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Friday, December 1, 2017

DCAA AUDITS AND SMALL BUSINESS JOB COST ACCOUNTING SYSTEMS





DCAA Audits And Small Business Job Cost Accounting Systems

By Ken Larson

IntroductionSmall Businesses typically have a learning experience growing into government contracting. Part of that process is undergoing reviews by the Defense Contract Audit Agency (DCAA). It takes knowledge of the requirements and strategic focus to set up the type of business processes required for accommodating government contract job cost accounting and fit those processes into the way your company does business.

DCAA or other agency representatives do not approve job cost accounting software packages. They approve contractor job cost accounting practices in compliance with Federal Cost Accounting Standards (CAS). If you are a small business, you are probably going to come under modified CAS Coverage that you can read about at the following link:


Cost Accounting Standards Compliance

Perhaps you have already examined the above background, but I would encourage you to review it again in connection with planning for your business system. Perhaps you have discovered that CAS compliant job cost accounting effects your estimating structure, your long range planning for indirect rates, as well as your general ledger, overhead and G&A structure. You may have discovered as well that DCAA wants to see your government contracts accounted for in a separate cost center from your commercial work and that there are certain unallowable costs that cannot be charged directly or indirectly to government contracts.

Proposal AuditsProposal audits are performed by DCAA on your cost proposal at the request of the Procurement Contracting Officer (PCO) and verify your direct and indirect rates against your long range plan, your labor category pricing, contingent hire agreements, vendor quotes, subcontractor proposals and all other data related to the cost volume of the proposal. Results go to the PCO. Arithmetic checks are made. No opinion is offered on the merit of the pricing, only that it has been documented in a long-range plan or a vendor or subcontractor quote and it is accurate.

Progress Billing Audits under Firm Fixed Price ContractsThis type of audit is on live data from your billing system. It is triggered by your submitting a progress payment under a firm, fixed price contract. Progress payments can be allowed in long-running firm, fixed price contracts that are front-end loaded with material and labor investment and have lengthy schedules for delivering the end product.



The DCAA Auditor will get the audit request from the contracting activity and will ask to examine the complete set of job cost records in your accounting system for incurred cost on the fixed price contract and tie those records out to the progress payment requested amount (usually 85-90% of the incurred cost to date - they hold some billed amount in retention). Records audited are at the time card and expense report level, as well as purchase orders, travel vouchers and any other transactions that are booked and billed in your accounting system to the fixed price contract. They will want to see the time cards and other documents and will trace them back through the system.

If you do not have a progress billing clause in your firm, fixed price contract, it is unlikely you will be audited. The contracting activity or the Defense Finance Accounting System (DFAS) will simply compare the final amount you bill to the firm, fixed price amount in your contract and pay if the item or service has been accepted and delivered. (Usually a sign-off by the PCO, Contracting Officer's Technical Representative (COTR) or a DD Form 250 signed by a government inspector on product deliveries)

Cost Plus and T&M Contract Billing AuditsBilling audits are performed by DCAA, again at the request of the contracting activity. The auditor will go into all actual cost records submitted with your billing. Cost plus and T&M billings must have all the billing detail behind them or they will not be paid. The detail must be at the transaction level and the audit is identical to the one discussed above for progress payments.

Incurred Cost Audits (Often referred to as "Rate" audits)These audits are conducted when you are closing out contracts with the government and they have been billed at provisional rates, or the government needs to establish that you are billing accurately from a rate standpoint. If the contract is fixed price with progress payments, cost plus or T&M in nature and has been billed over a long period, particularly if it has crossed more than one government fiscal year, then a system-wide incurred cost audit will be necessary to verify the rates that were charged to the government and determine the difference between the provisional rate billed and the actual rate incurred (where applicable).

In addition it is periodically necessary for the government to establish that no unallowable costs have found their way into government contract billings.

The government allows provisional billing rates for the convenience of the contractor based on his long-range plan and mix of business. The government holds a retention amount on each billing and then at closeout determines with the contractor through an incurred cost audit the final amount due on the contract, releases the retention accordingly, and the contract can then be closed if all other obligations have been completed. At closeout the government pays the final bill.

