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.


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.;, 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

One Little Email and We Might be Talking a Different Case

The Armed Services Board of Contract Appeal is 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 DCAA’s right to change their mind in subsequent audits. Again, I am not a lawyer and this is not legal advice.


DCAA’s Right to Change Their Mind

The disagreement between the ASBCA judges and too much of the 61-page opinion addresses the question of DCAA’s changing its mind from audit to audit and from auditor to auditor. To sum up, the two judges in the majority believe DCAA has a broad right to do so, while the minority judge does not.

I am not going to quote their respective arguments, which coincidently coincides with their website unavailability, because I believe this is a horrible case to address the issue.

If DCAA audits, or chooses not to audit, a subcontractor’s invoices in 2012 and sees nothing wrong; this does not prevent them from looking at the subcontractor’s new invoices in 2013 and deciding there is something wrong. All of the extensive legal arguments between the judges aside, the ability to look at costs fresh from year to year is simply common sense to me. This is not absolute but generally true.

One obvious area where DCAA must change its opinion is when there a change in law, regulation, or GAAP.

Does this infer that I believe DCAA is allowed to change their mind at any time and without any constraint? NO, IT DOES NOT. I just believe, despite the pages and pages dedicated to the issue, that this was not the case to explore DCAA’s mind changing abilities.

Let us look at some areas where I believe DCAA’s ability to change its mind is limited.


Underlying this, as is often the case with DCAA, is the fundamental issues surrounding burden of proof. DCAA auditors can propose findings based on two conclusions: first; the finding is based on a violation of statute, regulation, or GAAP[1]; second; the finding is based on DCAA’s assertion that the cost is unreasonable or imprudent.

If a subsequent DCAA auditor objects to a cost that a previous DCAA auditor allowed because the previous auditor missed an applicable regulation, then the new DCAA auditor is not only within rights to question, but is ethically obligated to proceed with the finding development. However; if the proposed finding is based on reasonableness (or unreasonableness), I believe the contractor enjoys a strong argument that the actions of the previous auditor establish the cost was reasonable and that the personal differences in auditors cannot form the basis for a finding.

Implicit in this is the assumption that both auditors actually sampled and audited the cost. If the first auditor did not actually sample and audit the cost, there is no assumption made.

Sometimes I believe the only person some DCAA auditors lacks respect for more than a contractor is another DCAA auditor. It does not surprise me that this second guessing occurs frequently, but I have now provided a basis for evaluation and objection.

For a closer look at burden of proof issues, look at these previous articles.


Another common area where we witness disputes between prior and present DCAA auditors is regarding documentation. The first auditor accepts the documentation while the subsequent auditor does not. Again, there is the assumption the first auditor actually sampled and reviewed the documentation. Again, if there is a SRG issue, especially a change in one of them, I believe the subsequent auditor has the right to raise the issue.

In most cases, the difference arises out of a different interpretation of the SRG. A good example is how some auditors read the requirement for consultant documentation. We will discuss this thoroughly in a future article on this case, but I will just point out that the judges noted that the subsequent DCAA’s auditor’s interpretation of the regulation on consultant documentation was wrong.

Where the documentation is basically identical, the issue gets a bit trickier. As the recent Lockheed Martin case asserted (I would link it if the website was up), inadequate documentation is not a reasonable and prudent argument. Because of this the burden of proof that the documentation is inadequate rests with the government auditor. Now the auditor has to demonstrate the documentation is inadequate despite the previous auditor’s acceptance. I think that is a challenge, but not an impossible one.

Policy and Procedure

Where DCAA should respect prior audit opinions is in the area of a contractor’s policies and procedures, and accounting structure.

DCAA recommended approval of an accounting system is a positive assertion on their part that the contractor’s accounting system is adequate for government contracting purposes. This is done by the auditor signing the SF 1408.

