Meeting the challenge

Transcription

1 Government Contract Services Meeting the challenge Ernst & Young LLP s Government Contract Services (GCS) can help you meet the challenges of government contracting. As the largest buyer of goods and services in the world, the US Government presents companies with significant business opportunities. But success in selling your goods and services in the federal marketplace will depend on your ability to comply with the government s procurement rules and regulations. These touch all aspects of the business relationship, from proposal submission, contract award and performance to contract close-out and final payment. These rules and regulations affect financial and management systems, particularly cost accounting, product pricing, labor recording, material purchasing, inventory management, customer billing and contract administration. For more than 30 years, GCS has helped companies gain access to this demanding marketplace, whether through contracts, grants and/or cooperative agreements. Our team of experienced professionals has both depth of knowledge and breadth of experience in applying the procurement rules and regulations of several government agencies, including the Department of Defense, Department of Homeland Security, General Services Administration, National Aeronautics and Space Administration, Department of Commerce, Department of Energy, Department of Health and Human Services, Department of Veterans Affairs, Environmental Protection Agency, the National Institutes of Health and many more. The thought leadership we have produced on important procurement issues over the years, such as Cost Accounting Standards, proposed changes to the Federal Acquisition Regulation, contract pricing, commercial item acquisition, and state and local tax credits, has been well-recognized in both the public and private sectors. It places us in a unique position to serve our international client base of government contractors, both large and small.

2 With GCS you get technical knowledge, practical experience and results across a wide range of government contracting functions and disciplines. Some of our key core competencies include: Allowable costs Audits Business systems Claims and disputes Commercial item acquisition Contract pricing and proposal support Cost Accounting Standards Federal Supply Schedules Grants and cooperative agreements Indirect cost rates Investigations Termination proposals, both for convenience and for default Training The strength of GCS is our team perspective and the synergies from our professionals, who have hands-on experience resolving the complex issues faced by government contractors today. With GCS on your team, you will have direct access to professionals who have prior public sector experience as procurement officials, contract auditors and private sector experience as business or financial executives. We have seen government contracting from both sides of the business relationship: that is why Ernst & Young LLP is the firm of choice for companies dealing with complex matters, whether firsttime contractors or those needing the assistance of expert witnesses in litigation proceedings. Your Ernst & Young LLP GCS team is eager to meet with you and tell you more about our experience and service offerings. Our promise is that you will get the expertise and experience you need and the attention you want. Contact us at any time. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0335 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

3 Government Contract Services Allowable costs Determining allowable costs for contract pricing or reimbursement purposes can be complicated. Many government contracts incorporate the Allowable Cost and Payments clause and require compliance with the provisions of Federal Acquisition Regulation (FAR) Part 31, Contract Cost Principles and Procedures, when pricing contracts and requesting payments. The contract cost principles provide guidance on whether a cost is allowable, reasonable and allocable to government contracts. A cost may be expressly unallowable, such as bad debts or charitable contributions, or it may be conditionally allowable, such as compensation or travel. Contractors need to establish policies and procedures for identifying and accounting for unallowable costs, including costs considered to be directly associated with unallowable costs. In much the same way that FAR Part 31 covers contract cost principles for contracts with commercial organizations, other government rules apply cost principles to other contracting circumstances, such as awards with educational institutions, non-profits or state, local or Indian Tribal Governments. In early 2014, the US Office of Management and Budget (OMB) issued broad revisions to its guidance for these types federal awards. The final OMB guidance, 2 CFR Chapter 1 and Chapter 2 Parts 200, 215, 220, 225, and 230, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards, will streamline and consolidate eight existing OMB documents and regulations into one document. By law, a contractor s proposal for final indirect cost rates cannot be accepted unless the contractor has certified that (1) all proposed costs are allowable in accordance with the FAR and agency supplements and (2) the proposal does not include any costs that are expressly unallowable. The statutes prescribe penalties for non-compliance.

