Acquisition of Property under MMAS

Rich CulbertsonLMCOWayne NormanNGC

Background

• Under DoD, contractors with large contracts must have a Material Management and Accounting Systems (MMAS) systems deemed adequate in order to minimize overall material inventory costs and related expenditures

• The system must conform to the standards at 252.242-7004(f) and is included in contracts when the contractor has cost-reimbursement or fixed-price contracts exceeding the simplified acquisition threshold, with progress or other contract financing provisions, except when all of the contracts and subcontracts are awarded under the set-aside or Section

MMAS disclosure, demonstration, and maintenance requirements.  (a) A large business contractor is subject to MMAS disclosure, demonstration, and maintenance if in its preceding fiscal year the contractor received DoD prime contracts or subcontracts (including modifications) totaling-  (1) $70 million or more; or  (2) $30 million or more (but less than $70 million), and the contracting officer determines it to be in the best interests of the Government (e.g., contractor disclosure, demonstration, or other activities indicate significant MMAS problems exist).

The system may or may not cover the same cage codes as the property system

Comment:  Many contractors have an automated system for determining requirements. A material requirements planning (MRP) system is a system for identifying requirements, initiating procurement, and maintaining current and future materials necessary to support production operations. Hence, MRP is a method of inventory control, not inventory costing. However, an MRP system does initiate inventory transactions and provides information used for costing those transactions. It takes into account the specific timing of material requirements, with the objective of minimizing inventory investment consistent with meeting a given production plan. An effective MRP system will result in having the optimum amount of material available for planned production. Consequently, a contractor’s investment in inventories is minimized.

How does this differ and how is it the same as a Fixed Asset System?

Acquisition:  Costing of Transferred Parts

a. The MMAS system should transfer parts and associated costs within the same billing period. The billing period implied is a monthly accounting period.

Transfers from one contract to another should be based on a CAS 411 valuation method. (CAS 411 Cost Accounting Standard—Accounting for Acquisition Costs of Material.)Selected valuation procedures must be documented, disclosed, and consistently applied to all subject transfers regardless of the nature of the final cost (government or commercial) or type of contract (cost reimbursable or fixed price).

Why consistently applied?

Does CAS 411 apply – why or why not?

(e) MMAS standards. The MMAS shall have adequate internal controls to ensure system and data integrity, and shall--(1)Have an adequate system description including policies,

procedures, and operating instructions that comply with the FAR and Defense FAR Supplement;

(2) Ensure that costs of purchased and fabricated material charged or allocated to a contract are based on valid time-phased requirements as impacted by minimum/economic order quantity restrictions.

What are internal controls?

(e) MMAS standards.

…(i) A 98 percent bill of material accuracy and a 95 percent master production schedule accuracy are desirable as a goal in order to ensure that requirements are both valid and appropriately time-phased.(ii) If systems have accuracy levels below these, the Contractor shall provide adequate evidence that—(A) There is no material harm to the Government due to lower accuracy levels; and(B) The cost to meet the accuracy goals is excessive in relation to the impact on the Government ; Cost vs. benefit considerations apply.

What Concept is being applied here?

Comment: An MRP system consists of a set of logically related procedures, decision rules, and records designed to translate a bill of material and a master production schedule into time phased net requirements, and the planned coverage of such requirements, for each component inventory item needed to implement this schedule.

An MRPII system re-plans net requirements and coverage as a result of changes in the master production schedule, inventory status, or product composition.

Does the MMAS system include the production system?

Comment: Today, according to DFARS 252.242.7004, MMAS is defined as “the Contractor's system or systems for planning, controlling, and accounting for the acquisition, use, issuing, and disposition of material. Material management and accounting systems may be manual or automated. They may be stand-alone systems or they may be integrated with planning, engineering, estimating, purchasing, inventory, accounting, or other systems”.

Any manual standalone systems?

MMAS Standards: • 1 through 8 apply to commingled materials for which costs are

charged or allocated to fixed price, cost-reimbursement, and commercial contracts

• 9 means commingling of inventories for fixed-price, cost-reimbursable, and commercial contract is permissible as long as standards 1 through 8 are followed. Standard 9 is the only standard that is dependent on all of the other standards

Why is commingling a good idea or a bad idea?

