Wednesday, January 16, 2019

Labor Department Compliance Audits

The Department of Labor's Wage and Hour Division (WHD) investigators have been pretty busy lately, investigating contractor violations of certain labor related regulations. For contractors subject to the minimum wage and reporting requirements of Davis-Bacon (DB) and the Service Contracting Act (SCA), the probability of being audited for compliance is actually quite high and the consequences for failing to comply can be significant. The Labor Department recently sent out press releases concerning the outcome of two such investigations.

In the first case, a roofing contractor out of Tuscaloosa Alabama agreed to pay $57 thousand in back wages, overtime and fringe benefits to 41 employees after the Labor Department investigation found the company (employer) violated requirements of the Davis-Bacon Act (DBA), the Contract Work Hours and Safety Standards Act (CWHSSA) and the Fair Labor Standards Act (FLSA). The company failed to pay one employee for overtime hours on a DBA project and several employees for overtime when they worked more than 40 hours on a commercial project. Additionally, the roofing company failed to submit accurate certified payroll records and maintain accurate daily records of the number of hours employees worked.

In the second case, a Texas-based contractor paid $24 thousand in back wages to ten employees after investigators found the company had inaccurately classified several employees as exempt from the overtime requirements of the FLSA when none met the requirements for exemption. The company paid the affected employees flat weekly salaries regardless of the number of hours they worked, resulting in overtime violations when they worked more than 40 hours per week without overtime payment.

These two cases almost sound like "honest mistakes" where very small contractors did not have the internal resources to know all the rules and regulations that applied. We see honest mistakes happen frequently in our consulting business. However, when it comes to labor law, employees are often more informed about such matters than their employers and with the abundance of hotlines and other avenues for whistleblowing, the , it only takes a phone call to have investigators show up on your doorstep.

Tuesday, January 15, 2019

Subcontract Pricing Considerations - Prime Contractors Must Demonstrate Reasonableness of Proposed Subcontract Costs

Earlier this month, we highlighted a revised audit policy from the Defense Contract Audit Agency (DCAA) concerning the evaluation of subcontract costs included in forward pricing proposals. FAR 15.404-3(3)(b) requires prime contractors to perform whatever cost/price analysis is necessary to determine the reasonableness of proposed prices. Sometimes they don't do that so historically, DCAA has considered them unsupported and perhaps identified the omission as an estimating deficiency. That policy did nothing to advance contract negotiations nor help procurement offices to negotiate fair and reasonable prices. Under the new guidance, DCAA is to provide whatever information it has available or conduct additional analytical work (i.e. develop decrement factors) to assist in any way it can. See "Revised Audit Policy for Reviewing Subcontractor Costs" for more information on the new policy.

Contractors need to be cautioned however that DCAA's performance of alternative procedures (or requesting an assist audit) does not relieve prime contractors or upper-tier contractors from their responsibility to perform cost or price analyses of subcontract proposals.

Whatever analytical work the auditors might perform, the procurement regulations stand. FAR 15.404-3(3)(b), Subcontract pricing considerations, unequivocally requires prime contractors and higher-tier subcontractors to conduct appropriate cost or price analyses to establish the reasonableness of proposed subcontract prices. It also requires the prime or higher-tie contract to include the results of these analyses in its price proposal.

When auditors encounter situations where contractors or higher-tier subcontractors have not met the regulatory requirement to prove the reasonableness of proposed subcontract prices, they will include that omission as a material noncompliance with FAR 15.404-3(b) in the audit report. What are the consequences of an inadequate estimating system? Well, it could be significant. It could result in additional auditing, additional oversight, the necessity of getting contracting officer consent to subcontract (with all the additional documentation that requires), and loss of future contracting opportunities.

Monday, January 14, 2019

Cash Flow Shortages Caused by Partial Government Shutdown

The partial Government shutdown is having financial ripple effects on, not only the furloughed Government employees, but on Government contractors. For contractors and subcontractors, the disruption of Government payments for work performed makes it difficult for some contractors (and subcontractors) to meet their own financial obligations.

Some contractors are contemplating borrowing money to tide them over. That is certainly one strategy to keep funds flowing but keep in mind that the interest on those borrowing is unallowable (see FAR 31.205-20, Interest and Other Financial Costs). There is no "wiggle room" in that cost principle to make interest costs allowable - not even if the cash shortage was caused by a Government shutdown.