Some consultants sign the SF1408 and argue that this is the contractor’s privilege. I absolutely believe this is contrary to the regulation and it also takes away the DCAA signature accepting your accounting system and the positive assurance I am talking about.

I would argue that if it is covered by the SF 1408, the contractor and the government is provided assurance by DCAA that the system, to include policies and procedures is adequate.

For example, section 2(c) of the SF 1408 addresses allocation method.:

“A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives. (A contract is final cost objective.).”

There is a critical grammar mistake on the government’s part (is it “A contract is a final cost objective” or “A contract is the final cost objective”?).

Grammar question aside, an approved SF 1408 is an approval of the contractor’s allocation method (Total Cost Input, Value Added, or otherwise). DCAA should not subsequently object to the contractor’s allocation method unless there is a change (SRG or internal).

The SF 1408 is not comprehensive even if your policies and procedures are. Unfortunately, this does not mean that, as part of the process, when you send DCAA your hundred-page accounting policies and procedures you can assume they are all approved. I would only assume the ones covered by the SF 1408 are.

The best example of this are bonuses, which are not addressed in the SF 1408.

TSI believed they addressed the issue with DCAA. Their bonus plan was new to the year that was the subject of the audit findings and the appeals case. Before the submission they started a discussion on the bonus plan with DCAA :

“Mr. Fletcher testified that he met with DCAA auditor Marie Pepin for approximately two hours on 28 February 2008 to discuss the ICP for FY 2007 that would be submitted later in 2008, and raised the executive bonus plan with her during this discussion (tr. 2/121-22). According to Mr. Fletcher, Ms. Pepin said words to the effect of “this looks good to me,” and then they moved on to other subjects (tr. 2/123). We find, as a matter of fact, that this discussion was relatively short and superficial in nature and did not constitute any representation that the government gave final approval to the bonus plan as proposed or executed.”

I wonder if the court would have thought differently if TSI had employed my recommended procedures and followed up the meeting with an email documenting the agreement and attaching the plan?

If TSI had sent that email, we might have had a good case for deciding when and how DCAA can change its mind, even if DCAA ignored the email.

[1] I am going to refer to proposed findings based on statute, regulation or GAAP as “SRG” for the rest of this article.

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Very, Vary, Variance

Let us take a break from the Technology Services, Inc (TSI) case and talk about a continuing flaw in most small government contractor’s accounting system: tracking variances, specifically those associated with cost type contracts and the associated indirect costs.

Simply put, the variance is the amount the government owes you because your rates ran higher than your billing rates or the amount you owe the government because your rates ran lower than the billing rates.

DCAA’s Information for Contractors discusses the subject in Enclosure 5.

  1. Provisional Billing Rates.
  2. FAR 42.704 provides the CO (or cognizant Federal agency official) or auditor responsible for establishing the final indirect cost rates also shall be responsible for determining the billing rates. The Government allows interim payments, if authorized by the contract, during contract performance by progress payments for fixed-price contracts, or by public voucher for cost-type contracts. Reimbursement of indirect costs for these payments is generally made through billing rates that are established to approximately equal the expected final indirect cost rates for the contractor’s fiscal period, as adjusted for any unallowable costs. These billing rates are used for interim reimbursement purposes until settlement is reached on final rates after the end of the contractor’s fiscal year. Billing rates may be prospectively or retroactively revised by mutual agreement, at either the Government’s or contractor’s request, to prevent substantial overpayment or underpayment. Once the final rates are established, an adjustment is made for any variance between the billing and final rates.
  3. Upon receipt of the certified final indirect cost rate proposal, FAR 42.704(e) provides that the Government and the contractor may mutually agree to revise billing rates to reflect the certified proposed indirect cost rates. The proposed indirect rates will be adjusted to reflect historically disallowed amounts from prior audits until the proposal has been audited and settled. The historical decrement will be determined by either the CO or the auditor responsible for determining final indirect cost rates. If billed costs exceed claimed costs, the contractor must appropriately adjust the next voucher or remit or otherwise credit the Government for the difference.

