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Accounting System Adequacy 101The Fundamentals of Government Contracting May 26, 2016


Your Presenters

[email protected]

MikeMardesichDixonHughesGoodmanLLP703.970.0508mike.mardesich@dhgllp.com

@DHG_GovCon


Fundamentals – Season 1

• Challenges of Contracting with the Federal Government (November 2015) -Completed

• Contract Types and Associated Risks (December 2015) – Completed• Year-End Closing (January 2016) - Completed• An Introduction to the Incurred Cost Submission

– Part I: Who, What, Where, When, Why, and How? (February 2016) -Completed

– Part II: Preparation and Adequacy Review (March 2016) - Completed• Accounting Systems and Setups (April 2016) - Completed• Accounting System Adequacy 101 (May 2016) – You are Here!• The Composition of Total Cost (June 2016)• Making Way for 2017 – Budgeting and Provisional Rates (July 2016)• Procurement Systems: DFARS Business Systems Rule and Criteria (August 2016)• Exploring the Gray Area of Unallowable Costs (September 2016)• Policy and Procedures Manual: What’s In It and Why Do You Need One? (October

2016)

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Overview

• Review of Business System Requirements• Current Regulatory Environment• DFARS 252.242-7006 vs. SF 1408• Accounting System Adequacy Review and Audit

Readiness• Benefits of Compliance

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Business System Requirements

The Fundamentals of Government Contracting Webinar Series


DFARS Business System Rule

• DFARS Interim Rule issued May 2011; Final issued February 24, 2012– Systems identified

– 5% Maximum withhold per system; 10% max for two or more systems

• Progress payments• Performance based payments• Interim payments under Cost, T&M, and Labor-Hour contracts

– Corrective Action Plans may reduce withholds by 50%– DCMA tracking status of contractor business systems in

Contractor Business System Analysis Repository

@DHG_GovCon

Accounting MMAS Estimating

EVMS Procurement Property


Summary of Business Systems @DHG_GovCon


Business Systems Clauses @DHG_GovCon

• Accounting System (252.242-7006)• Material Management and Accounting System

(252.242-7004)• Estimating System (252.215-7002)• Earned Value Management System (252.234-

7002)• Purchasing System (252.244-7001)• Property Management System (252.245-7003)


Other Considerations @DHG_GovCon

• Only applicable to contracts subject to Cost Accounting Standards (CAS) covered awards

• Business systems will be considered either “Approved” or “Disapproved”– No in between or “Inadequate in Part”

• A single significant deficiency in any of the systems will trigger disapproval

• Approval process once a system has been considered “Disapproved”


Approval Process – DCAA/DCMA @DHG_GovCon

DCAAIssuesReportwithSignificant

Deficiency

IfACODeterminesSignificantDeficiency

Exists

COInitialDetermination

ContractortoRespond

IfACODeterminesSignificantDeficiency

StillExists

COFinalDetermination/

CAR

ContractorPreparesCorrectiveAction

Plan(CAP)

30Days

45Days

10Days 30Days

ACOWithholds

ACOMonitors


Current Regulatory Environment



Renewed Audit Focus

• DODIG-2014-084 & DODIG-2015-139 reports– Failure to make timely final determinations regarding

business systems– Ensure withholdings are implemented timely

• National Defense Authorization Act (NDAA) of Fiscal Year (FY) 2016– Prohibits DCAA from providing audit support to non-

Defense Agencies• Recent NIH RFP requiring verification from DCAA,

DCMA, any federal civilian audit agency, or a third party CPA firm of an accounting system that has been audited and determined adequate prior to proposal submission

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DFARS vs. SF 1408



When To Use

• DFARS– DoD contracts subject to CAS

• Standard Form (SF) 1408 or Pre-Award Survey– Request of a Contracting Officer or Prime Contractor per

FAR 9.106– Formal guidance is not spelled out in the FAR, but the SF

1408 is a good benchmark to use• Provides a list of several requirements to determine if a

Contractor’s accounting system is “Adequate” for determining costs applicable to the contract or order

– Can be used to “self-certify”

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SF 1408 pg. 1 @DHG_GovCon


SF 1408 pg. 2 @DHG_GovCon


Accounting System Criteria Per DFARS 252.242-7006



DFARS 252.242-7006(c)(1)

• “A sound internal control environment, accounting framework, and organizational structure;”– Ensure segregation of duties is in place

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DFARS 252.242-7006(c)(2)

• “Proper segregation of direct costs from indirect costs;”– Ensure Chart of Accounts separates direct

and indirect costs– Ensure there’s a policy and procedure in

place for adding and removing accounts– The total cost of a contract is the sum of the

direct and indirect costs allocable to the contract

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DFARS 252.242-7006(c)(3)

