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

GAO Turns Left at Albuquerque and I Did Not Even Get the Chance to Wave….

The Ignorance regarding how DCAA works is not limited to contractors, but is prevalent (no surprise) among government acquisition staff. The ignorance found among the GAO appeals division is a bit surprising and disconcerting.

There have been several decisions recently supporting the acquisition staff’s positions requiring a DCAA approved accounting system. Bidders who are not “DCAA Approved” face disqualification or penalization in the bidding process. Look at my recent article on this issue.

In the famous words of Bugs Bunny “I knew I should have taken that left turn at Albuquerque”, the GAO has taken a strange turn moving government contracting out of the Twilight Zone and into Toonland.

Now, A contractor is not only required to bid with only an approved DCAA accounting system, but must have a positive assertion of the DCAA approval. The contractor asserting such and even providing the DCAA audit report number is now deemed inadequate.

DISCUSSION

Leader essentially argues that the solicitation required only that offerors have received verification from DCAA that their accounting systems had been audited and determined adequate, but did not require the submission of any documentation from DCAA itself.[3]  Protest at 5-6; Comments at 3-4.  In this regard, Leader contends that its elimination from the competition was unreasonable because Leader met the RFP’s requirement by providing its own unambiguous statement that its accounting system had been audited and approved by DCAA, along with the 2008 DCAA audit report number and additional information.  Id.  In Leader’s view, this information was sufficient for the agency itself to independently confirm with DCAA the verification and audit of its accounting system.  Id.

In response, the agency acknowledges that a DCAA audit report would have been an acceptable source of verification; however, it explains that the solicitation expressly required offerors to furnish verification from DCAA with its proposal.  AR, MOL at 8; AR, see also Supp. MOL at 3-6.  In this regard, the agency also explains that the solicitation did not permit offerors to essentially self-verify the adequacy of their accounting systems.  Rather, by requiring offerors to provide verification from DCAA, the agency would obtain independent verification that offerors’ accounting systems had been audited and determined adequate.  Id.

When a dispute arises as to the actual meaning of solicitation language, our Office will resolve the matter by reading the solicitation as a whole and in a manner that gives effect to all provisions of the solicitation.  See Level 3 Commc’ns LLC, B-412854 et al., June 21, 2016, 2016 CPD ¶ 171 at 7; KAES Enters., LLC, B-411225 et al., June 18, 2015, 2015 CPD ¶ 186 at 5.  A solicitation is not ambiguous unless it is susceptible to two or more reasonable interpretations. WingGate Travel, Inc., B-412921, July 1, 2016, 2016 CPD ¶ 179 at 7.  If the solicitation language is unambiguous, our inquiry ceases.  Id.

On this record, we find that the agency’s interpretation of the solicitation, when read as a whole, is reasonable, whereas the protester’s interpretation is not reasonable.  Here, the solicitation stated that an offeror “must have verification from [DCAA]. . . of an accounting system that has been audited and determined adequate” in order to be eligible for award.  Id. at L-17 (emphasis added).  The solicitation also advised that the agency would “evaluate evidence that the [o]fferor . . . [has] an adequate accounting system . . . as required under Section L.3.1.h.”  Id. at M-3 (emphasis added).  Finally, the solicitation cautioned that failure to “furnish verification of an adequate cost accounting system” would result in a rating of unacceptable and render the proposal ineligible for award.  Id. (emphasis added).  As explained by the agency, contrary to Leader’s contentions, the solicitation did not contemplate that an offeror could simply provide a declarative statement in lieu of the submission of evidence from DCAA verifying the adequacy of the offeror’s accounting system.  See AR, Supp. MOL at 5.  On this record, we find that the agency followed the clear and unambiguous terms of the solicitation and reasonably found Leader’s proposal unacceptable because it did not provide verification from DCAA that its accounting system had been audited and deemed adequate.[4]

Leader also argues that its proposal should nonetheless have been accepted because it satisfied the agency’s actual and reasonable needs, its acceptance would not result in unfair prejudice to other offerors or provide Leader with a competitive advantage, and it contained sufficient information for the agency to obtain additional verification or confirmation with DCAA.  See Protest at 6; Comments at 7-8.  We disagree. 