A rate audit determines the compliance of the job cost system if it occurs while the contract is in process. If an incurred cost audit occurs on contract closeout actions, results will directly impact final contract billing approval and amounts.

Job Cost Accounting Software
My experience with job cost accounting software tools is that complete packages are pretty expensive. COTS accounting packages such as Quick Books do not provide job cost accounting. I have installed JAMIS, which is the 'Cadillac', DELTEK, which is the 'Fairlane 500', and SYMPAQ, which is the 'Volkswagen'. They are all expensive, even for single user licenses. You can go to these and other product sites on the web and examine their capabilities:

Deltek

Sympaq

JAMIS

Here are some products especially designed for small business:

ERP-GOV is a new product that appears to be economical and fairly high quality:

ERP.GOV

ICAT is an add-on tool for Quick Books that some small companies are using:

ICAT

PROCAS is an offline and online, on-demand approach that is relatively new and shows promise:

PROCAS

All of the above suppliers are used to long sales cycles and competing against each other. They will do remote demos for you and bend over backwards to show you their products. You can learn much about government contract job cost accounting just by taking the time to go through a demo. For companies whose direct job cost records are growing fast, these tools offer the utility to manage data volume and efficiently handle requirements such as changes to existing records driven by rate changes, fiscal period closing or contract closeout.

Growing Your Job Cost System
Many small companies doing government work start out with a rudimentary direct job cost accounting software package such as Peach Tree or the add-on tool for Quick Books mentioned above and crutch it with manually maintained records on spreadsheets for indirect cost allocation, time keeping, expense reporting, purchasing and supplier commitments. There is nothing wrong with such an approach as long as you can supply job cost (individual contract) records complying with modified CAS Coverage and demonstrate such things as:

Time Cards and time keeping process by worker and labor category by contract or indirect cost pool

Expense Reports and expense report process by worker by contract or indirect cost pool

Purchase Orders with job cost accounting data traceable thru invoices to contacts or indirect cost pools after payment

Overhead Allocations in a Government-unique cost center to individual contracts at month end based on individual contract direct labor cost

G&A Allocations in a Government-unique cost center to individual contracts at month end based on individual contract total cost

A semi-manual approach gets burdensome as the company grows and the number of accounting transactions at the direct and indirect cost level increase in volume.

If you do not have a good job cost software, I recommend you begin looking for one and plan strategically to implement it if progress billings and service contracting to include time and material and cost plus contracts are in your future. Implementing a government compliant job cost system is a sensitive matter and must be planned. I was never able to pull it off in a small company in any less than a year with some delicate timing, particularly during cut-over from the old system to the new.

As companies grow and get involved in larger programs they come under full CAS Coverage that requires a disclosure statement and considerably more controls on the structure of the business system. You can read about full CAS coverage at the link contained in the introduction to this article.

Summary
If you have the investment budget available, you may wish to consider the job cost accounting system software suppliers I mentioned above and compete them against each other for a price. Installing one of these packages is critical from an accounting period standpoint. I recommend a new year starting point and running in parallel on your old system for at least a quarter.

Keep in mind that DCAA does not approve COTS job cost accounting system software. Buying the software will not make you "DCAA Compliant" or "CAS Compliant" That objective is achieved through careful process development, specific to your company, utilizing software as a tool to operate your own unique business processes. Your processes will include long range planning, pricing, job cost accounting, indirect cost allocation, time-keeping, expense reporting, purchasing and commitments and billing - all geared to accurate job cost records at the individual contract level.

To the extent that you cannot demonstrate the above features to DCAA when they audit your business you CAN demonstrate that you are aware of the necessity to set these things up, lay out your plan to do so, and specify a time frame within which DCAA can expect to see you complete your compliant government contract pricing and accounting structure.

