The Odd Couple – Contract Administration & Cost Accounting Administration

C03 • Understanding Contract Management • Intermediate

John Hindman, Senior Manager, Baker TillyJack Coviello, CPA, Manager, Baker Tilly

December 4, 20173:30PM-4:45PM

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Your Presenters

John Hindman, Senior Manager

John Hindman is a Senior Manager in Baker Tilly’s Government Contractor Advisory Services practice. John has assisted a wide range of government contractors across numerous industries with complex regulatory compliance issues. John frequently works with contractors on the design and implementation of their systems of internal controls relative to contractor business system requirements. Specifically, he focusses heavily on compliance with accounting, purchasing, and estimating system requirements relative to the DFARS business system criteria. John works closely with contractors on responding to Government audit reports and has implemented numerous corrective action plans that have successfully resolved Government findings. John also helps contractors navigate a myriad of complex cost accounting matters to ensure compliance against the Government’s Cost Accounting Standards, FAR Part 31 cost principles, indirect cost rate submission requirements, and preparation of final indirect cost rate proposals (or incurred cost submissions).

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Your Presenters

Jack Coviello, CPA, Manager

Jack Coviello is a Manager in Baker Tilly’s Government Contractor Advisory Services (GCAS) practice with over seven years of experience. He assists clients with a broad range of GCAS matters including cost accounting and compliance, and specializes in matters related to the Federal Acquisition Regulation (FAR) and associated agency supplements and the Cost Accounting Standards (CAS). He routinely assists clients with indirect cost rate structuring and modeling, proposal pricing and cost estimating, final indirect cost rate calculation, proposal preparation and review, contract administration, and contractor business systems. Furthermore, Jack works closely with clients to develop, implement, and monitor policies and procedures and internal controls relative to the aforementioned compliance matters; more specifically in the accounting, estimating, and purchasing business systems. Jack is a regular speaker at NCMA events on topics such as the incurred cost proposal, accounting system, purchasing system, and FAR Part 30 CAS administration and cost impacts.

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Agenda

• Cost Accounting Standards (CAS) Overview

• Contracts Administration• Determining CAS Applicability

• Reporting and Disclosure Requirements

• CAS Administration

• Subcontract CAS Administration

• Exercises: Real World Scenarios

CAS OverviewWhat is CAS?

• Public Law 48 CFR 9904• Title 48: Federal Acquisition Regulations System• Part 9904: Cost Accounting Standards

• CAS is a supplement to FAR• FAR regulates cost allowability and allocability• CAS regulates cost allocation, assignment & measurement

with its 19 standards

• Different from US GAAP• When applicable, CAS trumps GAAP for Government

contract cost accounting purposes• Company must likely still follow GAAP for financial reporting

purposes• Creates two different books of record

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CAS Overview

Reminder: What is Cost Accounting?

• Total cost absorption Government contractors able to recover allowable, reasonable, and allocable costs

• Direct costs Costs discretely identifiable with specific contracts/cost objectives

• Indirect costs Overhead/SG&A-type costs in support of multiple cost objectives/running the business as a whole

• Indirect rates/cost accounting Indirect costs typically recovered through application of indirect cost rates to direct costs (estimated or billed)

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Direct Costs

Indirect Costs

Total Cost Absorption

CAS Overview

Why does the gov’t have separate standards?

• To create uniformity in how contractors treat costs• Measurement• Assignment to cost accounting periods• Allocation to contracts

• To require consistency of individual contractors• Reduce contract disputes• Improve contract administration

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CAS Overview

Examples of standards (19 total):

• 401 Estimating, Accumulating, Reporting Costs

• 402 Allocating Costs Incurred for the Same Purpose

• 403 Allocating Home Office Expenses to Segments

• 405 Accounting for Unallowable Costs

• 410 Allocation of G&A Expense

• 418 Allocation of Direct and Indirect Costs

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CAS Overview

How does this impact contract / subcontract administration?

• Key provisions

• Reporting requirements

• Negotiations

• Disclosures

• Subcontract flow-down, etc.

