DCAA Relations, Incurred Cost Proposals

Contractor Rights Expanded

Let DCAA speak for itself…..

 

This memorandum is being issued to confirm that Agency policy will be revised to require incurred cost submissions to be reviewed for adequacy within 60 days of receipt, as required by the 2018 NDAA enacted on December 12, 2017. The DCAA CAM will be updated to reflect this requirement. Therefore, for any incurred cost submission received since December 12, 2017, the audit team must complete the adequacy review and notify the contractor of the results of the adequacy review within 60 days.

Another important aspect of the NDAA requirement is completing incurred cost assignments within 12 months of receiving a qualified submission after the date of enactment (December 12, 2017).

http://www.dcaa.mil/content/Documents/mmr/18-PIC-001.pdf

 

 

 

 

 

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DCAA Relations, Incurred Cost Proposals

Great Job DCAA and Senator McCasskill!

But lessons to be learned for contrtactors….

 

https://www.militarytimes.com/news/2018/04/14/how-in-the-world-are-taxpayers-paying-for-alfa-romeos-and-bentleys-senator-pushes-army-leaders-on-afghan-contracts/

 

 

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DCAA Relations, Incurred Cost Proposals

Survivors of the 2008 DCAA Crisis are Now Supervisors…..

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):

“Inquiries:
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.

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Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Thank You DCAA for New Adequacy Guidance.

I can take this one of two ways:

  1. DCAA now agrees that adequacy is defined by the regulation and should not be subject to individual auditor whims.
  2.   Doing the right thing means doing less work upfront as they probably will not audit anyway.

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

  1. Comparative analysis of indirect expense pools detailed by account to prior fiscal year and budgetary data can be provided on the following schedules:
  2. Supplemental Schedule A-1 – Overhead
  3. Supplemental Schedule A-2 – G&A
  4. Supplemental Schedule A-3 – Intermediate Pool Costs
  5. Supplemental Schedule A-4 – Direct Costs

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.

  1. Supplemental Schedule B – Compensation for Certain Contractor Employees per FAR 31.205-6(p).
  2. Supplemental Schedule C – Prime Contracts Under Which the Contractor Performs as a Subcontractor.
  3. Supplemental Schedule O – Contract Briefs.
  4. List of ACOs and PCOs for each flexibly priced contract.
  5. Identification of and information on prime contracts under which the contractor performs flexibly priced effort as a subcontractor.
  6. List of work sites and the number of employees assigned to each site.
  7. Description of accounting system.
  8. Procedures for identifying and handling unallowable costs.
  9. Certified financial statements or other financial data (e.g., trial balance, compilation, review, etc.).
  10. Management letter from outside CPAs concerning any internal control weaknesses.
  11. Actions that have been and/or will be implemented to correct the weaknesses described in number 11 above.
  12. List of internal audits or other types of audits or studies performed by other than DCAA in this fiscal year.
  13. Annual internal audit plan of scheduled in process but not issued audits in this FY.
  14. Federal and state income tax returns (Schedule R).
  15. SEC 10-K report.
  16. Minutes from Board of Directors meetings.
  17. Listing of Delay and Disruptions and Termination Claims submitted which contain costs relating to the subject fiscal year.
  18. Contract Briefings – (Schedule S) Contract briefings generally include a synopsis of all pertinent contract provisions, such as, contract type, contract amount, product or service(s) to be provided, applicable Cost Principles, contract performance period, rate ceilings, advance approval requirements, precontract cost allowability limitations, contract limitations, and billing limitations. A typical format for the briefings is shown on Schedule S.  A contractor need not use the example form if the information is already generated and available within its automated accounting or billing systems.”
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Accounting System, Cost And Accounting, DCAA Relations, Incurred Cost Proposals

DCAA and the Myth About Return on Investment (ROI)

Return on Investment (ROI) always proved a concept of limited value and extreme abstraction in government.  How does one measure the ROI associated with a paratrooper sitting on the ground at the green ramp waiting to deploy in harm’s way?  How is the ROI measured on a nuclear missile resting in its silo?

Several years ago, DCAA adopted ROI as one of its main arguments to defend (or excuse) the quantity and quality of their work to taxpayers.  ROI was an alternative to other measurements such as audit productivity, down to 1.06 audits per year per auditor from 1.5 in 2012.   Additionally, form your own opinion about the fact that DCAA wins only half of the fights that get past the auditors and are made by someone outside DCAA.

