How to Pass an Estimating System Review

1 How to Pass an Estimating System ReviewFebruary 27, 2013 ANNOUNCEMENTSMr. James J. GallagherPartner, McKenna Long & Aldridge LLPMs. Jami LevyPricing Manager, Northrop Grumman CorporationMr. David E. TrottaEstimating Manager, ViaSat DOD Business Systems RuleFebruary 27, 2013 Jay GallagherMcKenna Long & Aldridge LLP Applicable through clauses in DOD, CAS-covered contracts awarded after May 2011 Imposes numerous System requirements, including SOX like internal controls procedures Approval by ACO/DACO/CACO based upon DCAA opinion Applies to the contractor, meaning the legal entity Rule citations Interim rule (76 Fed. Reg. 28,856 (May 11, 2011)) Final rule (77 Fed. Reg. 11,355 (Feb. 24, 2012))Overview of Final Rule Requires existence of six approved systems Accounting (includes internal controls and billing) Purchasing Estimating Materials Management and Accounting Government Property Earned Value ManagementOverview of Final Rule (cont.)

2 Overview of System Approval Fundamentals Approval requires that no significant deficiency exists Affirmative finding What if no finding? Initial assessment by DCAA Each System is to be approved by ACO/DACO/CACO Must rely on DCAA input unless basis exists to reject Rejection requires board of Review Potential for rubber stamping DCAA assessmentSystem Approval Fundamentals:No Significant Deficiency The DFARS Rule defines a significant deficiency as: A shortcoming in the System that materially affects the ability of officials of [DOD] to rely upon information produced by the System that is needed for management purposes The DFARS Rule does not define material Focus is on DOD s perspective SOX/GAAP standards unlikely determinative Comments to Final Rule suggest anyfailure to comply with a System criterion is material and a significant deficiencyNo SignificantDeficiency(cont.) DCAA guidance Significant deficiency results from a material weakness Material weakness means A deficiency or combination of deficiencies, in internal control over compliance such that there is a reasonable possibility that a material noncompliance with a compliance requirement.

3 Will not be prevented, or detected andcorrected on a timely basis Material noncompliance means a material noncompliance with DFARS criteriaNo SignificantDeficiency(cont.) DCAA guidance (cont.) Material A reasonable possibility that noncompliance with DFARS criteria will result in material noncompliance with .. applicable government contract laws and regulations, thus materially affecting reliability of the data produced by the System Is not financial reporting standard Monetary impact not requiredNo SignificantDeficiency(cont.) DCMA guidance Consistent with DCAA guidance Material weaknesses include impacts on any of the following Information the government relies upon to fund contracts Information the government relies upon to price contracts Summary Judgmental While circular in concept, the fundamentals are A noncompliance with a DFARS criterion That is a material noncompliance with law, regulation or contract That impacts the reliability of contractor dataNo SignificantDeficiency(cont.)

4 DCAA s low materiality threshold, combined with a vague deficiency standard, means that the burdenwill be on the Contractor to show a deficiency is not significant Based on the facts and circumstances; , System design issue Final control point vs. Initial entry subjectto final control Compliance issue Number of occurrences ( , bad statistical sample) Amount involved Based on System criteria in the relevant System clauses in covered contracts No SignificantDeficiency(cont.) Electronic systems that have Strong internal controls Function with minimum errors Are integrated, reconcilable and auditable Robust written policies and procedures that clearly describe the relevant systems and compliance requirements Robust practices for ensuring compliance Training Internal compliance reviews Internal controls ( , approval levels) Appropriate and timely resolution of deviationsApproval Fundamentals: Key System Criteria Includes cost accounting, cost allowability, billing and ethics Selected areas of focus CAScompliance for contract element cost allocations (among CLINs, sub-CLINS or units, etc.)

5 ; relates to EVMSR equirements Indirect cost allocations Consistent practices Reflective of beneficial/causal relationship Cost allowability, including costs of subcontracts, bid and proposal, professional and legal services, travel and insurance Accounting System Selected areas (cont.) Internal controls Automated and integrated systems with built-in segregation of employee responsibilities Internal audit activity Functionally and organizationally independent Has requisite specialized knowledge to Review government contract compliance Periodically performed System output can be and is reconciled Financial ledgers vs. contract ledgers Sub-ledgers vs. general ledgerAccounting System (cont.) Selected areas(cont.) Internal controls (cont.) Error correction Timely Accurate Ethics practices Timely investigation of issues Documented resolution and corrective action Appropriate disclosures and follow-up Billings Errors minimized Reconciled to ledgersAccounting System (cont.)

