A New World for Government Contracting

This year has been one of hope, surprise, conflict, change, and finally, new directions in government contracting.  
     The American Recovery and Reinvestment Act of 2009 (ARRA) was passed in early February.  In addition to the money, the Act established heavy oversight of federal funds through the Accountability and Transparency provisions.  Not only do ARRA funded projects include all federal contracting rules, there are additional requirements, such as reporting jobs created or saved, and more rules are expected as this program is more fully developed.
    The much awaited USDOT OIG report on A/E contracting with state DOTs and in particular executive compensation has now been issued. And finally, the new AASHTO Audit Guide is scheduled to be published by the end of the year with an effective date for years beginning after December 31, 2009. FHWA is expected to incorporate the Guide into their regulations and rules next year.
    All of these events will greatly expand the use of Federal Acquisition Regulations (FAR) in the A/E community.
    The USDOT's  IG report concluded FHWA and state DOTs did not provide the proper oversight on contractor costs.  Since 2005 when section 174 was passed many states were introduced into the overhead audit business for the first time.  These were the former 'opt-out' states with low overhead caps and fixed rules as to cost allowability, leaving no reason to perform overhead audits as no firms could be expected to have rates below the limits.  
    Even FAR compliant states are having problems due to shrinking budgets and high employee turnover.  Our experience through AASHTO participation and overhead audit work paper reviews reveals an inconsistent application of the rules and confusion between law and policy between states (and localities).  We believe everyone we deal with has high integrity and wants to do the 'right thing.'  The problem is there has been little guidance on what is the 'right thing' for either contractors or agencies.
    Consultants tend to treat state DOTs and other agencies the way they do most clients; negotiate the contract, work hard and bill for the work.  This process will not work with DOTs, federal agencies or on ARRA funded projects.  
    When accepting federal funds, the cycle begins well before the contract is negotiated.  The rules demand an integrated project cost accounting and financial management system, formal policies and procedures and a complete internal control process including checks and balances.  Internal controls are a critical part of being a government contractor.  
    As the OIG report shows, documentation is key.  Many of the 'findings' in the OIG Report involve otherwise allowable costs which were not properly documented.  Firms typically do a good job capturing and documenting project charges but view overhead as if it is their money with less stringent documentation requirements.  In a government environment, this is not the case.  Overhead is the government's money (and thus the public dollar).
    It is not enough for you to know you made a prudent expense, you have to document it.  You need to think in terms of what your records show when the auditor visits. Will your records have sufficient documentation to demonstrate your costs are fair, reasonable, and allowable?
    What about outside CPAs?  Most firms performing overhead audits do not understand nor study very much about the FARs. Most do not understand the business model for A/Es and thus do not know what are the critical performance and reporting needs for A/E firms.
    Those who do, find it very difficult to get information or training other than just buying a book. We have CPAs in public practice who perform overhead audits in the PSMJ Financial Management Boot Camp and they were clueless about the FARs and design firm business in general.  We talk with firms every day that virtually ignore outside CPA reports because the format and content is not informative for the firm due to this lack of understanding the A/E business model.

What is Coming
In anticipation of the OIG report, AASHTO established a task force to rewrite their Audit Guide.  The plan for the guide is to make it legislatively authoritative, meaning compliance will be mandatory.  The current plan is to make it effective for years beginning after December 31, 2009.  
    As noted above, many firms treat government clients as all other clients, and this attitude must change to be able to continue contracting with state DOTs.  The effective date provides a very small window for firms to become compliant with the many changes this will make in DOT contracting in many states.

What Should You Do?
If a design firm wants to participate in the public market, they need to be willing to play within the rules.  The business must be run responsibly with deliberate action taken regarding documentation, internal controls and management oversight. The overhead audit is a serious and critical piece in this environment. The selection of a CPA firm should be based on qualifications not friendships, price, or location.  
    Proactive planning is the key.  Not only will this facilitate firm compliance, it will increase their profitability!
    What is the bottom line for consultants?  Documentation is the key.  Firms must take an objective look at their internal processes and make conscious choices and decide on their way (and to verify that this satisfies government contracting requirements).  This should be documented in a policies and procedures manual that includes time reporting, administrative, accounting and personal policies.  Compensation must be justified through objective evaluations and performance based bonus plans.  These evaluations and bonus plans must be well thought out and in writing.  Bonus plans must include written descriptions of the plan and employees must be informed of the plan.  Compensation should be subject to testing via surveys, or other documented research to establish that salaries are at market level (and properly administered).
    Government work can be both professionally and economically rewarding, but A/Es must recognize this market is very dependent upon their firm having proper financial systems.  Since we are entering an expanded world where these rules are followed, make sure your firm is ready if you want to participate.  ★