Business Systems Assessment Take Center Stage

So, how will this impact government contractors? It is now clear that after several years, the importance of government contractor business system assessments is returning to center stage. To stay competitive, savvy government contractors will need to get ahead of this shift in focus.

The Section 809 Panel first signaled business system assessment importance in January 2018 as cited above, and more recently, in Volume 3 Part 2 of its report. The panel stressed the importance of the business system requirements, but it also wanted to see a shift towards control-based criterion as a baseline for assessment of the accounting system. The panel’s Professional Practice Guide (PPG) draft further defined risk assessment guidelines for the accounting system. In addition, in both the FY17 and FY18 National Defense Authorization Act (NDAA), Congress has pushed legislation to address the absence of business system assessments and the incurred cost audit backlog. The proposed Defense Federal Acquisition Regulation Supplement ruling to address the FY17 NDAA recommendations, which would allow for CPA firms to perform business system assessments without additional review by the DOD, has been postponed twice and is now estimated to be released in Q3 or Q4 of FY19. Industry commentary will be extremely important. Private CPA firms are the key to providing business system assessments within the required review frequency timeframe.

Contractor Business System Review Frequency and Responsible Agencies

The GAO reports that the DCAA plans to perform 248 business system audits over the next four years. Although that is a dramatic improvement, it doesn’t even scratch the surface of business system reviews for all the contractors that need them or account for the systems’ triennial aging. The 248 system audits relate to accounting, estimating, and material management and accounting audits, for which the DCAA is responsible.

The Importance of Achieving Adequate Business System Status

Why is achieving adequate business systems status so important? From the government’s point of view, it’s the first line of defense in preventing fraud, waste, and abuse. However, contractors look not only at the inherent benefits that effective internal controls provide an organization, but that adequate business systems can also win favor in certain proposal evaluations. In some cases, it’s necessary for contract award. Additionally, the Section 809 Panel draft PPG features new Incurred Cost audit risk assessment factors, whereby an adequate accounting system will decrease one’s chance to being subject to Incurred Cost audits.

Deficient Business Systems: A Detrimental Purgatory

The GAO reported that of the business systems assessments they reviewed, it took between 15 months to five years, with 50 percent taking longer than four years to go from initial finding to system approval. This history, coupled with the business system backlog, makes the prospect of having an initial assessment of business system deficiencies that stick around for quite some time a very real possibility. A contractor may have fixed instances of deficiencies relatively quickly but have a difficult time getting DCAA to return and review the corrective action. In other instances, a corrective action may need to run its course through the system for several months before a substantive sample can be generated for testing. Bottom line: having a system with deficiencies is potentially worse than having an unassessed system, and it can be a detrimental purgatory of an existence until deficiencies are remediated and retested.

Proactive Compliance: A Less Expensive Approach than Reactive Compliance

This has been prepared for informational purposes, is general guidance only and does not constitute legal or professional advice. You should not act upon the information contained in this publication without first obtaining professional advice specific to, among other things, your individual facts, circumstances and jurisdiction. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its partners, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Over the past several decades, the Government has sought ways to remove barriers to acquiring readily available technologies that appear just out of reach, or at least significantly difficult to procure in a timely manner. Both the Government and suppliers echo frustrated sentiments with the difficulties of procuring advanced, innovative products from leading providers of technology.^[1] Many providers of commercially available products want to avoid the bureaucratic, administratively expensive process of selling to the Federal Government, i.e. commercial business must grapple with numerous contract clauses.

For example, leading technology developers of sensors or artificial intelligence believe the risk of compliance is too high versus the reward. The cherished seal^[2] of “Commercial item,” as defined under FAR 2.101, leaves a laundry list of go and no-go decisions that is cumbersome to navigate. In fact, Congress created the 809 Panel^[3] under the 2016 NDAA to look at this very issue, which followed a prior Panel created in 1991,^[4] to address these very same challenges with acquiring innovative products. Until more is done to bring the procurement process in line with traditional commercial practices, the Government will struggle to procure highly coveted, readily available commercial products.

In the meantime, to assist companies in navigating the nuances of the regulations, our team of professionals looked at the FAR 2.101 definition^[5] and began separating out these distinct characteristics.  We broke down the criteria into an easy-to-use decision flowchart to assist contractors in qualifying a commercial item. When an item is determined to be commercial, companies are not required to certify to either cost or pricing data, but may be required to provide “data other than certified pricing information”^[6] to substantiate the fairness of the price. Click here to access the flowchart.

To briefly explain “of a type” on the commercial services page, this is meant to provide contracting officers wider authority in making a commercial service determination. As per the January 2018 Department of Defense Guidebook for Acquiring Commercial Items, “The definition is applied when ascertaining whether items sold or offered for sale to the general public are present in the marketplace, and are similar [emphasis added] to those offered to fulfill the Government requirement.”

