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DCAA Audit Compliance, Part II

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Updated 02/10/2023
(As promised, here’s the Part II to “DCAA Trends in 2020“)

We’re preparing to make a bold statement that is practically blasphemy in our industry and especially with what BOOST does.

Care less about DCAA audit compliance and more about financial acumen.

There.  We said it.  Here’s what we mean and our rationale:

As we learned in the seminar briefing from DCAA earlier, small GovCons between $5-$50M have a 5% chance of being audited on your incurred cost submission.  Smaller GovCons (under $5M) have ½ of 1% chance.  In general, if you submit the paperwork on time (ICS, forward pricing), you aren’t getting audited.  Especially if you are going after prime work that is T&M or FFP (which most people are).

So why do we hit people over the head with “you must be DCAA compliant” time and time again?  Why do we scare off non-traditional companies who may consider playing in the federal space?  We hit them over the head with FAR compliance and cite it as a reason to drive a ton of changes.

Here is what we think is more important:

  • Profitability
    Are you in the green and have long-term positive net cashflow?  This is all your banker cares about.  Are you a safe bet to lend money to?  If you aren’t making money, why are you in business?  (Note to reader: this is our completely biased view that you should run companies to make money.  None of this “operate in business for years without a profit to show for it.”  Not very Silicon Valley of us, but hey, we’re capitalist!).
  • Competent Financials
    Does your balance sheet balance?  No seriously…this is a thing!  Does your P&L look reasonable and is it prepared in a logical manner?  Are you using accrual basis accounting?  Did your 18-year-old nephew/neighbor/spouse do your QuickBooks setup without any understanding of the federal market, almost certainly forgetting to install the add-ons that will make it DCAA audit compliant?
  • Job Cost Accounting
    Do you know your gross margin and profitability by project/customer?  Do you know and track your indirect rates?
  • Pre-award Surveys (i.e. 1408’s)
    This is way more important in our mind. Can you pass the audit to win the work?  To lose revenue or new opportunities simply because you don’t have your financials in order absolutely blows our mind.  Do you know how hard it is to win work as a prime?  Good grief, do not lose it on a technicality!

We view the above as the floor in terms of expectations.  If you can’t pull it together, you are dead in the water.  We’ve seen companies go out of business as they didn’t manage their wrap rates or their profitability.  This market is uber competitive and if you can’t win from a cost perspective, you will never grow.

Now that we’ve effectively scared the pants off of you (and if we didn’t it had better be because you are doing all of the above, and more) we can provide you with a solution. You guessed it, BOOST!  Our DCAA compliance consulting and accounting experts have years of experience keeping all of the ducks in a row. If you’re worried about DCAA audit compliance, or are wondering if it’s time for DCAA compliance consulting, visit us at www.BOOSTLLC.net/consultation/ and let’s get the important things in order.

DCAA Compliance for Small Businesses

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As a small govcon have you ever thought…do I really need to be DCAA compliant with a small business? What if I’m “just a subcontractor” or “too small that DCAA will never notice me”?
We hear the following from companies more often than they’d like to admit:

  • It’s so complicated to get DCAA compliant (insert the eye roll and swipe across the forehead)
  • It’s such as hassle, I’ll do it when we get bigger (the procrastinator)
  • I have both commercial and government business, so the govcon piece won’t get noticed (I’m awesome and therefore the rules don’t apply)
  • It’s too expensive (cheap catches up to you)
  • I only have FFP and T&M contracts, so I won’t get audited (wrong!)
  • If I fail an audit, I’ll get excused because I’m a small business (nope, the small business card doesn’t work with DCAA)

To these “excuses” our advice is…

Make your small business DCAA compliant and now!

Here’s why:

• It’s not as complicated as what you think.
There four primary components to being DCAA compliant – chart of accounts, timekeeping, forward pricing and policies and procedures. No one accounting system is deemed DCAA compliant.  It’s all about how your system is configured and your policies and procedures. A professional firm who knows DCAA compliant small business accounting is necessary to get the work done right…the first time.

• Small = less $ to become compliant.
Design a system that scales with you and the savings will be impressive. Retrofitting a large existing system to be DCAA compliant is time consuming and expensive.  Don’t get lazy – get it done when you are small. Small businesses can gain DCAA compliance for cheaper than larger businesses, get it done while it costs less.

• It’s a Pass/Fail test.
The is no B or C grade. You either pass or you fail.  Failing costs money and more money than it takes to preemptively become DCAA compliant as a small business.

