2014-05-15 Raffa BDO Managing Government Contracts

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  • next he needs to assign resources to the tasks for this project
  • Answer - Cash flow & Profitability Additionally, companies are required to monitor their actual indirect rates under cost-reimbursement contracts. Once it becomes evident that the year-end actual rates are expected to be materially different than the projections, the company is required to make adjustments to their billing rate at that time.
  • *This chart assumes that contractor would pursue rate variances. If revenue is recognized at target/provision then revenue would not increase and profit would decrease. Some contractors make the decision not to pursue rate variance (overruns) to maintain or build upon the customer relationship.Comparison is Actual versus budget/provisional rates – profit increase or decrease assumes you used you BUDGETED Rates to price the contractChanges in indirect rates also affects the profitability.Estimated indirect rates may be used as part of negotiating a FFP contract and for establishing hourly billing rates under T&M contracts. In both these cases for FFP and T&M , a company that under-runs their rates increases their profitability and cash flow. If their actual indirect rates exceed their estimates, then they are losing money and draining cash flow.
  • No different than how you would handle any other project
  • Most Audit work plans – for DCAA are posted on its website. Others auditors [most notably the GSA-OIG does not publish its work plan. However, anyone who’s gone through an audit can surely attest to the steps that will be performed.
  • Allows you to manage expectations and minimize confusion
  • Auditors will not be swayed by harsh and critical responses - nothing is to be gained
  • At the end of the day, by planning, documenting, communicating and negotiating – a contractor can manage an audit and mitigate risk. Ask for Questions:
  • 2014-05-15 Raffa BDO Managing Government Contracts

    1. 1. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. Managing Government Contracts Kellye Jennings, Partner, Audit - BDO Glenn Anstead, Sr. Manager, Financial Systems - Raffa Seth Zarny, Partner, Technology – Raffa Larry Mocniak, Principal, SL Foundation
    2. 2. Managing Government Contracts Page 2 Agenda • The Regulatory Environment • Business Systems • Time and Expense Requirements and Challenges • Job Costing • Other Issues • Provisional Versus Actual Rates • Types of Government Contracts • Government Audits • Questions?
    3. 3. Managing Government Contracts Page 3 SECTION 1 – THE REGULATORY ENVIRONMENT
    4. 4. Managing Government Contracts Page 4 The Regulatory Environment Heavily regulated: • Many potential pitfalls for the naïve or unwary seller • Compliance costs (personnel, systems, procedures) require up front investment Federal Acquisition Regulation (FAR): • Covers all aspects of contracting for the Federal Government • Includes “Cost Principles” and many other administrative procedures Agency Supplements (e.g., DFARS): • Provide additional Agency-specific guidance Cost Accounting Standards (CAS): • Provide guidance on acceptable cost accounting practices
    5. 5. Managing Government Contracts Page 5 (FAR) Federal Acquisition Regulation vs. (CAS) Cost Accounting Standards FAR Cost Principles determine ALLOWABLE Costs Cost Accounting Standards govern COST ACCOUNTING PRACTICES used for Government Contracts: • Measurement of Costs • Assignment of Costs to Cost Accounting Periods • Allocation of Costs
    6. 6. Managing Government Contracts Page 6 What is “FAR”? The Federal Acquisition Regulation (FAR) is the principal set of rules in the Federal Acquisition Regulation System. This system consists of sets of regulations issued by agencies of the Federal government of the United States to govern what is called the "acquisition process," which is the process through which the government purchases ("acquires") goods and services. That process consists of three phases: (1) need recognition and acquisition planning, (2) contract formation, and (3) contract administration The FAR System regulates the activities of government personnel in carrying out that process. It does not regulate the purchasing activities of private sector firms, except to the extent that parts of it are incorporated into government solicitations and contracts by reference.
    7. 7. Managing Government Contracts Page 7 Purpose of “FAR” The purpose of the FAR is to provide "uniform policies and procedures for acquisition." FAR 1.101. Among its guiding principles is to have an acquisition system that (1) satisfies customer's needs in terms of cost, quality, and timeliness; (2) minimize administrative operating costs; (3) conduct business with integrity, fairness, and openness; and (4) fulfill other public policy objectives. FAR 1.102(b). The FAR also includes socioeconomic requirements, such as requiring certain items to be purchased from the United States firms only and that large organizations to use smaller businesses as subcontractors.
