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Welcome to Apogee Consulting, Inc.

Holiday Hiatus

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Readers, clients, friends—and those who fall into all three categories: please be advised that Apogee Consulting, Inc. is shutting down for a summer holiday break. We will not be writing any blog articles, or participating in any conference calls until we return in early August. For that matter, we will not be answering emails, or the phone, or doing anything connected with “work” until our return.

We think we’ve earned a bit of a rest.

In the first half of 2017, this blog published 54 articles. That’s the highest rate of productivity we’ve been able to achieve in a few years—up about 20% from last year, for example. In contrast, DCAA has managed to publish three (3) MRDs in that same time period. (Granted, that’s a false equivalency—but it was a fun one to make.)

We promise to resume the pace upon our return.

In the meantime, feel free to review our archive of well more than 1,000 articles.

If you feel get bored, consider one of the following actions:

1. Go to the Section 809 panel and submit recommendations for significant changes that could be made to the current acquisition regulatory regime.

2. Write your Congressional Representative or Senator and ask them to demand the current Administration nominate an OFPP Administrator who will become the CAS Board Chair.

If you choose not to try to fix things (and of course it is your choice), then your complaints about the problems with the current system will not be received favorably here at Apogee Consulting, Inc.

Best wishes until our return.



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If you live in California (or neighboring states, or Texas) you will have heard about In-n-Out Burger, one of the nation’s premier fast-food restaurant chains. The family-owned chain has been around since 1946, and still does things “the old fashioned way”—which includes a relentless focus on food quality and customer service. We visited a local In-n-Out restaurant recently and we were struck by the quality of communication the team exhibited.

It should be obvious that a fast-food restaurant is staffed by a team of individuals, each with a primary assignment. At In-n-Out, some people make the fries and other people grill the patties and still other people take the patties and turn them into custom-ordered hamburgers. (For example, my favorite order is a Double-Single, animal style, extra pickles. That order makes sense at In-n-Out, and nobody pauses for even half a second when I make it.) The bottom-line is that this group of individuals has to work together as a team so as to receive, make, and deliver customer orders. They must do so as quickly and as efficiently as possible (since no order is started before it’s ordered), knowing that each order is going to be a one-off package uniquely tailored to the customer’s specifications. In other words, there is very little standard work at In-n-Out. There are standard processes, but almost no standard work. Thus, the team not only has to work together as one, but it must be flexible and adapt quickly to what the customers are ordering at the time.

The team accomplishes this through communication.

Years ago we worked on teams that used a tailored CMMI maturity model to evaluate the program management function at various aerospace and defense companies. At that time, we didn’t specifically focus on evaluating internal and external communications but, if we had, we probably would have set up a maturity model along the following lines:

1 – Rigid silos in evidence. Little or no internal communication between silos. Customer communications restricted to specific silos (e.g., Contracts) with little or no dissemination outside designated silos. Internal and external lines of communication have gaps and/or are misaligned. No escalation of risks and issues outside of silos.

2 – Rigid silos in evidence. Ad hoc / informal communication between silos. Customer communications officially restricted to specific silos with informal dissemination outside silos. Internal and external lines of communication have no gaps but may be misaligned in some instances. Escalation of risks and issues outside silos reactive and not timely.

3 – Silos in evidence but formal and informal communication between silos noted. Some use of Integrated Process Teams (IPTs) but IPTs are not the norm and may not be aligned when they exist. Customer communication disseminated through program team and matrix functions through documented protocols. Internal and external lines of communication are aligned, and have no gaps. Escalation of risks and issues formalized but posture is still reactive.

4 – IPTs abundant, managed, and aligned to bridge silos. Customer communication quickly disseminated to all stakeholders. Internal and external lines of communication are robust, linked to document management functions, aligned, and have no gaps. Risk and issues managed, escalated timely to minimize reactivity.

5 – Culture of communication and information management. Formal and informal communications abundant, designed to efficiently disseminate information, including risks and issues, to all stakeholders. Document management and retention linked to communication. All internal and external lines of communication operating well.

Our experience at In-n-Out would have pegged that restaurant as operating somewhere between a 3 and a 4 on the scale described above. The shift lead was communicating constantly with her team, telling people where to go and what to do. She clearly communicated her expectations, both for individuals and for the team as a whole. (For example, she said “I expect at least one positive customer comment to the feedback line for this shift. What are you going to do to make that happen?”) In a moment of quiet she went over and explained to a new person running the register how to properly input the special orders so that the rest of the team would understand what they had to do. People spoke to each other and the food was prepared and delivered quickly.