Clearly stated RFP requirements are considered material to the needs of the government, and a proposal that fails to conform to such material terms is unacceptable and may not form the basis for award.  AttainX, Inc.; FreeAlliance.com, LLC, B-413104.5, B-413104.6, Nov. 10, 2016, 2016 CPD ¶ 330 at 5; TYBRIN Corp., B-298364.6, B-298364.7, Mar. 13, 2007, 2007 CPD ¶ 51 at 5; National Shower Express, Inc.; Rickaby Fire Support, B-293970, B-293970.2, July 15, 2004, 2004 CPD ¶ 140 at 4-5.  As explained by the agency, here, the requirement to provide verification from DCAA was a material requirement, the waiver of which would result in an inconsistent and unfair evaluation, thereby prejudicing other offerors.  See AR, MOL at 6-7; AR, Supp. MOL at 7.  Accordingly, we have no basis to sustain the protest. 

Well, golly gee, what is next? Are we awaiting a disqualification because the DCAA audit is not fresh (over two years old)?

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

The Good and the Bad — All in the Same Audit

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

  1. Supporting Material Overhead rate
  2. DCAA auditor independence
  3. DCAA’s right to change their mind in subsequent audits
  4. Tax vs. Book on depreciation issues
  5. Bonuses
  6. Accrued Costs crossing fiscal year
  7. Unapproved subcontractors
  8. An excellent example of DCAA properly developing findings.
  9. Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about developing findings and documenting consultants’ work products. Again, I am not a lawyer and this is not legal advice.

 

Developing Findings

The fact that I consider this topic worthy of discussion illustrates the reality that the failure of auditors to properly develop findings is an ongoing issue in too many DCAA audits. Way too often, the first time a contractor hears about a proposed finding is when it is proposed.

During a recent DCAA auditor, the auditor thought she could benefit from the research she did on me and my views by announcing her agreement with what she thought was one of my strong assertions:

“Well, we all know that the Contract Audit Manual. is not regulatory and only guidance”.

My response had a visible impact on her: “The CAM is guidance for contractors, but it is your standing orders. I would expect a DCAA auditor to follow those orders.”

Let us see what those standing orders in the CAM say about developing findings:

4-303.1(b) The auditor should discuss preliminary audit findings (e.g., potential system deficiencies, potential FAR/CAS noncompliances, etc.) with the contractor to ensure conclusions are based on a complete understanding of all pertinent facts. These types of discussions do not impair auditor independence and are generally necessary to obtain sufficient evidence to support audit conclusions.

 

6-708(b). During the course of the audit, significant audit findings should be brought to the attention of, and discussed with, the contractor, and when appropriate with the cognizant principal ACO and CAC, as soon as possible to expedite the resolution process (See 6-902e). The discussions are to ensure that the auditor’s conclusions are based on a proper understanding of the facts and to ascertain whether the contractor/ACO/CAC has any additional information which would support or modify the audit findings. This will enable resolution of the findings to take place prior to the completion of the audit. If agreement on an issue cannot be reached, the contractor should be requested to prepare a rebuttal for inclusion in the audit report. The process outlined above will result in an efficient audit that will conserve both audit and contractor personnel resources.

6-709(b). During the course of the audit, significant audit findings should be brought to the attention of, and discussed with, the contractor, and, where appropriate, with the principal cognizant ACO and CAC, as soon as possible so as to expedite the resolution process (see 6-902e). The discussions are to ensure that the auditor’s conclusions are based on a proper understanding of the facts and to ascertain whether the contractor/ACO/CAC have any additional information which would support or modify the audit findings

I simply cannot stress how many times simple misunderstandings were cleared up because the DCAA field operator brought it to our attention before taking it to their supervisor, and after that writing it up as a proposed finding. Heading off trouble at the earliest stages is an essential aspect of successful DCAA relationships.

