Redstone Government Consulting Blog | DFARS Business Systems (13)

In its report dated March 25, 2015, DCAA issued its fourth Annual Report to Congress including a number of self-accolades for numerous accomplishments in spite of a huge disconnect between DCAA’s audits and its statutorily required audits.  DCAA provides an overview wherein it reports that its “cost-effective” approach examined $182.6 billion, issued 5,688 audit reports, identified $4.5 billion in savings with a 6.9 to 1 return on investment (ROI).   DCAA now represents that its ROI is based upon a “conservative approach” because the savings only include realized savings and not future potential savings if DCAA recommendations are implemented.   However, DCAA fails to mention that future potential savings will be reported when realized; hence, if in any given year DCAA did report future savings as well as realized savings, DCAA would be duplicating reported net savings (coincidentally an issue reported in a 2014 DOD-IG report because two different DCAA audit offices reporting the same net savings for the same audit exceptions).

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. 

This article is under review as a result of EO 14173, Ending Illegal Discrimination and Restoring Merit-Based Opportunity, signed by President Trump on January 21, 2025. As we await further information from OFCCP and the courts, please reference this article for current status and action items.

Though multiple legislative efforts have failed in amending Title VII to include sexual orientation and gender-identity to the list of protected classes which cannot be discriminated against, President Obama’s Executive Order (EO) 13672, signed on July 21, 2014, and the subsequent guidance issued by various government agencies leaves government contractors with changes to make in this arena.  Like EO 11246, Equal Employment Opportunity, issued in 1965, it impacts virtually all government contracts with a very low threshold of $10,000 or more in federal contracts or subcontracts.  Exclusions are few and unaltered as currently stated in the regulations, 41 CFR 60-1.5.

As a follow-up to a brief article in our February Newsletter which noted the February 4, 2015 disposition of a business systems proposed rule, “closed without further action”, it’s critical for government contractors to recognize that the proposal would have just added to an existing rule; however, what remains is far more substantial than the proposed changes.

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. 

Many of us who have retired from DCAA as well as contractors like to discuss the “good old days” before DCAA audits became marathons and helping contractors was not forbidden.  As DCAA became more demanding and intrusive, the preferred alternative for a contractor was to be subjected to the less-intrusive review by DCMA.  Now it appears that contractors may soon be longing for the “good old days” of DCMA as well.

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.