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

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

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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?

http://www.gao.gov/products/B-413559.2,B-413559.8#mt=e-report

 

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Cost And Accounting, DCAA Relations, Department of Defense News

DOD OIG Critical of DCMA Followup on CAS Violations

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http://www.dodig.mil/pubs/report_summary.cfm?id=7232&utm_source=DoD+IG+Email+Update+-+Reports+and+Testimonies&utm_campaign=1028bc1344-DoD_IG_Reports&utm_medium=email&utm_term=0_3a17f8681e-1028bc1344-277174597

 

“For the 27 DCAA CAS reports we selected, we identified several instances in which contracting officers did not comply with FAR, DoD Instruction 7640.02, or agency instructions. We found:

    • 12 instances in which contracting officers did not issue a Notice of Potential Noncompliance within 15 days, as FAR 30.605(b)(1) requires;     • 16 instances when contracting officers failed to complete all actions on the reported noncompliances within 12 months, as DoD Instruction 7640.02    requires;     • 3 instances in which contracting officers did not have adequate documentation or rationale for determining that the DCAA-reported noncompliance    was immaterial, contrary to FAR 30.602; and     • 8 instances in which contracting officers did not obtain a legal review of their CAS determination, as Defense Contract Management Agency (DCMA),   Instruction 108 requires.

As a result, correction of the reported CAS noncompliances was delayed. In addition, contractors may have been inappropriately reimbursed contractors additional costs resulting from the noncompliance.”

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

Really? Meals and Entertainment Expenses

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While working on another project this morning, I recalled that twice in the last year; two separate DCAA auditors working thousands of miles apart, asked why the contractor had separate accounts for Meals and Entertainment in their Chart of Accounts.

Enough said?

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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.

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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, Department of Defense News, Incurred Cost Proposals

Wait a Moment

As pointed out by Ken Bricker, DCAA has announced that they are all caught up on incurred cost submission and will begin working on audits outside the Department of Defense. And the world turns……

http://www.dcaa.mil/mmr/16-PPD-008.pdf

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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.

 

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