INSIGHTS - Using Weighted Guidelines Profit Determination In Federal Government Contract Negotiations

                             

    Image:  Skyway Acquisition Weighted Guidelines

The accepted template for negotiated procurements with the government is as follows:

A. Audit

B. Fact-finding

C. Pre-award Survey

D. Cost Negotiations

E. Final Profit Negotiations

F. Contract Award

Although policy in FAR Part 215-404-4 states that contracting officers ….” do not perform a profit analysis when assessing cost realism in competitive acquisitions”, it is wise to understand that during Steps A trough D above, the contracting officer and his representatives are indirectly forming opinions of the risk to the contractor and the mix of cost elements in the proposal. That opinion directly effects profit negotiations and judgments at Step E, above.

Although the above FAR clause allows for 3 methods of profit negotiation, the most common method contracting officers use is the Weighted Guidelines Method.

ELEMENTS

Contractors should be aware that the Weighted Guidelines Method is mandatory for all negotiated procurements except Cost-Plus Award Fee Contracts and exceptions as approved by a higher authority. Contracting officers are to prepare their position using DD Form 1547 with associated backup and file it at the conclusion of negotiations.

Understanding the weighted guidelines method can assist in achieving a higher profit because a contractor can present a profit position in a contract proposal that logically supports the below elements required by FAR Part 215-404-4."Profit" during negotiation. 

• Performance Risk
• Contract Type Risk
• Facilities Capital Employed
• Costs Efficiency

The detailed analysis guidelines for contracting officers under each of the above factors are contained at the following link:

http://www.acq.osd.mil/dpap/dars/dfars/html/current/215_4.htm#215.404-71

It should be noted that the Facilities Capital Cost Employed (FCCM) factor (a separate DD Form 1861) does not always enter into small business negotiations, because many start-ups and smaller enterprises do not propose it as part of their allowable costs due to elements they cannot demonstrate in capital investment, land, buildings and similar items.

UTILIZING THE FORM FOR NEGOTIATION

A DD Form 1547 accompanies this posting. An Excel version with arithmetic formulas and a separate tab for DD Form 1861, FCCM, can be downloaded from the  Box “References” cube in the top right margin of this site.

Study the form and its guidelines at the above link. Apply it to your proposal. This puts your perspective on profit into the same structure as the contracting officer is required to develop his.

When profit discussions ensue and the contracting officer takes a position, ask for a copy of his weighted guidelines analysis form. If he does not provide it, or has not prepared one, give him yours with your position on profit, updated to reflect costs negotiated during steps A-D above.

A reasonable discussion can then occur on the elements of profit negotiation and offers, counter offers and ultimate agreement can be equitably reached with a known structure addressing risk and other required factors.

SUMMARY

The majority of negotiated cost proposal effort involves coming to an agreement with the government via audit, fact-finding, pre-award survey and cost realism. But keep in mind that the government is forming an opinion on the elements of weighted guidelines profit determination during those stages as well.

You can influence the government negotiator (s) on the weighted guidelines profit elements during the early stages of negotiations as you settle on cost factors. You do so by presenting the data and narrative basis of estimate in such a fashion as to identify risk and other key area of weighted guidelines analysis. Insure the technical, management and cost volumes of your proposal, if they are required, are consistent in that regard.

Update your DD Form 1587 in your working file and prepare to use it as you settle on profit to conclude negotiations. Relate your profit position to weighted guidelines cost elements, as agreed upon with the government, supported by your proposal and any other documented disclosures you have submitted during negotiations. Doing so will support your position on profit and give the contracting officer an opportunity to accept it.

Cost Center Strategic Planning For Small Business Service Contractors

Image:  The Blue Print (Motley Fool) 

INTRODUCTION

A growing small enterprise can enhance competitive rate development and cost management by effective cost center utilization in federal government contracting.

A cost center is a single, pricing, accounting, and billing entity within a company, organized for a group of business lines and clients with close similarities for technical and management purposes. It has its own unique overhead rate and houses the projected direct cost labor dollar base and associated expenses for that base.

A cost center is also a financial consistency template that runs from long range planning through proposal pricing, accounting, billing and closeout for the contracts it houses.  It is the way DCAA and contracting officers view major aspects of your business and your rates for that business.

