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Contractor Purchasing System Reviews (CPSR’s) Can Improve Company Profitability

Contractor Purchasing System Reviews (CPSR’s) Can Improve Company Profitability. Breakout Session # 707 Name: Phil Bail Phil Bail & Associates - (A Center for Veterans Enterprise (CVE) verified Veteran-Owned Small Business) Date July 21, 2010 Time 0930-1045. 1. Outline. Background…

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Contractor Purchasing System Reviews (CPSR’s) Can Improve Company Profitability

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  1. Contractor Purchasing System Reviews (CPSR’s) Can Improve Company Profitability Breakout Session # 707 Name: Phil Bail Phil Bail & Associates - (A Center for Veterans Enterprise (CVE) verified Veteran-Owned Small Business) Date July 21, 2010 Time 0930-1045 1

  2. Outline • Background… • Unapproved versus Approved Purchasing System • Benefits • What is a CPSR? • Is Your Company a Target for a CPSR? • Core Elements of a Compliant Purchasing System • Process • Purchasing Policies & Procedures Manual • Supply Chain Buyer Training • Key Compliance Areas / Clause Flow Down • Summary • Questions? • References 2

  3. Background • In 1990 – CPSR Audit at my company • In 1991 – wrote an article for Contract Management magazine titled “Being Audited By the Government Can Increase Contractor Profitability” – article received the Charles J. Delaney Memorial Award for most outstanding article of the year. 3 3

  4. Unapproved Versus Approved Purchasing System

  5. What if Purchasing System is Not Government Approved? • Consentto Subcontract – FAR 44.201 and FAR 52.244-2, Subcontracts (June 2007) • CR, T&M, L-H, • FP and exceeds • $100,000 or 5% of the total estimated cost of the contract. • Advance Notification – FAR 44.201-2 • CPFF subcontract or FFP Subcontract >$100,000 or 5% of the total estimated cost of the contract 5 5

  6. What If Purchasing System is Approved by the Government? • The level of government administrative oversight on prospective contracts is reduced – Consent to Subcontract and Advance Notification requirements are no longer issues – unless required by 52.244-2 • Opportunities for future contracts are increased because purchasing system has more creditability with customers • Bottom Line – More potential revenue & profit dollars 6 6

  7. The Definition and Objective of a CPSR… • What is a CPSR? • What is the objective of a CPSR? 7 7

  8. Definition and Objective of a CPSR…FAR 44.3 • Definition: CPSR - the complete evaluation of a contractor’s purchasing of material and services, subcontracting, and subcontract management from development of the requirement through completion of subcontract performance. • Objective: “…to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when subcontracting.” 8 8

  9. Is Your Company a target for a CPSR? • ACO considers recommending a company for a CPSR by performing a risk assessment. • - Sales to government expected to exceed $25 Million in next year excluding competitively awarded FP contracts and sales of FAR Part 12 commercial items • Are there signs of trouble in the contractor’s supply chain? • Failure to comply with laws, or prime contract requirements • Quality or delivery issues • Contract mix moving from FFP to CR type contracts • DCAA audits 9 9

  10. Is Your Company a target for a CPSR? (continued) • Direct Materials and material overhead as a % of sales appears out of sync • Experience, knowledge, and training of the company’s purchasing personnel is low • Sales to the government as a percentage of a contractor’s total sales • A contractor’s relative position within an industry • Mergers, acquisitions, or divestitures • Significant increases or decreases in sales 10 10

  11. The Core Elements of a CPSR Compliant Purchasing System Process Purchasing Policies and Procedures Manual Supply Chain Buyer Training Key Compliance Areas / Clause Flow Down

  12. Process Part I Purchase Requisition Identification of Sources Part 2 Issuance of PO / Subcontracts at Reasonable Prices (Buyer Actions) Part 3 Timely Delivery of Quality Products or Services Evaluation of Vendors Part 4 (really part of entire process) Self Inspection of Process Management Oversight

  13. Process - Part 1Purchase Requisition / Source Selection Initiation of Purchase Requests By Whom? What Information is included? Sources? Prime Contract Requirements? Oversight (Management Review)

  14. Process - Part 2 Buyer Actions Subcontract / PO Selection FFP or CR Terms & Conditions / Clause Flow Down Source Selection – FAR 52.219-8 Extent of Competition Determining Prices Fair and Reasonable Competition Price Analysis Cost Analysis Certified Cost or Pricing Data Writing a Price Negotiation Memorandum

  15. Process - Part 3Order Administration Receipt & Acceptance of Products or Services Update of Vendor Rating System Quality of Products Timely Delivery Management Oversight 15

  16. Process – Part 4Self Inspection Internal Audit Program Management Oversight 16

  17. Purchasing Manual Should explain the Purchasing Process for the Benefit of ALL Employees, not just the Supply Chain Should include the 55 separate topics CPSR auditors expect in a Purchasing Manual (refer to DCMA Guidebook, Appendix B for a list of the topics)

  18. The 55 Topics(examples) Advance Notification and Consent 10. Commercial Acquisitions 19. Make or Buy Program 26. Truth In Negotiations 43. Single/Sole Source Procurements 45. Small Business Program 54. Specialty Metals

  19. The 55 Topics1. Advance Notification and Consent FAR 52.244-2, Subcontracts (JUN 2007) Is the clause in your contract? Is your purchasing system approved by the government? What kinds of contracts do you have? FFP/CR?

