Wednesday, July 17, 2019

Cost Incurred in Defending Against Third Party Lawsuits are Probably Unallowable

For 47 years between 1943 and 1990, the Government produced plutonium for nuclear weapons at the Hanford site in Washington State, leaving behind about 56 million gallons of nuclear waste stored in underground tanks. If all of that sludge were put in tanker trucks, the line of trucks would extend from Philadelphia to New York.

In 2000, Bechtel was awarded a cost-plus-incentive fee contract by the Energy Department for the design, construction, and operation of a nuclear waste treatment plant to process the waste. Now, 19 years later, the construction phase is yet to be completed.

During contract performance, two former Bechtel employees at the Hanford site sued Bechtel alleging sexual and racial discrimination and subsequent retaliation for raising their complaints. Bechtel settled these lawsuits out of court and then sought $500 thousand in reimbursement from the Energy Department for costs it incurred in defending against the two suits. Bechtel did not seek reimbursement for the settlement payments, presumably because those were covered by insurance.

In 2016, DOE (Department of Energy) disallowed the $500 thousand based on the standards set forth in a prior Federal Court of Appeals decision (the 'Tecom decision'). Bechtel then brought a suit in the Federal Claims Court challenging the contracting officer's decision. The Claims Court sided with DOE, concluding that Tecom was the proper standard for determining whether defense costs were allowable. Bechtel then appealed the Claims Court decision to the Federal Court of Appeals. The Appeals Court affirmed the Claims Court decision.

So what is the 'Tecom Standard'?

The Tecom case involved a similar dispute over whether costs associated with settling an employment discrimination lawsuit were allowable costs under a Government contract. A former employee had sued Tecom under Title VII, alleging sexual harassment and firing in retaliation for filing a sexual harassment charge. The allege conduct, if proven, would have violated Title VII. After settling the suit, Tecom sought reimbursement from the Government for (i) defense costs and (ii) settlement payments associated with the lawsuit.

One of the allowability criteria for costs on Government contracts is that they comply with the terms of the contract (see FAR 31.201-2). The Tecom contract included a clause that prohibited the contractor from discriminating against any employee or applicant for employment because ro race, color, religion, sex, or national origin (see FAR 52.222-26).

In the Tecom case, the Court articulated a standard for determining when costs incurred by a contractor in defending and settling third party claims are allowable under a Government contract. First, "... we ask whether, if an adverse judgment had been reached, the damages, costs, and attorney's fees would be allowable and second, if not, we ask whether the costs of settlement would be allowable". In the Tecom case, the Court found that a violation of Title VII would not be allowable under the contract because sexual harassment is a form of sex discrimination and the alleged discrimination would have clearly violated the contract. As for the second step, where damages or penalties paid in the even of an adverse judgment are disallowed, settlement costs are also unallowable unless the contractor can establish that the plaintiff in the discrimination suit had very little likelihood of success on the merits.

Since Bechtel did not provide evidence that the plaintiffs in its case had very little likelihood of success, the Court affirmed the contracting officer's decision and the Claims Court's ruling.

You can read the full Federal Appeals Court's decision here.


Tuesday, July 16, 2019

NDAA 2020 - Contracting Out DCAA and DCMA Functions - Study Required

The House passed its version of the 2020 NDAA (National Defense Authorization Act) late last week. Previously, the Senate passed its own version so now it on to a compromise committee to iron out the differences. And there are some significant differences which will probably make it difficult (but not impossible) to reach a compromise on a final bill. House members offered more than 430 amendments to the NDAA and a large number of those were adopted. In the coming days, we will take a look at some of the procurement related provisions that made their way into the Bill.

Congress is still on the 'commercialization-is-better' bandwagon as it applies to contract audits. The committee noted the following:
The committee is also aware that the Secretary of Defense is required to conduct joint reviews and submit reports regarding the Defense Contract Audit Agency, Defense Contract Management Agency, and Defense Finance and Accounting Service pursuant sections 925 and 926 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Public Law 115–232). Therefore, the committee directs the Secretary of Defense, acting through the Chief Management Officer of the Department of Defense, to submit risk assessments to the congressional defense committees not later than March 1, 2020, to supplement the reports required by sections 925 and 926 of Public Law 115–232.
The risk assessments should reflect the Department’s analysis of potential combination of functions with each other or the use of commercial providers, as applicable. The risk assessments should include analysis of the legal and ethical implications of:
conflict of interest considerations;
  1. the risks posed to governmental interests and the public when ‘‘closely associated with inherently governmental’’ functions as defined in section 2383 of title 10, United States Code, are performed by commercial providers; 
  2. the risks to mission failure when ‘‘critical’’ functions as defined in section 2461 of title 10, United States Code, are performed by commercial providers; 
  3. the risks of creating an ‘‘employer-employee relationship’’ through the use of ‘‘personal services contracts,’’ whether authorized by statutory exception (e.g., section 129b of title 10, United States Code) or otherwise prohibited; and 
  4. the application of each of the general ethical principles in 5 Code of Federal Regulation section 2635.101(b).
While this provision only calls for reports at this time, it does show that Congress doesn't quite trust DoD to do the right thing when it comes to using in-house resources versus contracting out for contract oversight programs and audits.

