/
Organizational Changes and Restructuring: Organizational Changes and Restructuring:

Organizational Changes and Restructuring: - PowerPoint Presentation

pamella-moone
pamella-moone . @pamella-moone
Follow
518 views
Uploaded On 2017-06-09

Organizational Changes and Restructuring: - PPT Presentation

Business and regulatory opportunities and challenges for Government contractors NCMA Bostons March Workshop March 8 2017 Agenda Section 1 Introduction Section 2 FAR and DFARS Regulatory Considerations ID: 557627

restructuring costs cost change costs restructuring change cost subject draft external business savings 205 dfars organization activities contract internal

Share:

Link:

Embed:

Download Presentation from below link

Download Presentation The PPT/PDF document "Organizational Changes and Restructuring..." is the property of its rightful owner. Permission is granted to download and print the materials on this web site for personal, non-commercial use only, and to display it on your personal computer provided you do not modify the materials and that you retain all copyright notices contained in the materials. By downloading content from our website, you accept the terms of this agreement.


Presentation Transcript

Slide1

Organizational Changes and Restructuring: Business and regulatory opportunities and challenges for Government contractors

NCMA Boston’s March WorkshopMarch 8, 2017Slide2

AgendaSection 1 - Introduction

Section 2 - FAR and DFARS Regulatory ConsiderationsSection 3 - Mergers & Acquisitions (“M&A”) Considerations Over the Deals Life Cycle

Strategy

Pre-deal due diligence

Post-deal integrationSection 4 - Internal ReorganizationsSection 5 – Restructuring Proposal Format – IllustrationsSection 6 - Group Discussion Topics / Q&A

Draft - Subject to Change

2Slide3

Section 1Introduction

Draft - Subject to Change3Slide4

Course ObjectivesIdentify organizational transformation initiatives and how those initiatives affect government contractors and contract cost accounting

Mergers and acquisitionsCost competitiveness

Operating synergies

Understand differences between external and internal restructuring activities and how those differences may affect transformation initiatives

Understand the approach for submitting restructuring proposals, securing an audit of the proposal, and obtaining an advance agreement on costs

Draft - Subject to Change

4Slide5

What is meant by organizational transformation?Defining an “organizational transformation”

Strategic change in business structure or end-to-end processes with the goal of improving performance by focusing on capabilities, effectiveness, and efficiency

Forms of organizational transformation

External M&A through acquisitions or carve-outs

Internal or intra-company realignments or cost improvementsCost allowability: organization costs vs. restructuring costs

Draft - Subject to Change

5Slide6

Section 2FAR and DFARS Regulatory Considerations

Draft - Subject to Change6Slide7

Discussion - Organization Costs Cost Principle

FAR 31.205-27 Organization Costs makes unallowable expenditures associated withPlanning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitionsResisting or planning to resist the reorganization of the corporate structure of a business or a change in the controlling interest in the ownership of a business

Raising capital (net worth plus long-term liabilities

)

Unallowable reorganization costs include the cost of any change in the contractor’s financial structure, excluding administrative cost of short-term borrowings for working capital, resulting in alterations in the rights and interests of security holders (i.e. “restructuring” costs) whether or not additional capital is raised

Draft - Subject to Change

7Slide8

Discussion - Organization Costs Cost Principle (cont’d)

FAR 31.205-27 Organization Costs examples of allowable costs include:Recurring costs associated with maintaining the business structure, including costs associated with changes in ownership of the contractor’s securities, are allowable under FAR 31.205-28 Other Business Expenses

Costs of providing contractor’s securities to employees for the primary purpose of compensation are allowable under FAR 31.205-6 Compensation for Personal Services

Costs of long-range management planning, including plans to make organizational change, are allowable under FAR 31.205-12 Economic Planning Costs and paragraph (b)(b) of FAR 31.205-38

Selling CostsAdministrative costs for arrangement of short-term borrowing that do not fall under FAR 31.205-20 Interest and Other Financial

Costs

Draft - Subject to Change

8Slide9

Discussion - Organization Costs Cost Principle (cont’d)

Costs of forming or changing the corporate structure of a business and raising capital have been unallowable since T.D. 5000 was published in 1940FAR 31.205-20 Interest and other Financial Costs and (f)(2) of FAR 31.205-47 Costs Related to Legal and Other Proceedings have the same restrictions

Rationale: costs have no relationship to the work of the existing business entity, and therefore provide little benefit to the contractor’s Government work

Disagreements between contractors and Government auditors when distinguishing between allowable organizational planning activity and unallowable organization costs

CAS 405-60(c) illustration uses this source of disagreement between organizational planning activity and organization costs as an example of the type of cost that need not be identified and excluded from contract cost until the contracting officer determines that such cost is unallowable

