2018 National Contract Management Association Boston Workshop

Transcription

1 2018 National Contract Management Association Boston Workshop Hot topics March 7, 2018

2 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 Page 1

3 DCAA/DCMA update Page 2

4 DCAA FY 2018 priorities Meeting customers needs on requested audits, including meeting agreed-upon dates Completing incurred cost audits in a timely manner Performing high risk post award Audits (Truth in Negotiations Act (TINA)/Truthful cost 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. Page 3

5 DCAA incurred cost strategy Since Better Buying Power 2.0 (2013), it has been a Defense Contract Audit Agency (DCAA) goal to eliminate the incurred cost backlog 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 Source: Hlavin, Jacqueline. "DCAA Update." 8 November 2017, PowerPoint file. Page 4

6 DCAA/DCMA forward pricing strategy Defense Contract Management Agency (DCMA)/Defense Contract Audit 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 Page 5

7 DCAA trends Number of days to complete audits government fiscal years (GFY) Average Elapsed Days to Complete Audit Year-Over-Year Change 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 2016 Forward Pricing N/A -8% -12% -2% -11% 1% Special Audits N/A 18% -15% -10% -4% -16% Incurred Cost 965 1,184 1,090 1, N/A 23% -8% -8% -12% 0% Other Audits N/A 36% -20% 49% -28% -20% Source: DCAA Report to Congress on FY 2016 Activities, 31 March Graphical data prepared by EY s Government Contract Services. Page 6

8 DCAA trends Completed DCAA audits GFYs Number of completed DCAA audits 1 Number of DCAA audits unresolved by DCMA 1 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 FY04 FY06 FY08 FY10 FY12 FY14 FY16 Incurred costs and special audits Price proposals Cost accounting standards Defective pricing Total audits 2,500 2,000 1,500 1, FY04 FY06 FY08 FY10 FY12 FY14 FY16 Total open 1 From Department of Defense Office of Inspector General (DoD IG) Semiannual Reports to Congress Prepared by EY Government Contract Services 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, Cost accounting standards 2,340 2,426 2,413 2,648 1,927 1, Defective pricing 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 Page 7

9 DCAA trends Questioned costs GFYs $10.00 $9.00 $8.00 $7.00 $6.00 $5.00 $4.00 $3.00 $2.00 $1.00 $- Questioned Cost per Audit (In Millions) 1 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sept-15 Mar-16 Sept-16 80% 70% 60% 50% 40% 30% 20% 10% 0% Percentage of Questions Cost Sustained 1 Mar-04 Sep-04 Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sept-15 Mar-16 Sept-16 Questioned Cost per Audit ($ millions) Percent Sustained Linear (Percent Sustained) 1 From DoD IG Semiannual Reports to Congress Prepared by EY Government Contract Services Page 8

10 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 Source: Hlavin, Jacqueline. "DCAA Update." 8 November 2017, PowerPoint file. Page 9

11 DCAA accounting system pilot Page 10

12 Background DCAA initiated pilot accounting system audits at multiple large defense 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 Page 11

13 Key considerations Request copies of any audit program Be prepared for extensive walk-throughs and demonstrations Assess billing and labor controls prior to DCAA audit Develop strategies for internal audit requests and compensation reviews Identify resources and system access controls needed for IT audit procedures Page 12

14 Purchasing system Page 13

15 Regulations, guidance and applicability Business system Contractor purchasing system DFARS contract clause guidance DFARS Threshold level and attributes Exemptions Cognizant audit/review authority Awards expected to exceed $25m over the next 12-month period include those represented by prime contracts, subcontracts under government prime contracts and modifications. Notes: (1) contractor purchasing system review is not performed for a specific contract; (2) the head of the agency responsible for contract administration may raise or lower the $25m review level if considered to be in the government's best interest. Firm-fixed-price contracts awarded on a competitive basis; competitively awarded fixed-price contracts with economic price adjustment; and FAR Part 12 qualifying sales or commercial items DCMA Note: Contractor Purchasing System Review (CPSR) guidebook, published October 2, 2017, establishes the CPSR threshold at $50m in annual sales (an increase over the $25m threshold established in Federal Acquisition Regulation (FAR) ). Page 14