This government publication points to one of the critical knowledge areas for small business government contractors. If you keep your books and accordingly run your business like the IRS wants their information, your will probably go out of business. If you do the same with regards to DCAA, you will almost certainly go out of business.

The IRS wants to collect information in a manner that makes it easier to assess your tax liability and collect the taxes. They simply have no interest in how your business is doing, your success or failure is not within their job description. DCAA enjoys a theoretical interest in a contractor’s success as it assumes that the contractor’s work is necessary to the government, but their institutional focus has been on the contractor’s expenses in terms of allocability and allowability. Profitability, to DCAA, is, at best, out of their scope of work. At worst, contractor profits can be a focus of suspicion for DCAA.

And variances have a direct impact on profitability and the ability of the contractor to succeed and prosper. Here are a couple examples from my work over the years:

A couple of decades ago, a contractor I worked with secured a $10,000,000 contract with the government and managed to talk them into a $5,000,000 advance payment on the contract. Almost unheard of, even back in those days.

Unfortunately, the owner died tragically just after receiving the advance payment. The company made the IRS happy and paid the taxes on the $5,000,000 and recorded the “revenue” on the books. Properly, the company should have booked the advance payment as Deferred Revenue, a liability, and the money should only have hit revenue as it was earned. This is an excellent example of how you fill out your tax return often should have no influence on how you manage your business.

I am sure you can guess, the contractor spent a lot of the money before they even began serious work on the contract and struggled for a couple of years to do the work without any new money for the work.

In another example going the other way, a client of mine brought me in to work some audit issues on a $27,000,000 contract. As I looked everything over, I asked about any variances and they assured me there were no variances. I looked at the billing for the five years and could not see any variance billing, and asked to take a look at one year to check. After some resistance, they agreed and I found they underbilled the government about $75,000 in the sample year. That justified taking a look at all five years and the amount grew to approximately $900,000 never billed to the government.

The latter one annoyed me a bit as this contractor paid me to help create their policies and procedures. These policies and procedures called on the contractor to track the variance on a monthly basis. Obviously this did not happen.

Other contractors I worked with over the years discovered during the preparation of their Incurred Cost Proposal that they owed the government tens of thousands of dollars they did not anticipate. Another former client never had a variance, his books somehow tied exactly to the billing rate year after year. It is a bit more innocent than it sounds. He actually thought he was contractually obligated to spend to that amount exactly.

And of course I have to mention the major accounting firm that called an emergency conference call because they did not understand why the rates on the incurred cost proposals differed from the billing rates.

Tracking variances is cost accounting 101. No one should be surprised by a variance. Contractors should track the variance on each contract each month. You calculate the variance (actual vs. billed) for the month and post the difference to the balance sheet. If you the variance is up one month and down the next, this method will show the contract-to-date total each month. Putting the variance on the books of record and reporting it on the balance sheet formalizes the process, making it a routine item to discuss at those monthly finance meetings.

After writing the first draft of this article this morning I reviewed standard report from one the popular government contracting system and discovered, to my great annoyance, that the variance was reported as an increase of profits!!!!  How do you explain this to your boss when you have to pay the money back? Maybe it is a setup issue, sigh….

There is some disagreement about where on the balance sheet to post the variance. I prefer to post the balances to an accounts receivable account (“CPFF Variance”) and the offset is to “CPFF Variance Revenue”. Some contractors use an inventory method, posting the variance to an inventory Work in Progress account on the balance sheet and posting the other side to a Cost of Goods Sold account.

Either way, you know where you are each month and there are no surprises.

What do you do if you are caught by surprise? Depending on your circumstances, there are some legitimate methods for addressing variances starting with a thorough analysis of allocability, allowability, and costs.

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Material Overhead Rate — Off and On

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

I talked about unapproved contractors in the last article and today I am going to look at item one: Supporting Material Overhead rate. Again, I am not a lawyer and this is not legal advice.