Draft - Subject to Change

9Slide10

Discussion - External Restructuring Costs10 U.S.C. 2325(a) Limitation on Payment

Secretary of Defense may not pay restructuring costs unless written determination that either:Savings exceed costs by at least 2:1; or

Savings exceed costs and preservation of critical capability would otherwise by lost to DoD

Secretary may not delegate the authority to make the determination, with respect to a

business combination, to an official of the Department of Defense -Below the level of an Assistant Secretary of Defense for cases in which the amount of restructuring costs is expected to exceed $25,000,000 over a 5-year period; orB

elow the level of the Director of the Defense Contract Management Agency for all other cases

Draft - Subject to Change

10Slide11

Discussion - External Restructuring Costs (cont’d)DFARS 231.205-70(c) Cost Limitation

Restructuring costs are allowed if:Costs are allowable in accordance with FAR Part 31 and DFARS Part 231

An audit of costs and savings is performed and reviewed by the ACO

ACO negotiates and advance agreement

USD (AT&L) or Director DCMA, depending upon the amount of restructuring costs, determines audited savings exceed costs by a factor of 2:1 or preservation of critical capability would otherwise by lost to DoDOtherwise, costs are non-reimbursable as restructuring

Draft - Subject to Change

11Slide12

Discussion – External Restructuring Costs (cont’d)DFARS 231.205-70(b) Definitions

Business Combination: Assets or operations of companies not previously under common control are

combined

External

Restructuring Activities:Occur after business combination (i.e. common ownership or control)Direct outgrowth of business combinationNormally initiated within 3 years of business combination

Restructuring Costs:

Direct and indirect costs of restructuring activities in

excess of $2.5 million allocated to

DoD contracts

Costs must be allowable in accordance with FAR Part 31 and DFARS Part 31

Restructuring Savings:

Direct and indirect cost reductions resulting from restructuring activities

Draft - Subject to Change

12Slide13

Discussion – External Restructuring Costs (cont’d)DFARS 231.205-70(b) Definitions - Restructuring Activities

Include:Efforts that are:Nonroutine

Nonrecurring

Extraordinary

To combine:Facilities

Operations

Workforce

In

order to

:

Eliminate redundant capabilities

Improve future operations

Reduce overall costs

Do

not include:

Activities occurring after a business combination that affect the operations of only

one

of the companies not previously under common ownership or control

.

Routine or ongoing repositionings and redeployments of a contractor’s productive facilities or workforce (e.g., normal plant rearrangement or employee relocation).

Other routine or ordinary activities charged as indirect costs that would otherwise have been incurred (e.g., planning and analysis, contract administration and oversight, or recurring financial and administrative support).

Draft - Subject to Change

13Slide14

Discussion - Organization Costs vs. Restructuring CostsDCAA Audit Guidance on Restructuring and Organization Costs (PAD 730.45/95-23)

Terms organization and reorganization apply to transactions that involve a change in the capital and/or financial structure of the company“

What constitutes a change in the capital and/or financial structure

?”

The Cost Principles Subcommittee relied upon the definitions of reorganization contained in A Dictionary for Accountants (Third Edition) by Eric L. Kohler:“A major change in the financial structure of a corporation or group of associated corporations resulting in alterations in the rights and interest of security holders

(emphasis added); a recapitalization, merger, or consolidation.”

Restructuring costs result from changes to a contractor’s organization in

a effort to address a declining base or to enhance business

efficiencies

Internal changes – e.g., downsizing, cost improvement program/initiative

External changes – e.g., mergers, divestiture, or other form of business combination

Restructuring costs and the “but for” argument - ASBCA decisions indicate costs associated with subsequent events, that are not in and of themselves organizational changes, do not meet the definition of organization costs under FAR 31.205-27 and should generally not extend to restructuring activity costs

Draft - Subject to Change

14Slide15

Discussion – Organization Costs vs. Restructuring Costs (cont’d)

DFARS 231.205-70 External Restructuring Costs provides a procedural process for obtaining recovery of post merger integration costs when certain conditions are metCAS 406-61 provides an interpretation that the treatment of restructuring costs (external or internal) may

be accumulated as deferred

cost

and subsequently amortized over a period during which the benefits of restructuring are expected to accrueFAR Part 30.603-2(e) for unilateral and desirable changes and 9903.201-8 contract requirements for compliant changes due to external restructuring provide that:Requirements for contract price and cost adjustments do not apply to compliant cost accounting practices that are directly associated with external restructuring activities meeting requirements of 10 U.S.C. 2325

However, disclosure requirements shall be followed

Draft - Subject to Change

15Slide16

Section 3M&A Considerations Over the Deal L

ife CycleDraft - Subject to Change

16Slide17

The deal life cycleDraft - Subject to Change

17Slide18

StrategyIntent of how acquired entity will operate

Buy and hold separateIntegrate with other businesses

Silo government contracting requirements

and compliance and reputational risks

within the organizationEstimate for potential unallowable costs that may not be recoverableIdentify government contracting market opportunitiesAdditional sales channelsTypes of contract vehicles

