Updates and Initiatives of the DCMA and DCAA

Presented by Christine Williamson, CPA, PMP, PartnerKristen Soles, CPA, Partner

March 8 , 2018

P L E A S E R E A D

This presentation has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

This presentation and its content are the property of CohnReznick LLP and are protected by applicable copyright laws. Any unauthorized use of the information herein will be considered a violation of CohnReznick LLP’s intellectual property rights. Unless stated otherwise herein, no part of this presentation may be copied, distributed, or published, in whole or in part, without the prior written agreement of CohnReznick LLP.

1

A g e n d a

• State of the Agencies – DCAA/DCMA

• Incurred Cost Initiative Update

• Select NDAA provisions

• Business System Status

• Commerciality for DOD

• 809 Panel Update

• Top 6 Items Contractors Should Follow 2018

• Industry Trends – As reported in CohnReznick’s GAUGE Report

2March 2018

R e p o r t s R e f e r e n c e d i n P r e s e n t a t i o n

NDAA FY2018 and 2017, Section 803, 809, 811

DCAA Report to Congress on FY 16 & FY15 Activities, March 31, 2017 & 2016

DODIG External Peer Review on the DCAA, November 17, 2017

Testimony of Anita Bales before the House Armed Services Subcommittee on Oversight and Investigations, April 6, 2017

GAO-17-738: Published: Sep 28, 2017. Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog

Interview Tim Callahan 1/16/18, Director of Contracts DCMA

DCMA Overview and Select Information Slides from the Agency

CohnReznick GAUGE Report November 2017

DCAA Update by Mr. Jason Besser, Chief, Pricing and Special Projects March 2018 presentation

809 Panel Interim Report May 2017 and Volume 1 Report March 2018

3March 2018

S T A T E O F T H E A G E N C I E S : D C M A & D C A A

D C M A & D C A A D I R E C T O R S

5March 2018

Date as of 12/31/17

Number of Civilians 11,558 Number of Military 531Number Operations Directorates 3Number of Contract Management Offices (CMOs) 45Serviced Contractor Locations 19,432 Number of Active Contracts 337,901

Date as of 9/30/16

Auditors 4023

Support Staff 490

Total4,513

CPAs/CFEs1,182

Other ProfessionalCertifications

425Advanced Degrees

1,883

6March 2018

D C A A S t r u g g l e s /S u c c e s s e s

• Staffing / budget issues – 26% of workforce licensed (down 1%); workforce down total by 6.5%

• Increased pressure from Congress who are skeptical about• Incurred cost closed without audit• Multiyear auditing• Materiality

• Awards to contractors whose business systems/proposals go unaudited (struggle for both)

• Updates to Estimating system workprogram complete• DCAA Reorg in effect in FY17• Significant increase in reported percentage of agreed to dates met• Successful peer review

7March 2018

D C M A S t r u g g l e s /S u c c e s s e s

• Business Systems- CBAR system

• Final Determination of the Adequacy Responsibility

• Aging of the System reviews

• Progress on Standing up 6 Commercial Items Centers of Excellence

• Contracting Officers disposition of aged incurred cost audits

• Contract Closeouts(Ability One)

• DCMA video on “who is DCMA”

• Resource Workload Struggles

• New Director Initiatives

8March 2018

U P D A T E O N I N C U R R E D C O S T I N I T I A T I V E

I n c u r r e d C o s t –U p d a t e o n P r o g r e s s

10March 2018

I n c u r r e d C o s t –U p d a t e o n B a c k l o g

11March 2018

A u d i t s C o m p l e t e d

DCAA Audit Reports Issued

Type FY15 FY16

Forward Pricing 883 873

Special Audits 1,095 981

Incurred Cost 1,925 2,103

Other Audits – Business SystemsAudits

643 312

4,546 4,269

12March 2018

I n c u r r e d C o s t E l a p s e d D a y s

13March 2018

C o s t s Q u e s t i o n e d

14March 2018

15March 2018

G A U G E R e p o r t F i n d i n g s o n D C A A A u d i t P r o g r e s s

W h a t T y p e o f A u d i t s t o E x p e c t B a s e d o n C o h n R e z n i c k ’ s G A U G E R e p o r t

16March 2018

D C A A – 2 0 1 6 R E P O R T T O C O N G R E S S

2 0 1 6 R e p o r t t o C o n g r e s s

• DCAA requested Early DCAA engagement on congressional proposals.