INITIAL COST CENTER EXPERIENCE

Enterprises that have not experienced federal government contracting typically base their initial proposals and bid submissions to the government on their commercial quotation approach and related market rates.  This usually involves a single company cost center approach with both government and commercial work together at the general ledger level. 

When the company gains experience in government contracting through audit exposure during proposal fact finding/negotiations, as well as accounting and billing, it becomes apparent that government cost accounting standards (CAS), job cost accounting and cost management at lower levels than the commercial general ledger are necessary to succeed.  At that point a business system to support the new requirements begins to take shape. 

The below graphic contains a typical graphic overview of the processes necessary.

PLEASE CLICK ON IMAGE TO ENLARGE

Note the long range planning and cost center blocks in the graphic.  The remainder of this article will focus on those two elements of the company business process. 
 

GROWING INTO MULTIPLE COST CENTERS

The time to consider separating government from commercial work and/or establishing new cost centers for bidding, accounting and billing purposes is when the enterprise is generating a long range marketing plan to determine rates for bidding new long terms contracts.

The location of the work (both geographic location and whether performance is in or out of a government facility, its duration, skill set requirements, government-mandated fringe benefits for workers and the competition are all factors to consider).

The government will not question your setting up a new cost center and projecting a direct cost business base within it together with associated expenses and the resultant forward pricing rates.  The reality you must remember is that the business in the cost center must materialize as a contributor to the company G&A base for the firm’s rates to remain consistent.   DCAA will check the math during a proposal audit.  You must make the projections happen to succeed if you win the work.  Please see the following article for the details on these relationships:

Establishing FAR and CAS Compliance

Setting up a new cost center retroactively for contracts that are already in process with pricing, job cost and billing records supported elsewhere in the plan, and the business system is extremely difficult.  Looking ahead during the bid process pays big dividends.

PROBABLILITY FACTORS IN COST CENTER FORECASTS

Probability factors reflect the likelihood of contract awards.

Place into the projected base for a cost center only that amount of forecasted direct cost base deemed likely to occur and then market and manage to make your forecast happen.  If major projects in the forecasted business do not materialize your actual, realized base will be too low and your overhead rates will go up during cost center operation unless expenses are cut. That means higher bidding and billing rates to your customers.

Probability factors are usually applied by forecasting the direct dollar labor content for the job in dollars and factoring it based on marketing intelligence relative to competition, the company capability statement, past performance with the agency and how well the firm is known to the customer.  Proper modeling of probability factors avoids unrealistic cost proposals and cost overruns under contracts while permitting flexibility in risk taking to beat the competition. Please see the below article for further details on this practice:

Provisional Indirect rates

SUMMARY

Projects performed in government facilities may require a separate cost center, since many of the associated expenses for such operations are born by the government, who in turn expects a lower overhead rate as a result.

For accounting purposes cost centers usually have individual subsidiary ledgers, balance sheets and profit and loss statements. They are summarized monthly to a company total. Each cost center must have job cost accounting for the contracts residing there and a cost-center-unique overhead rate. 

The sum of the direct and indirect costs in the company cost centers forms the G&A base to which corporate level expenses are applied when calculating the G&A rate that is further applied to all projects residing in all centers after labor, labor overhead, material and other direct costs (travel or like expenses) have been summed.

Assuming your competition pays a generally similar labor rate to employees as you do and that fringe costs about the same for everyone, then cost center overhead, coupled with the company G&A rate, are often what wins and loses price evaluations during source selection. 

For more on cost centers and attendant business system considerations, please see the PRICING, BUSINESS SYSTEMS, FINANCE & ACCOUNTING section of the free book offered at this site as well as the long range plan and estimating and pricing examples in Appendices A and B to the book. 

What to Expect from Government Small Business Contracting Pre-Award Surveys and Fact Finding

INTRODUCTION

When a government contracting specific market target has been identified and a proposal has been submitted, pre-award surveys and fact finding by the buying agency or the prime contractor often follow. These processes take two forms:

1. A survey visit to the small company facility

2. Inquiries with respect to supplementary details for enhancing the customer perspective on a proposal submittal.

Undertaking the above processes with a government agency differs from that of undergoing them with a prime contractor. You are not required to disclose proprietary data to a prime contractor. Please see the following articles for further information in this vital area:

Protecting Intellectual Property

This article will discuss each of the above processes and suggest measures to prepare for, conduct and succeed at pre-award surveys and fact finding.