    8. 8. Managing Government Contracts Page 8 What is “CAS”? The Cost Accounting Standards (CAS) are methodologies and techniques used to guide and consistently measure the cost accounting practices amongst government contractors. The Cost Accounting Standards Board (CASB) consists of members from the Office of Management and Budget (OMB), Department of Defense (DOD), General Services Administration (GSA), and private sector. To promote consistency across agencies, the Cost Accounting Standards which address the assignment of costs to government contracts are different from the „Cost Principles‟ which provide guidance for cost allowability. Some of the principles are based upon certain cost accounting standards and should be referenced to determine if a cost is unallowable. Cost accounting can be categorized into the following three areas: (1) measurement of cost (market vs. present value), (2) cost accounting period assignment (accrual vs. cash basis), and (3) allocation of costs (direct vs. indirect)
    9. 9. Managing Government Contracts Page 9 Purpose of “CAS” The purpose of the CAS is to ensure your cost accounting practices as a contractor are fairly standard, practical, yet flexible across the industry, while remaining consistent with your disclosed practices, procedures, and policies for cost recovery: (1) CAS should be considered during the design and configuration of your financial systems, (2) CAS directly affect compliance (3) CAS have a direct impact on your ability to recover costs Your disclosed (submitted statement, if applicable) cost accounting policies and practices must also be adequate and compliant and should be the basis for your accounting and financial system design.
    10. 10. Managing Government Contracts Page 10 Compliance Is Your Friend Compliance Is Your Friend Compliance generally leads to a competitive advantage. Noncompliance may lead to imposition of penalties, suspension, debarment, and no award
    11. 11. Managing Government Contracts Page 11 SECTION 2 - BUSINESS SYSTEMS
    12. 12. Managing Government Contracts Page 12 Business Systems Rule Simply stated… the Contractor shall establish and maintain acceptable business systems… • Establishes criteria for mandatory adherence of requirements specifically related to a contractors business systems to ensure best practices are maintained for all government contracts. • Criteria reflects a combination of existing requirements as found in CAS, FAR, DFARS, and those historically enforced by DCAA, DCMA, cognizant audit agency, etc. • Identifies the relevant business systems, corresponding guidelines and compliance requirements.
    13. 13. Managing Government Contracts Page 13 Business Systems Rule (cont.) • Provides for mandatory financial penalties for any noncompliance that is deemed a “significant deficiency” • Allows for discretion (as exercised by government audit agency and reviewers) in how compliance will be achieved; final determination resides with ACO, CO directs withholding decision • Defines grace period for implementing corrective action plan to rectify deficiencies
    14. 14. Managing Government Contracts Page 14 Acceptable / Deficient “Deficiency” is defined as a shortcoming in the contractors business system(s) that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes. “Acceptable contractor business systems” are contractor business systems which are found to be in compliance with relevant laws and regulations [Cost Accounting Standards (CAS) clauses and Federal Acquisition Regulations (FAR) principles] as reviewed by your cognizant audit agency.
    15. 15. Managing Government Contracts Page 15 What happens if found “Deficient”? You must respond in writing to your Contracting Officer (CO) within 30 days of receiving your determination of identified business systems deficiencies to include your comments – rationale for disagreement CO may issue a notice of intent to Contractor to withhold amounts from interim billings not to exceed: • 5% for one or more identified significant deficiencies in any single business system • 10% significant deficiencies in multiple business systems
    16. 16. Managing Government Contracts Page 16 What happens if found “Deficient”? (cont.) If you correct the deficiencies or submit an acceptable corrective action plan (one that includes milestones and steps taken to eliminate issues) within 45 days of notice of intent to withhold, and as verified by the cognizant audit agency (auditor), the CO may: • Decrease the withholding percentage until such time all deficiencies have been corrected and verified • Discontinue withholding and release previously withheld amounts (if not related to other system deficiencies) and verified by auditor • If no determination of the corrective action plan by the CO has been made within 90 days, withholding could be reduced by 50%, but not release payment for previous withholdings If the corrective plan is not followed and the deficiencies continue to exist, the CO may: • Increase the withholding percentage if the corrective action plan is not followed and deficiencies continue to exist
    17. 17. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. What systems can I use to run my business?
