President Obama has sent his preliminary budget request for FY2014 to Congress as of Wednesday this week. In his release, President Obama stated that the budget would emphasize job creation, emphasize education, health care and emphasize energy independence. He replaced certain Sequestration cuts with more targeted cuts that should result in an additional $1.8 trillion cut (he stated this was a compromise offered to Speaker Boehner) that he indicated is more balanced than the sequestration cuts.
In the President's State of the Union address earlier this year he made it quite clear his priorities would center around building up the middle class in the country. President Obama said the budget proposal supported the 3 areas of emphasis from his State of the Union address:
- How do we attract more jobs to our shores?
- How do we equip our people with the skills to do those jobs?
- How do we make sure that hard work leads to a decent living?
Certainly the emphasis on job creation should help small business as the Obama administration has long recognized that small business is the primary engine for job creation. The emphasis in the budget for American innovation should translate into support for the SBIR/STTR programs for small business. The emphasis on energy independence should present opportunities from the Department of Energy for small business as well as the emphasis on health care provide opportunity for firms that work with the Health and Human Services Agency.
There were also rays of "sunshine" in the Department of Defense budget proposal. The Air Force and Navy budget requests included some opportunities. For instance, the proposed Air Force budget showed a "gain" of $4.65 Billion from last year's budget. This is the only DoD service that showed an increase from last year. The increase in Air Force budget is due to the increasing threats in Asia/Pacific region as compared to the ground wars of the past 10 years. Programs such as the F-35 are seen as getting more priority.
The Navy, receiving the largest amount of funding of any of the services at $155 Billion. The emphasis in the Navy's budget is modernization of the fleet as well as developing next generation technologies. The Navy is tasked with maintaining a strong forward presence, especially in light of the newer Asia/Pacific threats.
Obviously, this is just the first proposal for the FY2014 budget. There is still much negotiation and political positioning that must go on before this budget becomes final. The good news is that there appears to be some compromise and there appears to be some priorities set in this proposal as opposed to an across the board cut. Hopefully this will translate into better fiscal management in the coming year.
We have had some internal discussions lately here and think it might be helpful to share some of our experiences of signs that an accounting system is not compliant with DCAA requirements. This is based on experience of looking at a lot of different systems, participating in many DCAA audits, not only in past careers but for clients, and day to day experiences working with these systems.
This list is based on the government's standard pre-award survey form SF1408 but we have also tried to put this in terms that most non-government people can understand to take away any confusion. So here are the top 15 signs (apologies to David Letterman's "top 10 list" and Bill Engvall - "here's your sign"):
15. Your Chart of Accounts is set up with expense accounts on an alphabetical basis
14. You don't use timesheets
13. You use timesheets, but not everyone fills them out or they don't fill out all time worked
12. Labor and other expenses are not segregated by direct and indirect categories
11. Direct expenses (both labor and other expenses) are not segregated by job or project
10. Indirect billing rates are not calculated monthly
9. Job costs and the application of indirect rates to each job are not calculated monthly
8. It's difficult or impossible to reconcile payroll with expensed labor
7. You're not sure if your contracts are fixed price, cost-plus or time and material
6. Your accounting system operates on a cash basis, not an accrual basis
5. You don't pay your subcontractors within 30 days
4. You don't produce an annual budget
3. You don't have written policies and procedures for all of the above
2. You've already failed a DCAA accounting system review
Andthe number one sign:
1. Your accountant asks for a copy of FAR Part 31.
I would like to thank our Dave Donley for his input to this. Some of you have either talked with Dave or remember him from some Blog posts when the blog was on the Tech BizSolutions website. Dave is a super guy and has tremendous insight into the government accounting regulations. Obviously this list is just that, a simple list. the only way to be completely sure your system will pass a DCAA audit is to have an expert review and evaluate your system. We can do that for you if you need some assistance. We offer quick reviews for free from time to time (monitor our website or sign up for our mailing list) and we can do complete reviews for a minimal fee when you are ready. The best way is to let ReliAscent take over your accounting completely. This way you can be sure it is done compliant and correctly and you can concentrate on the issues that are more critical to making money for your business.
As a result of the perfect storm created by the budget crisis, Continuing Resolutions, Sequestration, Troop withdrawals and Defense spending cuts the Defense Department announced earlier this year that they would begin furloughs for civilian contractors as well as many DoD personnel. As you may recall from my previous blogs, Ashton Carter indicated on January 10th that furloughs of up to 45 days during FY 2013 might be possible. Robert Hale indicated in a speech on February 10th that the DoD had no choice but to exercise furloughs. He also indicated that by law the government needed to provide written notice of furlough plans at least 45 days in advance for civilians and 30 days in advance for government employees. Under Secretary Hale indicated that furloughs could begin as early as April 1st for government employees. I do know that as of 2 weeks ago when I talked to an Air Force official that the official written notification had not yet been sent out. I talked last week with a DCAA employee who also confirmed that they had not yet received written notification.
