Department of Defense News

Supervisors Fail to Act Properly to DOD Employee ‘Misuse’ of government funds for Casinos and Adult Entertainement

Excerpt from a recent Department of Defense OIG audit followup to previous audit:



We determined that DoD management (cardholder’s commander or supervisor) and travel card officials did not take appropriate action when notified by the DoD OIG, during the previous audit, that cardholders had potentially misused their travel card. In this follow-up audit, we reviewed management’s actions for 30 nonstatistically selected cardholders with the highest dollar amount of high-risk transactions that had been referred to management in the prior audit. During this audit, we found that:

DCAA Relations, Running Your Business

It is all About Control

One note to my post yesterday “Some of the Strange Things Contractors Say“(

You want to control your business, your bid & proposal efforts, and all interactions with the government. The two cases I quoted yesterday demonstrate the problems that arise when Contractors lose control of the process to the Government.

In the first case the Air Force, with the subsequent support of the appeals board, recalculated the contractor’s fringe rate resulting (in the contractor’s belief) in the lost of the contract award.

The second case presents the opposite problem. Here, the Protester successfully argued that the government failed to evaluate the winning proposal’s rates, the government simply accepted the proposed rates. The Protester demonstrated pretty easily that these rates were inaccurate.

In both cases, the contractor surrendered control of the process to the government and even their competitor by not bidding supportable rates.

All easily prevented by an accurate complete cost accounting system.

Cost And Accounting, DCAA Relations, Running Your Business

Some of the Strange Things Contractors Say

We Are Doing Fine Without ALL OF THIS. We bid the Rates that Will Win the Contract and Still Make a Profit

I, for one, believe in the common sense I discover time and time again among small business contractors. Actually, without their common sense, my work would prove extremely difficult. They know when they are in trouble and they know when they are not.

Of course, in my humble opinion, backing up this common sense with data makes the small business decisions even more effective.

In almost every single contractor without DCAA activity I work with, the rates they bid are different on every proposal. Sometimes the use of different rates arises out of a perceived change in rates, but many times it is the pressure to feel competitive.

In a world without DCAA, the lack of accurate rate information is beginning to haunt contractors. Two recent GAO appeals (one involving an Air Force contract) illustrate the problem:

Because an agency must base its evaluation upon information contained within the offeror’s proposal, and because we will not consider Quantech’s untimely assertions that it could have substantiated its rates had it been permitted to revise its cost narrative, we have no basis to question the agency’s conclusion that Quantech’s revised indirect rates were unsubstantiated and thus unrealistic. In any event, we find that the Air Force’s adjustments to Quantech’s indirect rates were reasonable. Here, the CPET analyzed an offeror’s proposed indirect rates and cost narrative to determine whether the rates reflected the offeror’s unique business model with regard to allowable and allocable indirect costs, and compared the indirect rates to the offeror’s fiscal year 2015 provisional billing rates established by the Defense Contract Audit Agency (DCAA). While the agency concluded that Quantech’s initial rates were realistic based upon information in its cost narrative, the agency determined that the protester’s proposal provided “no rationale” to substantiate the dramatic reduction in its fringe benefit rate ([DELETED] percent to [DELETED] percent). AR, Tab 7, CPET Report, at 8. On this record, we find that the agency’s adjustments were reasonable, and the agency acted within its discretion in deciding to use Quantech’s initial rate, rather than the unsupported final proposed fringe benefit rate.[20] See CSI, Inc.; Visual Awareness Techs. and Consulting, Inc., B‑407332.5, et al., Jan. 12, 2015, 2015 CPD ¶ 35; Science Applications Int’l Corp., Inc.,supra.

