2015-03-10 managing government contracts

Managing Government ContractsMarch 2015

Nisha Gupta, Sr. Manager, Government Consulting Advisory Services – BDONatalie Wooten, Sr. Manager, Government Advisory Services - BDOGlenn Anstead Sr Manager Financial Systems - Raffa Glenn Anstead, Sr. Manager, Financial Systems - Raffa Seth Zarny, Partner, Technology – RaffaLarry Mocniak, Principal, SL Foundation

BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.

AgendaAgenda

• Introductions

• The Regulatory Environment

• Business Systems

• Time and Expense Requirements and Challengesp q g

• Job Costing and Indirect Rates

• Questions?

Managing Government Contracts

SECTION 1 – THE REGULATORY ENVIRONMENT


The Regulatory EnvironmentThe Regulatory Environment

Heavily regulated:• Many potential pitfalls for the naïve or unwary sellery p p y• Compliance costs (personnel, systems, procedures) require up front investment

Federal Acquisition Regulation (FAR):• Covers all aspects of contracting for the Federal Government• Includes “Cost Principles” and many other administrative procedures

Agency Supplements (e g DFARS):Agency Supplements (e.g., DFARS):• Provide additional Agency-specific guidance

Cost Accounting Standards (CAS):g ( )• Provide guidance on acceptable cost accounting practices


Compliance Is Your FriendCompliance Is Your Friend

Compliance generally leads to a competitive Compliance generally leads to a competitive advantage.

Compliance Is Your FriendNoncompliance may lead to imposition of penalties, suspension, debarment, and no awardp , p , ,


DOD Hotline Compliant Regarding DCAA Examination of p g gContractor’s Subcontract Costs (DODIG-2015-061)

• December 23, 2014The DCAA field audit office did not comply with GAGAS or agency policy for • The DCAA field audit office did not comply with GAGAS or agency policy for contractor-claimed subcontract costs

• The field audit office applied an arbitrary and unsupported 20-percent decrement factor to calculate questioned costsdecrement factor to calculate questioned costs

• The auditor made significant errors on the DCAA Form 1• Recommendations:

• DCAA should remove the questioned subcontract costs and consider reevaluating q gsubcontract costs that are not covered by assist audit requests

• DCAA to determine the extent to which other DCAA offices are inappropriately using the 20-percent decrement to question costs

• DCAA should consider revising its policies to clarify the DCAA Form 1 exclusions• DCAA should consider revising its policies to clarify the DCAA Form 1 exclusions


DCAA Office of Inspector General Createdp

• Effective January 5, 2015

• Way for employees and contractors to report fraud, waste and abuse by DCAA.

• Hotline and website now exist; previously this was internal to DCAA, but now it’s external and independent from the Agency.


SECTION 2 - BUSINESS SYSTEMS


Business Systems RuleSimply stated… the Contractor shall establish and maintain acceptablebusiness systems…

• Establishes criteria for mandatory adherence of requirements specificallyEstablishes criteria for mandatory adherence of requirements specificallyrelated to a contractors business systems to ensure best practices aremaintained for all government contracts

• Criteria reflects a combination of existing requirements as found in CAS, FAR,DFARS and those historically enforced by DCAA DCMA cognizant auditDFARS, and those historically enforced by DCAA, DCMA, cognizant auditagency, etc. Identifies the relevant business systems, correspondingguidelines and compliance requirements

• Provides for mandatory financial penalties for any noncompliance that isd d “ ig ifi t d fi i ”deemed a “significant deficiency”

• Allows for discretion (as exercised by government audit agency andreviewers) in how compliance will be achieved; final determination resideswith ACO, CO directs withholding decision

• Defines grace period for implementing corrective action plan to rectifydeficiencies


Acceptable / DeficientAcceptable / Deficient

“Deficiency” is defined as ashortcoming in the contractors

“Acceptable contractor businesssystems” are contractor businessshortcoming in the contractors

business system(s) that materially affects the ability of officials of the Department of Defense to rely upon

systems” are contractor businesssystems which are found to be incompliance with relevant laws andregulations [Cost Accountinginformation produced by the system

that is needed for management purposes.

regulations [Cost AccountingStandards (CAS) clauses and FederalAcquisition Regulations (FAR)principles] as reviewed by yourprinciples] as reviewed by yourcognizant audit agency.