Alignment with the organization’s strategic goals and objectives for growth

Design of future state organizational cost accounting

structure

Minimize indirect rate impacts

on current contract base

Maintain indirect rate competitiveness for the

future

Align cost accounting periods and estimating practices

Disclosure of

changes in

cost accounting practices

Draft - Subject to Change

18Slide19

Pre-deal Due DiligenceIdentify and diagnose key compliance risks/issues by analyzing:

Acquisition target’s government contracts portfolioCustomers, contract mix, procurement regulation requirements

Open audits or unsettled

contract costs and compliance issues

Pipeline/backlogGrowth and earnings potential based on contract types and government customerErosion of small business set-aside opportunities

Balance sheet reserves for existing and future contract cost settlement risks

Contractor business systems approvals

Desired level of system integration –

plan to adopt currently

approved processes and controls

Deficiencies could impact cash flow

via billing

withholds and

affect qualifications to pursue and receive

contracts

Contract novation requirements could lead to delays

in

customer acceptance and billing collections

Draft - Subject to Change

19Slide20

Post-deal External RestructuringDFARS 231.205-70(c) - Cost Limitation

Restructuring costs are allowed if:Costs are allowable in accordance with FAR Part 31 and DFARS Part 231

An audit of costs and savings is performed

Administrative Contracting Officer (“ACO”)

negotiates an advance agreementAudited savings exceed costs by factor of at least 2:1 or preservation of critical capability otherwise lost to DoDOtherwise, costs are non-reimbursable

as restructuring

External restructuring activities are a direct outgrowth occurring after a business combination; normally initiated within 3 years

External Restructuring Benefits:

Cost Impact

Exemption - FAR 30.602(e) and

9903.201-8

The

contract price and cost adjustment requirements

are

not applicable to compliant cost accounting practice changes directly associated with external restructuring activities that are subject to and meet the requirements of 10 U.S.C.

2325; disclosure of the practice changes still required

Assignment Period – CAS 406-61

Restructuring costs may be accumulated as a deferred cost, and subsequently amortized, over a period during which the benefits of restructuring are expected to accrue, but not to exceed 5 years

Draft - Subject to Change

20Slide21

External Restructuring CostsRestructuring

costs include:Personnel costs (e.g., relocations, severance, retraining, early retirement incentives)Facility

and asset costs (e.g., relocations, rearrangements,

dispositions)

Project management (e.g., incremental costs for labor, travel, consultants)Business process changes and related costsIncremental costs for information technology

Restructuring costs

do not

include routine management actions designed to improve operational efficiency

Evaluate allowability and reasonableness under FAR Part 31 and DFARS 231

Draft - Subject to Change

21

Consideration: 1) one-time, nonrecurring, nonroutine activity,

and

2) would otherwise not have been incurredSlide22

External Restructuring SavingsDirect and indirect cost reductions resulting from restructuring activities, such as:

Facilities savings (vacate, closure, downsize, etc.): rent, operating expensesFTE reductions: salary, fringe, bonuses

Reasonable expectation of

increased future

contract costs had the restructuring not occurredReassignments of cost to future periods are not restructuring savingsOverall costs and savings are to be realized:

Over a period not to exceed 5-years

Discounted to current year dollars

Draft - Subject to Change

22Slide23

DFARS 231.205-70(d)/PGI 231.205-70(d) – ACO Procedures

Execute contract novation agreement, if necessaryIn accordance with FAR 42.12 and DFARS 242.12 and include the provision at DFARS 242.1204(e)

Direct contractor to:

Segregate restructuring costs

Suspend them from billing and settlements until DoD makes determination of projected restructure savingsRequire contractor plan showing net present value of costs and savings

Adequately supported proposal to establish reasonableness of costs and projections

Breakout by year by cost element with basis of estimate rationale for accumulation, amortization, and methods of allocation

DoD participation rate or “share” of projected costs and savings

Separately identify from internal restructuring costs, if any

Draft - Subject to Change

23Slide24

DFARS 231.205-70(d)/PGI 231.2015-70(d) – ACO Procedures (cont’d)

Notify major buying activities of:Contractor’s restructuring actions

Impacts on major weapons

programs

Adjust FPRs to reflect the impact of projected restructuring costs and savingsUpon receipt of the contractor’s proposal, request an audit review Negotiate an advance agreement with the contractor setting a cumulative cost ceiling and cost amortization schedule (when necessary)