There was one time at a swanky restaurant in Las Vegas when I saw a team operating at a level beyond rating. The kitchen was open and the patrons sat around watching food being prepared. And not a word was exchanged between the individuals in the kitchen. They were silent. They were silent because they all knew what needed to be done and were proficient at doing it. They were demonstrating “unconscious competence” and the patrons were paying for it. (It was worth it.)

How would you rank your operating culture in terms of communication?

In our experience government contractors don’t have really great communication. Which is a problem for the compliance function, because communication facilitates compliance.

Questions to consider when ranking your operating culture:

  • Does the proposal team know the terms and conditions that affect the cost estimate? For example, are there Section H terms that impact per diem reimbursement? If personnel are operating OCONUS, does the team understand the tax implications?

  • How accurate is the contract brief? What’s the lag time between receipt of a contract mod and the updating of the contract brief? Is the contract brief disseminated to everybody who needs to know contract information, including the billing function?

  • What indirect rates are used to prepare program EACs? Are they the most current and accurate rates or are they last year’s FPRA rates?

  • What is the time lag between submission of final billing rates and the submission of “period 13” adjustment vouchers?

  • In a T&M contract environment, how often are hourly labor billing rates reviewed to make sure all personnel are in the correct rate categories?

  • When senior leadership makes a strategic decision, how long does it take for that decision to be disseminated to the rest of the organization?

We could go on.

The point of this article is that communication matters. It may be the single most important indication of the ability of an organization to execute efficiently and effectively.

In-n-Out Burger may have figured out how to communicate and how to use communication to facilitate superior execution.

How are you doing?


Disclosed or Established

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If you are a CAS-covered government contractor, you already know a lot about cost accounting practices. You probably know about Disclosure Statements and how to prepare them, and how to revise them when cost accounting practices change. If you already know those things, it’s likely that you are not a small business.

While many small businesses are required to comply with individual Standards in order to make their costs allowable, those same small businesses are exempt from the CAS requirements pertaining to disclosing cost accounting practices and disclosing changes in cost accounting practice. To be clear: in addition to the 19 Cost Accounting Standards, there are other CAS regulations that large businesses have to deal with. There is also FAR language. And there are certain CAS clauses that come into effect for large businesses that win fully CAS-covered contracts. In sum, while small businesses have to deal with some aspects of CAS that are solely related to cost allowability, there is a whole ‘nother world out there that large businesses have to deal with.

We’re going to discuss that bigger world of CAS regulations in this article.

For many people, when they hear “CAS” the first thing they think of is “Disclosure Statement.” In our experience, that’s the bogeyman that small businesses fear when they think they have grown to the point when they may become subject to CAS coverage. We get that, we really do. If you haven’t seen a Disclosure Statement before, it can be a daunting challenge to fill one out. (Even if you have seen one, it can still be a daunting challenge: Word tables are no fun at all.) It’s an eight-part form with lots of topics and opportunities for “continuation pages” that require one to squeeze lots of diverse information into a single document.

But of course it is a form. The Disclosure Statement is nothing more than a standard government form. If you are a commercial organization you fill out Form CASB DS-1 and if you are an educational institution you fill out Form CASB DS-2. When you have completed your Disclosure Statement form, you submit it to your Cognizant Federal Agency Official (CFAO) and your local DCAA office, and you wait to see if anybody will review it and give you feedback. Meanwhile, your customers tell you that they can’t award that contract until your Disclosure Statement has been determined to be adequate. (See FAR 30.202-6(b).) In that case, the timely review of your CASB Disclosure Statement becomes very very important, and this becomes one government oversight activity that you actually push for.

Because it is a standard government form, it’s a one-size-fits-all form. Consequently, the Disclosure Statement does not require you to describe all of your cost accounting practices; it only requires you to describe what it requires you to describe. It is likely that your organization may have other, additional, cost accounting practices that the form doesn’t address.

That’s fine. That’s the way it is.

That’s why noncompliances can cover not only disclosed cost accounting practices, but also established cost accounting practices. The promulgators of the CAS regulations and Standards recognized that what your company does may not fit neatly inside their standard form, and they made allowances for that. Thus: you can be noncompliant with Standard 401 (“Consistency in Estimating, Accumulating and Reporting Costs”) because you were inconsistent with respect to your established cost accounting practices, even if you were consistent with respect to your disclosed cost accounting practices.

