RGCI - What Policies and Procedures Should a Government Contractor Have

If this were only a simple question. The most straightforward answer is that it is a good idea for any company to have policies and procedures. If that company is going to do business with the US Government, those policies and procedures will have to be expanded, as each contract may present additional requirements. To help you understand the complex requirements, we will address the major business systems and other key areas.

Accounting System

FAR 16.301-3(a)(3) provides that a contracting officer can only award a cost reimbursement contract when the contractor’s accounting system is determined to be adequate. The expectation of most DCAA auditors, or even Certified Public Accountants hired by a Federal Agency, is that the contractor has policies and procedures that address all of the criteria listed on the Standard Form 1408, which are the same criteria set forth in the DFARS clause 252.242-7006, Accounting System Administration. The DFARS clause adds a requirement for sound internal controls. As we discussed in our prior article, “Why are Policies and Procedures so Important?” policies and procedures are the backbone of good internal controls.

The Department of Defense (DoD) has a contract clause (DFARS 252.242-7006) that it includes in all cost-reimbursement, incentive-type, time-and-materials, labor-hour contracts, and fixed-price with progress payments contracts on a basis of cost or percentage of completion. Yes, any of these contracts, no matter the dollar value. Additionally, many other Federal Agencies have copied and pasted this clause into their contracts.

Basically, if you plan to do business with the US Government on anything other than a commercial or fixed-price basis, with payment on delivery or performance-based payments, you should start putting policies and procedures in place that align with the SF 1408 and DFARS 252.242-7006(c) system criteria.

Estimating System

FAR 15.406-3(a)(4) requires the contracting officer to document in the price negotiation memorandum (PNM) “[t]he current status of any contractor systems (e.g., purchasing, estimating, accounting, and compensation) to the extent they affected and were considered in the negotiation.”

FAR 15.407-5(a) provides that “[u]sing an acceptable estimating system for proposal preparation benefits both the Government and the contractor by increasing the accuracy and reliability of individual proposals.” It then goes on to state that the cognizant audit activity, “when it is appropriate to do so, shall establish and manage regular programs for reviewing selected contractors’ estimating systems or methods.”

Based on these requirements, if a contractor is submitting proposals requiring certified cost or pricing data, it is very likely that their estimating system is going to be reviewed or at least the auditors will expect to be able to compare the contractor’s proposals to a set of estimating policies and procedures when auditing their individual price proposals.

Material Management and Accounting System (MMAS)

FAR places no specific requirement on a contractor to maintain policies and procedures for the management and accounting of materials and material-related costs. So, when contracting with other than the DoD, there is no requirement for MMAS policies and procedures. However, contracts with DoD do have requirements.

DFARS 242.7204 requires the inclusion of DFARS 252.242-7004, Material Management and Accounting System, in all cost-reimbursement contracts and fixed-price contracts with progress payments based on cost that are not awarded to small businesses, educational institutions, or nonprofit organizations. One would think there would be a dollar threshold and a limitation to only production contracts, but that is not the case. Even research and development contracts with no established bill of materials contain this clause.

If you are a commercial organization with a DoD cost-reimbursement contract or a fixed-price contract with progress payments based on cost, you will need MMAS policies and procedures.

Government Contractor Purchasing System

FAR 44.204(a)(1) requires that FAR 52.244-2, Subcontracts, be included in cost-reimbursement contracts and any letter contracts, fixed-price contracts, time-and-materials, and labor-hour contracts exceeding the simplified acquisition threshold (SAT). So, other than commercial FAR Part 12 contracts, FAR 52.244-2 is in pretty much every Government contract over the simplified acquisition threshold of $250,000. This clause requires consent to subcontract unless the contractor has an approved purchasing system. An “[a]pproved purchasing system means a Contractor’s purchasing system that has been reviewed and approved in accordance with part 44 of the Federal Acquisition Regulation (FAR).” FAR 44.303 specifically requires evaluation of “the contractor’s purchasing system, including the contractor’s policies, procedures, and performance under that system.”

DFARS 244.305-71 requires the inclusion of DFARS 252.244-7001, Contractor Purchasing System Administration, in all DoD contracts that include FAR 52.244-2. DFARS 252.244-7001(c) lists 24 specific system criteria that your purchasing system policies and procedures must address. The Defense Contract Management Agency (DCMA) is the federal agency that performs most reviews of a contractor's purchasing system, and even if it is not DCMA, the DCMA Contractor Purchasing System Review (CPSR) Guidebook is used by other reviewers. This guidebook expands the 24 system criteria into 30 areas covered during the review, with the first area being policies and procedures. Most CPSRs are limited to contractors with more than $50M in annual Government sales unless the administrative contracting officer identifies sufficient risk to warrant a review.

