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San Diego ChapterNational Contract Management

The Business Systems Rule: Requirements And Practical Considerations

mckennalong.commckennalong.com

National Contract Management Association

Kevin J. SlattumKeith M. ByersMay 16, 2012

• Background/Overview Of Final Rule• Business System Review Process

Agenda

• Business System Review Process• “Significant Deficiencies” • Identifying And Rebutting “Significant Deficiencies”• Preparing For System Reviews• System Criteria• Business System Review Process• Preparing and Responding to System Reviews: Practice Considerations• Responding to ACO Determinations • Resolving DeficienciesResolving Deficiencies • Withholds• Other Withholds • Procurement Issues• Lessons Learned • Systems Reviews: DCMA Guidance • Business Systems Flowchart

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• How We Got Here:

Background/Overview of Final Rule

– Proposed Rule (75 Fed. Reg. 2,457 (Jan. 25, 2010))

– Revised Proposed Rule (75 Fed. Reg. 75,550 (Dec. 3, 2010))

– Interim Rule (“IR”) (76 Fed. Reg. 28,856 (May 11, 2011))

– Final Rule (“FR”) (77 Fed. Reg. 11,355 (Feb. 24, 2012))

• Firestorm of Industry Comment/Criticism During Process:– Withhold Amounts

– Application

– Definition of Deficiency

– System Criteria

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• Final Rule:

Background/Overview of Final Rule (cont.)

– No significant departures from IR

– Applicable through clauses in DoD, CAS-covered contracts

– “Covered contract” = “subject to” CAS, DFARS 242.7000(a))

– Applies to the “contractor,” meaning the legal entity

– Encompasses six contractor systems: (1) accounting; (2) estimating; (3) purchasing; (4) EVMS; (5) material management; and (6) property managementand (6) property management

– IR definition of “significant deficiency” untouched

– Amends IR to require COs to reduce withhold by 50% if CO has not made A determination W/in 90 days of contractor notification that deficiencies have been corrected

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• “Significant Deficiency” Predicate For System Disapproval

Significant Deficiencies

and Withholding– It only takes ONE (see e.g., DFARS 242.7501—”one or more”)

• What Is A Significant Deficiency?– “A shortcoming in the system that materially affects the ability of

officials of [DOD] to rely upon information produced by the system that is needed for management purposes” (DFARS 252.242-7005(a))

“M i l” I N D fi d• “Material” Is Not Defined– Focus is DoD perspective– DCAA considers many (all?) of its findings to be material– SOX/GAAP standards unlikely determinative– Industry pushing for objective criteria

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• DCAA’s Low Materiality Threshold, Combined With Vague

Identifying Significant Deficiencies (cont.)

y gDeficiency Standard, Means That Burden Will Be On Contractor To Show Deficiency Is Not Significant/Material

• The Critical Facts And Circumstances Relate To:– Design of the system –

How is it supposed to work?

Does the system have proper controls and is it accurate?

f ?– Functioning of the system – is it operating as designed?

– Compliance with system requirements Are system inputs appropriate and accurate?

Are requirements to be performed by employees met?

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• Self-assessing Whether A Significant Deficiency Exists

Identifying Significant Deficiencies (cont.)

g g y– System design assessment includes assessing

The design of self-developed systems

The design of any customized system

All system interfaces

The appropriateness of commercially available software – obtain vendor certification of system appropriateness

– System function assessment includes assessingy g Accuracy of data input

Accuracy of data storage

Accuracy of data retrieval

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• Self-assessing Whether A Significant Deficiency Exists

Identifying Significant Deficiencies (cont.)

g g y(cont.)– System compliance assessment includes assessing

The adequacy of policies and procedures

Compliance with these policies and procedures

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• Use Facts Developed From Self Assessment

Rebutting a Significant Deficiency

• Attack Facts Underlying The Alleged Significant Deficiency, Including:– Facts are wrong– Facts relate to past issues that have been corrected

Initial government assessments likely based upon older audit reports

– Facts arose prior to May 2011 but are being applied to “requirements” that existed only after May 2011 New regulation cannot create new obligations or duties with respect to New regulation cannot create new obligations or duties with respect to

past transactions or considerations. (See Kearfott Guidance & Navigation Corp. v. Rumsfeld, 320 F.3d 1369, 1374 (Fed. Cir. 2003))

Pursuant to final rule, new criteria “do not affect existing contracts that do not include the business systems clause unless the contractor and the Government agree to modify the contract bilaterally.”

