1. 2016 Incurred Cost Proposals: A Year In Review
Ryan Koenitzer, CPA March 8, 2017
RKI (USG Contracts Practice)

2. RKI USG CONTRACTS PRACTICE
RKI is a full-service government contract consulting practice dedicated exclusively to assisting contractors with USG compliance. Services include:
Federal Acquisition Regulation (FAR) compliance
Cost Accounting Standards (CAS) compliance
CASB Disclosure Statement Development and & Changes
Incurred Cost Proposals
Indirect Cost Rate Structuring
DFARS Business Systems Reviews (Accounting, Estimating, USG Property, Procurement, etc.)   
Government (DCAA, DCMA, etc.) Audit Support
Internal Audit Support

3. 2016 Incurred Cost Proposals: A Year In Review

4. What do we want to learn from this presentation. https://www. youtube
What do we want to learn from this presentation? Not This

5. Why Changes in USG ICP Process are Significant DCAA Backlog
AGENDA
Why Changes in USG ICP Process are Significant
DCAA Backlog
Changes to ICE Model and Adequacy Checklist
Unallowable Costs
Compensation Limits
Changes in Audit Focus

6. WHY CHANGES IN USG ICP PROCESS ARE SIGNIFICANT
U.S. Government, like a company, is an evolving organization
Changes in their people, process, or technology have both an internal and external impact
Monitoring of changes is essential to ensuring:
Compliance;
Optimizing recovery of allowable costs
Having a common understanding with USG customers/auditors for healthy dialogue
2016 was a busy year with regards to Incurred Cost Proposals
Focus on what each change means to the ICP process

7. DCAA BACKLOG
Stated in DCAA’s 2015 Report to Congress as the “top priority”
2015 highlights heading into 2016:
A reduced employee count of 278 (of a total of approx. 4,300
Completed 1,925 ICP audit reports
Closed 9,400 incurred cost years
DCAA prohibited from performing non-DoD audits (superseded 9/30/16)
2016 report typically released in March

8. So What? DCAA BACKLOG Your auditor may be different:
DOE and NASA have engaged private CPA firms; others potentially to follow
You may be de-risked!
If you are delinquent, you must submit or wind up in a total contract cost decrement circumstance (up to 16.4%)
DCAA is catching up – Other audit focus likely:
ROI audits (Estimating and Forward Pricing)
DFARS Business Systems required, 22 occurring

9. Changes to ICE Model and Adequacy Checklist
Recent history of changes to ICE Model:
October 2016:
Heading change to supplemental schedule C
December 2015:
Additional Schedule J information required including:
DUNS numbers for subcontractors
Prime contract value to which subcontract pertains

10. Changes to ICE Model and Adequacy Checklist
Recent history of changes to Adequacy Checklist:
June 2016:
Addition of Advance Agreements for Exec Comp
August 2015:
Clarifying some of the checklist items related to inter-schedule tie-outs
Adding a tie-out between Schedule H and Schedule J for subcontract costs
Adding a final overall determination of adequacy section

11. Changes to ICE Model and Adequacy Checklist
So What?
Use the current version of the ICE Model (v f October 2016) if you want a happy DCAA auditor
Always evaluate your proposal against the current version of the DCAA Adequacy Checklist - they change

12. Unallowable costs
Expressly Unallowable Costs
DCAA issued two MRDs clarifying their interpretation of expressly unallowable costs:
12/14
1/15
These MRDs were used by auditors in FY2016 audits

13. Unallowable costs Definition (1/15 MRD): Expressly Unallowable Costs
“In order for a cost to be expressly unallowable, the Government must show that it was unreasonable under all the circumstances for a person in the contractor’s position to conclude that the costs were allowable. Thus, a cost principle makes costs expressly unallowable if:
1. It states in direct terms that the costs are unallowable, or leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria; and
2. It identifies the specific cost or type of costs in a way that leaves little room for interpretation”

14. Unallowable costs Expressly Unallowable Costs
“In summary, a cost can be expressly unallowable even though the cost principle does not explicitly state that the cost is unallowable or not allowable.”
“The Government must establish that it was “unreasonable under all the circumstances for a person in the contractor’s position to conclude that the costs were allowable.”
Defined 110 expressly unallowable cost principle references
Perhaps more than industry has previously interpreted

15. Unallowable costs Expressly Unallowable Costs
Penalties apply to contracts covered for costs expressly unallowable under a cost principle in the FAR:
Amount of the disallowance plus interest on the paid portion
Two-times the Costs if previously determined to be unallowable in a prior proposal
Waiver of Penalty (709-5)
Proposal withdrawn before the audit entrance conference or Government provides written notice of audit
Amount of unallowable costs subject to penalty is $10K or less
Contractor has established policies, internal controls & training
Unallowable costs were inadvertently included (Error)

