1. Elimination of the need for repeated certification submission to contracting officers.
   
2. Regulation of the income standards for economically disadvantaged women.
   
3. Expansion of the WOSB Program industries from three to 83.
   
4. Broadening of the joint-venture requirements to allow a wider variety of partnerships.
   

Is the cost of travelling to and attending that convention an allowable claim? Can your business include the expense of sponsoring a conference in its claimed indirect expense pool? It all depends on the nature and purpose of the event.
 

• Antique car conventions.
• Arts and crafts fairs.
• Boat shows.
• Home and garden shows.
• Large-scale live events conventions.
• Literacy conventions.
• Pet owners' conventions.
• Science fiction conventions.

1. Is the primary purpose of the event to disseminate trade, business, technical or professional information?
2. Is the intent to stimulate production?
3. Is the primary reason to improve productivity?

1. The primary purpose of the convention appears social.
2. The main attraction is fun rather than business.
3. The convention is about a business unrelated to your organization's government contracting work.

DCAA has issued guidance for its auditors in implementing the recent change to FAR Part 31.205-46. The Travel Cost Principle was changed earlier this year to limit allowable airfare costs to the lowest airfare available to the contractor. Prior to the change, allowable airfare costs were limited to "the lowest customary standard, coach, or equivalent airfare."

DCAA has issued guidance[1] for its auditors in implementing the recent change to FAR Part 31.205-46.  The Travel Cost Principle was changed earlier this year to limit allowable airfare costs to the lowest airfare available to the contractor. [2]  Prior to the change, allowable airfare costs were limited to "the lowest customary standard, coach, or equivalent airfare."

This FAR change is premised on the assumption that contractors can get lower airfares than those available to the general public. In its discussion of the change, the FAR Councils stated:

"The (airfare) limitation was being interpreted inconsistently, either as lowest coach fare available to the contractor or lowest coach fare available to the general public, and these inconsistent interpretations can lead to confusion regarding what costs are allowable. The Councils believe that the reasonable standard to apply in determining the allowability of airfares is the lowest priced airfare available to the contractor. It is not prudent to allow the costs of the lowest priced airfares available to the general public when contractors have obtained lower priced airfares as a result of direct negotiation." 

The DCAA guidance states:

 "Auditors should question airfare costs claimed in excess of the lowest airfare available to the contractor. Generally, this is based on airfares available to the contractor through direct negotiation with airlines or travel agents."

This new rule and the DCAA guidance work fine for large contractors who have significant purchasing power and can negotiate directly with the airlines, but what about the great majority of contractors who do not have this capability?

The DCAA guidance places an additional burden of documentation on contractors and brings in the issue of nonrefundable airfares (which previously were not considered in the "lowest airfare" test):

"To comply with the revised rule, the contractor's policies and procedures should provide for advance planning of travel to assure that the lowest priced airfare available to the contractor for flights during normal business hours is documented and utilized as the baseline allowable airfare cost. To determine the lowest airfare available to the contractor for flights during normal business hours, the contractor must now consider nonrefundable airfares and lower airfares negotiated with airlines, travel service providers, credit card companies, etc. However, auditors should not question airfare costs claimed in excess of nonrefundable airfare available during normal business hours if the contractor's data show that its experience with canceling nonrefundable tickets results in increased cost in comparison to the cost of refundable tickets. The contractor must utilize the lowest airfare so determined as the baseline allowable airfare cost unless substantiating documentation is maintained for one of the exceptions to the lowest priced airfare requirement in FAR 31.205-46(b)."

From personal experience, I know that the cost of canceling nonrefundable tickets can be significant.   I also know that the burden on contractors to develop "experience" to show that use of nonrefundable tickets results in increased cost in comparison to the cost of refundable tickets will be significant.

The DCAA guidance also brings into play a requirement for documentation of "price competition" in support of airfare costs:

 "Ordinarily, with adequate advance planning, documentation substantiating the lowest airfare available takes the form of quotations from competing airlines or travel service providers from which the lowest priced airfare can be selected, giving proper consideration to any potential discounts or credits to the contractor's cost. There may be instances where only one flight is available for a given mission need and, therefore, only one quote is obtained, in which case the one quotation would substantiate the lowest priced airfare available. However, auditors observing frequent instances in which a single quotation is obtained to support the airfare should assess whether the design or execution of the contractor's policies and procedures results in unreasonable airfare costs."

The change to the Travel Cost Principle was no doubt required.  I believe it was a good first step.  However, the bias towards large contractors who have advance agreements with the airlines clouds the picture for the vast majority of government contractors who now must revise policies and procedures to protect against DCAA claims of unallowable airfare costs.

**This article was contributed by Joe Higgins, of JTH Consulting, LLC.  E. Cohen and Company, CPAs has teamed with JTH Consulting, LLC to offer government contractors a thought provoking Series of Articles and Upcoming Training Sessions on "Helping Federal Contractors Meet Today's Challenges". 

On January 15, 2010, the Department of Defense ("DoD") unveiled a proposal to amend the Defense Federal Acquisition Regulation Supplement ("DFARS") to require withholding of contractor payments for contractor failure to maintain "acceptable business systems."  Business systems covered by the new rule would include accounting systems, estimating systems, purchasing systems, earned value management systems (EVMS), material management and accounting systems (MMAS), and property management systems.

