Government and Commercial Work

Transcription

1 Government and Commercial Work Presented by CohnReznick s Government Contracting Industry Practice Christine Williamson, Partner and Darrell Hineman, Director

2 PLEASE READ This presentation has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. This presentation and its content are the property of CohnReznick LLP and are protected by applicable copyright laws. Any unauthorized use of the information herein will be considered a violation of CohnReznick LLP s intellectual property rights. Unless stated otherwise herein, no part of this presentation may be copied, distributed, or published, in whole or in part, without the prior written agreement of CohnReznick LLP. 1

3 Should you organize your company to isolate its Government work from its commercial work? 2

4 Maybe Just because your are in a highly regulated industry doesn t mean that the laws of economics are suspended for you. 3

5 OBJECTIVES What should determine how my business is structured? What problems are not solved by my business structure? What is my organization structure going to do to how I price interdivisional transfers? What is the underlying problem I am trying to solve? 4

6 WHAT SHOULD DETERMINE HOW YOUR BUSINESS IS STRUCTURED? Business Considerations Capital Utilization - Economic reasons Risks - Internal control and cultural reasons Legal and Tax Considerations 5

7 WHAT SHOULD DETERMINE HOW YOUR BUSINESS IS STRUCTURED? Legal Entities see your attorney and / or tax advisor 6

8 WHAT SHOULD DETERMINE HOW YOUR BUSINESS IS STRUCTURED? Business Unit any segment of an organization or an entire business organization that is not divided into segments (FAR Part 2, CAS 410, 411, and 414). General and Administrative (G&A) expense any management, financial, and other expense which is incurred by or allocated to a business unit and which is for the general management and administration of the business unit as a whole (FAR Part 2) 7

9 WHAT SHOULD DETERMINE HOW YOUR BUSINESS IS STRUCTURED? Organization Structure Management establishes structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives. (COSO Integrated Framework Principle No. 3 of 17). 8

10 BUSINESS CONSIDERATIONS Product or Service What do you sell and how do you sell it? Capital Utilization Cost Saving Synergies Hard Assets, Soft Assets, and Support Functions Management & Administration Resources People (expertise, etc.) Physical (e.g. location, facilities, etc.) 9

11 LEGAL CONSIDERATIONS LAWS, REGULATIONS, & COMPLIANCE INFRASTRUCTURE Reliance on Legal Protections or Barriers to Entry Intellectual Property Protection International Traffic in Arms Regulations (ITAR), Classified Contracts, etc. Commercial Pricing Support Compliance Systems 10

12 CULTURAL CONSIDERATIONS Government contractor doing commercial work vs. Commercial contractor doing government work 11

13 WHAT PROBLEMS WILL NOT BE SOLVED? GOVERNMENT OVERSIGHT Use of commercial pricing for Government work Establishment of commerciality Support for price reasonableness Audits of commercial entities Termination of commercial items Supporting allocations of items required to be transferred at cost Audit support 12

14 WHAT PROBLEMS WILL NOT BE SOLVED? COST ALLOCATION Home Office allocations Costs benefiting other or multiple divisions Service center costs Intercompany transfer pricing / costing 13

15 Interdivisional Transfer Pricing

16 INTERDIVISIONAL TRANSFER PRICING FAR (e) Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred in accordance with this subpart. However, allowance may be price when-- 1) It is the established practice of the transferring organization to price interorganizational transfers at other than cost for commercial work of the contractor or any division, subsidiary, or affiliate of the contractor under a common control; and 2) The item being transferred qualifies for an exception under (b) and the contracting officer has not determined the price to be unreasonable. 15

17 INTERDIVISIONAL TRANSFER PRICING Remember the PED rule for interdivisional transfer pricing? Practice Exception Determined What is considered adequate policies and procedures? Established (practice) policies and procedures Adequately describing how transfer pricing is billed and booked to projects Issue standardized Purchase Order (PO) Invoices from related party transaction i.e. treated like a third-party transaction 16