• Timekeeping is like eating healthy.
It’s all about behavior modification. It takes daily reminders to establish healthy eating habits and it is the same for timekeeping. Additionally, it’s the most critical component of the DCAA audit.  Establishing solid policies and procedures for timekeeping when you are small is the easiest way to establish behaviors and set the tone for the critical importance of timekeeping.  Get HR involved because timekeeping should be in your employee handbook.  Educate employees on why timekeeping is important.

• Improve your dating profile.
Teaming partners, especially large integrators, like to work with DCAA-compliant small businesses. You might not have been audited yet, but you are prepared in case you do and that is half of the battle.

Bottom line – get your small business DCAA compliant now!
BOOST can help and it’s one of our favorite accounting projects. Well, we have lots of favorites, but this one is rewarding and we actually like doing it!  So, now go get healthy, change your behavior, spend some money in order to save some money and prepare for the inevitable.

Audit Files, How Important Are They?

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Well, the proposal was submitted, the “all-nighters” are done, the proposal team has celebrated either with a big happy hour or a 48-hour night/day of sleep, and all is well.  It seems that way at first until the pricing specialist wakes up in the middle of the night dreaming of errors and mistakes or compliance issues (I can only speak about myself, I’m sure the rest of the proposal team has the same sort of nightmares!).  One way to avoid having post-proposal-submission-anxiety is to document and save records of everything in your pricing files.  This is critical not only for your mental health, but for the corporate audit risk as well.  DCAA can and will come back at any point to conduct audits of how the proposal rates were developed.  Here are some quick tips to be prepared and to alleviate any post-proposal submission stress (I’ve named this condition PPSS):

  1. Create an Audit folder – archive this as a part of your proposal files. Create a substructure in which you can store documents related to inputs, version control history, emails, etc.
  2. Document, document, document – any email with inputs from the proposal or management team, such as basis of estimates, changes to management plans, hours, staffing or teammates. Anything that documents the direction of the proposal, why something changed, when it changed, and the reasoning.
  3. Save all emails – no shortcuts
  4. Save all inputs from the Finance, Accounting, HR teams – These are critical, because they will be the back up required to demonstrate how your rates and assumptions were developed.
  5. Save all versions of your cost models – This way you’re able to track and see iterative changes related to inputs or assumptions, and amendments related to the RFP.
  6. Save all versions of your cost volume – Ensure track changes are on, in all the draft versions, and save the final submitted versions (gold team), in a separate folder. You need to be able to trace if and how changes were made.  This is not just about CYA, it’s about accountability. If something changed and it didn’t sync up with the technical volumes, you may be able to figure out why and remedy it if the government wants clarifications and corrections after submission.
  7. Have a dedicated folder – It is best practice to create and save this folder as you develop the proposal, but it’s OK if you don’t get to it until after submission. Just make sure it’s done either way!

 

Overall, be smart, save all the relevant documents, versions and files in an archive folder.  Don’t alter the files, lock them down and only give access to parties that require it.  This is your audit folder, this should provide all the clarifications and corrections to DCAA, should they audit your proposal.  This also provides a good way to review any proposal related mistakes or for a regular after-action review.  This will also help you (yes, you the Pricing team), get a good night’s rest because you’ll have all the history saved and be able to check on mistakes or errors or compliance issues that might be keeping you up.  You can only prevent mistakes in the future if you know what happened.  This audit file can also be used during a re-compete to pull historical data or historical assumptions that might form the pricing strategy for your new bid.  Basically, always prepare and keep an audit folder after your proposal is submitted.

 

Proposals are challenging, but the hard work makes the win so much sweeter. Let BOOST LLC help you with your pricing strategy. Email [email protected] and schedule a consultation today.

Incurred Costs Submissions, Tis the Season

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As we take more sinus meds and smell the pollen, it’s time to start talking about an annual rite of passage for most in the GovCon world. The annual incurred costs submission to DCAA.  While many might think a sinus infection sounds like more fun (and we tend to agree), now is the time to start planning on your submission.

The Incurred Costs Submission (or ICS) is due 6 calendar months after closing your fiscal year, which means many are due on June 30.  FAR 52.216-7 Allowable Costs and Payments requires submissions of annual final cost rates.  The ICS (or sometimes called ICE, which is the Incurred Costs Electronically Model, the actual excel spreadsheet that is submitted) determines the final actual indirect cost rates that a GovCon incurred for the previous year.  These rates are used to “settle up” on the contract, particularly CPFF type contracts.

