BDO Knows Government Contracting Newsletter - Winter 2017

February 2017


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Table of Contents


Challenges Government Contractors Face Maintaining a Compliant Supply Chain, Part Two

By Julia Bailey

While comprehensive, end-to-end supply chain management is a moving target for all businesses, government contractors are subject to scrutiny, regulation and penalties for non-compliance unique to the federal government marketplace. To help prime and subcontractors monitor and secure their supply chains and keep their competitive edge, we’re exploring the many pieces that make up the complex supply chain puzzle for government contractors in a series. If you haven’t already, read part one here for a look at the Contractor Purchasing System Review, recently released counterfeit parts rules and country of origin restrictions.

In this installment, we’ll explore ethical considerations for government contractors, including the Federal Acquisition Register (FAR) “Contractor Code of Business Ethics and Conduct” clause, and discuss risk management for prime and subcontractor relations, the Combatting Trafficking in Persons (CTIP) FAR clause and the False Claims Act (FCA).

What does FAR 52.203-13 require?

Contracts for a value expected to exceed $5.5 million and with a performance period of 120 days or more must contain FAR 52.203-13, the “Contractor Code of Business Ethics and Conduct” clause, which requires the prime contractor to:

I.  Have a written code of conduct made available to employees;
II. Exercise due diligence to prevent and detect criminal conduct;
III.   Promote an organizational culture that encourages ethical conduct and compliance;
IV.   Include a business ethics awareness and compliance program and an internal control system, unless the contract is for commercial items or with a small business.
V. Disclose in a timely manner credible evidence of certain wrongdoing in connection with their government contracts and subcontracts (specifically, violations of federal criminal law involving fraud, conflict of interest, bribery or gratuities or violations of the civil False Claims Act); and

The duty of a contractor to disclose credible evidence of wrongdoing committed by its subcontractors applies regardless of whether FAR 52.201-13 is included in the contract (FAR 3.1003), and could result in suspension and/or debarment for failure to disclose (FAR see 9.406-2(b)(1)(vi) and 9.407-2(a)(8)). This clause, along with several other FAR provisions, specifically require contractors to report or disclose bribery and corruption, or evidence of significant overpayments on the prime contract. A contractor must also report possible violations of the Anti-Kickback Act when they have reasonable grounds to believe a violation may have occurred.

What other business ethics considerations could impact my supply chain?

The Contractor Code of Business Ethics and Conduct clause also requires that prime contractors ensure business ethics awareness and compliance program commitments include training for agents and subcontractors as appropriate. Per FAR 52.203-13(d), the clause also states the prime contractor must flow down the entire clause into subcontracts that meet the size and duration thresholds that trigger its applicability to prime contracts.

Given the consequences, a prime contractor should obtain information about the subcontractor past performance and its compliance program before entering into a contract and negotiate clauses that require certifications, notification and ongoing access to information, such as a right to audit relevant books and records. During contract performance, prime contractors should review and monitor a subcontractor’s business ethics and conduct. 

What does the Combating Trafficking in Persons clause require, and how can I manage risk?

Contractors and subcontractors must comply with federal legislation and regulations issued to combat trafficking in persons (CTIP), FAR 22.17 and FAR 52.222-50. The CTIP FAR clause is a mandatory flow-down clause for all covered contracts.

The CTIP rules addresses trafficking in persons in three ways. First it prohibits a range of activities, applicable to all government contracts and subcontracts, including commercially available off-the-shelf (COTS) items. Prohibited activities include, among others:

I.  Engaging in severe forms of trafficking in persons, including using force or the threat of force in hiring, during the period of performance of a contract;
II. Procuring commercial sex acts during contract performance; 
III.   Using forced labor in the performance of a government contract; and
IV.   A range of other practices related to trafficking in persons in recruiting, hiring and employing for both domestic and overseas contract performance, such as destroying, concealing, confiscating or otherwise denying access to the employee’s identity or immigration documents or denying payment for return transportation.

Second, CTIP rules create an expanded reporting and enforcement mechanism. Duties applicable to all contractors include:

I.  Creating an awareness program to inform employees about the prohibitions and potential punishments for violation of the policy;
II. Notifying the U.S. government when they receive “credible information” that a contractor employee, subcontractor, subcontractor employee or their agent has violated the CTIP regulations;
III.   Providing “full cooperation” with government CTIP investigations and audits, which includes commitments to:
    a. Disclose credible information of any alleged violations of the CTIP regulations,
    b. Provide timely and complete responses to auditors’ and investigators’ requests for documents,
    c. Provide reasonable access to facilities and staff to facilitate federal audits and investigations,
    d. Protect employees suspected of being victims of trafficking or witnesses, and
    e. Refrain from hindering or preventing employees from cooperating with U.S. government authorities.

Third, the CTIP rules impose a broad set of risk management requirements for overseas contracts and subcontracts (except COTS) where the estimated value of the supplies to be acquired or services required to be performed outside the U.S. exceeds $500,000. These requirements include:

I.  A compliance plan for prevention, monitoring and detection of trafficking in persons, which must be appropriate for the size and complexity of the contract; the nature and scope of the activities to be performed under the contract, including the number of non-U.S. citizens expected to be employed; and the risk that the contract or subcontract will involve services or supplies susceptible to trafficking;
II. Due diligence to determine potential violations in the supply chain; and
III.   Certifications of no violations in the supply chain.

Contractors should ensure the minimum commitments required under the CTIP are flowed down to all subcontracts and contracts with agents, except the risk management requirements, which apply only to non-COTS, overseas subcontracts for which the overseas portion exceeds $500,000.

Additional best practices to manage risk under CTIP rules include:

I.  Conduct due diligence and investigate whether subcontractors have engaged in prohibited practices before certifying compliance to the government;
II. During contract performance, engage in risk assessment and due diligence of subcontractors;
III.   Carefully analyze CTIP and related rules for protecting employee victims and witnesses in trafficking investigations;
IV.   Ensure that subcontractors are knowledgeable about prohibitions and commitments and monitor their own supply chains for compliance; and 
V. Implement effective training, monitoring, auditing and reporting systems to carry out CTIP prohibitions and commitments.

How can I guard against False Claims Act exposure?

In its June 2016 decision, Universal Health Services, Inc. v. United States ex rel. Escobar, the Supreme Court upheld the “implied false certification” theory of liability under the FCA, which sets out both to mitigate the risk for government fraud and to penalize those who commit such fraud. The theory treats a government payment request as an “implied certification of compliance” with pertinent statutes, regulations or contract requirements material to conditions of payment, as explained in the Court’s opinion. The decision rejects the position supported by some industry groups, holding that the theory can provide a basis of liability in some circumstances, and implements a rigorous materiality standard for determining liability in those cases.

There are several potential risk scenarios for government contractors, including payment of a claim or reimbursement of a prime contractor based on false claims initially submitted or false statements or compliance certifications initially made by a subcontractor. For example, for certain contracts, a prime contractor’s proposal or invoices may relay or repeat a subcontractor’s statements, representations or certifications. Although a supplier submitting false information to the prime contractor or higher-tier subcontractor may be liable under the FCA, the prime contractor may also be exposed under the FCA for the subcontractor’s conduct.

Some prime contractors are beginning to require suppliers and subcontractors to indemnify them for liability that could arise under the FCA due to false claims or statements made by the supplier or subcontractor. As a best practice, prime contractors should exercise and update existing due diligence processes and internal controls, according to this new interpretation of liability to mitigate the risk for certifying false statements, even if unknowingly. They might also consider taking other steps to ensure that any such reliance on claims or statements made by the supplier or subcontractor is reasonable under the circumstances.  

Stay tuned for the final part in this series, where we’ll examine export controls, anti-boycott measures and risks contractors face with regard to the Foreign Corrupt Practices Act.

Julia Bailey is a managing director and may be reached at [email protected].

