DCAA Relations, Incurred Cost Proposals

Confusing Adequacy and Audit – Incurred Cost Proposal Fiction and Reality Part Two – Good Intentions and an Honest Effort to Avoid Work

DCAA will often assert that the ICE (Incurred Costs Electronically) and an ICP (Incurred Cost Proposal) are the same thing. They simply are not. This is true by regulation and by DCAA’s own guidance (Information for Contractors has an entire section acknowledging that they cannot require electronic submissions (p73)).

“Let’s step back for a moment and look the DCAA Model ICE as a whole. First let us look at a couple of facts, absolute facts.

  1. DCAA created the Model ICE in the 90’s to provide an example to contractors on what DCAA thought a good incurred cost submission would look like.
  2. There is no requirement to use DCAA’s Model ICE, if there was, it would be an approved government form subject to GSA and OMB standards, to include the Paperwork Reduction Act.
  3. There is no requirement to submit an incurred cost proposal in Microsoft Excel. There is no requirement to submit an incurred cost proposal electronically.
  4. The government finally adopted a regulation that paralleled the general description of the ICE — FAR 52.216-7(d) – Allowable Cost and Payment. The final regulation did not adopt the requirements found in the DCAA Model ICE even though the Model preceded the regulation.
  5. The government can only reject a cost proposal based on adequacy[1]”.

If you are a conscientious government employee and realize, for whatever reason, that there is not going to be a lot of audit work done in the foreseeable future, you might get a bit worried about simply accepting a contractor’s incurred cost proposal and recommending payment of a check to them on their rate variances. Honestly, taxpayers might thank you for that; but while this might provide aid and comfort to DCAA, it is not audit. These ‘questions’ follow none of the rules of audit or even, often, DCAA’s own written orders (“guidance”).

If you take the “A” is for Audit out of DCAA then you must rely on what little interaction you have with the contractor via the incurred cost proposal the contractor submits and certifies each year.

This is an extremely generous and positive view of why DCAA undertook what I am calling the “ICE Wars”.

There is no doubt that a standardized incurred cost proposal model would make DCAA’s work easier in the same manner that the IRS Form 1040 makes the work easier for the government.

Unfortunately, there is a major difference between the Model ICE and the IRS Form 1040, one of them is formally approved by the government regulators (Form 1040) and the other is not (DCAA Model ICE). As noted above, regulators rejected the ICE when adopting the regulations about submission.

One of the reasons the regulators rejected the ICE was its constant changing nature. Here are two examples, one benefits contractors and the other does not.

Section J

FAR 52.216-7(d) – Allowable Cost and Payment (2)(iii)(J) reads as follows:

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contract information).

A careful reading of the regulation could support the position that contractors are required to report the above information on all subcontractors to include those working on prime fixed price contracts and even commercial work.

This was the position many DCAA auditors took at the time the government adopted the regulation. They argued that the complete data was necessary in order to evaluate the contractor’s purchasing systems and subcontractor management. I even had one client with no government participation where DCAA demanded an audit of them as a subcontractor on a prime with government participation.

Over time, many DCAA auditors moved away from this position and now the Model ICE focuses the reporting on those contracts with government participation. The current ICE Model Manuals reads:

“Subcontract number, prime contractor number, subcontract point of contact and phone number, subcontract value, costs incurred in FY, and award type.  The schedule provides identification of subcontracts awarded to companies where the contractor is the prime or upper-tier contractor, including inter-divisional effort.  This information is required at the pricing action level (e.g. delivery order, CLIN) for all subcontract awards (e.g. cost-type, incentive contracts, T&M/LH, FFP, etc.) issued under flexibly-priced and IDIQ prime contracts.” (p27) (emphasis added).

A client and I actually panicked a couple of weeks ago when a DCAA supervisor took the original position. I could not argue with the auditor’s original interpretation of the regulation, but, fortunately, the auditor changed their mind before we could respond.

NOTE: Notice how DCAA got the regulation to match up with the Model ICE schedule titles. That was largely the extent of their success.

Executive Compensation

(iv) The following supplemental information is not required to determine if a proposal is adequate, but may be required during the audit process:

   (A) Comparative analysis of indirect expense pools detailed by account to prior fiscal year and budgetary data.

   (B) General Organizational information and Executive compensation for the five most highly compensated executives. See 31.205-6(p). Additional salary reference information is available at http://www.whitehouse.gov/omb/procurement_index_exec_comp/ .

Executive Compensation is defined by statute, but DCAA asserts the right to ‘improve’ on the statute by claiming auditing the costs under the reasonable and prudent regulation “31.201-3 Determining reasonableness”[2].