    18. 18. BDO USA, LLP, a Delaware limited liability partnership, is the U.S. member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. Short answer… …there is no single “silver bullet” system This morning we will discus things to consider when implementing an automated system for Government Contractors, including one system from Microsoft Dynamics…
    19. 19. Managing Government Contracts Page 19 Microsoft Integrated Solutions • Dynamics ERP • SharePoint 1
    20. 20. Managing Government Contracts Page 20 What is Microsoft Dynamics? • Integrated Financial and Operational/Project Management Software • Familiar to Your Employees • Government Contracting Industries: • Professional Services • Contracting • Manufacturing • Distribution • Accepted by DCAA 2
    21. 21. Managing Government Contracts Page 21 Functionality Provided by Dynamics •Financials •Accounting •Fringe, Overhead and G&A Rate Calculations - Cost Segregation – Allowable vs. Unallowable •Job Costing •Mobile Time & Expense processing and approvals •Purchasing & Requisition Mgmt •Manufacturing •Inventory Management •Sales Orders •Service Management •Customer Relationship Management 2
    22. 22. Managing Government Contracts Page 22 Microsoft SharePoint What is Microsoft SharePoint? A foundation for connected information • Team Collaboration • Dashboard • Key Performance Indicators • Dynamics Business Portal • Excel Services (Dashboard reporting) • Integrated with Project Server 2
    23. 23. Managing Government Contracts Page 23 What will you get from the Integrated Solution? Organized flow of information Project Management Resource Allocation Financial Reporting Seamless integration of information One view of the data Tools your team is familiar with… 2
    24. 24. Managing Government Contracts Page 24 A solution that provides a unique set of capabilities to free the user from System Configuration, Setup Concerns and Technical constraints that limit business growth and results. • Pre-Configured Chart of Accounts – Changes easily adapted • Pre-Configured Allowable vs. Unallowable Cost Tracking • Pre-Configured Fringe, Service Center, Overhead, Mat. Handling & G&A • Pre- Configured Burden • Pre-Written Financial Reporting • Economies of Pre-Configured System • FEI = Faster Economic Installation • Quick Start with proven implementation methodology It„s all about business and technical freedom:
    25. 25. Managing Government Contracts Page 25 Dynamics SL Pre-Configured Software The strength of a pre-configured system involves: •Plug & Play for Commercial-Government Contractors •DCAA System Audit Road Map – Reports Template •Microsoft Office - Integration •Financial - Project Reporting •Budgeting/Planning •Business Intelligence Reporting •Internet Access Via SharePoint •Document Imaging •Utility Tools •Easy integration of legacy data
    26. 26. Managing Government Contracts Page 26 Dynamics SL Pre-Configured Software Features of a pre-configured system includes: •Chart of Accounts •Cost Pools Allocation and Rate Structures •Job reports to include committed costs •DCAA Accounting Manual •DCAA System Audit Support •Electronic Time Sheets •Expense Reports •Purchasing
    27. 27. Managing Government Contracts Page 27 • Fringe, Service Centers, Overhead, Material Handling, & G&A Rate Structures • Electronic Time Sheets • Automated Floor Checks • Daily Records of hours charged to projects • Open Time Sheets show up as committed cost • Expense Reports • Web Based Expense Reporting • Reporting • Financial Reporting • Project- Plan vs. Actual • Trending • Business Intelligence Optimization (BIO) • Dashboards Pre-Configured Integrated Software The strengths of an pre-configured system involve…
    28. 28. Managing Government Contracts Page 28 Critical Requirements for Success What to look for when reviewing integrated solutions? • Out of the Box, Proven Financial and Operational Software • Proven management of Indirect and Direct Costs • Integrated across Finance and Project Management / Operations • Business Process Automation • Setup Flexibility to meet business needs • Ease of Setup and Configuration Does a pre-configured option make sense? 2
    29. 29. Managing Government Contracts Page 29 Business Process Improvements Indirect Rates • Monitor Trends via standard reports • More Accurate Cost Information for Bidding • More Accurate Historical Procurement Costs Traceability of Source Documents • Management Reporting Drill Down • On line Inquiry Screens • Transaction Level Detail • Imaging/Document Management 2
    30. 30. Managing Government Contracts Page 30 Reporting vs. Dashboards Many people use the terms interchangeably What is the purpose of a report in Government Contracting company? • Compliance • Company Directed What is the purpose of a dashboard? • Drive user towards decision How do you know what the Dashboards should be? • Key Performance Issues of Company What are KPI‟s? • Key Performance Indicators 3
    31. 31. Managing Government Contracts Page 31 Statement of Indirect Expense 3
    32. 32. Managing Government Contracts Page 32 Operational Benefits What benefits should Operations & Project Managers receive from Microsoft Dynamics? • Superior Cost Control • Real time visibility into committed costs • Immediate access to supporting documentation via document imaging • Earned Value Management visibility 3
    33. 33. Managing Government Contracts Page 33 SECTION 3 – TIME AND EXPENSE REQUIREMENTS AND CHALLENGES
    34. 34. Managing Government Contracts Page 34 Objectives of Timekeeping System Ensure that proper and reliable contract labor costs, identified as either direct or indirect, are: • Accumulated • Reported • Billed Billings to the government via a system of accurate, timely, and complete posting of labor hours on individual employee timecards
    35. 35. Managing Government Contracts Page 35 Basic Requirements of Timekeeping System • Employee is given or mapped to correct project or charge number via work authorization before work commences • Time cards/sheets or access to system provided to employee at beginning of pay period • Time cards/sheets are pre-coded with pay period, name, etc., if manual • Employee has control or possession of timesheet (if manual) or sole access to electronic system • Employees record time daily • Supervisors or other personnel do not prepare timesheet entries for employees (unless out due to sickness, etc.)
