Presented by Brent Calhoon and Patrick Fitzgerald

1. JUNE 19 – 21, Bethesda, MD
PRICING-RELATED CURRENT EVENTS,
TRENDS AND COMING ATTRACTIONS

2. INTRODUCTION
Brent Calhoon, CPA
Partner, Baker Tilly Government Contractor Advisory
Brent.Calhoon@bakertilly.com
703 923-8311
Patrick J Fitzgerald, CPA
Director, Baker Tilly Government Contractor Advisory
Patrick.Fitzgerald@bakertilly.com
(703) 923-8505
2

3. AGENDA
Discussion Areas
• Overview of the Change Drivers
o Section 809 Panel
o National Defense Authorization Act
• Contract Compliance and Audit
• Commerciality
• Key New Thresholds
• Takeaways
3

4. SECTION 809 PANEL - OVERVIEW
Section 809 of the FY 2016 NDAA required the Secretary of Defense to
appoint a panel to streamline and improve the defense acquisition
process. It has two years to develop recommendations.
All new legislation or regulation impacting government contracting
since 2008 was written on band-aides and stuck to a golf ball.
4

5. SECTION 809 PANEL - OVERVIEW
Former Chairwoman’s (Dee Lee) Marching Orders:
• Be BOLD, think differently
• DoD needs more insight, not oversight
• Every recommendation will include everything necessary to implement it
Success Yardsticks:
• Mission First
• Simplify
• Value Time
• Decriminalize Commerce (create cooperation)
5

6. SECTION 809 PANEL - OVERVIEW
Team 1: FAR to Statute Baseline
• Review acquisition regulations and statutes and recommend changes or
deletions for timely acquisition of systems, services and solutions.
• Focus on recommendations to maintain DOD’s technological advantage
and enhance access to emerging technologies.
Team 2: Streamlined Procurement Process
• Streamline noncomplex acquisitions less than $15 million to enable DOD
to meet its acquisition needs for smaller contracts.
Team 3: Commercial Buying
• Simplify DOD’s commercial buying practices to be more adaptable and
agile in acquisition and to have greater access to companies not currently
selling to the department.
6

7. SECTION 809 PANEL - OVERVIEW
Team 4: Barriers to Entry
• Evaluate and remove regulatory, cultural, or bureaucratic barriers to entry to the
DOD marketplace.
• Attract companies interested in conducting business with DOD that have not
previously entered the DOD marketplace.
Team 5: Characteristics of Successful Programs
• Identify attributes and qualities common to successful programs that can be
widely employed and provide recommendations for best practices, regulations,
and statutes.
Team 6: IT Acquisition
• Streamline the IT acquisition process with a specific focus on defense business
systems and IT services. Increase use of commercial best practices and
business processes, delivering capability faster and keeping DOD’s technology
current and supportable.
7

8. SECTION 809 PANEL - OVERVIEW
Team 7: Budget
• How DOD gets money and how it is spent.
• Optimize efficient flow of resources of the acquisition budgeting process in
DOD.
Team 8: Streamlining Regulations
• Identify, then streamline or eliminate regulations pertaining to defense
acquisition that are no longer necessary.
Team 9: Cost Accounting Standards
• Modernize cost accounting standards.
Team 10: Workforce
• Consider statutory and regulatory reform that would foster a culture of authority
and accountability in the acquisition process, enabling the workforce to serve
the mission free of unnecessary obstacles.
8

9. National Defense Authorization Act (NDAA) Overview
History
• 1961 – 1/3 page
• 1969 – 3 pages
• 2017/2018 – roughly 1000 pages
o More Directive and Prescriptive
Title VIII
• Acquisition Policy, Acquisition, Management, and Related Matters
• Audit Specific
o 2009-2014 – Only 4 issues.
 Contractor Business Systems (FY 2011)
 Internal Audit Reports ( FY 2013)
 Annual Report
 Small Business Focal Point
Very Active last 3 years 2016-2018
9

10. Contract and Audit Compliance
Section 809 Panel – Recommendations
Baker Tilly GCAS team members volunteered in support of Team 4 to develop
recommendations for a new DoD compliance oversight framework.
These recommendations were presented to and approved by the Panel in November
2017 and published as Section 2 of the 809 Panel’s January 31, 2018 report.
• Overall problem
o Most stakeholders believe DoD’s compliance process is costlier than the benefits attained by the
government.
• Guiding principles
o Compliance professionals’ primary mission is to help the acquisition team and contracting officers
make decisions in the government’s best interest.
o Compliance should be as close to real time as feasible and appropriate, and responsive to the needs
of the acquisition team and contracting officers.
o Compliance must be a value proposition of benefits versus costs.
o Criteria, standards and practices already widely used to protect the public and taxpayers should be
adopted where appropriate.
o Compliance agencies such as DCAA and DCMA are an integral part of DoD’s system of internal
controls.
10

