Congratulations! You have won your first prime federal contract – now what do you do?! Unfortunately, regardless of how many contracts a company has won, the focus seems to be on “the win” and NOT how a company is going to manage and administer the contract. Larger companies’ that have been around for years have figured out through the “school of hard knocks” (i.e. Government audits, ACO cure notices, contract terminations, debarments, system inadequacies, etc…), how to comply with all the federal laws and regulations that are inevitably part of the Federal government contract you were just awarded.
What is a small or mid-sized contractor to do? There are a lot of moving parts in both performing and administering your contract. From preparing the proposal to final contract close-out, government contractors are subject to several rules and regulations. Contractors often overlook sections H Special Contract Requirements and I Contract Clauses of their contract. Section H includes a clear statement of any special contract requirements that are not included in Section I Contract clauses, or in other sections of the uniform contract format. Schedule I will include clauses required by law or regulation and any additional clauses expected to be included in the contract, if these clauses are not required in any other section of the uniform contract format. An index may be inserted if this section’s format is particularly complex. If clauses are referenced, read them from the original source.
It still amazes me when I ask clients about their contract mix and requirements, they cannot provide the information easily. Small to mid-size companies are concerned about the profit margins and do not want to spend the money on the administrative side of the house. This is often a mistake and as companies grow and are subject to more contract oversight (i.e. audits), they often get “caught with their pants down”.
Nearly all agencies are required to comply with the Federal Acquisition Regulation (FAR), most have supplemental regulations (e.g. DFARS or Defense FAR Supplement) and some agencies are exempt from FAR (e.g., the Federal Aviation Administration, and the U.S. Mint) in which case they the agency promulgates its own procurement rules. The purpose of the FAR is to provide "uniform policies and procedures for acquisition." Among its guiding principles is to have an acquisition system that satisfies customer's needs in terms of cost, quality, and timeliness; minimize administrative operating costs; conduct business with integrity, fairness, and openness; and fulfill other public policy objectives.
Successful contractors recruit qualified knowledgeable personnel for the administrative side of the house either by hiring or using supplemental external sources for accounting, contracting, subcontracting, purchasing and human resource personnel. They are often considered the “non-value added” staff (i.e. they do not directly produce revenue); however, they are the compliance side of the house that will keep the doors open and the lights on when it comes to avoiding costly compliance issues.
What are SOME of the things government contractors need to know?
1. READ YOUR CONTRACT from start to finish! Understand what you have signed up for and what the risk exposures are to the company.
2. Know the FAR and/or hire or otherwise engage experienced personnel with government contracting experience and knowledge. Obtain a copy of the FAR and bookmark the website http://www.acquisition.gov/far
3. Obtain a copy of the applicable FAR Supplements; e.g. DFARs for DoD http://www.acq.osd.mil/dpap/dars/dfarspgi/current/index.html
4. Understand key FAR clauses or other federal rules and regulations that may be part of your contract. Understand the company’s roles and responsibilities and potential impact on contract performance.
Examples of some key clauses and federal rules and regulations that may apply to your contracts and organization:
- The McNamara-O'Hare Service Contract Act of 1965 (SCA) FAR 52.222-41, 52.222-42, 52.222-43) - applies to all federal contracts where the principal purpose is to furnish services in the U.S. through the use of service employees (FAR 22.1003). Contracts that may exceed $2,500 must contain certain clauses (FAR 22.1006) regarding SCA requirements, and most SCA-covered contracts must also contain one or more wage determinations listing the minimum wage and fringe benefits rates to be paid to covered employees. Examples of covered services can be found at FAR 22.1005.
- The Davis-Bacon and Related Acts (DBA) (FAR 52.222-6) - applies to all contractors and subcontractors performing on federally funded or assisted contracts in excess of $2,000 for the construction, alteration, or repair (including painting and decorating) of public buildings or public works. Davis-Bacon Act and Related Act contractors and subcontractors must pay their laborers and mechanics employed under the contract no less than the locally prevailing wages and fringe benefits for corresponding work on similar projects in the area.
- Contractor Purchasing System Review (CPSR) (FAR Part 44; Clause 52.244) - examines your company's compliance with government subcontracting rules and can be required when your company approaches an annual government sales threshold of $25 million (FAR Part 44.301).
- Cost Accounting Standards (CAS) (FAR 52.230) – a set of 19 standards and rules promulgated by the United States Government for use in determining costs on negotiated procurements. CAS differs from the FAR in that FAR applies to substantially all contractors, whereas CAS applies primarily to the larger ones. Contracts awarded to small businesses are exempt. The threshold for CAS is initially triggered at $7,500,000 with subsequent CAS covered awards at $700,000 and the administrative rules for CAS are complicated and by all measures “contractor unfriendly”.
- Truth – in Negotiations (TINA) (FAR 52.215-12/13) - If the prime contract was awarded with a total value in excess of $700,000 and was awarded on a noncommercial and/or noncompetitive basis, it is subject to TINA. TINA requires the organization to provide the government with current, accurate and complete cost or pricing data including the requirement to submit updated data throughout the negotiation process and to certify that the data is current, accurate and complete at the close of negotiations.
- International Traffic in Arms Regulations (ITAR) – These regulations control the import and export of defense-related articles and services in the United States Munitions List.
- Incurred Cost Submission - Any contract that includes the FAR clause 52.216-7, “Allowable Costs and Payment Clause,” includes the requirement for submission of an adequate indirect cost rate proposal within six months of its fiscal year end. This proposal is prepared by contractors to document its contract direct costs as well as the indirect (Overhead and General and Administrative (G&A) rates for its fiscal year.
- Small Business Subtracting
5. Ensure your accounting, billing, purchasing and estimating systems can pass audit scrutiny. Standard Form (SF) 1408 lists several requirements to determine if an accounting system is adequate. Adequate accounting systems need to be able to segregate direct and indirect costs, track costs per contract (down to the lowest billing level), track employee’s time by intermediate or final cost objective and use a labor distribution system to charge labor costs to the appropriate project.
Again, this is just the “tip of the iceberg” of things government contractors need to know and be aware of while performing their contracts. Unfortunately, all too many companies do not read or fully understand their contract requirements and believe that because the government initially pays the contractor bills, they are won’t be audited and don’t need to invest the time and resources in ensuring compliance. Don’t make that mistake!