What Small Business Should Know About FAR And CAS

 

Federal Acquisition Regulation (FAR) 

& 

Cost Accounting Standards (CAS) 

Rules Of The Game And Developing Your Game Plan

INTRODUCTION

Small businesses consistently encounter FAR and CAS requirements upon entering or growing into federal government contracting.   The purpose of these standards is to supply uniform regulatory guidance to all companies doing business with the government and to the agencies that buy from them. 

A  basic understanding of FAR and CAS is necessary to manage government contracts  as well as design business process approaches to meet the requirements.  

The FAR applies to the full acquisition cycle for all supplies and services the federal agencies buy. 

The CAS apply to consistency in estimating, pricing, job cost accounting, billing and closeout of financial data under the contracts for supplies and services regulated by the FAR. 

FAR and CAS are not "Rocket Science" but they are different than the commercial business sector.  

HOW TO DETERMINE WHAT FAR AND CAS MEAN TO YOU

No one ever reads the full body of FAR and CAS from cover to cover.  They are reference documents, maintained by the government to oversee the contracting process.  From time to time changes to the regulations are offered for public comment at the FAR web site. 

 Such changes are more common in the FAR than in CAS.  The CAS have been constant for several years and are not as dynamic as the detail processes in the FAR. 

The below table contains the principle FAR chapter titles and each of the 19 CAS clauses.  Linked below the table are the web sites that can be utilized to explore these documents. 

(Please Click Image To Enlarge)  

Federal Acquisition Regulation

Determine the regulation basics that apply to any given job considered for bidding.  Examine a few solicitations in your area of expertise at the SAM web site:

SAM Contract Opportunities

Glance through the terms and conditions of a given solicitation and note the FAR and CAS requirements sited.  Use the links to the FAR and CAS web sites as source documents to read in detail the clauses you must understand to effectively bid the job .  

Cost Accounting Standards

Small businesses are generally required to meet modified CAS coverage. Small businesses are generally required to meet modified CAS coverage.  The business system requirements for Modified Cost Accounting Standards (CAS) Coverage are defined by the government as follows: 

Standard 9904.401, Consistency in Estimating, Accumulating, and Reporting Costs

Standard 9904.402, Consistency in Allocating Costs Incurred for the Same Purpose

Standard 9904.405, Accounting for Unallowable Costs

Unallowable Cost Guidance

Standard 9904.406, Cost Accounting Standard―Cost Accounting Period

Modified, rather, than full, CAS coverage may be applied to a covered contract of less than $50 million awarded to a business unit that received less than $50 million in net CAS-covered awards in the immediately preceding cost accounting period.

The following article contains practical business system guidance regarding building a Modified CAS Coverage Small Business System for federal government contracting:

Managing Risk In Small Business Federal Government Contracting Business System Development

If you have confusion regarding interpreting a requirement, seek assistance in the table of contents to the free book at this site offering guidance under the topic in question

SUMMARY

While assessing the impact of FAR and CAS on your company educate yourself on that what directly affects your company first in making the transition to federal government contracting and growing into the field.

Carefully  maximize your existing business processes and systems first before making changes and do not jump to instant fixes with exotic software tools a supplier or consultant has told you will make you compliant or competitive overnight in government contracting. 

FAR and CAS are generally logical bodies of regulation that have come about due to the need to control and make consistent the government and industry approaches to meeting prudent and sound contracting objectives with the necessary  transparency to govern. 

FAR and CAS do not impose business systems.  They do require that you disclose the way you meet regulatory requirements in the way you operate with your processes and tools. Plan the approach and learn to convey it to auditors, contracting officers and industry partners.

Grow into the business by exploring the venue and having it grow into you.  

Managing Risk Under 'The Truth In Negotiations Act (TINA)'

THE RISKS ASSOCIATED WITH DEFECTIVE PRICING 

INTRODUCTION:

 
We have previously discussed at this site the development of credible cost and pricing data. That data is the product of not only estimating and pricing but also job cost accounting for managing contracts, business system design to meet Cost Accounting Standards (CAS) and the integrated aspects of the company business system demonstrating regulatory compliance:

Pricing With Credibility

Pricing Small Business Federal Government Contracts

Small Business Systems Development

DCAA Audits and Small Business Job Cost Systems

The purpose of this article is to cite the specifics of the “Truth in Negotiations Act” and recommend  management techniques to comply with this law and avoid defective pricing claims by the US Government. 