What happens if found “Deficient”?• You must respond in writing to your Contracting Officer (CO) within 30 days of receiving

your determination of identified business systems deficiencies to include your comments –rationale for disagreement CO may issue a notice of intent to Contractor to withholdamounts from interim billings not to exceed:

5% for one or more identified significant deficiencies in any single business system• 5% for one or more identified significant deficiencies in any single business system• 10% significant deficiencies in multiple business systems

• If you correct the deficiencies or submit an acceptable corrective action plan (one thatincludes milestones and steps taken to eliminate issues) within 45 days of notice of intentincludes milestones and steps taken to eliminate issues) within 45 days of notice of intentto withhold, and as verified by the cognizant audit agency (auditor), the CO may:

• Decrease the withholding percentage until such time all deficiencies have beencorrected and verified

• Discontinue withholding and release previously withheld amounts (if not related toother s stem deficiencies) and verified b a ditorother system deficiencies) and verified by auditor

• If no determination of the corrective action plan by the CO has been made within 90days, withholding could be reduced by 50%, but not release payment for previouswithholdings

• If the corrective plan is not followed and the deficiencies continue to exist, the CO may:• Increase the withholding percentage if the corrective action plan is not followed and

deficiencies continue to exist


DCAA MRD 14-PAS-009(R) – Audit Guidance on Reporting ( ) p gBusiness System Deficiencies

Dated June 26, 2014

Clarifies Business System Report Guidance for Findings Less Severe Than Significant Deficiencies/Material Weaknesses

• Business System Non-compliances That Are Less Severe Than Material Weakness but Warrant Attention of Those Charged with Governance – auditor’s will issue a memorandum to the Administrative Contracting Officer including a statement a memorandum to the Administrative Contracting Officer including a statement of condition and recommendation (SOCAR) providing sufficient information to understand the condition and severity of the deficiency.

• Exception: when the auditor will be issuing a report that includes other significant deficiencies or with an opinion of the overall system to include:


DCAA MRD 14-PAS-009(R) – Audit Guidance on Reporting ( ) p gBusiness System Deficiencies (cont.)

• Deficiencies found in other than a Business System Audit – when both a significant deficiency (GAGAS material weakness) as defined by the DFARS business system clause and non-compliances that are less severe than a significant deficiency the auditor will include the less severe non-compliances in the audit report as a separate Exhibit titled “Deficiencies that Warrant in the audit report as a separate Exhibit titled Deficiencies that Warrant Attention of the Contracting Officer.” All significant deficiencies/material weaknesses will be in an Exhibit titled “DFARS Significant Deficiencies.”

• Deficiencies found in a Business System Audit – at the completion of a full business system audit only deficiencies that are less severe than a significant deficiency as defined by the DFARS business system clause but warrant the attention on those charged with governance need to be reported in the audit attention on those charged with governance need to be reported in the audit report with a qualified opinion identifying the less severe deficiencies in an Exhibit titled “Deficiencies that Warrant Attention of the Contracting Officer.”


New DFARS Proposed Rule – Case No. 2012-D042: Business pSystems Compliance (now closed)

• DoD proposed changes to DFARS business system rules on July 15, 2014 introducing new requirements for large government contractors for:

1. Annual Reporting;2 T i i l CPA A dit d2. Triennial CPA Audits; and3. Documentation Requirements.

• The proposed requirements do not apply to small businesses.The proposed requirements do not apply to small businesses.

• Affects accounting, estimating, and material management and accounting systems (MMAS) only (DCAA responsible).y ( ) y ( p )

• Does not affect purchasing, earned value management, and government property business systems (DCMA responsible).


New DFARS Proposed Rule – Case No. 2012-D042:pNew Requirements (now closed)

1 Annual Reports contractors are required to provide an annual report to the contracting 1. Annual Reports – contractors are required to provide an annual report to the contracting officer regarding a self-assessment of compliance with each business system criteria within six months of the its fiscal year end.

The annual report is required to include:

• A statement that the contractor has evaluated the business system’s compliance with the system criteria of the clause;

• The contractor’s assessment of the business system’s compliance with prescribed criteria, including a statement as to whether or not the system complies in all material aspects;

• Disclosure of any significant deficiencies with sufficient information for the government to understand the deficiencies;Th t t f i ifi t d fi i i di l d b ith th t t ’ t th • The status of any significant deficiencies disclosed by either the contractor’s assessment or the independent auditor’s report (if applicable); and

• A corrective action plan with milestones and actions to eliminate any significant deficiencies which have not been corrected as of the date of the contractor’s report.


