CAS Board Continues to Meet with Little to Show for Board’s Efforts
The good news is that the CAS Board has continued to meet and is working on stuff. The bad news is that the stuff the Board is working on isn’t being published.
What is being published on the Federal Register is a meeting notice regarding past meetings held in February and March, 2020. Remember, the Board’s meetings are closed to the public, so all we have to go on is what they tell us in the meeting notice(s). The meeting notice linked to above identifies the tasks that the CAS Board is addressing, to include:
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Conformance of CAS to GAAP. The Board is discussing comments received in response to the Staff Discussion Paper (SDP) that it published literally a year ago. That’s right. A year later, the Board is still discussing the public’s input. In addition, the Board discussing a possible Advance Notice of Proposed Rulemaking (ANPRM) regarding CAS 408 and 409. Finally, “more generally,” the Board is discussing whether conformance of CAS to GAAP would be considered to be a cost accounting practice change under the Board’s regulations and the CAS contract clauses.
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Application of CAS to ID/IQ and hybrid contract vehicles. The Board will “revisit” recommendations from the Section 809 Panel regarding application of CAS coverage to such contract types. This has been a known issue for about 25 years; we’re very happy to hear that the Board has put it on the agenda for discussion.
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Amending the waiver threshold. Section 820 of the 2017 NDAA increased the CAS waiver threshold (the threshold under which CAS application may be waived “if the business unit of the contractor or subcontractor that will perform the work is primarily engaged in the sale of commercial items and would not otherwise be subject to CAS.” The threshold was raised in the statute from $15 million to $100 million, but the CAS Board has not yet seen fit to revise its regulations to conform to the statute. It’s only been four years—what’s the hurry?
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Producing the required Annual Report to Congress. The Board was required, by public law, to submit a report to Congress regarding its activities for Government Fiscal Year 2019 (ending September 30, 2019). It’s only been six months so we shouldn’t be impatient, right? On the other hand, exactly how much content is there to talk about, anyway? Seems like a two- or three-page report, with pictures to fill in the blank spaces, ought to do just fine.
What’s not listed in the above is the OMB request to Congress to increase the CAS applicability threshold from $2 million to $15 million. Had it not been for the recent GAO report on CAS Board activities, we wouldn’t have known about that, because the CAS Board isn’t acknowledging that it happened. Which is kind of funny, right? Because the CAS Board is an organizational element of the Office of Federal Procurement Policy (OFPP). And the OFPP is an organizational element of the OMB. So basically, the left hand is not talking about what the right hand is doing. Strange. You’d think the CAS Board would be a key stakeholder in any efforts to revise the CAS applicability threshold. Apparently, not so much.
Lots of talking; little output to show for it. We’ve spoken with people who are close to the CAS Board and they tell us the problem isn’t the Board; the problem is the Office of Information and Regulatory Affairs (OIRA). For those who may not know, OIRA is a mandatory reviewer of proposed and final regulations. Nothing goes out without an OIRA review/approval. Apparently, that review/approval step is taking a really long time. Or so we are told. The weird thing is that OIRA is yet another organizational element of the OMB. Thus, this is yet another example of left hand/right hand dysfunctional communications.
Or so it seems to us.
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?
‘Cause that would seem to be the thing to do here.
DCAA Audit Guidance on Sampling
Those of us deep into DCAA audits of final billing rate proposals (also known as “incurred cost audits”) have learned that the audit agency recently updated its required transaction sample sizes, based on input from statisticians. Unsurprisingly, the sample sizes didn’t go down; they almost doubled in size. That means more work for both auditors and auditees.
Note: DCAA still has 12 months to complete its audit, regardless of sample size used. In other words, the auditors must now cram in nearly twice the transaction review effort into the same audit duration. One might almost feel sorry for them.
Almost.
Transaction samples primarily are used on audits of indirect costs. The auditors pull as sample that is statistically significant and then they use the findings from that sample to project to the sample universe. For example, assume a universe of $1,000,000 and a statistical sample of $10,000. In that sample, auditors find $1,000 (10%) in questioned costs. They then write the report to show total questioned costs of $100,000 (10% of the universe). That’s basically how it works. Therefore, it’s important that the sample be statistically valid, because the audit agency doesn’t want contractors arguing that the projected results were wrong on statistical grounds.