Recommend for certification, or determination, or both, to Under Secretary of Defense (Acquisition, Technology, and Logistics) who determines in writing that the audited restructuring

savings will exceed

costs by a factor of at least 2:1

Draft - Subject to Change

24Slide25

DFARS 231.205-70(e) – Information NeedsNovation Agreement, if required

Contractor’s Restructuring ProposalProposed Advance AgreementAudit ReportAny other pertinent informationACO recommendation for certification, or determination, or both

Savings based on audited data and result in overall reduced costs to DoD

Audited savings for DoD exceed costs by 2:1

Preservation of critical capability/savings exceed costsDraft - Subject to Change

25Slide26

DFARS 231.205-70(f) – CO Responsibilities, in consultation with the cognizant ACO

Consider including a repricing clause in noncompetitive fixed-price contractsDecision to use repricing clause depends upon the particular circumstances:

When restructuring will take place

When savings will be realized

Contract performance periodReasonableness of impact estimate on the contractSize of potential dollar impact on contract

If repricing clause used, provide for downward-only adjustment

Draft - Subject to Change

26Slide27

External Restructuring Proposal ConsiderationsDetermine Restructuring Activities and Objectives

Identify Restructuring Projects and Tasks

Establish Anticipated Period of Performance

Develop Cost and Savings Summary – NPV / DoD Share

Determine Cost Accounting Structure / Practice ChangesDraft - Subject to Change

27Slide28

Section 4Internal Reorganizations

Draft - Subject to Change28Slide29

Internal ReorganizationsDefinition: the act of reorganizing the legal, ownership, operational, or other structures of a company for purposes of making it more profitable.

Internal reorganizational drivers:Legal entity consolidation

Streamline

operations and systems (people, processes, and technology)

Ability to create cost synergies through segment consolidation or establishing services centersLimit exposure within organization to government contracting requirementsAbility to share commercial/government labor resources across segmentsConsolidation of financial and ERP systems to a standard platform

Draft - Subject to Change

29Slide30

Internal ReorganizationsPlanning & Execution:

Define goals and cost synergies to formulate a plan on restructuring activitiesAssess the allowability of costs in accordance with FAR

Part 31

requirements

Consider following the DFARS external restructuring process to address:Determine if the audited savings exceed costs by factor of at least 2:1 Communicate plan with the ACOPrepare a proposal outlining internal restructuring savings and costs

Seek benefits of cost impact exemption and an extended restructuring cost assignment period

Draft - Subject to Change

30Slide31

Section 5Restructuring Proposal Format - Illustrations

Draft - Subject to Change31Slide32

Summary – Savings and CostsDraft - Subject to Change

32Slide33

Summary – Savings by Initiative by YearDraft - Subject to Change

33Slide34

Summary – Costs by Initiative by YearDraft - Subject to Change

34Slide35

Example – Basis of Estimate TemplateDraft - Subject to Change

35Slide36

Section 6Group Discussion Topics / Q&A

Draft - Subject to Change36Slide37

Group Discussion QuestionsWhat are some reasons the DoD initially encouraged defense contractors to restructure?

What are the threshold requirements for the DFARS external restructuring procedures? How is the threshold calculated in practice utilizing the rate structure?

Does the external restructuring cost principle make organization costs allowable? Why?

What are some positive benefits the external restructuring process provides for the government and for the contractor?

What are some negative consequences that may occur?Are internal reorganizations treated different than external as it relates to cost allowability?What business functions are involved internal/external restructuring activities? When should those functions be engaged in the process?

Once a deal is announced, what requirements are placed upon the Administrative Contracting Officer? What actions may be required of the Procuring Contracting Officer?

A deal is publicly announced in mid-February and closes in late May.

What kind of activities might occur during this time period and how

would you

treat those activities

?

When should planning related to a deal or internal reorganization be communicated to their Administrative Contracting Officer?

Draft - Subject to Change

37Slide38

Group Discussion Questions

Draft - Subject to Change38

How

would you determine which DoD contracts would participate in the savings from the business combination and contribute to cost recovery of the restructuring costs

restructuring?

Can an external restructuring process be initiated more than 3 years after a transaction closes?

Does the external restructuring process change any financial reporting measures under GAAP?

Are DoD and non-DoD contracts similarly affected by external restructurings? Why?

How are internal restructurings similar to and different from external restructurings? Should internal restructurings follow the external restructuring process?

How long does the external restructuring process take? What are some “leading practices”?

What records must be maintained to demonstrate the total restructuring savings and restructuring cost?Slide39

© 2017 PricewaterhouseCoopers LLP, a Delaware limited liability partnership. All rights reserved. PwC refers to the United States member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This document is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.

Questions?

Gregg

Pilotte

Mark Dostal

Director

Director

gregg.s.pilotte@pwc.com

mark.s.dostal@pwc.com

(617) 530

- 4514

(312) 298 - 2330