16 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 of segregation of duties Source selection adequately documented, including sole source justification Purchasing file maintenance and documentation retained Pricing and negotiation with subcontractors documented Clause flow-down Although there are 24 DFARS criteria, there are 29 appendices within the CPSR guidebook that dictate the DCMA audit process *See full text for criteria DFARS , Contractor Purchasing System Administration. Page 15

17 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 , Contractor Purchasing System Administration. Page 16

18 CPSR trends Data calls and determinations Data calls are requesting more data. Sixty days to write and internally vet reports. Administrative Contracting Officer (ACO) has 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. See full text for criteria DFARS , Contractor Purchasing System Administration. Page 17

19 CPSR trends Areas 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 See full text for criteria DFARS , Contractor Purchasing System Administration. Page 18

20 Historical CPSR findings Summary information of CPSR findings from FY16 which could result in corrective actions, inadequate determinations and disapproval: Finding Material Nonmaterial No finding Debarred suppliers Anti-lobbying FAR Price analysis DPAS FFATA Sole Source justifications Policies and procedures Commercial Item determinations Documentation TINA Flow-downs Training Internal review/audits Purchase reqs Negotiation evidence Source: 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 Page 19

21 Leading practices in CPSR preparation Our experience has shown that most contractors that successfully navigate a CSPR typically share the following traits: Minimum six-month preparation prior to expected on-site CPSR activity CPSR readiness team to perform a comprehensive review of key CPSR topics Risk assessment of purchase orders and subcontracts, including an assessment of award type, dollar value, volume and prior related DCAA/DCMA findings An initial detailed analysis of a sample of procurement files by parties external to the purchasing function (e.g., government compliance, third-party consultants, internal audit) Detailed analysis of current purchasing policies, procedures and practices against recent DCMA guidance Analysis and remediation of procurement files Based on initial assessments, may be a broad scrutiny of files or focused on certain aspects (e.g., cost/price analysis, certifications, file organization) Often choose to analyze all files in scope for the CPSR Development of a detailed audit support strategy, including: Participation by executive management Communication strategies Plans for system and process walkthroughs highlighting controls Plans to address known risk areas that could generate findings Page 20

22 FY18 focus areas Recent comments from DCMA leadership discussed the following areas as being 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 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-theshelf items Page 21

23 CPSR trends Reminders Plan plenty of time to complete both the risk assessment and the pre-cpsr data request Establish a relationship with DCMA Conduct pre-cpsr self-assessment Prepare a corrective action plan, if required, in a timely manner Page 22

24 2018 National Defense Authorization Acts Page 23

25 Sec. 803 Performance of incurred cost audits DCAA must notify contractors within 60 days whether the submission is adequate Audit findings shall be issued for an incurred cost audit no later than 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 be complete DCAA Issued a memorandum for regional directors on January 29, 2018 Issued to confirm that agency policy will be revised to require incurred cost submissions to be reviewed for adequacy within 60 days of receipt Agency will be providing guidance for complying with the National Defense Authorization Act (NDAA) one-year requirement Page 24

26 Sec. 803 Performance of incurred cost audits DoD is required to use a qualified private auditor to perform a sufficient 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 improve the 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. Page 25

27 Sec. 803 Performance of incurred cost audits Timeline for selection of qualified private auditors: Source: NDAA for FY2018. By October 1, 2018, DoD must provide the House Armed Services Committee and Senate Armed Services Committee copies of its acquisition 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 each year of FY19 25 By April 1, 2019, DoD must award an indefinite delivery/indefinite quantity contract to two or more qualified private auditors to perform incurred cost audits DCMA or other authorized entity outside of DoD is then authorized to issue task orders to perform incurred cost audits when needed Page 26

28 Other highlights Section 804 disallows contractors to select incurred cost submission (ICS) audit provider 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 ( ). Page 27

