Click to edit Master title style

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1 Click to edit Master title style Click to edit Master text styles Second level

2 Click Indirect to edit Rate Master Cycle title style Factors that Drive Your Indirect Rates and Impact Click to edit Your Master Proposal text styles Second level Breakout Session # B09 Kristen Soles, CPA, Partner, CohnReznick, LLP Darrell Hineman, CPA, CFE, Director, CohnReznick, LLP Date: Monday, July 27, 2015 Time: 2:30pm - 3:45pm 1

3 Click The Rate to edit Cycle Master and title Related style Trivia Prospective Click to edit Rate Master Submissions text styles Course Second Corrections level & Revisions Year-End Third Revised level Billing Rates/Invoices The Incurred Cost Submission Dreadful Incurred Cost Submission (ICS) Audit & Final Rates Negotiations Factors that Drive the Indirect Rates Trends in Indirect Rates 2

4 Click What to is the edit Indirect Master title Rate style Cycle? Click to edit Master text styles Second level 3

5 Click to edit Master title style Click to edit Master text styles Second level Prospective Rate Submissions 4

6 Click Forward to edit Pricing Master Rate title Proposal style (FPRP) Regulatory Click edit Master requirement text styles Required Second level to support negotiation of Forward Pricing Rate Agreement Such Fourth agreements level are administratively expensive» Fifth and level rare Most FPRPs result in a Forward Pricing Rate Recommendation (FPRR) 5

7 Click Forward to edit Pricing Master Rate title Proposal style (FPRP) FAR Click to edit Master Forward text Pricing styles Rate Agreements Second level May Third be level requested by the ACO or the contractor ACO determines whether FPRA will be negotiated ACO may require FPRP whether or not FPRA will be negotiated (this practice is encouraged by DOD policy) 6

8 Click Forward to edit Pricing Master Rate title Proposal style (FPRP) Due Click Date to edit Master text styles As Second established level in the ACO request (typically 60 days before the beginning of the contractor FY) Not established by FAR Time is set to permit Audit by DCAA Development of a negotiation position by the ACO Negotiations Drafting and execution of a bilateral agreement This process often (usually) ends with the audit 7

9 Click Forward to edit Pricing Master Rate title Proposal style (FPRP) Issues Click to edit Master text styles DCMA Second internal level guidance requires an FPRA or (if one Third cannot level be established) an FPRR for all contractors with more than $200M in annual sales to the Government If an FPRA results, contractor is obligated to monitor and update all supporting data as changes occur The FPRA may be cancelled at the option of either party 8

10 Click Forward to edit Pricing Master Rate title Proposal style (FPRP) Issues Click to (continued) edit Master text styles FPRP Second is NOT level subject to TINA (but must include Third cost level or pricing data that are current, accurate & complete (see FAR (b)) FPRA is» applicable Fifth level to all contracts where certified cost or pricing data are required and the TINA certification for such contracts includes FPRP data DCAM Release of Audit Reports to the Contractor draft and final audit reports on FPRPs are NOT releasable 9

11 Click DCAA s to edit Opinion Master on title Forward style Pricing Rates Proposal Audits Click to edit Master text styles The lack of audited rates adversely affect the acquisition process as well as the timelines of individual Second price level proposal audits Submissions received later in the process Inadequacies Fourth in level contractor proposals Continual» revisions Fifth level being made to contractor proposal DCAA recommends process improvement DFARS Adequacy checklist (December 2014) New Audit Program 10

12 Click to edit Master title style Click to edit Master text styles Second level Provisional Billing Rates 11

13 Click Provisional to edit Indirect Master title Billing style Rates Regulatory Click edit requirement Master text styles Requirement Second level for provisional billing rates is in FAR (e), Allowable Cost and Payment (June 2011)Third level The clause provides that the Government shall reimburse the Contractor at billing rates established by the Contracting Officer or by an authorized representative (the cognizant auditor), subject to adjustment The clause further provides that the rates may be prospectively or retroactively revised by mutual agreement, at either party s request, to prevent substantial overpayment or underpayment. 12

14 Click Provisional to edit Indirect Master title Billing style Rates Click to edit Master text styles Regulatory requirement (continued) Procedures Second level for establishing rates are found at FAR , Billing Rates The provision states The contracting officer (or cognizant Federal agency official) or auditor responsible under for establishing the final indirect cost rates also shall be responsible for determining the billing rates. For DOD contracts (or contractors audited by DCAA), that is now the ACO (per the DFARS Business System Rule) Rates are established based on experience, previous rate audits, or other reliable data 13

15 Click Provisional to edit Indirect Master title Billing style Rates Form Click & to Substance edit Master text styles Billing rate proposals should include Second level Proposed billing rate calculations (Pool and Base) Prior Year Pool and Base amounts & rates Current FY Budgeted amounts (e.g. sales pipeline, estimated» Fifth direct level & indirect costs, assumptions, etc.) Explanation of significant differences between years Common proposal pitfalls Including unallowable costs! Just using the prior year rates Failure to adjust for experience in the prior year 14