I have found that DCAA auditors are reasonable people who understand small companies must grow into government business systems. Showing them your accounting structure and your business system plans will display knowledge they will appreciate and assure them you understand the requirements, even if you cannot demonstrate all the processes at the point in time that the government initially audits your company.

Chapters 45 and 51 through 53 of my Book, "Small Business Federal Government Contracting" provides further detail and examples on establishing CAS-Compliant small business planning, pricing and job cost accounting. The book is free as a download in the right margin of this site in the "Box Net" cube.

Wednesday, November 1, 2017

KNOW YOUR OPTIONS FOR GOVERNMENT CONTRACT DISPUTES AND APPEALS



REQUESTS FOR EQUITABLE ADJUSTMENT (REA)

ALTERNATIVE DISPUTE RESOLUTION (ADR)

CLAIMS

I.  INTRODUCTION

The Federal Acquisition Regulation (FAR) contains provisions for contractors and the government to resolve contract disputes.  The disputes often arise due to events during performance, many times surfacing weaknesses in the original contract work definition, technical parameters, schedule factors or related terms and conditions that can lead to change implications effecting cost, schedule and delivery.

In short, when the understanding the parties thought they had at negotiation and execution of the contract is in dispute, there must be a resolution. 

These conditions open the baseline of the contract to further clarification and negotiation. The FAR recognizes that a fair and equitable process is necessary to settle disputes and re-establish a mutually agreeable contract baseline.

 II. GENERAL CONSIDERATIONS

Contract baseline management has been discussed previously in the following article:


The above article offers six (6) rules of thumb:

1. KNOW - The contract value and its ceiling amount
2. KNOW - The incurred cost to date and commitments
3. KNOW - The scope of work and whether or not your current efforts are supporting it or some other objectives
4. KNOW - The estimated cost at completion based on where you are at today
5. KNOW - Your customer and who among the customer population is prone to direct out of scope effort.
6. KNOW - WHEN TO SAY "NO" to "Scope Creep" and say it officially in writing to the contracting officer specified in your contract.

The remainder of this article will discuss the three most common processes that contract disputes undergo when the baseline is in dispute and selecting the best method considering the circumstances that exist on the contract. 


III. REQUESTS FOR EQUITABLE ADJUSTMENT (REA)

An REA is most often the first and the least formal step undertaken by a contractor when there has been a clear and recognizable departure from the contract baseline in terms of events that warrant cost, schedule, technical performance or terms and conditions parameter modification.  It does not start the formal claims process under FAR with associated interest implications.

Submitted in the form of a proposal for contract change, the REA cites the "Before and After" conditions of the contract baseline and the details regarding the delta.  Implicit in the submission are actual cost records, documents regarding government actions and guidance, an estimate of the new baseline impact in terms of cost, schedule or technical modifications to the agreement and a request for contract change. 

The government agency may approve or deny the proposal, further negotiate the details with the contractor and may or may not modify the contact.  The following article is an excellent guide to use and preparation of REA’s:


IV. ALTERNATIVE DISPUTE RESOLUTION (ADR)

ADR takes advance planning on the part of the government agency and the contractor.  Not every government contracting office chooses to place an ADR clause in contacts they execute.  Not every contractor is willing to accept one at contract award.

ADR is intended to be an alternative to the REA and formal claims process, whereby the government and the contractor agree in advance to place an ADR clause in the contract and subject any dispute that arises to the ADR process for resolution.  

Below is a quote from the FAR on the use of ADR:

33.214  Alternative dispute resolution (ADR)
(a) The objective of using ADR procedures is to increase the opportunity for relatively inexpensive and expeditious resolution of issues in controversy. Essential elements of ADR include—
(1) Existence of an issue in controversy;
(2) A voluntary election by both parties to participate in the ADR process;
(3) An agreement on alternative procedures and terms to be used in lieu of formal litigation; and
(4) Participation in the process by officials of both parties who have the authority to resolve the issue in controversy.
(b) If the contracting officer rejects a contractor’s request for ADR proceedings, the contracting officer shall provide the contractor a written explanation citing one or more of the conditions in 5 U.S.C. 572(b) or such other specific reasons that ADR procedures are inappropriate for the resolution of the dispute. In any case where a contractor rejects a request of an agency for ADR proceedings, the contractor shall inform the agency in writing of the contractor’s specific reasons for rejecting the request.
(c) ADR procedures may be used at any time that the contracting officer has authority to resolve the issue in controversy. If a claim has been submitted, ADR procedures may be applied to all or a portion of the claim. When ADR procedures are used subsequent to the issuance of a contracting officer’s final decision, their use does not alter any of the time limitations or procedural requirements for filing an appeal of the contracting officer’s final decision and does not constitute a reconsideration of the final decision.
(d) When appropriate, a neutral person may be used to facilitate resolution of the issue in controversy using the procedures chosen by the parties.
(e) The confidentiality of ADR proceedings shall be protected consistent with 5 U.S.C. 574.
(f)(1) A solicitation shall not require arbitration as a condition of award, unless arbitration is otherwise required by law. Contracting officers should have flexibility to select the appropriate ADR procedure to resolve the issues in controversy as they arise.
(2) An agreement to use arbitration shall be in writing and shall specify a maximum award that may be issued by the arbitrator, as well as any other conditions limiting the range of possible outcomes.
(g) Binding arbitration, as an ADR procedure, may be agreed to only as specified in agency guidelines. Such guidelines shall provide advice on the appropriate use of binding arbitration and when an agency has authority to settle an issue in controversy through binding arbitration.”

V. CONTRACT CLAIMS

A formal contract claim is a significant step in the relationship with your customer.  It acknowledges that the REA and ADR (if applicable to the contract) processes have not been effective in resolving the dispute and refers the matter to a formal claim which has the potential for adjudication.  It also starts the interest clock in terms of government payment liability in the event the agency loses the claim during adjudication. 

Below are the major clauses regarding formal contact claims and the certifications by the contractor that apply.  They have significant legal implications.


VI. SUMMARY

When contract disputes or the potential for claims and appeals arise it is best to view each instance uniquely in deciding which of the three avenues discussed in this article may be appropriate. 

Contract disputes are serious matters. In the event the impact to the company from a risk perspective is substantial, it is best to involve a law firm that specializes in government contract claims for advice on how to proceed. 


Sunday, October 1, 2017

Techniques for Small Business Product/Services Development in Government Contracting

 
Image:  Getentrepreneurial.com


INTRODUCTION

This article will suggest approaches in developing a product to the point where it can be marketed in the small business federal government contracting venue. Individuals usually succeed at such an endeavor by forming a company, separating it from their personal assets and then developing the company and its product(s)/service(s); even if it is only a one-person operation at the start.

There are techniques for small business to gain government participation in growing an idea into a company. Small Business Innovative Research and Technology Transfer (SBIR/STTR) programs in major federal agencies seek concepts that can be funded and developed into products the government needs. Here are some examples:

 DOD SBIR/STTR Small Business Portal

National Institute of Health SBIR/STTR


Service contracting is another form of gaining entrance into the market, creating opportunities for introducing products by selling skilled labor under a government agency service contract or prime contractor teaming arrangement.

A GSA schedule affords a platform for products and services but sales must have been achieved historically in the commercial or government markets before applying because GSA relies heavily the most recent 2-year pricing data in negotiating a schedule.

The government contracting product and services venue is competitive and requirements by federal agencies are often bundled into larger systems procurements. Therefore, it is necessary first to position a small enterprise and its product offerings before tapping the federal market for development support.

GENERAL OVERVIEW

Product entrepreneurs all face the same challenges. Those who succeed recognize they need to visualize themselves in the product development business, structuring an enterprise, generating a business plan, protecting intellectual property and then seeking industry partners and investors to bring the product to market.

In the process, copyrights, patents and royalty issues may come into play and development and distribution agreements are formed. Pricing is finalized based on cost and expense projections and competitive factors unique to the company as negotiation results are achieved with industry teaming partners, developers, manufacturers and distributors.