29 DCAA rights to data and records Page 28

30 DCAA rights to data and records Access to records controlled under FAR , Audit and Records contract 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 or anticipated to be incurred directly or indirectly in performance of this contract. right of examination shall include inspection at all reasonable times of the contractor s plants, or parts of them, engaged in performing the contract. The contracting officer (or authorized representative) has the right to examine and audit all of the records (including computations and projections) in order to evaluate the accuracy, completeness, and currency. FAR Determining allowability A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported. Page 29

31 DCAA rights to data and records 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 records should be readily available Request should clearly state what support is needed and when it should be provided Request needs to be clearly defined for time periods, contracts covered, 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 Page 30

32 What if DCAA is overreaching? Communicate and clarify the nature and timing of the requested data 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 the conversation if a resolution cannot be achieved If the issue still cannot be resolved, elevate the issue, in writing, to the DCAA Field Audit Manager and engage with the DCAA Regional Audit Manager Finally, if mutual understanding still cannot be reached, the issue should be elevated, in writing, to a Senior Executive Service official at the cognizant DCAA Regional Office or DCAA HQ Page 31

33 Relevant legal cases Page 32

34 Raytheon Unallowable 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 expressly unallowable did not address level 2 penalties. It found directly associated costs of lobbying were subject to level 1 penalties, despite not being expressly unallowable. The Board found testimony and other evidence can be used to demonstrate allowability of professional services/consultant costs absent any other contemporaneous documentation. This demonstrates the importance of having established policies and personnel training to provide assurance that unallowable costs subject to penalties are precluded from being claimed. Title 10 U.S.C. 2324(b) provides for penalties when a contractor includes in its proposal a cost that is [expressly unallowable under a cost principle ]. Source: Armed Services Board of Contract Appeals Nos , 57743, and Page 33

35 DoD IG report Page 34

36 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 response 1 Did Not Obtain Sufficient Evidence 27% Disagree Did Not Report on Pertinent Information or Scope Restrictions Did Not Adequately Document the Procedures Performed Did Not Perform Adequate Supervisory Reviews Did Not Exercise Professional Judgment in Some Instances 12% Disagree 13% Agree 9% Disagree 6% Agree Page 35

37 Contract closeout Page 36

38 Contract closeout overview What is contract closeout? A process to finish or resolve all contractual requirements for a physically complete contract The objective is to establish the final price and make the final payment. Closeout is complete when all administrative actions have been completed, all disputes settled, and final payment has been made. (DCMA Contract Closeout Guidebook) Page 37

39 Contract closeout overview Responsible personnel (DoD contracts) Submit indirect cost proposal Coordinate closeout actions Settle subcontracts Manage funds Submit final invoice/voucher Process plant and property clearance Negotiate final rates Contractor DCMA Approve final invoice Perform indirect cost audits Audit subcontractors DCAA DFAS Reconcile payments Pay final invoice Review final invoice Page 38

40 Contract closeout overview Timing guidelines 0 12 months 6 months months Varies 4 months Varies due to circumstances Physical completion DCAA actuals 8 12 months DCAA actuals 30days Closed End contractor FY Audit final incurred cost proposal* Review and process final invoice Final incurred cost proposal due* Final invoice due Legend Contractor DFAS Settle final rates* Process and pay final invoice DCAA Project office Contract Administration Office Source: DCMA * Not required for firm fixed price contracts or Contract Line Item Numbers timeline should be reduced 30 months Page 39

41 Contract closeout Leading 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 of performance 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 Page 40

42 Contract closeout Leading 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 Page 41

43 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 Page 42

44 DFARS Case 2016-D006 Procurement of commercial items Page 43

45 DFARS Case 2016-D006 Procurement 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, including cost data Promotes consistency in making commercial item determinations 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 Page 44

46 DFARS Case 2016-D006 Procurement of commercial items Expands opportunities for nontraditional defense contractors to do business 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 detail and a hierarchy of other than certified cost or pricing data that should be included in proposals Page 45

47 Questions? Page 46

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