2015-03-10 Managing Government Contracts

Managing Government Contracts
March 2015
Nisha Gupta, Sr. Manager, Government Consulting Advisory Services – BDO
Natalie Wooten, Sr. Manager, Government Advisory Services - BDO
Glenn Anstead Sr Manager Financial Systems - RaffaGlenn Anstead, Sr. Manager, Financial Systems - Raffa
Seth Zarny, Partner, Technology – Raffa
Larry Mocniak, Principal, SL Foundation
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.

AgendaAgenda
• Introductions
• The Regulatory Environment
• Business Systems
• Time and Expense Requirements and Challengesp q g
• Job Costing and Indirect Rates
• Questions?
Page 2

SECTION 1 – THE REGULATORY ENVIRONMENT
Page 3

The Regulatory EnvironmentThe Regulatory Environment
Heavily regulated:
• Many potential pitfalls for the naïve or unwary sellery p p y
• 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):Agency Supplements (e.g., DFARS):
• Provide additional Agency-specific guidance
Cost Accounting Standards (CAS):g ( )
• Provide guidance on acceptable cost accounting practices
Page 4

Compliance Is Your FriendCompliance Is Your Friend
Compliance generally leads to a competitiveCompliance generally leads to a competitive
advantage.
Compliance Is Your FriendNoncompliance may lead to imposition of
penalties, suspension, debarment, and no awardp , p , ,
Page 5

DOD Hotline Compliant Regarding DCAA Examination ofp g g
Contractor’s Subcontract Costs (DODIG-2015-061)
• December 23, 2014
The DCAA field audit office did not comply with GAGAS or agency policy for• The DCAA field audit office did not comply with GAGAS or agency policy for
contractor-claimed subcontract costs
• The field audit office applied an arbitrary and unsupported 20-percent
decrement factor to calculate questioned costsdecrement factor to calculate questioned costs
• The auditor made significant errors on the DCAA Form 1
• Recommendations:
• DCAA should remove the questioned subcontract costs and consider reevaluatingq g
subcontract costs that are not covered by assist audit requests
• DCAA to determine the extent to which other DCAA offices are inappropriately using
the 20-percent decrement to question costs
• DCAA should consider revising its policies to clarify the DCAA Form 1 exclusions• DCAA should consider revising its policies to clarify the DCAA Form 1 exclusions
Page 6

DCAA Office of Inspector General Createdp
• Effective January 5, 2015
• Way for employees and contractors to report fraud, waste and abuse by
DCAA.
• Hotline and website now exist; previously this was internal to DCAA, but
now it’s external and independent from the Agency.
Page 7

SECTION 2 - BUSINESS SYSTEMS
Page 8

Business Systems Rule
Simply stated… the Contractor shall establish and maintain acceptable
business systems…
• Establishes criteria for mandatory adherence of requirements specificallyEstablishes 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 auditDFARS, and those historically enforced by DCAA, DCMA, cognizant audit
agency, etc. Identifies the relevant business systems, corresponding
guidelines and compliance requirements
• Provides for mandatory financial penalties for any noncompliance that is
d d “ ig ifi t d fi i ”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
Page 9

Acceptable / DeficientAcceptable / Deficient
“Deficiency” is defined as a
shortcoming in the contractors
“Acceptable contractor business
systems” are contractor businessshortcoming in the contractors
business system(s) that materially
affects the ability of officials of the
Department of Defense to rely upon
systems” are contractor business
systems which are found to be in
compliance with relevant laws and
regulations [Cost Accountinginformation produced by the system
that is needed for management
purposes.
regulations [Cost Accounting
Standards (CAS) clauses and Federal
Acquisition Regulations (FAR)
principles] as reviewed by yourprinciples] as reviewed by your
cognizant audit agency.
Page 10

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• 5% for one or more identified significant deficiencies in any single business system
• 10% significant deficiencies in multiple business systems
• 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 intentincludes 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 s stem deficiencies) and verified b a ditorother 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
Page 11

DCAA MRD 14-PAS-009(R) – Audit Guidance on Reporting( ) p g
Business System Deficiencies
Dated June 26, 2014
Clarifies Business System Report Guidance for Findings Less Severe Than Significant
Deficiencies/Material Weaknesses
• Business System Non-compliances That Are Less Severe Than Material Weakness
but Warrant Attention of Those Charged with Governance – auditor’s will issue
a memorandum to the Administrative Contracting Officer including a statementa memorandum to the Administrative Contracting Officer including a statement
of condition and recommendation (SOCAR) providing sufficient information to
understand the condition and severity of the deficiency.
• Exception: when the auditor will be issuing a report that includes other
significant deficiencies or with an opinion of the overall system to include:
Page 12