“We support improvements to the acquisition process and believe that by working with Congress to understand the overall objectives from the outset, we can more effectively help them accomplish those objectives, capitalize on progress already made, and prevent potential disruptions to audit process efficiencies.”

• Once again asked for assistance in maintaining a steady staffing level of 5,100 employees.

18March 2018

2 0 1 6 R e p o r t t o C o n g r e s s

Items of Note:

High Risk Business Systems• Audited 21 high risk Estimating and MMAS systems (issued 6 reports)• Audit programs updated as a result to be applicable to companies of all

sizes

Use of Audits – FY17 Initiatives• Working with Textron Corporation to use Textron’s internal audit group to

perform certain portions of fieldwork.• Also asking contractors to submit working papers from Sarbanes Oxley

testing to see if any of it is useful to gain efficiencies in contract audit.

19March 2018

D C A A - F Y 1 7 A C T I V I T I E S

D C A A R e o r g a n i z a t i o n M a p

DCAA Reorganization-Effective

21March 2018

N e w M R D ’ s – a l l o n o n e s l i d e

22March 2018

C e n t e r s o f E x c e l l e n c e

( T I N A = T r u t h f u l C o s t o r P r i c i n g D a t a )

23March 2018

C B A R & B U S I N E S S S Y S T E M U P D A T E

D C M A C B A R U P D A T E

• CBAR (Contractor Business Analysis Repository)• A secure system to share information between

DOD procurement and DCMA.• Information about each and every government

contractor.• Supports price negotiations and awards• Ask for your CBAR results and often

25March 2018

T y p e s o f I n f o r m a t i o n i n C B A R

Indirect and Direct Rates Forward Pricing Rate Agreement (FPRA) Forward Pricing Rate Recommendation (FPRR) Indirect Expense History IR&D and B&P data – past and future Cost Estimating Relationships

Status of Business Systems – CAGE and corporate level

Cost Accounting Standards Status – Disclosure and Standards

Business Clearance Data

Parent Corporation information

DCMA and DCAA Points of Contact

26March 2018

W h o ’ s r e s p o n s i b l e f o r w h a t ?

(1) Contractor Purchasing system (CPSR)(2) Property system(3) Earned Value Management system (EVMS)

(1) Accounting systems (2) Estimating system(3) Material Management

and Accounting system (MMAS)

DCAA DCMA

27March 2018

B u s i n e s s S y s t e m s D F A R S 2 5 2 . 2 4 2 -7 0 0 5 – W h y a r e t h e y C r i t i c a l

PCO should insert the clause or delegate authority to do so (if missing) DCMA – INST 131Accounting, Property and Purchasing are the top 3 reviewedDCMA HQ CBS REVIEW PANEL – Meet to review the disapproval before the contractor is notified

– in writing 318 disapprovals since September 2011 Final determination 30 days after contractors reply Corrective action Provide withhold instructions

N o v 2 0 1 7

28March 2018

B u s i n e s s S y s t e m U p d a t e – w h a t b u s i n e s s s y s t e m i s c o s t l y t o c o n t r a c t o r ?

29March 2018

CW1

Slide 30

CW1 Christine Williamson, 1/17/2018

B u s i n e s s S y s t e m U p d a t e – y e a r o v e r y e a r – t h e y a r e a g i n g !

30March 2018

As of April 2015 As of May 2016 As of Nov 2017 Change

Accounting 3,164                    3,442                        3,707                    265                 Estimating 603                       605                           727                        122                 EVMS 288                       250                           323                        73                    MMAS 275                       279                           354                        75                    Property 1,966                    2,167                        2,389                    222                 Purchasing 718                       748                           890                        142                 

7,014                    7,491                        8,390                    899                 

B u s i n e s s S y s t e m R u l e A p p l i c a b i l i t y

Accounting System All contractors with cost, T&M, labor-hour, or incentive contract or Fixed-Price

contracts w/ cost-based progress paymentsEstimating System All contractors NOT a small business AND with…

– $50 million or more prior FY in DOD contracts/subs for which certified cost or pricing data was required; or

– $10 million or more prior FY in DOD contracts or subcontracts for which certified cost or pricing data was required; and was notified in writing by CO that clause applies

