Redstone Government Consulting Blog | Redstone Team (16)

On April 12, 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued a joint statement explaining their standard of review under the antitrust statutes of proposed transactions (mergers, teaming agreements, and other joint business arrangements) acquisitions, within the defense industry. The DOJ and FTC are responsible for reviewing mergers in the defense industry under Section 7 of the Clayton Act, which prohibits mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly.”

Over the past few years, the Department of Energy (DoE) has, to the unpleasant surprise of some prime contractors, quietly been inserting contract clauses in all of their management and operating contracts and some non-management and operating contracts making prime contractors responsible for not only managing their subcontracts but also for auditing their subcontracts.  More recently, the Inspector General has been conducting reviews of prime contractors for compliance with this requirement and contracting officers have been placing greater emphasis on enforcing the requirement.

DCMA and DCAA have issued guidance on how to deal with the impact of the $487,000 rate cap that applies to contracts subject to FAR 31.2 and awarded on or after June 24, 2014. If you have not read this document, see DCAA’s MRD 16-PSP-005(R), dated February 19, 2016. It includes the DCMA guidance also. You have flexibly priced contracts that require an annual incurred cost submission. Now what, exactly, are you supposed to do with this guidance?

As a small (or potential) government contractor or subcontractor, one question you will frequently encounter is if you have a “Job Cost Accounting System.” This may sound like a specific type of software, but it is not. Many different accounting software systems can provide job cost accounting if properly configured. The questions on the SF 1408, Pre-award Survey of Prospective Contractor Accounting System, are designed to discover if you have a job cost accounting system. This still doesn’t tell the non-accounting person what a job cost accounting system is or why it is important (other than to get the right answers on the SF 1408 to qualify for a government cost-reimbursable contract).

For years, DCAA has promised Congress it would get current on its incurred cost backlog. For years, it has failed to deliver on that promise. Logically, you would have expected DCAA to address the quality of their audits (or lack thereof) and eliminate the inefficiencies caused by, among other issues, (i) failure to adequately assess risk, (ii) performance of unnecessary procedures due to fears of failing the internal quality control reviews, regardless of risk, (iii) inadequate understanding and misinterpretation of regulatory requirements, and (iv) failure to have sufficient communication with the contractor to understand the issues. Unfortunately, that has not been DCAA’s approach. Instead, DCAA chose to increase the thresholds for the incurred cost submissions selected for audit, write off millions in lieu of audit, and claim victory. That strategy failed once they ran out of low hanging fruit to write off and still needed to do actual audits.    

For government contractors your indirect rate structure is critical to your competitiveness, perhaps more so than any other element of the proposal.  In today’s LPTA environment, most offerors are going to be very similar when it comes to technical capabilities and past performance, so almost always award decisions come down to cost.  For the select few companies that have a technical edge or a differentiator in the way of performance that outweighs the cost to your government customer you can stop reading now.  The vast majority of companies working with the federal government don’t have this luxury, so what are they doing to set themselves apart when it comes to developing their indirect rates and overall wrap rates (wrap rates are a function of total direct and indirect costs for a labor hour divided by the direct labor hourly rate); hence, a lower wrap rate is perceived to be a more competitive overall cost structure)?

In each of the past four years, the Justice Department has recovered more than $3.5 billion dollars from cases that involve the False Claims Act (FCA). Although the FY2015 recoveries are a substantial decline from FY2014’s $5.7 billion, these are still extraordinary amounts of money that are being recovered based upon fraud allegations. It should be noted that the DOJ FY2015 Summary Media Release mentions a number of settlements by name (i.e. specific identification of the individual or company which allegedly violated the FCA); however, this DOJ Media Release masks the fact that many of these involve mere allegations with no finding of liability (a statement included at the very end of each individual settlement media release). Of note, the government contracting world we live in represents the second largest piece of the recovery pie; according to the Department of Justice’s release, the government contracting slice was $1.1 billion over the last fiscal year. Something of a “wow moment” even though FCA recoveries from health related services continue to lead the pack.

In today’s budgets constrained environment U.S. Government contracting officers are seeking every opportunity to obtain discounted or reduced prices for services and materials, and as a tax payer that should make us all happy. However, for those of us who work in the government contracting industry the sight of LPTA solicitations, and enhanced scrutiny of proposals does make work life more challenging. One of the areas that we see challenged by contracting officers either during the proposal process or after award is the application of G&A on direct travel associated with the contract. This might be a solicitation provision, a Government expectation for contractor concessions during negotiations or a Government interpretation after contract award.

“Help! We received a letter from our ACO informing us that they will be conducting a Contractor Purchasing System Review (CPSR) three months from now – can you help us?” This is a scenario we hear all too frequently these days. As promised, DCMA has ramped-up their efforts to ensure contractors purchasing systems are being reviewed and assessed for adequacy.

DFARS 252.242-7006(c)(8) specifically requires management reviews or internal audits of the system to ensure compliance with the contractor’s established policies, procedures.

One of the first things a DCAA auditor looks at when auditing a contractor’s accounting system is its policies and procedures. Policies and procedures represent control activities that are essential for an adequate system of internal controls. Good policies and procedures help ensure consistent operations in accordance with management objectives. DCAA cites policy and procedure inadequacies or the failure to comply with policies and procedures in virtually every deficiency report it issues related to internal controls.