DCAA MRD 14-PAS-009(R) – Audit Guidance on Reporting( ) p g
Business System Deficiencies (cont.)
• Deficiencies found in other than a Business System Audit – when both a
significant deficiency (GAGAS material weakness) as defined by the DFARS
business system clause and non-compliances that are less severe than a
significant deficiency the auditor will include the less severe non-compliances
in the audit report as a separate Exhibit titled “Deficiencies that Warrantin the audit report as a separate Exhibit titled Deficiencies that Warrant
Attention of the Contracting Officer.” All significant deficiencies/material
weaknesses will be in an Exhibit titled “DFARS Significant Deficiencies.”
• Deficiencies found in a Business System Audit – at the completion of a full
business system audit only deficiencies that are less severe than a significant
deficiency as defined by the DFARS business system clause but warrant the
attention on those charged with governance need to be reported in the auditattention on those charged with governance need to be reported in the audit
report with a qualified opinion identifying the less severe deficiencies in an
Exhibit titled “Deficiencies that Warrant Attention of the Contracting Officer.”
Page 13

New DFARS Proposed Rule – Case No. 2012-D042: Businessp
Systems Compliance (now closed)
• DoD proposed changes to DFARS business system rules on July 15, 2014
introducing new requirements for large government contractors for:
1. Annual Reporting;
2 T i i l CPA A dit d2. Triennial CPA Audits; and
3. Documentation Requirements.
• The proposed requirements do not apply to small businesses.The proposed requirements do not apply to small businesses.
• Affects accounting, estimating, and material management and accounting
systems (MMAS) only (DCAA responsible).y ( ) y ( p )
• Does not affect purchasing, earned value management, and government
property business systems (DCMA responsible).
Page 14

New DFARS Proposed Rule – Case No. 2012-D042:p
New Requirements (now closed)
1 Annual Reports contractors are required to provide an annual report to the contracting1. Annual Reports – contractors are required to provide an annual report to the contracting
officer regarding a self-assessment of compliance with each business system criteria
within six months of the its fiscal year end.
The annual report is required to include:
• A statement that the contractor has evaluated the business system’s compliance with the system
criteria of the clause;
• The contractor’s assessment of the business system’s compliance with prescribed criteria,
including a statement as to whether or not the system complies in all material aspects;
• Disclosure of any significant deficiencies with sufficient information for the government to
understand the deficiencies;
Th t t f i ifi t d fi i i di l d b ith th t t ’ t th• The status of any significant deficiencies disclosed by either the contractor’s assessment or the
independent auditor’s report (if applicable); and
• A corrective action plan with milestones and actions to eliminate any significant deficiencies
which have not been corrected as of the date of the contractor’s report.
Page 15

New DFARS Proposed Rule – Case No. 2012-D042:p
New Requirements (now closed) (cont.)
2. Triennial CPA Audits - contractors are required to obtain an independent, objective,
and qualified CPA examination of the contractor’s compliance with the relevant systemand qualified CPA examination of the contractor’s compliance with the relevant system
criteria and provide the results to the government for the initial year that the contractor
is required to begin providing annual reports. The independent CPA firm would then
perform an audit every three years thereafter, or more frequently if directed by the
Contracting OfficerContracting Officer.
• The examination must be performed in accordance with GAGAS and include sufficient information
about report significant deficiencies for the government to understand.
• “Significant deficiency” is a “shortcoming in the system that materially affects the ability of• Significant deficiency is a shortcoming in the system that materially affects the ability of
officials of the DoD to rely upon information produced by the system that is needed for
management purposes.”
• Contractors may also be required to provide the CPA’s audit strategy, risk assessment, and audit
plan to the contracting officer would then forward it to DCAA to obtain a review of any potentialp g y p
issues.
• There is no criteria set forth for DCAA’s review of the CPA’s audit strategy, risk assessment, and
audit plan; which also does note constitute the contracting officer’s approval.
Page 16