Purchasing System subject to review when… Includes FAR clause 52.244-2 Subcontracts

(conflicts with cost-based threshold for CPSR)

31March 2018

B u s i n e s s S y s t e m R u l e A p p l i c a b i l i t y

Material Management and Accounting System All contractors with an MMAS and with cost-type contracts or fixed-price contracts with

progress payments and exceeding $150k (aggregate) not for commercial items, and Not small, educational institution, or nonprofitProperty Management subject to review if… Includes FAR clause 52.245-1 Government propertyEarned Value Management must be audited when… Cost or incentive contracts >= $20M or based on risk assessment, and containing

EVM clause must be reviewed against DFARS criteria for “acceptability” Cost or incentive contracts >= $50M and containing EVM clause subject to full system

validation by DCMA

32March 2018

D C A A – O T H E R I T E M S

D C A A E x t e r n a l P e e r R e v i e w R e p o r t

34March 2018

S u m m a r y O v e r v i e w

• DODIG reviewed the DCAA’s system of quality control in effect as of June 30, 2016.

In our opinion, except for the evidence, reporting, documentation, supervision and professional judgment deficiencies described…. The system of quality control for DCAA in effect for the year ended June 30, 2016, has been suitably designed and complied with to provide DCAA with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects. Audit organizations can receive a rating of pass, pass with deficiencies, or fail. DCAA has received a rating of pass with deficiencies.

35March 2018

S u m m a r y o f D e f i c i e n c i e s

1. DCAA did not obtain sufficient evidence to support the opinion in the report (18 of 67 audits – 27%)

2. DCAA did not report on pertinent information or scope restrictions (8 of 67 audits -12%)

3. DCAA did not adequately document the procedures performed in order to understand the nature, timing, extent or results of work performed. (9 of 67 audits –13%)

4. DCAA did not perform adequate supervisory reviews which impacted the accomplishment of audit objectives (6 of 67 audits – 9%)

5. DCAA did not exercise professional judgment (4 of 67 audits – 6 %)

DCAA agreed to some findings and disagreed with others. GAO’s opinion remain unchanged in light of the DCAA’s response.

36March 2018

G A O R e p o r t - A d d i t i o n a l M a n a g e m e n t A t t e n t i o n a n d A c t i o n N e e d e d t o C l o s e C o n t r a c t s a n d R e d u c e A u d i t B a c k l o g

37March 2018

G A O R e p o r t - A d d i t i o n a l M a n a g e m e n t A t t e n t i o n a n d A c t i o n N e e d e d t o C l o s e C o n t r a c t s a n d R e d u c e A u d i t B a c k l o g

Contract Closeout delays are not all DCAA’s fault…

38March 2018

D C M A P R I O R I T I E S & U P D A T E S

D C M A P R E S E N C E I N U . S .

40March 2018

D C M A V A L U E T O D o D

41March 2018

W h e r e D C M A A s s i s t s b y P h a s e

42March 2018

D C M A / D C A A H a v e t o W o r k To g e t h e r

43March 2018

N D A A & 8 0 9 P A N E L – E F F E C T S A N D O P I N I O N S O N W H A T C O U L D H A P P E N

W I T H D C A A & D C M A

S e c t i o n 8 0 9 P a n e l

The 18-person panel, created in section 809 of theFY 2016 National Defense Authorization Act(NDAA) and amended by section 863(d) of theNDAA for FY 2017 and sections 803(c) & 883 ofthe NDAA for Fiscal Year 2018, is tasked withfinding ways to streamline and improve thedefense acquisition process. The panel has 2years to develop recommendations for changes inthe regulation and associated statute to achievethose ends.

45March 2018

8 0 9 P a n e l

46March 2018

8 0 9 P a n e l

47March 2018

8 0 9 P a n e l R e c o m m e n d a t i o n s t h a t i m p a c t D C A A

Rec. 6: Revise the elements of DCAA’s annual report to Congress to incorporate multiple key metrics.

Rec. 7: Provide flexibility to contracting officers and auditors to use audit and advisory services when appropriate.

Rec. 8: Establish statutory time limits for defense oversight activities. (DCAA or IPA)

Rec. 9: Permit DCAA to use IPAs to manage resources to meet time limits.

