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DCAA Audit Guidance: Inadequate Cost/Price Analysis

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In September, 2017, DCAA issued audit guidance that discussed evaluations of prime contractor cost/price analyses of proposed subcontractor costs. We didn’t discuss it because it didn’t really merit discussion; at its core it was a restatement of requirements found in FAR Part 15 (at 15.404). Prime contractors that already knew about those requirements and that were complying with them were not going to have significant issues with the “new” audit guidance; so we refrained from offering comment.

Now DCAA has issued revised audit guidance and it’s worth discussing.

MRD 18-PSP-006(R), dated November 27, 2018 (but published in January, 2019) addresses “incomplete or inadequate prime contractor cost or price analyses.” The objective of the MRD is to help auditors avoid classifying proposed subcontractor costs as being “unsupported” simply because the auditors don’t like the cost/price analyses that the prime contractor performed. If the prime’s analyses are flawed, the MRD directs the auditors to attempt to perform alternate procedures; proposed subcontractor costs should be classified as “unsupported” only if those alternate procedures fail to provide sufficient evidence to support an audit conclusion.

The MRD also directs auditors who are forced to use such alternate procedures to report the dollars associated with incomplete or inadequate cost/price analyses to the CO as a “material noncompliance” with FAR requirements. Readers should note that there is no such thing as a “material noncompliance” with FAR requirements and any such finding carries with it exactly zero consequences. Though, having said that, we suppose that piling up a bunch of such reported “material noncompliances” is not going to make the next Estimating System review go any easier.

What are these alternate procedures that the auditors are supposed to perform?

  • Create a decrement based on purchase order history

  • Create a decrement based on comparisons of prior subcontractor proposals to the cost/price analyses of those proposals

  • Create a decrement based on comparisons of prior subcontractor proposals to the actual negotiated values of the subcontractors

  • Request an assist audit of the subcontractor’s proposal by the DCAA audit team with cognizance over the subcontractor

In discussing this new guidance with professional subcontractor cost/price analysis guru Dan C., Dan noted that prime contractors can use the exact same procedures in their cost/price analyses of received subcontractor proposals. In other words, if your cost/price analyses of a subcontractor proposal isn’t going well, see if any of the procedures listed above help get you where you need to go. If so, then you will have a complete and/or adequate subcontractor cost/price analysis to share with your customer (and DCAA), thus minimizing DCAA”s need to implement the alternate procedures when performing audits of your proposal. (Thanks Dan!)


CID Authority Centralized in DCMA CIG

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Previously on Apogee Consulting, Inc.:

  • We noted that DoD had issued a draft Commercial Item Handbook (version 2.0).

  • We discussed a proposed rule regarding how contracting officers should make Commercial Item Determinations (CIDs).

  • We reviewed a revised proposed rule (same topic) and noted some improvements.

  • We told you about a DPAP Memo announcing the creation of six (6) Commercial Item Centers of Excellence, each “staffed with a cadre of engineers and price/cost analysts to advise” COs in how to make commercial item determinations. The six CoE’s (located in Tampa Bay, Denver, Indianapolis, Phoenix, Boston, and Philadelphia) are collectively known as the Commercial Item Group (CIG). That policy Memo clearly stated that “the responsibility for commercial item determinations remains a PCO responsibility.”

  • We reported that a final DFARS rule had been issued and that DoD had (finally) issued its Commercial Items Handbook (version 2.0). The final version—issued literally nine years after the draft had been published—came in two volumes (“Commercial Item Determination” and “Commercial Item Pricing”), and we provided a link to that new Handbook, which was now called a Guidebook.

Now we present:

On December 20, 2018, the Acting Principal Director, DoD Defense Pricing and Contracting, issued a short policy Memo that stated “effective immediately, DCMA CIG Contracting Officers will serve as determining officials for all commercial item review requests submitted to DCMA. … Determinations by the CIG will relieve buying activity Procuring Contracting Officers (PCO) from duplicating effort expended reviewing the CIG recommendations to determine whether an item meets the FAR 2.101 definition of ‘commercial item’ as well as provide consistency in the commerciality review process.”

