What You Need to Know About the Contractor Purchasing System Review
by Kim KosterGovCon, Government Compliance
May 26, 2021
What is a CPSR? A contractor purchasing system review (CPSR) is performed by the Defense Contract Management Agency (DCMA) to evaluate the efficiency and effectiveness with which a contractor spends government funds and complies with government policy when subcontracting. In short, a CPSR is a review of a contractor purchasing system. Before we learn a little more about the review itself, let’s back up and level-set on what exactly a purchasing system is. What is an Approved Purchasing System? “System” is not interchangeable with “software” or “technology”—it’s not something you purchase off the shelf and install. A contractor’s purchasing system is an amalgamation of people, processes, and tools that must work together to achieve the goal of spending taxpayer dollars wisely. So, an approved purchasing system is one that has passed a CPSR, meaning it is designed to ensure that purchases are made at fair and reasonable prices and in compliance with the applicable contract terms, regulations, and public laws. When and Why is a CPSR Performed? As stated above, the goal of a CPSR is to ensure that a contractor purchasing system is operated in such a manner as to assure that the contractor spends government funds in accordance with the FAR. The review gives the Administrative Contracting Officer (ACO) a basis for granting, withholding, or withdrawing approval of the contractor’s purchasing system. Contractors cannot initiate a CPSR on their own. Rather, once a contractor’s sales to the government—excluding competitively awarded firm-fixed-price and fixed-price with economic price adjustment contracts and sales of commercial items pursuant to FAR Part 12—are expected to exceed $50 million in the next 12 months, the ACO is required by regulation to conduct a risk assessment. The ACO will review the contractor’s past performance and the volume, dollar value, and complexity of their purchasing to determine if the risk of ineffective or inefficient purchasing justifies the costs and effort required to perform a CPSR. Though the ACO is solely responsible for initiating a CPSR, it is possible other government organizations can determine the risk justifies the effort and ask the ACO to schedule a CPSR. For DOD contractors, a CPSR, as contemplated by FAR Subpart 44.3 and DFARS Subpart 244.3, will be conducted by the Defense Contract Management Agency (DCMA) in accordance with its CPSR Guidebook. Civilian agencies might request that DCMA conduct a CPSR on their behalf or contract with an independent audit form for the review. A few civilian agencies even have in-house teams that can conduct a CPSR. All CPSRs, except a follow-up review, are predicated on a risk assessment. Take the time to understand what the reviewers will be looking for in your purchasing system. Even if the CPSR is to be conducted by an organization other than DCMA, it is worthwhile to carefully review the DCMA CPSR Policies and Procedure Checklist. There are 24 DFARS criteria to be addressed and at least 65 items on the DCMA checklist. The DCMA materials are quite comprehensive and a good resource even if another organization will conduct your review. CPSR References: DFARS 252.244-7001, Contractor Purchasing System Administration DCMA CPSR Policies and Procedures Checklist DCMA CPSR Guidebook Advantages of Having an Approved Purchasing System Maintaining an approved purchasing system (i.e. one that has passed a CPSR) benefits the contractor for many reasons, including: It may fulfill a contractual requirement. All Department of Defense cost reimbursable or time and material (T&M) contracts will contain a clause (252.244.7001) that requires the contractor to maintain a compliant purchasing system. If the contractor is subject to the Cost Accounting Standards, the clause allows the government to withhold up to 5% of payments under the contract if the contractor fails to maintain an adequate purchasing system. These regulations apply even if the contractor’s system has not been formally reviewed. Some solicitations require the bidders to have an approved purchasing system. Others, such as the recent General Services Administration (GSA) Governmentwide Acquisition Contract (GWAC) solicitations, offer bonus evaluation points for contractors that have an approved purchasing system. Providing advance notification and obtaining the contracting officer’s consent to subcontract is generally not required when the contractor has an approved purchasing system. Not only does this eliminate some bureaucratic paperwork, it also significantly reduces a contractor’s risk. If the contractor was required to provide advance notification and obtain consent for a subcontract and did not––or cannot prove that they did––auditors will often question all costs associated with that subcontract. Risk Assessment Form Now that you know why a CPSR is performed, let’s talk about the risk assessment. The ACO will conduct the risk assessment utilizing the CPSR risk assessment form. Some of the information that will be requested is company information, last CPSR date and recommendations, sales data, contract type mix, sales to the government as a percent of total sales, number of POs/subcontracts by dollar values for the most recent year, type of business, and if you have been suspended from doing business in the past three years. The ACO will use your completed risk assessment form to determine if a CPSR is warranted and should be scheduled. If you have reached or are about to reach the $50 million threshold, it is time for you to make sure your purchasing system is operating in a manner that can pass a CPSR. Policies and Procedures are a Big Part of the CPSR Having and adhering to policies and procedures is the largest part of this review. So, making sure your documentation is in order, up-to-date, followed, and monitored is critical. TIP: Establish a self-audit program and document the results. Reviewers will see this as a very favorable activity. Below are some basic, overarching guidelines for your CPSR policies and procedures: Establish clear lines of authority and responsibility Ensure that all purchases are based on authorized requisitions and include documented support for vendor selected, price paid, and files, which are subject to government review Implement internal audits or reviews, training, and policies for the purchasing department to ensure the integrity of the system Include a system description detailing policies, procedures, and purchasing practices that comply with the requirements of the FAR and DFARS Install a sound organizational and administrative structure to ensure effective and efficient