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Apogee Consulting Inc

COVID-19 Resources

Nick Sanders
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The tendency over here is to just write about COVID-19 stuff, because that’s what’s on everybody’s mind right now. Contractors are concerned about workforce health and safety (as they should be), and also about impacts to their existing contracts. Of course there will be impacts.

There will be direct cost impacts associated with absent employees, or with quarantined employees, or simply because of inefficiencies created by the need to keep social distancing. We’ve heard it referred to as “employee density.” We’ve also heard about some contractors being directed to reduce their “footprint” at certain governmental installations, also in the name of reducing employee density. If you were a learning curve contractor, you’re pretty much going to throw that learning curve right out the window.

There will be indirect cost impacts associated with unanticipated paid time off, or with additional standby/idle time, or with the additional costs associated with facility cleaning/sterilization. Many contractors are giving their employees facemasks to wear—and those facemasks cost money. Whatever indirect rates you thought you were going to run at for 2020, you’re pretty much going to throw those rates out the window.

Recovery of the direct and indirect cost impacts associated with COVID-19 will depend on contract type, contract terms and conditions, your customer, and your contracting officer. Recovery will also depend on how well you documented your circumstances and your decisions made in response to those circumstances. As we’ve posted before, every contractor should be (1) segregating COVID-19 impacts in their accounting system, and (2) documenting everything. Two or three years from now, you’re going to be glad you did so.

Auditors are going to push contractors to justify why their decisions—and the resulting costs—were reasonable. FAR 31.201-3 establishes the basis for reasonableness. It states:

(a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.

(b) What is reasonable depends upon a variety of considerations and circumstances, including-

(1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance;

(2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations;

(3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and

(4) Any significant deviations from the contractor’s established practices.

(Emphasis added.)

Document decisions made with an eye to supporting the reasonableness of those decisions, giving the definition quoted above. Obviously, the COVID-19 pandemic crisis is hardly normal circumstances, so deviations from the contractor’s established practices should be expected. However, undocumented deviations that haven’t been communicated to customers and contracting officers are going to be suspect.

Further, note that what is reasonable can turn on “the contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large.” Use that. Actions taken to address COVID-19-related responsibilities to the government, the employees, and the public at large should be deemed to be reasonable actions, and the resulting costs accepted as being reasonable costs. Document why that is the case!

Also look at the cost principle 31.205-13. We’ve written about that cost principle before—particularly as it interacts with the cost principle at 31.205-14.

In this article, we discuss a couple of contractors who got it wrong.

In another article, we spent a bit more time comparing the 31.205-13 principle to the 31.205-14 principle.

In essence, the 31.205-13 cost principle states “Aggregate costs incurred on activities designed to improve working conditions, employer-employee relations, employee morale, and employee performance (less income generated by these activities) are allowable, subject to the limitations contained in this subsection.” But it’s not that straightforward and so you need to read the details for yourself, in case you end up like the contractors we write about.

However, it seems fairly clear to us that costs associated with COVID-19 activities intended to protect employee health and welfare, and to keep employees working on their DPAS-rated government contracts, are (generally speaking) fully allowable under 31.205-13. Further, even if you are a contractor that doesn’t have DPAS-rated contracts, at some point this crisis is going to be over and you will need a workforce ready and available to perform those contracts. Actions taken now to ensure performance can resume will likely be viewed as being both reasonable and allowable.

If you document them.

Before we wrap this up, we wanted to list some important COVID-19-related websites that have important resources. Those resources are already establishing the government’s position on many issues we’ve discussed here. In particular, DOD has issued many guidance documents, and so you need to be aware of them if you are a defense contractor.