New DFARS Proposed Rule – Case No. 2012-D042:pNew Requirements (now closed) (cont.)

2. Triennial CPA Audits - contractors are required to obtain an independent, objective, and qualified CPA examination of the contractor’s compliance with the relevant system and qualified CPA examination of the contractor’s compliance with the relevant system criteria and provide the results to the government for the initial year that the contractor is required to begin providing annual reports. The independent CPA firm would then perform an audit every three years thereafter, or more frequently if directed by the Contracting OfficerContracting Officer.

• The examination must be performed in accordance with GAGAS and include sufficient information about report significant deficiencies for the government to understand.

• “Significant deficiency” is a “shortcoming in the system that materially affects the ability of • Significant deficiency is a shortcoming in the system that materially affects the ability of officials of the DoD to rely upon information produced by the system that is needed for management purposes.”

• Contractors may also be required to provide the CPA’s audit strategy, risk assessment, and audit plan to the contracting officer would then forward it to DCAA to obtain a review of any potential p g y pissues.

• There is no criteria set forth for DCAA’s review of the CPA’s audit strategy, risk assessment, and audit plan; which also does note constitute the contracting officer’s approval.


New DFARS Proposed Rule – Case No. 2012-D042: New pRequirements (now closed) (cont.)

3 Documentation the Accounting System Administration clause (DFARS 252 242 7006 3. Documentation – the Accounting System Administration clause (DFARS 252.242-7006 (b)(2) has been modified to state that the contractor shall: “Make available to the Government, upon request, the results of internal or external reviews or monitoring that have been conducted to ensure compliance with the system criteria…and established accounting system policies and procedures ”accounting system policies and procedures.

• Contractors will also be required to maintain documentation about the selection criteria for the CPA firm including the diligence supporting the CPA firm’s independence, objectivity, and

lifi iqualifications.


New DFARS Proposed Rule – Case No. 2012-D042: Concerns & Implications (now closed)

1. Increased costs and impacts on overhead – Contractors will incur additional costs for these new audits and to support the audits.

2. Government Acceptance of CPA Opinion – To what extent will DCAA and DCMA rely on the opinions of the CPA firms? How will concerns or potential business system findings by DCAA be addressed and reconciled with CPA firm opinions?

3. Access to Records – CPA Workpapers - Firms may be hesitant to provide full access to planning documentation and workpapersdocumentation and workpapers

4. Access to Records – Contractor Documentation - Rule requires “documentation to provide reasonablesupport” (emphasis added) for the self certification

5. Timelines and effect of DCAA oversight & review – Rule provides for DCAA approval of workplan and approach but does not establish timelines to allow for sufficient execution of the CPA’s audit

6. Clarity and guidance on key definitions – Both materiality and significant deficiency definitions should be dd d t i t t li ti b t CPA fi d taddressed to ensure consistent application between CPA firms and government

7. Non-Major Contractors – May not have been subject to rigorous system audits but will now be required to self certify and subject to third party audit


What systems can I use to run my business?What systems can I use to run my business?


Short answer…there is no single “silver bullet” system

This morning we will discus things to consider when implementing an automated system for Government Contractors, including one system from Microsoft Dynamics…


Microsoft Integrated SolutionsMicrosoft Integrated Solutions

Dynamics ERP• Dynamics ERP• SharePoint

W b S i• Web Services• Business Analyzer

O l k• Outlook• Office


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What is Microsoft Dynamics?What is Microsoft Dynamics?

• Integrated Financial and Operational/Project Management SoftwareSoftware

• Familiar to Your Employees• Government Contracting Industries

• Professional Services• Contracting• Manufacturingg• Distribution

• Accepted by DCAA


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Functionality Provided by Dynamics Functionality Provided by Dynamics

• Financials• AccountingAccounting• Fringe, Overhead and G&A Rate Calculations• Cost Segregation – Allowable vs. Unallowable• Job Costing & Project Management• Job Costing & Project Management• Purchasing & Requisition Management• Manufacturing• Inventory Management• Sales Orders• Service ManagementService Management• Customer Relationship Management


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What will you get from the Integrated Microsoft Solution?Microsoft Solution?