18 INTERDIVISIONAL TRANSFER PRICING FAR (b) Exceptions to certified cost or pricing data requirements (but may require data other than certified cost or pricing data as defined in FAR to support a determination of a fair and reasonable price or cost realism) (1) Adequate price competition (2) Set by law or regulation (3) Commercial item (4) Waiver has been granted (5) Modifying a contract or subcontract for commercial items 17

19 INTERDIVISIONAL TRANSFER PRICING Market Price controlled by Forces of Economics? The intercompany, division, or affiliate is buying the products or services at prices established by the market. The Market determines a fair and reasonable price not the relationship between the related parties. (Market pressures control the price, not the relationship.) Commercial divisions may offer the related division a discount on the price 18

20 INTERDIVISIONAL TRANSFER PRICING Commercial Product / Item FAR Part 12 Fair and Reasonable Price Not based on Cost Commercial Market exists for goods or services Substantial Quantity Sold Evidence 19

21 INTERDIVISIONAL TRANSFER PRICING Two Separately disclosed & established practices: Intercompany Transfer-ins Intercompany Transfer-outs 20

22 INTERDIVISIONAL TRANSFER PRICING FAR (f) When a commercial item under paragraph (e) of this subsection is transferred at a price based on a catalog or market price, the contractor-- 1) Should adjust the price to reflect the quantities being acquired; and 2) May adjust the price to reflect the actual cost of any modifications necessary because of contract requirements. 21

23 INTERDIVISIONAL TRANSFER PRICING Accounting for Intercompany Transfer Pricing Can a division purchasing commercial goods apply G&A to the intercompany transfer-in if the G&A (or home office costs) were already allocated to the product? How about applying profit on a good from a commercial division that already includes profit? 22

24 INTERDIVISIONAL TRANSFER PRICING What is the difference between transfer at Price versus Cost? Price Cost Direct Material Direct Labor Other Direct Costs Subcontractor Costs Total Direct Costs Direct Material Direct Labor Other Direct Costs Subcontractor Costs Total Direct Costs Fringe Overhead G&A Total Indirect Total Costs Fringe Overhead G&A (only once) Total Indirect Costs Total Costs Profit Price = Includes Profit Profit 23

25 INTERDIVISIONAL TRANSFER PRICING Best Practices Obtain commercial determination from the Contracting Officer Document, document and document to support practice (i.e. PO, Invoices, Policies & Procedures, etc.) Consistently Practiced no matter the pressure from Management Train Proposal Teams, Pricing and Buyers in Procurement on policy and procedures Offer Quantity Discounts, if appropriate Avoid Modifying Item or services to avoid reporting actual cost 24

26 What is the underlying problem we are trying to solve? Government Oversight

27 DoD IG Report of Significant Incurred Cost Audits Questioned Amount Reports % Unsupported $ % Statute of Limitations (FY + 7) % CAS and Other Allocation Issues % Not Described % Material or Subcontracts % Other FAR Part % Other (e.g., Calculation Errors, etc.) % Legal Costs % Health Insurance Costs % T&M Qualifications % Labor % Executive Compensation % Not in Accordance with Contract % Travel Costs % Total $ 3, % 26

28 DCAA AUDIT SUPPORT What is the greatest audit risk for the contractor? How to avoid that risk? Understanding of the auditee Communication with auditee Understanding of relevant controls Obtaining sufficient evidence 27

29 CONCLUSION Should you organize your company to isolate its Government work from its commercial work? 28

30 CONTACT INFORMATION Christine Williamson Partner Darrell Hineman Director GovCon360 keeps you abreast of the ever-changing regulatory environment that is Government contracting. From reference materials, like searchable pdf copies of the FAR and DCAM, to our past Lunch and Learn seminar slide decks and thought pieces on industry matters, we ve got it covered. Subscribe to our RSS feed to receive short alerts on recent industry changes. It s always been our job to help our clients maintain a competitive advantage by staying ahead of the curve. This website is an extension of the services we ve been providing for over 35 years by putting useful resources and up-to-date information at your fingertips. 29