Friday, September 21, 2018

Proposed Changes to Progress Payment Rate - Public Meeting Scheduled

About a month ago, we brought you news about the Defense Department's proposed changes to progress billings (see Proposed Changes to Progress Payment Rate). Essentially, the proposed rule drops the standard progress payment rate from 80 percent to 50 percent, however, contractors have the opportunity to score a higher rate when they achieve certain goals, like having acceptable business systems with no deficiencies, meeting contract delivery dates, closing out corrective action requests, meeting small business subcontracting goals, etc.

The goal here is to incentivize contractors to "fix" things that would otherwise have no adverse consequences. The downside is that the proposed rule will require a significant amount of effort to implement and track. It goes without saying that if contractors cannot achieve the full 80 percent rate, there will be a significant impact on their cash flow and in some cases, their ability to continue as a Government contractor. Think about it. If you have a $5 million contract stretching over two years, you will be floating the Government an interest free loan of a few million. Do you have that kind of financial resources available?

This has been a highly controversial move by DoD and so the Department has decided to schedule a public meeting next month in the DC area to obtain the views of experts and interested parties in the private sector (that includes current and prospective Government contractors) regarding the proposed changes. To attend, one needs to be pre-registered. Instructions for registering are found here. If you have a vested interest in the outcome, attending might be worthwhile. We can't imagine that there will be too many in attendance that will have come in support of the proposed rule.

Thursday, September 20, 2018

DCAA "Slowness" Cost a Company a Contracting Opportunity

Back in June 2016, GSA (General Services Administration) issued a solicitation to procure IT services for various Governmental agencies. It was a multiple-award ID/IQ contract where awardees under the solicitation would become eligible to receive task orders under the contract.

One of the conditions that bidders needed to establish was the adequacy of their cost accounting systems (CAS). Bidders could provide evidence from DCAA (Defense Contract Audit Agency), DCMA (Defense Contract Management Agency) or another Cognizant Federal Agency. One of the bidders, Dynanet Corporation did not have such evidence so GSA requested DCAA to perform a pre-award accounting system survey.

On August 12, 2016, DCAA acknowledged GSA's request for the review so sometime after that, DCAA initiated its review.

Proposals were due to GSA on October 7th but by then, DCAA had not completed its audit. That was nearly two months after the audit request and should have been plenty of time to complete these rather perfunctory reviews. Two days and the day before proposals were due, Dynanet frantically communicated with DCAA as to the report status. Dynanet pleaded with DCAA, if they were not able to issue a report, to provide them at least a letter to the effect that their cost accounting system was adequate.

DCAA refused saying that the audit had to be reviewed by a supervisor and would be issued the following week. DCAA did issue the report the following week, October 14, 2016 and found Dynanet's accounting system to be adequate for Government contracting. But by then, it was too late. GSA deducted points from Dynanet's bid because the proposal did not include evidence that the accounting system had been approved by DCAA. That point reduction was enough to reduce Dynanet's score below the award cutoff. Specifically the contracting officer noted that Dynanet
did not provide evidence of an acceptable accounting system that has been audited and determined adequate for determining costs applicable to the contract. [Dynanet] provided a letter from DCAA dated August 12, 2016 that simply indicated that an audit request has been received. [Dynanet] also provided an [email] string from DCAA dated October 6, 2016 (one day before the [bidding window] closed) where [the DCAA] stated that the audit was in its final stages with a goal of having it completed by October 14, 2016 (7 days after the [bidding window] closed).
Dynanet appealed but that appeal failed (see CFC 18-795C) because the contracting officer had evaluated everything in strict accordance with the solicitation.

If only DCAA could have published its report one week sooner, Dynanet might have had a contract.

Wednesday, September 19, 2018

What Happens When a Contractor Files for Bankruptcy?

It doesn't happen frequently but contractor bankruptcy happens often enough to warrant a special contract clause that appears in every contract above the simplified acquisition threshold (currently set at $150 thousand). The Bankruptcy clause is found at FAR (Federal Acquisition Regulations) 52.242-13. and requires contractors entering into proceedings relating to bankruptcy, whether voluntary or involuntary, to furnish by certified mail (or electronic commerce method authorized by contract), written notification to the contracting officer responsible for administering the contract.

This notification is time sensitive. It must be furnished within five days of the initiation of the proceedings relating to bankruptcy filing. Additionally, the notification must include certain information:

  1. The date on which the bankruptcy petition was filed
  2. The identity of the court in which the bankruptcy petition was filed
  3. A listing of Government contract numbers and contracting offices for all Government contracts against which final payment has not been made.

