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

The Life of a Contractor: Part Two – Early Childhood or “How DCAA, Contractor, and Consultant Can Ruin an Audit”

Despite the apparent belief by the Air Force that DCAA would not show up, DCAA did. The contractor, with no professional accounting staff and an outside tax CPA who disavowed all knowledge of government contracting, hired an outside consultant (not me). It did not go well.

I am going to talk about what happened. I am going to talk about what the contractor did wrong and I am going to talk about what I believe the consultant did wrong. I am even going to talk a bit about what I believe DCAA did wrong.

I am uncomfortable criticizing another consultant for obvious reasons, but I believe the story of this contractor is an excellent example of the extremes that many small business government contractors face. The first consultant is part of this story.

Before I do this, I want to talk about why I believe hiring the right consultant is almost always the best step for a small government contractor to take. Since I happen to be the consultant I know best, some of what follows is self-serving and thus a little arrogant. I feel like I need to talk about what I see as the ‘good’ consultants and how to select one. I am sure many of you will take exception, please feel free to discuss.

The Risk and Consequences of Not Getting Help

The decision about bringing an outside consultant in to deal with DCAA is a difficult choice small business contractors make every day. Of course, before they even consider going alone, they should purchase and read my second book: Surviving a DCAA Audit: The Accounting System.

First incident of self-promotion aside, it is all a question of risk and consequences. The risks and consequences of an inadequate accounting system hits contractors in two major areas.

First, the lack of an excellent accounting system translates into poor knowledge about how efficient and profitable the company’s individual activities (jobs or projects) are. Small business owners utilize excellent common sense in this area; but improved data provides, if nothing else, a competitive advantage to either you or your competitors (those guys you are bidding against who know their costs).

Second, if DCAA determines the accounting system inadequate there can be major consequences. Just ask Lockheed Martin, who could not collect most of the profit on a major government contract for years after the government decided their cost accounting system inadequate. Also, look back at the small business contractor discussed in the first article of this series and their inability to recover money they believed the government owed them.

Cost seems to be a driving factor in deciding to select a consultant.  One of the biggest factors impacting consultant cost is contractor knowledge, contractor commitment, and the consultant’s ability to transfer that knowledge to the contractor.  I belief it is a natural conclusion that If you turn everything over to a consultant your costs, short term and long term, are higher. You also never gain the critical ability to assess their work.

Anyone reading my books or poking around my website quickly realize that I believe contractor knowledge is critical and reduces the cost to the government and the taxpayer. I like clients to graduate from my services or training programs. They know I am always there when they are not sure about an issue or there are major changes they want a fresh look at.

The quality of the consultant is an area that challenges contractors as they begin to look at the idea of bringing a consultant aboard. Here is another area where I believe providing potential clients with a serious look at the world of government contracting via my books and website helps with this decision. Although I know excellent consultants without a website and few of us author books.

I will address one common myth: Some contractors seem to believe that hiring a former DCAA auditor as a consultant is an obvious approach. Unfortunately, I believe this myth is simply not valid.

I know at least two excellent consultants who are former DCAA auditors and do simply outstanding work, but I know at least a dozen former DCAA auditors who do not. Before the former DCAA auditors scream at me, I believe the same about other consultants who never worked for DCAA. I know a handful of outstanding ones and dozens who are not.

My point is this:  experience as a DCAA auditor does not necessarily translate into success as a consultant working with DCAA. There is no special advantage or knowledge that a former DCAA auditor offers. There is no secret handshake or inside knowledge. I look forward to reading the arguments and support of anyone who claims otherwise.

Good auditors have a healthy amount of distrust. On numerous occasions we faced encounters where one DCAA auditor signed off on an item one year only to have another DCAA auditor object the next year to the very same item. If DCAA auditors have a healthy distrust of fellow DCAA auditors, why would they have more trust in a former DCAA auditor?

I noticed over the years on LinkedIn and other places that some former DCAA auditors continue to take DCAA’s positons on compliance issues; positions that myself and other experienced consultants do not necessarily agree with. According to DCAA’s own reports to Congress, only about half of DCAA positions are sustained. It is always easier to agree with DCAA but it is not always profitable or fair.

Again, according to DCAA’s own reports to Congress, the average number of audits completed by a DCAA auditor each year is under 1.5. That is not a lot of audit experience. I close a great deal many more than that each year.