Financing is always a factor and can be achieved through loans or investors with a good business plan. The remainder of this article will address the basic elements of a framework within which to succeed with your product development for federal government contracting. 

BUSINESS STRUCTURE

For the majority of individuals who are starting single person or no more than 2 or 3 person operations, a Limited Liability Company (LLC) registered with the state and with the federal government is recommended.

It will separate personal assets from company assets and protect them. When product or services sales begin generating revenue an LLC has many tax advantages. It can be registered as Sub Chapter 'S' for tax purposes and revenue and the expenses can be passed through to personal tax returns, paying no taxes as a company. The double taxation issue prevalent with many of the other types of incorporation is avoided with a Sub chapter “S” LLC. An LLC assists in limits your personal liability for debt and court judgments that may not fall in your favor.

Representing the business as a company allows pursuing financing as an enterprise. You can think of a creative name for your LLC and you can complete the articles of incorporation necessary to bring your enterprise into existence. The term, "LLC" must conclude the name of your company if you decide to form such an organization.

Instructions for registering in your state and federally with the IRS are available at your state web site and at the IRS site. You will receive tax and employer identification numbers by registering your business.

PROTECTING INTELLECTUAL PROPERTY

Patents and copyrights for your idea may ultimately protect you to a degree but the government agencies granting them have no enforcement arm so you must discover a violation yourself, retain a lawyer, bring a court proceeding against a violator and then hope to recover your costs and a reasonable settlement if you win. 

 The U.S. Patent System

Therefore, most of my clients use non-disclosure agreements (NDA’s) in dealing with other companies. Teaming is a practical fact of life in pursuing the larger federal government contracts.

You can download an NDA from the “References” Box Net Cube at the right margin of this site. Fill in the blanks as appropriate for a given exchange with outside individuals and companies. Before you meet to disclose details with a potential teaming company or investor, for instance, ask them to sign the document with you up front, put a serial number on it and reference the serial number and the agreement and date on any written materials you give to them.

After the meeting draft a short letter, documenting the minutes of the meeting, what was discussed and stating that the verbal disclosures and materials in the meeting are subject to the agreement and reference the agreement by number and date. Put an acknowledgment line on the letter and ask them to return a signed copy to you. This confirms their receipt of your proprietary information and their agreement to protect it in accordance with the NDA.

There are certain exceptions with regard to individuals or companies you may be dealing with on investing where you may not choose to use an NDA. Some Angel and Capital Investors are sensitive about being asked to sign them. You will have to trade their objections off against the value they represent to your company and conduct your risk analysis on a case-by-case basis.

For detail information asserting rights in technical data and software to government agencies and protecting intellectual property with other companies please see the following article:

Protecting Intellecutal Property 


BUSINESS PLANNING

Visit the SBA website on business planning. There are major topics in the business planning process which, when addressed in a plan, will insure the success of your enterprise and assist you in determining and supporting the amount of funding you need. Such topics as marketing, advertising, competitor analysis and financing are covered there. You will find a presentation and examples that you can follow in improving your plan or in generating a plan if you do not have one. The link to the site is below:

Writing a Business Plan

Articles on strategic planning and developing your marketing plan are also at the “References” Box Net Cube at this site. They address evolving an operations vision for your enterprise showing its potential to present to a banker or to an investor.

Here is a site with free business plan samples:

Business Plan Samples 

It may assist you in visualizing your own business growth to look at an example of how someone else addressed a given topic. I have learned from having worked with many new business owners that it is best to have you examine the material and continue your plan, contacting me with issues and questions as they occur.

THINGS TO THINK ABOUT WHILE PLANNING

 
Locate teaming companies to further the objective that they would market your product as part of their offerings with your company licensing and sharing in the proceeds.

A business plan and the guidance above for its generation is the road map for developing ideas, laying out how to expand the sales of your product and researching your market to do so. It will also assist in developing pricing to considering the direct costs of product development, service implementation and distribution as well as the indirect costs of the enterprise itself (operating expenses).must be considered and financed.

