Curtis Matthews, Managing Partner Government Accounting, Estimating, and Billing Systems: Pitfalls and Answers Findley Gillespie, Senior Manager May 18, 2011 1
The material appearing in this presentation is for informational purposes only and is not legal or accounting advice. Communication of this information is not intended to create, and receipt does not constitute, a legal relationship, including, but not limited to, an accountant-client relationship. Although these materials may have been prepared by professionals, they should not be used as a substitute for professional services. If legal, accounting, or other professional advice is required, the services of a professional should be sought. 2
Agenda Comparison of accounting, estimating and billing systems Government oversight Accounting system requirements Estimating system requirements Billing system requirements DCAA accounting system deficiency reports Methods to achieve system compliance 3
Systems Comparison System Estimating Accounting Billing Purpose System for estimating future direct and indirect costs. Used to prepare proposals where cost and pricing data are required, including forward pricing indirect rate proposals. System for accumulating actual costs and for allocating costs to cost objectives. System for preparing monthly billing on contracts. Relationship to Other Systems Utilizes actual data from accounting system to develop future estimates. Utilized by estimating system and by billing system to prepare proposals, public vouchers and progress payments. Utilizes data from accounting system and provisional rates from estimating system. Close-out requires final rates from the accounting system. Pitfalls of Noncompliance Noncompliant estimating systems may result in non award of contract or defective pricing findings. A finding of accounting system noncompliance can result in non award of contract or withholding of progress payments on existing contracts. Noncompliant billing systems may result in disapproval of progress payments or public voucher payment applications. 4
Government Oversight Several layers of Government Oversight: Procurement Contracting Officer o Contract negotiation Administrative Contracting Officer o Contract administration Defense Contract Audit Agency o Pre- and post-award contract audit and systems reviews US Court of Federal Claims Armed Services Board of Contract Appeals o Post-award contract disputes 5
Government Oversight Defense Contract Audit Agency (DCAA): o Performs both pre-award and post-award accounting, estimating and billing system surveys/audits o Key areas reviewed: Timekeeping system Labor distribution system System for segregation and exclusion of unallowable costs System for consistent determination of direct and indirect costs System for accumulation and allocation of indirect costs 6
Government Oversight Penalties and impacts of failure to comply o DCAA issuance of a flash accounting, estimating or billing system deficiency report may: Prevent award of other contracts until resolved Result in withholding of payment on progress payments or public voucher payment requests Tarnish the reputation of the company in the eyes of Contracting Officers; this decreases the possibility of future contract awards 7
Government Oversight The following statement was recently made by the Director of the DCAA, Patrick Fitzgerald: The agency has hired 500 new auditors and will add 1,000 more by fiscal 2015, a 37 percent staffing increase. July 8, 2010 article on GovExec.com Result: Expect increased scrutiny of the sufficiency of accounting systems 8
Accounting System Requirements Labor Cost Charging Pitfalls [Defense Contract Audit Manual (DCAM) 6-404]: o Untimely time entry can result in determination that the hours are not supported and thus unallowable o Inconsistent labor charging (across customers and contract types) can result in a finding of noncompliance with Cost Accounting Standard (CAS) 402 or with Federal Acquisition Regulation (FAR) 31.202 o Inadequate internal controls related to documentation, supervisory approval and change control can result in a finding of accounting system deficiency 9
Accounting System Requirements Labor Distribution Pitfalls [DCAM 6-410]: o Incorrect treatment of uncompensated overtime can result in an accounting system deficiency determination o To be compliant, contractors must: Account for all hours worked for exempt employees. Allocate an equitable share of salary costs paid to all efforts performed in accordance with FAR 31.201-4. Account for all work accomplished, including using excess hours worked by exempt employees. This must be included in the base for distribution of overhead costs. 10
Accounting System Requirements Pitfalls in the system for segregation and exclusion of unallowable costs: o Inadequate systems for segregating unallowable costs could result in a determination of accounting system deficiency o FAR Part 31 non-compliance: 31.201-2 Determining allowability 31.201-6 Accounting for unallowable costs 31.205 Selected Costs o Noncompliance with additional federal agency specific requirements (DoE, DHHS, DoT, etc.) o Noncompliance with state specific requirements 11
