Berkeley Research Group’s Government Contracts Advisory Services practice is committed to keeping clients up to date on the latest regulatory developments affecting the government contracts industry. This inaugural edition of the GovCon Research Report summarizes the critical regulatory and compliance issues contractors face in the second calendar quarter of 2012. The issues are summarized by the following key subject matter areas:
• Federal Acquisition Regulation (FAR) updates
• Defense FAR Supplemental (DFARS) updates
• Industry topics
Defense Contract Audit Agency (DCAA) Audit Guidance updates
Office of Federal Procurement Policy (OFPP)/ Defense Procurement Acquisition Policy (DPAP) memos
Defense Contract Management Agency (DCMA) updates
Government Accountability Office (GAO)/ Office of Inspector General (OIG) updates.
KEY FEDERAL ACQUISITION REGULATION UPDATES
Several revisions to the Federal Acquisition Regulation, proposed and final, have been made in the past quarter. We list select updates and a brief explanation of their potential impact below. We include a complete listing of all changes this quarter in the appendix to this document.
Justification and Approval of 8(a) Sole Source Contracts (Final Rule)
This rule requires the head of an agency to execute and make public prior to award the justification for an 8(a) sole source contract in an amount exceeding $20 million dollars. As a result of this final rule 8(a), sole source contract decisions will receive much more public scrutiny.
Revision of Cost Accounting Standards (CAS) Threshold (Final Rule)
This rule revises the CAS Threshold from $650,000 to $700,000 at FAR 30.201-4 and FAR 52.230-1 through -5. The FAR does not use the phrase “the Truth in Negotiations Act threshold, as adjusted for inflation” for purposes of clarity. This threshold will be revised every five years.
KEY DFARS UPDATES
Solicitation Provisions and Contract Clauses for Acquisitions of Commercial Items (Proposed Rule)
This rule provides a single list of all 58 provisions and clauses that currently apply to Department of Defense (DoD) solicitations and contracts for the acquisition of commercial items. Where a provision or clause is included to implement statutes or executive orders applicable to defense acquisitions of commercial items, the statute or order is identified following each provision or clause.
Contingency Contract Closeout (Final Rule)
The rule implements a requirement for the contracting officer to close out contingency contracts with the highest priority. Heads of contracting activities must monitor and assess on a regular basis the progress of the contingency contract closeout activities and take appropriate actions if a backlog occurs. The rule results in a prioritization of contingency contracts in contract closeouts.
Contractors Performing Private Security Functions (Final Rule)
This rule was implemented pursuant to the sections of several National Defense Authorization acts. It provides for establishment of a minimum process and requirement for the selection, accountability, training, equipping, and conduct of personnel performing private security functions under DoD contracts in contingency operations, humanitarian and peacekeeping operations, or other military operations or exercises performed outside the United States. Most notably, it includes a provision for award fee reduction or denial for failure to comply with private security functions requirements set forth in the rule. In addition, it requires that contractors and their employees provide ‘‘full cooperation’’ with any government-authorized investigation related to the covered private security functions. This rule should be of particular interest not only to private security contractors but also prime contractors operating in covered operations who subcontract private security functions, as the rule requires flow-down of the requirements to subcontracts performed outside the United States in areas of combat and other covered operations.
Only One Offer (Final Rule)
This rule was initially proposed on July 25, 2011, to address competitive acquisitions in which only one offer had been received. This final rule, which incorporates some changes, requires that if only one offer is received when competitive procedures are used and the solicitation allowed for fewer than 30 days for receipt of proposals, then the contracting officer should see if the requirements documents should be revised and resolicit—allowing at least 30 additional days for receipt of proposals.
DCAA AUDIT GUIDANCE UPDATES
The following is a summary of several key memorandums for regional directors (MRDs) issued by the DCAA during the calendar quarter.
Audit Guidance on Audit Leads: 12-PPS-010(R)
Provides an update to the DCAA’s Contract Audit Manual (CAM) Section 4-403.e addressing the following:
• Auditors will prepare audit lead sheets when issues arise outside the scope of the current audits
• Supervisors will review draft audit lead sheets and provide guidance for action/follow-up
• Final approved audit lead sheets will be kept in the originating assignment working papers and the FAO contractor permanent file
• Audit lead should not be dispositioned until sufficient evidence has been gathered to make a determination that the audit lead no longer poses significant risk to the government.
