Proposed rule on contractor business systems
Monday, February 22nd, 2010
Contractor Business Systems and Internal Controls, By D. Walker
As we briefly noted in our January 2010 newsletter, DPAP (Defense Procurement and Acquisition Policy) has proposed a rule to address contractor business systems. The Federal Register (Vol. 75, No. 10, January 15, 2010) issued a proposed amendment to DFARS to improve the effectiveness of DoD oversight of contractor business systems (internal controls). The proposed rule defines contractor business systems and will implement compliance enforcement mechanisms which include withholding payments for business systems which contain deficiencies. Of particular note, interested parties should submit comments in writing on or before March 16, 2010.
In terms of the impetus for this proposed rule, it is clearly aimed at resolving the alleged dysfunctional relationship between DCAA and DCMA as reported by the Commission on Wartime Contracting (CWC). Most recently, the CWC Special Report on Contractor Business Systems, dated September 21, 2009 (available at www.wartimecontracting.gov) reported five systemic problems, and number one is the ―divergent and often contradictory behaviors (DCAA and DCMA) sending mixed messages to contractors‖. This is an obvious embarrassment to the DoD and by all indications the reason for the petulant response in the form of the proposed DFARS rule.
Regardless of the fact that the proposed rule is attributable to the issues solely attributed to wartime contracting, it is a much broader proposed rule and it will likely result in changes to the regulatory requirements relative to all DoD contractor internal controls or as coined by the CWC, ―business systems‖. In addition to the definition of six business systems (estimating, purchasing, property management, earned value management systems, material management and accounting systems) , the proposed rule includes enforcement provisions which range from 5% to 100% withholdings applied to contractor invoices (public vouchers and progress payments).
On a positive note, the rule clearly assigns the decision making authority to the contracting officer who would rely on DCAA audits to make a decision as to the adequacy of a business system. Applied to the overall accounting system the expectation is stated in terms of the system providing reasonable assurance that laws and regulations will be complied with, data is reliable, and risk of misallocations and mischarges are minimized (other systems have system specific criteria delineated in the proposed rule). However, the rule fails to define any measurable objective standards unless such standards already exist (e.g. MMAS or Material Management and Accounting Systems which does have for example a specific ―desirable‖ level of inventory accuracy of 95%).
The DPAP website has also publicized its creation of a subcommittee on ―Contractor Business Systems Issues‖ whose focus areas include the assessment of the need for standards (such as those published for Earned Value Management Systems (EVMS)) for the various business systems. Unfortunately and inexplicably DPAP has disconnected the critical issue of defining the standards for measuring business systems from the DFARS rule making process on business systems. The DFARS proposed rule appears to have a placeholder for the outcome of the subcommittee with respect to standards for business systems; hence, public comments on the DFARS proposed rule are in something of a vacuum with respect to the full, ultimate context of the DFARS rule. We are left to comment on a proposed rule arguably missing its most critical component; analogous to voting on a government referendum and only knowing part of the referendum while deferring to a government subcommittee to ―fill in the blank‖ at a later date.
As it relates to standards which would otherwise define business systems requirements for an accounting system, the proposed rule essentially incorporates the SF1408 criteria (Standard Form 1408 which is currently used to document a government/DCAA assessment of a contractor’s accounting system before awarding a contract to a contractor). Before listing the 17 requirements, the proposed rule includes the statement, ―including but not limited to, as applicable‖ (with respect to the list of 17 criteria). Open-ended regulations simply cannot result in consistent interpretations, particularly when the government audit agency (DCAA) freely interprets and applies requirements over and above any stated requirements (see related discussion in the article on Bid Protest).
In many cases, the first obstacle or issue will continue to be the question of ―as applicable‖ because most DCAA auditors view applicability in the broad context of government contracting and not in the narrow context of the specific contract or solicitation to which the instant SF 1408 evaluation applies. Ultimately, government contractors will continue to face DCAA’s free-wheeling interpretations of requirements over and above the stated requirements because the wording of the proposed rule simply opens the door to a much more expansive definition of accounting system requirements.
