Webinar: Managing Cost Type Contracts

Managing Cost Type Contracts

Donna Dominguez & Tom Marcinko | February 22, 2017

http://blogs.aronsonllc.com/fedpoint/

2© 2017 | www.aronsonllc.com | www.aronsonllc.com/blogs |

Introduction

Truism No. 1•Cost type contracts are substantially more challenging to manage than their Fixed Price or T&M counterparts

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Introduction

Truism No. 1•Cost type contracts are substantially more challenging to manage than their Fixed Price or T&M counterparts

Truism No. 2•Many Government contractors are unaware of Truism No. 1







Introduction

Poorly managed cost type contracts can result in:•Incurring a loss•Poor cash flow•Inaccurate cost reporting•Inadequate accounting system•False Claims Act violations







Agenda

• Cost Reimbursement Contracts• What are costs?• How are costs invoiced?

– Direct costs– Indirect

• Practical Tips• Conclusion







Cost Type Contracts

• Cost Sharing• Cost• Cost Plus Incentive Fee (CPIF)• Cost Plus Award Fee (CPAF)• Cost Plus Fixed Fee (CPFF)







Cost Type Contracts

Application (FAR 16.301-2)Cost reimbursement contracts are suitable when•Requirements cannot be defined sufficiently to support fixed price work•Performance uncertainties do not permit the development of an accurate estimate







What are Costs?

Definition: •Cost reimbursement contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract (FAR 16.301-1)







What are Costs?

• Allowable Cost and Payment Clause (52.216-7): The Government will make payments to the contractor in amounts determined to be allowable by the Contracting Officer in accordance with FAR Subpart 31.2 and the terms of the contract.

• FAR Subpart 31.2, Contracts with Commercial Organizations: Total Costs are the sum of allowable direct and indirect costs properly allocated to the contract.







What are Costs?

IndirectDirect

Allocable

Costs are allocable as:

•Direct costs if incurred specifically for a contract.

•Indirect costs if they benefit numerous contracts or are necessary for the overall operation of the business.







What are Costs?

If allocable is the cost:

• Reasonable in nature & amount?• Compliant with terms of contract?• Compliant with FAR 31.2 cost principles?• Compliant with CAS or modified CAS?

Allocable costs are Allowable if they are:

•Reasonable in nature and are in compliance with the contract terms.







What are Costs?

Allowable/Billable or Unallowable/Non-Billable?

Direct non-billable Project Cost

Indirect Unallowable Fringe, OH, G&A, ect.

No Yes

No Yes

Direct

Indirect







What are Costs?

Allocable

Allowable/Billable or Unallowable/Non-Billable?

If allocable is the cost:

• Reasonable in nature & amount?• Compliant with terms of contract?• Compliant with FAR 31.2 cost principles?• Compliant with CAS or modified CAS?

Direct IndirectDirect

Direct non-billable Project Cost Indirect Unallowable Fringe, OH, G&A, ect.

No Yes No Yes

Allocable







How are Costs Invoiced?

Allowable Cost and Payment Clause (52.216-7) •Contractors may submit to the Government, no more than once every two weeks, an invoice in such form and detail as may be required by the Contracting Officer supported by a statement of the claimed allowable costs







How are Costs Invoiced?







How are Direct Costs Reimbursed?

Allowable Cost and Payment Clause (52.216-7)•Costs are defined as those recorded costs that, as of the invoice submission the contractor has paid i.e. incurred costs (Paid to Cost Rule)

Incurred A Cost Paid for Product/Service Reasonable, Allowable & Allocable Invoice for Reimbursement

•“Contractor Paid” meaning by cash, check, or other form of actual payment for items or services purchased directly for the contract

Invoicing Tip: Always best to generate an invoice from the system rather than externally creating an invoice and recording it into the system.







How are Direct Costs Reimbursed?

Exceptions to the paid to cost rule are•Payroll •Travel•Indirect Rates•Costs incurred but not yet paid for supplies and services purchased directly for the contract provided that the payments will be made per the payment terms of the subcontract and ordinarily within 30 days of submission of the prime contract invoice.







How are Indirect Costs Reimbursed?

Allowable Cost and Payment Clause (52.216-7)Contractor indirect costs shall be reimbursed at “billing rates” established by the Contracting Officer subject to adjustment when the final rates are established. The billing rates shall be; •The anticipated final rates

– Update indirect rates annually•May be revised by mutual agreement, at either parties request to prevent substantial over or under payment








Contractor Actions








How are Indirect Rates “Trued Up”

•Contractor must submit a final indirect cost rate proposal (i.e. Incurred Cost Submission) to the Contracting Officer and audit agency within 6 months of the end of each fiscal year.•The ICS is audited •Final Indirect Rates are established•“True Up” invoice submitted (or refund as required)







Managing a Cost Reimbursement Contract

Accounting System

•Requirement: The contractor’s accounting system is adequate for determining costs applicable to the contract

•You can’t manage what you can’t measure, (& forecast!)