It turns out that the reason there have not yet been any written notifications is because the government was dragging their feet on furloughs. Late last week the Pentagon announced that the number of furlough days was reduced from 22 to 14. That certainly is good news for Department of Defense employees. The Pentagon also announced that they are considering some areas that could be exempt from furloughs. They would not go so far as to say what areas would be exempt from furloughs but obviously they are still evaluating critical functions with respect to this cost saving measure.
Some early criticism of the reduction of furloughs include accusations that the Department of Defense may have overstated the impacts of budget cuts earlier in an effort to protect previous levels of funding. In other words, political positioning. I certainly think there is always some of that going on. I'm not convinced that we have seen all the impacts yet on these budget measures. I think there will be some furloughs and many program cuts. We don't know the full extent yet of all these actions. The good news is a reduction in the number of furlough days. I think having your contracting officer, for instance, furloughed for 20 percent would have made administration of your contract more difficult. So, for the time being, good news.
It seems that most of the news coming out of the Government lately is depressing and seems to not be in favor of small business contractors. Some of this bad news is political positioning and some of the news is a warning to small businesses that are not paying attention to their customers and of course some of it will impact small business. Being an optimist at heart, I would like to look for the opportunities in all of this. I saw a couple of opportunities in the past week that I would like to bring to everyone's attention. These could be good ways to find opportunities in an otherwise shrinking pool.
The first is an announcement by the Small Business Administration (SBA) on March 14th about the launching of their new program called the American Supplier Initiative. This initiative will allow small businesses to connect with larger private sector companies. One of the programs under this initiative is the Supplier Connection, created by the IBM Foundation. Some of the firms participating in this include Facebook, AT&T, IBM, Pfizer, UPS, Caterpillar, AMD, Office Depot, Dell, JP Morgan, John Deere, Wells Fargo, Citi, Kellog's and Bank of America. The SBA expects that other companies will join this program as well.
A second part of the initiative is called SUB-Net. The SBA maintains a database that allows the small business to search for sub-contracting opportunities to Primes with larger contracts.
Finally I want to tell you about an initiative from Lockheed Martin called the Lockheed Martin Silicon Valley Alliance, this is designed to provide more visibility between small businesses and the Federal Government. It is designed specifically around innovative technologies and how to bring these to the attention of primarily the Federal Government, especially where agencies like the DoD or NASA may be able to use some of these technologies directly.
There are other avenues for Small Business to explore also. For instance, many of the large prime contractors will actively seek small businesses to support during an SBIR grant. I know several that publish lists every time an SBIR topic list is released that indicate which topics the company is interested in and even specific technical contacts within the company that are interested in that topic. This is a great way for a Small Business that is writing a proposal for an SBIR grant to get a large company letter of support. This type of support is always viewed as favorable by the SBIR review committee.
The government released this week a draft for a Proposal (RFP) this week called One Acquisition Solution for Integrated Services (OASIS). OASIS is a Multiple Award, Indefinite Delivery, Indefinite Quantity (IDIQ) type contract for Government-wide professional service procurement. The opportunity is coming out of the GSA branch of the government and has two parts. The first part will be an unrestricted contract but includes goals for small business subcontracting of 50%. The second part is a set aside contract for small business. As you can see, there is a tremendous opportunity within this vehicle for small business participation. The goal of this contract is to supply professional services to both commercial and non-commercial needs within the federal agencies. The areas of expertise include the following categories:
- Management Consulting
- Program Management
The core disciplines addressed by this contract include:
- Program Management Services
- Management Consulting Services
- Scientific Services
- Engineering Services
- Logistics Services
- Financial Management Services
- Ancillary Support Services (including administrative support, data entry, IT and other professional and non-professional services) - cannot be the primary support service
Comments on the draft solicitation are due no later than Monday April 29th, 2013 at 5:00pm Central Time via e-mail submission. I encourage all small businesses to look over the draft solicitation right now. This is the time for you to have your input if you have questions or suggestions that would make this easier for the government to utilize. You should also contact your prospective clients to see if they will be using OASIS in the future so you can position yourself to take advantage of this great new vehicle.