• Organized flow of information• Organized flow of information

• Project Management• Resource Allocation• Financial Reporting

Seamless integration of information• Seamless integration of information• One view of the data• Software Tools your team is familiar with…


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Business Process ImprovementsBusiness Process Improvements

• Indirect RatesM it T d i t d d t• Monitor Trends via standard reports

• More Accurate Cost Information for Bidding• More Accurate Historical Procurement Costs

• Traceability of Source Documents• Management Reporting Drill DownManagement Reporting Drill Down• On line Inquiry Screens• Transaction Level Detail• Imaging/Document ManagementImaging/Document Management


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Reporting vs. Dashboards

• Many people use the terms interchangeably• What is the purpose of a report in Government p p p

Contracting company?• Compliance• Company Directed• Company Directed

• What is the purpose of a dashboard?• Drive user towards decision

• How do you know what the Dashboards should be?• Key Performance Issues of Company

• What are KPI’s?What are KPI s?• Key Performance Indicators


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Reporting Example – Statement of Indirect Expense


Dashboard ExampleDashboard Example


Operational Benefits

• What benefits should Operations & Project Managers receive from Microsoft Dynamics?receive from Microsoft Dynamics?

• Superior Cost Control R l ti i ibilit i t itt d t• Real time visibility into committed costs

• Immediate access to supporting documentation via document imaging

• Earned Value Management visibility• Earned Value Management visibility


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It‘s all about business and technical freedom: A solution that provides a unique set of capabilities to free the user from System Configuration, Setup Concerns and Technical constraints that limit business growth and results

It s all about business and technical freedom:

constraints that limit business growth and results.

• Pre-Configured Chart of Accounts – Changes easily adapted

• Pre-Configured Allowable vs. Unallowable Cost Trackingg g

• Pre-Configured Fringe, Service Center, Overhead, Material Handling & G&A

• Pre- Configured Burden

P W itt Fi i l R ti g• Pre-Written Financial Reporting

• Economies of Pre-Configured System

• FEI = Faster Economic Installation

• Quick Start with proven implementation methodology


Dynamics SL Pre-Configured Software Strengths

• Plug & Play for Commercial-Government Contractors

• DCAA System Audit Road Map – Reports Template

• Microsoft Office - Integration

Fi i l P j t R ti • Financial - Project Reporting

• Budgeting/Planning

• Business Intelligence Reporting• Business Intelligence Reporting

• Internet Access Via SharePoint

• Document ImagingDocument Imaging

• Utility Tools

• Easy integration of legacy data


y g g y

Dynamics SL Pre-Configured Software

Features• Chart of Accounts

C P l All i d R S• Cost Pools Allocation and Rate Structures

• Job reports to include committed costs

• DCAA Accounting Manual• DCAA Accounting Manual

• DCAA System Audit Support

• Electronic Time SheetsElectronic Time Sheets

• Expense Reports

• Purchasingg


Pre-Configured Integrated Software Strengths of an pre-configured system involve…

• Fringe, Service Centers, Overhead, Material Handling, & G&A Rate Structures

• Electronic Time Sheets• Automated Floor Checks

• Daily Records of hours charged to projectsDaily Records of hours charged to projects

• Open Time Sheets show up as committed cost

• Expense Reports• Web Based Expense Reporting

• Reporting • Financial Reporting

• Project- Plan vs. Actual

• Trending

• Business Intelligence Optimization (BIO)


• Dashboards

Critical Requirements for SuccessCritical Requirements for Success

What to look for when reviewing integrated solutions?Out of the Box Proven Financial and Operational Software • Out of the Box, Proven Financial and Operational Software

• Proven management of Indirect and Direct Costs• Integrated across Finance and Project Management / Operations• Business Process Automation• Setup Flexibility to meet business needs• Ease of Setup and Configuration Ease of Setup and Configuration

Does a pre-configured option make sense?


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Business Process ImprovementsBusiness Process Improvements

Indirect RatesMonitor Trends via standard reports• Monitor Trends via standard reports

• More Accurate Cost Information for Bidding• More Accurate Historical Procurement Costs

Traceability of Source Documents• Management Reporting Drill Down• On line Inquiry Screens• On line Inquiry Screens• Transaction Level Detail• Imaging/Document Management


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Reporting vs. DashboardsMany people use the terms interchangeably

What is the purpose of a report in Government Contracting company?p p p g p y• Compliance• Company Directed

What is the purpose of a dashboard?W at s t e pu pose o a das boa d?• Drive user towards decision

How do you know what the Dashboards should be?• Key Performance Issues of CompanyKey Performance Issues of Company

What are KPI’s?• Key Performance Indicators


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Statement of Indirect Expense


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Operational BenefitsOperational Benefits

What benefits should Operations & Project Managers receive from Microsoft Dynamics?

