ACCOUNTING SYSTEM: and Services in 2012, According to Recent Data from the Congressional BUSINESS SYSTEM and INTERNAL Budget Office

SPRING 2015 www.bdo.com

THE NEWSLETTER FROM THE BDO GOVERNMENT CONTRACTING PRACTICE

DID YOU KNOW...

According to Bloomberg Government, the total federal IT budget proposed by President Obama would grow to $86 billion, a 2.7 percent increase above the current year’s levels.

Nonprofit research center Good Jobs First reports that 49 of the federal government’s top 100 contractors also won grants, loans or tax credits over the past 15 years.

Government agencies spent more than $500 billion on outside products ACCOUNTING SYSTEM: and services in 2012, according to recent data from the Congressional BUSINESS SYSTEM AND INTERNAL Budget Office.

CONTROL REQUIREMENTS FOR According to Defense One, the Navy FEDERAL CONTRACTORS plans to increase the number of its deployed ships to the Middle East and Asia by more than 20 percent over the By John Van Meter and Giacomo Apadula next five years.

In 2014, nearly 35 percent of contracts ontractors often find it challenging Using this timeline of events, let’s consider with the Department of Homeland to identify business systems three contractors with varying business Security were held by small businesses, Cand associated internal controls models to understand the complexity of reports the Federal Times. requirements embedded in their federal requirements for one business system, the contracts. This “identification” challenge accounting system and/or related system of According to Fierce Government, directly impacts a contractor’s ability internal controls: federal agencies paid out $125 billion to meet system design/implementation in improper payments in 2014, requirements and to effectively monitor its • Contractor A: A company that sells compared to $106 billion in 2013. federal contracts’ compliance requirements. commercial services to various federal Simply consider the established timeline of agencies under GSA multiple award accounting system requirements and the schedule (MAS) contracts. Contracts various regulatory and advisory direction exceed $5 million and a 120-day period of issued across government authorities over the performance. last few years (as interpreted in the cycle of federal contracts): • Contractor B: A small business receiving Department of Defense (DoD) and other 2

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Source: BDO Knows: Government Contracting newsletter

agency cost-reimbursable contracts Trade Agreement Act Compliance, Basis clause 52.203-13, Contractor Code of

containing the allowable cost and payment of Award customer discount monitoring, Business Ethics and Conduct, requiring an clause (FAR 52.216-7). environmental compliance and assurance ethics program and mandatory disclosure. deliverables are provided within the As a commercial item contractor, though, • Contractor C: A major DoD contractor contractually negotiated terms. Therefore, Contractor A is not required to have a formal with contracts containing the allowable MAS contract requirements could system of internal controls as required by cost and payment clause; business system technically fall under an accounting 52.203-13(c). Contractor A also has the requirements include 252.242-7005, system. But, that is entirely different from requirement to deliver conforming goods Contractor Business Systems and 252.242- the accounting system requirements and services under its contracts. Given what 7006, Accounting System Administration. established by DoD contracts containing appears to be a reportable condition under the allowable cost and payment clause. mandatory disclosure, Contractor A should Given these three different types of have considered adopting certain elements contractors, let’s take a look at hypothetical c. From a compliance standpoint, there are of Contractor B and C’s control environment scenarios to help us compare Contractor conditions that would position Contractor and timekeeping internal controls to mitigate A and B’s accounting system requirements A for success if it were to adopt certain the risk of contract noncompliance. Answer to those of Contractor C. Try to select the aspects of Contractor B and Contractor (c) above appears to be the answer in light of answer that best supports each Company’s C’s accounting system and related Contractor A’s compliance risks. compliance requirements. internal controls. Scenario 2: Should Contractor B implement Scenario 1: Does Contractor A have an Now let’s add a layer of complexity: internal controls as required by the DoD accounting system and associated internal During a GSA audit, the auditor discovers Accounting System DFARS 252.242-7006, controls requirement similar to Contractor B Contractor A has been selling an Engineer Accounting System Administration? and/or C in any aspect? I (less experienced) as Engineer V (more experienced). The program manager explains a. No! A company needs a CAS-covered a. Of course not! By definition, Company A to the auditor that she and the CFO are aware contract to incorporate DFARS business is selling commercial services under MAS of this practice, but the customer “knew who system requirements. The accounting contracts and has no accounting system they were getting and program ratings are system clause is “inert,” and Contractor B requirements. through the roof!” should ignore it. b. With that said, however, federal supply Does this condition change the best outcome b. However, Contractor B may still have schedule contracts require sales tracking, for Scenario 1? Contractor A has contract an accounting system requirement 3