As it pertains to the ominous withhold (enforcement) provisions, these are viewed by DPAP as necessary presumably because DCMA has asserted that current regulations do not provide for administrative withholds in contrast to interpretations by DCAA (another DCAA interpretation which appears to be inconsistent with and more unfavorable to contractors than the actual regulation; imagine that). The proposed withholds are 10% for a business system (with one or more deficiency) up to 50% for more than one business system (i.e. five or six business systems, each with one or more uncorrected deficiency would result in a mandatory withhold of 50% of all government public voucher or progress payments). And of course, the ultimate withhold of 100% of contractor payments for deficiencies ―highly likely‖ to lead to improper contract payments‖. As proposed a contractor could find itself without any government payments (100% withholds) based upon no actual mischarges or overbillings, but merely a deficiency which is ―highly likely to lead to‖ improper contract payments. If a system deficiency is ―highly likely‖ to lead to improper contract payments, even a moderately skilled auditor should be able to uncover the actual overpayments as opposed to effecting a rule which imposed an arbitrary 100% withhold.
There are provisions to reduce withholds to 5% wherein a contractor has prepared an acceptable corrective action plan, but not fully implemented that plan. Of course the corrective action plan must be acceptable which is defined nowhere within the proposed rule.
Unless we’ve missed the exemption, the DFARS proposed rule will be applicable to all DoD contracts (large business or small business) although the proposed rule specifically asks for comments from small entities as to the expected impact on those small entities (we are not sure why DPAP introduced the otherwise undefined terminology of small entities instead of using the more tradition reference to small business). No doubt, small entities will be receptive to the proposed rule and the idea of investing hundreds of thousands for business systems solely to be able to obtain DOD contracts; well maybe not so receptive.
Of passing note, FAR 52.203-13 imposed internal controls requirements, but only on contracts in excess of $5 million and not applicable to small businesses. By implication and by no means unique to this particular DFARS proposed rule, DOD contractors are once again going to be held to a higher standard than are government contractors in general.
There is significantly more to the proposed rule which can be accessed by going to the Federal Register regulations.gov and search for DARS-2010-0001-0001. All DoD contractors are encouraged to read the proposed rule and to comment on the proposed rule. Certainly Beason & Nalley will be submitting comments with respect to the DFARS proposed rule.
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Surviving a DCAA Audit
Tuesday, February 16th, 2010
How to survive a DCAA audit
Surviving a DCAA audit can be tricky if you do not take the necessary steps to ensure that you understand, manage and respond appropriately to the audit. These steps will go a long way to ensuring a successful audit.
What is a successful audit, it is one in which the contractor and the contractor’s systems are found to be in compliance with all pertinent procurement regulations and statues. A successful audit at a minimum meets the following criteria:
DCAA applies the audit procedures objectively,
- The audit is conducted in accordance with audit plan,
- The company plans for support during the audit are appropriate,
- The audit is fair and balance highlighting both positive and negative aspects of the audit subject,
- DCAA audit findings are adequately documented and presented fairly and appropriately in the audit reported, and
- DCAA audit process presents a minimum disruption to the contractor’s normal operations.
Most contractors would view a successful audit as one that results in “no findings” that significantly impact to the company’s operations or finances.
Findings that would be considered significant to a contractor and therefore to be avoided include; those of considerable dollar value, those that are a surprise to management, and/or those that reveal a systemic problem within the contractors operations.
To adequately survive a DCAA audit, contractor cannot just stand by and let it happen. They must plan ahead and prepare for the various types of audits in which the contractor may be subject to. How can a contactor know what audits it may be subject to, a first step would be to gain an understanding as to the types of audits DCAA performs? This information can be obtained from the DCAA Contract Audit Manual (DCAAM) which is found on DCAA’s website (www.dcaa.mil). The second step would be to determine as a contractor your classification status, are you a small, medium, or large contractor; are your contracts competitively awarded or negotiated; and are your contracts Cost Accounting Standards (CAS) qualified. Understanding your status as a contractor will help in determining what type of audits you may be subject to and how to plan for those audits.
