Wednesday, August 23, 2017

Terminations for Convenience and Bad Faith by the Government

Did you know that the Government can terminate your contract at any time for any reason? Well, so long as there is no bad faith or a clear abuse of discretion that is. Every Government contract has a termination for convenience clause. These clauses are found at FAR 52.249-1 through -10, depending upon the type of contract. Although these clauses are not mandatory flow down clauses for subcontractors, prime contractors would be taking undue risk if they don't flow them down to their subcontractors  - if the Government terminates the prime, the prime will certainly need to do the same to its subcontractors.

The Government has the right to terminate a contract at will under the termination for convenience clause and, absent bad faith or a clear abuse of discretion, the contracting officer's decision is final.

How would a contractor go about proving the contracting officer acted in bad faith? Its not easy. It is well established that Government officials are presumed to act in good faith. To prove that a Government official acted in bad faith, a contractor must show a specific intent to injure by clear and convincing evidence. That requires a showing of "well-nigh irrefragable proof of malice" or a specific intent to injure. Due to this heavy burden of proof, contractors have rarely succeeded in demonstrating the Government's bad faith.

A party to a contract cannot use an implied duty of good faith and fair dealing to expand another party's contractual duties beyond those in the express contract or create duties inconsistent with the contract's provisions. As a result, if the government has the contractual right to terminate a contract for convenience (and it does), the Government may exercise that right without breaching the duty of good faith and fair dealing. Seems obvious, right, but contractors have tried that argument.

If a contract is terminated, contractors are entitled to costs that have not already been reimbursed, a portion of the fee that was earned, and settlement costs.

Tuesday, August 22, 2017

Caution Regarding Substitutions for Contracted Skill Levels

T&M (Time and Material) contracts are common Government contract types. These contracts are usually issued when the Government cannot realistically estimate the requirements or the requirements cannot be known at the time of award. Firefighting is a good example. The Government wants to have forest/brush fire fighting capability under contract but the requirements depend on the number of forest fires which cannot be reasonably or accurately forecast.

There are special schedules in annual incurred cost submissions that require contractors to list their T&M contracts and then to detail the billings submitted to the Government for the work performed. Auditors generally focus on two areas related to T&M contracts; (i) are the hours charged to the Government supported by the contractors books and records and (ii) do the employees charging those hours meet the labor qualification set forth in the contract. Auditors might also compare the billing rates to the contract rates but this usually is not a high-risk are that auditors desire to pursue.

At one time, contract auditors were instructed to question any costs for work performed by employees who did not meet the qualifications for the position. So, for example, if the position called for an engineer with a graduate degree and the auditor found the engineer had only a bachelor degree, the auditor would question the entire charges.

The problem with this practice is that in many cases, contracting officers had approved the lesser qualifications or were satisfied with the services rendered by lesser qualified persons and approved it after the fact. This resulted in a significant waste of time by auditors, contractor personnel and contracting officers in developing findings, responding to findings and resolving findings.

In 2014, things came to a head and DoD insisted that before the contract auditors question any costs for work performed by under-qualified individuals, they first contract the contracting officer to determine whether approval was granted to the contractor to utilize those employees for the required tasks. But that's not all. If the contracting officer did not approve substitutions, the contract auditor must ask whether, under the circumstances, if retro-active approval will be given. If so, auditors should not question any costs.

If you're a T&M contractor and find yourself in similar situations, be sure to obtain contracting officer approval before substituting skill levels for contract minimums. Even if you need to adjust the contract price as a result, you should still be profitable.

Monday, August 21, 2017

More on Setting Up Internal Controls Over Company-Issued Purchase Cards

Internal controls over company-issued purchase cards should be of paramount concern to Government contractors. Regular readers of this blog will recall several reports where the cost of improper purchases using company-issued purchase cards were passed along to the Government and fraud charges resulted. Its serious enough when employees defraud their employer but when those charges pass through to a Government contract, things get much more serious. A contractor cannot just let those involved slip quietly off into the night. There will be consequences for both the individual(s) and the contractor.

But purchase card fraud is not just a contractor problem. It affects the Government as well. In fact, GSA's (General Services Administration) Office of Inspector General recently (OIG) published an audit that found GSA's purchase card program is vulnerable to illegal, improper, and erroneous purchases.

The OIG reported three deficiencies, each serious enough in its own right but when viewed in their totality, leaves the Government (and taxpayers) highly vulnerable to improper, if not fraudulent, purchase card charges. These deficiencies include:

  • GSA does not have assurance that purchase cards are used exclusively for approved, business-related goods and services because controls to support and review transaction documentation are not performed consistently
  • GSA may not identify illegal, improper, or erroneous purchases because controls over the resolution of questionable purchase card transactions are not operating effectively
  • GSA lacks controls for identifying split purchase card transactions, making GSA vulnerable to cardholders violating federal procurement regulations.

Contractors might want to assess their own purchase card policies and procedures against these reported (and common) deficiencies. Here's a few ideas you can use to enhance your own internal controls.

