Presentation on theme: "Cost Proposals and DCAA Preaward Surveys"— Presentation transcript:
1Cost Proposals and DCAA Preaward Surveys Presented By:Jana YoungKelly L. Chanay, CPA MSADefense Contract Audit Agency(DCAA)Even though no official representation is stated or implied, where an individual uses a title or otherwise identifies herself/himself with the Department of Defense, he/she will include in all material, oral or published, a statement to the effect that his/her views do not necessarily purport to reflect the position of the DCAA or the Department of Defense.Disclaimer will be explained…
2DEFENSE CONTRACT AUDIT AGENCY OBJECTIVETo discuss Cost Proposal requirements and Preaward policies contained in FAR/DFARS and explain DCAA’s role in each.
3DEFENSE CONTRACT AUDIT AGENCY AGENDABasics about Defense Contract Audit AgencyPreaward Survey Policies – FAR/DFARFinancial Condition / CapabilityPreaward Accounting Systems
5DEFENSE CONTRACT AUDIT AGENCY Established in 1965Separate Agency of the DoDReports to DoD ComptrollerProvides Services to All DoD ComponentsProvides All Contract Audits for DoDProvides Accounting and Financial Advisory Services for DoD and Non-DoD customersOver 320 Field Audit and Sub Offices worldwide
6DCAA ORGANIZATION Director Deputy Director Executive General Counsel OfficerGeneral CounselDefense Legal ServiceAssistant DirectorOperationsAssistant DirectorPolicy & PlansAssistant DirectorResourcesMr. Bill Reed was the DCAA Director from 1986 until his recent retirement December Ms. April Stephenson, former Deputy Director is the new Director and is also one of the 5 members of the CAS Board.Mr. Reed last visited San Antonio (Brooks City-Base) in 2003 at the invitation of the local NCMA.FLAs fall under the Audit Liaison Division (OAL).Regional Offices (5)DirectorDeputy DirectorAudit LiaisonDivision (OAL)Five Regions Supervise Following Offices: TotalResident OfficesBranch OfficesSuboffices (Off-site)290Regional Offices (5): Central, Eastern,Mid-Atlantic, Northeastern, and Western
7DCAA FLAs vs. Auditors FLA Field Auditor On-Site with Customer Available for immediateadvice on cost/pricingdata and audit/financialissuesFacilitate audits/servicesOn-Site at contractor locationHas access to contractor’sbooks and records (originalsource documents – not copies)Performs audits/engagementsIssues DCAA reportsGives opinionsFLAs do not provide audit opinions, but can interpret the audit opinions furnished by the FAO. FLA can not sign documents in their capacity as representatives of DCAA, if it would give the appearance of providing an audit opinion. We can provide work product as long as no appearance of audit opinion, (e.g. source selection boards, cost estimates).
8DCAA performs more than 80 different types of audit services DCAA ServicesDCAA performs more than 80 different types of audit services
11FAR 15.402 Pricing Policy FAR 15.402 - Pricing Policy states: “Contracting Officers shall --(a) Purchase supplies and services from responsible sources at fair and reasonable prices...”Responsible Sources – FAR 9.1Fair and Reasonable Prices – FAR
12FAR 9.103 Responsible Contractors FAR – Responsible Contractors states: “Purchases shall be made from, and contracts shall be awarded to, responsible prospective contractors only.”
