Situation: You price a product/job/contract based on best available information.  You submit your proposal.  Eureka, You Win!  You submit an invoice and your customer informs you that they will be paying by credit card.  You say great, we will get paid early.  And you know that any processing fees can be claimed as an allowable cost. 

However, did you consider this cost when you prepared your proposal?  Did you take into consideration that if the government decided to pay by credit card it would cost you between 1.5% and 4.0% in processing fees?

INQUIRY Paul: I just reviewed part of your presentation to the audience at the American Legion.  I have a concern.  Your Indirect Costs include Fringe Benefits and Payroll Taxes.  In my experience, if I have a clerk assigned to a particular contract, I classify that clerk’s wages, H&W, payroll taxes, worker’s compensation and general liability as direct costs. This is ok as long as that clerk devotes his/her full work day to that contract.  Is there a problem here?

RESPONSE - Good question and it shows colleagues such as you are delving into the issues, statements and opinions.  We received great response on this overview presentation. Feedback, such as yours provide our members/readers with valuable insight from various points of view. 

First of all, there are various ways to classify cost and it depends on a company and industry.  In making presentations I strive to select what may be typically used as examples of a “concept”.  As a matter of fact, someone could look at the methodology in your inquiry and question it because it is different then there’s.  But read on and hopefully your question gets addressed. 

The Answer: It depends!  Either way could be okay, as long as the method results in a fair and reasonable assignment of the costs to final cost objectives (contracts) AND the method is consistently used.  It must also Not result in double charging of a cost to contracts.   Let's go deeper....

Pre-award versus Post-award - Survey versus Audit - Understanding the Intent and Letter of the law as it pertains to small prospective contractors accounting systems.  

Despite all of the various focus and opinions that are discussed on this topic, the following depicts my SME interpretation and preferred applicability of the current guidance and objectives to auditors, government procurement staff, and the small contractor as it relates to the pre-award survey of the accounting system, and the post-award audit option.   

The interpretation of the guidance and ensuring the customer requesting the review understands the options they have and the limitations of a small contractor are important to this process.  The post-award audit option is an important issue that the requesting customer should be aware of.  As a contractor, you should know what to share when supporting your opinion. 

According to the DCAA Audit Program and DCAAM 7640.1Guidance The major objectives of the pre-award audit are to obtain an understanding of the accounting system to appropriately complete the Pre-award Survey of Prospective Contractor Accounting System, SF 1408, and to opine as to whether the design of the contractor’s system is acceptable for the award of a prospective Government contract.

Let's break this down and explain what it means to you the contractor.....

This is becoming an issue among our members so let’s address it.  There are auditors that are saying it is not allowable. Some say to exclude out of the G&A Pool. Some say that the state taxes are to be included in the G&A base.  Understanding this can save big dollars.  It has already for some. 

It may get a bit complicated but try to follow the logic. This is a more advanced issue than discussed in our class but let’s have at it!  Please review the entire discussion to see the issues that affect allocation of these costs.  Also, please note that comments in Blue are my opinion and interpretation for reference and not a part of government documented guidance. 

Are State Income or Franchise Taxes Allowable?  Yes, Generally, Subject to guidelines.  That’s the simple answer.  Now for a few details…

Do you need them? Should they be documented? How do you start developing them? How detailed should they be? 

Yes you do and Yes you should move toward documentation!  Everyone has them.  That’s right, I said everyone has them.  You see, your policies and procedures are simply the methods you use day by day within your business to meet goals and objectives and to comply with guidelines and requirements as applicable.  

Everyone has policies and procedures in some form or another.  They may or may not be very good policies or procedures and they may or may not be documented, but they do exist. 

Unfortunately, most small businesses do not have policies documented, or documented adequately, nor do they know where or how to start! Policies and procedures are a roadmap of what you do and how you do it in your company.  They will help others in your firm and those looking in your firm to understand how you operate.  They will help your firm to be consistent in it’s’ operations and provide confidence to auditors, bankers, contracting officers, prime contractors, and customers in general.

Now lets address this in more detail and answer the other questions....

Situation: A General Contractor doesn't have a lot of labor associated with their contracts and, in fact on some projects, may not have much at all compared to other projects.  DCAA material suggested to use "direct labor" as an allocation base.  My question Mr. Gunn is: can another method be used such as sales or total direct cost instead of direct labor? (Provided that we use a consistent method that has stable results?), and 

If such an alternative method is acceptable, would we (can we) then put all direct payroll taxes and direct workers comp. associated with a project in "direct costs" (and directly job cost it) instead of an "indirect pool" allocating these costs?  Any guidance that you can extend would be greatly appreciated.

The answer to your first question is Yes with some cautionary notes.....

INQUIRY: Are 8(a)'s always exempt from CAS requirements?  If we are awarded a subcontract from a prime when the prime contract is billions of dollars, what CAS requirements would we be subject to?

RESPONSE: Cost Account Standards (CAS) are complex, misunderstood, and often used with apprehension by people in the procurement profession.

Generally this is how it goes: Being subject to CAS is not an 8(a) or non 8(a) issue but is dependent on Size Standard of a firm categorized as a small business, as well as other factors.  If a small business wins a large contract that now makes them no longer eligible to be considered small under their primary NAICS code, then yes CAS could be applicable.

