Topics for Discussion

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1 Government Contracting Update September 2010 Presentation By: James W. Thomas LLP PwC New and Proposed Regulations - Cost or Pricing Data - Acquisition Thresholds - Business Systems - Pensions - Security Topics for Discussion Cases affecting government contract costs - IR&D - Adequacy of Records - Adequacy of Accounting System Trends and Hot Topics - Contracting Integrity - Restructuring - DCAA Initiatives Slide 2

2 Date Certified Cost or Pricing Data Final Rule The final rule (74 Fed. Reg. 53,135, 8/30/10, effective 10/1/10) clarifies terminology used in the FAR to make it consistent with TINA Certified cost or pricing data information that was required to be submitted in accordance with FAR and and have been certified or are required to be certified Data other than cost or pricing data pricing data, cost data and judgmental information necessary for the CO to determine a fair and reasonable price or to determine cost realism Deletes the phrase information other than cost or pricing data Slide 3 Certified Cost or Pricing Data (cont.) Slide 4

3 Certified Cost or Pricing Data (cont.) This rule neither expands nor diminishes the existing rights of contracting officers to request cost or pricing data (whether certified or other than certified) The rule does not require, encourage or authorize CO to obtain cost or pricing data or other information unless it is need to determine that prices offered are fair and reasonable Requiring contractors to submit more data than what is needed can lead to increased proposal preparation costs, generally extend acquisition lead time, and consume additional contractor and government resources Slide 5 Acquisition Thresholds Final Rule Final Rule (75 Fed. Reg. 53,129) effective 10/1/2010 Simplified Acquisition Threshold (FAR 2.101) - $100,000 to $150,000 Ceiling for commercial items test program (FAR ) - $5.5 million to $6.5 million Cost and pricing data threshold (FAR ) - $650,000 to $700,000 Prime contractor subcontracting plans (FAR ) - $550,000 to $650,000 Construction subcontracting plans (FAR ) - $1 million to $1.5 million Slide 6

4 Unclassified Data Security Proposed Rule DoD has made a concerted effort to try to consolidate its policies, combine its resources and unify its cyber defenses March 3, 2010 DoD issued an advance notice of proposed rulemaking (ANPR) discussing possible changes to the DFARS adding new requirements for the proper safeguarding and handling of unclassified DoD information -Rule would apply to all DoD prime contractors and subcontractors at any tier regardless of dollar amount -Potential for immediate costs due to new safeguards being implemented Slide 7 Business Systems Proposed DFARS Rule Proposed DFARS Rule 2009-D038- Business Systems (Jan 15, 2010 DFARS Parts 215, 234, 242, 244, and 252) Allows administrative contracting officer to withhold a percentage of payment when contractor s business system contains deficiencies Business system includes accounting system, estimating system, earned value management system, material management and accounting system, property management system, purchasing system If the ACO determines that there are one or more system deficiencies that are highly likely to lead to improper contract payments, or represent an unacceptable loss to the Government, then 100% of payments will be withheld until deficiencies are corrected 8

5 CAS 412 and 413 Harmonization Proposed rule to harmonize CAS 412 and 413 with the Pension Protection Act of 2006 issued on May 10, 2010 (75 Fed. Reg ) Addresses many cost accounting requirements relating to the cost of defined benefit pension plans Recognition of minimum actuarial liability consistent with PPA minimum contribution requirements Assignment of actuarial gains and losses over a 10 year period rather than current 15 year period May result in increased allocable costs for defined benefit pension plans in near term Any changes not directly required by CAS 412 and 413 will be voluntary Forward pricing rates must be consistent with likely impact of change DOD is considering modifying FAR to eliminate allowability of costs resulting from the amortization of actuarial gains and losses 9 Independent Research & Development Independent Research & Development (ATK Thiokol, Inc. v. U.S., March 19, 2010, Federal Circuit No ) Affirmed U.S. Court of Federal Claims decision in favor of ATK Allowed concurrent IR&D and contract effort Effort not specifically required by contract was IR&D when practice disclosed and met definition of indirect cost Analogy to Bid & Proposal cost Contractors should understand the new ruling and avoid a false sense of security Slide 10

