Previously, Wilkinson explored how the COVID-19 pandemic has impacted the professional services industry and how these firms will be able to adapt to the new “work from anywhere” transition and the demands of the new cost accounting practices.
In his latest GovCon Expert article, GovCon Expert Rich Wilkinson provided a guide on the importance of updating business systems in the federal sector and detailed what it takes for firms in our industry to clear their systems with the federal government as well.
You can read Rich Wilkinson’s latest GovCon Expert article below:
A Guide to Bringing Business Systems Up to Uncle Sam’s Exacting Standards
By Rich Wilkinson
If your firm does business with the U.S. government on a cost-reimbursable basis, then you likely have come face-to-face with Part 16 of the Federal Acquisition Regulation, FAR 16.301-3, which requires government contractors to have adequate accounting systems.
Part 16 serves as a gate through which all contractors that wish to do business with the U.S. government must pass. If the proposed contract is the first for a contractor on a cost-reimbursable basis, a pre-award survey of the prospective contractor’s accounting system may be required. Procuring contracting officers (PCOs) are required to determine if a contractor’s accounting system is adequate to account for and report (bill) costs before a cost-type award can be made and the pre-award survey provides support for that determination.
Some form of adequacy assessment may also be required for other systems. These include purchasing, estimating, material management accounting (for manufacturers), government property management and earned value management. None of those additional systems are required to be adequate by regulation, but an adequate system may be part of an agency’s requirements for a particular procurement.
Today, almost every solicitation for a multiple award contract (MAC) or government-wide acquisition contract (GWAC) comes with some kind of requirement to demonstrate an adequate accounting system in order to be considered. Many also require an approved purchasing system. Where it is not a requirement, some solicitations offer extra points in the evaluation criteria for an approved system.
So for firms that want to win this kind of business, it’s critical they bring their business systems up to standards, then be prepared to demonstrate the acceptability of those systems. Let’s look at what it takes for firms to get their systems cleared by the government.
We’ll start with the most likely candidate for examination, the accounting system. If a firm has never been awarded a cost-type contract before, a review of their system (or proposed system) might be required, as specified in Standard Form 1408 (SF1408). The 1408 form is unique among reviews in that it can be completed for an accounting system not yet implemented, solely based on documentation.
For firms doing business with the Department of Defense, click here to see the audit program for the pre-award survey at the DCAA (Defense Contract Audit Agency) website and here to see the pre-award survey checklist. If an Administrative Contracting Officer (ACO) requires more than a 1408 review, the DCAA will perform a full accounting system audit, which can take six months or more. Click here for details on this audit program.
Whether it is an SF1408 review or a full audit, the “system” being examined is not simply the software. A firm’s policies, documented procedures, actual practices and the tools (software) used are all part of what the government considers to be the accounting system.
The goal: a “Yes” recommendation, meaning the contracting officer can award a cost-type contract to the prospective contractor. [For those of you keeping score, not one of Unanet’s more than 1,400 GovCon clients has ever failed to achieve an “adequate” status under SF1408, a record of which we are very proud.]
Estimating systems get similar treatment, with an opinion from the government as to whether a system is adequate for use on government contracts. But a review is only required when a contractor has received $50 million of DoD contracts or subcontracts in the previous fiscal year for which cost or pricing data were required.
That makes it hard for smaller contractors to get their systems even reviewed, much less accepted. For those companies, engaging a CPA firm to assess the system is worth considering. Most federal agencies will accept that opinion in fulfillment of a contractual or solicitation requirement and it could get you into a competition from which you might otherwise have been excluded or earn you points in an evaluation.
There is little or no software component to an estimating system review. Instead, the review focuses on the policies, procedures and practices that guide the estimating process, including the estimating of labor and material requirements, calculation of out-year indirect and labor rates, and pricing in general.
For DOD solicitations, DCAA and third-party reviewers use the DFARS Business Systems Rule adequacy criteria (DFARS 252.215-7002) and the DCAA estimating system audit program for the review. Again, an opinion letter from a CPA firm is usually, but not always, accepted by the government as evidence of an adequate estimating system.
Click here for DFARS estimating systems requirements, here for DCMA instructions to ACOs for estimating system review, and here for a full description of the DCAA audit program for estimating systems.
Firms that expect their estimating system to have a role in an upcoming contract or solicitation would be wise to proactively get their system reviewed rather than waiting until the solicitation is on the street.
A firm’s purchasing system is another candidate for government scrutiny. Under FAR, only the contracting officer (the ACO for DOD solicitations) can approve a purchasing system. This contractor purchasing system review (CPSR) process is known as a “file review” because it examines files and documentation of purchases made and charged directly to contracts.
Software plays little or no role in this evaluation either. Instead, the focus is on your policies, procedures and documentation of actions taken from market surveys to competition among suppliers, to compliance with the Buy American Act.
At DOD, the CPSR typically is performed by DCMA. While several civilian agencies perform their own or contract out the review, it’s important to note that the government will not approve a system based on a CPSR performed by a non-governmental entity unless they specifically contracted for that review. Check out this white paper for more about the CPSR.
Like all business systems, a contractor’s earned value management system (EVMS) consists primarily of the policies, procedures and practices that govern how the discipline is implemented within a firm. Within the EVMS discipline, these are collectively known as the “system description,” a single, integrated set of processes, practices and applications that state how the firm will implement the discipline of EVM in compliance with EIA 748.
The government does not certify or validate software for EVM compliance, nor does it “approve” systems. Neither can any software product claim to be “government approved” for EVMS. The government will, however, issue a “letter of acceptance” for a specific contractor’s system following a successful assessment or validation.
While only Uncle Sam can issue that acceptance, some firms have successfully claimed “points credit” in solicitation evaluation schemes using an opinion letter from a third-party EVMS consulting firm. That is certainly not assured, but that approach may be preferable to waiting years for DCMA to perform a systematic review or validation.
Your ERP system provider should be able to help with the development of EVM process maturity within the firm. But for contract-specific EVM needs (including a solicitation or evaluation requirement), a separate EV calculation and reporting engine will be required to meet the stringent requirements of EIA 748. We recommend considering a third-party EVM software tool for the calculation and reporting processes, and perhaps an expert EVM consultant to assist in implementing the discipline.
For more information about government acceptance of EVM systems, the National Defense Industrial Association (NDIA) has published an excellent guide to the process.
Like most assessments performed by the government on contractor systems, an EVM review can be a protracted process. If you need an opinion on your EVMS or assistance with developing a system description, don’t wait until the solicitation is on the street or the contract negotiations have begun. Be proactive and start the process now by reviewing this guide to CPSR.
About GovCon Expert Rich Wilkinson
Rich Wilkinson works for Unanet and is an expert in government contracting, specializing in compliance. He has spent the last 25 years in executive roles with prominent GovCon accounting software companies. Prior to that, he was a controller for Washington DC area government contractors and before that, he served as a contracting officer with the Naval Air Systems Command.