Some Good News, Some Bad: Proposed Changes on Contract Closeout & Incurred Cost Submissions The Federal Acquisition Regulation councils have issued proposed rule changes that are intended to clarify and streamline the contract closeout procedures and to develop a more detailed description of an adequate final indirect cost rate proposal and supporting information. These changes can have both a positive and negative impact upon a contractor’s cash flows. The councils are proposing changes to the following FAR clauses: •FAR 42.705-1 Determination of Final Indirect Rates •FAR 42.708 Quick-closeout procedures •FAR 52.216-7,8,9,10 Allowable cost and payment (by contract type). Impact on Contractors The good news is that the proposed changes to FAR 42.708 allow for the more frequent use of the quick-closeout procedure. A quick-closeout procedure allows a contract to be closed out without a DCAA audit. The contracting officer and contractor negotiate the final indirect rates and close out the contract. The rule changes expand the use of this method by increasing the ceiling of the total unsettled indirect and direct costs to $4 million, from $1 million. These amounts cannot exceed 20% (previously 15%) of the total contract, task order or delivery order. As in the past, the contracting officer has the discretion to use the quick-closeout procedure based on the perceived risk to the government. This proposed rule change should benefit contractors that have their financial and contractual houses in order. The bad news is that under FAR 52.216-7 all schedules found in the Model Incurred Cost Submission (including the supplemental schedules) will be required during the audit process. These schedules (including Executive Compensation) were previously optional and most small businesses were exempt from the submission of the schedules. This will have the effect of adding additional time, effort and expense to the preparation of incurred cost submissions. Additionally, the following requirements have been added to the submission: •List of ACOs and PCOs for each flexibly priced contract. •Description of accounting system. •Procedures for identifying and handling unallowable costs. •List of internal audit reports issued in this fiscal year. •Annual internal audit plan of scheduled audits to be performed in this fiscal year. •Minutes from board of directors meetings. •Listing of delay and disruptions and termination claims submitted which contain costs relating to the subject fiscal year. •The Contractor shall update the schedule of cumulative direct and indirect costs claimed and billed within 60 days after settlement of final indirect cost rates. •The completion invoice or voucher shall include settled subcontract amounts and rates. Impact on Cash Flows FAR 52.216-8, 9, and 10 is amended to promote the withholding of retainage on contracts under the premise that this encourages contractors to expedite the contract close process. The proposed changes allow the contracting officer to withhold up to 15% of the total fixed fee or $100,000, whichever is less. This would have the effect of delaying the payment of these amounts for at least five years under a five-year contract. The rule change should not concern companies that have very large dollar-value contracts or companies in the construction industry that have been accustomed to withholding amounts until completion of a project. However, small businesses and other companies that have a large volume of relatively low-dollar contracts or task orders could see a severe impact on their cash flows. It appears this change benefits the cash flows of government agencies at the expense of the cash flows of small contractors. What can you do? Cash flows are the lifeblood of any small business. Interested parties should submit written comments to the Regulatory Secretariat on or before Oct. 19 to be considered in the final formulation of the rule. Submit comments identified by FAR case 2008-020 by any of the following methods: •Regulations.gov: http://www.regulations.gov •Fax: 202-501-4067 •Mail: General Services Administration, Regulatory Secretariat (VPR), 1800 F Street, NW, Room 4041, Washington, DC, 20405, ATTN: Hada Flowers. Glenda Tysinger is a senior manager with Federal Strategies Group LLC. She provides government contract and management consulting, M&A advisory, litigation support and expert testimony to the government contracting industry. She can be reached via email at GlendaT@FedStrat.com.