There is no question that the Defense Department issues more contracts to suppliers than any other branch of the government. So with all the pressures on spending in Washington lately, all agencies are reviewing how they might save more money and be more efficient going forward. When you look at trends over teh last 10 years you can see the number of Fixed Price contracts in the Defense Department grew from about $158 Billion in 2003 to about $250 Billion in 2013. Cost Reimbursement contracts grew over the same period so some of this increase can be explained by the department just increasing the spending (due in main to the efforts in Iraq and Afghanistan). In the fall of 2009 the President encouraged agencies to use more Fixed Price contracts as a way to control spending. The effectiveness of the President's request is debatable. But since then, the defense budget has come under extreme scrutiny and we have wound down one war and are in the process of winding down the efforts in Afghanistan. Last week the Director of Defense Procurement and Acquisition Policy, Richard Ginman, issued a memo calling for a class deviation and Prohibition on the use of Cost-Type contracts for production of major defense acquisition programs. This memo affects any contracts that are entered into on October 1, 2014 or after.
It seems that with these events there is a recognition within the government that the Fixed Price contract represents the least amount of risk to the government and therefore may result in more efficient spending of the Federal Budget. As we watch the Federal Budget crisis we can only guess what will actually happen but the trend to more Fixed Price contracts and the trend toward more IDIQ contracts (See my blog from March 20, 2013) will almost certainly transpire. So the question becomes, will it be easier to handle a Federal Contract or harder? My guess is that contractors will have more pressure to control their costs in order to make a profit so some will find this very difficult to do. Others have been doing this in the commercial marketplace for years and will find it a little less restricting (hopefully) in regards to the controls and terms put on the contract. My advice is to be flexible in looking at the different types of contract vehicles that are becoming more popular. If you have a difficult time wading through the requirements, terms, conditions, FAR, DFARS, CFR's and OMB regulations, give me a call.
The Federal Government's use of IDIQ (Indefinite Delivery Indefinite Quantity) type contracts has been increasing rapidly over the last 10 years. Many times these contracting vehicles are referred to as Multiple-Award Contracts (MAC). The Federal Government obligations under MAC awards have grown by over 5X from 2003 until this year. By far the largest of the IDIQ contract vehicles is the Navy's Seaport-e program. There are currently over 3,300 Seaport-e prime contract holders and obligated dollars in this program is over $5 Billion. The Navy has just announced (this week) that they will allow a "rolling admissions" to add to the contractor base for prime contractors in this vehicle. The solicitation is N00178-13-R-4000 and proposals will be due by May 1, 2013. Awards are expected to be given in October or early November of 2013.
A few caveats relative to the Seaport-e program include:
- Offers will be evaluated on a "best value" basis
- IDIQ contracts may have fixed price and cost type Task Orders but no Time and Material task orders
- All requirements are filled competitively on a task order basis by the individual offices
- Heavy emphasis is given on Performance Based Orders
- Small Business is favored in the process as 33% of total obligated dollars must go to Small Business and Large Business awards must have a Small Business Subcontracting plan of at least 20%
- Only 1 IDIQ contract is allowed per Prime but a company may subcontract to many Primes
- There are 7 geographic zones for which task orders are issued and work completed
- The basic IDIQ limits pass through charges and caps fees and requires demonstrated cost savings including annual cost escalation factors
As I mentioned above, there seems to be a very large trend in the award of this type of contract vehicle. There are two ways to participate, one is to go to the Seaport-e website and study the list of Prime contract holders. Then, contact the primes that you can partner with and become a team member for a Prime in winning an award. A Seaport-e contract vehicle is not normally required to be a team member like this. The other strategy is to submit a proposal during these periodic rolling admissions and become a prime yourself. For Small Business this can be a more lucrative avenue to pursue provided you have done your homework and know where your products and/or services can be used.
ReliAscent has helped people with their proposals for Seaport-e and we can help you if you are confused at this point. Don't hesitate to give us a call.
Sequestration is now a reality. OK, a 5 to 10% cut across the board and no big deal, right? Who hasn't had to deal with a 10% cut in business and managed to make the adjustment? If that was all that was asked, I don't think there would be this much complaining. The real issue is the compounding of several events. It started in 2010 when the Defense Department announced they would trim $100 Billion from their budget over the next 5 years. Then came the Budget Control Act in 2011 that required the Defense budget be cut by $487 Billion over the next 10 years. Add to that the recent pressure to reduce the budget for 2013 and 7-10% Sequestration cuts across the board. Not to mention the continuing resolution, which is still looming, that threatens to reduce the 2013 proposed budget further. I just saw today where congress is considering a plan to reduce the effects of sequestration by replacing it with a "more responsible" spending cut plan that could soften the blow in the DOD.