So, presented in no particular order:

https://www.acquisition.gov/coronavirus

https://www.businessdefense.gov/coronavirus/

https://www.acq.osd.mil/dpap/pacc/cc/COVID-19.html

https://www.dentons.com/en/issues-and-opportunities/covid-19-coronavirus-hub

https://www.cov.com/en/news-and-insights/insights/2020/03/covid-19-evolving-considerations-for-global-business

https://www.insidegovernmentcontracts.com/tag/covid-19/

https://www.crowell.com/Practices/Coronavirus-COVID-19-Resource-Center

https://www.bdo.com/insights/business-financial-advisory/risk-advisory/novel-coronavirus-(covid-19)-impact-and-risk-respo

https://www.pillsburylaw.com/en/news-and-insights/scenarios-government-contractors-may-face-during-the-covid-19-national-emergency.html

https://www.nationaldefensemagazine.org/articles/2020/3/19/contractor-tips-for-covid19-pandemic

http://thecgp.org/coronavirus-resources-for-federal-contractors

 

Update: DOD Progress Payments

Nick Sanders
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Recently we told readers that the Dept. of Defense was increasing its progress payment rates to help its contractors through the COVID-19 crisis. In that article we documented a bit of confusion regarding which contracts where eligible for the increased rates, whether consideration would be required, and whether DOD was going to take advantage of “block modifications” versus modifications of individual contracts.

For the most part, that confusion was resolved satisfactorily. DCMA modified some 1,500 active contracts via a block change, and no consideration from the contractor was required. Sure, there were some outliers that didn’t make the DCMA list, but that small group could be dealt with relatively easily on an individual basis.

So far, so good.

But what wasn’t being satisfactorily resolved was the implementation of the new progress payment rates. DOD leadership seemed firm that the new rates were to be implemented prospectively, effective March 20, 2020, and not retrospectively on all inception-to-date incurred costs. This was a problem.

Remember, the SF 1443 progress payment request requires the contractor to apply the rate to inception-to-date costs. There is no way to stratify incurred costs into “pre-20 March” and “post-20 March” to apply different rates. Further, our understanding is that DFAS and MOCAS didn’t have the functionality to have two different progress payment rates associated with the same contract.

Finally, there was a potential cash flow problem if a 90% liquidation rate was applied to a cost that had been previously subject to an 80% progress payment rate. It was quite possible that a contractor could actually see negative cash flow in that situation, which was a result that was obviously contrary to the intent of the Class Deviation.

That last bit of confusion was resolved via an undated “Q&A” guidance document from Kim Herrington, Acting Director, Defense Pricing and Contracting. Here’s a link to that updated guidance document. That document resolves any remaining confusion, as follows:

The [Class] Deviation for the increased progress payment rate applies to prospective Progress Payment Requests (PPRs) only and not to prior requests. However, 52.232-16 (DEVIATION 2020-O0010), paragraph (a)(1), explicitly states, “Unless the Contractor requests a smaller amount, the Government will compute each progress payment at 90 percent of the Contractor’s total costs incurred under this contract whether or not actually paid, plus financing payments to subcontractors (see paragraph (j) of this clause), less the sum of all previous progress payments made by the Government under this contract.” Therefore, there is no need to resubmit adjustments to previous PPRs. The SF1443 should continue to be completed based upon inception to date cost. As a result, the first post-modification PPR will result in the application of the higher progress payment rate against all qualified costs, including costs that have been incurred prior to the issuance of the Deviation

(Emphasis in original.)

In addition, the guidance clarifies that there is no intent to impact contractor cash flow negatively. If the scenario where the increase in financing requested is offset by the increase in required liquidations, then “the contractor should stop progress billing until the progress payment calculation turns positive.”

To conclude, DOD implemented new, higher, progress payment rates for all fixed-price contracts—both existing ones and new ones to be awarded. Although there was some confusion about how those new rates actually would be implemented on existing contracts, that confusion was sorted relatively quickly. So: good on DOD!

 

The CAS Board Does Stuff

Nick Sanders
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One of the joys of blogging is that, sometimes, you are wrong. You are wrong and it’s out there for the world to see. Like that time we criticized GSA but we didn’t put in the bit that GSA was really two GSAs and only one was bad. (But then GSA merged so we weren’t as wrong as we were before. We were prescient but with bad timing. So, you know. Like that. That’s our story and we’re going to stick with it.)

