Building a Successful Foundation for DCAA Compliance Larry Mocniak – CFO Phoenix International K.D. “Ken” Bricker, Senior Partner Goodman & Company, LLP Microsoft Government Contractor Summit

5-200 Section Preaward Surveys of Prospective Contractor Accounting Systems and Post Contract Award Accounting System Audits DCAA CONTRACT AUDIT MANUAL

5-202 Preaward Survey of a Prospective Contractor's Accounting System – The audit is made at the request of a contracting officer to determine the accept­ability of a contractor's accounting system for accumulating costs under a prospective Government contract. – The audit scope should be limited to obtaining an understanding of the design of the prospective accounting system – Special emphasis should be placed on the ability of the accounting system to generate the specific cost information required under the anticipated contract and on inequities that might occur if the prospective contract were executed. – The auditor should determine the equity and consistency of direct charging as generally applied by the contractor and as it is intended to be applied to the proposed contract. – Evaluate the acceptability of the design of the contractor's accounting system for accumulating costs under a Government contract DCAA CONTRACT AUDIT MANUAL

5-203 Post Contract Award Accounting System Audits – The major objective of the post contract award accounting system audit is to determine if the contractor's accounting system is adequate for accumulating and billing costs on Government contracts. – The post contract award accounting system audit program includes comprehensive steps to gain a detailed understanding of the contractor's accounting system (e.g., tracing costs billed to source documentation) sufficient to render an opinion on the adequacy of the system. DCAA CONTRACT AUDIT MANUAL

5-204 Audit Reports – The pre-award survey report provides an opinion on whether the design of the accounting system is acceptable, not acceptable, or acceptable with a recommendation that a follow-on accounting system audit be performed after contract award DCAA CONTRACT AUDIT MANUAL

General Accounting Budgeting Report Writers Payroll/HR Customer Address Job Cost Accounting DATA BASE Accounts Payable Accounts Receivable Fixed Assets Fixed Assets Purchasing Contract/ Service Invoicing Contract Change Management Contract Change Management Time Entry/ PR/HR

Dynamics SL 6.5 Technology COMPANY has established a standard for managing the labor and O.D.C. associated with government and commercial contracts for effective accounting and management utilizing Microsoft's Dynamics SL software. COMPANY has established a standard for managing the labor and O.D.C. associated with government and commercial contracts for effective accounting and management utilizing Microsoft's Dynamics SL software. –Dynamic SL System Financial Reporting Project Reporting Time & Attendance Labor Distribution Rate Structures Purchasing Contract Management New System

Introduction to the Chart of Accounts Setup Division Division Project Numbers Project Numbers Natural Account Structure Natural Account Structure Work Breakdown Structures (WBS) / Task Work Breakdown Structures (WBS) / Task

Chart Of Account Chart Of Account What is it? What is it? Why is it used? Why is it used? How it is used? How it is used?

CHART OF ACCOUNTS What is it? Chart of Accounts is a list of Numbers and Names arranged in the order in which they customarily appear on Financial Statements & Reports Chart of Accounts is a list of Numbers and Names arranged in the order in which they customarily appear on Financial Statements & Reports

Why is it used? To collect financial data based on cost objective To collect financial data based on cost objective Project Job Cost Reports Project Job Cost Reports To create Financial Statements and Management reports To create Financial Statements and Management reports To retrieve historic data To retrieve historic data Trend Analysis Trend Analysis Financial Planning (budgeting) Financial Planning (budgeting) To compare Actual expenses to Planned expenses To compare Actual expenses to Planned expenses

How is it used? Project Job Costing Project Job Costing Labor Tracking/Time Sheets Labor Tracking/Time Sheets Invoicing Invoicing Vendor Invoices Vendor Invoices Expense Reports Expense Reports Purchase Orders Purchase Orders

DYNAMICS SL Chart of Accounts Introduction NATURAL ACCOUNT STRUCTURE NATURAL ACCOUNT STRUCTURE PROJECT NUMBERS PROJECT NUMBERS WORK BREAKDOWN STRUCTURE (WBS) / TASK WORK BREAKDOWN STRUCTURE (WBS) / TASK

Natural Account Prefix Value 4XXX = Revenue 4XXX = Revenue 5XXX = Direct Cost 5XXX = Direct Cost 7XXX = Overhead 7XXX = Overhead 8XXX = G & A 8XXX = G & A 4 Characters Numeric

Natural Account Numbering System (Chart of Account) Common 3 digit code 5XXX = Direct Cost 5XXX = Direct Cost 7XXX = Overhead 7XXX = Overhead 8XXX = G & A 8XXX = G & A UNALLOWABLE TRACKING

Vocabulary/Terminology Project/Department Number = 6 Digit Number used to capture financial data Project/Department Number = 6 Digit Number used to capture financial data EXAMPLE: Main Project Number = EXAMPLE: Main Project Number = EXAMPLE: Accounting Department Number = 101 EXAMPLE: Accounting Department Number = 101 Natural Account = 4 Digit Number used to captured cost by cost objective. Natural Account = 4 Digit Number used to captured cost by cost objective. EXAMPLE: Direct Charge Office Equipment = 5081 EXAMPLE: Direct Charge Office Equipment = 5081 EXAMPLE: G&A Charge Office Equipment = 8081 EXAMPLE: G&A Charge Office Equipment = 8081 Work Break Down Structure = up to a 4 Digit Alpha/Numeric used to captures cost by Work Break Down Structure = up to a 4 Digit Alpha/Numeric used to captures cost by Work EXAMPLE: = 2000 Work EXAMPLE: = 2000 PLEASE NOTE THAT ALL DEPARTMENTS WILL USE “0000” FOR THE WBS CODE Please note that all Natural Accounts in Capital letters are non chargeable account.