    36. 36. Managing Government Contracts Page 36 Basic Requirements of Timekeeping System (continued) • Audit trail for changes made to initial timekeeping entries • Management approval of timesheet corrections noted • Explanation of timesheet corrections provided • Timesheet signed by employee at end of pay period • Paid absences charged to correct indirect code • Indirect duties (training, meetings, etc.) properly charged • Timesheets collected by appropriate official and reviewed and approved
    37. 37. Managing Government Contracts Page 37 Time Reporting • All time worked should be reported, including all time worked in excess of the standard workweek. This includes all time worked for clients, whether billable or not. • All time and expenses associated with an individual contract should be recorded in a Work Breakdown Structure (WBS) element. Any time or expense related to the execution of a specific contract should be charged to the correct WBS elements, regardless of whether or not those time and expenses can be billed. All other time and expenses should be charged to the appropriate WBS element.
    38. 38. Managing Government Contracts Page 38 Labor System Authorization & Approvals • The contractor should have procedures to ensure the segregation of duties for work authorizations and/or job assignments to the extent practical. Work authorizations/job assignments should be controlled and issued by individuals independent of those responsible for performing the work - a critical control is the procedure used to open and close work authorizations. • The contractor should have procedures for the preparation of labor documentation/work descriptions that require clear identification of the nature of the work performed - trackable to intermediate or final cost objectives • The contractor should establish a labor charging awareness program to train all employees, as appropriate, on proper labor charging practices.
    39. 39. Managing Government Contracts Page 39 Labor System Authorization & Approvals cont. • The contractor should assure that labor hours are accurately recorded and that any corrections to time keeping records are documented including the appropriate authorizations and approvals. • The contractor should assure the proper allocation of labor costs to cost objectives. • The contractor should provide reasonable assurance that labor transfers or adjustments of the labor distribution are documented and approved. • The contractor should monitor the overall integrity of the time keeping system.
    40. 40. Managing Government Contracts Page 40 Overtime Approval • Requests for overtime should be made by project managers or department managers. Overtime must only be authorized when a project or department manager has documented the following in writing: - Overtime is necessary to meet delivery requirements, - Overtime is necessary to meet performance requirements, or - Overtime is necessary to make up for delays beyond the control or without the fault or negligence of the contractor • When required by contract provisions, the project manager authorizing overtime must obtain the contracting officer's written approval.
    41. 41. Managing Government Contracts Page 41 Timecard Changes / Modifications • It is improper for supervisors to unilaterally make changes to an employee‟s timecard. Doing so may result in disciplinary action. • If a time correction is necessary PRIOR TO submitting the time sheet to the Payroll Department, the employee should ensure that the time sheet correction is made in ink and initialed. The reason should be clearly documented and approved by a supervisor. • When making a correction(s) to reported time SUBSEQUENT TO submitting the time sheet to the Payroll Department: - The correction may not be more than 30 days old. - Employees must indicate the reason for the correction, the job numbers affected by the adjustment, and the related hours. - The documentation for the labor corrections must be signed by a supervisor and submitted to accounting. - Consider creating a “Labor Correction Form” that will state the necessary procedures for making labor corrections.
    42. 42. Managing Government Contracts Page 42 Distribution of Labor Costs and Labor Transfers • Written justification is required for any transfer of labor costs to ensure the proper allocation of labor costs to each project. Each justification should be retained in accordance with the contractor‟s record retention policy. Journal vouchers are commonly used to document labor transfers. • The contractor should consider additional procedures for more closely scrutinizing transfers. • The contractor should include procedures to address management review and approval of labor transfers, labor distribution edit errors, and review and correction of labor errors. • Labor distribution edit errors should be processed in a suspense account and billed to customers only after correction.
    43. 43. Managing Government Contracts Page 43 What DCAA observations will elevate audit risk? • Mix of cost plus government & commercial contracts • Lack of written or inadequate T&E procedures • Significant adjusting entries to G/L labor charges • Data indicated on timesheet during floor check does not match time sheet after entered to labor distribution • Significant and non-verifiable changes and alterations to employee timesheets • Timesheets without employee signatures • Inadequate demonstration of employee training for preparing time sheets
    44. 44. Managing Government Contracts Page 44 Consequences for Deliberate Failure to Follow Timekeeping Policies and Procedures • The contractor should be committed to the enforcement of all timekeeping procedures. Any clear infraction of the policy stated above will result in disciplinary action which may include a warning, reprimand, probation, suspension, reduction in salary, demotion, or dismissal. • Employees should be aware, in addition to company imposed sanctions, that individuals directly responsible for deliberate mischarging of time or materials may be held personally liable for civil penalties and actual damages sustained by the government as a result of the mischarging. Criminal prosecution may also result which carries fines and/or imprisonment.