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Contract Administration

Contracts’ Role in Administering CAS

• Determining CAS Applicability

• Reporting & Disclosure Requirements

• CAS Administration

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Determining CAS Applicability

When does CAS apply?

• CAS applies to individual contracts, NOT contractors

• Applicability to a contract based onA. Certain qualitative characteristics

i. FAR Part 52 – CAS Clauses

ii. Contract type (CPFF, T&M, FFP, etc.)

iii. Non-commercial item

iv. Contractor business size (not applicable to small businesses)

B. Contract AND contractor quantitative characteristics

i. Total contract award value

• Greater than $750k

• Not “funded value”

ii. Contractor currently performingon another CAS covered contract > $7.5M

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Determining CAS Applicability

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Determining CAS Applicability

What is a “contract” with regards to CAS applicability?

• FAR 2.101 – “Contract”

• A mutually binding legal relationship obligating the seller to furnish supplies or services and the buyer to pay for them

• Includes all types of commitments that obligate the Government to an expenditure of appropriated funds

• Generally, CAS applies to negotiated contracts and subcontracts where a contractor’s estimated and/or actual costs are relevant to the determination of contract price when contract value at the time of award is greater than exemption thresholds • The term “negotiated contract” is not defined in the CAS Board’s

regulations, but exemptions from CAS coverage provide some insight

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Determining CAS Applicability

• CAS applicability to IDIQ contracts – IDIQ contract vs. Orders issued• Relevant legal decisions:

• SIZE APPEAL OF: AIS ENGINEERING, INC., APPELLANT RE: ULTISAT INC., SBA No. SIZ-5614

• KINGDOMWARE TECHNOLOGIES, INC. v. UNITED STATES

• Methods for valuing IDIQ award values

• CAS applicability to contract modifications• CAS Working Group Item 76-2

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Determining CAS Applicability

• Full CAS Coverage

• Applies if any of these conditions are met:

• Covered award is $50 million or more

• Contractor has $50 million or more in net CAS-covered contracts for the preceding accounting period

• The contractor has $50 million or more for a single CAS-covered contract during the current accounting period

• All 19 standards apply

• Must file a CAS Disclosure Statement (CASB DS-1)

• Modified CAS Coverage

• Covered awards up to $50 million

• Four standards apply: CAS 401, 402, 405, 406

• May require CAS Disclosure Statement

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Determining CAS Applicability

• Contracts Administrators play a key role in determining CAS applicability• Assess each contract at the time of award for CAS applicability

• Regardless inclusion/exclusion of CAS-related contract clauses

• Document determinations as part of a contract briefing process• Maintain a running list of CAS covered awards

• Maintain critical contract data necessary for making CAS determinations• Contract clauses

• Award value

• Contract type

• Commercial / non-commercial

• Business size at time of award

• Monitor CAS contract universe to identify changes in CAS status (full vs. modified)• Needed for new contract awards and solicitation representations

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Determining CAS Applicability

• CAS applicability determinations, monitoring, and administration is a cross-functional process• Contracts

• Compliance

• Accounting and Finance

• Pricing and Estimating

• Program Management and Business Development

• CAS coverage has significant compliance and financial/accounting implications

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Reporting & Disclosure Requirements

CAS Contract Clauses

• FAR 52.230-1, Cost Accounting Standards Notices and Certification• Solicitation provision to help Government determine

whether CAS would apply to the contract

• Contractor provides representations and certifications relative to:• CAS applicability or exemptions

• CAS disclosure statement requirements

• Eligibility for modified CAS coverage

• Required changes in cost accounting practices if awarded the contract

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Reporting & Disclosure Requirements

CAS Contract Clauses

• FAR 52.230-3, Disclosure and Consistency of Cost Accounting Practices• Requires submission of CAS disclosure statement

• Submission to CFAO

• FAR 52.230-6, Administration of Cost Accounting Standards• Prescribes negotiation and administrative procedures for

• Cost accounting practices changes• Cost accounting standards non-compliance

• CFAO has administrative duties• All communications should include CFAO

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Reporting & Disclosure Requirements

