But lessons to be learned for contrtactors….
But lessons to be learned for contrtactors….
A DCAA auditor recently contacted a client with a concern about their incurred cost submission for 2014, The auditor asked the following (contract information redacted):
1) In comparing on Schedule I to Schedule H, Schedule I, cell G30 ($38,287) and Schedule H, cell P36 ($34,579) are both values for FYE 2014 Costs, Subcontract XXXXXXXXXX. What accounts for the difference between these two numbers?”
If you could not guess, this was the T&M section of the Schedule I. This section of the Schedule I records the government’s costs while the section referred to in the Schedule H records the contractor’s costs. Under any reasonable circumstances they should not tie. A careful reading of DCAA’s own adequacy checklist confirms this (link to Schedule K not H).
Answering this type of question is a conversation I try to have over the telephone or in person. I avoid putting our response in writing due to the fear of focusing the adequacy discussion on the government and not the contractor.
I telephoned the auditor and she immediately agreed with my response but insisted that I reply in writing to provide a record of the response. This is when I guessed that the question originated with her supervisor and not herself. Apparently, a supervisor who survived the DCAA Internal 2008 Adequacy Crisis and is now a supervisor.
Here are some of the requirements from the Department of Homeland Security’s latest SBIR RFPs
“Additional deliverables in this phase include the following (templates to be provided later by the federal Program Manager):
I recently participated in a Navy SBIR conference where one of the other panelists encouraged contractors not to worry about the budgets on their SBIR Phase One. It appears that may no longer be the case.
I had a dim memory of the DOD program staff asking for similar reports years ago. I went to look and found one form so old that I cringed at the title: “Fund Man Hours Expenditures”. I imagine an updated version of this is in many small business contractor’s futures.
All of this underlines the importance of doing it right from the start. Contractors starting out should start out with a cost accounting system that will meet their needs and the government requirements.
In 1998, I listened to an IT staff member from a large contractor proceed to chew out the contractor’s accounting staff for ‘losing’ a folder stored on the company’s servers containing all of the year-end closing work. He proceeds to call the staff “idiots” and ignorant while glossing over the fact that the IT department’s backup of the critical data had failed the night before.
He noticed my smile and could not decide if I was agreeing with him or laughing at him, so he asked me what the F**K I was smiling about. I replied,
“I want to thank you. For years people have criticized accountants as being unresponsive to the company’s needs, speaking a language no one else understands, and not really caring about the success of the company. People now say this about IT people instead”.
A few weeks later a software consultant, with full access to all of the IT systems, destroyed the company’s general ledger by using direct access to the database to create new balances in 146 general ledger accounts. The consultant then spent months trying to fix the error while hiding it from the company. Nine months later, one of the company’s employees printed out a general ledger report that showed a WIP balance of a little over two million dollars while the subsidiary ledger showed an amount several times larger.
What saved us was the trial balance that I had printed out the day before the consultant screwed up the general ledger. I took the printout with me as a resource for my work for them with DCAA.
As a result of this lesson, and too many others, I started asking myself twenty years ago about the relationship between accounting and IT. Part of my thinking can be seen in the name I chose for my later technology company: “Accountable Technologies”. I would love to say that Edward Snowden was the final nail in the coffin, but there are thousands of accidental and deliberate Snowdens scattered across American businesses, large and small.
I personally believe that IT personnel should have episodic access to the accounting system; not at will. Perhaps you do not agree with this, fine.
But, you should take advantage of the new cyber security requirements adopted by the Department of Defense to think about the issue, to develop your own policies and procedures.
DARPA put up an excellent guide for small business with links to expanded materials. Take a look and think about it.
By, the way, if you were wondering what happened to the missing folder, an employee visiting from another location to document procedures, had moved the folder to her personal files for future reference thinking she had copied it. We discovered this a couple of hours later when she wandered in to the office.
More at www.dcaacompliance.com
I can take this one of two ways:
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
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.
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.
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.
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.
|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 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.
 Evaluation of Defense Contract Management Agency Actions on Reported DoD Contractor Business System Deficiencies (Project No. D2013-DAPOCF-0201.002) DODIG-2016-001
 Lockheed Martin just finished three years of fee withholding for a noncompliant estimating system.
 Armed Services Board of Contract Appeals (ASBCA) 56581 and 58038
 We will discuss the regulations later in the chapter.
Excerpt from Surviving a DCAA Audit, available on Amazon