I apologize that this seems to be an advertisement for myself and the few unidentified consultants I deem, in my arrogance, to label competent. As noted above, what follows is not only the story of a small business contractor who entered and later decided to leave government contracting; it is also the story of two consultants working with one of the more interesting (difficult) DCAA offices I work with.

To be continued…

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

A Note on the Birth of the Contractor, the Previous Article.

One quick note about the contractor is described in the previous article, how I described their critical technology, and the way this often impacts the compliance process and audits.

Too many contractors believe that the importance of their work should provide them with a free pass on accountability.  I join with DCAA auditors and taxpayers in rejecting this positon.

DCAA auditors are required to walk a fine line between protecting taxpayers’ assets (money) and assuring that the service members DCAA are supporting get the resources they require. Often, the auditors have no knowledge of the contractor’s work and its importance.

In my book, Accounting Policies and Procedures: For Small Government Contractors Working with the DCAA and Other Government Agencies I encourage contractors to begin their accounting manual with a description of the company and the work they do:

“The manual should start with a little background information on your company as an introduction for the DCAA auditors. You would be surprised how hungry auditors are for this information, and how critical it is in their assessment of your operations. Rightly so, the DCAA auditors are an essential aspect of our nation’s defense and it is only natural they wish to make some attachments to your efforts in our nation’s defense. “

It does not appear that any such knowledge made any impact on this case, but I believe the concept is valid.


Accounting System, DCAA Relations, Running Your Business

The Birth, Life, and Death of a Small Business Contractor



Part One – The Illegitimate Birth


One of my clients is a small government contractor in the South with only a few employees. They are developing a technology that anyone could easily identify as critical in both military and civilian applications. The development is at a ‘job phase’ where units are built individually in the attempt to improve the process and the technology. Each one of these individual units are functional and critical.

Almost all of the national labs, many foreign countries, and others in industry have purchased these units and employed them immediately, even as the technology continues to be developed. I should say that the technology saves lives and is not a weapon.

Of course the military wanted the technology; but instead of going out and buying a unit, the military issued a contract, a cost type contract.  In 2010 the United States Air Force issued the contractor a cost type contract.

The Federal Acquisition Regulations (FAR) restricts the government from issuing cost type contracts to contractors unless “The contractor’s accounting system is adequate for determining costs applicable to the contract or order…” (FAR 16.301-3(a)(3)). During this time, standing orders required the Air Force to wait on an opinion from DCAA about the contractor’s accounting system and for DCMA to issue an approval of the accounting system.  This was during a period where local contracting officers could not always know when and if DCAA would show up and the Air Force really wanted the technology and issued the contract without an approved or audited accounting system.

Why the Air Force did not simply follow the example of the National Labs and issue a fixed price contract or a purchase order, we will never know. Instead, the Air Force issued a cost type contract to a contractor without an approved or even audited accounting system.

The contractor did not realize that the Air Force actions transferred almost all of the risk concerning the contract to the contractor, the opposite of what a cost type contract is ‘designed’ to do.

The fact that the FAR prohibited the Air Force from issuing the contract is not a defense the contractor may raise as one contractor found out when they complained to the Armed Services Board of Contract Appeals. In this case, the contractor claimed the government owed them hundreds of thousands of dollars. The government successfully argued that the contractor’s inadequate accounting system made any such claim impossible to support. An adequate accounting system protects the contractor and the government.

Of course, the Air Force or DCMA did order an audit and the contractor hired and consultant (not us) to help them with DCAA. This did not turn out well.

But a government contractor was born, arguably illegitimately, but born none the less.

Next, “How DCAA, Contractor, and Consultant Can Ruin an Audit”.

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Cost And Accounting, DCAA Relations

17-2 Costs Related to Extraordinary Reviews of Unsettled Overhead Costs

One of the probably unforeseen outcomes of DCAA’s decision to spin off Chapter Seven of the Contract Audit Manual (CAM) into a new document SELECTED AREA OF COST GUIDEBOOK: FAR 31.205 COST PRINCIPLES is that it reminds us of some of the more interesting sections of the Contract Audit Manual.

And notice the clever way they seem to present their own thoughts as regulatory by linking their thoughts “Guidebook” to the actual rules “FAR 31.205 Cost Principles”.

Section 17 is lifted up from the CAM and only true regulatory or statutory reliance is the “reasonable and prudent” standard. In other words, DCAA applies the reasonable and prudent standard when they cannot find a law, legal decision, or regulation that supports their decision and decide that the contractor’s actions were not those typical to another contractor in a similar position. This assertion is made by DCAA Auditors whom, the vast majority, have never made a business decision. They have never sweated a payroll, created a set of books, invoiced, or other reasonable and prudent activities.