PRE-AWARD SURVEY

A pre-award survey is a government or prime contractor visit to a supplier's facility. The Procurement Contracting Officer (PCO) or the Administrative Contracting Officer (ACO) and the Contracting Officer’s Technical Representative (COTR) as well as members of their respective staffs may attend.

In some instances the local Defense Contract Management Area Office (DCMAO) is involved. As you become a regular supplier to an agency, site survey visits will normally cease or occur only rarely.

For further explanation of the above government officials and their roles, please see the following article:

Government Contracting Customer Relations

The site survey team is interested in establishing the physical presence of a new supplier, the technical capability and the human resources to perform the prospective work and the quality of the environment in which the effort will be performed. A "Pre-award Survey of Prospective Contractor" Forms are completed and become part of the contract file:

Pre-award Survey Forms

Pre-Award Survey of Prospective Contractor SF-1403 8/1997
Pre-Award Survey of Prospective Contractor (Accounting System) SF-1408 8/1997
Pre-Award Survey of Prospective Contractor (Financial Capability) SF-1407 8/1997
Pre-Award Survey of Prospective Contractor (Production) SF-1405 8/1997
Pre-Award Survey of Prospective Contractor (Quality Assurance) SF-1406 8/1997
Pre-Award Survey of Prospective Contractor (Technical) SF-1404 8/1997

Select the person who will lead the meeting with the government survey team. This person should be empowered to speak for the company and should be completely familiar with details of the solicitation and your company's offer.

If relevant, make available one or more technicians to answer questions. Identify any disparities that may exist between the solicitation and your company's offer that should be resolved during the initial meeting with the survey team. Think about how you can demonstrate actual technical capability or the development of technical capability on the proposed contract. Make sure your facilities and equipment are available and operable. If they are not, be prepared to demonstrate that they can be developed or acquired in time to meet proposed contract requirements.

Make sure that your labor resources have the proper skills or that personnel with the needed skills can be hired expeditiously. Gather and make available to the survey team documentation, such as previous government contracts or subcontracts or commercial orders, to demonstrate a past satisfactory performance record with regard to delivery, quality and finances. Gather financial documentation for the team financial analyst, including the company's current profit and loss summary, balance sheet, cash flow chart and other pertinent financial information. Make sure the plans are in place for vendor supplies and materials or subcontracts to assure that the final delivery schedule can be met. Make sure that these plans are verifiable.

Review any technical data and publications that may be required under the proposed contract and make sure you understand them. If the contract is a type other than a firm-fixed price or if you have requested progress payments, prepare adequate accounting documentation for review. Review your quality control program and make sure that it is workable and consistent with the quality requirements stated in the contract.

PROPOSAL FACT FINDING
Fact-finding usually involves the government requesting additional information to supplement that which was submitted by you in your proposal. These areas of interest are early indications of where the negotiator is looking for weaknesses in your cost justifications or disconnects between your technical approach and the cost you are estimating to do the job. If you have subcontractors or major material suppliers, the government may ask for copies of your vendor proposal evaluations. The government may wish to examine cost history for the last time you performed similar efforts.

Keep in mind that most government agencies put together an independent cost estimate of what they feel the item or service should cost. These are commonly called "Should Cost Estimates". The additional requests for information during fact finding are feeding the should cost estimate. The Procurement Contracting Officer (PCO ) typically has an end user for the product or service internal to his organization who will become the Contracting Officer's Technical Representative (COTR) when the contract is awarded.

The COTR has a strong influence on the negotiations and will usually be present when negotiations commence. On many occasions, the COTR is the real internal customer at the agency. He has fiscal, technical and schedule responsibilities to his management for the program you are servicing. He simply cannot sign for the government.

The PCO has the agency warrant to commit the government and knows the most about public law and the Federal Acquisition Regulation (FAR) as it is applied to contracts the agency undertakes. It is the COTR who is likely feeding the PCO requests for fact-finding data. Keep in mind that the COTR and the PCO are formulating their assessment of the cost and the risk associated with the program during the fact-finding process. Cost is the first item of negotiation and risk has a direct influence on the government's position on profit.