CONTINUED FROM PAGE 2 ACCOUNTING SYSTEM YOU’RE INVITED through the accounting system clause Learn More About Business included in its contract. There may be no mandatory withhold, though, as CAS- System Challenges at covered contracts are absent based on Contractor B’s small business status. By BDO’s Second Annual definition, no government agency would audit the accounting system against the Executive Seminar for rigorous internal control/documentation Government Contractors requirements of a full-blown accounting system. Instead, Contractor B should expect a simple Standard Form (SF) On April 28, BDO will be co-hosting with the Public Contracting 1408 review to be conducted—incurring Institute and BakerHostetler its second annual day long executive nowhere near the amount of scrutiny seminar for government contractors to discuss key issues and (or stress) a company being audited for an “adequate” accounting system might regulatory considerations for the industry. experience. Therefore, Contractor B should only prepare for an SF 1408 to save time Attendees will have the opportunity to hear from Congresswoman Barbara Comstock and resources. (R-Va.), as well as other leading industry executives, about a range of issues facing contractors, including the current DCAA/DCMA environment, compliance matters, c. Contractor B did accept a contract with the the impact of business system requirements in today’s marketplace and the latest DFARS 252.242-7006, Accounting System legal updates influencing the sector. The seminar will also explore recent DCAA audit Administration, clause appropriately guidance and best practices for compliance management. included. As a best practice, Contractor B should map its current practices, Additional speakers include: policies and procedures against DFARS Steve Trautwein, Acting Director, DCMA Cost & Pricing Center requirements and remediate gaps based on Michele Bolos, CEO, NT Concepts, Inc. a reasonable definition of compliance for a Chad Braley, Capital Edge Consulting small business. Hilary Cairnie, Partner, BakerHostetler Chris Gilley, VP, Government Finance & Compliance, DynCorp International However, what happens when Contractor B John Panetta, Sr. Director of Government Accounting, Raytheon Company finally receives unfavorable incurred cost audit Matthew Popham, VP, Government Compliance Director, Leidos results from DCAA? During the audit, DCAA Nick Sanders, President, Apogee Consulting, Inc. determines that unallowable costs have been John Van Meter, Managing Director, BDO USA included in federal billings, the indirect rate Russ Wright, CEO, Sentel structure is illogical, Contractor B is unable to separate direct costs from indirect costs and The event will take place at The Ritz-Carlton, Tysons Corner in McLean, Va., from billings can’t be reconciled to cost records—all 8:30 a.m. to 4:30 p.m. To learn more and register for the event, click here. DFARS 252.242-7006 criteria.

It’s true that Contractor B is not subject to mandatory withholds under DFARS Its internal controls would address the same 252.242-7005, Contractor Business Systems, imposed by FAR 52.203-13, Contractor criteria as those used by Contractor C, but based on its small business CAS exemption. Code of Business Ethics and Conduct and practices should be scaled to address the small However, Contractor B is at risk of having its agency-specific requirements for accounting/ business environment. accounting system deemed inadequate under business system compliance. Stay tuned as we DFARS 252.242-7006, Accounting System continue to explore other business systems in Administration, criteria. Contractor B may future newsletters. then be ineligible to receive additional cost- SUMMARY reimbursable contracts under FAR 16.301- Business system requirements and business system compliance are part of a dynamic and For more information on contractor business 3, Limitations Guidance. Therefore, it is in system requirements please contact John Van Contractor B’s best interest to map internal ever-changing landscape. Every company Meter, Managing Director of BDO’s Government controls to DFARS 252.242-7006, Accounting doing business with the federal government Contractor Advisory Services (GCAS) group at System Administration, requirements. should establish a practice of performing 408-981-4155/ [email protected], or Giacomo Answer (c) above appears to be the answer regular risk assessments, paying particular Apadula, Senior Manager at 609-617-4191/ [email protected]. in light of Contractor B’s compliance risks. attention to internal control requirements 4

