"Alert" is a periodic communication from Gelman, Rosenberg and Freedman, CPAs, to keep our government contractor clients, associates and friends informed on issues impacting the industry.

Minority Business Development Agency
March 2010

While attending the National Institute of Standards and Technology/Montgomery County Chamber of Commerce Industry day, we learned about new initiatives that may help minority-owned businesses in the area.

As an offshoot of the Department of Commerce, the Minority Business Development Agency (MBDA) functions as a source of private equity, bonding/loan referrals, and strategic partnering for minority-owned businesses of all sizes. Their core focus is on companies with between $500,000 and $1 million in revenue, but they have recently widened their focus to incorporate larger entities as well.

Additionally, through MBDA, contractors can register for an Online Bid Matching System for free. There is more information on their web site: http://www.mbda.gov/.

After speaking with some the staff, it really appears that they are genuinely interested in helping minority-owned businesses.

If you have any questions, let us know.

Current DCAA Initiatives
February 2010

Recently, a member of GRF’s Government Contractor Practice attended an Institute of Management Accountants Breakfast Meeting, which featured a presentation on current DCAA initiatives by Maria A. Davey, MBA, CPA, Branch Manager of the DCAA Reston Branch Office.

According to Ms. Davey and internal memos from DCAA, below are some of the current initiatives and brief summaries regarding their importance:

• Audit Guidance on the Status of Contractor Systems of Internal Control (Memorandum for Regional Directors dated October 22, 2009)
• An internal control audit report is no longer current if it has not been audited in the last four years, or has been significantly changed since the last audit.
•  Non-current audit reports may result in additional disclosures and expanded audit testing.
• While internal control systems audits are usually conducted only at major contractor locations, we anticipate these audits may flow down to smaller contractors.
  
  
• Audit Guidance on Review of Dependent Health Benefit Costs (Memorandum for Regional Directors dated August 24, 2009)
• Auditors need to make sure that a contractor’s costs (both forecasted and incurred) do not include health benefit expenses for ineligible dependents.
• Auditors must also verify that the contractor has adequate procedures that ensure benefits are paid only to employees and eligible dependents. Failure to have these measures in place will be reported as an internal control deficiency.

• FAR Revisions Related to Contractor Code of Business Ethics and Conduct (Memorandum for Regional Directors dated July 23, 2009)
• FAR has been revised to require contractors to have the following:
• A written code of business ethics and conduct
• A business ethics and compliance training program
• An internal control system that ensures improper conduct is discovered, disclosed, and corrected quickly
• Failure to promptly report wrong doing will be reported as an internal control deficiency.

• Audits of Subcontractors’ Forward Pricing Proposals (Memorandum for Regional Directors dated June 30, 2009)
• Auditors can audit subcontractor proposals BEFORE the prime contractor completes its proposal and/or its subcontractor analyses, under certain conditions:
• The proposal is approved by subcontractor management
• The prime contractor has submitted the subcontractor proposal to the government and has asserted (in writing) that they intend to work with the subcontractor
• The subcontractor proposal is ready to be examined
• The CO, prime auditor, or high-tier subcontractor auditor requests an audit and determines that support is necessary
• An audit of the subcontractor proposal does not relieve the prime contractor from performing a price/cost analysis.
  
  
• Audit Guidance on Approving and Rescinding Contractor’s Authorization to Participate in the Direct Bill Program for Major Contractor’s
• DCAA Field Audit Offices were instructed to ensure, by May 2009, that all known major contractors with direct billing systems had not changed their systems since their last audit.
• If there have been changes, the DCAA will immediately provide verbal and written notification that the contractor’s participation in direct billing will be canceled in 30 days.
• Auditors should begin an audit of the billing system immediately and, if the system is deemed adequate, the contractor will be reauthorized for direct billing.

Allowability of Business Meals

November 2009

In October 2009, a conference sponsored by the Institute of Management Accountants included a session on Cost Principles and Cost Accounting Standard Updates.  During that presentation, the speaker indicated that DCAA is taking a strict stance on the allowability of business meals.  The DCAA position is that meals are unallowable if a contractor cannot establish that there was no other time to discuss business than meal time.

Since many of our federal government contractors have in their chart of accounts an expense line for business meals, we wanted to alert you to this DCAA position and suggest that you review your policies and procedures regarding business meals to ensure that you are in compliance with the FAR. 

The following are relevant sections of the DCAA Contract Audit Manual and FAR 31.205 regarding business meals.