A negotiation position for a given product will be driven by certain strategic factors:

1. Does a developer or teaming partner have a strong but realistic incentive to actively make the product a part of the marketplace?

2. Does market research indicate the idea will have strong sales volume once it is developed and distributed?

3. How much will a prospective teaming partner or investor have to invest in the product to get it to market? Does the product require testing?

4. Which is the better deal? Is it better to receive a 7% royalty on $5,000 worth of sales or a 1% royalty on $500,000 of sales? Even though 1% does not sound too impressive, of course it’s the better choice in this example.

A negotiation position should be based on support by for the argument that a concept will experience a certain level of sales and the royalty should be based on a % of estimated end user volume sales, discounted for the investment that the developer and distributor must make to get it to market.

The royalty should be outside of the distributor cost breakdown and the end user cost breakdown. It is simply a deductive factor the manufacturer will have to introduce into their profit equation after the costs have been tabulated. They should not view royalties as a cost factor; they should view them as a share of the profit on the total estimated sales.

Chances of succeeding with a negotiation with a developer and/or distributor are increased by showing understand the prospective market for the product and drawing some comparisons between the product and other similar successful products.

Naturally there will be some give and take with the other side about estimated costs to get the product to market. Be forthright in acknowledging their investment but also support a position with some research and comparative data on the product potential.

Lastly, settle on a % of the end user sales volume based on an estimate to which is agreed with the other party and insures that the purchase agreement for royalties entitles the agreed upon % on all future sales.

FINANCING

The SBA assists prospective business owners in completing sound business plans, which can then be presented to a banker in applying for financial assistance.

In the event that 2 banking institutions deny a loan application, a candidate can apply to the SBA for a loan guarantee that may assist in achieving a loan, since it would back up the application to a bank.

Loan officers are interested in a business plan to get a view of the business future and place a value on products and services based on the market, the competition, the sales projections, costs, expenses and profit expectations. The link to the SBA loan guarantee program is below:

SBA Loans and Grants

Veterans have access to small business loans via the Patriot express program:

 Patriot Express Program


ANGEL AND CAPITAL INVESTORS

Angel and private investors have two prominent characteristics:

(A) They want a high return on investment (ROI)

(B) They typically want a great deal of control of the operation.

According to the Colorado Capital Alliance, surveys of angel investors show that:

1. Angels are seeking companies with high growth potential, proven management and sufficient information about the company, its management team, and its market to be able to assess a company's value.

2. On average, Angels expect 10 to 15 percent above of the S&P 500 return on equity.

3. Typically, Angels invest in companies seeking between $50,000 and $1,000,000.

4. Angels generally prefer to finance manufacturing or product-oriented ventures, especially in the high-tech fields.

5. On average, Angels are 47 years old, have a postgraduate degree, and management experience in an entrepreneurial venture.

An angel investor may ask for at least ten to twenty times return in just five years. For many angel investors, it’s not just about the money; they want to actively participate in developing your business. They want to act as a mentor and sometimes even to take an active role in managing the company. This often translates into the angel investor having a seat on the company Board of Directors.

Angels are also highly interested in an exit strategy from for a full return on their investment in your business. The closest thing to it is an astute business plan that calls out the specifics of potential ROI, based on sound planning and analysis and addresses the following as possible exit strategies. Remember, investors are very aware that an exit strategy cannot be guaranteed. But they can be offered more than the wishful thinking that an IPO will occur in three years.

It is always good to have a lawyer involved in complex documents or in the development of documents. This will further protect a concept. A lawyer does not necessarily have to be present during the exchanges with prospective companies, but a lawyer review and comment on documents before they are signed.

SUMMARY

This article has conveyed preliminary steps for the small business in product development for the federal marketplace.

It should be noted that much of the process discussed in this article is the same for the commercial product development and a certain amount of commercial success is usually achieved before selling products in the government contracting venue. The exception to that rule is in highly technical product pursuits where the government is funding advanced development.