The contacting officer may order a Defense Contract Audit Agency (DCAA) audit. The Request for Proposal (RFP) to which you responded may in fact have ordered a copy of your proposal be submitted to the DCAA Office nearest your location. If you are a new supplier to the government, DCAA may ask for a copy of your long-range plan containing your direct and indirect rate structure. They will verify the rates utilized in your proposal against your LRP, evaluate escalation factors utilized for long term projects and check the math. For guidance on these matters, please see the following article:

DCAA Audits And Small Business Job Cost Accounting Systems

The auditor will ask for copies of major material and travel quotations and insure that government per diem rates are utilized for lodging and meals in the cost proposal. DCAA may also visit your facility to check compliance with Cost Accounting Standards insuring that the company sets up each new government contract on job cost accounting in the identical manner in which it was proposed; in effect identifying direct labor, direct material and other direct costs to each contract monthly and allocating overhead and G&A utilizing the same numerator and denominator relationships upon which the contract was originally estimated.

DCAA is paid by the PCO to perform the audit. The audit does not extend to negotiations and at the audit conclusion the auditor files a report with the PCO. The report will contain information on any errors uncovered and findings on the adequacy of the accounting and long range planning systems. DCAA will not express an opinion on the cost content of the proposal in terms of a value judgment regarding prices for prospective supplies and services. If the auditor does not offer an exit interview, ask for one. Better yet, ask for a copy of the audit report to the PCO. Many DCAA offices will provide a copy to audited contractors. DCAA does not have the authority to direct a proposal revision based on audit findings. An astute contractor will immediately correct any errors found by the auditor in the proposal and examine other audit findings in preparation for negotiations.

SUMMARY
With adequate preparation and understanding of what the processes involve, the small enterprise can succeed in passing government agency or prime contractor site surveys and fact finding.

Remember that these encounters are extensions of your image as presented in your proposal. They are building block in nature and serve to establish, reinforce or change a customer’s view of your company and your proposal.

Is Small Business SETA Contracting for You?

INTRODUCTION

The commercial, start up or growing entrepreneur may have specialized skills,products and services that could be marketable to the government but a window of opportunity or an entrance niche is sometimes difficult to locate in the very large and competitive federal contracting venue.

System Engineering and Technical Assistance (SETA) contracting may provide an avenue for the small business in gaining the momentum necessary for building a government contracting past performance record. It does not require an off-the-shelf product or capital intensive facilities.

SETA contracting is often utilized by the government to enhance agency statistics requiring firms that hold small business designations and who can offer quality services in support of the internal agency facilities or operations.

Set Aside Designations

DEFINITIONS

FAR Sub-part 37.2 defines advisory and assistance services and provides that the use of such services is a legitimate way to improve the prospects for program or systems success:

Advisory and Assistance Services

FAR 16.505(c) provides that the ordering period of an advisory and assistance services task order contract, including all options or modifications, may not exceed five years unless a longer period is specifically authorized in a law that is applicable to such a contract:

Indefinite Delivery Contracts

DFARS Part 237.2 provides very important information applicable to advisory and assistance contracts:

ServiceContracting

The contracting officer and requiring activity must also be aware of FAR Subpart 9.5 when considering the potential for organizational and consultant conflicts of interest:

Conflict of Interest

THE NATURE OF THE WORK 

Typical SETA efforts may involve long term contracts to perform acquisition assistance, project management, price or program analysis, independent estimates, administrative support, computer and data base operations, technical and security services, facilities maintenance functions or similar tasks. The typical SETA contractor rarely interacts with other government contractors and if interaction occurs it is only with other SETA contractors and subcontractors performing in similar roles at the same agency or in the presence of a government contracting officer/authorized representative. They are generally behind the scenes and cannot directly represent the US Government. 

SETA contracting requires skilled management and labor resources capable of performing a scope of work for which the government has identified a need and for which outsourcing to an industry contractor has been selected as the means to fulfill that need. The venue demands strong human resources management and an enhanced business system to price, account and bill on a job cost basis under government service contracts.

INCUMBENT WORK FORCES

SETA contractors often target incumbent work forces where an agency plans to offer a small business the opportunity to assume an existing services program formerly run by a larger firm or a small business that has grown beyond the size limit designated for the procurement.

