Friday, November 16, 2018

Contractor Responsibility Determinations

The Government will award contracts to responsible prospective contractors only and no award can be made unless the contracting officer makes an affirmative determination of responsibility (see FAR 9.103(a) and (b)). Why is contractor "responsibility" so important? Because the award of a contract to a supplier based on lowest evaluated price alone can be false economy if there is a subsequent default, later deliveries, or other unsatisfactory performance resulting in additional contractual or administrative costs (see FAR 9.103(c)).

When making responsibility determinations, contracting officers can and will consider a number of sources of information about bidders and/or offerors. The common sources of information alread collected and readily available to the contracting officer includes the Federal Awardee Performance and Integrity Information System (FAPIIS), System for Award Management (SAM), and Past Performance Information Retrieval System (PPIRS).

Information in FAPIIS will identify affiliates, immediate owners, subsidiaries, and predecessors that have held previous Government contracts. It contains comments on how the contractor (or subcontractor) performed on previous contracts and whether there has been any administrative actions such as debarment or suspension. It contains information regarding criminal or civil proceedings, terminations for default or cause, and determinations of non-responsibility because the contractor does not have a satisfactory performance record or a satisfactory record of integrity and business ethics.

In addition to consulting the FAPIIS, contracting officers, when making responsibility determinations have other sources of information to help make those determinations. These include

  • Records and experience data, including verifiable knowledge of personnel with the contracting office, audit offices, contract administration offices and other contracting officers. In other words, contracting officer will often query those around them for whatever information they might hold on a particular contractor or offeror.
  • The prospective contractor - including bid or proposal information, questionnaire replies, financial data, information on production equipment and personnel information.
  • Commercial sources of supplier information of a type offered to buyers in the private sector.
  • Preaward survey reports - usually performed by DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) - including accounting system adequacy and financial capability reviews.
  • Other sources such as publications, suppliers, subcontractors, and customers of the prospective contractor, financial institutions, Government agencies, and business and trade associations.
Contractors and prospective contractors should never underestimate the impact of negative information or a negative perception by someone within the Government. Sometimes all it takes is an off-hand comment bubbling up to the contracting officer to influence award decisions.

Thursday, November 15, 2018

$236 Million Settlement in Bid-Rigging Scheme

Back in the mid-70s, the Army began to realize that it was paying excessive prices for military construction projects in South Korea. In fact, many of these projects cost more than comparable construction projects would cost back in the States. Given that Korean labor at the time was earning $2 to $4 per day, something was obviously off balance. The Army CIC (Criminal Investigative Command) conducted an extensive investigation and found wide-spread collusion among contractors as well as Korean Government involvement in directing which contractor would win each bid. The solution at the time was to move from competitive bidding process to negotiated procurements complete with certified cost or pricing data and full pricing audits. It worked. Costs for construction projects fell significantly. Over the intervening years however contracting shifted back to competitive procurements. The Korean economy boomed and the U.S. Government's was not as significant economic influence as it once was. There was presumption that contractors' ethics had improved. The Army wanted to streamline its acquisition processes - it requires a lot more work to negotiate a contract based on certified cost or pricing data than it does to award based on competition. It didn't take too many years for the shift from negotiated competitive procurements to become complete.

For those involved in ferreting out the graft and corruption of that era, yesterday's announcement by the Justice Department of a massive collusion scheme by Korean suppliers of fuel to the Army, Marines, and Air Force in South Korea was not shocking. Three South Korean companies agree to plead guilty to bid rigging on Defense Department fuel supply contracts. Together the companies have agreed to pay $236 million in fines and damages. The three suppliers agreed to pay $82 million in criminal fines for their involvement in a decade-long bid-rigging conspiracy that targeted fuel supply contracts and $154 million in restitution. This bid-rigging conspiracy went on for more than ten years discovery and the $154 million settlement is less than the amount of the overcharging. The Government rationalized this by stating that it reflected the value of defendants' cooperation commitments and the cost savings realized by avoiding extended litigation. These three companies have also been barred from further Government contracts.

The Justice Department press release alluded to the fact that additional charges in this matter would be forthcoming. The press release did not indicate how the scheme was uncovered or specifically how the collusion occurred. Perhaps we'll learn more about this case later on.

Wednesday, November 14, 2018

Double Jeopardy - Incurred Cost Audits

DCAA's (Defense Contract Audit Agency's) policies and procedures for sampling low-risk incurred cost proposals, while certainly helping to reduce the Agency's incurred cost backlog, has not been without its detractors in the contract administration community. There are anecdotal stories out there where contracting officers try to initiate their own reviews of incurred costs after receiving notification from DCAA that a particular contractor submission has been deemed low risk and should be relied upon to close contracts for that year. Contractors were understandably upset because of the apparent "double audit". The problem became significant enough that the Defense Department amended its FAR Supplement (DFARS) to, in effect, tell contracting officers to knock off the second-guessing of audit results.

