The Many Complications that Will Arise from the ARRA for Government Contractors

The following article was submitted by Richard Marksberry, former Partner in the MidAtlantic practice of Tatum, LLC. During the last four years Mr. Marksberry has, as the CFO, led the selection and implementation of accounting systems for three federal contractors each with sales over $100 million annually.  He was recognized as one of the “Top 10 CFO’s in Government Contracting” by ExecutiveBiz in 2008.

The $787 billion gorilla has come out of the corner!  The Administration is finding out that it is easier to say “stimulus,” than it is to actually spend the money.  With its slow start the American Recovery and Reinvestment Act (ARRA) distributions are reminiscent of the movie Brewster’s Millions, except that the “inheritance” is a growing economy. And, although the current Administration’s desire is to cut back on government contracting, this will be one of the key ways the stimulus money will have to be spent.

The channels for this spending will be through Federal, State and local governments and will be geared toward infrastructure where possible.  This is the crux of the issue as the “rules” for the spending and its oversight will differ depending on the primary or first tier source of the funding (or the prime contract source).  The rules and reporting requirements are an “enhancement” of the Federal contracting rules under the Federal Acquisition Regulations (FAR).  These enhancements support the Administration’s desire to have greater “oversight and accountability” along with more “transparency.”  Ultimately the need to show and report results are important to the success of this effort.

As a result of these changes, there are a number of potential complications for Federal contractors. The following are some that I believe are the key ones to be prepared for during the first wave of funding:

• Extended Reporting Requirements
• Job Creation Statistics
• Focus on Buy American
• Audit Rules Extensions
• Wage Rate Specifications

 The extended reporting requirements are not very clear and are scheduled to be changed in the next quarter.  For now we know that there are two requirements to keep in mind.  The first is that if you receive funds from the ARRA you are required to report the salaries of the company’s top five wage earners.  Not a change for public or not-for-profit companies, but this is new for private companies who are not accustomed to this level of information dissemination.  Oh, and incidentally, if you are a private company with a contract initiated prior to the ARRA, and if ARRA funding is allocated to your contract in the effort to complete spending, you will find yourself in the enhanced reporting requirement for current and comparative prior years! 

The other reporting requirement, and pull out your thinking cap, is for “progress being made,” “detail” of how recovery funds are being spent, and the number of jobs “created or preserved” by the use of ARRA funds.  Systems that allow for tagging of transactional information with multiple uses will be necessary unless you want to maintain and reconcile multiple ledgers for the same transaction.  This could get complicated and hard to audit, but more on that later.  Perhaps the initial quarter reporting under ARRA will help in defining the way forward. Clarity of this kind of reporting may be yet down the road, though it is still a current requirement. 

The Buy American focus is mainly for raw materials used in construction, however, it is not altogether clear when it comes to compliance with the various international trade agreements. It appears to result in tighter restrictions at the state and local contracting level than at the Federal level.  Restrictions may vary from country to country, the type of material, and if it is a Federal, state or local project.  Due to the level of complexity here and the need to be competitive but profitable, I feel an analysis is necessary in each case before bidding the contract in question.

Audit rules have taken on a new life under the ARRA!  As soon as ARRA funding is in the mix you may expand your authoritative audit agencies by up to four or five agencies including the new “Recovery Accountability and Transparency Board.”  Additionally, the rules give new levels of access to documents, records, and personnel.  To state it plainly, when ARRA funds are used the Comptroller General and the agency inspector general are granted access to any transactional support, including the interview of contractor officers and employees related to the transaction.  The ruling applies to all contract types, not just cost plus, and extends to commercial item contracts and commercially available off-the-shelf item contracts!   And why stop there when you have a good thing going?  The extended audit rules also apply to those contracts that are at or below the simplified acquisition threshold, which was originally established by the Federal Acquisition Streamlining Act (FASA) to help level the playing field for small government contractors.

In relation to wage rates the Act specifies that the use of prevailing wage rates specified by the U.S. Department of Labor. Many construction contractors are familiar with this “contract requirement”, however under ARRA there are additional considerations for the proper level of spending for services contracted for by the government as it applies to all requisite labor types.  This may add complications of varying wage rates when an employee works on multiple contracts, and only some are ARRA funded. Again we see the need for sophisticated accounting and payroll systems for even entry level companies.

One last point is important to note.  In most federal government contracting there are “flow down rules” for requirements that must be adhered to by both the prime and subcontractors as they “flow-down” to subs.  Rule enhancements appear to apply to the prime and subcontractors in all cases.  The advantages that were often provided for small and emerging contractors do not seem to have a place in ARRA and this new need for “transparency, oversight and accountability.”