New DFARS Proposed Rule – Case No. 2012-D042: Newp
Requirements (now closed) (cont.)
3 Documentation the Accounting System Administration clause (DFARS 252 242 70063. Documentation – the Accounting System Administration clause (DFARS 252.242-7006
(b)(2) has been modified to state that the contractor shall: “Make available to the
Government, upon request, the results of internal or external reviews or monitoring that
have been conducted to ensure compliance with the system criteria…and established
accounting system policies and procedures ”accounting system policies and procedures.
• Contractors will also be required to maintain documentation about the selection criteria for the
CPA firm including the diligence supporting the CPA firm’s independence, objectivity, and
lifi iqualifications.
Page 17

New DFARS Proposed Rule – Case No. 2012-D042:
Concerns & Implications (now closed)
1. Increased costs and impacts on overhead – Contractors will incur additional costs for these new audits and
to support the audits.
2. Government Acceptance of CPA Opinion – To what extent will DCAA and DCMA rely on the opinions of the
CPA firms? How will concerns or potential business system findings by DCAA be addressed and reconciled
with CPA firm opinions?
3. Access to Records – CPA Workpapers - Firms may be hesitant to provide full access to planning
documentation and workpapersdocumentation and workpapers
4. Access to Records – Contractor Documentation - Rule requires “documentation to provide reasonable
support” (emphasis added) for the self certification
5. Timelines and effect of DCAA oversight & review – Rule provides for DCAA approval of workplan and
approach but does not establish timelines to allow for sufficient execution of the CPA’s audit
6. Clarity and guidance on key definitions – Both materiality and significant deficiency definitions should be
dd d t i t t li ti b t CPA fi d taddressed to ensure consistent application between CPA firms and government
7. Non-Major Contractors – May not have been subject to rigorous system audits but will now be required to
self certify and subject to third party audit
Page 18

What systems can I use to run my business?What systems can I use to run my business?

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…

Microsoft Integrated SolutionsMicrosoft Integrated Solutions
Dynamics ERP• Dynamics ERP
• SharePoint
W b S i• Web Services
• Business Analyzer
O l k• Outlook
• Office
Page 21
2

What is Microsoft Dynamics?What is Microsoft Dynamics?
• Integrated Financial and Operational/Project Management
SoftwareSoftware
• Familiar to Your Employees
• Government Contracting Industries
• Professional Services
• Contracting
• Manufacturingg
• Distribution
• Accepted by DCAA
Page 22
2

Functionality Provided by DynamicsFunctionality Provided by Dynamics
• Financials
• AccountingAccounting
• Fringe, Overhead and G&A Rate Calculations
• Cost Segregation – Allowable vs. Unallowable
• Job Costing & Project Management• Job Costing & Project Management
• Purchasing & Requisition Management
• Manufacturing
• Inventory Management
• Sales Orders
• Service ManagementService Management
• Customer Relationship Management
Page 23
2

What will you get from the Integrated
Microsoft Solution?Microsoft Solution?
• Organized flow of information• Organized flow of information
• Project Management
• Resource Allocation
• Financial Reporting
Seamless integration of information• Seamless integration of information
• One view of the data
• Software Tools your team is familiar with…
Page 24
2

Business Process ImprovementsBusiness Process Improvements
• Indirect Rates
M it T d i t d d t• Monitor Trends via standard reports
• More Accurate Cost Information for Bidding
• More Accurate Historical Procurement Costs
• Traceability of Source Documents
• Management Reporting Drill DownManagement Reporting Drill Down
• On line Inquiry Screens
• Transaction Level Detail
• Imaging/Document ManagementImaging/Document Management
Page 25
2

Reporting vs. Dashboards
• Many people use the terms interchangeably
• What is the purpose of a report in Governmentp p p
Contracting company?
• Compliance
• Company Directed• 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?What are KPI s?
• Key Performance Indicators
Page 26
2

Reporting Example – Statement of Indirect Expense
Page 27

Dashboard ExampleDashboard Example
Page 28

Operational Benefits
• What benefits should Operations & Project Managers
receive from Microsoft Dynamics?receive from Microsoft Dynamics?
• Superior Cost Control
R l ti i ibilit i t itt d t• Real time visibility into committed costs
• Immediate access to supporting documentation via document
imaging
• Earned Value Management visibility• Earned Value Management visibility
Page 29
2

