CohnReznick LLP

UPDATES AND INITIATIVES OF THE DCMA & DCAA

June 18, 2020

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PLEASE READAny advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice.

No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

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REPORTS REFERENCED IN PRESENTATION• Federal Registers

• NDAA FY19, 20, 21

• DCAA Report to Congress – March 2020

• GAO report: Analysis of Section 820 of

the FY17 NDAA. GAO-20-266

• DCAA & DCMA FY 2020

President’s Budget dated March

2019

• Section 809 Panel Volume 3

• GAO report: Analysis of DOD

Policies and Regulations GAO-

19-212

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AGENDA• State of the Agencies – DCAA/DCMA• Select NDAA provisions• Other GovCon News – CAS Board, SBA, OFPP, etc• COVID-19 Impacts• Business System Status• FAR & DFAR Rules Looming• Reminders

STATE OF THE AGENCIES– DCMA/DCAA

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DCMA AND DCAA DIRECTORS – WELCOME BASSETT

Assumed leadership on 6/4/2020

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WHO’S DCMA AND DCAA?Christine Williamson, CPA, PMP (DCMA)Partner Government Contracting Industry PracticeTysons, VA

Kristen Soles, CPA (DCAA)Partner & Industry Practice LeaderGovernment Contracting Industry PracticeTysons, VA

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DCMA AND DCAA BY THE NUMBERS

Date as of 1/23/2020

Civilians (47% Veterans) 11,987

Number of Military (4.5%) 569

Total 12,556

Corporate Operation Directorates 3

Contract Management Offices 47

Serviced Contractor Locations 15,129

Number of Active Contracts 308,749

Date as of 3/31/2020

Auditors 3,994

Support Staff 516

Total 4,510

Corporate Operation Directorates 4

CPAs 1,009 (22%)

Other Professional Certifications 1,524

Advanced Degrees 2,250

DCAA - CADS 1) Massachusetts (Raytheon, General Dynamics, BAE) 2) Virginia (Northrop Grumman) 3)Missouri (Boeing, Honeywell), 4) Texas (Lockheed Martin)

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DCAA AND DCMA PRESIDENTS BUDGET 2018 – 2020 ($ in thousands)

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DCMA STRUGGLES/SUCCESSES• CBAR System – only as good as CO input

• Personnel Changes and Reductions

• Reforming of the Fourth Estate (this affects DCAA too)

• Consolidation activity – Move to Centralized vs de-centralized functions for efficiencies and auditability

• Focus on high risk/high priority programs

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DCAA STRUGGLES/SUCCESSES• Focused on business systems, TINA, labor and material reviews and

CAS audits

• Turning adequacy checks around much more quickly post NDAA requirement (but were very picky)

• In compliance with 99% of audits being completed within one year in 2019

• Awarded 7 contracts to $3.7M to third party audit firms for 101 incurred cost audits

• Beginning to adopt / rollout / train new audit sampling methodology

• Meets regularly with the AIA

DCAA REPORT TO CONGRESS HIGHLIGHTS

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INCURRED COST – UPDATE ON PROGRESS

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NDAA COMPLIANCE

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FY17 NDAA REQUIREMENT TO COMPLETE AUDIT WITHIN 12 MONTHS OF ADEQUATE SUBMISSION

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AUDITS COMPLETED

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AUDITS COMPLETED – METHODS CLOSED

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INCURRED COST AVERAGE DAYS TO COMPLETE

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COST QUESTIONED SUSTAINED

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COST QUESTIONED SUSTAINED

DCAA – RESULTS OFFY18 & FY19 INITATIVES

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2018 RESULTS TO CONGRESS• Engagement with 809 panel, adopting risk and materiality standards

• Development Program in Leadership - 18 month executive level program to help senior level career employees prepare for leadership positions in the federal government

• Catchup of the backlog

• No language around business systems

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2019 RESULTS TO CONGRESS• Independent Public Accountants Contracted for Incurred Cost Audits

• TIN audits

• Leveraging Technology to Improve the Audit Process

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BUSINESS SYSTEM INITIATIVE

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NEW MRD’S

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RISK BASED SAMPLING AND MATERIALITYAdopted 809 panel recommendations for risk based sampling of incurred cost submissions.

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RISK ASSESSMENT FRAMEWORK

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SELECTION PROCESS• DCAA Auditors use the new risk-based sampling eligibility determinations

• They code the ICPs as eligible or ineligible for sampling in DMIS (DCAA Management Information System)

• Information is pulled from the DMIS at the regional level to perform the sampling of the ICS strata.