    45. 45. Managing Government Contracts Page 45 Consequences for Deliberate Failure to Follow Timekeeping Policies and Procedures cont. • Employees must be vigilant in their efforts to accurately record time. The penalties for knowingly mischarging time can be as severe as termination and other Governmental ramifications (i.e., False Claims Act). • The contractor should periodically conduct floor checks to ensure timekeeping practices are being followed and actual hours worked are accurately recorded.
    46. 46. Managing Government Contracts Page 46 Dynamics Overview Web based Timecards Online Timesheets 4
    47. 47. Managing Government Contracts Page 47 Web Based EE Expense Report 4
    48. 48. Managing Government Contracts Page 48 Dynamics SL Overview - Assign Resources 4
    49. 49. Managing Government Contracts Page 49 Dynamics Overview - Increased Visibility Real-time visibility into your data Labor statistics by Customer 4
    50. 50. Managing Government Contracts Page 50 SECTION 4 – JOB COSTING AND INDIRECT RATES
    51. 51. Managing Government Contracts Page 51 Job Cost Accounting Systems • Used to determine cost of a product or service • Can be used to determine prices – government contract prices are often based on costs charged to a job • Used to record cost of an individual transaction • May be used to distribute indirect costs to cost objectives • Government does not require “on book” distributions • “Memo records” are acceptable • Facilitates integration of production data into accounting records
    52. 52. Managing Government Contracts Page 52 Job Cost Accounting Systems (continued) • Costs must be accumulated under general ledger control o Job costs must be reconcilable and posted to general ledger control accounts o Costs must be posted at least monthly to books of account • Costs must be segregated between direct and indirect types o Controls must exist to preclude direct charging of indirect expenses • Direct costs must be accumulated by contract o Must either have a subsidiary job cost ledger or accounts receivable ledger o Must be able to “drill down” to at least Contract Line Item Number (“CLIN”) level • Indirect costs must be allocated to jobs o Accumulated in logical cost groupings and allocated based on causal or beneficial relationships
    53. 53. Managing Government Contracts Page 53 Allocation of Expenses When a company incurs an expense, it is either a direct expense that is charged to a specific project or it is an indirect expense that benefits various projects and the company as a whole.
    54. 54. Managing Government Contracts Page 54 Accounting for Unallowable Costs An allowable cost in government contracting terms means billable – it‟s allowable if the rules permit it to be included in an invoice to the government. An unallowable cost is just the opposite; it‟s the kind of cost you can‟t bill the government for. Under the FAR 31.201-2, a cost is allowable only when it meets all of these requirements: Terms of the contract Limitations set for the in FAR 31.201 Reasonable and allocable
    55. 55. Managing Government Contracts Page 55 What is a Direct Cost? If a cost is easily identified with a single project, it is generally considered a direct cost. To help make this determination, ask… “If we did not have this contract, would we still incur this cost?” A “no” answer to this question indicates that it is probably a direct cost.
    56. 56. Managing Government Contracts Page 56 Direct Costs Examples • Labor performed while working on a project • Travel to project status meetings • Material consumed entirely on a project • Subcontractors/consultants hired to work on a project .
    57. 57. Managing Government Contracts Page 57 What is an Indirect Cost? An indirect cost is a cost incurred that: • Benefits more than one contract • Incurred for the common good of the company • Impractical to split • Immaterial direct cost
    58. 58. Managing Government Contracts Page 58 Most Commonly Used Indirect Cost Pools General and Administrative Company Management and Administrative Total Contract Cost Subcontractor – Material Handling Procurement, Management Support Subcontractor, Material, Equipment Overhead Contract Support Contract Labor + Applied Benefits Intermediate Pool Facility Expenses Occupied Space Fringe Benefits Company Benefits Company Labor
    59. 59. Managing Government Contracts Page 59 Defining Indirect Costs Fringe benefits Company expenses incurred for the benefit of its employees • Employer payroll taxes • Medical insurance paid by the company • Company 401(k) contributions • Paid time off
    60. 60. Managing Government Contracts Page 60 Defining Indirect Costs Overhead Costs not directly related to cost objectives but are support-type costs necessary for the production of goods or services • Salaries and wages of support and production personnel • Facilities cost • Supplies It is common to find separate overhead pools for engineering, manufacturing, and for certain off-site activities
    61. 61. Managing Government Contracts Page 61 Defining Indirect Costs G&A Costs associated with the general administration and overall management of a company • Compensation of company executives and related fringe • Legal and professional fees • Administrative personnel and costs • Business insurance • Company taxes (except federal income taxes) • Bid and proposal costs
    62. 62. Managing Government Contracts Page 62 Defining Indirect Costs Subcontractor/material handling Costs associated with overall administration of subcontractor and materials acquisitions • Selecting, negotiating, and managing subcontractors and materials purchases
    63. 63. Managing Government Contracts Page 63 Direct or Indirect – Gray Areas Example: Company A and B ship monthly program reports to their clients Company A • Charges the shipping expense against the contract • Support personnel charge time to overhead Company B • Charges all shipping to overhead • Administrative staff charge: o Time supporting projects o Overhead when working on support of a general nature The same approach can be taken on many other types of expenses, such as photocopies, phone calls, faxes, etc.