13FAR and DFARS Key References 9.104 Responsibility StandardsGeneral StandardsGeneral StandardsApplication of StandardsSubcontractor Responsibility9.105 Obtaining InformationFinancial Responsibility of ContractorsAccounting System and Controls
14FAR 9.104-1 General Standards FAR – “Prospective Contractor must:”Have adequate financial resourcescomply with required delivery/performance scheduleHave a satisfactory performance recordHave satisfactory record of integrity/business ethicsHave the necessary organization, experience, accounting and operational controls, and technical skills…Have the necessary equipment…Be qualified and eligible to receive an award…
15DFARS 209.104-1 / 242.7501 General Standards DFARS (e) & – Applicable to:Cost-Reimbursement or Incentive type contractsContracts billed using progress payments“… prospective contractor’s accounting system and related internal controls must provide reasonable assurance that—(i) Applicable laws and regulations are complied with;(ii) The accounting system and cost data are reliable;(iii) Risk of misallocations and mischarges are minimized; and(iv) Contract allocations and charges are consistent with invoice procedures.” (ie, billed the same way as accounted for)
16FAR 9.104-3 Applying the Standards FAR – Application of StandardsAbility to obtain resources – includes financial resources, accounting controls, technical skills, and equipmentSatisfactory performance record“Affiliated concerns” (ie, related parties)Small business concernsIf found non-responsible, may be referred to SBA to obtain a Certificate of Competency (COC)May be found non-responsible if unable to comply with subcontracting limitations in FAR (ie, 50% rule)
17FAR 9.104-4 Subcontractors FAR 9.104-4 – Subcontractor Responsibility Generally, prime contractor determines subcontractor responsibility and may be required to show evidence of responsibilityGov’t may directly determine subcontractor responsibility:When contract involves medical suppliesWhen contract involves urgent requirementsSubstantial subcontracting is proposed
18FAR 9.105 Obtaining Information FAR (b)(1) – Obtaining Information“Generally, the contracting officer shall obtain information regarding the responsibility of prospective contractors, including requesting preaward surveys when necessary, promptly after a bid opening or receipt of offers.However, in negotiated contracting, especially when research and development is involved, the contracting officer may obtain this information before issuing the request for proposals.”
19FAR 9.105 Obtaining Information FAR (b)(2)(ii) – Obtaining Information“…the contracting officer shall obtain from the auditor any information required concerning prospective contractors' financial competence and credit needs, the adequacy of their accounting systems, and these systems' suitability for use in administering the proposed type of contract .”
20FAR 19.6 & 19.8 Small Businesses & 8(a) Small Businesses are exempt from the 19 Cost Accounting Standards (CAS) per 48 CFR 99However, small businesses are not exempt from:Accounting for their costs on cost-type contractsMaintaining adequate financial resources to performPCOs should still request Preaward SurveyIf small business does not meet FAR Part 9.1, they may apply for SBA Certificate of Competency (COC)FAR and
21FAR 1.102-4(e) Role of the Acquisition Team (FAR Part (e))“...If a policy or procedure, or a particular strategy or practice, is in the best interest of the Government & is not specifically addressed in the FAR, nor prohibited … the Team should not assume it is prohibited. Rather, absence of direction should be interpreted as permitting the Team to innovate & use sound business judgment that is otherwise consistent with law & within the limits of their authority.”
22DCAA Services - Preaward Surveys Financial Capability reviews (DCAA code 17600)Accounting System reviews (DCAA code 17740)Customer can request these reviews BEFORE obtaining proposals from the contractors
23DCAA Services - Preaward Surveys – BEST PRACTICE Suggested sequence of steps during source selection:Prospective offerors who intend to bid indicate readiness for DCAA Accounting System and Financial Condition reviews 2-3 months prior to the date proposals will be due:DCAA/Contractor/PCO works to resolve findingsOfferors subsequently submit proposalsCustomer evaluates price/cost & documents Ktr responsibility
24DCAA Services - Financial Condition/Capability Financial Condition Risk Assessment – focuses on current condition based on existing financial data, past trends, ratiosPerformed annuallyFinancial Capability Audit – focuses on contractor’s future capabilities to perform contracts based on projected business, future cash flows, lines of credit to sustain them, etcPerformed if Financial Condition Risk Assessment reveals problems