Look Before You Leap! Don’t Get Blindsided by Unforeseen Tax Costs When Bidding on International Contracts

By Matt Legg

With any proposal, knowing your costs is key in order to properly price a bid. One of the biggest mistakes companies make when bidding on international contracts is failing to fully consider local country tax and tax compliance costs, which may be triggered once performance under the contract commences. Tax implications can vary widely depending on the country involved and the nature of the activities, and failure to do the proper due diligence during the bid process can result in unforeseen taxes, compliance costs and penalties that can eat away at profit margins. It pays to factor potential tax and compliance costs into the equation on the front end when pricing out an international project. To help prevent surprises later, take a look at some of the key tax considerations that need to be addressed as a company considers taking on contracts outside the U.S.

One of the primary considerations for an overseas project is whether the company will be subjected to income taxes in that country as a result of the proposed activities under the contract. If so, they’ll need to understand what the applicable tax rates are and what the mechanism will be for paying the tax (e.g., withholding at the source on a gross basis or filing local income tax returns on a net basis). When making this determination, the devil is in the details. The decision is dependent on factors such as the nature of the activities to be performed, whether personnel will be performing services in country and, if so, where and for how long. Regularly conducting business or having a fixed place of business in another country will create a taxable presence and subject the company to income tax in that country. Even concluding or negotiating contracts in a foreign jurisdiction through employees or agents could create a taxable presence in that country.

Though an analysis of those factors may point to a potential taxable presence for local country income tax purposes, the U.S. has entered into double tax treaties, Status of Forces Agreements (SOFA) and other bilateral or multilateral agreements with many countries. Such arrangements may override local tax rules and limit a company’s exposure to a foreign jurisdiction’s tax regime or preclude taxation of the company and/or its employees altogether. Depending on the country, tax treaties often require a higher threshold of presence or activity level in-country to establish a taxable presence than local tax rules. Treaties also provide for reduced tax rates or exemption from local country taxation on certain types of income. 

If a company is subjected to foreign income taxes, it may be possible to recover some or all of that foreign income tax cost as a reduction against U.S. income taxes paid by the U.S. company or its owners via the U.S. foreign tax credit regime or as a business deduction. In some cases, however, this can create cash flow challenges where the foreign taxes are collected in advance via withholding or estimated payments throughout the year, but are not claimed as a foreign tax credit by the U.S. company or its owners until their U.S. income tax returns are filed in the next year.

As an alternative to the U.S. company engaging and performing all activities under the contract in the foreign jurisdiction, in some cases it may be advantageous to set up a separate subsidiary in the local country through which to conduct activities under the contract. Approaching the contract this way could benefit longer-term or open-ended projects, projects requiring hiring of local country personnel, and projects where a local country bidder is required or advantageous or U.S. or local country tax benefits or reporting efficiencies may arise. However, it should be noted that establishing a foreign subsidiary also adds complexity such as potential U.S. income tax information reporting for the foreign subsidiary (e.g., Forms 5471, 8865, and 8858), foreign bank account reporting, tax implications and reporting of transfers of cash or other property to the foreign subsidiary, entity selection, potential applicability of U.S. anti-deferral rules, and transfer pricing as well as costs to address this additional complexity.

Other (non-income) taxes might also be triggered as result of contract activities. For example, many countries and localities have indirect taxes, such as sales taxes or value-added tax (VAT) on the sale of goods or provision of services in-country, that may be applicable on goods and services purchased by the contractor or on sales of products and services by the contractor to its customer under the contract. These tax costs may not be fully recoverable from the tax authority or the ultimate customer, and should be considered in pricing the proposal.

If the company will have personnel based in-country, a thorough understanding of potential employment-related taxes is also important. Unless exempted from local country taxation under a tax treaty, SOFA or other similar agreement, U.S. employees may be subjected to local country taxation and withholdings, and both employer and employee may bear such costs.

Companies should also consider costs of compliance with all required administration and reporting associated with the various local country taxes to which the company and/or its employees may be subject. There may also be certain business and tax registration requirements and fees to be properly licensed in a jurisdiction, or to carry out required withholdings and reporting and payment of applicable taxes. This will likely require engaging local country tax advisers—and incurring the associated professional fees—to assist to ensure nothing slips through the cracks and results in unexpected penalties or interest, or threatens the company’s ability to continue doing business in a given country.

Performing under international contracts introduces many potential tax implications and costs that need to be carefully considered before moving forward with an international contract. Performing this analysis and factoring such costs in on the front end during the bid process is a sound way to help maximize profits on international contracts and avoid unexpected surprises.

Matt Legg is a managing director, International Tax Services, and may be reached at [email protected].

ICYMI: New Tax Due Dates this Spring!

By Jeff Schragg and Meredith Pilaro

In July 2015, the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015 created new tax filing due dates for certain income tax filings for tax years beginning after Dec. 31, 2015. The goal of the changes is to allow for tax preparers and taxpayers to have a flow of returns from flow-through entities to taxpayers (e.g., individuals and C corporations). For 2016 calendar year filers, the 2017 due dates are as follows:

In general, for fiscal year filers, taxpayers can apply the same timeframes to determine applicable due dates (e.g., a partnership with a year beginning Jan. 1, 2016, or later will have a return due the 15th day of the third month after that year-end). This generality does not apply to C corporations with a June 30 year end. The change in due dates for C corporations to the 15th day of the fourth month does not apply to that specific year end until 2025. Until then, they are allowed a seven-month extension from Sept. 15 to April 15 of the following year. The change in due dates, particularly the change in the partnership due date from April to March, should help individual and corporate taxpayers with partnership investments prepare more accurate returns by providing a month between receiving Schedules K-1 and their own filing date to incorporate the activity.  They will have 15 days for Trust Schedules K-1, Sept. 30 to Oct. 15.

Jeff Schragg is a tax partner and may be reached at [email protected].

Meredith Pilaro is a core tax services senior director, and may be reached at [email protected].


Preparing for Implementation of the New Lease Standard

By Amy Thorn

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standard Update (ASU) No. 2016-02, Topic 842, Leases. The new standard is applicable for both lessees and lessors. Here, we’ll examine the impact of the new standard for lessees and, specifically, the anticipated impact to government contractors who hold leases.

ASU No. 2016-02 takes effect in 2019 for public entities and in 2020 for all other entities. While there is still time to assess and prepare, given the magnitude of the impact this standard will have on most entities’ balance sheets, it is important to have an understanding of this standard now, particularly if you are or will be negotiating new long-term leases between now and the effective date.

What does the ASU require?

Under the new guidance, lessees will be required to recognize assets and liabilities for leases with terms of more than 12 months. For leases with a term of 12 months or less, a practical expedient is available. In that case, a lessee may elect, by class of underlying asset, not to recognize a right of use (ROU) asset or lease liability and would simply recognize the lease expense over the term of the lease, generally on a straight-line basis.

At inception, the lease must be classified as finance or operating. In a finance lease, the lessee effectively obtains control of the underlying asset. In an operating lease, the lessee does not effectively obtain control of the underlying asset.

A lessee is considered to have control if one or more of the following criteria are met:
  • The lease transfers ownership of the underlying asset to the lessee by the end of the lease term.
  • The lease grants the lessee an option to purchase the underlying asset that the lessee is reasonably certain to exercise.
  • The lease term is, for the major part, defined as 75 percent or more, of the remaining economic life of the underlying asset.
  • The sum of the present value of the lease payments and the present value of any residual value guaranteed by the lessee amounts to substantially all, defined as 90 percent or more, of the fair value of the underlying asset.
  • The underlying asset is of such a specialized nature that it is expected to have no alternative use to the lessor at the end of the lease term.
The table below compares the accounting for finance and operating leases under the new standard.

