2018 National Contract Management Association Boston Workshop · Page 4 2018 National Contract Management Association Boston Workshop DCAA incurred cost strategy Since Better Buying

2018 National ContractManagement AssociationBoston WorkshopHot topics

March 7, 2018

Page 1 2018 National Contract Management Association Boston Workshop

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Agenda

DCAA/DCMA update

DCAA accounting system pilot

Purchasing system

2018 National Defense Authorization Acts

DCAA rights to data and records

Relevant legal cases

DoD IG report

Contract closeout

DFARS Case 2016-D006: Procurement of commercial items

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DCAA/DCMA update


DCAA FY 2018 priorities

Meeting customers’ needs on requested audits, including meeting agreed-upondates

Completing incurred cost audits in a timely manner

Performing high risk post award Audits (Truth in Negotiations Act (TINA)/Truthfulcost or pricing data)

Performing high risk business system audits

Completing termination audits in a timely manner

Performing real-time testing of labor and materials

Source: Hlavin, Jacqueline. "DCAA Update." 8 November 2017, PowerPoint file.


DCAA incurred cost strategy

► Since Better Buying Power 2.0 (2013), it has been a DefenseContract Audit Agency (DCAA) goal to eliminate the incurred costbacklog

► DCAA approach► Developed a multipronged approach to working down backlog

in an effective manner► Dedicated audit teams► Multiyear audit techniques► Increased staffing dedicated to incurred cost► Implementing a low-risk sampling approach to performing

incurred cost audits



DCAA/DCMA forward pricing strategy

► Defense Contract Management Agency (DCMA)/Defense ContractAudit Agency (DCAA) Joint Communication Plan► Early coordination► Responsive to the buying commands► Eliminate duplication

► Tailoring audits to meet the customer’s needs► Timely completion of audits


DCAA trendsNumber of days to complete audits government fiscal years (GFY) 2012–2016

Source: DCAA Report to Congress on FY 2016 Activities, 31 March 2017. Graphical data prepared by EY’s Government Contract Services.

Audit Report Type GFY 2011 GFY 2012 GFY 2013 GFY 2014 GFY 2015 GFY 2016 GFY 2011 GFY 2012 GFY 2013 GFY 2014 GFY 2015 GFY 2016Forward Pricing 120 110 97 95 85 86 N/A -8% -12% -2% -11% 1%Special Audits 184 217 184 165 159 133 N/A 18% -15% -10% -4% -16%Incurred Cost 965 1,184 1,090 1,006 883 885 N/A 23% -8% -8% -12% 0%Other Audits 283 384 309 461 333 268 N/A 36% -20% 49% -28% -20%

Average Elapsed Days to Complete Audit Year-Over-Year Change


DCAA trendsCompleted DCAA audits GFYs 2004–2016

Number of completed DCAA audits

Type of audits FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Incurred costs and special audits 26,480 26,360 23,697 22,519 19,956 12,826 5,166 3,886 4,189 4,187 3,796 3,214 3,085

Price proposals 10,299 9,673 9,015 8,182 8,113 7,004 5,590 2,599 1,811 1,316 1,089 883 873

Cost accounting standards 2,340 2,426 2,413 2,648 1,927 1,292 916 874 680 725 779 423 276

Defective pricing 586 562 485 452 356 154 59 31 37 31 24 26 35

Total audits 39,705 39,021 35,610 33,801 30,352 21,276 11,731 7,390 6,717 6,259 5,688 4,546 4,269

1 From Department of Defense Office of Inspector General (DoD IG) Semiannual Reports to Congress

Prepared by EY – Government Contract Services

0

5,000

10,000

15,00020,000

25,000

30,00035,00040,000

45,000

FY04 FY06 FY08 FY10 FY12 FY14 FY16

Number of completed DCAA audits1

Incurred costs andspecial audits

Price proposals

Cost accountingstandards

Defective pricing

Total audits0

500

1,000

1,500

2,000

2,500

FY04 FY06 FY08 FY10 FY12 FY14 FY16

Number of DCAA audits unresolved by DCMA1

Total open


DCAA trendsQuestioned costs GFYs 2004–2016

$- $1.00 $2.00 $3.00 $4.00 $5.00 $6.00 $7.00 $8.00 $9.00

$10.00

Mar

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Questioned Cost per Audit(In Millions)1