16 Click Provisional to edit Indirect Master title Billing style Rates Due Click Date to edit Master text styles Prior to the beginning of the fiscal year you intend Second level to use them but no regulatory deadline Whenever established rates no longer approximate Fourth where level you ll be at the end of the year Issues No response from the ACO on provisional rates No longer goes to DCAA should be ACO (DOD) Most contractors don t re-submit throughout the year Some contractors don t submit PBRs at all! 15

17 Click Why the to edit FPRP Master & Provisionals title style Are NOT the Same Purpose Click to edit Master text styles The FPRP provides a basis for negotiation of rates Second level to be used in pricing all proposals for the coming year The provisional rate submission provides a basis for the rates» Fifth to level be used on all cost-reimbursable contract vouchers and progress payment vouchers on fixed price contracts for the coming year The current year FPRP rates and the Provisional Rates should be the same - not required to be Be prepared to explain the difference 16

18 Click Why the to edit FPRP Master & Provisionals title style Are NOT the Same Differences Click to edit Master text styles The Defense Contract Audit Manual (DCAM) Second level cautions auditors in DCAM that Because of the large degree of interdependence between billing Fourth rates and level forward pricing rates for the current contractor fiscal year (CCFY), the auditor should expect both types of rates for the CCFY to be the same. It then goes on to say Any significant differences between the rates must be fully explained and supported by the contractor. What are some reasons for the differences? 17

19 Click to edit Master title style Click to edit Master text styles Second level Course Corrections & Revisions 18

20 Click Corrections to edit - Master Why & title When style Why Click to edit Master text styles Cash Second flow, level cash flow, cash flow FAR (c), Billing Rates, which states Fourth in part level billing rates may be prospectively or retroactively revised by mutual agreement of the contracting officer (or cognizant Federal agency official) or auditor and the contractor at either party s request, to prevent substantial overpayment or underpayment. When agreement cannot be reached, the billing rates may be unilaterally determined by the contracting officer (or cognizant Federal agency official) 19

21 Click Corrections to edit - Master Why & title When style When Click to edit Master text styles Anytime Second level actual year-to-date rates vary materially from provisional rates being billed, Fourth AND level The rates being billed have the potential to result in significant over- OR under-payments Within rate ceilings 20

22 Click Corrections to edit - Master Why & title When style Why Click again to edit Master text styles FAR Second 3.10, level Contractor Code of Business Ethics and Conduct, in (a)(3), states If the contractor becomes aware that the Government has overpaid Fourth on level a contract financing or invoice payment,» the Fifth contractor level shall remit the overpayment amount to the Government. Good news! While does permit a contractor to be suspended and/or debarred for knowing failure to timely disclose a significant overpayment, that does NOT apply to progress payments or interim payments on cost-type contracts 21

23 Click to edit Master title style Click to edit Master text styles Second level Year-End Revised Billing Rates/Invoices 22

24 Click Corrections to edit - Master Why & title When style Why Click to edit Master text styles Uhhhh, Second cash level flow in the case of underpayments? Just saying Fourth level Of course, there s also that pesky ethics in the event of overpayments 23

25 Click Corrections to edit - Master Why & title When style When Click to edit Master text styles As soon as possible following year-end Second level DCAM Third (e) level cautions auditors to compare the interim billing rates with the year-end recorded allowable rates (considering any historical audit exceptions) to determine if the billing rates need to be adjusted. The same provision admonishes auditors they should not wait to receive the final indirect cost submission and that the comparison should be done as soon as practicable after the yearend closing. 24

26 Click Corrections to edit - Master Why & title When style When Click to edit Master text styles Upon Second submission level of the incurred cost proposal (required) DCAM , Adjustment of Interim Indirect Cost Reimbursement, instructs auditors If claimed costs exceed billed costs, advise the contractor to submit an interim claim for the difference. But If billed costs exceed claimed costs, the contractor must appropriately adjust the next voucher or remit the difference. 25

27 Click to edit Master title style Click to edit Master text styles Second level The Incurred Cost Proposal 26

28 Click Incurred to edit Cost Master Proposal title style Regulatory Click edit Master Requirement text styles FAR Second level gives the cognizant contracting officer (ACO for DOD) the responsibility for establishing indirect rates FAR Allowable Cost and Payment Clause is the source of the submission requirement 27

29 Click Incurred to edit Cost Master Proposal title style Form Click to and edit Substance Master text styles Prior Second to June, level 2011, sole requirement was for the Third contractor level to submit an adequate final indirect cost rate proposal For contracts» Fifth awarded level after June 2011 (or since modified to contain the June 2011 clause) the requirement is Substantially the same as the schedules contained in DCAA s ICE model Electronic submission is NOT mandatory 28

30 Click Incurred to edit Cost Master Proposal title style Form Click to and edit Substance Master text (continued) styles Schedules Second level formerly optional are now considered supplemental and often demanded up front DCAA will» Fifth examine level for adequacy (checklist) but only the ACO or CO can reject ACO or CO often take the auditors opinion unless contractor can substantiate the reasons for exclusion 29

31 Click to edit Master title style Click to edit Master text styles Second level Dreadful ICS Audit & Final Rate Negotiations 30