* The discount rate used should be the rate implicit in the lease. If the rate is not readily determinable, the lessee should use its incremental borrowing rate (the rate that the lessee would have incurred to borrow the funds to purchase the leased asset over a similar period of time). As further discussed in BDO Knows: FASB, Leases Topic 842, BDO believes that readily determinable is similar to the prior lease guidance, and would indicate that the information is available without undue effort.

Implementation Method and Expedients

At the time of implementation, the lessee should measure leases at the beginning of the earliest period presented using a modified retrospective approach. Equity must be adjusted at the beginning of the earliest comparative period presented. The standard provides for certain optional practical expedients to make implementation more practical, including that an entity has the option to record the lease on the balance sheet, but will not be required to reconsider the classification of the lease before the effective date. Leases previously classified as operating under the previous guidance will be accounted for as operating leases, and leases that were previously classified as capital leases will be classified as finance leases. Additionally, the entity is not required to reconsider whether existing contracts contain a lease.

Presentation and Disclosure

ROU assets resulting from finance leases must be presented separately from ROU assets resulting from operating leases and other assets. The same applies to presentation of lease liabilities. Additionally, current and long-term portions of assets and liabilities must be properly presented on the balance sheet.

The FASB stated in paragraph 264 of the ASU, Basis for Conclusions, that it is appropriate to separate the assets and liabilities resulting from operating and finance leases due to the difference in the nature of the transactions. A finance lease is debt-like, while an operating lease is not. Accordingly, combining these assets and liabilities on the balance sheet could be misleading.

The new standard requires substantial disclosures related to lessees. Disclosures required include, but are not limited to, the following:
  • General description of the lease;
  • Terms related to any variable lease payments and options to extend or terminate the lease (both those that are included in the measurement of the ROU asset and lease liabilities and those that are not);
  • Terms of purchase options;
  • The allocation of consideration between lease and non-lease components, and the determination of the discount rate for the lease; and
  • Finance lease costs, with interest on the lease liability and the amortization of the ROU assets separately reported. Operating lease costs are also separately reported.

Practical Points for Implementation

This guidance will impact any entity that enters into a contract that is classified as a lease. Most entities which have historically had significant operating leases for office space or warehouses and smaller capital leases for equipment will need to account for substantial assets and liabilities on the balance sheet.

Generally, leases that are presently classified as operating leases will remain operating leases under the new guidance. Similarly, leases that are presently classified as capital leases will be classified as finance leases under the new guidance.  Rent expense recorded under operating leases and amortization expense associated with the ROU asset under finance leases will be allowable for purposes of calculating indirect rates. The interest portion under finance leases will be unallowable, in accordance with FAR.

It is not too early to understand the impact of this new guidance on any long-term leases you may presently have that will extend into the period of the effective date, particularly if you are in the process of negotiating new, long-term leases. Generally, we expect that lenders, investors and other users of the financial statements will have a solid understanding of the guidance well in advance of the effective date. Companies are wise, however, to ensure they are educating executive management, audit committees and boards of directors on the upcoming standard, and the impact it will have on their financial statements.  They should also be prepared to discuss financial and other restrictive covenants with lenders and investors well in advance of the effective date.

The federal income tax law governing the treatment of leases has not changed. However, make sure you understand the impact of ASC 842 on your financial statements, and discuss the potential tax implications with your advisors. Implementation of the new standard may result in new deferred tax assets or liabilities or new book-to-tax differences in the entity’s income tax provision.

For more information on the lease accounting standard, read BDO’s Assurance newsletter on FASB Topic 842 here. You can reference all FASB Accounting Standard Updates, including ASU 2016-02, here.

Amy Thorn is an assurance partner, and may be reached at [email protected].

Current Trends in Commercial Rebate Compliance Reviews: How to Mitigate Delays

By Susan Dunne

The manufacturer rebate process is rapidly evolving and changing as mergers and acquisitions of Pharmacy Benefit Managers (PBMs), consolidations of Managed Care Organizations (MCOs), expansion of the control of retail and mail order pharmacy companies and reorganizations within manufacturers continue to make front-page headlines.
In order to provide assurance that rebate agreements are being uniformly met, many manufacturers perform commercial rebate compliance reviews. Most often these reviews are done in conjunction with the manufacturer’s internal Sarbanes-Oxley requirements. Compliance reviews may also be undertaken because of mergers, identified problems, concerns over trading partner practices or due to an agreement dispute. Given the financial scope of rebates and the detailed formulary and benefit provisions associated with most rebate agreements and governmental requirements, it is also good business hygiene to review compliance on a periodic basis.

Five years ago, a rebate compliance review averaged a span of four to six months from the notification to the delivery of final results to the manufacturer. While some reviews are still completed in this time frame, the average stretch is now six to nine months, with some trading partners averaging close to one year or more for completion.

So, what are the factors that are extending the timeline, and how can manufacturers mitigate? 

First, more frequently trading partners will stall progress after notification and refuse to move toward negotiating scope because there are outstanding amounts not paid or disputes. At times, we have found the manufacturer is not always aware of the outstanding amounts or the disputes that exist at the time of notification for a commercial rebate compliance review. For manufacturers with the resources, we recommend investigating the status of the reconciled invoices prior to notification for the relevant review period to ensure unpaid dollar amounts and outstanding disputes are resolved with the trading partner. Similarly, some trading partners have regular blackout periods which must be worked around for compliance review activity. Knowing the timing of periods and notifying early is essential to ensuring adherence to any expected time frame requirements.

Recent years have shown a rise in restrictions for these compliance reviews, and protocols and timing delays in the contract review clause provisions. Some trading partners require waiting periods due to agreement language that may require a delay of 18 to 24 months between the review period and the commencement of the review. What manufacturers have not been able to plan for is that these same trading partners often have issues with retrieving requested documents due to data archiving and storage windows, or clients that have terminated, merged or moved and are no longer accessible. Often, the manufacturer waits the required time, and has a very short window before being told the data is no longer available for the relevant period due to archiving or client changes. Unresolved trading partner disputes shrink the window of availability further. 

Another common area of discussion relates to the scope and the number of formulary documents and/or claim samples permitted for review. The numbers of consolidations, mergers and acquisitions, the number of clients, claims and formularies included in each invoice period has dramatically increased for some trading partners. This means that any negotiated scope must take into account the products under review, and the number of clients and formularies invoiced during the period. The scope must cover, and allow for the review of, an acceptable percentage and confidence level of the invoiced dollar amounts for those products under review.  

Likewise, manufacturers are noticing an uptick in aggressive trading partner agreement language deflection in the form of clauses that refer to vague statements regarding “audit/review protocols” without defining or providing explanations of the limitations contained within those protocols. Some trading partners are also focusing on requirements that are not relevant to the review process, such as the requirement of CPA licenses. In fact, compliance reviews of rebate agreements are not “audits” in the true sense of the term, and do not involve attestations or require CPA involvement, as they do not involve financial analysis. By forcing CPA licenses, the trading partners are trying to limit the options for review. 

One emerging issue noted more frequently now is trading partner requests to review the compliance review report in its entirety prior to manufacturer receipt. This is problematic when the insistence includes the dollar impact. While it is certainly appropriate to share findings with the trading partner and allow the opportunity to provide management response and resolve findings, sharing the dollar impact for findings with the target rather than solely the manufacturer is more problematic. The methodology for any variance calculation is intrinsically based on a priority ranking of business decisions by the manufacturer. This bias impacts how the numbers are developed and which claims are worth pursuing. The report is a document owned by the manufacturer; choosing which claims to pursue is the manufacturer’s right. The reviewer is merely an agent, with obligations to the manufacturer, and should not be in the position to make business decisions with manufacturer input. 

