Considering Accounting System Deficiencies

[Don Mansfield]

I was reading through the new DFARS rule on Contractor Business Systems and I came across the following at DFARS 242.7502(g)(2):

The contracting officer responsible for negotiation of a proposal generated by an accounting system with an identified deficiency shall evaluate whether the deficiency impacts the negotiations. If it does not, the contracting officer should proceed with negotiations. If it does, the contracting officer should consider other alternatives, e.g.?

(i) Allowing the contractor additional time to correct the accounting system deficiency and submit a corrected proposal;

(ii) Considering another type of contract, e.g., a fixed-price incentive (firm target) contract instead of a firm-fixed-price;

(iii) Using additional cost analysis techniques to determine the reasonableness of the cost elements affected by the accounting system's deficiency;

(iv) Segregating the questionable areas as a cost-reimbursable line item;

(v) Reducing the negotiation objective for profit or fee; or

(vi) Including a contract (reopener) clause that provides for adjustment of the contract amount after award.

Bold added.

So, the guidance for negotiating a proposal that is affected by an accounting system deficiency includes using a pricing arrangement that requires an adequate accounting system. Does this make sense to anybody?

[Don Mansfield]

Looks like there is similar guidance if a proposal is affected by a purchasing system deficiency at DFARS 244.305-70(f)(2):

The contracting officer responsible for negotiation of a proposal generated by a purchasing system with an identified deficiency shall evaluate whether the deficiency impacts the negotiations. If it does not, the contracting officer should proceed with negotiations. If it does, the contracting officer should consider other alternatives, e.g.?

(i) Allowing the contractor additional time to correct the purchasing system deficiency and submit a corrected proposal;

(ii) Considering another type of contract, e.g., a fixed-price incentive (firm target) contract instead of firm-fixed-price;

(iii) Using additional cost analysis techniques to determine the reasonableness of the cost elements affected by the purchasing system's deficiency;

(iv) Segregating the questionable areas as a cost-reimbursable line item;

(v) Reducing the negotiation objective for profit or fee; or

(vi) Including a contract (reopener) clause that provides for adjustment of the contract amount after award.

So if a proposal is affected by an accounting and/or purchasing system deficiency, the contracting officer should consider using a pricing arrangement that places more cost risk on the Government. I don't get it.

[Whynot]

The restriction in 16.403-1©(1) seems to be in conflict with the remedy in 242.7502(g)(2). Seems a better remedy would be to move to FFP and avoid 252.242-7006 all together - see prescription in 242.7503.

[Whynot]

I also noted that the DFARS still use the old terminology- "cost or pricing data" and "information other than cost or pricing data" instead of the new terminology found in FAR - "certified cost or pricing data" and "data other than certified cost or pricing data". Do you think that the reference to "cost or pricing data" in the current Business Systems rule refers to "certified cost or pricing data" or to both "certified cost or pricing data" and "data other than certified cost or pricing data"?

I think it refers to "certified cost or pricing data", but how do you find out for sure?

[Don Mansfield]

I just sent that comment in. I think they mean "certified cost or pricing data."

[ContractPriceAnalyst]

I was reading through the new DFARS rule on Contractor Business Systems and I came across the following at DFARS 242.7502(g)(2):

Bold added.

So, the guidance for negotiating a proposal that is affected by an accounting system deficiency includes using a pricing arrangement that requires an adequate accounting system. Does this make sense to anybody?

I can't believe that got overlooked by the DAR council! The recommendations that you had bolded do make sense for an estimating system deficiency but definitely not as corrective action for an inadequate accounting system.

[Retreadfed]

I can't believe that got overlooked by the DAR council! The recommendations that you had bolded do make sense for an estimating system deficiency but definitely not as corrective action for an inadequate accounting system.

That requirement has been in all three versions of the rule.

[Guest Vern Edwards]

The rule is not be as goofy as it seems. The passage quoted by Don is from a paragraph entitled, "Mitigating the risk of accounting system deficiencies on specific proposals." The first subparagraph says: "Field pricing teams shall discuss identified accounting system deficiencies and their impact in all reports on contractor proposals until the deficiencies are resolved." Subparagraph (2) recommends ways to continue with negotiations when an audit report questions a cost due to an undesirable feature of the offeror's accounting system.

