Incurred Cost Submissions - It's Not Too Early!

Incurred Cost Submissions - It's Not Too Early! March 28, 2013 David Eck and Todd W. Bishop Dixon Hughes Goodman LLP

Agenda Treat Incurred Cost Submissions like a Project Why an Incurred Cost Submission? Current requirements for the Incurred Cost Submission DCAA s current checklist for ICS adequacy Some common mistakes causing ICS to be returned as inadequate Allowability Issues of the Day GAO s recent audit report outlining DCAA s significant backlog and DCAA s proposed action plan The Statute of Limitations and the potential impact of recent court decisions on older, unaudited submissions Penalties 2

Treat ICS Like a Project Establish a Project Plan for the preparation of your ICS Identification of Milestone projects (i.e., each ICS Schedule) Identification of key parts of each ICS Schedule and responsible parties Milestone dates (beginning and end) for reviewing and completing each project/schedule, and for final review and submission of the ICS Purpose of this webinar is to help you get started in preparing your ICS, or help in the review process Please contact us on detailed questions you may have on Schedules or any other aspects of the ICS 3

Why an Incurred Cost Submission? Federal Acquisition Regulation (FAR) 52.216-7(d), allowable cost and payment Annual rates and bases shall be established based on FAR 42.7 Shall submit an adequate Rate Proposal within 6 months of FYE Clause ((d)(2)(iii)) includes list of schedules to meet adequacy FAR 42.7, Indirect Cost Rates Provides CO with procedures to settle final indirect rates Prescribes final vouchering process (within 120 days of final rates) Includes Quick Close-out (FAR 42.708) FAR 52.232-7, Payments under Time-and-Materials and Labor-Hour Contracts Labor is excluded from ICS requirement (Hours and Labor Rates) Defines material costs (travel, ODCs, materials, subcontracts, indirect) Pass through costs defined by costs accounting practices 4

Current Requirements Must be adequate based on DCAA checklist or civilian agency requirements!! Subcontractors where you are the Prime (Schedule J) Review each of your subcontract documents to ensure subcontract type Determine if your subs are required to submit ICS (Type and Materiality) Utilize Quick Close-out procedures (FAR 42.708) Cost Type subcontracts ensure your SubK Admin P&Ps are adequate Subcontractors where you are the Sub Be prepared for Prime to request an ICS (T&M, Cost Type SubK) If immaterial, request Quick close-out process Ensure that supporting financial data and documentation is readily available Indirect Rate True-ups/Adjusting Vouchers See DCAA Adequacy Checklist for specific details 5

The Adequacy Checklist

Examples Proposal Adequacy Checklist Questions Ensure all claimed pools, bases, and rates are shown, including COM (Schedule A) Verify the contractor has included explanatory notes for any adjustments from G&A Expenses booked per G/L to claimed costs (Schedule B) Ensure a cost schedule is provided for each overhead pool (Schedule C) Ensure a cost schedule is provided for each intermediary cost pool (Schedule D) Ensure that an explanation of each allocation base is included (Schedule E)

Examples Proposal Adequacy Checklist Questions Ensure the contractor calculated a separate COM rate (if applicable) for each final indirect pool (Schedule F) Verify the contractor included explanatory notes for any adjustments from direct costs and indirect costs booked per G/L to claimed costs (Schedule G) Ensure all flexibly priced contracts and subcontracts, including commercial T&M, are listed by contract and subtotaled by contract type. FFP and other commercial contracts may be shown on one summary line each (Schedule H)

Examples Proposal Adequacy Checklist Questions Verify cost detail is in the same level used for billing costs, comparisons of billed and claimed costs have been made and that any overpayments have been identified and include explanations on notifications to the government (Schedule I) Ensure the auditable subcontract schedule includes all types of subcontracts (e.g., cost-type, T&M/LH, IDIQ, with a variable element and FPI) and intercompany costs claimed by the contractor on flexibly prices contracts and/or upper-tier subcontracts (Schedule J)

Examples Proposal Adequacy Checklist Questions Ensure T&M contract cost information is presented by cost element, with labor presented by labor category, showing contract labor rates, not actual labor rates (Schedule K) Verify reconciliation of total payroll per IRS Form 941 to labor costs distribution (Schedule L) Ensure completion of the list of decisions, agreements, approvals, and accounting/organization changes that may impact claimed costs negative responses are required (Schedule M)

Examples Proposal Adequacy Checklist Questions Verify that the Certificate of Final Indirect Costs is signed by an individual of the contractor s organization at a level no lower that a vice president or chief financial officer of the business segment of the contractor that submits the proposal (Schedule N) Verify the contractors has accurately identified physically complete contracts that are already closed or ready to close (Schedule O)

Common Mistakes Driving Inadequacies Reconciliation of Disclosure Statement, Accounting Description and Forward Pricing Rate Submission to ICS to verify all rates have been included (especially intermediate pools) and direct costs are at the right level Appropriate T&M/LH/LOE contracts have been included on Schedule H of costs by contract and subcontract Overpayments/underpayments identified on Schedule I on billed and claimed costs have not been identified, of explanations have not been provided for payment identified payment variances

Common Mistakes Driving Inadequacies All auditable subcontracts (e.g., T&M/LH and FPI) have not been identified on Schedule J and reconciled to purchasing department information Contract/subcontract briefs are not adequate (especially identification of contract billing instructions) On T&M/LH contracts, employees appear to be billed in labor categories where they do not have the appropriate qualifications per the contract, and explanations have not been provided (e.g., resumes have not been updated, CO provided a waiver, etc)

