Monday, April 22, 2019

$1.6 Million Settlement for Violations of the Service Contract Act

In yet another settlement involving failure to pay minimum wages - this one larger than other recent announcements - the Labor Department's Wage and Hour Division (WHD) announced that a California company agreed to pay $1.6 million in back wages and benefits.

This settlement was also unique in that the company, McKesson Specialty Distribution contacted WHD to self-report the infraction. WHD investigated and confirmed that McKesson failed to pay required prevailing wage rates to employees performing wok on a federal service contract. This meant that the company also failed to pay the correct overtime rates and the correct fringe benefits.

The Services Contracting Act (SCA) requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality, or the rates, including prospective increases, contained in a predecessor contractor's collective bargaining agreement.

The Labor Department lauded McKesson for coming forward and self-reporting the violations and encouraged all employers to review their pay practices and to contact the WHD for compliance assistance.

You can read more about this case here.

Friday, April 19, 2019

Congressional Earmarks are Back

Citizens Against Government Waste (CAGW) is a private, non-partisan (perhps) non-profit organization with about a million members. Its purpose is to eliminate waste, mismanagement and inefficiency in the Government. It was co-founded back in 1984 by J. Peter Grace (the Grace Commission) and Jack Anderson. Some of your (older readers) may recall Jack Anderson, a syndicated columnist and considered by many to be one of the fathers of modern investigative journalism. Jack exposed such things as the Nixon administration's harassment of John Lennon, fugitive Nazi's living in South America, plots to kill Castro, and the Iran-Contra affair under the Reagan administration.

CAGW produces numerous publications highlighting wasteful government spending including "Government Wastewatch". Its most noteworthy (and highly anticipated) publication is the annual Congressional Pig Book which exposes the most glaring and irresponsible port-barrel projects in the 13 annual appropriations bill.

The 2018 Congressional Pig Book (download here) exposes 232 earmarks in fiscal year 2018 costing $14.7 billion (the record year was $29 billion in fiscal year 2006). To make it in the Congressional Pig Book, the appropriation must meet one or more of the following criteria.

  • Requested by only one chamber of Congress
  • Not specifically authorized
  • Not competitively awarded
  • Not requested by the President
  • Greatly exceeds the President's budget request
  • Not the subject of congressional hearings, or
  • Serves only a local or special interest.

Read the report to see whether any of your Government contracts is the result of "blatant examples of pork".

Thursday, April 18, 2019

Audited Financial Statements Do Not Provide Assurance that Cost Accounting System is Adequate for Government Contracting

Back in 2016, the National Institute of Health (NIH) issued a solicitation for "IT (Information Technology) Solutions and Services". Bidders were advised that proposals would be evaluated in two phases. In Phase 1, the Government would evaluate the proposals based on four go/no-go requirements, one of which was a verification of an adequate accounting system. The solicitation advised that proposals found to be unacceptable in any of the four Phase I requirements would be ineligible for further consideration for award.

Shivoy Inc was one of 552 bidders for the work but NIH found the its proposal unacceptable at Phase 1 because it did not include verification that its CTA member (Contractor Team Arrangement) had an adequate accounting system. Thus, Shivoy's proposal was rendered ineligible for further consideration.

Shivoy appealed to the GAO (Government Accountability Office) arguing that NIH unreasonably found its proposal unacceptable because its CTA member had in fact, submitted documentation that complied with the solicitation's requirement for the verification of an adequate accounting system.

NIH responded by noting that the documentation submitted by the CTA member was not verification of an adequate accounting system but only a standards auditors' report for a financial audit of the CTA's parent company and subsidiaries. A standard financial statement audit report simply indicates that an accounting system utilized to prepare audited financial statements was operated in accordance with generally accepted accounting procedures. Such a report does not assert, either implicitly or explicitly that the accounting system was adequate for determining costs applicable to a cost-reimbursement contract in accordance with FAR.

The GAO sided with NIH and denied Shivoy's appeal. The GAO found that NIH's evaluation reasonable and consistent with the solicitation. The solicitation clearly required verification on an accounting system that had been audited and determining costs applicable to the contract in accordance with FAR. Audited financial statement fall far short of assuring that the (cost) accounting system has such capabilities.

Wednesday, April 17, 2019

Contract Funds Withheld for Non-Conforming Deliveries

There's a contract clause included in all firm-fixed price research and development contracts that allows the Government to reject non-conforming work and make an equitable price reduction if its not fixed. FAR 52.246-7, Inspection of Research and Development - Fixed Price requires, among other things, that contractors implement and maintain an inspection system acceptable to the Government and maintain complete records of such inspections and make those records available to the Government during contract performance and for as long afterwards as the contract requires. This clause also give the Government the right to perform its own inspections.

But here's the hammer. After delivery, the Government either accepts or rejects the work. The Government has the right to reject nonconforming work. If the Contractor fails or is unable to correct or to replace nonconforming work within the delivery schedule, the Contracting Officer may accept the work and make an equitable price reduction. Failure to agree on a price reduction shall be a dispute. So, the Government withholds payment and its up to the contractor to appeal that decision if it wants additional contract funds.

How does this work in practice? A recent ASBCA (Armed Services Board of Contract Appeals) case involving a fixed-price research and development contract, illustrates how the Government applied this clause to withhold funds from a contractor.

NASA awarded a SBIR (Small Business Innovation Research) contract to Energia for photo-chemical remediation of sites contaminated with hazardous solvents at the Kennedy Space Center. The contract was for a fixed price of $597,960. The research contract was not fully completed and the Government withheld about $160,000 from the contract price based on the aforementioned contract clause. Energia appealed back in 2016 but lost the appeal on entitlement grounds. The ASBCA (Armed Services Board of Contract Appeals) remanded the case back to the parties for quantum (i.e. figuring out what the withhold should be).

The parties  couldn't reach agreement. Energia wanted it all. The Board found that Energia had no basis for its claim for the full amount and found credible, NASA's calculations of the equitable price reduction. Ultimately, the Board ruled that the Government was entitled to an equitable price reduction of $160,000 which exceeded the amount previously withheld by NASA. The Board found that Energia was not entitled to payment of any additional contract amounts.

Tuesday, April 16, 2019

Contractor (and its Owner) Ordered to Pay $48 Million in Clean-up Costs

Lawrence Aviation Industries located in Long Island, New York was an aircraft parts manufacturer making titanium parts for military aircraft. The company is now out of business but its location is now an EPA (Environmental Protection Agency) Superfund Site.

In 1980, county health officials visited the site and were alarmed by what they saw. They found an accumulation of drums, many improperly stored and in disrepair, in seven areas of the site. They also noted unpermitted discharges of liquid waste, unlined cesspools and lagoons where liquid waste was stored.

Since then, no one has been permitted to drink groundwater near and down-gradient from the site as it has serious contamination issues resulting from the contamination.

Yesterday, a federal court ordered Lawrence Aviation and its former owner to pay more than $48 million in cleanup costs and penalties for discharging hazardous substances at the site. It seems unlikely however that the Government will ever recover that amount. Not too many people have those funds lying around and the company is out of business. Perhaps there might be insurance coverage but if history is any indication, the insurance companies will find ways not to pay.

When Lawrence Aviation was ordered to come into compliance, the company ordered its employees to use a front-end loader to crush 55-gallon drums containing hazardous substances (the owner already spent a year in jail for that one). There were 1,600 such drums scattered across the site. This resulted in a massive discharge of waste directly onto the ground. Samples from these drums revealed extraordinarily high levels of pollutants.

EPA's clean-up of the site is now into its 19th year. The Justice Department's press release on this case can be viewed here.