DFARS 242.705, Final indirect cost rates was added as follows:
DCAA Policy and Procedure for Sampling Low-Risk Incurred Cost Proposals issued on Junly 24, 2012. Effective immediately, for the purposes of satisfying the audit requirements at FAR 4.804-5(a)(12), 42.705-1(b)(2), and 42.705-2(b)(2)(i), Department of Defense contracting officers shall continue to rely on either a DCAA audit report or a DCAA memorandum documenting that, based on a risk assessment and a proposal adequacy evaluation pursuant to FAR 42.705-1(b)(1)(iii), DCAA deemed the incurred cost proposal to be low-risk and did not select it for further audit in accordance with its policy.
This policy certainly doesn't mean that DCAA can make its determination in a vacuum without consulting the contract administration office. Before DCAA makes its high risk/low risk determination on a particular year at a particular contractor, it requests that the contracting officer provide them with a list of any known significant risk factors. The notification typically follows this wording:
Please notify us of any significant risk factors you are aware of that would impact the low-risk determination for the subject contractor and fiscal year. A negative response is requested. We request that you provide a response to our office no later than ten business days from the date of this letter.
Contracting officers are always given the opportunity to weigh in on what they view as risk factors at a particular contractor. And, the contract auditors are obligated to consider these views when assessing whether to perform an audit or to close it out with no audit because the risk factors did not justify a full audit.

Tuesday, November 13, 2018

Notice of Intent to Disallow Costs

The Government cannot arbitrarily withhold contract funds. There is a due process involved that consists of written rationale in the form of a proposed action but also gives contractors ample opportunity to state their case as to why that action should not be taken.

The procedure is laid out in FAR 42.801. Briefly, it goes like this:

At any time during the performance of a contract (typically a cost-reimbursable contract), the contracting officer responsible for administering the contract may issue the contractor a written notice of intent to disallow specified costs incurred or planned for incurrence. However, before issuing the notice, the contracting officer shall make every reasonable effort to reach a satisfactory settlement through discussions with the contractor (FAR 42.801(s)).

A notice of intent to disallow such costs usually results from monitoring contractor costs. The purpose of the notice is to notify the contractor as early as practicable during contract performance that the cost is considered unallowable under the contract terms and to provide for timely resolution of any resulting disagreement. In the event of a disagreement, the contractor may submit to the contracting officer a written response. Any such response shall be answered by withdrawal of the notice or by making a written decision within 60 days (FAR 42.801(b)). A notice of intent to disallow can also be the result of a report by the contract auditor.

At a minimum, the notice shall

  1. Refer to the contract's Notice of Intent to Disallow Costs clause
  2. State the contractor's name and list the numbers of the affected contracts
  3. Describe the costs to be disallowed, including estimated dollar value by item and applicable time periods, and state the reasons for the intended disallowance
  4. Describe the potential impact on billing rates and forward pricing rate agreements
  5. State the notice's effective date and the date by which written response must be received
  6. List the recipients of copies of the notice, and
  7. Request the contractor to acknowledge receipt of the notice

Recently, the U.S. Court of Federal Claims took the Department of Energy to task for not following these procedures. DOE withheld costs from a contractor who had given employees a pay raise. DOE requested the contractor to provide information necessary for it to determine whether the pay raises were justified and if the information was not provided, DOE planned to take appropriate action to protect the Government's interests. The contractor did not provide the requested data so DOE withheld two percent of billed direct labor costs.

The contractor argued that DOE had not complied with the FAR criteria for disallowing costs. It had not issued a notice of intent to disallow costs nor had it afforded the contractor the opportunity to responded to the notice.

The Federal Claims court agreed with the contractor and ordered DOE to repay the $1.1 million withheld plus any additional amounts that may have been withheld in the interim.

The full decision can be read here.

Monday, November 12, 2018

Inter-Company Transfers - Limitations

Material costs, including such items as raw materials, parts, sub-assemblies, components, whether manufactured by the contractor or purchased are, of course, allowable costs on Government contracts (see FAR 31.205-26, Material Costs). There are limitations however, when those materials are being purchased from an affiliated company.

Paragraph (e) of the aforementioned FAR (Federal Acquisition Regulations) Cost Principle provides the following:
Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred. That means, no profit can be added. However, allowance may be at price when (i) it is the established practice of the transferring organization to price inter-organizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate under a common control and (ii) the item being transferred qualifies for an exception under FAR 15.403-1(b) and the contracting officer has not determined the price to be unreasonable.
Note the two conditions; there must be an established practice that is followed for both commercial and Government customers and the item(s) must qualify for some kind of exemption. What are those exemptions? FAR 15.403-1(b) lists the exceptions to certified cost or pricing data requirements. Among them are

  1. When the contracting officer determines that prices agreed upon are based on adequate price competition
  2. When the contracting officer determines that prices agreed upon are based on prices set by law or regulation
  3. When a commercial item is being acquired
  4. When a waiver has been granted, or
  5. When modifying a contract or subcontract for commercial items.
The idea behind these limitations is to avoid doubling up on profit, to pay a contractor profit on top of a material item for which it has already received profit. Contract auditors are very aware of this potential and will closely scrutinize any estimates or costs incurred under cost-type contracts for inter-company transactions to ensure that costs are consistent with the FAR limitations.