Questioned Cost per Audit ($ millions)

0%10%20%30%40%50%60%70%80%

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-04

Sep-

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ar-0

5Se

p-05

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Percentage of Questions Cost Sustained1

Percent Sustained Linear (Percent Sustained)

1 From DoD IG Semiannual Reports to Congress

Prepared by EY – Government Contract Services


DCAA future approach

► Moving forward – increasing the Agency audit effort in:► Business systems audits► Post award audits► Real-time Labor and Material audits

► Eliminating the Incurred Cost backlog► Creating an Incurred Cost Proposal portal► Increased use of joint audit efforts with willing contractors, DCAA

and contractor Internal Audit



DCAA accounting system pilot


Background

► DCAA initiated pilot accounting system audits at multiple largedefense contractors

► It removed the accounting system audit program from its website.► DCAA is using a draft audit program that is significantly modified

from prior audit programs► Pilot audit program appears to be consistent among contractors► Additional contractors are receiving notifications of accounting

system audits


Key considerations

Requestcopies of any audit

program

Be prepared for extensivewalk-throughs and

demonstrations

Assessbilling and

labor controls prior toDCAA audit

Develop strategies forinternal audit requests and

compensation reviews

Identify resources andsystem access controls

needed for IT auditprocedures


Purchasing system


Regulations, guidance and applicability

Business system Contractor purchasing systemDFARS contract clause guidance DFARS 252.244-7001

Threshold level and attributes Awards expected to exceed $25m over the next 12-monthperiod include those represented by prime contracts,subcontracts under government prime contracts andmodifications.Notes:(1) contractor purchasing system review is not performed for aspecific contract; (2) the head of the agency responsible forcontract administration may raise or lower the $25m reviewlevel if considered to be in the government's best interest.

Exemptions Firm-fixed-price contracts awarded on a competitive basis;competitively awarded fixed-price contracts with economicprice adjustment; and FAR Part 12 qualifying sales orcommercial items

Cognizant audit/review authority DCMA

Note: Contractor Purchasing System Review (CPSR) guidebook, published October 2, 2017, establishes the CPSRthreshold at $50m in annual sales (an increase over the $25m threshold established in Federal AcquisitionRegulation (FAR) 44.302).


Purchasing system criteria

► 24 criteria* under the DFARS clause, in summary:► Defined segregation of duties for subcontracting functions► Periodic formalized training, focusing on public laws and

regulations, prohibited practices and importance ofsegregation of duties

► Source selection adequately documented, including solesource justification

► Purchasing file maintenance and documentation retained► Pricing and negotiation with subcontractors documented► Clause flow-down

► Although there are 24 DFARS criteria, there are 29appendices within the CPSR guidebook that dictate theDCMA audit process

*See full text for criteria DFARS 252.244-7001, Contractor Purchasing System Administration.


CPSR trends – Process

► DCMA has standardized its processes► Revised DCMA CPSR guidebook two times in 2017► More detailed data requested pre-CPSR► More communications with contractors pre- and post-CPSR► Reports and initial determinations completed in a timely manner► Less files and more depth► Notice up to six months prior to CPSR► Sixty days or so to complete► Number of questions have increased over previous year► Very standardized► Enterprise-wide data required

See full text for criteria DFARS 252.244-7001, Contractor Purchasing System Administration.


CPSR trendsData calls and determinations

► Data calls are requesting more data.► Sixty days to write and internally vet reports.► Administrative Contracting Officer (ACO) has 10–15 days to issue

initial determination to contractors.► DCMA CPSR Team Lead can issue Level 2 Corrective Action

Requests (CARs).► Initial determination letter addresses all Level 3 (and above)

CARs.► Contractor needs to address Level 2 CARs directly with CPSR

Team and Level 3s directly with ACO.► DCMA CPSR Team can review contractor acquired property.► ACO can conduct surveillance reviews.