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• Attack The Validity Of Conclusion That Identified Errors Are

Rebutting a Significant Deficiency (cont.)

yMaterial, Including: – The statistical sampling was inappropriate (See J.F. Taylor,

ASBCA No. 56105 (Jan. 18, 2012))

– Identified errors have little or no impact because system controls eliminate the errors

– The errors relate to data not relied upon by DoD

The number of errors is low compared to the number of– The number of errors is low compared to the number of transactions processed

– The monetary impact is low, especially when compared to the cost of correction

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• Contractor Should Assess Adequacy Of Business Systems

Preparing for System Reviews

q y yAnd Achieve, As Best As Possible, Compliant Systems Before Government System Reviews– DCAA apparently is not focused on system reviews, focusing on

incurred cost submission reviews, creating a possible window of opportunity

• Benefits Of Reviewing Systems Before GovernmentReb t deficienc findings ithin process timeframes– Rebut deficiency findings within process timeframes

– Prevent withholds, or minimize amount and length of withholds if imposed by ACO

– Ensure ability to compete for cost contracts, and maintain competitive position in all future procurements

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• Business Systems Rule Identifies “Criteria” For Each System

System Criteria: Overview

• “Acceptable” System Means A System That Complies With The “System Criteria” (see e.g., DFARS 252.242-7006(a)(1))

• Deficiencies Will Be Tied To Applicable System Criteria– Deficiency due to contractor’s failure to meet “one or more of

accounting system criteria” (e.g., DFARS 242.7501(d)(2)(ii)

– Example: DCAA concludes contractor has charged unallowable meal costs which violates Accounting System Criteria (1), (12)meal costs which violates Accounting System Criteria (1), (12)

• System Criteria Loaded With Vague Standards—i.e., “sound” “proper” “adequate” – Lack quantifiable outcomes

– Vulnerable to subjective interpretation

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• Accounting System Criteria (DFARS 252.242-7006(c)(1)-

Systems Criteria: Accounting Examples

(18)) Include:– “A sound internal control environment” (1)– “Proper segregation of direct costs from indirect costs” (2)– “A labor distribution system that charges direct and indirect labor

to appropriate cost objectives” (10)– “Exclusion from costs charged to Government contracts of

amounts which are not allowable in terms of FAR part 31 . . . and other contract provisions” (12)other contract provisions (12)

– “Adequate, reliable data for use in pricing follow on acquisitions” (17)

– “Accounting practices in accordance [with] CAS, if applicable, otherwise GAAP” (18)

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• Estimating System:

Systems Criteria: Estimating Overview

g y– New requirement (DFARS § 252.215(d)(1), (d)(3), (g))

Disclose system in writing to CO

Comply with the system as disclosed

“Timely” disclosure to ACO of “significant changes”

Significant deficiencies can prompt withholds in accordance with DFARS § 252.242-7005, when included in the contract

– Estimating system integration withg y g Accounting system

Purchasing system

Budgeting processes

– Meet requirements of law and regulations (e.g., TINA)

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• Purchasing System Criteria (DFARS § 252.244-7001(c)(1)-

System Criteria: Purchasing Overview

g y ( § ( )( )(24)) Include:– Requirements identification

– Source selectionCompetition

Cost or price analysis

Approvals

Appropriate contract type and requirements– Appropriate contract type and requirements

– Contract closeout

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• EVMS Criteria (DFARS § 252.234-7002(b)(1)-(2)) Include:

System Criteria: EVMS Overview

( § ( )( ) ( ))– American National Standards Institute/Electronics Industries

Alliance Standard 748 (“ANSI/EIA-748”)

– Provide timely and accurate information for the Cost Performance Report and Integrated Master Schedule

– Integration between systems (i.e., accounting, purchasing, inventory, program management to support EVMS)

– Adequate controls to update budgets and schedules as a resultAdequate controls to update budgets and schedules as a result of changes, modifications, government delays

– Accounting for level of effort functions in program budgets

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• Material Management Criteria (DFARS § 252.242-

System Criteria: MMAS Overview

g ( §7004(d)(1)-(10)) Include: – Adequate controls to timely identify unauthorized transfers/loans

of materials

– Adequate inventory controls to track removal of materials from inventory and use on contract

– Adequate controls to ensure that loaned materials are timely repaid to lending contractrepaid to lending contract

– Transfer/loans from cost-type contracts to commercial or fixed price work

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• Government Property System Criteria (§ 252.245-7003(c)

System Criteria: Government Property Overview

p y y (§ ( )Include:– Proper Acquisition

– Proper physical controlReceipt

Use

– Flow down of Government property terms and conditions to subcontractorssubcontractors

– Audits/due diligence to ensure Government property systems are functioning

– Disposition

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• Government System Review: DCMA/DCAA Perform Audit; Exit

Business System Review Process

Conference– Report shall describe any deficiency “in sufficient detail” (See e.g., DFARS

242.7501(b)—Accounting Systems)

• Initial ACO Determination: ACO Provides Written Initial Determination To The Contractor Detailing Any “Significant Deficiencies” (DFARS 242.7501(d)(2); DFARS 252.242-7005(c)(1))

• Contractor Response: Within 30 Days Of Receipt Of Initial ACO D t i ti C t t M t R d I W iti T ACODetermination, Contractor Must Respond In Writing To ACO (DFARS 252.242-7005(c)(1))

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• Final ACO Determination: ACO Evaluates Contractor’s Response

Process Overview (cont.)

