Government Contractor CFO's 101 (Part II) - Understanding Your Regulatory Environment

Government Contractor CFO services – Risk Management I

The first thing the government contracting CFO needs to understand is the regulatory environment a firm finds itself in. Also important is whether that environment will change and what compliance risks it imposes.

Understanding the government buyer

A CFO in the government contracting environment knows that the government prefers to buy goods and services on a commercial, off-the-shelf, competitive basis. Simplified bid and proposal techniques apply in this approach, typically asking only about price and delivery, with contracts awarded on a competitive price and schedule basis.

Even so, it’s good policy to at least have an idea of cost performance to make sure your firm’s products and services are competitive.

The ability to segregate project costs and “indirect” costs becomes more important when a few thresholds are met:

• You bid on a sole source government contract.
• Your bid is more than $700,000.
• You bid on a government grant.

Even if these contacts and grants are fixed price, you may be required to provide a proposed budget that articulates and defends all project costs as well as calculates and allocates indirect costs.

The government may also purchase goods and services on a cost-reimbursement basis, requiring a host of risk-mitigating regulatory features the government will apply.

Specific examples

The government requires Certified Cost & Pricing information on bids over $700,000 that are not commercial in nature and where the government believes there is not adequate price competition. This can be worrisome since by certifying that your cost & pricing data used for negotiating the contract is “current, accurate, and complete”, you expose your firm to allegations of defective pricing. Defective pricing can be alleged in a post-award environment if it is determined the cost & pricing data offered by the contractor to the government is found to have been flawed in regard to data being “current, accurate, and complete.”

Remedies in this case include reduction in the cost and fee awarded under the contract.

Another example is requiring an “approved” accounting system. An approved accounting system in the government’s eyes says “… the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type.” (FAR 16.104(h))

All cost-reimbursement contracts will require a government approved accounting system. This is not a trivial task, as most small businesses have their accounting systems designed by tax CPAs altogether unfamiliar with the rigorous government job cost accounting requirements. For a sample of what’s required in this environment, search for “SF1408” on your web browser.

Not passing a pre-award accounting system survey can set back a fledging small business for a number of years.

Small to Large business transition

Small businesses enjoy a number of economic benefits when contracting with the government. Knowing when the government no longer considers you a small business is critical, especially if there is an acquisition or major investment event. It’s important to understand and plan for the increased regulatory scrutiny you’ll face when transitioning from a small business to a large government contractor. Formal Cost Accounting Standards (CAS) compliance is one of the biggest hurdles. The CFO will have related concerns if the firm, large or small, requires an approved purchasing and material management system, cost estimating, or an Earned Value Management System (EVMS).

Additional risk factors

A knowledgeable CFO will be aware of the unique risks buried in a government contract’s terms and conditions:

• Liquidated damages
• Billing/financing techniques and instructions
• Termination for convenience
• Contract changes
• Limitations on costs, funding, and fee
• Consent to subcontract

As well as compliance requirements:

• Agencies involved, their roles and authority
• Disallowance of costs
• Detection and reporting of fraud, waste, abuse
• Audit exposure
• Annual cost reporting

Conclusion

As a key member of the management team, a CFO familiar with the government contracting landscape is critical for operational success.