procurement of requirements at the best value from responsible and reliable sources Establish a role-based training program for all who participate in the purchasing process CPSR Requirements and DFARS 252.244.7001(a) DOD’s Business Systems Rule sets forth 24 system criteria that must be present in all contractor purchasing systems for a purchasing system to be “acceptable.” The criteria are outlined in DFAR 252.244-7001(a). In this blog, we will review these requirements. Below, the DFARS criteria are grouped into summary activities with the applicable criterion. Procurement Planning/Market Research (2 Criteria) Apply a consistent make-or-buy policy that is in the best interest of the government Ensure proper type of contract selection and prohibit issuance of cost plus a percentage of cost subcontracts Conflict of Interest/Misconduct (1 Criterion) Enforce adequate policies on conflict of interest, gifts, and gratuities, including the requirements of the Anti-Kickback Act Competition (2 Criteria) Use competitive sourcing to the maximum extent practicable, and ensure debarred or suspended contractors are properly excluded from contract award Require management level justification and adequate cost or price analysis, as applicable, for any sole or single source award Negotiated Procurement (1 Criterion) Document negotiations in accordance with the FAR requirements for negotiation Memoranda Cost of Pricing Data and Price Reasonableness (5 Criteria) Evaluate price, quality, delivery, and technical, and financial capabilities of competing vendors to ensure fair and reasonable prices Perform cost or price analysis and technical evaluation for each proposal or quote to ensure fair and reasonable subcontract prices Document negotiations in accordance with FAR 15.406-3 Take discounts, including cash discounts, trade discounts, quantity discounts, rebates, freight allowances, and company-wide volume discounts Establish and maintain procedures to ensure performance of adequate price or cost analysis on purchasing actions Source Selection (3 Criteria) Use competitive sourcing to the maximum extent practicable, and ensure debarred or suspended contractors are properly excluded from contract award Evaluate price, quality, delivery, technical capabilities, and financial capabilities of competing vendors to ensure fair and reasonable prices Establish and maintain selection processes to ensure the most responsive and responsible sources and to promote competitive sourcing so that purchases are reasonably priced and from sources that meet quality requirements Contract Formation and Content (3 Criteria) Ensure purchase orders and subcontracts contain all flow-down clauses, including terms and conditions, and any other clauses needed to carry out the requirements of the prime contract Notify the government of the award of all subcontracts that contain flow-down clauses that allow for government audit of subcontracts, and ensure the performance of audits of those subcontracts Ensure purchase orders and subcontracts contain mandatory and applicable flow-down clauses, as required by the FAR and DFARS Foreign Purchasing and Performance (3 Criteria) Ensure compliance with all relevant domestic preference requirements Ensure compliance with export control regulations Ensure agreements are not executed with prohibited parties Procurement Administration (4 Criteria) Maintain subcontract surveillance to ensure timely delivery and procedures to notify the government of potential subcontract problems that may impact delivery, quantity, or price Document and justify reasons for subcontract changes that affect cost or price Ensure that proper types of subcontracts are selected, and that there are controls over subcontracting, including oversight and surveillance of subcontracted effort Establish and maintain procedures to timely notify the contracting officer, in writing, of excessive pass-through concerns Tips for a Successful CPSR The process kicks off with the risk assessment and a series of detailed data questionnaires. Make sure your data is correct and that YOU understand what the information means so you can easily answer the reviewer’s questions. Answer clearly and timely so that the reviewer can understand the answer. Contractors that don’t have CPSR experience in-house may find it beneficial to engage a consultant to help prepare for the CPSR. Review the below tips for a successful CPSR: Prepare a strategic plan for compliance Prepare yourself with policies, procedures, and tools Self-audit plan executed and documented Understand the purpose of the purchasing review Study the guidebook and all references that DCMA provides Have at least one member of the executive team and ALL other participants at the entrance meeting Choose a point of contact to be a liaison with the CPSR team Keep a copy of all questions and answer documented At the exit meeting, make sure that you have all the stakeholders and understand issues brought up by the team The CPSR report will state recommendations that the CO/ACO will use to make the final determination of approving or disapproving the purchasing system. Common Issues Some common review issues can be easily corrected by taking the time upfront to put together a comprehensive plan. Planning the system is very important, so don’t rush through it. Make sure you are thorough. After the system is planned and documented, it must be executed and maintained to avoid issues. Below are a few common issues, but this list is by no means exhaustive: Policies and procedures don’t address the requirements The actual practice doesn’t match the policies and procedures Lack of competition – too many sole-source with inadequate justifications Inadequate FAR/DFAR flow-downs Inadequate price analysis Inadequate documentation Having a Successful CPSR Requires an Integrated ERP Tool Unanet purchasing software delivers powerful functionality to manage and simplify your buying process, designed to address the specific needs of professional services firms. With Unanet’s one system, purchasing integrates directly with timekeeping, expense, financials, and billing, saving time and money, and increasing accuracy. Our web-based system makes the process easy and visible from purchase requisition (PR), to issuance of the purchase orders (PO), through to customer invoice. Through Unanet’s workflow and approval process, all purchasing transactions can be tracked efficiently and integrated into the project forecasts. You can trust the accuracy of the data you are providing to the CPSR team as well as provide reports with all the needed traceability. To learn more, download the Aronson and Unanet white paper, The Contractor Purchasing System Review (CPSR) – What You Should Know.
