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Department of Defense News, Running Your Business

Common Sense, Policies & Procedures, Hand Grenades, and a Corvette

Most of what we address in policies and procedures are common sense. What little that is not is government “sense”. I bet you wondered why I included hand grenades and a corvette. Let me tell you a tale from my youth.

DRF1

I served in the 82nd Airborne division as an infantry soldier during the cold war. One of the primary responsibilities of the 82nd (along with the 101st  and the 24th) was the ability to send a battalion size force anywhere in the world within two hours. Since the 82nd was burdened with parachutes and not helicopters (101st was not airborne when I served) or armored vehicles (24th), the primary burden fell on the 82nd.

The division was divided into 9 units of readiness status called “DRF” for Defense Readiness Force”. The highest status was DRF 1 which meant that the battalion needed to be able to assemble within two hours. For us, it meant no leave and we had to be within a half hour of the base at any time, ready to gear up and deploy.

Of course, Deployments happened for real and deployments happened for training, and God Bless the US Army, someone was always trying to figure out a way to improve the deployment process.

One of the slowdowns was issuing out ammo to the DRF 1 force. For example, as a grenadier, I carried seven 30 round magazines of 5.56 for my M203, about twenty 40mm grenades for the launcher, a belt of 7.62 for one of the platoon’s M60 machine guns, a couple of hand grenades, and other odds and ends in addition to food, water and my regular gear. I also carried half of a M47 anti-tank missile.

Multiple this load by 800 other guys with similar loads then add odds and ends such as mortar rounds, .50 caliber rounds, TOW rounds, etc.… and it adds up to several tons for us to carry and deploy. In addition, the force must deploy with adequate reserves, at least two or three times the amount we carried. two or three times that amount in reserve.

Half of a Brilliant Idea

This bottleneck led to half of a brilliant idea by someone in the chain of command. Why not pre-issue the ammo to the DRF 1 force? The immediate challenge this presented was how to secure the tons of deadly material. There really was not a warehouse within a DRF 1 unit for this purpose.

Well, all the units were across the street from a small area of woods fondly referred to as “Area J”. The battalions utilized Area J for quick training, physical training, and harassing new members of the division. “Smith, would you go and ask Top for the keys to Area J?”.

The idea some unknown person came up with was to issue the ammo and take the ammo out to Area J. Security? Put three strands of concertina wire around it and let put a squad to guard it. This is what they did the next time my battalion went on DRF 1.

I do not remember being told that we were going to have guard duty on top of everything else associated with DRF 1 status, but my squad came up on rotation and we got in a deuce and a half and deployed into area J and the ammo dump.

We were a tight squad and worked well together, my squad leader was busy with something else when we arrived and asked me to talk to the sergeant of the squad we were reliving.

Looking at the large number of crates around us, I asked the sergeant for the inventory form. He replied, “What inventory form?”

“What Inventory Form?”

Apparently, no one else shared my shock and I am sure the rest of the squad got tired of my complaining about this for the rest of the night. Yes, they agreed with me that it was a stupid idea, but bureaucracies, and the Army was often a bureaucracy with weapons, was full of stupid ideas.

We finished our guard duty, turned the ammo over to the next squad, and went back to the barracks. We heard nothing more about inventory for several months.

The Art of the Deal

The story we heard later was that a guy from one of the other companies in our battalion attempted to buy a car from a local dealership and failed to close the deal. He later decided to express his anger by returning to the dealership at night and chucking a hand grenade into it. The only injury, as we heard about was to a corvette.

What our young soldier did not realize, is the spoon of a hand grenade contains identifying numbers that allowed law enforcement to track the hand grenade back to one of the boxes issued to our battalion during the DRF 1 readiness period.

Consequences

The Army immediately locked our battalion down, bringing in all the guys who lived off post and putting them on the floors of our barracks. All the cars were searched, including mine, and no one was going anywhere until the hand grenades were located or at least accounted for.

It took several days for the culprits to confess (sometimes peer pressure is a wonderful thing), and the story was that they stole at least one CRATE of hand grenades.

I assume they were courtmartialed, or if the Army wanted to keep it quiet – an Article 15. I was just happy to return to a normal life.

Common Sense

Maybe it was asking too much for infantry grunts to think about inventory, although in my young mind it was the word “accountability”.  I often wondered how the ammo got checked back in without an inventory, or just who the hell signed for it.

Accountability is a critical concept is government and business and this is one of the stories that led to my development of Single Point of Responsibility (SPR) as an essential management tool.

Government personnel and contractors should always think in terms of accountability and responsibility in their actions. It does not matter if it is hand grenades, dollars, or even human beings you are responsible for. Developing systems of accountability is simply common sense.

 

 

 

 

 

 

 

 

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Cost And Accounting, Running Your Business

The Costs Must Go Somewhere

Good morning,

To follow up on our discussion yesterday about the markups, overhead, and G&A.