• Superior Cost Control

Real time isibilit into committed costs• Real time visibility into committed costs

• Immediate access to supporting documentation via document imaging

• Earned Value Management visibility


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SECTION 3 – TIME AND EXPENSE REQUIREMENTS AND CHALLENGES


Objectives of Timekeeping SystemObjectives of Timekeeping System

• Ensure that proper and reliable contract labor costs, identified as either direct or indirect, are:,

• Accumulated• Reported• Billed

• Billings to the government via a system of accurate, timely, and complete posting of labor hours on individual employee timecards


Basic Requirements of Timekeeping System

• Employee is given or mapped to correct project or charge number via work authorization before work commences

• Time cards/sheets or access to system provided to employee at beginning of pay periodTi d / h t d d ith i d t if l• Time cards/sheets are pre-coded with pay period, name, etc., if manual

• Employee has control or possession of timesheet (if manual) or sole access to electronic system

• Employees record time dailyp y y• Supervisors or other personnel do not prepare timesheet entries for employees (unless

out due to sickness, etc.)• Audit trail for changes made to initial timekeeping entries

M t l f ti h t ti t d• Management approval of timesheet corrections noted• Explanation of timesheet corrections provided • Timesheet signed by employee at end of pay period• Paid absences charged to correct indirect codePaid absences charged to correct indirect code• Indirect duties (training, meetings, etc.) properly charged• Timesheets collected by appropriate official and reviewed and approved


Time ReportingTime Reporting• All time worked should be reported, including all time worked in excess of the

standard workweek. This includes all time worked for clients, whether billable or notor not.

• All time and expenses associated with an individual contract should be recorded in a Work Breakdown Structure (WBS) element Any time or expense recorded in a Work Breakdown Structure (WBS) element. Any time or expense related to the execution of a specific contract should be charged to the correct WBS elements, regardless of whether or not those time and expenses can be billed. All other time and expenses should be charged to the appropriate WBS lelement.


Labor System Authorization & ApprovalsLabor System Authorization & Approvals• The contractor should have procedures to ensure the segregation of duties for

work authorizations and/or job assignments to the extent practical. Work authorizations/job assignments should be controlled and issued by individuals authorizations/job assignments should be controlled and issued by individuals independent of those responsible for performing the work - a critical control is the procedure used to open and close work authorizations.

• The contractor should have procedures for the preparation of labor p p pdocumentation/work descriptions that require clear identification of the nature of the work performed - trackable to intermediate or final cost objectives Th h ld bli h l b h i i ll • The contractor should establish a labor charging awareness program to train all employees, as appropriate, on proper labor charging practices.


Labor System Authorization & Approvals (cont.)Labor System Authorization & Approvals (cont.)• The contractor should assure that labor hours are accurately recorded and that

any corrections to time keeping records are documented including the appropriate authorizations and approvals appropriate authorizations and approvals.

• The contractor should assure the proper allocation of labor costs to cost objectives.

• The contractor should provide reasonable assurance that labor transfers or The contractor should provide reasonable assurance that labor transfers or adjustments of the labor distribution are documented and approved.

• The contractor should monitor the overall integrity of the time keeping system.


Overtime Approval Overtime Approval

• Requests for overtime should be made by project managers or department managers. Overtime must only be authorized when a project or department manager has documented the following in writing:

• Overtime is necessary to meet delivery requirements, • Overtime is necessary to meet performance requirements, or• Overtime is necessary to make up for delays beyond the control or without the

fault or negligence of the contractor

• When required by contract provisions, the project manager authorizing overtime must obtain the contracting officer's written approval.


Timecard Changes / ModificationsTimecard Changes / Modifications• It is improper for supervisors to unilaterally make changes to an employee’s

timecard. Doing so may result in disciplinary action.• If a time correction is necessary PRIOR TO submitting the time sheet to the

Payroll Department, the employee should ensure that the time sheet correction is made in ink and initialed. The reason should be clearly documented and approved by a supervisorapproved by a supervisor.

• When making a correction(s) to reported time SUBSEQUENT TO submitting the time sheet to the Payroll Department:

• The correction may not be more than 30 days old.y y• Employees must indicate the reason for the correction, the job numbers affected

by the adjustment, and the related hours.• The documentation for the labor corrections must be signed by a supervisor and

submitted to accountingsubmitted to accounting.• Consider creating a “Labor Correction Form” that will state the necessary

procedures for making labor corrections.