And Will Issue A Final Written Determination And Begin Withholding, If Significant Deficiency Exists (DFARS 252.242-7005(c)(2); DFARS 242.7501(d)(3))

• Contractor Corrective Action: Within 45 Days Of Receipt Of Final Determination, Contractor Must Correct Deficiencies Or Submit An Acceptable Corrective Action Plan (CAP) (See DFARS 252.242-7005(d)(2); DFARS 242.7501(d)(3))

• ACO Monitors/Approves CAP: Could Result In Reduction Or Increase In Withholding Until Approved. (See DFARS 252.242-7005(d)(2), (E))

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• Initiate An Internal Review Of Each System For

Preparing for System Reviews: Practice Considerations

Deficiencies Under Attorney-client Privilege– Cross-check system design and functionality against business

systems compliance requirements– Review policies and procedures– Review past audit reports– Review lessons learned

• Design And Timely Implement Corrective Action Plans, As g y pNecessary To Achieve Compliant Systems– Establish goals– Assign adequate resources– Create and enforce an achievable schedule

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• Contractor Should Request A Briefing And Draft Of Report

Responding to System Reviews: Practice Considerations

q g pBefore Release Of Report

• Contractor Should Attempt To Resolve Any Issue The Auditor Identifies Before It Goes In The Final Report

• If Issue Cannot Be Resolved With Auditor, Contractor Should Provide The Auditor With Contractor’s Written Position To Be Included In Report

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• Contractor Required To Respond Within 30 Days Of

Responding to an Initial ACO Determination

q p yReceipt Of Initial Determination

• Timely And Persuasive Response Important To Protect Against Impacts On Contract Awards And Contract And Modification Pricing

• If 30 Days Is Impracticable (e.g., multiple deficiencies), Consider Addressing Deficiencies Individually And Prioritizing Them (e.g., By Prioritizing Those Most Likely To Impact New Procurements Or Those That Are Simpler To Resolve To Limit Impact Of Potential Withhold)

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• Inclusion Of Corrective Action Plan In Response To Initial

Responding to an Initial ACO Determination – Corrective Action Plan

pDetermination Should Depend On Balance Of:– Agreement with initial finding

– Likelihood of persuading ACO that no significant deficiency exists

– Cost in time and money of potential corrective action

– Pending proposal opportunities

I t t t t f ti id tifi d i ifi t– Importance to contractor of practice identified as significant deficiency

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• If Final Determination Finds Significant Deficiency,

Responding to Final ACO Determination

g yContractor Required Either To Correct Deficiency Or Submit An Adequate Corrective Action Plan Within 45 Days

• Contractor’s Response Should Include An Express Request For Elimination Or Reduction In Payment Withholds

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• Contractor’s Proposed Corrective Action Plan Should:

Responding to Final ACO Determination – Corrective Action Plan

p– State the system deficiencies

– Identify the causes for those deficiencies

– Identify and explain solutions

– Divide solutions into discrete and measurable actions

– Establish timely but achievable due dates

– Explain how corrective action plan will be monitored

– Designate individuals accountable for results

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• Contractors May Dispute The Existence Of A Significant

Responding to Final ACO Determination –Disputes

y p gDeficiency Through CDA Disputes Process Or In Bid Protest– DCMA is taking position that ACO final determination is not a

final decision, and that contractor must request a final decision

• Contractors Also May Dispute The ACO’s Significant Deficiency Finding While Simultaneously Implementing C ti A ti T C t Th All d D fi iCorrective Action To Correct The Alleged Deficiency– Payment withhold is not subject to the interest-penalty provisions

– Successful appeal will result in recovery of interest

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• ACO, Along With DCAA/DCMA, Will Monitor The

Resolving Deficiencies

gContractor’s Progress In Correcting Deficiencies

• Contractors Should Closely Follow Accepted Corrective Action Plan To Avoid Increase In Withhold Amount

• Contractors Also Should Provide Updates To ACO On Status Of Corrective Action And Ensure ACO Is Comfortable With Efforts

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• ACO, With DCAA/DCMA Input, Will:

Resolving Deficiencies (cont.)

– Determine that the deficiencies have been corrected, approve the system, and release the withholds; or

– Determine that there is a reasonable expectation to believe that deficiencies have been corrected, approve the system, and release withholds; or

– Determine that significant deficiencies still exist and continue the withholds

• If ACO Has Not Made Determination Within 90 Days Of• If ACO Has Not Made Determination Within 90 Days Of Receipt Of Contractor’s Notice Of Deficiency Correction, Withhold Amount Must Be Reduced By 50%

• If Deficiency Is Resolved, Contractor Should Ensure Relevant Procurement Officials Receive Copies

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• Contracts Subject To Withholds Are Contracts Subject To

