Current Government Contracting Hot Topics · Several revised FAR references ‐52.242‐5, 52.212 ‐5 ... administration and management processes ... contracts subject to Construction

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Current Government ContractingHot Topics

Presented by:Brian GallagherMichael Carter

March 21, 2018

Agenda

• Overview of Capital Edge

• Recent final and interim rules

• 2017 NDAA

• Recent case law

• DoD IG Report

• DCAA Report to Congress

• 2018 NDAA

• Update on Contractor Purchasing Systems

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Value Proposition

Capital Edge is the country’s largest independent consulting firm focusing solely on the U.S. Government contracting market.

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The Solution Model

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Recent Final and Interim

Rules

Final Rule – Congressional Investigations or Inquiries

• The FAR Council issued a final rule January 13, 2017, effective immediately, amending the cost principles to now include as unallowable costs the costs associated with contractors’ relating to congressional investigations or inquiries.

• Key provisions of this final rule include: New FAR reference – 31.205‐47(f)(9)

Clarification that GAO investigations or inquiries are outside this specific provision, i.e., 31.205‐47(f)(9)

Clarification that the investigation or inquiry must be a known event –versus an event that may occur

• Takeaway: Contractors should now identify and segregate costs associated with applicable congressional investigations and inquiries. These costs will need to be excluded pending the outcome of the matter.

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Final Rule ‐ Late or Reduced Payments to Small Business Subcontractors

• The FAR Council issued a final rule December 20, 2016, effective January 19, 2017, requiring prime contractors to report any “untimely” or reduced payments made to their small‐business subcontractors. Additionally this final rule requires contracting officers to document for past performance evaluation purposes contractors with a history of late or reduced payments to subcontractors. This rule applies to all prime contracts that require a small business subcontracting plan (currently greater than $700,000 or $1,500,000 for public facility construction).

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Final Rule ‐ Late or Reduced Payments to Small Business Subcontractors (Cont.)

• Key provisions of this final rule include: Several revised FAR references ‐ 52.242‐5, 52.212‐5, 52.219‐9, 42.1502(g) and 19.704

Requires contractors to report to the ACO within 14 days (FAR 52.242‐5)

“Untimely” defined to mean greater than 90 days past due under the terms of payment

“Reduced” defined to mean less than the amount agreed upon

Requires small business plans to contain language re assurances to pay the subcontractor as well as notify the government (FAR 52.219‐9)

• Takeaway: Contractors should assess current supply chain administration and management processes to avoid payment related issues with small business subcontractors. Repeated offenses may negatively affect past performance evaluations and risk future award opportunities.

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Interim Rule – Paid Sick Leave

• The FAR Council issued an interim rule December 16, 2016, effective January 1, 2017, requiring contractors provide paid sick leave to eligible employees under covered contracts. This rule applies to solicitations or contracts subject to Construction Wage Rate Requirements or Service Contract Labor Standards, where work is to be performed, in whole or in part, in the United States.

• Key provisions of this interim rule include: Two new FAR references – Subpart 22.21; 52.222‐62

Requires contractors to provide a minimum of 56 hours of paid sick leave per year

Hours may be accrued as earned throughout the fiscal year or simply provided lump sum at the beginning of the fiscal year

Provides potential consequences for nonconforming contractors, including suspension, debarment or termination for default

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Interim Rule –Paid Sick Leave (Cont.)

• Takeaway: Adverse cost impacts may arise under applicable CAS‐covered contracts as a change in cost accounting practice may be required to account for these costs. Increased costs may be recoverable through the REA process as the potential change in accounting practice should be deemed by the government as a mandatory change or considered to be costs incurred for the first time. Contractors should assess if a change in practice is required, and notify the contracting officer.

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2017 NDAA

2017 NDAA –Cost Accounting Standards

• Section 820 of the NDAA includes several provisions largely related to authorities and responsibilities of the CAS Board(s) that could affect government contractors.

• Key provisions and concerns of Section 820 include:Various administrative responsibilities relating to the existing CAS Board

Establishment of a new CAS Board with applicability only within DoD

Defense CAS Board to contain seven members with one each from the accounting profession and a ‘non‐traditional defense firm’

Primary objective of the Defense CAS Board is to review current standards and potentially make changes to achieve uniformity and consistency across DoD contracts

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2017 NDAA – Cost Accounting Standards (Cont.)

