The Contractor Submission Portal
You can’t find the MRD on the DCAA website, but it’s making the rounds via industry associations, so we thought we’d talk about it. Give it a week or two, and then MRD 20-OTS-005 will be available to the general public.
What is MRD 20-OTS-005?
It’s called “Introduction of The Contractor Submission Portal,” and—as the name foretells—it discusses a new means for contractors to submit the annual proposals to establish final billing rates. (Which are popularly but incorrectly called “incurred cost submissions,” but that’s not the point of this article.)
The Contractor Submission Portal (“CSP”) is “a formal electronic method for contractors to submit their certified incurred cost submissions.” According to the MRD, “The goal of this portal is to provide a single place for contractors to submit their incurred cost proposal.”
Wait, what?
Historically, contractors already have had a single place to submit the final billing rate proposals. It was called email. You emailed the proposal to the cognizant Federal agency official (ACO, DACO, CACO, whatever) and you sent a copy to DCAA. We always sent it to the FAO Manager, but your mileage may vary. Anyway, it’s worked just fine for dozens of years; but now apparently we have a CSP to replace it.
Back to the MRD.
When a contractor submits its proposal into the CSP, an email will be generated from the CSP “to the cognizant FAO mailbox.”
So, basically, the CSP is simply a middleman. Instead of emailing your proposal to the FAO Manager, you submit to CSP and then CSP generates an email to the FAO Manager. That’s some brilliant process improvement and streamlining, right there.
Back to the MRD.
What the CSP is, according to the MRD, is a Sharepoint site that “is designed to allow access to all employees within the FAO.” What’s the value-added by the CSP Sharepoint site? “This allows any employee within the FAO to download a copy of the proposal submission from the SharePoint site to the contractor perm file and perform the adequacy review and subsequent audit of the submission.”
As opposed to forwarding it via email, we guess.
Another benefit (to DCAA) is that the CSP can generate status reports by contractor, showing which proposals are pending an adequacy determination and/or which proposals have been determined to be adequate and need to be audited. This is a cool feature, because (as you probably know) DCAA has two months after receipt to determine proposal adequacy and 10 more months after than to start and complete the proposal audit. We get that it would be important to be statusing contractor proposals, by contractor and by FAO, to make sure the statutory deadlines are being met.
Therefore, as near as we can tell, there is zero benefit to the contractor from the new CSP and next to zero benefit to the FAO auditors, but perhaps some moderate benefit to DCAA Headquarters from improved reporting.
Meh.
Contractors are not required to use the new CSP, as the MRD makes very clear. However, FAOs are required to engage with their contractors and “encourage” support of the new initiative. It would be weird if nobody used this fancy Sharepoint site, right? Kind of makes you wonder what Fort Belvoir would do when some of the data is coming out of the CSP Sharepoint site and the rest is being manually aggregated by each FAO.
And there it is. Once touted as a “TurboTax of Incurred Cost Submissions,” the CSP is revealed to be a ho-hum Sharepoint site with some basic reporting functions.
Use it if you wish.
But before you decide, there is one thing we will mention that you may want to consider—and it’s something we’ve mentioned here before. Courts have held that the Contract Disputes Act’s Statute of Limitations does not start to run until the government knew or should have known about the costs the contractor was claiming. Courts have held that the government should not be expected to know about potentially disputable indirect costs until they have access to details about those costs; commonly, that’s not until the audit actually starts. We think that one way to start the clock earlier is to submit the entire expense ledger along with the final billing rate proposal.
It’s not clear to us that the CSP will accept such a potentially massive document. If the CSP will not accept it and you want to get that clock started, then that would be a reason not to use it and stick with tried-and-true email. Of course, given the current deadlines, it’s fairly rare that DCAA will wait to get that audit started. But you never know….
Something to consider.
Is Severance Pay Subject to the FAR Compensation Ceiling?
The FAR cost principle at 31.206 establishes the allowability of various aspects of employee compensation. It’s the longest cost principle, running from 31.205-6(a) through 32.205-6(q), and covers such diverse items as income tax differential pay, bonuses and other incentive compensation, and backpay. Among the items addressed in the cost principle is severance pay.