THE TRUTH IN NEGOTIATIONS ACT (TINA)

Public Law 87-653 (codified by 10 USC 2306a) was originally enacted in 1962 to place the Government on equal footing with the contractor during contract negotiations.  The following are the principal features of the law:

• Defines requirements for obtaining cost or pricing data

•  Requires certification that data are current, accurate, and complete

• Delineates exceptions to the requirement

• Addresses data submission for pricing of commercial items, below threshold contracts, and “other information”

•  Provides right of Government to examine contractor records

• Defines cost or pricing data

• Provides rules governing defective pricing

• Downward Contract price adjustment

• ·Recovery of overpayment (cost & profit) & interest (as of 1985)

• 2 M Threshold for contract actions (DOD recently increased from 750 K) Recent Procurement Reforms

• Contract actions include contracts, subcontracts, and modifications

•  TINA applicability is not affected by contract type

•   For subcontracts, the $2M threshold applies to the submission of data from the subcontractor to the prime contractor.

 
FIVE POINTS THE GOVERNMENT UTILIZES FOR ESTABLISHING DEFECTIVE PRICING

 
1)    The information in question fits the definition of cost or pricing data.

(2)    Accurate, complete, and current data existed and were reasonably available to the contractor before the agreement on price.

(3)    Accurate, complete, and current data were not submitted or disclosed to the contracting officer or one of the authorized representatives of the contracting officer and these individuals did not have actual knowledge of such data or its significance to the proposal.

(4)    The Government relied on the defective data in negotiating with the contractor.

(5)    The Government’s reliance on the defective data caused an increase in the contract price.

MANAGING THE RISK OF A DEFECTIVE PRICING CLAIM

 
A government auditor relates to TINA and defective pricing whether or not it is required contractually and uses the TINA provisions as a frame of reference in how he or she views trend analysis of your company. Even if you do not have the TINA requirement in your bid or your contract, be aware the auditor is forming his or her opinion of your compliance with the law against the TINA framework.

Post award audits can be ordered at any time by a PCO. During such audits your proposal is juxtaposed to your incurred cost and historical data on a given contract. During such juxtapositions, defective pricing stands out glaringly.  If you become aware of an anomaly, cover your tracks by immediately assessing the impact and deciding whether or not a disclosure should be made.  

Integrate your system from pricing to billing to close out utilizing a consistent cost structure template and be aware you are putting audit history in place and that historical trends are what auditors follow.
 

Keep all subsequent disclosures under proposals to the government well documented, serialized and current at the prime and subcontract level, reflecting them in a detail record of negotiation.  

If you have commenced work prior to final negotiations under a letter contract or similar interim arrangement, conduct a sweep of actual costs and commitments and reflect them in an updated proposal to the government prior to negotiation of a final price.  Reassess quotes, escalation factors, indirect costs and related factors in the same manner if a proposal expires and you are asked to extend your pricing. 

If substantive conditions in an open proposal estimate change, document them thoroughly and disclose them to the government based on an astute analysis of your risk if they can be misconstrued as defective pricing by an auditor.  Carefully convey the impact on the prospective contract and its pricing to the contracting officer if you decide to disclose. 

Consistency with CAS and your CAS disclosure statement as well as your latest negotiated forward pricing rates is mandatory. Any departure from these baselines will attract audit attention.
In many defective pricing instances what you knew and when you knew it becomes a factor.  Continually assess changing conditions that may dramatically impact your cost performance and manage them by taking corrective actions, developing workarounds and carefully communicating requirements to your subcontractors and suppliers. 

Remember under TINA you are required to perform cost/price analysis of your subcontractors if their work scope exceeds the $700k threshold. You must submit the results with your proposal to the government.  If a disclosure becomes necessary, make it sooner rather than later when the data may be under the cloud of a negative audit finding.