WHY GOVERNMENT CONTRACTING FIRMS ARE CHOOSING TO BE ESOP OWNED

By Andrew Gibson and Jeff Schragg

EMPLOYEE STOCK OWNERSHIP 3. Equity Incentive Plan for ESOP transaction-related debt. This can be a PLANS (ESOPs) HAVE Key Associates significant cash flow advantage. 48 CFR Part 9904 [which amended CAS 412 (pension PROVEN THEMSELVES TO BE Government contracting companies costs) and 415 (deferred compensation costs)] commonly provide key associates with the A SUCCESSFUL COMPANY provides that the contractor’s “allowable cost” opportunity to buy stock in the corporation, OWNERSHIP STRUCTURE FOR A in the fringe benefit rate that can be charged effectively forcing these associates to have to the government ”shall be the contractor’s WIDE VARIETY OF GOVERNMENT some “skin in the game.” ESOP companies contribution, including interest and dividends CONTRACTORS. commonly have equity compensation plans if applicable, to the ESOP.” that allow for “reloading” of the equity (the hile every company’s dynamics equity is held for a limited period and then and ownership base are different, reissued), providing the board of directors 6. Prevailing Wage Wand ESOPs may not always be a means to efficiently compensate equity Prevailing wage rates can include appropriate, ESOPs offer a number of benefits to the associates who are generating value contributions to a qualified retirement plan. that make them an option your organization in the current year and are the future of the Therefore, the ESOP contribution can also be may want to consider. Below, we outline nine company. The equity is granted annually as included in the prevailing wage rate since it key advantages offered by ESOPs. part of the key associate’s compensation is a qualified retirement plan. The company package, which may require that it be needs to evaluate the benefits or detriments 1. Corporation’s Income Tax Benefits exercised after a limited period of years (such of including ESOP contributions as part of as five years) so that the equity does not get the prevailing wage. In order to qualify for ESOPs are the most efficient ownership “stale” with the key associate. prevailing wage, the ESOP may be required to: structure from an income tax perspective. The ESOP trust, as a shareholder in an S • Accelerate immediate vesting to 100 percent corporation, is not subject to federal as well as 4. Refresh Ownership • Provide immediate payout on termination most state income tax liability on its share of ESOPs can help government contracting • Accelerate the company’s cash flow to the S corporation taxable income. In addition, companies address the issue of how to satisfy the requirement that the employer employer contributions to the ESOP to fund effectively transfer equity from older contribution be transferred to the retirement debt payments are tax-deductible. This creates associates or founders to newer key plan as the associate performs the services an income tax advantage of approximately associates. More specifically, these plans allow • Establish immediate eligibility for allocations 40 to 50 percent of the corporation’s the company to provide equity to associates for new hires (rather than requiring 12 taxable income. who represent the future of the company months of service and 1,000 hours) while providing current owners with a tax- 2. Key Associate’s Income efficient means to sell their stock. An ESOP allows shareholders to realize their equity 7. Leadership is Uncoupled Tax Benefits value by selling to the ESOP (ESOP also refers from Ownership Income tax benefits can also be realized by key to the trust [ESOT] in this article) with equity In government contracting companies, associates of the company through deferred compensation arrangements to efficiently leadership is often directly tied to the compensation arrangements. The corporation allocate equity into the future. If the company ownership. This has both positive and does not realize the income tax deduction is a C corporation, the shareholders may be negative outcomes. The negative outcome is in a non-qualified deferred compensation able to sell their stock to the ESOP and elect that if a leader in the organization needs to arrangement until the employee reports the to defer the gain on the sale under Internal be terminated, there is both the impact to compensation on his/her Form 1040. A 100 Revenue Code Section 1042. leadership and also the impact to cash flow percent ESOP-owned S corporation does to buy back stock. Most ESOP companies’ not pay income tax, so it does not impact its 5. Cost Reimbursement Contracts leadership teams consist of key associates cash flow to delay the income tax deduction who possess strategic vision, rather than being related to deferred compensation. Therefore, The ESOP is a defined contribution plan. a collection of shareholders. ESOP company it is common for ESOP companies to establish Contributions to defined contribution equity compensation plans allow the board deferred compensation arrangements for key plans can be a reimbursable expense in of directors to incentivize leaders more associates, allowing employees to defer their cost reimbursement contracts. Therefore, effectively because ownership is settled in a income tax on compensation until retirement, properly structuring the ESOP loan and share 100 percent ESOP-owned company. This can college tuition or other personal financial release can help cash flow for repaying the lead to more efficient corporate governance events warrant it. 5

CONTINUED FROM PAGE 4 ESOP FEDERAL GRANTS: decisions for ESOP companies. Note: the ESOP DIVERSIFYING OPPORTUNITIES is the shareholder, so participants do not have shareholder rights, such as voting for board FOR FEDERAL CONTRACTORS of directors, access to financial statements or attending board of directors meetings. By Andrea Wilson

