New Rule Requires Contractor Disclosure of Executive Compensation

New Rule Requires Contractor Disclosure of Executive Compensation – More Transparency or More Bureaucracy?

Our friends at leading government accounting firm Goodman and Company have a pretty direct take on some of the changes The Obama Administration is taking towards a more open government and how it affects contractors, in this case  some new changes in reporting requirements that affect federal contractors. An interim rule, which took effect July 8 and will be phased in over the next nine months, amends the Federal Acquisition Regulation (FAR). The intent is to ensure that FAR complies with two federal laws mandating greater transparency in government…. Read the entire article and find out how it affects you.

EVM Solution with DecisionEdge Software

We are very excited about our partnership with DecisionEdge Software to bring government contractors a comprehensive but easy-to-use earned value management (EVM) solution. Government contractors need to have an EVM solution in place in order to comply with ANSI standard 748,  and most are looking for the easiest, least intrusive solution to meet compliance. We have found that the DecisionEdge Earned Value Manager is an excellent complement to the Microsoft Dynamics NAV for Government Contractors financial management solution and gives our clients what they need to comply.

PVBS and DecisionEdge will be demonstrating the complete solution at a lunch seminar on September 10 at the Microsoft Technology Innovation Center in Reston.  This event will be a great way for government contractors to see the breadth of solutions available for them to meet DCAA and EVM compliance. Click here to register for the seminar.

The DecisionEdge EVM solution produces reports and graphics that help government contractors mine rich data to make sound business decisions about their contracts.  And it integrates with Microsoft Office Project and Microsoft Dynamics NAV for Government Contractors to generate the comprehensive reports that the government requires.

To learn more about EVM, send Bernard Mustafa an email and he’ll send you a copy of the NDIA’s Earned Value Management Systems Intent Guide which discusses EVM in detail.

Cost Accounting Practice Changes – Why are They Important?

The following article was included in the August 2009 PVBS High-Growth Government Contractor News. Ken Bricker, partner at Goodman & Company, LLP, has worked in the government-contracting and acquisitions arena since 1975. He has extensive knowledge of the Federal Acquisition Regulations (FAR) and the Cost Accounting Standards (CAS). Ken frequently assists clients with regulatory issues such as systems reviews, bids and proposals, rate structure development, forward pricing, wage determinations, claims, defective pricing, and incurred cost submissions.

Self-initiated (“unilateral”) cost accounting practice changes – what are they and what are the potential ramifications?  Such changes are primarily specific to negotiated contracts. 

The definition of a cost accounting practice (CAP) is found in the Cost Accounting Standards (CAS), i.e., a cost accounting practice is any disclosed or established accounting method or technique which is used for allocation of cost to cost objectives, assignment of cost to cost accounting periods, or measurement of cost.  A cost accounting period is normally a contractor’s fiscal year; allocation of cost refers to classifying a cost as either direct or indirect; and measurement of cost means determining the baseline for cost measurement (e.g., standard or actual, historical or market, capitalized or expensed). 

It follows that a unilateral CAP change is simply any self-initiated alteration in an allowable cost accounting practice to another allowable CAP, with two important exceptions, neither of which constitutes a change: (1) the initial adoption of a practice for the first time a cost is incurred, and (2) revision of a previously immaterial cost accounting practice.  Examples of CAP changes include changing actuarial cost methods, depreciation method, or the method of allocating general and administrative (G&A) expenses.  Examples of changes which are not CAP changes include a cost increase in fringe benefits, cost of a new pension plan, or a change in estimated depreciable lives. 

The basic intent underlying the FAR is allowability of cost, i.e., a cost is allowable when its treatment complies with the FAR cost principles.  One requisite for allowability is allocability of cost.  Certain FAR Part 31 cost principles incorporate the measurement, assignment, and allocability rules of selected CAS and limit the allowability of costs to the amounts determined using those criteria.  Upon award of a CAS-covered contract, the contractor is to consistently follow its cost accounting practices in estimating, accumulating, and reporting costs in compliance with CAS as well as the FAR cost principles. 