In December, 2019, DCAA issued revised audit guidance on when sampling may be used by auditors. The guidance (MRD 19-PIC-005), was published on DCAA’s website only recently. We have read it several times and, frankly, it’s not the clearest piece of writing that DCAA has ever issued. Fortunately, it references a Contract Audit Manual (CAM) section (6-104). The CAM has several revised sections, effective February, 2020—and this is one of those sections. We went to the revised section 6-104 in order to understand what the MRD was trying to say.
Here’s what we learned:
Effective with final billing rate proposals (which DCAA calls “incurred cost proposals” or “ICPs”) received after January 1, 2020, ICPs eligible to participate in the risk-based sampling process will be assessed for sampling eligibility. If the ICP is determined eligible for sampling it will be placed in the sampling universe subject to random selection for audit based on established sampling parameters. If the ICP is not randomly selected for audit, a risk-based sampling memorandum will be issued to the contracting officer indicating the ICP was eligible for sampling and not selected for audit.
(Remember, DCAA is using a “risk-based” stratification of contractor proposals, such that only the largest proposals (measured by Auditable Dollar Value or ADV) get audited every year. The smaller proposals get audited less often. Contractor proposals with an ADV of $5 million or less don’t get audited. Ever. We’ve written about the DCAA audit approach before—see (for example) this article. We have not been fans of DCAA’s “new approach” (we call it “new” even though its seven years old at this point) because it simply seems like another way of not fulfilling DCAA’s contract audit mission. Whatever.)
(Also, there are two type of ADV calculations. The first ADV addresses the overall contractor ICP risk, which is total flexibly priced contract dollars plus T&M billed dollars less subcontractor dollars. The second ADV (called “sampling ADV”) is defined as “total cost proposed on flexibly priced Government contracts, plus total cost billed on Government T&M contracts, less direct costs on non-DoD contracts in which the reimbursable agency does not participate.” The more you know ….)
Back to the CAM:
Well, it looks like we were wrong, because sometime between 2016 and 2020, DCAA changed its policy such that proposals with small ADVs can be audited. They can even be audited via statistical sampling methodology! The revised CAM now states that such ICPs may be audited via sampling when (1) there were no significant questioned costs in the last completed incurred cost audit, and (2) there are no Department (ACO, PCO, COR, DCAA, etc.) concerns with a significant impact on the ICP. So there.
For proposals with sampling ADVs between $5 million and $100 million, transaction sampling may be used when conditions (1) and (2) (as above) apply, plus a condition (3): “The contractor does not have a pre-award accounting system survey that resulted in an unacceptable opinion, or a disapproved accounting system based on a postaward accounting system audit.”
For contractor proposals with sampling ADVs between $100 million and $250 million, first thing is that they must be audited every 5th year. Beyond that, transaction sampling may be used when conditions (1), (2), and (3) apply, plus the following additional conditions: (4) the contractor does not have any business system deficiencies relevant to the incurred cost year subject to audit, (5) the contractor does not have any significant accounting practice changes in the year subject to audit; and (6) the contractor has not experienced any significant organizational changes in the year subject to audit.
For contractor proposals with sampling ADVs between $250 million and $500 million, first thing is that they must be audited every 4th year. Beyond that, conditions (1) through (6) (as above) apply.
For contractor proposals with sampling ADVs between $500 million and $1 billion, first thing is that they must be audited every other year. Beyond that, conditions (1) through (6) apply.
Contractor proposals with sampling ADVs greater than $1 billion must be audited every year.
What does it mean if a contractor’s proposal is subject to audit but, for whatever reason, sampling and projection cannot be used? As we understand it, a prohibition on using statistical sampling methodology simply means that the results cannot be projected to the universe. However, we may be wrong about that. Perhaps in those higher-risk situations, a super-high sample size is used because there is no ability to project. Neither the MRD nor the CAM is particularly clear on the issue.
Clearly, the auditors’ judgment must be used to develop appropriate audit techniques. Maybe some smart auditor who’s taken AUD 113 Risk-Based Sampling of Incurred Cost Submissions at DCAI can write us and let us know the official answer.