First, the mechanics 
Most GovCon accounting systems actually prepare this report.  But if you think it’s as easy as running it and submitting, you would be wrong.  Now is where the rubber hits the road in terms of what your accounting and contracts departments have been filling out in the accounting system.  Suddenly you find POC info isn’t in the system or that you’ve missed a task order change or any number of things that you need to QA.  Prepare to spend a decent amount of time on reviewing the information, going back to your contracts and accounting files and making sure everything is legit.

A DCAA auditor briefed us earlier this year that the top issues with submission were:

  • Unsupported costs in the Incurred Cost Proposals
    • Fix this by maintaining records of all your costs. Make sure that they are stored on the company shared files, not on someone’s laptop somewhere.  If your controller leaves the company, you still want to have the backup required to argue for allowability.  You could leave money on the table by not having this documentation.
  • Schedule H
    • Schedule H seems to be the biggest issue on Incurred Cost Submissions – specifically not providing enough detail to justify the costs. Putting one line-item for a huge IDIQ isn’t going to cut it.

Second, the reality.
If this is the first time you realize that you owe the government money back or need to send a huge bill, you are doing it wrong.  Nothing in this report should be a surprise nor should any of these numbers be new.  As one who has lived with an $800,000 CREDIT to the government (seriously), it impacts all areas of the business – contracts, operations/program management and accounting.  It could impact BD/Capture’s ability to win more work with a customer if you become known as the contractor who couldn’t budget your indirect rates.  Every department needs to know what the bottom line is and the impact.

BOOST has the knowledge, resources and experience to mitigate your brain function when it comes to preparing your annual incurred costs submission to DCAA. June 30th is closer than you think. Contact us today and let’s get you on the right path before the mud starts flying.  Email [email protected].

Accounting Keeping You Up At Night?

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It’s the middle of the night, and you are wide awake…from a nightmare about the state of your GovCon accounting system. It happens all the time. The accounting system struggle is real for government contractors.  Your accounting system is the backbone of your company.  If your accounting system is in pain, the effects are felt in all areas of your company.  And let’s get real…nobody wants to hear from an employee that their paycheck was incorrect (again) or hear from a customer that an invoice has to be resubmitted because the proper format wasn’t followed.  Never mind the impact on cash flow!

Do you have any clue what is really going on inside your accounting system?

  • Are you panicked, wondering if it is DCAA compliant?
  • Do you have an accurate understanding of your indirect rates? Where do things stand from a cash flow perspective?
  • What about did you fudge on a proposal that your system is DCAA compliant and you have no idea if it is?
  • Are your invoices a nightmare to produce? Are you preparing them manually in excel?
  • Is your timekeeping system cumbersome, clunky or not syncing correctly?
  • Are your managers not approving timesheets when they are supposed to?
  • Is payroll a stressful event that everyone dreads?
  • When is the last time your books were closed?
  • Do you have the financial reporting to guide your company?

It can be difficult to see the big picture of your accounting system when you are in the weeds.  Hence the need for an accounting assessment.  Process improvement is best done by an outside party to evaluate what you currently have in place. GovCons should work with companies that have expertise in govcon accounting (not only for an assessment but for all things accounting).

What can you expect from an accounting assessment?
A good accounting assessment will evaluate:

  • current accounting system (chart of accounts, AR/AP, general ledger)
  • systems information and set-up (timekeeping, payroll, bill pay, expense reimbursement)
  • reporting capabilities (balance sheet, profit/loss, cash flow, income statement, job costing)
  • banking, 401K requirements (what reporting is required, what is being submitted)
  • timekeeping system (project codes, approvals, prime/sub timekeeping)
  • invoices (process, how they are generated, accuracy, timeliness)
  • policies and procedures (what is currently being documented)

An assessment final report should provide you with insight into your current system overview, what can be streamlined for greater efficiency and what is needed for DCAA compliance.  The report should include recommendations for resolving any identified issues.

BOOST can help you with an accounting assessment. This assessment will provide insight into your accounting system, a plan forward for fixing any issues and creating a seamless, fully functional, effective accounting department.  This will give you peace of mind and help you sleep better at night.  Or at the very least, you won’t be able to blame your accounting system for your lack of sleep.

DCAA Trends for 2019

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After attending a seminar on DCAA Updates provided by one of the local DCAA folks, I thought I’d save you the mediocre breakfast and dry presentation to reclaim an hour of your life.  You can thank me later.

