Subcontract Management Regulatory Compliance - The Most Current Trends and Issues

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2 Subcontract Management Regulatory Compliance - The Most Current Trends and Issues Breakout Session #: B16 Presented by: Jeffery A. White, C.P.M. Date: July 22, 2013 Time: 2:30 3:45

3 Subcontract Compliance Management A Current Perspective We re drowning in information and starving for knowledge. -Rutherford D. Rodgers 2 2

4 Subcontract Management Regulatory Compliance - The Most Current Trends and Issues Current Subcontract Management Regulatory Compliance Environment is Heavily Influenced by Results of Commission on Wartime Contracting and Associated Lessons Learned Changes in CPSR Leadership/Organization Increased Number of CPSR's conducted in 2012 and planned for 2013, but impacted by budget cuts Increase number of CPSR auditors - 37, but high turnover rate Most firms will fail initial CPSR A number of major contractors failed business systems over last 12 to 18 months 3

5 Subcontract Management Regulatory Compliance - The Most Current Trends and Issues Impact of New Contractor Business Systems Rules More in-depth reviews Failed CPSR will cause % of payments to be withheld Zero Audit Methodology is Applied by Analysts (up to 250 files audited; Risk is being examined at all dollar values) CPSR teams/aco s use 24 major contractual factors to measure system (significant) deficiencies (See DFARS ) Rules of engagements as to how CPSR are administered have changed. Any inquiry can result in a finding Buyers/SCA s are being interviewed CPSR Teams want to examine contractors Enterprise Systems 4

6 Subcontract Management Regulatory Compliance - The Most Current Trends and Issues Contractors are no longer provided a list of recommendations at the out brief; only potential findings are identified (but not in writing). Report reviewed by a Review Board ACO issues initial determination with report Contractor has 30 days to respond if initial determination indicates that significant deficiencies were observed ACO can with hold payment at that point, or after corrective action plan has been submitted Contractor has 45 days to submit a corrective action plan to ACO if initial response to CPSR report is deemed inadequate 5

7 CPSR/DCMA Oversight Environment Industry-Wide Benchmarks CPSR's can trigger and/or influence other reviews and/or audits Earned Value Management System Small Business Review Material Management Accounting System Property System Estimating Systems Accounting/Billing Systems DCAA Audits Inspector General Audits Special Investigations 6

8 CPSR/DCMA/DCAA Oversight Environment Negative Trends/Benchmarks of Companies Failing Audits/Reviews Various Enterprise Systems Deployed; Data Integrity Issues Decentralized Organization High Visibility Programs High Turnover (Sr Executives/PM s/procurement Leadership/SCA s) Projects Understaffed (bid that way and executed that way) Wartime Procurement Activities Inadequate Lead Time Heavy Post-award workload Inadequate Procurement Administrative Lead-time PM/Requester largely controls/influences procurement process Inadequate Training Conducted Inadequate Policies and Procedures Non-Compliance Related to File Documentation Requirements Lack of Sr. Management Commitment Failure to Implement Subcontract Monitoring Inadequate Close Out Process Other Failed Business Systems 7

9 Procurement Manual Compliance A Number of Compliance Elements Examined CAS Anti-Kickback Authorized Dollar Approvals Commitment Authority EPLS Commercial Items Equal Opportunity Single/Sole Source Procurements Make or Buy Teaming Agreements Prime Contract Flow downs Requisitions Modifications Anti-Lobbying Prompt Payment Discounts Progress Payments Accounting System Reviews Earned Value Management Micro-Purchases Subcontract Administration Administration/Documentation of Task Orders Excessive Pass Through Executive Compensation Trafficking in Persons Counterfeit Goods 8

10 Impact of Purchasing System Clause on System Approval Clause Defines Significant Deficiency Significant deficiency means a shortcoming in the system that materially affects the ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes. Failure to maintain an acceptable purchasing system, as defined in this clause, may result in disapproval of the system by the Contracting Officer and/or withholding of payments. An acceptable purchasing system is on that complies the 24 system criteria listed in the clause. Lets take a look at the clause 9

11 CPSR Compliance Elements DFARS (1) Have an adequate system description including policies, procedures, and purchasing practices that comply with the Federal Acquisition Regulation (FAR) and the Defense Federal Acquisition Regulation Supplement (DFARS); (2) Ensure that all applicable purchase orders and subcontracts contain all flow down clauses, including terms and conditions and any other clauses needed to carry out the requirements of the prime contract; (3) Maintain an organization plan that establishes clear lines of authority and responsibility; (4) Ensure all purchase orders are based on authorized requisitions and include a complete and accurate history of purchase transactions to support vendor selected, price paid, and document the subcontract/purchase order files which are subject to Government review; (5) Establish and maintain adequate documentation to provide a complete and accurate history of purchase transactions to support vendors selected and prices paid; (6) Apply a consistent make-or-buy policy that is in the best interest of the Government; (7) Use competitive sourcing to the maximum extent practicable, and ensure debarred or suspended contractors are properly excluded from contract award; (8) Evaluate price, quality, delivery, technical capabilities, and financial capabilities of competing vendors to ensure fair and reasonable prices; (9) Require management level justification and adequate cost or price analysis, as applicable, for any sole or single source award; (10) Perform timely and adequate cost or price analysis and technical evaluation for each subcontractor and supplier proposal or quote to ensure fair and reasonable subcontract prices; (11) Document negotiations in accordance with FAR ; (12) Seek, take, and document economically feasible purchase discounts, including cash discounts, trade discounts, quantity discounts, rebates, freight allowances, and company-wide volume discounts; (13) Ensure proper type of contract selection and prohibit issuance of cost-plus-a-percentage-of-cost subcontracts; 10

