DCAA Perspective: Key Subcontracting Practices for Maintaining Approved Business Systems Accounting System and Estimating System

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2 DCAA Perspective: Key Subcontracting Practices for Maintaining Approved Business Systems Accounting System and Estimating System Breakout Session A Alfred J. Massey, Western Region, Special Programs Manager, Defense Contract Audit Agency (DCAA) Patricia L. Lee, CPA, Western Region, Regional Audit Manager, Defense Contract Audit Agency (DCAA) March 27, :00am 10:15am

3 Agenda Subcontract Award Analysis of Subcontract Pricing Commercial Items or Services Competition Subcontract Administration Billings Incurred Costs Closeout Business Systems 2

4 Subcontract Award The prime contractor has a responsibility to provide proper management of its subcontracts Must ensure and support that the price proposed by the subcontractor is fair and reasonable the subcontractor is a reputable source and the subcontractor provides a value-added enhancement to the product or contract 3

5 Analysis of Subcontract Pricing FAR (b) outlines prime contractor responsibilities to (1) conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices; (2) include the results of these analyses in the price proposal; and (3) when required submit subcontractor certified cost or pricing data to the Government as part of its own certified cost or pricing data 4

6 Commercial Determinations DFARS provides that prime contractors are responsible to determine if the subcontract item or service is commercial per the definition in FAR Part 2 Prime contractors need to perform adequate market research and investigate claims of commerciality by their subcontractors Prime contractors need to document and support commercial item determinations Any determinations based on of a type must show that the governmental items are of similar form, fit, and function of the commercial items and any difference must be justified and supported, including any impact on price 5

7 Commercial Price Reasonableness Prime contractors should obtain and review commercial market sales data provided by its subcontractors to determine if the data is adequate and sufficient to establish a fair and reasonable price If subcontractor data is insufficient, prime contractors should pursue additional data (i.e. data other than certified cost or pricing data, including cost data) from subcontractors needed to establish price reasonableness Prime contractor must promptly notify the contracting officer if they are unable to obtain sufficient data from its subcontractor 6

8 Competition FAR Part 6.1 establishes a clear preference for promoting and providing for full and open competition in soliciting offers and awarding Government contracts and any underlying subcontracts Accordingly, prime contractors should use competitive procedures to the fullest extent possible in awarding subcontracts to help control costs Prime contractors should have detailed procedures for competing requirements to ensure it maintains the integrity of the bid process 7

9 Subcontract Administration Prime contractors are responsible for subcontract management actions through completion of subcontract performance monitoring, auditing, administering, and closing of each subcontract. In order to perform these responsibilities, prime contractors shall establish and maintain subcontract management policies and procedures (FAR and DFARS ) Subcontractor is compliant with laws, regulations, subcontract terms Administration for each subcontract If the subcontractor does not allow the prime contractor access to specific data, the prime contractor shall review the information to which they have access and request ACO assistance for the review of the specific information to which the subcontractor denied access. 8

10 Subcontract Billings A critical part of subcontract management is the payment of subcontractor interim billings (under cost-reimbursable and fixed-price subcontracts) Review the adequacy of subcontractor billings prior to making payment Make payments to the subcontractor in amounts determined to be allowable in accordance with FAR 31.2 and the terms of the subcontract Ensure the subcontractor submits timely indirect rate adjustments to reflect the claimed year-end indirect cost rates 9

11 Subcontract Incurred Costs Another critical part of subcontract management is the payment of subcontractor final billings (under cost-reimbursable and fixed-price subcontracts) The prime contractor must contractually enforce that the subcontractor fully supports the work of the prime contractor and Government resources 10

12 Subcontract Closeout The prime contract final invoice or voucher shall include settled subcontract amounts and rates FAR (a)(9) provides that the Government cannot closeout a prime contract until all of the subcontracts are settled The prime contractor is responsible for settling subcontractor amounts and rates included in their final invoice or voucher and providing the status of subcontractor audits to the contracting officer upon request (FAR (d)(5)) 11

13 Contractor s Business Systems The final Business Systems Rule was issued on February 24, 2012 Accounting System Estimating System DCAA Material Management and Accounting System (MMAS) DCMA Purchasing System Property Management Earned Value Management System (EVMS) with DCAA support DCAA will report on compliance with the criteria in DFARS DCAA Reports will identify significant deficiencies defined by the Business System Rule as Shortcomings 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 12

14 Evaluating Identified Noncompliances In evaluating whether a noncompliance is severe enough to be considered a material noncompliance and therefore, a significant deficiency/material weakness, DCAA will consider: The nature and frequency of the noncompliance Whether the noncompliance with the DFARS criteria is material considering the nature of the compliance requirements The root cause of the noncompliance The effect of compensating controls The possible future consequences of the noncompliance with the DFARS criteria Qualitative considerations, including the needs and expectations of the report s user. For Government contract cost issues qualitative considerations also include serving the public interest and honoring the public trust 13

15 Business Systems Both prime contractors and subcontractors have the responsibility for establishing and maintaining acceptable business systems for Government contracting It is incumbent upon prime contractors to ensure their subcontractors maintain acceptable business systems by performing procedures to determine if the subcontractor s business systems (e.g., estimating, accounting, and purchasing systems) are adequate before award; and monitoring the adequacy of the subcontractor s systems during subcontract performance The DFARS clauses describe the criteria for acceptable business systems 14

16 Best Practices Prime contractors should flow down proposal or submission checklists to their subcontractors to ensure subcontractor proposal submissions and assertions are adequate Prompt communication of problems when difficulty obtaining subcontractor data Adequate supporting data in a timely manner and timely access to key contractor personnel responsible for the data or activity Real-time DCAA access to contractor systems 15

17 Defense Contract Audit Agency Additional information on DCAA and Points of Contact available at 16

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