Welcome to the Cost Corner. This is the first in a series of articles exploring the complex cost and pricing regulations that apply to government contractors. This article provides an overview of the regulatory framework and its rationale. Subsequent articles will explain specific aspects of the regulations in further detail and provide periodic updates on new developments.
Auditing by the Defense Contract Audit Agency (“DCAA”) is a ubiquitous cost of doing business with the Department of Defense, and one which many defense contractors have come to dread. Unfortunately, far too often the DCAA’s audit reports rely upon faulty evidence and/or unreasonable interpretations that ignore the plain language of contracts, procurement regulations, and existing decisional law. When this happens, contractors typically have no choice but to engage in the costly process of challenging the audit findings and, when contracting officers lack the will to butt heads with the DCAA, to pursue litigation (and incur unallowable costs) to obtain relief from noncompliance determinations that never should have issued in the first place.
Continue Reading Clearly Erroneous Audit Assertion – An Expensive Thorn in Contractors’ Sides
Note: This post was originally published in the October 2017 issue of the National Defense Industrial Association’s National Defense magazine.
Recent studies show that the percentage of overall research and development spending sponsored by the government has dropped sharply over the last 50 years.
Whereas government funding accounted for 67 percent of R&D in 1964, it accounted for 23 percent in 2015, a 44 percent reduction. For the government, this is not a salutary development. Increasingly, “state of the art” is being defined by the commercial marketplace, without government participation and often without its access to the resulting technological advances.
Continue Reading Industry Struggles With Ever Changing Acquisition Rules
Volume X – Accounting for the Cost of Business Combinations Under Government Contracts
Mergers and acquisitions create additional costs and complex accounting issues for government contractors. There are fees for accounting, legal, and business consultants. There may be restructuring costs associated with combining business operations. Segments may be closed and retirement plans may be terminated. Golden handcuffs and golden parachutes are also common. Assets may be revalued, goodwill may be created, and there may be changes in cost accounting practices.
The Department of Defense (“DoD”) recently proposed to make specified costs allowable that are associated with discovering and correcting counterfeit or suspect counterfeit electronic parts. DoD’s proposed rule would amend the Defense Federal Acquisition Regulation Supplement (“DFARS”) to implement the National Defense Authorization Act (“NDAA”) for Fiscal Year 2016.
Continue Reading DoD Proposes Cost Allowability Rule for Correcting Counterfeit Electronic Parts
The Department of Defense intends to issue a proposed rule to ensure that substantial future independent research and development (“IR&D” or “IRAD”) expenses, which can be used as a means to reduce bid prices in competitive source selections, are evaluated in a uniform way during the competitive process. 81 Fed. Reg. 6488 (February 8, 2016). However, interested parties and industry leaders can help formulate this regulation before the DoD issues the proposed rule.
Continue Reading DoD Seeks Public Comments Before Issuing a Proposed Rule on IR&D Costs
Last month we wrote about a provision in the proposed 2013 National Defense Authorization Act (“NDAA”) that would have given the Defense Contract Audit Agency (“DCAA”) statutory authority to demand a company’s internal audit reports in order to audit the efficacy of a company’s internal business systems. Surprisingly, the authorization, as originally proposed, was modified in the final legislation. While Congress directed DCAA to issue new guidance regarding auditor access to internal audit reports, Congress stopped short of giving DCAA actual authority to demand such reports. As such, contractors will remain at loggerheads with DCAA auditors who try to exceed their statutory authority.
The Defense Contract Audit Agency (“DCAA”) has long sought access to contractors’ internal audit reports in connection with the routine audit of contractors’ business systems. Contractors have, in most cases, successfully resisted requests for such access on the grounds that DCAA has no statutory authority to request such documents. But that may soon change. Section 843 of the Senate version of the 2013 National Defense Authorization Act (S. 3254) would grant DCAA broad access to contractor internal audit information.
Continue Reading Smash & Grab – DCAA Poised to Gain Access to Contractor Internal Audit Reports
By David S. Gallacher and Kerry O’Neill
Last April, we wrote about proposed changes to Department of Defense ("DoD") reporting requirements for independent research and development ("IR&D"), raising concerns about how the proposed change would tie recoverability of IR&D costs to new reporting and disclosure requirements. Recently, Defense Federal Acquisition Regulation Supplement ("DFARS") 231.205-18(c) was finalized, with changes. See 77 Fed. Reg. 4632 (Jan. 30, 2012). This final rule is a mixed bag that got some things right, but also leaves some of the most serious issues unresolved.
Continue Reading Final Rule for IR&D Reports Fails to Address Most Serious Questions
By David Gallacher and John Bonn
On January 2, 2011, the President signed the James Zadroga 9/11 Health and Compensation Act of 2010, Pub. L. No. 111-347, which set up a relief fund for victims, first responders, and construction workers who were injured in the September 11 terrorist attacks in New York City. To pay the estimated $4.3 billion price tag for the Act, Section 301 of the Act imposed on any foreign person a tax equal to 2% of federal procurement payment received by that foreign person. See 26 U.S.C. § 5000C. In addition, any person who makes or otherwise is a withholding agent with respect to such a payment is required to withhold the 2% tax from the federal procurement payment and remit the tax withheld to the Internal Revenue Service (“IRS”) under tax laws and regulations applicable to withholding of United States taxes from payments made to foreign persons. Although the tax has been in place for more than 14 months and the IRS has issued a revised Form 1042 with revised instructions to implement withholding and reporting obligations, the Government is only now turning to the details of how this tax will be accounted for in connection with the procurement process. And – as is often the case – there is quite a lot of devil in those details.
Just in time for the end-of-year push to fund the Government and to "create more jobs," members of Congress and President Obama had a rare moment of consensus when they unanimously(!) repealed an extremely unpopular withholding requirement that has been haunting recipients of federal funds since 2005. The "3% Withholding Repeal and Job Creation Act" was signed into law on November 21, 2011 (Pub. L. No. 112-56, Title I), eliminating a requirement to withhold 3% on most payments to contractors and grant recipients. While there are many in Government and industry alike who are ecstatic at the passage of the Act, the Ghost of Christmas Future warns that this specter of "withholding" may not have yet fled the scene. Like poor, chained Jacob Marley from Dickens’ A Christmas Carol, industry may yet find itself captive, bound, and double-ironed by future Congressional plots to confiscate funds from government contractors. Miserly grasping for every penny, one can almost hear the federal Government grumbling, "Bah! Humbug!"
Continue Reading “Bah! Humbug!” – 3% Withholding and the Ghost of Christmas Future