It is the manufacturer’s right to consider the findings in light of their scope and financial impact, and make choices regarding how to proceed. Putting a financial value on findings before the manufacturer has an opportunity to review and prioritize findings could potentially have an adverse effect on the relationship with the trading partner. The dollar value of exclusions and findings may be used to help a manufacturer understand the scope of an issue, and may not necessarily relate to the manufacturer’s plans to recoup on the findings. Findings may be utilized by the manufacturer on a prospective relationship basis; to identify areas requiring rebate amount changes and corrections and/or other areas of agreement language changes.

The primary goal of the contract compliance review is to provide a level of assurance that trading partners are adhering to the specific provisions of the rebate agreement. The trading partners must be able to provide the necessary documentation to assure a satisfactory level of accuracy and confidence to the manufacturer that they are in compliance with the intent of the agreement. Delays, limitations and restrictions by the trading partners extend the length of time to complete the review and shorten the manufacturer’s time to appropriately act on findings and make corrections to overpayments, underpayments, product placement and benefit requirements, along with any identified agreement language clarification and corrections.

Susan Dunne is a managing director and may be contacted at [email protected].

Regulatory Updates


Clarification of Requirement for Justifications for 8(a) Sole Source Contracts
KEY DETAILS: DOD, GSA and NASA are proposing a rule that would amend the Federal Acquisition Regulation (FAR) to clarify the guidance for sole-source 8(a) contract awards exceeding $22 million. This rule would implement a recommendation by the Government Accountability Office (GAO) regarding the need for additional guidance on when an 8(a) justification is required. The proposed guidance would clarify whether an 8(a) justification is required for 8(a) contracts that are subject to a pre-existing Competition in Contracting Act of 1984 class justification, provide additional information on actions contracting officers should take to comply with the justification requirement when the contract value rises above or falls below $22 million between the Small Business Administration’s acceptance of the contract for negotiation under the 8(a) program and the contract award and clarify whether and under what circumstances a separate sole-source justification is necessary for out-of-scope modifications to 8(a) sole-source contracts.

Effective Communication between Government and Industry
KEY DETAILS: DOD, GSA and NASA are proposing a rule that would amend the FAR to clarify that agency acquisition personnel are permitted and encouraged to engage in responsible and constructive exchanges with industry, so long as those exchanges are consistent with existing law and regulation and do not promote an unfair competitive advantage to particular firms. The amendment to FAR 1.102-2(a)(4), coupled with the existing guidance in the FAR subpart 1.1 and the market research strategies set forth in FAR part 10, is intended to better equip federal acquisition officials with the information needed to issue high-quality solicitations.

COMMENTS DUE: Jan. 30, 2017

Set-Asides Under Multiple-Award Contracts
KEY DETAILS: The FAR Council has published a new proposed rule that would amend the FAR to implement Small Business Administration (SBA) regulations providing governmentwide policy for partial set-asides and reserves, and setting aside orders for small business concerns under multiple-award contracts. The rule would align the FAR with SBA’s regulations implementing provisions of the 2010 Small Business Jobs Act. The Jobs Act provided agencies with authority to set aside part or parts of a procurement for small business, reserve one or more contract awards for small businesses under a full-and-open multiple award procurement and set aside orders placed against multiple-award contracts, notwithstanding fair opportunity requirements.

COMMENTS DUE: Feb. 6, 2017


Paid Sick Leave for Federal Contractors
KEY DETAILS: A new interim rule amends the FAR to implement former President Barack Obama’s Executive Order, Establishing Paid Sick Leave for Federal Contractors, as well as a final rule issued by the Department of Labor (DOL). Although the DOL rule covers both FAR-based contracts and non-FAR-based contracts and contract-like instruments, this interim rule only applies to FAR-based contracts. This interim rule is effective Jan. 1, 2017, and applies to solicitations issued on or after that date. For existing contracts, contracting officers shall include the clause in bilateral modifications extending the contract where such modifications are individually or cumulatively longer than six months. Contracting officers are strongly encouraged to include the clause in existing indefinite-delivery, indefinite-quantity contracts if the remaining ordering periods extend at least six months and the amount of remaining work or number of orders expected is substantial.

COMMENTS DUE: Feb. 14, 2017


Limitation on Allowable Government Contractor Employee Compensation Costs
KEY DETAILS: DOD, GSA and NASA are adopting as final, with changes, an interim rule amending the FAR to implement a section of the Bipartisan Budget Act of 2013. The final rule revises the allowable cost limit relative to the compensation of contractor and subcontractor employees. Section 702 of The Bipartisan Budget Act of 2013 revised the application of the compensation cap, the amount of the cap and the associated formula for annually adjusting it, and set the initial limitation on allowable contractor and subcontractor employee compensation costs at $487,000 per year. This cap will be adjusted annually to reflect the change in the Employment Cost Index for all workers as calculated by the Bureau of Labor Statistics. This rule also implements the narrowly targeted exception to this allowable cost limit for scientists, engineers or other specialists upon an agency determination that such exceptions are needed to ensure that the executive agency has continued access to needed skills and capabilities.

EFFECTIVE: Sept. 30, 2016

Prohibition on Contracting With Corporations With Delinquent Taxes or a Felony Conviction
KEY DETAILS: DOD, GSA and NASA have adopted as final, without changes, an interim rule amending the Federal Acquisition Regulation to implement sections of the Consolidated and Further Continuing Appropriations Act, 2015 to prohibit the federal government from entering into a contract with any corporation having a delinquent federal tax liability or a felony conviction under any federal law, unless the agency has considered suspension or debarment of the corporation and has made a determination that this further action is not necessary to protect the interests of the government.

EFFECTIVE: Sept. 30, 2016

Sole Source Contracts for Women-Owned Small Businesses
KEY DETAILS: DOD, GSA and NASA have adopted as final, with a minor edit, an interim rule amending the FAR to implement regulatory changes made by the SBA that provide for authority to award sole source contracts to economically disadvantaged women-owned small business concerns and to women-owned small business concerns eligible under the Women-Owned Small Business (WOSB) Program.

EFFECTIVE: Sept. 30, 2016

Amendment Relating to Multi-Year Contract Authority for Acquisition of Property
KEY DETAILS: DOD, GSA and NASA are issuing a final rule amending the FAR to implement a section of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2016, to require that “significant” savings would be achieved by entering into a multi-year contract. DOD, GSA and NASA are amending FAR subpart 17.1 to implement Section 811 of the NDAA for FY 2016. Section 811 amended subsection (a)(1) of 10 U.S.C. 2306b by striking “substantial” and inserting “significant.” This rule makes conforming changes at FAR 17.105-1(b)(1) to state that the head of an agency may enter into a multi-year contract for supplies, if the use of such a contract will result in significant savings of the total estimated costs of carrying out the program through annual contracts. This change applies to the DOD, NASA and the Coast Guard.

EFFECTIVE: Oct. 31, 2016

Consolidation and Bundling
KEY DETAILS: DOD, GSA and NASA are issuing a final rule to amend the FAR to implement sections of the Small Business Jobs Act of 2010 and regulatory changes made by the SBA, which provide for a governmentwide policy on consolidation and bundling. DOD, GSA and NASA published a proposed rule on June 3, 2015, that revised the FAR to provide for a governmentwide policy on consolidation and bundling. SBA’s final rule implements the statutory requirements related to bundling and consolidation as set forth in Sections 1312 and 1313 of the Small Business Jobs Act of 2010, as well as Section 1671 of the NDAA for FY 2013.

EFFECTIVE: Oct. 31, 2016

Contractors Performing Private Security Functions
KEY DETAILS: DOD, GSA and NASA are issuing a final rule amending the FAR to remove the DOD-unique requirements for contractors performing private security functions outside the United States and provide a definition of “full cooperation” within the associated clause. DOD, GSA and NASA published a proposed rule on May 27, 2015, to implement Section 862 of the NDAA for FY 2008. This rule amends FAR 25.302, Contractors Performing Private Security Functions Outside the United States, and the associated clause at 52.225-26, removing the DOD-unique requirements, which were incorporated in the Defense Federal Acquisition Regulation Supplement (DFARS) on June 30, 2016. This rule also adds the definition of “full cooperation” to FAR clause 52.225-26 in order to affirm that the contract clause does not foreclose any contractor rights arising in law, the FAR or the terms of the contract when cooperating with any government-authorized investigation into incidents reported pursuant to the clause.