DCAA Compliance: What You Need to Know
by Rich WilkinsonGovCon, Government Compliance
Apr 30, 2021
Who or what is DCAA? It’s an acronym, of course, for the Defense Contract Audit Agency. Their mission is to provide audit and financial advisory services to DOD and other federal entities responsible for acquisition and contract administration (straight from their website). The subtext of that mission is to ensure DOD gets the best value for every dollar spent on defense contracting. The agency was formed in January 1965 under the direction of the Under Secretary of Defense (Comptroller) in response to a study directed by Secretary of Defense Robert S. McNamara. William B. Petty, former Deputy Comptroller of the U.S. Air Force, was appointed director of the brand new agency. Previously, the various branches of the military had been responsible for their own contract audits, but there was little consistency in either administration or auditing. Joint audits began with the Navy and Army Air Corps in 1939 and a unified acquisition regulation, known as the Armed Services Procurement Regulation (ASPR) was established in 1947, but a single contract audit manual was not issued until 1952. Once DCAA was authorized, they took over maintenance of the manual and today the Defense Contract Audit Manual (DCAM) is considered the definitive source of detailed processes and procedures for all government contract audits whether the contracts in question are awarded by DOD or by a civilian agency. If DCAA is an Audit Agency, What is “DCAA Compliance?” It’s really shorthand for compliance with all the cost accounting regulations of the federal government. Because DCAA is the largest, by far, of all the participants in government contract auditing, the phrase “DCAA Compliance” has become synonymous with federal contract cost accounting compliance. It’s probably not very accurate, but it’s handy. When it comes to cost accounting compliance, there are really two sets of rules. The first, and the one that applies to pretty much everyone, is the Cost Principles found in Part 31 of the Federal Acquisition Regulation (FAR). Those principles guide the treatment of costs from labor and payroll costs to bid and proposal expense – in great detail. Part 31 also contains extensive rules about what kinds of costs are “allowable” and can be passed on to the government either as direct charges to a contract or in the contractors’ indirect rates, and which are “unallowable” and may not be passed on to the government at all. The second set of rules is known as the Cost Accounting Standards. Whereas the cost principles of the FAR are concerned primarily with allowability, the CAS is concerned almost exclusively with allocability – how the costs must be measured and allocated. “DCAA Compliance” has one other connotation. In a DCAA audit report, they express opinions on the allowability of costs (FAR), the allocability of costs (CAS) and on the reasonableness of costs or “quantum” in accountant-speak. A company is said to be “DCAA Compliant” when: Their policies say the right things about the cost accounting treatment of their costs, Their procedures describe the correct steps to do the right things with those costs, and Their actual cost accounting practices match their policies and procedures. The “who” and the “what” of DCAA auditing DCAA, as their name implies, audits government contracts. They also audit contractors, but only in connection with one or more contracts that are themselves subject to audit. DCAA would not audit a contractor that supplied goods exclusively on competitively awarded firm fixed price contracts. If those same contracts were cost reimbursable, the contractor would almost certainly be subject to audit as an organization. The contracts and contractors they audit are primarily those awarded by the DOD. But DCAA does perform a significant portion of the audits of government contracts awarded by civilian agencies such as NASA, DOE, EPA, DHS and the VA. DCAA is reimbursed by those agencies when they audit on their behalf. The other agencies have historically contracted for audit services to be performed by commercial audit firms such as CPA firms. All the audits performed by DCAA, whether on behalf of DOD or a civilian agency, are governed by a written audit program. That program specifies every step of the audit process in excruciating detail from the notification of the contractor and the conduct of the entrance conference to the formulation of the report, its findings, and its distribution. DCAA’s audit programs are also utilized by civilian agencies as part of their own statements of work when they contract for audits by commercial firms. All of the audit programs are made available to the public at DCAA’s web site here. All of their internal guidance to the agency’s auditors is also public and may be found here. A visit to the Directory of Audit Programs should be the very first action by a contractor on receipt of a notification that DCAA will be auditing some aspect of its operations or one of its government contracts. If the type of audit described in the notification is unfamiliar, the contractor should ask which specific audit program will be performed prior to scheduling an entrance conference or auditor visit. The program will detail not only the steps of the audit, but the data and reports they may request during the audit. Forewarned is forearmed and knowing exactly what DCAA is likely to ask for before they ask can be worth its weight in gold. DCAA does not audit the Department of Defense. DOD has its own audit agency for internal audit as do all the uniformed services and most other DOD agencies (such as Defense Intelligence Agency). Neither of these does DCAA compliance with labor laws such as the Service Contract Act (SCA) – the Department of Labor does that even in connection with a Defense contract. The primary audits performed by DCAA DCAA is required to provide a report of its activity for the previous Government Fiscal Year (GFY) to Congress by March 31st each year. In the 2019 report, published March 31st, 2020, DCAA described the audits they perform as four basic types: Forward Pricing: Forward pricing audits are generally completed before contract award where DCAA evaluates a contractor’s estimate of its proposed cost to provide goods or services to the government. Forward pricing includes demand work—proposal audits, forward pricing rates, and estimating system audits. Incurred Cost: Incurred cost audits determine the accuracy of a contractor’s annual allowable cost representations. Based on the findings of such an audit, DCAA expresses an opinion as to whether the costs are allowable, reasonable, and allocable to the contracts performed that year, based on government accounting and acquisition provisions. Special Audits: Special audits are largely conducted after contract award. Most of the reports in this category are issued in response to requests from contracting officers. Special audits are associated primarily with costs arising out of claims and terminations. Other Audits: Other audits can be requested by a contracting officer or initiated by DCAA. These audits focus on adequacy of the contractor’s Cost Accounting Standards (CAS) Disclosure Statement, compliance with cost accounting standards, review of contractor business systems, or compliance with the Truth in Negotiations Act (TINA). If an audit is in my future, DCAA or otherwise, what should I look for in a cost accounting system? DCAA compliance requires that your accounting and related business processes which collectively include policies, manual procedures and tools be compliant. Software alone is not audited for DCAA compliance or certified, nor approved as DCAA compliant. However, Unanet software has been reviewed by DCAA auditors at more than 2400 customer sites and, along with the customer policies and procedures, approved as supporting DCAA requirements. DCAA compliance should be a result and a state, not a project of its own. Unanet is a well-designed system with features to enforce the GovCon rules and automate the GovCon specific processes (like calculation and application of indirect rates and project-based billing and reporting) can accomplish just that. Unanet is purpose-built in-house by GovCon professionals, and is the only native integrated Cloud ERP solution built from the ground up to serve this unique market. DCAA compliance and audit confidence are foundational, not simply a goal to achieve—Unanet features support DCAA requirements at each stage. See what Unanet can do for your organization. “Posting revenue by type of contract saves time so that financial periods can be closed quickly and efficiently. We know that everything is closed on time and correctly. Unanet shone during our DCAA audit.” —Bob Deegan, Senior Vice President and CFO, Array Information Technology Want to learn more? Our 2021 GovCon Success Guide explains why building a robust, strategic business and technology foundation is the key to unlocking your firm’s full potential and will give you practical steps to improve your competitive posture in 2021 and beyond.