Withholds

j jCAS Coverage That Contain DFARS § 252.242-7005 And The Applicable System Clause– Subject to this limitation, ACO has discretion to identify the

contracts from which to withhold payments

• Amount: – 5% for one disapproved system or up to 10% for two or more

disappro ed s stems of all billings nder co ered contractsdisapproved systems, of all billings under covered contracts

– Pre-existing withholds should preclude or reduce further withholds for system disapproval

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• Ensure That Only Minimum Withholds Are Imposed

Responding to Withholds

y p– Any withhold may be challenged by filing a claim

– The government must reduce the 5% (10%) withhold: To 2% when implementation of an approved corrective action plan

begins

By 50% when the government fails to act timely

To 0% when the significant deficiency has been resolved

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• E.g., Progress Payments Clause (FAR 52.232-16)

Other Withholds Remain In Force

– CO may reduce or suspend progress payments after a finding of: Failure to comply with material contract requirement (including

requirement to maintain an “accounting system and controls adequate for proper administration” of progress payments clause)

Failure to make progress or unsatisfactory financial condition Inventory exceeds reasonable contract requirementsContractor delinquent in paying costs of performing contract Fair value of undelivered work is less than amount of unliquidated q

progress payments for that workContractor is realizing less profit than reflected in liquidation rate,

and that rate is less than the rate established for the contract

• Government Right Under Case Law To Withhold For Debts Owed By The Contractor

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• This Is A Critical Short Term Risk Area For Contractors

Procurement Issues

• Consider Bid Protests To Protect Competitive Position– Circumstances

Excluded from a procurement

Down scored in evaluation

– Exclusion likely requires pre-award protest

– GAO or court will only review the record before the agency at the ti f th ’ d i i i i th t th PCO htime of the agency’s decision, requiring that the PCO have: Record of why no significant deficiency exists

Any corrective action plan

Input from the ACO

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• Price Negotiations Will Be Impacted By Significant

Procurement Issues

Deficiencies (Accounting, Purchasing)– If PCO determines that deficiency impacts negotiations, the PCO

can choose from numerous mitigation efforts, including (seeDFARS 242.7501(g):Reducing negotiation objective for profit or feeUsing reopener clausesUsing additional cost analysis

Contractor should expect PCOs to use these same mitigation– Contractor should expect PCOs to use these same mitigation efforts for other system deficiencies (e.g., estimating)

– Contractor proposals should explain why there is no deficiency, ongoing corrective action and how contractor has mitigated government’s risk

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• Purchasing, Estimating And Accounting Systems Appear To Be The

Lessons Learned

Primary Focus Of Early Reviews

• Long-approved Systems Are Being Disapproved Based On New System Criteria And Public Law Requirements (e.g., TINA and CAS)

• Trends In Government’s Deficiency Findings:

– Apply criteria retroactively

– Generally identify numerous significant deficiencies in system under reviewunder review

– Lack necessary detail to fully understand and rebut alleged deficiency

– Focus on documentation and weaknesses in system policies and procedures

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• DCMA Recently Issued Flowchart And Related Guidance

System Reviews – DCMA Guidance

yDiscussing DCMA Process For Systems Disapprovals, Withholds And Resolution/Re-approval

• Contains Internal Guidance For System Reviews, Including: – ACO’s initial determination should be issued within 10 days of

receiving the audit or functional specialist report

– “Business Systems Review Panel” will conduct a higher-level re ie of an ACO’s final determination to disappro e areview of an ACO’s final determination to disapprove a contractor’s business system, prior to notifying contractor that system is disapproved

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Business Systems Flowchart

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Business Systems Flowchart (cont.)

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Contractor Business System Flowchart – 16 Dec 2011

Start Auditor/Functional

Specialist Issues Report to CO

CO Receives/Reviews Report Findings and Advice; Determine if

Significant Deficiencies Exist in Business System

Significant Deficiencies

Exist?

Draft Notification to Contractor that

Business System is Acceptable and

Approved.

Coordinate as Necessary; Submit to CMO Contracts

Director for Review/Approval

CMO Contracts Director

Approved?

*Send Letter to Contractor

Update Business

System Status Document and

CBAR

End

No

Yes

CO Drafts Initial Determination

Coordinate as Necessary; Submit to CMO Contracts

Director for Review/Approval

CMO Contracts Director

Approved?

Send Initial Determination to

Contractor

Yes

No

No

Yes

Initial Determination – Within 10 Days

Contractor Responds to Initial

Determination

Within 30 Days

CO Evaluates Contractor Response in Consultation with Auditor/Functional

Specialist; Make Final Determination

Significant Deficiencies

Exist?

Draft Notification to Contractor that

Business System is Acceptable and

Approved.

Coordinate as Necessary; Submit to CMO Contracts

Director for Review/Approval

CMO Contracts Director

Approved?

*Send Letter to Contractor

Yes

No

No Yes

Coordinate as Necessary; Submit to CMO Contracts

Director for Review/Approval

CMO Contracts Director

Approved?