The material overhead rate did not actually end up as part of this case only because the second DCAA auditor did not pursue it. TSI proposed a material overhead rate of 1.05% that the first DCAA auditor recommended be 100% disallowed while the second auditor accepted the rate. TSI alleged that the first auditor “had it in” for them and we will discuss the minimal discussion on DCAA auditor independence later.

Almost all of this article is speculative on my part and should not be taken to represent what actually occurred, but when I got the page where the initial DCAA auditor rejected all of the material overhead rate I thought “Crap, that has been a long time coming”. When I saw that DCAA backed off in the second stab at the audit, I breathed a sigh of relief and thought, “Not this time”.

Two Sides of the Circle or Contractors with Multiple Government Bosses

It is important to remember that government contractors circle around two extremes of government compliance. On one side, there is the programs staff and their associated contracting officers. These are the guys who issue the RFP, decide you are the guy they want, and issue the contract in coordination with DCMA.

On the other side of the circle is DCAA which looks at the contractor’s costs and business systems then recommends actions to DCMA based on their audit work.

A government contractor needs to make both sides as happy as possible, and I would argue that Material Overhead Rates is one of the bizarre evolutions within government contracting that arose to make this hope of making both sides (programs and compliance) happy a reality. The concept exists in established cost accounting practice but is not as universal as many RFPs would imply.

Just Where Do We Put that Pesky G&A?

The FAR, CAS, and DCAA are strong on contractors allocating general and administrative (G&A) costs utilizing a method labeled Total Cost Input (TCI). TCI allocates G&A costs over all other costs (direct (to include materials and subcontractors), overhead, fringe and so on). CAS actually states “A total cost input base is generally acceptable as an appropriate measure of total activity of a business unit”.

Thus TCI is automatically accepted as a valid way of allocating G&A by everyone. Everyone except the government people on the other side of the circle (programs and their branch contracting officers). It often seems a majority of them think burdening travel, materials, subcontractors, and materials with a G&A rate is an outrageous and immoral act. Addressing this indignation over the years, it is clear to me that many of the associated program people (including buyers) look at this allocation as a mark-up not an allocation of actual allowable indirect costs.

I will give you two recent examples. One was a final four major accounting firm auditing a client’s incurred cost proposal on a DOE contract. The supervisor auditor entered my office at the client site (I was there supporting the audit) and spent a lot of time arguing that allocating G&A on a subcontract was unethical (his words) since the subcontract contained its own G&A and this meant the government was being charged twice.

Obviously he did not enjoy a great deal of experience with value added taxes, and I responded by asserting that was the subcontractor’s G&A and not the prime’s (my client). The two could simply not be compared. A G&A rate is not arbitrary and represents an allocation of legitimate indirect expenses, expenses of both the subcontractor and the prime contractor. It is not a ‘profit’.

He then argued that the allocated G&A simply stood out of proportion to the base cost. It takes a great deal more G&A to administer direct labor than cut a check to a subcontractor. I actually thought this a much stronger argument, but he was still out of his league. I reminded him that the prime is responsible for the subcontractor and it is never as simple as cutting a check.

He still argued on and on about the injustice of the allocation. I finally made two additional points that finally closed the argument. First, all allocation methods are ultimately subjective and arbitrary. Second, please leave my office and come back with a statutory or regulatory basis that supported his argument.

The second example involved an Army contracting officer complaining that because their contract with the contractor was about half materials and the Air Force’s contract was all services, the Army was receiving an inequitable allocation of G&A. I responded by stating that the inequity could only be applied on a government wide level and not a branch level.

The thought behind these arguments and the countless other times I encounter them, is that a dollar spent on direct materials, subcontractors, and even travel, should not receive the same amount of G&A as direct labor. To approach from a different angle, given a G&A rate of 10% it is unfair to burden $500,000 of material costs with $50,000 of G&A.