CPSR trendsAreas of focus

► Policy and procedure manual► Commercial item acquisitions► Protecting the Government’s interest when subcontracting with

contractors debarred, suspended or proposed for debarment► Limitation on use of appropriated funds to influence certain federal

contracting and financial transactions (anti-lobbying)► Defense priorities and allocation system (DPAS) rating► Cost and price analysis► Flow-downs► Terms and conditions► Reporting of executive compensation



Historical CPSR findings

Summary information of CPSR findings from FY16 which could result incorrective actions, inadequate determinations and disapproval:Finding Material Nonmaterial No findingDebarred suppliers 66 15 45

Anti-lobbying FAR 52.203-12 48 78

Price analysis 43 17 66

DPAS 34 92

FFATA 31 95

Sole Source justifications 27 18 81

Policies and procedures 20 74 32

Commercial Item determinations 15 111

Documentation 12 52 62

TINA 12 114

Flow-downs 31 95

Training 25 101

Internal review/audits 24 102

Purchase reqs. 20 106

Negotiation evidence 18 108Source: Obermeyer, Andrew. "Preparing for a CPSR (Contract Purchasing System Review) - Hot Topics." The 36th Annual Government Contract Management Symposium,5 December 2017, Hyatt Regency Crystal City, Arlington, VA, Conference Presentation


Leading practices in CPSR preparation

► Minimum six-month preparation prior toexpected on-site CPSR activity

► CPSR readiness team to perform acomprehensive review of key CPSR topics

► Risk assessment of purchase orders andsubcontracts, including an assessment ofaward type, dollar value, volume and priorrelated DCAA/DCMA findings

► An initial detailed analysis of a sample ofprocurement files by parties external to thepurchasing function (e.g., governmentcompliance, third-party consultants,internal audit)

► Detailed analysis of current purchasingpolicies, procedures and practices againstrecent DCMA guidance

► Analysis and remediation of procurement files► Based on initial assessments, may be a

broad scrutiny of files or focused oncertain aspects (e.g., cost/price analysis,certifications, file organization)

► Often choose to analyze all files in scopefor the CPSR

► Development of a detailed audit supportstrategy, including:► Participation by executive management► Communication strategies► Plans for system and process walk-

throughs highlighting controls► Plans to address known risk areas that

could generate findings

Our experience has shown that most contractors that successfullynavigate a CSPR typically share the following traits:


FY18 focus areas

► Recent comments from DCMA leadership discussed the following areas asbeing important for FY18 CPSRs► Renewed emphasis on commercial items

► Documenting market research► Conducting robust price analysis► Reviewing commerciality assertions

► Counterfeit parts► Only applies to cost accounting standards covered contractors► Inadequate system can trigger disapproval of purchasing system and withholds► Clause must be included in subcontracts, including commercial item contracts for

electronics or anything containing electronic parts► DFARS 252.246-7008 Sources of Electronic Parts creates new notification requirements

► Buy American is a new CPSR report element► Not a flow-down but prime must verify that the requirements are met► Applies to all purchases above the micro-purchase threshold except commercial off-the-

shelf items


CPSR trendsReminders

► Plan plenty of time to complete both the risk assessment and thepre-CPSR data request

► Establish a relationship with DCMA► Conduct pre-CPSR self-assessment► Prepare a corrective action plan, if required,

in a timely manner


2018 National Defense Authorization Acts


Sec. 803Performance of incurred cost audits

► DCAA must notify contractors within 60 days whether thesubmission is adequate

► Audit findings shall be issued for an incurred cost audit no laterthan one year after the date of receipt of adequate submission► If audit findings are not issued within one year after receipt of

adequate submission, the audit shall be considered to becomplete

► DCAA Issued a memorandum for regional directors onJanuary 29, 2018 – Issued to confirm that agency policy will berevised to require incurred cost submissions to be reviewed foradequacy within 60 days of receipt► Agency will be providing guidance for complying with the

National Defense Authorization Act (NDAA) one-yearrequirement



► DoD is required to use a qualified private auditor to perform asufficient number of incurred cost audits to confirm:► Incurred cost audits are completed no later than one year after

the receipt of a qualified incurred cost submission► DCAA is able to devote ample resources to high priority audits► Qualified private auditors are used to perform a substantial

number of incurred cost audits on an ongoing basis to improvethe efficiency and effectiveness of incurred cost audits

► Establishes numeric materiality standards► Requires the DoD to coordinate with the private auditor and 809

panel when establishing the standards► Requires peer review be performed by an external party on

unqualified (clean) DCAA opinions

Source: NDAA for FY2018.