SUMMARY

 
Defective pricing actions by the government can have a severe impact on your past performance rating.  They must be cited by you with any new business proposal in which you are asked if your company has been accused or convicted of a violation of the law or has open or pending government adjudications regarding legal violations. 

Sculpt and educate your auditor, contracting officers and government analysts on the specifics of your company business system and preserve its integrity over the long run to maximize your win potential and lower the risk of defective pricing claims by the government. 

A good rule of thumb is to consider every proposal as if it were under TINA compliance whether or not you must submit a “Certificate of Current Cost and Pricing” under TINA.  This will keep your business system sharp, your ethics and standards high and your past performance record clean.

 

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.

Managing Risk In Small Business Federal Government Contracting

The challenges and difficulties for the small business in government contracting are not so much in the areas of barriers as  they are in lack of knowledge (which I concede is a form of barrier but one that can be dealt with).

Successful Traits in Government Contracting

Large business and government agencies indirectly take advantage of the small enterprise lack of knowledge or make poor assumptions regarding what a small business knows about the Federal Acquisition Regulation (FAR) and associated Cost Accounting Standards (CAS). This leads directly to abusive practices.

A prime example of an abusive practice is large corporations signing  teaming agreements during proposal efforts and then not awarding  subcontracts to the small enterprise as agreed, keeping the majority of work for themselves.

Managing Teaming Relationships

Agencies can take extended periods to put in place actual prime contracts after source selections and award to a small business. They do not realize that a small enterprise does not have deep pockets and must have cash flow to sustain a new program with new employees.

Funding levels on IDIQ and Omnibus programs are insufficiently committed and the small enterprise is not adequately informed about limitation of funds and  funding exposure. 

Managing Government Contract Limitation of Funds and Funding Exposure

Enough small  businesses succeed in the government contracting field that I am  convinced the government needs more active roles in education of  the small enterprise and more trained contracting officers that understand the limitations of a small business.

The most common traumatic situation I encounter is with newly  established businesses who have won their first government contract and  have no CAS compliant job cost accounting system in place to bill it  out. The government has assumed that capability will materialize and  when it does not they audit the bills, find no backup and shut down the  cash flow until the system is fixed. At that point the business can fail. The company should have been educated much earlier in the process about these requirements.
 What Small Business Should Know About FAR and CAS

The number of poorly performing SETA contractors in roles not suited  to them in contract administration support is increasing in federal  agencies. These firms need to be vetted and better managed for the  omissions and commissions they contribute to the above.
SETA Contracting

Not every small enterprise can get  into a class on government contracting at George Washington University,  The Defense Acquisition University or send their personnel to lengthy  and costly seminars conducted by organizations like the National Contract  Management Association. These are  great education sources but do not  come close to filling the complete requirement and they cost time and money.

The contracting officer and his staff as well as larger enterprises need to be upgraded in the skills necessary to guide - not abuse - the small business in federal government contracting.

REMEMBER:

Be straight-forward and honest with your industry teaming partners.

Do not violate share arrangements, teaming agreements or non-disclosure agreements. Such violations are a death knell for your reputation in the business.

Do not become known as a resource raider by hiring away from other firms with whom you have teamed.

Give it your best shot as a prime or a sub but involve the government contracting officer if you must resolve industry teaming disputes that may damage your past performance record.

Exclusivity in teaming is a practical way to go on any given large scale program. Team early and exclusively then give it your all and be a winner. Your reputation is key, ethics count and your customers as well as your industry are observing you.

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 SAM  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

Establishing Compliant Small Business Systems For Federal Government Services Contracts

INTRODUCTION

To effectively market a federal government services contract a small business must sell on the basis of having a business system as well as technical performance infrastructure ready to run the job when a contract proposal is submitted. This dual requirement is where many small businesses fall short in their federal government contract start up planning.

Parallel thinking is required to plan for government project technical effort against a template of necessary business process infrastructure, driven by introducing Federal Acquisition Regulations (FAR) into the company. Key elements of the necessary business system infrastructure are discussed in this article which assumes that your are in the federal government services contracting business, that you plan to price your services at an hourly rate and sell them by labor categories with professional job descriptions to perform the government's statement of work and bill by the hour. This article also assumes that you are not contracting under FAR Part 12, "Commercial Contracting".