Thus, the responsibility for commercial item determinations (CIDs) has been transferred from the DCMA PCOs to the DCMA CIG COs. (Acronym soup for the win, right?) The CIG COs will make the call on the CIDs, and that call is final.

Is this a good thing? It depends. Those of us who’ve dealt with the reluctance of DCMA PCOs to make a decision might well think it is a good thing, whereas those of us who’ve been able to sail through a local CID might not look forward to having the “pros from Dover” reviewing the commerciality supporting documentation with a fine-toothed comb. Given the “unevenness” of expertise throughout the PCO ranks, we probably tend to bias towards the “good news” side of the spectrum.

Of course, your mileage may vary.

Last Updated on Sunday, 13 January 2019 07:43

2018 Recap – Federal Acquisition Circulars

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Starting in 2019 I will be editing a reference book on the FAR, tracking changes made in 2018. Consider this article to be a foretaste of that update.

There were four Federal Acquisition Circulars (FACs) issued in 2018. Interestingly, with the issuance of FAC 2005-99 (June 15, 2018) the numbering reset and the following FAC (December 20, 2018) was numbered 2019-01.

FAC 2005-97 was issued January 24, 2018. It contained one final rule (FAR Case 2018-001: Trade Agreements Thresholds) that adjusted “the thresholds for application of the World Trade Organization Government Procurement Agreement and the Free Trade Agreements as determined by the United States Trade Representative, according to predetermined formulae under the agreements.” The final rule made changes to FAR 25.4 (“Trade Agreements”) and other FAR sections that include trade agreement thresholds. It also revised certain solicitation provisions and contract clauses.

FAC 2005-98 was issued May 1, 2018. It contained four final rules, as follows:

  • FAR Case 2015-039: Audit of Settlement Proposals. Increased the “dollar threshold for the audit of prime contract settlement proposals and subcontract settlements submitted in the event of contract termination, from $100,000 to align with the threshold in FAR 15.403–4(a)(1) for obtaining certified cost or pricing data, which is currently $750,000.”

  • FAR Case 2017-004: Liquidated Damages Rate Adjustment. Made an inflation adjustment to “the rate of liquidated damages assessed for violations of the overtime provisions of the Contract Work Hours and Safety Standards Act.” The rate to be used is specified at 28 C.F.R. 5.5(b)(2).

  • FAR Case 2017-007: Task- and Delivery-Order Protests. Raised the protest threshold “from $10 million to $25 million (applicable to DoD, NASA, and the Coast Guard) and [repeals] the sunset date for the authority to protest the placement of an order (for the other civilian agencies), which was also previously repealed by the GAO Civilian Task and Delivery Order Protest Authority Act of 2016.”

  • FAR Case 2017-008: Duties of Office of Small and Disadvantaged Business Utilization. Amended FAR 19.201 “to update the list of duties for OSDBUs and OSBPs in line with section 15(k) of the Small Business Act. No clauses or provisions are being created or revised by this rule.”

FAC 2005-99 was issued June 15, 2018. It contained two interim rules and zero final rules. The two interim rules were:

  • FAR Case 2017-018: Violations of Arms Control Treaties or Agreements with the United States. Added a new FAR section, 9.109, to “address the prohibition on contracting with an entity involved in activities that violate arms control treaties or agreements with the United States.” Also added a new provision 52.209-13 that requires a contractor certification. Does not apply to acquisitions of commercial items or to acquisitions below the Simplified Acquisition Threshold.

  • FAR Case 2018-010: Use of Products and Services of Kaspersky Lab. Added a new FAR section, 4.20, and a related contract clause to “prohibit[] the use of hardware, software, and services of Kaspersky Lab and its related entities by the Federal Government on or after October 1, 2018.”

FAC 2019-01 was issued December 20, 2018. It contained one final rule (FAR Case 2015-017: Combatting Trafficking in Persons-Definition of “Recruitment Fees”). The final rule added a definition of “recruitment fees” to FAR 22.1702 and revised the language at 22.1703. It also revised the language of contract clauses 52.212-5, 52.213-4, 52.222-50, and 52.244-6.

