Good news – your company just won a federal contract.
But don’t celebrate yet. Your business could be subjected to a second, “make sure” review of its financial health before the contract is actually awarded.
Why? The federal government’s contracts are often three to five years in length. The government client is making the assumption that you are a going concern for the length of the contract. The government doesn’t want to risk a time-consuming and expensive contract termination.
A similar example would be that you selected and awarded a building contractor to build a custom home. You discover that the contractor has used your down payment to pay off debts incurred on other projects. And this discovery is why the project’s completion date is not close to the original date of completion.
Financial capability audits are one of the government’s tools for avoiding the aforementioned scenario.
What Triggers a DCMA Audit?
Recently, we have encountered multiple government contractors whose ownership have treated the company’s cash balance like their personal “ATM.” In some cases, this behavior resulted in the contractor’s failure to make timely payments for key liabilities. In other cases, a disgruntled subcontractor reported the contractor’s late payment history to credit bureaus, and even the government contracting officers. When payments to key vendors such as subcontractors and key suppliers are much later than the terms of their contracts with your company, then the government needs to investigate.
The DCMA is a division of the Department of Defense that is tasked specifically with dealing with contractors. The Preaward Survey of Prospective Contractor Financial Capability (SF1407) can be arduous due to the large amount of financial disclosure required. It can also be time-consuming, as that financial disclosure is continuous—contractors have to constantly update their information and send it to the DCMA in accordance with deadlines.
To access a contractor’s suitability to be awarded the contract in question, the DCMA uses financial ratios, 18-month financial forecasts, and 18-month cash flow projections. Then contractor receives and adjudication that is basically a thumbs up or a thumbs down as to whether or not it is financially fit to deliver on its responsibilities under the contract. Unlike when the DCAA performs financial evaluations, DCMA personnel are not accountants, but rather are trained in measuring efficiencies in a contractor’s performance, e.g., Earned Value Management.
It is worth noting that there have been several recent incidents in which contractors have provided information that triggered the DCMA to uncover “false assets.”
Those false assets included:
- Large officer loans categorized as Current Assets with no history of repayment to the company (lender) by the officer who received the loan, and
- Marketable securities that have not been written down due to their loss in value.
How Can You Avoid a DCMA Audit?
To avoid the additional burden of a DCMA financial review, which could be the start of contract terminations to your firm, the ownership of the government contractor should try to adhere to these three simple good business practices:
- Act as responsibly: Pay your employees and your creditors before “taking yours.”
- Have at least three to six months of liquid assets to fund operations without receiving any remuneration.
- Stay in good standing with your employees. Negative information about your company on social media or career websites can actually help trigger a DCMA audit, and be factored into their review.
Winning the contract can be just the beginning of a new responsibility to deliver services or products under the terms dictated by the contract. Then, you have to run and maintain a financially responsible business. Do not give anyone reason to doubt that! Act ethically and abide by the above tips to avoid a DCMA audit, and the ramifications that could potentially come with it.