Distribution of Labor Costs and Labor TransfersDistribution of Labor Costs and Labor Transfers

• Written justification is required for any transfer of labor costs to ensure the proper allocation of labor costs to each project. Each justification the proper allocation of labor costs to each project. Each justification should be retained in accordance with the contractor’s record retention policy. Journal vouchers are commonly used to document labor transfers.

• The contractor should consider additional procedures for more closely scrutinizing transfers.

• The contractor should include procedures to address management The contractor should include procedures to address management review and approval of labor transfers, labor distribution edit errors, and review and correction of labor errors.

• Labor distribution edit errors should be processed in a suspense account p pand billed to customers only after correction.


What DCAA observations will elevate audit risk?• Mix of cost plus government & commercial contractsMix of cost plus government & commercial contracts

• Lack of written or inadequate T&E procedures

• Significant adjusting entries to G/L labor charges

• Data indicated on timesheet during floor check does not match time sheet • Data indicated on timesheet during floor check does not match time sheet after entered to labor distribution

• Significant and non-verifiable changes and alterations to employee Significant and non verifiable changes and alterations to employee timesheets

• Timesheets without employee signaturesp y g

• Inadequate demonstration of employee training for preparing time sheets


Consequences for Deliberate Failure to Follow Consequences for Deliberate Failure to Follow Timekeeping Policies and Procedures

• The contractor should be committed to the enforcement of all timekeeping procedures. Any clear infraction of the policy stated above will result in disciplinary action which may include a warning, reprimand, probation, suspension reduction in salary demotion or dismissalsuspension, reduction in salary, demotion, or dismissal.

• Employees should be aware, in addition to company imposed sanctions, that individuals directly responsible for deliberate mischarging of time or materials individuals directly responsible for deliberate mischarging of time or materials may be held personally liable for civil penalties and actual damages sustained by the government as a result of the mischarging. Criminal prosecution may also result which carries fines and/or imprisonment.


Consequences for Deliberate Failure to Follow Consequences for Deliberate Failure to Follow Timekeeping Policies and Procedures (cont.)

• Employees must be vigilant in their efforts to accurately record time. The penalties for knowingly mischarging time can be as severe as termination and other Governmental ramifications (i e False Claims Act)other Governmental ramifications (i.e., False Claims Act).

• The contractor should periodically conduct floor checks to ensure timekeeping practices are being followed and actual hours worked are accurately recorded.practices are being followed and actual hours worked are accurately recorded.


Time and Expense examples…


Dynamics Web based Timecards


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Web based Timecards (cont.)


Dynamics Web based Expense Reports


Expense AttachmentsExpense Attachments


Web Based Approvals


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SECTION 4 – JOB COSTING AND INDIRECT RATES


Job Cost Accounting Systems Job Cost Accounting Systems

• Costs must be accumulated under general ledger control• Job costs must be reconcilable and posted to general ledger control accountsJob costs must be reconcilable and posted to general ledger control accounts• Costs must be posted at least monthly to books of account

• Costs must be segregated between direct and indirect typesg g yp• Controls must exist to preclude direct charging of indirect expenses

• Direct costs must be accumulated by contract• Must either have a subsidiary job cost ledger or accounts receivable ledger• Must be able to “drill down” to at least Contract Line Item Number (“CLIN”) level

Indirect costs m st be allocated to jobs• Indirect costs must be allocated to jobs• Accumulated in logical cost groupings and allocated based on causal or beneficial

relationships


Allocation of Expensesh h d h h dWhen a company incurs an expense, it is either a direct expense that is charged to

a specific project or it is an indirect expense that benefits various projects and the company as a whole.


Accounting for Unallowable Costsll bl i i bill bl i ’An allowable cost in government contracting terms means billable – it’s

allowable if the rules permit it to be included in an invoice to thegovernment. An unallowable cost is just the opposite; it’s the kind of costyou can’t bill the government for.

Under the FAR 31.201-2, a cost is allowable only when it meets all of theserequirements:

T f hTerms of the contract

Limitations set for the in FAR 31.201

R bl d ll blReasonable and allocable


DCAA Audit Alert: Identifying Expressly Unallowable Costs

• Issued on Dec.18, 2014, enhanced guidance issued on Jan. 7, 2015

• Audit alert distributes a list of costs determined to be expressly unallowable under FAR Part 31 and DFARS Part 231.