8. Employee Culture ver the last four years federal contract awarded an average of $5.4 billion in grants to An ESOP provides a scoreboard to reinforce dollars have steadily declined from for-profit companies. Interestingly, one area a culture where associates are encouraged to O$540.4 billion in 2010 to $445.3 of diversification we have found to be under- work as a team with entrepreneurial spirit. billion in 2014 causing federal contractors explored by many in the contracting industry The ESOP provides a long-term compensation to explore new sources of revenue to remain is the pursuit of funding through federal grants benefit that is paid at retirement or other viable in a highly competitive environment. and cooperative agreements. termination of employment. However, the While some contractors have sought to motivating aspect of equity ownership is to diversify their business by developing new While federal grants do not permit profit, they provide associates with at least an annual products or services, others have looked to do provide other benefits attractive to for- reflection of how their efforts impact the expand their customer base to offset potential profit companies. By expanding a company’s company’s value. declines in revenue. Surprisingly, federal base, grants can assist in driving down indirect spending under assistance instruments, rates making companies more competitive 9. Competitive Advantage i.e., grants and cooperative agreements and more profitable overall. Further, grants (collectively grants), appears to have bucked can provide new entry points into new Many government contracting ESOP the declining federal spending trend. Since markets, products, locations and services companies are realizing the income tax 2011, the federal government has annually making firms more competitive under RFPs. savings, ownership motivation, compensation structure, corporate governance and other benefits of ESOP ownership. This helps Total Federal Contract & Grant Dollars (in billions) Grants generate a number of competitive advantages. 700 For example, mature ESOP companies are Contracts able to accumulate substantial amounts of 600 money on their balance sheets, giving them an advantage with their surety company 500 and lender. Companies may also be better positioned to pursue acquisitions and 400 expansions, and are able to attract and retain high-quality key talent. 300

200 Does ESOP Align With Your Ownership Goals and Objectives? 100 Many government contracting companies have found ESOPs to be an effective and 0 profitable form of ownership. 2010 2011 2012 2013 2014

Source: USASpending.gov For more information about ESOPs and to discuss whether they may be an option for your organization, please contact Andrew Gibson, tax Total Award Dollars $billions partner, leader of BDO’s Global Compensation Grants to for-profit and Benefits Practice and the Regional Managing Grants organizations Contracts Partner for the Southeast Tax Practice at [email protected] or Jeff Schragg, tax partner 2010 622.5 20.8 540.4 in BDO’s Government Contracting practice at 2011 571.7 7.2 539.6 [email protected]. 2012 544.8 4.4 518.3 2013 524.4 5.1 462.5 2014 590.8 4.9 445.3