    64. 64. Managing Government Contracts Page 64 G&A or Overhead Company A charges HR costs to G&A while Company B allocates the cost of HR across the entire company. HR benefits the Company as a whole, meeting the criteria of a G&A cost, but HR also benefits all ee‟s of the Company. Company B rational: • The fundamental costs of the majority of ee‟s are maintained in OH • HR costs will be allocated between OH & G&A based on a method such as using proportionate number of ee‟s Can certain G&A costs qualify as OH expenses? Deciding to allocate costs between G&A and OH takes detailed planning and consideration of materiality and cost /benefit relationship
    65. 65. Managing Government Contracts Page 65 Defining Allocation Bases Assigning an indirect cost pool to a particular allocation base depends upon: • Types of costs included in the pool • Whether the base provides a reasonable representation of the relative consumption of pooled indirect costs by direct cost activities Labor costs are an appropriate allocation base for the fringe expenses. There is a clear relationship between the two.
    66. 66. Managing Government Contracts Page 66 Indirect Rates Indirect rates are equitable, logical and consistent process for allocating costs not directly associated with a single project or cost objective. The only requirement of the FAR is that the allocation of indirect costs be: • Fair • Reasonable • Equitable
    67. 67. Managing Government Contracts Page 67 Indirect Rates Key points to establish and manage indirect cost structures: Fiscal year The period for allocating indirect costs is a contractor‟s fiscal year – it is not related to a period of performance for a given contracts. Simplicity When substantially the same result can be achieved through less precise methods, a company is permitted to keep the allocation simple and not be forced into more complicated allocation formulas that are technically more accurate but not materially different. Consistency Once treated as a direct (or indirect cost), a cost should be treated consistently. Companies have a great deal of latitude to determine indirect rate structure
    68. 68. Managing Government Contracts Page 68 Indirect Rates Methods practiced to reduce indirect rates: • Charge as many costs direct as possible. By charging shipping and copying directly to a contract, it will keep it out of overhead pool, which will in turn reduce the overhead rate. • Direct charge unique costs to a specific contract • More indirect rates by splitting large groupings of indirect expenses • Indirect rates for different types of products and services • Establish a service center (or multiple service centers) A company with high rates may not really be any more expensive -- though they are often perceived that way. When developing or evaluating indirect rates, a company should keep in mind ways to reduce at least the appearance of indirect rates.
    69. 69. Managing Government Contracts Page 69 Indirect Cost Allocation Cycle Indirect cost allocation typically follows the cycle depicted in the following figure: Forward Pricing Estimate Indirect Contract Costs Final Allocation Allocate Indirect Costs to Contracts Billing Progress Payments Cost Reimbursement
    70. 70. Managing Government Contracts Page 70 Government Contract Life-Cycle Pre-Award Award Accounting Controls [Policies,Procedures,Training] Accounting System
    71. 71. Managing Government Contracts Page 71 Indirect Cost Allocation Cycle Forward Pricing- During this phase, the contractor proposes forward pricing rates and uses those rates in contract proposal pricing. Contract Billing- Provisional / Target rates are indirect rate projections used on contract billing that have been reviewed and approved by the DCAA or the contractor‟s cognizant agency for proposal and estimating purposes. For example, a company may develop budgeted rates for the current year and forecasted rates for the next two years. All three years of rates can be approved for proposal preparation purposes.
    72. 72. Managing Government Contracts Page 72 Indirect Cost Allocation Cycle Final Pricing. After the cost accounting period is completed, contractors can calculate actual indirect cost rates to determine actual contract cost. • For contracts that require final pricing (e.g. cost plus) the responsible contracting officer or auditor must determine final indirect rates for the contract. • Final indirect rate proposal is submitted by the contractor. • Months or years may be required to complete this process. Under certain limited conditions, the contracting officer and the contractor may agree to use estimated quick-closeout indirect cost rates for final pricing. • Data used to support final rates will become part of the data available for estimating forward pricing and billing rates for subsequent accounting periods.
