DCAA Relations, Incurred Cost Proposals

Schedule I 2a: Final thoughts on Design Issues.

If the design objectives associated with the Schedule I did not prove enough of a challenge (Entity and Timing), the implementation of those objectives appears, from the results, an impossible task. As discussed in the previous article, the Model Schedule I fails to address the cost requirement due to confusion about just which entity (government or contractor) is reporting their costs.

As to the timing issue, there is simply not much DCAA can do to address this flaw as there is no practical method to require contractors to match their billing to their costs (on the form’s required cash basis) without throwing out GAAP, probably a few internal controls, and addressing the entity issues.

A final Design problem arising out of both the entity and the timing issue is Cost Sharing contracts. DCAA seems to blatantly ignore the huge hole these contracts represent to the design and utilization of the Schedule I. A contractor with a cost sharing contract will record 100% of the contract costs on the Schedule H but only bill the government for their share of the costs, say 85%.  DCAA’s Model Schedule I ignores this completely as have every DCAA auditor I worked this issue with.

If the basic design objective of the Schedule I is defined by the regulation to capture claimed and billed costs for reconciliation the DCAA Model I fails to meet tis design objectives by:

  • Confusing contractor and government costs
  • Assuming GAAP matching on a cash schedule (timing)

If I am wrong about the design objectives, please enlighten me.

Advertisements
Standard
DCAA Relations, Incurred Cost Proposals

Model Schedule I: Part 2 or: “With all respect, Sir, I can only follow your orders, not read your mind”

 

I remember enduring a room inspection as an enlisted man in the 82nd Airborne with a new company commander. The 1st Sergeant usually tried to make my room the first for inspection, trusting me to delay the CO long enough to prepare the other rooms for any of his individual idiosyncrasies. This particular company commander, who ended up as the best of the four or five I served under, was chewing me out for laying out my inspection items in a manner required by his predecessor. Finally, I turned to him and said:

“With all respect, Sir, I can only follow your orders, not read your mind”.

He laughed, agreed, and moved on. Of course the 1st Sergeant had time to warn the rest of the barracks and make the necessary adjustments. Once again, “Ave” (one of my many nicknames in service) took a bullet for the team.

 

I am reminded of this story almost every time I open an email from a DCAA auditor; although I can count on one hand the number of DCAA auditors who saw the other side of the issue.

The Model Schedule I is an excellent example of where contractors are often forced to read individual DCAA auditor’s minds and deal with their idiosyncrasies. The problem with the model exists primarily on two levels: design and implementation.

Design

In the attempt to read the DCAA’s collective mind, the primary design of the Model I, as stated by the regulation, is a reconciliation of claimed and billed costs by contract.

DCAA appears to limit this universe of contracts and subcontracts to those contracts that include government participation. A simple definition of government participation are those contracts or subcontracts with variable indirect rates (adjustable indirect rates subject finalization and thus “government participation”).

Cost type contracts are the primary member of this universe and Time and Material (T&M) contracts where there is a variable rate (provisional G&A rate for example). For reasons poorly defined, the majority of DCAA auditors will expect all T&M contracts to be reported on the Schedule I regardless of government participation.

Let’s go ahead and focus on the cost type contracts for the moment to address the fundamental design flaw in the Model Schedule I

COSTS

We agree that the Schedule I is intended to capture and reconcile COSTS, but whose costs: the government’s or the contractors? The difference is something we accountants refer to as the “Entity Concept”. The government’s costs (entity “government”) and the contractor’s costs (entity “contractor”) are not necessarily the same. DCAA’s failure to understand this primary accounting principle leads to problem after problem when working with their Model Schedule I.

First Example—Fee. Fee is a cost to the government but not a cost to the contractor. Where does fee go on the Model Schedule I? Obviously it is included with the contractor’s billed amount but then this makes reconciliation to the Schedule H (contractor’s costs) problematic. Some DCAA auditors address this by asking the contractor to add a column to the billed section for fee. Some demand the contractor remove the fee from the billed amount. Most ignore it.

Second Example – Sales Tax. A couple of states, Hawaii and New Mexico for example, tax many government contracts under sales tax or gross revenue tax.  Contractors are allowed to bill these amounts on cost type contracts. GAAP does not allow these payments to be treated as a contractor expense. The amount billed to the government goes to a liability account and is relieved when paid. According to GAAP, and we all know contractors are required to follow GAAP, the sales tax never hits the contractor’s income statement as an expense or revenue.