Project = Project = Rental of a training facility = Nat. Acct 5334 Rental of a training facility = Nat. Acct 5334 WBS/TASK = 2000 WBS/TASK = 2000 Coding would look like this Example of Charge Code Project # Natural Acct WBS/TASK

Example of Charge Code Accounting/Finance = Dept #101 Accounting/Finance = Dept #101 Office Supplies = Nat. Acct 8112 Office Supplies = Nat. Acct 8112 BLANK WBS/TASK = BLANK WBS/TASK = Coding would look like this Coding would look like this Dept # Natural Acct WBS/TASK PLEASE NOTE THAT ALL DEPARTMENTS WILL USE “0000” FOR THE WBS CODE

Account Structure Cas h Operating supplies Div. produc t Cell Phones Benefi ts Revenue travel POOLS

Overview Capture financial data Capture financial data Project Reporting Project Reporting Sort Data based on Mgmt Requirements Sort Data based on Mgmt Requirements Customized Mgmt Report Customized Mgmt Report Departmen t Cas h Operatin g supplies Region produc t Cell Phone s Benefi ts Revenu e travel

RATE POOLS RATE POOLS

Great follow-on product ImageLink Great follow-on product Great follow-on product ImageLink provides quick access to all accounting support records ImageLink provides quick access to all accounting support records Document access is available from Document access is available from –within Solomon IV (native ImageLink) –a user’s desktop (optional Super Search)

System Summary Chart of Accounts is designed to capture cost by cost objective. Chart of Accounts is designed to capture cost by cost objective. Used as a Project Management tool Used as a Project Management tool Overhead & G&A Rate Calculations Overhead & G&A Rate Calculations Track Allowable and Unallowable Cost Track Allowable and Unallowable Cost Time & Attendance Time & Attendance Labor Distribution Labor Distribution Customizing of Management Report Customizing of Management Report Financial Planning Financial Planning Actual Cost Vs Planned Cost Actual Cost Vs Planned Cost Most Importantly is to have a Solid Integrated Business System Most Importantly is to have a Solid Integrated Business System

Accounting Manual 12.0 Expense Reports 12.0 Expense Reports –12.1 Travel –12.2 Reimbursement 13.0 Purchase Orders 13.0 Purchase Orders 14.0FAR Part 31 – Contract Cost Principles and Procedures 14.0FAR Part 31 – Contract Cost Principles and Procedures FAR -- Part 31 Contract Cost Principles and Procedures (FAC ) 8 February Scope of Part. This part contains cost principles and procedures for -- (a) The pricing of contracts, subcontracts, and modifications to contracts and subcontracts whenever cost analysis is performed (see ); and (b) The determination, negotiation, or allowance of costs when required by a contract clause Definitions. As used in this part -- Accrued benefit cost method means an actuarial cost method under which units of benefits are assigned to each cost accounting period and are valued as they accrue; i.e., based on the services performed by each employee in the period involved. The measure of normal cost under this method for each cost accounting period is the present value of the units of benefit deemed to be credited to employees for service in that period. The measure of the actuarial accrued liability at a plan’s inception date is the present value of the units of benefit credited to employees for service prior to that date. (This method is also known as the unit credit cost method without salary projection.) “Accumulating costs” means collecting cost data in an organized manner

THE DEFENSE CONTRACT AUDIT AGENCY On 8 January 1965, the Defense Contract Audit Agency (DCAA) was formed. Mr. William B. Petty, formerly the Deputy Comptroller of the Air Force, was selected as the Director with Mr. Edward T. Cook, formerly Director of Contract Audit for the Navy, selected as the Deputy Director. On 8 January 1965, the Defense Contract Audit Agency (DCAA) was formed. Mr. William B. Petty, formerly the Deputy Comptroller of the Air Force, was selected as the Director with Mr. Edward T. Cook, formerly Director of Contract Audit for the Navy, selected as the Deputy Director. Today, the Defense Contract Audit Agency consists of approximately 4,000 people located at more than 300 field audit offices throughout the United States, Europe, and in the Pacific. The Agency provides standardized contract audit services for the Department of Defense, as well as accounting and financial advisory services regarding contracts and subcontracts to all DoD Components responsible for procurement and contract administration. These services are provided in connection with negotiation, administration, and settlement of contracts and subcontracts. DCAA also provides contract audit services to some other Government Agencies. Today, the Defense Contract Audit Agency consists of approximately 4,000 people located at more than 300 field audit offices throughout the United States, Europe, and in the Pacific. The Agency provides standardized contract audit services for the Department of Defense, as well as accounting and financial advisory services regarding contracts and subcontracts to all DoD Components responsible for procurement and contract administration. These services are provided in connection with negotiation, administration, and settlement of contracts and subcontracts. DCAA also provides contract audit services to some other Government Agencies.