12 Compliance Elements DFARS (14) Maintain subcontract surveillance to ensure timely delivery of an acceptable product and procedures to notify the Government of potential subcontract problems that may impact delivery, quantity, or price; (15) Document and justify reasons for subcontract changes that affect cost or price; (16) Notify the Government of the award of all subcontracts that contain the FAR and DFARS flow down clauses that allow for Government audit of those subcontracts, and ensure the performance of audits of those subcontracts; (17) Enforce adequate policies on conflict of interest, gifts, and gratuities, including the requirements of 41 U.S.C. chapter 87, Kickbacks; (18) Perform internal audits or management reviews, training, and maintain policies and procedures for the purchasing department to ensure the integrity of the purchasing system; (19) Establish and maintain policies and procedures to ensure purchase orders and subcontracts contain mandatory and applicable flow down clauses, as required by the FAR and DFARS, including terms and conditions required by the prime contract and any clauses required to carry out the requirements of the prime contract; (20) Provide for an organizational and administrative structure that ensures effective and efficient procurement of required quality materials and parts at the best value from responsible and reliable sources; (21) Establish and maintain selection processes to ensure the most responsive and responsible sources for furnishing required quality parts and materials and to promote competitive sourcing among dependable suppliers so that purchases are reasonably priced and from sources that meet contractor quality requirements; (22) Establish and maintain procedures to ensure performance of adequate price or cost analysis on purchasing actions; (23) Establish and maintain procedures to ensure that proper types of subcontracts are selected, and that there are controls over subcontracting, including oversight and surveillance of subcontracted effort; and (24) Establish and maintain procedures to timely notify the Contracting Officer, in writing, if (i) The Contractor changes the amount of subcontract effort after award such that it exceeds 70 percent of the total cost of the work to be performed under the contract, task order, or delivery order. The notification shall identify the revised cost of the subcontract effort and shall include verification that the Contractor will provide added value; or (ii) Any subcontractor changes the amount of lower-tier subcontractor effort after award such that it exceeds 70 percent of the total cost of the work to be performed under its subcontract. The notification shall identify the revised cost of the subcontract effort and shall include verification that the subcontractor will provide added value as related to the work to be performed by the lowertier subcontractor(s). 11

13 Role of ACO ACO must review business system reports and determine: Extent of Significant Deficiencies (Map Report to the Clause) Present recommendations along with initial determination Review contractor responses to recommendations Present final determination Review Corrective Action Plan (CAP) Support CAP validations and/or follow up CPSR 12

14 CPSR Trends CPSR Teams will not identify sample list until the Monday morning of the review. If files are located at multiple sites, they will review samples from each site. Files are to be shipped in and boxes are to remain unopened. 13

15 CPSR Trends CPSR Teams are reviewing sample files from each non-dod customer. We need to do the same. CPSR Teams hold daily debriefs They will not provide written recommendations prior to or during the exit conference. The CPSR Director is actually attending CPSRs Increased ACO participation during CPSR 14

16 CPSR Trends Companies must have a Make Or Buy Decision Process and must demonstrate that they document the results of meetings. Contractors must consider using a separate numbering system for CPSR auditable vs. non-auditable files. CPSR Teams might validate skipped PO numbers to see if any were removed on purpose. 15

17 CPSR Trends Teams want to operate the actual procurement enterprise system. Demonstration of approach to hands on day to day Subcontract management. Focus on compliance with terms and conditions. CPSR teams do not have an Audit Plan. Lack of consistency between and among CPSR analysts and ACO s. 16

18 17 CPSR Trends Interviews are being conducted. If the interview questions are provided in writing, they will include: Specialty Metals - Berry Amendment Executive Compensation Excessive Pass Thru Subcontract Management Supply Chain Management Make vs. Buy Management Attitude Towards Purchasing Competition Commercial Item Procurements Determinations and Flow downs Intercompany Transactions Best Value Training of Buyers Close-Out Company Organization

19 CPSR Trends Need to validate the SCA/Buyer's signature authority Authorizations to Proceed are not acceptable in lieu of a letter subcontract If the start of the Period of Performance is prior to issuance of a PO/Subcontract, a letter subcontract should have been issued 18

20 CPSR Trend RFP must be issued by the Procurement Staff otherwise this is Usurpation of Authority RFP's and Proposals must be in all Files Purchase Requisitions must contain the date entered in the Procurement and a dollar value equal to or above the order placed. 19

21 CPSR Trends All Team Mates submitting proposals on a generic SOW, is no longer considered competition if multiple awards are issued----must document them as if the files are noncompetitive files or must document them as if award will be made to a single low offeror. Task Orders need to be documented as standalone transactions 20

22 Subcontract Management Regulatory Compliance Trends Future clauses will factor in subcontract compliance monitoring Proposed Small Business Rules Payments to Subcontractors Counterfeit Goods Subcontract Management Reviews a Possibility??? 21

23 Summary Subcontract management regulatory compliance has changed more since May 2010 then over the last 25 years. ACO s play a more active role Adequate File Documentation is critical Sound Policies and Procedures are Necessary Risk Assessment and Pre-Audit Data must be accurate Enterprise Systems are being reviewed Subcontract Monitoring Future Trend 22

24 For Additional Information Jeffery A. White, C.P.M., President J.A. White & Associates, Inc Garner Lane, Suite 104 Columbia, SC (fax) Jeff Rankin, Vice President, Business Development J.A. White & Associates, Inc Wisconsin Ave. N.W. Suite 440 Washington, DC (office) (mobile) 23