  20. The 55 Topics10. Commercial Items Definition of “commercial item” at FAR 2.101 Who determined a vendor purchase was for a commercial item? How was the decision made? Government may look at a sample of “commercial item” Purchase Orders / Subcontracts

  21. The 55 Topics19. Make or Buy Program FAR 15.408 – is a “make-or-buy” program incorporated into any of your contracts? FAR 52.215-9, Changes or Additions to Make-or-Buy Program

  22. The 55 Topics26. Truth In Negotiations Public Law 87-653 FAR 15.403-4, Requiring Cost or Pricing Data FAR 52.215-12, Subcontractor Cost or Pricing Data (OCT 1997) Threshold?

  23. The 55 Topics43. Single/Sole Source Procurements CPSR Auditor will look at single/sole source purchase orders to determine if sole source is justified Price reasonableness assessment will be performed on single/sole source Purchase Orders and single/sole source Subcontracts

  24. The 55 Topics45. Small Business Program FAR 19.7 – The Small Business Subcontracting Program FAR 52.219-8, Utilization of Small Business Concerns (MAY 2004) FAR 52.219-9, Small Business Subcontracting Plan (APR 2008) Thresholds?

  25. The 55 Topics54. Specialty Metals DFARS 225.7003-5(a)(1) What clause applies to your contract? DFARS 252.225-7014, Preference for Domestic specialty Metals (JUN 2005) (Deviation) Alternate 1 (OCT 2007); or DFARS 252.225-7008, Restriction on Acquisition of Specialty Metals DFARS 252.225-7009, Restriction on Acquisition of Certain Articles Containing Specialty Metals DFARS 252.225-2010, Commercial Derivative Military Article – Specialty Metals Compliance Certificate

  26. Buyer Training At a minimum the Supply Chain Buyer should receive training on the following subjects: Overview of the Federal Acquisition Regulation (FAR) Negotiation Techniques Price Analysis / Cost Analysis Writing a Price Negotiation Memorandum (PNM) Truth in Negotiation Act (P.L 87-653) Cost Accounting Standards (CAS) (P.L. 100-679) DPAS (Title I of Defense Production Act of 1950) Small Business Program (P.L. 95-507 of 1978) Selecting Contract Types (FAR Part 16) Commodity Specific Education Ethics Training 26

  27. Key Compliance Areas / Clause Flow Down but first…

  28. How should a government contractor flow Federal Acquisition Regulation (FAR) and Department of Defense FAR Supplement clauses to its vendors? Identifying them in full text on the Purchase Order? Identifying them by reference on the Purchase Order? By referring vendors to a FAR and DFARS clause list on their web site? Don’t bother, just include “company standard” terms and conditions on Purchase Orders? Answer: Refer to FAR 52.102 and 52.301 National Defense Industrial Association (NDIA), (703) 522-1820 or http://www.ndia.org $50.00 28

  29. Key Compliance Areas / Clause Flow DownSource Document “A Study of the Applicability of Federal Acquisition Regulation (FAR) Clauses to Subcontracts Under Prime Defense and NASA Contracts, including Defense FAR Supplement (DFARS) and NASA FAR Supplement (NFS)” National Defense Industrial Association (NDIA), (703) 522-1820 or http://www.ndia.org $50.00 29

  30. Key Compliance Areas / Clause Flow Down (examples) What clauses are included in the prime contract ? For example…all $ values 52.244-2, Subcontracts 52.211-15, Defense Requirements and Allocation Requirements Greater than $30,000 52.209-6, Protecting the Government’s Interest When Subcontracting with Contractors Debarred, Suspended, or Proposed for Debarment Greater than $100,000 52.203-11, Certification and Disclosure Regarding Payment to Influence Certain Federal Transactions 52.219-8, Utilization of Small Business Concerns EO 13496 – Duty of Federal Contractors, Subcontractors to Notify Employees of Their Right to Form and Join Unions 30

  31. Key Compliance Areas / Clause Flow Down Greater than $550,000 52.219-9, Small Business Subcontracting Plan Greater than $650,000 552.230-2, Cost Accounting Standards (P.L 100-679 – CAS Applicability and Disclosure Statement Determination) P.L 87-653 – Truth in Negotiation Act (TINA) 31

  32. Summary Establish a Process from PR initiation to PO issuance to receipt and acceptance or rejection of products or services, and FOLLOW IT Rate vendors so you don’t keep buying from poor providers Allow the Supply Chain to focus on purely buying activities, emphasizing a need to negotiate with vendors Justify single/sole source procurements and price reasonableness determinations Track negotiated savings 32

  33. References FAR Subpart 44.3 Contractors’ Purchasing Systems Reviews Http://guidebook.dcma.mil/26/guidebook_process.htm DCAA Internal Control Matrix for CPSR/Purchasing System Audit

  34. Questions? 34

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