EFFECTIVE: Oct. 31, 2016

Unique Identification of Entities Receiving Federal Awards
KEY DETAILS: DOD, GSA and NASA are issuing a final rule amending the FAR to redesignate the terminology for unique identification of entities receiving federal awards. The change to the FAR removes the proprietary Data Universal Numbering System number, and provides appropriate references to the website where information on the unique entity identifier used for federal contractors will be located. This final rule also establishes definitions of “unique entity identifier,” and “electronic funds transfer (EFT) indicator.”

EFFECTIVE: Oct. 31, 2016

Fair Pay and Safe Workplaces; Injunction
KEY DETAILS: This final rule amends a previous final rule implementing former President Barack Obama’s executive order on Fair Pay and Safe Workplaces to account for a court order enjoining implementation. The rule amends the FAR to include caveats for each section, provision and clause that was enjoined by the terms of the court order. The caveat explains that the affected regulatory coverage has been enjoined as of October 24, and is enjoined indefinitely, but will become effective immediately if the injunction is terminated. The GSA’s Integrated Award Environment has halted actions to release the changes for the System for Award Management that would support bidder and contractor submission of information on labor law violation decisions, as well as change that would support public disclosure of this information in the Federal Awardee Performance and Integrity Information System. Notably, the court order—and thus, this final rule—does not affect implementation of the coverage on paycheck transparency. Accordingly, the paycheck transparency clause language at FAR 52.222-60, 52.244-6(c)(1)(xiv), 52.212-5(b)(36), (e)(1)(xvii) and Alternate II(e)(1)(ii)(Q) take effect for new solicitations issued on or after Jan. 1, 2017, as stated in the final rule.

EFFECTIVE: Dec. 16, 2016

Public Disclosure of Greenhouse Gas Emissions and Reduction Goals-Representation
KEY DETAILS: This final rule amends the FAR to establish a representation for offerors to indicate if and where they publicly disclose greenhouse gas emissions and greenhouse gas reduction goals or targets. Offerors who are registered in the System for Award Management and who received $7.5 million or more in contract awards during the prior fiscal year are required to represent whether or not they publicly disclose their greenhouse gas emissions and their greenhouse gas emissions reduction goals in order to seek new contract opportunities. This representation is voluntary for offerors who received less than $7.5 million in contract awards during the prior fiscal year.

EFFECTIVE: Dec. 19, 2016


DOD has published six notices of proposed rulemaking (NPRM) to establish an updated interim implementation of governmentwide guidance on administrative requirements, cost principles and audit requirements for federal awards, in relation to DOD grants and cooperative agreements.

COMMENTS DUE: Feb. 6, 2017 (for all six NPRM)

Revised Interim Implementation of Governmentwide Guidance for Grants and Cooperative Agreements
KEY DETAILS: In the first of six NPRM regarding its grants and cooperative awards, DOD proposes to remove a part of the DOD Grant and Agreement Regulations (DODGARs) and replace it with a new DODGARs part containing a revised interim implementation of the guidance, while establishing seven subchapters within DOD’s chapter of the Grants and Agreements title of the Code of Federal Regulations. The purpose of this NPRM is to provide an organizing framework for the DODGARs to make it easier for users of the regulations to locate the content that they need.

Format for DOD Grant and Cooperative Agreement Awards
KEY DETAILS: In the second of six NPRM regarding its grants and cooperative awards, DOD proposes to add a new DODGARs part to establish a standard format for organizing the content of DOD Components’ grant and cooperative agreement awards and modifications to them.

Administrative Requirements Terms and Conditions for Cost-Type Awards to Nonprofit and Governmental Entities
KEY DETAILS: In the third of six NPRM updating the DODGARs, DOD proposes to add seven new DODGARs parts to address the administrative requirements included in general terms and conditions of DOD cost-type grants and cooperative agreements awarded to institutions of higher education, nonprofit organizations, states, local governments and Indian tribes. The administrative requirements are in areas such as financial and program management; property administration; recipient procurement procedures; financial, programmatic, and property reporting; and subawards. The proposed new parts establish a uniform way for approximately 100 DOD Component awarding offices to organize the administrative requirements in their general terms and conditions. The proposed new parts also provide standard wording of terms and conditions for the administrative requirements, with associated regulatory prescriptions for DOD Components to provide latitude to vary from the standard wording where appropriate.

National Policy Requirements: General Award Terms and Conditions
KEY DETAILS: In the fourth of six NPRM updating the DODGARs, DOD proposes to add a new DODGARs part to establish a consistent way for DOD Components to organize the portion of their general terms and conditions covering national policy requirements in areas such as nondiscrimination, environmental protection and live organisms. The new part also provides standard wording of terms and conditions for national policy requirements that apply generally to DOD programs and awards.

Definitions for DOD Grant and Agreement Regulations in Subchapters A Through F
KEY DETAILS: In the fifth of six NPRM updating the DODGARs, DOD proposes to add definitions of terms that are common to most portions of those regulations, as well as a central location for the definitions. DOD is proposing terms to define funding instruments and associated business relationships; DOD entities, officials, and programs; principal and co-principal investigator; approved budget; exempt property; small award; and unique entity identifier.

DOD Grant and Agreement Regulations
KEY DETAILS: In the sixth of six NPRM updating the DODGARs, DOD proposes to remove two existing DODGARs parts and revise four others in order to conform them with the 11 parts of the DODGARs proposed in the NPRMs preceding this one.

COMMENTS DUE: Feb. 6, 2017


Undefinitized Contract Action Definitization
KEY DETAILS: DOD is proposing to amend the DFARS to provide a more transparent means of documenting the impact of costs incurred during the undefinitized period of an undefinitized contract action (UCA) on allowable profit, and to recognize when contractors demonstrate efficient management and internal cost control systems by submitting a timely, auditable proposal to support the definitization of a UCA. In some cases, DOD contracting personnel have not documented their consideration of the reduced risk to the contractor for costs incurred as of the date the contractor submits a qualifying proposal to definitize a UCA. While such costs generally present very little risk to the contractor, the contracting officer should consider the reasons for any delays in definitization in making their determination of the appropriate assigned value for contract type risk. Specifically, this rule would:
  • Amend DFARS 215.404-71-2, Performance Risk, to specify that if the contractor demonstrates efficient management and cost control through the submittal of a timely, auditable proposal in furtherance of definitization of a UCA, and the proposal demonstrates effective cost control from the time of award to the present, the contracting officer may add one percentage point to the value determined for management/cost control up to the maximum of 7 percent.
  • Amend DFARS 215.404-71-3, Contract Type Risk and Working Capital Adjustment, to reflect the separation of Item 24 on the DD Form 1547, Record of Weighted Guidelines, into Item 24a, Contract Type Risk (based on costs incurred as of the date the contractor submits a qualifying proposal); Item 24b, Contract Type Risk; and Item 24c, Totals.
  • Amend DFARS 217.7404-6, Allowable Profit, to require contracting officers to document in the price negotiation memorandum the reason for assigning a specific contract type risk value.
  • Amend DFARS 243.204-70-6, Allowable Profit, to require contracting officers to document in the price negotiation memorandum the reason for assigning a specific contract type risk value.
Use of the Government Property Clause
KEY DETAILS: DOD is proposing to amend the DFARS to expand the prescription for use of the FAR government property clause. Specifically, the rule would amend DFARS 245.107 to strengthen the management and accountability of government-furnished property (GFP). DOD has identified a gap in the current process that hinders full implementation of achieving accountability for GFP due to an exception to the use of the clause at FAR 52.245-1, Government Property. The basic property receipt and record-keeping requirements of FAR clause 52.245-1, and as proposed in this rule, mirror customary commercial record-keeping practices.