FAR 45.103(a) Agencies shall- (3) Ensure maximum practical reutilization of contractor inventory for government purposes; The system should transfer parts and associated costs within the same billing period. In the few instances where this may not be appropriate, the Contractor may accomplish the material transaction using a loan/pay-back technique. The “loan/pay-back technique” means that the physical part is moved temporarily from the contract, but the cost of the part remains on the contract.

(i) The Contractor shall maintain and disclose written policies describing the transfer methodology and the loan/pay-back technique.

“Contractor inventory” means— (1) Any property acquired by and in the possession of a contractor or subcontractor under a contract for which title is vested in the Government and which exceeds the amounts needed to complete full performance under the entire contract; …

Acquiring material/ Parts for a new requirement Step One-The requirement (need) for the item is loaded in the Bill of Material

Step Two-The MMAS/MRP system should see if the part number has any available quantity available on hand

• Because another demand went away• MIN/Max extra quantity on hand• Lower than forecasted attrition on another demand

• If there is any, then the item should be redirected and transferred to the new demand-• At cost, using a disclosed/ consistent practice for moving the cost• The item is then transferred at cost and remains CAM on the new

contract

Acquiring material/ Parts for a new requirement Step three-If excess stock is not on hand, it is then routed to a buyer for a new procurement

When transferring property within an MMAS – do you need the contracting officer’s signature? Why or why not?

(b) One of the following inventory costing methods shall be used when issuing material from a company-owned inventory:

(1) The first-in, first-out (FIFO) method.

(2) The moving average unit cost method (MAUC).

(3) The weighted average cost method.

(4) The standard cost method.

(5) The last-in, first-out (LIFO) method.

Your Company should have Disclosed one of these techniques and should be consistent.

Techniques for moving cost on material contract transfers (CAS 411)- 

• GFP IS NOT INCLUDED IN THE MMAS's SPAN

OF CONTROL

Note- GFM should never be added into the MMAS/MRP CAM instance/partition, where the material could be reutilized (treated like CAM)

Comment:

In the few circumstances where it may not be appropriate to transfer parts and associated costs within the same billing period, use of a "loan/payback" technique must be approved by the ACO. When the technique is used, there must be controls to ensure that parts are paid back expeditiously; procedures and controls are in place to correct any overbilling that might occur; at a minimum, the borrowing contract and the date the part was borrowed are identified monthly; and the cost of the replacement part is charged to the borrowing contract.

Why avoid borrow/ payback1- it needs ACO approval2- more cumbersome3- old school, the MMAS/MRPII transfer process a lot cleaner

Other issues

Title on available property– cost type vs. fixed price

Fixed price contract with progress payments - When the contract deliverables have all been met, the residual material is then contractor owned.

Fixed price contract- The customer has title to the residual/ excess material?

Contract closeout issues – When should excess determinations be made?

Moving items at no cost:

When to do:• Contractor and Customer agree to move to another contract under a no

cost transfer, becomes GFM, and needs to be removed from the main MMAS costing plant/partition

• From fixed price contracts with no MMAS clause

• From a fixed price contract to a new contract where pricing was revealed to include no cost material

• Material is picked up via the plant clearance process --outside of the MMAS

Why not to do:• MMAS Clause- (b) (1)iii – Be careful‘Maintains a consistent, equitable, and unbiased logic for costing of material transactions’

DFARS 242.7203 Review procedures.(c) (MMAS)System evaluation. Cognizant contract administration and audit activities must jointly establish and manage programs for evaluating the MMAS systems of contractors and must annually  establish a schedule of contractors to be reviewed. In addition, they must --(1) Conduct reviews as a team effort .(i) The ACO--(A) Appoints a team leader; and(B) Ensures that the team includes appropriate functional specialists (e.g., industrial specialist, engineer, property administrator, auditor ).

(c) System evaluation.

DCAA Audit Manual  5-705 Scope of Audit c. …, the auditor should coordinate closely with other responsible Government representatives such as Government property specialists and engineering and other technical representatives. Team tasks must be clearly defined to take advantage of the available Government expertise and mission requirements of all members. Most important, the team must make every effort to avoid duplication of effort.

QUESTIONS ???