Don’t Let Accounting Pitfalls Jeopardize Your 8(a) Contract

June 18, 2014

Patricia J. Mensch

Partner, Government Contract Consulting

2

Agenda.• Introduction to accounting requirements

• Understand your contracts

• Accounting system requirements

• Monitor your subcontractors

• Potential audits

3

Know Your Accounting Requirements.

Your 8(a) status does not exempt you from accounting requirements in the Federal Acquisition Regulation.

Federal auditors will not “give you a break” because you are an 8(a).

There are lots of rules and regulations, but today our goal is to discuss the practical application of these rules to your business.

4

Not All ContractorsHave the SameAccounting Requirements.Company size is not the primary driver• Large companies may have little or no special requirements• Small 8A companies may have detailed compliance

requirements

Company size may influence the complexity of the accounting system• Policies and procedures will likely be influenced by the

companies size so be cautious about borrowing policies from other companies

• The indirect rate structure may be impacted by the company’s size but not the basic requirement to properly allocate indirect costs in a reasonable manner

5

The Amount of Regulation and Compliance Required is Determined by Contract Award Type.

Basic Types of Awards• Commercial• Competitive Bid• Negotiated Procurement

o Sole Sourceo Price is not the determining factor

6

Type of Award is theStarting Point forDetermining Accounting Requirements.

• Firm fixed price (FFP)o How will you be paid?

• Time and Material/Labor Houro Must have an adequate accounting systemo Will you have materials or ODC‘s?

• Cost reimbursable – CPFF, CPAF, CPIFo Must be able to track contract costso At what level will you need to track costs?

7

Don’t Be Surprised!

Be sure that you understandyour contract terms• At what level must costs be accumulated?• Is the contract type really T&M, or does the customer just

require that billing format?• Do your vouchers reconcile to your books?• Don’t assume that the contract is closed just because

the period of performance has ended.

8

Subcontractors - Be Very Careful and Gain a Complete Understanding of Your Contract!

Be aware of flow down requirementsand contract clauses• Termination for convenience of prime• Blanket flow down of all prime contract clauses• Inconsistencies among documents – which will take

precedence?• What is the close out process?

9

Having an Approved Accounting System isthe Gateway to Awardof a Cost Type Contract.

• Failure to demonstrate adequacy will stand in the way of awardo Reversing the auditor’s opinion is very difficulto Your customer will not be happy

• Don’t wait for DCAA to arrive to tell you what an adequate accounting system iso It’s not their jobo It’s pass or fail

10

Basic Accounting Requirements.

• In accordance with GAAPo Not cash basiso Not tax basiso 8(a) exception for companies with revenue under

$2,000,000, with no flexibly priced contracts

• Common audit findingso Tax depreciation not GAAPo Proper accruals missing

– Vacation , bonus, pension, salary

o Prepaids improperly expensed

o Appropriate cutoffs

11

Additional Accounting Requirements.

• Segregate Costs by Contracto Adequate timekeeping system

o Training

• Segregate FAR unallowable costs

• Common audit findingso Related party rent

o Travel, business meals

o Bonus

o Consulting costs

12

Monitor Your Rates.

• Provisional billing rates are just that – provisional• FAR requires that you bill based on your expected final

rates and adjust your provisional rates if they are no longer valid

• Calculate your year to date rates monthly• Don’t wait to the end of the year or the end of the

contract to adjust your rateso Government may determine that your accounting system is

inadequateo You may have to pay back money that you could have used

13

Even Small Companies Need Basic Policies and Procedures.

• DCAA will expect large businesses to have many established policies and procedures

• Small companies need the basicso Accounting system descriptiono Treatment of unallowable costso Segregation of direct and indirect costso Government billingo Timekeeping

• Test your policies and procedures against what you are actually doing – DCAA will!

14

Monitor Your Subcontractors.

Pre Award• Be careful as to the type of subcontract

award you make• If cost type, you must

o Verify that they have an adequate accounting system

• Appropriate flow downs are criticalo Termination clauseso Don’t automatically flow down all of your prime contract clauses

• Obtain ACO approval to subcontract when required

15

Monitor Your Subcontractors.

Post Award• As the Prime, you are responsible for your

subcontractorso If the subcontractor overbills or bills for unallowable costs, you

are responsible

• Prime is responsible for monitoring subcontractor awards, rates, subcontract performance

• If cost type subcontract, you must o Verify that they submit an ICPo Verify that they monitor their rates and adjust in accordance

with FAR

16

Finalize Allowable Contract Costs Annually.

Incurred Cost Proposals• Determine if you have a submission requirement

o CPFF, T&Mo Prime Contracts o Subcontracts

• Complete the DCAA Adequacy Checklist• Common Problems

o Subcontractors – who/where to submito Providing FFP contract detailso Reconciling T&M labor hours billed to bookso Reporting incorrect cumulative contract costo Reporting costs at the incorrect levelo Missing/incomplete required scheduleso Failure to include all pools in required schedules

17

Audit Interfaces.

• Manage the audit• Understand the regulations• Understand the long term impact of audit

findingso Does the issue impact the cost recovery, or are you in an

overrun position?o Does the issue impact your ability to win new work?o Does the issue impact your relationship with your customer?

18

AccountingSystem Audits.

• Pre Award Auditso Demonstration of accounting systemo Detailed testing not requiredo Policies and Procedureso Prepare a walk through

• Post Award Auditso Test that the system is operationalo Trace timecardso Test transactionso Test cutoffso Test accruals/prepaids

19

Be Prepared for Your Accounting System Audit.

• Understand DCAA’s audit access rights - what they can or cannot request

• Be prepared and organized to support the audit – first impressions count!

• Understand the lingo so that you respond correctly to questions – don’t volunteer information

• DCAA Auditor quote – “If you prep for thepre-award audits, they go pretty quickly.”

20

Accounting Audits.

• Voucher Audits – Cost type contractso Test billed costs to accounting books and recordso Test for timely vendor paymentso Test for correct indirect billing rates

• Voucher Audits – T&M contractso Test billed hours to timecards and bookso Review for employee qualificationso Test for correct billing rates compared to contract

21

Voucher Audits AreCritical to Your Cash Flow!

• Failed Voucher Audit Contributes to Unfavorable Auditor Risk Assessmento Increased voucher auditso Increased scrutiny of incurred cost

proposalso Delays in payment

22

ICP Audits.

• DCAA performs a risk assessment• DCAA tests reconciliation of ICP to books• DCAA performs detailed testing

o Labor – Timecardso Expense Accounts – FAR Part 31 Unallowable Costso Bases and Pools

23

Accounting Audits.

• Progress Payment Audits – Firm Fixed Price Contracts with payments based on costso Require an adequate accounting systemo Test the mathematical formulas used in the vouchero If the auditor finds significant errors, the progress payment is

rejected and audit effort is suspendedo Apply a loss ratio if the contract is in a loss positiono Verify costs billed to accounting books and recordso Verify indirect costs billed are based on approved billing

rateso Verify vendors paid in accordance with vendor termso Require a verifiable ETC/EAC

24

Questions.

25

PresentersContact Information.

• Patricia J. Mensch

– Email: pmensch@mgocpa.com

– Phone: (858) 792-2210

• MGO Mensch

– http://www.mgomensch.com/