4 Practical experience Many Ernst & Young LLP Government Contract Services (GCS) professionals have dealt with cost allowability issues from multiple perspectives: as government procurement officials and auditors and as business people in the private sector. Some team members have participated in the formation of cost principles, while others have conducted government audits as a member of the Defense Contract Audit Agency (DCAA). We have a proven record in dealing with affecting the allowability of costs under government contracts, grants and cooperative agreements at the federal, state and local levels. Our GCS team has worked on many complex questions brought on by an ever-changing business environment including: Employee compensation limitations, deferred compensation and pensions Costs related to business combinations, acquisitions and reorganizations Allowable travel, subsistence and lodging costs Allowable legal and consulting costs Our allowable cost advisory services include: Helping to interpret contract cost principles based on law, regulation, case history and industry practice Helping to interpret contract cost principles under OMB Guidance and a variety of state and local regulations Advising on development of policies, practices and procedures for accounting for unallowable costs Vetting indirect cost proposals for compliance with certification requirements Helping prepare advance agreements on allowable costs Facilitating resolution of allowability and allocability issues with government officials, such as contracting officers, DCAA auditors and agency inspector general personnel Assisting to identify, segregate, and exclude unallowable costs on Government proposals and billings EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0327 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

5 Government Contract Services Business systems DFARS Contractor Business Systems DFARS , Accounting System Administration DFARS , Cost Estimating System DFARS , Contractor Property Management System Administration DFARS , Contractor Purchasing System Administration DFARS , Earned Value Management System (EVMS) DFARS , Material Management and Accounting System (MMAS) Business systems are an integral part of the day-to-day compliance for companies contracting with the Government. A multitude of Government regulations require contractors to have acceptable business systems as a condition to contract award. The provisions of the Defense Federal Acquisition Regulation Supplement (DFARS) authorize Contracting Officers (COs) to withhold a percentage of payments, under certain conditions, when a contractor s business system contains a significant deficiency and the CO makes a final determination to disapprove the contractor s system. In addition to the cash flow impact, a disapproved business system may result in competitive disadvantages, including on competitive proposals for follow-on Department of Defense (DoD) awards. Further, shareholders and key stakeholders could lose confidence in the company s financial and operational credibility. The Contractor Business Systems clause at DFARS specifies six key business systems that DoD contractors must maintain as acceptable systems, including adherence to the following criteria: Accounting systems Companies with contracts subject to Federal Acquisition Regulation (FAR) Part 31, Contract Cost Principles and Procedures, and/or Cost Accounting Standards (CAS) are required to maintain a system with acceptable internal controls. The Contractor s system should include accounting methods, procedures and controls established to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data for reporting in compliance with applicable laws and regulations, including FAR and/or CAS and DFARS (a)(2). Ineffective internal controls may impact allocations of indirect and direct costs, compensation, billing, labor and general information technology. Cost estimating systems Certain large businesses must document and disclose their estimating systems in writing, provide verifiable and supported source data, utilize sound estimating techniques and good judgment, maintain a consistent approach, accurately describe policies, procedures and practices currently in use to prepare cost proposals and adhere to those established policies and procedures. Contractor property management systems Where the Government will furnish Government property or the contractor acquires Government property, contractors may be subject to requirements to control and manage that property. As part of an acceptable property management system, contractors are expected to maintain records to identify Government property, track maintenance, secure and maintain the property, obtain approval to use the property on other contracts or for other uses, report discrepancies, perform and disclose periodic inventory counts, and comply with property closeout requirements.

