Keys to Submitting an Adequate Incurred Cost Proposal

Keys to Submitting an Adequate Incurred Cost Proposal

Presented By:

Karen Williams, Senior Consultant, WJ TechnologiesKeith Romanowski, Senior Manager, Watkins Meegan

March 20, 2013

AgendaAgenda

Who ‐ Needs to submit an ICP?What‐ Are attributes of an adequate ICP?What Are my chances of being audited?What‐ Are my chances of being audited?Why‐ Are adequate submissions important?h f l ?Where‐ Do I file an ICP?

When‐ Do I submit an ICP?

Proprietary and Confidential 2

What is AN Incurred Cost Proposal?What is AN Incurred Cost Proposal?

• Statement of direct and indirect costs by y

contract and cost element

• The final avenue of reimbursement for both f

direct and indirect costs

• Used to review, audit, and approve direct pp

costs and final indirect rates for every year

• Required for contract closeout

• Required by the Federal Acquisition

Regulation


Who Needs to Submit an ICP?Who Needs to Submit an ICP?

• Requirement triggered by FAR 52.216‐7, q gg y ,Allowable Cost and Payment Clause

– All Cost‐type or T&M contracts– FP contracts with cost reimbursable clins– “Christian Doctrine” (even if clause not included)( )

• Required of Subs as well as Primes


Submission RequirementsSubmission Requirements

• The contractor shall submit an adequate final indirect costThe contractor shall submit an adequate final indirect cost rate proposal to the Contracting Officer (or cognizant Federal agency official) and auditor within the 6‐month period following the expiration of each of its fiscal years.

• The Contractor shall support its proposal with adequate d ( f f )supporting data. (See DCAA Information for Contractors)

• Final annual indirect cost rates and appropriate bases shall b bli h d i d i h S b 42 7 f hbe established in accordance with Subpart 42.7 of the Federal Acquisition Regulation (FAR) in effect for the period covered by the indirect cost rate proposalcovered by the indirect cost rate proposal.


Inaccurate or Incomplete SubmissionInaccurate or Incomplete Submission

• How does this happen?pp– Lack of adequate review– Inadequate version control– System reports are incorrect– Contract types are mixed

i l i l– Data entry is sloppy or incomplete– Contract date base is not maintainedSchedule totals from schedule to schedule DO NOT– Schedule totals from schedule to schedule DO NOT MATCH

– Started preparation Late


Consequences of Inaccurate SubmissionConsequences of Inaccurate Submission

• Increased probability of future auditsIncreased probability of future audits

• Administrative, Civil & Criminal Penalties

• May be an indicator of an inadequate accounting system• May be an indicator of an inadequate accounting system

• Incorrect final indirect rates• Incorrect / inaccurate billings• Reduced revenue and profit and/or reversal of revenue and profit already taken

• Contract close out delays


Filing Late or Not Filing At AllFiling Late or Not Filing At All

• How does this happen?How does this happen?– Not realizing you must file– No one clearly assigned the responsibility

Si l t tti t it– Simply not getting to it

• What are the Consequences?Filing in arrears is difficult; historical knowledge may be lost– Filing in arrears is difficult; historical knowledge may be lost

– ACO can unilaterally set indirect rates and close contracts (FAR 52.705‐1)St t t f li it ti t d d– Statute of limitations extended

– Elevates your contractor risk factor• “Inadequate accounting system?”


Escalation ProcessEscalation Process

• Failure to file can go undetected for yearsg y• Three month letter• If overdue 6 months letters begin to escalate• If overdue 6 months, letters begin to escalate• After six months the DCAA will recommend a unilateral rate determinationunilateral rate determination

• ACO can unilaterally set indirect rates and close contractscontracts


What is the ICE Model?What is the ICE Model?

• ICE (Incurred Cost Electronic)( )• Electronic form provided by the DCAA for completion of the Incurred Cost Submissionp

• The ICE model schedules ARE required– FAC 2005‐52 effective June 11 2011 incorporated theFAC 2005 52, effective June 11, 2011 incorporated the ICE Model schedules into the Allowable Cost and Payment clause, FAR 52.216‐7y

• Template model in Excel Format (located at www.dcaa.mil)


How Can We Succeed?How Can We Succeed?