In these instances the winner will have solid plans for recruiting and retaining the existing work force executing a transition plan and insuring that the government does not encounter an interruption in services.

Contingent hire agreements and sophisticated human resources processes are necessary to position the company during the proposal effort and as the contract proceeds. Contingent personnel are well aware of their market value among the SETA contractors competing for the work.

Contingent Hire Agreement

MARKETING APPROACH

As budgets become tighter, the government agencies will be looking for solid performance at the lowest possible price, stability in performance and contractors adept at learning government processes and systems as well as working with the agency to improve them.
Find opportunities well in advance of their being formally solicited on FEDBIZOPPS. Look for existing services and support contracts in their last year or self-market a services contract to an agency whose mission requires your expertise.

Propose and price to win using the following guidance:

Proposal Preparation

Pricing Service Contracts

UNDERSTAND ORGANIZATION CONFLICT OF INTEREST (OCI) RESTRICTION

If you are considering becoming a SETA contractor, determine what portion of the market in your industry will be unavailable to you in that role with the agency to whom you contract. As a SETA contractor you will not be allowed to compete for the programs being procured by the agency other than the SETA support contacts. You knowledge of the inside workings of the government agency would be a conflict of interest in bidding other projects.
You should target for SETA exploration only those agencies to which you do not intend to market other services.

SUMMARY

Consider SETA contracting if your marketing plan contains elements of support and assistance that an agency may be willing to outsource. If you hold small business designations, seek marketing opportunities to foster government set aside procurements for the designations you hold and understand that SETA contract will be the only programs you will hold with that agency due to OCI restrictions.　
　

10 Misconceptions About Small Business Federal Government Contracting

1. It is easy to become established in the federal marketplace by founding a start up in small business contracting to the federal government

Very few do so. The principle reason for this is lack of past performance records either commercially or as a registered government contractor.  Past performance is a major factor in awarding government contracts:

The Small Business Federal Government Contracting Past Performance Challenge

Small enterprises who succeed in federal government contracting usually have a sustaining commercial business as ongoing support while they learn federal contracting bid, proposal, and pricing, industry teaming and marketing techniques.

Your Entry Points Into Small Business Federal Government Contracting

2. Federal government contracting is just like local and state contracting

It is not.  Every local and state government agency has their own set of rules and contracting techniques.  Although states must meet federal law with regard to interstate trade, EEO and similar matters, they are given wide latitude by the federal government. Most state and local or municipal agencies are very dissimilar in the specifics of how they conduct procurements and are strongly influenced by community ordinances and state law. 

Federal government contracting has its own set of specific rules (The Federal Acquisition Regulation (FAR) and  Cost Accounting Standards (CAS) which cross all agencies.  Small business must understand how these rules affect their doing business at the federal level.

What Small Business Should Know About FAR and CAS

3. Business can be conducted at the federal level without significant process changes from commercial practices

To succeed in federal contracting the small enterprise must implement processes such as GSA pricing, job cost accounting, forward pricing rates and related matters that are not common in the commercial venue. This takes research, time and process/business systems implementation that many firms overlook until they realize, through hard experience, that they must develop them on the fly to succeed.  Federal government contracting is not rocket science but it is different than commercial contracting.

A Framework For Federal Government Service Contracting Small Business Systems

4. Federal government contracting can begin immediately after registration

This is a hypothetical possibility but not realistic.  Registration simply self-certifies a small business to compete, establishes a Registration Number and a Federal CAGE Code for the firm.  Agencies do not go looking for registered firms to do business with them.  A niche must be located by the prospective contractor in the form of an agency requirement that fits the company. Or the company must locate industry team member (s) that can use capabilities available from the newcomer.  Very small enterprises achieve these objectives to a large scale degree within their first year of pursuing contracts with the federal government.

Marketing to Achieve a Small Business Set-aside Government Contract

5.  All federal government contracting agencies are the same

Not so. Department of Defense (DOD)  contracting, for instance is very different than contracting with  civil agencies like the FAA.  The technical requirements, environment and security factors vary dramatically even though they use the same contracting rule book. The seller must market to the agency that has the greatest need for the product or service offered and team with industry partners who can enhance the potential of the small business in collaborative efforts. 