Rec. 10: Replace system criteria from DFARS 252.242‐7006, Accounting System Administration, with an internal control audit to assess the adequacy of contractors’ accounting systems.

48March 2018

8 0 9 P a n e l R e c o m m e n d a t i o n s t h a t i m p a c t D C A A

Rec. 11: Develop a Professional Practice Guide for DoD’s oversight of contractor costs and business systems.

Rec. 12: Require DCAA to obtain peer review from a qualified external organization.

Rec. 13: Increase coverage of the effectiveness of contractor internal control audits by leveraging IPAs.

Rec. 14: Incentivize contractor compliance and manage risk efficiently through robust risk assessment.

Rec. 15: Clarify and streamline the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of DoD’s oversight.

49March 2018

N D A A f o r F Y 2 0 1 8 f o r D C A A S e c t i o n 8 0 3 h a s s i g n i f i c a n t i m p a c t

• NLT 10/1/2020 DoD shall comply with commercially accepted standards of risk and materiality in performance of Incurred cost audits.

• The DoD shall use qualified private auditors to perform a sufficient number of incurred cost audits.

• Incurred cost audits are completed within one year after the date of a qualified submission. Contractors must be notified within 60 days of submission if qualified.

• Effective 10/1/2022 the DCAA may only issue unqualified audit findings for an incurred cost audit only if the DCAA is peer reviewed by a commercial auditor and passes such a peer review. (No longer DODIG)

• No multi-year audits unless requested by the contractor.

50March 2018

2 0 1 8 N D A A C o n t i n u e d

51March 2018

C O M M E R C I A L I T Y U P D A T E

C o m m e r c i a l i t y C e n t e r s o f E x c e l l e n c e

53March 2018

R o l e s o f D C M A & D C A A f o r C o m m e r c i a l i t y

DCAA• Pre-award and post-award audits• Incurred Costs and Billing Audits• Focus on Subcontract Determination for Commercial Item• Non-reliance on past determination and in-depth analysis of price

reasonableness

DCMA• CPSR Focus• Cost & Pricing Center recommendations• Contracting Officers decide Commercial Items status for Primes• Moving follow on contracts from Part 15 to Part 12

54March 2018

R E C E N T C R I T I C A L D F A R S O R F A R S T A N D A R D S

R e c e n t C l a u s e s t o t a k e n o t e o f a n d / o r t h o s e w h i c h h a v e r e s u r r e c t e d

Buy American, Hire American: 52.225 sections. Executive Order 13788.

Cyber Security: New DFARS clauses to protect Covered Defense Information (CDI), also known as Controlled Unclassified Information (CUI), or Unclassified ControlledTechnical Information (UCTI). Went into effect Dec 2017. Primes and subs still trying to figure out what is required. DCMA is too. Contractors are either using in-house FSO to establish requirements and testing or using outside experts to test and report

OTAs

DOD Restructuring of Undersecretary ATL position

All Small Mentor Protégé Program

Bid Protest

56March 2018

F Y 1 8 I n i t i a t i v e s D C A A

57March 2018

F Y 1 8 + P r i o r i t i e s f o r D C M A

o Contract close out issueso NIST Standardso Working with DCAA/DCMAo Workforce retiring/filling positionso New director = new initiatives

58March 2018

W h a t d o e s D C M A D o

https://www.dvidshubet/vide/480264/dcma-does

59March 2018

S t a y T u n e d – I t ’ s N e v e r a D u l l M o m e n t ! !

• Stay tuned to see what's next for Government Contractors:• FY 2018 Budget or Continuing

Resolution• Shutdown Fallout• 809 Panel Progress & Changes• M&A Picking up• How will the tax reform affect

decisions• Revenue Recognition Changes• Complete the FY18 GAUGE survey

by going to: http://bit.ly/2BVPKnV

60March 2018

A B O U T T H E P R E S E N T E R SC H R I S T I N E W I L L I A M S O N , C P A , P A R T N E R

7 0 3 - 8 4 7 - 4 4 1 2c h r i s t i n e . w i l l i a m s o n @ c o h n r e z n i c k . c o m

K R I S T E N S O L E S , C P A , P A R T N E R

7 0 3 - 8 4 7 - 4 4 1 1k r i s t e n . s o l e s @ c o h n r e z n i c k . c o m

61March 2018