• Unsure the % chosen from each strata or how they determine which ones ICP’s do versus which ones DCAA completes.

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MATERIALITY & PROFESSIONAL PRACTICE GUIDE

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INCURRED COST CHANGES• Grumblings about 941 rec being a waste of time, CACW’s as well

• AIA is working with DCAA on ICS, to make less burdensome, fewer schedules, maybe not do CACWS, maybe no Schedule D. Eliminate L and O, streamline Sch J, Sch K – consolidate down to Labor vs Non-Labor billed, submit CACWS 60 days after rate settlements

• Could cause problems if DOD adopts changes but what about everyone else?

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DEFECTIVE PRICING AUDITS

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DEFECTIVE PRICING AUDITS

TIN Audit ProgramActivity Code 42000

DCMA PRIORITIES, INITIATIVES & CBAR UPDATES

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DCMA ORGANIZATION CHART

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WE ARE…………….THE NATION’S WARFIGHTER PRODUCT DELIVERY ORGANIZATION

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ROI COMPARISON OF 2017 TO 2019DCMA budget compared to savings

2019 2018 2017

Savings to Govt $2.8B $4.83B $2.8BBudget $1.44B $1.37B $1.35BROI 2 : 1 3.5 : 1 2 : 1

Cost Recovered $639M $1.68B $946MCost Saved $37M $353M $250MCost Avoided $2B $2.81 $1.6B

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DCMA 5 GOALS FY19-22 -

ALL EMPLOYEES RESPONSIBLE

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FY20 BUDGET PRIORITIES• Cutting on items that aren’t part of the goals:̶ $1.8M in salaries reductions HQ̶ $1M in travel by leveraging technology and telework̶ Commercial Pricing Centers of Excellence̶ Facilities̶ Contract Closeout initiative

• Spending more on high risk/high reward̶ Joint Strike Fighter, Long Range Missile, and FIAR̶ Audit functions̶ Consolidation of property audits̶ IT Cyber folks̶ DISA

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BUSINESS SYSTEM RESPONSIBILITIES – DCMA & DCAA

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DCMA CBAR UPDATE• CBAR (Contractor Business Analysis Repository)

• A secure system to share information between DOD procurement andDCMA

• Information about each and every government contractor

• Supports price negotiations and awards

• Ask for your CBAR results and often

• Accounting, Property and Purchasing are the top 3 reviewed (in DMV area replace Property with Estimating as top 3)

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BUSINESS SYSTEMS DISAPPROVALS• PCO should insert the clause or delegate authority to do so (if missing)

– DCMA – INST 131• Significant deficiency - a shortcoming that materially affects the DOD to rely

upon the information produced by the system

• DCMA HQ CBS REVIEW PANEL –– Meet to review the disapproval before the contractor is notified in writing– 348 disapprovals since September 2011– Final determination 30 days after contractors reply– Corrective action plan– Provide withhold instructions

Data Source: CBAR eTool, as of May 29, 2020

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APPROVAL STATUS– WHAT IS THIS SAYING?

Data Source: CBAR eTool, as of May 29, 2020

As of Nov 2017 As of Jan 2019 As of May 2020 Change

Accounting 3,707 3,747 3,731 (16)

Property 2,389 2,440 2,410 (30)

Purchasing 890 857 866 9

Estimating 727 686 687 1

EVMS 323 267 235 (32)

MMAS 354 311 311 -

8,390 8,308 8,240 (68)

Withholds $200M $293M $12M ($281M)

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WHAT BUSINESS SYSTEM IS MOST COSTLY?

Data Source: CBAR eTool, as of May 29, 2020

System Withhold 1/19 Withhold 5/20

change 19

over 20

Accounting 130,000$ 349,000$ 168%

Estimating 275,200,000$ 4,738,000$ -98%

EVMS 1,200,000$ 1,815,000$ 51%

MMAS 5,600,000$ -$ -100%

Property 4,000,000$ 935,000$ -77%

Purchasing 6,400,000$ 3,830,000$ -40%

Totals 292,530,000$ 11,667,000$ -96%

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BUSINESS SYSTEMS UPDATE – YEAR OVER YEAR –THEY ARE AGING

2017 2019 2020

% change 19

vs 20

Approved 8390 8308 8240 -0.8%

Disapproved 71 83 73 -12.0%

Not Evaluated 233 259 316 22.0%

Data Source: CBAR eTool, as of May 29, 2020

OTHER RELEVANT ACTIVITY, TRENDS AND REGULATIONS

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CAS BOARD ACTIONQuite a few regular meetings during the year

