounting is actually practiced in the trenches.

The client’s tax accountant took a different approach, and I loved it.

He turned to the auditor and told him in no uncertain terms that the contractor kept his books on a cash basis because he, the tax accountant, recommend the contractor do so and that any small business owner that did not do so was an idiot and paying thousands of dollars in unnecessary taxes.

The room fell silent and I managed to keep a straight face as I backed the tax accountant up and said that not only was he correct, it was common sense, and allowed under GAAP as I previously outlined (cash converted to accrual during period close).

The DCAA auditor quickly packed up and left. I held my breath for a couple of days until DCAA approved the contractor’s accounting system, even though I knew that both the tax accountant and I made strong arguments in defense of the contractor’s practices.

This is simply one of the countless examples of where we worked hand in hand with the contractor’s tax accountant and/or bookkeeper to move the contractor’s business forward.

Indeed, many of our referrals actually come from the contractor’s outside accountant and I am happy to return the favor when one of my clients is seeking tax or audit work.

I will direct the reader to a previous article about cash v accrual accounting for the specific accounting arguments at https://dcaacompliance.wordpress.com/2016/08/15/all-the-fuss-over-accrued-accounting/.

Both Books graphic

 

 

 

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Accounting System, Cost And Accounting, DCAA Relations, Running Your Business

The Small Business Contractor

You

You know who you are. Yes, you, the one trying to figure out just when DCAA is going to enter your life, or worse, a non DCAA auditor or government official is assessing your operations and accounting system. Perhaps, just perhaps, you already had the pleasure and are reading this simply to improve the experience (read: “recover from disaster”).

Why You?

If You Want the Money

Federal regulations require an approved accounting system before the government can award a cost type contract.[1]

  • Cost type contracts are those contracts where the government reimburses the contractor for the contractor’s approved costs, director indirect, and sometimes a fee. The government recently expanded the definition to include fixed price contracts that allow for “progress payments”.
  • Cost contracts make up almost half of the contracts issued by the federal government and the majority of service contracts.

Two Presidents, Regan and Obama, started out their presidencies trying to reduce or even forbid government cost type contracts. In both cases, the number of cost type contracts actually grew.

There is a wealth of government created documents justifying the use of cost type contracts. Most of them center on the necessity of the government to assume the risks associated with the contract. Since cost type contracts are a reality, let me just make two observations and move on:

  • Cost type contracts require greater management and involvement on the government’s parts. They are involved in every aspect of the contract as opposed to simply writing a check upon delivery. DCAA has gone so far as to request from Congress in their annual report 24/7 access to contractor’s accounting systems. Greater government involvement translates into a larger number of government employees to manage an audit the process at all steps. In short, cost type contracts keep government employees ‘busy’ and ‘over worked’. DCAA continues to add new positons each of the last several years.
  • You hear about cost overruns and this is one of the ‘selling’ points for cost type contracts. If you run over budget the government will send you a check. It happens, but there is a lot of paperwork involved and a lot of compliance requirements. More often than not, the opposite happens and contractors do not make as much money on cost type contracts as they would on fixed price work. This translates into an excellent reason why the government likes cost type contracts – the actual amount paid to the contractor is reduced and paid to the bureaucrats instead in the form of salaries and other benefits (see point one).

One of the bizarre results of the crisis government contracting entered into in the year 2008, is the increased award of cost type contracts to small contractors without an approved accounting system despite the requirements forbidding this. It started out by contracting officers just ignoring the regulations in order to get the critical contracts issued, but now some of them are actually ‘approving’ the accounting systems after the contractor fills out a form.

Of course contractors may pay for this action by the contracting officers. Recent Armed Services Board of Contract Appeals (ASBCA) decisions that asserted that a lack of an approved accounting system was no defense for the contractor[2] and contractors with cost contracts and an unapproved accounting system appear to be holding all of the risks.

I am not telling contractors to turn down contracts, I am just pointing out issues for consideration.

Your solution may be as simple as taking the contract and making sure your accounting system is fully compliant in anticipation of the day DCAA or another auditor working for the government shows up.

The process of adopting and implementing an accounting system that would win government approval reduces the contractor’s risk and provides critical information to help them identify and manage costs.

Excerpt from Surviving a DCAA Audit available on Amazon 

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[1] FAR (16-301-3(a)(3)) “(3) The contractor’s accounting system is adequate for determining costs applicable to the contract or order…”

 

[2] ASBCA 56581 and 52593

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Cost And Accounting, Running Your Business

Tom Price and Indirect Costs

Tom Price, Secretary of Health and Human Services, seems to hold a limited understanding of cost accounting and the necessity of indirect costs. I guess he is one of those guys who believes that organizations can exist without administrative costs.

Both the House and the Senate rejected the change this week.

“Tom Price, the secretary of health and human services, said the government

could achieve huge savings next year without harming lifesaving research by paring

back payments to universities for overhead — the “indirect costs” of research

financed by the health institutes.

 

These include the cost of utilities, internet service, data storage, the construction

and upkeep of laboratories, disposal of hazardous waste and compliance with federal

rules protecting human subjects of clinical research.

 

“About 30 percent of the grant money that goes out is used for indirect

expenses, which, as you know, means that that money goes for something other than

the research that’s being done,” Mr. Price said.”

New York Times April 3, 12017

 If you are uncomfortable with the press reporting on this issue, feel free to watch the testimony on the House’s site. If you think that is fake new, I cannot help you.

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