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Changing Contract Environment – Competitive Bid to Negotiated Sole Source
Sometimes stellar performance can lead your business in a different direction. A certain corporation performed so well for its Government customer that they were suddenly moved to a sole source contract instead of a competitive bid basis.  As a result the corporation had to adjust its accounting and pricing to meet the more complex DCAA and Government requirements.
A mid size corporation located in the mid-west had been doing business in the aerospace industry. The bulk of their business was commercially based but they were moving into more Government business. Their performance on their Government contracts fostered great reliance by the customer on the corporation’s abilities. When a new contract was to be proposed, the customer asked them to sole source bid the program. The program involved setting up logistics for acquiring, storing and distributing parts and included the creation of a facility for that purpose. 
The corporation and its divisions who would perform the work had not needed to adhere to Federal Acquisition Regulations (FAR) when conducting business on a competitive bid basis. They had minimal expertise to review their accounting practices, accounting systems, and the chart of accounts to structure their costs and rates to conform to the FAR. 
A consultant with this expertise was enlisted to perform a review and work with the staff to incorporate changes to make financial data conform to the regulations and to prepare rates for use in proposals to the customer. Specifically each account was reviewed to determine what the Government considered allowable cost that could be included in the proposal. The consultant also provided guidance as to designation of direct and indirect expenses and the composition of indirect cost pools for rate calculations. The consultant was asked to visit the prospective facility to identify accounting requirements that would be unique.
Proposals were submitted successfully by the corporation and customer audits supported by the consultant resulted in favorable contract terms and price. The revised structure is now being used for other programs and has been given to a full time staff to perform the activities needed on a full time basis. The corporation was able to meet its submission schedules and was able to perform the contract in a timely manner.
Senior management has been pleased with the result and has promoted similar operations at its divisions. A full time position was created at the corporate level and the consultant was offered the position and declined but eventually was used to assist in the interview of the eventual successful candidate.  The consulting agreement has been renewed for the next 2 years and other divisions have used the consultant’s services.

Accounting Practices for a U.S. Government Contracting Environment

Government Contracting activities can have a significant impact to a company’s accounting practices. Although much of the Government regulations parallel Generally Accepted Accounting Principles (GAAP), there exist distinct areas of differentiation. Government regulations provide Reasonableness, Allowability and Allocability criteria for most expenses incurred by a business. These distinctions can be managed in most cases with a modicum of complexity. The primary impact regulations are the Federal Acquisition Regulations (FAR) Part 31 Cost Principles and the Cost Accounting Standards (CAS). Property acquired to meet contractual requirements is also subject to regulations that require accounting and tracking of the material acquired.
Cost principles provide guidance as to the type of costs the Government will consider when paying their bills. The cost must be reasonable. That is, cost that a prudent businessman would incur to further hi business. They must be allocable. That is, they must be incurred directly or indirectly for the benefit of the contract. They must be allowable. That is, they must adhere to the guidance provided by the cost principles. There are 52 cost principles identified including compensation including pensions, depreciation, advertising, royalties, bad debt, labor relations, selling costs, Independent Research & Development (IR&D), Bid & Proposal (B&P), insurance, relocation, travel, taxes, and lobbying to name a few. Certain expenses are considered allowable in whole or part and other are not allowed.
Accounting systems will generally record most of these expenses. For purposes of Government contracting, these records would need to be modified to exclude unallowable expenses whether direct or indirect from any billings to the Government customer. The 52 principles are not always explicit but include criteria to establish allowable cost and can be interpreted differently by individuals. This can lead to disagreement during an audit or review process with the Government. Indirect expenses are normally collected in homogeneous pools such as General & Administration (G&A), Selling, Indirect such Engineering and Manufacturing. These pools are then allocated using an appropriate allocation base to the final cost objective (contract, program, etc.). The accounting practices that are established to do this must be applied consistently during the proposal, cost accumulation, and billing processes.
Cost Accounting Standards are applicable to a company who do business with the Government in excess of $50 million will have full coverage. Those with less will qualify for modified coverage. Companies will be required to complete and submit a CAS Disclosure Statement that describes its accounting practices in detail. This document is a specific form to be completed. There are 19 cost accounting standards that provide instruction as to the allocability and method of allocation for several expense items including pensions, depreciation, compensation, G&A, IR&D, insurance, payroll allowance, and corporate charges. It also prescribes consistency in accounting practices criteria. Individual contracts in excess of $500,000 would be subject to the rules. Those less than that would not but could effectively comply if accounting system is so structured.
Companies that do business with the Government on a regular basis will apply the above requirements and regulations and compile indirect expense rates, labor rates, and other rates as needed on a prospective basis and use them for pricing the proposed work to the customer. This allows both parties to reach an agreed price for fixed price competitive business that is not subject to later adjustment. It also allows for billing rates to be established for cost type programs that are billed monthly and for establishment of final rates for final contract billings. Rates established in this manner will be reviewed and audited by a government agency. Unless there are substantial changes in the make up of expenses or the rules governing them, the audit process should not be complex or adversarial.
Government Property regulations require the segregation and accounting of all material bought under a contract. An inventory system that identifies the part or item, its location, and its cost must be in place to ensure integrity. Any transfers between contracts, usage, and disposable needs to be recorded and reported.
In summary, a company entering into substantive business with the U.S. Government will need to adjust its accounting practices to some degree. However, they will not deviate substantially from GAAP principles in most cases. These differences are manageable with the use of personnel (either internal or contracted for) with expertise in these areas. The business payoff can be substantial.