Audit Guidance on Auditing Contractor Business Systems and Contractor Compliance with DFARS 252.242-7006, Accounting System Administration: 12-PAS-012(R)
This MRD provides general guidance on DCAA’s new approach and revised policy for auditing major and other large contractor accounting systems under the DFAR’s business system rules, as revised in May 2011. The MRD provides guidance to DCAA auditors specifying:
• Three new audit programs are available: accounting system, control environment, and billing
• Separate audits of the Labor Accounting System and Indirect and Other Direct Costs will no longer be performed, but elements of these legacy audits will be included in the new accounting system audit procedures
• As part of a new audit approach, DCAA will require contractors to provide contractor system demonstrations and walkthroughs of the system and subsystems
• Business system audits will opine on the contractor’s compliance with the DFARS business system clause criteria rather than on the effectiveness of the contractor’s internal controls or the adequacy of the contractor’s business systems
• Significant deficiency as defined in DFARS will “generally represent a material weakness in internal control as defined in the auditing standards”
• A material noncompliance with any one of the 18 DFARS accounting system criteria indicates that “a significant deficiency/material weakness exists and that the contractor has not complied in all material respects with the DFARS criteria
• Collectively, multiple noncompliances affecting the same criteria can result in a material noncompliance for the criteria
• It is not necessary to demonstrate an actual monetary impact to the government to report a significant deficiency/material weakness
• Accounting system and control environment audits should be performed every third year, unless there are significant accounting system changes or other audits performed in the interim warrant an early review
• Billing audit will be performed every year, and outstanding deficiencies/material weaknesses will be included in the next accounting system audit report
• Business System Deficiency Report Assignments are created when a business system criteria significant deficiency/material weakness is found during a non-business system audit and should be issued as soon as possible.
The MRD is the first in a series of guidance memoranda to be issued by DCAA as it relates to the Business System requirements. Similar MRDs related to the Estimating System and Material Management Accounting System are expected to be issued later this year.
Audit Guidance on Sampling Low-Risk Incurred Cost Proposals: 12-PPD-011(R)
The DCAA is revising policies and procedures for reviewing and reporting on low-risk final indirect rate proposals. Per the MRD, the DCAA proposes to expand the initiative to low-risk contractors with more than $15 million in auditable dollar value. The revised policy and its implementation are being coordinated with the DPAP and DCMA.
Audit Guidance on Executive Compensation Cap for Contractor Fiscal Years 2011 and Beyond: 12-PPD-013(R)
The MRD notes the change in executive compensation cap to $763,029 for costs incurred after January 1, 2011. Auditors are reminded that, based on risk assessment, the reasonableness of executive compensation should also be evaluated.
Audit Guidance on Elimination of Non-major Incurred Cost Audit Program: 12-PPD-014(R)
Effective May 2, 2012, DCAA will no longer have a separate incurred cost audit program for major and non-major contractors. The current major incurred cost audit program will be used for non-major contractors.
Audit Guidance on Performing Sufficient Testing: 12-PAS-015(R)
The MRD reinforces guidance on the testing needed to obtain sufficient, appropriate evidence to provide a reasonable basis for the conclusions expressed in the audit report, as required by Generally Accepted Government Auditing Standards. The MRD:
• Reiterates audit procedures, risk assessment procedures, test of controls and substantive procedures, sufficient appropriate evidence, selecting items for testing, and documentation requirements for auditors
• Includes example scenarios on sufficient testing and audit procedures for historical data when the contractor’s estimates or the auditor’s approach are based upon historical cost and annual incurred cost audits have not yet been completed for several of the applicable years.
NEW DCAA AUDIT PLANS
This publication would normally include all the audit plan changes made within the last quarter. However, DCAA changed 72 of their 90 audit plans in April, May, and June 2012. Many revisions implement audit requirements of the new DFARS business systems clauses, but a full discussion of all 72 updated programs is beyond the scope of this report. If you are concerned as to how changes to specific audit programs will affect your organization, please contact us. We will be happy to discuss these changes with you.
OFPP: “Myth-Busting” Memorandum 2: Addressing Misconceptions and Further Improving Communication during the Acquisition Process” (May 7, 2012)
The memo discusses the misconceptions that may be held by some in the vendor community with respect to improving communication between the government and vendors during the acquisition process. In the memorandum, the OFPP:
• Clarifies that “early, frequent, and constructive engagement with industry leaders leads to better acquisition outcomes”
• Discusses eight misconceptions about government procurements:
The best way to present a company’s capabilities to the government
The right people to bring to meetings with an agency’s technical staff
The value of attending industry days and outreach events
The pre-RFP impact that a company can have on an agency’s requirements and acquisition approach
The protection of proprietary data by government personnel
Interagency ability to share contract information
Tailoring proposals to specific solicitation requirements
The value of a post-award debriefing, even if your company loses the competition.
