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© Grant Thornton. All rights reserved.

Warning: What you don't know will endanger you.

A Government Contractor’s survival guide to navigating

complex rules and regulations imposed by the DCAA and

FAR

October 4, 2012

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-Today's Presenters

Julian Rosenberg

Government Contracting Practice Leader 703.637.4100

Julian.Rosenberg@us.gt.com Ret. Vice Admiral Lou

Crenshaw

National A&D Practice Leader 703.837.4430

Lou.Crenshaw@us.gt.com

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© Grant Thornton. All rights reserved. 6

-Agenda

• Welcome & View from inside the beltway

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Welcome & What's happening inside the beltway

Vice Admiral Lou Crenshaw USN (Ret.), Aerospace & Defense

Practice Leader Grant Thornton LLP

Grant Thornton Partner and former senior resource and

requirements manager of the U.S. Navy where he was

responsible for overseeing an annual budget of $130bn

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88

Full range of services

: Audit, Tax &

Advisory including Corporate Finance

• 529 offices in

110 countries with over

30,000 partners and employees

worldwide. 52 US offices with over 5,000

people. Worldwide revenues of

$3.6 billion

• Ranked as a top 25 Advisor worldwide and

one of very few on that list

focused on the

middle market

.

Grant Thornton is one of the largest professional service

organizations in the world

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99

View from inside the beltway

• Budget

• Sequestration

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Warning: What you don't know will endanger you.

Julian Rosenberg, Government Contracting Practice Leader,

Grant Thornton LLP

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11 11

Our Government Contracting Practice

• We help clients:

– Identify, evaluate, and prioritize the risks that are inherent in their

government contracting compliance environment.

– Assess the effectiveness and efficiency of internal controls that have

been put in place to manage government contracts and industry

guidance compliance.

– Focus on core government contract requirements, including the

Federal Acquisition Regulation (FAR), Cost Accounting Standards

(CAS), AASHTO Audit Guide, and other specific contractual

requirements that are critical to many federal, state and local

government contracts.

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12 12

The Future

• The future may bring:

– increased Terminations for Convenience

– Mergers & Acquisitions

– Government looking for any way to reduce costs

and/or recover funds

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13 13

The Future

• Increased DCAA & DCMA attention to Business

Systems Compliance

• DCMA now has oversight of the following contractor

business systems:

- Accounting

- Cost Estimating

- Earned Value Management (EVM)

- Material Management and Accounting

(MMAS)

- Property Control

- Purchasing

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14 14

The Future

Why the changes?

• Confusion and Inconsistency

– In language, e.g., "approved", "adequate",

"acceptable"

– Regulatory Requirements

– Authority of DCAA & DCMA

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15 15

Business Systems Compliance

Intent?

• Improve the effectiveness of government oversight

• Weak business systems increase risk of:

– Inflated contract prices/costs

– Paying costs that are unallowable, unreasonable

and not allocable to the contract

– Inflated subcontract costs

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Business Systems Compliance

The Plan?

• Contracting Officer, in consultation with DCAA, shall:

– Determine acceptability of contractor's business

systems

– Approve or disapprove systems

– Pursue correction of

significant deficiencies

– Withhold payments, until

significant deficiencies

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Business Systems Compliance

"Significant Deficiency" Definition

• Significant Deficiency: A shortcoming in the system

that materially affects the ability of government officials

to rely upon information produced by the system

needed for management purposes

• Deficiency: Failing to meet one or more Systems'

Criteria

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Accounting System Criteria

1.

Sound internal controls

2.

Segregation of direct from indirect costs

3.

Accumulate direct costs by contract

4.

Accumulate direct costs to intermediate &

final objectives

5.

Accumulate costs in general ledger

6.

Reconcile subsidiary ledgers to general

ledger

7.

Approve/document adjusting entries

8.

Periodic monitoring of system

9.

Timekeeping system for employees

10. Labor distribution system for charging

direct & indirect labor

11. Monthly posting of books of account

12. Excludes unallowable costs (FAR Part 31

& other contract provisions)

13. Identify costs by CLIN & units if required

by contract

14. Segregate preproduction from production

costs

15. Cost accounting info required by contract

clauses & to readily calculate indirect cost

rates from books of accounts

16. Billings can be reconciled to cost

accounts for current & cum amounts

claimed & to comply with contract

17. Adequate, reliable data for pricing

follow-on acquisitifollow-ons

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Executive Compensation

• ASBCA Nos. 56105, 56322: DCAA Executive

Compensation Approach Fatally Flawed

“…we conclude that there are

statistical flaws in the government

methodology for determining

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Other Issues

• Small companies are not equipped to deal with DCAA &

DCMA pressures - They will be taken advantage of!