Timeline for selection of qualified private auditors:► By October 1, 2018, DoD must provide the House Armed Services

Committee and Senate Armed Services Committee copies of itsacquisition plan, including:► Description of the incurred cost audits DoD determines are

appropriate to be conducted by qualified private auditors► Estimate of the number and dollar value of incurred costs

audits to be conducted by qualified private auditors for eachyear of FY19–25

► By April 1, 2019, DoD must award an indefinite delivery/indefinitequantity contract to two or more qualified private auditors toperform incurred cost audits► DCMA or other “authorized entity outside of DoD” is then

authorized to issue task orders to perform incurred cost auditswhen needed

Source: NDAA for FY2018.


Other highlights

Section 804 disallows contractors to select incurred cost submission (ICS) auditprovider

Section 805 increased the simplified acquisition threshold to $250k

Section 806 increased the micro purchase threshold to $10k

Section 811 increased the cost or pricing data threshold to $2m

Section 822 limits uses of lowest price technically acceptable

Source: H.R.2810 — National Defense Authorization Act for Fiscal Year 2018, 115th Congress (2017–2018).





► Access to records controlled under FAR 52.215-2, Audit and Recordscontract clause► The government “… shall have the right to examine and audit all records and other

evidence sufficient to reflect properly all costs claimed to have been incurred oranticipated to be incurred directly or indirectly in performance of this contract.”

► “… right of examination shall include inspection at all reasonable times of thecontractor’s plants, or parts of them, engaged in performing the contract.”

► “The contracting officer (or authorized representative) has the right to examine andaudit all of the records (including computations and projections) in order to evaluatethe accuracy, completeness, and currency.”

► FAR 31.201-2 Determining allowability► “A contractor is responsible for accounting for costs appropriately and for

maintaining records, including supporting documentation, adequate to demonstratethat costs claimed have been incurred, are allocable to the contract, and complywith applicable cost principles in this subpart and agency supplements. Thecontracting officer may disallow all or part of a claimed cost that is inadequatelysupported.”



► Request can be verbal or in writing► Time to retrieve or produce requested records needs to be

“reasonable,” although DCAA’s standard of late is that recordsshould be “readily available”

► Request should clearly state what support is needed and when itshould be provided

► Request needs to be clearly defined for time periods, contractscovered, specific items … unambiguous and not open ended

► Access does not mean uncontrolled access► Electronic records are suitable as are paper copies► Communicate with government representative(s) if clarification

needed► Don’t delay or ignore in responding to a formal request► Avoid “Denial of Access to Records” determination


What if DCAA is overreaching?

► Communicate and clarify the nature and timing of the requesteddata

► Determine the relevance and availability of records requested –consider offering alternatives

► If records are lost, destroyed or stolen, or otherwise compromised,notify the DCAA and the ACO as well as internal legal counsel

► Request the DCAA auditor’s supervisor be engaged in theconversation if a resolution cannot be achieved

► If the issue still cannot be resolved, elevate the issue, in writing, tothe DCAA Field Audit Manager and engage with the DCAARegional Audit Manager

► Finally, if mutual understanding still cannot be reached, the issueshould be elevated, in writing, to a Senior Executive Serviceofficial at the cognizant DCAA Regional Office or DCAA HQ


Relevant legal cases


RaytheonUnallowable cost penalties

► The Board addressed penalties related to unallowable costs.► It found that costs previously determined to be unallowable were

not subject to level 1 penalties because they were not expresslyunallowable – did not address level 2 penalties.

► It found directly associated costs of lobbying were subject to level1 penalties, despite not being expressly unallowable.

► The Board found testimony and other evidence can be used todemonstrate allowability of professional services/consultant costsabsent any other contemporaneous documentation.

► This demonstrates the importance of having established policiesand personnel training to provide assurance that unallowablecosts subject to penalties are precluded from being claimed.

► “Title 10 U.S.C. § 2324(b) provides for penalties when a contractorincludes in its proposal a cost that is [expressly unallowable undera cost principle …”].

Source: Armed Services Board of Contract Appeals Nos. 57576, 57743, 57798 and 58280.