• Takeaway: Formation of a separate CAS Board with exclusive authority related to DoD contracts appears redundant and potentially problematic for contractors. Contractors with a mix of DoD and non‐DoD contracts risk coverage under these contracts utilizing differing or conflicting Standards related to same or similar cost issues. Further, administration on both the government and contractor sides will increase, contractor reporting responsibilities to the government (Disclosure Statements and cost impacts related to changes in cost accounting practice) will become more complicated and several revisions may be required to various FAR provisions to align with potential changes in the CAS rules, for example, FAR Subpart 31.2 ‐ Cost Principles.

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Recent Case Law

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Lockheed Martin Integrated Systems Case

• The ASBCA recently decided two cases related to claimed direct subcontractor costs submitted in Lockheed Martin Integrated Systems’ annual final indirect cost rate proposal. The basis of the costs questioned by the DCAA, and ultimately sustained by the DCMA contracting officer, are relevant and provide context around prime contractor responsibilities and obligations with respect to claiming subcontractor costs under flexibly priced contracts.

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Lockheed Martin Integrated Systems Case (Cont.)

• Key aspects of these cases include: The DCAA questioned nearly $117M of direct subcontractor costs during the course of the audit of the final indirect cost rate proposal (also referred to as incurred cost submission or incurred cost proposal). The DCMA ACO then issued a final decision seeking payment from Lockheed for the same

The basis of the questioned costs are twofold – first, differences between amounts billed by Lockheed to the government and amounts determined to be allowable subcontractor costs based on an assist DCAA audit; second, Lockheed did not require nor receive final indirect cost rate submissions from its subcontractors

The ASBCA agreed with neither of these bases to question the subject costs

• Takeaway: This Lockheed decision is just one example, similar audit challenges exist with other contractors as well. It is important to clearly understand what the prime contractor responsibilities are and related cost allowability implications.

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Sparton DeLeon Springs, LLC Case

• The ASBCA recently decided a case related to direct labor costs invoiced to the government by Sparton DeLeon Springs, LLC. The government paid the submitted amounts, then several years later during the contract closeout process noticed that these invoiced and paid costs were not included in Sparton’s corresponding annual final indirect cost rate proposals, and thus demanded repayment from Sparton.

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Sparton DeLeon Springs, LLC Case (Cont.)

• Key aspects of this case include: The government questioned and demanded repayment nearly $577,000 of direct labor costs in conjunction with a review of final vouchers submitted to the government during the contract closeout process

The government’s contention is that the SOL clock started upon their review of the final vouchers in 2015

Sparton’s contention is the SOL clock started when the corresponding final indirect cost rate proposals were submitted to the government in 2006 and 2007

The ASBCA agreed with Sparton as the government should have known in 2006 and 2007 that these labor costs were not included in the final indirect cost rate proposals and could have asserted their claim then

• Takeaway: This decision is only a recent example, similar SOL challenges are somewhat frequent the last few years. It is important to submit adequate incurred cost proposals with proper cost visibility to mitigate risks with SOL determinations.

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DoD IG Report

DoD IG Report

• The DoD IG issued February 9, 2017 report ‘Evaluation of Defense Contract Management Agency Actions on Defense Contract Audit Agency Incurred Cost Audit Reports’ criticizing the DCMA re their processing and resolution of findings contained in selected audit reports issued by the DCAA.

• Key aspects of this report include:22 DCAA issued reports between September 2013 and July 2015 used as sample

DCMA did not follow the FAR, DCMA Instruction or DoD Instruction 7640.02

8 instances of unresolved questioned direct costs totaling $305M

7 instances of not adequately documenting the assessment or waiver of penalties on questioned costs totaling $1.4M

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DoD IG Report (Cont.)

• Key aspects of this report include:2 instances of not adequately documenting reasons for not upholding questioned costs totaling $5.6M

5 instances of not resolving items within required timeframes

3 instances of sustained questioned costs not included in the incurred cost agreement

• Takeaway: Contractors need to closely monitor the entire audit and settlement process to ensure reported information is accurate and complete. Curiously, the DoD IG report is silent on any quality aspects of the 22 reports used as the sample.

