Friday, May 18, 2018

Deficiencies in Small Business Subcontracting Goal Oversight

The Federal Government does a pretty good job of meeting its small and disadvantaged subcontracting goals. (See, for example, Proposed Legislation to Increase Small/Minority/Disadvantaged Subcontracting Goals). Prime contractors have not been doing as well and some of the blame has been pinned on Government contracting officers for inattention to what their prime contractors are doing.

In March 2018, the DoD Office of Inspector General (DoD-IG) issued an audit report on its review to determine whether contracting officers were taking appropriate actions to ensure that prime contractors met their small business subcontracting goals. The review focused on two Army contracting centers, Redstone and Warren and covered 50 contracts worth $1.6 billion.

The results were woeful. The DoD-IG found that, in general, contracting officers were not ensuring that its prime contractors were providing adequate subcontracting opportunities to small businesses.

The DoD-IG made a series of recommendations, largely related to the need for additional training.
These challenges existed because training and guidance provided to contracting officials were not adequate, and administering subcontracting plans was often not a high priority. Shortfalls also commonly existed with high turnover rates among contracting personnel negatively impacting transferring duties to administer subcontracting plans from one contracting official to another.
Contracting officers also did not consistently enter data correctly into the Federal procurement system databases that allowed contracting officials to monitor compliance with small business subcontracting plans or enable contractors to submit individual subcontracting reports in the Electronic Subcontracting Reporting System.
 One of the recurring problems pointed out in the report had to do with the disconnect between subcontracting plans and actual performance. Prime contractors dutifully developed their plans and submitted them to contracting officers but that became almost perfunctory with no subsequent oversight to determine whether contractors were fulfilling those plans or at least attempting to comply with those plans.

Thursday, May 17, 2018

Contract Disputes - Briefly

It is the Government's policy to try to resolve all contractual issues by mutual agreement at the contracting officer's level without litigation. Often times, it does not seem like this is the Government's policy at all. There are a few contracting officers out there that fancy themselves as the supreme authority on contractual matters and rebuff any attempts at compromise or resolution. Likewise, there are contractors out there that view any questions or queries from Government officials as personal attacks on their character and integrity. When these two meet, there is little hope of resolution so contracting officers issue their final decision and contractors submit claims.

The Contract Disputes Act of 1078 (41, USC 7013) requires that claims exceeding $100,000 be accompanied by a certification. The certification has three elements:

  1. The claim is made in good faith
  2. Supporting data are accurate and complete, and
  3. The amount requested accurately reflects the contract adjustment for which the contractor believes the Government is liable (sometimes referred to as a "sum certain".

The certification must be signed by a person authorized to bind the Contractor with respect to the claim. Usually this is an officer of the company.

The contracting officer has 60 days to decide the claim or 60 days in which to notify the contractor of the date by which the decision will be made. On complex issues, it usually takes much longer than 60 days for the contracting officer to render a final decision.

The contractor is entitled to interest from the date of the certified claim, should the dispute ultimately be decided in the contractor's favor.

Contractors still have a duty to proceed with contract performance while a claim is pending.

The Government estimates that contractors submit 13,500 claims requiring certification (i.e. those exceeding $100 thousand) per year. Only a tiny fraction of those are appealed to the ASBCA (Armed Services Board of Contract Appeals) or Federal Court. The ASBCA encourages the use of ADR (alternative disputes resolution) methods to settle prior to litigation.

See FAR 52.233-1, Disputes, for more information on filing claims against a contracting officer's final decision.

Wednesday, May 16, 2018

Fraud Conspiracies are Hard to Detect

Contractors are required by contract to have codes of ethical conduct, sound internal controls in business systems used in Government contracting, and procedures to detect and prevent fraudulent activities. Segregation of duties and levels of approvals are controls that will help prevent fraud. However, conspiracies (two or more people acting in concert to override existing internal control systems) are much more difficult to detect and tend to go on for a long time.

Consider the case of Clayton Pressley, a (former) Senior Chief Petty Officer in the Navy. Besides his full-time sailor duties, he owned or managed several businesses and was named the COO (Chief Operating Officer) of another company (referred to in Court documents as "Firm G". Mr. Pressley found himself three other conspirators (two contractors and one Navy) and together they created a scheme whereby they would order supplies under DLA's (Defense Logistics Agency's) Electronic Mall System (E-Mall) or DLA's Tailored Logistics Support Program (TLSP) for the Navy.

