DCAA Relations, Incurred Cost Proposals

Schedule I Final Thoughts: “DCAA auditors are awarded professional judgement by an Act of Congress”

 

“DCAA auditors are awarded professional judgement by an Act of Congress”

Surviving a DCAA Audit

 

Of course on a practical level, my opinions mean very little. Contractors and consultants try to accommodate DCAA and their inadequacy as much as possible. I personally construct incurred cost submissions that, on the surface, appear to look like the Model ICE. I send the submissions in Microsoft Excel but I remove all of the links and formulas (This last step I finally took a couple of years ago after a DCAA Supervisor kept screwing up the links and demanding that we resubmit them ‘correctly’).

The Schedule I has always been the weak link in this approach because of the extensive design flaws and implementation issues I outlined in the previous articles.  These flaws make this form, DCAA’s Models Schedule I, difficult for both DCAA and contractors to work with. There are the GAAP problems, the omission problems, and the certification problems that just run across the entire form.

I sit here and look at the Model Schedule I and ponder what lines, both literally and figuratively, I should draw in an effort to move this forward. The figurative line means it is perhaps time to complain to the DOD OIG about this matter, about violations of the Paperwork Reduction Act, and exceeding their regulatory authority.

The literal line is the following implementation of a revised Schedule I:

  1. I agree with DCAA’s restriction of the form to only those contracts with government participation. This means only those T&M contracts with variable indirect rates are included on the Schedule K and carried to the Schedule I.
  2. Only contracts with current year activity will be reported.
  3. The regulation specifically rejected the need for the contractor to submit at any level greater than contract level. Failure of the contractor to report more extensive detail beyond the contract level is a matter of audit not adequacy. The government is free to request this information as part of their audit.
  4. The disjointed and flawed division of the Schedule I into four parts is now formalized and defined:
    1. Part One – Cost Type Costs (entity Contractor)
    2. Part Two – Time and Material (T&M) contracts at bill rate and contractor’s variable costs
    3. Part Three– Government Costs as billed (to include Fee and any relevant taxes)
    4. Part Four – Reconciliation of cost to billing. A reconciliation of billing and costs is inferred in the regulation and thus poorly thought out by both DCAA and regulators. I discussed the reason in previous articles, but this illusionary reconciliation is the heart of the schedule. Inclusion of this meaningless data is an imposition on contractors, but there are a lot of those.
  5. As to specific format:
    1. “Unsettled/Claimed Direct And Indirect Costs Using Claimed: Prior Year Costs FYE” is simplified to “Remaining Prior Year Costs”.
    2. “Less Contract Limitations Rebates/Credits” is simplified to “Cost in Excess of Contracted Amounts”
    3. A Column for Fee is added under Government Costs
    4. Optional Columns are placed under Government Costs to include: “State or Local Tax Assessed on Contract”, “Contractor Costs Associated with Cost Sharing”.

I consider these minor changes but I am sure there will be too many DCAA auditors who will argue otherwise?

What are your thoughts?

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DCAA Relations, Incurred Cost Proposals

Schedule I:“The Truth and Nothing but the Truth, at Least How I See it”

Let’s step back for a moment and look the DCAA Model ICE as a whole. First let us look at a couple of facts, absolute facts.

  1. DCAA created the Model ICE in the 90’s to provide an example to contractors on what DCAA thought a good incurred cost submission would look like.
  2. There is no requirement to use DCAA’s Model ICE, if there was, it would be an approved government form subject to GSA and OMB standards, to include the Paperwork Reduction Act.
  3. There is no requirement to submit an incurred cost proposal in Microsoft Excel. There is no requirement to submit an incurred cost proposal electronically.
  4. The government finally adopted a regulation that paralleled the general description of the ICE — FAR 52.216-7(d) – Allowable Cost and Payment. The final regulation did not adopt the requirements found in the DCAA Model ICE even though the Model preceded the regulation.
  5. The government can only reject a cost proposal based on adequacy.

Given these facts, I will draw the following opinions:

  1. The government had the chance to adopt regulations closer to DCAA’s Model ICE and chose not to. One can argue that the final regulations are a refutation of the Model ICE in favor of a more flexible simpler standard.
  2. The government (DCAA in practice) cannot base adequacy on anything other than the regulation.
  3. a. Bringing the Schedule I back into our discussion as an example, DCAA cannot reject a Schedule I for not following the Model ICE’s Schedule I as long as the contractor provides the information required by the regulation.
    1. DCAA cannot reject an incurred cost proposal for the contractor’s failure to meet the ‘standards’ espoused by DCAA’s ”CHECKLIST FOR DETERMINING ADEQUACY OF CONTRACTOR INCURRED COST PROPOSAL” when the checklist exceeds the regulatory requirements.
  4. There is a poor understanding by DCAA of the line between adequacy and audit. I recently fought with an auditor who believed that the Schedule H failed to report all of the client’s activity. Naturally she failed to check the Schedule H to the Schedule G or even the included Trial balance to see if her assumption was valid. Even if it was, I argued, the issue was a subject for audit not adequacy (this could be another article on its own given the current audit environment and DCAA’s attempt to address its backlog).
  5. I am very thankful for the fact that the majority of DCAA auditors appear to understand the problems associated with the Model Schedule I and ignore the Schedule during determinations of both adequacy and during audit. It is the few, but still too many, who seem to blindly defend the Model ICE that present the difficulties we are discussing.
  6. Given the inadequate levels of knowledge, support, and training provided to DCAA auditors, the Model ICE often functions as a crutch, an obsession build around the very inadequacy they are trying to prevent.