- CO document file, as necessary - Input SP Code “U” in MOCAS for Selected Contracts; - *Send Final Determination to Contractor

No

Yes

Continue Process on Next Page

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- Start of Process

- DCMA Action

- Notes/Coordination

- Contractor Action

- End of Process

- Key Control Point

Time Frames: (*DCMA-Mandated)

• 10 Days – CO Initial Determination

• 30 Days – Contractor Response to Initial

Determination

• 30 Days – CO Final Determination

• 45 Days – Contractor Submits CAP or

Corrects Significant Deficiencies

• *15 Days – CO Reviews CAP

• 90 Days – CO Determines All Significant

Deficiencies Corrected

*Distribution Requirements: Provide copy of CO final determination to approve or disapprove to auditor/functional specialist, affected CO’s at buying activities, and any other impacted CO.

Pre-Process Action

During CRR, if DFARS Clause 252.242-7005 is in contract, ACO ensures R9 Code “30” is

input in MOCAS

Submit to Contractor Business Systems

Review Panel

Notes: - CACO/DACO’s shall coordinate with ACO to identify list of contracts. - ACO shall establish Withhold Tracking Spreadsheet. - If CACO/DACO/ACO network exists, CO shall obtain other CO’s concurrence in network.

Panel Reviews CO’s Final Determination to

Disapprove; Concur or Non-concur to CO

Final Determination – Within 30 Days

CO Drafts Final Determination • Disapprove System • Notice of Withhold - 5% • Prepare List of Affected Contracts • Request Correction of Deficiencies or Submission of CAP • Contractor 45 Day Suspense Date

Notes: - CO discuss findings w/Auditor or Functional Specialist. - Rejection of advice from Auditor or Functional Specialist is subject to Board of Review.

Update Business System Status Document and

CBAR

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*Send Final Determination to

Contractor

Contractor Submits Response:

Corrects Deficiencies or Submits CAP

Deficiencies Corrected?

CO Evaluates CAP in Consultation with

Auditor/Functional Specialist or Requests

Evaluation of Corrected Deficiencies

Within 45 Days

- CO Reduces Withhold to 2% - Written Notice to Contractor; - CO/Auditor/Functional Specialist Monitor Contractor Progress as Outlined in Acceptable CAP (failure to follow acceptable CAP-increase withhold %)

Draft Determination Letter to Contractor

• Business System is Acceptable and Approved • Discontinue Withhold • Release Previous Withhold • Authorize to Bill

Coordinate as necessary; Submit to

CMO Contracts Director for

Review/Approval

CMO Contracts Director

Approved?

- Remove SP Code “U” From MOCAS - *Send Letter to Contractor

Update Business System Status

Document and CBAR

End

No

Yes

Continued From Previous Page

Yes

Acceptable CAP?

Contractor Effectively

Implementing CAP?

No

No or No Reasonable Expectation

Contractor Notifies CO that All Significant Deficiencies

Have Been Corrected

Yes

CO Notifies Contractor to Submit an Acceptable

CAP (withhold remains at 5%)

CO Requests Audit/Functional Specialist Evaluation and

Determines if Deficiencies are Corrected.

Reduce Withhold By At Least 50% If Determination Not Made Within

90 Days.

Deficiencies Corrected?

Draft Determination Letter to Contractor • Business System is Acceptable and Approved • Discontinue Withhold • Release Previous Withhold • Authorize to Bill

Coordinate as necessary; Submit to CMO Contracts

Director for Review/Approval

CMO Contracts Director

Approved?

- Remove SP Code “U” From MOCAS - *Send Letter to

Contractor

Yes or Reasonable Expectation

CO Continues Withhold or Increase Withhold %. Notify

Contractor Significant Deficiencies Continue to Exist.

No

Determination - Within 90 Days or Reduce Withhold by 50%

Yes

No

Payment Withhold Percentages Per Contract - 5% Per Business System When Final Determination is Issued - Not to Exceed 10% for Multiple Business Systems - 2% When CAP is Determined to Be Acceptable - Reduce Withhold % By At Least 50% if CO Determination is Not Made Within 90 Days From Receipt of Contractor Notice that All Deficiencies Have Been Corrected.

CO Notifies Contractor Deficiencies Remain –

Request Submission of an Acceptable CAP (withhold

remains at 5%)

Within 15 Days of Receiving CAP

DFARS Business Systems Clauses MOCAS Code - 252.242-7005, Contractor Business Systems R9 30 - 252.215-7002, Cost Estimating System Requirements R9 87 - 252.234-7002, Earned Value Management System R9 PP - 252.242-7006, Accounting System Administration R9 89 - 252.242-7004, Material Management & Accounting Sys R9 88 - 252.244-7001, Contractor Purchasing System Admin R9 90 - 252.245-7003, Contractor Property Management Admin SP E

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Presenters

• Kevin J. SlattumKevin J. Slattum– kslattum@mckennalong.com

– 213-243-6035

• Keith M. Byers– kbyers@mckennalong.com

– 213-243-6172

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– 213-243-6172

• Business Systems Compliance Guide Available At:– http://www.mckennalong.com/media/resource/1672

_GC-BusinessSystemsComplianceGuide.pdf

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Kimberly Rinder, Manager of Subcontracts, General Atomics Aeronautical Systems, Inc.