GAO Report of USAID Oversight of Assistance Funds and Programs: GAO-12-802T (June 6, 2012)
The GAO report includes discussion of USAID shortcomings in the administration and oversight of contracts and assistance instruments. The report addresses:
• Gaps in planning for the use of contractors and assistance recipients
• Visibility into the numbers provided by contractors and assistance recipients.
• Per the report, the GAO identified that:
• Risks, such as possible conflicts of interest, were not addressed
• USAID is limited in visibility into the number and value of contracts and assistance instruments in Afghanistan
• USAID also does not have visibility into the people working under these contracts and assistance instruments.
• As a result of the GAO report, it is expected that there will be:
• More oversight and requests for transparency from USAID as they implement corrective actions to address the findings in the GAO report
• More organization and coordination in the planning stages for assistance funds projects
• A greater emphasis on conflicts of interest during the award and administration of programs issued using assistance funds.
GAO Report of Action Needed to Improve the Timeliness of Grant Closeouts by Federal Agencies: GAO-12-360 (April 16, 2012)
The GAO report analyzed the remaining funding left in expired grants. Per the report, more than $794 million remained in expired grant accounts.
As a result of the GAO’s findings, it is expected that:
• Agencies will begin to develop and implement strategies to annually identify and close out these accounts and return unspent grant funds to the U.S. Treasury
• Agencies with expired grant accounts with no undisbursed balances remaining will develop and implement procedures to annually identify and close out these accounts to ensure that all closeout requirements have been met.
Federal Acquisition Regulation
• Final Rules
Biobased Procurements (FAR Case 2010-004), April 18, 2012
Representation Regarding Export of Sensitive Technology to Iran (FAR Case 2010-018), April 18, 2012
Justification and Approval of Sole Source 8(a) Contracts (FAR Case 2009-038), April 18, 2012
Revision of Cost Accounting Threshold (FAR Case (FAR Case 2012-003), May 10, 2012
Correction: Justification and Approval of Sole Source 8(a) Contracts (FAR Case 2009-038), June 14, 2012
• Interim Rules
Free Trade Agreement—Colombia (FAR Case 2012-012), May 10, 2012
Prohibition on Contracting With Inverted Domestic Corporations (FAR Case 2012-013), May 10, 2012
• Proposed Rules
Nondisplacement of Qualified Workers Under Service Contracts (FAR Case 2011-028), May 3, 2012
Updated Postretirement Benefits (PRB) References (FAR Case 2011-019), May 17, 2012
Defense Federal Acquisition Regulation
• Final Rules
Report on Waiver of Prohibition on Acquisition From Communist Chinese Military Companies (DFARS Case 2012-D023), May 22, 2012
Contingency Contract Closeout (DFARS Case 2012-D014), May 22, 2012
Order of Application for Modifications (DFARS Case 2012-D002), May 22, 2012
Utilization of Domestic Photovoltaic Devices (DFARS Case 2011-D046), May 22, 2012
Title 41 Positive Law Codification Further Implementation (DFARS Case 2012-D003), June 15, 2012
Contractors Performing Private Security Functions (DFARS Case 2011-D023), June 15, 2012
Updates to Wide Area WorkFlow (DFARS Case 2011-D027), June 29, 2012
New Qualifying Country—Czech Republic (DFARS Case 2012-D043), June 29, 2012
Only One Offer (DFARS Case 2011-D013), June 29, 2012
Shipping Instructions (DFARS Case 2011-D052), June 29, 2012
Applicability of Hexavalent Chromium Policy to Commercial Items (DFARS Case 2011-D047), June 29, 2012
United States–Korea Free Trade Agreement (DFARS Case 2012-D025), May 22, 2012
New Free Trade Agreement With Colombia (DFARS Case 2012-D032), May 22, 2012
Defense Trade Cooperation Treaty With The United Kingdom (DFARS Case 2012-D034), May 22, 2012
Acquisition of Tents and Other Temporary Structures (DFARS Case 2012-D015), June 29, 2012
• Proposed Rules
Solicitations Provisions and Contract Clauses for Acquisitions of Commercial Items (DFARS Case 2011-D056), April 5, 2012
Item Unique Identifier Update (DFARS Case 2011-D055), June 15, 2012
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