DCAA Contract Audit Manual

7-1103.3 Business Meals

1. For individuals on official travel, assure the meal expense is not included in both the claimed travel costs and subsistence costs included as part of organizing the meeting.
2. For individuals not on official travel, assure that any meal expense is an integral part of the meeting as described in FAR 31.205-43(c), necessary for the continuation of official business during the meal period, and not a social function.

7-1103.4 Documentation

1. Determination of allowability requires knowledge concerning the purpose and nature of activity at the meeting or conference.  The contractor should maintain adequate records supplying the following information on properly prepared travel vouchers or expense records supported by copies of paid invoices, receipts, charge slips, etc.
2. Date and location of meeting including the name of the establishment.
3. Names of employees and guests in attendance
4. Purpose of meeting
5. Cost of the meeting, by item.
6. The above guidelines closely parallel the current record-keeping requirements in Section 274 of the Internal Revenue code for entertainment costs as a tax deductible expense.  Where satisfactory support assuring the claimed costs are allowable conference expenses is not furnished, the claimed conference/meal costs and directly associated costs should be questioned.

FAR 31.205-43(c)

The following types of costs are allowable . . .

(c) When the principal purpose of a meeting, convention, conference, symposium or seminar is the dissemination of trade, business, technical or professional information or the stimulation of production or improved productivity –

                (1) Costs of organizing, setting up, and sponsoring the meetings, conventions, symposia,etc., including rental of meeting facilities, transportation, subsistence, and incidental costs;
                (2) Costs of attendance by contractor employees, including travel costs; and
                (3) Costs of attendance by individuals who are not employees of the contractor, provided –

(i) Such costs are not also reimbursed to the individual by the employing company or organization, and
(ii) The individuals’ attendance is essential to achieve the purpose of the conference, meeting,convention, symposium, etc.

Government Contractors Now Required to Use E-Verify to Confirm Employee Work Authorization

October 2009

On September 8, 2009, a new FAR Amendment became effective requiring Government Contractors to use E-Verify to confirm employee work authorization.

E-Verify is a joint venture between the Department of Homeland Security’s US Citizenship and Immigration Services and The Social Security Administration. Employers can use the system to check the authorization and Social Security Numbers of employees against a national online database as part of the form I-9 process. The I-9 forms will still be required.

According to US Citizenship and Immigration Services, the new rule applies to the following contracts:

1. “Prime federal contracts with a period of performance longer than 120 days and a value above the simplified acquisition threshold ($100,000).”
2. “Subcontracts that flow from those prime contracts…for services or for construction with a value over $3,000.”
3. “Existing indefinite-delivery/indefinite-quantity contracts…for future orders if the remaining period of performance extends at least six months after the final rule effective date, and the amount of work or number of orders expected under the remaining performance period is substantial.”

Per USCIS, the E-Verify rule does not apply to the following:

1. Contracts that include only commercially available off-the-shelf (COTS) items (or minor modifications to a COTS item) and related services;
2. Contracts of less than the simplified acquisition threshold ($100,000);
3. Contracts less than 120 days; and
4. Contracts where all work is performed outside the United States.

According to the new rule, all employees (old and new) who are “assigned to the contract” must be checked through E-Verify. Employers must “Enroll as a Federal Contractor in the E-Verify program within 30 calendar days of contract award,” and “Within 90 calendar days of enrollment in the E-Verify program, begin to use E-Verify to initiate verification of employment eligibility of all new hires of the Contractor, who are working in the United States, whether or not assigned to the contract, within 3 business days after the date of hire.” Additionally, the rule states, “The Contractor may elect to verify all existing employees hired after November 6, 1986, rather than just those employees assigned to the contract.” This needs to be done within 180 days of either enrollment in to E-Verify program, or notification to E-Verify of intent to exercise this option.

If you have any questions, please contact us.

For more information:

Read the full text of the rule here: Part 1, Part 2

USCIS E-Verify Frequently Asked Questions

Proposed changes to FAR Rules on Quick Close-Outs and Adequate Indirect Cost Rate Proposals

September 2009

On August 20, 2009, the Department of Defense, the General Services Administration, and NASA submitted proposed revisions to the FAR rules governing Contract Closeouts.  Essentially, the new rules revise the procedures for clearing final patent reports and quick closeouts, as well as describe what constitutes an adequate final indirect cost rate proposal and supporting data.

The major proposed changes include requiring supplemental information on internal control, updating cumulative direct and indirect costs claimed and billed within 60 days after settlement of final indirect cost rates, and making the prime contractor responsible for settling subcontractor amounts and rates (including the completion invoice).