Source: USASpending.gov 6

CONTINUED FROM PAGE 5 FEDERAL GRANTS

$750,000 or more in federal grants and/or Grants to For-Profit Organizations by Federal Agency 2010-2014 (in billions) cooperative agreements during the entity’s fiscal year may be required to undergo a 25 comprehensive financial and compliance audit. This audit is meant to provide 20 assurance to the government of the proper use of its award dollars by the receiving 15 entity. The audit should be performed by an independent accounting firm at the cost of the 10 grant recipient. 5 Prior to the issuance of the Uniform Guidance, 0 the cost principles found in FAR Part 31 Dept. of Dept. of Dept. of Dept. of Dept. of applied to for-profit entities in both their Energy Health and Transportation Defense Commerce contract and grant endeavors. However, Human Services the new grant regulations under 2 CFR 200 Subpart E apply uniformly to both nonprofit Source: USASpending.gov and for-profit entities implementing federally funded grants and cooperative agreements. Many federal agencies that provide contract new requirements in BDO’s Uniform Guidance While FAR Part 31 generally remains the more funding to companies also award grants to for- article that highlights significant changes stringent, there are nuanced differences that profit organizations, such as the Departments from prior grant regulations. Subrecipient for-profit entities should take note when of Commerce, Defense, Education, Energy and monitoring, audit requirements and cost implementing grant programs. Travel costs – Health & Human Services, along with sub- principles illustrate three significant and one of our favorites– and airfare in particular, agencies like the U.S. Agency for International nuanced differences between the grant and illustrate the slight nuance between the FAR Development (USAID), the National Institutes contract worlds. and Uniform Guidance. Under FAR 31.205- of Health (NIH), and the National Science 46(b) and in accordance with the referenced Foundation (NSF). Similar to the contracting The Uniform Guidance at 2 CFR 200.330 Federal Travel Regulations (FTR) Chapter 301- process, a grant recipient must respond to a establishes onerous requirements for 10.123, other than coach-class airfare may be published funding opportunity in order to be subrecipient monitoring. As non-procurement allowable under certain conditions if approved considered for the award. These opportunities, transactions, the FAR does not address by the awarding agency. 1 These conditions however, allow for more funding flexibility subrecipients. Accordingly, subrecipient include, but are not limited to: a lack of by focusing on a specific public objective in monitoring may be a new area for for-profit “reasonably available” coach class airfare 2; contrast to contracts where the government companies implanting grants. A subrecipient when it is necessary to accommodate a dictates precisely what it will procure. is a non-federal entity to which you provide medical disability or other special need; when Consistent with the nuances embedded in a subaward to carry out the federal program. exceptional security circumstances apply; or the proposal process, the awards themselves In summary, the new regulation requires when the origin and/or destination are outside are governed by a different set of regulations. pass-through entities to make a case-by-case the contiguous United States (OCONUS) and While contracts adhere to the familiar “FAR” contractor versus subrecipient determination, the scheduled flight time, including stopovers requirements, federal grants follow a newly conduct a pre-award risk assessment of and change of planes, is in excess of 14 hours – revised set of regulations issued by the Office the subrecipient, monitor the subawardee i.e., the “14-hour rule.” of Management and Budget (OMB) titled throughout the implementation of the Uniform Administrative Requirements, Cost program and impose proper remedies in case Under the Uniform Guidance travel rules (2 Principles and Audit Requirements for Federal of non-compliance. The costs associated CFR 200.474(d)), airfare in excess of the “basic Awards, which is also known as the Super with subrecipient monitoring should be least expensive unrestricted accommodations Circular and codified under 2 CFR 200, herein strategically considered when developing class offered by commercial airlines are referred to as the Uniform Guidance. both your indirect costing policies and unallowable except” under five conditions proposals to ensure consistencies throughout when such accommodations would: (1) require While the tenor of the Uniform Guidance your company. circuitous routing; (2) require travel during brings the grants world closer to the FAR— unreasonable hours; (3) excessively prolong which contractors are very familiar with— Additionally, federal grants generally contain travel; (4) result in additional costs that would significant differences remain. Contractors a robust audit provision as required under offset the transportation savings; or (5) offer receiving federal grants should familiarize the Single Audit Act included in Subpart F accommodations not reasonably adequate for themselves with these requirements before of the Uniform Guidance (formerly referred the traveler’s medical needs. embarking on grant activities and review the to as an A-133 audit). Recipients receiving 7

PErspective in Government Contracting

Although the federal and improve their systems’ defense Other contractors have also been snapping budget outcome capabilities. President Obama’s proposed up smaller technology companies for their for fiscal year 2016 fiscal 2016 budget includes $86 billion lucrative federal contracts. In March, for remains to be seen, the for IT spending—a year-on-year increase example, state Medicare claims processor government contracting of 2.7 percent—including $14 billion Maximus acquired technology contractor industry continues to find opportunities for cybersecurity. Acentia for $300 million from private equity in the healthcare, technology and defense firm Snow Phipps Group in order to grow its industries. Specifically, the healthcare and These trends have spurred robust M&A federal healthcare IT contracting footprint. technology sectors are providing some activity. Big-name contractors—especially Over the last two years, Accenture and glimmers of hope for private equity firms from the defense sector—have acquired ManTech International acquired ASM looking to grow or exit their investments. smaller healthcare IT companies in order Research and Delta respectively—both of to bolster growth. Last October, defense which had a task order in the Department Defense retains the largest overall contractor Lockheed Martin bought of Veterans Affairs’ $12 billion contract to spend—$200 billion in fiscal year 2014— healthcare IT company Systems Made modernize its electronic health records, the although that figure is down by more than Simple, and defense and intelligence firm Washington Post reports. a third from 2008. Despite this, private Booz Allen Hamilton made two healthcare equity firms have never been more invested IT acquisitions—the health division of Cybersecurity is another area of growth, in the defense contracting space. Between Genova Technologies, which has received attracting significant investment from 2004 and 2013, private equity invested $90 million in HHS business since the private equity companies. Bain Capital more than $30 billion in 358 U.S. defense passing of the health law, and health recently acquired Blue Coat Systems for and aerospace companies, according to analytics startup Epidemico. This comes as $2.4 billion with the goal of returning Pitchbook data. However, sequestration part of a larger push by Booz—part-owned it to the public markets. Private equity fears and budget caps mean that many by the Carlyle Group—to sell technology firms spent $191.9 billion globally on have held onto their investments longer and consulting services to the Department data security firms last year, up from than usual, delaying exits while waiting for of Health and Human Services, the $170 billion in 2013, according to the San the market to improve, the Washington Washington Post reports. Francisco Chronicle. Post reports. “Private equity firms are both buyers and The number of defense company exits Meanwhile, the Affordable Care Act, as sellers in today’s market,” says Joe Burke, we see in the next year will hinge a lot well as legislation passed under former Transaction Advisory Services Partner in on whether Congress increases military President George W. Bush to modernize BDO’s Government Contracting practice. spending. But whichever version of the the government’s aging IT infrastructure, “Valuations continue to vary greatly based budget passes, private equity companies have provided plentiful opportunities on the level of the government contractor’s will likely see continued opportunity in the for providers of healthcare and more capabilities and the size and visibility of healthcare and technology spaces. general technology. Agencies across the their customer contracts.” PErspective in government contracting is a board are looking to update their systems feature examining the role of private equity in the government contracting space.