  1. Create a formal purchase card policy. Who is authorized to have a card?. What type of purchases are allowable? 
  2. Require substantiation. Require original receipts. Document business purpose to ensure purchase has a legitimate business purpose. Require formal approvals.
  3. Periodic internal reviews. Require independent (skeptical) internal review to periodically review purchase card statements and supporting documentation for propriety.
Remember, "trust" is not an internal control.

Friday, August 18, 2017

Bid Protest Involving Unequal Discussion With Bidders

YWCA of Greater Los Angeles, a 52 year incumbent, protested the Labor Department's award of a contract to "newbie" Management and Training Corporation (MTC) to operate a Job Corps center in Los Angeles contending that the Labor Department engaged in unequal discussions. The GAO upheld the protest. The reasoning gets a little confusing so hang in there.

The solicitation designated the center's director position as a key personnel position, and required offerors to submit a resume and letter of commitment for the director. The solicitation also advised offerors that they must notify the contracting officer in writing of any change in the availability of the proposed center director when the change in status occurs, at any point in the procurement process. But here's the rub. The solicitation also contained a provision explaining that any offer, modification, or withdrawal received after the exact time specified for receipt of the offers is late and would not be considered.

The GAO has oft explained that offerors are obligated to advise agencies of material changes in proposed key staffing, even after submission of proposals. Additionally, when a solicitation requires resumes for key personnel, the resumes form a material requirement of the solicitation. When the agency is notified of the withdrawal of a key person, it has two options; either evaluate the proposal as submitted, where the proposal would be rejected as technically unacceptable for failing to meet a material requirement, or open discussions to permit the offeror to amend its proposal.

In this case however, the Labor Department maintained that the language in the solicitation afforded it a third option. The GAO did not agree.

The Labor Department argued that the terms of the solicitation permitted offerors to substitute key personnel at any time. They further maintained that allowing offerors to do so does not constitute "discussions". They argued that this situation differed from prior situations considered by the GAO because the solicitation contained an explicit requirement that offerors notify the Labor Department if any of their proposed key personnel become unavailable. Thus, according to the Labor Department, it did not conduct improper "discussions" but simply allowed MTC to make a late key personnel substitution as permitted by the solicitation. Sounds like a reasonable interpretation, right?

YWCA on the other hand argued that the plain language of the solicitation does not support the Labor Department's interpretation because it is silent with regard to the submission of a proposal revision substituting a new key person for one that becomes unavailable. YWCA further argued that the Labor Department's interpretation would create a conflict between the key personnel notification provision and the provision dealing with late modifications provision because the late modification provision  does not contain an exception for the type of proposal modifications necessary to propose new key personnel after the time specified for the receipt of offers.

GAO agreed with YWCA. GAO stated that the plain language creates nothing more than an obligation for an offeror to provide notification if proposed key personnel become unavailable. The Labor Department's interpretation would be in conflict with the provision prohibiting late modifications. The notification requirement did not implicitly grant special permission for offerors to make late modifications regarding key personnel.

The GAO made another point:
Further, even assuming for the sake of argument that the solicitation could reasonably be read to permit offerors to make late substitutions of key personnel, the agency's decision to allow MTC to submit a late modification to its proposal would still have been tantamount to the conduct of discussions. Submission of key personnel resumes after receipt of final proposals constitutes discussions, not clarifications, because without the resumes, the proposal would omit material information required by the RFP. When an agency conducts discussions with one offeror, it must conduct discussions with all offerors in the competitive range. Here we find the agency's conduct of discussions with only one offeror constituted unequal and therefor improper discussions.
You can read the entire bid protest decision here.

Thursday, August 17, 2017

Government Recovers $9.2 Million in Labor Mischarging Scheme

Huntington Ingalls Shipbuilding has agreed to pay $9.2 million to settle allegations that it violated the False Claims Act by knowingly over-billing the Government for labor charges on Navy and Coast Guard ships at its Pascagoula, Mississippi shipyard.

This represents the culmination of a long drawn-out investigation and prosecution for labor mischarging that occurred beginning in 2003. Previously, three individuals who worked for Huntington were prosecuted and sentenced under the case. Two were sentenced in 2015 and the third in 2016.

Huntington billed the Navy and Coast Guard for labor costs that were actually worked on other contracts. Presumably, the Navy and Coast Guard contracts were cost-reimbursable contracts while the other "unmentioned" contracts were fixed-price contracts and may have been in overrun position.

Huntington also billed the Navy and Coast Guard for dive operations to support ship hull construction that did not actually occur.

The labor mischarging allegations were originally raised in a whistleblower lawsuit (i.e. a Qui Tam action) which permits private individuals to sue on behalf of the Government and share in the recoveries. In this case, the whistleblower will receive nearly $1.6 million (or we should say that the whistleblower and his attorney(s) will share in the $1.6 million reward). The poor whistleblower probably thought he would never see the end of it. Indeed, some whistleblowers have died before their cases were settled.

As is typical in these matters, the settlement does not mean that Huntington is guilty. Its just a settlement to put the matter behind them.

Here again, as we've written many times, the importance of effective internal controls over labor charging which includes the proper "tone at the top" is essential to prevent labor mischarging from occurring. Integrity should not be too much to ask from Government contractors.

You can read the full Justice Department press release concerning this settlement here.