There has been no shortage of news and writing about Sequestration and how that is affecting Federal Contracts. As the dust begins to settle it is becoming obvious that some of the loudest complaints about Sequestration could have been just political positioning. For instance, Dr. Stephen Fuller of George Mason University indicated last week that the cuts in the 2012 Federal Budget were more severe than the Sequestration cuts of 2013. Certainly things like threatening to shut down air traffic control are done in a grandstanding manner to draw attention to certain areas and create public sympathy for the agency facing budget cuts. There are beginning to be more and more examples of the amount of political positioning that was going on in the name of Sequestration. There also are other consequences from Sequestration that perhaps are less publicized.
One real effect of Sequestration is the slowing of processing not only contracts within the government but also the slowing of the government in paying its contractors. The slowing of issuance of contracts has the unintended consequence of contractors looking elsewhere for their business. I actually heard a small business that was told for over 9 months that they would receive a contract, the funds were there but it keep being delayed. In the end, the government did not issue them the contract after waiting for this period of time. Do you think this contractor will wait around in the future? There are also real examples of how the government is delaying payment to contractors as we have examined in this blog earlier this year. This was done so that the government could protect their cash flow. This action actually hinders small business and increases the cost to the small contractor for doing business with the Federal Government. This unintended consequence will actually put an upward pressure on prices. So this will artificially make the government's budget cuts harder to administer. Also, I heard last week from a couple of Air Force officials, that Sequestration is causing the government to use incremental funding more than in the past since they don't know if the full amounts are approved for spending. This means more contracts, more negotiations, more audits and more administration in general. Again, this will have an impact on the federal budget in that procurement personnel, Contracting Officers and others will see an increase in workload. This is not the right direction if we are serious about cutting waste from the budget.
It is these unintended consequences, mainly a result of political positioning, that will add cost back into the Federal Budget. So the real savings is debatable. We might be saving money on certain programs only to add money back into the bureaucracy. Certainly not the right direction to be headed if we want to trim expenses.
I attended a seminar this week put on by a large national law firm focusing on the status of government contracts and changes that have occurred over the last year. I thought it would be a good idea to share some of what I learned in this blog. While the seminar was put on by lawyers for lawyers, and there were a large number of lawyers in the audience, it also was of great benefit to contract administration personnel and even some input for accounting personnel. The overall message I got from the session was that it is becoming increasingly difficult to follow all of the regulations when you are contracting with the Federal Government. The opening keynote speech was from a US District Attorney who indicated that the number of cases for fraud have been going up dramatically over the last couple of years. A graph was presented showing a dramatic increase in suspensions and disbarments (48% increase in debarments last year). With the extreme pressure on Federal Budgets, there is an enhanced focus on making sure the government is not swindled and an enhanced focus to detect and prevent fraudulent relations. There also was some discussion about the statute of limitations for prosecuting a case involving a government contractor. While there is normally a 6 year Statute of Limitations, there are ways that this can be avoided to the benefit of the prosecution so the advice to contractors is to 1) make sure you are doing things to ensure compliance with the contract requirements, 2) make sure to document what you are doing (including a basis for most decisions) & 3) make sure to save your records. The saving records is especially important as currently the DCAA is about 6-7 years behind in auditing ICP's so they are looking for records that old. If the Statue of Limitations is what lawyers refer to as "tolled" this period could be extended.
There also was quite a discussion about changes being proposed by the government regarding counterfeit parts. There have been some issues and abuses on this recently and certainly this ties in with the fraud issues discussed above. The government is proposing more regulations to ensure they do not purchase counter fit parts. These regulations could possibly evolve into a system similar to an ISO quality system or a DCAA type accounting system. If this happens, the result can only add more cost to the government procurement. This cost will be justified in that the government cannot afford to purchase parts that might fail under extreme conditions where US lives are at stake. Again, the message is that there could be more layers of regulations in the future when dealing in certain areas of Federal Supply.