However, the supplies were never shipped to the Navy. The Navy conspirator falsified documentation saying the goods were received, the Navy would pay for the supplies, and the four conspirators would distribute the money. Before the scheme was halted, the conspirators got about $2.3 million. Mr. Pressley and the other Navy conspirator received the biggest chunk - 40% each.

Investigators were able to piece together some of Pressley's use of the ill-gotten money. Good times included hotels, expensive meals (one costing $938), Casinos, clothing, and of course, an expensive car (a Porsche).

We were unable to determine how the fraud was uncovered. Mr. Pressley was already serving time for using his position as a senior enlisted member to access personal identity information and identification documents of members of his command, using that information to secure several loans. Investigators also found identity documents for eight other members at Mr. Pressley's personal residence. Perhaps it was this that led investigators to dig a bit deeper into Mr. Pressley's activities.

There was one clue that could have, and perhaps should have, alerted someone to what was going on. The conspirators used a contractor that held legitimate E-Mall and TLSP contracts, directing the company to use a specific subcontractor for the supplies. This should never happen. The Government should not normally direct a contractor to utilize specific vendors because to do so, would require that contractor to violate its own purchasing policies and procedures.

Tuesday, May 15, 2018

Contractors Can File Claims Pertaining to Novated Contracts

The Government filed a motion to dismiss a claim filed by Cooper/Ports America (CPA) with the ASBCA (Armed Services Board of Contract Appeals) because the company was not the contractor within the meaning of the Contract Disputes Act at the time the claim accrued.

In 2015, the Government awarded a contract to Shippers Stevedoring Company (Shippers) for stevedoring and related terminal services. IN 2016, CPA acquired Shippers and entered into a novation agreement with the Government.

CPA opposed the Government's motion arguing that under the novation agreement executed by the Government, it has the legal right to assert claims that pre-date the novation agreement, i.e. as the successor in interest under the contract, has the right to assert a claim accruing prior to the novation agreement.

The Board did not sustain the Government's motion. The Board ruled that the Government expressly recognized CPA as the contractor in the novation agreement and recognized CPA as "entitled to all rights, titles and interest of the Transferor in and to the contracts as if the Transferee were the original party to the contracts.
To read this broad recognition as excluding the right to pursue a claim accruing to the original contractor, as the government urges us to do in this case, would do violence to the clear intent of the agreement.
If the tables were turned, and CPA had urged us to limit its assumption of "all obligations and liabilities of, and all claims against, the Transferor under the contracts as if the Transferee were the original party to the contracts" to those liabilities or claims expressly spelled out in the agreement by the Government, we doubt the Government would acquiesce.
The Government cannot have it both ways.

You can read the full decision by clicking here.

Monday, May 14, 2018

New DoD Rule on Review, Audit, and Approval of Electronic Parts Purchases

DoD issued a final rule last week that makes contractors and subcontractors subject to approval, review and audit by DoD officials when identifying a contractor-approved supplier of electronic parts.

DoD was quick to point out however that this new rule shouldn't be too much of a burden on contractors as the review, audit, and approval of contractor-approved suppliers will generally be in conjunction with a contractor purchasing system review (CPSR) or other surveillance of purchasing practices by the contract administration office. However, if the Government has credible evidence that a contractor-approved supplier has provided counterfeit parts, it can, and will initiate a separate review, audit, and approval.

This new process relate only to electronic parts that are not in production by the original manufacturer or an authorized aftermarket manufacturer and that are not currently available in stock from the original manufacturer, their authorized suppliers, or suppliers that obtain such parts exclusively from the original manufacturers.

Contractors have already been required to establish counterfeit electronic part detection and avoidance systems under DFARS 252.246-7007 (if that clause is included in a DoD contract) as part of their established purchasing systems. Any deficiencies in a purchasing system, including counterfeit electronic parts, will impact across the board to all contracts.

For contractors that already have approved purchasing systems, the prior approval remains in effect. That approval remains in effect for three years. After three years, the purchasing system is no longer approved. The status is listed as "not applicable" which means it is neither approved nor disapproved. It seems likely that such systems would have an increased chance of being subjected to review, audit and approval of electronic parts purchases.

To read more about the new rule, click here.