• 36% of government IT workforce is over 50 years old

• Most people believe the government will continue to kick

the can down the road so the next Congress has to deal

with the issues

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21 21

FAR Council Proposed Basic Safeguarding for Government

Information

• The proposed FAR clause would mandate “basic safeguarding” measures for information “provided by or generated for” the government which “resides on or transits through [contractor] information

systems.” Required protective measures would include:

Public computers: A prohibition on processing information on public computers (e.g., public kiosks, hotel business centers) and computers that do not have a form of access control.

Public websites: A prohibition on posting government information on websites that do not control access by user ID/password, user certificates, or other technical means.

Electronic communications: Transmission of email, text messages, blogs, and similar communications using technology and processes that provide “the best level of security and privacy available, given facilities, conditions, and environment.”

Voice and fax communications: Transmission of voice and fax messages only when the sender has a “reasonable assurance that access is limited to authorized recipients.”

Physical and electronic barriers: Protection of information by at least one physical and one electronic barrier (e.g., locked container or room, login and password) when not under direct individual control. • Mobile media: Sanitizing media such as flash drives and external hard drives before disposal.

Intrusion protection: Regularly updating malware protection measures (e.g., anti-virus, anti-spyware) and applying security-relevant software upgrades (e.g., patches, service-packs, and hot fixes).

Subcontractors: Transmission of information to subcontractors only when they require such information for purposes of contract performance, and when they comply with the FAR clause (which is a

mandatory flowdown).

• By its own terms, the clause would apply broadly to nearly all federal contracts and orders—including those for commercial items and commercially available off-the-shelf items—when the contractor’s information system may contain information provided by or generated for the government. The clause would not apply to “public information,” defined as information that an agency discloses, disseminates, or makes available to the public.

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FAR Council Proposed Basic Safeguarding for Government

Information

Physical and electronic barriers

: Protection of information by at least one physical and

one electronic barrier (e.g., locked container or room, login and password) when not

under direct individual control.

Mobile media

: Sanitizing media such as flash drives and external hard drives before

disposal.

Intrusion protection

: Regularly updating malware protection measures (e.g., anti-virus,

anti-spyware) and applying security-relevant software upgrades (e.g., patches,

service-packs, and hot fixes).

Subcontractors

: Transmission of information to subcontractors only when they require

such information for purposes of contract performance, and when they comply with the

FAR clause (which is a mandatory flowdown).

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FAR Council Proposed Basic Safeguarding for Government

Information

By its own terms, the clause would apply broadly to nearly all

Federal contracts and orders—including those for commercial

items and commercially available off-the-shelf items—when

the contractor’s information system may contain information

provided by or generated for the government. The clause

would not apply to “public information,” defined as information

that an agency discloses, disseminates, or makes available to

the public.

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© Grant Thornton LLP. All rights reserved.

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© Grant Thornton LLP. All rights reserved.

Contact Information

Lou Crenshaw Grant Thornton LLP

333 John Carlyle, Suite 500 Alexandria, VA 22314, USA T +1 703 837 4430

E Lou.Crenshaw@us.gt.com Julian Rosenberg

Grant Thornton LLP

2010 Corporate Ridge, Suite 400 McLean VA USA T: +1 703 637 4100 E: Julian.Rosenberg@us.gt.com Camila Wingrove Grant Thornton LLP 175 W. Jackson, 20thFloor Chicago, IL 60602, USA T +1 704 280 0331 E Camila.Wingrove@us.gt.com

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© Grant Thornton LLP. All rights reserved.

Disclaimer

This Grant Thornton LLP presentation is not a comprehensive analysis of the

subject matters covered and may include proposed guidance that is subject to

change before it is issued in final form. All relevant facts and circumstances,

including the pertinent authoritative literature, need to be considered to arrive at

conclusions that comply with matters addressed in this presentation. The views

and interpretations expressed in the presentation are those of the presenters and

the presentation is not intended to provide accounting or other advice or guidance

with respect to the matters covered.

For additional information on matters covered in this presentation, contact your

Grant Thornton LLP adviser.

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© Grant Thornton LLP. All rights reserved. 2727

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