DoD IG report


DoD IG report

► External peer review on DCAA System performed 11/17/17► Summary

► “Pass with Deficiencies” audit opinion► Of the 67 audits sampled, 5 deficiencies were noted (7%)

# Deficiency Audits cited DCAA response1 Did Not Obtain Sufficient Evidence 27% Disagree

2 Did Not Report on PertinentInformation or Scope Restrictions 12% Disagree

3 Did Not Adequately Document theProcedures Performed 13% Agree

4 Did Not Perform AdequateSupervisory Reviews 9% Disagree

5 Did Not Exercise ProfessionalJudgment in Some Instances 6% Agree


Contract closeout


Contract closeout overviewWhat is contract closeout?

► A process to finish or resolve all contractual requirements for aphysically complete contract

► The objective is to establish the final price and make thefinal payment.► “Closeout is complete when all administrative actions have

been completed, all disputes settled, and final payment hasbeen made.” (DCMA Contract Closeout Guidebook)


► Coordinate closeout actions► Manage funds► Process plant and property

clearance► Negotiate final rates► Approve final invoice

► Submit indirect cost proposal► Settle subcontracts► Submit final invoice/voucher

► Reconcile payments► Pay final invoice

► Perform indirect cost audits► Audit subcontractors► Review final invoice

Contract closeout overviewResponsible personnel (DoD contracts)

Contractor DCMA

DFASDCAA


Contract closeout overviewTiming guidelines

Source: DCMA

Physicalcompletion

Audit finalincurred cost

proposal*

Final invoice due

End contractor FY

Final incurred costproposal due*

Process and payfinal invoice

ClosedDCAA actuals8–12 months DCAA actuals

30days

* Not required for firm fixed price contracts or Contract Line Item Numbers –timeline should be reduced 30 months

0–12 months 6 months 12–24 months Varies 4 months Varies due tocircumstances

Contractor

DCAA

Contract Administration Office

DFAS

Project office

Legend

Review andprocess

final invoice

Settle final rates*


Contract closeoutLeading practices

► Retain detailed contract records► Contract type► Modifications► Currently active contracts► Contracts currently being bid on

► Develop a closeout plan► Assign roles and responsibilities in advance

► Actively manage inventory throughout the contract period ofperformance

► Exercise good record-keeping skills and document control► Track costs and comply with requirements of Limitation of

Cost/Funds Clause► Monitor indirect rates to mitigate payback responsibility


Contract closeoutLeading practices

► Submit all contractor requirements on time► Submit ICP six months after fiscal year-end► True-up all interim vouchers 60 days after rates are settled► Close all subcontracts early► Once overhead rates are settled, prepare final voucher within

120 days► Identify any contracts that may be qualified for quick closeout► Utilize available government guidance and resources

► DoD Contract Closeout Checklist► DCAA Cumulative Allowable Cost Worksheet► DCMA Contract Closeout Guidebook► Defense Finance and Accounting Service Payment History

Data


GAO report – Contract closeout backlog

► Report summary► Contracts generally not closed out within FAR time parameters► ICS Audit backlog contributes to backlog► DoD included in Government Accountability Office (GAO)

review► Findings overview

► No agency tracking/oversight of closeout process► DCAA did not meet goal to eliminate backlog by FY2016► DCAA averaged 885 days from submission -> audit completion

► Agency recommendations► Establish goals and performance measures to close out

contracts► DCAA recommendations

► Assess use and effect of multiyear audits► Develop processes and metrics to reduce audit time frame


DFARS Case 2016-D006Procurement of commercial items



► The final ruling provides the following:► Additional guidance on making price reasonableness

determinations► Purchase prices paid by both the government and

commercial customers are used for purchase price basis► If contracting officer determines that pricing information

isn’t sufficient to determine price reasonableness,contracting officer can request other relevant info, includingcost data

► Promotes consistency in making commercial itemdeterminations► DoD has establish a cadre of experts within DCMA to

provide advice to Contracting Officers► DCMA is also facilitating collaboration with contractors

through commercial item memorandums of agreement



► Expands opportunities for nontraditional defense contractors to dobusiness with DoD► 66% of total contracts were to small businesses in FY16► The exception to certified cost or pricing data would benefit

small businesses that meet the definition► Does not remove existing requirements for submission of other

than certified cost or pricing data, but rather provides further detailand a hierarchy of other than certified cost or pricing data thatshould be included in proposals


Questions?

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2018 National Contract Management Association Boston Workshop · Page 4 2018 National Contract Management Association Boston Workshop DCAA incurred cost strategy Since Better Buying