Contractor Business Systems Series: Part 1 – Applicability

HOST: SUSAN MOSER: Hi. Welcome to Cherry Bekaert's GovCon podcast, where we discuss current government contracting trends, compliance matters, and best practices to guide federal contractors forward.

HOST: SUSAN MOSER: I'm Susan Moser. I'm the partner in charge of our government contracts practice today, and joining me is one of our newer members of our Government Contract Services group, Roy Rashing.

HOST: SUSAN MOSER: Roy has an interesting background. I'd like to ask him first to introduce himself and share a little about his background, and then we will get into today's topic, which is Business Systems applicability.

GUEST: ROY RUSHING: Thank you, Susan. I'm very excited to be here to discuss Business Systems and to introduce myself.

GUEST: ROY RUSHING: About 25 years ago I started my journey when I joined the United States Coast Guard, which led me to becoming a Contracting Officer early in my career. After two tours on active duty supporting many operational and support missions, I decided to explore a civilian career in government contracting.

GUEST: ROY RUSHING: Over the last two decades I served as a Contracting Officer with various agencies such as the United States Coast Guard, the General Services Administration, and the Department of Defense. I worked major systems procuring ships, aircraft, and weapon systems, supporting programs with contracting professional services, and I served as a Construction Contracting Officer providing facilities and infrastructure to support the warfighter and the fleet.

GUEST: ROY RUSHING: After I left federal service and before coming to Cherry Bekaert, I served as a contract administrator and business development specialist for an SBA small business, where I gained experience in what it takes to be successful in the private sector and as a small business emerging in the marketplace.

HOST: SUSAN MOSER: Roy does have a great background and is a strong addition to our team. He's been helping a number of contractor clients with contract management and various compliance issues that arise when the government is your customer.

HOST: SUSAN MOSER: Having worked with both the government and with contractors adds a lot of value. Today's topic is Business Systems applicability, and we thought we'd start by providing some background. This is the first in a new series on Business Systems. Subsequent podcasts will cover more information on each of the six Business Systems, but today will be a broad overview.

HOST: SUSAN MOSER: Roy, could you start by giving a quick overview of what the Business Systems are and a little background?

GUEST: ROY RUSHING: The Business Systems rules were put in place in the FAR in 2012. They consist of six separate contractor Business Systems that are subject to a determination of adequacy per the terms and conditions described in applicable Business Systems clauses.

GUEST: ROY RUSHING: Under these rules, the Department of Defense conducts audits and reviews the adequacy of these systems, and the rules apply primarily to Cost Accounting Standards (CAS)-covered contracts. The DoD considers Business Systems the first line of defense against waste, fraud, and abuse.

HOST: SUSAN MOSER: In your experience, when should contractors be concerned about these Business Systems, and which systems typically come into play first?

GUEST: ROY RUSHING: Contractors should take Business Systems seriously because acceptance of a Business System affects a contractor's ability to obtain larger contracts and future government work. Contractors typically encounter Business Systems when they grow beyond the small business exemption, are awarded a CAS-covered contract, are proposing on an RFP that includes Business Systems requirements from the contracting officer, or cross a dollar threshold that triggers a Business System requirement.

GUEST: ROY RUSHING: The most prevalent systems are the first three: Accounting, Estimating, and Purchasing. Accounting is often the most in-depth review and contains multiple criteria that will be audited.

GUEST: ROY RUSHING: Accounting reviews look at whether the contractor maintains sound internal controls in their environment, whether the accounting framework and organizational structure are appropriate, and whether there is proper segregation of direct and indirect costs. Auditors check identification of direct costs by contract, a logical and consistent method of accumulation and allocation of indirect costs and final cost objectives, and timekeeping systems to ensure labor is accurate and recorded properly.

GUEST: ROY RUSHING: Auditors also review labor distribution to ensure charges are allocated to the appropriate cost objectives and that costs are identified to the actual contract line item number (CLIN).

GUEST: ROY RUSHING: Estimating is a system that demonstrates the contractor has budgeting and planning controls to generate costs submitted in proposals that are fair and reasonable to the government. Reviews cover organizational structure, established lines of authority and responsibility, internal controls, management reviews, workflow coordination, and communication.