Defense Contract Audit Agency (DCAA) audits of both price proposals and incurred costs require that the contractor be able to support that all purchases are based on fair and reasonable pricing. Additionally, DCAA has questioned direct purchases where consent documentation has not been obtained or adequately maintained.

Even a small business needs policies and procedures to support fair and reasonable pricing and to document consent to subcontract, when required.

Government Property Management System

FAR 45.107 requires that FAR 52.245-1, Government Property, be included in any contract under which the contractor will be in possession of Government property. FAR 52.245-1(b)(1) states “[t]he Contractor shall have a system of internal controls to manage (control, use, preserve, protect, repair, and maintain) Government property in its possession. The system shall be adequate to satisfy the requirements of this clause. In doing so, the Contractor shall initiate and maintain the processes, systems, procedures, records, and methodologies necessary for effective and efficient control of Government property.” FAR 52.245-1(f) establishes the requirements and criteria the system must meet. While a contractor with a limited number of Government property items can limit its implementation to a plan specific to those items, it must still be a written plan that meets the requirements and criteria.

There is a specific DFARS clause 252.245-7003, Contractor Property Management System Administration; however, the system criteria requirement in (c) simply refers back to FAR 52.245-1(f).

Earned Value Management System (EVMS)

FAR 34.203(c) requires that FAR 52.234-4, Earned Value Management System, be used for major acquisitions for development, in accordance with OMB Circular A-11. For the most part, this applies to very large acquisitions that have a material impact on the Federal Government's budgeting process. FAR 52.234-4(a) requires that the contractor’s earned value management system (EVMS) be compliant with the guidelines in Electronic Industries Alliance Standard 748 (EIA-748).

The DFARS 252.234-7002, Earned Value Management System, clause requires the same standards for compliance; however, a determination that the system complies is required only if the contract exceeds $50M.

Contractor Code of Business Ethics and Conduct

FAR 3.1004(a) requires that FAR 52.203-13, Contractor Code of Business Ethics and Conduct, be included in all contracts exceeding $6M with a period of performance greater than 120 days. FAR 52.203-13 requires the contractor to:

  • Put a written code of business ethics and conduct in place within 30 days of contract award;
  • Prevent and detect misconduct;
  • Report in writing violations; and
  • Establish a business ethics awareness and compliance program and internal control system within 90 days of award.

The program requirement does not apply to small businesses or contractors receiving a FAR Part 12 commercial contract.

Human Resources

FAR Parts 3, 4, 22, and 23 each include a number of contract clauses requiring the addition of policies and procedures impacting your human resources (HR) department and your employees’ awareness regarding their work on Government contracts. Human Resources and Office of Federal Contract Compliance Programs (OFCCP) requirements include:

Compensation System

DCAA audits of your accounting system, incurred cost, and price proposals all expect the contractor to walk the auditor through its compensation system. As we discussed in our prior article, “Why are Policies and Procedures so Important?” DCAA believes that any system without adequate policies and procedures is inadequate. Please refer to the additional articles below for more information on the importance of this area.

What Policies and Procedures are Required for a Small Business?

Aside from MMAS and EVMS, the requirements for a small business are not significantly different from those for a large business. While key controls, such as segregation of duties, are hard, if not impossible, to demonstrate, it is still important to have a minimum set of policies outlining the compliance requirements for your government contracts.

Takeaway

Companies doing business with the US Government will need policies and procedures to a greater extent than an average commercial company. The following summarizes the requirements:

  • Accounting policies and procedures tied to the SF 1408 requirements are necessary if you plan to do more than commercial fixed price work with the Government.
  • Estimating policies and procedures are necessary before you submit the first price proposal, which will require you to certify your cost or pricing data.
  • Material Management and Accounting policies and procedures are necessary upon award of any DoD cost-reimbursement contract and fixed-price contract with progress payments based on cost, unless you are a small business, educational institution, or nonprofit organization.
  • Purchasing policies and procedures are necessary before submitting a price proposal for anything other than a competitive fixed-price or commercial FAR Part 12 offer to the Government. A small business can limit the policies to those necessary to support fair and reasonable pricing, flow-down clauses, and consent to subcontract.
  • Property Management policies and procedures are necessary prior to the award of any contract under which the contractor will take possession of Government property.
  • Earned Value Management policies and procedures are necessary prior to the award of any contract specifically requiring earned value reporting.
  • Ethics and conduct policies and procedures must be established within 30 days of the award of any contract exceeding $6M with a period of performance greater than 120 days. Small businesses do not have to implement an ethics awareness and compliance program.
  • Human Resources policies and procedures are necessary for all organizations and continue to expand as your government business grows.
  • Compensation policies and procedures are part of your accounting system and are necessary if you plan to do more than commercial fixed price work with the Government.