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DCAA Report to Congress

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• The DCAA submitted in March 2017 their annual report to Congress

• Among the reported itemsNet savings (not defined, but presumably some derivation of dollars sustained by the CO) resulting from total audited dollars was $3.6B. This amount is up from FY 2015 reported savings of $3.1B

Total dollars audited during FY 2016 were $287B with $9.9B in questioned costs with $4.7B in sustained costs (approximately 52%)

Total claimed return on investment was $5.70 for every $1.00 spent to fund the Agency. This is up from FY 2015 reported ROI of $4.80, but still down from $7 average between 2012 ‐ 2014

Total professional (auditors) headcount was 4,023 and is down approximately 270 from FY 2015. Of the 4,023 auditors, approximately 26% or 1,182 are CPAs

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• Among the reported items (Cont.) Strategic shift in organization from geographically based structure to contractor‐based structure

4 Corporate Audit Directorates focused on major defense contractors

3 Regional Audit Directorates focused on mid‐sized and small contractors

Field Detachment for Classified Work

Revision to how they present total elapsed days for an audit, particularly as they relate to incurred cost. Previously defined as time between receipt of an adequate incurred cost proposal and the issuance of a report, which stood at 883 in FY 2015. New presentation based on time elapsed between entrance conference and report issuance, shown as 138 for FY 2016.

4,269 audit reports were issued – down from 4,546 in FY 2015.

Recommended actions to improve the audit process were noted and focused on staffing and budget challenges faced by the DCAA; Specifically states a need for approximately 5,100 employees compared to current headcount of 4,500.

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• DCAA 2015 Report to Congress estimated that 675 Business System audits need to be performed annually to get current; FY 16 included a focus on MMAS and Estimating system audits but only produced 21audits with only 6 reports

• Under Section 893 of the NDAA for fiscal year 2016, the DCAA was prohibited from performing audit services for non‐DoD agencies until they reduced their incurred cost audit backlog to less than 18 months

• This prohibition would be released upon the DCAA certification to the Secretary of Defense that the backlog was at the level required by the NDAA

• Confusion arose as what to do when a contractor performs under both D0D and non‐DoD contracts and what the potential involvement from the DCAA could be

• Effective October 1, 2016, the DCAA resumed operations as before and provide audit services to non‐DoD agencies

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• Consistent with the “doing more with less” tone of the report, DCAA boasted improvements in the acquisition and audit processes through focus on Pre‐Award Audits and Small Business Outreach

• Development of tools to assist both contractors and auditors resulting in 90% rate at which accounting systems are found acceptable, up from 78% in FY 2012

• FY 2017 will involve initiatives to leverage existing internal audit work at contractors to meet audit requirements Textron internal audit will perform portions of DCAA audit fieldwork

Requesting SOX testing work papers to evaluate methods of incorporating information into existing efforts

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Practical Impact on Compliance Environment

• Insufficient staffing will likely result in less frequent audits for many mid‐sized and small contractors

• With release from prohibition on auditing non‐DOD agencies combined with continued dip in ROI for FY 2016 audits, DCAA likely to shift focus away from incurred cost audits and towards estimating audits and forward pricing reviews

• Section 893 of 2017 NDAA allowing third‐party auditors to conduct business system reviews impacting DCAA audit approachRisk assessment vs. elapsed audit time

Out of scope audit findings

Questioned cost vs. sustained cost

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Practical Impact on Compliance Environment

• Will DCAA continue to reduce its audit backlog for incurred costs and final indirect rates?

• Should contractors be proactive with allowing their internal audit personnel to conduct field testing as part of DCAA audit efforts?

• How will DCAA utilize information gathered from SOX testing work papers provided by contractors?

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2018 NDAA

FY 2018 NDAA

• FY 2018 NDAA – Title VIII ‐‐ Acquisition Policy, Acquisition Management, and Related MattersPresident Trump signed December 12, 2017 the National Defense Authorization Act (NDAA) Conference Report for Fiscal Year (FY) 2018. This signed legislation contains several notable provisions to introduce new or modify existing U.S. federal government contracting compliance requirements.

