VSRA Contract Compliance Seminar August 23, 2011

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2 VSRA Contract Compliance Seminar August 23, 2011

3 Topics Overview What s new? Defense Federal Acquisition Regulation Supplement; Business Systems Definition and Administration (DFARS Case 2009-D038) Reporting Requirements for Executive Compensation and First-Tier Subcontract Awards; Solicitation Provision and Contract Clause FAR Quick closeout/incurred Cost Submission (FAC ) 3% Federal Withholding Rule

4 Topics Overview (con t) DCAA Hot Topics Accounting Systems setting up multiple pools to accumulate costs accurately for estimating/billing Timekeeping systems and timecard procedures getting employees to take ownership of timekeeping procedures Appropriate level of support for Proposal/Pricing Evaluations Limitation of cost / Limitation of funds clauses

5 Defense Federal Acquisition Regulation Supplement; Business Systems Definition and Administration (DFARS Case 2009-D038)

6 Contract Applicability Contract is subject to Cost Accounting Standards (CAS) full or modified, and The solicitation or contract includes any of the following clauses: Cost Estimating System Requirements ( ) Earned Value Management System ( ) Material Management and Accounting System ( ) Accounting System Administration ( YYY ) Contractor Purchasing System Administration ( XXX) Contractor Property Management System Administration ( XXX )

7 DFARS Case 2009-D038 Policies, Procedures, and Monitoring Establish and document lines of authority, duties, and responsibilities Document policies, procedures, and monitoring of budgeting, planning, estimating, purchasing, and accounting Adequate training and documentation of such for estimating, purchasing, and accounting Internal review and accountability for the acceptability of the estimating system and purchasing system Consistency between contract allocations and charges and billing procedures Generation of timely, reliable, and verifiable information for the Contract Performance Report (CPR) and the Integrated Master Schedule (IMS) for EVMS Comply with applicable laws and regulations adequate documentation of procedures to ensure compliance

8 Compliance Enforcement If contractor s business system is found to contain significant deficiencies, payments subject to withholding. Withholding percentages: 5% for each business system deficiency Reduced by 50% or more if an acceptable corrective action plan is submitted Maximum withholding percentage of 10%

9 Reporting Requirements for Executive Compensation and First-Tier Subcontract Awards Solicitation Provision and Contract Clause FAR

10 Introduction Applicable to Contracts > $25,000 Report information on a public website Required information: Executive compensation First-tier subcontract award information Executive compensation of subcontractors

11 Reporting Executive Compensation of Prime and Subcontractor Report the names and compensation of the five most highly compensated executive if: 80% or more of its total revenues from Federal contracts (and subcontracts), loans, grants (and subgrants) and cooperative agreements, and $25,000,000 or more in gross revenues from Federal contracts (and subcontracts), loans, grants (and subgrants) and cooperative agreements, and The public does not have access to information about compensation of the executives through SEC reporting requirements or IRS reporting requirements for exempt organizations. All three criteria must be met in order to require the reporting of executive compensation.

12 Reporting First-Tier Subcontract Award Information Report the following for each first-tier subcontract: Unique identifier (Duns number of sub and /or subs parent) Amount and date of the award Description of the product or service or results of the subcontract Subcontract number assigned by the contractor Subcontractor s physical address including congressional district Address of the primary performance location including congressional district The prime contract number, order number if applicable, awarding agency name and code, funding agency name and code, government contracting office code, Treasury account symbol as reported in FPDS and NAICS..

13 Quick closeout procedures and incurred cost submission (FAC Amendment to FAR)

14 FAC Overview FAC issued to amend the FAR in the following areas: 1. Contract Closeout revises procedures for clearing final patent reports and quick-closeout procedure, and sets forth a description of an adequate final indirect cost rate proposal and supporting data. amends (b)(1) Contracting officer determines whether or not an incurred cost submission (ICS) is adequate., not the auditor. 2. Oversight of Contractor Ethics Programs - ensure that contractors have implemented the mandatory contractor business ethics program requirements. FAR Contractor Code of Business and Ethics Conduct

15 3% Federal Withholding Rule

16 3% Federal Withholding Rule Overview All persons performing services for federal, local, or state government will be subject to 3% retention on payments Does not apply to payments less than $10,000 Most likely will be applied as a tax deposit as part of filing the annual tax return (uncertain based on how the law was written) As it stands now, the withholding tax affects contracts awarded after December 31, Potential to push off indefinitely

17 DCAA Hot Topics

18 Adequate Accounting Systems

19 Elements of an Adequate Accounting System Proper segregation of direct costs from indirect costs Identification and accumulation of direct costs by contract (job order cost accounting system) A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives.

