As I have mentioned on my website, Deltek is the leader in government contract accounting systems. However, for the most part Deltek has not been very attainable for most small businesses. As a result most small businesses have been limited to Quick Books. As I mention on this website, Quick Books can be made DCAA and FAR compliant. This involves some add-ons and other work arounds. I do this rather often for small business clients. Deltek apparently has now developed an alternative that may be reachable by some small businesses. I feel the need to let the small business community know about this capability. It is called Deltek Essentials. I have not experienced this new Deltek product so I cannot comment on how well it will work for small business. The price tag is greater than any Quick Books solution; however, it is within reach of some small businesses. My first reaction to Essentials is whether the typical small business would have the adequate resources to run it and manage it. Or is this a tail wagging the dog thing. That would be my number one question. There is no doubt it will exceed the FAR and DCAA accounting system requirements as the Deltek technology has always been a leader. Deltek has always been an excellent technology for government contract accounting systems; actually it is no. 1 in the industry. JAMIS is right there as well. It has a lot of advantages over Quick Books. Assuming government contract accounting expertise is not required to run and manage it, and additional accounting resources are not required either, then I believe it will be a good solution for small businesses. This new Deltek product is certainly worth investigating. If I get the chance to see Essentials in action I will certainly comment on its viability for small business. At this point, it sounds like an alternative worth investigating.

I hear DCAA is going to re-focus on marketing costs for allowability. I understand they are going to start increasing its scrutiny on reviewing sales and marketing expense reports for allowability. This should make one emphasize the segregation of promotional marketing from Bid and Proposal efforts and direct selling efforts. The latter two are allowable in most cases. Contractors should review its expense reporting practices to make certain unallowable costs are properly segregated.

The whole idea under a cost reimbursable contract is to submit an Incurred Cost Submission at year end and firm up the billings to actual rates. However, DCAA has fallen far behind on its audits to finalize rates at year end. In some cases as much as three years. This situation is not addressed in the Allowable Cost and Payment clause. This is unfortunate for contractors. Unfortunately situation places contractors in a delay position on collecting any amounts due as a result of final indirect cost rates. It results in an under-recovery and the inability to collect until DCAA gets around to auditing the Incurred Cost Submission. Some suggestions to minimize this situation include:

1. Get submissions into DCAA as soon as you possibly can to get the ball rolling.
2. Go on offense pressure both DCAA and the Contracting Officer to make the audit a priority.
3. Get provisional rate proposals and agreements in place as soon as possible.
4. Remain conservative on forecasting the provisional rates knowing it may take years for DCAA to finalize the final rate. Do not understate these rates. Understating these rates is in essence an interest free loan that you are offering the government. This loan may take years to unravel.

To get caught up, I hear DCAA is hiring special audit travel teams to come in and get caught up in areas where DCAA is unreasonably behind. I have found this situation to be favorable to contractors. Get your submissions in so your rates can be audited and settled.

Most important is get the Incurred Cost Submissions into DCAA. Failing to do so puts the obligation on you. This further delays finalizing these rates and unltimately getting what your entitled to for indirect costs. Remember, you can only recover costs for indirect rates if there is funding available. The sooner you get the rates submitted, the more likely you can make certain there is adequate funding. If you have a funding issue, solicit additional funds sooner versus later. It is difficult to secure these funds late in a fiscal year or late in the contract’s period of performance.

DCAA by its Memorandum dated October 18, 2010 increased the threshold for conducting audits on price proposals to $10 Million for fixed price proposals and $100 Million for cost type proposals. The only exception is under exceptional circumstances outlined in the contracting officer audit request letter.

I agree with this development as it reduces potential audits on small insignificant proposals. This may prove beneficial to small businesses. However, small businesses must still develop its proposals in a manner that is compliant with cost or pricing data requirements. The upside is there should be less audit activity on smaller proposals resulting a more streamlined approach to contract negotiations.

I am often asked about deferring compensation especially in start up situations. This cost can be allowable if it meets all the requirements of FAR 31.205-6 (k) which incorporates CAS 415, Deferred Compensation. Keep in mind under cost reimbursable contracts and in situations where the Progress Payments clause is invoked billable direct costs must be paid in the normal course of business, usually within a business cycle. For deferred compensation to be allowable the FAR and CAS criteria must be met. There are special rules for unique circumstances and what if scenarios. If your company uses deferred compensation suggest the program be reviewed in light of these requirements. Also recommend that the awards be reduced to a written agreement.

A brief description of the main requirements is provided below. It is not meant to be a complete discussion on the subject but to list the main requirements. Please contact me for details if needed.

1) There is a requirement to make the future payment(s) which the contractor cannot unilaterally avoid.

(2) The deferred compensation award is to be satisfied by a future payment of money, other assets, or shares of stock of the contractor.

(3) The amount of the future payment can be measured with reasonable accuracy.

(4) The recipient of the award is known.

(5) If the terms of the award require that certain events must occur before an employee is entitled to receive the benefits, there is a reasonable probability that such events will occur.

(6) For stock options, there must be a reasonable probability that the options ultimately will be exercised.