 

I will conclude this series on the Schedule I with final article: “I Realize My Opinion Might Not Matter, but I am Going to Provide One Anyway”.

 

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Department of Defense News

Do as I Say, Not as I Do

Seriously, 7% of DOD travel payments are “improper”?

“DoD Component actions were not adequate to reduce estimated improper payments in the DoD Travel Pay program. The Under Secretary of Defense (Comptroller)/Chief Financial Officer reported that estimated improper payment rates for the DoD Travel Pay program increased from 5.0 percent for FY 2012 to 6.5 percent for FY 2013 and 7.0 percent for 2014. The estimated rates missed the improper payment reduction goals for each of those years.”

http://www.dodig.mil/pubs/report_summary.cfm?id=6833&utm_source=DoD+IG+Email+Update+-+Reports+and+Testimonies&utm_campaign=24114820f8-DoD_IG_Reports&utm_medium=email&utm_term=0_3a17f8681e-24114820f8-277174597

 

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DCAA Relations, Incurred Cost Proposals

Schedule I Part Four: Columns in Battle

The next columns I want to look at are:

“Prior Years Settled Total Costs”

“Unsettled/Claimed Direct And Indirect Costs Using Claimed: Prior Year Costs FYE”

 

 “Prior Years Settled Total Costs”

This column is used to record the previous costs on a contract settled with the government. If you have a $1,000,000 in proposed costs on several years of incurred cost submissions and DCAA has audited and agreed to only one year, say $200,000, you would put $200,00 in this column for the contract’s prior year’s settled total costs.

“Unsettled/Claimed Direct And Indirect Costs Using Claimed: Prior Year Costs FYE”

This is simply a beautiful, clear, use of the English Language. Just what does “FYE” mean in this context? Yes, I understand it literally means “Fiscal Year Ending” but if this column is meant to record all of the costs before the current fiscal year should you proceed the FYE with a date such as 12/31/2015? I believe settled costs are claimed also. Are they included in this column?

DCAA interprets this column as where you record the contract’s claimed but unsettled costs totaled of the previous years, thus “Prior Year Costs” means “Prior Years’ Non Negotiated Costs”.

 

Less Contract Limitations Rebates/Credits

The little column that could do it all, except adhere to the underlying regulation.  DCAA note on the following states:

“5. Contract limitations include costs incurred that are included in the column entitled ” Total Cumulative Settled or Claimed” and are either (i) in excess of contract ceiling rates, (ii) unallowable per contract terms, (iii) outside the period of performance, or (iv) in excess of contract ceiling amounts, etc.”

Let us start with the low hanging fruit: “unallowable per contract terms”.  Gee, didn’t DCAA’s Model Schedule I already address this in the earlier columns on year’s costs, the “claimed” costs?  This kind of implementation issue supports my earlier thought about “form by committee”.

In addition to doing work that the previous columns addressed, this hard working column attempts to capture all of the areas in DCAA’s imagination that could trigger costs in excess of contracted amounts.

One wonders why they just do not say this: “Costs in Excess of Contracted Amount”? Does it matter if the excess costs arise out of contract ceiling rates, unallowable costs, outside of the period of performance (which would normally be unallowable by the way), the contract ceiling amounts, or the DCAA noted “etc.”.

Incurred cost proposals are certified by the contractor. I cannot imagine that anyone worries about populating this column in the manner DCAA wishes would be a waiving of any rights to recover those costs. I mean DCAA, did use the term “etc”. I imagine it is just another example, rife on this form, of bureaucratic language.

Wait, wait, wait… this is addressed in the note for the next column: “6. The cumulative amounts in this column should not exceed the contract ceiling.  If amounts exceeding the ceiling are in dispute, or if you have requested that the contracting agency increase the contract ceiling, please include the amounts in the ” Contract Limitations” column and provide an explanation in a footnote.” (emphasis added).

Gee, whatever was I thinking, of course it only appears to protect your rights on recovery of any costs in excess of contracted amounts you need to actively assert a defense on the Model Schedule I on a form that exceeds the regulatory requirements without approval of OMB or any other government official outside of DCAA.

The rest of the columns deal with billing. It is a bit amusing that DCAA reminds everyone that these are ‘manual’ entries. I guess they forgot that most of the other columns are also manual entry. More ‘committee’ design issues.

The problem on the billing sections are the design problems associated with DCAA failing to define “costs’ in terms of basic accounting principles.

Let’s move to the bottom of the form reference the T&M part. IF you look at the DCAA Demo worksheet none of the prior year data is populated for T&M contracts. Is this simply laziness on DCAA’s part or an attempt to limit the perception of the flawed and fractured nature of the model schedule?