20 Elements of an Adequate Accounting System (con t) Accumulation of costs under general ledger control A timekeeping system that identifies employees labor by intermediate or final cost objectives A labor distribution system that charges direct and indirect labor to the appropriate cost objectives.

21 Elements of an Adequate Accounting System (con t) Interim (at least monthly) determination of costs charges to a contract through routine posting to book of account Exclusion from costs charged to Government contracts of amounts that are not allowable pursuant to FAR Part 31, Contract Cost Principles and Procedures, or other contract provisions Identification of costs by contract line item and units (as if each unit or line item was a separate contract) if required by the proposed contract. Segregation of preproduction costs from production costs

22 Elements of an Adequate Accounting System (con t) Billings (progress payments, public vouchers) contractor has controls or procedures that would provide that interim billings of direct cost are prepared directly from the books and records, excluding unallowable costs. Adequate, Reliable Data contractor s system capable of producing cost information at a sufficient level of detail for use in pricing follow-on contracts

23 Adequate Timekeeping Systems

24 Labor Charging System Timekeeping procedures and controls on labor charges Management must hold employees responsible for accurately recording time charges

25 Labor Charging System Criteria for effective internal controls over labor charging: 1. Segregation of responsibilities for labor-related activities 2. Documented procedures must be evident, clear-cut, and reasonable 3. Controls must be monitored and violations must be remedied through prompt and effective action. 4. Individual employees must be constantly made aware of controls that act as an effective deterrent against violations

26 Labor Charging System Timecard Preparation detailed instructions for timecard preparations should be established and documented with company policy and procedure manual. Automated systems remote data entry terminals to record labor charging data directly to computer for processing. Manual systems instructions should indicate that employee is responsible for: 1. Recording his/her time on a daily basis 2. Recording time on timecard in ink 3. Correct distribution of time by project numbers, contract number, or name 4. All changes to timecard should be lined through, with employee s initials beside the change indicating the employee personally made that change and that it is correct 5. Recording all hours worked, whether they are paid or not 6. Signing the timecard at the end of each work period.

27 Labor Charging System Recommended timekeeping policy 1. Supervisor should approve and cosign all timecards 2. Supervisor prohibited from completing an employee s timecard 3. Guidance states that nature of work determines the proper distribution of time (not due to availability of funding, type of contract, or other factors). 4. Policy should state that accurate and complete preparation of timecards is a part of the employee s job.

28 Labor Charging System DCAA floor checks auditors periodically perform physical observations of work areas and inquiries of employees to determine if: 1. Employees are actually at work 2. Employees are performing in their assigned job classification 3. Employee time is charged to the appropriate job or indirect account

29 Labor Charging System Penalties for Labor Mischarging manipulation of charges to a contract may be subject to criminal charges. The following can be liable for violation: 1. Employees who fill in and sign timecards with false information 2. Supervisors who approve the timecards with knowledge that they contain the false information 3. Managers and officers know timecards are incorrect and make the claim anyway by submitting the invoice 4. The Company, in a case where the falsification is known by individuals who submit or who have authority to submit or disapprove the submission of invoices, or who are of a sufficiently high enough level in the company that the court will impute their knowledge to the corporation.

30 Appropriate level of support for Pricing/Proposal Evaluations

31 Cost/Price Proposals Requirement for submission of cost or other pricing data is met when all accurate cost and pricing data reasonably available to the offeror have been submitted, either actually or by specific identification in writing.

32 Cost/Price Proposals FAR , Table 15-2-Instructions for Submitting Cost/Price Proposals When Cost or Pricing Data are Required I. General Instructions II. III. Cost Elements Formats for Submission on Line Item Summaries

33 Table 15-2-Instructions for Submitting Cost/Price Proposals Cost Elements you must provide breakdowns for the following basic cost elements, if applicable: A. Material and services Provide a consolidated priced summary of individual material quantities Conduct price analyses of all subcontractor proposals. Conduct cost analysis for all subcontracts when cost for pricing data are submitted by the contractor