Independent Research and Development Expenses
KEY DETAILS: DOD has published a proposed rule that would amend the DFARS to ensure that substantial future independent research and development expenses, to reduce evaluated bid prices in competitive source selections, are evaluated in a uniform way during competitive source selections. Specifically, DOD is proposing to amend the DFARS to require contracting officers to adjust the total evaluated price of major defense acquisition programs and major automated information systems proposals, for evaluation purposes only, to include the amount by which the offerors propose that future independent research and development investments reduce the price of the proposals.

Offset Costs
KEY DETAILS: DOD has published a proposed rule that would amend the DFARS to implement statutory changes related to costs associated with indirect offsets under foreign military sales (FMS) agreements. A previous interim rule amended DFARS 225.7303-2, Cost of Doing Business with a Foreign Government or an International Organization, by providing guidelines to contracting officers when an indirect offset is a condition of a foreign military sales acquisition. Specifically, the interim rule set forth that all offset costs that involve benefits provided by the U.S. defense contractor to the FMS customer that are unrelated to the item being purchased under the Letter of Offer and Acceptance (LOA) are deemed reasonable for purposes of FAR Part 31 with no further analysis necessary on the part of the contracting officer, provided that the contractor submits to the contracting officer a signed offset agreement or other documentation showing that the FMS customer has made the provision of an indirect offset of a certain dollar value a condition of the FMS acquisition. FMS customers are placed on notice through the LOA that indirect offset costs are deemed reasonable without any further analysis by the contracting officer.


Network Penetration Reporting and Contracting for Cloud Services
KEY DETAILS: DOD is adopting as final, with changes, an interim rule amending the DFARS to implement a section of the NDAA for FY 2013 and a section of the NDAA for FY 2015, both of which require contractor reporting on network penetrations, as well as DOD policy on the purchase of cloud computing services. This rule is part of DOD’s retrospective plan, completed in August 2011, under Executive Order 13563, “Improving Regulation and Regulatory Review.” DOD’s full plan and updates can be accessed at:!docketDetail;D= DOD-2011-OS-0036.

EFFECTIVE: Oct. 21, 2016

Display of Hotline Posters
KEY DETAILS: This rule amends the DFARS to consolidate the multiple hotline posters into one poster that delineates multiple reportable offenses. At DFARS 203.1003, paragraph (c) is added to permit alternative means of notifying contractor personnel of the DOD Hotline program in lieu of displaying the posters, when performance is outside the United States and security concerns can be appropriately demonstrated to the contracting officer. In the DFARS 252.203-7004 clause, a similar statement is also added at paragraph (b)(1)(ii). The final rule also removes from the DFARS 252.203-7004 clause the statement regarding assistance with translation. The contractor bears the individual and financial responsibility for translation and accuracy of translated hotline posters.

EFFECTIVE: Oct. 21, 2016

DFARS Technical Amendments
KEY DETAILS: DOD is making technical amendments to the DFARS to provide needed editorial changes. This final rule amends the DFARS as follows:
1. Provides direction to contracting officers at DFARS 204.270-2(c) to follow the procedures at DFARS Procedures, Guidance and Information (PGI) 204.270-2(c) regarding the creation and processing of contract deficiency reports;
2. Corrects a reference at DFARS 246.870-2(a)(2) to the clause at 252.246-7008, Sources of Electronic Parts; and
3. Corrects a reference at DFARS 252.246-7008(b)(3)(i) to another paragraph of the clause.

EFFECTIVE: Oct. 21, 2016

Enhancing the Effectiveness of Independent Research and Development
KEY DETAILS: DOD is issuing a final rule amending the DFARS to improve the effectiveness of independent research and development (IR&D) investments by the defense industrial base, by requiring contractors to engage in technical interchanges with DOD before costs are generated. The rule also requires the results of these exchanges to be shared with appropriate DOD personnel.

EFFECTIVE: Nov. 4, 2016

Pilot Program on Acquisition of Military Purpose Nondevelopmental Items
KEY DETAILS: DOD is adopting as final, with changes, an interim rule amending the DFARS to implement a section of the NDAA for FY 2016 that changes the criteria for the pilot program for acquisition of military purpose non-developmental items. Section 892 of the NDAA for FY 2016 removed the requirements under the pilot program for the use of competitive procedures and for awards to be made to nontraditional defense contractors. Section 892 also increased the threshold for use of the pilot program to contracts up to $100 million.

EFFECTIVE: Nov. 4, 2016

Contiguous United States
KEY DETAILS: DOD published a final rule amending the DFARS to remove the acronym CONUS as a term meaning contiguous United States, because it may be confused with “continental United States.”

EFFECTIVE: Nov. 4, 2016

DFARS Final Rule Eases Justification Requirements for Providing Customary Contract Financing
KEY DETAILS: DOD has issued a final rule to amend the DFARS to provide that contracting officers are not required to further justify a decision to provide customary contract financing, other than loan guarantees and advance payments identified in FAR Part 32, for certain fixed-price contracts. The rule applies to contracts with a period of performance in excess of one year that meet the dollar thresholds established in FAR 32.104(d). DOD has determined that the use of such customary contract financing provides improved cash flow as an incentive for commercial companies to do business with DOD, is in the department’s best interest, and requires no further justification of its use.

EFFECTIVE: Dec. 12, 2016


Withholding of Unclassified Technical Data and Technology From Public Disclosure
KEY DETAILS: DOD has published a proposed rule that would establish policy, assign responsibilities and prescribe procedures for the dissemination and withholding of certain unclassified technical data and technology subject to the International Traffic in Arms Regulations and Export Administration Regulations. This proposed rule would apply to DOD components and their contractors and grantees and is meant to control the transfer of technical data and technology contributing to the military potential of any country or entity that could prove detrimental to the nation’s security or critical interests. This rule instructs DOD employees, contractors and grantees to ensure unclassified technical data and technology that discloses technology or information with a military or space application may not be exported without authorization and should be controlled and disseminated consistent with U.S. export control laws and regulations.

Government Property-USAID Reporting Requirements
KEY DETAILS: The U.S. Agency for International Development (USAID) has issued a proposed rule that would amend USAID Acquisition Regulation 752.245-70 to clarify accountability for all mobile information technology equipment provided as government-furnished property to federal contractors. Instead of requiring designation of mobile IT as accountable on a case-by-case basis, the clause is being amended to clarify that all mobile IT equipment is identified as accountable. This includes both mobile IT equipment that is USAID-owned and furnished to the contractor, as well as contractor-acquired mobile IT equipment. Mobile IT equipment includes, but is not limited to, mobile phones, laptops, tablets and encrypted devices. The format of the required Annual Report of Government Property in Contractor’s Custody is corrected to read that all accountable government-furnished property must be reported.

NASA Federal Acquisition Regulation Supplement: Award Term
KEY DETAILS: NASA has issued a proposed rule that would amend the NASA FAR Supplement to add policy on the use of award terms as a contract incentive. NASA is proposing to add Section 1816.405-277 to address the use of award term incentives, including considerations when planning the use of award term incentives, procurement procedures, contractual language and the government’s right to not grant or to cancel award terms and the conditions under which this may occur. The rule also would establish a minimum contract value of $20 million for the use of award term incentives. The rule also would add a clause at 1852.216-XX, Award Term, to inform the contractor of the conditions for earning an award term and the fact that, even if the contractor meets the standards of eligibility for an award term, the government may not grant the award term or cancel the award term under certain listed conditions.