25DETAILED RISK ASSESSMENT AND AUDIT SUMMARY OF POTENTIAL CONSIDERATIONS FINANCIAL CONDITIONHistorical data which represents a snapshot at a point in time.FINANCIAL CAPABILITYProspective data based on current and near term.PASTFUTUREZ-score recently eliminated… However,Realize that DCAA evaluates many factors – not any single factor, metric, or magic formula to make an evaluation judgment. We look for what’s behind and beyond the metrics.Financial Condition looks at Past Activity (DCAA risk assessment)Financial Capability is concerned with Future ActivitiesDCAA will form an opinion only after reviewing all the factors – Acceptable, Unfavorable, Adverse, or Disclaimer of OpinionIn the past, computation of the Z-Score has always been considered a risk assessment step and was never reported as the basis for an opinion. If you use a Z-Score, you should be able to explain the financial health of the company without using a Z-Score. Stress points might include:Downward trends in key ratiosUnfavorable ratios compared to industryIncreased losses and debtsWeak Cash Flows and Working CapitalInsufficient sources of creditFINANCIAL CONDITIONRISK ASSESSMENT ONLYNO AUDIT OPINIONFINANCIAL CAPABILITY AUDITAUDIT OPINION based both on Risk Assessment and Audit Procedures
26RFP Items to Request - Financial Condition At a minimum RFP should request offerors:Identify significant related parties / extent of parent controlRequest financial data for Parent co. if they control cash/creditSuggest corporate guarantee when Parent controls cash/creditThree to Five (3-5) years of financial statements to includeAudited, Reviewed, Compiled or Certified Financial StmtsBalance sheet, Income Statement, and Cash Flow StatementNotes / disclosures to financial stmts; explain unusual itemsLatest interim YTD financial statements for current periodCredit Line and Significant Loan Information– including current amount available, date when it becomes due
27Key Financial Condition Steps Compute several Key Financial RatiosBenchmark Key Financial Ratios to IndustryEvaluate Trends over a 3+ year periodGo Beyond Metrics & evaluate stress points:Unpaid Payroll TaxesPension FundingInadequate InsuranceNote and Disclosures with regards to:Internal Control IssuesRelated Party Interests, Organizational Changes, etcGoing concern issues, disputes, claims, litigationWhat areas does the contracting center typically evaluate compared with this list?The major evaluation steps include evaluating trends and benchmarking the key ratios to industry.Note that 2 years (or 2 data points) will not identify a trend. You need at least 3 data points to show any kind of trend.When a company is in distress -- taxes, pension and insurance are among the first to go – so we look at that.
288 Key Financial Ratios Ratio Formula Current Ratio Current Assets / Current LiabilitiesAcid Test (Quick Ratio)Liquid Assets / Current LiabilitiesReturn on InvestmentNet Income / Total AssetsDebt to EquityTotal Debt / Stockholder’s EquityX1 (Per Altman Model)Working Capital / Total AssetsCash Flow to DebtCash Flow / Total DebtCash Flow to SalesCash from Operations / SalesDebt CoverageTotal Debt / Cash from OperationsThese are the 8 Key Financial Ratios we use to begin measuring the financial health of a contractor. The are properly balanced drawing from:Income StatementBalance SheetStatement of Cash FlowsWhat do the last 3 ratios have in common? Note that we should be measuring cash flows from operations, investing and financing against future obligations.Cash Flow can also be measured using Cash Flow Adequacy and Cash Flow to Assets. Cash flow numbers are taken from Stmt of Cash Flows.Some studies have shown the Cash Flow to Debt to be the single best indicator of Financial Distress because you are measuring Cash against future Obligations.Also, for conservatism, we recommend using “cost basis” statements for evaluation purposes. “Current Value” means they wrote up the value of assets to appraised value, with corresponding credit to equity. Financial Health may be overstated if the “current value” is not supported.There may also be other key ratios that may be specific to the industry under review.
29Benchmarking Key Ratios We use a market survey service called CompustatIndustry codes based on NAICS or SICFor example, single family housing falls under:NAICS CodeSIC CodeIndustryDescription2361151531General ContractorsNew Single Family Housing Construction (except Operative Builders)236117Operative BuildersNew Housing Operative Builders236118Remodeling ContractorsResidential Remodelers236220Barrack & Dorm ConstructionCommercial and Institutional Building Construction
30Key Financial Capability Steps Evaluate near term Cash FlowsBudgets, forecasts, projections, workload volumeEvaluate near term Sources & UsesA/P & A/R AgingsLoans & Lines of Credit – debt schedulesNew contracts or backlogAcquisitions plannedOff balance sheet activitiesOther Significant Sources or ObligationsThis is not everything we look at to evaluate a company’s near term health, but this illustrates the major ones.Again, which of these steps does the contracting center typically review?