Labor Categories

Each skill set in the company must be specified and defined as chargeable directly to a contract, or indirectly to a cost center overhead, a material handling pool or a general and administrative pool. Each labor category must have a job description and a prospective salary range for proposal purposes.

Cost Center

A Cost Center is a single business entity within the company, organized for a group of business lines and clients with close similarities for technical and business management purposes. Cost centers are also driven by geographic location and the requirement to separate commercial from federal government business. Projects performed in government facilities may also require a separate cost center, since many of the associated expenses for such operations are born by the government. Cost centers usually have individual subsidiary ledgers, balance sheets and profit and loss statements and 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.

Examples:

Commercial Cost Center

Federal Government Cost Center

Government Site Unique Cost Center

Annual Overhead Rate

An overhead pool is made up of individual Cost Center indirect expenses projected for a given year divided by the projected Cost Center direct labor dollars for that year to determine a rate. Typical Cost Center Overhead general ledger expenses are those which cannot be effectively charged direct to contracts. These include Cost Center management, building lease, telephone, fringe benefits, electricity, capital equipment, depreciation, and the like.

An example of a 2023 Cost Center Overhead Rate of 110%  is as follows: 

2023 Gen Indirect Exp for Cost Center        =  $459,800

_____________________________________________= 110%
2023  Projected Dir. Labor $ for cost center = $418,000

The estimated annual Cost Center Overhead Rate is applied to direct labor cost estimates to price labor cost through overhead for 2023 for the Cost Center. When a contract is awarded, actual overhead expenses are allocated monthly to direct labor by contract on the basis of direct labor dollars incurred. Projected overhead rates are adjusted based on actual total cost center experience as the year progresses.

Annual Material Handling Rate (if required) - Corporate wide expenses specifically associated with buying, storing and shipping material for a given year divided by the projected direct material dollars projected company-wide for that year. Not all companies have business that is material intensive enough to warrant a separate pool for material handling. Where extensive buying or subcontracting is conducted out of the corporate headquarters and inventory and shipping labor are high, a material handling pool is permitted by the government when it is not administratively possible to charge these expenses directly to contracts.

The estimated annual Corporate Material Handling Rate is applied to direct material cost estimates to price material for all Cost Centers. When a contract is awarded, actual material handling expenses are allocated monthly to direct material by contract on the basis of direct material dollars incurred. The projected material-handling rate is adjusted based on actual total company experience as the year progresses.

Annual General and Administrative Rate (G and A) is corporate indirect expenses projected for a given year divided by the total projected direct cost plus overheads for all cost centers for that year. Typical G and A general ledger expenses include costs which cannot be charged direct to contracts or to cost center overhead expenses such as corporate executive management, headquarters building leases, legal expenses, company wide insurance, corporate advertising, and the like.

MANAGEMENT FACTORS

Success will be determined by managing the numerator in each of the above equations and winning or maintaining the projected direct cost programs in the annual denominator. If expenses increase due to unforeseen events or if the company loses more projects than planned in the annual denominator base, the associated rate will go up for estimating purposes and under cost plus or time and material contracts the rate billed to the government will also increase. 

Existing fixed price contracts under these circumstances will become less profitable. Pricing for future fixed price contracts must reflect the increased rates being experienced to avoid further losses.

Correspondingly, if expenses decrease due to unforeseen events/good management or if the company wins or grows more projects than planned in the annual denominator base, the associated rate will decrease for estimating purposes and under cost plus or time and material contracts the rate billed to the government will also decrease. Existing fixed price contracts will become more profitable. Pricing for future fixed price contracts must reflect the decreased rates being experienced.

For time and material and cost plus contracts, monthly billing rates utilized are "Provisional Rates" that the contractor is free to change based on experience as long as he informs contracting officers and the local Defense Contract Audit Agency (DCAA) of the changes and reasons for the changes can be demonstrated. Before time and material and cost plus contracts can be closed out, provisional rates must be adjusted to reflect actual rates experienced. 

The contractor will owe the government if provisional billings have been higher than actual cost history. Correspondingly, if the actual rates for cost plus or time and materials contracts have been higher than the provisional rates billed by the contractor, the government will owe the contractor at closeout. 