In the meantime, we trust we’ve decoded the latest MRD. At least, we did our best to do so.
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COVID-19 and Government Contractors
Well, it’s getting real now, isn’t it?
As employers we are having to face a number of issues related to the COVID-19 outbreak, including reductions/eliminations of travel, cancellation of training seminars, moving meetings from in-person to virtual, and deciding how to deal with production line issues.
Certainly, we are now seeing the “downside” of modern office life, with cubicle warrens, shared offices, and “bullpens.” Putting all those bodies in a concentrated space reduced office space costs, but at a price. If one infectious person comes to work then an entire activity or function can be taken out in a matter of days. Not good.
Meanwhile, your employees’ school districts are likely to have announced that children are now receiving an unplanned vacation, ranging in duration from two to four weeks, and now they have serious childcare issues that may require flexible work schedules and a lot of working from home.
OMB just issued guidance that encourages Federal agencies to—
… maximize telework flexibilities to eligible workers within those populations that the Centers for Disease Control and Prevention (CDC) has identified as being at higher risk for serious complications from COVID-19 … and to CDC-identified special populations including pregnant women …. These CDC-identified populations include older adults and individuals who have chronic health conditions, such as high blood pressure, heart disease, diabetes, lung disease or compromised immune systems. Agencies do not need to require certification by a medical professional, and may accept self-identification by employees that they are in one of these populations. Additionally, agencies are encouraged to consult with local public health officials and the CDC about whether to extend telework flexibilities more broadly to all eligible teleworkers in areas in which either such local officials or the CDC have determined there is community spread. Agencies are also encouraged to extend telework flexibilities more broadly to accommodate state and local responses to the outbreak, including, but not limited to, school closures.
Thus, feel free to emulate the Federal government and “maximize telework flexibilities” as much as possible.
Not to be outdone, the Department of Defense also announced that service members and civilian employees have had their travel plans halted.
This restriction will halt all domestic travel, including Permanent Change of Station, and Temporary Duty. This restriction will also pause civilian hiring at DoD installations and components for persons who do not reside within the hiring entity's local commuting area. Additionally, service members will be authorized local leave only, following Service guidelines. This new guidance is effective March 16 and continues through May 11.
Obviously, exceptions will be made, but right now we interpret that announcement to mean that there is going to be a significant reduction to travel. It may impact source selection decisions, or business system reviews, or contracting officer review boards, or even DCAA floorchecks. Some flexibility in how audits/reviews will be conducted and/or supported is obviously warranted.
There are any number of law firms and attorneys who have advice to offer in situations such as these. One firm we’ve been following is Covington. Covington has published several informative articles that we bring to your attention.
That last article is interesting, because it discusses the “excusable delay” clauses and what contractual rights they confer. Here’s an excerpt:
Key here is that these provisions do not entitle the contractor to compensation. Non-compensable delays are delays for which the contractor is entitled to a time extension, but there is no entitlement to any additional monetary compensation. The theory is that neither the contractor nor the federal government has control over the non-compensable delay. Therefore, both parties assume their own additional costs. The contractor absorbs its delay costs for being out on the project longer and the federal government absorbs its costs by granting a time extension to the contractor and extending the contract.
Despite the contractual language discussed in the Covington article, it is likely that most contractors will see increased indirect costs stemming from the COVID-19 outbreak. There will likely be some inefficiencies created as companies respond to the situation. Employees may use more sick leave that usual. Compassionate leave may be granted. On its face, those increased costs would seem to be fully allowable.
However, to the extent that contractors have Forward Pricing Rate Agreements (FPRAs) or Provisional Billing Rate Agreements (PBRAs) based on 2020 budgets, it is possible that the additional costs (coupled with a potential reduction in direct costs) are going to blow those budgets out of the water. Thus, two points: (1) try to document the increased costs associated with the COVID-19 situation, and (2) as those costs are recorded, work to understand the impact on 2020 budgets. And a third point: communicate with your cognizant contracting officers and/or ACOs to let them know what you’re seeing.
The situation is fluid and will likely evolve over the next few weeks. But this is our assessment of what’s happening at this time.