Incurred Costs Proposals

DCAA has been under the gun for the past few years to catch up on their backlog.  Their mantra (which may be on numerous internal PowerPoint briefs) is to “eliminate the backlog.”  As of now, they report that they are relatively done through 2015.

  • The goal is to catch up with 2016 and 2017 in calendar year 2019
  • Numbers provided for their audits in 2018 show that most (53%) came away with a memo, 24% had a report/full audit and 23% were canceled for various reasons.
  • My takeaway (not said outright by DCAA) – If you are under $100M, you’re getting a memo. Keep your stuff relatively in order and you should come out ok.  Don’t get cute with the costs and try to keep things DCAA compliant.

Forward Pricing

DCAA is often tasked with auditing your rates submitted on a proposal.  Given the pressure on margins, I can imagine that there are some “creative” pricing strategies out there.  That being said, why it takes so long to audit these things is elusive to me.  Some stats:

  • The average elapsed days for forward pricing audits:
    • FY11 – 120 days
    • Fast forward to FY17 – 83 days
    • FY18 – 85 days
  • DCAA’s stated goal is to reduce the time but doesn’t seem to be making much progress.
  • Takeaway – have your forward pricing backup ready so you can immediately turn around data calls. Every day you hem and haw over finding that elusive salary survey that you cited (but really used salary.com), is a day you aren’t getting the award.  You can’t speed up DCAA, but you can speed up your response.
  • Make sure your audit backup file documentation is part of your proposal process. Many proposal managers say they will come back to this when the proposal is turned in, but few do.  This makes the audit all the more painful.  More importantly, there is real money (i.e. a contract award) on the line.  Don’t lose because you don’t have your act together.

Contractor Common Mistakes

When asked what DCAA sees most often in terms of mistakes, they cited:

  • Unsupported costs in the Incurred Cost Proposals
    • Fix this by maintaining records of all your costs. Make sure that they are stored on the company shared files, not on someone’s laptop somewhere.  If your controller leaves the company, you still want to have the backup required to argue for allowability.  You could leave money on the table by not having this documentation.
  • Schedule H seems to be the biggest issue on Incurred Cost Submissions – specifically not providing enough detail to justify the costs. Putting one line item for a huge IDIQ isn’t going to cut it.
  • Supporting the basis of costs in your Forward Pricing Submission
    • Again, keep the audit file! If you haven’t done this, start now in 2019.  It is good practice and saves headaches in the future.  Knowing how you back-of-the-enveloped the number is critical for execution.
  • Supporting subcontractor costs as part of your Forward Pricing Submission
    • Getting subK costs is like herding cats. You never know what they actually submit to DCAA and if they are actually competent (and compliant!).  DCAA has to coordinate between their various offices as one office may be reviewing your proposal, but another office may review your subs.
    • Reduce your risk by utilizing an outside pricing SME to evaluate your subs cost proposals. Then you know it’s right.

Executive Compensation

Reasonableness is the theme here.  Reasonable to DCAA may not be reasonable to you, but they don’t care.  Your company’s compensation will be compared to a similar sized company within the same industry.  Geography seems not to matter as much (frustrating for those in high salary areas).  Best bet – utilize legitimate salary surveys as backup.

New Regulations

DCAA must provide an adequacy review of Incurred Costs Submissions within 60 days.  They are laser focused on this number.  Then they must conduct the audit within a year.  So, in theory, all of the backlog will become relatively caught up.

DCAA must also comply with commercially accepted standards of risk and materiality by Oct 1, 2020.  What does that mean?  No one knows, but DCAA is talking to industry to figure it out.  TBD on how that plays out, but fingers crossed it makes contractors lives easier.

2019 Focus

DCAA’s stated focus for this year is:

  • Completing all 2017 and earlier Incurred Costs Submission audits
  • Reducing the days for forward pricing audits
  • Increasing resources (i.e. auditors) in TINA compliance, Real-Time Labor and Material Audits (hello floor checks??) and Business System Audits
    • Expect more Accounting System and estimating system audits specifically

If you need help with any of the above, BOOST makes a living doing this stuff (yes, you can question our sanity).  We can do your Incurred Costs Submission, prepare your pricing, audit your subcontractor’s pricing, support forward pricing audits and provide salary information from our over 25 salary surveys.  We also can help prepare you for accounting system and estimating system audits.

What we cannot do is explain the rhyme and reason of DCAA.  It’s still a bit of a mystery, but hopefully, this summary sheds some light on it.  Or saved an hour of your life. 😊