 

Next: What is a contractor and DCAA to do?

 

 

 

 

 

 

 

 

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DCAA Relations, Incurred Cost Proposals

Model Schedule I Part Three: Contract?

“Definition of a committee: A creature with at least six legs and no brain” – Robert Heinlein

I would guess that the Model Schedule I is the product of a committee.  The lack of coherence or unity in the design and implementation is only matched by the lack of training and support. DCAA devotes an entire chapter to incurred cost proposal audits (Chapter 6) without discussing their model incurred cost proposal beyond mentioning its existence and a section on CACW that actually contradicts the regulation it refers to.  Most DCAA auditors will accept any interpretation of the Schedule I that contractors offer but too many try to defend or even interpret the schedule in the strange manners I discuss during implementation.

Implementation

Let’s go through each column(s) on the Model Schedule I and discuss what it says and how DCAA sees it (not always the same thing). We are only going to get through one column wit this post.

Contract No.  I already noted DCAA’s decision to restrict their Model Schedule I to cost type and T&M contracts.  This is noted on their model schedule.

The majority of DCAA auditors I work with believe all T&M contracts should be listed on the Schedule I regardless of government participation. The confusion seems to arrive out of the Schedule H, how it is populated, and how it relates to the Schedules I and K.

Properly done, the Schedule H should tie to the contractor’s general ledger and tie back to the various Schedules B – G, with adjustments for various unclaimed costs. To maintain this integrity, the Schedule H should include, by contract number or summary (commercial), all contracts. This means that all T&M contracts should be recorded on the Schedule H, both those with government participation (variable rates) and those without.

To add to the confusion, DCAA’s Model Schedule H labels “C.. VAR. TIME & MAT’L”. Does the “VAR” mean “various” or “variable”? Over time, I get both answers from different DCAA Auditors. I assume it means “various” but “variable” makes sense when you consider the aspect of government participation.

The Schedule K is where DCAA collects T&M information as the regulations states: “(K) Summary of each time-and-materials and labor-hour contract information, including labor categories, labor rates, hours, and amounts; direct materials; other direct costs; and, indirect expense applied at claimed rates”.

Nowhere on DCAA’s Model Schedule K is the schedule linked back to Schedule H. According to the model schedule, the Model Schedule K only links back to the Schedule A, but if you look at the flowchart included with DCAA’s Model ICE you will notice a link drawn from the Schedule H to the Schedule K. Gee, I wonder which one is correct?

Why don’t we continue to add to the confusion, by the time we are done you may even feel sorry for your DCAA auditor, until they attempt to defend this mess.

The information collected on the Schedule K is radically different from the information collected on the Schedule H. The Schedule K captures the government’s costs while the Schedule H captures, as noted earlier, the contractor’s costs.

This means that the Schedule I captures and treats as identical (from a design and implementation viewpoint) both contractor’s costs (carried from the Schedule H for cost type contracts) and government’s costs (from Schedule K). DCAA seems to mix apples and oranges and then requires the contractor to treat them as grapes.

Of course to keep the level of complexity up, let us circle back to the original issue. Since most DCAA auditors (and I agree) that all government time and materials contracts are listed for the year on the Schedule H, these auditors go a step farther (NOT SUPPORTED BY THEIR OWN MODEL) and insist that all time and material contracts, regardless of government participation, be listed on the Schedule K and carried to the Schedule I.

So, the Model Schedule I appears to lack consistency in two major areas as the majority of DCAA auditors audit:

  • First, the top of the model schedule is restricted to only cost type contracts that, by nature, include government participation, while most DCAA Auditors believe the bottom of the Model Schedule I should include all time and material contracts regardless of government participation.
  • Second, by design, the top of the schedule captures contractor costs while the bottom captures government costs.

To add one more level of complication, a DCAA auditor last year insisted that the Schedule I must include all cost and T&M contracts to include those that had no costs for the year but had not been formally closed.

The only thing worse than the individual musings of a DCAA auditor creating headaches for contractors is the collective musing of DCAA creating contractor headaches. Let’s look at the regulations again:

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

Now compare this to DCAA’s adequacy checklist:

“29. Is the cost detail in the same level used for billing costs (e.g., by delivery order)?”.

Thus the word “contract” does not mean “contract” but whatever DCAA takes it to mean. This appears to go way beyond the regulatory requirement and require the contractor to populate each individual line on a CLIN, ACRN, or delivery order level, placing a huge compliance burden on the contractor not found in the regulation. Of course I am sure DCAA cleared this in accordance with the requirements of the Paperwork Reduction Act of 1995.

 

My, my, we are only on the FIRST Column and already have looked at the following issues:

  • DCAA seems to want all T&M contracts on the Schedule I regardless of government participation.
  • The top of the schedule (cost type contracts) captures the contractor’s costs while the bottom captures the government’s
  • One DCAA auditor considers an incurred cost submission inadequate unless all unclosed cost and T&M contracts are included even if there are no current year costs included on the Schedule I.
  • DCAA exceeds dramatically their regulatory authority if they insist on the word “contract” means “delivery order”.

Next: “Prior Year Costs does not mean prior year’s costs”.

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