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AWR Articles
Transitional Issues Facing Mid-Size Government Contractors
As government contractors (GC’s) grow from emerging to small to mid-size (say over $30 million in revenue), we are often asked, “What should we be preparing for?” Given this, we have prepared this article for those of you who need guidance or simply want a look at things to come. The following is an outline of key thoughts and with expansion into certain related areas:
Government Contracting Compliance
- Contractor Purchasing System Reviews —if awards by the government or a government prime contractor exceed $25 Million, including:
- Establish and submit a small and small disadvantaged business-subcontracting plan.
- Be prepared to be subject to subsequent reviews of the plan versus actual results.
- For DoD contractors, the Contractor is a large business if either of the following occurs:
- In its fiscal year preceding award of this contract, received Department of Defense (DoD) prime contracts or subcontracts, totaling $50 million or more for which cost or pricing data were required; or
- Received DoD prime contracts or subcontracts totaling $10 million or more (but less than $50 million) for which cost or pricing data were required; and was notified in writing by the Contracting Officer that the requirement applies.
A mid-size GC company should review and modify its organization structure and cost accounting practices prior to obtaining CAS covered contracts. Once the Company is CAS covered, the government has the right to be informed and approve changes to the cost accounting practices. The Company’s accounting and estimating systems must be integrated to produce consistent and usable data for estimates and budgets.
The Company needs to formalize compensation systems and HR practices. The government will eventually review it.
In addition, the Company also needs to formalize contract administration to assure achieving most favorable terms and not agreeing to terms which the Company is exempt from, such as CAS.
CAS Matters
As a $50+ million government contractor, the CAS exemption as a small business no longer applies. Therefore, once a $7.5 million CAS covered contract is awarded, the trigger contract, all contract $500,000 or more are CAS covered. There are two levels of CAS coverage:
- Modified — applies CAS, 401, 402, 405 and 406
- Full — applies when one contract award exceeds $50 million or when total CAS covered contract and subcontract awards in prior period exceeds $50 million
Disclosure Statements
Once fully CAS covered, a Disclosure statement is required. The disclosure statement is a formal document that is submitted to the federal government and is used to determine your cost accounting practices and also for research by the CASB.
The Disclosure statement should not be your accounting manual, though it should not conflict with the accounting manual. The accounting manual should be in more detail than the Disclosure statement. We recommend completing the related Disclosure statement forms as soon as possible as a means of identifying any compliance issues.
Other Issues
Since the company is growing, the likelihood of a defective pricing audit has and will continue to increase if the Company has fixed price contracts. In addition, the likelihood of having unfavorable findings during a defective pricing audit is high if the Company’s estimating systems have deficiencies.
Regarding the filing of incurred cost submissions as required, there will be less flexibility on the part of the government as the Company continues to grow. They need to be completed on time complete and accurate.
As a government contractor grows and has more contracts, there is an increased probability of contract terminations. That means the Company needs to establish policies and procedures governing:
- Severance and employee compensation in such situations, and
- Capturing all termination settlement costs.
Financial Accounting
Software & Systems
Mid-size GC’s looking to go to $150 million, which are on Deltek GCS Premier, should consider moving to Costpoint (or a similar/competitive product) for enhanced program and financial management information systems. For instance, a program management system which provides online, real time access to program activities, in a secured environment, is a powerful tool for obtaining operational information for sound project management. In addition, automation and integration of back office activities (accounting, HR, contracts and procurement) streamlines processes. Work flow enhancements such as electronic document approvals is another example. These types of enhancements can not be done with GCS Premier, and yet the implementation of such changes results in significant efficiencies and savings — which would help any mid-size GC become more cost competitive (facilitate growth) as well as more profitable. The benefits derived from enhanced systems usually far outweigh the cost of the enhancements assuming, of course, the systems are properly installed and utilized.
By the way, AWR does not provide systems integration services so we are not bringing this up to generate a potential service which we could benefit from. We would highly recommend Scott Goss at (703) 627-1220. Scott is clearly a real expert in this area and former President of Signal Corporation.
Indirect Rate Structure
Analysis and Review
We are very big proponents of forward pricing and evaluation/revaluation of indirect rate structures to facilitate competitive as well as smart contract pricing. We find that many of our very successful clients obtain such success through innovative pricing strategies. There is no better time than now, before the Company becomes CAS covered, to reevaluate its indirect rate structures and Forward Pricing tools. While this should be completed periodically throughout a Government Contractor’s life cycle, it’s most critical for mid-size GC’s as smart pricing is essential to its success.
Other Matters
- Need to focus on timely project financial information and periodic reviews to as sure that projects are on target. Also, need a good written accounting manual, desk procedures for accounting staff, and formalized policies for financial charging practices such as Capitalization.
- Project management policies and practices should be written to maintain reasonable control and good quality assurance.
- A business risk analysis of the Company should be performed and developed including back-up and recovery systems incorporating appropriate types and levels of business insurance.
- Review accounting/finance organization structure to ensure that it meets the needs of a larger company. Consider decentralizing some functions to the operating group or division level to operating/ processing efficiencies and information flow.
- Evaluate/implement budgeting process to ensure timely and relevant information, management accountability and “buy-in” at the lowest level, and detailed, effective monthly analysis.
- Evaluate the Company’s business lines/ market segments to determine which provide the greatest opportunity to increase the Company’s market value and allocate marketing and other resources accordingly.