One way I attempt to explain this to the program’s side is by trying to tie them into the whole picture:

“Okay, if a contractor has $75,000 in direct labor, $25,000 in subcontractor costs with $10,000 in allowable G&A, we have to allocate the $10,000.  The government is legally obligated to pay for the $10,000. Total Cost Input gives $7,500 to the labor costs and $2,500 to the subcontractor costs. How would you do it?”

Too often I get a response such as “I do not know, but that is too much on the subcontractor”.

The Program People Come Up with an Idea

This, I believe led to the development of “Material Overhead Rate”, “Subcontractor Handling Rate” and other similar line items on various RFPs approximately fifteen years ago. These line items are intended to relieve materials and subcontractors of G&A costs while acknowledge there are indirect costs associated with these direct cost elements.

Problem solved?

The number one question I get from contractors working on these RFPs is “What rate do we use?” or “How do we calculate this rate?” In other words, how do contractors separate out from G&A the part of G&A associated with subcontractors or materials. The base is defined, but how do you populate the pool? How do we justify a 3% Material Overhead Rate with a separate 10% G&A rate?

If you want a glimpse at the potential can or worms these rates may open look at questions 12 -21 on the “Contractor Forward Pricing Rate Proposal Adequacy Checklist” under DFARS 215.403-5.

Again, this is supposition on my part, but I wonder if the first DCAA auditor asked TSI for just such documentation, the justification for creation and operation of the Materials Overhead rate. I am guessing she decided it was inadequate. I am also guessing the second DCAA auditor understood the complexity of this issue and decided to focus valuable time elsewhere.

Material Overhead and Subcontracting Handling are legitimate cost accounting objectives The challenges in developing and maintaining the rate are reduced for larger contractors where the size and frequency of activity makes it easier to allocate and define such allocations.

Small business contractors face greater challenges developing, implementing, and defending these rates. If you can identify time spent on handling materials on a specific contract, is this Material Overhead or Direct Labor? The same is true of the time spent reviewing a subcontractor invoice. Even if you feel comfortable with the methodology you develop there is no guarantee DCAA will not question it this year or next year (which is another issue raised in this case that we will address later).

This is one of those rare occasions where I will not share some of my approaches for addressing this issue among small business contractors. I prefer to share these on a case by case basis with DCAA if required. They are ethical and defensible, but vary from contractor to contractor.

Some RFPs appear to acknowledge some of these complexities and replace Material Overhead Rate with Material Overhead Fee. Take them at their word and treat it as a fee, a request not to burden materials or subcontractors with G&A while compensating contractors for the acknowledged costs involved in administrating those costs (materials and subcontractors). Do not include it in your rate proposal.

That is until some bright DCAA auditor wonders if the fee should be included in the base….

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Unapproved Subcontractors — Recent ASBCA Ruling

We are going to spend some time on a recent Armed Services Board of Contract Appeals (ASBCA) Technology Systems, Inc. (ASBCA 59577). The case addresses several government contracting concerns and breaks almost evenly between favoring the contractor and favoring the government (DCAA). The ruling is sixty-one pages and mainly focuses on if DCAA can subsequently change their mind (in this case the answer was yes with a dissenting opinion)

A quick reminder that I am not an attorney and this article represents my thoughts and is not a legal opinion of any sort. It is interesting to note that the owner of Technology Systems was not an attorney either but represented himself and managed to beat the government in several key areas. I stand in admiration but not a practice I would recommend.

