Small Business Insight Into the Business System Review and Audit Process Business Systems Overview

Introductions Your Instructor (Mark Hijar) Founder of and Lead Consultant for ProcureLinx LLC Creator of ProcureLinx Pro™ Web-Enabled CPRS Solution Former … Subject Matter Expert, Federal Procurement Compliance General and Corporate Counsel Director of Compliance Director of Purchasing Sub/Contracts Administrator

Introductions Course Overview – What Will We Cover? Business Systems Rule Impact of Business System Oversight on Small Businesses Overview of Federal Contractor Business Systems Insights into Surviving the Business System Process

Business Systems Rule Implemented in FEB 2012 via DFARS Creates the formal process through which the six (6) contractor business systems will be evaluated and the impact of these evals Applies to Department of Defense Prime Contracts, however … Multiple Government Agencies require maintenance of various DoD business systems AND Once you’re “in the cycle” all system output can be reviewed by DoD oversight agencies. 4

Business Systems Rule DFARS describes the six (6) systems that can be reviewed/audited by the Government. Systems with “significant deficiencies” require: Corrective Action Plan proposal by Contractor and Acceptance by the Government Re-evaluation of the Significant Deficiencies; and 5% withhold of amounts payable to Contractor under covered contracts (10% if 2 or more systems have “significant deficiencies” 5

What happens when you pass a Review/Audit? Qualification to respond to RFPs that require one or more business systems. Ability to manage complex contract types and tasks with little or no direct Government oversight Increased profitability at lower overall proposed prices. How? Supporting documentation to ensure payment for work performed. When and why? 6

What Happens When You Fail a Review/Audit? Disqualified from bidding on a wide variety of contracts. How is the Government increasing business system requirements? Management of complex contracts is not available or only available with significant oversight (including prime contractors). During and after performance: Proposed amounts will be questioned during consent process Significant reductions during incurred cost audits. 7

What are the Business Systems Subject to Evaluation? Accounting – Audit of contractor’s system for collecting, segregating and invoicing time and costs (DCAA) Property – Review of contractor’s system for receiving, tracking, segregating and disposing of government property (DCMA) Purchasing – Review of contractor’s system of compliant supply chain management, including competition and price analysis (DCMA) 8

What are the Business Systems Subject to Evaluation? Earned Value Management – Review of contractor’s system for recognizing cost savings resulting from long term contract performance (DCMA) Material Management and Accounting – Audit of contractor’s system for managing material buys against a controlled configuration (DCAA) Estimating – Audit of contractor’s system for proposing actual, realistic and compliant costs for developmental contracts (DCAA) 9

Business System Commercial Continuum Substantially Similar to Commercial Practices: Property (“Industry Standard” practices are approvable per FAR Part ) MMAS (Regulatory implementation of standard manufacturing metric tracking) Commercial / Government Hybrid Systems: Accounting (Record maintenance and core concepts substantially similar; Federal specific rules impact allowable costs and documentation requirements) Purchasing (Source Selection/Price Analysis/Negotiation/Risk Allocation substantially similar; Federal specific lows and regulations related to documentation and cert requirements) Pure Federal Systems: EVMS (Multi-Year cost reimbursable commercial development contracts are extremely rare) Estimating (Supply, demand and relationship management are primary controls on commercial estimates) 10

Business System Overview – Accounting System An adequate accounting system is required for the award of flexibly priced prime contracts (FAR ) Adequacy can be determined via SF1408 Pre-Award Audit process. This is one of the easier business system evaluations to pass. WHY? Adequacy is maintained during routine accounting system audits. These can be some of the harder business system evaluations to pass. WHEN and WHY? Audit focuses on Contractor’s processes for incurring, segregating, supporting and invoicing costs under federal contracts. How are accounting systems deemed adequate? By whom? How can significant deficiencies lead to significant lost revenue? HINT: This doesn’t happen during a business system audit! 11

Business System Overview – Purchasing System Approval obtained during Contractor Purchasing System Review (CPSR) Contractors become eligible for a CPSR when they: Exceed $25M in revenue from federal contracts in previous year; or Submit proposal for RFP that requires approvable purchasing system Currently 95%+ contractors fail their first CPSR. Why? What should small businesses focus on? Public Law Compliance, particularly Day of Award Certs, DPAS and TINA Documented Competition OR Adequate Source Justifications Documented Price Analysis (and Negotiations of noncompetitive awards) Maintenance of Procurement Autonomy (Lead Time, Segregation of Duties) 12

Business System Overview – Property System Approved Property Systems are generally required under contracts where the contractor is required to maintain government property during performance. Property systems can be approved via pre-award review. Approval can be maintained by either desk audits or full reviews. What’s the difference? Federal property systems can be based on commercial industry standard practices for property management. Why? “Hinge System” – acts as foundational basis for several additional regulatory requirements, including: Counterfeit Parts Compliance Material Management and Accounting IU/ID 13

Business System Overview – EVMS/MMAS/Estimating Remaining Systems are not usually maintained by Small Businesses EVMS - Main concept of system is that ongoing performance should create operational efficiencies. These efficiencies should, over the course of performance, create cost savings when the ratio of management to workers widens. System is set up in accordance with general criteria but audit is contract specific. MMAS – Commercially based system that oversees how manufacturers track yield/defects/etc. while maintaining high percentage of system performance “up time” Estimating – System almost exclusively maintained by $1B+ service contractors 14

Questions? Mark Hijar: End of Presentation