Presented at NCMA's World Congress 2016 Presenters: Baker Tilly's Brent Calhoon, CPA, Partner and Jennifer Flickinger, Partner The world of cost reimbursement contracts has many exciting twists and turns. Contractors have to be ready to tackle the roller-coaster ride that comes with these complex contracts. This session provides an overview of some of the strict regulatory requirements that come into play as contract value and risk increase. The presenters will touch on the business system criteria, annual cost reporting requirements, the Cost Accounting Standards, and more. www.bakertilly.com/governmentcontractors

2. New to Cost Reimbursement
Contracts? Meet Your New
Friends
Breakout Session #: G07
Brent Calhoon
Partner
Baker Tilly
Shingai Mavengere
Director, Government Accounting
UnitedHealthcare Military & Veterans
Date: Wednesday, July 27
Time: 9:45am-11:00am

3. INTRODUCTIONS
Brent Calhoon
• Brent joined Baker Tilly’s Government Contract Advisory practice in
2009. He has more than 20 years of experience providing consulting,
accounting, auditing, and investigative services to government
contractors in connection with complex cost accounting, contract
pricing, and regulatory compliance matters. He advises contractors on
business processes and functions critical to managing compliance and
financial risks unique to government contractors.
Shingai Mavengere
• Shingai Mavengere is the Director of Government Accounting for
UnitedHealthcare Military and Veterans. His portfolio includes a wide
range of matters such as analyzing compliance with Government
procurement regulations, including the Federal Acquisition Regulation
(FAR), Cost Accounting Standards (CAS), agency supplements to the
FAR and other federal government procurement regulations and
guidance. Shingai also is responsible for financial reporting, cost
accounting and other regulatory compliance.
2

4. Contents
• Introductions
• Overview: Government Contract Risk Factors
• Contract Value / Volume vs. Risk Continuum
• Key Compliance Requirements and Oversight Risks
• Organizational and Operational Considerations
• The Watchdogs
3

5. Understanding your contract risk
profile
• Although many factors can influence the nature and extent of
government contract oversight, five have the greatest impact.
• They are interdependent on each other, and therefore must be
considered individually and in the aggregate.
• Contractor Size
• Commerciality
• Contract Type
• Contract Size
• Competition/Negotiation
• Successful contractors use these factors as a tool to understand,
anticipate, manage, and mitigate government contract compliance risk.
4

6. Risk Factor #1: Contractor Size
• Contract requirements and exemptions vary for smaller and larger
firms, as well as whether a firm is a prime contractor or a
subcontractor.
• Small businesses (meeting the Small business Administration’s size
standards) are exempt from some of the Government’s most onerous
regulations.
• As contractors grow, they can expect more regulatory burdens and
more direct government oversight
5

7. Risk Factor #2: Product/Service
Commerciality
• Commercial item means any item that is customarily used by the
general public or by non-governmental entities for purposes other than
governmental purposes and
o Has been sold, leased, or licensed to the general public; or
o Has been offered for sale, lease or license to the general public
• Modifications are acceptable if they are customarily available in the
commercial market or do not significantly alter the function, essential
physical characteristics, or purpose of an item, component, or process
• Services are “commercial items” if based on established market prices
for specific tasks performed or outcomes to be achieved and under
standard commercial terms and conditions
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8. Risk Factor #2: Product/Service
Commerciality (cont’d)
• The government’s rules require it to acquire commercial products
and services at reasonable prices established in the commercial
marketplace, making a contractor’s production costs irrelevant.
• Accordingly, commercial item contracts are exempt from many
onerous regulations and generally insulated from many (but not all)
government audit and oversight activities.
• Contractors selling commercial and non-commercial items on a
single contract must persuasively demonstrate commercial pricing to
rebuff the Government’s ever-present desire to audit production
costs (and deny reasonable/necessary commercial margins).
7

9. Risk Factor #3: Contract Type
• Contract type is the nucleus of government contract risk.
• It is the instrument by which performance and cost risks are
allocated between the parties.
• Contractors willing to accept greater performance and cost risk
are rewarded with less burdensome requirements.
• As the government accepts greater performance and cost risk,
contractors must accept heavier regulatory compliance and
oversight burdens.
• Contractors new to cost reimbursable contracts must enter
with eyes wide open and with considerable organizational
preparedness for the oversight that will ultimately follow.
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10. Risk Factor #3: Contract Type (cont’d)
9
Firm-Fixed Time & Materials/ Cost
Price Labor Hour Reimbursable
Performance risks are
allocated to Contractor
Labor price per unit is fixed
and labor cost risk shifted to
Contractor; Government
retains risk for volume and
incidental "materials"
Performance risks are
allocated to Government
Cost Contractor High Low
Risk Government Low High
Technical Contractor High Low
Risk Government Low High
Compliance Contractor Low High
Risk
Oversight Government Low High
Risk
Contract Type Continuum