6 Cost Allowability Cases Hot Topics in Government Contracting Bearing Point (ASBCA and 55555, 10/16/09, 09-2 BCA 34289) - An appeal of disallowed labor and transportation costs was sustained when the contractor met its burden of proof on allocability: - Allowable Cost and Payment clause did not require the contractor to substantiate labor costs with time sheets - Audits and Records clause did not prescribe the form records or other evidence must take - Documentation for Payment clause did not describe the requisite level of detail for the contractor s books and records - Contract payment and audit clauses were consistent with FAR (d), which refers broadly to a contractor s responsibility to maintain documentation for claimed costs - An appeal of disallowed compensation related costs was denied when the government met its burden of proof on allowability by citing specific contract limitations 11 Accounting System Adequacy Hot Topics in Government Contracting PMO Partnership Joint Venture (25 CGEN 113,022,1/14/10) - Bid protest case where the bidder was excluded because of a determination that the bidder s accounting system was inadequate and indirect rate structure was unacceptable - Upon review, the GAO ruled that CAS did not apply as determined by the government and there was no analysis by the government to show that the indirect rate structure violated applicable requirements - GAO recommended that the government reevaluate the protester s accounting system and, if adequate and the protester is in line for award, make an award to the protester 12

7 DoD Panel on Contracting Integrity 2010 Areas for Review and Development Prime contract surveillance and pricing of subcontracts DoD policy regarding the definition of adequate price competition Training related to the current structure of contracting integrity Use of level-of-effort contracts, including firm fixed-price and cost-plus awards Use of senior mentors/advisors/highly qualified experts and potential conflicts of interest Requirements placed on DCAA for reports and reviews to determine if all are necessary or can be performed by others Contracting peer review process DoD policy covering contractor business systems to include reviews, approvals and surveillance 13 Restructuring Costs Hot Topics in Government Contracting Restructuring Activities Defines Significant change in business operations or structure. Activities include: Reduce cost levels in future periods Work force reductions Elimination or combination of operations Plant relocations Restructuring Charges Include Personnel costs, e.g., relocations, severance, retraining, early retirement incentives, etc. Facility and asset costs, e.g., relocations, rearrangements, dispositions, etc. Project management, e.g., incremental costs for labor, travel, consultants, etc. Business process changes and related costs Incremental costs for information technology Restructuring costs do not include routine management actions designed to improve operational efficiency Restructuring savings means cost reductions, including both direct and indirect cost reductions that result from the restructuring activities 14

8 Restructuring Costs Hot Topics in Government Contracting External restructuring activities defined Means restructuring activities occurring after a business combination that affect the operations of companies not previously under common ownership or control Does not include restructuring activities occurring after a business combination that affect the operations of only one of the companies not previously under common ownership or control, or, when there has been no business combination, restructuring activities undertaken within one company External restructuring activities are a direct outgrowth of a business combination. They normally will be initiated within 3 years of the business combination If external restructuring costs allocated to DoD contracts are $2.5 million or more, they are subject to audit and review - Must demonstrate 2:1 savings ratio - External restructuring proposal subject to DCAA audit - Exempt from cost impact requirements of CAS 15 DCAA Initiatives Subcontract Administration Prime contractors must assume contracting officer responsibilities, as set forth within FAR, when awarding subcontracts including: Contract type Competition requirements Price reasonableness or cost realism analysis Audits of forward pricing rate agreements Contract management Slide 16

9 DCAA Initiatives Mandatory Disclosure Update Mandatory Disclosure Audits Internal Control System Audits - Evidence of current comprehensive risk assessment - Assessment of compliance program effectiveness - Adequacy of policies (e.g., credible evidence ) - Treatment of internal hotline calls and investigations Maintenance of Contract Information Contractors need the ability to identify affected contracts TINA coverage, CAS coverage, commercial contracts, etc. Slide 17 DCAA Initiatives Audit Programs Audit Programs are being updated System audit programs being developed DCAA is beta testing audit programs at certain contractor sites Industry speculation on overall content and impact Findings may affect earned value and purchasing system reviews Slide 18