COMMENTS DUE BY: Feb. 7, 2017


Requirement for Nondiscrimination Against End-Users of Supplies or Services (“Beneficiaries”) Under USAID‑Funded Contracts
KEY DETAILS: USAID has issued a final rule to amend its regulations to incorporate a new clause titled “Nondiscrimination Against End-Users of Supplies or Services.” This clause expressly states that USAID-funded contractors must not discriminate among end-users of supplies or services—beneficiaries and potential beneficiaries—in any way that is contrary to the scope of the activity as defined in the statements of work.

EFFECTIVE: Oct. 25, 2016

Revised Voucher Submission & Payment Process
KEY DETAILS: NASA has issued a final rule to amend the NASA FAR Supplement to revise the agency’s voucher submittal and payment process. Effective Dec. 14, 2016, the rule removes an outdated NFS payment clause and its associated prescription relative to the NASA voucher and payment process, and inserts a new clause revising the process. The rule applies to contractors requesting payment under cost reimbursement contracts. NASA believes the changes will result in fewer voucher rejections, rework requirements and payment delays.

EFFECTIVE: Dec. 14, 2016

Incremental Funding of Fixed-Price, Time-and-Material or Labor-Hour Contracts During a Continuing Resolution
KEY DETAILS: The Department of the Treasury has issued a final rule amending the Department of Treasury Acquisition Regulation to provide acquisition policy for using incremental funding for fixed-price, time-and-material or labor hour contracts during a period in which funds are provided to Treasury Departmental Offices or Bureaus under a CR. Heads of contracting activities may develop necessary supplemental internal procedures as well as guidance to advise potential offerors, offerors and contractors of these policies and procedures.

EFFECTIVE: Dec. 16, 2016

Fair Opportunity Complaints on GSA Contracts
KEY DETAILS: GSA has issued a final rule amending the GSA Acquisition Regulation to clarify that the ordering-agency task and delivery order Ombudsman has jurisdiction and responsibility to review and resolve fair opportunity complaints on task and delivery orders placed against GSA multiple-award contracts. Also, the final rule requires the ordering agency to include contact information for their task and delivery order Ombudsman when placing task or delivery orders against GSA multiple-award contracts. Finally, so that GSA can maintain insight into fair opportunity complaints that arise on orders other agencies place against these contracts, the final rule requires the contractor to provide a copy of its complaint to the GSA procurement ombudsman for informational purposes, at the same time the contractor files its complaint to the ordering agency for action.

EFFECTIVE: Jan. 9, 2017

Contractor Financial Reporting of Property
KEY DETAILS: NASA has published a final rule amending the NASA FAR Supplement to add a monthly reporting requirement for contractors having custody of $10 million or more in NASA-owned property, plant and equipment. Each NASA contractor is required to submit NASA Form 1018, NASA Property in the Custody of Contractors, on an annual basis. This rule will add a new reporting requirement requiring contractors to submit a report if at any time during performance of the contract NASA-owned property in the custody of the contractor has a value of $10 million or more. New PP&E reporting requirements are the same for both large and small businesses once the NASA-owned PP&E threshold of $10 million is reached. However, according to NASA, property records show that only three small business contractors with custody of NASA PP&E valued at $10 million or more.

EFFECTIVE: Jan. 17, 2017

Significant Accounting & Reporting Updates

FASB Eliminates Income Tax Deferral for All Intra-Entity Asset Transfers Except Inventory
In October 2016, the FASB issued ASU 2016-16 eliminating the existing exception in U.S. GAAP that prohibits the recognition of income tax consequences for most intra-entity asset transfers. However, the exception has been retained for intra-entity asset transfers of inventory only. As a result, entities will now be required to recognize current and deferred income tax consequences of intra-entity asset transfers (other than those of inventory) when the transfer occurs. The ASU is effective for public business entities for annual reporting periods beginning after Dec. 15, 2017, and interim reporting periods within those fiscal years, and for entities other than public business entities for annual reporting periods beginning after Dec. 15, 2018, and interim periods within annual periods beginning after Dec. 15, 2019. An entity may elect early adoption, but it must do so for the first interim period of an annual period if it issues interim financial statements. The ASU must be applied on a modified retrospective basis through a cumulative-effect adjustment, including the effect of any resultant valuation allowance, to retained earnings as of the beginning of the period of adoption.

FASB Updates Evaluation of Interests through Related Parties Under Common Control in a VIE Analysis
The FASB recently issued ASU 2016-17, to revise how a single decision-maker of a variable interest entity (VIE) should treat indirect variable interests held through related parties that are under common control when determining whether it is the primary beneficiary of that VIE. The ASU amends the VIE guidance to require consideration of such indirect interests on a proportionate basis, instead of being the equivalent of direct interests in their entirety. This makes consolidation less likely. The amendments are effective for public business entities for fiscal years beginning after Dec. 15, 2016, including interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2016, and interim periods within fiscal years beginning after Dec. 15, 2017. Early adoption is permitted. However, if an entity early-adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of that fiscal year.

FASB Clarifies Restricted Cash Presentation
The FASB recently issued ASU 2016-18 to clarify the presentation of restricted cash in the statement of cash flows. The ASU does not define restricted cash and there is no intent to change practice for what an entity reports as restricted cash. The amendments require that a statement of cash flows explain the change during the period in restricted cash or restricted cash equivalents, in addition to changes in cash and cash equivalents. That is, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. Consequently, transfers between cash and restricted cash will not be presented as a separate line item in the operating, investing or financing sections of the cash flow statement. The ASU includes examples of the revised presentation guidance.

The amendments require an entity to disclose information about the nature of the restrictions and amounts described as restricted cash and restricted cash equivalents. Further, when cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, an entity must reconcile these amounts to the total shown on the statement of cash flows, either in narrative or tabular format. This information should be provided on the face of the cash flow statement or in the notes to the financial statements.

The amendments are effective for public business entities for fiscal years beginning after Dec. 15, 2017, and interim periods within those fiscal years. For all other entities, the amendments are effective for fiscal years beginning after Dec. 15, 2018, and interim periods within fiscal years beginning after Dec. 15, 2019. The amendments should be applied retrospectively to each period presented. Early adoption is permitted, including adoption in an interim period. If an entity early-adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. Transition disclosure is required in the first interim and annual period including the nature of and reason for the change in accounting principle, the method of applying the change and description of the prior-period information that has been retrospectively adjusted.

SEC Staff Updates the Financial Reporting Manual and Compliance and Disclosure Interpretations
The staff of the SEC’s Division of Corporation Finance recently published an update to the Division’s Financial Reporting Manual (FRM). [1] The inside cover of the FRM lists a summary of the paragraphs that were updated.

The update amended paragraph 10220.5, which addresses an emerging growth company’s reporting requirements associated with financial statements of entities other than the registrant and pro forma financial information. An emerging growth company (EGC) is permitted to present only two years of financial statements for entities other than the registrant in its initial registration statement, even if the application of the significance tests otherwise results in a requirement to present three years. Paragraph 10220.5(a) explicitly extends this relief to an EGC’s acquired real estate operations under Rule 3-14 (the FRM had previously extended this relief to acquired businesses under Rule 3-05 and equity method investees under Rule 3-09). Additionally, paragraph 10220.5(c) was amended to explicitly permit an EGC to omit pro forma financial information from its initial registration statement if it reasonably expects that such periods will not be required at the time of the offering. The guidance is consistent with securities law amendments included in the Fixing America’s Surface Transportation (FAST) Act, which permit an EGC to omit historical periods from its financial statements if it reasonably expects that such periods will not be included in its effective registration statement.