In addition to the foregoing, a late proposed rule was issued December 26, 2018. The proposed rule would implement FAR Case 2017-005, entitled “Whistleblower Protection for Contractor Employees.” The proposed rule would “make permanent the pilot program for enhancement of contractor protection from reprisal for sharing certain information.” It would also “clarify” that “that the cost principles at 10 U.S.C. 2324(k) and 41 U.S.C. 4304 and 4310 that prohibit reimbursement for certain legal costs apply to costs incurred by a contractor, subcontractor, or personal services contractor.” The rule-making comments note that “personal services contractors are contractors” and “cost principles generally already apply in the same way to costs incurred by subcontractors as to costs incurred by contractors.”

Last Updated on Friday, 28 December 2018 07:50

2018 Recap – Apogee Consulting, Inc.

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Those who dish it should be able to take it, right? Given our penchant for offering criticism of our government policy-makers, rule-makers, and auditors, we think it’s only fair to offer our own statistics for criticism as well.

Apogee Consulting, Inc. as a Consultancy

2018 was a great year. It wasn’t the best year, in terms of gross revenue, but it was a strong No. 3 in that regard. (FYI, the best year was 2011, followed by 2012.) Of course, our idea of a good year is based on the size of the consultancy, which is—shall we say?—not large.

In 2018, we served a double-handful of clients. Engagements ranged from supporting cost/price analyses to helping draft new Estimating System and Purchasing System Descriptions. In the meantime, we supported a smallish company’s efforts to develop an adequate Accounting System, and we worked with a couple of other formerly small businesses on Small Business plans and CAS/FAR related matters. We were pleased to see that the ASBCA told the Department of Defense that our CAS/FAR litigation consulting expenses were both reasonable and reimbursable under the Equal Access to Justice Act.

One long-term client essentially went on hiatus in 2018, as it engaged attorneys to tap-dance through litigation motions and such. (Happy to say that we recommended the law firm and lead attorney.) We expect that client to request our services again in 2019.

Apogee Consulting, Inc. as Educator

As noted on this website, I made several public presentations in 2018 to both the Association of Government Accountants (AGA) and the National Contract Management Association (NCMA). I did not publish any articles this year, which always disappoints. But of course there was the blog (I’ll get to that in a moment.)

Looking forward into 2019, I will be teaching a class in the San Diego State University’s Continuing Education Services’ Government Contracts series. I will also be editing two books for Lexis Nexis. I will also be presenting at a local seminar, sponsored by BDO, LLP and Deltek, in February.

Apogee Consulting, Inc. as Blogger

We published 113 blog articles in 2018, which is a rate of more than two per week. Each article was at least 500 words and most were at least 1,000 words. Basically, I wrote a novel’s worth of blog posts.

It’s tough to tell which articles were popular and which articles had their “hit” statistics inflated by bots and attempts to hack the site. In fact, 2018 was marked by a number of attempts to hack the site through SQL injections and email attacks. For a few days, I was overwhelmed with Chinese character emails (which are tough to block with conventional means, because most US software doesn’t recognize that character set). Despite the attacks, we made it through the year relatively unscathed.

As far as the articles go, I think the ones about the CAS Board were the most popular. As I wrote before, I don’t think it has to do with my writing or the content of the posts; but rather it is a symptom that people in this business are starved for news on the topic. The CAS Board, which published meeting agendas only sporadically (at best) throughout the year, meets behind closed doors and offers very little of substantive commentary to the public. As a result, people glom onto anything that looks remotely like news about the CAS Board's doings, even our blog articles.

We spent a lot of time this year writing about the compliance gaps created by statutory changes that were slow to be implemented in regulations. We also wrote about the Section 809 Panel and some of its recommendations.