There was a briefing about the DCAA and accounting systems. A lot of talk focused on areas that we have talked about before like the backlog of work within the DCAA, the audits as much as 5 to 6 years old and how the DCAA is more "pass-fail" today than ever before. As a result, Contracting Officers are using more withholds of some of the contract money. A Withhold puts a burden on the contractor to make sure that the situation is corrected or they stand to lose some of the contract value. Swift action by a contractor is required to remedy a Withhold if that is used on your contract. One of the other interesting observations is that the DCAA is still under intense scrutiny. The DOD Inspector General released a report in March this year reporting many of the DCAA's audits still do not meet their standards.
All of this information tells me that the "rat maze" is getting more complex. And the potential risk of penalty of not following the maze is going up. Now more than ever, you need to make sure that you are doing your Federal Contracting correctly.
I was talking with a prospect the other day and he mentioned something that I think we all tend to overlook from time to time. He mentioned a problem that he had encountered with the DCAA relative to naming of some of his accounts on the Chart of Accounts (COA) in his General Ledger (GL). It seems his particular problem revolved around the naming of an account. For commercial business, that may not be an issue, you can call an account whatever name that you like. For a Federal Government Accounting system, you should be careful that an account name does not raise suspicion, especially in the mind of an auditor. For instance, by just labeling an account something like "Entertainment" would certainly get an auditor's attention. The auditor will certainly dig into this to find out if this account contained a mixture of allowable and unallowable expenses. If the account only contains unallowable expenses, the auditor will next be very interested to follow that account to make sure it does not end up in any billing to the government. By labeling the account something like Administration, Travel, Meals it becomes more clear as to what is in the account. Another example might be the use of the term "Bonuses". I know a business that puts owner distributions under an account labeled "Bonuses" but in reality this is "Owner Distributions". These types of subtle differences can be the source of problems, especially during a government audit.
Another issue with the COA and government accounting is the use of account numbers. The government likes to see unique account numbers on all accounts in the COA. This prevents confusion on items that might be classified in two different areas, depending on the nature of the expense. For instance, travel. Travel could be a direct expense in some instances for a specific contract. In other instances, the travel might benefit the company and be an indirect expense. So there may be more than one travel account to make sure to keep the expenses segregated. With unique account numbers, it is very clear which is which and the expense can be easily keep segregated (and demonstrated as segregated to an auditor).
Finally, the concept of pooling like expenses on your COA is something that makes Federal Government Accounting easier. This way like expenses can be collected together and easily tallied to facilitate calculation of indirect billing rates. These and other items related to your General Ledger system are often overlooked and can cause more than a minor problem in an audit of the system.
The FY2014 Federal Government Budget was released by the Executive Branch and sent to the Legislative branch on April 10, 2013. The budget proposal is 244 pages long. President Obama indicated that this budget proposal was geared to make America a magnet for new jobs and manufacturing. So what does that mean and how will that create opportunities? I want to explore a little of that here.
I talked a little bit about the President's proposed budget and opportunities in the Department of Defense a couple of weeks ago. To expland on that, here are the defense opportunities from a top level of this proposed budget:
- The budget for the Air Force is actually increasing over FY 2013 levels (going from $140B to $144.5B)
- Provides for an increased focus on cyber security
- Military Personnel is increasing from $135B to $137B
- Operations & Maintenance is decreasing slightly from $210B to $209B (although the Air Force will see an increase of $2.4B)
- Military Construction will increase very slightly by $531M (again, the largest increase in the Air Force)
- The budget for procurement is flat at about $99B (down about 1/2%)
The President also explains that this budget proposal includes elimination of many of the tax incentives that caused jobs to be moved off American soil. There is also a tax incentive proposed for businesses that hire new workers or increase pay for workers. There are other incentives, such as building up the infrastructure (roads, bridges, etc.) to facilitate business. There is a focus on education to build up our future workforce as well.
