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The Importance of Compliant Subcontracting under Federal Government Contracts

gov IRG • October 3, 2016
Did you know that if you purchase or subcontract anything under your government contract that you are subject to almost all the same rules as the federal government follows?  By using your contract money to procure goods or services to support that contract, you are using taxpayer money that is subject to many rules and possibly audit. As a government prime contractor, you must know how to properly spend your prime contract money and also reduce your corporate risk.  An audit is something many government contractors will face, if you are caught not spending the money correctly, you could be subject to repaying the government or fines.
 
The Federal Acquisition Regulation (FAR) is not entirely written for contractors, however contractors that ignore its rules with regards to procurement could find themselves in hot water.   As a prime contractor, your company is a steward of the government’s money.  The government therefore expects you to spend their money as they would, and also follow the rules and regulations specifically set out for a contractor. This applies to both grants and contracts.  “Subcontractor” is not defined in FAR Part 2, Definitions. However, if you were to dive into FAR Part 44, Subcontracting Policies and Procedures, we would see how broad the term is. Many contractors are under the false presumption that subcontracting is a much narrower term than it is. “Subcontract” means :  any contract as defined in  Subpart 2.1  entered into by a subcontractor to furnish supplies or services for performance of a prime contract or a subcontract. It includes but is not limited to purchase orders, and changes and modifications to purchase orders. And  
 
means any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime contractor or another subcontractor.
 
We can use the definition of “Acquisition” though in FAR Part 2 to provide the parameters of a contractor’s subcontracting process.

“Acquisition”  means the acquiring by contract with appropriated funds of supplies or services (including construction) by and for the use of the Federal Government through purchase or lease, whether the supplies or services are already in existence or must be created, developed, demonstrated, and evaluated. Acquisition begins at the point when agency needs are established and includes the description of requirements to satisfy agency needs, solicitation and selection of sources, award of contracts, contract financing, contract performance, contract administration, and those technical and management functions directly related to the process of fulfilling agency needs by contract.

A prime contractor should take the above definition, and replace the word “contract” with “subcontract” and the definition now is useful for a prime contractor.  The  acquisition is “by” the Federal Government because your company is using the prime contract to support the Federal Government’s needs. It is “for the use” of the Federal Government for the same reason, in addition, as it is often the case, anything procured by the prime for the government could become government property – to include intellectual property.  Therefore, the prime contractor’s acquisition process needs to be in line with the rules and regulations the federal government places on itself as well as it explicitly places on the contractor via FAR Part 44 and contract-specific terms.