Severance pay is defined at 31.205-6(g) as “a payment in addition to regular salaries and wages by contractors to workers whose employment is being involuntarily terminated.” (We’re guessing most of our readers already knew that part.) According to the cost principle, severance pay is allowable only to the extent that it is required by law, required by an employer-employee agreement, an established policy that constitutes (in effect) an implied agreement, or “circumstances of the particular employment.” Except for that last part—which seems rather vague—the cost principle is fairly straight-forward. If you meet one of the four tests, the severance pay is allowable.
The 31.205-6 compensation cost principle also establishes allowability limits for certain employees. If you check out 31.205-6(p), you’ll find a fairly complex set of rules that establishes, based on the agency and timing, maximum ceilings on the compensation of certain contractor “senior executives”—and then later “all employees” regardless of their title. The rules are so complex that DOD, DCAA, and contractors all agreed that a “blended rate” formula could be used to establish compensation allowability in the aggregate, rather than by individual employee. (For some discussion on blended rates, please see this article.)
Of particular note, 31.205-6(p) has a unique definition of compensation that applies only to that paragraph of the cost principle. According to 31.205-6(p)—
‘Compensation’ means the total amount of wages, salary, bonuses, deferred compensation (see paragraph (k) of this subsection), and employer contributions to defined contribution pension plans (see paragraphs (j)(4) and (q) of this subsection), for the fiscal year, whether paid, earned, or otherwise accruing, as recorded in the contractor's cost accounting records for the fiscal year.
Presumably, if an element of compensation is not included in the above list, then it may properly be excluded from calculating an individual’s compensation that is subject to the 31.206-6(p) ceilings. At least, that’s what we thought, until a recent opinion by Judge Clarke at the ASBCA called that presumption into question.
The situation was fairly simple. In 2014, and as required by the 2014 Separation Agreement, DynCorp International (DI) made a severance payment to its CEO on the way out. The severance payment was also made pursuant to the 2010 Employee Agreement between the CEO and the company. The severance payments were made over a three-year period, in 2014, 2015, and 2016. DCAA questioned the costs because the auditors believed the severance payments were not reasonable.
Interestingly, the DCAA audit report stated that the amount of the severance payments was not significantly more than other defense contractors of similar size had made, and that DI’s severance payments “were reasonable in comparison.” Nonetheless, the auditors questioned the severance payments because—and we’re going to quote the audit report note in full—
In our opinion, the annual compensation used in the calculation should be subject to the limit discussed in FAR 31.205-6, Compensation. FAR 31.205-6(p)(1)(i) defines compensation as, in part: “...the total amount of wages, salary, bonuses ....” Although the severance payments do not meet the definition of compensation, the salary and bonus components of the severance calculations do meet this definition. Therefore, in our opinion, the FAR 31.205-6(p) limitation on allowability of compensation is an appropriate benchmark to determine reasonableness of the salary and bonus components. Consequently, in our opinion, the salary and bonus portion of the severance payment calculation in excess of the limit in FAR 31.205-6(p)(1)(i) is unreasonable.
(Emphasis in original quote found in the ASBCA opinion.)
To determine the allowable amount of compensation, the auditors went back to the 2010 executive compensation limit and then applied that amount to the severance pay (doubling it as required by the terms of the agreement). Thus, $7,812,098 out of $8,050,000 was questioned as compensation in excess of the ceiling in effect at the time the CEO was hired.
DynCorp disagreed but the CACO agreed with the auditors and issued a Contracting Officer’s Final Decision in which he unilaterally establish DI’s final rates based, in part, on the questioned severance payments.
Judge Clarke started by agreeing with DI that severance pay is not compensation as defined by 31.205-6(g). But then he took issue with DI’s argument that DCAA had found the amount of compensation to have been reasonable. He wrote—
DI interprets this [the DCAA audit note we quoted above] to mean that the severance payment ‘amounts’ are reasonable. We do not agree. DCAA simply found that ‘severance terms of twice a CEO’s salary plus bonus to be reasonable.’ The word ‘terms’ cannot reasonably be interpreted to refer to the dollar amount of the severance paid to former CEO Gaffney. We interpret the language as DCAA finding the mechanism of calculating the severance pay reasonable.
