06.04.10

Contractor Purchasing System Review –  What to Expect

by Sajeev D. Malaveetil

CPSR Objectives
Per Federal Acquisition Regulation (FAR) 44.301, the objective of a Contractor Purchasing System Review (CPSR) is to evaluate the efficiency and effectiveness of a contractor’s practices as they relate to the procurement of goods and services and compliance with regulatory requirements related to subcontracting. The CPSR is performed by the Defense Contract Management Agency (DCMA), and the results of the CPSR serve as the basis for the approval of a contractor’s purchasing system by its Administrative Contracting Officer (ACO).

CPSR Scope
The ACO is responsible for determining whether a contractor is subject to a CPSR. Generally, if a contractor’s sales to the Government – excluding competitive firm-fixed price sales, firm-fixed price with economic price adjustment sales, and sales of commercial items – are expected to exceed $25M over a 12 month period, it will be subject to a CPSR.

A CPSR includes a review of procurements related to the acquisition of goods and services as well as the award and administration of subcontracts. The review includes both direct and indirect purchasing actions.

Ramifications of an unapproved systems and associated findings
Contractors without an approved purchasing system are required to comply with the consent and advance notification requirements of FAR Part 44 and FAR Clause 52.244—2 Subcontracts. These include a requirement to obtain written consent from and provide advance notification to the Contracting Officer whenever entering into most subcontract types.

Contractors with approved purchasing systems often avoid these requirements, enabling them to expeditiously enter into subcontract agreements to meet performance and financial requirements. However, some contracts and/or agencies may stipulate requirements for consent and notification, even when a contractor has an approved system.
A lack of an approved purchasing system can significantly impact a contractor’s ability to win awards due to inadequate systems and may result in the Government and higher-tier contractors enforcing withholds against payments to the contractor in an effort to mitigate financial and performance risk.

Specific aspects of a CPSR are included in other Government audits – most notably audits of a contractor’s Accounting Systems, Billing Systems and General IT Controls. To the extent that a contractor has an adverse finding on its CPSR, it could result in adverse findings in other system reviews and audits – thereby compounding the impact on the company’s ability to win new awards and increasing the potential of contractual withholds.

A CPSR differs from a Procurement Controls System review, which is typically performed by the DCAA. The DCAA’s audit objective in performing a Procurement review is to assess the adequacy of a contractor’s internal controls related to its purchasing system and its processes for monitoring compliance with its controls. Accordingly, the DCAA review will often include additional review elements related to general purchasing controls and may often omit specific requirements related to regulatory and statutory requirements that would otherwise be included in the CPSR.

Despite these differences, both DCAA and DCMA rely on elements of one another’s reviews when performing their respective evaluation of a contractor and may even call on one another to perform specific elements of their own review. As such, an adverse or inadequate finding in one review will often result in a negative finding in the other.

Accordingly, when preparing for either a CPSR or DCAA Procurement Controls System review, it is good practice to consider requirements from both reviews to ensure comprehensive coverage of audit risk.

Preparing for a CPSR
If you wait to receive notification from the Government of a CPSR to prepare for the review, it may be too late. Successful preparation for the CPSR requires the implementation of a comprehensive purchasing control environment and adherence to established practices related to the overall Purchasing process.

Furthermore, a documented history of the application and results of a Purchasing System should be available for review during the CPSR. If a system is not operable or otherwise not fully implemented, it is recommended that the contractor request an extension to commencement of the review.

Advance Document Request
In advance of the CPSR, the Government will send various requests for information. The requests can be broken into two distinct categories –requests for general documents and data and requests for specific documents and data. The requests related to general documents and data are intended to assist DCMA with performing its risk assessment requirements of the CPSR.

The general requests, which typically are made a couple of months in advance of the CPSR, will include a request for information related to the contractor’s volume of sales to the Government:

• broken out by various contract types;
• in relation to its total sales of the company;
• stratified by dollar value;
• subject to various statutory requirements including, but not limited to, the Truth in Negotiations Act (TINA); Cost Accounting Standards (CAS); Small Business requirements; EEO Pre-award Certification; and Advance Consent and Notification requirements.

In addition, the DCMA will inquire about past system approvals, other Government audits and request documentation related to the training of the contractor’s purchasing staff. The general requests will also include requests for information related to internal reviews and audits performed by the contractor as it relates to various purchasing functions such as procurement and subcontract administration.

The requests for more specific documents and data will typically be made within 45 to 60 days prior to the start of the CPSR. The more specific requests will include requests for:

• the company organizational charts;
• an organizational chart for the purchasing department (including procurement and subcontract functions);
• a listing of all employees within the purchasing department as well as their credentials;
• a listing of company facilities/locations subject to the review;
• a listing of CAGE Codes covered by the review;
• the number of employees for the entire company, as well as within any departments associated with Purchasing functions– for the prior year, current year and projected year;
• a break out of purchasing actions by type, and dollar value;
• a listing of the company’s top subcontracts;
• a summary of the company’s purchasing or sales data;
• a list of major contracts and awards;
• management reports related to backlog and shortages;
• information related to affiliated departments and organizations;
• standard purchasing terms and conditions;
• internal metrics (as monitored and reported) related to –
  • Competitive purchasing actions
  • Single and sole source actions and justification and documentation
  • Obtaining cost or pricing data or information other than cost or pricing data, as required
  • Price analysis
  • Negotiations
  • Advance notification
  • Definitization of any letter subcontracts
  • Delivery
  • Small Business utilization
• examples of checklists, templates forms used in the procurement process;
• an example of a complete purchasing document file;
• a list of vendors/bidders;
• the company’s Purchasing Policies and Procedures Manual; and
• a list of all actions processed through the purchasing system during the current and prior year.

