Facilities Capital Cost of Money (FCCM)

Cost Accounting Standards 414 and 417 allow contractors to recover facilities capital cost of money under their Government contracts. These CAS Standards have been incorporated into FAR 31.205-10 so as to apply to all contractors, regardless of their level of CAS coverage. Contractors with investments in property, plant, and equipment should not overlook these imputed costs. In order to claim these costs, FCCM must have been included in the initial pricing proposal. We have seen cases where contractors failed to propose FCCM and were later precluded from billing them becasue they were not initially proposed. The computation of the FCCM rate(s) is not complex but is beyond the scope of this post. The FCCM rate changes every six months, January 1st and July 1st. The current rate (as well as historical rates) can be found on the Treasury's website. Note that this site does not refer to Facilities Capital Cost of Money but rather to Prompt Payment Act Interest Rates. The FCCM rates are the same as the Prompt Payment Act rates. CAS and FAR require that the interest rate be based on the rates determined by the Secretary of the Treasury, pursuant to Public Law 92-41 (Prompt Payment Act).

For your convenience, we have included a permanent link to the FCCM rates on our resources page.

Control Objectives - Part 3

Lately we've been discussing the subject of control objectives as used in the formulation and implementation of internal control systems. This subject is important to most Government contractors because the Government expects contractors to have effective internal control systems to help ensure the propriety of costs charged to contracts. An internal control system that is found to have a material weakness (a technical term that means there is more than a remote chance that something bad will happen as a result of an internal control deficiency) can result in a number of undesirable actions including suspended or disallowed costs, increased Government oversight, or even disqualification of a bid.

Each internal control system has a number of distinct control objectives associated with it. There are (at least) two control objectives that are common to all internal control systems. Yesterday, we discussed one of those; independent reviews. Today we discuss the other; training.

Companies must ensure that its personnel have sufficient training, experience, and guidance to perform tasks in accordance with established procedures. A training program usually consists of (i) initial training such as that given to newly hired employees or existing employees moving to different positions within the company and (ii) periodic training (typically annually) for all employees involved in the process.

Companies will need to develop training plans, prepare training materials, identify trainers and maintain records (or other evidence) of completed training to demonstrate that employees have been trained in accordance with established policies and procedures. Larger companies typically develop in-house capabilities while smaller companies frequently outsource their training needs.

Control Objectives - Part 2

In our post from December 22, we defined, discussed, and provided examples of "control objectives" in the context of internal control systems. Auditors will identify company internal control systems that are relevant to whatever attestation service they are providing, be it financial auditing for the purpose of rendering an opinion on financial statements or government contracting for the purpose of ensuring the propriety of costs charged to contracts. For each relevant internal control system, auditors will identify control objectives necessary to make the systems work. In reality, these control objectives are pretty well established in professional standards and while they are tweeked now and then, there are rarely any substantive changes to the control objectives. Once the auditor identifies the system to be reviewed, he/she goes to a book or a manual to look up the control objectives that should be present and functioning in an adequate system.

There are two control objectives that are common to any internal control system; independent reviews of the system and training those individuals that are involved in the process. Today we will discuss independent audits. Tomorrow we will discuss training.

In any kind of internal control system, it is presumed that the company will have written policies and procedures. For example, Government contractors will need policies and procedures for timekeeping and all companies will require policies and procedures for extending credit to customers. For an internal control system to work effectively, management must periodically perform independent reviews of the policies and procedures to ensure that they comply with applciable regulations, have been properly implemented, and are operating effectively. It doesn't do any good to have policies and procedures that are not being followed and it does not do any good to have policies and procedures that are followed but are ineffective.

The reviewer's independence is important. Larger companies will have internal audit staffs. Other companies will spread the duties among various departments, ensuring that those performing the reviews are not directly involved in the processes under review.

When deficiencies are disclosed, it is important that the company take prompt corrective action. After the corrective action has been implemeted and has been operating for a reasonable amount of time (e.g. six months), it is important to initiate a follow-up review to ascertain whether the corrective action was indeed taken but also to evaluate the effect of the corrective action to determine whether it was effective in resolving the deficiency.

Finally, it is important for companies to prepare working papers, to maintain records of completed internal reviews, to prepare and update the status of corrective actions, and prepare plans for future reviews.

In-sourcing

Just a few years ago, the Government was outsourcing (contracting) as many jobs as it could. If a job was not for an inherently governmental function, it was targeted for outsourcing. Now the pendulum has swung and the trend this year is "in-sourcing"; replacing contractors with federal employees.

Last year, Congress determined that contract employees were costing the Government an average of $250 thousand per year, an amount far in excess of what it cost for a federal employee. The Department of Defense estimated that it could save an average of $44 thousand per year per job for every contractor position it replaced with a federal position. For fiscal year 2010 defense appropriation bill, each Defense Department agency has been given in-sourcing targets.