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FY 2018 NDAA ‐Performance of ICP Audits (SEC. 803)

• Directs DoD to use qualified private auditors to perform a sufficient number of incurred cost audits to eliminate by October 1, 2020 any backlog of such audits of the DCAA, and, complete audits no later than one year from receipt of a qualified incurred cost proposal.This section includes implementation and status report dates to Congressional Defense Committee and Committee on Armed Services of the Senate and House of Representatives

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FY 2018 NDAA ‐ Performance of ICP Audits (SEC. 803)

• Initial questions that need to be addressed in the implementing rules include:What is a qualified incurred cost proposal and will it differ from established adequacy criteria currently used by the DCAA (proposal adequacy checklist)?

Who makes the determination that a proposal is qualified?

Will a risk‐based audit approach be utilized to recognize low risk or low dollar value incurred cost proposals?

What numeric materiality standards will be developed?

Will the selected private auditors be sufficiently knowledgeable in pertinent government contract and cost allowability compliance requirements?

How will the one‐year audit completion requirement align with the current six‐year statute of limitations and related time barred outcomes? Will audits not completed within one year be time barred?

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FY 2018 NDAA ‐ Repeal of Certain Auditing Requirements (SEC. 804)

• Strikes the FY 2017 NDAA language allowing contractors to select their private auditors. Private auditors under the FY 2018 NDAA SEC. 803 requirements are to be selected by the DoD.This section includes implementation and status report dates to Congressional Defense Committee and Committee on Armed Services of the Senate and House of Representatives

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FY 2018 NDAA ‐SAT and TINA (SEC. 805 and 811)

• Increased Simplified Acquisition Threshold (SEC. 805) –Increases the simplified acquisition threshold to $250,000. No effective date was noted.

• Modifications to Cost or Pricing Data and Reporting Requirements (SEC. 811) – Increases the Truthful Cost or Pricing Data threshold to $2,000,000 applicable to contracts awarded on or after July 1, 2018. Also of note, the CAS threshold will as well increase to $2,000,000 as the CAS threshold self‐executes to mirror the TINA threshold as implemented by a 2011 Office of Federal Procurement Policy interim rule.

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FY 2018 NDAA ‐ Enhanced Post‐Award Debriefing Rights (SEC. 818)

• Provides enhanced rights to offerors (successful and unsuccessful) regarding a post‐award debriefing process, including:Disclosure of the agency’s written source selection award determination for contract awards greater than $100,000,000 (redacted to protect confidential information);

Disclosure of the agency’s written source selection award determination for contract awards greater than $10,000,000 and not greater than $100,000,000 (redacted to protect confidential information) and made to a small business or nontraditional contractor; and

A written or oral debriefing for all contract awards and task or delivery orders valued at $10,000,000 or higher.

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FY 2018 NDAA ‐Sections 820, 832 and 864

• Change to Definition of Subcontract in Certain Circumstances (SEC. 820) – Changes the definition of a subcontract to exclude “commodities that are intended for use in the performance of multiple contracts with the Federal Government and other parties and are not identifiable to any particular contract”.

• Prohibition on use of Lowest Price Technically Acceptable Source Selection Process for Major Defense Acquisition Programs (SEC. 832) –Prohibits the use of lowest price technically acceptable source selection processes for the engineering and manufacturing development of a major defense acquisition program applicable to programs for which budgetary authority is requested for FY 2019 or subsequent FYs.

• Other Transaction Authority for Certain Prototype Projects (SEC. 864) –Increases the threshold to $500,000,000 for certain Other Transaction Authority prototypes. No effective date was noted.

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Update on Contractor Purchasing Systems

Contractor Purchasing Systems ‐ Update

• Takeaways:The most recent changes to the CPSR requirements, Government players and the overall process

Lessons learned from recent successful CPSR experiences

How you can mitigate risk in your next CPSR

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Contractor Purchasing Systems – Update (Cont.)

• Historical Overview of the CPSR Environment

• Current CPSR Environment and Expectations

• What’s really Changed

• How to Prepare

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• Historical PerspectiveResourcingCompliance Approach

Policy

Regulatory Requirements

Political Emphasis

ConsistencyTransparency

Public Posting

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Questions on Historical Environment?