Speaking of bad timing, we very recently posted a blog article that criticized the CAS Board for meeting and meeting and talking and talking without, you know, actually accomplishing anything of substance. We wrote “Could somebody please light a fire under the chairs at the CAS Board? And maybe get them talking to other organizational elements of the OMB?” Basically, if you got the sense that, if hot air were gold bullion then we thought the Board members were all gazillionaires, then we were probably doing some effective writing. Or so we thought.

But no, it turns out that we were wrong about several things (not all things, but a lot of things).

We said the CAS Board hadn’t discussed the recent OMB legislative proposal to increase the CAS applicability threshold from $2 million to $15 million. That was an error.

We implied the CAS Board wasn’t dispositioning public input to the year-old SDP on conforming CAS 408 and 409. That was wrong; indeed, they have dispositioned those public comments.

So, yeah. Kind of not so good. We plead bad timing and bad Federal Register notifications. But still …

What’s the real story?

On March 19, 2020, the CAS Board published a notice of meetings in the Federal Register. That notice was brought to our attention and we wrote about it. The content of our blog article was based on that notice.

But that wasn’t the only notice the CAS Board published in the Federal Register on that day.

On that same day, the CAS Board published another notice, entitled “Notice on Principles and Other Matters To Guide Conformance of the Cost Accounting Standards to Generally Accepted Accounting Principles.”

In that other Federal Register notice, the CAS Board announce the availability of yet another piece of content. That was basically it. The notice literally said:

… publishing this notice to announce the availability of a notice discussing the Board's responses to public comments on its principles, roadmap, and template to address the conformance of the Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP). The comments were received in response to a Staff Discussion Paper (SDP) published on March 13, 2019.

Publishing a notice to announce the availability of a notice.

Sure. That was well-phrased. Especially when the “notice” wasn’t a notice at all, but instead a .pdf file hidden on the White House website.

Regardless of phrasing, what it told the astute reader (which was obviously not us) was that there was a third document—and this one might have some interesting content. But you can’t find that third notice on the Federal Register website, which is where you expect to find CAS Board content. Instead, you have to click the link provided in the second notice, which takes you out of the Federal Register and over to the White House website.

So: to our readers, here is a step-by-step instruction on how to find interesting CAS Board content:

Step (1) follow the link in this article to the second Federal Register notice. That’s the phrase “another notice” in bold font.

Step (2) when you get to the second notice, look for the link that says:

Availability: The full text of the notice is available on the Office of Management and Budget homepage at: https://www.whitehouse.gov/wp-content/uploads/2020/03/2020-03-supp-cas-gaap-gp.pdf.

Click the link and—voila!—you will be transported to a .pdf document entitled “Notice on Principles and Other Matters to Guide Conformance of the Cost Accounting Standards (CAS) to Generally Accepted Accounting Principles (GAAP).”

That’s the treasure you’ve been looking for!

(We know it’s a treasure because it took the equivalent of a treasure map to find it.)

When you find the treasure you can read it and learn lots of interesting stuff. A summary follows!

  1. Discussion of public comments received in response to the March 2019 SDP, and the Board’s responses thereto. In those responses, we learned that “the Board worked with the Office of Management and Budget on a legislative proposal that would raise the threshold for CAS applicability from $2 million to $15 million and reduce the number of CAS-covered business segments by approximately 60 percent. The proposal was transmitted to Congress at the end of April for consideration in the National Defense Authorization Act.” (See page 3.) So yeah, about that criticism. …

  2. An appendix to the document that establishes the Board’s “guiding principles” for conforming CAS to GAAP.

A treasure of CAS-related content indeed!

Anyway, let’s wrap this up. The CAS Board has been meeting, it’s been doing some stuff (but not as much as perhaps we wish they would), and it’s been publishing some content—for those who can follow the treasure map to find it. We were wrong about several things in our previous article and we regret those misstatements.

Also, Laurie Schmidgall has departed the CAS Board after eight years of serving as the industry representative. Trust us when we tell you that she has been a key player in pushing the CAS Board to accomplish whatever amount of progress it has made during her tenure. She will definitely be missed.

