Government Contractor CFO's 101 (Part VI) - Risk Management II

Dave Donley July 28, 2016

CFO Risk Management– Part II

In our introduction to risk management, understanding the regulatory environment a firm finds itself in was a critical first step for any CFO. For a deeper understanding on how this affects a business, let’s assume you’re a small business (according to the Small Business Administration) having a prime cost-plus type contract. What are the risks involved that the CFO should be aware of?

Accounting System Risks

Government regulations requires an agency’s procurement office to “survey” the capabilities of potential contractors who may receive a cost-plus/cost-reimbursable type contract. This could be a research and development type contract (i.e. SBIR/STTR) or a professional services type contract potentially having cost-type task orders (i.e. Navy Seaport-E).

While contractors aren’t required to have an “approved” accounting system in order to respond to a government solicitation, they will have to pass a Pre-award Accounting System Survey (see our popular white paper: "A Quick Guide to the DCAA Compliant Accounting System: Understanding the SF1408"), that proves to the government a firm can track contract costs. A savvy CFO may wish to set up an “approved” accounting system in accordance with the government checklist found in Standard Form 1408 in anticipation of a solicitation or award.

If awarded a contract, the accounting system will likely be reviewed by the Defense Contract Audit Agency (DCAA) for DoD agencies, and perhaps by others for other agency grants or contracts. Not passing a pre-award accounting system survey could imperil a pending award or, at a minimum, delay an award. This potential barrier to the government market represents the highest stakes a small business may encounter in its early formation.

Risks through Price Negotiations

Negotiating a final price on a government bid can present certain financial challenges. As was discussed in a previous blog entry, presenting a proposal using an appropriate indirect rate structure and indirect rates goes far in giving the government confidence in their procurement partner. Justifying allowable costs during negotiations and understanding agency-specific cost limitations can avoid frustrating the government and potentially delaying an award. Worst case scenarios has the government “capping” indirect rates due to their concerns about a contractor’s ability to control costs.

Risks through Billing Processes

Having a cost-plus type contract invites a higher level of scrutiny from the government. Provisional billing rates must be negotiated with the DCAA for the DoD and with others for other agencies. Limitations spelled out in the contract govern cost allowability, funding limits and other billing withholds. Government billing systems can be difficult to understand and navigate, causing gaps in cashflow. Shoddy internal control of the accounting and billing systems can also expose a contractor to violations of the False Claims Act.

Audit Risks

Since cost-plus contracting is considered risky from a government buyer’s perspective, any number of audits are used to ensure a contractor is compliant with cost regulations. A company CFO can expect any or all of the following audits to occur during the life of a contract:

Timekeeping and labor distribution
Billing system
Final indirect rates – Incurred Cost Proposal
Grants – Independent project cost audit, likely combined with a separate evaluation of indirect rates
Accounting system

Contract Performance Risks

For cost-type contracts, many contractors overlook their responsibilities for safeguarding and reporting material bought under this type of contract. Once purchased, this material is considered government property. The CFO must recognize that the accounting system can become the entry point for the required recordkeeping.

The CFO should also keep an eye on job profitability, paying particular attention that costs don’t exceed incremental funding limits or the total cost reflected in the contract.

Conclusion

The CFO very quickly becomes the focal point for the financial success of a firm once it wades into the higher risk areas of government contracting.

- Dave Donley, ReliAscent

Helpful DCAA Compliance Resources

If you would like to learn more about how ReliAscent's outsourced CFO experts can help your business, please visit our Outsourced CFO Services page, and complete the form on the left. Other helpful pages include our DCAA Audit Support Page, and Government Contract Management Pages.

We also have a number of useful white papers on these topics, available for download:

1) "A Quick Guide to the DCAA Compliant Accounting System: Understanding the SF1408" - white paper

2) "The DCAA Audit Prep Checklist" - white paper

3) "Is Your Timekeeping System DCAA Compliant?" - white paper

4) "The Top 10 Reasons You Need a Government Contract Manager" - white paper