As DCAA continues to lose many of these cases concerning compensation before the appeal board[3], they appear to be looking for a magic bullet to help with this issue, mainly via the supplemental form B, formerly form T. This form continues to grow with each version of the Model ICE. The latest version adds numerous new data collection points to the previous versions (MODEL ICE 2.01g):

“Basis of Contractor’s Compensation:  Below, please check the box next to the item or items which describe the contractor’s basis for the proposed compensation costs, i.e. how the compensation levels were established in accordance with any existing policies and procedures.  Also, did the contractor consider whether the proposed compensation was reasonable in accordance with FAR 31.205-6(b)?  If so, include any reasonableness analysis, including all assumptions, data relied upon, compensation surveys and/or any other data.   Include any attachments (survey data, comp plan/policy, etc.) separately.                                                                                                                                                                                        

Market Pricing Data (Compensation Surveys)              

Prior DCAA Audit of Compensation Reasonableness                                                                              

Written Compensation Plan/Policy                                                                             

3rd Party (Consultant) Compensation Analysis                                                                                        

Management Judgment (No written plan/policy)                                                                                       

Other — ________________________________________                                                                                   

Determined by Board of Directors                                                                                                                            

                                                                                                                       

(1) Indicate if Job Descriptions are available:                                              YES ___               NO ___                                                                                                                         

*Written description Other compensation:                                                                                                                                                                                          

*Breakdown of Other compensation by cost element: “              

This new version of the form reminds me of Admiral Ackbar’s line from “Return of the Jedi” – It’s a trap!” (https://www.youtube.com/watch?v=4F4qzPbcFiA).

This potentially turns a monstrous one page form into a  monstrous form with a thousand page attachment. Sort makes you wish they were getting these forms approved and following the Paperwork Reduction Act.

To Form or Nor to Form

I agree with the FAR Council, which when adopting the regulation promised contractors they would not be required to use the DCAA Model. In the adoption of the regulation, the FAR Council brought up the DCAA Model ICE five (5) times and each time rejected its adoption:

“Comments: Two respondents submitted comments in regard to formatting. One respondent states that DCAA’s insistence that data be converted into other formats (such as spreadsheets using DCAA’s ICE Model) is in direct contradiction of FAR 52.215-2(d)(2) that access to records “may not be construed to require the contractor or subcontractor to create or maintain any record that the contractor or Comments: Two respondents submitted comments in regard to formatting. One respondent states that DCAA’s insistence that data be converted into other formats (such as spreadsheets using DCAA’s ICE Model) is in direct contradiction of FAR 52.215-2(d)(2) that access to records “may not be construed to require the contractor or subcontractor to create or maintain any record that the contractor or subcontractor does not maintain in the ordinary course of business or pursuant to a provision of law.” The other respondent suggests that the proposed revision at FAR 42.705-1(b)(1) eliminates the suggestion in the current rule that contractors can use the DCAA model incurred cost rate proposal and supporting data for guidance on what constitutes an adequate final indirect cost rate proposal. According to the respondent, this proposed revision also refers the definition of adequacy to the revised clause at FAR 52.216-7(d)(2), which makes mandatory specific schedules and data requirements taken almost verbatim from the DCAA ICE Model.

 Response: The information required from the contractor for an adequate indirect cost rate proposal is not new. No specific format is prescribed for the submission. This information should be readily available in the contractor’s books, records, and systems.”

 Federal Register, Volume 76 Issue 104 (Tuesday, May 31, 2011)

 

Notice the wonderful reference to FAR 52.215-2(d)(2), but we all benefit if we follow the general outline of a universal submission as adopted by the FAR Council while ignoring the parts of the DCAA Model ICE that concern us or exceeds their regulatory authority.

This is especially true when we confuse Adequacy with Audit.

 

Next :Adequecy

[1]“Schedule I: :The Truth and Nothing but the Truth, at Least How I See it”    https://dcaacompliance.wordpress.com/2016/03/11/schedule-ithe-truth-and-nothing-but-the-truth-at-least-how-i-see-it/

 

[2] See my previous article  “Burden of Proof” at https://dcaacompliance.wordpress.com/2015/10/21/burden-of-proof/

 

[3] Metron for example: http://www.asbca.mil/Decisions/2012/56624,%2056751,%2056752%20Metron,%20Inc.%206.4.12%20PUBLISHED.pdf

 

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Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Confusing Adequacy and Audit – Incurred Cost Proposal Fiction and Reality Part One – A Messy History

FAR 52.216-7(d) – Allowable Cost and Payment

“2(i) The Contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6-month period following the expiration of each of its fiscal years.”