Patricia J Mensch Mensch & Associates CPAPatricia J. Mensch, Mensch & Associates, CPA

Development of written policies and proceduresp

Implementation of policies, procedures and practices

Monitoring

Government oversight

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Need to be written◦ Involve the implementers◦ Involve the implementers

Need to provide adequate controls ◦ Consider size and complexity of business

Need to be current Need to be current ◦ Schedule periodic reviews◦ Assign responsibility

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Are we doing what we say

Can we follow our policy

Train employees on policies

Test compliance with policies Test compliance with policies

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Example

D l i P l Developing a Proposal

Estimating system requirements

Accounting system requirements

Purchasing system requirements

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Must have compliant proposals in accordance with FAR 15-408, Table 15-2,

Use the DCMA Proposal Adequacy Checklist◦ www.guidebook.dcma.mil/22/DCMAProposalAdequ

acyChecklist.doc

Key note: Provide a map from your data and Key note: Provide a map from your data and documentation to your proposal (e.g. page number referencing)

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May be required on negotiated acquisitions requiring certified cost or pricing data whose q g p gestimated value is $12.5 million or more, except R&D and prototypes with no productions

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Always compete if possible Competitions should include all quotes and a bid p q

summary and recommendation Competitions do not require a price analysis Sole source must have a justification, not just the

name of the approved source for the drawing How long is the sole source valid for If the determination is not cost effective or timely If the determination is not cost effective or timely

to find a second source, you must include your calculations that made this determination

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Must have appropriate personnel to review the elements of the proposal and provide b i d h llbasis or acceptance and challenges

Factual data is the best case Industry standard acceptable Reviewers experience less acceptable Comparison to similar items/services with

complexity factors if applicablecomplexity factors if applicable Statement that BOM was reviewed and the

part numbers and quantities proposed are acceptable

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PGI, DFARS, FAR Must have sold to a commercial customer ust a e so d to a co e c a custo e

same item Must have sold to a commercial customer

similar item and describe the difference (minor)

Must provide copies of these to prime contractor and/or government (sanitized/un-sanitized)

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Price analysis report◦ Published price list not acceptable by itself◦ GSA not acceptable by itself◦ Must justify the item not just compare to last buy

history and escalation or de-escalation Cost analysis must also include a price

analysis◦ If you can’t get audit report in time for submissionIf you can t get audit report in time for submission,

provide expected date of completion

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DCAA letter PSP 730.5.1.A/2010-026, dated 11/15/10, titled “Audit Guidance on Audit Procedures Related to Long Term Agreements (LTAs)

Basis of estimate includes existing LTA plus a new quote, both individually under $700k on the proposal

Plus: quick turn around and support of proposals Negative: At time of negotiation of the agreement if Negative: At time of negotiation of the agreement, if

not in support of specific government contract, DCMA will not audit.

Consider placing annual agreements with options

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If they exceed $700k, they must include backup such as sole source or competitive, p p ,technical evaluation, CID and PAR/CAR

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Evaluate and test your business systems

Take correct action ◦ Establish a schedule for completion◦ Test

Don’t wait for DCAA

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Understand DCAA audit approach

Assign staff to manage the audit(s)

Facilitate the flow of information◦ Be responsive to Auditor’s requests

Keep management informed Keep management informed

Work to resolve issues before they become findings

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D fi i i d d l i Definitions and underlying concepts Significant Deficiency “A shortcoming in the system that materially affects the

ability of officials of the Department of Defense to rely upon information produced by the system that is needed for management purposes”

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Generally Accepted Government Auditing Standards (GAGAS)

Generally Accepted Auditing Standards (GAAS)

Cost Accounting Standards (CAS)

Reasonable Judgment

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Material Weakness ◦ “A material weakness in internal control over compliance is a

deficiency in internal control, such that there is reasonable possibility that material noncompliance with a type of compliance requirement of a federal program will not be prevented, or detected and corrected, on a timely basis”

Significant Deficiency◦ “A significant deficiency in internal control over compliance is a

d fi i i i t l t l li ith t fdeficiency in internal control over compliance with a type of compliance requirement of a federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance”

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9903.305 Materiality In determining whether amounts of cost are material or immaterial, the following

criteria shall be considered where appropriate; no one criterion is necessarily determinative:

(a) The absolute dollar amount involved. The larger the dollar amount, the more likely that it will be materiallikely that it will be material.

(b) The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost, the more likely it is to be material.

(c) The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect costs, will normally have more impact than the same amount of indirect costs.

(d) The impact on Government funding. Changes in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.