11. CONTRACT AND AUDIT COMPLIANCE
SECTION 809 PANEL – RECOMMENDATIONS (CONT’D)
Compliance professionals’ primary mission is to help the acquisition
team and contracting officers make decisions in the government’s best
interest.
• Realign DCAA mission statement to focus on its customer, the contracting
officer
• Revise the elements of DCAA’s annual report to Congress
• Provide flexibility to contracting officers and auditors to use audit AND non-audit
services when appropriate
• Criteria, standards and practices already widely used to protect the public and
taxpayers should be adopted where appropriate.
o Revise DFARS 252.242-7006, Accounting System Administration, to mandate an
internal control audit to assess the adequacy of contractor’s accounting systems
o DCAA, DCMA, GAO, AICPA and industry will jointly develop a “Professional Practice
Guide” to DoD’s oversight of contractor costs and business systems
o Require DCAA to obtain peer review from an external organization
11

12. CONTRACT AND AUDIT COMPLIANCE
SECTION 809 PANEL – RECOMMENDATIONS (CONT’D)
Compliance should be as close to real time as feasible and appropriate,
and responsive to the needs of the acquisition team and contracting
officers.
• Increase coverage of the effectiveness of contractor internal control audits by
allowing industry to contract with independent public accountants (IPAs)
• Incentivize contractor compliance and manage risk efficiently through a robust
risk assessment
• Establish statutory time limits for defense oversight activities
• Permit DCAA (and contractors under limited circumstances) to utilize IPAs to
manage resources and to meet statutory time limits
• Clarify and streamline the definition of and requirements for an adequate
“Incurred Cost Proposal” to refocus on timely settlement of final indirect cost
rates
12

13. CONTRACT AND AUDIT COMPLIANCE
SECTION 809 PANEL – COST ACCOUNTING STANDARDS
The Cost Accounting Standards (CAS) team’s preliminary
recommendations aim to focus the benefits of CAS on contracts that
warrant the added cost and administrative burden of CAS
• Increase applicability thresholds; decouple from TINA
• Clarify exemption of FFP-type contracts
• Address applicability to IDIQ contracts
• Address applicability to hybrid contracts
13

14. CONTRACT AND AUDIT COMPLIANCE
RECENT NDAAs – INCURRED COST AUDITS
HASC/SASC staff consulted with the Section 809 Panel throughout 2017
• FY18 NDAA requirements lay a foundation for the 809 Panel’s recommendations,
especially regarding incurred cost audit performance:
o Within 60 days
 Contractors will receive notice whether an incurred cost submission is considered
qualified for audit within 60 days of submission
o Within one year
 Audit findings must be issued within one year of the receipt of a qualified incurred cost
submission or else the audit will be considered completed
 DoD comptroller may waive this requirement upon request by DCAA director
o Limitations on multi-year audits
 To complete outstanding audits on ICPs submitted prior to 12/12/2016
 With written request and justification from a contractor to DoD comptroller
14

15. CONTRACT AND AUDIT COMPLIANCE
RECENT NDAAs – INCURRED COST AUDITS
DoD to use qualified private auditors to:
• Ensure timely and effective incurred cost audits
• Allow DCAA to allocate resources to higher risk and more complex audits
• Assist in eliminating the DCAA backlog of incurred cost audits
By April 1, 2019, DoD shall award a task order or contract to two or more
qualified private auditors to perform incurred cost audits of costs
associated with DoD contracts
• Must conduct the audit in accordance with the GAGAS
• All working papers and reports on the audit shall be the property of DoD
DoD to consider results of incurred costs audits regardless of whether or
not DCAA performed it
15

16. CONTRACT AND AUDIT COMPLIANCE
RECENT NDAAs – INCURRED COST AUDITS
Numerical materiality standards
• Requires DoD to implement “numeric materiality standards for incurred
cost audits to be used by auditors that are consistent with commercially
accepted standards of risk and materiality” no later that October 1, 2020
• DoD to work with the 809 Panel to prepare report containing proposed
numeric materiality standards by October 1, 2019
Backlog of incurred cost audits
• Imposes an October 1, 2020 deadline for DCAA to eliminate any
backlog of incurred cost audits
Peer review
• DCAA to undergo peer review beginning October 1, 2022
• Peer review to be completed by a commercial auditor
Repeal of Certain Auditing Requirements
16

17. COMMERCIALITY
RECENT NDAAs – COMMERCIAL ITEMS
Congress becoming increasingly frustrated with DoD commercial item acquisitions
DoD struggles with how to determine price reasonableness for:
• New items (i.e., products, services and technologies) that have not yet been sold
commercially in sufficient quantities (this is the primary thrust of the FY16 and FY17 NDAAs)
• Old items that were once sold commercially in sufficient quantities, but now only the
government buys them (e.g., spare parts)
• Items “of a type” where government-specific modifications make price comparability difficult
in the absence of competition
• Items sold with a variety of different terms and conditions that make price comparability
difficult in the absence of competition
• Services other than productized services (e.g., knowledge-based (ex. engineering), facilities-
related, construction, medical, transportation) as specifically identified in Section 876 of the
FY17 NDAA
o Draft FY19 NDAA Sec. 831 clarifies the definition of commercial items as commercial products or
commercial services
17