The case covers at least nine areas in my mind worth a few moments discussion:

  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

I am going to start with number 7 – “Unapproved subcontractors”. The relevant section of the FAR 52.244-2 “Subcontracts”. This one the government won and I will let the decision speak for itself and then add a few of my thoughts:

The “Subcontracts” clause, included in all four contracts, generally requires that prime contractors that do not have an approved purchasing system must obtain the CO’s written consent to enter into cost-reimbursement, time-and-materials or labor-hour subcontracts. FAR 52.244-2( d)(l) (1988, 1998). TSI did not have an approved purchasing system (which is not atypical for a contractor of its size (tr. 2/55, 65)) and, as a result, was required by the contract to obtain approval to enter into subcontracts from the CO (tr. 2/55). This, it did not do for the time-and-materials subcontracts questioned by the ACO (R4, tab 16 at 261-62, tab 6(a) at 79-80; tr. 1/130-31, 2/58). Mr. Fletcher testified on TSI’s behalf that it generally did not seek pre-approval for its actions because it had found it difficult to contact the ACO (tr. 2/135-36).

After DCAA identified the subcontracts that had not received prior approval and recommended their complete disapproval, ACO Cuellar requested that it attempt a post hoc justification of their prices (tr. 11250-51, 271 ). She allowed the cost for one of the questioned subcontracts because DCAA was able to perform an analysis that demonstrated the prices to be fair and reasonable (id., tr. 1/269). For the others, however, DCAA and the ACO felt themselves unable to perform such a post hoc justification of the costs with the information provided (tr. 11271-73 ). These costs were in the amount of $2,661 under contract 0236 (R4, tab 16 at 261) and $28,568 under contract 0340 (id. at 262).

In December 2008, after it became clear that approval of subcontracting costs would be an issue in the audit, Mr. Benton reached out to DCMA ACO, then, Ms. Sandee Murray, and requested retroactive approval of some the subcontract awards (R4, tab 6(f)). There was no apparent government response to this letter, and, in 2014, Mr. Benton reached out to a number of people seeking support for the subcontract costs. The record includes emails from Mr. Timothy Devin, Mr. Adam Cascioli (project officer for contract 0340), and Mr. Brian Almquist (the contracting officer’s technical representative (COTR)) (app. supp. R4, tab 156, at 3-4, tab 157 at 1-2). All of these email correspondences indicate that the subcontracts “were in support of the [statement of work]” (e.g., app. supp. R4, tab 157 at 1), but none of them venture to provide an opinion regarding the reasonableness of the prices charged (see tr. 2/51-52). We have no reason to doubt that the subcontract prices were allocable to the contract, and so find here, but there is no evidence elsewhere in the record with respect to the reasonableness of the subcontract charges, except the earlier statement that the ACO was able to independently confirm the reasonableness of the cost of one subcontract (tr. 11269).

It appears that both DCMA and DCAA worked with the contractor to approve these costs by working on a retroactive approval of the subcontractors, with some success. The efforts stalled where they were unable to determine the pricing was fair. Of course if the contractor had built a pricing case before entering into the subcontract, this might have worked.

Often we can argue and win cost arguments with DCAA based on the ability to clearly demonstrate the work was done (and we will see examples of this later in this same case). These efforts fail in the face of a specific contractual or FAR requirement. You will notice the FAR even bends over backwards and allows the ACO to specifically exempt identified subcontracts from this clause; however, barring this, the clause stands and the approval is needed.

Other lessons:

  • There is a bit of a break for fixed price subcontracts if they are under the simplified acquisition threshold (I believe the current number is $150,000 but it changes) or 5% of the total estimated price of the contract. I encourage clients to utilize fixed price subcontracts where possible but to always build a price case.
  • It has to be the ACO that the contractor notifies, not the government program officer, not the branch or agency contracting officer (unless this person is the ACO). In my experience, I have always found DCMA accessible.
  • Most small business contractors have not been around long enough to remember the days when small business subcontracting regulatory environment allowed for the exploitation of small business members by major contractors acting as subcontractors. Much of the current regulation arose out of those issues. In addition, the government want to make sure the pricing is fair. Build a price case. To simplify what can be a bit of a complicated process: get three bids, or create a white paper showing why the subcontractor is the only available resource, or create a white paper supporting the subcontractor’s pricing.