Below is a detailed breakdown of the proposed changes.  Read the full text of the proposed rule changes for more information.

PROPOSED FAR REVISIONS

1. FAR 4.804-5 – set a timeframe of 60 days for clearing a final patent report
   
2. FAR 42.705-1 – language for cognizant auditor to determine adequacy of contractor’s proposal for audit and language
   
3. FAR 42.708 – increasing dollar threshold and revising percentage limitation in existing quick-closeout criteria
• Current – total unsettled indirect cost to be allocated to any one contract does not exceed $1,000,000
• Proposed – total unsettled indirect and indirect costs to be allocated to any one contract do not exceed $4,000,000 and do not exceed 20% of the total contract
  
4. FAR 52.216-7 – description of what data shall be submitted in an adequate final indirect cost rate proposal, what supplemental data required for audit, and a requirement for contractor to update cumulative costs claimed and billed within 60 days of rate settlement
• Current – did not include a description of what should be included in the indirect cost rate proposal
• Proposed –
  • Spells out what  is covered in the ICE format – required schedules A through O, and supplemental information required for the audit that may be submitted with the final indirect cost rate proposal. 
  • Added clause requiring update of the schedule of cumulative direct and indirect costs claimed and billed within 60 days of settlement of final indirect cost rates. 
  • Added language regarding subcontractors:  The completion invoice shall include settled subcontract amounts and rates.  The prime contractor is responsible for settling subcontractor amounts and rates included in the completion invoice and providing status of subcontractor audits to the contracting officer upon request.
5. FAR 52.216-8 – withhold fixed fee to protect government’s interest
• Current – says contracting officer may withhold up to 15%
• Proposed – says the contracting officer will withhold up to 15%
  
6. FAR 52.216-9 – withhold fixed fee-construction to protect government’s interest – same as FAR 52.216-8
   
7. FAR 52.216-10 – withhold incentive fee to protect government’s interest – same as FAR 52.216-8
   

FAR 52.216-7 – SUPPLEMENTAL INFORMATION

It appears that new supplemental information is required during the audit process, including:

1. List of work sites and number of employees assigned to each site
2. Management letter from outside CPAs concerning any internal control weaknesses
3. Actions that have been and/or will be implemented to correct the internal control weaknesses
4. List of internal audit reports issued in the fiscal year
5. Annual internal audit plan of scheduled audits to be performed in the fiscal year
6. Federal and state income tax returns
7. Minutes from board of directors meetings

DCAA Issues Memo on Incurred Cost Electronically (ICE) Model

June 2009

In a recent internal memorandum, the Defense Contract Audit Agency revealed that errors were discovered in the Incurred Cost Electronically (ICE) Model Version 2.0.0, which was issued in May of last year.

The errors affected the following calculations:

1. G&A/G&A Cost of Money (COM) rate/allocation where a value-added base is used
2. G&A rate/allocation when fringe on IR&D/B&P is applied as an intermediate allocation
3. Overhead/Overhead COM rate/allocation where fringe is included in the overhead base
4. G&A COM pool when material COM is applied to IR&D/B&P material

DCAA removed version 2.0.0 from the public web site once the errors were identified. Version 2.0.1, which corrects the programming errors, has since been posted.

President Obama Pledge to Revamp Government Contracting

March 2009

On Wednesday, President Obama declared that the government contract award process should be overhauled to target waste.  Much of the focus will be on defense contractors.

The Wall Street Journal recently produced an article with more information on the initiative. The article can be read here.

If you have any questions, please be sure to contact your Certified Public Accountant.

New Far Rule - Mandatory Disclosure of Violations

January 2009

On December 12, 2008, a new Final Rule added to the Federal Acquisition Regulations (FAR) went into effect. The Final Rule contains a number of new requirements relating to Contractor business ethics.

The new rule requires that all Contractors disclose to the appropriate agency Office of Inspector General any of the following:

1. Criminal violations involving fraud, conflict of interest, bribery or gratuity
2. Civil violations of the False Claims Act
3. “Significant overpayment” in connection with any stage of the contract

The disclosures only need to be made when the Contractor has “credible evidence” of any principal, employee, agent or subcontractor of the company committing such a violation. Failure to disclose such violations in a timely manner (within three years after final payment on the contract) could lead to suspension or debarment.

This rule is a significant change from the way Government Contracts were previously administered. In the past, such disclosures were not mandatory and the new requirements now apply to contracts for commercial items and contracts awarded (and performed) outside of the US. Small businesses are also affected by the new requirements.