• “Identification and accumulation of direct costs by contract;”– Ensure direct costs can be tagged to a final

cost objective (or contract)– No final cost object shall have allocated to it

as a direct cost any cost that has been included in an indirect cost pool

– Ensure setup occurs when contract is awarded

– Ensure that the system can lockdown the job code when period of performance has ended

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DFARS 252.242-7006(c)(4)

• “A logical and consistent method for the accumulation and allocation of indirect costs to intermediate and final cost objectives;”– An indirect cost is not to be allocated to a final cost

objective if other costs incurred for the same purpose in like circumstances have been included as a direct cost of any other final cost objective

– Ensure indirect cost accounts are grouped by type (Fringe, OH, G&A) on the Chart of Accounts

– Ensure structure and allocation bases are reasonable and tailored to how your company operates

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DFARS 252.242-7006(c)(5)

• “Accumulation of costs under general ledger control;”– Ensure all costs incurred can be recorded and

traced to an account

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DFARS 252.242-7006(c)(6)

• “Reconciliation of subsidiary cost ledgers and cost objectives to general ledger;”– Ensure General Ledger reconciles to the Trial

Balance

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DFARS 252.242-7006(c)(7)

• “Approval and documentation of adjusting entries;”– Ensure there’s a formal approval process in

place for adjusting entries– Ensure documentation of signoff and reason

for adjustment

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DFARS 252.242-7006(c)(8)

• “Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices;”– Ensure management periodically reviews and

reconciles balance sheet accounts– Ensure that policies and procedures are

reviewed periodically

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DFARS 252.242-7006(c)(9)

• “A timekeeping system that identifies employees’ labor by intermediate or final cost objectives;”– Ensure employees are assigned job codes

and can only post time to the job codes they are authorized

– Ensure employees fill out timesheets on a daily basis and include all hours worked included uncompensated overtime

– Ensure supervisor approval of timesheets are documented

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DFARS 252.242-7006(c)(10)

• “A labor distribution system that charges direct and indirect labor to the appropriate cost objectives;”– Ensure labor can be traced from the approved

timesheets to each project/job code– Ensure labor cost distribution records

reconcile to payroll records

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DFARS 252.242-7006(c)(11)

• “Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account;”– Ensure costs are posted in the accounting

system at least monthly

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DFARS 252.242-7006(c)(12)

• “Exclusion from costs charged to Government contracts of amounts which are not allowable in terms of Federal Acquisition Regulation (FAR) part 31, Contract Cost Principles and Procedures, and other contract provisions;”– Ensure unallowable costs are identified and

segregated on the Chart of Accounts – Ensure unallowable costs are excluded from

billings

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DFARS 252.242-7006(c)(13)

• “Identification of costs by contract line item and by units (as if each unit or line item were a separate contract), if required by the contract;”– Ensure costs can tracked at the task order

level• Needs to expand beyond the project or contract

number– Ensure contract is adequately briefed to

determine what level of detail is needed

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DFARS 252.242-7006(c)(14)

• “Segregation of preproduction costs from production costs, as applicable;”– Only applicable to manufacturing companies– Ensure you check “N/A” if the criteria is not

applicable to you

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DFARS 252.242-7006(c)(15)

• “Cost accounting information as required-– By contract clauses concerning limitation of

cost (FAR 52.323-20), or allowable cost and payment (FAR 52.216-7); and

– To readily calculate indirect cost rates from the books of accounts;”

– Ensure indirect rates are monitored routinely– Ensure total contract expenditure against

contract limitations on price or cost is monitored at least monthly

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DFARS 252.242-7006(c)(16)

• “Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms;”– Ensure only costs which comply with FAR 52.216-7 have

been billed• Recorded costs that have been paid• Includes subcontractor and vendor costs that will be paid in

accordance with terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor’s payment request to the Government

– Ensure total billed is based on current contract provisions and has not exceeded any contract work order, funding limitation, or any other contract ceiling amount

– Always helpful to have a written contract brief

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DFARS 252.242-7006(c)(17)

• “Adequate, reliable data for use in pricing follow-on acquisitions; and”– Can the accounting system produce

adequate, reliable data in real-time for pricing?

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DFARS 252.242-7006(c)(18)

• “Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles.”

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Benefits of Compliance



The Why…

• Sound business practices result in efficiencies and cost reductions (FAR Council theory)

• Avoid adverse impact on cash flow• Competitive advantage (increasing # of RFPs

include “Approved” systems as evaluation criteria)

• Avoid the costs associated with responding to significant deficiencies, implementing Corrective Action Plans, and trying to release payment of withholds

• Improved client relationships/trust

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Questions? @DHG_GovCon


Join us next month for The Composition of Total Cost on Thursday, June 23, 2016


accounting system adequacy 101 - dhg · government contracting 4 overview • review of business...

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