Here are some of the opportunities in Agencies other than the Department of Defense:
- The Department of Commerce has a $1B increase over FY2012, mostly focused on improving manufacturing (thereby creating jobs)
- The Department of Energy has an 8% increase over FY2012 levels including a 5.7% increase in funding for key research agencies
- The National Science Foundation has about an 8% increase over FY2012 funding levels
- Provides for over $80B in discretionary funding for the Health & Human Services, an almost $4B increase over FY2012 levels
- Department of the Interior has about a 4% increase, Department of Transportation increase 5.5% and HUD has about a 9% increase over FY2012 levels.
- The Department of Agriculture's discretionary funding level is about equal to the level in FY2012Other agencies are either flat (compared to FY2012) or declined from those values including NASA that is down 0.3%
You can view the full budget here to see more specifics and details in areas I've outlined above. I think there has been a lot of talk about how the Federal Government is no longer a good customer for business. I don't think that is fair. The Federal Government is re-adjusting (following a period of spending to support domestic programs as well as a major military effort) but we have seen this many times before in history. The government still needs goods and services and still desires to purchase them from private industry where economical. In most cases, private industry will be the most economical source. There may be a shift in what is purchased during this period but the government will still spend very close to the same amount of money (as we can see above). If you have difficulty in finding where to shift your marketing efforts, give me a call. I'll be glad to discuss it with you.
Funding a small start-up business is one of the most difficult hurdles a new business owner faces. At this point the financing options are limited. Usually either the 4 F's (Founder, Family, Friends & Fools) or SBIR/STTR money is the only way to fund a very early development effort. Since there is a limit on the amount of funding available from the 4 F's, the SBIR program was designed to help American companies get their technology funded in early stages. As a result, more and more small businesses are taking advantage of this non-dilutive source of funding. The cost of doing business with the Federal Government, however, is real, significant and many times non-compliance with regulations can spell disaster for a small business. Heck, it can be problematic for large companies too. So what is the small business owner to do?
At ReliAscent we have studied this process for many years and think we know a thing or two about how this process works. The SBIR/STTR process usually results in a fixed price award for a Phase I effort (lasting usually 6 to 9 months). A fixed price arrangement from the Federal Government comes with very few "strings" attached. The small business is responsible for performing the work for the amount of money given. The risk is on the small business, not the Federal Government. The program was designed this way. The Phase II efforts are entirely different stories however. The Phase II effort is normally a cost reimbursable type arrangement. In this type of contract (see our previous blog from Feb. 8, 2013) the risk is now on the Federal Government and they will put in place some regulations to try to mitigate these risks. So ReliAscent has designed a series of programs designed to install only the elements of a job cost accounting system when the start-up business needs the tools. In other words, don't put all the requirements into play until they are needed but install a base accounting system from which to build upon as the company grows. These series of programs are called the "Introduction to Government Accounting Program™". The first program in this series was introduced last week and is designed to meet the requirements that the Department of Defense would expect from a Phase II SBIR/STTR winner. The name of this program is the FAR Foundations Program™ since it is based heavily on setting up a program that meets the FAR requirements. Of course, only the elements that are absolutely necessary during Phase I are put in place to start with to make it very affordable for the start-up business. This program will also satisfy requirements from NASA, DHS and a few others. Other programs will be coming out in the next couple of months as other agencies announce winners in their SBIR/STTR programs.
At ReliAscent we have noticed lately several examples of the DCAA interpreting a regulation differently than they had in the past. This apparent shift in interpretation might catch an unsuspecting company by surprise and cause some heartache. What we have noticed is related to how the FAR addresses consultant and subcontractor costs in FAR 31.205-33. The issue seems to center around adequate documentation for consultants. The DCAA appears to be interpreting this regulation very literally now. The FAR requires monthly time reporting, monthly work product or similar to support the Consultant services. In many audits from the past, this type of proof was either not looked at or not required in many instances. I have heard of several instances where Incurred Cost submittals for up to as much as 7 years ago are just now being audited (this is another problem). The issue is that the DCAA is requiring companies on these audits to produce this documentation and in many cases it just doesn't exist since the work was completed a long time ago. I know of one case where the same consultant, working for the same company had their invoices passed in an ICE audit for the year 2006 but now (this year) when the 2007 ICE is being audited the DCAA is rejecting the consultant documentation. They have indicated that the consultant should be providing adequate time sheets for this time period and, in fact, this consultant may no longer be active or able to produce the time documentation. It would be a different story if the DCAA were timely and looking back only at last year but records 5 to 6 years old, for a small business and for a small business consultant are now being called into question. This just goes to show you how important it is to maintain all your records when you are contracting with the Federal Government, and keep them for a longer period of time than you might otherwise think prudent. In two other separate instances, companies are being audited for 2007 Incurred Cost submittals. In both cases the DCAA has disallowed nearly all of the consultant costs because of inadequate documentation by the consultants. Both companies have used the same procedures for many years (up to 20 years) and have been continuously audited by the DCAA without any consultant costs being questioned until now.