Common Mistakes Driving Inadequacies Appropriate reconciliations of claimed direct and indirect costs to the G/L have not been performed, or if performed, differences have not been adequately explained Adequate reconciliations of total payroll per IRS submissions to labor cost distributions have not been included in ICS DCAM 6-406 only requires a reconciliation to payroll totals if labor system is adequate ICS does not include a Schedule of Cumulative Allowable Costs by Contract

Common Mistakes Driving Inadequacies For identified unallowable costs, ICS does not include any directly associated costs Certificate of Final Indirect Rates has not been signed by a business segment VP or higher

Allowability Issues of the Day Executive Compensation (FAR 31.205-6) Compensation reasonable reviews conducted by DCAA, especially Mid-Atlantic Region (FAR 31.205-6); DHG has issued 2 articles: DCAA Compensation Reviews Court Finds They are based on Fatal Statistical Flaws 2/7/12 DCAA Compensation Reviews Court Finds Again They are Flawed 9/25/12 Incomplete supporting data for purchases and subcontracts, especially cost/price analyses (FAR 31.205-26)

Allowability Issues of the Day Professional and Consultant Costs (FAR 31.205-33) Travel Costs (FAR 31.250-46) Unreasonable Health Benefits, with emphasis on ineligible dependents Unexplained reconciliation issues

Executive Compensation 2012 Authorization Act ( 803) extended reimbursement cap to all employees rather than top 5, starting January 1, 2012 Exemption to scientists/engineers when necessary to ensure DOD access to needed skills Executive caps 2011: $763,029 (applies to all future years until revised) 2010: $693,951 2009: $684,181 2008: $612,196 Applies to DOD, Coast Guard and NASA contracts

ICS Audit Backlog and Plan Forward December 2012 GAO Report (GAO-13-131) Assessed DCAA plan for 25,000 audit Backlog (Dates back to 1996) Timely contract closeout dependent upon audits Plan Forward Developed sampling plan in Coordination with DCMA Will use 42.705-1, Contracting officer determination procedure, for ICS not audited

Contract Closeout Process Figure 1: DOD Contract Closeout Process Interactive Graphic To highlight firm-fixed-price closeout process, roll mouse over legend. Click on blue box to go to figure 2, DCAA s incurred cost audit process. Contract is physically complete/ goods and services received Contracting officer performs pre-closeout administrative tasks a Payment differences reconciled and excess funds deobligated Final payment made Contract closed when contracting officer signs contract completion statement Indirect cost rates settled with DCAA recommendations Indirect cost rates for all relevant years applied to contract Final invoice submitted and reviewed Firm-fixed-price Flexibly priced Source: GAO analysis of federal and DOD regulations and guidance. a Certain low-dollar, fixed-price contracts are closed using a more simplified process.

DCAA s Risk based Initiative Creating DCAA s Sampling Pool (Data from March 14, 2013 DCAA Presentation American Bar Associations-Section of Public Contract Law Conference)

How Does DCAA Develop Sampling Pool? Most Importantly, an Adequate ICS DCAA Determines Adequacy Using its Checklist (available on DCAA website) Total Value of Incurred Cost Proposal Four Different Ranges Over $250M Then Expect an Audit Most recent audited ICS questioned costs Classified as Significant Meet the Above Criteria, Then Join the Sampling Pool as Low Risk

How Many Proposals Will DCAA Sample? (Data from March 14, 2013 DCAA Presentation American Bar Associations-Section of Public Contract Law Conference)

DCAA Backlog Sampling Criteria Exceptions If $1M or less and submitted Prior to 09-30-11 then Excluded from Sampling Pool 100% Greater Than $250M will be audited All Proposals Greater than $100M will be audited once every three years Four Different Ranges Low Risk Not Sampled, Contracting Officer Negotiation/Determination DCMA Class Deviation Memorandum through Sept. 2013

Contractor Actions Regarding Backlog Evaluate your most recent negotiated Audited Rates and Amounts Questioned Do you fit the Sampling Criteria? Communicate with cognizant CO s/aco s regarding this process Are CO/ACO s are even aware of the process? Recommend Quick Closeout Procedures (FAR 42.708) as they might be applicable regardless of Sampling Criteria

Statute of Limitations on ICS DHG issued article on 3/19/2013 entitled When Does the Clock Start Ticking? In 1994, Federal Acquisition Streamlining Act (FASA) established a six-year Statute of Limitations for claims Recent Court Cases demonstrate the Statute of Limitations is being tested at phases throughout the contract life cycle Each of these cases deal with cost claims and some directly relate to ICS One testing ground still to be proven either way is the applicability of the Statute of Limitations to the eventual audits of the ICS

Statute of Limitations on ICS Some companies have taken bold steps on unaudited ICS over 6 years old, such as: Notify DCAA they have 30 days to take what ever action on the old ICS, and then records will be destroyed Refused DCAA access to records on ICS, saying the ICS are no longer subject to audit Consult with your legal and other advisors before taking bold steps

Penalties Expressly Unallowable Costs ACO Assessment (FAR 47.709) Unallowable Costs Under $10K, Mandatory Waiver (Far 42.709-1, FAR 47-709-5) Thomas Assoc., Inc., ASBCA No. 57126, May 17, 2011, 11-1 BCA 34,764

ICS Audit Process - Before and After BEFORE AFTER 29

Questions? 30

Contacts David Eck, CPA Director, Government Contracting 1410 Spring Hill Rd., Suite 500 Tysons, VA 22102 703.970.0480 david.eck@dhgllp.com Todd Bishop Director, Government Contracting 1410 Spring Hill Rd., Suite 500 Tysons, VA 22102 703.970.0504 todd.bishop@dhgllp.com