CONTINUED FROM PAGE 6 FEDERAL GRANTS For airfare, the Uniform Guidance does not associated internal controls designed to meet 1 For a complete list of conditions, see: FTR Chapter 301- refer to the FTR for further guidance, thus the more rigorous demands of federal contract 10.123 http://www.gsa.gov/portal/ext/public/site/FTR/file/ eliminating a small degree of flexibility compliance to successfully manage federal Chapter301p010.html/category/21868/ provided by the “14-hour rule” for booking grant awards. To be clear, the transition 2 “Reasonably available” means available on an airline that is scheduled to leave within 24 hours of your proposed better than economy-class airfare. into the federal grant space is not without departure time, or scheduled to arrive within 24 hours of its challenges and brings with it a learning your proposed arrival time. Similar examples of seemingly minor nuances, curve unique to the environment. However, which drastically alter the application of these when established correctly, contractors For more information about pursuing federal grants governing principles, are repeated between can successfully execute federal grants and the differences between federal contracts the grants and contracts world. Yet we find and enhance their opportunities to secure and federal grants, please contact Andrea Wilson, Managing Director of BDO’s Government Contracts that contractors are uniquely positioned additional federal awards. and Grants Advisory Services at 703-752-2784 / to leverage the key business systems and [email protected]. 8