• Audit teams will use the list as a tool to help determine if a cost is expressly unallowable

• It is not a comprehensive list; instances may occur when additional analysis is required to determine allowability

Q estioned cost not incl ded on this list sho ld be ele ated to the regional point • Questioned cost, not included on this list, should be elevated to the regional point of contact. If the regional staff agrees, it should elevate the issue to the Accounting and Cost Principles Division.


DCAA Audit Alert: Identifying Expressly Unallowable Costs (cont.)y g p y ( )

• Issued enhanced guidance is meant to assist audit teams with making determinations on specific cost principles determination of allowability.

• Expressly unallowable costs must show that is was unreasonable under all the circumstances for a person in the contractor’s position to conclude that the

t ll blcosts were allowable.

• It states in direct terms that the costs are unallowable, or leaves little room for differences of opinion as to whether the particular cost meets the allowability differences of opinion as to whether the particular cost meets the allowability criteria; and

• It identifies the specific cost or type of costs in a way that leaves little room for interpretation.

• In summary, a cost can be expressly unallowable even though the cost principle does not explicitly state that the cost is unallowable or not allowable.


What is a Direct Cost?If a cost is easily identified with a single project, it is generally considered a direct cost. Examples include:

• Labor performed while working on a project

• Travel to project status meetings

• Material consumed entirely on a project

• Subcontractors/consultants hired to work on a project

To help make this determination askTo help make this determination, ask…

“If we did not have this contract, would we still incur this cost?”

A “no” answer to this question indicates that it is probably a A no answer to this question indicates that it is probably a direct cost.


What is an Indirect Cost?

An indirect cost is a cost incurred that:

• Benefits more than one contract• Incurred for the common good of the company• Impractical to splitImpractical to split• Immaterial direct cost


Most Commonly Used Indirect Cost Pools

Fringe Benefits

Company Benefits Company Labor

Intermediate Pool

Facility Expenses Occupied Space

Overhead

Contract Support Contract Labor + Applied Benefits

Subcontractor – Material Handling

Procurement, Management Support Subcontractor, Material, Equipment

General and Administrative

Company Management and Administrative Total Contract Cost


Defining Indirect Costs

Fringe benefits - Company expenses incurred for the benefit of its employees

• Employer payroll taxes• Medical insurance paid by the company• Medical insurance paid by the company• Company 401(k) contributions• Paid time off


Defining Indirect CostsDefining Indirect CostsOverhead - Costs not directly related to cost objectives but are support-type costs necessary for the production of goods or services

• Salaries and wages of support and production personnel• Facilities cost• Supplies

It is common to find separate overhead pools for engineering, t s co o to d sepa ate o e ead poo s o e g ee g,manufacturing, and for certain off-site activities


Defining Indirect CostsG&A - Costs associated with the general administration and overall management of a company

• Compensation of company executives and related fringe• Legal and professional fees• Administrative personnel and costs• Business insurance• Company taxes (except federal income taxes)• Bid and proposal costs

Subcontractor/material handling - Costs associated with overall administration of subcontractor and materials acquisitions• Selecting, negotiating, and managing subcontractors and materials purchases


G&A or Overhead

Can certain G&A costs qualify as OH expenses?

Company A charges HR costs to G&A while Company B allocates the cost of HR across the entire company.

HR benefits the Company as a whole, meeting the criteria of a G&A cost, but HR also benefits all ee’s of the Company.

Company B rational: • The fundamental costs of the majority

of ee’s are maintained in OHDeciding to allocate costs betweenG&A and OH takes detailed planningof ee s are maintained in OH

• HR costs will be allocated between OH & G&A based on a method such as using proportionate number of ee’s

G&A and OH takes detailed planningand consideration of materiality andcost /benefit relationship


Defining Allocation BasesDefining Allocation Bases

Assigning an indirect cost pool to a particular allocation base depends upon:• Types of costs included in the poolTypes of costs included in the pool• Whether the base provides a reasonable representation of the relative

consumption of pooled indirect costs by direct cost activities

The only requirement of the FAR is that the allocation of indirect costs be: • Fair • Reasonable• Equitable

Labor costs are an appropriate allocation base for the fringe expenses.

There is a clear relationship between the two.