We would be interested to hear from our readers to see if you have encountered similar situations. ReliAscent is working through several national organizations to try and establish some consistency on this but this type of background work will take time. Meanwhile, there are lots of past due Incurred Cost Submission Audits being conducted and this could cause some headache. The only way to prepare for this is to review your documentation and, if possible, make sure your consultants and subcontractors can help supply any missing documentation.
The Navy has just released its latest solicitation for the Seaport-e contract vehicle. This open solicitation is part of what the Navy calls its Rolling Admissions program. The Navy has a Rolling Admission to expand the contractor base in their Indefinite Delivery / Indefinite Quantity (ID/IQ) prime contracts. This is also an opportunity for existing Seaport-e prime contract holders to expand the scope of their contract or expand the geographical scope that their contract covers.
For those not familiar with the Seaport-e program, the navy issues these ID/IQ contracts to prime contractors that they potentially will do business with. Then the prime contract holders bid on individual task orders to secure awards. The task orders are all bid competitively among only the ID/IQ contract holders. There is a significant bias towards awarding business to Small business. The goal for the Seaport-e program is 33% of total obligated dollars awarded to small business and large business awards must subcontract at least 20% to small business. The task orders are awarded in one of seven geographical zones. The ID/IQ holder must specify which zones they are qualified to bid in when they secure the Seaport-e contract (before the task orders are issued). These zones are:
| Zone 1 |
Northeast |
| Zone 2 |
National Capital |
| Zone 3 |
Mid Atlantic |
| Zone 4 |
Gulf Coast |
| Zone 5 |
Midwest |
| Zone 6 |
Southwest |
| Zone 7 |
Northwest |
The Rolling Admission solicitation, N0017813R400, is available on-line now. There are some significant due dates associated with this and the clock is ticking. For those that are interested, now is the time to get involved and begin a proposal. Here is a quick guide to critical dates in this process:
| May 2, 2013 |
Written questions due to Seaport office |
| May 17, 2013 |
Registration for applicants due on Seaport site |
| May 30, 2013 |
Complete proposals due in Seaport office |
| November 15, 2013 |
Estimated award date |
At ReliAscent, we have experts that have done these proposals before and can guide the contractor through the process. In addition, pricing is critical on this since you will be bound to these rates for the task orders. A DCAA compliant accounting system is also a requirement. These are all things not to be taken lightly and should be discussed now, during the proposal stage. ReliAscent can help. Call us today.
As the Federal Government's budget crisis continues to unfold, many people are starting to believe that there will be a "war on profits". The government has always wanted a good deal from government contractors and that includes defining a certain limit on the amount of "fee" or profit that they are willing to pay. This is especially true on cost reimbursable type contracts. Of course, many government contractors are looking for excuses on why they are loosing some business from their biggest customer. While the government is trying to reduce waste and trim budgets, they claim that they are not trying to force contractors to take unreasonably low profits or no profits. The Pentagon has assured contractors that they are not trying to eliminate profits or restrict them. They are trying to eliminate cases where any contractor may be taking advantage of the government. This becomes a delicate line to walk. Many times in the past the lower than normal profits on government contracts could be rationalized as a cost of doing business in exchange for a large customer that always paid their bills and always paid on time (as long as you followed the procedure). You didn't have to worry about a "bad debt expense" with this customer. But there were a small percentage of firms that took advantage of the government. This abuse caused headaches for all government contractors as more rules and regulations are constantly added to help prevent the abuse of "the system".