CAS Compliance: What You Need to Know
by Rich WilkinsonGovCon, Government Compliance
Apr 30, 2021
What is CAS? CAS is an acronym that stands for Cost Accounting Standards. CAS is one of two primary sets of “rules” about how government contractors are required to do their cost accounting. The other is the Federal Acquisition Regulation (FAR) Cost Principles, contained in Part 31 of the FAR. The Cost Accounting Standards consist of a set of 19 separate standards, commonly referred to by number, and numbered from CAS 401 to CAS 420. There is a missing standard (419) that was proposed, but never issued. Each of the 19 standards addresses the cost accounting treatment of a separate type of cost or practice. The standards are: CAS 401 – Consistency in Estimating, Accumulating, and Reporting Costs CAS 402 – Consistency in Allocating Costs Incurred for the Same Purpose CAS 403 – Allocation of Home Office Expenses to Segments CAS 404 – Capitalization of Tangible Assets CAS 405 – Accounting for Unallowable Costs CAS 406 – Cost Accounting Period CAS 407 – Use of Standard Costs for Direct Material and Direct Labor CAS 408 – Accounting for Compensated Personal Absence CAS 409 – Depreciation of Tangible Capital Assets CAS 410 – Allocation of Business Unit G&A Expenses to Final Cost Objectives CAS 411 – Accounting for Acquisition Costs of Material CAS 412 – Composition and Measurement of Pension Cost CAS 413 – Adjustment and Allocation of Pension Cost CAS 414 – Cost of Money as an Element of the Cost of Facilities Capital CAS 415 – Accounting for the Cost of Deferred Compensation CAS 416 – Accounting for Insurance Costs. CAS 417 – Cost of Money as an Element of the Cost of Capital Assets Under Construction CAS 418 – Allocation of Direct and Indirect Costs CAS 419 – [Reserved] CAS 420 – Accounting for IR&D Costs and B&P Costs The purpose of the Cost Accounting Standards is to promote consistency and uniformity in the outcomes of federal contractors’ cost accounting systems, especially in the following areas: How costs should be allocated or assigned How certain kinds of costs should be measured Requirements for covered contractors to comply with the standards Requirements for covered contractors to adjust contract prices when there is a change to a cost accounting practice Requirements for covered contractors to formally disclose their practices to the government in a prescribed form and format (forms available at: https://www.whitehouse.gov/wp-content/uploads/2017/11/CASB_DS-1.pdf) How is CAS different from FAR? The Federal Acquisition Regulations (FAR) and Cost Accounting Standards (CAS) are very different. First, FAR is concerned primarily with the “allowability” of costs in a GovCon’s books. It specifies whether or not you can pass those costs on to the government in your contract costs, either directly or as indirect costs. The FAR is managed and maintained by an organization within the General Services Administration (GSA), the FAR Council. The Council itself is administered by the Office of the Secretary of Defense (OSD) and that office publishes a list of all pending or proposed changes to the FAR. CAS is all about the “allocability” of costs. The standards govern how a GovCon firm may assign costs to a project, or “final cost objective” in accountant-speak, especially concerning allocations from cost pools or service centers. The standards are promulgated and amended, from time to time, by a Board authorized by statute (41 U.S.C. 1501 et seq.) and consisting of five members; the Administrator for Federal Procurement Policy, who chairs the Board, and four members with experience in Government contract cost accounting, two from the Federal government (DOD and GSA), one from industry, and one from the accounting profession. The DOD representative is currently the Director of DCAA. The full text of the standards is codified in law at 48 CFR § 52.230-2 – Cost Accounting Standards. An excellent reference to the standards may be found at the Legal Information Institute of Cornell University. FAR and CAS also differ rather significantly in their approach. FAR is directive. It specifies exactly which costs may be passed on to the government and which costs may not. CAS is outcome-based. It sets standards for the required results of a contractor’s assignment and allocation practices, but it does not specify how the practices must be performed. The practices are up to the contractor and may be anything desired so long as the results meet the standards. There is one more rather significant practical difference. There are more than 40 changes to the FAR pending which could reasonably be expected to be issued in the next year or so and four of those will have some impact on cost accounting practices. The CAS Board, on the other hand, has not issued a new standard nor made any significant change to existing standards since 1978. What does it mean to be CAS Compliant? A contractor is said to be “CAS Compliant” if the results of its cost allocation practices meet all of the standards. Like compliance with the FAR cost principles, CAS compliance is not dependent on tools or software. It is measured strictly by looking at the results achieved by a contractor’s policies, procedures and actual accounting practices. A cost accounting system purpose-built for government contractors like Unanet’s GovCon ERP, with built-in functionality for calculation and allocation of indirect rates, segregation of direct and indirect costs and segregation of allowable and unallowable costs, will make CAS compliance not only much easier, but much more consistent. Trying to be compliant without a purpose-built software tool with automated processes and practice enforcement rules would be burdensome at best. Trying to do it with no tools at all would be simply crushing. Who audits CAS compliance? Like compliance with the FAR cost principles, compliance with the CAS is audited by DCAA for DOD contractors and a number of other agencies which use DCAA for their auditing (such as NASA and DOE). Other civilian agencies will sometimes use a CPA firm to audit CAS compliance when required. CAS audits are usually triggered by the initial submission of a contractor’s CAS Disclosure Statement when they first become covered. When a contractor becomes CAS covered is another topic all its own. If CAS is in my future, what should I look for in a cost accounting system? You need automation for processes like indirect rate calculations, application of indirect costs to direct costs, and internal controls. You also need a chart of accounts with enough flexibility to properly segregate direct and indirect costs and to segregate allowable and unallowable costs. In short, you need a project based ERP that is purpose-built for the needs of government contractors and their unique cost accounting processes. Purpose-built in-house by GovCon professionals, Unanet is the only native integrated Cloud ERP solution built from the ground up to serve this unique market. CAS compliance and audit confidence are foundational, not simply a goal to achieve—Unanet features support DCAA requirements at each stage. See what Unanet can do for your organization. “Posting revenue by type of contract saves time so that financial periods can be closed quickly and efficiently. We know that everything is closed on time and correctly. Unanet shone during our DCAA audit.” —Bob Deegan, Senior Vice President and CFO, Array Information Technology Want to learn more? Our 2021 GovCon Success Guide explains why building a robust, strategic business and technology foundation is the key to unlocking your firm’s full potential and will give you practical steps to improve your competitive posture in 2021 and beyond.