6. Small Business set aside designations will yield immediate business

Self-certifying as a minority-owned,  woman-owned, veteran-owned or disabled, veteran- owned business allows a firm to compete with other companies who have the same designation. At times this involves substantial competition.   Achieving a government certification as a small-disadvantaged 8(a) or HUB Zone enterprise may allow set-aside contracts without competition, but such awards are becoming rare, harder to justify by the government and are monitored closely for competitive possibility by oversight functionaries.

Federal Government Contracting Small Business Set-aside Designations 

7. Federal government contracting can be undertaken by a company on a stand-alone basis

This is only true for companies with very unique, off the shelf products involving small buys.  Even then, knowledge of the industry and networking with other firms dramatically increases the possibility of expanding sales.  Relationships must be developed with primes and other small businesses that can help the small firm, team by teaming with it and keeping it in mind as they search for success. That takes time, patience and open-minded, out of the box thinking.

Synergism is paramount in teaming with any size company, whether in a lead or subcontracting role. There should be technical, management and market segment similarities between the small business and any company with whom it  is considering teaming. A prospective team member ideally will not be a direct competitor; rather a business in a related field with whom the small enterprise shares a mutual need for each others contributions in pursuing large-scale projects.

Small Business Teaming in Government Contracting

8. Small Businesses receiving set aside contract awards from the federal government can subcontract all the work to other, larger and established enterprises

Companies obtaining small business set aside awards must be capable under the law of performing a minimum of 51% of the required effort internal to their organization.The quantitative measurements the government uses to gauge this rule are the work scope, hours and dollars content of the prospective contract.

9. Obtaining a GSA schedule guarantees new business

A GSA schedule permits a quick ordering process for  federal and state clients. In dealings with prime contractors to which the small firm aspires to subcontract a GSA schedule is valid pricing which can be readily included in proposals to government agencies. A GSA schedule facilitates teaming with other synergistic small companies in proposing large scale efforts.

However, a GSA schedule does not guarantee new business will come. Very few companies await government agencies to find them by searching the GSA data base. To succeed, small businesses must actively market their schedule to targeted agencies as an expedient way to contract with them or as a qualification criterion for new business awards.

Achieving and Utilizing a GSA Schedle

10.  FEDBIZOPPS (Now SAM Opportunities)  is the best way to identify, bid and obtain federal government business 

Often misunderstood, is that much has occurred in the way of marketing activities by companies in advance of notices formally published by the government on SAM.  By the time the formal, solicitation is published it is too late to market for setting a procurement aside for a small business designation if it has not already been established as such. In addition, formal solicitation publication closes the window on self-marketing by HUB Zone and 8(a) firms for set asides to them individually without competition. In short, businesses have been marketing for a requirement long before it became formally announced.

Finding a solicitation that is ideal for a company for the first time on  is excellent market research insight into what the agency publishing the requirement is buying. However, a careful bid/no bid analysis should be conducted as to whether it is prudent to go through the expense of a proposal if the opportunity has not been a new business target for the firm earlier in the game.

What Small Business Should Know About FEDBIZOPPS (Now SAM Opportunies)

SUMMARY:

Federal government contracting is not a quick process; but for many it can provide a steady cash flow and potential growth.  

To succeed, a carefully constructed, relationship-driven, marketing and business operations program must be developed, tailored to the federal environment. The program must include adequate research and preparation with respect to bid decisions, teaming, proposal preparation pricing and business system requirements. 

Multiple Front Marketing In Small Business Federal Government Contracting

DCAA Service Contract Audits and Small Business Job Cost Accounting

INTRODUCTION

Small Businesses typically have a learning experience growing into government services 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:

What is a "Compliant" Federal Government Contracting Small Business System?

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 AUDITS

Proposal 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 CONTRACTS

This 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 TIME AND MATERIAL CONTRACT AUDITS

Billing 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 Time and Material 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 TOOLS

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:

ICAT

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 and 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 tool, I recommend you begin looking for one and plan strategically to implement it if  significant progress billings and service contracting transactions, 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. '

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" You do that 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.

NOTE:  Comments at this post have been retained from previous discussions on the topic at "Small to feds"