To Adjust or Not to Adjust…. Inventory – A Case Study

1. To Adjust or Not to Adjust…. Inventory – A Case Study Tamra Zahn CPPA, Rich Culbertson CPPM, Russ RussilloAIA Property Management Committee

2. To Adjust or Not to Adjust… Inventory • Case Study Hand-out • Take 5 minutes and review the inventory adjustment scenario • We will then break into groups of 3-4 and critique the scenario

3. To Adjust or Not to Adjust… Inventory Exercise # 1 • Break into groups of 3-4 • What data, if anything is missing from Acme’s inventory plan? • What do you see could be problematic with Acme’s reporting process? • Share results

4. To Adjust or Not to Adjust… Inventory • What is an inventory adjustment? • Definition: • Inventory Adjustment: Correction of inventoryor stockrecords to bring them into agreement with the findings of the actual (physical) inventory. BusinessDictionary.com

5. To Adjust or Not to Adjust… Inventory 31.205-26  Material costs. • (c) Reasonable adjustments arising from differences between periodic physical inventories and book inventories may be included in arriving at costs; provided such adjustments relate to the period of contract performance.

6. As determined by the GPA Regulatory Requirement when incorporated • FAR 52.245-1 (f)(1)(vii)(c) Unless the contract provides otherwise, the Contractor shall be relieved of stewardship responsibility and liability for property when— • (1) Such property is consumed or expended, reasonably and properly, or otherwise accounted for, in the performance of the contract, including reasonable inventory adjustments of materialas determined by the Property Administrator;

7. As Agreed …. 252.245-7002 Reporting Loss of Government Property. (b)  Reporting loss of Government property….               (1)  The Contractor shall use the Defense Contract Management Agency (DCMA) eTools software application for reporting loss of Government property.  Reporting value shall be at unit acquisition cost.  The eTools “LOSS of Government Property” toolset can be accessed from the DCMA home page External Web Access Management application at http://www.dcma.mil/aboutetools.cfm.               (2)  Unless otherwise provided for in this contract, the requirements of paragraph (b)(1) of this clause do not apply to normal and reasonable inventory adjustments, i.e., losses of low-risk consumable material such as common hardware, as agreed to by the Contractor and the Government Property Administrator.  Such losses are typically a product of normal process variation.  The Contractor shall ensure that its property management system provides adequate management INTERNAL control measures, e.g., statistical process controls, as a means of managing such variation.

8. Discussion –Inconsistent with FAR FAR 1 .304b Agency acquisition regulations shall not …(b)…. Be not be inconsistent with FAR content. • Breaking it down • Reasonable = must be reasonable • Material =Material only! • Determined by the PA = Property Administrator determines reasonableness per FAR 52.245-1 • Agreed by the Contractor and the GPA Losses do not apply to reasonable inventory adjustments as agreed by the Contractor and the GPA per DFARS 252.245-7002

9. Definition: Reasonable 1. Capable of reasoning; rational: a reasonable person. 2. Governed by or being in accordance with reason or sound thinking: a reasonable solution to the problem. 3. Being within the bounds of common sense: arrive home at a reasonable hour. 4. Not excessive or extreme; fair: reasonable prices. WHAT DOES FAR 31 OR SECURITIES EXCHANGE ACT OF 1934 – GAO YELLOW BOOK?SAY, Who DETERMINES?

10. What can we deduce from the FAR to be reasonable? • FAR 31.201-3  Determining reasonableness. • (a) A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business. Reasonableness of specific costs must be examined with particular care in connection with firms or their separate divisions that may not be subject to effective competitive restraints. No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable. • (b) What is reasonable depends upon a variety of considerations and circumstances, including— • (1) Whether it is the type of cost generally recognized as ordinary and necessary for the conduct of the contractor’s business or the contract performance; • (2) Generally accepted sound business practices, arm’s-length bargaining, and Federal and State laws and regulations; • (3) The contractor’s responsibilities to the Government, other customers, the owners of the business, employees, and the public at large; and • (4) Any significant deviations from the contractor’s established practices.

11. Exercise # 2 • What would you define as fair and reasonable? • What suggestions do you recommend to improve Acmes inventory adjustment process? • 3 min in your groups • Share results

13. THE MESSAGE - THIS IS COMPLICATED NEED TO KNOW FAR, DFARS, CAS, GAAP and YELLOW BOOK • The Goal: To determine what is fair and reasonable then document the process • Key Challenges: • Agreeing on what is “reasonable” • Key Benefits: • Relief from unnecessary cost • Reduced chance of inaccurate reporting

14. Acme took the following actions • Researched normal process variations • Created a metric to track process variation • Defined reasonableness (w/ concurrence from GPA) • Updated procedure to report variations when they fell outside the normal process variation metric • Updated procedure to clearly define was required to report as a loss based on FAR 52.245-1 and 252.245-7002

15. References • BusinessDictionary.com • FAR 52.245-1 • DFARS 252.245-7002 • FAR 31.205-26

16. Recommended Reading • GAO Government Auditing Standards • Cost Accounting Standards