Indirect RatesK i t t t bli h d i di t t t tKey points to establish and manage indirect cost structures:

Fiscal yearThe period for allocating indirect costs is a contractor’s fiscal year – it is not related to a period of performance for a given contracts.

SimplicityWhen substantially the same result can be achieved through less precise methods, a company is permitted to keep the allocation simple and not be forced into more complicated allocation formulas that are technically more accurate but not materially different.

Consistency

Companies have a great deal of latitude to determine indirect rate structure

Once treated as a direct (or indirect cost), a cost should be treated consistently.


Indirect RatesIndirect RatesMethods practiced to reduce indirect rates:

• Charge as many costs direct as possible By charging shipping and copying directly to a• Charge as many costs direct as possible. By charging shipping and copying directly to acontract, it will keep it out of overhead pool, which will in turn reduce the overheadrate.

• Direct charge unique costs to a specific contract• More indirect rates by splitting large groupings of indirect expenses• Indirect rates for different types of products and services• Establish a service center (or multiple service centers)

A company with high rates may not really be any more expensive -- though they are often perceived that way. When developing or evaluating indirect rates, a company should keep in mind ways to reduce at least the appearance of indirect company should keep in mind ways to reduce at least the appearance of indirect rates.


Indirect Cost Allocation CycleIndirect Cost Allocation CycleIndirect cost allocation typically follows the cycle depicted in the following figure:

Forward Pricing

Estimate Indirect

Contract CostsContract Costs

Final AllocationAllocate

Indirect Costs

BillingProgress

Payments Cost to Contracts Reimbursement


Profitability and Cash Flowy

So, why is it important to monitor indirect rates

Under-running rates - billing rates are simply estimated rates that must beadjusted to actuals at year end. A company that has predominantly cost-adjusted to actuals at yea e d. co pa y t at as p edo a tly costreimbursement contracts and they are significantly under-running theirestimated rates, which means their actual rates are lower than the approvedbilling rates, they will be expected to reimburse the government any excesscash collectedcash collected.

Over-running rates - if actual indirect rates are running higher than the billingrates, the company needs to either slow down the operating expenses being, p y p g p gincurred or they will be forced to support the negative cash flow through othermeans, such as line-of-credit borrowing.


Monitor Indirect Rates and Projectswith Pre-defined Reports and Web Apps


Fringe Rates


Overhead Rates


G&A Rates


Profitability and Cash Flow

Indirect Rates Affect the Revenue and Profitability of Various Contract Types

CPFF FFP T&M

Revenue Profits Revenue Profits Revenue Profits

Increase in Increase* No change* No change Decrease No change DecreaseActual Rates Increase* No change* No change Decrease No change Decrease

D i Decrease in Actual Rates Decrease No change No change Increase No change Increase

*Assumes no rate ceilings.


Measurable Benefits of Effective Job Cost Systems• Better Prioritization of Projects and Services

• It is shocking how many “projects” operate below the radar screen with no plans, controls or accountability

• Shorten Billing Cycles • Better allocation of resource T&E to project schedules and invoicing, and

faster resolution of billing disputesfaster resolution of billing disputes

• Minimize Revenue Leakage• Eliminate errors from manual entry or redundant systems used to invoice y y

client services

• Improved Service Agility• Quicker response to sudden or unexpected changes in business priorities,

competitive pressures new technology and economic downturnscompetitive pressures, new technology, and economic downturns

• Standardized Reporting


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Project Dashboard

Real-time visibility into your data

Project P&LProject P&L

Labor hours statistics


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Job Summary Report


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Executive Management DashboardsReal-time visibility into your data

Top 10 Customers

Year over year Sales and Margin


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Project – GL reconciliation report


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Provisional vs. PTD Actual reporting


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Provisional vs. YTD Actual


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Increased Visibility

Real-time visibility into your data

Labor statistics by CustomerCustomer


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Project Visibility


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Self Service Access


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Questions?Questions?Nisha Gupta – Senior Manager BDONisha Gupta Senior Manager, [email protected]

Natalie Wooten – Senior Manager, [email protected]

Seth Zarny – Partner, [email protected]

Glenn Anstead – Senior Manager, Raffag ,[email protected]

Jeremy Taro – Account Executive, [email protected]

Larry Mocniak – Owner, LGM [email protected]


2015-03-10 managing government contracts

Documents

costs dcaa

dcaa form

exclusions dcaa

dcaa offices

audit requests dcaa

dcaa field audit office

federal government

government contractsmarch