Column: Policies and Procedures Manuals - Are They Necessary?

      Most growing contractors with whom I have worked are much more worried about winning their next contract, performing under their existing contracts and becoming cash flow positive rather than having a written policy and procedure manual in place. What if I were to tell you that such a document can help you achieve all of these items while also keeping the company from receiving hefty fines, and keep you out of jail all at the same time?

      This article will discuss the importance of having written policies and procedures and the need to keep this document current.

      Many contractors make the mistake of assuming a policies and procedures manual is merely a tool for addressing accounting issues. While accounting policies and procedures are an important part of a company’s internal control structure, it is only a subset of all the areas that the document should address.

Why is a Manual Necessary?

      A well-written policies and procedures manual can assist the contractor by:

1. Ensuring compliance with laws and regulations;
2. Reducing the audit time of government auditors;
3. Providing guidance for employees in adhering to the Company’s objectives;
4. Eliminating uncertainty in questionable circumstances; and
5. Providing the first line of defense in civil and criminal matters as well as for questioned costs.

      For a small company, it is much easier to oversee the behaviors and practices of its employees. However, as an organization grows, it becomes more and more difficult to ensure the behaviors and practices of its employees are consistent with the company’s objectives.

      In addition, regulations passed by the government require contractors to adopt a formal compliance program as well as mandatory disclosure of certain violations.

      Finally, formal policies and procedures can keep contractors from having to pay hefty fines as well as employees out of jail.

Policy vs. Procedure

      It is important to understand the difference between a policy and a procedure. They are equally valuable.

      A policy is a general goal or objective for a specified area. Examples include:

• “It is the policy of our company to ensure that all labor hours are charged to the correct contract, CLIN, indirect code or final cost objective.”
• “It is the goal of our company to comply with all applicable laws and regulations that govern this organization.”

      A procedure is a specific action an employee will take to ensure the policies are being achieved.

• “All employees will enter their time daily, at the end of each day, detailing all hours worked by contract, CLIN, indirect code or final cost objective.”
• “All employees are required to undergo company-sponsored legal and ethical training annually.”

      Together all policies and procedures adopted should provide the employees with the guidance needed to handle most situations they may face.

Areas to be Covered

      Policies and procedures should be adopted for each major business area including:

• Corporate Governance and General Business Conduct (including compliance with applicable laws and regulations);
• Financial Management and Accounting;
• Cost Estimating;
• Purchasing and Procurement;
• Employee and Human Resources;
• Business Development;
• Contract Performance.

      There are many subcategories that need to be addressed as well. For example, more and more contracts are being awarded requiring an accounting system certification. Without functioning accounting policies and procedures in place, the contractor will not pass such an audit and may lose the procurement.

Best Practices

      An effort should be undertaken to identify the key areas (see above) and subcategories that require formal policies and procedures. The people handling this effort should have a working knowledge of the Federal Acquisition Regulation, Cost Accounting Standards, Generally Accepted Accounting Principles, Tax Code of the Internal Revenue Service and state taxing authorities, as well as of various legal decisions.

      If the company does not have the internal expertise for this effort, it should seek outside consulting help.

      Employees should be made aware that this effort is underway and that once adopted, will require absolute adherence. Upon identification of various areas, discussions should be had with affected parties to gain their input, and acceptance, prior to formal adoption.

      All policies and procedures should then be committed to writing. It may take several iterations before an acceptable manual is adopted and approved by management. An internal hotline should be established to provide a vehicle for employees to report possible violations anonymously. Finally, these policies and procedures should be updated annually and included in annual training to all employees.

Conclusion

      Having been involved in numerous audits of federal contractors by offices of inspector general, as well as by the FBI, the best way to avoid such an ordeal is to adopt formal policies and procedures, ensure employee adherence through implementation and training, and to continually review and update them. If an allegation is made against the Company, this written document can be your most powerful ally for your defense.

Michael Smigocki, CPA, ABV is the Senior Managing Director of Federal Strategies Group, LLC. He can be reached at: MikeS@FedStrat.com.

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Column: Policies and Procedures Manuals - Are They Necessary?

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