Contracting Officer Podcast Slides Knowledge & Insights From Contracting Officers 1

Episode 065 Do I Need an Approved Accounting System? Original Air Date: Feb 8, 2016 Hosts: Kevin Jans & Paul Schauer 2

Formatting notes Hyperlinks: Blue font indicates hyperlinks – presentation must be in ‘Slide Show’ mode to activate the linkBlue Red bold font indicates a point of emphasis Green bold font indicates CO’s personal comment or perspective 3

Introduction Purpose of this episode: To discuss the concept of the “Approved Accounting System” There are different levels of “accounting scrutiny” depending on: The size the contract The size of the company Whether the contract was competed, etc. For example, one of our clients was overshooting what they needed because they didn’t know what they didn’t know 4

When do Approved Accounting Systems happen? Acquisition Time Zones (from Podcast Episode 003)Episode 003 Requirements Zone (Targeting Zone) Market Research Zone (Capture Zone) RFP Zone (Proposal Zone) Source Selection Zone (Waiting Zone) Generally during sole-source negotiations for new contracts and ECPs 5

FAR FAR – Cost Objectives Overall objective: provide that, to the extent practicable, all organizations of similar types doing similar work will follow the same cost principles and procedures. FAR a shall be used in pricing negotiated supply, service, experimental, developmental, and research contracts and contract modifications with commercial organizations whenever cost analysis is performed as required by FAR a

FAR FAR – Cost Objectives FAR b (1) Determining reimbursable costs under -- (i) Cost-reimbursement contracts and cost-reimbursement subcontracts under these contracts performed by commercial organizations; and (ii) The cost-reimbursement portion of time-and-materials contracts except when material is priced on a basis other than at cost (see FAR (c)(3)); FAR (c)(3)) (2) Negotiating indirect cost rates (see Subpart 42.7);(see Subpart 42.7); (3) – (5) …. (6) Pricing changes and other contract modifications (catch-all phrase) 7

Why the Government Demands This Fidelity They don't trust you (Some unscrupulous contractors have taken advantage) They need to know that you can appropriately allocate, track and accumulate costs COST REFRESHER: Direct cost: Single objective - incurred only because of performance on the contract in question (labor hour for a person working only on this project) Indirect cost: More than one objective - incurred in support of this contract and other contracts (the accounting person) Allocable to contract, & Allowable per the FAR Government spends LOTS of money; must have a way to make sense of it 8

Basic Concepts In general, all contractors are required to have an adequate accounting system in order to do business with Government “Adequate” is a low bar…it’s Business 101 An acceptable accounting system should be able to: Accumulate and report costs for each final cost objective (gov’t contract) Properly segregate direct costs from indirect costs Identify and accumulate direct costs Properly allocate indirect costs Provide a proper labor system that identifies direct and indirect labor costs Provide monthly report of costs charge to the contract 9

Basic Concepts DFARS (a)(1) Defines an “acceptable Accounting System as:DFARS (a)(1) “a system that complies with the system criteria in paragraph (c) of this clause to provide reasonable assurance that— (i) Applicable laws and regulations are complied with; (ii) The accounting system and cost data are reliable; (iii) Risk of misallocations and mischarges are minimized; and (iv) Contract allocations and charges are consistent with billing procedures.” 10

Basic Concepts Common Deficiencies Contractors not making interim (at least monthly) determination of costs charged through routine posting to books of account Failure to properly segregate direct and indirect costs Improper timekeeping Failure to exclude unallowable costs 11

As Companies Get Bigger… To get an “approved” system, outsiders (like Defense Contract Audit Agency) get to review the company Ex: Large business contractors undergo ”business system audits” All companies contracting with the Federal Government must comply with the Federal Acquisition Regulations and Cost Accounting Standards (FAR & CAS) Also DFARS if the contracts are with Department of Defense (DoD) These audits may have many requirements 12

As Companies Get Bigger… Some of these systems need to be evaluated: Accounting System Earned Value Management System Estimating System Property Management System Purchasing System FAR/CAS compliance 13

Why are Approved Accounting Systems important? Costs will ALWAYS matter It’s our tax dollars after all You will not be awarded bigger contracts unless you have an adequate accounting system It’s how the government can trust that you costs are what you say they are You want to be proactive, but not TOO proactive Like an avocado! Requires precise timing – not needed for long periods, but must be ready when needed 14

Why Should Government Care? Contractors (a small minority) have taken advantage Taxpayer dollars = your dollars Defense Contract Management Agency (DCMA) and DCAA are overwhelmed It’s how you can know their costs are correct Approved systems save “one by one” process for each contracting office Approved = goodness Don’t ask for what you don’t need 15

Why Should Industry Care? This is one of those areas that you don’t need to be THAT proactive Again, it’s an avocado Unlike the commercial world, Government cares what your actual costs are You must be able to prove your costs in order to work with Government You need to understand whether you are making money or losing it An adequate/approved accounting system helps with that understanding Harsh but true fact: Government doesn’t care whether you’re making profit...they just care if you can keep delivering and be low maintenance The rules are hurdles as you grow - small to large business threshold is HUGE! 16

Why Should Industry Care? Very small businesses don't have many requirements for accounting systems Especially if you don't have any prime contracts Build your systems with the idea that you eventually must meet these standards Keep records of everything as you grow – you will need them Be prepared for increased scrutiny as you get bigger contracts Even if the thresholds for applicability haven't been triggered Don’t be late 17

It’s not easy…but the government is ‘here to help...’ FAR Availability of Accounting Guide Contractors needing assistance in developing or improving their accounting systems and procedures may request a copy of the Defense Contract Audit Agency Pamphlet No , Information for Contractors Look for checklist on 18

Summary There’s a sliding scale: Adequate Just because you have a contract doesn’t mean you need to prove adequacy of accounting system Approved accounting system If you’re big and complex …and approved other systems: EVMS, Property Management, Purchasing, etc. 19

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