(e) The cumulative impact of individually immaterial items. It is appropriate to ( ) p y pp pconsider whether such impacts:

(1) Tend to offset one another, or (2) Tend to be in the same direction and hence to accumulate into a material

amount. (f) The cost of administrative processing of the price adjustment modification shall

be considered. If the cost to process exceeds the amount to be recovered, it is less likely the amount will be material.

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“The magnitude of an omission or misstatement of accounting information that, g ,in the light of surrounding circumstances, makes it probable that the judgment of a reasonable person relying on the information would have been changed or influenced by the omission or misstatement.”

20

5/14/2012

11

Inadequate/non-existent written policies and procedures

Failure to monitor indirect rates Failure to monitor indirect rates Failure to update billing rates Failure to update billings to the rates claimed in the

final Incurred Cost Submission Unallowable costs not properly segregated◦ Travel◦ Business meals

Inadequate Timekeeping◦ Billed labor does not equal booked labor

Billings not reconciled to actual cost Failure to monitor subcontractors’ accounting and

billing systems

21

Patricia J. Mensch, CPA◦ Mensch & Associates, CPA◦ San Diego, CA◦ 858.792.2210◦ patmensch@mensch-cpa.com

Kimberly Rinder◦ General Atomics Aeronautical Systems Inc◦ General Atomics Aeronautical Systems Inc◦ San Diego, CA◦ 858.312.4227◦ Kimberly.Rinder@uav.com

22

Kevin J. SlattumPartner - Los Angeleskslattum@mckennalong.com

300 South Grand AvenueSuite 1400Los Angeles, CA 90071

TEL: 213.243.6035FAX: 213.243.6330

Los Angeles - South Grand Avenue300 South Grand Avenue, 14th FloorLos Angeles, CA 90071

Publications:

"The MLA GovernmentContractor Business SystemsCompliance Guide," co-authoredby Thomas Lemmer, JamesGallagher, Kevin Slattum andSteven Masiello (January 2012).

“The Brave new Audit World:DCAA Issues Troubling AuditGuidance Covering Access toContractor Records and InternalControl Audits” (January 2009).

“DOD Issues New Interim RuleAmending RegulationsGoverning ‘Excessive’Subcontract Pass-throughsCharges” (May 2008).

“Federal Circuit Decision Begsthe Question: Can the ContractorEver Rely on Directions From aContracting Officer's DelegatedRepresentative?” (October2007).

Seminars And Presentations:

“Truth in Negotiations Act: TheBasics” (Client Seminar,February 2009)

“Teaming Arrangements: TheGood, The Bad and the Ugly”(NCMA South Bay Chapter,September 2008)

“What’s Happening Now?Trends/Emerging Issues inGovernment Contracts (ClientSeminar, December 2007)

“The Minefield of FederalProcurement Fraud Enforcement”(Lorman Education Services,August 2007)

“Contract Claims/EquitableAdjustments” (NCMA SanFernando Valley Chapter, June2007)

“Conflict of Interest Prohibitionson Defense Contract HiringPractices (NCMA South BayChapter, January 2005)

“Subcontract Disputes UnderPrime Contracts” (NCMA AnnualEducation Symposium, October1998)

PRACTICES:

Government Contracts

Bid Protests-

Claims and-Terminations

Cost Accounting-

Procurement Fraud-

State and Local-GovernmentContracts

Suspension and-Debarment

Litigation

INDUSTRIES:

Aerospace andDefense

Construction &Engineering

Experience

Kevin Slattum’s practice touches on nearly all aspects of federalgovernment procurements with extensive experience in contractdisputes, government cost accounting issues, cost recovery andDefense Contract Audit Agency (DCAA) challenges, subcontractdisputes, bid protests, contract terminations and fraud/false claimsdefenses.

He has shepherded clients “from the cradle to the grave” in theprocess of making successful Requests for Equitable Adjustments(REAs) and in winning contract claims against the governmentleveraging a broad range of legal theories, including contractinterpretation, government interference and out-of-scope direction,defective specifications, government-caused delays and numerousother grounds. Mr. Slattum has litigated cases totaling more than$400 million involving an array of government agencies, includingDCAA, Army, Navy and NASA, and arising in a variety of contexts,including high technology space and satellite procurements, A-76outsourcing issues, Service Contract Act (SCA) issues,construction, smart weapons and other high-technologymanufacturing issues. Mr. Slattum has also represented clients incontesting terminations for default. He has appeared in a variety offora, including the Armed Services Board of Contract Appeals(ASBCA) and other administrative boards, federal district andappellate courts, the Comptroller General of the GovernmentAccountability Office (GAO), state courts and in private arbitrationsand mediations.