Maintaining Policies and Procedures Aligned with Contract Requirements

Government contractors should treat policies and procedures as more than internal guidance because they are often used to demonstrate how the company meets contract clauses, business system criteria, documentation expectations, and Government review requirements. Redstone GCI supports government contractors by reviewing applicable FAR and DFARS clauses, identifying required subcontract flowdowns, assessing written policies against SF 1408, DFARS business system criteria, ethics, human resources, and compensation requirements, and helping align purchasing, accounting, and operational processes with the documentation needed to support proposals, billing, incurred cost submissions, subcontract files, and Government reviews. Our team of subject matter experts also assists with policy development, customized training, corrective action planning, and operational support when government contractors need additional capacity to maintain required procedures as their contract requirements evolve.

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Written by John C. Shire, CPA

John C. Shire, CPA John is a Director with Redstone Government Consulting, Inc. providing government contract consulting services to our clients primarily related to the DFARS business systems, CAS Disclosure Statements, and DCAA/DCMA compliance preparation, advisory, and defense. Prior to joining Redstone Government Consulting, John served in a number of capacities with DCAA/DCMA for more than 30 years. Upon his retirement, he was based in Texas as an SES-level Corporate Audit Director for DCAA, managing a staff of 300 auditors at one of the largest DOD programs. Professional Experience John began his career in the late 80s working in the Clearwater, FL audit office and over the next three decades he progressed through a number of positions within both DCAA and DCMA with career highlights as DCAA Program Manager at Ft. Belvoir, Chief of Technical Programs Division, Deputy Assistant Director-Policy, Director of the DCMA Cost and Pricing Center, the SES-level Lockheed Martin Corporate Audit Director, and Director of Integrity and Quality Assurance. John’s three decades of experience in performing and leading DCAA auditors and DCMA reviewers provides a wealth of expertise to our clients. John’s role, not only in the performance of audits, but also in the development of audit policy affords him unique insights into the defense of audit findings and the linkage of audit program steps to the underlying regulatory framework. He is an expert in FAR, DFARS, and other agency acquisition regulation, as well as a subject matter expert in the Cost Accounting Standards having reviewed and provided audit feedback on many of the largest and most complex cost accounting practices during his tenure with the DCAA. John’s tenure with DCAA and DCMA came at a critical time during each agency’s history where a number of changes were occurring such as the response to the ICS backlog, development of audit approaches to the DFARS Business Systems and implementation of new audit initiatives as a result of Congressional oversight through the NDAA process. John’s leadership at the DCMA Cost & Pricing center saw oversight of all major DOD pricing actions, leadership of should cost review teams, the Commercial Pricing group and many other areas of strategic value to our clients. His involvement in these and other Agency initiatives is of great value to our clients due to his in depth understanding of DCAA and DCMA’s internal policy directives. Education John holds a Master of Business Administration and a B.A. in Accounting from the University of South Florida. Certifications Certified Information Systems Auditor State of Alabama Certified Public Accountant

About Redstone GCI

Redstone GCI is a consulting firm focused on fulfilling the needs of government contractors in all areas of compliance. With a singular mission to help contractors through the multiple layers of “red tape,” we allow contractors to focus on what they do best – support their mission with the U.S. Government. We are home to a group of consultants made up of GovCon industry professionals, CPAs, attorneys, and retired government audit and acquisition professionals.

Our focus and knowledge of audit and compliance functions administered by DCAA and DCMA will always be at the heart of what we do. However, for the past decade, we’ve strategically grown to support other areas of the government contractor back-office with that same level of focus and expertise. We’ve added expertise in contracts management, subcontract administration, proposal pricing, various software systems, HR and employment law, property administration, manufacturing, data analytics/reporting, Grant specialists, M&A, and many other areas. When we see a trend in the needs of contractors, we act to ensure we can provide the best expertise in the market to fulfill those needs.

One thing our clients can be certain of is that with the Redstone GCI Team in your corner, there is no problem too big and no issue too technical for our team to tackle.

Topics: Accounting System Compliance, Contracts & Subcontracts Administration, DFARS Business Systems, Human Resources, Contractor Purchasing System Review (CPSR), Government Regulations, Government Property Management, Federal Acquisition Regulation (FAR), Material Management & Accounting System (MMAS), Estimating System Compliance