It‘s all about business and technical freedom:
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
It s all about business and technical freedom:
constraints that limit business growth and results.
• Pre-Configured Chart of Accounts – Changes easily adapted
• Pre-Configured Allowable vs. Unallowable Cost Trackingg g
• Pre-Configured Fringe, Service Center, Overhead, Material Handling & G&A
• Pre- Configured Burden
P W itt Fi i l R ti g• Pre-Written Financial Reporting
• Economies of Pre-Configured System
• FEI = Faster Economic Installation
• Quick Start with proven implementation methodology
Page 30

Dynamics SL Pre-Configured Software
Strengths
• Plug & Play for Commercial-Government Contractors
• DCAA System Audit Road Map – Reports Template
• Microsoft Office - Integration
Fi i l P j t R ti• Financial - Project Reporting
• Budgeting/Planning
• Business Intelligence Reporting• Business Intelligence Reporting
• Internet Access Via SharePoint
• Document ImagingDocument Imaging
• Utility Tools
• Easy integration of legacy data
Page 31
y g g y

Dynamics SL Pre-Configured Software
Features
• Chart of Accounts
C P l All i d R S• Cost Pools Allocation and Rate Structures
• Job reports to include committed costs
• DCAA Accounting Manual• DCAA Accounting Manual
• DCAA System Audit Support
• Electronic Time SheetsElectronic Time Sheets
• Expense Reports
• Purchasingg
Page 32

Pre-Configured Integrated Software
Strengths of an pre-configured system involve…
• Fringe, Service Centers, Overhead, Material Handling, & G&A Rate
Structures
• Electronic Time Sheets
• Automated Floor Checks
• Daily Records of hours charged to projectsDaily 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)
Page 33
• Dashboards

Critical Requirements for SuccessCritical Requirements for Success
What to look for when reviewing integrated solutions?
Out of the Box Proven Financial and Operational Software• 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 ConfigurationEase of Setup and Configuration
Does a pre-configured option make sense?
Page 34
3

Business Process ImprovementsBusiness Process Improvements
Indirect Rates
Monitor Trends via standard reports• 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• On line Inquiry Screens
• Transaction Level Detail
• Imaging/Document Management
Page 35
3

Reporting vs. Dashboards
Many people use the terms interchangeably
What is the purpose of a report in Government Contracting company?p p p g p y
• Compliance
• Company Directed
What is the purpose of a dashboard?W at s t e pu pose o a das boa d?
• Drive user towards decision
How do you know what the Dashboards should be?
• Key Performance Issues of CompanyKey Performance Issues of Company
What are KPI’s?
• Key Performance Indicators
Page 36
3

Statement of Indirect Expense
Page 37
3

Operational BenefitsOperational Benefits
What benefits should Operations & Project Managers receive from
Microsoft Dynamics?
• Superior Cost Control
Real time isibilit into committed costs• Real time visibility into committed costs
• Immediate access to supporting documentation via document
imaging
• Earned Value Management visibility
Page 38
3

SECTION 3 – TIME AND EXPENSE REQUIREMENTS
AND CHALLENGES
Page 39

Objectives of Timekeeping SystemObjectives 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
Page 40

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
Ti d / h t d d ith i d t if l• 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 dailyp y y
• Supervisors or other personnel do not prepare timesheet entries for employees (unless
out due to sickness, etc.)
• Audit trail for changes made to initial timekeeping entries
M t l f ti h t ti t d• 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 codePaid absences charged to correct indirect code
• Indirect duties (training, meetings, etc.) properly charged
• Timesheets collected by appropriate official and reviewed and approved
Page 41

Time ReportingTime 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 notor not.
• All time and expenses associated with an individual contract should be
recorded in a Work Breakdown Structure (WBS) element Any time or expenserecorded 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
lelement.
Page 42

Labor System Authorization & ApprovalsLabor 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 individualsauthorizations/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 laborp p p
documentation/work descriptions that require clear identification of the
nature of the work performed - trackable to intermediate or final cost
objectives
Th h ld bli h l b h i i ll• The contractor should establish a labor charging awareness program to train all
employees, as appropriate, on proper labor charging practices.
Page 43

Labor System Authorization & Approvals (cont.)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 approvalsappropriate 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 orThe 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.
Page 44

Overtime ApprovalOvertime 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.
Page 45

Timecard Changes / ModificationsTimecard 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 supervisorapproved 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.y y
• 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 accountingsubmitted to accounting.
• Consider creating a “Labor Correction Form” that will state the necessary
procedures for making labor corrections.
Page 46