As non-lawyers, this reasoning seems confusing. To us, if the mechanism of calculating the amount is reasonable and in alignment with what other contractors of similar size do, then the result of that mechanism must also be reasonable. But as we said, we’re not lawyers. So what do we know?
Even though Judge Clarke agreed that the severance payments were not subject to the exact ceilings found in 31.205-6(p), he decided that they were unreasonable in amount, because DynCorp had a responsibility to “the Government … and the public at large” under the definition of “reasonableness” found at 31.201-3(b)(3). He concluded as follows—
DI’s severance payments were calculated in part using salary and bonus amounts that exceeded the statutory caps. We find that the portion of the severance payments derived from unallowable salary and bonus amounts above the statutory caps are likewise unallowable. This conclusion is just common sense, there is nothing magic about a severance pay calculation that converts unallowable salary into allowable severance payments. … Bottom line: unallowable salary cost used in a severance pay calculation results in unallowable severance costs – unallowable in, unallowable out.
So, common sense apparently trumps the plain language of the cost principles.
Nice.
As non-lawyers who nonetheless have been dealing with FAR cost principles for several decades, we must express vehement disagreement with this opinion. How Judge Clarke persuaded two other Judges of the Board to agree with him is a mystery to us.
But as we said, we’re not lawyers. So what do we know?
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The CASB Preambles
I’ve been doing CAS for many, many years. First, I was a student, trying to figure out what the Standards and the Regulations meant, then I was a consultant (working for somebody who was on the original CAS Board), and later I became an instructor. Now I’m the Editor of the LexisNexis reference book addressing CAS compliance.
The point is, I think I know something or two about the Federal Cost Accounting Standards.
When I teach CAS, I attempt to make clear that just reading the Standards is not sufficient. To get a good understanding of what a Standard means and how it is to be applied, you need to study three things:
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The Standard itself (there are 19 of them)
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The CAS Board Preambles associated with that Standard, which explain why the Standards and related Rules and Regulations were written, and provide a rationale for positions taken relative to issues raised in the public comments
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Any judicial opinions regarding disputes on how a contractor interpreted and/or applied the Standard
Until you’ve studied those three things, you don’t really know what any particular Standard means. Note I said “studied,” not skimmed, or scanned, or reviewed. If you are serious about gaining an understanding, you need to look carefully at each sentence. You may need to highlight and underline and draw arrows connecting concepts. You may need to diagram the sentence to ensure you really understand it.
You need to do the same thing with the Preambles and the judicial interpretations. You can’t just run through them in five minutes. You need to take your time and think about what you’re reading. If you’re not doing that, you’re not studying; you are simply reading. And that won’t get you where you need to go.
Now, many business people don’t have the time, or the inclination, to do all that. That’s where consultants come into play. (Hello!) Consultants have—at least in theory—spent the time studying so you don’t have to.
But assuming you want to put in the time and diligence, the FAR Councils just made it harder to do so.
On October 23, 2020, the FAR Councils published a final rule that ostensibly removed any references to a “FAR Appendix” (also known as “Appendix A to Part 30,” “Appendix B,” and “the Appendix). In addition, references to a FAR “loose-leaf” edition were also removed because “the FAR loose-leaf version is now published online at https://www.acquisition.gov. It is no longer published as a paper loose-leaf version.”
Well, that sounds innocuous, doesn’t it? No need for a loose-leaf FAR version when you can get it online. And why reference a “FAR Appendix” when people can “access 48 CFR chapter 99 easily online at the electronic Code of Federal Regulation (eCFR) website (https://www.ecfr.gov).”
Who could complain?
I could.
