Exploring Contractor Business System Reviews for A&E Firms

BRYNN MCNEIL: Welcome to Cherry Bekaert's Professional Services Podcast. My name is Brynn McNeil, and I'm an audit partner focusing on serving architectural and engineering firms within our Professional Services industry group. Along with me today is Eric Poppe, a managing director in our GovCon advisory practice. Today we'll focus on adequate system reviews so you can better understand when and why it may be beneficial for your company to have one.

BRYNN MCNEIL: Eric, what are the various system reviews that you typically perform?

ERIC POPPE: I work primarily with companies that do work with the federal government. For companies performing certain types of federal work, there are system requirements to have an adequate system. From the government's perspective, there are six business systems a government contractor should have, depending on size and the nature of work: accounting system, earned value management system, estimating, material management and accounting system, property management, and purchasing system.

ERIC POPPE: These requirements depend on organization size and the type of work, but we see them across companies of all shapes and sizes.

BRYNN MCNEIL: When would it be good for a company to look into having one of these system reviews? Are some more common than others?

ERIC POPPE: Typically, the first system that becomes applicable is the accounting system, followed by estimating and purchasing. As an organization grows, earned value and material management and accounting system criteria come into play. Property management is contract dependent if you're managing government property. The accounting system usually applies if you have any flexibly priced or cost-type work with the federal government, regardless of company size.

BRYNN MCNEIL: Are there size limitations or system limitations companies could run into?

ERIC POPPE: There are no size standards for accounting system applicability; it's based on the type of work. Certain thresholds exist for other business systems, excluding government property, which is contract dependent. We're seeing requirements trickle down to small businesses via solicitations because the government uses system adequacy on scorecards to award points.

ERIC POPPE: When I talk about systems, I'm not referring to your ERP or the software you use for estimating or purchasing. It is the people, processes, procedures, and practices behind that software. For example, a primary criterion for accounting is compliance with GAAP, which relates to accounting practices, not an ERP.

ERIC POPPE: For estimating, you need adequate supervisor review and training, which is about practices rather than tools. Many A&E firms must have audited overhead rates based on the AASHTO guide, which draws on FAR Part 31 and the Cost Accounting Standards. Those same principles underlie much of our system criteria.

BRYNN MCNEIL: We often get fire drills where a company needs this quickly for a proposal. Assuming planning ahead, when is the right time to do a business system review and how long does certification or approval last?

ERIC POPPE: If you start seeing these requirements in solicitations, consider a review. As part of strategic planning, if you expect significant federal work growth or plan to expand into cost-plus work, tackle the accounting system first. Emerging small businesses preparing for open competition should consider purchasing and estimating.

ERIC POPPE: Approvals typically have a shelf life of three to four years. Many system reviews by the government are performed under GAGAS; DCAA performs three system reviews and DCMA performs three. The government must request these audits, so many companies have third parties perform them to obtain an adequacy letter or an audit under attest standards for inclusion in proposal packages and records.

BRYNN MCNEIL: Who can perform this work? Can third parties like Cherry Bekaert perform it, or must it be done by the government?

ERIC POPPE: Both scenarios exist. You must coordinate with your contracting officer to request a government audit. Solicitations vary: some require the adequacy to be issued by the government, others allow a third party, and some require third-party work under GAGAS. The gold standard is GAGAS; a common alternative is AICPA Consulting Standards. The underlying criteria are the same, but professional standards dictate the level of documentation and workpapers, including fraud interviews and internal control testing.

BRYNN MCNEIL: Solicitation language can be loose with terms like "audit." If confused, it's useful to have a third party confirm whether the work can be done under consulting standards or requires attest standards or GAGAS.

ERIC POPPE: If early enough in the solicitation process, submit a question for clarification. We've seen clients get clarification that the government used "audit" loosely to mean a review or assessment. Some companies accept the risk of submitting an adequacy letter under consulting standards and see how it affects scoring. Consult legal counsel or advisors when in doubt.

BRYNN MCNEIL: For a company seeking an approved accounting system for the first time, what tips would help them succeed?

ERIC POPPE: First, review the criteria; you may already meet much of it. For estimating, ensure proper training and supervisory review and have documentation capturing training and approvals. Second, consider a mock assessment or gap assessment to leverage current processes and identify gaps.

ERIC POPPE: After setting up your system, you must perform the processes as documented in your policies and manuals. Mock audits conducted by former DCAA and DCMA auditors can simulate government assessments and prepare you for actual reviews. Don't recreate the wheel—leverage existing policies and procedures and apply a different lens.

BRYNN MCNEIL: Why might this be advantageous for an emerging small business?

ERIC POPPE: Although there is an upfront investment in documentation and policies, these systems provide infrastructure for rapid growth. They create consistent practices, which help manage turnover and support scalable operations. The systems also dovetail with internal controls over financial reporting; for example, accounts receivable testing ties to the accounting system, and procure-to-pay ties to the purchasing system.

ERIC POPPE: These practices benefit organizations beyond government contracting by strengthening financial reporting and internal controls and making cultural change easier when implemented early.

BRYNN MCNEIL: Thank you, Eric. This has been very informative. Cherry Bekaert will produce other podcasts within the Professional Services Industry Group, and we hope you'll join us for those. All of our podcasts are posted on cbh.com. If you have questions or needs, please reach out.

ERIC POPPE: Thanks for having me.