New rule affecting a contractors compliance and internal control systems is codified by FAR 52.203-13. Actually the clause has been around for a while. It was established in 2008. The rule has been heavily debated with back and forth but is now implemented. In addition DCAA has started an initiative to audit against it. The new rule is applicable to contracts exceeding $5 Million and 120 days of contract performance. Certain parts of the rule apply to small business. The rule requires:

1. Contractors maintain written standards of conduct, be diligent in the prevention and detection of criminal conduct and maintain a culture of ethical conduct/compliance. It also requires contractors to disclose in writing to the Office of the Inspector General incidents where there is credible evidence that a violation has occured of criminal law or the civil False Claims Act.

2. Contractors must implement an ongoing employee awareness program regarding standards of conduct and reporting incidents, an internal controls system that is designed to detect incidents of noncompliance and corrective measures are implemented and carried out. The rule goes on to describe minimum requirements including periodic audits, testing and monitoring. This item only applies to large businesses, small businesses are exempt from the internal control system requirement.

This is an alert and is intended to notify contractors of the new rule and is a summary. It is not an analysis of the new rule as it is a substantial rule with detailed requirements. I encourage contractors to get a copy of FAR 52.203-13 and review the clause in its entirety.

This new rule imposes substantial compliance responsibility upon large and small businesses. Small businesses are only subject to the standards of conduct policies, training and the reporting provisions of this new rule. I encourage all contractors to review its compliance policies, procedures and monitoring in light of this rule. I encourage contractors to enhance its policies, procedures and internal control programs to comply with this complex but important rule. In regards to the reporting to the Office of Inspector General I strongly encourage contractors to seek legal counsel regarding its rights in light of disclosure. Contractors should engage qualified professionals and possibly legal counsel as needed.

The Government revised the Air Fare allowable cost rules (FAR 31.205-46) by further limiting allowable costs to the lowest air fare available to the contractor. DCAA chimed in and issued revised audit guidance by its MRD dated March 22, 2010. In this guidance DCAA is instructing its auditors to make assessments of contractor policies and procedures to secure the lowest air far available. It even goes as far as requiring its auditors to investigate the use of nonrefundable air fares or lower fares that have been negotiated by the contractor with airlines, travel agents, credit card companies, etc. Auditors will be making assessments of contractor policies relative overall travel management and advance planning to get the lowest possible air fares. It will also be investigating whether utilizing nonrefundable air fares will benefit the government net of cancellation fees.

I guess the government made a straight forward regulation more complicated. The added costs of administration may very well erode any real savings the government thinks it may recieve. DCAA is complicating this further with the added evaluation of non refundable airfares. In any event contractors should evaluate their policies and procedures relative to travel management and be aware that DCAA may be questioning normal coach air fare costs if there are possible lower cost air fares available to the contractor. Nonrefundable airfares will now be considered if the contractor’s history of cancellation fees does not outweigh any savings from non refundable air fares.

This regulation like most is aimed at the larger Defense contractors. In most cases these regulatory changes trickle down to small contractors. Small contractors are not immune to this new rule nor the DCAA audit guidance.

Contractors that execute cost reimbursable contracts or other contracts that invoke the Allowable Cost and Payment Clause (FAR 52-216-7) are required to submit its Incurred Cost Proposal submission within six months after the the completion of the accounting year. This proposal establishes final direct cost and indirect rates for the fiscal year. For calendar year contractors the due date is June 30. The proposal submission must be considered adequate for audit. Use of the DCAA Incurred Cost Electronically(ICE) Model is the expected format. This model is a very substantial submission.

As a reminder the June 30 date for calendar year contractors is soon approaching. If you have questions about this submission or its requirements please contact me.

Over a year ago DCAA made an abrupt change in how it handles audits by considering even minor deviations from compliance requirements a major deficiency. As a result, it has been recommending a host of negative actions including rejecting the adequacy of accounting systems for government contracting. Initially this was aimed at large DoD businesses. However it is also being applied to small businesses. I personally have witnessed these actions across the country at many small business locations. However, the DCAA application of this radical change in audit guidance has been very inconsistent. It varies by location and even by auditor. I have successfully turned many of these scenarios around for the contractor and to facilitate the award of contracts. But this required lots of work. I have also seen situations where the government procurement personnel have avoided DCAA essentially circumvented this guidance to get past the DCAA audit report, amazing.

The bottom-line is this, if you get one of these auditors that is following this guidance then the smallest deviations in accounting policy or practices, once considered to be immaterial, now render your systems to be inadequate. For a small business this may very well prevent you from securing contracts or a host of other negative consequences. Suggest systems, practices and policies/procedures be closely reviewed and corrective actions be taken immediately.

This is an information post. DCAA on December 10, 2009 provided direction and audit guidance to its auditors to determine compliance with the 2009 Appropriations Act. This Act limits indirect costs on DoD research grants and other contract vehicles. The limit is 35% of total costs. DCAA has instructed its auditors to verify compliance with this requirement and to audit the contractor’s internal controls regarding this compliance requirement.

Contractors should keep this in mind understand its indirect costs invoicing will be to limited to this cap and make adjustments in its billing procedures to not exceed this limitation. Should you have questions on this or been requested by DCAA to demonstrate your system meets this requirement please contact me.