• Start as soon as possible after the close of the fiscal yearp y

• Utilize the DCAA ICP adequacy checklist, “GUIDE FOR DETERMINING ADEQUACY

OF CONTRACTOR INCURRED COST PROPOSAL”, as a benchmark,

• Competent Preparer– Knows where to get the data– Won’t take data or things at face value– Understands the schedules– Doesn’t just fill in the boxes

• Competent and thorough review

• Tie GL to the IC submission


How Can We Succeed? (Continued)How Can We Succeed? (Continued)

• Ensure that all schedules Tic and Tie

• Final review / sanity check

• Version Control• Version Control– Save the reports you create!– Document what you did and how you did it for future reference / audits/

etcetc

• Understand your contract types and how costs are accumulated (CPFF, T&M, FP, etc)T&M, FP, etc)

• Knowledge of how the contract is invoiced by task or as one line item– If by task, the cost has to be reported by tasky p y


Required SchedulesRequired Schedules

• Sch A ‐ Summary of Claimed Indirect Expense Ratesy p

• Sch B ‐ General and Administrative (G&A) Expenses (Final Indirect Cost Pool)

S h C O h d E (Fi l I di t C t P l)• Sch C ‐ Overhead Expenses (Final Indirect Cost Pool)

• Sch D – Occupancy Expenses (Intermediate Indirect Cost Pool)

• Fringe

• Sch E ‐ Claimed Allocation Bases

• Sch F ‐ Facility Capital Cost of Money Factors Computation

• Sch F(1) ‐ Calculation of net book value( )


Required Schedules (continued)Required Schedules (continued)

• Sch G – Reconciliation of Books of Account and Claimed Direct Costs

• Sch G(1) – Reconciliation of G/L to JCL

• S mmar Sch H Sched le of Direct Costs b Contract/S bcontract and• Summary Sch H – Schedule of Direct Costs by Contract/Subcontract and Indirect Expense Applied at Claimed Rates

• Sch H Direct and indirect costs by contract• Sch H – Direct and indirect costs by contract

• Sch H(1) – Government participation Percxentages

• Sch I – Schedule of Cumulative Direct and Indirect Costs Claimed and Billed


Required Schedules (continued)Required Schedules (continued)

• Sch J – Subcontractor information

• Sch K – Summary of Hours and Amounts on T&M/Labor Hour Contracts

• Sch L Reconciliation of Total Pa roll to Total Labor Distrib tion• Sch L – Reconciliation of Total Payroll to Total Labor Distribution

• Sch M – Decisions/Agreements/Changes

• Sch N – Certificate of final indirect rates

• Sch O – Contract Closing information for contracts completed during the Fiscal Year

• Sch P – Allowable IR&D/B&P


Optional SchedulesOptional Schedules

• Sch Q(1) to Q(4) – Comparative schedules Q( ) Q( ) p• Sch R – Tax return reconciliation• Sch S – Contract Briefs• Sch S – Contract Briefs• Sch T – Executive Compensation


Key SchedulesKey Schedules

• Sch H – Direct and indirect costs by contracty• Sch I – Summary of claimed and billed• Sch J Subcontractor info• Sch J – Subcontractor info• Sch K – Hours and amounts on T&M contracts


Sch H – Direct and indirect costs by contracty

• Direct costs by major cost element by contract or contract tasky j y

• Contracts are grouped by contract type, show job number and client, sub or prime– Hybrid contracts– Fixed price/commercial contracts summarized

• Labor is entered by overhead pool (IMPORTANT)

• Include unbillable cost

• Direct costs are totaled and burdened with fringe, overhead, G&A, or other indirect cost

and totaled again

• Good place to check against system generated direct cost reports


Sch H – SampleSch H Sample


Sch H – PitfallsSch H Pitfalls

• Not enough detailg– Not listing contracts by contract type– Not providing cost by task if funded by taskNot providing cost by task if funded by task– Labor not detailed correctly by overhead pool

• Incorrect totals• Incorrect totals– Totals do not tie to GL amountsFormulas are wrong– Formulas are wrong

– Links are incorrect


Sch I – Summary of claimed and billedSch I Summary of claimed and billed

• Prior Years settled costs

• Prior Year unsettled claimed costs – direct and indirect burdened at claimed rates – by yeary y

• Current year claimed costs – direct and indirect burdened at claimed rates

• Cumulative Billed, Voucher number of last invoice, date billed through

• Calculates over (under) billing• Calculates over (under) billing

• Yes / No – is the contract subject to the Penalty Clause (FAR 52.242‐3)


