Hey Nineteen
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:
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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.
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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.
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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.
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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.
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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.
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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.
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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.)
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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.
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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
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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The CAS Board Does Stuff
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!
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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. …
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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.
DOD Increases Progress Payment Rates in Response to COVID-19 Crisis
There was a time, not so long ago, when the DOD was contemplating lowering customary progress payment rates to 50 percent for large businesses, with an opportunity to earn higher rates based on meeting certain performance criteria. To be sure, that proposed rule was formally withdrawn, but DOD never withdrew from its initiative to reform contract financing payments and link those payments to “performance incentives” that would be established by DOD bureaucrats.
Public meetings on the topic were scheduled for early 2019. We never heard any feedback from those meetings; and since that time we’ve not seen any formal Federal Register publications on the topic. But we suspect the initiative has not gone away.
In any case, DOD recently issued a Class Deviation to increase customary progress payment rates. Class Deviation 2020-O0010, entitled “Class Deviation—Progress Payment Rates” provides contracting officers with alternate contract clauses that increase customary progress payment rates “to 90 percent for large business concerns and 95 percent for small business concerns,” effective immediately.
Which is a good thing!
Only … we wonder how effective it will be.
Our point is: the Class Deviation does not seem to apply to current, active, contracts. Instead, it seems to apply to new contract awards. Thus, if you are a defense contractor trying to address production concerns with your existing contracts, this Class Deviation does not seem to help you.
We can envision an scenario where a contractor in need approaches a contracting officer to modify an existing contract to incorporate the alternate clauses. According to contract theory, that would only happen if the contractor offered some form of consideration. For example, reduced profit. Then the parties negotiate and maybe—just maybe—the contract gets modified. But by then the crisis may be over, so what’s the point?
No, the alternate clauses with the increased progress payment rate seems focused on new contract awards, which are likely to be related to COVID-19 responses. Companies that would seem to be the beneficiaries will be those that produce masks, or ventilators, or other medical equipment. They are going to see the benefits of the increased progress payment rates, not the traditional defense contractors that produce more mundane products such as fighter jets and tanks.
And perhaps that’s appropriate, given the nation’s priorities at the moment.
EDITOR'S NOTE: It appears that Senior DOD Leadership has committed the agency to modify existing contracts, without consideration and potentially via "block change," even though nothing of that sort was mentioned in the Class Deviation. You had to read the DOD press release and then confirm via other sources. Still, all's well that ends well.
But remember, customary progress payments are based on costs incurred. Companies that don’t have any employees (because they are all at home) won’t have a lot of payroll costs to cover. Further, supply chain costs may be minimal, because the suppliers don’t have workers either. Companies that produce necessary medical supplies and equipment may be exempt from state or local “lock-downs”—we don’t know if that’s the case, but it would certainly make sense. If so, then strike this paragraph and skip to the next one.
Further, use of progress payments requires the contractors to have an adequate accounting system. Therefore, this Class Deviation is aimed at existing defense contractors, not at any non-traditional defense contractors that may start producing medical products in response to the invocation of the Defense Production Act. Would those non-traditional defense contractors even make use of progress payments based on costs? Remember, such contractors (and products) likely qualify for treatment as commercial items, based on FAR and DFARS definitions, already. If so, they probably don’t need progress payments based on costs and, instead, would like payment in full, in accordance with commercial terms.
Okay, so there’s a lot we don’t know; and this article contains a lot of speculation and “what-ifs” that may be completely unwarranted. What do you expect from me, sitting here in my home office? Obviously, somebody in the Pentagon thinks this is a good idea—and it may very well be a good idea! Certainly, it doesn’t hurt anything.
As they say: Primum non nocere.
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