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@DHG_GovConBudgeting and Provisional RatesJanet BorjesonMike MardesichJuly 28, 2016

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConYour Presenters

Janet BorjesonDixon Hughes Goodman LLP240.403.3735janet.borjeson@dhgllp.com

Mike MardesichDixon Hughes Goodman LLP703.970.0508mike.mardesich@dhgllp.com

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@DHG_GovConFundamentals – Season 1

• Challenges of Contracting with the Federal Government (November 2015) - Completed• Contract Types and Associated Risks (December 2015) – Completed• Year-End Closing (January 2016) - Completed• An Introduction to the Incurred Cost Submission

– Part I: Who, What, Where, When, Why, and How? (February 2016) - Completed– Part II: Preparation and Adequacy Review (March 2016) - Completed

• Accounting Systems and Setups (April 2016) - Completed• Accounting System Adequacy 101 (May 2016) – Completed• The Composition of Total Cost (June 2016) – Completed• Making Way for 2017 – Budgeting and Provisional Rates – You are

Here!• Procurement Systems: DFARS Business Systems Rule and Criteria (August 2016)• Exploring the Gray Area of Unallowable Costs (September 2016)• Policy and Procedures Manual: What’s In It and Why Do You Need One? (October

2016)

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@DHG_GovCon

Making Way for 2017 – Budgeting and Provisional Rates

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConOverview

• What are Provisional Rates • Indirect Rate Life Cycle • Importance of Budgeting • Budgeting for 2017 • Actual Compared to Budget • Short Term and Long Term Budgeting• Compliance and Audit Scrutiny• Other Considerations

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@DHG_GovCon

What are Provisional Rates?

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConProvisional Rates (FAR 42.704)

• Provisional (forward pricing) rates are sometimes utilized for both pricing and billing.

• “Provisional” implies subject to change and approved on an interim basis by DCMA/DCAA.

• Programs and projects can enter and leave the business base earlier or later than planned. For these reasons actual experience in terms of indirect rates may differ (+or-) from provisional rates.

• Provisionally billed rates must be periodically compared to actual rates and reconciled to actual rates at contract closeout for cost-plus and time and material contracts.

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@DHG_GovCon

Indirect Rate Life Cycle

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConThe ICS and the Indirect Rate Cycle

• An ICS is a contractor submission to the Government to “true-up” Provisional (Forward Pricing) Rates to Actual Rates as a part of the Indirect Rate Cycle.

• Your ICS rates are comprised of costs which are allocable, reasonable, and allowable on Government contracts.

- Contractor Indirect Rate Cycleo Bid and bill with Provisional rateso Monitor the Provisional rates

versus Actual rates periodically.o Compare the rates at the end of

year, at ICS submittal, and when the ICS is settled.

o Submit revised rates if there is a material difference throughout contract

o Submit final rates in ICSo Settle final rates at contract

closeout

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@DHG_GovConIndirect Rate Cycle – Rate Monitoring

• Rates must be monitored by the contractor and may be adjusted as necessary throughout the year (FAR 42.704(c) and FAR 52.216-7(e))– Protects the Contractor and the Government– Review indirect rates on a regular basis– Monitoring Over/Under Billings per contract– Once material rate variances are evident, submit

adjusting invoices timely• Ensures payment to the contractor prior to exhausting of funding• In current budget environment the contractor is wise to recover actual costs

as quickly as possible

– No cash flow or financial statement surprises if regularly reviewed

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@DHG_GovConIndirect Rate Cycle - Contract Closeout

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@DHG_GovCon

Importance of Budgeting

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConWhy Budget?

• Provides a guide for achieving the company goals

• Provides a baseline for measuring performance– Business as a whole– Business lines– Manager performance

• Assists with developing a pricing model for proposals

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@DHG_GovConWhy Budget continued

• Development of indirect rates– Increasing the likelihood of cost recovery– Provisional rates reflect the expected reality

• Assists with obtaining external financing– Demonstrates a commitment to sound

business practices– Potential lenders can be eased about the

quality of the company’s financial management skill.

