Top 5 Deficiencies in a CPSR Audit
Federal Acquisition Regulation (FAR) 44.303 identifies 11 items that command “special attention” during a Contractor Purchasing System Review (CPSR) audit; Defense Acquisition Regulation Supplement (DFARS) 242.244-7001(c) lists 24 criteria a contractor’s purchasing system shall contain; and the Defense Contract Management Agency (DCMA) CPSR Guidebook contains 30 Job Aids to aid DCMA analysts during a CPSR audit.
While all elements of a contractor’s purchasing system are important, which policies and/or processes are most often found to be deficient during a CPSR audit? According to DCMA, the following deficiencies have been in the top 10 over the past five years with Price Analysis, Sole Source Justification, and FFATA ranking #1, #2, and #3 respectively:
- Policy & Procedures Manual (a/k/a Procurement Manual)
- Federal Funding Accountability and Transparency Act (FFATA) (a/k/a Executive Compensation)
- Cost/Price Analysis
- Sole Source Justification
Let’s look at each one in depth.
1. Policy & Procedures Manual
It is understandable why the Policy & Procedure Manual would be among the top five deficiencies discovered by DCMA during a CPSR audit. It is the compilation of a company’s policies, procedures, guidelines, practices, forms, etc. DCMA CPSR analysts will take note if it is not updated regularly to reflect changes in federal regulations, thresholds, internal corporate changes, etc.
- Policies & Procedures are inadequate to provide the proper guidance to procurement personnel in order to prevent inappropriate spending of USG funds;
- Policies & Procedures are inadequate due to the need for revisions or expansion of certain sections within the manual;
- Policies & Procedures are inadequate because regulatory references do not include prior thresholds and dates.
SpendLogic’s onboarding process includes a review of an organization’s policies and procedures to identify and address deficiencies or inadequacies. SpendLogic incorporates and references the organization’s policies & procedures into the development of the organization’s SpendFile module.
2. Federal Funding Accountability and Transparency Act (FFATA)
FAR 52.204-10, Reporting Executive Compensation and First-Tier Subcontract Awards, when included in the prime contract and no exemption applies, requires prime contractors to report, in the Federal Funding Accountability and Transparency Act Subaward Reporting System (www.fsrs.gov), specific information on first-tier subcontractors to include the executive compensation of the top five executives of first-tier subcontractors who receive an award of $30,000 or greater 1. Reporting must be completed by the end of the month following the month of award. Inasmuch as this is a Public Law (PL 109-282), failure to comply is a violation of public fund transparency laws which DCMA CPSR auditors would note as a significant deficiency in their report.
- Contractor’s policy and procedure fails to provide proper guidance to ensure compliance with Public Law 109-282;
- Contractor failed to report first-tier subcontractor awards and executive compensation;
- Contractor failed to timely report first-tier subcontractor awards and executive compensation;
- Contractor failed to report or timely report any increases in first-tier subcontractor award;
- Contractor failed to correctly report a de-obligation.
SpendLogic’s SpendFile (Documentation Folder) module includes automatic triggers based on federal procurement regulatory thresholds to ensure that procurement personnel are aware of any reporting requirement. SpendFile’s built-in peer and compliance review workflows further mitigate the risk of non-compliance.
3. Cost/Price Analysis
In the absence of competition, a price analysis or cost analysis (Truthful Cost or Pricing Data (Truth in Negotiations Act (TINA))) must be conducted to determine whether a supplier’s price is “fair and reasonable”, and the analysis must be properly documented in the file. FAR 15.404-1(b)(2) describes each of the price analysis methodologies to determine price reasonableness. For subawards exceeding $2M, FAR 15.403-4 requires the submission of certified cost or pricing data. FAR 15.404-1(c)(2) describes the cost analysis methodologies available to evaluate each cost element individually. In addition to a cost analysis, a price analysis should also be performed. It is not the responsibility of the prime contractor to “justify” the price of the supplier, but rather to ensure that it is fair and reasonable. Inasmuch as Truth Cost or Pricing Data is a Public Law (PL 87-653), DCMA CPSR auditors note this noncompliance as a significant deficiency. Notably, DCMA CPSR auditors will be mindful of contractors who attempt to split an award to avoid compliance with regulatory requirements.
- Contractor’s policy and procedure fails to provide proper guidance to ensure compliance with priced analysis and cost analysis (Public Law 87-653);
- Contractor’s price or cost analysis is conducted AFTER an award is made;
- Contractor relies solely on GSA schedule prices as basis for price comparison;
- Contractor price/cost analysis documentation is inadequate or missing;
- Contractor failed to document competitive award;
- Contractor failed to either conduct or sufficiently document price negotiations when price was determined not to be fair and reasonable;
- Contractor’s documentation of a best value award is insufficient, inadequate, or missing;
- Contractor failed to obtain Certified Cost or Pricing Certification from supplier;
- Contractor failed to flow down the prescribed FAR clause;
- Contractor failed to document an exemption to Truthful Cost or Pricing Data.