11. Risk Factor #4: Contract Size
• Contracts below the simplified acquisition threshold
($150,000) generally carry the fewest compliance
requirements.
• Additional regulatory burdens accumulate as contract value
grows beyond $750,000.
• Generally, a large volume of low dollar contracts will
attract less direct government oversight than a small
volume of large dollar contracts.
10

12. Risk Factor #5: Competition &
Negotiation
• The competitive spectrum ranges from sealed bidding to sole-
source negotiation.
• Combined with the four factors above, competitively awarded
fixed price contracts for commercial items offered by small
businesses below $150,000 carry the least compliance and
oversight risk.
• The opposite carries the most risk.
• In the absence of commercial market information and
competitive forces, the government deploys its arsenal of
regulations to prescribe nearly every contractor business
activity.
11

13. Cost-Type Contract Profile
• Cost reimbursable, CAS-covered contracts carry the most
challenging compliance requirements
o These contracts allocate all cost and performance risk to the
Government
o In return for accepting this risk on behalf the contractor, the
Government allocates a wide variety of compliance
requirements to the contractor. This is because the
Government does not trust commercial companies to perform
these contracts efficiently or effectively without specific contractual
requirements for nearly every accounting and business process
o Unlike the commercial market, the Government has
significant audit rights and a robust oversight and
enforcement regime
• To be successful, Management teams must have a general
appreciation of the requirements and what it takes to comply
• Failing to invest in compliance creates significant risks today that
will go unquantified until many years later
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14. Contract Value/Volume vs. Risk
Continuum
13
Active Government Oversight
&
False Claims Act Allegations
• Cost Accounting Standards (CAS)
• CAS Administration
• Contractor Business System Clause
• Cost Accounting (FAR Part 31)
• Timekeeping and Labor
Accounting
• Annual Cost Reporting
• Business System Criteria

15. KEY COMPLIANCE REQUIREMENTS
AND OVERSIGHT RISKS
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16. Key Compliance requirements and
Oversight Risks
Cost Accounting (FAR Part 31 Cost Principles) –
• Cost Allowability –
o Specific types of cost that the Government will or won’t
reimburse
o Complex rules on pricing of inter-organizational transfers
o Compliance requires awareness, discipline, and consistency
throughout organization
o Noncompliance may carry penalties and interest
o Also governed by applicable agency FAR supplements and
unique contract terms
• Cost Allocability –
o Requires logical and equitable methods
o Must consistently charge costs direct vs. indirect
15

17. Key Compliance requirements and
Oversight Risks (cont’d)
Timekeeping and Labor Accounting –
• Labor is generally the single largest cost charged
to contracts
• Increased management oversight is necessary to
drive employee timekeeping discipline
• Inconsistent labor charging across customers and
contract types (including frequent uncorrected
mistakes) can become basis for false claim
allegation
• Unrecorded uncompensated overtime increases
risk of inequitable labor cost allocations and
accounting system “significant deficiency”
• Labor accounting impacts the integrity of both the
accounting and cost estimating systems
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18. Key Compliance Requirements and
Oversight Risks (cont’d)
Annual Cost Reporting (FAR 52.216-7, Allowable Cost and
Payment Clause) –
• Provisional/Forward Pricing Indirect Cost Rate Proposals –
o Used for interim billing/pricing of indirect costs when actual
costs not yet known
o Subject to true-up after each cost accounting period (usually
fiscal year end) for cost type contracts
o Established by Contracting Officer or Auditor after evaluation
of indirect rate proposal
• Final Indirect Cost Rate Proposal (a.k.a. Incurred Cost
Proposal) –
o Establishes final indirect cost rates; submission due no later
than six months after year end
o Considered a “claim” and must exclude unallowable costs
o Subject to stringent adequacy review and audit
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19. Key Compliance Requirements and
Oversight Risks (cont’d)
Business System Criteria (DoD Contracts Only, but DOE rules
coming soon) –
• Accounting – 18 criteria (internal control requirements)
covering indirect and other direct costs; compensation;
billing; labor accounting; and general information
technology
• Cost Estimating – 17 criteria covering budgeting, planning,
cost estimating methods & techniques, bases of estimates,
disclosure of factual information (i.e., cost or pricing data),
etc.
• Purchasing – 24 criteria covering nearly every aspect of
purchasing, subcontracting, and intercompany work orders
• Government Property, Earned Value Management System
(EVMS), and Material Management Accounting System
(MMAS) are less common among service contractors
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20. Key Compliance Requirements and
Oversight Risks (cont’d)
Cost Accounting Standards (48 CFR 9904) –
Specific requirements for measuring, assigning, and allocating costs to contracts
• Modified Coverage – Four standards apply (401, 402, 405, 406) and a CASB Disclosure
Statement may be required.
o Applies when a negotiated contract initial award value exceeds $7.5 million and does
not meet the requirements for full CAS coverage
• Full Coverage – All 19 standards apply and a CASB Disclosure Statement is required. Full
coverage applies when:
o Single contract award ≥ $50 million; or
o Multiple CAS-covered contract awards in prior fiscal year ≥ $50 million in aggregate
• Standards generally require:
o Cost accounting consistency
o Cost allocations using proscribed principles
o Prescribed rules to accounting for specific cost types
• CAS Administration (much more complex than complying with 19 standards)
o CAS applicability (when it applies, and to what extent)
o Disclosure Statements (must be current, accurate, and complete)
o Notifying, Measuring, and Negotiating Cost Accounting Practice Changes
o Resolving CAS non-compliances
o Subcontractor CAS administration
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21. DFARS Contractor Business System Clause (DFARS 252.242-7005) –
Applies to CAS-covered DoD contracts when any of the individual
system criteria apply (See Business System Criteria Section)
• Significant deficiencies with any system criteria will lead to
system disapproval and billing withholds of 5% to 10%
• System disapprovals create a significant competitive
disadvantage
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Key Compliance Requirements and
Oversight Risks (cont’d)