SERVICES “TO CONTRACTING OFFICERS” DCAA provides a wide variety of products and services to contracting officers: DCAA provides a wide variety of products and services to contracting officers: Preaward Contract Audit Services Preaward Contract Audit Services Price Proposals Price Proposals Preaward Surveys Preaward Surveys Forward Pricing Labor & Overhead Rates Forward Pricing Labor & Overhead Rates Postaward Contract Audit Services Postaward Contract Audit Services Incurred Costs/Annual Overhead Rates Incurred Costs/Annual Overhead Rates Truth in Negotiation Act Compliance Truth in Negotiation Act Compliance CAS (Cost Accounting Standards) Compliance & Adequacy CAS (Cost Accounting Standards) Compliance & Adequacy Claims Claims Financial Capability Financial Capability Contractor Internal Control System Audits Contractor Internal Control System Audits Accounting Accounting Estimating Estimating EDP (Electronic Data Processing) EDP (Electronic Data Processing) Compensation Compensation Billing Billing Budgeting Budgeting Material Management Material Management Labor Labor Purchasing Purchasing Indirect and Other Direct Cost Indirect and Other Direct Cost

AUTHORITY TO AUDIT Examination of costs. If this is a cost-reimbursement, incentive, time-and- materials, labor-hour, or price redeterminable contract, or any combination of these, the Contractor shall maintain and the Contracting Officer, or an authorized representative of the Contracting Officer, shall have the right to examine and audit all records and other evidence sufficient to reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of this contract. This right of examination shall include inspection at all reasonable times of the Contractor’s plants, or parts of them, engaged in performing the contract. Examination of costs. If this is a cost-reimbursement, incentive, time-and- materials, labor-hour, or price redeterminable contract, or any combination of these, the Contractor shall maintain and the Contracting Officer, or an authorized representative of the Contracting Officer, shall have the right to examine and audit all records and other evidence sufficient to reflect properly all costs claimed to have been incurred or anticipated to be incurred directly or indirectly in performance of this contract. This right of examination shall include inspection at all reasonable times of the Contractor’s plants, or parts of them, engaged in performing the contract. (c) Cost or pricing data. If the Contractor has been required to submit cost or pricing data in connection with any pricing action relating to this contract, the Contracting Officer, or an authorized representative of the Contracting Officer, in order to evaluate the accuracy, completeness, and currency of the cost or pricing data, shall have the right to examine and audit all of the Contractor’s records, including computations and projections, related to -- (c) Cost or pricing data. If the Contractor has been required to submit cost or pricing data in connection with any pricing action relating to this contract, the Contracting Officer, or an authorized representative of the Contracting Officer, in order to evaluate the accuracy, completeness, and currency of the cost or pricing data, shall have the right to examine and audit all of the Contractor’s records, including computations and projections, related to -- –(1) The proposal for the contract, subcontract, or modification; –(2) The discussions conducted on the proposal(s), including those related to negotiating; –(3) Pricing of the contract, subcontract, or modification; or –(4) Performance of the contract, subcontract or modification.

PREAWARD SURVEY OF PROSPECTIVE CONTRACTOR ACCOUNTING SYSTEM SF 1408 SF 1408 –Is the accounting system in accordance with GAAP? –Accounting System Provides for: Proper segregation of direct costs from indirect costs Proper segregation of direct costs from indirect costs Identification and accumulation of direct costs by contract Identification and accumulation of direct costs by contract A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives A logical and consistent method for the allocation of indirect costs to intermediate and final cost objectives Accumulation of costs under general ledger control Accumulation of costs under general ledger control A timekeeping system that identifies employees labor by intermediate or final cost objectives A timekeeping system that identifies employees labor by intermediate or final cost objectives A labor distribution system that charges direct and indirect to the appropriate cost objectives A labor distribution system that charges direct and indirect to the appropriate cost objectives Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account Interim (at least monthly) determination of costs charged to a contract through routine posting of books of account Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31 Exclusion from costs charged to government contracts of amounts which are not allowable in terms of FAR 31 Identification of costs by contract line item and units if required Identification of costs by contract line item and units if required Segregation of preproduction from production costs Segregation of preproduction from production costs

PREAWARD SURVEY OF PROSPECTIVE CONTRACTOR ACCOUNTING SYSTEM (Continued) Accounting System Provides Financial Information: Accounting System Provides Financial Information: –Required by contract clauses concerning limitation of cost or limitation on payments –Required to support requests for progress payments Accounting Is the accounting system designed, and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow on acquisitions? Is the accounting system designed, and are the records maintained in such a manner that adequate, reliable data are developed for use in pricing follow on acquisitions? Is the accounting system currently in full operation? Is the accounting system currently in full operation?

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