We didn’t write very much about DCAA, at least in comparison to prior years. A couple of things contributed to the relative paucity of articles. First, DCAA doesn’t issue very much audit guidance anymore; or, perhaps we should say that the audit agency doesn’t publish very much audit guidance in the form of Memoranda for Regional Directors (MRDs) on its website. Our count is three. DCAA published only three MRDs in 2018, which is dramatically fewer than in previous years. Another change is that DCAA wasn’t mentioned in as many court decisions as in previous years; we decline to speculate as to why that might be the case. Finally, another fruitful area of potential blog articles—the “Selected Area of Cost Guidebook”—continues to be “under construction” in many chapters. So, all in all, 2018 was not a good year for spawning blog articles about the audit agency.

Recap: 113 blog articles in 2018, an increase from 2017’s 101 blog articles. In 2016 we published 89 articles. In 2015 we published 111 articles. Thus: 2018 represents the most prolific we’ve been in many years.


Lots of blog articles. Lots of consulting activity. More clients and more new clients.

Here’s hoping that 2019 is more of the same. For us all!

Last Updated on Tuesday, 01 January 2019 10:40

Shay Assad Moves On

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I’ve always been confused by Mr. Assad’s role(s) within the Department of Defense. At different points, he’s been a mediator (between DCAA and DCMA), a policy-maker, a builder of empires, and an industry antagonist. And those are just off the top of my head.

Let’s be clear here: I’ve never met Mr. Assad (unlike some of my industry peers) and I do not know him personally. What I know of the man, I know through public information: the ineligible healthcare dependent position, the CAS 412/413 position, the redefinition of “adequate price competition” decision, the Performance-Based Payments cash flow tool, various DFARS Class Deviations, and other similar issues that have come from his office over the past nine years. A keyword search identifies that we have written about Mr. Assad and his directives 49 times since 2010; this article marks the 50th instance. A quick scan of those articles reinforces our opinion. Based on the public information available to us: not a fan.

And now Mr. Assad is moving on.

We already knew that Mr. Assad was departing his role as Director, Defense Pricing and Contracting and we alluded to it in mid-December. We didn’t know where he was going or what he was going to be doing, but we knew he was moving on. Now comes word, via a report by Marcus Weisgerber at DefenseOne, that Mr. Assad is being reassigned to a DCMA office in Boston. His exact role is unclear, but it is being described as a lateral move. The exact report is as follows—“in the coming weeks, Assad will be moved from his position as director of defense pricing and contracting initiatives to a lateral position within the Defense Contract Management Agency in the Boston area. …” It’s tough to imagine what “lateral position” DCMA might offer him in terms of policy-making impact, but it’s likely that “lateral” refers to pay band and not roles and responsibilities.

An interesting aspect of Mr. Assad’s compensation was a negotiated agreement to permit him to maintain a primary residence in the Boston area while commuting to Washington, D.C., for his job at the Pentagon. Unlike almost every civilian and military employee of DoD, he was not required to relocate to accept a new position. Indeed, the taxpayers paid for his commuting expenses (though we suspect it was reported as taxable income to him). The DefenseOne article stated—

Assad had a special arrangement that allowed him to live in the Boston area and commute regularly to Washington, current and former defense officials said. Neither Ash Carter, then the Pentagon’s acquisition chief, nor his successor Frank Kendall objected to this arrangement, because they viewed Assad as unusually good at saving taxpayers’ money.

According to the article, taxpayers spent $503,000 on Assad’s travel during the past seven years. Is that a lot? Not really. But it is unusual, isn’t it?

Although the travel reimbursement may be an interesting aspect of Mr. Assad’s compensation, it is not why he is being reassigned, according to the report. Two other reasons were given: the first was the recent proposed rule on contract financing payments, about which we have written fairly extensively. (Note: not fans.) The second reason had to do with Mr. Assad’s character. Although he was seen as a shrewd and tough negotiator, “some current and former officials also describe him as a bully who needed to be monitored by his superiors out of fear he would overstep his authorities.”

When one combines the travel reimbursement with the political backlash from the contract financing rule, and then combines those with the perception that he was a maverick that needed watching, it seems that Mr. Assad’s liabilities outweighed his benefits, at least in the minds of his bosses.

Thus: Mr. Assad’s return to a permanent work location in the Boston area, one near his home and family, at what we assume to be a commensurate salary.

A soft landing indeed.


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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.