6 Contractor purchasing systems Contractors may be subject to a contractor purchasing system review (CPSR) to evaluate the efficiency and effectiveness with which the contractor procures goods and services by spending Government funds and complies with Government policy when subcontracting. Examples of attributes of a purchasing system include a written system description, maintenance of accurate purchase history documentation and proper flowdown of clauses to subcontractors. Earned Value Management Systems (EVMS) Contractors who have been awarded cost or incentive contracts and subcontracts valued at $50 million or more shall have an EVMS that has been determined by the Government to comply with American National Standards Institute/Electronic Alliance Standard 748 (ANSI/EIA 748). Such contractors are also required to implement management procedures that provide for generation of timely, reliable and verifiable information for the Contract Performance Report (CPR) and the Integrated Master Schedule (IMS). Material Management and Accounting Systems (MMAS) Requirements to demonstrate compliance are applicable to large business contractors that received DoD prime contracts or subcontracts totaling $40 million or more in the preceding fiscal year for specific contract types. A compliant MMAS meets criteria that reference 10 Standards, including a written system description, adequate audit trail, and prescribed accuracy measures for physical inventory and scheduled production. Practical experience EY GCS professionals have experience in advising companies on how to develop, assess and maintain compliant business systems. Our tailored and phased approach includes providing gap and risk assessments, detailed transaction testing and monitoring services, when appropriate. Additionally, we have helped companies prepare for systems demonstration and audits by the Government and developed action plans to correct deficiencies detected during audits. With the EY GCS team, you will have direct access to numerous professionals who have prior public sector experience, such as former DCAA executive management and contract auditors, and private sector experience, such as business and financial executives. Our business systems service offerings include: Performing business systems evaluations, including risk assessments and gap analyses between existing systems and Government regulatory requirements Customizing business system compliance assessments to meet company-specific needs, with each business system test crossreferenced to its corresponding observations and findings as well as the business system regulatory criteria Assisting companies in developing corrective action plans based on noncompliances identified internally or by the Government Co-developing continuous monitoring plans and providing training Serving as technical subject matter resources to aid companies in preparing for audits under the DFARS criteria Assisting with dispute resolution with regard to systems deficiencies alleged by the Government, including taking steps to help resolve payment withholdings EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0349 CSG No ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

7 Government Contract Services Claims and disputes Claims and disputes can arise on government contracts for a variety of reasons, including: Defective pricing and allegations of Truth-in-Negotiations Act (TINA) violations False Claims Act and False Statements Act Allegations of fraud Delay and disruption Defective specification or material Insufficient clarity in the statement of work or changes to scope of work Unresolved unallowable cost issues or other government audit issues Allegations of Cost Accounting Standards (CAS) non-compliances Termination for convenience Termination for default Voluntary and mandatory disclosures Government contracts provide a variety of approaches for seeking administrative remedies for claims and disputes. To some extent, the process is embodied in the applicable contract clause. Where the parties are unable to resolve the issue, claims and disputes may proceed under the Disputes clause or along other routes. In addition to claims by government contractors, claims might also be made by the government. Frequently, these take the form of allegations of civil or criminal fraud under the applicable statutes. In fact, these allegations could give rise to claims by contractors involving defective pricing, unallowable costs and non-compliance with delivery and payment terms. Private individuals might also make allegations under the qui tam statues.

8 Practical experience Claims and disputes are substantial core competencies of Ernst & Young LLP s Government Contract Services (GCS). Our team has more than 30 years of experience assisting clients on a wide variety of issues in numerous resolution forums. Over the years, GCS has provided: Assistance in conflict resolution on government allegations of defective pricing, CAS non-compliance, unallowable costs under Federal Acquisition Regulation (FAR) Part 31, Contract Cost Principles and Procedures and systems determined to be inadequate or deficient by the government Identification of entitlement opportunities and preparation of equitable price adjustment proposals for scope changes, defective materials, delay and disruption Preparation of proposals and claims under both types of contract terminations for default and for convenience Expert witness testimony services before courts, boards, arbitration and mediation forums EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0328 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

9 Government Contract Services Commercial item acquisition Opportunities for commercial companies that want to sell their products and services to the federal government have increased since the passage of the Federal Acquisition Streamlining Act (FASA) and the Clinger-Cohen Act. Although these bills swept away many obstacles, government contracts still bring their own rules and risks especially pricing terms and conditions. Although most contracts for commercial items are awarded competitively, some are negotiated on a sole-source basis. For these awards, data other than certified cost or pricing data must often be prepared and submitted pursuant to FAR Although this information is no longer subject to post-award audits (except in the case of some Federal Supply Schedule contracts), care still must be taken in its preparation and submission. The first objective is to demonstrate that the price being offered to the government is fair and reasonable. Analysis and presentation of your company s commercial sales information is key, especially if the item requested is new or customized. The information does not need to be comprehensive, but it must be accurate and not misleading. Although most price adjustment clauses have been removed, other remedies for inaccurate information can still apply to these procurements. The second objective is to ensure that only appropriate terms and conditions are included in the contract. Commercial item acquisitions should be conducted by the government under Federal Acquisition Regulation (FAR) Part 12, Acquisition of Commercial Items, which prescribes only a few required clauses. Tailoring of these clauses and the addition of other clauses should be limited to those consistent with customary commercial practice in a particular industry.