See one thing people may not know is that the FAR Appendix used to contain the CAS Board Preambles. You could look them up and study them, if you had a mind to. At one point, you could even order a hardcopy of the Preambles from the Government, if you had the inclination to send a letter to the Publications Office, Office of Administration, Executive Office of the President. But not any longer.
This final rule puts the final nail in the coffin by deleting any references to the Preambles from FAR Part 30.
Before the regulatory revision, FAR 30.101 stated—
(c) The Appendix to the FAR loose-leaf edition contains-
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Cost Accounting Standards and Cost Accounting Standards Board Rules and Regulations Recodified by the Cost Accounting Standards Board at 48 CFR Chapter 99; and
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The following preambles:
(i) Part I-Preambles to the Cost Accounting Standards Published by the Cost Accounting Standards Board.
(ii) Part II-Preambles to the Related Rules and Regulations Published by the Cost Accounting Standards Board.
(iii) Part III-Preambles Published under the FAR System.
(d) The preambles are not regulatory but are intended to explain why the Standards and related Rules and Regulations were written, and to provide rationale for positions taken relative to issues raised in the public comments. The preambles are printed in chronological order to provide an administrative history.
Those paragraphs were stricken by the final rule, and you won’t find them in the FAR again. Unless you already know about the Preambles, you won’t know they exist.
Over the years, the Preambles have become harder and harder to locate. Certainly, they do not exist in either the 48 CFR Chapter 99 found on www.acquisition.gov. Nor do they exist in the 48 CFR Chapter 99 found on the Electronic Code of Federal Regulations. You can’t get where you want to go from those sites.
What you will get is the same statement found in the CAS Board’s Regulations (at 48 CFR 9903.307). To wit—
Preambles to the Cost Accounting Standards published by the original Cost Accounting Standards Board, as well as those preambles published by the signatories to the Federal Acquisition Regulation respecting changes made under their regulatory authorities, are available by writing to the: Publications Office, Office of Administration, Executive Office of the President, 725 17th Street NW., room 2200, Washington, DC 20500, or by calling (202) 395-7332.
Go ahead and write them. I did. When I did, I was told that no copies were available. Maybe you’ll have better luck than I did.
As noted in the soon-to-be-deleted FAR paragraphs quoted above, the Preambles have three parts. Finding Part III used to be relatively easy, but finding Parts I and II was damn near impossible. Now, the Preambles—all three parts—will be assumed to just not exist.
Which is tragic in many respects. As I stated in the beginning, I don’t think you can really understand the Board’s intentions with respect to the CAS Rules, Regulations, and Standards unless you study the Preambles. Consequently, locating them so that you can study becomes rather critical.
Where can you find them?
Well, we noted that the CPA firm Cohn Reznick has kept a copy of Preambles Parts I and II, and made that copy available on its website.
If you want just Part III, you can find it on www.acquisition.gov, even though you can’t find it under the FAR Chapter 99 heading. (Link: HERE.)
You can also buy Lou Rosen’s 2013 book, Cost Accounting Standards Board Regulations, Standards and Rules. That has the Preambles in it; however, be advised that the Preambles are organized chronologically, and not grouped by the Standard (or Regulation) to which they pertain.
The situation, then, is problematic. At least, it’s problematic for students (or want-to-be students) of the Federal Cost Accounting Standards. The FAR Councils’ decision to delete any FAR reference to the Preambles just makes it that much harder for the next generation of contracting officers, auditors, and contractor compliance folks who have to interpret and administer them, without access to the CAS Board's thoughts.
It Used to be Called the “Perm File”
Eventually one learns that the Defense Contract Audit Agency (DCAA)—the auditors with whom most government contractors interact—maintains a file on each contractor, in which Internal Control Questionnaires, CASB Disclosure Statements, audit reports (especially Mandatory Annual Audit Reports), and the like are stored so that they can be reviewed during risk reviews and other activities. It’s like a contractor’s Permanent Record. In fact, it’s called the “Perm File.”