CAP changes, by their nature, are generally considered to be prospective in nature.  That is, there is no (or very limited) retrospective application to prior periods, unlike the requirements in Financial Accounting Standards Board Statement (FAS) No. 154, Accounting Changes and Error Corrections.  CAP changes should be made with a view toward improving the cost accounting system.  A higher level of compliance with FAR and/or CAS should result in demonstrable improvements in the costing of government contracts which should benefit both the contractor and the government. 

FAR Part 31 has no regulations specific to CAP changes.  The FAR states only that that excess costs resulting from inconsistent application of FAR Part 31 cost principles are unallowable.  Cost accounting practices therefore need to be consistently applied and conform with FAR Part 31 for all work, regardless of contract mix.  An acceptable accounting system which complies with FAR Part 31 is intended to result in fair and reasonable prices for both parties.  Practices which are inconsistent (e.g., by contract type or product line) do not, taken together, represent an acceptable accounting system because the reality is that two or more accounting systems exist which almost certainly will result in perceived or actual inequities in contract costing. 

CAS has a very sophisticated system of requirements when effecting a CAP change, including downward price adjustments to the universe of affected contracts.  However, price reductions can even apply to contracts which are not subject to CAS-coverage but which are subject to the Truth in Negotiations Act (TINA).  TINA is triggered by the submission of certified cost or pricing data.  TINA requires disclosure of actual or intended CAP changes by the date of final agreement on price or the government has the right to a price adjustment after contract award for any significant amount by which the price was increased if it is determined that the cost or pricing data upon which the negotiated price was based were inaccurate, incomplete, or noncurrent (aka, defective pricing).  Even if neither CAS nor TINA apply, cost disallowances can result on flexibly-priced contracts if CAP changes are determined to result in significant cost distortions.

Government customers may not view even meritorious accounting system improvements favorably if they increase funding requirements for their contracts, regardless of how well-intentioned or theoretically sound they may be.  Occasionally a CAP change is involuntarily triggered by the government.  To illustrate, assume that a small contractor was awarded a prime cost-type contract (not subject to CAS or TINA) under which the contractor intended to use significant subcontractor effort in accomplishing the contractual scope of work.  The procurement activity established a ceiling on the G&A expense rate to be allocated to subcontract costs.  The contractor utilized a total cost input G&A expense allocation base, and its G&A rate was considerably in excess of the ceiling rate.  Analysis of the contractor’s ongoing contract work revealed that significant subcontract effort was atypical of its other contract work, which was fixed-price with periods of accomplishment shorter than that contemplated for the contract in question.  Under this scenario, the new contract would very likely absorb an inequitable amount of G&A expenses, possibly even resulting in a loss contract.  Implementing a CAP change from a total cost input base to a base which excluded subcontract costs could result in a more equitable allocation, decrease the cost to the government, restore the contract to profitability, and avoid contract financing problems.

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.”

Dynamics NAV Supports Recovery Act Reporting Requirements

 

On February 17, 2009, President Obama signed Public Law 111-5, the American Recovery and Reinvestment Act of 2009 (“Recovery Act”, “Stimulus Act”), which included a number of provisions to be implemented in Federal Government contracts.

 

Effective March 31, 2009, interim Federal Acquisition Regulation (FAR) 52.204-11 went into effect that implements this mandated clause.  This requires the prime contractor and their first tier subcontractors to provide quarterly reports documenting their use of stimulus funds.   If you win contracts that use Recovery Act funds, you are subject to these reporting requirements.

 

Cohen Seglias Pallas Greenhall & Furman PC give a good overview in their Federal Construction Contracting Blog about the Reporting Requirements associated with the Recovery Act. The FederalRecovery.Gov website is being developed to “serve as the gateway for recipients to meet the reporting requirements” of the Act.

 

Dynamics NAV for Government Contractors will have the capabilities you need to report on your Recovery Act contracts.  Click here for information on the wide range of reporting capabilities found in Dynamics NAV.

CPA Tech Advisor Gives Dynamics NAV 5 Stars

In its annual review of mid-range accounting solutions, The CPA Technology Advisor gave Microsoft Dynamics NAV an overall 5-star rating. Dynamics NAV received a 5-star rating in all areas of the review, which were: Ease of Use/Transaction Entry, Modules & Notable Features, Integration/Import/Export, Reporting, Support/Training/Help, and Relative Value.