The two proposed solutions that are bothering Don -- switching from FFP to FPI or isolating the cost as a cost-reimburseable line item -- would be applicable when a CO is negotiating a firm-fixed-price. They would apply when the parties are having trouble reaching agreement on price due to the audit report. The recommendation is that instead of staying hung up on price or agreeing to a price that might be higher than it ought to be, the parties should consider moving from FFP to a type of agreement in which the cost in question could be treated under the principles of allowability in FAR Subpart 31.2 after award, either (1) during negotiations for a final price under an FPI incentive price revision clause or (2) by isolating the cost in question for treatment as a cost-reimbursement item. The recommended solutions would decrease the risk to the government of agreeing to a firm-fixed-price that might be too high, because the government would have the right after award to disallow all or any part of the cost that it felt was due to an unacceptable feature of the accounting system. Moreover, under an FPI contract, the contractor would presumably have a reason to keep the cost in question under control.

I think the DFARS rule makes sense.

[Don Mansfield]

Vern,

FAR 16.301-3(a)(3) states that a cost-reimbursement contract may be used only when, among other things, "The contractor?s accounting system is adequate for determining costs applicable to the contract." FAR 16.403-1( c )(1) states that an FPI(F) contract may only be used when "The contractor?s accounting system is adequate for providing data to support negotiation of final cost and incentive price revision." If a contractor's accounting system contains an unresolved "significant deficiency", then the implication at DFARS 242.7502(d)(3)(i)((2) and DFARS 252.242-7006(d)(3)(iii) is that the contracting officer is to disapprove the accounting system. (I acknowledge that DFARS 242.7502(g)(2) does not use the term "significant deficiency." Instead, it uses the word "deficiency", which I assume includes a significant deficiency.) Do you think that an accounting system can be both disapproved and meet the requirements at FAR 16.301-3(a)(3) or FAR 16.403-1( c )(1)?

[Guest Vern Edwards]

I'm not concerned about any of that. You asked if anybody thought the DFARS passage made sense. I think it does, and I said why. DFARS is not talking about an entire contract estimated cost or target cost, but an "area" of the cost under discussion in an FFP negotiation. And DFARS is not talking about an accounting system that has been declared entirely inadequate, but one with "an identified deficiency." Resorting to FPI or to a CR line item enables the parties to defer their disagreement to a later time, gives them time to work out their differences, and gives the government the authority to disallow the cost if the problem cannot be solved during performance. It makes perfect sense to me. I believe in adhering to regulations, but I think you're over-applying 16.301-3(a)(3) and 16.403-1( c )(1).

[Don Mansfield]

I assumed that if a contractor's accounting system were disapproved, they wouldn't be able to receive cost-reimbursement or incentive contracts. Maybe that's wrong. I'm going to do some more research.

[Retreadfed]

I assumed that if a contractor's accounting system were disapproved, they wouldn't be able to receive cost-reimbursement or incentive contracts. Maybe that's wrong. I'm going to do some more research.

Don, you are touching on something I have been wondering about. If a pre-award survey is done, the criteria listed on the SF 1408 are used to determine if the contractor has an adequate accounting system. The SF 1408 only lists 12 attributes, but the interim DFARS 252.242-7006 lists 18, some of which have sub-criteria. Which criteria are to be used to trigger action under 242.7502(g)? Further, what is the interplay between 242.7502(g) on the one hand and FAR 16.301-3(a)(3) and 9.104-1(e) on the other hand?

[Don Mansfield]

Maybe there is no interplay. Maybe the DFARS standards for accounting systems are only meaningful in the context of determining whether the Government should withhold payment and the standards for accounting systems stated on the SF 1403, in FAR Part 16, and FAR 9.104-1(e) are only meaningful in determining whether the contractor's accounting system is adequate to perform a cost-reimbursement or incentive contract.

[dlgsharp]

Retreadfed, on 15 June 2011 - 01:48 PM said:

What is the interplay between 242.7502(g) on the one hand and FAR 16.301-3(a)(3) and 9.104-1(e) on the other hand?

Don Acquisition replied that there might not be an interplay. I would like to get some more thoughts on this matter. DFARS 242.7502(g), provides guidance on how to mitigate risk stemming from an accounting system deficiency. One of the alternatives is to pursue a different contract type. My assumption regarding this alternative is that you could avoid accounting system risk by using a FFP or Firm-Fixed-Price, Level-of-Effort Term Contract. Question 1: is this a good assumption?

DFARS 242.7502(g) also suggests other alternatives, such as reducing the fee objective or using a re-opener. These alternatives suggest that you would award a cost contract in spite of an accounting system deficiency. Question 2: are these still viable courses of action if the contractor has a disapproved accounting system?

FAR 16.301-3(a)(3) requires an adequate accounting system in order to enter into a cost reimbursable contract. Question 3: Could a contractor with a disapproved accounting system meet this requirement, assuming that the contractor has approved Corrective Action Plans and the government pursues some risk mitigation technique, per DFARS 242.7502(g)?