The DCAA Contract Audit Manual states (at 3-204.3)—
When developing the audit scope, review the permanent file (including assessments of internal control system and control risk summarized on the internal control assessment planning summary sheets or internal control questionnaires, and audit lead sheets) and prior audit work packages to determine what data are available, what audit steps were done in the past, and the findings from those steps. This may identify areas where additional audit work is advisable (i.e., areas of high risk) or where audit scope can be reduced (i.e., areas of low risk).
After the revelation that DCAA maintains Perm Files, one soon learns that the Perm File isn’t as permanent, or as comprehensive, as anybody would reasonably think it would be. As a contractor, when DCAA asks for something you already provided a year or two ago, you’d like to say “go pull it from the Perm File.” But then the auditor looks at you funny and shakes their head. It’s not there. Chances are, nobody updated the Perm File when they should have. Or maybe it was updated but the auditor can’t find what they’re looking for. Or maybe they can’t actually find the Perm File. Auditors use judgment to determine what goes into the Perm File; maybe one auditor’s judgment differed from another’s. You don’t know and the auditor probably doesn’t know. The reason doesn’t matter; all you know is that the Perm File isn’t really what you thought it was and it isn’t what reasonable people would reasonably expect it to be.
To be clear, not everything is supposed to go into the Perm Files. The audit working papers (stored electronically via CaseWare) normally do not; they eventually end up at the National Archives and Records Administration (NARA). Which is about as deep as we are going to go into that. A Google search led us to DCAAM 5015.1 (“Files Maintenance and Disposition Manual”) but the document that came up was dated 2001 and signed by Bill Reed, so we’re not going to delve into it. Try to contain your disappointment.
What we do want to talk about is a new MRD, dated September 29, 2020, entitled, “Guidance on the Contractor Information Survey (CIS).” What is the CIS? According to the MRD, the CIS is “a tool for obtaining information about contractors to assist the audit team in identifying potential areas where future audit effort may be warranted.” In addition, the CIS “will assist the audit team in understanding the contractor’s organizational structure and business, the overall design of the contractor’s accounting system, and basic information related to internal control.”
Sounds a lot like a Perm File, doesn’t it?
However, unlike a Perm File, the CIS is not to be used “as an integral part of the risk assessment process.” In the MRD, the word “not” is bolded.
Which makes us wonder. If the CIS is not a part of the risk assessment process (unlike a review of the Perm Files per DCAAM 3-204.3, as quoted above), then what exactly is it to be used for? What value does it add? Because if it doesn’t add any value, then completing it is just wasted time.
The good news is that it’s DCAA’s time to waste. It seems clear from the MRD that the auditors complete the CIS, and not contractor personnel. But still … we’ve all been there, right? We’ve all helped our auditors complete their required documentation because doing so helps ensure it is accurate, and because doing so get’s the audit completed that much faster. We have to wonder how much of the CIS will really be completed by the auditors, and how much will end-up getting handed-off to a contractor.
Another piece of good news is that the CIS is aimed primarily “at smaller contractor locations where they have had little or no audit effort in three to five years.” Remember, under the new DCAA risk-based incurred cost audit selection process (which really isn’t new at this point), some contractors may go years with an audit of final rates or incurred costs. (We think this is a bug, not a feature; but nobody else seems to care much about it.) Thus, the apparently role of the CIS is to document information about those contractors in between the very infrequent DCAA audits.
The CIS (Version 1.0) includes three parts, as follows:
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Part A assists in understanding the contractor’s organizational structure, size, complexity, and business base.
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Part B assists in understanding the design of the contractor’s accounting system and basic information related to internal control.
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Part C provides for the auditor’s identification of potential recommended activities for future planning.
If you look at the questions the auditors are supposed to answer, you get the feeling that they will be reaching out to contractors. For example, how are the auditors supposed to answer the following question? “Have there been any changes in the last two years, or are there plans to implement future changes, in the methods used to account for or allocate costs?” Or what about “Use the embedded Excel file to document the contract/subcontract information for contracts awarded in the previous FY.”
We are thinking that the smaller contractors who have escaped in-depth DCAA audits, because they are “low-risk contractors,” are going to be getting some phone calls and/or emails in the near future….
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