This aside, the section asserts DCAA’s right to question as unallowable contractor costs associated with reviewing indirect costs.

To your amazement, I have a few problems with this positon:

  • The adjective “Extraordinary” is in itself, extraordinary and subjective. It calls on DCAA auditors to determine if the review of indirect costs are routine or “extraordinary”.


Of course DCAA tries to help an auditor with this:


This extraordinary effort is often the result of the contractor’s earlier negligence in establishing, maintaining, and/or implementing an adequate system of internal control.

 When the circumstances cited above are encountered and the contractor is incurring or is expected to incur significant costs, the auditor should notify the contractor that the costs associated with such extraordinary reviews of unsettled overhead costs are considered to be unreasonable and will be questioned under FAR 31.201-3, Determining reasonableness. The reasons to be cited are:

  1.  1. The costs are not of a type generally recognized as ordinary and necessary for the conduct of the contractor’s business or the performance of a contract. The costs are duplicative of costs incurred for the same purpose in prior periods. The Government has already reimbursed the contractor for the costs of preparing billings and claims for reimbursement. The fact that this task was not adequately accomplished does not entitle the contractor to additional reimbursement.
  2. The costs are the result of the contractor’s failure to follow the requirements of generally accepted sound business practices and contract terms.
  3. The costs result from actions taken which were not those of a prudent businessman in the circumstances, considering his responsibilities to the owners of the business, his employees, his customers, the Government, and the public at large.

A lot more words they employ here call for professional judgement: negligence, significant, failure, and my favorite: duplicative.

Let us remember that DCAA Auditors are awarded professional judgment by an act of Congress. According to their own report to Congress, only about half of their professional judgements are supported and that is with the majority of contractors not contesting DCAA proposed decisions.

These words are loaded terms without definition. The “guidebook” provides no guidance to define the line between ordinary and extraordinary or any other loaded terms. The DFARS 252.242.-7006 provides some guidance on defining significant but this is not referenced in the guidebook.

2. And speaking of the DFAR regulation, how does this section match up with the requirement for Management Review and/or Internal Audit. When do these required activities become “extraordinary”?

3. Duplicative? Did DCAA forget that good internal controls are often duplicative by nature? When does double checking payroll cross from ordinary to extraordinary? When did taking advantage of the time spent preparing your incurred cost submission to check your costs become unreasonable and not prudent? Maybe DCAA is just trying to create work and success for themselves by discouraging contractors from double checking their work?

I am sorry, but I just have to wonder about this. Many people would argue that double entry is duplicative. Accounting is built on cross checking and rechecking, at least good accounting is.

DCAA, when you spend tax dollars to create something new, such as this guidebook, please create something new.


DCAA Relations

DCAA Publishes New Cost Guidance

DCAA published “75” chapter new guide tying into FAR 31.205 on their website. I say “75” chapters because many of them are placeholders, but this is still a significant level of guidance that will take a while to process.


Department of Defense News

Supervisors Fail to Act Properly to DOD Employee ‘Misuse’ of government funds for Casinos and Adult Entertainement

Excerpt from a recent Department of Defense OIG audit followup to previous audit:



We determined that DoD management (cardholder’s commander or supervisor) and travel card officials did not take appropriate action when notified by the DoD OIG, during the previous audit, that cardholders had potentially misused their travel card. In this follow-up audit, we reviewed management’s actions for 30 nonstatistically selected cardholders with the highest dollar amount of high-risk transactions that had been referred to management in the prior audit. During this audit, we found that:

DCAA Relations, Running Your Business

It is all About Control

One note to my post yesterday “Some of the Strange Things Contractors Say“(

You want to control your business, your bid & proposal efforts, and all interactions with the government. The two cases I quoted yesterday demonstrate the problems that arise when Contractors lose control of the process to the Government.

In the first case the Air Force, with the subsequent support of the appeals board, recalculated the contractor’s fringe rate resulting (in the contractor’s belief) in the lost of the contract award.

The second case presents the opposite problem. Here, the Protester successfully argued that the government failed to evaluate the winning proposal’s rates, the government simply accepted the proposed rates. The Protester demonstrated pretty easily that these rates were inaccurate.

In both cases, the contractor surrendered control of the process to the government and even their competitor by not bidding supportable rates.

All easily prevented by an accurate complete cost accounting system.