FAR and CAS Compliance for AE Firms Part 3

Posted by Deltek on December 1, 2015

Capital Building

This is part 3 in a three part series on “FAR and CAS Compliance for A&E Firms”.  Click to see part 1 or part 2. 

The above article is an excerpt from the Deltek’s Special Edition “Project-Based ERP for Dummies”. To download your complimentary copy of the entire book click here.

Examining Pay

When dealing with employee compensation, some costs are allowable and others aren’t.

Allowable cost for salaries include:

  • Compensation reported on W-2 forms
  • Payments in accordance with a written plan, offer letter, or employee contract
  • All reasonable remuneration paid or proffered for services rendered
  • Commitments made before services rendered

Auditors tend to pay special attention to executive compensation. For executive compensation to be considered allowable, it must be reasonable compared to other firms and it must be related to services performed, rather than distribution of profits. That “golden parachute” for the top brass? It’s only allowable if it’s not above normal severance pay limits.

A lot of people benefit from variable compensation — you probably call it a bonus. This is considered allowable as long as a written plan is in effect before services are rendered, the plan is followed consistently, and it’s incentive-based, not based on profits. As for consultant pay for contract work, that’s fine, but not if the consultant was previously classified as an employee.

Looking at Procurement and Subcontracts

What if you need to acquire property or equipment in the course of doing government work? There are a number of principles to keep in mind. First of all, the government maintains any lease-or-buy authority. If these kinds of purchases are made with government money, the title resides with the government, not your organization. And lease or rental costs are allowable, as long as they’re reasonable, but interest costs aren’t.

In other cases, you’ll be working with government-furnished property or equipment. Take good care of that property because you’re responsible for any loss or damage to the equipment. You’re also responsible for tracking the equipment and conforming to FAR Part 45 requirements. When dealing with subcontractors, many rules exist — you’ll find them listed in FAR 19.502-2, if you’re looking for a good read tonight. You’ll need ACO approval when the subcontract is for cost reimbursement, time and material (T&M) or labor hours, and the cost is greater than $25,000 including the fee.

You’ll also need approval if the subcontract is fixed price and the cost is greater than $25,000 or 5 percent of the total estimated cost of the prime contract. And for most subcontracts greater than $100,000, approval is also a must.

Getting to Know Your Auditor

The DCAA is just one of the potential auditors you might face. You could hear from an inspector general (or IG), whose job is examining the actions of a government agency as a general auditor. The IG ensures that the agency is operating in compliance with generally established government policies, audits the effectiveness of security procedures, and is on the lookout for misconduct, waste, fraud, theft, or certain types of criminal activity. There also are audit agencies within the U.S. Department of Urban Housing and Development (HUD), the U.S. Environmental Protection Agency (EPA), and the National Aeronautics and Space Administration (NASA).

But no matter which agency is conducting the audit, there are key topics of interest. The auditor is ensuring that all transactions (including those involving your firm) are proper and legal. The auditor wants to be sure transactions are recorded accurately and that everyone is complying with established policies.

Want to be as audit-safe as possible? Make sure that everyone in your organization has a role and employees are responsible for timesheet accuracy and consistently following established policies. And management must ensure that policies are consistently applied and that auditors get the help they need.

When the auditors arrive, demonstrate a spirit of cooperation and show that you have a genuine desire to assist in the audit process. If possible, assign an audit liaison to be the primary face of your organization with the audit staff.

Following the Rules

Civil and criminal penalties await your organization if you’re found to be out of compliance. Civil penalties are determined per violation per invoice. The government can recoup $5,500 to $11,000, and the contractor may pay the government up to three times the damage.

Criminal penalties are much more serious. We’re talking up to five years’ imprisonment for whoever signed the Certificate of Cost and Pricing data. It’s probably a no-brainer but still worth mentioning that you run the risk of having your payments suspended or the contract terminated if you’re found to be out of compliance. The latter can happen if termination is deemed to be in the best interests of the public (that’s called convenience), or if your company is found to be in default on the contract, meaning you’ve failed to deliver.

Then there’s debarmentwhich essentially means you’re banned from the government contracting world. Debarment can either be statutory (for willful violations of certain statutes) or administrative (for violations of criteria provided in agency regulations).

It is a best practice to use accounting systems that help keep you compliant by ensuring you have accurate data, process flows, and canned reports that help you respond to audits quickly and effectively.

Learn how an A&E industry specific, integrated accounting, time entry & project management system will help you meet compliance and increase profitability. Click here to download whitepaper now.

Here’s a Quick Summary of Various Audit Types

  • Incurred cost: A review of accounting practices and systems, ensuring that costs charged are allowable, allocable, and reasonable.
  • Pre-award audit: A review of procedures for generating a price.
  • Defective pricing: Ensures that cost and pricing data are current, accurate, and complete.
  • Forward pricing plan audit: A check of contract pricing rates to determine a fair and reasonable basis for negotiating a cost proposal.
  • Compensation and benefits: An audit of the contractor’s compensation system and related
  • internal controls.
  • Contract purchase systems review (CPSR): A review to understand the contractor’s purchasing system and related internal controls.
  • Labor charging/floor checks: A check for mischarges, fraud, and cost shifting, and a general check for accounting policy

The above article is an excerpt from the Deltek’s Special Edition “Project-Based ERP for Dummies”. To download your complimentary copy of the entire book click here.

This is part 3 in a three part series on “FAR and CAS Compliance for A&E Firms”.  Click to see part 1 or part 2.