To consider non-profit grants and direct government contract funding potential please see the following article:

Grants Vs, Direct Government Contracts

 
Once a company is formed, a product platform established and a position to market a useful product to the federal government is achieved, please see the following articles at this site in developing a marketing plan

Registering Your Business For Government Grants and Contracts

Multiple Front Marketing

Should You Consider Small Business Governement Contracting?

Small Business Teaming

With careful structuring, planning and marketing, a product with potential can find its place in federal government contracting.


Thursday, September 14, 2017

New Federal Fiscal Year - Have You Managed Contract Funding Risk?


INTRODUCTION

As the federal fiscal year draws to a close and the new year opens this month, an astute contractor will have examined the funding status of all government contracts for risk.

Limitation of funds and funding exposure must be a vital topic for every government contractor.

THE FUNDING CHALLENGE

Many federal contracts are funded incrementally, usually based on the government fiscal year that runs from 1 October to 30 September. Although the government may negotiate dollar price ceilings for cost plus and time and materials contracts or firm, fixed total price arrangements, the contracts themselves may be incrementally funded, particularly if they extend over two government fiscal years. A contract may contain negotiated prices or a cost ceiling but also specify an incremental funding value.

The contractor is required to inform the government when actual costs incurred plus obligations to suppliers or payroll on a specific contract reach certain thresholds of the current incremental funding specified in the contract (usually 80%). The government is then obligated to further fund the contract. 

In the event the contract is not funded further, the contractor has the right to stop work before he exceeds the incremental funding. Some contractors choose to operate on "risk," continuing to perform on a contract while exceeding the incremental funding in booked cost and obligations. 

The government is under no obligation to reimburse the contractor for invoiced amounts exceeding incremental funding. Nearing the end of a government fiscal year, a contractor may find delays in funding reaching all the way to congress. This situation must be managed with the government contracting officer. Limitation of Funds and Funding Exposure

STOP WORK ORDER

In the current political climate with Sequestration still in vogue and new fiscal year appropriations being incrementally approved by Congress, contractors may receive stop work orders from agencies unless their contracts were fully funded in the previous fiscal year.   Even then, the government reserves the right to de-obligate funding on contracts, which can effectively bring them to a halt. 


Stop work orders are serious matters and require special handling to comply with government direction and manage the associated financial risk. 

Upon receipt of a stop work order you have no guarantee of payment for any transaction date-stamped in your accounting system after the date of the stop work order (or the commencement date of a stop work order specified in a Contracting Officer's Letter).

Applicable charge numbers in the accounting system must be closed until the stop work order is lifted and any effected suppliers and subcontractors must be notified to do the same.

To the degree the government has made progress payments or has any other form of payment invested in a physical product to date it has ownership rights. If that is the case, treat the physical material work-in-process as government owned, store it as such without performing any more effort on it and await further disposition.

To the degree the government has not paid anything on the contract or delivery order they have no ownership rights to the physical product and you are free to complete it and sell it to another customer (commercial or government that has not stopped work). If the government recommences the order, quote a new price and delivery from ground zero.

At the bottom line a stop work is blunt and to the point.  Treat it as if you will never hear from this customer again to manage the risk.

To the degree you do hear from the Contracting Officer again and he or she has the funding to recommence work, be prepared to submit a proposal for what it will take to start the effort and a realistic delivery schedule to complete it, but do not build any retroactive costs incurred during the stop work period into your logic and expect to bill them; they may not come to payment fruition. 

Continuing effort on a contract after receipt of a stop work is high risk. Astutely managing your options is a far better approach.   What is a Government Contract Stop Work Order?

SUMMARY

Having a limitation of funds and funding exposure process in the company should be a standard part of doing business.  A, shrinking, remaining funding level condition on incrementally funded contracts should trigger a risk analysis and government notification process throughout the year.  The federal fiscal year-end brings an additional element of risk to the process with the annual budgeting, approval and appropriations process required by law. 









Friday, September 1, 2017

Managing Risk in Small Business Federal Government Contracting Business System Development


INTRODUCTION

Most small enterprises must undertake some form of business process augmentation when entering federal government contracting.