One famous example was a DCAA auditor putting together this extensive spreadsheet that “proved” the contractor was calculating social security taxes incorrectly and that highly compensated employees were not paying their fair share of social security tax. He was still pretty embarrassed, but at least he had not written it up and sent it to his supervisor.

No one likes egg on their face and contractors should avoid watching DCAA auditors make fools of themselves. Sometimes this results a stubborn refusal on the part of some DCAA auditors to admit an error, such as my aggregating “Backspace Key Crisis

In the TSI case, it appears time and time again that both DCAA (at least the second auditor) and DCMA bent over backwards in the attempt to allow the contractor to dispute the findings. Despite this, it appears DCAA and DCMA stuck to their guns only to find the appeals board disagreeing with the auditors on over half of their findings.

Documenting Consultants Work Product.

It is a pure joy to hear the appeals board admonish DCAA with the exact arguments I made time and time again. I will let the judges speak for themselves:

The government labors under the false impression that the FAR requires a consultant to create “work product” merely for the purposes of proving its costs (see R4, tab 16 at 258, 260; gov’t br. at 54-55, 64-66). Though the FAR language in question is not as clear as we might like, it can be read- as we read it here – to impose no such requirement, Moreover, we have factually found the invoices submitted by TSI to be adequate to support a finding that TSI incurred the charged costs for SMI’s marketing activities.

We begin by examining that language of the FAR that the government holds out as requiring the generation and provision of “work product” to entitle recovery of costs for professional and consultant services. FAR 31.205-33, Professional and consultant service costs, provides in relevant part that:

(f) Fees for services rendered are allowable only when supported by evidence of the nature and scope of the service provided. work performed is proper and does not violate law or regulation shall include

(1) Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses, if any) with the individuals or organizations providing the services and details of actual services performed;

(2) Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided; and

(3) Consultants’ work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

The government makes a superficially persuasive argument, that the FAR’s statement that the evidence necessary to determine that the work is proper “shall include … work products” and related documents, makes the provision of such documents mandatory (gov’t hr. at 54). The problem with this interpretation of the FAR is that it does not account for the case in which such documents were never created by the consultant. Moreover, it does not account for the case where, as here, the invoices include the data that the FAR defines as work product, such as persons visited and subjects discussed. We further note, that DCAA’s own audit manual, reflecting the government’s own interpretation of this FAR requirement, provides that, “[t]he auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.” DCAA Manual, at 58-2 – 58-3. Moreover, amongst the “Frequently Asked Questions” in the relevant portions of the audit manual are responses indicating that other additional evidence may be considered to determine whether the services were, indeed, provided and allowable. Id. at 58-7.

Thus, we conclude that FAR 31.205-33(f) may require the provision of a consultant’s work product, if it exists, but is not so rigid as to require its creation when it would not otherwise be necessary for the consultant to perform its duties. To be sure, any lack of work product makes it more difficult for a contractor to prove that it incurred the costs for which it seeks compensation, and the lack of work product in an instance where the consulting work was of such a scale or scope that work product would be expected may properly subject the costs to question. As with most things, the proper amount of documentation and work product to be expected will largely depend on the scope of work performed, and we do not conclude that the FAR 25 intended to impose “make work” upon consultants that would only lead to higher costs to the contractor which would then be imposed upon the taxpayer.

Turning to the facts before us, we have found that the consulting agreements and the invoices provided, combined with the testimony given at the hearing, persuade us that the costs included in TSI’s FY 2007 ICP for SMI’s marketing services were, in fact, for that purpose and are allowable. This portion of the appeal is sustained.

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Accounting System, Cost And Accounting, Incurred Cost Proposals

The Line Between Simplicity and Woops!