Once a contractor identifies the types of audits they are subject to, the planning process should include at minimum the following steps to ensure DCAA provides adequate information as to the scope of the audit, stays within the audit scope, and provides an opportunity for the contractor to obtain information on the audit findings and provide a written response for inclusion in the audit report.
The minimum audit planning steps include the following:
1) Insist on an entrance conference to discuss the audit scope,
2) Appoint an internal liaison that the DCAA auditor must coordinate the audit process through,
3) Assemble a management team for the purpose of responding to and addressing any audit request from DCAA,
4) Make sure that an accurate and accessible record-keeping system exist
5) Ensure the company provides timely responses,
6) Have the liaison maintain a detailed log of all DCAA request and information provided,
7) Ensure that the audit does not exceed the agreed to scope,
8) The liaison should insist on a list of required interviews,
9) The liaison should be present at all interviews to ensure the interviewee understands what is being requested of them and that interviewee is the appropriate individual for the information DCAA is seeking,
10) The management team must review the preliminary findings at the appropriate functions/department level,
11) Ensure DCAA provides for an exit conference at the company level and that the company has an opportunity to respond in writing to any findings.
TD Government Solutions regularly provides assistance to large and small government contractors before, during and after DCAA audits. These services over the years has provided us a clear picture of what issues most often trigger problems that may result in costly findings.
For further information please contact the offices of TD Government Solutions
tim.diguiseppe@tdgovernmentsolutions.biz
(814)-242-2410
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News Alert – February 16, 2010
Tuesday, February 16th, 2010
Ensuring a compliant cost accounting system
A direct result of GAO’s position that DCAA had become too cozy with government contractors, DCAA is more likely to question or disqualify a contractor’s cost accounting system as reliable and/or compliant with FAR and CAS. This action puts the contractor’s ability to obtain payment for its products or services rendered under a government contacts at risk.
This risk to contractors’ financial viability was brought front and center by DoD’s recent proposal of a new DFARS rule that will allow Contracting Officers (CO) to withhold 10%, 50%, or even 100% of interim payments to contractors where CO determines that a contractor’s “business systems” are deficient. How does the CO make this determination, they rely primarily on the results of DCAA system audits. This proposed DFARS rule poses significant risk to contractors of all sizes.
What should contractors do to protect themselves from such actions by DCAA and the CO? Contractors need to ensure that their cost accounting system is compliant with the principles outlined in the FAR and if applicable, CAS. For many contractors, understanding and implementing compliant systems is a major problem because their staff lacks the experience, training, or both, to ensure the company is compliant. Many of these contractors rely on professional consultants to assist in designing and implementing compliant systems.
TD Government Solutions, a professional services firm, specializes in government contracting matters. We bring financial and regulatory solutions to companies that provide products and services to Federal, State and local government agencies. Our professionals provide assistance through all phases of the contracting cycle, including compliance, contract risk assessments and management, cost accounting, financial management, disputes avoidance through risk management, alternative dispute resolution procedures and litigation support.
TD Government Solutions’ teams of advisors come from industry and government, and are credentialed in accounting, law, investigations, and finance. They have intimate knowledge of the Federal procurement rules that apply to Federal Government agencies, and how those rules apply to state and lower tier governments when Federal funds are involved.
Key areas of expertise include but are not limited to the following:
• Compliance with Government rules and regulations
• Cost Accounting Standards (CAS)
• Federal Acquisition Regulation (FAR) and related agency supplements
• Contract management, clauses, and compliance
• DCAA audit support
• Accounting system requirements, Indirect rate development, internal controls
For further information please contact the offices of TD Government Solutions
tim.diguiseppe@tdgovernmentsolutions.biz
(814)-242-2410
Click here for a copy of the news alert