But the situation does make handling changes to cost accounting practice more challenging.

If you are subject to the CAS regulations then you are required to provide advance notice to your CFAO 60 days prior to making a change in cost accounting practice. You may have to submit a cost impact. If you are changing a disclosed cost accounting practice, you will have to submit a revised Disclosure Statement. Typically, along with the revised Disclosure Statement you include a matrix showing every single change and where in the Disclosure Statement it was made

But if you are changing an established cost accounting practice, one that doesn’t fit into the Disclosure Statement, then what do you do?

You don’t need to submit a revised Disclosure Statement, because nothing in the Disclosure Statement is changing. How do you then provide adequate notification to your CFAO and DCAA of the upcoming change(s)?

Our experience tells us that you still need to comply with the advance notification requirements found in your CAS-related contract clauses. You still need to submit a letter to the CFAO 60 days in advance of the change. It’s probably a good idea to have a Gross Dollar Magnitude (GDM) cost impact analysis ready to share with the CFAO and DCAA.

Our experience further tells us that the government folks who receive advance notification and a GDM impact analysis without a revised Disclosure Statement are going to be confused. They are going to be skeptical. They are going to be suspicious. They are not going to understand how a contractor can make a change to a cost accounting practice without also revising its Disclosure Statement. It is likely that they are not going to understand the difference between a disclosed cost accounting practice and an established cost accounting practice. Most people, both within and without government, believe that the Disclosure Statement is a comprehensive document in which the contractor is required to describe all of its cost accounting practices; they aren’t going to easily accept that it’s a government form with the same limitations inherent in all government forms. Therefore you are going to have a bit of a sales job on your hands. Some knowledge transfer will be required.

In the final analysis, if you look only at a Disclosure Statement and ignore cost accounting practices that haven't been disclosed, you may miss the changes to established cost accounting practices. If you are a government oversight official, you may miss changes that impact contract costs. If you are a contractor employee, you may similarly miss those changes, and that may lead to you violating the requirements associated with your CAS contract clause(s). Both parties need to look at the entire universe of contractor cost accounting practices holistically, so that all changes that affect contract costs can be identified and used to analyze the cost impact(s).

There’s also another way in which an undue focus on the Disclosure Statement can lead people down the wrong path: if you look only at a Disclosure Statement you may see more changes to cost accounting practice than are actually taking place. If you submit a change matrix along with the revised Disclosure Statement, the tendency is to count the number of changes in the matrix and to think that each change is a change in cost accounting practice.

That’s not necessarily the case.

And we’re not even talking about changes that don’t rise to the level of a change in cost accounting practice: the first time incurrence of a cost or the elimination of a cost, or treatment of a cost that had previously been immaterial but is now material. And we’re not talking about reorganizations, or pool splits or pool combinations. We’re talking about an actual miscount of the real changes to cost accounting practice because “both sides of the same coin” are being counted as two changes.

For example, if there is a change in a home office allocation that forces a change in the receiving segment in order to receive the new home office allocation, that is (in our view) one change, not two changes. The change is being made at the home office and then the segment is reacting to that change. If you look at the two Disclosure Statements, you see two changes. But if you look holistically at what is happening, there is one change with a “ripple effect” at the segment level.

This matters because of the government’s cockamamie approach to concurrent changes in cost accounting practice. We’ve written fairly extensively on this site about the government’s viewpoint—which was upheld by the ASBCA. (We haven’t written that many legal practitioners believe that aspect of the Raytheon appeal was wrongly decided. But that seems to be the case, from what we’ve heard.) In the government’s view the contractor cannot net concurrent changes against each other, since the FAR doesn’t permit that.

But one change that has ripple effects is not a set of concurrent changes; it is one change. To evaluate the impact of that one change, the impact at the contract level will have to be estimated. That means that the ripple effects will have to be netted against each other.

We are not here to argue that concurrent changes can be netted against each other. That argument has been made at the ASBCA and the Board didn’t buy it. But we strongly believe that an undue focus on the individual revisions to a Disclosure Statement (or set of Disclosure Statements) without a more holistic view of both disclosed and established cost accounting practices may lead one to seeing more changes than are actually present. That’s what we want to warn against.

CAS is hard. Disclosure Statements are hard. Changes to cost accounting practice are hard. Remembering that some cost accounting practices exist outside of a Disclosure Statement, while others cross multiple sections of a Disclosure Statement (or cross multiple Disclosure Statements), helps with the challenges inherent in CAS administration.