SERVICE CONTRACT ACT CONSIDERATIONS FOR GOVERNMENT CONTRACTORS

By Maureen Miller and Krysta Gamble

IN THE GOVERNMENT contractual obligations are typically handled noncompliance, it will require the contractor CONTRACTING INDUSTRY, outside of HR. However, deciding which to make all impacted employees “whole,” CONTRACTS THAT MUST positions are SCA begins and ends with the which will include payments for any historical contract position’s Fair Labor Standards and current differences in wages and benefits. COMPLY WITH THE MCNAMARA- Act (FLSA) status. The specific duties and The DOL also has the authority to withhold O’HARA SERVICE CONTRACT responsibilities of the position dictate whether payments on any active contracts that are ACT (SCA) ARE BECOMING MORE it is exempt or non-exempt and, if non- federally funded, terminate the contract, PREVALENT THAN EVER BEFORE. exempt, if it is bound by the SCA and the find company officers personally liable and— WD. Often, a company executive or program potentially the most damaging—debarment manager will want all positions to be exempt from participating in federal contracts for up he SCA’s intent is to ensure that to avoid having to pay overtime and risk to three years. In this case, the decision to businesses with contracts whose misclassifying positions. A misclassification debar a contractor is solely up to DOL, and principal purpose is to provide T can be very detrimental when dealing with they have been known to initiate this process services in excess of $2,500 offer established SCA contracts. It is in a company’s best on findings and violations that some would wages and benefits to covered employees. interest to ensure that a comprehensive FLSA consider rather small. If a contract is deemed to be subject to the audit is done on all SCA-eligible positions SCA, all non-exempt employees working when bidding on the contract, as well as Although contractors are wary of the fact they on that contract—in any capacity—must intermittently throughout the contract. must comply with many regulations, including be compensated based on their respective employment-related laws, it’s important Wage Determination (WD), which establishes Once a company has correct FLSA that they understand the potential risks. the minimum wage and benefits for classifications, an HR advisor can make sure With the government contracting industry various positions. the company complies with other aspects anticipating a growing number of service of the SCA/WD, including, compensating contracts in 2015, opportunities abound for Companies that previously had only a few employees at the correct prevailing wage, contractors. However, they must also be employees covered under these provisions providing the correct amount of vacation time aware of the risks associated with complying are now finding themselves managing tens or and compensating employees for the correct with applicable regulations and conduct the hundreds of SCA employees. Other companies holidays—which are dictated by the WD. necessary risk assessments before they forge are also realizing that if they want to continue ahead. The good news for contractors, though, growing, SCA contracts—which are managed After tackling the standard HR items listed is that following SCA regulations needn’t be by the Department of Labor’s Wage and Hour above, it is important to understand how to overwhelming or complex: Solid counsel from Division—cannot be avoided. manage the Health & Welfare (H&W) dollars experienced HR advisors can help maintain that each SCA employee will receive per hour compliance, and success, from start to finish. The reality is that SCA contracts can be worked, up to 40 hours per week. The intent overwhelming and intimidating to many of H&W dollars is to pay for eligible benefits. employers for a variety of reasons, such as: 1) Maureen Miller is a director in BDO’s Human Capital This can range from the full medical, dental the SCA regulations are complex and make Solutions Group and can be reached at mamiller@ and vision premium cost for all covered bdo.com. Krysta Gamble is a senior consultant in compliance challenging; 2) the DOL is active in participants, additional vacation or sick leave, BDO’s Outsourced Human Resources practice and monitoring compliance; 3) every county in the tuition reimbursement, 401(k) employer can be reached at [email protected]. U.S. has a different WD; and 4) many unions match, life insurance and disability coverage. are SCA and have a separate WD, among The key is for a company to understand what others. However, if the government is granting it is able to take credit for out of this bucket more contracts for services, are contractors of money. One of the trickiest parts of H&W really prepared to pass on a sizable market dollars is completing mandatory quarterly of possible work? Most likely, they are not. reconciliations. A best practice is to perform a The bigger question is: how do they position reconciliation every pay period or each month, themselves to compete in this marketplace? though the DOL only requires this to be done on a quarterly basis. The best way to get to the root of how the SCA will impact a company begins with a What are the potential risks of not complying? trusted Human Resources (HR) advisor. Some Over the last few years, the DOL has taken might be surprised by this suggestion as on more SCA audits. If the DOL identifies 9

REGULATORY UPDATES

Proposed DFARs Rules also provides consistency and communicates employees, as well as private citizens, a way Case 2014-D015: Past Performance expectations to prevent rework and improve to report suspicious activities. The hotline is Information Retrieval System-Statistical the efficiency of the negotiation process. available 24 hours a day, seven days a week Reporting (PPIRS-SR); The Department and can be reached at 855-414-5892 or of Defense (DoD) is proposing to amend This proposed rule promotes the increased use [email protected]. the DFARS to require contracting officers of forward pricing rate agreements (FPRAs) to to evaluate past performance using the reduce administrative costs and to promote Commercial Items and the information in the Statistical Reporting greater efficiency and productivity in the Determination of Reasonableness of module of the Past Performance Information preparation and review of FPRA proposals. Price for Commercial Items Retrieval System when involved in a The amendment to DFARS 215.403-5 requests On Feb. 4, 2015, a memorandum was issued competitive solicitation for supplies using by the DoD on guidance related to commercial simplified acquisition procedures. contractors to submit the Contractor Forward Pricing Rate Proposal Adequacy Checklist at item determinations (FAR Part 12) and price reasonableness analyses. The topic of concern The PPIRS-SR module was originally created table 215.403-1 with FPRPs. DoD does not expect this rule to have a significant economic is in regards to the amount of money being to fill the need for past performance data on spent on commercial items ($60B in the last lower dollar value contracts. The goal is to use impact on a substantial number of small businesses. fiscal year) versus the amount of oversight objective data on past performance to assist being issued to determine if prices are contracting officers in making better-informed reasonable. best value award decisions on small dollar DCAA Office of Inspector value acquisitions for supplies. This process General Created In the past, determining commerciality of helps to eliminate the burden of collecting The Defense Contract Audit Agency (DCAA) an item has been difficult for Contracting subjective past performance information on officially established the Office of Inspector Officers. However, the DoD is working to contractors for smaller dollar value contracts. General (OIG) on Jan. 5, 2015. The OIG will revise the DFARS Procedures, Guidance and provide DCAA employees an avenue for Information (PGI) along with an update to Final DFARs Rules disclosing incidents of fraud, waste, abuse the DoD Commercial Item Handbook on Case 2012-D035: Forward Pricing Rate or gross mismanagement without fear of Commercial Items. Proposal (FPRP) Adequacy Checklist; The DoD retaliation. has issued a final rule effective Dec. 11, 2014, The intent of the memo is to provide guidance amending the DFARS to provide guidance to The DCAA Hotline is also included in the for Contracting Officers as to how they should contractors, which ensures the submission of DCAA OIG function. The hotline allows approach the pricing of items claimed to be thorough, accurate and complete FPRPs. It DCAA civilian employees, DCAA contractor commercial. Recommendations include: 10