10 Practical experience Ernst & Young LLP s Government Contract Services (GCS) was substantively involved in the commercial item acquisition reform process, and we were among the first to train both government and contractor personnel in the meaning and practical application of the new procurement rules. From helping contractors determine whether products or services qualify as commercial items and assisting through the solicitation and proposal process, GCS has the knowledge and experience of a wide variety of pricing, contract administration and systems issues. For example, our GCS team can: Review solicitations and help clients challenge the inclusion of inappropriate terms and conditions Assist with determining whether products or services qualify as commercial items, which can be acquired using FAR Part 12 Help with your preparation of pricing proposals, including making appropriate pricing disclosures and helping to develop pricing that is fair and reasonable and consistent with customary commercial practices Review policies, procedures and systems for developing pricing proposals, and recommend necessary improvements and training needs Assist with preparation for government audits or analysis of audit findings, including helping resolve issues with audit and procurement personnel EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0329 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

11 Government Contract Services Contract pricing and proposal support Government acquisition of goods and services can be rejected by the customer. A proposal that does not conform to the proposal requirements can be rejected by the customer as non responsive, resulting in a lost opportunity and wasteful expenditure of bid and proposal resources. A contractor s understanding of these complex processes is critical to the development of capture strategies and winning government contracts. There are two basic approaches to pricing government contracts: cost-based and price-based. The cost-based approach requires estimates of material, labor and other direct costs, plus estimated overhead and general and administrative expenses that would be incurred to accomplish the work required by the contract. In addition to these costs, the prospective contractor may add its profit or fee. The price-based approach relies on prices at which same or similar items previously have been sold in the commercial marketplace. The price-based approach dictates the proposal data submitted by the prospective contractor. The cost-based approach requires certified cost or pricing data, per Federal Acquisition Regulation (FAR) , while the price-based approach uses data other than certified cost or pricing data per FAR The distinction is significant because the type of pricing proposal data establishes the government s access to records and audit rights, as well as remedies over defective pricing. The government s proposal instructions are contained in the solicitation provisions of the Invitation for Bid (IFB) or Request for Proposal (RFP). The Uniform Contract Format is intended to provide uniformity and consistency in contracting among all federal agencies, as well as to simplify the contract solicitation and award process. Most of the key requirements can be found in Sections L, Instructions, Conditions and Notices to Offerors, and Sections M, Evaluation Factors for Award of the Uniform Contract Format. When the government is purchasing a commercial item, it uses a form other than the standard format. The purpose of the alternative format is to make it easier for commercial companies to sell their supplies and services to the government.

12 There are fewer contract terms and conditions, and these may be tailored according to customary commercial practice. In these circumstances, key requirements can be found in FAR and FAR of the Uniform Contract Format for Commercial Items. Practical experience Ernst & Young LLP s Government Contract Services (GCS) professionals draw on their experience as well as technical skills honed while employed by the government or working for companies performing federal contracts. Some have been government contracting officers and others have been government contract auditors. Other GCS professionals have similar experience in private sector positions, such as business management executives and proposal managers. This diversity of experience allows GCS to offer you contract pricing and proposal support services on several fronts. Our contract pricing and proposal support offerings include: Reviewing IFBs and RFPs for risk and compliance issues and developing questions for government clarification Assisting in the development and operation of the proposal team Helping compile pricing proposals, including establishing indirect cost rates and factors Helping apply the Department of Defense s Weighted Guidelines Method of profit analysis or the structured approaches required by other government agencies Helping create special pricing provisions Drafting basis of estimate documenting the methodology and techniques used to establish proposal cost or pricing Identifying and helping to resolve issues involving certified cost or pricing data and helping to perform sweeps of cost and pricing data or information other than certified cost or pricing data Advising on implementation of commercial pricing techniques, including the preparation of the Commercial Sales Practices for Federal Supply Schedule contracts Working with companies on conducting final or Red Team proposal reviews Helping prepare proposals for equitable price adjustments, termination settlements and claims EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0330 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

