Redstone Government Consulting Blog | Compliant Accounting Infrastructure (23)

A Prospective View of Model Employer (Government Contractor)

On April 15, 2015, members of the self-proclaimed Congressional Progressive Caucus called for an Executive Order (EO) which would define a model employer and provide model employers with preferences in terms of government contract awards.  The Progressive Caucus envisions an EO which would define a model employer to include a minimum wage of $15/hour, other benefits including paid time off, full-time hours and predictable schedules.  As noted by this Caucus, the 2014 EO which raised the minimum wage to $10.10/hour for employees of government contractors was simply not enough to eliminate stagnant wages which tether jobs to poverty and government assistance. 

Most contractors (those with calendar year ends) have incurred cost proposals (ICP) due to the government on June 30 and we know that preparing the incurred cost proposal can be stressful and time consuming.  We have prepared 10 helpful tips for contractors to consider when preparing their ICP this year to help alleviate stress, reduce the amount of time spent preparing the ICP and most importantly to result in ICP adequacy.

Government contractors have been undergoing accounting system reviews by DCAA for years, but more recently, the adequacy of a contractors accounting system does not necessarily have to be determined by DCAA.  Some Government agencies are relying on outside accounting and consulting firms to offer confidence that a government contractor has an adequate accounting system as a prerequisite for awarding a cost reimbursable contract. 

As we approach year-end, many of our clients are in the midst of preparing to close the year, of which tax planning is always an important consideration.  Historically, government contractors have maintained “2 sets of books.”  The first on a GAAP accrual basis, which is required as a component of an adequate accounting system per the SF1408 PreAward Accounting System Survey for all contractors working with flexibly-priced contracts, and the second set of books maintained on a tax basis.  There are a variety of factors that create differences between the two sets of books, such as the IRS 50% rule for business meals vs. FAR 31 allowability/allocability considerations for the same category of expense.  Further, DCAA is not tasked with assessing tax compliance, and as an agency income tax treatment has no impact to the audits performed by the agency. This year, however, a new IRS regulation concerning the capitalization of assets is creating confusion for some government contractors and could impact cost accounting for government contracts. 

On November 12, 2014, the U.S. Government Accountability Office (GAO) issued its report on the results of its review of DCAA actions to comply with section 832 of the National Defense Authorization Act (NDAA) for Fiscal Year 2013, regarding requests for company internal audit reports.   The purpose of the GAO review was to assess the extent DCAA’s revised guidance “(1) complied with the act, and whether selected requests for company internal audit reports were documented in accordance with requirements, and (2) contains safeguards to help ensure that companies’ internal audit reports are used only for authorized purposes.”

In a July 18, 2014 blog, we noted that a summation from a recent DOD-IG report (DODIG-2014-088) indicated that DLA (Defense Logistics Agency) had potentially overpaid about $9 million on 33 of 35 spare parts which were sole-sourced to the particular government contractor.  At the time, we only had the summary conclusion (the report was non-releasable); however, we recently obtained (through FOIA) a redacted copy of the DOD-IG report and that provides more clarity in terms of the alleged failings of DLA.  Coincidentally, we’ve recently read an article (Defense E-Brief published by NDIA) which emphasized that the Pentagon is putting defense contractors on notice that DOD contracting officers will demand fair prices for commercial items.

Prior to retiring from DCAA, I was involved in developing the 2012 DCAA Requirements Plan for the Huntsville Branch Office. Since one of my Huntsville contractors was a major, I was required to coordinate my plan with the DCAA Contract Audit Coordinator (CAC) in Chicago. The CAC was estimating the Business Systems staffing requirement for ONE major contractor. The estimate was prepared to consider auditing the Accounting and Billing business system requirements using the draft DCAA audit program for the respective systems. The CAC advised me that its estimate of the hours required to complete TWO business system audits across all segments of the ONE major contractor would be 235,000 over a two-year period. This estimate was communicated to DCAA management at the All Managers Meeting in the fall of 2011.

I recently delivered a presentation at the National Contract Management Association (NCMA) World Congress on the July 15, 2014 DoD proposed changes to DFARS business system Rules (DFARS Case 2012-042) for contractor accounting systems, estimating systems, and material management and accounting systems (MMAS).  A public hearing on the proposed changes is scheduled for August 18, 2014 and comments are to be submitted on or before September 15, 2014.  As noted in previous blogs, the new rules do not apply to small businesses or to other DFARS defined business systems (purchasing, EVMS, Government property).

Although the DODIG report (DODIG-2014-088) was not released because of FOUO (For Official Use Only) restrictions, the summary statements published by the DOD-IG suggest that the DOD-IG has absolutely no interest in adhering to the long-standing acquisition principles concerning commercial items and commercial item pricing (wherein the price is the price and the contractor’s profit or loss is not a factor).  The DOD-IG reported that a government contractor had significantly over-charged the government for spare parts for certain military helicopters (which presumably have commercial variants); specifically, that DLA (Defense Logistics Agency) had potentially overpaid about $9 million on 33 of 35 spare parts which were sole-sourced to the particular government contractor.  To preclude this from recurring, the DOD-IG recommended a DOD acquisition policy “to establish a percentage of commercial sales that is sufficient to determine fair and reasonable prices when items are being acquired on a sole-source contract and market-based prices are used”.  Translated, the DOD-IG wants DPAP (Defense Procurement Acquisition Policy) to provide percentages of commercial sales (presumably versus sales to the Government) to “add clarity” to the FAR 2.101 definition of items or services customarily used by the general public or by non-government entities.