CP-24: An Audit and Compliance Grab Bag:DCAA & DCMA Trends with a Costpoint Lens

Nathan Geesaman, Accenture Federal ServicesDerek Boyd, Baker Tilly

Agenda

• Regulatory Updates

• Managing Audit Requests

• Hot Topic Areas Where Costpoint Can Help

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National Defense Authorization Act

Section 809 Panel Reports and Documentation

Case Law Update

DCAA Update

On the Horizon

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Regulatory UpdatesFY19-20 National Defense Authorization Act (NDAA)

– 2019 NDAA

– Passed by House 7/26/18; passed with amendments by Senate 8/1/18

– Signed into law by President 8/13/18

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Section 821Increase of the micro-purchase threshold applicable to DoD

Section 822Department of Defense contracting disputes

Section 836 Commercial Items

4Sections 851-853Small business matters

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Regulatory UpdatesSection 809 Panel

–FY16 NDAA Section 809 required the Secretary of Defense to appoint a panel to streamline the defense acquisition process

–The Panel has made a number of recommendations to DoD, published in the Panels January 2018, June 2018, and January 2019 reports

– Professional Practice Guide (PPG) now referenced in DCAA Memorandums

– DCAA Recommendations – refocus on mission to help the acquisition team

– Policy Recommendations – increased reliance on contractor internal controls

– Cost Accounting Standards – decouple from TINA and increase thresholds

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Regulatory UpdatesCase Law Update

– COFC: The Boeing Company v. United States (Civil No. 17-1969C) – May 29, 2019

– Boeing challenged that CAS benefits the government by not permitting offsets in impacts of simultaneous cost accounting practice changes

– COFC ruled in favor of the Government, noting a lack of jurisdiction upon failing to raise via pre-award protest or contract negotiations

– Impacts: How GDMs are completed, plus may lead to an increase in pre-award protests for ‘extra’ FAR clauses in contract solicitations

– ASBCA: Raytheon Co. (No. 55743) - August 28, 2018

– Raytheon challenged several cost allowability issues

– The primary ruling in favor of the government stated that salaries for unallowable political activity (i.e., lobbying) were expressly unallowable and subject to penalties (even though FAR 31.205-22 does not explicitly discuss salaries or compensation, it is “common sense” that these are included in the principle)

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Regulatory UpdatesDCAA Update – Recent Memorandums for Regional Directors– 18-PSP-006(R) – Audit Guidance on Revised Treatment of Incomplete or

Inadequate Prime Contractor Cost or Price Analyses– Alternate procedures for proposed subcontractor costs vs. defaulting to

‘unsupported’

– 19-PIC-001(R) – Audit Guidance on Revised Policies and Procedures for Auditing Incurred Subcontract and Inter-Organizational Transfer Costs

– Plan to increase DCAA coordination for subcontract assist audits with annual ICS audit

– 19-PAC-002(R) – Audit Alert on Identifying Expressly Unallowable Costs– DCAA notes to FAR 31 cost principles to support what expressly

unallowable means

– 19-PAS-003(R) – Audit Guidance on Materiality in Incurred Cost Audits (CAM 6.107)

– Quantified materiality thresholds for ICS audits pursuant to Sec 809 PPG

Costpoint Impacts

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Regulatory UpdatesDCAA Update – Updated Audit Programs (AP)

– Nearly 50 AP updates in 2019 per DCAA Website – Major changes include:

– Incurred Cost Audits

– MAARs (e.g., 6-Floorchecks, 13-Purchase Existence and Consumption)

– Accounting System audits

– CAS Audits

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Regulatory UpdatesOn The Horizon

– Mergers & Acquisitions

– Continued M&A activity in government contracting marketplace (large companies)

– New entrants, especially private equity firms new to marketplace

– Cybersecurity Maturity Model Certification (CMMC)

– DOD requiring contractors to have internal IT systems certified by a third-party auditor in 2020, and will begin using as table stakes for contractors to bid on RFPs

– NIST 800-171 (100+ requirements), and then some

– Draft CMMC summarizing requirements, capabilities, and certification levels in Sept 2019

– Plan to finalize version 1.0 by Jan 2020 and will begin to incorporate into RFPs in Sept 2020

Costpoint Impacts

Best Practices

Incurred Cost Audits

Mandatory Annual Audit Requirements (MAARS)

Proposal/Pricing Audits

Contractor Business System Audits

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Managing Audit RequestsBest Practices– Confirm appropriate staff members and establish a liaison in a timely manner

– Ensure company POC is a knowledgeable and experienced employee

– Identify potential issues with achieving stated deadlines quickly after receiving a request

– Each data request should be entered on a log and updated daily

– Thoroughly review responses/data prior to submitting back to DCAA/DCMA

– Incorporate prior year requests into current year preparations

– Maintain ongoing logs of all incoming requests and outgoing responses/documentation, including fields for:

– Request Number

– Assignment number

– Date of receipt of request

– Date of requested response

– Date of anticipated contractor response

– Date of actual response

– Requestor

– Description of Request

– Priority Level of Request (low/medium/high)

– Status of response (opened/closed)

– POC for response (contractor side)

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Managing Audit RequestsIncurred Cost Audits

– Timeline Impacts – DCAA Policy of 60-day adequacy and 1-year audit completion

– Increased use of third-party auditors (IPA)

– Re-adoption of DCAA assist audits from other agencies

– Multi-year audits and negotiations

– Incurred Cost Submission reporting strategy and Costpoint data validation

Costpoint Impacts

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Managing Audit RequestsKey Mandatory Annual Audit Requirements (MAARS)– Performed During the Fiscal Year