Optimize Your Business with Crucial Technology & Benchmarking Insights | The 2020 GAUGE Report
by Kim KosterGovCon, Government Compliance
Sep 17, 2020
Between the COVID-19 pandemic, CMMC compliance, and social unrest—not to mention the usual myriad of unique industry challenges—2020 has been an unprecedented, arduous year for the GovCon industry and beyond. With so much change and so many surprises, many contractors are left with their heads spinning, wondering where to turn. One thing is clear during this tumultuous period: one of the best sources of advice for GovCons is each other. There’s great benefit in learning how other government contractors are confronting challenges and opportunities similar to yours. Unanet and CohnReznick’s fourth annual GAUGE Report can provide this guidance. This report is a collection of survey results from over 1,450 contributors in the GovCon sphere and provides performance metrics and business practices that are shaping this current volatile government contracting landscape. “The year 2020 continues to be a season of reckoning,” the report authors observe, “as government contractors are either reaping the rewards of having laid a sound business and technology foundation, or paying the price of playing catch-up.” Technology is the theme of this year’s GAUGE and the report explores how GovCon leaders need to leverage technology to best position their companies not only during this season of remote work but for the next five years. Some major takeaways from the report include: Optimism impacted: Prior to the pandemic in early March, 84% of survey respondents reported that they were either very or cautiously optimistic about their business outlook. Near the end of March, the percentage of respondents reporting this optimism dropped to 68%. Project and resource success: 59% of respondents reported that 76%-100% of their projects are on or under budget, and 55% of respondents rated their resource management at a high level of maturity, an improvement over previous years. Slowly adapting new technology: 53% of surveyed contractors use a project-based ERP system, while 18% use an entry-level system and 29% rely on other generic ERP tools. With the focus on technology in this year’s report, it is clear that GovCons’ success going forward depends on them “empowering teams to be productive in any setting and adapting quickly to new ways of operating” through the use of technology. You can get your own copy of the GAUGE Report here and begin leveraging crucial industry information and best practices. We’re excited to hear how the report helps your organization establish and refine company goals in 2020 and beyond.
An Up-Close Look at DCAA’s Ambitious Audit Plans for 2020
by Kim KosterGovCon, Government Compliance
Jul 16, 2020
Government contractors, prepare for closer scrutiny from the Defense Contract Audit Agency in fiscal 2020 and beyond. Having cleared its longstanding audit backlog, the DCAA has returned to performing a full range of audits, the agency’s director, Anita F. Bales, declared in a recent letter to the U.S. Congress. In fiscal 2019, the DCAA “focused more effort on other audits such as business systems, Truth in Negotiation Act, Cost Accounting Standards, and labor and material reviews,” she said in the letter, which accompanied a report summarizing the agency’s activities last fiscal year. “We also successfully met the Congressional requirement to complete incurred cost audits within one year of adequate submission as well as contracted with seven independent public accounting (IPA) firms to perform 101 incurred cost audits.” The DCAA’s renewed commitment to timely audits is expected to continue in the current (2020) fiscal year, putting the onus on government contractors to prepare for a busy compliance season. In particular, DCAA said it “prioritizes the audits that pose greatest risk to the government,” namely contracts that “involve significant costs, significant audit findings in the past, or circumstances that reduce the incentive to control costs, such as those inherent in cost-type of contracts.” Here’s what the agency says about various types of audits: Incurred cost audits “continue to be a priority to meet both the adequacy review (60 days) and completion (12 months) timelines.” Forward pricing audits “net the highest rate of return and are time sensitive because to be of value they must be completed before contract negotiations.” Special audits are prioritized in coordination with contracting officer needs. Other audits become a high priority “when DCAA or the contracting officer identifies a high-risk area such as inadequate business systems. DCAA assigns priority to additional audits based on individual contract and audit risks to the government.” To maintain timeliness with its audits and prevent another backlog, the DCAA indicated it plans to continue using IPA firms to conduct select incurred cost audits. To support a more aggressive audit caseload, the DCAA said it is focusing on recruiting, developing and retaining high-quality auditors and support staff, such as with hiring events and internship programs aimed at bringing college students into the fold and grooming them to become full-time employees. As it ramps up its caseload, the DCAA also has increased its industry outreach. In July 2019, it adopted the materiality guidelines from DoD’s Professional Practice Guide to “help oversight professionals plan their work and provide the information contracting officers need to make reasonable business decisions.” The agency also has been regularly engaging with industry groups, resulting in a proposed FAR change and improvements to the incurred cost electronic (ICE) model. It also is working with the acquisition community to mitigate the risks associated with using Other Transaction Agreements, or OTAs. The goal: ensure cost reasonableness “without hindering the speed that makes OTAs so valuable.” Moving forward, expect the emphasis on Truth in Negotiation Act audits to continue. The DCAA said it is stepping up efforts to train and educate its staff about TIN audits, and that beginning in fiscal 2020, its field audit offices will join its headquarters TIN team in conducting TIN audits. ”These collaborative, proactive efforts are vital as DCAA will double the number of hours dedicated to these audits in FY 2020.” Also expect the DCAA to continue to leverage technology — data analytics, “intelligent documents,” etc. — as it moves away from outdated Excel and Word-based audit tools. Looking ahead to fiscal 2020 and beyond, DCAA said it expects to “move away from complex, specialized audits performed by dedicated teams, like TIN and business systems, to performing these audits with our FAO staff.” The agency also plans to finalize its strategic plan in FY 2020, meaning more changes to audit processes and procedures could be forthcoming. We closely monitor the DCAA here at Unanet, so stay tuned to this space for updates.