As a government contractor, you know when the Department of Defense ("DoD") enacts a new DFARS regulation, the entire Federal Government doesn't take long to follow suit with a comparable Federal Acquisitions Regulation ("FAR").  Recently, the DoD unveiled a proposal that would greatly impact the government contractor community, and in particular, small to medium-sized government contractors. 

The proposal, unveiled on January 15, 2010, is keynoted as follows:

"Contractor business systems and internal controls are the first line of defense against waste, fraud, and abuse. Weak control systems increase the risk of unallowable and unreasonable costs on Government contracts. To improve the effectiveness of  . . . oversight of contractor business systems, DoD is considering a  rule to clarify the definition and administration of contractor business systems . . ."

Business systems covered by the new rule would include:

 Accounting systems,
 Estimating systems,
 Purchasing systems,
 Earned value management systems (EVMS),
 Material management and accounting systems (MMAS), and
 Property management systems.

A new contract clause would require the Administrative Contracting Officer (ACO) to:

 ". . . immediately withhold ten percent of each of the Contractor's payments . . ." once the ACO makes a final determination that a business system contains deficiencies. 

The clause further specifies:

 ".  . if the ACO is withholding payments for deficiencies in more than one business system, the cumulative percentage of payments withheld shall not exceed fifty percent . . . if the ACO determines that there are one or more system deficiencies that are highly likely to lead to improper contract payments being made, or represent an unacceptable risk of loss to the Government, then the ACO will withhold up to one-hundred percent of payments until the ACO determines that the Contractor has corrected the deficiencies".

This clause would be required in solicitations and contracts when contemplating:

A cost-reimbursement, incentive type, time-and-materials, or labor-hour contract;
A fixed-price contract with progress payments made on the basis of costs incurred by the contractor or on a percentage or stage of completion;
A construction contract that includes the clause 52.232-27, Prompt Payment for Construction Contracts.  

While the proposed regulation relies in large part on existing guidance on determining adequacy of estimating systems, EVMS, MMAS and property management systems, new clauses are proposed that cover accounting systems and purchasing systems.  These new clauses greatly codify requirements that heretofore were matters of judgment and organizational style for many contractors.

Purchasing Systems

Another proposed clause, "Contractor purchasing system administration", describes a purchasing system as follows:

" . . the Contractor's system or systems for purchasing and subcontracting including make or buy decisions, the selection of vendors, analysis of quoted prices, negotiation of prices with vendors, placing and administering of orders, and expediting delivery of materials.."

Similar to the accounting system clause discussed to the right, the clause defines a deficiency as "a failure to maintain an element of an acceptable purchasing system" and provides another list of seventeen (17) "elements" of an acceptable system:

 
1.  Have an adequate system description including policies, procedures, and operating instructions that comply with the FAR and DFARS.

2.  Ensure that all applicable purchase orders and subcontracts contain all flow down clauses, including terms and conditions and any other clauses needed to carry out the requirements of the prime contract.

3.  Maintain an organization plan that establishes clear lines of authority and responsibility.

4.  Purchase orders are based on authorized requisitions and include complete history files.

5. Establish and maintain adequate documentation to provide a complete and accurate history of purchase transactions to support vendors selected and prices paid.

6. Apply a consistent make or buy policy that is in the best interest of the Government.

7. Use competitive sourcing to the maximum extent practicable and ensure debarred or suspended contractors are properly excluded from contract award.

8. Evaluate price, quality, delivery, technical capabilities, and financial capabilities of competing vendors.

9. Require management level justification and cost/price analysis as applicable for any sole or single source award.

10. Perform appropriate cost or price analysis and technical evaluation for each subcontractor and supplier proposal or quote.

11. Document negotiations in accordance with FAR 15.406-3.

12. Seek, take, and document appropriate purchase discounts, including cash discounts, trade discounts, quantity discounts, rebates, freight allowances, and company-wide volume discounts.

13. Ensure proper type of contract selection and prohibit issuance of cost-plus-a-percentage-of-cost subcontracts.

14. Maintain subcontract surveillance to ensure timely delivery of an acceptable product and procedures to notify the Government of potential subcontract problems that may impact delivery, quantity, or price.

15. Document and justify reasons for subcontract changes that affect cost or price.

16. Notify the Government of the award of an auditable subcontract and perform adequate audits of those subcontracts.

17. Enforce adequate policies on conflict of interest, gifts, and gratuities, including the requirements of the Anti-Kickback Act.
 
Important:  This pending change to requirements will surely place increased scrutiny on contractor business systems.  And, once this change is implemented, the consequences of non-compliance could be very serious.

ECC has teamed with JTH Consulting, LLC to offer a Special Series:  Helping Government Contractors Meet Today's Challenges.  This article is our first installment in the series of articles and upcoming training sessions.  Contact info@ecohencpas.com if you would like more information on the upcoming training session.

Payroll Network recently hosted a panel discussion at the Congressional Country Club in Bethesda, Maryland, where four government contract specialists gathered to share their insider's view and let attending government contractors know just what they need to have in their human capital management and regulatory compliance toolkit.

Attendees learned how to avoid pitfalls and penalties, and maximize efficiencies by relying on best-of-breed solutions for recruiting, HR management, accounting services, and payroll services.

Click here to view the government contractor tool kit with invaluable information and checklists for your company's success.