2. 22 Presented by: Chad Braley, CEO & Managing Director Capital Edge Consulting Breakout Session D5 Date: November 6, 2012 Time: 11:15am-12:30 pm The Competitive Advantage of Compliance in Today’s Acquisition Environment

3. 33 Recent Events Impacting the Current Contracting and Audit Environment

4. 44 Events Impacting the Defense Contract Audit Agency GAO Reports on DCAA in 2008 and 2009 Found DCAA non-compliant with GAGAS –Working papers did not support report findings and opinions –Inadequate Field Work to support conclusions –Supervisors changed report opinions without adequate evidence to do so Found that supervisors had advised auditors not to speak to the GAO Relationships between contractors, procuring agency, and the auditors reflected potential lack of independence

5. 55 Events Impacting the Defense Contract Audit Agency GAO Reports on DCAA in 2008 and 2009 The 2009 GAO Study: Prompted by the results of the 2008 investigation Broader in scope – covered all regions GAO conclusion… ”Widespread Problems with Audit Quality Require Significant Reform” The Central and Western Regions had the most number of adverse findings

6. 66 Events Impacting the Defense Contract Audit Agency GAO Reports on DCAA in 2008 and 2009 Outcomes impacting the Contracting Community: DCAA “materiality threshold” appears significantly lower Increased number of (negative) internal control findings Rigid conformance with Internal Control Matrix criteria in evaluating systems More frequent application of very subjective FAR “Reasonableness” criteria to question costs No longer allowing a contractor to correct deficiencies to avoid adverse reporting

7. 77 Events Impacting the Defense Contract Audit Agency GAO Reports on DCAA in 2008 and 2009 Outcomes impacting the Contracting Community: Increased number of audits Increased scope – longer time on-site Increased requests for data and records Less communication and informal opinions during the audit… “Ambush” approach to disclosing audit issues The overall result - contractors must increase their vigilance and participation in the audit process

8. 88 Events Impacting the Defense Contract Audit Agency Commission on Wartime Contracting 2009 hearings addressed inadequate contractor business systems and found: DCMA ignored DCAA reports indicating contractor business systems were unacceptable DCMA and DCAA not working together effectively DCMA not aggressively encouraging contractors to improve business systems DCAA reports lack sufficient information for DCMA to make informed decisions Agencies are under-resourced to meet wartime needs

9. 99 Events Impacting the Defense Contract Audit Agency Commission on Wartime Contracting 2009 hearings addressed inadequate contractor business systems: The conclusion reached was that unreliable business systems generated billions of dollars of contingency-contract costs that auditors could not verify Recommendations included: –Better coordination between DCAA and DCMA –DCMA increased aggressiveness in enforcing compliance –DCAA to expand reports to be more useful

10. 10 Events Impacting the Defense Contract Audit Agency DoDIG Weighs in In a 2009 oversight review, the DoDIG found that DCMA: Routinely ignored or failed to support DCAA recommendations Provided insufficient rationale for significant adjustments to costs questioned by DCAA Did not consult DCAA prior to making a final determination on significant estimating system deficiencies (decision favorable to the contractor) The DoDIG recommended DCMA: Seek expert advice (from DCAA) on complex noncompliance issues Require contracting officers to adequately justify departures from DCAA recommendations

11. 11 Events Impacting the Defense Contract Audit Agency To Recap Oversight Activity in 2008 and 2009 GAO finds DCAA independence and audit quality issues in 2008 investigation in California GAO finds widespread DCAA independence and audit quality issues in 2009 review Commission on Wartime Contracting confirms in 2009 that significant issues exist with contractor business systems: –Dysfunctional DCMA DCAA relationship –DCAA audit reports are not adequate to support action DoDIG reports in 2009 that the relationship between DCMA and DCAA is dysfunctional –DCMA routinely ignored DCAA findings

12. 12 Reactions to Oversight Activity in 2008 and 2009 Changes in Policies and Regulations

13. 13 Events Impacting the Defense Contract Audit Agency Reactions to Oversight Activity in 2008 and 2009 Changes in Policies and Regulations Resolving DCAA/DCMA disagreements –DEC 2009 Defense Procurement and Acquisition Policy (DPAP) memo outlines conflict resolution process –DPAP policy defines disagreements as where the contracting officer…plans to sustain less that 75% of total recommended questioned cost ($10M proposal) –Provides for elevation of disagreements to Under Secretary of Defense for Acquisition and Technology Impact – DCMA rigid enforcement of DCAA findings

14. 14 Events Impacting the Defense Contract Audit Agency Reactions to Oversight Activity in 2008 and 2009 Changes in Policies and Regulations DFARS 242.70, “Contractor Business Systems” DoD revised the DFARS in February 2012 to accomplish the following with regard to Business Systems: –Clarify the definition of business systems –Clarify and define the criteria for an “acceptable” system –Clarify the responsibilities for evaluating and making determinations for “acceptance” –Providing the structure for re-determinations and withholds where systems are not acceptable

15. 15 Events Impacting the Defense Contract Audit Agency Reactions to Oversight Activity in 2008 and 2009 Changes in Policies and Regulations DFARS 242.70, “Contractor Business Systems” The revised DFARS rule includes the following changes: Replaced the ICAPS systems with 6 Business Systems: –Accounting –Estimating –Material Management –Purchasing –Earned Value Management –Contractor Property