CONTINUED FROM PAGE 9 REGULATORY UPDATES

• Ask the question: “Am I paying a fair and unallowable even though the cost principle GSA plans on creating a Common Acquisition reasonable price?” does not explicitly state that the cost is Platform (CAP), which will be an online • Establish goal of determination within 10 unallowable or allowable. marketplace to help streamline information business days among agencies. CAP would make available • Use market-based pricing to assist in DCAA Memorandum for Updated the prices paid by other government buyers determination Audit Guidance on the Treatment of for similar products or services. Contractors would be required to electronically report • If needed, use cost-based analysis in lieu of Overdue Indirect Rate Proposals market-based pricing contract sales monthly through this user- On Feb. 12, 2015, DCAA issued a friendly online reporting system. The report Contract files to maintain: Memorandum for Regional Directors (MRD) would include transactional data elements providing guidance regarding the settlement such as unit measures, quantity of item sold, • Justification of additional cost information of overdue indirect rate proposals. DCAA universal product code, if applicable, price paid • Copy of any request from the DoD to the will furnish a memo to DCMA with a list of per unit and total price. Contractor for additional cost information contractor fiscal years (CFYs) for which DCAA • Any response received by the has not received a final indirect rate proposal, A public meeting was held by GSA on April 17, Contracting Officer and the Contracting Officer has not granted 2105. Attendance was in person or virtually a valid extension. The assignments on the through GSA’s Internet meeting platform. The Defense Contract Management Agency list sent to DCMA will be closed on June 30, (DCMA) Cost & Pricing Center has been 2015, if DCMA contracting officers do not Small Business Administration (SBA) designated to provide expert advice to the notify DCAA of any extensions or ongoing acquisition workforce. coordination that would result in leaving the On Feb. 5, 2015, the SBA proposed to amend assignments open. its regulations to implement provisions of the Small Business Jobs Act of 2010 and the DCAA Audit Alert on Identifying DCAA will close the overdue proposals based National Defense Authorization Act for Fiscal Expressly Unallowable Cost on some form of a unilateral determination in Year 2013. The proposed rule would establish Jan. 7, 2015: Audit Alert on Identifying conjunction with the Contracting Officer. The a government-wide mentor-protégé program Expressly Unallowable Cost. The DCAA recently guidance suggests to DCMA a total contract for all small business concerns, consistent with released a memorandum to address expressly cost decrement of 16.2 percent that the SBA’s mentor-protégé program for participants unallowable costs. The newest alert enhances Contracting Officer may consider using when in SBA’s 8(a) Business Development (BD) the guidance provided in the memorandum no relevant history exists. DCAA plans to re- program. As is the case with the current issued Dec. 18, 2014, which distributed a list assess the decrement rate every three years. mentor-protégé program, the various forms of of cost principles that meet the definition of assistance that a mentor will be expected to provide to a protégé include technical and/or expressly unallowable costs. Based on the cost General Services principles, expressly unallowable costs are management assistance, financial assistance Administration (GSA) identified if: in the form of equity investment and/or loans, GSAR Case 2013-G504: Transactional Data subcontracts and/or assistance in performing • It states in direct terms that the costs Reporting; The General Services Administration prime contracts with the government in the are unallowable, or leaves little room for is proposing to amend the General Services form of joint venture arrangements. differences of opinion as to whether the Administration Acquisition Regulation (GSAR) particular cost meets the allowability to require vendors to publish and report See 80 Fed. Reg. 6618 (Feb. 5, 2015) and criteria; and GSA prices paid by ordering activities under comments must have been received on or • It identifies the specific cost or type of the schedule at a transactional level. The before April 6, 2015, to be incorporated into costs in a way that leaves little room for changes to federal purchasing would allow for the final rule. interpretation. procurements to be managed by categories of purchases rather than individually. By However, some costs are not clearly stated in managing purchases by categories (i.e., IT direct terms as unallowable. The bottom line software/ IT hardware), the government will is that these types of costs can be expressly be able to make smarter buying decisions. 11

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