Communication, an Integral Tool for the Business Environment
In this age of instant communication with cell phones, internet chats and interactive communications, e-mail, PDAs, the human element is sometimes lost in the process. Teleconferences, video conferences, and group text messaging provide substantial benefit to communicate ideas to a broader audience. However, it sometimes is essential to see the subtle and not so subtle reactions that these media do not accurately capture. Knowing and/or seeing your audience or the group to whom you are communicating can be essential to making the best decisions and most successful negotiations.
Using the high powered tools for communicating can sometimes destroy or at least lesson the good etiquette and business decorum needed to make good business decisions. There is a tendency to short cut some of the proper techniques as a result of using instant tools. As a result, discussions between parties to resolve issues or problems can dissolve into partisan and adversarial confrontations that may have been avoided.
This is especially true in the government contracting arena where much of the activity is administered in a highly regulated and structured manner. The parties that interact have differing agendas and can more easily postulate a position that can seem harsh in an artificial environment. It is difficult to overcome these impressions without a face to face process. Face to face communication can establish a more personal and amicable connection. Subsequent communications between parties can then use other methods.
It is important to set up the face to face meeting properly. It should be in an environment conducive to achieving your desired result. An agenda should be prepared that will take everyone through the subject matter. The meeting should have some time span guidelines set. However, these should be flexible if this is a negotiation in process. If a presentation is part of the meeting, its topic should be noted sufficiently within the agenda to create an understanding of what is to be presented. Questions may be addressed during the presentation but should not disrupt the content. Questions, responses, and resolution of open items should be recorded. Each person speaking should be accorded the opportunity to complete his or her point or discourse. Results of the meeting should be summarized and agreed upon by all present. These should then be communicated in writing to all.
Further, it is important to provide written communications when a complicated or subjective topic is presented. These communications whether written or direct must be detailed but concise and state your conclusions with supporting facts and documents referenced or provided. If your communication is in reply to an earlier communication, it should indicate the item to which you are responding and then follow with your response. Always provide the recipient an opportunity to respond to the points made in your correspondence. Copies of the correspondence should be distributed to appropriate management levels.
If subsequent communications use telecommunications or other media, the content of those discussions should be noted and documented for the records. This is particularly important if final negotiation details are resolved in this manner. Contracts sometimes have long time spans between inception and completion. Negotiation of rates can extend the finalization even further. It is important to have a record of all that has transpired to avoid misunderstandings by others in the future.
In general, informal communication media should be limited as much as possible to avoid problems with future reviews of the contract activity or your accounting system. Use of e-mails, PDAs, internet chats, text messaging, or cell phone discussions should be limited in scope to avoid unnecessary complications.   They can be used to set meeting schedules and locations, agree upon agenda items, identify discussion points of particular interest, identify the proper parties to attend a meeting, set priorities, and note key individuals who will present agenda topics.
 Proper communication techniques are important in any business environment. This is especially true in the Government business arena where only the documented communication is not subject to future inquiry. One can use various media but the face to face and written communications are paramount to a good relationship with the customer.
 Finally, when all issues are resolved through the communication process, a document should be prepared that properly describes the results attained. This document should be executed by persons with signature authority to bind the parties to the agreed result.

Diversification in a Government Contracting Environment - Decentralized Purchasing System

By Anthony DeMarco

A large corporation located in the northeast has been doing commercial and government business in the aerospace industry. Recently it’s purchasing operations, which had been consolidated at the corporate level, was diversified and distributed to the various divisions within the corporation. Typically, the Government does periodic reviews of a contractor’s Purchasing System. The corporation was informed that this review was scheduled to be performed in the current accounting period. It was anticipated that each division would under go this Contractor Purchasing System Review (CPSR). Since the decentralization of the Purchasing process had recently been completed, the corporation requested a delay which was granted until the next accounting period.
Several of the divisions were concerned that their purchasing system may have deficiencies as a result of the decentralization. It was decided that they would contract with an outside consultant to perform a Preliminary CPSR. The corporation placed its requirements into the Ework Markets system. Their intent was to select a consultant locally to be cost effective for the project. We were selected and contacted by one of the divisions to submit a proposed plan for the CPSR. This plan and price was selected by the division to complete the CPSR.
A CPSR requires the review of all Purchasing department activities as well as other disciplines interacting with Purchasing. A detail analysis of the Purchasing department policies and procedures, the current government contracts, personnel interviews and internal records were performed. Several recommendations were made and most were accepted to improve the policies and procedures. Samples of purchase orders were selected and reviewed for consistency with policies and procedures and to government regulations. The on line purchasing systems were reviewed to determine that proper authorizations were in the system and that checks and balances were in place to preclude mishandling of the process. Several items were noted during these reviews and management concurred and would correct them.
It was also necessary to review Contract Administration, Engineering, Quality, Project Management, Finance, and Configuration Management. These reviews involved a series of interviews with key personnel from each of these departments to ascertain how their functionality interfaced with Purchasing. The interviews indicated that the process to flow down of prime contract clauses needed improvement. This aspect was reviewed with Purchasing and Contracts Administration managers and was to be enhanced.

As a result of the review, the division of the large corporation is better prepared to meet the scrutiny of the Government agencies who will review the purchasing system in the near future. The management of the purchasing department was very pleased with the results and the final report issued by this consultant. It is anticipated that this will result in further assignments.