Distribution of Labor Costs and Labor TransfersDistribution 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 justificationthe 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 managementThe 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 accountp p
and billed to customers only after correction.
Page 47

What DCAA observations will elevate audit risk?
• Mix of cost plus government & commercial contractsMix 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• 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 employeeSignificant and non verifiable changes and alterations to employee
timesheets
• Timesheets without employee signaturesp y g
• Inadequate demonstration of employee training for preparing time sheets
Page 48

Consequences for Deliberate Failure to FollowConsequences 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 dismissalsuspension, 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 materialsindividuals 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.
Page 49

Consequences for Deliberate Failure to FollowConsequences 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)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.practices are being followed and actual hours worked are accurately recorded.
Page 50

Time and Expense examples…
Page 51

Dynamics Web based Timecards
Page 52
5

Web based Timecards (cont.)
Page 53

Dynamics Web based Expense Reports
Page 54

Expense AttachmentsExpense Attachments
Page 55

Web Based Approvals
Page 56
5

SECTION 4 – JOB COSTING AND INDIRECT RATES
Page 57

Job Cost Accounting SystemsJob Cost Accounting Systems
• Costs must be accumulated under general ledger control
• Job costs must be reconcilable and posted to general ledger control accountsJob costs must be reconcilable and posted to general ledger control accounts
• Costs must be posted at least monthly to books of account
• Costs must be segregated between direct and indirect typesg g yp
• Controls must exist to preclude direct charging of indirect expenses
• Direct costs must be accumulated by contract
• Must either have a subsidiary job cost ledger or accounts receivable ledger
• Must be able to “drill down” to at least Contract Line Item Number (“CLIN”) level
Indirect costs m st be allocated to jobs• Indirect costs must be allocated to jobs
• Accumulated in logical cost groupings and allocated based on causal or beneficial
relationships
Page 58

Allocation of Expenses
h h d h h dWhen 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.
Page 59

Accounting for Unallowable Costs
ll bl i i bill bl i ’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:
T f hTerms of the contract
Limitations set for the in FAR 31.201
R bl d ll blReasonable and allocable
Page 60

DCAA Audit Alert: Identifying Expressly Unallowable Costs
• Issued on Dec.18, 2014, enhanced guidance issued on Jan. 7, 2015
• Audit alert distributes a list of costs determined to be expressly unallowable
under FAR Part 31 and DFARS Part 231.
• Audit teams will use the list as a tool to help determine if a cost is expressly
unallowable
• It is not a comprehensive list; instances may occur when additional analysis is
required to determine allowability
Q estioned cost not incl ded on this list sho ld be ele ated to the regional point• Questioned cost, not included on this list, should be elevated to the regional point
of contact. If the regional staff agrees, it should elevate the issue to the
Accounting and Cost Principles Division.
Page 61

DCAA Audit Alert: Identifying Expressly Unallowable Costs (cont.)y g p y ( )
• Issued enhanced guidance is meant to assist audit teams with making
determinations on specific cost principles determination of allowability.
• Expressly unallowable costs must show that is was unreasonable under all the
circumstances for a person in the contractor’s position to conclude that the
t ll blcosts were allowable.
• It states in direct terms that the costs are unallowable, or leaves little room for
differences of opinion as to whether the particular cost meets the allowabilitydifferences of opinion as to whether the particular cost meets the allowability
criteria; and
• It identifies the specific cost or type of costs in a way that leaves little room for
interpretation.
• In summary, a cost can be expressly unallowable even though the cost principle
does not explicitly state that the cost is unallowable or not allowable.
Page 62

What is a Direct Cost?
If a cost is easily identified with a single project, it is generally considered a direct cost.
Examples include:
• 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
To help make this determination askTo 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 aA no answer to this question indicates that it is probably a
direct cost.
Page 63

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 splitImpractical to split
• Immaterial direct cost
Page 64

Most Commonly Used Indirect Cost Pools
Fringe Benefits
Company Benefits Company Labor
Intermediate Pool
Facility Expenses Occupied Space
Overhead
Contract Support Contract Labor + Applied Benefits
Subcontractor – Material Handling
Procurement, Management Support Subcontractor, Material, Equipment
General and Administrative
Company Management and Administrative Total Contract Cost
Page 65

Defining Indirect Costs
Fringe benefits - Company expenses incurred for the benefit of its employees
• Employer payroll taxes
• Medical insurance paid by the company• Medical insurance paid by the company
• Company 401(k) contributions
• Paid time off
Page 66