Firm, Fixed Price Contracts are generally billed at negotiated fixed prices by line item at contract award and paid upon final delivery and acceptance or through monthly progress payments based on incurred cost with a percent of payment retention by the government until deliveries are complete. 

Fixed rate contracts are billed on a monthly basis through hours incurred. The hourly rates are fixed for the contract term and do not change.

COST ESTIMATING/COST ACCOUNTING EXAMPLE

Consider a historical 12-month project priced in a hypothetical small business utilizing forward pricing "Provisional Rates." The contract began in July of 2018 and continued to July of 2019. Direct labor rates were escalated between 2018 and 2019 by 3.5% based on the Consumer Price Index. The company decided to keep the indirect rates for Overhead and G&A the same for pricing purposes in 2018 and 2019. The company had no Material Handling Pool and charged purchasing, inventory and shipping costs direct to contracts.

This government contractor maintained Overhead and G&A rate databases in Excel by month by year to forward price projects such as the one in this example. The databases all utilized the same generic chart of expense accounts as a template for the Cost Center Overhead and G and A monthly expense forecasts (equation numerators). The project was priced in cost center 1 at an overhead rate of 110% and a corporate G and A rate of 10%.

Cost Center Direct Labor forecasts in the databases were projected by hours and salary dollars for each existing and anticipated project and then summarized to determine the equation denominator which when divided into the Cost Center Numerator B, above) yields the Cost Center Overhead forecast by month by year. Direct Labor was then burdened by the projected Cost Center Overhead and added to Material and Travel to yield a total Cost Center business summary through Overhead.

The G and A rate data base summarized total direct labor through overhead, material and travel cost for all cost centers (equation denominator) and divided it into the total corporate G and A expense (equation numerator) The equation result yielded the projected  G and A rate by month by year. All cost center labor through overhead, material and travel were then summarized and burdened through G and A to forecast a total cost projection by Cost Center at "Provisional Overhead and G and A Rates.

A copy of the annual baseline projected rate database was adjusted with actual expense data each month in the numerator after closing. The denominator for the month was also updated with actual existing and new business developments at the cost center level and G&A monthly actual cost at the corporate level. The resulting actual rate experience is then analyzed for trends as the year proceeds and utilized for making potential adjustments in provisional rates. 

When provisional rate changes are necessary, the government was notified in advance and provided with trend information justifying the rate change. Upon approval by the government, the baseline forecast was adjusted and utilized for billing on T&M and Cost Plus Contracts. The adjusted rates were also utilized to price all future projects. DCAA does not audit management decisions. They simply check the math.

Rate databases are usually fully detailed by month for the current year and 1-2 years into the future. Years 3-5 typically have summarized assumptions through use of escalation factors. Bids for out years 5-10 if required by the government definitely utilize escalation factors. Very few government contractors are willing to bid on a firm, fixed price basis beyond out year 5.

To comply with Cost Accounting Standards 401 and 402, this company set 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.

The larger the direct cost that was incurred on a contract in this company the greater the share of the cost center overhead and corporate G and A was incurred by that contract. 

The entire content of this company's business system was subject to audit and verification by the Defense Contract Audit Agency (DCAA) against Cost Accounting Standards 401 and 402. 

DCAA validated company records by requiring "Incurred Cost Submissions" from this contractor. The submissions validated final rates for cost plus and time and material contract closeouts. Fixed price contracts were closed out when final delivery was received and accepted.  Retention on monthly progress payments under fixed price contracts was released at closeout.

SUMMARY:

The software tools discussed at the posting at this blog DCAA AUDITS AND SMALL BUSINESS JOB COST ACCOUNTING SYSTEMS are designed to assist you in running the above process from a job cost accounting perspective. However, these tools must be set-up to reflect the unique way you are organized and they must reflect your specific business plans as discussed in this article. They will not do that for you.

Illustrations of the the rates, pricing and the long range plan utilized in the above example are available in Chapters 45 and 51 through 53 of my free book, "Small Business Federal Government Contracting" and appendices A and B. You may download the book and related documents from the "Box Net" Cube in the right margin of this site.