 

Hey Nineteen

Nick Sanders
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Everybody is dealing with COVID-19. Big companies, small companies, we’re all in this together right now.

Changes are happening quickly. The CARES Act. DOD Class Deviations. Direction to increase cash flow throughout the industrial base.

It’s hard to keep up with it all—and meanwhile, contractors have real issues to deal with.

The workforce is affected. Some are getting sick; others may have been exposed but aren’t showing symptoms yet. Freight costs are soaring (when you can get deliveries.) Suppliers are shutting down. And when suppliers are up and running, they’re running behind. Basic consumable supplies are hard to get. Some companies are retooling to make healthcare products.

Yeah, there’s a lot to worry about now.

You can find any number of free webinars on the various COVID-19 issues, offered by both law firms and providers of accounting services. They are, for the most part, worthy of your time if you have questions about how to respond to the various challenges your company is facing.

We’re not going to duplicate their content on this site. Go find one of the freebies and spend an hour getting up to speed.

Having said that, we will offer some thoughts that we have gleaned from thinking about various challenges companies are facing. We’re not lawyers and we’re not your consultants, so there is no guarantee we’ve got this figured out. In the “for what it may be worth” department:

  • Employees who can’t work because they are sick are going to burn through a lot of sick leave. If they are sick, you do not want them coming back to work. Have you considered amending your sick leave policy to offer more sick leave? What about “borrowing” future entitlements? We’re thinking allowable if reasonable in amount.

  • Employees who are sick are going to incur a lot of healthcare expenses. Deductibles, co-pays, etc. They may run up against annual limits. Have you considered covering those expenses on their behalf? That would mean revising your healthcare policies. We’re thinking allowable here as well.

  • Employees who’ve been exposed need to stay away from everybody else for at least 14 days. How should they charge that time? Direct or indirect? What about paid time off? What about administrative leave or stand-by time? (Have you read the CARES Act?) You need a labor charging policy right now to deal with this.

  • Speaking of labor charging policy, what happens if the government denies entry to a site where your employees have been working? What happens if employees can enter, but need to be quarantined for 14 days before they interact with anybody else? What happens if you have to shut down your own office or factory, because somebody with COVID-19 symptoms went into work? You need a policy position for all these contingent events—plus more we haven’t listed.

  • You may have a Forward Pricing Rate Agreement (FPRA) or you may have a Provisional Billing Rate Agreement (PBRA). Or you may be pricing and billing contracts on an individual basis. Whatever your situation, it is almost certain that your 2020 indirect cost rates are going to exceed what you budgeted/forecasted/negotiated. What are you doing about it? Let’s be clear: right now the US Government (and especially DOD and DOE) are concerned about the health of their industrial bases, and they are telling contracting officers to enhance contractor cash flow wherever and whenever possible. Use that policy guidance to negotiate higher bidding and billing rates. Obviously, you don’t know (because nobody does right now) the impact that will be felt by year-end. But don’t let that stop you from making an estimate now and seeing if your CACO/DACO/ACO/PCO is amenable to an upward adjustment. We’re betting most of them will be. You can always adjust later as more information becomes available.

  • Subnote to those who have FPRAs. Read FAR 15.407-4 and comply with its requirements. Even if you don’t adjust your FPRA, you still have an obligation under the Truthful Cost or Pricing Data Act (“TINA”) to make appropriate disclosures.

  • Any number of government contractors have DPAS-rated contracts. Normally, nobody cares about that (except for people who deal with CPSRs) but now it matters, since POTUS invoked the Defense Production Act (which constitutes the first three letters of DPAS). If you have a rated contract, you must do everything you can to keep working. If you did your job and properly flowed-down the DPAS rating to your suppliers, then they have to keep working as well. Which is to say: if your supplier tells you they are shutting down because of COVID-19, you get to tell them NO, they are not shutting down, because their subcontract/PO doesn’t let them. When the auditors question your charging decisions a year or more from now (as they will), your primary defense is going to be the DPAS rating in your contract. (The secondary defense is going to be the CARES Act. The third line of defense is going to be DOD press releases, guidance memoranda, and Class Deviations.)