Need Help with CARES Act, PPP, or Section 3610 Compliance? Read This First
by Kim KosterGovCon, Government Compliance
May 13, 2020
For government contractors and other firms that succeed in securing government relief during the COVID-19 crisis, an important question looms: What accounting, audit, and reporting capabilities must we have to meet the compliance requirements associated with these new programs? An article written by Unanet VP of Product Marketing Kim Koster and recently published in Compliance Week provides government contractors with the compliance answers they need to successfully navigate the CARES (Coronavirus Aid, Relief, and Economic Security) Act, the Paycheck Protection Program (PPP), and other federal relief programs. In the article, Koster identifies four critical areas where companies are likely to need an elevated level of end-to-end visibility to maximize the relief they receive, and to meet the new compliance responsibilities that come with it. She touches on the key data govcon firms will need to segregate and track to claim payroll relief under Section 3610, the documentation they’ll need in order to support their PPP loans and to claim CARES Act workforce retention credits, and other reporting and auditing responsibilities that companies will need to fulfill in pursuing the relief they need — and in justifying that relief with data when the compliance bell rings. To access the complete article, click here.
DoD Underscores Requirement of Segregating Covid-19-related Costs with 3610 Guidance
by Kim KosterGovCon, Government Compliance
May 11, 2020
For government contractors that managed to secure relief under the CARES Act or PPP, big questions still remain about compliance, reporting, auditing, and accounting. As usual, the details matter, and in the case of these emergency pieces of legislation, the details weren’t always addressed upfront. So, it’s good news that the Department of Defense (DoD) recently provided guidance for contracting officers (COs). Click here for a copy of the Class Deviation – CARES Act Section 3610 Implementation. But what’s most compelling is that these guidelines make it clear that it’s more critical than ever that GovCons prioritize their relationship with their CO during this unusual time, and have strong control measures in place. First, here are a few basic highlights from this recent guidance: COs must put in writing that a GovCon cannot perform its contracted work at a government facility due to facility closures, nor can they do the job via telework. Paid leave for employees idled by the facility closure, including sick leave, may be direct charged to the affected contract, and not as regular leave that would have been recorded as fringe expense in the normal course of business, so long as it can be attributed to the Covid-19 outbreak from Jan. 31 – Sept. 30, 2020. The leave charged to the contract must be necessary to maintain the workforce in a ready state to permit a return to work upon facility re-opening and to ensure the safety of the workers. Finally, and most important of all, the 3610 guidance is very clear that in order to be eligible for reimbursement of the cost of paid leave, GovCons must segregate these specific costs and actions so that compliance with these terms can be reasonably identified. The guidelines say, “segregation and identification of costs can be performed by any reasonable method, as long as the results provide a sufficient audit trail.” How can GovCons do this simply and effectively? This article in Compliance Week: Preparing for the compliance caveats that accompany CARES Act, PPP, gives good counsel on the value of ERP to resolve this segregation issue. Your Unanet platform will enable your business to accurately track, manage, and segregate costs associated with the Covid-19 outbreak so you can specifically demonstrate to your CO precisely where your business incurred costs that are eligible for reimbursement. Want to understand more about how Unanet can be a solution to helping your business segregate costs for reimbursement and manage your projects? Check out our white paper, The Business of Projects.
What is the DCAA, and What Audits Do They Perform?
by Kim KosterGovCon, Government Compliance
Aug 08, 2019
What is the DCAA? Let’s quickly level set on the mission of the Defense Contract Audit Agency (DCAA). Their primary function is to perform contract and financial audits for agencies that are responsible for acquisition and contract administration for the US Government. DCAA audits ONLY government contractors. They conduct these audits in accordance with the Generally Accepted Government Auditing Standards (GAGAS). The principles that GAGAS embodies are unbiased audit conclusions based on facts. DCAA is a very vital part of the acquisition process for the Department of Defense (DOD) and certain other agencies. Their charter is to make sure that the taxpayers’ money is spent responsibly and ethically by conducting audits that ensure the validity of costs throughout the acquisition process. They have a tremendous amount of influence because they communicate with the Contracting Officer (CO) and make recommendations that have an impact on contract negotiations. The recommendations help the CO understand what the price of the contract should be. In the past, the relationship between the government contracting community and DCAA has been strained. DCAA is making a concerted effort to improve overall relationships with government contractors by improving communication and coordination. Common DCAA Audits Understanding the various audits the DCAA tends to run is necessary for preparing for them. In future blogs, we will dive deeper into each audit, but for now, here is a quick description of some of the most common ones: Incurred Cost: The most common type of DCAA audit, an incurred cost audit exists to ensure that claimed actual costs and billed costs reconcile. Forward Pricing: This audit is conducted on contract proposals, are related to a specific contract, and are conducted prior to award. The purpose of this audit is to ensure out year rates are reasonable and realistic for use in forward pricing. Pre-Award: Accounting System Audit: An Accounting System Audit is performed to ensure that a government contractor’s accounting system complies with laws and regulations, is reliable, there is a minimal risk of misallocations and mischarges, and allocations and charges are consistent with billing procedures. Timekeeping: This audit aims to ensure the contractor is compliant with its timekeeping practices, that the employee time records are correct, that employees perform in their assigned job classifications, and time is charged to the proper cost objective. Special Audits: Special audits may be performed for a variety of reasons, but typically occurs when a Contracting Officer needs an independent financial opinion on specific portions of a contract for a contractor’s accounting business system. Other Audits: These audits are usually performed for a variety of reasons, usually when there is potential for a high risk of misallocation or mischarging of costs. Ease the Path to Compliance with Unanet What is the DCAA? Something you don’t have to fear with the help of Unanet! Remember that there is no such thing as DCAA compliant software. It is your organization and procedures that will be assessed for compliance. That said, Unanet is uniquely designed for government contractors and has been battle-tested for compliance rules and regulations. Our compliance features are built into the tool, making compliance part of the fabric of your business. Unanet currently has over 2,000 clients using and trusting the system. Unanet supports compliant accumulation and allocation of costs utilizing time keeping, expense accounting, cost pools, indirect rates, revenue recognition, and project management all in one truly integrated system. Whether you are a small new or a seasoned larger GovCon, you can count on Unanet for your compliance needs. Unanet is recognized by the audit agencies as being “compliant ready,” giving you an immediate advantage in the audit process. To learn more about the DCAA, download our white paper, “A GovCon’s Essential Guide to DCAA Compliance.”
