Government Contracting in 2015: Balancing Risks to Reap Rewards - Compliance Update

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1 Government Contracting in 2015: Balancing Risks to Reap Rewards - Compliance Update Baker Tilly Beers & Cutler, PLLC, is a wholly-owned subsidiary of Baker Tilly Virchow Krause, LLP Baker Tilly Beers & Cutler, PLLC

2 DCAA Audit Trends and Projections 2

3 DCAA Audit Trends > FY2011 was a very successful year for DCAA > FY2012 was a very successful year for DCAA > FY2013 was a very successful year for DCAA > We made major strides in tackling the incurred cost backlog we completed about 55 percent of the baseline backlog Source: DCAA Annual Reports to Congress 3

4 DCAA Audit Trends (cont d) The highest priority audits Source: DCAA Annual Reports to Congress 4

5 DCAA Audit Trends (cont d) Source: DoDIG Semi-Annual Reports to Congress Appendix D Very successful years 5

6 DCAA Audit Trends (cont d) Source: DCAA Annual Budget Submissions 6

7 DCAA Audit Trends (cont d) Source: DCAA Annual Budget Submissions and DoDIG Semi-Annual Reports to Congress Appendix D 7

8 DCAA Audit Trends (cont d) > DCAA significantly increased its incurred cost audits in FY 2012 and FY 2013 (FY13 Report; this sentence precedes the following graph) Source: DCAA FY13 Annual Report to Congress 8

9 DCAA Audit Trends (cont d) Incurred Cost Audit Backlog Source: DCAA Annual Reports to Congress Fiscal Year FY2011 FY2012 FY2013 Percent Change Total ICPs Pending and Awaiting Adequacy 24,000 26,000 23, % Determination Dollar Value of ICPs Pending and Awaiting Adequacy Determination (billions) $ 574 $ 710 $ % 9

10 DCAA Audit Trends (cont d) Source: DCAA FY13 Annual Report to Congress > A key indicator of DCAA s effectiveness is the increasing ratio of DCAA questioned costs to dollars examined. (FY12 Report) > An indicator of DCAA s effectiveness in using its risk-based approach is the increasing ratio of DCAA questioned costs to dollars examined. (FY13 Report) 10

11 DCAA Audit Trends (cont d) > Questioned costs as a % of dollars examined has increased, but DCAA s sustention rate has not. > Are DCAA s recent audits getting closed with these sustention rates? Source: DoDIG Semi-Annual Reports to Congress, Appendix E 11

12 Recent Government Contract Compliance Updates 12

13 Recent Government Contract Compliance Updates Contractor Business System Oversight: DFARS Proposed Rule -- July 15, 2014 > Stated purpose: entrust contractors with the capability to demonstrate compliance based on contractors self-evaluations and audits by independent CPAs. > Accounting system, estimating system, and MMAS > Contractors to provide annual assessments regarding compliance with business system criteria no later than 6 months after contractor s fiscal year > Every three years, contractors must have independent audit report of compliance with DFARS system criteria Final Rule estimated completion was April 2015* 13

14 Recent Government Contract Compliance Updates (cont d) Contractor Business System Oversight Continued: Contractors and CPAs weigh in > Contractors: unacceptable that DCAA is still required to meddle with contractor and independent auditor every step of way entrust is not what rule achieves > Contractors: shifts cost burden to industry will have asymmetrical impact > Contractors: generally like the idea of more timely audits and working with independent CPAs > CPAs: DFARS criteria too subjective to perform audit in accordance w/ Prof. Standards > CPAs: consequences unclear when CPA firms and DCAA disagree regarding deficiencies 14

15 Recent Government Contract Compliance Updates (cont d) FPRP Adequacy Checklist DFARS Final Rule > DoD issued a final rule amending the DFARS to provide guidance to contractors for the submittal of forward pricing rate proposals (FPRP). > Contracting officer will request that the contractor complete the Contractor Forward Pricing Rate Proposal Adequacy Checklist at Table , and submit it with the FPRP. > Proposals submitted at least 90 days prior to proposed effective date > Checklist includes three elements: Submission Item Proposal Page No. (if applicable) Explanation if not provided 15