The  Armed Services Board of Contract Appeal is STILL down again for the second time in the last several months. I will not let this attack on democracy (although I am sure the government has an excellent reason for the prolonged denial of access to this information) stop our discussion of the TSI case.

Back to the recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (TSI) (ASBCA 59577 and the nine areas I believe are worth discussing:

  1. Supporting Material Overhead rate
  2. DCAA auditor independence
  3.  

    DCAA’s right to change their mind in subsequent audits

  4. Tax vs. Book on depreciation issues
  5. Bonuses
  6. Accrued Costs crossing fiscal year
  7. Unapproved subcontractors
  8. An excellent example of DCAA properly developing findings.
  9. Documenting consultants work product

The scratched out areas were discussed in previous articles. Today, I am going to talk about depreciation. Again, I am not a lawyer and this is not legal advice.

Depreciation

Depreciation and its evil sister Amortization often result in contractor upset stomachs and a desire to find a nice quiet spot somewhere where accountants can be beaten with long thin sticks. Tax and GAAP rules often differ significantly and can result in reconciling differences the contractor must track. To further add to this complexity, many accelerated tax depreciation methods are available for defined periods or under special conditions due to political decisions to impact the economy. Some depreciation methods are even restricted to certain neighborhoods (Okay, enterprise zones).

Too many contractors avoid this complexity and stick with a simple universal method for both tax and their financial (GAAP) books. This can cost the contractor real money but allows these individuals to sleep better.

TSI appears to have been one of those contractors who tried to keep tax and financial accounting together. Up until the year in question (2007), they depreciated their assets on a multiyear basis but in 2007 they ‘expensed’ out $26,198 in computer equipment of which $18,840 went onto the tax return as capital assets and expensed under Section 179. They claimed the full amount on the incurred cost submission.

TSI came up with an after-the-fact argument that reasonably argued some of the costs were not capital costs (short life), but admitted that not all of the costs fell into this category and could not identify the different equipment.

The Board took notice that TSI did not have any depreciation polices in 2007 or the previous years. In absence of contractor policies, the Board relied on consistency and noted that previous to 2007 the contractor utilized multiyear depreciation. As a result, TSI lost most of the 26k it expensed on the incurred cost proposal.

Depreciation policies and procedures are not specifically addressed in DCAA’s preaward audit program or in the government’s SF 1408. This is another excellent reason why contractors should adopt comprehensive policies and procedures and move past what DCAA looks at initially. The only real FAR restriction for small contractors, as noted by the Board, is not to charge the government more than is found on your financial books.

Depreciation Lessons

  1. Depreciate Often and Wisely – Contractors should take advantage of tax benefits allowed and should set up systems that allow the differences between tax and GAAP to track easily by utilizing memorandum or reversing journal entries as a simple example. Many software programs offer to track this difference with little effort. This leads to the second point.
  2. Policies and Procedures Protect and Explain – It is not just about compliance, excellent policies and procedures serve as a roadmap allowing a contractor to see where they have been (current policy and procedure) and figure out where they want to be (adapted policy and procedures). To phrase this in a way many of my engineering clients will appreciate: How can you begin to discuss modifications to a design without the current specification sitting in front of you? Policies and Procedures are your business specifications.
  1. Excellent Policies and Procedures are Dynamic – Want to adapt accelerated depreciation? Look at your needs, GAAP, and other compliance issues and move forward. Just do not forget to include the changes on your Schedule M.

One final note, the Board, as is typical, ordered the government and TSI to recalculate the rates based on the Board’s decision. I wonder if there will be arguments on the allowable 2007 depreciation, given the lack of governing policies and procedures? I imagine they will eventually agree on the method used in previous years, but the DCAA may have question about those now that the light is focused on the issue. I am also curious if DCAA proposed disallowing ALL of the 2007 depreciation and the Board caught this.

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