DCAA Compliant Software
by Kim KosterERP Software Best Practices, GovCon, Government Compliance
Jun 13, 2019
Just to be clear, there is no such thing as DCAA Compliant Software! It is your organization and procedures that will be assessed for compliance. That said, software such as Unanet, that is purpose-built for government contractors can significantly help you with achieving compliance. DCAA compliance requires that your accounting and related business processes which collectively including policies, manual procedures and tools be compliant. Software alone is not audited for DCAA compliance or certified, nor approved as DCAA compliant. However, Unanet software has been reviewed by DCAA auditors at more than one thousand customer sites and, along with the customer policies and procedures, approved as supporting DCAA requirements. Unanet software makes implementation of the DCAA regulations easy and efficient. Here is a small sampling of the DCAA regulations that a compliant accounting system must include and that are directly supported by Unanet accounting software: Proper segregation of direct and indirect costs Identification and accumulation of direct costs by contract Method for allocation of indirect costs A Timekeeping System that enforces specific requirements related to charging hours Labor distribution – how costs are allocated to charged time Segregation of unallowable costs Accumulation of costs under General Ledger Control To learn more, download A GovCon’s Essential Guide to DCAA Compliance.
Getting Ready for a DCAA Audit
by Kim KosterGovCon, Government Compliance
May 22, 2019
Let’s quickly level-set on the mission of the Defense Contract Audit Agency (DCAA). Their primary function is to perform contract and financial audits for agencies that are responsible for acquisition and contract administration for the US Government. DCAA audits ONLY government contractors. Each DCAA audit is conducted in accordance with the Generally Accepted Government Auditing Standards (GAGAS). The principles that GAGAS embodies are unbiased audit conclusions based on facts. DCAA is a very vital part of the acquisition process for the Department of Defense (DOD) and certain other agencies. Their charter is to make sure that the taxpayers’ money is spent responsibly and ethically, by conducting audits that ensure the validity of costs throughout the acquisition process. They have a tremendous amount of influence because they communicate with the Contracting Officer (CO) and make recommendations that have an impact on contract negotiations. The recommendations help the CO understand what the price of the contract should be. In the past the relationship between the government contracting community and DCAA has been strained. DCAA is making a concerted effort to improve overall relationships with government contractors by improving communication and coordination. DCAA Audits are a Fact of Life for Government Contractors During our most recent GAUGE Report, we noted the types of audits that were most prevalent. There are many audits that a GovCon can be subject to. Below are those results with the ICS being the largest audit by far. Tips to Prepare for a DCAA Audit 2019 GAUGE survey respondents said that their DCAA oversight is increasing, 6% more than last year. So, it is important to understand how you can best manage your compliance and audits. Here are a several tips you can use to help ensure a successful DCAA audit. Why Unanet for DCAA Audit Preparation? Unanet is purpose-built with the project or contract in mind. It is uniquely designed for government contractors and has been battle-tested for compliance rules and regulations. Our compliance features are built into the tool, making compliance part of the fabric of your business. Unanet currently has over 1,000 clients using and trusting the system. Unanet supports compliant accumulation and allocation of costs utilizing time keeping, expense accounting, cost pools, indirect rates, revenue recognition, and project management all in one truly integrated system. Whether you are a small new or a seasoned larger GovCon, you can count on Unanet for your compliance needs. Unanet is recognized by the audit agencies as being “compliant ready,” giving you an immediate advantage in the audit process. Click here to learn more.
Understanding The DCAA Accounting System Audit
by Kim KosterAccounting, GovCon, Government Compliance
May 15, 2019
The topic of this blog is the post award accounting system audit. The post award accounting system audit is an examination of the accounting system at non-major contractors after contract award. The objective of the post award accounting system audit is to determine if the contractor’s accounting system complies with the DFARS 252.242-7006, Accounting System Administration, requirements. A post award accounting system audit is usually performed at the request of the contracting officer when: a follow-up audit to a preaward survey (SF1408) is recommended or a preaward survey was not conducted prior to contract award, and the contracting officer determines that an audit is now required to support contract requirements. What are the characteristics of an acceptable accounting system? Acceptable accounting system means a system that complies with the system criteria below to provide reasonable assurance that: Applicable laws and regulations are complied with; The accounting system and cost data are reliable; Risk of misallocations and mischarges are minimized; and Contract allocations and charges are consistent with billing procedures. What is DCAA Looking for in the Accounting System Audit? This list of criteria below is very similar to the SF1408 Preaward Survey. A sound internal control environment, accounting framework, and organizational structure Segregation of direct and indirect costs Identification and accumulation of direct costs by contract Consistent allocation method for of indirect costs to intermediate and final cost objectives Accumulation of cost under the general ledger control Reconciliation of subsidiary cost ledgers and cost objectives to general ledger Approval and documentation of adjusting entries Management reviews or internal audits of the system to ensure compliance with the Contractor’s established policies, procedures, and accounting practices A time keeping system that identifies employee’s labor by intermediate or final cost objectives A labor distribution system that charges direct and indirect labor to the final cost objectives Interim determination of costs charged to a contract through routine posting of books of account Exclusion from costs charged to the government contracts of amounts that are not allowable per FAR 31, Contract Cost Principals and Procedures, or other contract provisions Identification of cost by contract line item (CLIN) and by units if required by the proposed contract Segregation of preproduction costs from production costs Billings that can be reconciled to the cost accounts for both current and cumulative amounts claimed and comply with contract terms Cost accounting information, as required: By contract clauses concerning limitation of cost (FAR 52.232-20), limitation of funds (FAR 52.232-22), or allowable cost and payment (FAR 52.216-7); and To readily calculate indirect cost rates from the books of accounts; Adequate, reliable data for use in pricing follow-on acquisitions Accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles. A common question is what are some of the typical pitfalls contractors have when completing this audit. Our answer is that all of requirements are important and non-compliance could leave you with a non-adequate system. If the Contracting Officer makes a final determination to disapprove the Contractor’s accounting system, and the contract includes the clause at 252.242-7005, Contractor Business Systems, the Contracting Officer will withhold payments in accordance with that clause. No one wants to not get paid!! A tried and trusted tool like Unanet can help you meet the requirements above. If you are not comfortable with taking this on yourself please do reach out to Unanet as we have a partner network that can assist you every step of the way. It will be worth every penny you spend. Good luck on your audit and hope that there are many contract awards coming your way. For more information, download A GovCon’s Essential Guide to DCAA Compliance.