    73. 73. Managing Government Contracts Page 73 Profitability and Cash Flow Under-running rates - billing rates are simply estimated rates that must be adjusted to actuals at year end. A company that has predominantly cost- reimbursement contracts and they are significantly under-running their estimated rates, which means their actual rates are lower than the approved billing rates, they will be expected to reimburse the government any excess cash collected. Over-running rates - if actual indirect rates are running higher than the billing rates, the company needs to either slow down the operating expenses being incurred or they will be forced to support the negative cash flow through other means, such as line-of-credit borrowing. So, why is it important to monitor indirect rates
    74. 74. Managing Government Contracts Page 74 Monitor Indirect Rates with Pre-defined Reports
    75. 75. Managing Government Contracts Page 75 Fringe Rates
    76. 76. Managing Government Contracts Page 76 Overhead Rates
    77. 77. Managing Government Contracts Page 77 G&A Rates
    78. 78. Managing Government Contracts Page 78 Profitability and Cash Flow Indirect Rates Affect the Revenue and Profitability of Various Contract Types CPFF FFP T&M Revenue Profits Revenue Profits Revenue Profits Increase in Actual Rates Increase* No change* No change Decrease No change Decrease Decrease in Actual Rates Decrease No change No change Increase No change Increase *Assumes no rate ceilings.
    79. 79. Managing Government Contracts Page 79 Measurable Benefits of Effective Job Cost Systems 7 • Better Prioritization of Projects and Services It is shocking how many “projects” operate below the radar screen with no plans, controls or accountability • Shorten Billing Cycles Better allocation of resource T&E to project schedules and invoicing, and faster resolution of billing disputes • Minimize Revenue Leakage Eliminate errors from manual entry or redundant systems used to invoice client services • Improved Service Agility Quicker response to sudden or unexpected changes in business priorities, competitive pressures, new technology, and economic downturns • Standardized Reporting
    80. 80. Managing Government Contracts Page 80 Dynamics SL Overview Project Dashboard Real-time visibility into your data Project P&L Labor hours statistics 8
    81. 81. Managing Government Contracts Page 81 Job Summary Report 8
    82. 82. Managing Government Contracts Page 82 Dynamics SL Overview Exec Mgmt Dashboards Real-time visibility into your data Top 10 Customers Year over year Sales and Margin 8
    83. 83. Managing Government Contracts Page 83 Project – GL reconciliation report 8
    84. 84. Managing Government Contracts Page 84 Statement of Indirect Expense 8
    85. 85. Managing Government Contracts Page 85 Provisional vs. PTD Actual reporting 8
    86. 86. Managing Government Contracts Page 86 Provisional vs. YTD Actual 8
    87. 87. Managing Government Contracts Page 87 Dynamics Overview Increased Visibility Real-time visibility into your data Labor statistics by Customer 8
    88. 88. Managing Government Contracts Page 88 Dynamics Overview Project Visibility Online Project visibility – multiple levels… 8
    89. 89. Managing Government Contracts Page 89 Dynamics Overview Project Visibility Online Project visibility – multiple levels… Commitments & Budgets 8
    90. 90. Managing Government Contracts Page 90 Dynamics Overview Self Service Access Online Project visibility – multiple levels… Self-service – Project profitability 9
    91. 91. Managing Government Contracts Page 91 Dynamics Overview Ability to drill into the details Online Project visibility – multiple levels… Self-service – Drill into the supporting details 9
    92. 92. Managing Government Contracts Page 92 SECTION 5 – OTHER CURRENT ISSUES
    93. 93. Managing Government Contracts Page 93 Actual versus Provisional Rates • Provisional rates – estimated rates that are required to reimburse contractors on an interim basis. o Sometimes referred to as “target rates.” o Should be adjusted as facts and circumstances change to prevent substantial underpayments or overpayments. • Actual rates – final indirect rates that are determined during or after a contractor‟s fiscal period. o Subject to audit o Required to be submitted in the final indirect proposal within six months after year-end o Used in the contract close-out process
    94. 94. Managing Government Contracts Page 94 Basic Types of Government Contracts • Fixed price – contractor is paid a predetermined fixed amount for a specified scope of work and has full responsibility for the performance costs. • T&M and labor hour – contractor is paid fixed hourly rates for direct-labor hours expended under specified labor categories. Materials and other non-labor costs are usually reimbursed at actual costs plus allocable indirect costs. • Cost reimbursement – contractor is reimbursed for allowable incurred costs plus a fee (if specified). TIP: Do not make your accounting systems decision based on the contract mix that you have today.