Sch I – Summary of claimed and billed (C ti d)(Continued)• Yes/No – is contract physically complete?/ p y y p• Costs only/No Fee• CPFF claimed from Sch H• CPFF claimed from Sch H• T&M Claimed from Sch K

l d• Prior year settled costs


Sch I – SampleSch I Sample


Sch I – PitfallsSch I Pitfalls

• Inadequate Review – Review, review, reviewq , ,• Make sure links to Schedule H are correct• Prior year data not correct• Prior year data not correct


Sch J – Subcontractor infoSch J Subcontractor info

• Includes all subcontracts awarded on flexibly ypriced prime contracts and/or upper‐tier subcontracts

• Be sure to include all information • Identifies subcontractors to audit


Sch J – SampleSch J Sample


Sch K – T&M, ODCSch K T&M, ODC

• T&M labor hours by contract or contract tasky• Show Labor Category, Hours, Hourly Rate, and total

• ALL Travel & ODC’s incurred at actual • Indirect costs applied at claimed rates• Indirect costs applied at claimed rates• Ceilings identified on Sch I


Sch K – SampleSch K Sample


Sch K – PitfallsSch K Pitfalls

• Contracts/delivery orders not reported consistent / y pwith Schedule H

• Cost detail not consistent with billing detailg• Contract ceiling is not correct• ODC claimed for each contract/D O does not tie• ODC claimed for each contract/D.O. does not tie to ODC claimed in schedule H


Sch A – D and Fringe ‐ PitfallsSch A D and Fringe Pitfalls

• Not using the adjustment columng j– You can correct known mistakes in the GL here– If you know you charged unallowable as allowable,If you know you charged unallowable as allowable, change it here, take it out before the audit finds it!

• Not reviewing rates with system generated onesNot reviewing rates with system generated ones• Not checking pool totals with system generated totalstotals

• Unallowable costs not identified


Sch E – Allocation BasesSch E Allocation Bases

• Lists all indirect cost pools and bases and pcalculates rates

• Pulls base and pool information from individual pschedules


Sch G – Reconciliation of BooksSch G Reconciliation of Books

• Reconciles the GL with claimed costs• Links to trial balance cost accounts and Schedule H totals – DL, Travel, ODC, material, etc, , , ,

• Any discrepancies are explained in notes


Sch L – Payroll ReconciliationSch L Payroll Reconciliation

• Reconciles IRS Form 941’s to Total Labor Distribution

• Lists ALL employee labor cost by type and accountp y y yp– Direct Labor– Indirect LaborIndirect Labor– Vacation, Sick, PTO– HolidayHoliday– Bonus, etc


Sch M, N, O, Q, R, S, T ‐ PitfallsSch M, N, O, Q, R, S, T Pitfalls

• Not explaining organizational changes ‐ Schedule MNot explaining organizational changes Schedule M

• Certifying without reviewing ‐ Schedule N• Not knowing if your contract is ready to close Schedule O• Not knowing if your contract is ready to close ‐ Schedule O• Not reconciling or explaining delta between Schedule R & L• Not having contract briefs ‐ Schedule S• Not providing ALL executive compensation ‐ Schedule T


DCAA and Executive CompensationDCAA and Executive Compensation

• 2011 Statutory limit $763,029y $ ,• FAR 31.205‐6 Compensation for personal services

– Compensation must be reasonable for work– Compensation must be reasonable for work performed

• DCAM 5‐803‐1 Audit of executive compensationDCAM 5 803 1 Audit of executive compensation – More than 110% of reasonable compensation may be justified by clearly superior performancejustified by clearly superior performance…

• DCAA policy is to use 10% range of reasonablenessreasonableness


What does an adequate ICP mean?What does an adequate ICP mean?