Last Updated on Monday, 10 July 2017 21:14

Missing CAS

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During the writing of our latest article on cost accounting practices we had an opportunity to visit the CAS Board website, which is under the Office of Federal Procurement Policy (OFPP) website, which is under the Office of Management and Budget (OMB) website, which is under the White House website.

Only it isn’t there anymore.

There is no CAS Board website.

There is no OFPP website.

They are both gone.

Doing some more research, we found out that there is no CAS Board Chair. By statute, the Chair of the CAS Board is the OFPP Administrator.

There is no OFPP Administrator.

There is not even a person listed as “nominated” for the position and awaiting confirmation.

There is nobody responsible for CAS.

There is nothing.

And that’s the way it is, nearly six months after the current Presidential Administration came into office.

We are reminded, once again, of the DFARS Business System administration regime. The regime that everybody told the DAR Council would be unworkable because of a lack of government resources. As we’ve documented, the DAR Council simply did not care. They didn’t care that their oversight regime would be unworkable. They passed their DFARS rules over the objections of the public and now—more than five years later—we all know that the regime is unworkable. The only defense contractors subject to the DFARS requirements are the largest ones; the others have the same contract clauses but they know they’ll never be held to account for compliance with them.

Similarly, it has become clear over the past 10 or so years that the CAS regime is also unworkable. It’s overly complex. It’s ambiguous. It’s burdensome. It’s grounded in a viewpoint that’s more than 40 years old, where DOD acquired more goods than services. But in the past 40 years many things have changed and the CAS regulations and Standards have not kept up with the changes.

As we’ve noted from time to time, the CAS Board almost never met even when there was an OFPP Administrator to chair it. The published minutes reflected a situation where literally years would pass between meetings. The published list of CAS Board members included people who had left government service literally years before.

The current lack of anything official related to the CAS Board isn’t really anything new. The Federal government abandoned the Cost Accounting Standards years ago. We are just seeing that abandonment being documented.

Meanwhile, the Section 809 panel (Team 9) continues to move “with boldness” to reform an anachronism, an abandoned regulatory regime that once mattered but now is more of an historical curiosity.

Sure, people still follow the rules and people still submit Disclosure Statements, and if DCAA comes across something that looks like a noncompliance with one or more Standards they’ll do something about it. But we all know that we’re just following the letter of the rules.

The spirit is long dead.


Quimba’s Long-Delayed Victory

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A search tells us that we’ve mentioned Quimba Software seven times on this blog. We were following Quimba’s Quixotic quest for redemption even before the company hired us to assist in one small aspect of its many pieces of litigation before the ASBCA and U.S. Court of Federal Claims. To us, Quimba typifies the story of a small business run by smart people who have to learn the hard way that government contract cost accounting compliance is something that should not be taken lightly.

In 2003 Quimba was awarded a $200,000 CPFF contract from the U.S. Air Force to perform “information technology research.” Quimba performed the work satisfactorily. Then, years after the contract was complete, DCAA performed an “incurred cost” audit of Quimba’s claimed 2004 direct and indirect costs, and disallowed claimed deferred compensation costs. But that was not the first issue that Quimba had with its government customer.

Pursuant to the terms of its contract, Quimba submitted invoices for its costs as it incurred them--i.e., as it performed the work. It had a single invoice (in the amount of $30,322) approved by DCAA and paid by the Air Force. And then everything went to hell.

Apparently, the issue was that Quimba’s accounting system “was not DCAA-approved” and its indirect rates were similarly “not DCAA-approved” and “Quimba was told that it ‘would not get paid until its indirect rates were approved by DCAA.’” It took almost an entire year for DCAA to approve Quimba’s provisional billing rates—even though that was clearly the contracting officer’s job. Regardless, Quimba was told that it wouldn’t be paid for its work until DCAA had approved its accounting system and its rates. And even after provisional billing rates had been agreed upon, “Quimba did not receive any additional payments for work completed in 2004 prior to the end of FY 2004, and the [DCAA accounting system] audit continued into 2005.”

Quimba completed its work in March 2005. It was only after the work was completed that DCAA was willing to approve Quimba’s invoices.

The inequity in the foregoing facts should be obvious. Quimba was treated shamefully but, unfortunately, that treatment is not unusual. Small businesses get bullied by government customers, and typically they lack the knowledge, experience, and resources to do anything about it.