Another strategy is to defer payments to vendors and subcontractors. This strategy has some potential risks. Many vendor invoices come with fees and interest for late payment. Such fees and interest would, of course, be unallowable. Ultimately however, vendor and subcontractor need to be paid prior to invoicing the Government for those goods and services (or accrued and paid in the normal course of business - usually 30 days - for small businesses). This could create audit issues with DCAA (Defense Contract Audit Agency) or other contract auditors who perform "testing of paid vouchers" audits.

"Testing of paid vouchers" are conducted at every contractor. For non-major contractors, testing is performed on at least one voucher per year - more often if problems are identified and the auditors will specifically focus on payment timeliness.

One of the audit steps reads:

  • Verify that the contractor is not delinquent in the payment of cost incurred in the performance of the contract in the ordinary course of business. 
  • Review the contractor’s aging of accounts payable schedule. Discuss any significant amounts over 30 days old with the contractor. 
  • Based on the risk assessment, select a minimum number of items (e.g., five items) charged direct to the contract and trace the amounts from voucher(s) to evidence of payment. 
  • If the contractor is delinquent in paying costs in the ordinary course of business, the costs are not reimbursable in accordance with FAR 52.216-7(b) Reimbursing costs. 

Our advice to contractors facing cash flow shortages caused by the partial Government shutdown is to engage your contracting officer early on to document the issues and the ultimate resolution plan. If possible, obtain an advance agreement (see FAR 31.109) to avoid future disagreements.

Friday, January 11, 2019

Once You've Graduated, You Cannot Go Back

Graduation day is a good thing. Why would someone want to keep hanging around the old haunts after graduation? Wouldn't that be a little weird?

That's what Miracorp wants to do. Back in July of last year, DOE (Energy) issued a solicitation for administrative support services. The solicitation was set aside for companies in SBA's 8(a) program. Miracorp was the incumbent contractor but had graduated from the 8(a) program the prior February. After DOE eliminated Miracorp from competition because it was no longer an 8(a) contractor, the company appealed to the GAO  (Government Accountability Office).

GAO denied the protest on the grounds that Miracorp was not an "interested party" because it was not a member of the 8(a) program. Miracorp acknowledged that although it had graduated, it retained its 8(a) status because it was an 8(a) company when the original multiple-award contract was awarded.

GAO (and SBA) didn't agree. The agencies explained that to be an eligible 8(a) concern, the firm must be a current 8(a) participant as of the date specified for receipt of offers contained in the request for quotations for the order. Miracorp was not an 8(a) participant on the dated specified in the RFQ for receipt of quotations and therefore not eligible to receive the order.

The purpose of the 8(a) program is not to encourage entities to feed from the public trough forever. Companies get up to nine years to bid on contracts restricted to small disadvantaged businesses during which time the experience and seed money should be sufficient to give them a chance for success without the Government incentives.

You can read the full GAO decision here.

Thursday, January 10, 2019

Justice Department Recovered $2.8 Billion under the False Claims Act in Fiscal Year 2018

Late last month, the Justice Department issued its annual report on recoveries under False Claims Act (FCA) cases during fiscal year 2018.  The amount of recoveries was impressive (nearly $2.8 billion) but no where near the $6.1 billion recovered in fiscal year 2014.

The preponderance of the recoveries (87 percent) related to what we can generically refer to as Health Care fraud. The largest of these recoveries came from the drug and medical device industry. For example, the Department recovered $625 million from a company that circumvented safeguards intended to preserve the integrity of the nation's drug supply by repackaging drugs supplied to cancer-stricken patients. In another case, a medical device manufacturer paid $33 million for selling a materially unreliable testing device that was intended to aid clinicians in the diagnosis of drug overdoses and other serious conditions.

Recoveries for procurement fraud paled in relation to health care fraud. The Department recovered only $107 million (only?). The most significant recovery was $66 million from a company selling defective fiber used in bullet proof vests. Another $20 million came from a company that over-billed the Navy by overstating the quantity of goods and services it delivered. The Department recovered $12 million from a company that misrepresented its status as a small business. We previously reported on these cases and many others on these pages.

Interestingly, most of the recoveries were the result of whistleblower actions (a.k.a. Qui Tam). Of that $2.9 billion recovered, $2.1 billion was the result of lawsuits filed by whistleblowers. The whistleblower payouts during the year totaled $301 million. We don't know how much of the payout went to whistleblowers and how much to their attorneys. We know of one case, years ago, where the attorneys took the preponderance of a whistleblower's payout.

The Justice Department report stated:
Whistleblowers have played a vital role in unmasking fraudulent schemes that might otherwise evade detection. The taxpayers owe a debt of gratitude to those who often put much on the line to expose such schemes.
You can read more about the Annual report and download related statistics here.