We recognize with the recent NDAA, the 2018 Congress instructs DOD to accept prior commercial item determinations that were acquired applying FAR Part 12 acquisition procedures, unless a senior procurement executive determines it is no longer appropriate. We fully support these moves to simplify and clarify confusing language; however, we believe there remains much more to be done in simplifying and streamlining the acquisition of technologies offered in the commercial market, while still protecting our security interest.

For more information about how to determine if your commercial item or service is exempt from the certified cost or pricing data requirement, please contact our government contracting professional listed below.

Chase Clark, CPA
Manager, Government Contracting Industry Practice
CohnReznick
858-926-3813
Chase.Clark@CohnReznick.com

^[1] Trowel, Larry. Defense News, Congress Can Simplify Commercial Buying and Increase Government Innovation, July 2017

^[2] There is no official “seal” or “designation” to commercial item exemption or what is known as a contracting officer’s determination letter. We took liberty to characterize this commercial item determination as a seal of approval by the contracting officer.

^[3] FY 2016 National Defense Authorization Act (NDAA), 25 Nov 2015, Section 809,

^[4] FY 1991 NDAA, Section 800 Panel sought was to streamlining commercial procurement laws, which led to the Federal Acquisition Streamlining Act of 1994 (FASA)

^[5] FAR 2.101 Definition (26 Oct 2018). The definition contains 559 plus associated bullets.

^[6] FAR 2.101 Definition (26 Oct 2018); 15.403-1

We see RFPs being issued with either SF 1408 (Pre-Award Survey of Prospective Accounting System) or Accounting System Review (ASR) requirements as a pre-requisite to a contract award that third- party CPA firms can perform.  Sometimes RFPs are not clear on what the government wants. As previously discussed in our blogs, understanding RFP requirements and draft-contract clauses are tantamount to enabling a successful proposal submission. In many instances, primes may ask for a higher-level assertion of the accounting system, then the contemplated contract requires. Understanding these requirements is extremely important in negotiating contract requirements with prime contractors.

What Should Contractors Know about Accounting System Assessments?

 Does the RFP require you to have an adequate accounting system that can perform on a cost reimbursable contract (SF 1408) or an acceptable or approved accounting system based on the 18 accounting-system criteria presented in Defense FAR Supplement (DFARS), clause 252.242-7006?

Significant Differences Between the Two

SF (standard form) 1408

• Used when a company is new to government contracting or new to cost reimbursement contracts;
• Provides a recommendation without any assurance on adequacy or suitability of the accounting system;
• Involves the evaluation of the design effectiveness not the operating effectiveness of the accounting system (meaning the system may not be currently set up); and
• Generally, does not involve tests of transactions and hence quicker to perform and does not result in an audit opinion.

ASRs

• Opines on the compliance with criteria as prescribed in the DFARS clause;
• Involves detailed testing of transactions to ensure operating effectiveness of the accounting system; (system must be up and running with historical transaction data);
• Takes time to complete (often 1-2 months, at least);
• Puts final determination of accounting-system adequacy in the hands of the contracting officer or the administrative contracting officer; and
• Confirms that an accounting system review is valid for three years in the absence of any material changes in the accounting system.

Benefits of an Approved Accounting System

• Gives Contractors a competitive advantage by reducing the pool of competitors when RFP’s have these requirements;
• Is compliant with RFPs contemplating cost-reimbursable contracts or CLINs;
• Many agencies are adopting the DFARS criteria as a sound model for an acceptable system;
• Most agencies will accept a qualified CPA firm opinion on accounting system adequacy.

What Can Contractors Do?

• Be proactive with contracting officers! Utilize the RFP Q&A process to clarify business system requirements;
• Be proactive within your own entity. Understand when certain business systems may meet thresholds for further scrutiny. Use our recently published business system assessment.
• If the RFP does not require a formally approved system prior to contract award, it is incumbent on the Contractor to ensure their accounting system is properly functioning and ready for audit should they be selected for award;
• If the RFP requires a formally approved system prior to contract award, it is incumbent on the Contractor to schedule an ASR long before procurement response is due when verification and evidence is required to support solicitation requirements;
• Prime Contractors should consider flowing down accounting system requirements, as part of their subcontract monitoring responsibility per FAR 42.202(e)(2) when awarding a cost-type subcontract.
• Subcontractors should understand the accounting system requirements placed upon them by Prime Contractors in relation to the prospective contract type.

Contact

For more information please contact Kiran Pinto, Senior Manager, at kiran.pinto@cohnreznick.com or (703) 847-4458 or Kristen Soles, Partner, at kristen.soles@cohnreznick.com or (703) 847-4411.