    95. 95. Managing Government Contracts Page 95 Scope of Government Audits • Proposal / pre-award • Incurred cost • Business systems • Forward pricing/estimating • Special o Termination proposals o Progress payments o Financial capabilities o Other claims • Other audits o CAS Compliance o Defective pricing o Other
    96. 96. Managing Government Contracts Page 96 The Current Audit Environment • Increased oversight on contractor business systems and controls • Stringent rigor applied to audit practices, programs and documentation o Decreased cooperation with contractors to prevent appearance of bias o “Zero tolerance” with respect to meeting control objectives. o Elimination of recommendations on deficiencies o Inadequate/adequate findings – no more “inadequate in part” • As a result, an increasing number of contractors now have inadequate systems with “significant deficiencies” and “material weaknesses” • Most inadequacies have been accompanied with recommendations to ACOs to pursue withhold of payments • ACOs face an up hill battle in disagreeing with auditor findings • Impacting contractors ability to win new awards and sub-awards
    97. 97. Managing Government Contracts Page 97 The Current Audit Environment (continued) • Through periodic business systems audits and flash reports – opportunities for inadequate systems are higher. • Since there are no longer “inadequate in part” determinations, a single finding is now a “significant deficiency” representing a “material weakness.” • As a result, a single audit finding can now result in a recommendation of withhold of fees/payments. • Since there is a backlog of audits and because audits > 4 years old are no longer current, there is an increased number of contractors with unaudited systems. • DCAA is working on reducing the backlog of open incurred cost audits. o Data is old o Personnel may have changed o Systems may have changed • Results in increased audit scrutiny (e.g., substantive testing) in all other audits and impacts contractors ability to obtain new awards
    98. 98. Managing Government Contracts Page 98 Dealing with government auditors • Understanding what is being audited o Pre-award – evaluation of whether the contractor is capable of performing the proposal. o Post-award – evaluation of accuracy, completeness, and currency of pricing data submitted. o Incurred costs – evaluation of whether direct and indirect costs are properly claimed for reimbursement on flexibly-priced contracts. • Be prepared o Establish an audit liaison o Understand the programs that the auditor will be using o Insist on an entrance and an exit conference o Be prompt in your responses • Understand that not all government auditors are the same.
    99. 99. Managing Government Contracts Page 99 Manage the Audit 99 Prepare Document Communicate Negotiate/Dispute Audit
    100. 100. Managing Government Contracts Page 100 Preparing for Government Audits Obtain an audit plan from your auditor / ACO Understand the standards to which the audit will be conducted and the individual scope of each audit • GAGAS: most Government audits are subject to Generally Accepted Government Auditing Standards [also known as the Yellowbook] • GAGAS contains standards to be used by Government auditors in the planning, execution, and reporting of an audit • Understand the requirements of individual audits and the audit objectives Perform a Gap Analysis of where you are to what you will be audited against Proactively identify and address any apparent limitations/deficiencies 100
    101. 101. Managing Government Contracts Page 101 Documenting Audits and Requests Document all communications with auditors and retain copies of all documents provided to their auditors Critical to also show timeliness and responsiveness with respect to providing access to records Ensure that all requests [even follow-on requests and clarifications] are documented in writing Documenting the audit and requests serves to protect the contractor in the event that disagreements arise with respect to individual audit findings; and or to the extent that an audit issue becomes a dispute or investigation Common Tools Used by Contractors: • Dedicated email accounts for Audit Requests and Responses • Utilization of SharePoint, databases and order management applications to track audit requests / responses 101
    102. 102. Managing Government Contracts Page 102 Communicating with Auditors Contractors should strive to stay in constant communication with their auditors regarding audit plans and schedules, the status of individual audits, and the communication of any potential audit findings For each audit, insist on formal kick-off and exit meetings - required by GAGAS - Any response to a potential audit finding should be communicated in writing and documented Hold periodic status meetings with your DCAA and/or ACO Keep audits within scope Clarify basis of requests - make sure the auditor knows what they are asking for Request Draft Audit Reports DCAA Recent MRD Communications 102
    103. 103. Managing Government Contracts Page 103 Negotiating/Disputing Audit Findings Negotiate the delivery date of responses to requests Negotiate the amount of data necessary to meet requests Disagreement with audit findings should be communicated to the auditor and substantiated by facts - cite regulations and audit standards Ensure that responses are included in the final audit report Contractors should present their positions to their ACO documented with a sound basis for their positions Dispute: Contractors are entitled to escalate audit issues through the appropriate legal avenues provided for by the Contracts Disputes Act of 1978, which is enforced by FAR clause 52.233-1 Disputes Maintain a standard of professionalism 103
    104. 104. Managing Government Contracts Page 104 Other Tips for Working with Auditors • If not available, request audit plan that will be used to conduct the audit • If uncertain, request an explanation for the basis of an audit request • Verify DCAA‟s basis for Access to Records • DCAA frequently request records for which they have no authority or basis to actually request • Only respond to/deliver data that was requested – do not over deliver • Request Drafts of Audit Reports and Preliminary Findings • Request to submit additional data in response to proposed findings • Make every effort to address issues prior to the Audit Report being issued 104
    105. 105. Managing Government Contracts Page 105 Questions?

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