Continuing a six-part series, MorganFranklin’s Government Contracting Advisory Services (GCAS) team examines key considerations for government contractors as they navigate compliance with federal contracting regulations. We also focus on establishing, evaluating, and enhancing internal controls within the confines of maintaining compliance.
This article will examine a key element of the procure-to-pay business process for government contractors, the Contractor’s Purchasing System. The typical procure-to-pay process involves buying goods or services beginning with a purchase requisition, followed by a purchase order and moving to invoice and payment processing. The Defense Federal Acquisition Regulation Supplement (DFARS) (under 252.244-7001) focuses on the purchase requisition and purchase order process to ensure contractors are procuring fair and reasonably priced items and taking proper due diligence in the sourcing and selection process. The Contractor Purchasing System clause in the DFARS prescribes twenty-four criteria a contractor must meet when executing a procurement.
Contractor Purchasing System Reviews (CPSRs) are conducted by the Defense Contract Management Agency (DCMA) to evaluate the system’s effectiveness and determine adequacy. Receiving a rating of inadequate in a CPSR can result in organizational impediments including needing to obtain a contracting officer’s consent to subcontract, withholding of payments, and potential harm to the organization’s reputation. This can additionally lead to increased scrutiny by the government and lessen the probability of obtaining future government contracts.
Having a sound, efficient, and compliant purchasing system provides an organization with ability to operate more efficiently, maintain accurate and comprehensive support for purchases, and reduce risks of errors or questioned costs through effective segregation of duty and channels of authority.
Key Compliance Consideration #1: Streamlined Processes
Many contractors perform purchasing in a decentralized manner. For example, procurements may be executed at the project level and be executed slightly differently by different projects or programs. This often results in inconsistencies related to supporting documentation which can lead to inadequate supporting documentation for procurements if one area of the organization has not implemented practices and processes which produce the required and compliant documentation. This can also create inefficiencies related to various levels of review, and potentially increase costs of procurement activities.
How can this risk be mitigated?
Creating a streamlined procurement process that can be applied to all procurements across the organization can minimize inconsistencies and increase efficiency in the procurement process. This begins with designing and implementing comprehensive policies and procedures for the end-to-end procurement process. The policies and procedures should include well-defined roles and responsibilities for each individual involved in the procurement process to reduce duplication of efforts and confusion on task ownership.
Along with well-defined policies and procedures, organizations should design and implement standard templates for documentation of procurement requirements. The DFARS purchasing system clause requires contractors to maintain supporting documentation on vendor selection, price and cost analysis, negotiations, and other considerations taken during the procurement process. Creating templates with the required fields and structure for this documentation reduces the risk of missing or inadequate documentation and makes the process clearer for procurement personnel. Organizations can also consider the use of automation tools to process and store documentation. Most procurement tools have the capability or can be customized to route transactions or requisitions to the appropriate preparers and approvers based on the organization’s policies and procedures, which can save time and reduce manual efforts.
In addition, performing a periodic (best practice being at least annual) internal review of the procurement process, including how practices in place adhere to prescribed policies and procedures, can help management identify any non-compliances or process bottlenecks. This review can be critical in resolving issues in the process, finding new efficiencies, and resolving any non-compliances.
Key Compliance Consideration #2: Price & Cost Analysis
A common finding related to cost and price analysis is that the contractor did not adequately document the analysis performed and the conclusion reached.
As a part of the procurement process, when selecting a vendor or subcontractor, contractors must evaluate proposals for fair and reasonable price or cost. A price analysis is performed when there are multiple vendors or subcontractors who can perform the work or provide the product. This is considered a competitive bid. When there is competition, contractors are only required to analyze and compare the price of the work and do not need to evaluate cost build up. The same is true for commercial items, however commercial items require slightly different documentation known as a “Commercial Item Determination” form. We will not dive into commercial items in this article, but it is important to note they do fall under the price analysis category.
Cost analysis is required when contractors are performing single or sole source selections, meaning only one vendor or subcontractor has the qualifications and ability to perform the work or provide the product. Contractors must obtain and review the cost build up from the vendor or subcontractor and evaluate it for fair and reasonable pricing.
How can the risk of inadequate cost or price analysis be mitigated?
When performing both price and cost analyses, contractors should document the procedures performed and conclusions reached. This is a step in the contractor’s procurement where template forms can be critical in ensuring documentation contains all necessary information. Preparers and reviewers should have comprehensive training on what data is required in the documentation. In addition, companies should perform routine reviews of procurement files to ensure they are compliant with policies and procedures and documentation is adequate.
Key Compliance Consideration #3: Fiscal Authority & Controls
A key part of streamlining the procurement process is creating clear lines of authority and appropriate fiscal authority levels. This means removing complexity in authority matrices, as much as possible, to ensure the right people are approving the right documentation and transactions and eliminate redundancy.
Another common inefficiency within contractor purchasing systems is too many levels of review for transactions and documentation. This is often caused by organizational changes or restructurings, leading to updates and additions to authority matrices but not necessarily optimizations. These levels of review can sometimes be lateral for awareness purposes but require various functions across the organization to review purchasing file documentation, increasing the time it takes to fully process a procurement.
How can this risk be mitigated?
Implementing a simpler, more targeted authority structure can improve processing time for procurements and add clarity to the process.
One way of accomplishing this is reviewing the company’s authority matrix and ensuring it aligns with fiscal authority required for approving procurements. This eliminates having multiple levels in the authority matrix fall within one fiscal category for procurements. Additionally, the authority matrix should differentiate between types of procurements and show exactly which positions should approve different procurements, eliminating confusion and the potential for obtaining multiple approvals “to be safe” when the requirement is not clear.
The contractor purchasing system is a complex and highly scrutinized process for government contractors. To help manage risks associated with process complexities, contractors can create streamlined policies, procedures, and practices to help ensure purchasing personnel have clearly defined roles and responsibilities and processes to follow. Additionally, well-designed tools and templates add standardization and eliminate questioning on what documentation is required, adding efficiency and accuracy to the process. Regularly training employees on the tools, policies, procedures and templates supports a cohesive process across the organization and reduces the risk of errors.
The self-assessment below can be used to evaluate your organization’s current state procurement system and identify any aspects which may require optimization.
- Is the end-to-end purchasing process clearly defined and described in the company’s policies and procedures?
- Does the company authority matrix effectively cover procurement types and required approvals?
- Is your authority matrix current? When was it last updated?
- Is an annual internal review of the procurement process performed?
- Do procurement policies and procedures align with current practices?
- Are employees involved in the purchasing process receiving the applicable training?
How MorganFranklin Can Help
At MorganFranklin we have a team of seasoned government contracts advisors with over 50 years of combined experience that includes FAR, DFARS, CAS, FFRDC, Business Systems designs, evaluations, optimization, including creating, reviewing, and implementing relevant policies, procedures and processes to ensure clients maintain or achieve the level of compliance necessary to obtain adequacy. We have experience supporting audits and negotiating with government procurement personnel to mitigate risks and remediate non-compliances.
Authored by: Jose Soto and Mike Castellon
Want to catch up? Check out the first two blogs of the series below.
Part I: https://www.morganfranklin.com/insights/key-internal-control-considerations-in-govcon-compliance-hire-to-retire-part-one/
Part II: https://www.morganfranklin.com/insights/key-internal-control-considerations-in-govcon-compliance-hire-to-retire-part-two/