National Manufacturing Day, held annually on the first Friday in October, is celebrated to 'spark' the imaginative curiosity of the next generation of manufacturers - by showcasing the reality of modern manufacturing. Together companies and leaders collaborate to educate and inspire the next generation of manufacturers by demonstrating the importance of manufacturing.
As a leading consulting and solution provider, Kinetek understands the importance of manufacturing; specifically manufacturing for the government. We help our clients stay up to date with the latest industry trends and technology as well as industry requirements; digitally transforming businesses and empowering project success through proven modernization techniques and consulting strategies.
In honor of this year's “Manufacturing Day,” we will educate our fellow project manufacturers on the importance of ‘Compliance.’
If your business is project manufacturing, and if you’re reading this it probably is... your daily challenges include reacting quickly and efficiently to engineering changes, ensuring that you have the right parts and resources on-hand to meet customer demands whilst ensuring you are remaining compliant with today’s rules and regulations. In a perfect world, you would manufacture a product just in time to meet the customer’s delivery dates while hitting your revenue goals and breezing past every audit. (A novel thought)
The problem is that any project, product, or manufacturing order can turn into a disaster if critical designs, materials, and resources aren’t planned and inserted into the manufacturing process at just the right time.
However, when you are contracting for the federal government, you can’t unnecessarily stockpile materials. All inventory purchases must be carefully planned against accurate designs and inventory must be stocked by the owning project. The contractor is also constrained by several rules about when and how much inventory you can buy with ‘Uncle Sam's money.
One of the ways the government ensures contractors are spending money on the correct materials is to ask the Defense Contract Audit Agency to perform a Material Management and Accounting System (MMAS) Audit.
In this blog series, you will learn the basics of material management and accounting system audits and how to ensure your project manufacturing business can remain compliant!
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What is the Defense Contract Audit Agency (DCAA) and what do they do?
It is in the government’s best interests—to ensure that funds are spent properly. One of the ways it ensures that contractors are spending money appropriately is through audits. These audits are meant to determine whether contract costs are allowable, allocable, and reasonable.
The DCAA performs contract auditing for the Department of Defense (DOD) and other federal agencies. The scope of the DCAA’s influence is significant. The agency provides definitive recommendations to contracting officers that affect negotiations with nearly 7,500 contractors a year. Contracting officers are better able to negotiate prices and settle contracts for services and supplies using DCAA recommendations.
The DCAA has no direct role in determining which companies are awarded defense contracts; instead, it provides only recommendations to the government officials who select contractors to perform government-funded work and negotiate prices for products and services. The DCAA audits only federal contractors; it has no internal audit responsibilities for the DOD.
Of most concerns, for project manufacturers is a Material Management and Accounting System (MMAS) audit. The DCAA conducts these audits to ensure that contractors are:
- Properly accounting for materials and costs
- Ordering materials based on accurate requirements in a time-phased approach
- Ensuring the contractor has valid processes and procedures in place
- Having complete audit trails from part to project to customer delivery
The goal for government contractors is to maintain compliant systems in accordance with FAR and DFARS regulations and use good business practices to ensure proper cost accounting for their projects, inventory, and manufacturing operations.
10 Key Elements of MMAS Compliance (1-3)
Government contractors whose business is project manufacturing are governed by the same rules laid out in Defense Federal Acquisition Regulation Supplement (DFARS) Subpart 252.242-7004, Contractor Material Management and Accounting System. All federal government contractors—including subcontractors—must follow these standards.
Let’s dive into the 10 Key Elements of Material Management and Accounting System (MMAS) Compliance:
1. System Description: Policy, Procedures, and Operating Instructions
MMAS Standard 1 requires you to provide an adequate system description, including policies, procedures and operating instructions compliant with FAR and CAS criteria for all elements of affected cost.
It is important for you to maintain a self-assessment of your systems, including written policies, procedures, and operating instructions. During the MMAS audit, the auditor will assess your system to obtain an understanding of your control procedures and will determine your risk level accordingly.
2. Material Requirements: Time-Phased Materials, Bill of Material Accuracy, and Master Production Schedule Accuracy
MMAS Standard 2 requires that the costs of purchased and fabricated material charged or allocated to a contract are based on valid time-phased requirements as affected by minimum/economic order quantity restrictions.
The primary objective of this standard is to ensure sufficient controls are established and used to ensure that material costs are valid and time-phased.
Accurate bills of material and master production schedules should ensure that the contractor's material costs are both valid (a valid requirement for the material) and reasonably time-phased (billed within a reasonable time of the actual need date).
Materials requirements cover three main areas for government contractors.
1. The auditor must review your procedures for planning and ordering the material and when those material costs are billed to the contract. This review will ensure materials are not received and charged to contracts earlier than is reasonably justified.
2. The auditor will evaluate the engineering design process and look for a goal of 98% accuracy in the bill of materials. Because many contractors manufacture and delivery highly complex products, engineering changes are frequent and require immediate attention. The review will look at how these changes are processed and what effect they have on the bill of material's accuracy and overall project costing.
3. The auditor will review your production schedule. This will include a review of manufacturing process times, as well as your production capacity and the availability or resources
3. System Monitoring
MMAS Standard 3 requires that your system provide a mechanism to identify, report, and resolve system control weaknesses and manual overrides.
If you are audited, the auditor will use these criteria to determine whether you comply with MMAS Standard 3:
- Determine the sufficiency of the contractor's analysis of MMAS-related exception reports and reports that track manufacturing process performance pertaining to the contractor's material.
- Evaluate how the contractor selected significant reports and determined that exceptions are adequately identified, reported, and resolved consistent with procedures (testing of the system).
- Evaluate the analysis regarding the adequacy of the system to timely identify exceptions such as excess and residual materials, no cost transfers, lost/found parts, etc.
Part two of this series where we dive into the next 3 additional elements of MMAS compliance is NOW LIVE!
Click below to continue to the next post in this series!