The combination of SpendLogic’s Price Analysis module (and soon to be released beta version cost analysis module) and SpendFile will significantly mitigate the risk of non-compliance. SpendLogic’s Price Analysis helps procurement professionals avoid DCMA CPSR pitfalls by producing audit-ready analyses with citations and calculations. The Price Analysis module is compliant with FAR 15.404-1(b)(2) and can analyze parts, services, and travel in one single report. SpendFile’s automatic dollar threshold triggers, with built-in exceptions, alert the procurement professional when a price analysis and/or cost analysis is required. Additionally, the built-in peer and compliance review workflows further reduce non-compliance risks.
Prime contractors should only be doing business with responsible subcontractors. FAR 52.209-6(c) requires that for each proposed subcontractor whose award will exceed $35,000 shall disclose, in writing, whether, at the time of award, the subcontractor, or any of its principals, is not debarred, suspended or proposed for debarment by the Federal government unless that supplier is providing a commercially available off the shelf (COTS) item. This is a mandatory flow down requirement.
- Contractor’s policies & procedures are insufficient to ensure the requirements are met on all applicable subawards;
- Contractor failed to include the requirements of FAR 52.209-6 in each subcontract;
- Contractor obtained disclosure after the date of award to the subcontractor;
- Contractor failed to notify Contracting Officer, in writing, that subcontractor is debarred, suspended, or proposed for debarment prior to award.
SpendFile’s automatic dollar threshold triggers, with built-in exceptions, notifies the procurement professional when FAR 52.209-6 applies. Moreover, the built-in peer and compliance review workflows further reduces non-compliance risks.
5. Sole Source Justification
FAR 52.244-5 requires the selection of a supplier/subcontractor be made on a competitive basis “to the maximum practical extent.” If an award is not competed, documented justification is required demonstrating why the award was not competed and showing management approval (DFARS 252.244-7001(c)(9)). Competition provides the government with the best assurance of receiving a fair and reasonable price.
- Contractor makes no subawards on a competitive basis;
- Contractor’s policies and procedures are insufficient and do not ensure buyers consider price, quality, ability to timely deliver, technical capabilities, and financial capabilities when award is made to other than lowest price;
- Contractor’s documentation for a single or sole source award is inadequate or missing;
- Lack of or missing “management level” justification or approval;
SpendLogic’s Price Analysis module has a built-in Source Justification workflow in which the procurement professional can either complete the Source Justification or submit a Source Justification request to a program/engineer focal. SpendLogic’s Source Justification module is based on the methodologies in FAR 6.302 and, depending on the selection, requires specific documentation and calculations to support the focal’s reason for the single/sole source. Once the company focal completes the Source Justification, the procurement professional receives and email that it is complete. Additionally, when used in conjunction with SpendFile and when a single/sole source justification is required, SpendFile’s “stop light” visual will indicate to the procurement professional, peer, or compliance reviewer whether the single/sole source justification is complete and in the file.
Significance of a CPSR Audit Deficiency
When a deficiency is identified during DCMA’s CPSR audit, a Corrective Action Report (CAR) is used to document the deficiency. The ACO makes the determination whether a deficiency is “significant” for a business system deficiency. It is important to understand the different levels of CARs. Pursuant to DCMA-MAN 2303-01, the four CAR levels are:
Level I: Describes a deficiency on an outcome of a process(es) and is not a symptomatic breakdown of a process or system.
Level II: Describes a deficiency in a contractor’s process(es) that are:
- An escalation of a Level I CAR; or
- Multiple major or critical deficiencies indicating a systemic issue through a process(es).
Level III: Describes a deficiency in contractor’s system impacting the ability to meet cost, schedule, or performance requirements that are:
- A significant deficiency pursuant to DFARS 252.242-7005, “Contractor Business Systems”, or
- A failure to respond to a lower-level CAR or remedy a recurring non-compliance.
Note: A Level III CAR may result in a business system disapproval, among other contractual available remedies.
Level IV: Describes when a deficiency is of a serious nature or when a Level III CAR has been ineffective.
Note: A Level IV CAR will result in a mandatory review of available contractual remedies, including but not limited to purchasing system disapproval.
What is obvious to our current customers, based on their 100% CPSR pass rate, SpendLogic can automate and improve your company’s purchasing system documentation in ways unmatched by other solutions in the industry and help you avoid the top 5 DCMA CPSR audit deficiencies.
See for yourself: Schedule a quick 15-minute demonstration of SpendLogic.
1. When prime contract award date is October 1, 2015, or later.