16 Recent Government Contract Compliance Updates (cont d) Commercial Items of a Type Determinations DoD Reviewing Acquisition Procedures > DoD is reviewing acquisition procedures for commercial items of a type. These are privately-developed items sold exclusively or nearly exclusively to federal customers. > DoD believes that some contractors are overcharging federal customers for commercial items and are unable to substantiate their prices based on commercial market sales data. > If contractors have market based prices that can be substantiated through sales in the commercial market place, then the Government pays what the market pays. > DCMA is hiring and training full-time commercial pricing experts to assist contracting officers in making determinations of whether an item meets the definition of commercial item. 16

17 Recent Government Contract Compliance Updates (cont d) New Executive Compensation Regulations Blended Rate Calculations > Director, Defense Pricing has deemed contractor s use of the blended rate approach a practical and cost efficient way to address the FAR Council s new interim rule on allowable annual compensation costs. > The blended rate methodology will be calculated on a weighted average composite cap amount based on a contractor s contract volume prior to and after June 24, 2014 Contractors may elect to use this approach or another compliant approach (e.g., apply the $487k cap to all contracts) This approved methodology only applies to DoD contracts and requires an advance agreement. > DCAA, however, deems blended rates unacceptable (DCAA CAM ), making the advanced agreement an important aspect of this methodology. It is unclear if DCAA will update their guidance subsequent to this memo. 17

18 Recent Government Contract Compliance Updates (cont d) Contractor Internal Audit Reports GAO Audits DCAA Requests, Use, & Safeguarding of IA Reports > 2013 NDAA required DCAA to revise its audit guidance on: Documenting requests for contractors internal audit (IA) reports and; Safeguarding the IA reports against unauthorized use. > According to GAO, DCAA has not revised its guidance sufficiently to define authorized use or prescribe adequate safeguards. > GAO identified that DCAA used disparate standards and procedures for reporting to DCAA headquarters the number of requests and their disposition. > GAO recommends that DCAA provide: Specific details that should be in requests for IA reports Guidelines on documenting how IA reports are specifically tied to audit work Definition of authorized use Consistent guidelines and controls for reporting information to headquarters 18

19 Recent Government Contract Compliance Updates (cont d) DoD Cost-Reimbursements Acquisitions DoD IG Audits DoD Implementation of Revised FAR Rules > Inspector General (IG) issued an audit report on DoD s compliance with revised rules (issued in 2012) for issuing and managing costreimbursement contracts. Rules cover five areas: Approval level: at least one level above CO Justification: justified use of cost-reimbursement contract Transition Strategy: documentation of potential of cost-reimbursement contracts to transition to firm-fixed-price contracts Adequate Resources: resources available to management the contract Adequate Accounting System: determination of contractor s system > IG found that DoD contracting personnel did not consistently implement the revised rules for 68% of cost-reimbursement acquisitions reviewed. 19

20 Recent Government Contract Compliance Updates (cont d) DoD IG Audits Hotline Complaint of DCAA DCAA Did Not Follow GAGAS or Agency Policy > DCAA questions $6.6M in claimed subcontractor costs > Auditor did not obtain sufficient evidence to conclude that subcontract costs were unsupported > Field audit office applied an arbitrary and unsupported 20% decrement factor to calculate questioned subcontract costs > Use of decrement inconsistent with DCAA policy DoD IG noted that other DCAA auditors could be using the decrement inappropriately at other field audit offices Additional Errors Noted on DCAA Form-1 > Errors resulted in DCAA disallowing incorrect amounts on contractor billings Could have led the contracting officer to make an inappropriate final determination 20

21 Questions? Tom Tagle Partner Baker Tilly Government Contractor Advisory Services (703) Baker Tilly refers to Baker Tilly Virchow Krause, LLP, an independently owned and managed member of Baker Tilly International. 21

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