GUEST: ROY RUSHING: The Purchasing System review examines whether contractors follow proper procedures and processes to ensure oversight and management supervision, consistent purchasing practices, and that the government is receiving fair and reasonable prices on awarded subcontracts. Effective supply chain management is also assessed.

HOST: SUSAN MOSER: As you mentioned, small businesses are generally exempt from some of these requirements. I also want to note that many small businesses are familiar with a pre-award accounting system survey, which is a prospective assessment of an accounting system's design to determine adequacy for certain flexibly priced contracts, such as cost-type contracts.

HOST: SUSAN MOSER: To contrast, a pre-award accounting system survey focuses on whether the design of the system is in place and does not require the system to be fully operational. A DoD accounting system audit is much more comprehensive and assesses whether the system is in place and operational.

HOST: SUSAN MOSER: Roy, you mentioned there are six Business Systems. You covered the first three. What are the other three?

GUEST: ROY RUSHING: The other three systems are Property, Earned Value Management System (EVMS), and Material Management and Accounting System (MMAS). You will mostly see these systems in cost-reimbursement contracts, on contracts covered by CAS, when an agency or contracting officer deems them necessary in the contract, or when a contract triggers a specific threshold.

GUEST: ROY RUSHING: The Property system is usually seen when the government furnishes equipment or property that the contractor controls and is liable for at their facility for a specific contract objective. MMAS is commonly seen in production contracts where material is procured to produce an end product.

GUEST: ROY RUSHING: EVMS requires a system that complies with the guidelines found in ANSI/EIA-748 and demonstrates proper cost controls to ensure performance, pricing, and costs provided to the government are consistent and fair.

GUEST: ROY RUSHING: EVMS and MMAS are among the least common, but we work with them frequently in manufacturing and shipbuilding.

HOST: SUSAN MOSER: One trend we're seeing is that many IDIQ vehicles and RFPs evaluate contractor proposals on a points basis and award points for having some of these systems in place. We're also seeing this in small business set-asides, which creates some tension because small businesses are generally exempt from these requirements, but there are business practice benefits to having them.

HOST: SUSAN MOSER: Roy, what are your thoughts on IDIQ vehicles for small businesses where evaluators award points for having these systems?

GUEST: ROY RUSHING: Generally, small businesses are not expected by federal agencies to have estimating or purchasing systems, nor are they typically subject to CAS. The smallest firms usually will not have significant cost or pricing data or large subcontractor efforts that warrant such systems. However, the government increasingly seeks assurance that contractors have systems for costs, materials, and other elements that reduce performance risk.

GUEST: ROY RUSHING: If a small government contractor plans to pursue larger contracts, such as multiple award contracts or cost-plus contracts, they should begin working now with a consulting or accounting firm such as Cherry Bekaert that specializes in government contracting to be competitive in future acquisitions. When evaluators award extra credit for having approved systems, contractors without them may receive lower evaluation scores and lose awards.

GUEST: ROY RUSHING: Implementing and obtaining approval for these systems takes time and planning to comply with the applicable audit agency requirements.

HOST: SUSAN MOSER: These Business Systems rules are incorporated in the DFARS for DoD, and DoD often sets the standard other agencies follow. Other agencies, such as the Department of Energy, may have purchasing system requirements that are similar but differ in some details. Generally, following DoD's DFARS rules for Business Systems will be more than adequate for other agencies.

HOST: SUSAN MOSER: In future podcasts, we will delve into more detailed information on each of the six Business Systems. Our podcasts are meant to be fairly short, about 15 minutes, but we will produce a series that addresses each system in more detail.

HOST: SUSAN MOSER: Typically, DCAA has oversight over accounting, estimating, and MMAS, and DCMA has oversight over purchasing, EVMS, and property. Those are typically the agencies you would be dealing with for evaluations.

HOST: SUSAN MOSER: We will wrap up now. Please look for our future Business Systems podcast series, and check out our website for more information, including other podcasts, articles, and webinars.

HOST: SUSAN MOSER: Please contact Susan Moser or Roy Rashing if we can help you with a particular system. Our contact information is on the website. We hope this overview was helpful and that you will join us for future sessions.