To try and get a sense of what is actually going on, I listened to an Air Force director of small business programs at an NDIA meeting last week. He is concerned about a number of things including employee furloughs, canceled programs and the effects on small business. He also has some good news for small business. He indicated that the Air Force utilization (Small Business Obligated $ divided by Total Eligible Obligated $) of Small Business has been on the decline the last 4 years. The Air Force is committed to reverse that trend going forward. That will mean a more focused effort to give more awards to small business. He suggested that Small Businesses get to know their customer(s) in the Air Force and look for opportunities. They need to make sure they pay attention to the Air Force Long Range Acquisition Estimates and do their due diligence with the contracting office and the technical representatives. So, while the total DOD opportunities will be limited, there will be a focus in the Air Force at least to doing more with Small Business. If you need help trying to figure out how to get on board with this, let me know.
Many times in the commercial business world companies do their due diligence prior to accepting a large order from a new customer. This includes evaluating whether or not the new customer is a viable concern, how well they pay their bills and their capability of meeting the obligations in the new arrangement. In other words, what is the risk involved in doing business with this new customer. It certainly doesn't make good business sense to incur cost on the business side if the revenue to be realized in return does not come through or is at risk. In the past, this due diligence was not required on a Federal Government contract since the government had the highest credit rating possible and they always paid and on time. That may be changing right now. In 2011, we saw Standard & Poor's downgrade the U.S. credit rating for the first time in history from AAA to AA+. Last week many of the credit rating agencies were saying that the sequestration cuts would not be enough to protect the current credit rating of the US Government. The agencies probably would have downgraded the rating of the US had the sequestration cuts not gone into effect but they are now also saying that these cuts are not sufficient to establish control of the spiraling debt. Many, including Fed Chairman Ben Bernanke, think that the sequester are only very limited, short term measures. The main drivers of the deficit remain the entitlement programs and nothing is being done to address them. Combine that with the aging population in the US and the debt can be seen to continue to rise, even with the sequestration cuts.
We have seen that the government is slowing payments to try and conserve cash flow (See our blog dated Feb. 25, 2013 on "Changes in the Government Contract world" and our blog dated March 8, 2013 on "The Effects of Sequestration on Small Business"). These measures are all a drop in the bucket compared to the entitlement programs that are driving the deficit. Given the inability of Congress to work together on both sides of the aisle lately, it seems unlikely that progress will be made this year or in the near future. Should that continue, the credit rating agencies will have no choice but to lower the ratings again. This becomes a little more risky for businesses contracting with the federal government. These businesses will have to evaluate the risk and now do some due diligence on whether or not they want to do business with the Federal Government. There is a price for doing business with the Federal Government. This price may rise in the near future as well.
The Sequestration deadline passed a week ago and we are starting to see how this will affect our economy, and more importantly, how it will affect small business. Some of the first announced cuts from the Sequestration action were announced Monday. This is just the tip of the iceberg. Leading the way in these initial cuts were:
- NASA announced $212 Million in reductions for space operations
- The Centers for Medicare & Medicaid Affordable Insurance Exchange grants announced $44 Million in reductions
- The DoD announced $31 Million in reductions for the acquisition workforce development fund
- NIST is reducing scientific and technical research by $20 Million
These represent the largest of the initial cuts announced and there will be plenty more as time goes on. The US Navy has already announced many actions that they plan to take. One small business that is a supplier to the Navy is already cutting back on worker's hours because of the cancellation of maintenance contracts by the Navy:
At ReliAscent we have heard from many of our clients that awards they had previously been notified on have not yet been awarded. The agencies are playing a waiting game. We also heard from at least one client that the resinding of the accelerated payments clause (Class Deviation 2012:O0014) has delayed funds owed to them by the government. One client has even had to take out temporary loans to keep the business in operation while waiting for the delayed payment. This business was in luck as they had a usable line of credit to keep their business afloat. Many other small businesses may not have as many options and as the government delays payments they may face severe cash flow issues.
As the sequestration cuts start to take effect, the uncertainty is just compounded for small business. There is also the new health care laws that will start to affect small business. While the law does not apply to firms smaller than 50 employees (firms larger than 50 will be required to provide health insurance to employees) it may well impact the smaller firms. To be competitive, these smaller firms will have to offer health insurance to attract employees. There has been a slowdown in the number of new employees hired by small business during the last 4 years anyway and this may only make it more difficult to add more employees at this level. In addition, the insurance industry is already talking about larger than normal increases in premiums for insurance to help mitigate the risks of smaller insured pools. Again, this cost will be more difficult for small business to absorb. The employment gains over the last couple of years has been about 8% for large companies (more than 1,000 employees) but has only grown 3.4% for small business during the same period. There is evidently a real risk and more uncertainty for small business in this climate. Sequestration, health insurance uncertainty, continuing resolution for FY2013 and delayed formation of FY2014 budget create a lot of uncertainty for small business.