18. COMMERCIALITY
RECENT NDAAs – COMMERCIAL ITEMS
DoD's Final Rule regarding Commercial Item Procurement (83 Fed. Reg. 4431)
• Only prior DoD CIDs will qualify for the presumption (if at all)
• Commercial item determination still conflated with price reasonableness
• Overly rapid request that the contractor provide data contrary to FAR pricing
policy
• Overly restrictive interpretation relating to nontraditional defense contractors
and this avenue is not available for subcontracts
18

19. COMMERCIALITY
RECENT NDAAs ETC. – COMMERCIAL ITEMS
DoD recently released its long-awaited Commercial Item Acquisition Guidebook v2.
• Two Parts: Commercial Item Determination and Price Reasonableness
• Despite the clear distinction and emphasis of these distinct questions, the Guide continues to
conflate the separate events
• It does not adequately address Congress’s concerns and NDAA provisions
• Industry provided significant comments (some of which were addressed), but the Guide still does
not provide guidance on for challenging situations where PCOs really need help
• While COs may rely on prior CIDs, they are guided to do so only after confirming they are
adequately supported
o Reliance limited to prior DoD determinations
o Does not outline/identify any clear way to challenge a CID with which a contractor disagrees
• Check the practical examples; your product or service might be described in a way that is not
helpful
19

20. COMMERCIALITY
RECENT NDAAs, ETC. - COMMERCIAL ITEMS
Items previously purchased under FAR Part 12 may not be purchased under FAR
Part 15 unless (FY 18 NDAA Sec. 848):
• Head of contracting activity determines in writing that the commercial item
determination was improper
• Senior procurement executive of DOD provides written determination that it is no
longer appropriate to acquire the item as commercial
Procurement through Commercial E-Commerce Portals (FY18 NDAA Sec. 846)
• Establishes a government-wide program to procure commercial products through
commercial e-commerce portals (“Amazon for Government”)
• Calls for a series of studies and development plans with years-long timelines
• This program has substantial implications for companies who sell commercial
items to the government, but the program is still in very preliminary stages
20

21. COMMERCIALITY
809 PANEL – COMMERCIAL ITEMS
Four Recommendations:
1. Revise and harmonize definitions related to commercial items.
• Commercial products, COTS, commercial services, and subcontracts
• Provide for the output of commercial processes as a commercial item
2. Roll-back the regulatory creep applicable to commercial items and create
safeguards to prevent it from recurring.
3. Fix the commercial item termination language by removing reference to FAR
Part 49 as “guidance” in a FAR Part 12 termination.
4. Harmonize DFARS technical data rights clauses with commercial practices.
21

22. KEY NEW THRESHOLDS
RECENT NDAAs
Simplified Acquisition Threshold (FY18 NDAA Sec. 805)
• Increases the simplified acquisition threshold from $150,000 to $250,000
Micro-purchase Threshold (FY18 NDAA Sec. 806)
• Increases micro-purchase threshold from $3,000 to $10,000 for civilian agencies
• DoD’s threshold was increased to $5,000 in FY17 NDAA
o Threshold for DoD increases to $10,000 in FY19 Draft NDAA Sec. 822
TINA (and CAS) Threshold (FY18 NDAA Sec. 811)
• Increases threshold for submission of certified cost or pricing data to $2 million
22

23. KEY NEW THRESHOLDS
RECENT NDAAs – LOWEST PRICE TECHNICALLY ACCEPTABLE
Limitation on Lowest Price Technically Acceptable (LPTA) criteria
(FY18 NDAA Sec. 822 & 832)
• Continues trend of Congress and the DoD narrowing conditions under which this
selection procedure may be used
• Additional requirements are added for when the Department of Defense (DoD)
may use LPTA criteria:
o If the DoD will not realize any additional innovation or future technological advancement
by using a different acquisition methodology
o If the goods procured are expendable in nature, are non technical or have a short life
expectancy
o Prohibition on use LPTA process for engineering and manufacturing contracts for
a MDAP
23

24. TAKEAWAYS
Section 809 Panel will release Volume 2 of report in June 2018 and Volume 3 (final report) in January 2019
• June Report Topics
o Cost Accounting Standards
o Services
o Workforce
o Statutory recodification
o Enterprise portfolio
o Simplified Commercial Source Selection
• Public comments and suggestions through website will only be accepted through June 30, 2018
NDAA timelines
• Initially driven by President’s budget request to Congress (February)
• House version – Full committee markup held 5/9/18
• Senate version – Subcommittee markup scheduled 5/21/18 with full committee markup 5/23/18
• Floor consideration and referred to other chamber for review and amendments (June-September)
• Conference committee to resolve differences (September-November)
• Sent to President (December)
• Implementation through regulation (depends)
DCAA – Reduction to ICP audit backlog
• Renewed focus on non-ICP audits (business systems and (TINA audits, Post Award audits, Defective Pricing audits)
Opportunities exist as the definition and pricing of commercial items and services continues to evolve within DOD.
24