GovCon Expert Kim Koster Offers a Guide to Turning Compliance Into a Competitive Edge

by Kim Koster, VP of Industry Marketing at Unanet

As heated as competition for government contracts is these days, being good enough is, well, no longer good enough. To win new business and grow the bottom line, GovCon firms must find creative ways to distinguish themselves from the thousands of other firms that crowd the market.

The ability to consistently choose the right opportunity targets and teaming partners is one obvious way for a firm to separate itself from the crowd. Developing a track record of strong performance is another. But in a market as highly regulated as this, there’s one often-overlooked factor that can really elevate a GovCon firm’s résumé: proven compliance excellence.

The Defense Contract Audit Agency “touched” about 5,800 contractor business units in fiscal 2021, not all of which are up to the rigor of maintaining accounting compliance in the government space. But those that are can and should be using their compliance track record to gain an edge.

The 2022 edition of the GAUGE Report, the annual GovCon benchmarking study from Unanet and CohnReznick, includes several insights that hint at how compliance gives firms extra competitive traction:

• Adequate accounting systems were “frequently or always required” in solicitations 66% of the time.
• Government contracting firms put “adequate business systems” second on their list of top audit challenges (see the graphic below).
• Labor floor checks increased this year, partly due to remote work.

Six defined business systems are relevant to the audit process: accounting, estimating, material management and accounting systems, purchasing, government property and earned value. Firms that demonstrate they have adequate business systems in these areas may have a built-in advantage over the competition in the bid process. In the GAUGE Report, we found that accounting systems were cited as the most frequently required system on new solicitations, followed by purchasing systems (see the graphic below).

One interesting note here is that many contractors with systems that are deemed adequate often do not have documentary evidence to support that claim. How can firms substantiate an “adequate” rating? A GovCon firm itself can’t get DCAA or the Defense Contract Management Agency to review a system on request. The agency has to initiate it. What’s more, there is no incentive for agency purchasing contracting officers to increase the bidders’ pool. Thus the burden is on the bidder when a solicitation requires documentation. In many cases, bidders are required to provide some form of evidence (like a letter from DCAA or other independent agency) stating that a certain system has been approved for use on government contracts.

Today, unfortunately, contractors that do not have assessed systems can be excluded from solicitations because of uncorrected system deficiencies, because systems have not been reviewed, because they’re waiting for system corrections requested during a review to be verified and approved, or because a system adequacy determination has expired.

Against this backdrop, let’s explore three potential pathways a firm can take to turn compliance into a competitive advantage. In Plan A, the optimal route, your firm’s system has been examined by an agency and determined to be adequate. In this case, you’ll want to get a copy of the report and/or determination, and provide it as part of a project bid. If one of your systems was examined and found to be deficient, fix the deficiencies, then get a follow-up audit or review to secure an adequacy determination and use that determination in your bids.

If one of your systems has never been reviewed, go to Plan B. This entails:

• Getting your system reviewed by the government — if you can. Remember, neither DCAA nor DCMA will examine a system based on a contractor request. They will, however, respond to such a request if it’s made by a PCO. Here’s where to leverage a solid relationship with a PCO, prevailing upon them to request an examination of a system.
• Being proactive in pursuit of an exam. An SF1408 examination, for example, takes just a few days. But because DCAA has a considerable backlog, the sooner your firm gets in the queue, the better. An estimating system examination is more complex and can take longer. A contractor purchasing system review or CPSR can take months and there’s an even greater backlog at DCMA to get one.

If neither Plan A nor Plan B is viable or applicable, it’s on to Plan C, where your firm pays a commercial firm to conduct an independent examination. The Federal Acquisition Regulation or FAR contemplates an SF1408 examination being performed by an independent audit organization, such as a CPA firm. Keep in mind, however, that certain government solicitations will only accept an SF1408 examination finding that has been executed by a government official. OASIS solicitation language is a case in point: “Acceptable documentation may include current and valid determination letters from the Contractor’s cognizant DCMA or CFA CO, DCAA audit reports,” it states, “or Pre-Award Surveys of Prospective Contractor Accounting System (SF1408) completed by Government Officials.”

There does appear to be progress on this front, as OASIS+ solicitation language provides more flexibility by following the latest procurement trend, a self-scoring system, where firms earn points for systems, clearances, certifications and past performance, and all bidders meeting the minimum points requirement are eligible to win an OASIS+ contract.

Whatever pathway your firm ultimately takes, be sure to stay proactive by:

1. Advocating for yourself and making your voice heard. Make a comment on a solicitation as you consider bidding. Object to the restriction limiting SF1408 examinations to “government officials,” noting that FAR permits examinations by commercial audit organizations. While FAR does not address purchasing, estimating, EVM, property or MMAS systems, many audit firms do cover them. So state plainly that you support audit firm examinations being recognized.
2. Asking for clarifications of vaguely worded compliance sections. In recent solicitations the requirements for business systems are not always clear. Do not hesitate to get further clarification; it could be the difference between winning or losing.
3. Ensuring your firm and its accounting department are up-to-date and well versed in new accounting standards such as ASC 606 and ASC 842. Understand how the changes will impact your books and your practices around billing, expense reporting and debt covenants.
4. Investing in cybersecurity. No matter what service you provide the federal government, cybersecurity is bound to carry more weight in competitive procurements. This is especially true within the Department of Defense. Make sure your users, business systems and data are secure and understand how Cybersecurity Maturity Model Certification requirements will affect your business.

In a business as competitive as government contracting, don’t overlook the importance of compliance. All the little things a firm does to give itself an edge on the compliance front may well add up to big-time project wins.