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@DHG_GovConSolutions to Budget Challenges

• Not enough time– Start budgeting early – Review often– Time will be found

• Not sure where to start– Direct costs– Indirect costs

• Can’t budget revenue– Look to current contracts– Proposals

• No one is qualified to prepare a budget– Work with consultants– Accounting system can help

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@DHG_GovCon

Budgeting for 2017

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConDirect Costs Budgeting

• Start with labor, for a typical service-oriented business– Direct labor budget

• Develop a master labor budget by employee, and anticipated hires

• Estimating current contract requirements• Determine labor requirements on potential new

contacts, options, and follow-ons• Rely on project managers for preliminary project

budget hours

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@DHG_GovConDirect Costs Budgeting continued

• Direct subcontracts– Review open contracts for subcontract

requirements– Review RFPs and proposals for subcontract

estimates• Travel and ODC

– Review open contracts for travel and ODC requirements

– Review RFPs and proposals for travel and ODC requirements

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@DHG_GovConIndirect Costs Budgeting

• Start with master labor budget– Fringe labor

• Holidays• PTO

– OH labor– G&A labor

• General• B&P• IR&D

• Fringe benefits– Health cost increase– Changes in benefits for staff

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@DHG_GovConIndirect Costs Budgeting continued

• Facilities – Rent escalation– Additional facilities costs– Capital expenditures

• Overhead– Labor specific

• G&A– General business operations– Bid and proposal– Research and development

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@DHG_GovConReview Often

• Review the budget for 2017 often looking for

– Contract awards

– Option year

– Staffing changes

– Salary increases

– Fringe benefit changes

– Other items that potentially will change

• Develop provisional rates for 2017

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@DHG_GovCon

Short Term and Long Term Budgeting

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConShort Term and Long Term Budgeting

• Use of trends and budgetary data• First year based on detailed management approved

operating budget• Subsequent years – based on adjustments to

operating budget based on strategic and long range forecasts

• Level of detail will decrease as period being estimated moves forward

• Adjustments to out year pools and bases should be based on reasonable sales forecasts

• Extend of detail based on size and complexity of contractor

• Smaller contractors generally do not develop detailed budgets – use trend data and history

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Actual Compared to Budget

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConActual Cost Compared to Budget

• Financial statement close• Actual vs budget reports

– Direct and indirect cost– Actual and budget projections– Salary and wages

• Evaluate – Master labor budget– Current budget – Current rates – Current actuals costs with project balances

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@DHG_GovCon

Compliance and Audit Scrutiny

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConWhere and when do I submit?

• Where?• The office responsible for final indirect cost rates also

establishes provisional billing rates. (FAR 42.704) – If final rates are ACO determined, submit to that office.– If final rates are audit determined, submit to local DCAA Office.

• When?• Before the beginning of the fiscal year (once budgets are

complete) or when the established billing rates are no longer representative of final year end rates.

• Rates should represent a 12-month contractor’s fiscal year• PBRs should be submitted at least annually• Vouchers and progress payments can be returned if

submitted without properly established billing rates.

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@DHG_GovConDCAA Adequacy

• DCAA has published an Adequacy Checklist for Forward Pricing Rate Proposals – http://www.dcaa.mil

• DFARS Adequacy Checklist– http://www.acq.osd.mil/dpap/dars/dfars/html/current/2

15_4.htm#215.403-5

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@DHG_GovConProvisional Rate Requirements

• Proposed billing rate calculations (Pool and Base) with descriptions

• Prior fiscal year (FY) pool and base• Current FY to date pool and base• Current FY budget pool and base, if

available • Comparative analysis with explanation of

any significant differences

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@DHG_GovConDCAA Reviews

• Some example procedures DCAA may perform include the following:• Compare proposed pool and base to prior year and

year-to-date pool and bases.• Review trend of questioned costs in relevant incurred

cost audits and consider an adjustment for unallowable expenses in calculating current year provisional billing rates.

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@DHG_GovConDCAA Audits

DCAA Audit Guidance• 10-PSP-021, 8/24/10 – Audit Alert Related

to Budgetary Data Supporting Forward Pricing Rates (www.dcaa.mil)

• Contractor walkthroughs– Understand submission– Estimating methodology– Location of cost/pricing data– Cost rate monitoring process

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@DHG_GovConCommon Deficiencies

• Failure to use historical data• Absence of analytical support• Excessive reliance on personal judgment• Failure to integrate relevant information from other

management systems• Lack of business base support• Lack of trend and budgetary data• Failure to remove unallowable costs from the

billing rate projections• Failure to adjust provisional billing rates based on

actuals if there are known significant variances

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Other Considerations

The Fundamentals of Government Contracting Webinar Series

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@DHG_GovConOther Considerations

• Cash Management– In the current Federal budget environment it is

important to look at areas where cash is currently being held by the Government or Prime Contractors.

– Some of the more common withholds are associated with indirect rate variances on cost reimbursement contracts and withholds of fees.

– It is the obligation of the Contractor to ensure that they receive what is due, and reduce the risk of delays in payment or putting the entire amount at risk due to funding issues.

• Financial Management- Are we profitable on a per contract basis?

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@DHG_GovConQuestions?

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@DHG_GovCon

Join us next month for “Procurement Systems: DFARS Business Systems Rule and

Criteria”on Thursday, August 25, 2016

The Fundamentals of Government Contracting Webinar Series