Thus, sales tax is an expense to the government entity but not the contractor entity. Some auditors take the same path as on fee and add a column to the Model Schedule I’s billing section for the tax amounts. Others go further and demand the contractor add a column to the Schedule H.

TIMING

The other fundamental flaw in the

basic design principle of the Model Schedule I is timing. In all the innocence that can only be found with inexperience, when DCAA created the Model Schedule I assuming that billing would match costs in any particular year. This is an especially interesting assumption given that many contractors are allowed to bill as often as every eight days. In reality, the amount billed for the year rarely matches the costs for the year (fee and sales tax aside).

 

 

Given these significant design issues, it will not surprise anyone that the implementation created new issues. I will hit this on the next post.

 

 

Standard
DCAA Relations, Incurred Cost Proposals

Let’s Talk About the Model Schedule I

In my mind, the DCAA crisis manifests in two prime areas: Leadership and Instructional Knowledge. Too, many of the unsupported untrained auditors highlighted in the 2008+ GAO and DOD OIG reports are (if they were not smart enough to quit) now supervisors. Supervisors we are now dealing with in unique exchanges based on their extended ‘experience’ as DCAA employees.

In one particular DCAA office these exchanges seem to center on the Schedule I. Previously, I swore to leave the Schedule I alone and let DCAA fix it, but recent events demonstrate this is a hopeless fantasy. I mean, contractors and the government began using electronic timesheets decades ago and DCAA still provides their auditors no guidance on evaluating these systems in the CAM. What hope is there for an improved Schedule I?

As a patriot who actually believes in the mission of DCAA, let me help. Let me build a Schedule I of practical value and use. Let me begin a series of articles on the Schedule I focusing on the regulatory basis, the inferred objectives of the Model DCAA Schedule I, the problems with the current model, and the elements of a better Schedule I. Who knows, maybe someone from DCAA will listen and if we do all of the work…….

The Regulatory and Guidance Basis for the Schedule I.

Regulation

Of course, most of us know that the Model Schedule I (DCAA’s fantasy about what a Schedule I from the contractor should look like) came about years before DCAA managed to get a regulatory basis for it.

Additionally, everyone but DCAA understands that DCAA’s attempt to create a regulatory basis for their Model Schedule I failed miserably. The regulators rejected the vast majority of the demanded information DCAA sought in their Schedule I. The regulation reads:

“(I) Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract” (FAR52.216-7(d) – Allowable Cost and Payment).”

That’s it folks. There is no division of settled and unsettled but claimed costs, no demographic information (last voucher number), and so on. Just a schedule of cumulative direct and indirect costs claimed and billed.

 

Guidance

The only real guidance DCAA has on the regulatory requirements is the Model Schedule I which exceeds the regulation significantly and DCAA’s adequacy checklist:

 

“CHECKLIST FOR DETERMINING ADEQUACY OF CONTRACTOR INCURRED COST PROPOSAL”

 

“29. Is the cost detail in the same level used for billing costs (e.g., by

delivery order)?

 

  1. Do FY claimed dollars tie to Schedule H for cost type contracts?

 

  1. Do FY claimed dollars tie to Schedule K (not Sch. H) for T&M

contracts?

 

  1. Are prior years settled total costs the same as the prior year’s

Cumulative Allowable Cost Worksheet?

 

  1. Are contracts identified as physically complete reported on Schedule

O?”

 

One could argue that all of these, with the possible exception of number 32, exceed the requirements outlined in the regulation. Remember the regulation came after the Model Schedule I and could be argued as refutation of the Model for going too far.

The Model Schedule I goes even farther as it attempts (poorly) to collect additional demographic and accounting data. This effort is inflicted on us without a basic understanding of a couple of the critical concepts of accounting: the entity principle or “Just whose costs are we talking about?”; the periodicity principle or “what is I do not bill for all of the costs on the last day of the year?”

I will explore this and both DCAA’s apparent Model Schedule I objectives and better objectives arising out of this analysis.

 

 

 

 

 

 

 

 

Standard
Accounting System, DCAA Relations, Incurred Cost Proposals

You Must Remember This

Contractor’s must keep in mind that the majority of DCAA Auditors have no direct experience with many of the simple tasks that make up a contractor’s daily life.

Most DCAA Auditors have:

  • Never ran a payroll (much less sweated over funding a payroll)
  • Never kept a set of books
  • Never invoiced a customer
  • Never fired an employee
  • Never negotiated with vendors

Excerpt from Surviving a DCAA Audit available on Amazon

Surviving a DCAA Audit

Surviving a DCAA Audit

Standard