Also: wash your hands.
Is There Such a Thing as Too Transparent?
On January 22, 2020, the Office of Management and Budget (OMB) proposed a revision to its Guidance for Grants and Agreements (found at Title 2 of the Code of Federal Regulations). If you are an entity subject to the OMG Guidance, you probably know about the proposed revision. You may even be working on your comments to be submitted for consideration.
For those who may not be as attuned to what’s happening (or what is proposed to be happening), the OMB stated that the “proposed revisions are intended to reduce recipient burden, provide guidance on implementing new statutory requirements, and improve Federal financial assistance management, transparency, and oversight.”
Well, that’s nice, isn’t it? Who could disagree with those objectives?
Further, in the Background section of the Federal Register notice, the OMB stated—
Based on feedback and ongoing engagement with the grants management community, the current Administration established the Results-Oriented Accountability for Grants Cross Agency Priority Goal (Grants CAP Goal) in the President's Management Agenda on March 20, 2018 (available at: https://www.performance.gov/CAP/grants/). The Grants CAP Goal recognizes that grants managers report spending a disproportionate amount of time using antiquated processes to monitor compliance. Efficiencies could be gained from modernization and grants managers could instead shift their time to analyze data to improve results. To address this challenge, the Grants CAP Goal Executive Steering Committee (ESC), which reports to the Chief Financial Officer's Council (CFOC), identified four strategies to work toward maximizing the value of grant funding by developing a risk-based, data-driven framework that balances compliance requirements with demonstrating successful results for the American taxpayer.
1. Strategy 1: Standardize the Grants Management Business Process and Data
2. Strategy 2: Build Shared IT Infrastructure
3. Strategy 3: Manage Risk
4. Strategy 4: Achieve Program Goals and Objectives
The proposed revisions support those four strategic goals, or so OMB asserted.
Readers, in many years of reviewing proposed Federal rule-making, we have learned to watch for certain words, such as “consistency,” “transparency,” and “standardization”. When we see those words, we put our hands in our pocket to hold on to our wallet. This may be one of those times.
We are not going to recap all the proposed revisions to the Guidance, of which there are many. The link is in the first sentence and you can go read the Federal Register notice yourself. If you do take the time to review the proposed rule, perhaps you will ask yourself whether this is yet another example of sneaky stuff being implemented in the name of transparency and standardization.
We would like to point out one interesting aspect of the proposed rule. We can’t take credit for noticing it; this particular aspect was brought to our attention by an industry group.
What do you think of this?
Lastly, for transparency purposes, a proposed revision adds a new subsection to 200.414(h) to require that all grantees' negotiated agreements for indirect cost rates are collected and displayed on public website. The agency responsible for this task and the public website will be designated by OMB.
As we understand the proposal, should your entity agree to receive a Federal grant or other agreement, and should you have to negotiate indirect cost rates as part of receiving that grant or agreement, then you also agree that your indirect cost rates will be publicly posted for all to see.
For transparency purposes.
Now, if this were about for-profit entities that compete for Federal funds, that right there would be a deal-breaker. The company would say “How about no?” and walk away quickly. There are not many more proprietary things than a commercial company’s indirect cost rates.
But this is not that. This is for other entities, such as educational and heath institutions. Generally speaking, those entities are not-for-profit and we suspect they do not compete among themselves based on estimated costs. So maybe—just maybe—this is not the same deal-breaker for them that it would be for the commercial entities.
So we’re not sure what to think about this proposal.
Is it an overreach, or maybe not such a big deal after all? We really do not know.
But the question is: for the entities affected by the proposed rule—those that must comply with the OMB Guidance found in Title 2 of the CFR—what do they think about it?
What will they agree to as a condition of receiving Federal funds?
How far are they willing to go in the name of transparency?
Is this business as usual, or is there really such a thing as too much transparency?
You can email us and let us know your thoughts.
But better yet, you can submit your thoughts, in the form of a public comment on the proposed rule, to the OMB directly. There’s a link to do so on the Federal Register page. As we type this, 12 comments have been received so far.
You have until 23 March 2020 to submit your thoughts and comments to the rule-makers, should you be so inclined.
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