Deltek Insight 2011: New DFARS Business Systems Rule & Your Accounting System

ECT-202New DFARS Business Systems Rule & Your Accounting System

May 17, 2011

Presented byMichael Steen, CPA

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DFARS Business Systems Rule & Your Accounting System: Presentation Topics

Overview of the proposed rule

Status of the rule (still a proposed rule as of March 2011) Why DOD believes it needs a rule Details of the proposed rule including:

• The six systems defined within the rule

• The criteria for government evaluations of compliance

• The process for government evaluations of compliance

• The government leverage to motivate one to comply


DFARS Business Systems Rule & Your Accounting System: Presentation Topics

The unanswered questions What are the implications to those not directly covered by the rule? How will contract audit oversight adapt to the new requirement? How will this impact me if I am only a subcontractor on government

contracts?


DFARS Business Systems Rule & Your Accounting System: Overview of the Proposed Rule

DFARS Case 2009-D038 (www.regulations.gov) Posted in the Federal Register December 3, 2010 (a significant rewrite of the

January 2010 proposed rule) Public Comments through January 10, 2011 (all favorable—well not exactly) Target date for issuing a final rule---there isn’t one Background (as stated within the proposed rule)

• DOD is defining six business systems which must be adequate• DOD is proposing a compliance enforcement mechanism (to withhold

payments on contracts with the clause)


DFARS Business Systems Rule & Your Accounting System: Status of the Proposed Rule

Public comment cutoff was January 10, 2010 Heralded (by DCAA Director) as one of three key factors for achieving more cost

effective government contracts DFARS Council (which published the rule) does not publish expected or target

dates for a final rule Rule will not be effective until:

• It is published as a final rule (included in a DFARS contract clause) and• A company is awarded a contract with the clause


DFARS Business Systems Rule & Your Accounting System: Why DOD Needs the Rule

Originated from Commission on Wartime Contracting (CWC) Hearings DCAA (Defense Contract Audit Agency) assertions that billions at risk (anecdotal

evidence and a few “attention grabber” examples) DCMA (Defense Contract Administration Agency) assertions that it had no

“enforcement” or “compliance mechanism” CWC conclusion that DCAA-DCMA working relationship was dysfunctional CWC assertion that business systems internal controls are the first line of

defense against fraud, waste and abuse Congressional Hearings in addition to CWC Hearings

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DFARS Business Systems Rule & Your Accounting System: Six Systems Defined

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Accounting (auditor) Estimating (auditor) Purchasing (auditor or purchasing system analyst) Earned Value Management/EVMS (auditor or functional specialist) Material Management & Accounting/MMAS (auditor and functional specialist) Government Property Management (property administrator)

NOTE: The rule will be incorporated into a DFARS contract clause 252-242-7XXX which will be required in contracts greater than $50 million (assume contract value is the maximum including all options)


DFARS Business Systems Rule & Your Accounting System: Evaluation Criteria

Criteria established for each applicable system Defines a system deficiency as “a failure to maintain one or more system

criteria of an acceptable business system” System deficiencies will be reported in sufficient detail to allow the contracting

officer to “potential adverse impact to the Government” Establishes a process for initial review, adequacy determination, follow-up and

monitoring corrective action plans/actions, decreasing or increasing withholds Mandates withholds for a system deficiency

• 5% (or 2% for small business) for one inadequate system• 20% maximum withholds (large business) for multiple deficient systems• Withholds applied to all forms of payments on contracts with the DFARS clause

and in addition to any other withholds under other contract provisions• Withholds are amounts sufficient to protect the government’s risk

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DFARS Business Systems Rule & Your Accounting System: Evaluation Criteria--Examples


Estimating System DFARS 215.407-5-70 & 252.215-7002 Revised proposed rule eliminated ambiguities such as “as applicable”

Criteria previously exists in -7002; examples:

• Maintained, reliable and consistently applied• Produces verifiable, supportable and documented cost estimates that are

adequate for negotiation• Integrated with the contractor’s related management systems• Subject to applicable financial control systems• NEW: Contractor compare projected results to actual results and analyze any

differences

Estimating system “disclosure” required if cumulative DOD awards > $50mil (which includes timely notification of significant changes to cost estimating system)

Contracting Officer determination (acceptable/approved or unacceptable/disapproved based upon the auditor’s documented findings)

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Accounting System DFARS 242.7501 & 252.242-7YYY Applicable to cost-type, incentive-type, time & materials or labor hour contracts

or contracts with progress payments, percentage or stage of completion or certain construction contracts

Includes systems and subsystems for accounting methods, procedures and controls to gather, record, classify, analyze, summarize, interpret, and present accurate and timely financial data

18 System Criteria

• Sound internal control environment, logical and consistent method for accumulation and allocation of indirect costs

• Accumulation of costs under a general ledger control and reconciliation of subsidiary ledgers with the GL

• Monthly determination of costs charged to a contract

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Accounting System DFARS 242.7501 & 252.242-7YYY 18 System Criteria (continued)