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

Some of Those Pesky Questions Surrounding Timekeeping

With DCAA’s announced return to audit functions other than incurred cost proposals (Annual Report of Congress 2015), contractors need to dust off those policies and procedures and ask themselves a couple of questions. Let us start with labor, timekeeping, and payroll:

How do you control where staff are allowed to charge their time?

DCAA holds to the belief that contractors should authorize employees to on a project and restrict their ability to charge without authorization. Implicit in this is the concern that if Jane, assigned to work on Project A, does not have anything to do on project A, the government does not believe she should wander over to Project B and lend a hand without someone planning for this.

How do you address idle time?

There can be a couple of subtle levels to this question. The first level is literal; how do you address idle time. The correct answer is by charging overhead or G&A.

The second level is: when is idle time too much? When does it become unreasonable and thus DCAA might see the idle time as unallowable?

The old joke about auditors comes to mind – “Definition of an auditor: someone who shows up after the battle and bayonets the wounded”.

I once had a 622% overhead rate approved by the government based on idle time, but not without a fairly extensive fight with the DCAA auditor. The rate arose out of five engineers charging overhead 100% of their time for a few months. The story that won the approval actually involved the Princess of Wales and robots. How could you not win with such a cast? We attributed the idle time to a conflict between a DOD agency and an Army field commander. First, DOD sent these engineers into a foreign area as a perfect place to test their emerging technology. When they got there, the Army field commander informed them that the location was not a laboratory but a combat zone and wanted to know what the heck the paratroopers were going to do with the civilian engineers. DCAA then raised the allegation that the contractors turned the time into a vacation while DOD hashed it out as The engineers sat around charging overhead until the field commander finally sent them home.

I told the DCAA auditor, with a straight face, that I believed the engineers should have charged the project direct and not overhead; but since it was a single contract division it did not really matter.

The point is that idle time is often a reality of government contracting and is not always the contractor’s fault. Addressing idle capacity often calls for hard decisions and the contractor needs to prepare to defend those decisions when tax dollars are involved.

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GAO Ruling Supports GSA Decision that Favors DCAA Accounting System Audits Over Private Firm Audits

A recent GSA RFP awarded 9.15%  (7,600 out of 83,100 points) of possible RFP scoring points for approved accounting and purchasing systems, systems approved by DCAA or another government agency. The approval of the critical systems by private accounting firms did not receive any points.

Evolver and AFSC challenge the agency’s basis for assigning certain points.  Specifically, both Evolver and AFSC challenge the RFP provision that, in order to be awarded 5,500 points for an “audited/adequate cost accounting system,” an offeror’s proposal must include proof of a federally audited and approved accounting system.  The firms maintain that this requirement is overly restrictive of competition, as there are independent public accounting firms that can verify the adequacy of an offeror’s accounting system for federal contracts.  The firms further argue that proof of an acceptable system should not be required with proposal submission; rather, proof should be provided only at the time the government actually requires the service for which the certification is necessary.”

Here is GAO ruling:

“Under these circumstances, where the agency can reasonably anticipate that DOD will be the prime user of the Alliant 2 GWAC, and where DOD does not accept third party certification of a contractor’s cost accounting system, we find nothing improper about the solicitation’s provision that gives an evaluation preference to firms that have a federally audited and approved accounting system.”

Now here is the troubling part of the ruling:

 “In this regard, the agency explains that allowing firms to accrue points in this manner helps to provide a GWAC where successful offerors have experience in government contracting.  In addition, successful offerors will be able to perform cost-reimbursement task orders for DOD from the first day the GWAC is awarded, and procuring agencies issuing task orders under the GWAC will not have to waste time and resources while vendors subsequently obtain an audited and approved system.  Id.  Given this explanation by the agency, we find nothing improper about the solicitation’s approach of awarding points to offerors that have proof of an audited system at the time of contract award.” (emphasis added).

Gee, wouldn’t it be wonderful if a contractor could just call DCAA and schedule an accounting system audit?,B-413559.8#mt=e-report


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