defense acquisition university american society of military comptrollers the good, the bad, and the...
Post on 28-Dec-2015
215 Views
Preview:
TRANSCRIPT
Defense Acquisition University
American Society of Military Comptrollers
The Good, the Bad, and the UglyWhat Every Financial Manager Should
Know About DoD Contracts
Joanne MacDonald-MorrowOSD, AT&LDefense Acquisition University619-524-4822joanne.macdonald-morrow@dau.mil
2
Highlights
• Contracting cycle
• Contract types
• Budgetary implications of contracting
• Explanation of various indirect cost rates
• Allowability of costs on a cost–reimbursement contract
• Pertinent contract clauses
• Contract changes
3
Contracting Cycle
GovernmentContractor
Requirement
RFP / SOO
Proposal
Contract Performan
ce
Bid / No-Bid Decision
Source Selection
Negotiations
Contract Award
Contract Close-Out
4
• Fixed Price Contracts
• Cost Reimbursement Contracts
– Provides for firm price or, in appropriate cases, an adjustable price
– Contractor’s profit built into price– Use when specific requirements known before
award
– Provides for payment of allowable incurred costs
– Contractor’s profit is negotiated fee– Use when uncertainties in contract performance
prevent sufficiently accurate estimate of costs for fixed-price contract
Two Families of Contracts
5
Two Families of Contracts
Types Within the Families
Fixed Price FamilyFixed Price Family
Firm Fixed Price (FFP)
Fixed Price (EPA)
Fixed Price Incentive (FPI)
Types
Cost Reimbursement FamilyCost Reimbursement Family
Types
Cost Plus Fixed Fee (CPFF)
Cost Plus Incentive Fee (CPIF)
Cost Plus Award Fee (CPAF)
6
Fixed Price
Contractor’s Promise Best Efforts Deliver specifics
Financial Risk to Contractor Low High
Financial Risk to Government High ???
Cash Flow to Contractor As Cost Incurred On Delivery
Progress Payments ------ % Incurred Performance Based Payments ------
Milestones (Preferred)
Government Administration High Low
Fee or Profit Fee Profit (no limit)
Cost Reimburseme
nt
Characteristics of Contract Types
Best Effort Specific Deliverable
Incurred Delivery
Fee Profit (no limit)
7
Budget Implications
• How much funding is needed? – Budget to “most likely price”
•Additional funds may be needed for overruns, requests for equitable adjustments modifications, claims, and litigation judgments (unfunded)
•Final determination of cost and fee at contract close-out (for cost reimbursement contracts)
•When do you obligate funding?- Prior to telling the contractor to start work- After the fee has been determined
8
FFP Negotiated Price
FP – EPA Negotiated Price (but not EPA)
FPI Target Cost + Target Profit
CPFF Estimated Cost + Fixed Fee
CPIF Target Cost + Target Fee
CPAF Estimated Cost + Base Fee + Maximum Award Fee
Budgeting for Contract Type
General Rule: Budget to Most Likely Price
Contract Type Budgeted Amount
9
• Cost Objective: A contract, product, or other work unit for which cost data is desired and provisions made in the accounting system to accumulate and measure costs
• Direct Cost: A cost that can be tracked directly to one specific cost objective. Includes direct materials, direct labor and other costs traceable direct to that single cost objective.
• Indirect Cost: A cost not directly identified with one specific cost object but identified with two or more cost objectives. – Two types of indirect costs: Overhead and General and
Administrative (G&A)– Overhead costs support a specific part or function of the
company but not the entire company– G&A costs benefit the business as a whole
Contract Costs
10
Indirect Cost Rates
Close-out Phase
Performance Phase
Proposal Phase
Rates Differ Depending on Phase of Contract
11
Proposal Phase • These are “Future Indirect Rates”• Contractor submits to the government –
– A contract proposal per RFP– A Forward Pricing Rate proposal for:
• Direct labor rates for various disciplines • Indirect cost rates based on total estimated revenues
and indirect costs
• Government evaluates contractor proposals• Government and contractor negotiate both the
direct labor rates and indirect cost rates• “Agreed to” rates become part of the contract • Result is Forward Pricing Rate Agreement (FPRA)
12
Performance Phase
• These are “Billing Rates”• Billing rates are:
– Applicable to only indirect costs– Based on estimated indirect costs (e.g.,
overhead)– Temporary and applicable during period of
contract performance – Adjusted during contract performance to
reflect indirect costs actually incurred vs. estimates
• Importance of billing rates: – Basis for invoices and payment to contractor – Reimbursement of contractor’s actual indirect
costs in timely manner
13
Contract close-out takes at least 5 to 7 years after award
Contract Close-Out Phase
• These are “End-of-Performance Actual Rates”• Indirect cost pool accounts are audited to verify
allowability of costs in that pool • Valid indirect costs actually incurred are
compared to indirect costs estimated during Proposal Phase and modified during Performance Phase
• “Actual” indirect rates computed based on “actual” indirect costs incurred – subject to negotiation between government and contractor
• Final contract price is based on actual direct costs incurred plus application of “actual” indirect rates
14
1. Verify contract work is physically complete
2. Obtain all forms, reports and clearances for closeout
3. Resolve all outstanding issues
4. Initiate final payment to – or collect overpayment from – contractor
5. Deobligate excess funds / request any required additional funds
6. Prepare contract completion statement
7. “Retire” contract file
Contract Close Out
15
• Ambiguous wording in original contract • Funds obligated on contract have gone into
cancelled status• All vouchers not yet submitted or final payments
not yet made• Audit delays
Common Problems with Close Outs
• Complex coordination between government entities
• Reconciliation issues between government and contractor
• Final “actual” indirect rates not yet negotiated
16
Answer: The government will pay all “allowable” costs
What Costs will the
There is no commercial market equivalent to the concept of “allowable” costs
• Direct costs are generally allowable if they are reasonable
• Allowability issues generally occur with indirect costs
Government Reimburse the Contractor?