• SF 1408 Review̶� GAAP Compliant̶� Segregation of direct costs from indirect costs̶� Allocation of indirect costs to intermediate and final cost objectives̶� A time keeping and labor distribution system̶� Exclusion of unallowable costs from contract billings̶� Written policies and procedures








Direct Costs•Responsibility: Manage what you can control̶�Project Team manages direct costs̶�Establish budget by cost element by time period (proposal?) ̶�Establish a management reserve̶�Track costs on an accrual basis ̶�Establish Program Control position̶�Take action and communicate








Indirect Costs•Responsibility: Back office function but who?̶�Monitor actual rates compared to billing rates monthly̶�Manage the indirect expenses̶�Under runs = added investment in infrastructure or more profit on FP/LH or more work on Cost Reimbursement̶�Overruns = decrease indirect costs or less profit on FP/LH or less work on Cost Reimbursement̶�Request adjustment if actuals materially deviate from the billing rates̶�Cash flow / False Claims Act








Indirect Costs•Project Managers react to indirect costs•Manage contract to actual indirect rates not provisional billing rates (even if CO will not change provisional billing rate)








Role of Invoices•Invoice on a cash basis at provisional indirect rates; manage on an accrual basis at actual indirect rates•Invoices are a tool for collecting cash, not a tool for project management








How to Protect Yourself! •Limitation of Funds (52.232-22)•Limitation of Costs (52.232-20)•Contractor agrees to perform up to the point at which the total amount due to the contractor approximates but does not exceed the contract funding.•Contractor will notify the CO in writing whenever the costs it expects to incur within the next 60 days, when added to the costs already incurred will exceed 75% of the funded amount.








How to Protect Yourself! •The notice shall include the amount of additional funds required in order to continue performance through the contract period. •Costs in excess of the funded amount will not be reimbursed unless the notices required by this clause were provided







Conclusion

Managing Cost type contracts is a sophisticated undertaking•Must understand what a “cost” is•Must have an adequate accounting system•Must establish both direct and indirect budgets and actively manage them•Must manage on an accrual basis•Must manage with actual not billing rates•Must communicate internally and with customers







Questions?

Questions?







About Aronson LLC

Aronson LLC provides a comprehensive platform of assurance, tax, and consulting solutions to today’s most active industry sectors and successful individuals. For more than 50 years, we have purposefully expanded our service offerings and deepened our industry specialties to better serve the needs of our clients, people, and community. From startup to exit, we help our clients maximize opportunity, minimize risk, and unlock their full potential.







About Aronson LLC

• Thinking ahead for clients for more than 50 years• 225+ professionals located in Rockville, MD• 80+ professionals dedicated to supporting government contractors • Aronson helps clients rethink the way they approach their business

through innovative, industry-specific services and advice:– Audit, Assurance and Tax– Deltek Systems and Outsourcing– Financial and Contract Compliance– GSA Schedules

• www.aronsonllc.com/blogs/fedpoint/ – News and trends and insight for today’s savvy government contractor













Awards / Accolades / Affiliations

The Gazette of Politics & Business Exceptional 53 Business Award In 2012, Aronson received the PB53 award for the third year in a row. The program acknowledges the top businesses and organizations in Maryland based on criteria that includes the company’s annual revenue, employee growth, noteworthy product or service innovations, community service efforts and more.

Accounting Today Top Firm In 2013, Aronson was once again named to Accounting Today’s list of the top 100 firms in the country. Accounting Today is a leading provider of online business news for the tax and accounting community.

Washington Business Journal Top 25 Aronson is ranked #12 on the Washington Business Journal’s Top 25 Accounting Firms in the DC Metropolitan area.

INSIDE Public Accounting Top 100 Once again, Aronson has earned a spot in the top 100 of this prestigious list, released by INSIDE Public Accounting. This is the longest running, most comprehensive and accurate independent analysis focusing on management and operations of America’s large local, regional and national firms.

Washington Business Journal Best Places to Work Aronson has been recognized five times as one of the Metro area’s “Best Places to Work.” The award recognizes a company’s achievements in creating a positive work environment that attracts and retains employees through a combination of employee satisfaction, working conditions and company culture.

Montgomery County Chamber Corporate Social Responsibility AwardIn 2010, Aronson was honored to receive the MCCC’s Corporate Social Responsibility Award based on the depth and breadth of the company’s energetic commitment to support young people, in the areas of education, housing and health.







Donna Dominguez is a director in Aronson LLC’s Government Contract Services Group, where she provides a wide range of financial compliance advisory services for government contractors. She is experienced in matters related to Federal Acquisition Regulations (FAR), cost accounting standards (CAS), incurred cost submissions, DCAA/cognizant audit support, provisional billing rates, establishing/revising indirect rate structures and cost proposal support. Donna works with contractors to help them grow their business while keeping their accounting systems adequate in the eyes of the government and their billing systems current and relevant. She is also involved in supporting the government contracting community as a frequent guest speaker on a variety of compliance topics. Donna earned her bachelor’s degree in accounting from the University Maryland and has completed additional coursework in contracts administration. She is a contributor to Aronson’s Fed Point blog and has co-authored articles for NCMA Contract Management Magazine.

Director, Government Contract Services Group

301.222.8232

[email protected]

Donna M. Dominguez







Tom Marcinko is a principal consultant in Aronson's Government Contract Services Group. He is responsible for providing clients with a broad variety of both pre- and post-award support. With over 30 years of government contracting experience, he specializes in proposal development, contract and subcontract administration, FAR compliance, small business programs, and government audits.Tom is a featured speaker at Aronson events and a frequent guest speaker for numerous organizations, including the GWSCPA, VSCPA, the Northern Virginia Technology Council, the Washington Board of Trade and the NCMA. Tom presents training classes on a variety of subjects, including several courses in the fundamentals of government contracting for the University of Virginia's government contracting certificate program. He has also written articles on government contracting for the NCMA Contract Management magazine and other periodicals.Tom earned his bachelor's degree in accounting from the University of Central Florida and his law degree from the University of Florida. He is a member of the Florida Bar and the National Contract Management Association (NCMA).

Principal Consultant, Government Contract Services Group

301.231.6237

[email protected]

Thomas A. Marcinko







Contact

301.222.8232

[email protected]

https://www.linkedin.com/in/donna-dominguez-664b26b


301.231.6237

[email protected]

https://www.linkedin.com/in/tom-marcinko-9978138


Donna Dominguez Tom Marcinko






Government & Nonprofit

Webinar: Managing Cost Type Contracts