The protest is denied.[1]


And this one

Here, we find that the agency’s acceptance of the unsupported G&A rates for eight of the awardees was unreasonable and inconsistent with the solicitation requirements. The RFP required that the proposed G&A rates would be evaluated using a cost analysis “based upon verification of the offerors’ cost submissions for their G&A rates and confirming that the submissions are in accordance with the contract cost principles and procedures described in FAR Part 31.”RFP, Tab 3 at 33.The protester, whose proposal complied with the solicitation requirements and whose G&A rate was supported by its certified financial statements, was prejudiced by the agency’s actions as follows: one offeror did not comply with the requirement to submit certified financial statements or a DCAA report; two offerors’ rates could not be verified by the information submitted; and five offerors proposed significantly lower rates than those identified in the certified financial statements they submitted with their proposals.AR, exh. 6, SSDD at 79-84. As a result, these offerors were viewed as offering a lower “price” to the government since the agency was using G&A rates as a proxy for price or cost. There is nothing in the solicitation that informs offerors that the agency would accept a G&A rate that was not supported by certified financial statements or DCAA reports and verified through a cost analysis of the required cost submissions. Accordingly, we sustain this basis for protest.[2]

Since contracting officers can no longer rely on DCAA to verify proposed contractor rates the burden now shifts to the contractor to defend those rates. A good defense arises out of a good cost accounting system.

A good cost accounting system also allows the contractor to defend any proposed changes to the rates. This is common due to the exponential growth experienced by successful small contractors.

I call this the “plumbing argument”. The plumbing costs in building a 2,000 square foot home as compared 5,000 square foot home are not as dramatically different as one would think as the plumbing layout is fairly centralized. Thus, plumbing costs more in a 2,000 square foot home than a 5,000 square foot home per square foot while the total cost of plumbing in the large home is a bit more.

This is also true of G&A costs. You are only going to need one Controller if you employ 100 people or 1,000 people, but she will cost more per employee for the smaller company.

But none of this does you any good if you do not know the costs and cannot do the math.

[1] Matter of:   Quantech Services, Inc. File:  B-408227.8; B-408227.9 Date:  December 2, 2015 =e-report

[2] Matter of: West Coast General Corporation File: B-411916.2 Date: December 14, 2015


EXCERPT from  Surviving a DCAA Audit: The Accounting System: For Small Government Contractors Working With the DCAA and Other Government Agencies available on Amazon.


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

All the Fuss over Accrued Accounting

I am not going to enter any fights about cash accounting versus accrued accounting. As I note in my latest book, there is not a small business owner that does not keep in her head how much she is owed or how much she owes. It is just a question of if she records it in her book of records.

I am not going to argue about if DCAA or GAAP requires accrued accounting. Thirty years ago one could raise the specter of cash accounting as an alternative ‘comprehensive’ form of accounting and there are still some specific industries where cash or modified accrued are even required.  Unless you are one of those specific industries (some form of insurance companies for example) DCAA is going to expect accrued accounting and GAAP assumes it.

I am going to argue that an understanding of accrued accounting takes a bit of work and is poorly understood by many DCAA auditors and many small business contractors. The Department of Defense actually placed their misunderstanding of accrued accounting into regulation with DFARS 252.242-7006 “Accounting System Administration”. I will explain why I believe this in a few moments.

I am also going to argue that the introduction of powerful inexpensive personal computer accounting software designed and marketed for use by non-accountants and non-bookkeepers further blurred the lines between cash accounting and accrued accounting and brushed aside the basic need to understand the very nature of accounting.

I feel I offer a bit of unique insight into this issue due to my background. I started out in operations with government contracting, frustrated because I did not understand what the accountants were muttering about.  I developed into a full charge bookkeeper in addition to my operational responsibilities and moved on to jobs as a controller, Finance Director, and CFO. Eventually I passed the CPA exam in one sitting, began my practice, and taught accounting both at the undergraduate and graduate level.

Let’s Make One Thing Perfectly Clear

I believe most of the confusion on accruals and government contracting compliance arise out of one simple misunderstanding of GAAP. It is this simple FACT – All of GAAP applies to the Accounting Period and for most entities the Accounting Period is one YEAR.  The accounting period is not the month, not the quarter, not the day. It is the YEAR!

