Wednesday, October 23, 2019

Expressly Unallowable Costs - Raytheon Court of Appeals Decision Broadens the Definition

The U.S. Court of Appeals for the Federal Circuit just upheld Raytheon's appealed a decision by the ASBCA (Armed Services Board of Contract Appeals) that unallowable salary costs associated with Raytheon's lobbying activities were 'expressly unallowable' under FAR 31.205-22 and thus subject to penalty under FAR 42.709-1(a)(1) (known as level 1 penalties).

Raytheon submitted its 2004 incurred cost proposal in 2005. DCAA (Defense Contract Audit Agency) completed its audit in 2006 and found, among other things, over $220 thousand of expressly unallowable lobbying salary costs. In 2011, DCMA (Defense Contract Management Agency) demanded that Raytheon repay the Government for these costs and additionally, assessed a penalty and interest under FAR 42.709-1(a)(1).

Raytheon appealed to the ASBCA and lost on this issue. Its argument was that salary costs associated with lobbying activities were not specifically referenced in FAR 31.205-22 and accordingly, were not "expressly unallowable". The ASBCA upheld the DCMA decision, finding that lobbying costs are subject to penalty because "costs associated with certain named lobbying activities are stated to be unallowable under FAR 31.205-22" and "they are ... expressly unallowable. (That Decision can be accessed here). The ASBCA also noted that FAR 31.201-9(a) and (e)(2) makes salary costs of employees who participate in unallowable activities are also expressly unallowable as directly associated costs of that activity.

Raytheon then appealed the ASBCA decision to the Court of Appeals. Raytheon argued that salary costs of employees who participate in lobbying activities are not expressly unallowable under a cost principle in FAR. Raytheon contended that an item of cost must be mentioned or identified by name to be expressly unallowable and that the generic language of costs associated with lobbying activities is insufficient. The Court of Appeals found no basis for such an interpretation and explains, in detail, why it came to that conclusion (The full Court of Appeals decision can be accessed here).

Perhaps a fallout of this decision will be that the Government may renew its aggressiveness on calling out costs as expressly unallowable and subject to penalties. The penultimate paragraph of the decision reads:
Finally, Raytheon relies on a decision in a prior proceeding where the Board held that neither bonus and incentive compensation costs nor compensation cost is specifically named and stated as unallowable under the cost principle (in FAR 31.205-22), nor are such costs identified as unallowable in any direct or unmistakable terms. That decision is not binding on this court, and in any event, is contrary to the plain language of Subsection 22 to the extent that it concludes that salaries in the form of bonus and incentive compensation for lobbying and political activities are not "expressly unallowable".
After the decision ASBCA decision referenced here, DCAA ratcheted back its guidance on what constitutes expressly unallowable costs. Perhaps we will soon see that guidance amended again.

Tuesday, October 22, 2019

New Guidance on Anti-Trafficking Regulations

FAR (Federal Acquisition Regulations) 22.17 requires Government contractors to work proactively to prevent human trafficking in their supply chains and take remedial steps if such activities are identified. The term 'human trafficking' encompasses many things but in the context of Government contracting, refers primarily to child labor and forced labor. The requirement applies to contracts greater than $500 thousand.

The Office of Management and Budget (OMB) released guidance yesterday to help contractors manage and reduce the burden of meeting their responsibilities. It describes anti-trafficking risk management best practices and mitigation considerations that acquisition officials can take into account when working with contractors to address their obligations.

The new OMB guidance:

  • Reviews key responsibilities of the regulations
  • Highlights best practices that have been shown to contribute to effective deterrence
  • Describes mitigation actions that should be given appropriate consideration by contracting officers in evaluating the suitability of steps taken by a contractor that has reported a trafficking incident and
  • Provides a FAQ section
The FAR regulations (and the underlying statute) contain express prohibitions on certain types of trafficking related activities. These include prohibition on charging employees recruitment fees, and destroying, concealing, confiscating or otherwise denying access to identity or immigration documents. The regulations also require contractors to implement risk management practices such as an employee awareness program, a recruitment and wage plan, and a housing plan. FAR also requires contractors to take appropriate action against employees, agents, or subcontractors that violate prohibitions. Additionally, contractors now have an affirmative duty to report violations to the OIG (Office of Inspector General).

While this new guidance is primarily aimed at contracting officers, the section on best practices contains a good bit of advice on what a contracting officer might consider when assessing contractors' compliance with the anti-trafficking regulations.