What is SF1408?
by Kim KosterGovCon, Government Compliance
Feb 21, 2019
Just in case you are completely new to Government Contracting, let’s quickly level set on the mission of the Defense Contract Audit Agency (DCAA). Their primary function is to perform contract and financial audits for agencies that are responsible for acquisition and contract administration for the US Government. DCAA audits ONLY government contractors like you. They conduct these audits in accordance with the Generally Accepted Government Auditing Standards (GAGAS). The principles that GAGAS embodies are unbiased audit conclusions based on facts. If you are interested there is a ton of information on the DCAA website dcaa.mil to help you more thoroughly prep for impending audits. With all that said, let’s focus in on the topic of this blog, which is the Pre-Award Accounting System Survey (SF1408). The Accounting System Survey is considered “pre-award audit” and it is necessary for the award of any Cost Type contract. Below is an excerpt from the DCAA Letters to Congress about Pre-Award Audits: Pre-Award Audits. Pre-award audits determine whether the design of a contractor’s accounting system is acceptable, which is a necessary condition for awarding cost type contracts. To better meet the needs of buying commands, DCAA prioritized these audits and developed tools to assist both contractors and auditors. As a result, DCAA has reduced the number of days to complete pre-award audits going from approximately 120 days in FY 2012 to about 60 days in FY 2016. Those measures, combined with effective communication between audit staff, contracting officers, and contractors, has allowed us to more quickly identify system deficiencies, provide workable solutions, and reduce the time between solicitation to award. Additionally, a part of our outreach to small businesses focuses on the necessary components of an acceptable accounting system, which we feel also contributed to this success. The “Pre-Award Survey (SF1408)” is conducted prior to award and is contract specific. It results in an opinion that the system is “acceptable” for use on the contemplated contract. It should be noted that this is NOT a true audit because it does not look at any actual costs – only the system capabilities. It is referred to as a “Survey” in the document and it is considered a “review” in auditor terminology. It can, and often is, done on a system that is not yet implemented based on the software capabilities and pro forma company policies and procedures. The Survey is a Pre-Award Survey known as Standard Form (SF) 1408 which is asking questions about your accounting system. Below are some of the inquiries of the form: Is the accounting system in accordance the GAAP? Accounting System provides for: Proper segregation of direct and indirect costs Identification and accumulation of direct costs by contract Method for allocation of indirect costs Timekeeping System Labor distribution Segregation of unallowable costs Accumulation of costs under General Ledger Control Accounting System provides financial information Required by contract clauses concerning limitation of cost (FAR 52.232-20 and 21) or limitation of payments (FAR 52.216-16) Required to support requests for progress payments Is the accounting designed to have reliable and accurate data? Is the accounting system fully operable? This overall process can be tricky for new government contractors and it is highly suggested that you have the right processes and tools in place to assure success. If you are not comfortable with taking this on yourself please do call Unanet, as we have a partner network that can assist you every step of the way. This is a great example of investing upfront to ensure the success of your project. It will be worth every penny you spend. For more information, download the SF1408 Overview.
DCAA Timekeeping Requirements and Timesheet Software
by Kim KosterGovCon, Government Compliance
Feb 04, 2019
Unanet has timesheet features and functions that directly support the DCAA timekeeping requirements stated in the Automated Timekeeping Systems section of the Defense Contract Audit Agency (DCAA) regulations and Federal Acquisition Regulations (FAR). Note that DCAA requires that the timekeeping process, collectively including policies, manual procedures and tools be compliant; timesheet software alone is not audited for compliance or certified, nor approved as DCAA compliant. However, Unanet timesheet software has been reviewed by auditors at hundreds of customer sites and, along with the customer policies and procedures, approved as supporting DCAA timekeeping requirements. Unanet timesheet software makes implementation of the DCAA regulations easy and efficient. Here is a small sampling of the DCAA regulations supported by Unanet: Employees charge time to authorized, open projects An employee access their timesheet through a secure password Employee records are viewable and there are auditable comments for any timesheet change Supervisors approve the entire timesheet All time must be reported (total time accounting) Administrators monitor delinquent timesheets Learn more about how Unanet timesheet software can help support DCAA timekeeping requirements! For information on controls checked during a DCAA audit please refer to publication 7641.90 titled, “Information for Contractors,” or contact the Defense Contract Audit Agency at the address below: Defense Contract Audit Agency ATTN: Policy Auditing Standards Division (PAS) 8725 John J. Kingman Rd., Suite 2135 Fort Belvoir, VA 22060-6219 (703) 767-3234 (FAX)