 
Your company may be subject to a Contractor Purchasing System Review or DCAA may want to understand your procurement practices to ensure that you’re spending contract dollars in an allowable and allocable manner.  But, at a minimum, you’ll need to understand compliant subcontracting (i.e. procurement) to provide fair and reasonable pricing that can be backed up (and certified to if necessary) in your proposals. Compliant procurement begins at proposal and ends with closeout.
November 5, 2024
The Single Audit threshold for organizations that receive Federal awards has been increased from $750,000 to $1 million, effective for fiscal periods starting on or after October 1, 2024. This adjustment is designed to streamline audit requirements and is intended to allow federal oversight resources to focus on larger awards. Here is a look at what this change means for organizations and how to prepare. What Is a Single Audit? A Single Audit is an audit of a non-federal entity’s financial statements and federal award expenditures, conducted to ensure that federal funds are used in compliance with relevant laws and regulations. Single Audits must adhere to Generally Accepted Auditing Standards (GAAS), Generally Accepted Government Auditing Standards (GAGAS) issued by the Comptroller General of the United States, and the Uniform Guidance. These audits assess compliance with federal award conditions and verify that organizations follow applicable financial and regulatory requirements. The Uniform Guidance, outlined in Title 2 of the Code of Federal Regulations, Part 200, establishes the standards for recipients of federal funds. It includes rules on cost principles, administrative requirements, and audit obligations to promote consistency in the management of federal awards. The New $1 Million Threshold – WHAT DOES THIS MEAN FOR BUSINESSES? Starting in fiscal years beginning on or after October 1, 2024, only organizations with federal expenditures of $1 million or more in a single fiscal year will be required to undergo a Single Audit. This threshold increase is intended to lessen the audit burden for entities with smaller awards and allocate audit resources toward higher-dollar programs. This change may benefit various organizations, including universities, non-profits, healthcare providers, and smaller government entities, that receive federal funding but typically fall below the $1 million expenditure mark. Key Points to Consider 1. Reduced Audit Burden : Organizations with federal awards under $1 million will no longer need to undergo a Single Audit, which may reduce administrative expenses and allow staff to focus more on their core programs. 2. Focused Oversight : With a higher threshold, federal audit efforts can concentrate on larger awards, where potential compliance risks may be greater. 3. Compliance Responsibility : Even if a Single Audit is not required, entities must still comply with federal requirements for award expenditures and conditions. Internal audits and controls remain essential for ensuring compliance.  4. Preparing for the Change : Organizations with federal expenditures that may vary across fiscal years should monitor their spending closely to determine when a Single Audit is needed. Resources for Navigating Single Audit Requirements While the threshold has increased, maintaining compliance with federal standards remains critical. The following resources provide additional information on Single Audits and compliance under Uniform Guidance: - Council on Governmental Relations (COGR): 2024 Uniform Guidance Readiness www.cogr.edu/sites/default/files/UG%20Readiness%202024_5th%20Look_Final%20Draft_9.17.24.pdf - U.S. Department of Health & Human Services: Office of Inspector General - Single Audit FAQs oig.hhs.gov/compliance/single-audits/frequently-asked-questions-faqs/single-audits-faqs/ The increase in the Single Audit threshold is likely to reduce administrative demands for many organizations. However, maintaining sound internal controls for managing and reporting federal funds remains essential. Preparing now for these changes will help organizations transition smoothly and stay compliant with federal requirements. Consulting with audit professionals or compliance advisors is recommended to ensure internal processes align with the latest federal guidelines. About govIRG govIRG is the government contract specialist with deep expertise across CFO Services, Contracts Management, Accounting, Accounting System Implementations, and Human Resources. Our mission is to provide government contractors with peace of mind by simplifying compliance and increasing business value. With a dedicated team focused on the unique needs of government contractors, govIRG delivers tailored solutions that streamline processes, ensure regulatory compliance, and foster business growth. We are the audit professionals you need. If you have any questions, please contact us.
By Chuck Anderson and Associates at govIRG October 4, 2024
Government contractors with cost-reimbursable contracts are required to submit provisional billing rates (PBRs) annually. While this may seem like a tedious compliance requirement, it’s actually an exercise that all companies should perform in some form. The insights gained not only help with billing on cost-reimbursable contracts but also offer a deeper understanding of a company’s finances. Developing PBRs is essentially a budgeting exercise that provides indirect rates representing the company’s break-even point. These rates are then used for invoicing on cost-reimbursable contracts in the following year. There are various ways to determine these rates, but the key requirement is that the process be well-documented and the data organized in a clear, intuitive format. Before starting the budgeting process, it’s crucial to ensure your Chart of Accounts (COA) is structured to categorize costs by “objective.” Typically, this structure will divide your COA into sections for recording costs such as Direct, Fringe, Overhead, G&A, and Unallowable. With this setup, you can easily identify and present the necessary details for calculating and submitting your PBRs. The budgeting process itself will vary based on the size, structure, and complexity of your business. The goal is to balance the time and cost of developing the budget with the accuracy of the results. govIRG can help you find the “sweet spot” to deliver an accurate forecast with the right level of effort. Our team can support this process at whatever level is appropriate for your company. Whether you need simple calculations and presentation or a deep dive into the details, we have the expertise to help you efficiently and accurately prepare your annual PBR.  Government contractors operate in a world where compliance is key. While developing PBRs may seem like a compliance obstacle, it’s actually a great opportunity to improve your company’s management. govIRG’s comprehensive approach to compliance management helps contractors avoid cash flow issues, stay compliant with government regulations, and ultimately increase the value of their business.
By Kevin Hoskins August 23, 2024
SBIR , or Small Business Innovation Research , and STTR , or Small Business Technology Transfer , are government-funded programs designed to engage small businesses in research and development efforts across the United States. These programs aim to boost the commercialization of federally funded research, enhance national investment, and foster technological innovation. The difference between SBIR and STTR The SBIR program is a three-phase award system that offers qualified small businesses the opportunity to propose innovative solutions that address the federal government’s specific research and development needs. The three phases are as follows: Phase I focuses on creating a proof of concept for the innovation; Phase II involves continuing research and development efforts; and Phase III is dedicated to pursuing commercialization in the private sector. STTR is intended to promote technology transfer by facilitating cooperative research and development between small businesses and research institutions. The key distinction from SBIR is that STTR requires the small business to formally partner with a research institution. At the time you apply for a SBIR you might also be eligible for “TABA (Technical and Business Assistance)” funds that is in addition to the SBIR funding to help you with your IP (Intellectual Property), Accounting System setup, and other things. You might also be eligible for R&D (Research & Development) Credits when you win an SBIR. GovIRG is committed to helping businesses thrive by simplifying compliance and increasing their business value. Our goal is to help businesses understand the available options and resources that can set them on the path to success. Some of this article references information found from SBIR.gov and U.S. Department of Education.
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