Keys to Submitting an Adequate Incurred Cost Proposal

Keys to Submitting an Adequate
Incurred Cost Proposal

Presented By:
Karen Williams, Senior Consultant, WJ Technologies
Keith Romanowski, Senior Manager, Watkins Meegan
March 20, 2013

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

f
• The final avenue of reimbursement for both
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 Requirements
Submission Requirements
• The contractor shall submit an adequate final indirect cost
The 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
supporting data. (See DCAA Information for Contractors)
d ( f f )
• Final annual indirect cost rates and appropriate bases shall
be established in accordance with Subpart 42.7 of the
b bli h d i d i hS b 42 7 f h
Federal Acquisition Regulation (FAR) in effect for the period
covered by the indirect cost rate proposal
covered by the indirect cost rate proposal.

Inaccurate or Incomplete Submission
Inaccurate or Incomplete Submission
• How does this happen?
pp
– Lack of adequate review
– Inadequate version control
– System reports are incorrect
– Contract types are mixed
– Data entry is sloppy or incomplete
i l i l
– Contract date base is not maintained
– Schedule totals from schedule to schedule DO NOT
Schedule totals from schedule to schedule DO NOT
MATCH
– Started preparation Late

Proprietary and Confidential
6

Consequences of Inaccurate Submission
Consequences of Inaccurate Submission
• Increased probability of future audits
Increased 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

7

Filing Late or Not Filing At All
Filing 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
Simply not getting to it
t tti t 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
Statute of limitations extended
t d d
– Elevates your contractor risk factor
• “Inadequate accounting system?”

8

Escalation Process
Escalation Process
• Failure to file can go undetected for years
g 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 determination
unilateral rate determination
• ACO can unilaterally set indirect rates and close
contracts

9

What is the ICE Model?
What is the ICE Model?
• ICE (Incurred Cost Electronic)
( )
• Electronic form provided by the DCAA for
p
completion of the Incurred Cost Submission
• The ICE model schedules ARE required
– FAC 2005‐52 effective June 11 2011 incorporated the
FAC 2005 52, effective June 11, 2011 incorporated the
ICE Model schedules into the Allowable Cost and
Payment clause, FAR 52.216‐7
y
• 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 year
p 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

11

How Can We Succeed? (
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/
etc

• 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 task
y p y

12

Required Schedules
Required Schedules
• Sch A ‐ Summary of Claimed Indirect Expense Rates
y p

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

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

• 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
( )

13

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
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

14

• 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
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

15

Optional Schedules
Optional 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

16

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

17

Sch H – Direct and indirect costs by contract
y

• Direct costs by major cost element by contract or contract task
y 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

18

Sch H
Sch H – Sample


Sch H
Sch H – Pitfalls
• Not enough detail
g
– Not listing contracts by contract type
– Not providing cost by task if funded by task
Not 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 amounts
– Formulas are wrong
Formulas are wrong
– Links are incorrect

20

Sch I Summary of claimed and billed
Sch I – Summary of claimed and billed
• Prior Years settled costs
• Prior Year unsettled claimed costs – direct and indirect burdened at
claimed rates – by year
yy
• 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)

21

Sch I – Summary of claimed and billed
(Continued)
(C ti d)
• 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
• Prior year settled costs
l d

22

Sch I – Sample
I


Sch I
Sch I – Pitfalls
• Inadequate Review – Review, review, review
q , ,
• Make sure links to Schedule H are correct
• Prior year data not correct
Prior year data not correct

24

Sch J Subcontractor info
Sch J – Subcontractor info
• Includes all subcontracts awarded on flexibly
y
priced prime contracts and/or upper‐tier
subcontracts
• Be sure to include all information
• Identifies subcontractors to audit


Sch J – Sample
J


Sch K T&M, ODC
Sch K – T&M, ODC
• T&M labor hours by contract or contract task
y
• 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 – Sample
K