One of the key issues being discussed is the difference between a "free enterprise" system and a system where government tells the contractor how much money it can make. When the government buys on a fixed price contract and there is competition in bidding, a free enterprise system is in play. The contractor should only make a fair profit based on market conditions since they are competing with other contractors for the business. As long as a contractor doesn't "underbid" and sell at a loss to try and secure business, the government should get market price and the contractor should get a "fair" profit. A cost reimbursable type contract is a little different situation. In this type of arrangement, the government is agreeing to pay for some of the contractor's overhead expenses. So limiting profit seems reasonable on these types of contracts since in a free enterprise system customers usually don't care what your costs are, just your price. Now, having said that, to reduce profits below the normal levels of 5-9% on a cost type contract would be squeezing the contractor more than they have been in the past. At some point, the contractor will decide that even thought a portion of their overhead is being covered, that they still want to make a profit. What level of profit depends on the contractor but my guess is that as profit goes down, the contractor will look for more lucrative private markets for their goods and services. Hopefully the Department of Defense is not having a "war on profit" and driving it down. That would only serve to limit their available pool of suppliers and thus the quality of what they buy.
Last week we talked about some of the opportunities in the President's proposed new budget for FY2014. I would like to look at more of the specifics of how that might translate into something good for small business. The Office of Management and Budget issued some insight to the thinking behind the FY2014 budget. The main emphasis is, of course, to help build-up and support a strong middle class in America. These programs are seen to either support that or help Americans reach that level. The main thrusts of the budget are:
- Spur job creation by enhancing small business access to credit - this initiative has several thrusts. The budget supports development of SBA ONE which is a one stop lending platform aimed to simplify the loan process for both lenders and borrowers. Also, the budget supports $16 Billion in SBA 7(a) loan guarantees, $6 billion in guaranteed SBA lending for commercial real estate development and heavy machinery purchases, $4 billion in Small Business Investment Company (SBIC) debentures to support new businesses and new jobs through early-stage and mezzanine small business financing and $18 million in direct loans, for intermediaries to provide small loans to emerging entrepreneurs and other borrowers unable to receive credit elsewhere.
- Cut taxes to small businesses seeking to grow and expand - There are proposed tax credits for new hires as well as tax incentives for expansion in both plants and equipment.
- Boost investment in small business - A proposal to eliminate the capital gains tax on investment in small business stock.
- Promote Impact Investment in Economically Distressed Regions, for Disadvantaged Groups, and in Sections of National Significance - Provide support to investments in areas under-served by venture capital.
- Help Innovative Small Businesses Obtain Early-Stage Financing - Up to $200 million in guaranteed debentures for matching funds will be available in 2013 to investors seeking to support innovative companies ramping up their operations and creating new jobs.
- Improve Small Businesses and Exporter Access to Federal Services - Creating a "no wrong door" policy so that small business seeking help from the government feels like they are dealing with one organization, no matter what agency or resource they start with.
- Help Small Businesses Connect to Regional Innovation - $3.4 Million from the SBA to foster local business development including things like enhancing the Mentor-Protégé program.
- Strengthen Small Business Exports - The Budget proposes $517 million for the International Trade Administration (ITA) to continue implementation of the National Export Initiative.
- Double the Small Employer Pension Plan Startup Credit - The budget proposes to double the tax credit for small business (less than 100 employees) for qualified retirement plans or SIMPLE plans.
- Help Small Businesses Provide Health Insurance to their Employees - The budget proposes to expand and simplify the credit for this from the Affordable Health Care Act.
You can see more from the OMB website on some of these if you like by clicking here. Again, like we discussed last week, this is just a proposal at this point. No telling what may happen after Congress gets through with this. Stay tuned. There look like there will be some good things for small business.
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.