One hundred years ago, without the help of computers, businesses kept their ledgers on a cash basis. At the end of the accounting period, the balances were transferred to a working trial balance where adjusting journal entries were made to correct any identified errors and to make the necessary accruals. After the creation of the necessary financial documents (Balance Sheet and Income Statement) the closing entries were made to close out the temporary accounts to retained earnings, most of the adjusting journal entries were reversed, and the business began the accounting for new accounting period (year). This is what is referred to as the Accounting Cycle.

Without the help of computers, it was almost impossible to track accruals easily. Even with computers it is amazing how much trouble small businesses get into. The art of the reversing journal entry seems to be lost as accountants attempt to ‘true up’ entries when the actual amounts are known instead of reversing the original accrual and entering the actual cost.

Compounding this is the lack of documentation to support accruals and journal entries. When I taught intermediate accounting, I displayed a section of the original accounting records maintained by the US Army. Perhaps you heard of the bookkeeper – George Washington. Almost 250 years after he started keeping track of the Army’s revolutionary war expenses you can follow his entries perfectly; “To Cash for recovering of my pistol which had been stolen and for repairing then afterwards – 1.10”. I bet he kept the receipt.  I told my students that I expected to see their journal entries as clearly stated 250 years after the fact. I cannot express my frustration with journal entries that, if I am lucky, say – “To credit cash and debit repairs”. If you cannot articulate why you are doing the entry how sure can you, or anyone else, be that it is correct?

GW Bookeeping

I worked with one of the largest government contractors in the country in the 90’s and they still preserved this historical proven Accounting Cycle, although due to SEC and DCAA positions they applied most accruals on a monthly basis. They did this even with the resources available with today’s accounting software. Payroll was weekly and this made the Wages Payable accrual pretty easy. It was set up to automatically reverse at the start of the new month allowing the actual amount to post. Accounts Payable (AP) were cleared every Thursday and any unpaid AP at the end of the month was put into a file, added up, and accrued as a reversing journal entry. Unearned revenue was accrued on a reversing entry and so on.

Again, modern accounting software makes it easy for most contractors to keep a fully accrued set of books if they are just careful about any journal entries or adjusting journal entries they make. Of course, I find that most small business contractors, knowingly or not, do not keep fully accrued books each month. I believe I have successfully demonstrated that GAAP does not require them to do so as their accounting period is one year. One of many example areas is depreciation. Many small business contractors do not make depreciation entries until they close their year and finish their tax returns. Again, GAAP states this is fine.

Everyone happy? Apparently the Department of Defense was not. For years DCAA auditors time and time again would argue that GAAP applied as they wished, normally on a monthly basis. A few years ago, DOD adopted the aforementioned regulations that requires contractor accounting systems to record costs on a monthly basis. Sigh…

There is a definition of ‘costs’ that confines them to a cash basis but there is also a definition that defines costs as the total to include multiple expenses ($1,000 in costs divided between an expense of $750 dollars and an asset of $250 for example). Guess which definition DCAA will rely on?

Both Books graphic

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Accounting System, Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Just What is a Subcontractor?

At a recent conference an audience member asserted that the FAR (Federal Acquisition Regulations) did not define subcontractors and she felt free to put the costs wherever she wished on an incurred cost proposal, specifically under Other Direct Costs. I assumed she meant consultants providing direct services on a job or contract, but I did not argue with her and we agreed to disagree.

Subsequent to this, I gave up documenting FAR definitions of subcontracting after the fifth one. All of these included the term “services”.  I will quote, cite, and discuss some of the specific definitions in a bit, but first I want to broaden the issues to the needs of government contractors, especially small business government contractors.

Not only does the FAR define subcontractors, it is an area of intense regulation and receives serious attention from DCAA to include an ever evolving “Schedule J” on DCAA’s model incurred cost electronically (ICE). It is in a contractor’s interest to avoid this greater scrutiny while complying with existing statutes, case law, and regulations (notice I did not say guidance, as in DCAA’s Contract Audit Manual or Information for Contractors).

I will also note that some contractor approaches can lead to unnecessary complications and even visits from the IRS wanting more money.