Accounting System Requirements Pitfalls in the system for determination of direct and indirect costs per FAR 31.202, FAR 31.203 and CAS 402: o Inconsistent treatment of direct and indirect costs can result in a finding of accounting system deficiency. The fundamental requirement is: No final cost objective shall have any cost allocated as an indirect cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective, and vice versa. 12
Accounting System Requirements Pitfalls in indirect cost allocation: o There are a variety of regulations pertaining to the allocation of indirect costs including: FAR 31.201-4 (Determining Allocability) FAR 31.203 (Indirect Costs) CAS 403 Allocation of Home Office Expenses CAS 410 Allocation of Business Unit General and Administrative Expenses to Final Cost Objectives CAS 418 Allocation of Direct and Indirect Costs o Noncompliance with any of these regulations can result in a finding of accounting system deficiency 13
Accounting System Requirements FAR 16.301-3 permits the use of a cost reimbursement contract only when the contractor s accounting system is adequate for determining costs applicable to the contract If the contractor is deemed to have a deficient system, the contractor may lose the opportunity to perform on that contract 14
Estimating System Requirements Estimating System Exposure Areas: o Consistency in Estimating, Accumulating and Reporting Costs (CAS 401): Level of detail Allocation methods direct and indirect cost o Unbalanced Bidding (FAR 15.404-1(g)): Front-loading schedule of values/contract Line Item Numbers (CLIN) Can be basis for disqualification 15
Estimating System Requirements Exposure Areas (cont.): o Cost and Pricing Data Requirements: FAR 15.402 (Pricing Policy) Specifies contracting officer requirements for cost and pricing data Truth in Negotiation Act (TINA) Provides criminal penalties for submitting non current, incomplete or inaccurate cost and pricing data. Applies to procurements exceeding $550,000. FAR 15.804 Table 15-2 specifies the proposal format, CAS coverage disclosure, compliance statement and demonstration of price competition as applicable to procurements exceeding FAR 15.403-4 thresholds 16
Billing System Requirements DCAA Pamphlet 7641.90 Chapter 5: o Cost Type Contracts: Interim payment for costs on a Standard Form (SF) 1034 public voucher o Fixed Price Contracts FAR Part 32 financing methods, including: Cost based payments requested on a Standard Form 1443 (Progress Payment Request Form) Performance-based payments (i.e., percentage completion), particularly with regard to construction contracts 17
Billing System Requirements For those contracts where billings are based on cost, the following procedures generally apply: o Companies submit a provisional indirect rate calculation for the year(s) in which the project will be performed. This submission may be audited by the DCAA, and agreedupon provisional rates may be negotiated. o Companies determine actual direct costs on a monthly basis. o Monthly billings are a combination of actual direct costs and provisional indirect rates applied to the direct costs. 18
Billing System Requirements Billing system exposure areas: o Billing processes are not consistent with contract requirements and required accounting practices o Fixed price billings do not accurately reflect project progress o Cost reimbursable billings do not match contract and accounting system requirements Unallocable and unallowable cost 19
DCAA Accounting System Deficiency Reports DCAA MRD 08-PAS-043(R) (Issued 12/9/2008) o Audit reports on contractors internal controls that report any significant deficiencies/material weaknesses will include an opinion that the system is inadequate o Adverse audit reports will recommend that the contracting officer disapprove the system (if applicable) and pursue suspension of a percentage of progress payments or reimbursement of costs o Suggestions to improve systems will no longer be reported to contractors 20
DCAA Accounting System Deficiency Reports Real life examples Cost Transfers o The contractor did not have adequate procedures covering cost transfers between contracts, nor did they maintain sufficient documentation to demonstrate the reason for the transfer o Not only was the contractor s system disapproved, but also a project manager was criminally prosecuted for transferring cost from a lump sum contract to a cost reimbursable contract 21
DCAA Accounting System Deficiency Reports Real life examples Monitoring and Management Oversight o The contractor did not have procedures requiring periodic management reviews or provide any evidence that the contractor had conducted management reviews of the accounting system and related internal controls. Unallowable Costs o The contractor had not developed acceptable and reliable written policies and procedures for identifying and excluding unallowable costs from the contractor s annual incurred cost claim. Both of these DCAA findings resulted in disapproval of the contractor s accounting system. 22
Methods to Achieve System Compliance Determine the applicability of federal requirements over your accounting, estimating and billing system Document or update your formal policies and procedures Implement required changes to comply with Government rules Independently verify that your system is compliant prior to a government audit 23
Questions? Curtis.Matthews@mossadams.com (503) 704-6943 Findley.Gillespie@mossadams.com (206) 302-6212 Sign up for next month s webcast www.mossadams.com/events 24