13 Government Contract Services Cost Accounting Standards Originally established to address concerns involving defense contractor cost estimating, accumulating and reporting under negotiated government contracts (and subcontracts), the Cost Accounting Standards (CAS) can now apply to civilian agency contracts and also extend to certain colleges and universities. There are two levels of CAS coverage: full coverage and modified coverage. Full coverage requires a business unit to comply with all 19 cost accounting standards. It applies to a contractor s business units that either receive a single CAS-covered contract award of $50 million or more or received $50 million or more in net CAS-covered awards during its preceding cost accounting period. 1 Modified CAS coverage is available if the contract award is less than $50 million and the business unit received less than $50 million in CAS-covered awards in the prior cost accounting period. Undermodified CAS coverage, the contractor must comply with the following four standards: CAS 401 Consistency in estimating, accumulating, and reporting costs CAS 402 Consistency in allocating costs incurred for the same purpose CAS 405 Accounting for unallowable costs CAS 406 Cost accounting period Once a company exceeds a $50 million threshold of CAS-covered contracts, business units with CAS-covered contracts generally must submit a Disclosure Statement describing its cost accounting practices for measuring, assigning and allocating costs. The contractor must consistently follow their disclosed cost accounting practices. Under $50 million, contractors must consistently follow their established cost accounting practices. Any change to either disclosed or established practices is governed by the CAS clauses. 1 CAS applicability is subject to a determination contract amount (e.g., contracts less than $7.5 million, provided the business unit is not currently performing any CAS-covered contracts valued at $7.5 million or more), and existence of CAS covered contracts at time of award.

14 Practical experience CAS is a major core competency of Ernst & Young LLP s Government Contract Services (GCS), where we have significant and nationally recognized professional experience. Our team members have hands-on experience in handling CAS issues for hundreds of clients, from both public and private sector perspectives, and have testified as expert witnesses on cases involving CAS issues. GCS offers you practical experience, bolstered by a thorough knowledge of CAS. Our specific areas of experience include: Helping interpret CAS requirements and applicability Helping prepare Cost Accounting Standards Board (CASB) Disclosure Statements Supporting efforts to resolve issues raised by government officials or higher-tier contractors with respect to CAS compliance Analyzing changes to cost accounting practices, including preparing required general dollar magnitude and detailed cost impact studies Providing litigation analysis and expert witness testimony Assessing cost accounting practices against requirements of Cost Accounting Standards EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0331 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

15 Government Contract Services Federal Supply Schedules The Federal Supply Schedules program (FSS) is also known as the GSA Schedules Program or the Multiple Award Schedule Program and is operated by the General Services Administration (GSA). The GSA has delegated authority to the Department of Veterans Affairs (VA) to procure medical supplies and administer the VA Federal Supply Schedules program. Supply schedules provide for long term, government wide contracts with commercial firms to provide access to commercial supplies and services at volume discount pricing. While this fast growing area of federal procurement presents significant opportunities for companies to provide a wide range of commercial products and services to federal customers, these supply schedule contracts bring their own rules and risks. Because of the structure of supply schedule contracts, pricing must be viewed as a continuous process to manage the attendant pricing risk. This would involve attention to contract terms involving: The operation of the price adjustment clauses for failure to provide accurate information (current, accurate and complete) Price Reductions Quarterly sales reporting and industrial funding fees Economic Price Adjustment Modifications Manufacturers of covered drugs must also comply with the pricing provisions of the Veterans Health Care Act. The pricing process begins with the disclosure of commercial pricing practices in the Commercial Sales Practice (CSP) forms. Making current, accurate and complete, as well as meaningful disclosures that serve a company s negotiation objectives, requires both knowledge of the rules and experience with how they are applied in practice. Modifications to add products and services are a common feature of Federal Supply Schedule contracts and may also require disclosure of additional pricing information.