Defining Indirect CostsDefining 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,t s co o to d sepa ate o e ead poo s o e g ee g,
manufacturing, and for certain off-site activities
Page 67

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
Subcontractor/material handling - Costs associated with overall
administration of subcontractor and materials acquisitions
• Selecting, negotiating, and managing subcontractors and materials purchases
Page 68

G&A or Overhead
Can certain G&A costs qualify as OH expenses?
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
Deciding to allocate costs between
G&A and OH takes detailed planningof 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
G&A and OH takes detailed planning
and consideration of materiality and
cost /benefit relationship
Page 69

Defining Allocation BasesDefining Allocation Bases
Assigning an indirect cost pool to a particular allocation base depends upon:
• Types of costs included in the poolTypes 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
The only requirement of the FAR is that the allocation of indirect costs be:
• Fair
• Reasonable
• Equitable
Labor costs are an appropriate allocation base for the fringe expenses.
There is a clear relationship between the two.
Page 70

Indirect Rates
K i t t t bli h d i di t t t tKey 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
Companies have a great deal of latitude
to determine indirect rate structure
Once treated as a direct (or indirect cost), a cost
should be treated consistently.
Page 71

Indirect RatesIndirect Rates
Methods practiced to reduce indirect rates:
• Charge as many costs direct as possible By charging shipping and copying directly to a• 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 indirectcompany should keep in mind ways to reduce at least the appearance of indirect
rates.
Page 72

Indirect Cost Allocation CycleIndirect Cost Allocation Cycle
Indirect cost allocation typically follows the cycle depicted in the following figure:
Forward
Pricing
Estimate
Indirect
Contract CostsContract Costs
Final Allocation
Allocate
Indirect Costs
Billing
Progress
Payments Cost
to Contracts Reimbursement
Page 73

Profitability and Cash Flowy
So, why is it important to monitor indirect rates
Under-running rates - billing rates are simply estimated rates that must be
adjusted to actuals at year end. A company that has predominantly cost-adjusted to actuals at yea e d. co pa y t at as p edo a tly 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 collectedcash 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, p y p g p g
incurred or they will be forced to support the negative cash flow through other
means, such as line-of-credit borrowing.
Page 74

Monitor Indirect Rates and Projects
with Pre-defined Reports and Web Apps
Page 75

Fringe Rates
Page 76

Overhead Rates
Page 77

G&A Rates
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
Increase* No change* No change Decrease No change Decrease
Actual Rates
Increase* No change* No change Decrease No change Decrease
D iDecrease in
Actual Rates
Decrease No change No change Increase No change Increase
*Assumes no rate ceilings.
Page 79

Measurable Benefits of Effective Job Cost Systems
• 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 disputesfaster resolution of billing disputes
• Minimize Revenue Leakage
• Eliminate errors from manual entry or redundant systems used to invoicey y
client services
• Improved Service Agility
• Quicker response to sudden or unexpected changes in business priorities,
competitive pressures new technology and economic downturnscompetitive pressures, new technology, and economic downturns
• Standardized Reporting
Page 80
8

Project Dashboard
Real-time
visibility into
your data
Project P&LProject P&L
Labor hours
statistics
Page 81
8

Job Summary Report
Page 82
8

Executive Management Dashboards
Real-time visibility
into your data
Top 10 Customers
Year over year
Sales and Margin
Page 83
8

Project – GL reconciliation report
Page 84
8

Provisional vs. PTD Actual reporting
Page 85
8

Provisional vs. YTD Actual
Page 86
8

Increased Visibility
Real-time visibility
into your data
Labor statistics by
CustomerCustomer
Page 87
8

Project Visibility
Page 88
8

Project Visibility
Page 89
8

Self Service Access
Page 90
9

Questions?Questions?
Nisha Gupta – Senior Manager BDONisha Gupta Senior Manager, BDO
ngupta@bdo.com
Natalie Wooten – Senior Manager, BDO
noudar@bdo.com
Seth Zarny – Partner, Raffa
szarny@raffa.com
Glenn Anstead – Senior Manager, Raffag ,
ganstead@raffa.com
Jeremy Taro – Account Executive, Raffa
jtaro@raffa.com
Larry Mocniak – Owner, LGM Consulting
lmocniak@lgmfoundation.com
Page 91

2015-03-10 Managing Government Contracts

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