1. Don’t Let Accounting Pitfalls Jeopardize Your 8(a) Contract June 18, 2014 Patricia J. Mensch Partner, Government Contract Consulting

2. Agenda. Introduction to accounting requirements Understand your contracts Accounting system requirements Monitor your subcontractors Potential audits 2

3. Know Your Accounting Requirements. Your 8(a) status does not exempt you from accounting requirements in the Federal Acquisition Regulation. Federal auditors will not “give you a break” because you are an 8(a). There are lots of rules and regulations, but today our goal is to discuss the practical application of these rules to your business. 3

4. Not All Contractors Have the Same Accounting Requirements. Company size is not the primary driver Large companies may have little or no special requirements Small 8A companies may have detailed compliance requirements Company size may influence the complexity of the accounting system Policies and procedures will likely be influenced by the companies size so be cautious about borrowing policies from other companies The indirect rate structure may be impacted by the company’s size but not the basic requirement to properly allocate indirect costs in a reasonable manner 4

5. The Amount of Regulation and Compliance Required is Determined by Contract Award Type. Basic Types of Awards Commercial Competitive Bid Negotiated Procurement o Sole Source o Price is not the determining factor 5

6. Type of Award is the Starting Point for Determining Accounting Requirements. Firm fixed price (FFP) o How will you be paid? Time and Material/Labor Hour o Must have an adequate accounting system o Will you have materials or ODC‘s? Cost reimbursable – CPFF, CPAF, CPIF o Must be able to track contract costs o At what level will you need to track costs? 6

7. Don’t Be Surprised! Be sure that you understand your contract terms At what level must costs be accumulated? Is the contract type really T&M, or does the customer just require that billing format? Do your vouchers reconcile to your books? Don’t assume that the contract is closed just because the period of performance has ended. 7

8. Subcontractors - Be Very Careful and Gain a Complete Understanding of Your Contract! Be aware of flow down requirements and contract clauses Termination for convenience of prime Blanket flow down of all prime contract clauses Inconsistencies among documents – which will take precedence? What is the close out process? 8

9. Having an Approved Accounting System is the Gateway to Award of a Cost Type Contract. Failure to demonstrate adequacy will stand in the way of award o Reversing the auditor’s opinion is very difficult o Your customer will not be happy Don’t wait for DCAA to arrive to tell you what an adequate accounting system is o It’s not their job o It’s pass or fail 9

10. Basic Accounting Requirements. In accordance with GAAP o Not cash basis o Not tax basis o 8(a) exception for companies with revenue under $2,000,000, with no flexibly priced contracts Common audit findings o Tax depreciation not GAAP o Proper accruals missing –Vacation, bonus, pension, salary o Prepaids improperly expensed o Appropriate cutoffs 10

11. Additional Accounting Requirements. Segregate Costs by Contract o Adequate timekeeping system o Training Segregate FAR unallowable costs Common audit findings o Related party rent o Travel, business meals o Bonus o Consulting costs 11

12. Monitor Your Rates. Provisional billing rates are just that – provisional FAR requires that you bill based on your expected final rates and adjust your provisional rates if they are no longer valid Calculate your year to date rates monthly Don’t wait to the end of the year or the end of the contract to adjust your rates o Government may determine that your accounting system is inadequate o You may have to pay back money that you could have used 12

13. Even Small Companies Need Basic Policies and Procedures. DCAA will expect large businesses to have many established policies and procedures Small companies need the basics o Accounting system description o Treatment of unallowable costs o Segregation of direct and indirect costs o Government billing o Timekeeping Test your policies and procedures against what you are actually doing – DCAA will! 13

14. Monitor Your Subcontractors. Pre Award Be careful as to the type of subcontract award you make If cost type, you must o Verify that they have an adequate accounting system Appropriate flow downs are critical o Termination clauses o Don’t automatically flow down all of your prime contract clauses Obtain ACO approval to subcontract when required 14

15. Monitor Your Subcontractors. Post Award As the Prime, you are responsible for your subcontractors o If the subcontractor overbills or bills for unallowable costs, you are responsible Prime is responsible for monitoring subcontractor awards, rates, subcontract performance If cost type subcontract, you must o Verify that they submit an ICP o Verify that they monitor their rates and adjust in accordance with FAR 15

16. Finalize Allowable Contract Costs Annually. Incurred Cost Proposals Determine if you have a submission requirement o CPFF, T&M o Prime Contracts o Subcontracts Complete the DCAA Adequacy Checklist Common Problems o Subcontractors – who/where to submit o Providing FFP contract details o Reconciling T&M labor hours billed to books o Reporting incorrect cumulative contract cost o Reporting costs at the incorrect level o Missing/incomplete required schedules o Failure to include all pools in required schedules 16

17. Audit Interfaces. Manage the audit Understand the regulations Understand the long term impact of audit findings o Does the issue impact the cost recovery, or are you in an overrun position? o Does the issue impact your ability to win new work? o Does the issue impact your relationship with your customer? 17

18. Accounting System Audits. Pre Award Audits o Demonstration of accounting system o Detailed testing not required o Policies and Procedures o Prepare a walk through Post Award Audits o Test that the system is operational o Trace timecards o Test transactions o Test cutoffs o Test accruals/prepaids 18

19. Be Prepared for Your Accounting System Audit. Understand DCAA’s audit access rights - what they can or cannot request Be prepared and organized to support the audit – first impressions count! Understand the lingo so that you respond correctly to questions – don’t volunteer information DCAA Auditor quote – “If you prep for the pre-award audits, they go pretty quickly.” 19

20. Accounting Audits. Voucher Audits – Cost type contracts o Test billed costs to accounting books and records o Test for timely vendor payments o Test for correct indirect billing rates Voucher Audits – T&M contracts o Test billed hours to timecards and books o Review for employee qualifications o Test for correct billing rates compared to contract 20

21. Voucher Audits Are Critical to Your Cash Flow! Failed Voucher Audit Contributes to Unfavorable Auditor Risk Assessment o Increased voucher audits o Increased scrutiny of incurred cost proposals o Delays in payment 21

22. ICP Audits. DCAA performs a risk assessment DCAA tests reconciliation of ICP to books DCAA performs detailed testing o Labor – Timecards o Expense Accounts – FAR Part 31 Unallowable Costs o Bases and Pools 22

23. Accounting Audits. Progress Payment Audits – Firm Fixed Price Contracts with payments based on costs o Require an adequate accounting system o Test the mathematical formulas used in the voucher o If the auditor finds significant errors, the progress payment is rejected and audit effort is suspended o Apply a loss ratio if the contract is in a loss position o Verify costs billed to accounting books and records o Verify indirect costs billed are based on approved billing rates o Verify vendors paid in accordance with vendor terms o Require a verifiable ETC/EAC 23

24. Questions. 24

25. Presenters Contact Information. Patricia J. Mensch –Email: pmensch@mgocpa.compmensch@mgocpa.com –Phone: (858) 792-2210 MGO Mensch –http://www.mgomensch.com/http://www.mgomensch.com/ 25