Monday, July 15, 2019

Hiring Government Employees as Part-Time Consultants - There May Be Prohibitions

Government contractors need to be careful about who they hire and Government employees need to be discerning about the companies from whom they take part-time employment.

In a recent Justice Department press release, a "former" employee of the Army Corps of Engineers pled guilty to lying to law enforcement agents. What did she lie about? She lied about her part-time employment from Army contractors who she had oversight responsibilities as a Government employee.

Ms Sellers was a civilian employee of the Army Corps of Engineers. She was a biologist who's duties included coordinating and advising on environmental issues related to Army Corps projects. Part of her responsibilities included reviewing products from environmental consulting companies.

Federal ethics laws and regulations prohibit federal employees from engaging in outside employment that conflicts with employees' official duties. For about five years, while employed with the Army Corps, Sellers engaged in outside employment with a consulting company despite being part of a team that oversaw that company's work for the Corps. Ms Sellers used her personal non-Government email account to share sensitive, internal draft Government documents that she received in her official capacity with her part-time employer. She also used her personal email accout to participate in private email conversations with employees of the company and used her personal email and social media accounts to assist the company in contract negotiations.

Ms Sellers kept this part-time employment a secret from colleagues and management and tried to keep it a secret from investigators. Earlier this year, Ms Sellers falsely and willfully misled federal agents about her outside involvement with the consulting company. Where the federal agents got the information in the first place is not part of the publicly available documents. What is interesting to note however is that investigators seemed to have real time access to her private email because right after the interview where she lied to investigators, the investigators discovered another email she sent to the contractors stating "I can't do any of this work for you. I am on admin  leave from usace. Conflict of interest. May be fired."

Friday, July 12, 2019

Implementing NDAA Provisions - GAO Review

The 2019 NDAA (National Defense Authorization Act) contained a provision for GAO to review DoD's regulatory implementation of acquisition-related provisions between 2010 and 2018. There were about 180 of them. The purpose of the review was to determine how DoD implements acquisition-related  NDAA provisions in its DFARS (DoD FAR Supplement). Congress, of course, was concerned about the length of time it takes for a provision to go from law to implementing regulation.

After each NDAA is enacted, the staff of the Defense Acquisition Regulations System identify which provisions to implement through regulatory changes and which to implement through other means. Sometimes, rather than changing the DFARS, DoD can issue a 'class deviation' which allows its buying organizations to temporarily diverge from the acquisition regulations. Other changes can be implemented through its less formal PG&I (Procedures, Guidance, and Information) system.

GAO completed its review and found that on average, it took DoD about a year to implement an NDAA provision. In a few cases, it took more than two years. That didn't seem to concern GAO at all. The thing that did concern GAO was the lack of a mechanism to clearly communicate to Congress, industry, and other interested parties the status of regulatory or other changes based on NDAA provisions. Using only publicly-available reports and information, it is difficult for an interest party to find the implementation status of any given acquisition-related NDAA provision. As a result, interested parties are not always aware of what provisions have been implemented and when. This information is important for congressional oversight and to industry for planning and compliance purposes.

GAO recommended that DoD develop a mechanism to better communicate the implementation status of acquisition-related NDAA provisions, particularly those that direct a change or consideration of a change to the DFARS. DoD concurred with GAO's recommendation. It will be interesting to see how long it takes DoD to implement such a system.

Thursday, July 11, 2019

Production Surveillance

Production surveillance is a function of contract administration (e.g. DCMA or Defense Contract Management Agency) used to determine contractor progress and to identify any factors that may delay performance. It involves Government review and analysis of

  • Contractor performance plans, schedules, controls, and industrial processes; and
  • The contractor's actual performance under the plans.

Contractors are responsible for timely contract performance. However, the Government will sometimes feel it necessary to oversee that performance to protect its interests. It's up to the contracting officer to decide the extent of such surveillance.

Factors that contracting officers are to consider when developing a surveillance plan are laid out in FAR 42.1104 and include

  • The criticality (degree of importance to the Government) assigned by the contracting officer to the supplies or services
  • Contract requirements for reporting production progress and performance
  • The contract performance schedule
  • The contractor's production plan
  • The contractor's history of contract performance
  • The contractor's experience with the contract supplies or services
  • The contractor's financial capability

Contractors sometimes view these surveillance requirements as impediment to efficient production. That is why FAR also cautions contracting officers to avoid any action that may result in claims of waivers, of changes, or of other contract modifications. FAR also cautions contracting officers to avoid actions that may be inconsistent with contract requirements.

Contractors are not going to have much success in dissuading the Government from its surveillance activities. Its the Government's call. However, contractors can minimize a lot of extra work on their part by making available internal production control or data management information. Contracting officers are required to make maximum use of 'reliable' contractor developed information.