Traditionally, direct costs are recorded in five broad accounts: Direct Labor, Direct Travel, Materials, Other Direct Costs, and Subcontractors. Over the years. I observed contractors recording what the FAR and I define as subcontractor costs, in all five accounts to include Materials and Direct Travel. There is actually an accounting tax argument for recording subcontractor travel costs under direct travel (see my presentation: Meals & Entertainment Rules – Or How to Avoid Inviting Government Auditors to Your Lunch . I prefer to track subcontractor Meals and Entertainment (M&E) as part of the Subcontractor account, but I acknowledge the argument.

Despite what many DCAA auditors might argue, there is no requirement to use these five main direct cost account groups, but I am going to assume their use because of my vain hope as a taxpayer, that we can reduce costs by reasonable acceptable conventions. Adopting these five major accounts for tracking direct costs is such a convention. Further, these are the five the government cares about.

Subcontractor Definitions

Now to some of the definitions:

FAR 3.502-1

“Subcontract” means a contract or contractual action entered into by a prime contractor or subcontractor for the purpose of obtaining supplies, materials, equipment, or services of any kind under a prime contract.

“Subcontractor” (1) means any person, other than the prime contractor, who offers to furnish or furnishes any supplies, materials, equipment, or services of any kind under a prime contract or a subcontract entered into in connection with such prime contract; and (2) includes any person who offers to furnish or furnishes general supplies to the prime contractor or a higher tier subcontractor.

FAR 4.1.1701

“First-tier subcontract” means a subcontract awarded directly by the contractor for the purpose of acquiring supplies or services (including construction) for performance of a prime contract. It does not include the contractor’s supplier agreements with vendors, such as long-term arrangements for materials or supplies that benefit multiple contracts and/or the costs of which are normally applied to a contractor’s general and administrative expenses or indirect costs.

FAR 52.244-2

“Subcontract” means any contract, as defined in FAR Subpart 2.1, entered into by a subcontractor to furnish supplies or services for performance of the prime contractor a subcontract. It includes, but is not limited to, purchase orders, and changes and modifications to purchase orders.

Subpart 22.801

“Subcontract” means any agreement or arrangement between a contractor and any person (in which the parties do not stand in the relationship of an employer and an employee)—(1) For the purchase, sale, or use of personal property or nonpersonal services that, in whole or in part, are necessary to the performance of any one or more contracts; or (2) Under which any portion of the contractor’s obligation under any one or more contracts is performed, undertaken, or assumed.

“Subcontractor” means any person who holds, or has held, a subcontract subject to E.O. 11246. The term “first-tier subcontractor” means a subcontractor holding a subcontract with a prime contractor.


So much for the FAR not defining subcontractors and the definition not covering ‘services’ provided by consultants and other professionals. Having said this, it is critical to remember that FAR definitions typically apply to the section where they are found. For example, the last definition is found in the Equal Employment Opportunity section which is why it further defines subcontract as non employment.

This is where the FAR experts, Contracting Officers, DCAA auditors, and other government employees can spend too much time parsing the FAR in an attempt to twist it into what they mean. A few years ago, a DOE pricing specialist in a vain attempt to prove that the contract was enforceable before the FAR, ended up accidentally accusing the contractor of criminal fraud. Context is critical to pulling out FAR clauses.

But sometimes, the only regulatory guidance is stranded in strange places. The ONLY guidance on how to withdraw an incurred cost proposal properly is found under “Indirect Cost Rates” (FAR 42.7) but under the section about waving penalties (42.709-5)

Now, having said that, the first three definitions appear numerous times in the FAR and could be argued to create a general definition. Let us look at some of the general conclusions we can draw from these definitions:

  • Subcontracts, for government contracting purposes, only apply to direct costs. Many DCAA auditors attempt to apply subcontractor regulations and procedures to costs charged as indirect. Notice one definition specifically addresses this. Professional and consultant costs are covered under FAR 31.205-33. This FAR section seems to assume such charges are indirect; but is not specific about consultants as a direct charge, and not burdening them with the additional definition as a subcontractor.
  • There does not have to be a contract, note the term ‘contractual action’ in the first definition and the inclusion of purchase orders in other definitions.
  • Your weekly trip to Walmart for office supplies does not make Walmart a subcontractor. Any contractual action, to include the right of return, does not create a subcontractor relationship. Again, I am not a lawyer, but I do believe this is a bit of a grey area. A recent example of this was the IRS attempt to force business to issue 1099s to everyone. Fortunately, Congress corrected the situation. Vendors such as Walmart are not subcontractors, but a plumber that provides services on multiple contracts is a subcontractor even if one of the definitions would appear to make this an exception.

As a final look at the regulations, let us look at the requirements reference subcontractors for the contractor’s incurred cost proposal found at FAR 216-7(d) :

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contract information).

Complicating Your Life

Now if we are all depressed about the definition of a subcontractor and recovering from our dashed hopes of trying to avoid the extensive subcontractor requirements, let us look at a couple of other common actions small business contractors take with subcontractor costs that can actually complicate their lives.

  • Treating subcontractors as Direct Labor – This is fairly common. For example: Jane, your 1099 ‘employee’ works alongside the regular employees and is invited to all of the parties. Your customer may even require her to fill out a timesheet just like the regular employees. This treatment does presents a couple of challenges.
    1. First, since you treat Jane as an employee and charge her time to Direct Labor; the IRS will decide she is an employee and will send you a bill for her payroll taxes, interest, and penalties. There is now even a section on Jane’s tax return to tell the IRS about this.
    2. Second, as if the first issue was not enough, it makes a bit of a challenge to reconcile your payroll to your labor costs, as required by regulation and on the Schedule L of the DCAA model ICE. If you segregate the 1099 costs in their own account under Direct Labor, you identified them as nonemployee and we are back to the subcontractor identification.
    3. Third, there is the issue of rates and comparative rates in competitive bidding. If you are including 1099 labor in your fringe and G&A base, an appeal could argue that your rates are artificially low and even deceptive. Additionally, we all know how many contracting officers hate paying G&A on subcontracts and will award only a special ‘handling’ or ‘management’ rate for the subcontractor part. I am sure they would be happy to discover what they consider subcontractor costs in Direct Labor.
    4. Fourth, many contracts require contractors to notify the contracting officer about any subcontracts and if a significant portion of your Direct Labor could be seen as actually subcontractors, this could present a problem to include allowability of the costs.
  • Another common approach is to classify all ‘consultants’ as Other Direct Costs. This decision would raise the same issues raised above as to rates and notification. Also, the common sense definition of Other Direct Costs are costs that cannot be easily categorized as Labor, Travel, Materials, or Subcontractors. DCAA might conclude that consultants would fail this categorization as Other Direct Costs.
  • Spreading the Joy – I mentioned the tax argument for segregating the subcontractor M&E costs and some of those engineers might express a desire to separate out the material costs from the subcontractor’s invoice.

These temptations are easily addressed by adding subaccounts to the subcontractor account for travel and materials, if you wish.


Ah, the joy of government contracting. Again, there are excellent reasons why contractors attempt to reduce the government (DCAA) involvement in subcontractor management. Both the regulation and guidance are extensive, to include a requirement to flow down clauses on employee texting while driving. Unfortunately, this is the nature of the beast and any attempts to reduce the government’s involvement in the contractor’s employment of subcontractor needs to be carefully planned and compliant with statute and regulation.

Running Your Business

Employee Handbook Issues — Sigh NLRD Ruling on Workplace Happiness

ALBUQUERQUE, N.M. — Your employer can’t make you be happy at work.
That’s what the National Labor Relations Board ruled earlier this year in response to complaints by Albuquerque call center employees against T-Mobile.

The board ordered the mobile communication company to delete portions of its employee handbook that prohibits employees from making disparaging remarks about the company and details how employees should maintain a positive work environment.

MORE at Albuquerque Journal at