16. 16 Events Impacting the Defense Contract Audit Agency Reactions to Oversight Activity in 2008 and 2009 Changes in Policies and Regulations DFARS 242.70, “Contractor Business Systems” The revised DFARS rule includes the following additional changes: Defined “significant deficiency” as “…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…” Requires CO withholds when a system is disapproved Requires a 5% withhold for each deficient system up to 10% in total (Can be reduced after corrective action plan is submitted) Defines “covered contract” as one subject to CAS (eliminating small businesses)

17. 17 Business System Compliance It is imperative that contractors ensure their business systems: –Meet the criteria outlined in the specific audit programs and DFARs rule, –Are supported by policies and procedures that are current, accurate, complete, and reviewed annually, –Have adequate internal controls that are functioning properly –Are consistently monitored

18. 18 Ramifications of Deficient Systems Contractors may be precluded from award if they have current “inadequate” systems determinations (typically stated in RFP) Contract Withholds (the proverbial cash flow killer) Increased audit scrutiny, which will require additional contractor resources, time, and money

19. 19 Key Points to Remember If your system is “unaccessed” you cannot be precluded from bidding Understand the regulations that you are subject to and those that you are not so that you can accurately communicate w/ the customer DON’T be afraid to pick up the phone and involve your CO/ACO to ensure they are up to speed with any audits you may be currently undergoing Ensure DCAA is following their “Rules of Engagement” to ensure adequate communication during the audit.

20. 20 Key Points to Remember If you are the prime, DCAA now expects you to be adequately monitoring your subcontractors, including but not limited to: –Ensuring their systems are adequate –Ensuring that indirect rates are current, accurate, and complete –Ensure they are submitting timely incurred cost submissions, if required Maintaining compliance can put you at a significant competitive advantage as it relates to your systems

21. 21 Additional Regulatory Guidance and How it Affects You

22. 22 Regulatory Guidance Affecting Your Financial Management Systems Federal Acquisition Regulations (FAR). Individual agency supplements (i.e., DFARS). Cost Accounting Standards (CAS). Truth-in-Negotiations Act (TINA). Generally Accepted Accounting Principles (GAAP). Contract terms and conditions

23. 23 Impact of the Procurement Regulations on Job Cost Accounting The FAR: –FAR is “umbrella” procurement regulations. –Each agency can develop its own supplement to the FAR. Key FAR sections: –Contractor Qualifications (FAR Part 9). –Contracting by Negotiation (FAR Part 15). –Cost Accounting Standards (FAR Part 30). –Cost Principles (FAR Part 31). –Contract Financing (FAR Part 32). –Major System Acquisition-EVMS(FAR Part 34). –Contract Management (FAR Part 42). –Contract Clauses (FAR Part 52).

24. 24 FAR Part 15 – Contracting by Negotiation Applies to all awards in which negotiation process takes place as basis for award. Addresses solicitation and source selection. Establishes requirements for obtaining cost or pricing or other cost information. Addresses cost and price analysis techniques. Provides 15.408, Table 15-2, which details the contractor’s responsibility when preparing proposals that require the submission of certified cost and pricing data.

25. 25 Obtaining Cost or Pricing Data Cost or Pricing Data should not be required when: CO determines that prices are based on adequate price competition. Acquisition is below $700K. Set by law or regulation. When a “commercial item” is being acquired (see FAR Part 12). Waiver granted.

26. 26 Certification Requirements Contractor must certify that it has disclosed “accurate, complete and current” cost or pricing data (FAR 15.406-2). Data must be accurate, current, and complete as of the date of price agreement – the “handshake date”. Certificate of Current Cost or Pricing Data should executed as soon as practicable after the “handshake date”. Absence of a certificate is not a defense to defective pricing allegations as a matter of law.

27. 27 Prohibition on Obtaining Certified Cost or Pricing Data Certified Cost or Pricing Data shall not be required if the contracting officer determines: –Adequate price competition exists –A commercial item is being acquired –Price set by law or regulation –A waiver has been granted –The action is a modification to a commercial contract

28. 28 Adequate Price Competition 2 or more responsive, responsible offers and –Award is made to the offeror whose proposal represents the best value and price is a substantial factor in source selection; and –There is no finding that the price of the otherwise successful offeror is unreasonable Reasonable expectation two offerors would be received but only one responsive, responsible offer was received if the Contracting Officer can determine the offeror thought there would be competition and acted accordingly Price analysis clearly demonstrates the price is reasonable based on recent competitive awards

29. 29 Subcontract Data Submission Rules Prime must submit if cost or pricing data is required and: –Subcontract is >$12,500,000; –Subcontract is >10% of proposed price and the TINA threshold is met; or –Contracting Officer considers it necessary for the proper pricing of the prime contract

30. 30 Reality of Cost & Pricing Data Many prime contractors and Contracting Officers are requiring cost and pricing data and/or certified cost and pricing data in order to cover themselves, even if an applicable exception may exist Keep in mind, just b/c you know or think that the US Government received multiple bids doesn’t mean that they did or they were any good As procurements continue to be more competitive, expect requests for more audits, cost and pricing data visibility, cost realism analysis, etc to increase

31. 31 Summary Comments Three things we know: –The contracting environment is only getting more competitive –Customers budgets are tighter than ever –Solid business systems and compliance infrastructure can be a major advantage

32. 32 Summary Comments DO NOT be afraid to communicate with your customers (people don’t like major surprises) Don’t be surprised if customers ask for much more detail than they have in the past Understand the regulations & your rights

33. 33 Chad T. Braley CEO & Managing Director CBraley@CapitalEdgeConsulting.com 855-CAP-EDGE x101 (office) 703-835-6528 (mobile) http://www.capitaledgeconsulting.com CBraley@CapitalEdgeConsulting.com http://www.capitaledgeconsulting.com