  • Speaking of future audits, perhaps the single most important thing that contractors can and should be doing right now is to isolate COVID-19-related expenses from the normal routine expenses. Be in a position to show the (future) auditors where your costs increased because of the virus. Create new charge codes where necessary. Create new cost accounts and/or cost centers. Do everything you can to bucket the COVID-19 stuff because, a year or more from now, everybody is going to want to know how much the crisis cost your company.

  • The second most important thing we can think of is documentation. Your company is making a lot of decisions very quickly, and it’s likely that the documentation of those decisions is going to be a low priority. Don’t let it be. Document the circumstances and the rationale for the decisions. That documentation is going to be huge when the auditors challenge you to support why what you did was reasonable under the circumstances.

Whether you are a small contractor or one of the largest contractors, you are facing the same issues and challenges as everybody else. Everybody is struggling to adjust to the new normal and nobody has figured out every answer to every challenge yet. This article is intended to get you thinking about some of the challenges and their possible solutions. The rest is up to you.

 

OMB Reminds Agencies to be Flexible in the COVID-19 Crisis

Nick Sanders
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On March, 20, 2020, the Office of Management and Budget (OMB) reminding Executive Agencies to be flexible with respect to contractor performance challenges during the COVID-19 crisis. Here’s a link to the official Memo, entitled “Managing Federal Contract Performance Issues Associated with the Novel Coronavirus (COVID-19).”

Having given you the link, we are now going to quote extensively from the Memo, because so many of you will not click the link.

Federal contractors play a vital role in helping agencies meet the needs of our citizens, including the critical response efforts to COVID-19. … This memorandum identifies steps to help ensure this safety while maintaining continued contract performance in support of agency missions, wherever possible and consistent with the precautions issued by the Centers for Disease Control and Prevention (CDC). Achieving these important goals - and maintaining the resilience of our Federal contracting base - requires continued communication by agencies with their contractors, both small and large, and effective leveraging of flexibilities and authorities to help minimize work disruption.

(Emphasis added.)

But there’s more!

Agencies are urged to work with their contractors … to evaluate and maximize telework for contractor employees, wherever possible. … Equally important, agencies should be flexible in providing extensions to performance dates if telework or other flexible work solutions, such as virtual work environments, are not possible, or if a contractor is unable to perform in a timely manner due to quarantining, social distancing, or other COVID-19 related interruptions. Agencies should take into consideration whether it is beneficial to keep skilled professionals or key personnel in a mobile ready state for activities the agency deems critical to national security or other high priorities. Additionally, agencies should also consider whether contracts that possess capabilities for addressing impending requirements such as security, logistics, or other function, may be retooled for pandemic response consistent with the scope of the contract.

(Emphasis added. Again.)

But we’re not done yet!

… agencies are encouraged to leverage the special emergency procurement authorities authorized in connection with the President's emergency declaration under section 501(b) of the … the "Stafford Act". These flexibilities include increases to the micro-purchase threshold, the simplified acquisition threshold, and the threshold for using simplified procedures for certain commercial items, all of which are designed to reduce friction for contractors, especially small businesses, and the government and enable more rapid response to the many pressing demands agencies face. The availability of these flexibilities does not mean they will always be suitable, and agencies should exercise sound fiscal prudence to maximize value for each taxpayer dollar spent. At the same time, the acquisition workforce should feel fully empowered to use the acquisition flexibilities, as needed, consistent with good business judgment in response to this national emergency.

(Emphasis added. Yet again.)

The OMB Memo ends with a set of “Frequently Asked Questions.” The FAQ addresses schedule delays and requests for equitable adjustments. We won’t quote the answers here; we’ve already quoted enough from the Memo. However, we strongly recommend you read them yourself. We provided a link to the Memo in the first paragraph. If you didn’t click the link then, we suggest you do so now.

 
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Newsflash

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.