16 A company s negotiation objectives should include selection of a basis of award (i.e., tracking customer) that is precisely defined and drawn as narrowly as possible so that it can comply with the provisions of the Price Reductions clause. Successful compliance requires management information systems to be capable of supplying timely and accurate information about tracking customer pricing arrangements and transactions, including contracted pricing, bundling, special promotions and other changes to the defined pricing relationship. Practical experience Ernst & Young LLP s Government Contract Services (GCS) has long been at the forefront of providing services to prospective and performing contractors of GSA and VA Federal Supply Schedule contracts. From assisting contractors in obtaining Federal Supply Schedule contracts to helping resolve Department of Justice (DOJ) fraud allegations, we have knowledge and experience in a wide variety of pricing, contract administration and systems issues and litigation situations. For example, we: Assist companies in preparing proposals for submission to GSA and VA. This includes helping clients prepare and present the necessary CSP forms. Help companies develop compliance monitoring programs, including integrating the internal audit function. This effort typically includes training. Assist companies in performing reviews of compliance with the defective pricing, price reduction, industrial funding fee and billing provisions of Federal Supply Schedule contracts. Assist companies in preparing and presenting mandatory disclosures to contracting officers and the Office of Inspector General. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0332 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

17 Government Contract Services Grants and cooperative agreements Unlike contracts, grants and cooperative agreements are not covered by the Federal Acquisition Regulation (FAR). Instead, they are subject to an array of administrative requirements found in a variety of regulatory policies, such as authorizing program legislation statutory requirements found in appropriations acts Office of Management and Budget (OMB) Guidance agency policy statements and regulations, and various titles within the Code of Federal Regulations (CFR). In addition, compliance requirements may differ based on the federal agency issuing the award, the type of grant or cooperative agreement issued, or the type of recipient receiving the award. Cost principles, as applied to grants and cooperative agreements, are designed so that the government bears its fair share of total costs, except where restricted or prohibited by law. The tests for allowability are (a) reasonableness, (b) allocablility, (c) consistency with generally accepted accounting principles, and (d) conformity to any limitations or exclusions as set forth in the cost principles. Cost allowability is also subject to applicable specific grant or cooperative agreement terms.

18 Practical experience The Ernst & Young LLP Government Contract Services (GCS) team has practical experience in assisting grantees and recipients of cooperative agreement awards with many complex issues, including: Assessment of financial management systems, including assistance in the development of compliant financial management systems Regulatory compliance assessments and assistance with remediating compliance gaps Development of indirect cost rate structure and calculation of indirect rates In addition, the GCS team has performed audits and agreed-upon procedures, sometimes in conjunction with Ernst & Young LLP s financial audit teams, to provide the independent assessments required by a grant or cooperative agreement, including: Office of Management and Budget (OMB) Circular No. A-133 audits 1 Department of Energy independent audit requirements under 10 CFR Government Auditing Standards Yellow Book audits National Institute of Standards and Technology audits State indirect rate audits EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0333 CSG No NE ED None 1 For awards after 26 December 2014, superseded by 2 CFR Chapter 1 and Chapter 2 Parts 200,215,220,225 and 230, Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

19 Government Contract Services Indirect cost rates Indirect cost rates are necessary for contract pricing and payment purposes on government contracts, grants and cooperative agreements. Typically based on budgets for an ensuing project period, they can sometimes be derived from those allowable costs for a previously completed accounting cycle. The various types of indirect cost rates include predetermined rates, provisional rates and final rates. In addition to ongoing periodic monitoring of indirect cost rates, a contractor with a contract containing the Federal Acquisition Regulation (FAR) , Allowable Cost and Payment clause or similar clauses where final price is based on actual costs incurred is required to submit a final indirect cost rate proposal to the contracting officer within 180 days following the completion of its fiscalyear. This formal submission under the Allowable Cost and Payment clause is accompanied by a contractor s certification that no unallowable costs, as set forth in FAR Part 31, Contract Cost Principles and Procedures or other government requirements, were included in the final indirect cost rates the final indirect cost rate proposal shall not be accepted and no agreement shall be made to establish final indirect cost rates unless the contractor has executed a certification of final indirect costs. Once submitted and accepted, the proposal is reviewed by the contracting officer and, in most cases, sent to the cognizant government audit office for review, verification, testing and compliance analysis. The final indirect cost rates are negotiated with the contracting officer, but in some cases involving small companies, the final indirect rates are established through an audit determined procedure. In addition to the requirements for federal government contractors, several state agencies have separate requirements for the preparation, negotiation and audit of indirect cost rates. The state regulations may require a contractor to prepare indirect cost rates in accordance with the contract cost principles of FAR Part 31, in addition to unique state requirements.