• Exclusion from costs charged to government contracts FAR Part 31 unallowble costs and other contract provisions

• Identification of costs by contract line item (if applicable)• Cost accounting information to comply with Limitation of Fund & Limitation of

Costs, allowable cost and payment clause, calculation of indirect rates, and billings which can be reconciled with the cost accounts for both current and accumulative amounts

• Adequate, reliable data for pricing follow-on acquisitions• Accounting consistent with CAS (Cost Accounting Standards) if applicable

Contracting Officer determination (acceptable/approved or unacceptable/disapproved based upon the auditor’s documented findings)

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DFARS Business Systems Rule & Your Accounting System: Evaluation Criteria


EVMS, MMAS, CPSR, Government Property EVMS (252.234-7002) must comply with ANSI/EIA-748 (34 criteria) MMAS (252.242-7004) which includes “desirable” goals of:

• 98% Bill of Material accuracy• 95% Master Production Schedule accuracy• 95% Inventory accuracy

Government Property (252.245-7XXX) must be in accordance with FAR 52.245-1(f)

CPSR (252-244-7XXX) 23 Criteria (essentially unchanged from previous criteria)

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DFARS Business Systems Rule & Your Accounting System: Evaluation Process


Government review initiated by the Contracting Officer (CO) Functional specialist and/or auditor perform the review or audit and document

findings and recommendations in a report to the CO CO if no findings>promptly notifies the contractor and approves the system CO if findings:

• Initial determination on any system deficiency• Notify contractor in sufficient detail to allow the contractor to understand the

deficiency and the potential harm to the government• Request contractor response within 30 days• Evaluate the contractor response in consultation with the auditor and make a

final determination



Government review initiated by the Contracting Officer (CO) CO if findings and final determination of deficiencies (continuation):

• Request within 45 days either correction of deficiencies or corrective action plan

• Disapprove the system• Withhold in accordance with 252.242-7XXX

CO shall promptly approve a previously approved system when the CO determines that the contractor has substantially corrected all system deficiencies removing the potential risk of harm to the Government

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Random Observations Contracting Officers (DCMA) are openly stating that they must conform to the

audit report (findings and recommendations) Audits are not timely (initial business system audits or follow-up audits of

corrective actions) Follow-up audits will assert that a reasonable amount of time has lapsed in

order to evaluate the corrective actions vis-à-vis actual transactions Follow-up audits will not be limited to an evaluation of the corrective actions

Government leverage is obviously the withholds and the unpredictable timing of follow-up reviews, results and release of withholds (note withholds will apply even after a CPFF contract is physically complete)


DFARS Business Systems Rule & Your Accounting System: The Unanswered Questions

Business Systems Rule only applies to future DOD contracts > $50mil FAR Part 9.104-1 Contractor Responsibilities-General standards and 9-104-4

Subcontractor Responsibilities Accounting system requires DCAA audit utilizing a SF1408 (Standard Form)

which includes 13 of the 18 criteria (from the business systems rule) Accounting system is generally considered a prerequisite (must have been

audited and deemed adequate before a cost-type contract is awarded) System inadequacy and procedures/timeline for corrective actions, audit follow-

up, etc. are ill-defined and unpredictable FAR Part 9.104-1 deficiency implicates “hold” on future contract (or subcontract)

awards



Business Systems Rule and Contract Audit Oversight DCAA is pilot testing its business systems audits (displacing “ICAPS”) Pilot testing involves a “cast of thousands” with very few predictable results

• System audits will involve a large number of transactions for substantive testing

• System audits will most likely involve statistical sampling (DCAA issued two policies concerning statistical sampling)

• System audits/statistical sampling will involve DCAA requests for filtered or purified sampling universe, contractor demonstration that sampling universe is complete

• Audit will report deficiencies or lack thereof, but adequate or inadequate opinion will defer to the Contracting Officer



Business Systems Rule and Subcontractors Rule will flow down if subcontract value > $50 mil or prime contractor insists on

flowing it down (regardless of subcontract value) Prime contractor will incorporate “indemnification” clause wherein government

withholds partially flow down to subcontractor(s) Additional pressures on prime contractor for expanded access to subcontractor

business systems (accounting, estimating, purchasing, etc.) if government has not already reviewed/audited the subcontractor (as a prime on a government contract)



Business Systems Rule and Non-DOD Agencies Rule will not apply to civilian agencies; however FAR 9.104 does apply DCAA untimely audits (all) implicates civilian agencies will not necessarily involve

DCAA in any audits and will have no incentive to embrace the DFARS Business Systems Rule (notwithstanding the fact that DCAA’s Director has stated that this rule is one of three “silver bullets” for government cost reductions)


Although the revised rule maybe an improvement over the initial proposed rule, as the saying goes……….


In terms of predicting if, how and when the new rule will be implemented, your best tool is………………..


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Deltek Insight 2011: New DFARS Business Systems Rule & Your Accounting System

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