Mergers and acquisitions are on the increase. Whether it is to gain access to new technologies or increase resources and market presence, more companies, large and small are considering a merger or acquisition. Due diligence during a merger with or acquisition of a government contractor should be more than just numbers. Profit and loss statements, balance sheets and a myriad of financial ratios are just the tip of the due diligence iceberg. Even those merger or acquisition targets with the best of numbers may not be a good fit, taking your company where you don’t want to go.
An important part of due diligence should be an assessment of the targets culture and operating infrastructure. You need to evaluate the targets ability and, maybe more importantly, desire to be ethical and compliant with government acquisition regulations and applicable public law. Are policies, procedures and practices documented and in place to identify, mitigate and eliminate future risks of non-compliance and in the eyes of the Government, fraud, waste and abuse?
Key compliance areas that should be evaluated and questions that need to be answered include, but are not limited to:
- Do you have a business conduct and ethics policy in place with appropriate means of detecting and resolving non-compliances? (FAR Subpart 3.1, FAR 52.203-14 and FAR 52.203-14)
- Are your business systems adequate (including appropriate policies and procedures) for contracting with the Federal government?
- Accounting and Billing System (DFARS 252.242-7006)
- Purchasing System (DFARS 252.244-7001)
- Estimating System (FAR 15.407-4, DFARS 252.215-7002)
- Government Property Management System (DFARS 252.245-7003)
- Material Management and Accounting System (DFARS 252.242-7004)
- Earned Value Management System (DFARS 252.234-7002)
- Have these business systems been reviewed by DCAA/DCMA and granted approval?
- Do you have in place policies and procedures that allow you to be compliant with the Allowable Cost and Payment clause at FAR 52.216-7?
- Are procedures and practices in place and operational directing compliance with the identification and segregation of unallowable cost contained at FAR Subpart 31.2?
- Are policies, procedures and practices to ensure the proper recording of labor efforts for all employees – direct and indirect, non-exempt and exempt?
- Is “total time accounting” used as a basis for charging labor costs to cost objectives?
- Do you have people responsible for internal control and compliance?
Correct answers to these questions should assure that the target of your merger or acquisition has a sound compliance culture and infrastructure and limited negative exposure. It is important to remember that successfully merging two companies’ ethics and compliance cultures takes time and a lot of work and will not happen overnight.