20 Practical experience Ernst & Young LLP s Government Contract Services (GCS) has assisted numerous commercial organizations, colleges, universities and not-for-profit organizations in developing indirect cost rate structures that have helped improve contractors cost recovery. Our professionals have routinely identified and remediated gaps between contract requirements and a company s compliance practices. Typical services have included: Assessing indirect cost rate structure and identifying areas of potential non-compliance with the government s rules, such as FAR Part 31, Cost Accounting Standards (CAS), Office of Management and Budget (OMB) Circulars and special contract requirements Helping interpret and apply requirements of OMB Circulars, OMB Guidance and state agency regulations and guidance Helping prepare indirect cost proposals for interim billing purposes of final indirect cost rates and providing support during audit and subsequent negotiations with the government Screening general ledger expense accounts for unallowable costs and assisting in the development of accounting practices for identifying and removing unallowable costs from indirect cost proposals Assisting clients with their analysis and response to DCAA audit issues involving the client s indirect rate structure and/or annual incurred cost submittals EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0334 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com

21 Government Contract Services Training your staff Government contracting has its special set of rules and requirements, and different government contracts have different rules. Whether a company manufactures or provides services for the government, holds a Federal Supply Schedule contract, performs under research and development contracts, processes Medicare claims or student loans, it is essential to understand the government customer s requirements. Compliance with the government s rules and requirements requires sound policies and procedures and trained personnel. The necessary training can take many forms structured courses offered by established training groups, self-study or in-house training. Practical experience Ernst & Young LLP s Government Contract Services (GCS) has programs that address a wide variety of government contracting needs all with experienced instructors. Our team has substantial experience instructing under formal programs, including for Federal Publications Seminars, the American Conference Institute and the Public Contracting Institute, and has presented tailored training programs to government agencies and government contractors. The GCS advantage is the knowledge and experience of our professional training staff. These professionals have advised clients on both the meaning and practical application of the rules, and they have hands-on experience grappling with the tough issues, sometimes in litigation forums. They have also been engaged in thought leadership activities and possess detailed knowledge of current events.

22 Demonstrated results Our training programs have ranged from assisting new contractors with the basics to helping experienced contractors deliver their own advanced training and compliance programs. Our programs have covered many areas of government contracting and can be tailored to specific needs and levels of experience. Some examples of our course offerings, most often taught in association with formal programs, include: Cost Accounting Standards (CAS) covers the full range of CAS requirements, including CAS applicability to contracts, full and modified CAS coverage, CAS Disclosure Statement requirements, and changes in accounting practice. We also focus on practical problems of Disclosure Statements and non-compliance issues. Commercial Item Acquisition covers the history of commercial item acquisition reforms and the Federal Acquisition Regulation (FAR) Part 12 contracting process. We address practical problems, such as the commercial item definition, commercial pricing techniques and intercompany transfer pricing. Federal Supply Schedule Contracting covers the contracting process from solicitation and award to modifications, including preparation of Commercial Sales Practice (CSP) forms, negotiation of the basis of award (i.e., tracking) customer and government pricing objectives. We also cover the operation of pertinent clauses, including special topics like pharmaceutical pricing under the Veterans Health Care Act. Government Contract Accounting covers fundamental cost accounting requirements, including distinguishing direct and indirect costs, development of indirect cost structures, and allocation of indirect costs and service centers. We also cover the definition of and accounting for unallowable costs. Customized training tailored to meet your unique needs on a variety of subjects, including regulatory updates, effective business proposals, government property, contractor business systems and more. EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved. SCORE No. WW0336 CSG No NE ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com