The rule also stipulates the internal control systems that must be in place for large and medium-sized companies. According to the text of the Rule, the minimum requirements for the system are as follows:

1. Add a new paragraph requiring assignment of responsibility within the organization for the ethics awareness and compliance program and internal control system.
2. Require reasonable efforts not to include as principals individuals who have engaged in illegal conduct or conduct otherwise in conflict with the contractor’s code of business ethics and conduct.
3. Provide additional detail with regard to the requirement for periodic reviews.
4. Require that the internal reporting mechanism or hotline must allow for anonymity or confidentiality.
5. Provide that disciplinary action will be taken not only for improper conduct, but also for failing to take reasonable steps to prevent or detect improper conduct.
6. Require timely disclosure, in writing, to the agency OIG, with a copy to the contracting officer, whenever the contractor has reasonable grounds to believe that a violation of Federal criminal law has been committed in connection with the award or performance of any Government contract performed by the contractor or the award or performance of a subcontract thereunder.
7. Require full cooperation with any Government agencies responsible for audit, investigation, or corrective actions.

Small businesses and commercial item contracts are not required to have a system with the above criteria, but are still required to disclose any violations.

For more information about the Rule, please visit http://www.usda.gov/oig/webdocs/FARAmendment2008.pdf.

For more information about the new rule, other requirements of FAR, or any questions relating to the financial stability of your business, please contact your Certified Public Accountant.

Treasury Issues Guidance on Contract Awards and Conflicts of Interest Under TARP

November 2008

This fall, President Bush signed into law the Emergency Economic Stabilization Act, which authorizes the Troubled Asset Relief Program. The Act empowers the Treasury Department to broadly select and manage contractors by waiving specific FAR provisions, due to the urgency of the United States’ financial situation.

The Treasury Department issued interim guidelines for addressing conflicts of interest among contractors providing services under the program.  However, some in Congress raised concerns that the guidelines do not go far enough in addressing potential conflicts of interest and whether or not the contracts would be competitively bid upon.

According to the Federal Contracts Report, Prospective Contractors should obtain non-disclosure and conflict of interest agreements in advance of sending out a solicitation.  The solicitation should:

1. instruct offerors of any potential or actual conflicts of interest that could arise; and, if a conflict does arise, indicate that the offeror must submit a mitigation plan as part of its proposal;
2. include evaluation factors that Treasury will use to assess the mitigation plan;
3. identify minimum standards for the mitigation plan;
4. include a statement on when the contractor will owe a fiduciary duty to Treasury;
5. include provisions that the prime contractor obtain similar non-disclosure/conflict of interest agreements from any subcontractors, if appropriate;
6. and, state that Treasury will oversee and enforce the mitigation plan.

Mitigation plans will be examined and judged by Treasury on a case-by-case basis.  Once awarded, the mitigation plan will be incorporated into the contract, making its provisions contractually binding. To learn more about Government Contracts and their regulations under EESA, please visit www.treasury.gov/initiatives/eesa/authorities.shtml.

New FAR Codes of Conduct and Compliance Programs

August 2008

Effective for all federal government contracts entered into after December 23, 2007, the Federal Acquisition Regulation (FAR) was modified to substantially increase the ethics and compliance requirements for government contractors.  The new regulations implement several mandatory requirements, but some contractors and certain types of contracts are exempt.
 
Refer to FAR Part 3, Subpart 3.10 titled "Contractor Code of Business Ethics and Conduct" for more details.  The threshold for the application of mandatory requirements is contracts that are expected to exceed $5 million in value and that have a performance period of 120 days or more.  If you have represented yourself as a small business concern, the mandatory requirements do not apply.
 
Be aware that all contractors, whether large or small, should have an ethics and compliance training program.  If you are a small business and win a covered contract, you must promote compliance.  If you are a large business and win a covered contract, you must both promote compliance and establish an awareness program.
 

For more information, please contact

Jerry Rosenberg, CPA, CFP
Judy Lasley, CPA
Gelman, Rosenberg & Freedman, CPAs
4550 Montgomery Ave, Suite 650N
Bethesda, Maryland 20814
301-951-9090
jrosenberg@grfcpa.com
jlasley@grfcpa.com

The information here is provided by Gelman, Rosenberg & Freeman, CPAs for general information purposes.  It is not intended to replace or substitute legal, accounting, tax or other professional advice, consultation or service. Before making any decision or taking any action, we encourage you to consult with one of our government contractor accounting and consulting specialists.