On a Cost Reimbursement Contract,
Reimbursement of Expenses
17
• Costs are allowable when they meet the following atandards (FAR 31.201-2):
1. Reasonable2. Allocable3. In compliance with applicable cost
accounting principles, practices and standards (i.e., CAS and GAAP)
4. In accordance with terms of the contract5. Specific limitations in FAR 31.205
Allowable Costs
18
Reasonable
• Is the cost necessary to conduct routine business operations?
• Is the cost consistent with sound business practice, law and regulation?
• Does the contractor’s action (incurring a cost) reflect a responsible decision?
• Are the actions consistent with established practices (of the contractor)?
FAR 31.201-3
“…burden of proof shall be upon the contractor…”
19
• Have costs been properly allocated?
• Properly assigned to appropriate indirect cost pools– Like purpose
• Allocated using an appropriate allocation base– Do the costs have a logical relationship to the base?– In reasonable proportion to the benefits received
• Were all overhead rates calculated consistenly and in compliance with the cost accounting standards?
Allocable
20
Accounting Principles
• Does the contractor follow the Cost Accounting
Standards (CAS)? - Cost Accounting Standards Board- Established by Congress- Achieve uniformity and consistency
• Implemented by contract clause
• The FAR imposes similar requirements
• CAS is unique to the governmentCAS Focus: Allocating costs (cost accounting)
21
Accounting Principles (continued)
• Does the contractor follow Generally Accepted Accounting Principles (GAAP)?
• The contractor’s accounting system must be adequate to allow the government to make a final cost determination
• GAAP is not unique to the government
GAAP Focus: Financial Accounting
22
• Contract may contain special terms that address allowability of specific costs
• Terms can only be more restrictive – not less– Additional restrictions on allowability– Designation of otherwise allowable cost as
being unallowable
Terms of the Contract
23
• Does the contractor follow the cost principles in FAR Part 31.205?
•Costs are unallowable if:
– Not a legitimate costs of doing business with the government
– Against public policy
The FAR is unique to the government
FAR Limitations
24
Examples of Unallowable Costs
• Advertising• Interest (cost of money)• Entertainment• Lobby to influence legislation• Contributions• Alcoholic beverages• Losses on other contracts• “Directly associated costs”
IAW FAR Part 31.205
25
• Contractor is required to notify government 60 days prior to incurring costs equal to 75% of amount obligated – Incrementally Funded Cost-Reimbursement Contracts
• Called “Limitation of Funds Clause (LOF)”– Fully Funded Cost-Reimbursement Contracts
• Called “Limitation of Cost Clause (LOC)”
• Contractor is required to notify government 90 days prior to incurring costs equal to 85% of amount obligated– Incrementally Funded Fixed Price Contracts
• Called “Limitation of Government Obligation Clause (LOGO)”
Contract Clauses that Provide Control over Unliquidated Obligations
Notification allows termination liability to be covered by unliquidated obligations on that
specific contract
26
• Two formal methods to change a contract:– Supplemental Agreement: Fully negotiated
agreement on specific work, price and schedule. – Undefinitized Change Order: Tentative
agreement on work and schedule but final agreements not yet negotiated; usually has a “not-to-exceed” price.
• Informal way to change a contract:– Constructive change: government action causes
contractor to perform work differently than required by written contract
Contract Changes
Why do I need to know?
• Majority of DoD’s funding is put on contract
• Most funding problems come from contracted efforts
• Financial management personnel should understand relationship between contracts management and financial management
30
Contract Types
Cost
Profit
0/100 Share
FFP
(PTA)
CeilingPrice
TargetProfit
Fee Adjustment Formula (Ratio)
FPIF
Target Cost
Target Cost
CPIF
TargetFee
Max Fee
Min Fee
Fee Adjustment Formula (Ratio)
Estimated Cost
Fixed Fee
100/0 Share
CPFF
Base Fee (0-3%)
Award Fee Pool
Estimated Cost
CPAFMaxFee
Base Fee
Share = The government/contractor sharing ratio for cost savings or cost overruns
• Financial Management Regulation http://comptroller.defense.gov/fmr/
• Principles of Federal Appropriations Law (Red Book)http://www.gao.gov/legal.htm
• GAO Reports and Comptroller General Decisionshttp://www.gao.gov/subscribe/
• Defense Acquisition Portal https://dap.dau.mil
• DAU Acquisition Community Connectionhttps://acc.dau.mil/CommunityBrowser.aspx
References for Financial Managers
For those interested in keeping up on the news: • Government Executive http://www.govexec.com/
• Federal Times https://poky.atpco.com/fed/
• Defense News https://poky.atpco.com/dfn/
• FAR News http://www.arnet.gov/far/mailframe.html
• DFARS News http://www.acq.osd.mil/mailman/listinfo
• DoD Early Bird http://ebird.osd.mil/
References for Financial Managers
top related