In 2017, we had 13.422M in subcontractor revenue we billed as the prime against 12.254M in direct costs for a gross profit of 1.167M or 8.7%.

In 2017 G&A expenses made up 10.97% against the direct costs and associated fringe benefits (allocation method referred to as Total Cost Input (TCI)).

When the G&A costs are allocated against the subcontractor costs the net profit disappears on the subcontracts. The 1.167M drops to a loss of -177k,  the 8.7% gross profit is reduced to a loss of -1.32% on the net profit.

The natural question that arises in cost allocation is what happens if we do not allocate the G&A to the subcontractors. This is a common demand from program managers and government contracting officers.

G&A simply cannot disappear, it has to has to go somewhere. The next common method of allocation most contractors often think of is to burden Direct Labor and its associated fringe with the G&A.

While in 2017, using the approved TCI method above that resulted in a financial loss on our use of subcontractors, the same TCI method resulted in a profit on direct labor. We had a 24.69% net income on Direct Labor and associated fringe. There was 4.638M in direct labor revenue against 3.148M in direct labor costs to include fringe for a gross profit of 1.491M. When the G&A is allocated utilizing the TCI method the net profit is 1.145M or 24.69% profit.

At first glance you may wonder why there is a difference in profitability. The difference occurs due to differences in revenue (billing) not costs. We have overall higher billing on our labor costs as compared to our minimal and unprofitable markup on subcontractor costs.

If you shift the G&A from subcontractors to direct labor you get back the 1.167M in profits on the subcontractors but the profit on direct labor vanishes and moves to the negative, a loss of -7.85% is created for negative -364k from the positive 1.145M.

Again, the G&A costs must go somewhere, and the government is perfectly willing to negotiate us into bankruptcy.

Despite the objections from the programs and contract people, Total Cost Input is the regulatory defined de facto method of cost allocation. Changing allocation method does not eliminate costs, it only moves them somewhere else. Again, the costs have to go somewhere.

 

 

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Accounting System, Cost And Accounting, Department of Defense News, Running Your Business

A World Without DCAA hits SBIR Phase One

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):

  • Monthly Status Reports, including master schedule for Phase II activities, quad chart, table showing each task description, percentage completed, targeted completion date, revised dates (if applies), etc.
  • Monthly Financial Status Report showing reporting month, cumulative costs, allocated financial data for direct labor categories, labor hours, labor rates, consultants/subcontractors cost, travel, materials purchased, etc.
  • Monthly status calls “

Section A-5

https://www.fbo.gov/index?s=opportunity&mode=form&id=41268594cdfdef40295cae324d0b2abe&tab=core&_cview=1

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.

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Accounting System, Department of Defense News, Running Your Business

DFARS Cyber Security for Small Business Contractors

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.

https://www.darpa.mil/work-with-us/for-small-businesses/cybersecurity

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

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

How to LOSE Those PROFITS (What DCAA and the Government Will Do to You)

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.[1]

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.[2]

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.[3]

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[4] 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.

[1] Evaluation of Defense Contract Management Agency Actions on Reported DoD Contractor Business System Deficiencies (Project No. D2013-DAPOCF-0201.002) DODIG-2016-001

[2] Lockheed Martin just finished three years of fee withholding for a noncompliant estimating system.

[3] Armed Services Board of Contract Appeals (ASBCA) 56581 and 58038

[4] We will discuss the regulations later in the chapter.

Excerpt from Surviving a DCAA Auditavailable on Amazon

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Accounting System, Running Your Business

The Good Lord Forgive Me, My Favorite Embezzlement Story

http://articles.chicagotribune.com/1995-06-23/news/9506230160_1_arthur-andersen-tax-officials-fraud-and-tax-charges

Audit Firm Victim Of Embezzling

June 23, 1995|By Matt O’Connor , Tribune Staff Writer.

Arthur Andersen & Co., which helps set up internal controls for companies to prevent employee theft and fraud, itself was victimized by a longtime employee who embezzled $2.3 million over five years, authorities alleged Thursday.

During 21 years with the Chicago-based firm, Raymond R. Parcon, 42, of Naperville, rose to become a tax manager in the firm’s U.S. Tax Group, from which position he engineered the clever scheme, according to charges filed in federal court.

Among his duties, Parcon had authority to issue checks to federal and state tax authorities to pay Andersen’s employee tax obligations, prosecutors said.

On repeated occasions between mid-1989 and early 1994, he falsified paperwork to make it appear sizable checks had been sent to the Internal Revenue Service and Illinois tax officials to cover the company’s withholding obligations, prosecutors said.

In reality, Parcon submitted those checks, sometimes for hundreds of thousands of dollars at a time as payments on his personal tax debt, and then claimed huge refunds from the IRS and the Illinois Department of Revenue, the charges alleged.

When the money was refunded to him, Parcon deposited the funds in his personal bank accounts, the government said.

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