Once notified, the contracting officer has certain responsibilities as well. These responsibilities are delineated in FAR 42.902. When notified of bankruptcy proceedings, the contracting officer must do the following:

  1. Furnish the notice of bankruptcy to legal counsel and other appropriate agency offices (e.g. contracting, financial, property) and affected buying activities
  2. Determine the amount of the Government's potential claim against the contractor (in assessing this impact, identify and review any contracts that have not been closed out, including those physically completed or terminated)
  3. Take actions necessary to protect the Government's financial interests and safeguard Government property, and
  4. Furnish pertinent contract information to the legal counsel representing the Government.

The Government's financial exposure to bankruptcy is highly dependent upon the goods or services being purchased. A bankruptcy of a  fuel supplier for example, will not be too disruptive. The Government can go to the next supplier standing. On the other hand, purchases of systems that take months to produce and where advance payments or progress payments have been advanced represent significant financial risk to the Government.

Some of you have been subjected to the Government's financial capability review process. These reviews are simply the Government's way of mitigating the risk that contracts will be awarded to companies that are in financial distress and could end up in bankruptcy. If the Government doesn't think a prospective contractor has the necessary financial resources to complete a contract, and the prospective contractor cannot convince the Government otherwise, there will probably be no contract.

Tuesday, September 18, 2018

Keeping It In the Family

The Justice Department issued a press release yesterday announcing the sentencing of a father and son duo for several contracting related frauds. The father was sentenced to nearly six years in prison while the son sentenced to 12 months. In addition, the two agreed to pay $3.2 million in restitution to the Government and to clients they had stolen from. In sentencing, the Judge told the father that it appeared that he'd made a life out of lying and cheating. And it does appear that history supports the Judge's observation.

Father/son sole nearly $600 thousand from three clients. They set up a consulting firm to help small businesses secure USDA (Agriculture) contracts. They then misused their position as the company's agents to change banking information in an online Government system so that when USDA paid on their client's contracts, the monies were diverted to Father/son accounts.

Is your firm vulnerable to this type of fraud? Do you know who has access to your SAM, iRAPT, and WAWF accounts?

After that scheme was uncovered, Father/son set up a new business (Worldwide Connect LLC) as an approved USDA contractor. To do that, they falsified financial information. They also falsified a certification that none of the principals had ever been debarred or suspended. In fact, the father had been suspended and debarred from all federal contracting due to conduct at his prior business.

The new company won over $4 million in USDA food service supply contracts. Four of the five contracts were terminated for default after WWC (Worldwide Connect) failed to deliver. The father/son admitted that they had caused their suppliers to lose more than $1.5 million in the process. The two also admitted to siphoning off company funds for nightclub charges, luxury hotel stays and other personal items.

After those contracts were terminated, the father/son applied to SBA to be readmitted to federal contracting. As part of that application, the father falsely claimed veteran status and submitted falsified tax returns.

The Justice press release did not provide any insight as to how the scheme was uncovered. It is likely however that investigations were initiated based on information from the clients that the two had defrauded.

Monday, September 17, 2018

AFCE's 2018 Report on Fraud

Frequent disclosures of fraud, waste, and abuse in Federal Government contracting tend to make headlines but certainly those nefarious activities are not limited to the Federal Government. States, municipalities, counties, and essentially every organization with fiduciary responsibility for public funds have their share of scandals. While such scandals might make a local news site, they rarely rise to the level of national interest. What makes a better story, the Air Force ordering two refrigerators for Air Force One for $24 million (since cancelled) or a city manager in Topeka taking an unauthorized trip to Wichita or a contractor in Twin Falls being the victim of embezzlement.

The ACFE (Association of Certified Fraud Examiners) periodically publishes an analysis of occupational fraud. Its not comprehensive because it is based on information that comes from its members who were involved in the investigations of the cases. Even with this limited population, the 2018 report covers nearly 2,700 investigations conducted between January 2016 and October 2017. Here are some highlights.

  • 40 percent of corruption cases were detected b y a tip. For organizations with a hotline, 46 percent of cases were detected by a tip. For those without a hotline, only 30 percent came from tips. Organizations must make a point of establishing mechanisms that encourage employees to come forward. Hotlines and guaranteed anonymity are good starting points.
  • Internal control weaknesses were responsible for nearly half of frauds. Now you Government contractors understand the Government's emphasis on strong internal controls.
  • Median losses are far greater when fraudsters collude.
  • Small businesses lost almost twice as much per scheme to fraud than large businesses ($104 thousand per scheme for large businesses vs $200 thousand per scheme for small businesses. This is not surprising as small business have fewer resources to invest in internal controls.
  • 85 percent of fraudsters displayed at least one behavioral red flag of fraud.
  • A majority of the victims recovered nothing.
  • Only four percent of perpetrators had a prior fraud conviction.

 If you're not taking the prospect of fraud within your organization seriously, you are at risk of financial loss. Can you afford a $200 thousand loss - the average loss for small businesses covered by this survey? The full report can be found here.