The last decade proved largely unkind to DCAA as it received constant criticism from Congress, other government auditors (GAO, DOD OIG), other areas of Government (DOD, DOE, NASA, GSA, etc.) and the occasional contractor.

A great deal of the criticism, and two ACTS OF CONGRESS, focused on DCAA’s simple inability to complete audits and address contractor costs through timely audit of contractor’s incurred cost proposals (ICPs). An ICP is a contractor annual report accounting for the money spent and allocated to a government contract.

DCAA’s primary defenses are the increase in work due to almost two decades of war, a recent focus on more complex audits, and inadequate staffing.

Over the years I employed one simple breakdown to illustrate DCAA’s work efforts. According to DCAA’s own Report to Congress, DCAA employed 4,167 auditors. According to the same report, DCAA completed 3,581 audits in 2017. This works out to less than one audit per year per auditor (.86 audits per auditor). In the 2011 report (the oldest on DCAA’s website), the number of auditors was higher at 4,225 and the number of completed audits stood at 7,390 for a ratio of 1,75 audits per year per auditor.

Apparently 58 more auditors made a huge difference.

Skewing this analysis is the number of incurred cost proposals DCAA closes without audit. In 2107, DCAA closed 22.5% of their incurred cost proposal by audit (1,527 out of 6,786). What happened to the other 5,259 contractor ICPs? The government accepted the contractor’s proposed rates without audit.

Yes, the vast majority of work the AUDIT Agency does each year is not audit.

DCAA often justifies this lack of audit by comparing itself to the IRS and the IRS’s procedures[1]. The IRS does not audit most taxpayers, so why should DCAA?

I do not agree with the comparison for several reasons. I believe such comparisons are like comparing oranges and Italian race cars.

One simple reason is that the IRS is in possession of enormous amounts of collateral data on taxpayers. A huge advantage not enjoyed by DCAA. The IRS receives a copy of your W2 from your employer, your interest income from your bank, even information on your health insurance. The collateral information for businesses is even larger to include payroll tax filings, SEC reports, and more.

In other words, when the IRS gambles on taxpayer cheating, they know a great deal more information then DCAA does when they gamble on contractors with taxpayer’s money.

I realize that the majority of contractors rose up and began dancing behind their desks at the idea that there is about a one-five chance of DCAA showing up to audit your incurred cost proposal.

While I do not wish to throw any contractor in front of the bus filled with DCAA auditors, I believe we are all better off with an active viable DCAA audit function. The friction of the audit process helps both contractors and the government. Contractors gain wisdom about compliance, the ability to make audits smoother and when to draw the line on ridiculous and even unlawful auditor requests, such as copies of employee’s birth certificates. The government gets practice at their job and, hopefully, learn not to make ridiculous and even unlawful requests[2].

A viable active DCAA audit effort also helps keep the government out of mischief. The decline of the audit function and the resulting backlog of incurred cost proposals reaching monstrous numbers, has resulted in some changes in DCAA methods that I will categorize as mischief: 1) DCAA expanding their ‘model’ (in their minds) incurred cost electronically and; 2) DCAA confusing adequacy and audit.

NEXT – “Good Intentions and an Honest Effort to Avoid Work”.

 

 

[1]DCAA Director Bales’ testimony before Congress on Apr 6, 2017 (page r) https://docs.house.gov/meetings/AS/AS06/20170406/105777/HHRG-115-AS06-Wstate-BalesA-20170406.pdf

 

[2] I received my second request from different audit offices for contractor’s home addresses this morning. The previous request was a couple of years ago.

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Cost And Accounting, DCAA Relations, Incurred Cost Proposals

Be Fair to DCAA

One of the consequences of the new law requiring DCAA to accept of reject a contractor’s incurred cost submission within sixty (60) days is a possible DCAA conclusion that it must reject the proposal instead of simply calling the contractor and asking a few questions. The loop of question response, question response can eat up the clock pretty quick, especially when about 90% of the proposals are submitted on the sane day.

Some examples I am seeing:

a. Did you really mean that the contract reported on Schedule O is ready to close.

b. Are you missing any contracts on Schedule H, we think you might be.

c. We see that you got labor reconciled on Schedule L but we are not sure how you did it. We will go ahead and reject and let you explain it with the resubmission.

Please feel free to share your examples.

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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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DCAA Relations, Department of Defense News

The Good News — DCAA Gets A New External Peer Review Opinion. The Bad News — Qualified with Deficiencies (Again). DOD OIG identified 25 Deficiencies

DCAA receives it overdue external peer review from DOD OIG. Unfortunately, it is not the stellar report we hoped for.

https://media.defense.gov/2017/Nov/22/2001847672/-1/-1/1/DODIG-2018-028.PDF

 

DCAA Compliance Logo

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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