Other CAS Contract Clauses

• FAR 52.230-2, Cost Accounting Standards• Contract clause indicating CAS applicability and general cost

accounting requirements

• FAR 52.230-4, Disclosure and Consistency of Cost Accounting Practices-Foreign Concerns• Basic CAS clause for contracts with foreign concerns

• FAR 52.230-5, Cost Accounting Standards Educational Institution• Basic CAS clause for contracts with educational institutions

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CAS Administration

• FAR Part 30 CAS Administration: Describes policies and procedures for applying the CAS Board rules and regulations to negotiated contracts and subcontracts

• FAR 30.202 – Disclosure Requirements

• FAR 30.603 – Changes to Disclosed or Established Cost Accounting Practices

• FAR 30.604 – Processing Changes to Disclosed or Established Cost Accounting Practices

• FAR 30.605 – Processing Noncompliances

• FAR 30.606 – Resolving Cost Impacts

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CAS Administration

The Contracts Administrators role: Ability to identify CAS covered contracts and monitor CAS applicability is the foundation of sound CAS administration

• CAS covered contracts and the level of coverage (modified vs. full) drive CAS administration requirements

• When holding CAS covered contracts, contractors may be required to disclose, negotiate, and/or communicate:• Administrative or clerical updates to required disclosures• Changes in organizational structure• Cost accounting practices• Non-compliant estimating, accumulation, or reporting of cost

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CAS Administration

• CAS Disclosure Statement• Purpose – Document and describe cost accounting practices• Reminder on Applicability

• Full coverage = Required

• Modified = TBD

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CAS Administration

• Administrative/clerical, organizational, and cost accounting practice changes in CAS disclosures

• Contractors are required to update their CAS disclosure statements reflect administrative/clericial updates, organizational changes, and/or cost accounting practice changes

• Additionally, if practices are deemed non-compliant, contracts are required to adopt compliant practices and reflect associated changes in disclosures

• Cost Impact Analyses • Measure the financial impact and increased/decreased cost to the Government

associated with cost accounting practice changes or non-compliance on affected CAS-covered contracts

• What is an “affected” contract?

• Used one cost accounting practice to estimate costs and a changed cost accounting practice to accumulate and report costs under the contract or subcontract; or used a noncompliant practice for purposes of estimating or accumulating and reporting costs under the contract or subcontract

• Modified vs. full CAS coverage – Cost impact requirement may exist in either instance

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CAS Administration

• Measuring increased or decreased cost to the Government• Flexibly priced contracts vs. Fixed price contracts

• General Dollar Magnitude vs. Detailed Cost Impact

• Materiality

• What is a cost accounting practice change?• Required, unilateral, desirable changes

• 48 CFR 9903.302-2 – Change to a cost accounting practice.

• Memorandum for Assistant Secretary of the Army issued by Defense Procurement Director Deidre Lee January 17, 2002 – Guidance provided by David Capitano for use in implementing the definition of what constitutes a change in accounting practice per 48 CFR 9904.302-2

• Organizational changes – Restructuring, M&A• Often involve cost accounting practice changes, and therefore there may be a

requirement for a cost impact analysis

• FAR Part 30.603-2(e) – Waiver of FAR 30 reporting requirements for DFARS External Restructuring (DFARS 231.205-70)

• FAR 41.1204 Novation Agreement (b)(7) – Prohibition on increased cost

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Subcontract CAS Administration

Planning

•Prime Applicability

•Solicitation Exemptions

Solicitations

•Flowdown Provisions

•Representations

Award

• Disclosures

• Notification

• Flowdowns

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Exercises: Real World Scenarios

Scenario #1: Government contractor submits and maintains a CAS disclosure statement, but is not CAS covered

Scenario #2: Government contractor maintains inconsistent and unreliable CAS applicability data, and changes methodology for assessing CAS covered contracts

Scenario #3: Government contractor manages CAS flow downs to lower tier contractors by issuing multiple awards under regulatory thresholds

Contact Information

John HindmanBaker Tilly Virchow Krause, LLPJohn.Hindman@bakertilly.com703-923-8583

Jack CovielloBaker Tilly Virchow Krause, LLPJack.Coviello@bakertilly.com703-923-8676

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