31DCAA Services - Preaward Accounting System (17740) Financial Accounting System is NOT the same thing as Cost Accounting SystemFinancial Accounting (eg, a P&L statement) will only report total amounts incurred for each cost element (labor, materials, etc) at company wide levelCost Accounting System distributes and allocates those costs among specific contracts, jobs or other cost objectives in causal/beneficial relationshipsLabor costs, for example, must be based on timekeeping system with hours recorded to each job, payroll cost attributed to the hours, etc
32DCAA Services - Preaward Accounting System (17740) FAR (f), DFARS (e) andAudit is recommended for flexibly priced prime contracts (eg, CPFF, T&M, LH, etc)Preaward Accounting System Audit and SF focuses on contractor’s ability to:allocate costs among contracts and CLINs in logical mannerexclude unallowable costsrecord employee labor hours by contractsegregate direct and indirect costsprovide timely, accurate cost accounting data to support billingsprovide accurate data to support incurred cost claim by contract
33Best Practices - Preaward Reviews Request Electronic Data in the RFPRequest Accounting System and Financial Capability Reviews before proposal receiptHave offeror identify location of accounting records for parent / subsidiary company
34What is a cost proposal or submission? A BREAKDOWN OF COST BY COST ELEMENT REPRESENTING COSTS THAT WERE ALREADY INCURRED (SUBMISSION) OR ARE ESTIMATED TO BE INCURRED IN THE FUTURE (PROPOSAL)
35GENERAL INFORMATION ADEQUATE COST PROPOSALS By submitting cost proposals you grant the contracting officer the right to examine records that formed the basis for the pricing proposalThe examination can take place any time before awardThe examination may include books, records, documents, electronic files & other types of factual information that will permit adequate proposal evaluation
36Typical Problems found in Proposals Failure to conform to the specifications of the request for proposalProposal not mathematically correctUnallowable cost included in proposal (far )Supporting schedules do not tie into summaryLack of coordination between company departmentsPoor or no index of cost & pricing dataLack of support for SCA or DB wages above wage determination levelNo support for indirect expenses &/or improper allocation basesInadequate or poor accounting & estimating systems
37WHAT IS AN ADEQUATE COST PROPOSAL? Completed cover letterProposal indexIdentification of cost & pricing dataAccess to recordsMaterialsPriced bill of materialsScrap/material inspectionSubcontractsInterorganizational transfers
38WHAT IS AN ADEQUATE COST PROPOSAL? THE 1st PAGE OF THE PROPOSAL MUST CONTAIN THE FOLLOWING INFO:(1) Solicitation, contract, and/or modification number;(2) Name and address of offeror;(3) Name and telephone number of point of contact;(4) Name of contract administration office (if available);(5) Type of contract action (that is, new contract, change order, price revision/redetermination, letter contract, unpriced order, or other);(6) Proposed cost; profit or fee; and total;(7) Whether you will require the use of Govt property in the performance of the contract, and, if so, what property;Chart is self explanatory
39WHAT IS AN ADEQUATE COST PROPOSAL? THE 1st PAGE OF THE PROPOSAL MUST CONTAIN THE FOLLOWING INFO:(9) The following statement: This proposal reflects our estimates and/or actual costs as of this date and conforms with the instructions in FAR (b)(1) and Table By submitting this proposal, we grant the Contracting Officer and authorized representative(s) the right to examine, at any time before award, those records, which include books, documents, accounting procedures and practices, and other data, regardless of type and form or whether such supporting information is specifically referenced or included in the proposal as the basis for pricing, that will permit an adequate evaluation of the proposed price.(10) Date of submission; and(11) Name, title and signature of authorized representative.Chart is self explanatory.The signature of the authorized representative must be someone of sufficient authority to bind the company contracturally.
40WHAT IS AN ADEQUATE COST PROPOSAL Direct laborBasis for estimate of labor hrs (actual/engr est)Basis for labor ratesescalation factors (if proposed) (DRI/BLS)Indirect costsClear explanation of rate developmentList of expenses comprising the poolIs the selection of base equitable?Do pool & base costs reflect known facts?Other direct costs
41WHAT TO EXPECT - DCAA AUDIT PROCESS Auditor will review proposal for adequacyAuditor will establish mutually acceptable date for audit to beginAuditor will conduct entrance conferenceAuditor will review the proposal using generally accepted government auditing standards (GAGAS)Auditor will conduct exit conferenceAuditor will issue audit report to the contracting officerContractor generally must request copy of audit report from the contracting officer