The items provided in response to the specific request will serve as the primary basis for the planning of the CSPR review. Based on the information provided, the CSPR review team will formulate its review plan.

An item of particular importance in the CPSR is the company’s Purchasing Policies and Procedures Manual. For a successful CPSR, a company should have a robust set of policies and procedures that cover the life-cycle of the purchasing process enforce sound purchasing practice and ensure compliance with regulatory requirements. These should include, but not be limited to, policies and procedures covering vendor evaluation; sourcing; price negotiation; source justifications; bid evaluation; certification and representation; flow down of applicable clauses; compliance with statutory requirements; terminations and subcontract/purchase order close-out.

In addition to being documented, the purchasing policies and procedures should be disseminated to all purchasing personnel, and training should be provided to enforce a consistent understanding of the associated requirements. Any noncompliance with company policies and procedures identified during the CSPR would be considered a deficiency. The policies and procedures should periodically be reviewed and updated, as necessary, with appropriate date and version controls.

CPSR Fieldwork
A significant portion of the Government’s CPSR fieldwork will involve a review of the sampled files and performing interviews of company personnel. To the extent that prior internal or external audits and reviews have identified deficiencies within the Purchasing process, the Government CPSR team will also inquire about and test any corrective actions that were implemented to address the deficiencies.

The CPSR fieldwork will typically last from one to two weeks and will take place at the contractor’s site. The fieldwork should commence with an entrance conference where the CPSR team will present its objectives and intended review plan. The CPSR team will also provide the contractor with a list of purchasing files selected for review and an initial list of employees that it intends to interview.

In reviewing the specific purchasing files, the CPSR review team will review each sampled file to ensure that the files are documented and completed in accordance with company policy. Further, the review team will review each file for compliance with statutory and regulatory requirements. This would include compliance with TINA; CAS; requirements for notification of subcontract awards under cost-plus-fixed-fee prime contracts; Small Business Subcontracting requirements; and requirements related to the definitization of letter subcontracts.

The documentation within a purchasing file should contain all the necessary documentation required to understand the sourcing, pricing and negotiation of a purchasing action. In addition, the documentation should include evidence that requisite certifications and representation were obtained in advance of the purchasing action. It is recommended that contractors maintain a standard documentation filing system and enforce documentation requirements through the use of a file checklist and standardized forms and templates. It is also recommended that contractors require all purchasing files be reviewed internally for completeness and compliance with established documentation requirements.

The interviews of contractor personnel will include discussions on the familiarity and compliance with the company’s Purchasing Policies and Procedures; familiarity with regulatory and statutory requirements as well as discussions related to specific purchasing files.

The audit fieldwork concludes with an exit conference, where the CPSR team provides a debrief of its findings and any deficiencies noted. If an exit conference is not held as part of the CPSR, the contractor should request one.

ACO Formal Letter
Subsequent to the completion of the CPSR, the ACO will issue a formal letter either granting, withholding or withdrawing approval of the contractor’s purchasing system. If no deficiencies were noted during the CPSR, the ACO will grant approval of the contractor’s purchasing system and the letter will identify the date of approval, the applicability of the approval and include waivers of notification and consent requirements.

To the extent that approval is not granted, the letter will identify any deficiencies noted and will request that the contractor respond within 15 days with a corrective action plan. If the corrective action plan is accepted, the ACO will request a follow-up CPSR as soon as notification is provided that the deficiencies have been corrected.

Changing Approved Systems
Once a system is approved, it is approved as long as there are no fundamental changes to the system. Fundamental changes that could impact the status of the approval of a purchasing system include changes to the applications and tools used in the system, significant changes to the company’s Purchasing Policies and Procedures and changes to overall structure of the purchasing organization. Accordingly, to the extent changes are made to the purchasing system, it is recommended that contractors pro-actively notify the ACO of any such changes.

An ACO reserves the right to withdraw approval of a contractor’s Purchasing System at his or her discretion. This typically happens when other system audits reveal issues related to the Procurement process.

Regardless of whether changes have been made to a system or if other system audits or reviews have been performed, a contractor meeting the CPSR threshold may be subject to a CPSR every three years.

Summary
The benefits of an approved purchasing system include efficiencies gained from a more streamlined procurement and subcontract administration process; improved opportunities for consideration of future awards; reduced potential of contract withholds and reduced business and financial risk of regulatory and statutory noncompliance.

While the overall effort in developing the infrastructure processes and controls necessary to obtain an approved purchasing system may at first seem overwhelming, the benefits of an approved system are well worth the initial investment of time and resources.

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