22. Active Government Oversight –
• Defense Contract Audit Agency (or other auditors) – pre/post contract
award audits; incurred cost audits; billing audits, business system
audits; labor audits/floor checks; Disclosure Statement audits; CAS
compliance audits; etc.
• Defense Contract Management Agency (or other admin agencies) –
active contract administration, three business systems (purchasing,
property, & EVMS)
• Inspectors General/Department of Justice (False Claims)
• Your own employees (lucrative whistleblower rewards)
• Government watchdog groups (i.e., POGO) and the mainstream media
• Congress increasingly politicizing the government procurement process
21
Key Compliance Requirements and
Oversight Risks (cont’d)

23. False Claims Act (FCA) –
• Establishes civil and criminal remedies for the Government if a
contractor “knowingly presents or causes to be presented, a
false or fraudulent claim for payment or approval”
• Allegations can arise from many directions: employees,
government employees (including auditors and contracting
officers), subcontractors, higher tier contractors, or private
citizens
• Mandatory Disclosure Rule – contractors are required to “timely”
disclose to the Government “credible evidence” of criminal
wrongdoing – contractors must have robust procedures to
discover disclosable events
• Up to treble damages, plus civil penalties of $5,500 to $11,000
per false claim
• May cause significant reputational damage including
suspension/debarment
22
Key Compliance Requirements and
Oversight Risks (cont’d)

24. KEY ORGANIZATIONAL AND
OPERATIONAL CONSIDERATIONS
23

25. • To effectively and profitability conduct business in an environment flush
with additional requirements and oversight risks, organizational and
operational considerations in the following areas must be taken into
account:
o Home Office
o Support Functions
o Government business unit / operations
• Compliance requirements previously described will directly or indirectly
affect (or be affected by) each consideration listed in this section
24
Organizational and Operational
Considerations

26. 25
Organizational and Operational
Considerations (cont’d)
HOME OFFICE
Business strategy
Financial reporting
Corporate compliance/ethics
Executive Management
SOX compliance
Financial performance metrics,
measurement, management
Employee performance and
development expectations
Risk management
Conflict identification and mitigation
Customer satisfaction
Public and government relations
Employee compensation and benefits
Delegation of authority and
responsibility
Organizational structure – legal,
management, accounting
Business development and investment
planning
Business development resource
alignment and oversight

27. 26
Organizational and Operational
Considerations (cont’d)
SUPPORT
FUNCTIONS
Policies, processes, and procedures (internal controls)
Information systems and data capture
Data quality (accuracy, timeliness, consistency, completeness)
Routine/non-routine activities
Administrative or clerical activities vs. analytical activities requiring
professional judgment
Accounting
Pricing/Estimating
Benefits admin, employee relations,
recruiting
Legal
IT Support & Security
Procurement
Contracts
Travel
Training
Employee Timekeeping
Contract compliance, audit support
IN THE AREAS OF:

28. 27
GOVERNMENT
BUSINESS UNIT/
OPERATIONS
Tactical strategy and policy
execution
Opportunity evaluation
Bid and proposal preparation
Project and program
management
Resource optimization
and resource management
Customer relationship management
Inter-organizational Support
Business partner due diligence and
relationship management (such JV
partners, teaming partners, and
subcontractors)
Employee performance management
Technical disciplines and expertise
Risk (legal, compliance, performance)
identification, communication,
mitigation
Government property management
Government compliance awareness
and discipline
Budgeting and financial management
Markets, customers, and
contracts (type and size)
Organizational and Operational
Considerations (cont’d)

29. 28
Government Contract
Compliance Framework

30. Questions, Comments, Banter?
Shingai Mavengere, Director
UnitedHealthcare Military & Veterans
Government Accounting
29
Brent Calhoon, Partner
Baker Tilly
Government Contractor Advisory Services