INQUIRY: How do I determine if my cost or pricing data is adequate, or not deficient? RESPONSE: There is no set formula for determining when cost or pricing data is deficient enough to be reported to the contracting officer by an auditor.  However, the following are some examples of cost or pricing deficiencies that should be checked prior to submitting data:

(1) Significant amounts of unsupported costs.

(2) Significant differences between the proposal and supporting data resulting from the proposal being out of date or available historical data for the same or similar items not being used.

(3) Significant differences between the detailed amounts and the summary totals (e.g., the bill of material total does not reconcile with the proposal summary).......

Inquiry – How does one apply the non-manufacturing rule when most manufacturers of IT products for example are large and the resellers are small?

Response – The non-manufacturing rule, found in part 19 of the Federal Acquisition Regulation (FAR), is complex, often confusing and difficult to properly apply. The definition of the "non-manufacturer rule" is found in FAR 19.001 and reads as follows:

"Non-manufacturer rule" means that a contractor under a small business set-aside or 8(a) contract shall be a small business under the applicable size standard and shall provide either its own product or that of another domestic small business manufacturing or processing concern (see 13 CFR 121.406).

The three means of obtaining a waiver, along with some commentary, are as follows:

This PART 2 is a continuation of the information shown under PART 1.

Interest has been increasing with many members on this topic. I have been receiving increasing requests for information pertaining to the cost, pricing, and audit considerations for JV's and TA's as well as clarification on what an SBU is.  So I have decided to share the many audit, cost and pricing issues to be considered.  And there are a lot!  As a result, this topic will be covered in several parts.  I would recommend you share the information with your CPA's, Audit/Accounting Staff, and Legal Representatives.

Often, firms go into great detail on the technical and legal side of these arrangements but fail to put the effort and resources in ensuring the arrangements will stand muster under potential future audit and review.  So, here I am to put this forth for your information and to show you where to go to find out for yourself what you and your support personnel need to know. 

In this part we will continue by sharing the last seven (7) of eleven (11) areas of consideration as outlined by DCAA in providing guidance to their auditors.  To those that have attended, or viewed the DVD, of my training class, do you remember my discussion on "subject to interpretation"?  Well, there is much on this subject where interpretation applies.  So, do your homework, get proper and strong counsel, and be sure to include in your pricing any projected additional cost you may incur as a result of moving in this direction.

Interest has been increasing with many members on this topic. I have been receiving increasing requests for information pertaining to the cost, pricing, and audit considerations for JV's and TA's as well as clarification on what an SBU is.  So I have decided to share the many audit, cost and pricing issues to be considered.  And there are a lot!  As a result, this topic will be covered in several parts.  I would recommend you share the information with your CPA's, Audit/Accounting Staff, and Legal Representatives.

Often, firms go into great detail on the technical and legal side of these arrangements but fail to put the effort and resources in ensuring the arrangements will stand muster under potential future audit and review.  So, here I am to put this forth for your information and to show you where to go to find out for yourself what you and your support personnel need to know. 

In this part we will start by discussing the first four (4) of eleven (11) areas of consideration as outlined by DCAA in providing guidance to their auditors.  Remember my training class discussion on "subject to interpretation"?  Well there is much on this subject where interpretation applies.  So, do your homework, get proper and strong counsel, and be sure to include in your pricing any projected additional cost you may incur as a result of moving in this direction.

This information is not proprietary. 

INQUIRY:  I attended the 2-day cost seminar about 6 months ago. I want to join your monthly service. Customer has come to our place and performed an audit - I think we did GREAT! Now Customer wants a financial capability on our company to sustain a $2 million contract...can you help? Customer wants a balance sheet and I have a CPA doing that part. But I have to get a lending firm to cover my cash flow. I have just started this company 2 years in July. Customer wants to see if I can handle the 2 million dollar task.  I know I can, but I have to prove it.

RESPONSE:  Your concern is one of the areas the SBA exist to help or guide you!  Have you talked to a Business Development/Loan Specialist in your local office?  Here are several options:

Inquiry: I am trying to determine if I can use the excess vacation hours  we pay an employee in the calculation of the H&W rate. The contracting officer feels the benefit must be actual cash paid for 2080 hours times 3.24. I read that "bona fide" benefits include vacation. For 5 years, we are required to pay them 3 weeks of vacation but we actually pay 168 hours; I read that the excess is a bona fide benefit and can be used in the minimum calculation. We certainly want to be compliant. Response: Let’s look at the Federal Guidelines under the Code of Federal Regulations (CFR) to determine compliance and applicability.  These guidelines are generally applicable to The McNamara-O'Hara Service Contract Act (SCA) contracts.

If you are like most start-up government contractors, you’re using Quick Books Pro for your accounting software.  1) Can Quick Books Pro (QBP) be DCAA Compliant? 2) Will DCAA approve your accounting software?  3) How long will I be able to use QBP for my accounting system?The answers are 1) yes, 2) no, because DCAA doesn’t approve any accounting software, and 3) probably until you reach 20 employees or receive your first prime contract.  This article is the first in a series that will explain answers to those questions.

Those who Audit contractors on Timekeeping have their own issues.  We here at www.paulgunn.com want you to remember and understand that finding perfection in the Timekeeping environment and complying with requirements is not an exact science, but an art. We as small contractors can only do our best as we seek guidance!  Support, documentation, and compliance with your methodology are your best defense and offense. Article from the FederalTimes.com by Elise Castelli - December 16, 2008   Some Defense Contract Audit Agency employees are concerned the agency is reverting back to practices that congressional investigators say undermined the agency’s effectiveness.