Back to the story. “In May 2007, DCAA initiated an audit of Quimba’s FY 2004 ICP and an audit report was issued in July 2007.” (DCAA moved a lot faster then than it does today. We suspect the speed of the audit was helped by the fact that Quimba had only one government cost-type contract.) DCAA questioned $61,124 of Quimba’s claimed direct labor (charged to its one cost-type government contract) because “wages paid and deducted as compensation under IRS regulations to the two owners [were] significantly less than direct labor claimed on the government contract.”

The contracting officer took that finding and multiplied it, using some form of math unknown to people without Certificates of Appointment. The CO issued a Notice of Intent to disallow $148,684, because Quimba allegedly claimed costs made unallowable by the FAR compensation cost principle (31.205-6(b)(2)(i)) – “for closely held corporations, compensation costs . . . shall not be recognized in amounts exceeding those costs that are deductible as compensation under the Internal Revenue code and regulations under it.” In the Contracting Officer Final Decision (COFD), the claim was for $91,993. During arguments before the Court, the government admitted that figure was incorrect. The contracting officer knew it was incorrect but refused to revise or rescind the COFD.

And even though the government admitted the math was wrong, it still filed a counter-claim, demanding an additional $76,482—a figure that was later changed to $50,096.

Remember the original contract award was for $200,000. Basically, the government was demanding nearly three-quarters of the entire contract value, all related to Quimba’s claim of deferred compensation. And the Court was deciding the dispute a nearly 15 years after the costs had been incurred and claimed and billed and paid.

Quimba, readers may recall, was a small business. How many small businesses have the resources to maintain a fight with the U.S. Government for that length of time? Answer: Not many. Not very many at all.

Finally, nearly 15 years later, Quimba learned that, indeed, its deferred compensation costs were allowable, because they were deductible under IRS guidelines. The compensation costs were deductible because Quimba had no choice but to defer compensation costs. It had no choice but to defer compensation costs because its government customer refused to pay its bills. Quimba had no cash flow and was required to perform its contract work anyway, so it had to defer its compensation costs until the government got around to paying the bills.

According to the Court of Federal Claims, in a decision written by Senior Judge Loren Smith—

It is clear to this Court that, had the parties examined the C.F.R. more closely, the rebuttable presumption contained in 26 C.F.R. § 1.404(b)-1T would have resolved this case long ago. Quimba’s deferral of its FY 2004 compensation was unintended, unavoidable, and unanticipated. Furthermore, Quimba’s financial difficulty, which forced payment of the compensation beyond 2004, was unforeseeable throughout FY 2004. … While Quimba understood the company would be required to update its accounting system, there was no reason to believe that the updating and approval process would take the entirety of FY 2004 and continue through a significant part of FY 2005. This is not a case in which the company had a prior course of dealing with the government or an understanding of the elusive accounting system requirements. … As the government forced Quimba’s hand, it would be inequitable to find these deferred compensation costs unallowable nearly thirteen years after the fiscal year in question. The facts in this case make it clear that Quimba’s situation falls within this limited exception, and, had the government engaged in a more careful review of its own regulations, the parties could have avoided five years of unnecessary litigation.

(Emphasis added.)

Thus, Quimba emerged victorious. The government may still appeal the decision, but we suspect the government attorneys will read between the lines, and consider the matter resolved.

As for Quimba Software … it closed its doors long ago. The litigation was funded by the company owner(s), as a matter of principle and in an attempt to obtain some small measure of justice.


Last Updated on Tuesday, 04 July 2017 18:31

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In March 2009, Nick Sanders’ article “Surviving Government Audits: Have the Rules of Engagement Changed?” was published in Government Contract Costs, Pricing & Accounting Reports (4 No. 2 GCCPAR P. 11). Apogee Consulting, Inc. is proud to announce that Mr. Sanders’ article was selected for reprint and publication in Thomson West’s The New Landscape of Government Contracting.  Mr. Sanders, Apogee Consulting’s Principal Consultant, joins such distinguished contributors as Professors Steven Schooner and Christopher Yukins, Luis Victorino and John Chierachella, Joseph West and Karen Manos, Joseph Barsalona and Philip Koos and Richard Meene, and several others.  The text covers a lot of ground, ranging from the American Recovery and Reinvestment Act (ARRA) to Business Ethics and Corporate Compliance, and includes several articles on the False Claim Act and the Foreign Corrupt Practices Act.  In addition, the text includes the full text of many statutory and regulatory matters affecting Government contract compliance.


The book may be found here.