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Government Compliance

Government Compliance

There are many different types and sources of regulations with which a U.S. Government contractor may be required to comply depending on the type of contract awarded.  Some of these include the Code of Federal Regulations (CFR), of which the Federal Acquisition Regulations (FAR) is a part, agency FAR supplements such as the Defense Federal Acquisition Regulation Supplement (DFARS) and the NASA FAR Supplement (NFS), Cost Accounting Standards (CAS), and the McNamara-O’Hara Service Contract Act of 1965, just to name a few.

The contract itself is the source for all compliance requirements for that particular contract.  Every Government contract will have a separate section, or sections, listing all contract clauses either by reference or in full text.

The Department of Defense (DoD) employs its Defense Contract Management Administration (DCMA) to oversee DoD contractors and their contracts.  Local or regional Administrative Contracting Officers (ACOs) are assigned to manage each Government contract and oversee each contractor.  They are responsible for contractor compliance with all contract requirements and regulations.  ACOs, whether local or regional, may in turn use the services of the Defense Contract Audit Agency (DCAA) to perform various types of audits and provide findings and recommendations back to the requesting ACO.  Many non-DoD agencies such as the Department of Commerce, Department of Energy, and NASA may utilize DCAA to perform audits on their contracts as well.

It is just as important for Government contractors to understand the missions and relationships of DCMA and its contracting officers, DCAA, the Department of Labor (DOL), and other agencies as it is to understand the contracts themselves.

DCMA has regional offices throughout the country primarily responsible for the oversight and approval of Government contractors’ cost accounting practices and procedures, business systems, and rates.

A contractor’s cost accounting practices and procedures must be defined, described, and operated in accordance with one or more CAS Board (CASB) Disclosure Statements if it is awarded a contract subject to CAS.  CASB disclosure statements are prepared by contractors, submitted to DCMA for approval, and may be audited by DCAA if requested by DCMA.

Likewise direct and/or indirect rates, whether provisional for billing, forward-priced for proposals, or both, may be prepared and submitted to DCMA for review and approval.  The responsible contracting officer may request DCAA audit the rates prior to approval.

The most problematic area by far is business systems approvals.  It has become an exceedingly difficult and lengthy process to obtain business systems approvals, or findings of adequacy, from DCMA.  Most contractors erroneously believe it is DCAA that grants business systems approvals, but that is not the case.  DCMA is the only DoD agency whose ACOs can determine a contractor’s business systems approved or adequate.  DCAA may perform business system audits for DCMA and provide findings and opinions; however, it is DCMA that makes the final determinations.

In general dealing with Government auditors and contracting officers has likewise become somewhat problematic.  Years long relationships with Government personnel and offices have crumbled and practices long held to be acceptable are no longer.  Companies are seeing their Days Sales Outstanding (DSO) rates on Government contracts rise to levels not seen in years and their Return on Net Assets (RONA) or Return on Investment (ROI) rates likewise drop.  Some contracts cannot even be awarded to contractors whose cost accounting systems have not been approved or deemed adequate and prime contractors will not award cost-type subcontracts to companies with unapproved accounting systems.  Having business systems that have been determined to be adequate or approved by DCMA is by far the single most critical criterion for timely approval and payment of Government contractor invoices.

There are six primary contractor business systems on which the DCMA will focus for audit and approval or adequacy:

  1.   Cost Accounting System
  2.   Earned Value Management System (EVMS), if applicable
  3.   Cost Estimating System
  4.   Material Management and Accounting System
  5.   Property Management System
  6.   Purchasing or Procurement System

Each of the six business systems is described and explained in its own reference within the Business Systems guide listed below.  There are additional systems which may be subject to audit and approval such as Labor, Timekeeping, Human Resources (HR), Payroll, and others.  Each of these systems is covered under a separate topic or reference.

It is imperative that contractors comprehend the requirements for adequate business systems as defined by DCMA and DCAA because neither agency’s officers or auditors is allowed to assist contractors with designing acceptable systems nor will they answer specific questions as many have in years past.  DCMA will also no longer find a system partially adequate and accept a plan for addressing weaknesses listed in an audit report in the meantime.  The current procedure for approval is black and white – a contractor’s business system is either fully approved or deemed adequate or not, period.

It is also important to recognize that even though a business system has been audited and determined by DCMA to be adequate, it is subject to ongoing checks and audits on a continuing basis and at any time with or without advance notice from either DCMA or DCAA.  Many DCAA offices are resident at large business contractor sites and most will demand some sort of direct access to a contractor’s business systems so they may monitor at will.

There are two other significant changes to note in the way DCAA performs compliance audits on behalf of DCMA regional ACOs or local customer agency contracting officers.  One is in the scope of an audit.  There is practically no such thing as “scope” of audit any more, rather DCAA auditors will often decide for themselves what is within their scope of audit.  The second is DCAA’s proclivity to define any error or weakness found during an audit of an individual component, such as an invoice or a proposal, as a “systemic” issue.  This immediately calls into question the applicable business system whether it is currently approved or deemed adequate by DCMA or not.

It is also essential for a contractor to understand that a business system is not a software application.  The software application or solution is essential in that its processes and output must meet the requirements of Government regulations; however, a system is a comprehensive package of software solution and documented practices and policies to which employees are held accountable.  A system must include checks and balances and remedies to ensure that errors and anomalies are prevented and quickly resolved if and when they occur.

This is what sets Dassian apart from its competitors who continue to sell the notion that an approved system is a software tool.  It is not and even those who have comprehensive systems that have been approved will discover that maintaining that approval has never been more difficult.

Dassian is the first to offer that extra edge by stepping up and providing not only the GOVCON suite of products that are the cornerstone of an approved cost accounting, timekeeping, payroll, or HR system, but in the form of real guidance on how to set up and document a total and comprehensive system, complete a successful DCAA audit, and gain DCMA approval.

The bottom line is that contractor compliance with Government regulations and requirements for both individual contracts and entire business systems has never been more complicated, complex, and difficult.  It is an ongoing and continual process, not a one-time stamp of approval, and failure on any single point at any time, whether perceived or actual, will absolutely and immediately impact a contractor’s bottom line and its ability to be successful in Government contracting.


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