Agenda• Pension Adjustments for Extraordinary Events CAS 412 Composition and Measurement

of Pension Costs and CAS 413, Pension Adjustments for Extraordinary Events (i.e., plan terminations, plan curtailments, and segment closings)

• CAS Conformance to GAAP (Section 820 of the FY17 NDAA)• CAS Applicability Thresholds, 809 Panel of 16 NDAA asked they be increased to $100M

(if the business unit is primarily commercial sales and wouldn’t otherwise be subject to CAS)

• CAS Board may have their first report to Congress coming (Section 820 of FY17 NDAA)• GAO report about CAS Board activities showed them on track GAO-20-266

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CERTIFIED COST OR PRICING DATA THRESHOLDSSeveral class deviations in response to FY18 NDAA Section 811 for all applicable contracts after 7/1/18, increasing the threshold from $750,000 to $2,000,000.

• DoD 2018-O0012 – May 31, 2018 (still pending in FAR 2018-005)

• NASA 2018-N015 – July 1, 2018

• GSA CAAC Letter 2018-03 – May 3, 2018

Remember OFPP says CAS threshold = certified cost or pricing data threshold

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CMMC TIMELINE• The January 2020 V1. provides the basis for the training requirements for certification. The DoD has signed a

memorandum of understanding with the CMMC Accreditation Body, a nonprofit organization that will train and certify third-party assessment organizations (C3PAOs) on CMMC requirements and auditing processes.

• In late 2020, industry should begin to see the CMMC requirements as part of Requests for Information (RFIs) and Request for Proposals (RFPs). The DOD plans to introduce CMMC requirements in solicitations on a gradual basis in late 2020, starting with 10 select requests for proposals (RFPs) and 10 requests for information (RFIs). Compliance audits are most likely to start in late 2020 or early 2021, after the C3PAOs are identified and accredited. Once the C3PAOs are accredited, DOD contractors will coordinate directly with them to schedule a CMMC assessment.

January2020

Completion of CMMC Model v1.0

May - June2020

Finalization CMMC training and assessment guidelines

June – July 2020

Initiation of CMMC training for third-party assessment organizations (C3PAOs)

Late 2020

Initial inclusion of CMMC requirements in RFIs and RFPs

2025

All RFI’s and RFPs will have the CMMC requirements

2020 2025

COVID-19 IMPACTS

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WHAT HAVE WE LEARNED SINCE MARCH 13

• CARES ACT

• PPP

• 3610

• Remote working is almost 100% possible

• FFCRA, Retention Credit, Deferral of SS Tax

• COVID-19

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HOW WILL THE CREDIT BE APPLIED TO CONTRACTS?

• FFCRA (Medical/Sick) & Retention Credit – thru your 941 within the fringe accounts you’ve set up

• 3610 – reduce the amount you apply for by PPP and FFCRA

• PPP – if forgiven….what benefit does the govt get and how: ̶ thru billings?̶ thru indirect rates?̶ thru new mods?̶ thru final bills?̶ thru a special audit?̶ No benefit, no credit, not sure…..stay tuned

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3610 PROVISION – HAVE YOU TALKED TO YOUR CONTRACTING OFFICER?

• Agencies are asked to consider reimbursing contractors to keep employees and/or subs in a ready state; we must have a “mission-ready” workforce

• Not to exceed an avg of 40 hours/week

• Lost time - Includes paying direct for paid leave including sick in addition to worksite closures, personnel quarantines, state/local restrictions, unable to telework based on their job duties, or other COVID-19 reasons

• Jan 31 – Sept 30, 2020

• Minimum contract billing rates used for reimbursement

• Reduce reimbursement for any FFCRA credits & PPP loan to be forgiven (can't double dip)

• Appropriate documentation is a MUST – this Class Deviation memo is a must read

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PROVIDING CONTRACTING OFFICERSACQUISITION FLEXIBILITIES DURING COVID-19

• For any contract to be awarded and performed, or purchase to be made to acquire supplies/services used to support COVID-19 activities: ̶ inside the United States, the "micro-purchase threshold" is $20,000 and the

"simplified acquisition threshold" is $750,000;̶ outside the United States, the "micro-purchase threshold" is $30,000 and the

"simplified acquisition threshold" is $1,500,000; and

• For the acquisition of commercial items, the threshold for use of simplified acquisition procedures for certain commercial items is $13M.