• DCAA adequacy checklistq y– Mandatory schedules are there– Schedules tie to one anotherSchedules tie to one another– Claimed costs on schedules B, C & D tie to schedule A– CertifiedCertified

• Statute of limitations clock starts• Rate adjustment invoice• Rate adjustment invoice• ICP ready for audit


DCAA’s Revised PolicyDCAA s Revised Policy

• Effective July 6, 2012 – Modification of DCAA Process y ,for Sampling Low‐Risk Incurred Cost Proposals

• Effective September 6, 2012 – Audit Guidance on p ,Revised Policy and Procedures for Sampling Low‐Risk Incurred Cost Proposals

• All ICP’s will be evaluated upon receipt for adequacy– IAW FAR 52.216‐7– Using the DCAA Incurred Cost Proposal Adequacy checklist


ICP determination – Not AdequateICP determination Not Adequate

• ICP is determined to be NOT adequate and the deficiencies cannot be remedied with minor effort

– ICP will be returned to the contractor with written instructions on required corrective actions, IAW CAM qChapter 6


ICP determination ‐ AdequateICP determination Adequate

• In‐process assignments – continue as plannedp g p• All high risk proposals will be audited• All proposals >$250million auditable dollar value• All proposals >$250million auditable dollar value (ADV) will be audited

• Low risk proposals <$250million auditable dollar• Low risk proposals <$250million auditable dollar value (ADV) sampled


Low Risk Proposal CriteriaLow Risk Proposal Criteria

• Must have prior incurred cost audit experiencep p• No significant audit risks or leads

– Known system deficiencies– Known system deficiencies– Concern of Contracting OfficerSignificant changes in organization or operations– Significant changes in organization or operations

– Risks identified by audit teamNo significant total exception dollars– No significant total exception dollars


Low Risk Proposal Criteria(Significant Exception Dollar Table)

Low‐Risk Adequate Proposals by Auditable Amount of Previous Exception Dollars Dollar Value(ADV) (Including Corporate, Intermediate Home

Office, etc) Classified as Significant

$1M or Less $15,000

$1M to $15Million $25,000

$15M to $50 Million $55,000

$50 Million to $250 Million $100,000,


Low Risk Proposal Criteria(Sampling Percentages)

Low‐Risk Adequate Proposals by Auditable Low‐Risk Sampling PercentagesDollar Value (ADV)

$1M or Less 1%

$1M to $50Million 5%

$50M to $100 Million 10%

$100 Million to $250 Million * 20%

Greater than $250 Million 100%Greater than $250 Million 100%

* If not selected for audit for two consecutive years, third year will be selected for audit.


Low Risk Proposal CriteriaLow Risk Proposal Criteria

• If ICP not audited DCAA to issue a memorandum for the CO, including the key steps performed from the adequacy checklist

• If Contractor has multiple low risk audits open and one year sampled,

– All years will be kept open until audit is complete– If significant questioned costs are found, all year will be audited.


Key Changes to DCAA’s Low Risk CriteriaKey Changes to DCAA s Low Risk Criteria

Risk Factor Previous Criteria(applied to Revised Criteria (applied to proposals under $15M ADV) proposals under $250M

ADV)

History of incurred cost dit

At least one incurred costs dit 3

At least one incurred cost dit*audits audit every 3 years audit*

Previous questioned costs Below $10,000 Below thresholds ranging from $15,000 to $100,000 based on ADVbased on ADV

Audit leads or other significant risks

No relevant risk factors No changes

* Proposals with ADV of greater than $100 M to $250 M must have at least one audit every three years.


GAO Report on DOD Audit BacklogGAO Report on DOD Audit Backlog

• DCAA estimates they will be current by 2016DCAA estimates they will be current by 2016– High risk proposals are 250% of anticipated

• Initiative appears promising, but…pp p g,– DCAA has not fully developed measures to reduce backlog and protests taxpayers’ interests

DOD i i i i f ti t t t l• DOD is missing information on contracts to close– DCMA contract closeout metrics established and monitored – Army goal to close 475,000 contract by 9/2014 –y g , y /

• Missing info and no implementation plan– Navy & Air Force – performance metrics not established for closeout


ResourcesResources

• ICE Manual

• DCAA Information for Contractors ( pdated 6/26/12)• DCAA Information for Contractors (updated 6/26/12)

• DCAAM (Chapter 6)

• ICP audits – Incurred Cost Audit Program – download from www.dcaa.mil

• Excel version of ICS – down load from www.dcaa.mil

• FAR Cost Principal Guide

• Consultants


Questions?Questions?


Contact UsContact Us

•

8000 Towers Crescent DriveTysons Corner, VA 22182

k

13665 Dulles Technology DriveHerndon, VA 20171

www.WatkinsMeegan.com www.WJTechnologies.com

Keith Romanowski, Senior Manager(703) 847‐4429

Karen Williams, Senior Consultant(703) 885‐8157(703) 847 4429

[email protected](703) 885 [email protected]

Keys to Submitting an Adequate Incurred Cost Proposal

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