Rose Report: Issue 24

In the Changing GovCon Environment, Contractors Have to Do More


For government contractors, recent changes have increased the burden of compliance and also increased the cost of noncompliance. In other words, contractors have to do more to stay in the good graces of the government—and they have to do it better.

There are two factors driving this change in the government contracting environment.

  • In 2010, the DCAA revised its policies to do fewer pre-award audits so that it could catch up on its huge backlog of incurred cost audits. The agency now audits fixed-price contract proposals valued at more than $10 million, up from $1 million, and cost-reimbursement contracts valued at $100 million, up from $10 million.
  • In 2012, in response to pressure from Congress, DFARS rules changed to stipulate that if any of a company’s six business systems are found deficient by the DCAA, the government can withhold 5 percent of the contractor’s payment. (The business systems are accounting, estimating, purchasing, earned value management, material management and accounting, and property management.)

Combined, these two changes mean that contractors have to be more precise in terms of compliance than ever before. And there’s a ripple effect: Prime contractors, facing higher expectations from the government, have become stricter with subcontractors.

The good news is that the rules the government has put into effect fundamentally make sense. The bad news is that they are complex. In particular, compliance can be a challenge for new or small contractors.

Jeanne McMillen, a Rose Financial Services partner, says that companies new to government contracting sometimes don’t understand the cost and effort required to be fully compliant. But those initial costs of setting up a company’s systems correctly are small compared to the cost of scrambling to ensure compliance down the road. “It can cost more for a contractor to get everything straightened out” after veering off track, says McMillen. A contractor has to realize that being compliant from the start “is an investment to get the company going and keep the company on track.”

A particular pitfall for some contractors is being too confident in their software. McMillen emphasizes that software is just one part of the system. “There are three buckets,” she says. Having the proper software is one element of compliance, but many contractors fall short “when it comes to policies and procedures, and then actually following them.”

McMillen gives an example of a typical compliance failure. Under a cost reimbursement contract, there is a requirement in some situations to do reconciliation between billed indirect rates and actual rates and to submit an adjustment voucher annually to the government. If a contracting organization’s accounting manual fails to state that its corporate policy is to prepare these adjustments, which can be considered a significant deficiency. If the contractor fails to deliver these adjustment vouchers, that’s another significant deficiency. This sort of problem is easy to avoid—start by writing a policy and putting it in the manual. Keep in mind that the consequences of noncompliance are heavy.

In a changing environment where contractors are expected to do more to ensure compliance and face steeper penalties for failing to do so, it’s a necessity to make the upfront investment in making sure that the right policies and procedures are in place and that they are being followed correctly. “You have to follow the basic rules,” McMillen says, “and if you don’t know exactly what the rules mean, you have to go to somebody who can explain them in plain English.”