– MAARS 6 – Labor Floor Checks or Interviews

– Performed During an FPR or ICS Audit

– MAARS 2 – Contract Cost Analysis and Reconciliation to Books

– MAARS 3 – Permanent Files

– MAARS 4 – Tax Returns and Financial Statements

– MAARS 5 – General Ledger, Trial Balance, Income and/or Credit Adjustments

– MAARS 7 – Changes in Charging Direct/Indirect Costs

– MAARS 8 – Comparative Analysis-Sensitive Labor Account

– MAARS 9 – Payroll/Labor Distribution Reconciliation and Tracing

– MAARS 13 – Purchase Existence and Consumption

– MAARS 10 – Adjusting Entries and Exception Reports

– MAARS 12 – Auditable Subcontracts/Assist Audits

– MAARS 14 – Pools and Bases Reconciliation to Books

– MAARS 15 – Indirect Cost Comparison with Prior Years and Budgets

– MAARS 16 – Indirect Account Analysis

– MAARS 17 – Indirect Allocation Bases

– MAARS 19 – Indirect Rate Computations

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Managing Audit RequestsPricing/Proposal Audits

– Proposals may include evaluations of entire proposal, selected cost elements, or other selected items (as agreed-upon procedures)

– It’s easier to question an estimated cost than an actual cost

– DCAA Sustention Rates – FY18

– Even if a pre-award audit isn’t completed, post-award audits are still possible (i.e., Defective Pricing)

– Tripling the number of Truthful Cost and Pricing Audits next fiscal year

Audit TypeException

Percent Sustained

Forward Pricing 61.6%

Incurred Cost 24.1%

Special Audits 68.3%

Other Audits 45.2%

Total (Weighted Avg) 51.4%

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Managing Audit RequestsContractor Business System Audits

– Changes in DCAA audit approach – System Description Narrative Template

– Risk-based Approach – System risk factors (e.g., CR contracts, ERP system changes, contractor size, time between audits)

– Renewed Focus – Significant increase in DCAA business system audits expected in the next few years

Labor Cost Accounting

Total Incurred and Claimed Cost Universes

Billing History

Proposal Population

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Hot Topic Areas Where Costpoint Can HelpLabor Cost Accounting - Direct versus Indirect Labor

PAG Setup

COA Setup

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Hot Topic Areas Where Costpoint Can HelpLabor Cost Accounting - Payroll versus Labor and ICS Schedule L

ADP Interface

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Hot Topic Areas Where Costpoint Can HelpLabor Cost Accounting - Project Chargeability

Manage Employee Work Force

Employees Linked to PLCs

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Hot Topic Areas Where Costpoint Can HelpLabor Cost Accounting - Labor Reporting

Project Labor Summary Report(Cost-Reimb & T&M)

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– Incurred versus Claimed Cost on Incurred Cost Submission – Schedules H, I, K

– DCAA Incurred Cost Electronically does not inherently differentiate between incurred vs. claimed

– Full versus partial claim of indirect rate allocation

Hot Topic Areas Where Costpoint Can HelpTotal Incurred and Claimed Cost Universes - Incurred Cost Submission Schedules

Total Direct G&A Claimed

JOB SUBCONTRACT Total Sub- Direct Costs Plus Base G &A Total Total Grand

ORDER CONTRACT NUMBER NUMBER Labor Travel Material ODC Contracts Costs O/H (TCI) Applied Costs COM Total

A. COST TYPE(no entry on title line)

- - - - - - - -

A. TOTAL COST TYPE: - - - - - - - - - - - -

B. OTHER FLEXIBLY PRICED

- - - - - - - -

B. TOTAL OTHER FLEXIBLY PRICED - - - - - - - - - - - -

C. TIME & MAT'L

- - - - - - - -

C. TOTAL TIME & MAT'L - - - - - - - - - - - -

D. FIXED PRICE

- - - - - - - -

D. TOTAL FIXED PRICE - - - - - - - - - - - -

E. COMMERCIAL WORK

- - - - - - - -

E. TOTAL COMMERCIAL WORK - - - - - - - - - - - -

TOTAL CONTRACT COSTS - - - - - - - - - - - -

Fiscal Year End - mm/dd/yyyy

Schedule of Direct Costs by Contract/Subcontract

and Indirect Expense Applied at Claimed Rates

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Hot Topic Areas Where Costpoint Can HelpTotal Incurred and Claimed Cost Universes - Reconciliation of Costs to Invoices

Project Status Report- ITD Billed Amount- CTD Total Expense $

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Hot Topic Areas Where Costpoint Can HelpBilling History - iRAPT

Create iRAPT Billing Files

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Hot Topic Areas Where Costpoint Can HelpBilling History - Track Prior Period Billings

Manage Billing HistoryManage Closed Billing Detail

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Hot Topic Areas Where Costpoint Can HelpProposal Population

– Required as part of estimating business system audit

– Schedule of price proposals submitted to the government for the past 12 months showing the customer, contract type, proposed value for each major cost element (e.g., direct material, interdivisional, subcontracts, direct labor, ODC, indirect expenses, COM), and elements that were partly or entirely estimated using standard costs or a cost estimating relationship (CER). [Paraphrased from DCAA Audit Program 24010 B.01(C)]

– Contractor should also have certified cost or pricing data elements tracked as part of this schedule

– Level of testing on a proposal will vary by contractor risk profile and prior audit experience

– No direct linkage to Costpoint data

– Seek to identify data connection points in Project Setup process between proposal tracking system and Costpoint

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Summary and Wrap-up

– Look out for upcoming industry compliance activity

– FY20 NDAA

– Incorporation of other Section 809 Panel recommendations

– CMMC

– Track audit activity and requests - and make sure your contractor’s response to audits are incorporated into final audit reports!

– Leverage Costpoint functionality with adequate system configuration

– Costpoint pillar adjustments

– Use of PAGs, Workforce, PLCs, Customized reports, etc.