The natural inclination for small business is to immediately jump to buying computer software tools or services in an effort to expedite the business system growth process. That propensity is often enhanced by suppliers who maintain their product or service is “DCAA Compliant”, has been “Validated by the Government as an Earned Value Management System (EVMS)” and other similar claims.

This article will address cautions and tips regarding an immediate jump to software or services as a means of growing a government contract business system. It will recommend some rules of thumb to insure wise business system development decisions, specific to your company, for managing the associated risks.   

UNDERSTANDING THE REQUIREMENTS

The US Government learned decades ago that it cannot impose specific business systems on contractors.  One of the last great attempts to do so was the Program Evaluation and Review Technique (PERT).  It was abandoned in the late 1950’s and early 1960’s and replaced by a set of industry criteria now known as Earned Value Management Systems (EVMS). 

Similarly, the Federal Government Cost Accounting Standards Board (CASB) determined that job cost accounting systems could not be imposed on contractors. Over the years they have developed and maintained a set of Cost Accounting Standards (CAS) which governs requirements for accounting on government contracts. 

The GSA and similar agencies maintain policies on travel, human resources and wage/rate determinations that are not specific systems, but minimum standards as well.  A small business entering federal government contracting should research the above and similar requirements in such areas as quality assurance, inspection and acceptance and export management.

PROCESS COMES FIRST – MAXIMIZE WHAT YOU HAVE

Given a thorough understanding of the requirements for a government contract business system that fills the need for your specific product or service delivery, the next step is to examine existing processes to determine if they can meet the need or be minimally supplemented to do so.

Finding a need for major process changes or enhancements in the existing business system is the beginning of a requirements analysis to determine the labor, process change, planning, costs and eventual selection of new automated tools that fit the company and that need.

Many start-ups and small enterprises find they can crutch their existing job cost accounting system for service contracts with spread sheets instead of buying an expensive, data base oriented, software package or services initially.  As the company grows into government contracting and the number of transactions and associated revenue warrants the expense,  the firm can then evaluate more expensive packaged software tools or services and ease into them with a plan to minimize disruption.

A government contract award drives many things in government business, but small firms cannot wait until that event to position at least the minimal processes necessary to perform, price new business, function lawfully in the human resources area and submit supportable detail in billings. 

Please see the following articles for guidance on minimal business system requirements for small business federal government contacting.

What Is A Small Business Federal Government Contractor?

Pricing Small Business Federal Government Contracts

Small Business Job Cost Accounting Basics

Small Business Federal Government Contracting Business System Development


RULES OF THUMB FOR SELECTING AUTOMATED TOOLS

From strategic planning to marketing, from forward pricing to job cost accounting, from subcontracting and vendor/contractor management to human resources policies, the small firm finds itself undergoing a business system design project upon entering the government contracting venue.

Understand the requirements first, review existing processes and tools next, develop a thorough requirements statement of what must be done in the way of enhancements and then consider automating.  While performing your analysis keep the following 5 rules of thumb in mind:

1. An electronic computer software package or service is not a system. One cannot acquire a system by acquiring them. 

2. One acquires a system by conducting systems analysis, achieving a design and processes by working with the people who will run the system. This is hard work and time consuming. Processes are improved and made more efficient by modifying user behavior not by automating it.

3. Once system and analysis and system design are complete one can prudently choose tools to assist in running the system. The adequacy of a computer tool or service is driven by the requirements of the most efficient system design.

4. The biggest mistake implementation teams make is to believe they are buying a system when they buy a software tool or service or let the tools drive the systems analysis process. That is like asking a mechanic to drive a wrench from New York to St. Louis. It has resulted in millions of dollars wasted and plummeting efficiency in many organizations, large and small.

5. It is necessary to design a system and processes unique to the company to meet user requirements before going shopping for computer tools or services.  If you do not you will be pigeon-holing your company into becoming a slave to the company that owns the software source code or service. If you want anything changed it costs a big buck.