Sch K
Sch K – Pitfalls
• Contracts/delivery orders not reported consistent
/ y p
with Schedule H
• Cost detail not consistent with billing detail
g
• 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
Sch A – D and Fringe ‐ Pitfalls
• Not using the adjustment column
g 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 ones
Not reviewing rates with system generated ones
• Not checking pool totals with system generated
totals
• Unallowable costs not identified

30

Sch E – Allocation Bases
E Allocation Bases
• Lists all indirect cost pools and bases and
p
calculates rates
• Pulls base and pool information from individual
p
schedules


Sch G – Reconciliation of Books
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 Reconciliation
Sch L – Payroll Reconciliation
• Reconciles IRS Form 941’s to Total Labor
Distribution
• Lists ALL employee labor cost by type and account
p y y yp
– Direct Labor
– Indirect Labor
Indirect Labor
– Vacation, Sick, PTO
– Holiday
– Bonus, etc

33

Sch M, N, O, Q, R, S, T
Sch M, N, O, Q, R, S, T ‐ Pitfalls
• Not explaining organizational changes ‐ Schedule M
Not 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

34

DCAA and Executive Compensation
DCAA and Executive Compensation
• 2011 Statutory limit $763,029
y $ ,
• 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 compensation
DCAM 5 803 1 Audit of executive compensation
– More than 110% of reasonable compensation  may be
justified by clearly superior performance…
justified by clearly superior performance
• DCAA policy is to use 10% range of
reasonableness
35

What does an adequate ICP mean?
What does an adequate ICP mean?
• DCAA adequacy checklist
q y
– Mandatory schedules are there
– Schedules tie to one another
Schedules tie to one another
– Claimed costs on schedules B, C & D tie to schedule A
– Certified
• Statute of limitations clock starts
• Rate adjustment invoice
Rate adjustment invoice
• ICP ready for audit

36

DCAA s Revised Policy
DCAA’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

37

ICP determination Not Adequate
ICP 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
q
Chapter 6


ICP determination
ICP determination ‐ Adequate
• In‐process assignments – continue as planned
p 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

39

Low Risk Proposal Criteria
• Must have prior incurred cost audit experience
p p
• No significant audit risks or leads
– Known system deficiencies
Known system deficiencies
– Concern of Contracting Officer
– Significant changes in organization or operations
Significant changes in organization or operations
– Risks identified by audit team
– No significant total exception dollars
No significant total exception dollars

40

(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
,


(Sampling Percentages)

Low‐Risk Adequate Proposals by Auditable Low‐Risk Sampling Percentages
Dollar 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
Greater than $250 Million 100%

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


• 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.

43

Key Changes to DCAA s Low Risk Criteria
Key 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 At least one incurred costs At least one incurred cost
audits
dit audit every 3 years
dit 3 audit*
dit*
Previous questioned costs Below $10,000 Below thresholds ranging
from $15,000 to $100,000
based on ADV
based on ADV
Audit leads or other No relevant risk factors No changes
significant risks

* 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 Backlog
GAO Report on DOD Audit Backlog
• DCAA estimates they will be current by 2016
DCAA 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
DOD is missing information on contracts to close
ti t t t l
– DCMA contract closeout metrics established and monitored
– Army goal to close 475,000 contract by 9/2014 –
yg , y /
• Missing info and no implementation plan
– Navy & Air Force – performance metrics not established for
closeout

45

Resources

• 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

46

Questions?


Contact Us
Contact Us
•

8000 Towers Crescent Drive 13665 Dulles Technology Drive
Tysons Corner, VA 22182 Herndon, VA 20171
www.WatkinsMeegan.com
k www.WJTechnologies.com

Keith Romanowski, Senior Manager Karen Williams, Senior Consultant
(703) 847 4429
(703) 847‐4429 (703) 885 8157
(703) 885‐8157
Keith.Romanowski@WatkinsMeegan.com Karen.Williams@wjtechnologies.com

Keys to Submitting an Adequate Incurred Cost Proposal

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