Let us not forget that one of DCAA’s critical missions, and long neglected by their own admission, is to prevent or reduce costs associated with cost findings by auditing by approving or disapproving contractor’s business systems. I argue that developing and subsequent auditing of a compliant accounting system is a major return on investment for both the contractor and government. I will point out that DCAA recently developed and launched new tools that make major strides in this area with preliminary checklist forms and new audit programs that I believe will greatly enhance DCAA’s future efforts in this area.

I question how DCAA measures ROI as they include forward pricing ‘savings’ in the calculation. This is a classic example of counting your chickens before the eggs hatch.  If a contractor proposes $100,000 in fringe benefit costs and DCAA only approves $80,000, DCAA counts the $20,000 toward ROI. Unfortunately, when the year ends the contractor may discover the fringe costs proved $110,000 and bill the government for the $30,000 in difference.  To further complicate the issue, the incurred cost submission may propose a different number and the subsequent audit even a fourth number[1].

The irony of all of this is the development of the ROI model contributed to DCAA’s current crisis, the continued replacement of DCAA as incurred cost proposal auditors by outside accounting firms. ROI is now a dangerous temptation in evaluating ‘independent” accounting firms’ “success” in auditing incurred cost proposals.

In recent testimony before Congress, Industry complained that DCAA acted more like a collection agency than auditors. Imagine our response if this becomes formalized as commercial contractors are awarded contracts on their promises regarding return on investment.

www.dcaacompliance.com

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[1] There is no indication that DCAA follows the potential saving through the entire chain. First, they do not report how they calculated the ‘savings’ and given the incurred cost proposal backlog of years, one would wonder about the practicality of going beyond the simplest and first number.

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

I Will Pay You on Tuesday Out of My Award

 Let us finish my look at 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 look at the last two areas, “Accrued costs crossing the fiscal year” and “Bonuses”. Again, I am not a lawyer and this is not legal advice. I am an accountant and there may be some accounting advice.

Accrued Costs Across Fiscal Years.

Twice in the ruling the government raises an objection to the allowability of TCI’s costs because TCI accrued them in one year and expensed them in a subsequent year. At least I hope that is the government’s objection as the only reasonable alternative opens up a can of worms that the government would appear blind to.

Here are the two objections:

The ACO also disallowed some of the bonuses because they were paid in March 2008, in the fiscal year after FY 2007, which is the subject of this ICP.

And

According to the COFD, this prohibition prevented TSI from submitting its legal costs contemporaneously with their being incurred, 15 but the reason that TSI gave the DCAA for submitting the costs in the FY 2007 ICP, instead of in 2006 (when it supposedly became aware of the fact that it was cleared of wrongdoing), was that it “forgot” (R4, tab 16 at 260). Mr. Fletcher (with whom DCAA was dealing and would have been the person who DCAA claimed stated that he “forgot” to include the legal fees in FY 2006) denies ever making such a statement to DCAA (tr. 2/212).

For its part, the government does not dispute the fact that the legal fees for the investigation, as subjected to the 20% discount, would otherwise be allowable (see gov’t br. at 62, 64 ), but argues that the fees were expensed to the wrong year (id. at 62-63).

In the first case, the Board ignored the timing argument and disallowed the bonuses for reasons we will discuss later. In the second case, the Board directly rejected the timing argument in reference to the legal fees and allowed the majority of the fees.

Over the years, I encountered this timing argument from only a couple of DCAA auditors. Auditors raised the argument rarely and we addressed it pretty quickly by responding that GAAP required the accruals. The question displays a limited understanding of accrued accounting which is forgivable in a young auditor working through the differences between cost and expense. It is a bit more difficult to understand when the limited understanding rises all the way up DCAA and into an appeal before the Appeals Board. It is disheartening to look at the Appeals Board teaching DCAA GAAP 101.

Let us start with a simple absolute rule: if a cost is properly accrued and recorded, this is only reconsidered if the original entry is invalidated. An example of invalidation would be a subsequent decision not to pay the accrued expense. I would also note that GAAP enjoys extensive procedures for addressing such a subsequent event.

Legal fees present some unique challenges in government contractor accounting. Legal fees are, in my humble opinion, one of the only reasons for suspense accounts, as I go into detail about in this previous article. As I recommend in this article, legal costs where the allowability is unknown at yearend should be capitalized (after being accounted for tax and financial statement purposes) and expensed out as either claimed or unclaimed when their character is recognized. This would be a GAAP compliant policy in keeping with government contracting requirements.