16. Unallowable costs DCAA Selected Areas of Cost Guidebook
Penalties apply to contracts covered for costs expressly unallowable under a cost principle in the FAR:
DCAA recently released on their website new audit guidance related to cost allowability (FAR Subpart 31.2)
The new guidance is evolving and is in process; however, 13 areas of cost have been revised from the prior guidance in Chapter 7 of the CAM
Of note, the guidance related to professional and consultant service costs stresses the need for auditor judgment when assessing if the three requirements for allowability exist - agreement, sufficient invoice and evidence of work performed
Link: l

17. Unallowable costs So What?
Potential fines and penalties for DCAA defined “expressly” unallowable costs
Questioned costs due to insufficient documentation regarding consultants and professional services
Incorporate current DCAA interpretations into your internal unallowable cost guidance
Be prepared to have a healthy exchange with DCAA based on published guidance

18. Compensation limits Compensation Limits Bipartisan Budget Act of 2013
Removed authority of the Office of Management and Budget, Office of Federal Procurement Policy (OFPP) to establish executive compensation limits
Congress now sets the compensation limits applicable to ALL employees of contractors doing business with ANY Government agency
Changed the applicability of the caps from fiscal year to year of contract award, significantly increasing the complexity of cost reporting (ICS) requirements

19. Compensation limits
Compensation Limits

20. Compensation limits Compensation Limits
Defense Procurement and Acquisition Policy Memo
Recognized the challenges associated with applying multiple compensation caps emerging as a result of the Bipartisan Budget Act…attempted to find a solution
Recommended a “blended rate” solution:
Weighted average based on contract volume before and after June 24, 2014.
Contractors aren’t required to use the approach.
The memo actually suggests that contractors are free to apply the $487,000 cap to ALL contracts regardless of award date!
Contractor use of the recommended “blended rate” method requires an Advance Agreement with the contracting officer. (MRD:

21. Compensation limits Compensation Limits
Executive compensation review alone is not enough to support allowability of compensation – reasonableness criteria still must be evidenced
Evolving space – contractors have experienced an increased standard on compensation surveys, and similar, to substantiate compensation beneath exec comp thresholds
Be mindful of national blended salary surveys unadjusted for location and cost of living – one size does not fit all
Costs are being questioned if a formal, documented Compensation plan with associated policies/procedures cannot be demonstrated

22. Compensation limits So What?
If you have employees over $487,000, you must evaluate your contracting profile for a blended rate approach
No advance agreement = inadequacy
Too simplistic an approach may leave cost recovery on the table
Questioned compensation costs if you don’t have:
Market data supporting fair and reasonable comp
Policies/procedures on compensation process, including all eligible bonus plans

23. Changes in audit focus Increased Focus on Direct Costs
DCAA marked increased in the sampling of direct costs
Accounting system deficiencies citing lack of adequate direct cost sampling in unallowable cost policies/procedures

24. Changes in audit focus Labor Qualifications On T&M Contracts
5/22/14 MRD:
During ICP audits, DCAA reviewing invoiced labor under T&M contracts for proof of labor qualifications
Without acceptable proof, typically a resume, costs – sometimes in their entirety – are questioned
Contractors may be in an untenable negotiating position

25. Changes in audit focus Auditing of Cost-Type Subs
According to DCMA-INST 135 (IPC-1), released March 4, 2015, Section Subcontract Costs describes “The prime contractor is responsible for auditing subcontractors… DCAA may issue a qualified indirect cost audit report indicating that audit of certain subcontract costs has not been completed…”
DEAR “Accounts, Records, and Inspection”, sub-section (c) explicitly requires contractors to audit their subcontractors incurred cost proposals
A number of DCAA audit reports have found that millions of subcontract (direct costs) were questioned within a number of incurred cost audits

26. Changes in audit focus So What?
Potential Increased questioned costs surrounding:
Direct costs
Invoiced T&M labor
Cost-type subs
Potentially significant variances with subs affecting prime funding and financial accounting reserves
Delays in closing contracts due to unsettled subcontractor costs
DFARS Accounting system deficiencies

27. Wrap up 2016 was a busy year for incurred cost proposals
These things affect questioned costs and your bottom line if there is not a common understanding of expectations
2017 expectations:
Further reduction backlog to get current
DCAA demonstration of value through:
Evolving questioned cost interpretations
ROI Audits
Linkage to business system audits and audit leads
New audit programs and new auditors

28. Wrap up
Questions?

29. Thank you
Ryan Koenitzer, CPA Managing Principal RKI USG Contracts (617)