The update also provides guidance related to reporting implications of certain new accounting standards:
  • The New Revenue Standard (FASB Topic 606) - Paragraph 11120.4 was added to address the presentation of pro forma financial information associated with a significant acquired business in the year of adoption. If a registrant adopts Topic 606 on a full retrospective basis on Jan. 1, 2018, and acquires a significant business in 2018, it is not required to apply the new revenue standard to pro forma financial information for periods prior to adoption (e.g., the pro forma income statement for the year ending Dec. 31, 2017).
  • The New Leasing Standard (FASB Topic 842) – Section 11200 was added to address reporting issues related to the adoption of the new leasing standard. The guidance summarizes the available adoption dates and transition methods. A calendar year-end registrant is required to adopt the standard on a modified retrospective basis on Jan. 1, 2019, with an initial application date of Jan. 1, 2017. Paragraph 11210.1 specifies that companies are not required to also retrospectively revise their 2016 financial statements if they file a registration statement on Form S-3 in 2019. [2]  The guidance indicates that the reissuance of the financial statements in the Form S-3 only accelerates the requirement to recast the 2017 and 2018 financial statements, but it does not change the initial date of the standard’s application.
  • The New Disclosures about Short-Duration Contracts for Insurance Entities Standard (FASB Topic 944) – Section 11300 was added to address reporting issues related to the adoption of ASU No. 2015-09, Disclosures about Short-Duration Contracts. Like the sections on other new standards above, the guidance summarizes the adoption dates and transition methods. Paragraph 11310.1 was added to address the disclosure requirements related to claims development tables. ASU 2015-09 requires disclosure of disaggregated claims development tables for each reportable segment which reflect re-estimates of claims by accident year for up to ten years. Consequently, the guidance indicates that Property and Casualty insurers are no longer required to separately present the consolidated 10-year loss reserve development table required by Securities Act Industry Guide 6 and Exchange Act Industry Guide 4 in their filings.
The staff also updated its compliance and disclosure interpretations (C&DIs) several times this fall. Most of these updates are legal in nature and provide guidance on tender offers, Regulation A, Regulation AB, Regulation D, Pay Ratio Disclosure and various other Securities and Exchange Act rules and forms. One notable interpretation relates to the financial statement requirements in a Regulation A offering. Securities law amendments included in the FAST Act permit an emerging growth company to omit historical periods from its financial statements if it reasonably expects such periods will not be included in its effective registration statement. One of the new C&DIs formally extends this reporting relief to Regulation A filers. An issuer conducting a Regulation A offering is permitted to omit financial information for historical periods (including financial information of other entities that may be otherwise required) if it reasonably expects those periods will not be required at the time Form 1-A is qualified by the SEC.

PErspective in Government Contracting

A feature examining the role of private equity in the government contracting space.
The health IT space continues to heat up as the healthcare industry drives toward technology-enabled efficiencies, improved delivery of care and treatment innovations. And with federal agencies—Medicare, Medicaid and the Departments of Veterans Affairs and Defense—remaining among the leading global consumers of healthcare, according to Washington Technology, government contractors providing the latest in analytics, cloud computing and other key health innovations could become ripe targets for PE investment.
In 2015, the Centers for Medicare & Medicaid Services (CMS) reports that Medicare and Medicaid spending reached nearly $1.2 trillion, representing more than a third of all national health expenditures and exceeding private health insurance spending by roughly $2 billion. And according to Deltek, a government contractor information solutions provider, federal spending on health IT spending is on track to reach $6.4 billion by 2021, up from $6 billion in fiscal year 2016.

Deal activity in the health IT space has already started to accelerate in response to this burgeoning market. The Merck Global Health Innovation Fund, GE Ventures, Peloton Equity, Zaffre Investments and Morgan Stanley Alternatives Investment Partners recently announced a $30 million joint investment in Arcadia Healthcare Solutions, while TPG has announced it will be acquiring Mediware Information Systems from Thoma Bravo, with the deal set to close sometime in Q1 2017. Meanwhile, Washington Technology reports that IT solutions provider ManTech International acquired Edaptive Systems, a company providing software, business intelligence and data services to the Department of Health and Human Services, for an undisclosed sum in December 2016. Primus Capital also announced in January that it had acquired healthcare payment automation company Payspan, also for an undisclosed sum.

While the mid- to long-term picture suggests robust growth for government spending on health IT, the near-term picture is not quite so rosy. In fact, Nextgov reports that federal health IT spending is facing a $700 million decrease in fiscal year 2017 as the government aims to roll back CMS expenditures on Affordable Care Act initiatives. However, a number of recent fundraising announcements suggest that the PE industry is already beginning to position itself to reap the benefits that a steady, long-term increase in public and private sector demand will yield for investors.

In late December, Wildcat Venture Partners announced that it had raised $52.2 million toward its debut fund, which will focus on startups leveraging artificial intelligence, virtual reality, machine learning and other technologies in the digital health space, according to PitchBook. PitchBook also reports that NewGen Capital and Pitango Venture Capital—both of which invest in the digital health space—have announced new flagship funds that will target technological innovation in the health industry. NewGen is currently seeking $75 million, according to SEC filings, while Pitango’s $175 million fund has already made its first investment.

Of course, much remains to be seen about how federal spending priorities may shift under a new presidential administration. The longer-term outlook, however, remains bright as the government’s need for increasingly sophisticated healthcare technology—particularly for veterans and military members—continues to grow.

Future PErspectives: What’s Next for Government Contracting Investors
As the Trump administration settles into the White House, defense contractors are waiting to see what international, military and defense priorities emerge as the direction of foreign policy evolves. While the Trump administration has indicated a desire to rein in costs—recently meeting with Lockheed Martin and Boeing executives to discuss ways to bring down the costs of the F-35 stealth jet and presidential aircraft programs—Trump has also suggested that he would boost military spending overall. In addition, The Wall Street Journal reports that the military’s supply of precision-guided munitions is dwindling as a result of continued air support for U.S. engagements overseas, creating opportunities for defense contractors producing sophisticated weapons technology.

What does this mean for investors? The defense contracting industry—particularly those companies at the forefront of technological innovation—are likely to become more appealing for private equity firms looking for steady growth investments with solid returns.

Sources: Bloomberg, Business Insider, Buyouts, Deltek, Nextgov, PitchBook, The Wall Street Journal, Washington Technology

Did you know...

According to Washington Technology, IT modernization will be a top priority for 2017 as agencies look to address critical system and security shortcomings as well as meet citizen needs.

A total of $210 billion in DOD contracts are set to expire in 2017, says analytics firm Govini. Govini predicts the competitive environment will fuel the ongoing trend of mergers and acquisitions in the IT space.

Bloomberg Government reports that the DOD intends to learn about robotic technologies from Uber, following the recently awarded Advanced Robotics Manufacturing Innovation Hub.

In early January 2017, Boeing moved the headquarters of its $31 billion defense segment from the St. Louis metropolitan region to the Washington, D.C., area notes GovCon Wire.

The latest American Express OPEN for Government Contracting initiative survey reports that 72 percent of small businesses upped their efforts to bid on federal contracts, increasing time and money dedicated to winning part of the government’s $90 billion procurement budget.  

For more information on BDO USA’s service offerings to this industry, please contact one of the following practice leaders:

Christopher Carson
Audit Office Managing Partner, National Government Contracting Practice Lead


Eric Sobota
Managing Director, Government Contracting Advisory Services

Joe Burke
Partner, Transaction Advisory Services
  Derek Shaw

Stephen Ritchey 
Audit Partner
  Jeff Schragg 
Tax Partner


Andrea Wilson
Managing Director, Grants Advisory Services

[1]    The FRM is an internal SEC staff reference document that provides general guidance covering several SEC reporting topics. While the FRM is not authoritative, it is often a helpful source of guidance for evaluating SEC reporting issues. The FRM, along with other helpful guidance, can be accessed from the Division of Corporation Finance homepage, which is located at:
[2]    Item 11(b)(ii) of Form S-3 requires companies to file restated financial statements if there has been a change in accounting principle and the change requires a material retroactive restatement of the financial statements.