The Changing Government Contractor Environment

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1 The Changing Government Contractor Environment 1

2 Federal Government Contracting DCAA FY 2014 Report to Congress DCAA Audit Guidance Business systems Federal regulatory rule changes State Contracting (Dept. of Transportation) Indirect rates Select areas of costs AASHTO Audit and Accounting Guide DCAA FY 2014 Report to Congress Areas of audit focus Forward pricing Special audits Specific elements of a contract Aspects of the contractor accounting business system Contract terminations Incurred cost Other audits Cost Accounting Standards (CAS) Disclosure Statement CAS compliance Post Award (Truth in Negotiations) 2

3 DCAA FY 2014 Report to Congress Audit Priorities Overseas Contingency Operations (OCO) Forward pricing Backlog of incurred cost audits DCAA FY 2014 Report to Congress DCAA identified areas of significant deficiencies and recommended actions Adequacy of support for goods and services proposed under commercial prices DCAA requesting increased subpoena authority permitting it access to data other than certified cost or pricing data Access to contractor records Access to records, including internal audit reports Access to contractor employees 3

4 DCAA Audit Guidance select topics Audit alert on labor qualifications for time and material contracts (14 PPD 008(R) dated May 22, 2014) Audit alert on identifying expressly unallowable costs (14 PAC 022(R) dated January 7, 2015) and Listing of cost principles that identify expressly unallowable costs (14 PAC 021(R) dated December 18, 2014) Current status of business systems DCMA systems disapprovals Sept 2013 June 2014 Jan 2015 Accounting System Estimating System EVMS Government Property Purchasing MMAS Total disapprovals sought N/A Total disapprovals approved Systems subsequently reapproved N/A Total current withholds $362m $167m $157m Source: Statistics provided by Defense Contract Management Agency representatives during (various) industry conferences 4

5 Common issues and causes for disapproval System Accounting Property Purchasing Estimating EVMS MMAS Common pitfalls Questioned costs, CAS non-compliances Inventory and asset controls Cost price analysis, Commercial Item Determination, Cost/Price Analysis, Excessive Pass-through, documentation of procurements Cost price analysis, defective pricing findings, documentation of system Cost and schedule integration, inadequate variance analysis documentation, EV data integrity metric issues, adequacy of critical path scheduling, inadequate baseline management, EAC realism, CAM interview preparedness System documentation, inventory management, key metric monitoring Federal regulatory rule changes select topics Compensation Uncompensated overtime Combating trafficking in persons 5

6 Compensation Deleted the statutory formula cap Currently cap set at $487,000 Applies to all contractor employees Executive agency exception provided for one or more narrowly targeted employees (e.g., scientist, engineers or other specialist) Effective for contracts awarded on or after June 24, 2014 Uncompensated overtime For service contracts with the Government, the new rule requires the application of the adjusted hourly rate (including uncompensated overtime), to all proposed hours, whether regular or overtime hours, whenever the contractor has uncompensated overtime Final rule was issued without a period for public comment. Effective March 2,

7 Combating Trafficking in Persons Applicability Final rule, Ending Trafficking in Persons (103 FCR 91, 2/3/15) went into effect March 2 In addition to prohibiting traffickingrelated activities, the clause requires contractors to: Certification requirements All solicitations and contracts; compliance plan requirements only applicable to contracts >$500K Notify employees of USG s policy and of actions that will be taken for violations of policy Take appropriate action against employees, agents, or subcontractors that violate the policy Immediately notify CO and IG of credible trafficking allegations and actions taken against employees, agents or subcontractors Maintain an appropriate compliance plan based on the size and complexity of the contract and the nature and scope of the activities to be performed for the Government Prior to receiving an award, and annually thereafter contractors must submit certifications Subcontractor flow down All solicitations and contracts; compliance plan requirements only applicable to contracts >$500K Information posted to the record of the prime Noncompliance Penalties range from removal of contractor employee or employees from the performance of the contract up to suspension or debarment. State contracting Indirect Rates Development of indirect cost rates Risk analysis of indirect costs Identify significant accounts that may contain a mix of allowable and unallowable costs Accounting for unallowable costs Review of high dollar transactions Internal controls Job cost system Labor accounting / time keeping Cash disbursements 7

8 State contracting Indirect Rates Department of Transportation (DOT) cognizant reviews American Association of State Highway and Transportation Officials (AASHTO) Review Program for CPA Audits of Consulting Engineering Indirect Cost Rates Provides road map to key areas of focus and expectations of state DOT auditors Assists in the contractor analysis when developing its indirect cost rates and in compiling supporting documentation State contracting Select areas of costs Compensation Uncompensated overtime Other areas of costs 8

9 State contracting Compensation On October 24, 2014, the Director of Defense Pricing issued DoD guidance related to implementation of the Bipartisan Budget Act of 2013 that imposes a compensation cap of $487,000 Multiple approaches have been implemented in practice Emphasis on the importance of maintaining auditable evidence to support the contractor implementation methodology State contracting Compensation (continued) State DOT auditors have been challenging the contractor selection of third party compensation data used to determine the reasonableness of compensation National Compensation Matrix (NCM) not accepted by certain DOTs even though suggested as an acceptable method of evaluating the reasonableness of compensation by the AASHTO 9

10 State contracting Compensation (continued) Key considerations for supporting compensation costs: Reasonableness of costs Multiple surveys should be considered in the analysis (AASHTO recommends using three surveys as an industry best practice) Consistency of job descriptions with compensation survey data State contracting Compensation (continued) Key considerations for supporting compensation costs: Bonus expense Consider re visiting written bonus plans to ensure consistency with actual practice Consider guidance proved by AASHTO Audit and Accounting Guide in ensuring the various components of a written bonus plan are addressed 10

11 State contracting Uncompensated Overtime State DOTs continue to question contractor practices related to uncompensated overtime. Methods describe by AASHTO Effective rate method results in (calculated) variable wage rates based on actual hours worked Salary variance method overhead reduction based on appropriate portion of labor costs generated by uncompensated overtime hours State contracting Uncompensated Overtime Final rule has multiple implications including: Possible changes to contractor s existing cost accounting practices Potential changes to existing contractor labor accounting and time keeping systems Potential changes to existing policies and procedures Cost Accounting Standard 401, Consistency in estimating, accumulating and reporting costs 11

12 State contracting Other areas of cost Labor accounting and time keeping system and related internal controls Travel related costs Rental/Lease costs (office space) Insurance costs Related party transactions State contracting AASHTO Audit and Accounting Guide update Revisions to the AASHTO Uniform Audit and Accounting Guide (the Guide) are on going with the release of the revised edition anticipated in late 2015 Revised Guide to be used by contractors in the development of FY 2015 indirect rate development and related audit by CPA firms 12

13 Questions? Thank You Follow up/contact: Robert P. Malyska Robert K. Tanahashi

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