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• Recent Process ChangesDCMA initiated threshold ($50 million)

Contract Requirements Contract Clauses

Consent Package Review CPSR Team Insight into Practices

DCAA ParticipationDCMA ACO Participation

Counterfeit Electronic Parts Initially only CAS‐covered; Oct 2016 the rest

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• Recent Process ChangesCPSR Analysts Activity Post Review

Level II CARs

DCMA Cost and Pricing Center Commercial Item Group (CIG) Composition – Typically former DCAA or DCMA Cost/Price Analysts, former Industry

Organized in 6 Geographical Regions/Teams• St. Pete, FL (South Team)

• Boston & Philadelphia (Northeast Teams)

• Indianapolis (Midwest Team)

• Denver & Phoenix (West Teams)

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• Changes in Review CriteriaReduced individual topics addressed in a CPSR report from 40+ to 29 – now back up to 30 Examples of criteria no longer addressed individually in recent CPSR reports

• Split Awards

• Lead Time

• Letter Subcontracts

• Accuracy of the Universe

• Competition

• Sole Source Justifications

• Equal Employment Opportunity

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• Changes in Review Criteria? Does this mean we don’t need to prepare for the previously analyzed/reported criteria?

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Some criteria were eliminated and others combined:

Lead Time Procurement Requisitions

Competition Source SelectionSole Source Justifications

Letter Subcontracts Selection of Subcontract Type


• Changes in Review Criteria? DPASFFATASole Source Selection JustificationsTruthful Cost or Pricing Data (formerly TINA) Have expectations for compliance to these requirements changed?

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• Changes in Review Criteria? Most Common Material Deficiencies Identified during Recent CPSRs (2016 reports – as presented by DCMA in December 2017) Debarment (66/126)

Anti‐Lobbying (48/126)

Price Analysis (43/126)

DPAS (34/126)

FFATA (31/126)

Source Selection (SSJ) (27/126)

Policies and Procedures (20/126)

Commercial Item Determination (15/126)

TINA (Truthful Cost or Pricing Data) (12/126)

Documentation (12/126)

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• Changes in Review Criteria? Most Common Non‐Material Deficiencies Identified during Recent CPSRs (2016 reports – as presented by DCMA in December 2017) Policies and Procedures (74/126)

Documentation (52/126)

Flow Down/Terms and Conditions

Training (25/126)

Internal Review/Self Audits (24/126)

Requisitions (20/126)

Source Selection (18/126)

Negotiations (18/126)

Price Analysis (17/126)

Debarment (15/126)

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Newest element added to the CPSR criteria?

‐ Buy American – (Buy American‐ Hire American, April 2017)

Policies and ProceduresDocumentation of compliance

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Preparation:

• How should I approach my CPSR Readiness Activities?Know your contractsOngoing System Monitoring and Improvement

Assess and revise/develop, as necessary, purchasing system policies and procedures for compliance with: CPSR Guidebook & CPSR P&P Checklist

DFARS 252.244‐7001(c) and Public Law, FAR and DFARS reqs.

Ensure files are “standalone”, organized and available before the team arrives

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• Preparation:Lessons Learned from Poor CPSR Preparation, Management and Execution

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• Preparation:What Proactive Steps can you Take when the CPSR Team Leaves your Facility? Begin assessing the areas identified as concerns

Identify and implement corrective action• Update, develop, and enhance purchasing system policies and procedures to include forms and templates, as needed

• Conduct training on topics of concern

Develop draft responses to DCMA • Proceed with improved compliance

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• Compliance Tips: What do the most effective approved purchasing systems have in common? Compliant Policies and Procedures (and Follow Them!)

Purchasing Forms and Checklists (File Documentation)

Training and Internal Review/Self Audit Programs

High percentages of competition

Documented Negotiations

Price Analysis

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• Elevates Advance Notification and Consent to subcontract requirements which may cause delivery / performance delays

• Impacts your competitive position - both writing to approved business systems and your overall evaluated price in proposals

• Influences Government-wide notification (CBARS) & resultant reaction by procuring agency customers (e.g. no flexibly priced CLINs/TOs)

• Capable of causing an overall negative perception across your business systems leading to further DCAA/DCMA oversight

• Payment withholds affecting cash flow under DFARS Business System Rules

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Questions?

Contact Us

Brian Gallagher

[email protected]

240‐426‐1273

Michael Carter

[email protected]

480‐708‐2866

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Documents

Current Government Contracting Hot Topics · Several revised FAR references ‐52.242‐5, 52.212 ‐5 ... administration and management processes ... contracts subject to Construction