34 Table 15-2-Instructions for Submitting Cost/Price Proposals (con t) A. Material and services (con t) Adequate Price Competition Provide data showing the degree of competition and the basis for establishing the source and reasonableness of price for those acquisitions All Other Obtain cost or pricing data from prospective sources for those acquisitions Provide data showing the basis for establishing source and reasonableness of price Provide a summary of your cost analysis and a copy of cost or pricing data submitted by the prospective source in support of each subcontract, or purchase order

35 Table 15-2-Instructions for Submitting Cost/Price Proposals (con t) B. Direct Labor Provide a time-phased (monthly, quarterly, etc.) breakdown of labor hours, rates, and cost by appropriate category, and furnish bases for estimates. C. Indirect Costs Indicate how you have computed and applied your indirect costs, including cost breakdowns Show trends and budgetary data to provide a basis for evaluating the reasonableness of proposed rates Indicate the rates used and provide an appropriate explanation. D. Other Costs List all other costs not otherwise included in the categories described above (special tooling, travel, computer and consultant services, etc) and provide bases for pricing.

36 Limitation of Funds/ Limitation of Costs Clauses

37 Limitation of Funds and Limitation of Costs Clauses FAR indicates which clause will be used Limitation of Cost Clause is used for fully funded costreimbursement contracts Limitation of Funds Clause is used for incrementally funded cost-reimbursement contracts

38 Limitation of Funds Clause (FAR ) The Contractor shall notify the Contracting Officer in writing whenever it has reason to believe that the costs it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of: 1. the total amount so far allocated to the contract by the Government or 2. if this is a cost-sharing contract, the amount then allotted to the contract by the Government plus the Contractor s corresponding share. The notice shall state the estimated amount of additional funds required to continue performance for the period specified in the schedule.

39 Limitation of Funds Clause (FAR ) (con t) In addition, 60 days before the end of the period specified in the Schedule, the Contractor shall notify the Contracting Officer in writing of the estimated amount of additional funds, if any, required to continue timely performance under the contract or for any further period specified in the Schedule or otherwise agreed upon, and when the funds will be required. Task order or other appropriate designation may be substituted for Schedule wherever that word appears in the clause. The 60-day period may vary from 30 to 90 days and the 75% from 75% to 85% depending on the language in the contract.

40 Limitation of Funds Clause (FAR ) (con t) Notice must state the estimated amount of additional funds required Contractor is not obligated to continue performance under this contract including actions under the Termination clause of this contract or otherwise incur costs in excess of the estimated cost specified in the Schedule until the Contract Officer notifies the Contractor in writing that the estimated cost has been increased

41 Limitation of Costs Clause (FAR ) The Contractor shall notify the Contracting Officer in writing whenever it has reason to believe that (1) The costs the Contractor expects to incur under this contract in the next 60 days, when added to all cost previously incurred, will exceed 75 percent of the estimated cost specified in the Schedule or (2) The total cost for performance of this contract, exclusive of any fee, will be either greater or substantially less than had been previously estimated. Task order or other appropriate designation may be substituted for Schedule wherever that word appears in the clause. The 60-day period may vary from 30 to 90 days and the 75% from 75% to 85% depending on the language in the contract.

42 Limitation of Costs Clause (FAR ) (con t) Notice must state the estimated amount of additional funds required Contractor is not obligated to continue performance under this contract including actions under the Termination clause of this contract or otherwise incur costs in excess of the estimated cost specified in the Schedule until the Contract Officer notifies the Contractor in writing that the estimated cost has been increased

43 Miscellaneous Updates

44 Contractor Financial Condition Risk Assessments and Financial Capability Audits Field Audit Offices (FAOs) will no longer initiate annual financial condition risk assessments or financial capability audits as separate assignments or in conjunction with any other assignment Contracting Officer will make determination of financial responsibility DCMA established its Financial Capability Group to perform all financial analysis for the Department including preaward financial analysis, post award financial surveillance, and monitoring of contracts receiving financial payments DCAA will only perform financial capability audits when requested by the contracting officer based no unique circumstances.

45 Changes in CAS Coverage Threshold OFBB and CASB increased Truth in Negotiation Act (TINA) threshold for obtaining cost or pricing data from $650,000 to $700,000

46 DCAA Audits OVERALL YOU WILL NOTE AN INCREASE IN LEVEL OF SUBSTANTIVE TESTING BY DCAA ON ALL AUDITS!

47 Questions & Answers Jeffrey F. Estes, CPA Kathryn M. McLawhorn, CPA