Contracting Prohibited by FAR 4.7 BY ryan bolger 66 Contract Management July 2008
If FAR 4.7 was rewritten to amend the record retention requirements, the world of government contracting would be able to move toward a paperless environment, cutting record-keeping costs while saving the environment. Contract Management July 2008 67
paperless government contracting prohibited by far 4.7 Oil prices and environmental concerns are on the rise and talks of conservation appear in the news daily. The increased media coverage has proved to be a great channel to instill the global requirement for resourcefulness into society. While activists and some legislation officials take note of this changing world around us, others remain set in old ways. Unfortunately, old ways tend to degrade futuristic initiatives, eventually leading to bottlenecks that result in wasted time and money. The business environment has long been identified as a place where cutting indirect costs is of the utmost importance, yet the environmental impact usually gets overlooked. More specifically, the cost of paper, document storage, and expense routing has been a major topic for improvement through cutting costs and saving the environment at the same time. Many corporations receive paper documents daily through the mail or by fax, which tend to include invoices, expense reports, contractual obligations, leases, etc. Additionally, many corporations also receive electronic documents daily that also include the aforementioned documents. In the office, these documents eventually end up in one of three places: the recycle bin, the file cabinet, or the now more futuristic electronic document file system. If a company does not have an electronic storage system, electronic documents must be printed out on paper first and then directed to its respective file cabinet. When a company is able to focus completely on electronic storage and rule out file cabinets, document routing and retention becomes extremely streamlined and cuts paper costs dramatically. Fortunately, this is a possibility for the business world governed only by the Internal Revenue Service (IRS). The IRS has recognized the need for reliance upon electronic media storage and therefore has developed such regulations to explain these parameters. IRS Publication 583 Recordkeeping states that records maintained in an electronic storage system are accepted for recordkeeping purposes if the system complies with Revenue Procedure 97-22 in Cumulative Bulletin 1997-1. When looking over Revenue Procedure 97-22, it becomes apparent in section 7 that destruction of the original hardcopy books and records and the deletion of the original computerized records is permitted so long as (1) the system is tested and records can legibly be reproduced and (2) has instituted procedures to comply to the rest of the Revenue Procedure. Basing a company s document management system around IRS regulations would allow for complete destruction of all hardcopy documents immediately, so long as they are in a system that is accurate, legible, and regulated. As a government contractor decides to move toward electronic document storage, it is completely necessary to consult the Federal Acquisition Regulation (FAR) for contracting regulations and the IRS for tax regulations. Although the IRS allows for a completely electronic environment, the FAR does not. Under FAR 4.7, Contractor Records Retention, the policy, 4.703(c)(3) states that the contractor or subcontractor retains the original records for a minimum of one year after imaging to permit periodic validation of the imaging systems. Following the guidance and procedures in FAR 4.7 creates an environment that allows the contractor to have an electronic document management system, yet at the same time have to maintain an original record file cabinet to store documents for one year. Unfortunately, this is a very redundant policy because it forces the government contractor to maintain two record retention systems and hinders a completely paperless system. In this situation, the validation of records could easily occur immediately after the paper document is scanned so that the document could then immediately be destroyed, eliminating the one-year earmark on original records. Since this FAR policy opposes the paperless environment and causes for a costly document retention system, something has to change. On September 12, 2007, I sent a letter to Al Matera, chair of the Civilian Agency of Acquisition Council, to request a FAR case be opened upon FAR 4.7 Contractor Records Retention. Unfortunately, after all of their due diligence, the change requested was met with mixed reviews, and at press time, is leaning toward disallowance. The proposition at hand to change the FAR and drop the one-year probationary period is very miniscule but leads to a very proactive approach to the future of record retention. The IRS allows for immediate destruction and governs the overwhelming majority of businesses within the United States. If such a policy works in their favor, why must the FAR be any different on this subject? Several rebuttals to this FAR change have been brought to my attention, yet none have offered any real contest, and therefore, the disallowance of this change leaves me quite perplexed. These rebuttals are labeled as follows. Scanned electronic documents are not original documents. In order to address this, it is first important to define what exactly an original document is. First, let s assume an original document is the vendor invoice received through the mail. Let s take for instance, Verizon Wireless I can download an invoice from their Web page and then print it out on my printer. Does this make the invoice original 68 Contract Management July 2008
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paperless government contracting prohibited by far 4.7 because it is now on paper? Or do I have to receive it from Verizon through the mail? Let s say instead of printing this electronic document, I saved it to my hard drive. According to the FAR, this document is not allowable, yet when I print it out and use up paper it becomes an original? This is a huge waste of resources. A second example to look at is our banking system. Currently, we do not receive paper checks back from the bank anymore; instead, we are provided a CD with images. Are these originals? The fact of the matter is that they sure are, and will stand up in court as such. So why are other documents an exception? A third example is documents that were created electronically, signed electronically, and then e-mailed. With governing rules of FAR 4.7, this document must be printed out to become original (and waste paper and resources) and then be filed. Scanned electronic documents can be fraudulently manipulated easily. It is thought that scanned documents can easily be manipulated to read fraudulent information. The fact is that the one-year retention time would not stop this, nor does the fact that it is an electronic copy make this more prevalent. The truth is that an original fraudulent document can be made just as easily and printed out and kept as an original. For example, I could easily create a false invoice in Microsoft Word using real companies logos, print it out, place false signatures on it, and call it an original. The fact that it is a scanned document should not degrade its integrity whatsoever. Additionally, as the FAR clause stands right now with a one-year retention period, what is to say that after the retention period that fraudulent documents cannot be made? FAR 4.7 is protecting taxpayer dollars and it is necessary to have. The truth is that FAR 4.7 is spending taxpayer dollars poorly. The companies who are in the business of producing fraudulent documents will do so regardless of the FAR; in fact, this change does not make it any easier or any harder. The changing of this clause only rewards taxpayers with cost savings by rewarding contractors with cost savings. We are in the year 2008 and many companies have electronic storage mediums. Unfortunately, they also have paper storage mediums. The maintenance of both systems is very time-consuming and costly. The cost savings realized in an electronic environment are huge, and it is time to break us of the paper habit. The government has already realized this and has begun making many processes electronic, including record retention. The government, however, does not have a one-year limit on paper documents, which only makes me wonder if they care about fraudulent documents, especially expense reports. Additionally, the Defense Travel System (DTS) (the government s travel expense reporting system) allows for immediate destruction of receipts and records after the initial scan. When submitting expense reports, government employees now only submit electronic copies of their receipts for approval as opposed to submitting the original receipts. This is because routing and filing paper originals in this manner are time-consuming and costly when compared to the electronic passage. Why would the government not practice a policy in which it makes other companies adhere to when they can easily see the cost savings involved? Electronic document management and electronic expense reporting is the future of record retention. Yet following FAR 4.7, with one-year hardcopy retention required, a company moves one step forward while taking one step back. This requires a company to maintain two systems effectively, making the record-keeping process even more burdensome. If FAR 4.7 was rewritten to mirror the record retention requirements of the IRS and the practices of DTS, then the world of government contracting would better be able to move toward a paperless environment, cutting record-keeping costs while saving the environment. CM About the Author RYAN BOLGER is a financial analyst with Engineering Solutions and Products, Inc. Send comments about this article to cm@ncmahq.org. 70 Contract Management July 2008