32 Click ICP Audits to edit & Master Final Rates title style Regulatory Click edit Requirement Master text styles FAR Second level makes establishing final rates the responsibility of the contracting officer FAR (g) At any time or times before final payment, the Contracting Officer may have the Contractor s statements of cost audited In DOD, final rates are delegated to the ACOs at DCMA DCMA Instruction 125 requires audit of ICP by DCAA prior to negotiation of final rates Audit of the ICP is NOT REQUIRED BY FAR 31

33 Click ICP Audits to edit & Master Final Rates title style Form Click to and edit Substance Master text styles DCAA Second audit level program for ICPs is No Third and level is posted at (also Fourth adequacy level checklist) Instruction governing ACO procedures for establishing final rates is DCMA Instruction 125 and is posted at 32

34 Click ICP Audits to edit & Master Final Rates title style Issues Click to edit Audits Master text styles DCAA Second (alone) level has more than 17,600 ICPs that need to be audited Approximately 7,311 are over-aged (3-years old or more) DCMA handbook establishes targets for final rate determinations as 27 months for major contractors ($100M of ADV) 36 months for non-major contractors (less than $100M of ADV) DCAA completed more than 11,000 incurred cost years in FY 2014 receives about 4,500 submissions per year 33

35 Click to edit Master title style Click to edit Master text styles Second level Factors that Drive the Rates 34

36 Click Factors edit that Master Drive the title Rate style How do rates impact your Click proposal? to edit Master text styles Second level INCREASES COSTS! Can we control these costs? 35

37 Click Factors edit that Master Drive the title Rate style Overall rate structure Click to edit Master text styles Number of pools Second level Organizational Structure Geographical location Composition of the Indirect Pools Nature of the cost activity and function Type of transaction Classification of Direct versus Indirect Applied Allocation Base 36

38 Click Overall to Rate edit Master Structure title style Click to edit Master text styles Consideration for the Number of Pools Accounting Second level & Budgeting Systems (i.e. IT Capabilities) Administrative Costs for maintaining the pools versus the Benefits of equitable allocation Regulatory (FAR Part 31) and Law (Cost Accounting Standards (CAS)) Allocable to the project Equitable to the project Consistency 37

39 Click Factors edit that Master Drive the title Rate style Composition Click to edit of Master the Expense text styles Pool Homogeneous pool Second level Testing for similarity Classifying the costs as expense in the pool versus the base has strong ramifications on the amount of recoverable cost Are there components of G&A that may be included in the Overheads or vice versa 38

40 Click Factors edit that Master Drive the title Rate style Click to edit Master text styles Composition of the Expense Pool (continued) Expense Second Pool level Numerator Most Third indirect level pools contain 5 to 8 accounts that drive 70 to 85 percent of the cost Common» Significant Fifth level Factors Across Industries Indirect Labor Fringe Benefits Allocation Facilities (Intermediate Allocation) IT Intermediate Allocation Other service center allocations Professional services (Legal, Consulting, etc.) 39

41 Click Factors edit that Master Drive the title Rate style Monitoring Click edit the Master Allocation text Base styles Adjust Second rates level in bids for impact of new business, especially if unexpected Opening Fourth new level location Knowing how an indirect cost will react to a change in the volume is important for such pricing actions: Equitable adjustments Termination of Contracts Projection of indirect costs 40

42 Click Factors edit that Master Drive the title Rate style Click to edit Master text styles Monitoring the Allocation Base (continued) Examine Second the level allocation base and compare it to the functions & activities performed and/or the type of transactions. Consider the following: Output vs. input (resource consumed) Managed vs. transactional / event Traditional vs. Surrogate 41

43 Click Factors edit that Master Drive the title Rate style Click to edit Master text styles Monitoring the Allocation Base (continued) Allocations Second that level benefit one another may be accomplished by using: The cross-allocation (reciprocal) method, The sequential method, or Another method the results of which approximate those achieved by either of the methods above 42

44 Click Options to edit for Managing Master title Indirect style Rates Click Overhead to edit Rates Master text styles Customer site vs. contractor site Second level Government vs. commercial Segment/BU Geographic locations Product» type/service Fifth level line Service Center Rates Single vs. multiple Direct vs. indirect allocation 43

45 Click Options to edit for Managing Master title Indirect style Rates Click to edit Master text styles Identifying the controllable costs and assess Second Variable level vs. Fixed vs. Semi- Variable Separate Fourth long-term level versus short-term factors Service Centers Intermediate allocations Allocation base currently used my not be the right base now 44

46 Click Maximize to edit Cost Master Recovery title style by Reducing Unallowable Costs Click to edit Master text styles Reduce the conversion of indirect into unallowable Second level costs Adding Third overhead level bases that are less likely to contain unallowable cost Selecting» Fifth a G&A level base that is less likely to contain unallowable costs Selecting an accounting system that maximizes the allocation of unallowable costs from the G&A base to the G&A pool 45

47 Click Contact to edit Information Master title style Kristen Soles, CPA Click CohnReznick, to edit LLP Master text styles Second level CohnReznick.com Darrell Hineman, CPA / CFE CohnReznick, LLP Darrell.Hineman@CohnReznick.com GovCon360.com 46