Mr. Slattum has particular experience in the area of governmentcost and accounting. In recent years, he has successfullychallenged DCAA cost disallowances and unfavorable accountingand internal controls systems determinations. During his career hehas also obtained cost recovery and defended claims in the contextof Federal Acquisition Regulation (FAR) cost allowability, Truth InNegotiation Act (TINA) and CAS issues. He frequently counselsand defends government contractors facing allegations of fraud orrelated misconduct. These cases include those brought by thegovernment or qui tam relators under the False Claims Act (FCA) inthe contexts of environmental remediation and testing, majorweapons systems development, cost mischarging and mistesting.He has litigated cases brought under related Racketeer Influencedand Corrupt Organizations (RICO), conspiracy, mail fraud and wirefraud theories in the context of small business (SBA) governmentcontracting. He has also assisted clients in resolving organizationalconflict of interest (OCI) issues and in preparing OCI firewall plans.He counsels numerous clients on compliance and investigationissues and assists them in responding to Inspector General (IG)subpoenas.

Mr. Slattum received his J.D. degree, magna cum laude, fromPepperdine University School of Law, where he served as anassociate editor of the Pepperdine Law Review and was aquarterfinalist in the Dalsimer Moot Court competition. In a“previous life,” he was the chairperson of the English Departmentand a volleyball coach at Crespi High School in Encino, California,as well as an assistant basketball coach at Thousand Oaks HighSchool in Thousand Oaks, California.

Education

J.D., Pepperdine University School of Law, magna cum laude,1998

M.A., William & Mary, 1985

B.A., California Lutheran University, summa cum laude, 1981

Bar Admissions

California

Court Admissions

U.S. Court of Appeals for the Federal Circuit

U.S. Court of Appeals for the Ninth Circuit

U.S. District Court for the Central District of California

U.S. District Court for the Northern District of California

Keith M. ByersAssociate - Los Angeleskbyers@mckennalong.com

300 South Grand AvenueSuite 1400Los Angeles, CA 90071

TEL: 213.243.6172FAX: 213.243.6330

Publications:

"California Public ProcurementHandbook, 2010–2011 ed.," West Publications, November2010 (with Mike Rizzo and JohnBurkholder)

"The MLA GovernmentContractor Business SystemsCompliance Guide." - Contributor

“Export Control Reform - AtLast?,” 2010 (with KevinLombardo)

"Performance Problems," WestPublications Year In Review,February 2010 (with Tom Abbottand Fred Levy)

PRACTICES:

Compliance andInvestigations

Government Contracts

Bid Protests-

Claims and-Terminations

Construction-

Cost Accounting-

Procurement Fraud-

Litigation

Fraud and Criminal-InvestigationsLitigation

INDUSTRIES:

Construction &Engineering

Transportation

PROFESSIONALACTIVITIES:

State Bar of California

Experience

Keith Byers joined McKenna Long & Aldridge in 2008 and is anassociate in the Firm’s Los Angeles Office. Mr. Byers’ practicefocuses on a wide variety of issues related to government contractslaw, including claims and disputes, state and federal bid protests,False Claims Act (FCA) violations, Truth in Negotiations Act (TINA)violations, state procurement, organizational conflicts of interest(OCI), compliance and mandatory disclosures, overseasreconstruction contracts, domestic construction and securityclearances.

In addition to the practice areas listed above, Mr. Byers hasexperience counseling prime and subcontractors on contractformation issues with respect to federal and state procurements. Inthis capacity, he has worked closely with clients in drafting andnegotiating subcontract and lower-tier subcontract agreements formulti-million dollar state and federal projects. Mr. Byers also hasconsiderable experience supporting clients in the context ofprime-sub disputes. His experience in this arena extends tocounseling both prime contractors, and subcontractors, before andduring the dispute process.

Mr. Byers also has experience counseling clients facing DefenseContract Audit Agency (DCAA) and cost and accounting issues. Heroutinely works with clients to develop responses and defenses toonerous DCAA audits, cost disallowances and unfavorableaccounting and internal controls systems determinations. His DCAAand cost and accounting experience includes counseling anddefending government contractors facing allegations of fraud orrelated misconduct. These cases include those brought by thegovernment or qui tam relators under the FCA in the contexts ofnuclear remediation, major weapons systems development andcost mischarging.

Mr. Byers received both his J.D. and his B.A. (cum laude) from theUniversity of California, Los Angeles. During law school, he was asummer associate at McKenna Long & Aldridge LLP. He alsoclerked for the Long Beach (California) City Attorney’s Office wherehe engaged in various matters related to municipal law andadministration.

Education

J.D., UCLA School of Law, 2008

B.A., University of California, Los Angeles, cum laude, 2005

Bar Admissions

California

Court Admissions

U.S. District Court for the Central District of California

 

Kimberly Rinder has over 20 years of defense contracting; including subcontracts, contracts and 

purchasing. Ms. Rinder is a proud San Diego native and alumni of the University of San Diego for both 

her bachelor’s and master’s degree. Her first position was at General Dynamics Convair Division. She 

then moved to TRW which then became Northrop Grumman. Ms. Rinder is currently a Subcontracts 

Manager at General Atomics Aeronautical Division.