Some of the highlights from the evaluation were:

“Reporting options are excellent, using the Business Intelligence/Reporting function. Reports are easily customized using report wizards, and reporting options are found in each of the modules. VAT Reporting and Consolidation reporting is available in the GL module. Customized reports can also be built using SQL Server 2005 or SQL Server Reporting Services. The Business Analytics function allows users to obtain a comprehensive view of their business, drilldown to historical documentation, and process and review graphs and reports. Reports can be exported to Microsoft Word or Excel for additional manipulation.”

“Microsoft Dynamics NAV is a comprehensive product designed to provide…businesses with the tools they need to survive and thrive in the electronic workplace. If you’re looking for a scalable, customizable product that utilizes the strength of Microsoft products, you may want to take a look at this very powerful product.”

Click here to read the article.

Making New Reports Available on a Regular Basis

More than 300 standard reports are available to our customers as part of the solution. We’re constantly developing and adding new reports to our offering. Some standard reports include:

• Project Funding Notification
• Project Detail with Billing
• Project Revenue Summary
• Project Status Report
• Labor Utilization by Employee
• Labor Summary by Category
• Labor Utilization Trend
• Timesheet History
• Missing Time Entry
• Aged Project Receivable
• Contract Billing Trend
• Outstanding purchase order by Job
• Total Cost by Project Roll-up
• Summary of Hours and Amt on TM
• Individual by Project
• AR History by Project

Giving remote managers real-time access to program information

Many of the COO’s and CFO’s at the government contractors we meet with are looking for more effective reporting solutions, particularly if the company has employees at remote offices. Historically, project leaders at government contractors have had to wait weeks to get critical reports. They bristled because they could not manage their projects as efficiently as they wanted. The operations leaders were frustrated that the accounting and finance teams  could not service project leaders effectively. Frequently, the decision to purchase a solution like Dynamics-NAV is made by a team that includes the company’s ownership, chief operating officer (COO), and chief financial officer (CFO).  Usually the COO is interested in the reach of Dynamics-NAV reporting capabilities to support program management. The built-in real-time reporting capabilities Dynamics-NAV means that remote employees can get their information when they need it instead of having to wait weeks for an accounting clerk to support them. This is a huge plus.

Being able to provide management and financial reports is a critical responsibility for government contractor CFOs and accounting managers. Dynamics-NAV was built with ease of reporting in mind.  From within Dynamics-NAV, there are multiple reporting services. Plus, we’ve built online reporting capabilities that allow remote users to have access to critical contract information. The solution also takes advantage of built-in SQL Server reporting capabilities.  Reports are customizable and efficiently disseminated to key stakeholders.  Many users like the fact that they can self-service generate a management report and then email it to key constituents and have the confidence that the entire process is totally secure.

Microsoft Business Intelligence at the Desktop is for Everybody

The problem many of our government contractor customers face is that they are overwhelmed with data and have no easy way to organize it. We see it all the time. Even at small, fast growing government contractors, the accumulation of data is immense. This data comes from the financial management, ERP, CRM, and project management databases as well as many other places. It is often so unorganized that project managers would have no easy way to get the information they need to make good decisions about their projects in time to have a positive impact.

Many government contractors have decision makers in disparate locations and in some cases, in war zones. Historically, it can take weeks for the accounting department to get financial reports to these people, and then in hard copy. Almost every time we meet with a new customer, this is their biggest problem.  The ability to make information available to key stakeholders in real or near real time is very attractive to chief operating officers, chief financial officers and business owners.

What we see coming from Microsoft, and in large part available via recent launches are true, accessible business intelligence tools that make sense of this data. Microsoft has done a great job driving its business intelligence functionality and access deep into the organization.  We believe that Microsoft online reporting services will be a universal reporting solution. This is a huge because program and project managers can now get reports and information they need without having to wait for on-demand reports from an overly stretched accounting department. This functionality, at the desktop no less, will give these companies tremendous advantages in the marketplace.