Monday, October 21, 2019

Legislation Proposed to Repeal the Davis-Bacon Act (DBA)

Senator Mike Lee (Utah) has introduced (or should we say 're-introduced') legislation last week to repeal the Davis-Bacon Act. Six other Senator's signed on as co-sponsors of the proposed repeal.

The Davis-Bacon Act is a wage subsidy law requiring all federally-funded projects (greater than $2,000) to pay workers the "prevailing wage" rate on non-federal projects in the same locality. The problem with the prevailing wage law is, as everyone knows and understands or at least suspects, that the prevailing wage schedules coming out of the Labor Department, are significantly higher than the real prevailing wages. To illustrate with an anecdote, a plumber working for $33 per hour on new residential construction, was temporarily deployed by his employer to a project at a local military installation where he earned more than $40 per hour. After the military job was completed, he returned to his previous job site and began working again at $33 per hour.

According to Senator Lee's press release announcing the legislation,
The Davis Bacon Act exemplifies how big government hurts the people it purports to help, gives unfair advantages to favored special interests (e.g. unions), and squeezes the middle class. The Davis-Bacon Repeal Act would remove these government-imposed obstacles to economic opportunity facing low-skilled workers, and return wasted taxpayer dollars back into the hands of the American people.
There is no doubt that Federally funded construction projects would cost less without the prevailing wage law. However, we don't expect the proposal to get very far in Congress. Also, the Labor Department's Wage and Hour Division (WHD) would lose half its case load.

Read more about the proposal here.

Friday, October 18, 2019

Should You Insure Government Property in Your Possession?

Continuing on with our discussion of insurance costs and the allowability of such, we move now form our discussion of self-insurance to a few other types of insurance that have conditions upon whether associated costs are allowable.

Many Government contractors have Government property in their possessions for various reasons - usually temporary. The question often arises over whether the risks of loss of Government property should be insured and then if insured, whether the costs are allowable. FAR 31.205-19(e)(2)(iv) answers that question. FAR states that the cost of insurance for the risk of loss, damage, destruction, or theft to Government property are allowable only when three conditions are met:

  1. the contractor is liable for such loss, damage, destruction or theft
  2. the contracting officer has not revoked the Government's assumption of risk (in accordance with FAR 45.104(b). The contracting officer can revoke the Government's assumption of risk when the property administrator determines that the contractor's property management practices are noncompliant with contract requirements, and
  3. such insurance does not cover loss, damage or destruction which results form willful misconduct or lack of good faith on the part of any of the contractor's management personnel. Contractor's managerial personnel are defined in FAR 52.245-1(a) as directors, officers, managers, superintendents, or equivalent representatives who have supervision or direction of the company's business, plant, or separate location.

DFARS (Defense FAR Supplement) adds one other consideration to the allowability question. DFARS 231.205-19(e)(7) states that in addition to the FAR limitations listed above, the allowability of insurance costs are also subject to other limitations. These limitations are listed in DFARS 252.217-7012 and essentially related to contractor negligence.

The key to ensuring the allowability of insurance costs related to Government property is to maintain close coordination with your contracting officer as to what is insurable and to make sure your internal controls over Government property in your possession are adequate.

Thursday, October 17, 2019

Motions for Reconsideration of Previous Decisions

A 'motion for reconsideration' asks the judge to reconsider his/her decision in light of other facts, circumstances, or law that wasn't brought up in the original hearing on the matter.

In the context ASBCA (Armed Services Board of Contract Appeals) decisions, Rule 20 allows such motions to be filed by either party and must set forth specifically the grounds relied upon to grant the motion. Motions must be filed within 30 days of receiving the Board's decision. Opposing parties have 30 days after a motion has been filed to file any cross-motion for reconsideration. Extensions to these times are not granted.

It is well established that motions for reconsideration are not granted lightly. In order to prevail on a motion for reconsideration, a contractor or the Government must demonstrate a compelling reason for the Board to modify its original decision. There are three bases upon which the ASBCA will reconsider a previous decision:

  • Newly discovered evidence
  • Mistakes in finding of fact
  • Errors of law.

Motions for reconsideration are not intended to provide either party, the contractor or the Government, with another chance to again argue its position that was previously raised and denied. In some decisions where motions for reconsideration have been heard, the ASBCA is highly critical of parties that try to do just that - rehash the same arguments.

The probability of success in filing motions for reconsideration are slim. A brief scan of ASBCA decisions involving motions for reconsideration during the last couple of years found none that were not denied. There was one case where the Government argued that an opinion included factual errors as well as legal errors that stemmed from the factual errors. The ASBCA agreed that its decision included one factual error but it viewed the error as immaterial in the circumstances so denied the motion for reconsideration.