In order for the government’s argument to make sense — that the contractor “forget” (see above) and the contractor expensed them in the wrong year, there are only three reasonable possibilities: 1) the costs were not on the general ledger or 2) the expenses were not recorded properly in the first place (capitalized instead of expensed), or 3) the expenses were capitalized but not expensed properly (the wrong year).

Obviously, the first issue is the can of worms I mentioned earlier and, if true, we would be experiencing a completely different discussion.

The second possibility is one that major publicly traded corporations are often accused of – unnecessary capitalization to control earnings. Not something a tax paying small business if often accused of, and again the argument here would not be timing but why the expense was capitalized.

As noted above, GAAP enjoys extensive rules to address mistakes surrounding the third possibility and DCAA does not appear to raise these, especially in light of both times DCAA raises timing in this case (bonus and legal fees).

No, DCAA seems to object to the fact that the contractor wishes to charge the government in 2007 but not pay it until 2008.

Hm, isn’t that concept enshrined in the FAR at FAR 52.216-7? The one where a few DCAA auditors chastise contractors for not paying accrued expenses fast enough?

Come on DCAA, the real question is if the contractor reversed the accruals in 2008 before paying them or just expensed them again.

Bonuses

Bonuses or Incentive pay, present unique challenges for contractors. The issue is complicated by the specific and narrow regulations found within the FAR.

The Appeals Board quotes FAR 31-205.6(f) in its entirety but also utilized FAR 31-205.6(a)(6) when they refer to profits:

“This determination is buttressed by evidence that Mr. Fletcher considered the bonus pool to effectively come from company profits and the fact its distribution ca at the whim of TSI’s “in” group, justifying “close scrutiny,” Nolan Brothers, 437 F.2d at 1834, which it simply cannot withstand.”.

Every time a DCAA auditor brings up the ‘distribution of profits’ I respond, or am tempted to respond, that the statute defines the 401(k) as a ‘profit sharing’ plan and that is allowable.

I believe it is proper for DCAA, and in this case the Appeals Board, to use the IRS distribution of profits as a method for assessing unclaimed bonuses, I just wish they understood it better. The IRS standard is directed toward ‘C’ corporations that pay out all of the profits at year end as a bonus to avoid the double taxation inherit in ‘C’ corporations. But the rules work as a good method of determining what is a profit and what is earned compensation.

What every small business contractor wants is the right to award employees, at management’s complete discretion, for a job well done. I imagine the employees would like the same.

The regulations take all the fun out. In order to pass muster a bonus plan must be so well written that it is “an agreement to make such payment”. TCI failed this standard even after they thought they received DCAA acceptance.

So what is a poor small business contractor to do? Why the same thing the huge federal government does: avoid the words “bonus” or “incentive pay”.

Remember the GSA bonus scandals a few years ago? When the federal government handed out millions of dollars to employees despite poor performance? Look for the words “bonus” or “incentive pay” in GSA policies.  The word “bonus” is there alongside another program not as extensively defined: “award”.

Contractors are free to develop well written and measurable bonus plans that meet the regulatory requirements. Contractors should also reserve the right to award employees for single or periodic exceptional performance (as does the federal government).

Of course awards are subject to audit and question by DCAA, but under the reasonable and prudent standard plus a possible excessive compensation argument.

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DCAA Relations, Department of Defense News, Incurred Cost Proposals

Bales Testifies Before House, Industry refers to DCAA as a “Collection Agency”

DCAA Director Bales testified yesterday before the House Armed Services Subcommittee On Oversight and Investigations. Here is a link to her written testimony: http://docs.house.gov/meetings/AS/AS06/20170406/105777/HHRG-115-AS06-Wstate-BalesA-20170406.pdf

My Highlights:

  1. The Risk Assessment program for incurred cost proposal audits will continue.
  2. Outside CPA firms doing audits of incurred cost proposals are a bad idea because they are not qualified and lack governmental authority.
  3. She opposes proposed legislation requiring GS-14 managers to be CPAs because CPA skills do not translate to government contracting work (Yes, we are going to have fun with that one).
  4. She opposes proposed legislation requiring incurred costs proposal audits to be completed within one year of adequate submission because this would eliminate the efficiency of doing multiyear audits.

What is not clear is if DCAA is actually caught up. In the era of parsing words within the beltway, she states that there still is a backlog and the hiring freeze makes it impossible for them to catch up.

Best line from the industry testimony so far:

David Berteau, Professional Services Council

“As one of our member companies characterized it, DCAA should focus on being an auditing agency, not a collection agency”

 

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