6 Selected areas of focus Integration of Estimating and purchasing systems Enforcing TINA requirements Timely and adequate cost and price analysis Contemporaneous and written justification for lack of competition Authorized personnel make purchases based on authorized requisitions Subcontracts executed before any work is performed Update policies and procedure routinely and immediately followingnew requirements added to FAR/DFARS TrainingPurchasing System New requirement (DFARS (d)(1), d(3), (g)) Disclose System in writing to ACO Comply with the System as disclosed Timely disclosure to ACO of significant changes Significant deficiencies can prompt withholds in accordance with DFARS , when included in the contract Estimating System integration with Accounting System Purchasing System Budgeting processEstimating System Selected areas of focus Internal audits of Estimating System Too infrequent Lack adequate scope Inadequately documented corrective action Independent management Review Insufficient management oversight concerning high-risk proposals Unclear lines of authority for proposal approval Lack of documentation of Review /approval processEstimating System (cont.)

7 Selected areas (cont.) Continuous System maintenance/improvement Use internal audits to identify weaknesses and implement corrective action(s); document improvements Comprehensive training plan Timely policy revisions/distribution of updates Sharp focus on proposal format and content Comply with FAR , Table 15-2 (when TINA applies) Estimating System (cont.) Selected areas of focus Failure to properly tag and track government property Failure to appreciate the breadth of what is government property under cost-type and T&M contracts Use of government property for commercial operations without Government approvals Comingling of contractor and government property; capital type projects that integrate government funding susceptible to challengeGovernment Property System Selected areas (cont.) Government property terms and conditions are not flowed down to subcontractors Lack of audits/due diligence to ensure government property systems are functioning Assumption/reliance upon accounting/purchasing systems to track government property Can result in difficult process to identify government property when questions arise during audits or closeoutGovernment Property System (cont.)

8 Additional risks of noncompliance Cost disallowances because unable to substantiate that property was actually purchased in the quantities for which reimbursement is sought Contractor bears the risk of loss resulting from willful misconduct or lack of good faith by a contractor s managerial personnelGovernment Property System (cont.) Selected areas of focus Lack of controls to timely identify unauthorized transfers/loans of materials Inadequate inventory controls to track removal of materials from inventory and use on contract Failure to ensure that loaned materials are timely repaid to lending contract Transfers/loans from cost-type contracts to commercial or fixed price workMMAS Selected areas of focus Lack of necessary integration between systems (accounting, purchasing, inventory, program management) to support EVMS Failure to update budgets and schedules as a result of changes, modifications, government delays Inadequate accounting for level of effort functions in program budgets Adjustments of incurred costs lack reconciliation to accounting recordsEVMS Resist temptation to accept imposition of what the government says is a better practice when the current practice is better for your business Monitor government procurement decisions Timely file appropriate bid protests If excluded from a procurement, must file pre-proposal If not awarded, obtain a debriefing and ascertain the impact of unapproved System (s)Potential Issues Established at the DCMA HQ Level Chaired by the Director, Contract Policy Members include: HQs Legal Counsel, System PolicyOwner, CBS Policy Owner Purpose.

9 To ensure regulations/policy are followed,consistently applied, action is sufficiently documented, and proper coordination has occurred 18 Reviews as of October 2012: 8 Accounting, 3 Estimating , 2 EV, 3 Property, 2 Purchasing 12 disapproved systems 3 pending further fact finding 3 panel recommended alternative course of actionDCMA Implementation,Business System Review PanelsJami LevyPricing Manager, Northrop Grumman Corporation30 data driven Estimating Key to Estimating System HealthJami LevyNorthrop Grumman Aerospace SystemsPricing and Estimating Compliance Systems, Training and data driven Estimating Why Basis of Estimate (BOE) Focus? BOE - Description data driven Estimating - Definition Fundamentals of data driven Estimating data driven Estimate Examples We are the CustomerNon-Proprietary BOE Training Material Available to All32 Background/Objectives Background:There is a significant industry effort to increase the quality of contractor Estimating processes.

10 The industry has applied the term data driven Estimating to this new method of developing and documenting our estimates/BOEs. data driven Estimating methods have certain characteristics that are starting to emerge as standards within our industry. Objectives: What is driving our industry toward the use of data driven Estimating methods and why is this a business imperative Be able to identify the characteristics of good data driven Estimating processes and how they are represented in our BOEs Provide examples of data driven versus non-data driven BOEs Raise the bar by providing access to non-proprietary BOE training33 ResponsibilitiesMapping of DFARS Cost Estimating System Requirements to Major Estimating System ComponentsRolesTrainingEstimate Data SourcesEstimate PreparationEstimate ReviewEstimate ApprovalInternal ControlsWell Supported Data Driven Estimating in Key to Estimating System Health clear responsibility for preparation, Review , and approval of cost estimates and budgets.