• Stafford Act & DPAS rated contracts Invoked by President Trump

• OTA – higher threshold/reduced approvals ($7B spent by DOD thru 2019)

• Stimulus provided $350B to Agencies across the board

DFARS / FAR STANDARDS UPDATE

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DFARS RULES PENDING• 2020-D006 206, 219 (S) Justification and Approval Thresholds for 8(a)

Contracts

• 2019-D041 Strategic Assessment and Cybersecurity Certification Requirements

• 2018-D009 202, 212, 215, 216, 233, 252 (S) Postaward Debriefings

• 2017-D042 204.804, 252.204 Expediting Contract Closeout

• 2017-D021 242, 252 (S) Contractor Business Systems

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FAR RULES PENDING• 2020-005 (S) Explanations to Unsuccessful Offerors on Certain Orders

Under Task and Delivery Order Contracts

• 2019-014 (EO) Strengthening America's Cybersecurity Workforce

• 2018-018 (S) Revision of Definition of "Commercial Item"

• 2018-016 (S) Lowest Price Technically Acceptable Source Selection Process

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8 YEARS OF LEGISLATION IN 6 WEEKS!

• 3610 CARES Act provision – (yes govcons we got in the CARES act!)

• Progress Payment acceleration – to 90% from 80%

• Work remote requirement – maintain the workforce (OMB)

• Class Deviation Notices – deviate from the FAR/DFAR – many are coming out…set to your favorites

• Prompt Pay - accelerate small business payments (prime and sub) to 15 days

Point out a few that matter (new guidance coming out daily – the new normal)

REMINDERS

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SOMETHING OLD, NEW, BORROWED & BLUE• Review Business System Policies and CBAR (Old)̶ Use the business system checklist

• Be on the lookout for (New) 2020 GAUGE to come out late July̶ Compare your indirect rates and FTEs

• Update Training ̶ Unallowables̶ Code of Conduct̶ OCI

• Follow DPC website (Blue) for 3610 and PPP guidance

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DUE DATE REMINDERS

• ICE due 6/30

• Certain govt reporting extended

• 2019 Tax returns due 7/15, check your state for dates

• 1Q&2Q estimated tax payments due 7/15

• Revenue 606 Standard was pushed to 2021 if not implemented yet

• Lease 842 standard was moved to 2021 for non-public

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ICE AUDIT FOCUS - EXECUTIVE COMPENSATION & BONUS PLANS

• Analyze Compensation of the top 5 highly paid – NOT JUST EXECs

• Document the analysis with survey findings, resumes, financial benchmarks

• Voluntarily delete the amounts before sending trial balance to auditors or before filling out ICE

• Document your bonus plan with performance metrics and support calculations in writing

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EXECUTIVE COMPENSATION LIMITSAmounts:o $512,000 for 2017o $525,000 for 2018o $540,000 for 2019o $555,000 for 2020

• Current FY Cap Amount = Prior FY Cap Amount x Change in Employment Cost Index for all workers [i.e., BLS Table 4. Compensation (Not Seasonally Adjusted) Employment Cost Index for total compensation, for civilian workers, by occupational group and industry. (Twelve Months Ended September 30)]. Source: https://www.bls.gov/web/eci/ecicois.pdf

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STAY TUNED – THERE IS NEVER A DULL MOMENT!• Stay tuned to see what happens with DCAA/DCMA̶ 2021 NDAA – what could be in store with CAS?̶ New Director of DCMA̶ Section 893 of FY17 NDAA impact business system audit criteria̶ IPA audits increasing

• Stay tuned to see what’s in store for the industry ̶ Remote work policies̶ Virtual Audits̶ CMMC̶ Cost of Idle Facilities̶ Fall out from PPP

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WE’RE HERE FOR YOU

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QUESTIONS? CONTACT US

KRISTEN SOLES, CPAManaging Partner, Advisory –Global Consulting Solutions and Government Contracting Industry Leaderkristen.soles@cohnreznick.com

JEFF SHAPIRO, CPAPartner, Government Contracting, CohnReznick Global Consulting Solutionsjeff.shapiro@cohnreznick.com

CHRISTINE WILLIAMSON, CPA, PMPPartner, Government Contracting, CohnReznick Global Consulting Solutionschristine.williamson@cohnreznick.com

RICH MEENEPrincipal, Government Contracting, CohnReznick Global Consulting Solutionsrich.meene@cohnreznick.com