Recently, @Guy Filippelli sparked a discussion about the requirement from OSD SBIR that Phase II awards be cost-plus contracts, which requires small businesses to undergo accounting system audits by DCAA. This requirement has raised several concerns and considerations among small business owners, and is a soapbox topic for me. Rather than simply commenting on the thread, I decided to dig deeper into this topic in an Auxo blog post.
Let's start by clarifying that this post isn't aimed at providing an education on DCAA audits themselves. For that, interested parties should refer to DCAA’s Small Business FAQ’s [1] or seek out an expert (message me if you need a recommendation). Instead, my focus here is on helping businesses determine whether they should consent to such audits and exploring the associated pros and cons. Additionally, I'll speculate on why the USG implements such requirements, drawing from my personal experiences and observations both inside and outside of the USG.
Firstly, it's crucial to acknowledge that undergoing a DCAA audit isn't a trivial matter. It's a significant commitment that involves continuous procedures, controls, and audits throughout the company's lifecycle. Businesses must carefully evaluate whether this aligns with their business model or planned federal sales before agreeing to it.
Cost-plus contracts, as opposed to fixed-price contracts, require contractors to report actual costs incurred. For SBs, this becomes particularly pertinent in sole-source contracts, such as those awarded through SBIR Phase III authority, where the government lacks comparable offers for price comparison. In such cases, alternative methods can be used to determine if a proposed price is fair and reasonable, which oftentimes requires a more detailed evaluation of a contractor’s proposal [2].
But why does the USG insist on small businesses having audited accounting systems and/or being able to undertake cost-plus contracts? One rationale lies in the nature of the work being performed and the contract type. Particularly in R&D endeavors, there's a logical basis for awarding cost-plus contracts, considering the evolving nature of such efforts [3].
Furthermore, audited accounting systems provide valuable data to the USG and offer protection to the Contracting Officer. Many COs lack direct pricing support, especially for smaller contracts, and having an external agency validate a small business's rates can mitigate risks and provide insights into the true cost of fulfilling a requirement.
In my experience, the USG often emphasizes the importance of completing a DCAA audit, citing it as a sign of maturity in the federal space and a gateway to more diverse award opportunities. In fact, many of these USG members may have no idea what it takes to undergo an audit, and likely do not know whether or not it is to the SBs advantage to take contract types other than Fixed Price or Hours-based unless they are familiar with your company’s GTM strategy and product roadmap. However, each small business should carefully weigh these considerations for themselves, based on their specific offerings, business model, and sales goals.
For dual-use companies or those solely seeking eligibility for initial grants (such as OSD SBIR/STTRs), I recommend exploring alternative avenues for funding initial R&D. There are numerous ‘lightly competitive’ vehicles available that don't necessitate cost-plus awards, such as those awarded via Commercial Solutions Openings (CSOs).
Additionally, commerciality or having commercial historical sales/published pricing is both an exception to the requirement to provide certification of pricing (which ties to the requirement for a more detailed price proposal) and a method that the government can use to determine if your price is fair and reasonable. So, once you are able to generate commercial sales, you should not need to undertake cost-plus contracts unless you choose to do something exclusively for the USG that does not meet the definition of a commercial product or service.
Please note that opting out of a DCAA audit doesn't negate the need for a well thought-out and documented pricing model and methodology. Beyond being GAAP-compliant, you should consider what data your company needs to collect, analyze, and monitor to understand what it costs to sell your offering and what an appropriate price point is for your market. If you are dual-use, you should consider how your pricing model fits your use-case. For example, if your government use case is to sell software to USG customers that operate on classified networks, a per-seat model is going to be difficult to maintain and enforce.
Additionally, the timing of leveraging funding opportunities like SBIR/STTR while generating commercial sales, with the intent of selling commercial items back to the USG, is not an easy feat. However, there are ways to manage such a path without accepting a cost-plus contract.
In conclusion, while DCAA audits and cost-plus contracts may offer certain benefits, they aren't always the optimal choice for every small business. Understanding the nuances of contract types, market demands, and business objectives is crucial in making informed decisions in the federal contracting landscape.
Has your small, dual-use, or federal business undergone a DCAA audit? Please share your thoughts, experience, and advice in the comments below for others weighing this decision.
References:
- DCAA Small Business Frequently Asked Questions - [Link](https://www.dcaa.mil/Small-Business/Small-Business-FAQs/)
- DOD Proposal Adequacy Checklist - [Link](https://www.dcaa.mil/Checklists-Tools/Contract-Pricing-Proposal-Adequacy-Checklist/)
- DAU Comparison of Major Contract Types - [Link](https://www.dau.edu/tools/comparison-major-contract-types-chart)