Not everyone agrees that in-sourcing is a good thing however. Stan Soloway, the President and CEO of the Professional Services Coucil wrote that the Government's math is fuzzy and savings will be largely illusory. He also stated that he is seeing more arbitrary in-sourcing of purely commercial activities, rather than a focus on the critical skills the Government most needs.

The Huntsville Times reported that Government in-sourcing activities are of great concern to area companies, particularly smaller companies who are spending money to hire and train and develop a work force, only to lose it to their customer. The Times reported that many of these smaller companies are totally dependent on Government work and some will probably go out of business.

Merry Christmas from Pacific Northwest Consultants

Wishing Everyone a Merry Christmas

Bill, Paul, Ron, and Terry

Pacific Northwest Consultants

Acquisition and Contracting Improvement Plans and Pilots

On Monday, OMB released a report that identified more than $19 billion in contracting savings that Federal agencies expect to achieve in fiscal year 2010. This is nearly half of the Administration's $40 billion two-year goal. Of course, none of these savings have materialized yet, they're are simply projections. In reality, costs are going to increase, not decrease, as most agencies will see a five percent increase in their acquisition workforce this year, more than offsetting any saving to be achieved by these programs.

According to the OMB report, key acquisition reform actions include

• Agencies will cut contracting costs by 3.5 percent.
• Agencies are taking aggressive steps to improve accountability and management oversight
• Agencies are working to reduce their reliance on high-risk contracting by 10 percent
• Agencies are piloting new tools to determine the best mix of skills and workforce size for their organizations.

To achieve contract savings, one Agency standardized information technology. Another auctioned off some contracts and a third used in-house experts to improve a product.

To cut back on high-risk contracts, one Agency broke up a large cost-type contract into smaller competitive awards. Another converted a cost-type to a fixed price and a third initiated a peer review process that improved efficiency.

It is hard for us to get excited about these claims. Every administration want to reduce procurement cost. They initiate studies and pilot projects, claim victory, and go home. Yet when all is said and done, cost just keep rising. Does anyone really believe this stuff? What is most amazing to us is that when OMB briefed this report to reporters, some actually showed up. To view the entire OMB report, go here.

What are control objectives, anyway - Part 1?

In yesterday's post, The State of Federal Contracting, we discussed DCAA's (Defense Contract Audit Agency) new policy regarding the adequacy of contractor internal control systems. Under the new audit policy, a contractor's failure to meet a single internal control objective, would render the entire internal control system inadequate. So, what are "internal control objectives"?

Before we discuss "internal control objectives", we need to first identify the internal control systems that the Government (primarily DCAA) is interested in. Contractors have many systems that are not particularly important to the Government. For example, internal controls over cash is important for the independent auditor rendering an opinion of the financial statements but does not significantly affect costs charged to Government contract.. The internal control systems that are most relevant to Government contractors include:

• Overall accounting
• Information technology
• Budget and planning
• Purchasing
• Material management and accounting system
• Compensation
• Labor
• Indirect and other direct costs
• Billing
• Estimating

In order for auditors to determine whether these internal control systems are working effectively, they test for compliance with pre-established criteria or "control objectives". Each of these internal control systems has an associated set of "control objectives". For example, the first system listed, overall accounting internal control system, has eight "control objectives":

1. Integrity and ethical values - management must convey the message that integrity and ethical values cannot be compromised, and employees must receive and understand that message through continuous demonstration of words, actions and commitment to high ethical standards.
2. External audit reports - management should take timely corrective action on any deficiencies note by the external auditor.
3. Board of directors/audit committee - basically dealing with independence and setting the tone at the top
4. Basic organizational structure - clear lines of authority
5. Assignment of authority and responsibility - appropriate for risk and accountability
6. Financial capability - adequate financial resources to perform the contract(s)
7. Accounting system and controls - well-designed and operating effectively to provide reliable accounting data and prevent misstatements that would otherwise occur
8. Cost allocations - costs are assigned based on rules, regulations, and standards for proper distribution of direct cost and allocation of indirect costs.

These control objectives are not found in contract regulations or statutes. They were adapted by DCAA from accounting and auditing literature. Additionally, even a cursory reading of these control objectives reveals the highly subjective nature of many of them. These were two points raised by the attorney who testified at the House Subcommittee on Management, Organization, and Procurement and led her to conclude that DCAA was "wreaking havoc on the Government procurement world".

The State of Federal Contracting

The U.S House Committee on Oversight and Government Reform, Subcommittee on Management, Organization, and Procurement recently held a hearing on "The State of Federal Contracting: Opportunities and Challenges for Strengthening Government Procurement and Acquisition Policies". There were witnesses from the Government and from industry including law firms specializing in Government procurement. One consistent theme from all of the witness concerned the Government's acquisition workforce. Witnesses from DoD, GSA, and OMB highlighted reforms already underway while industry witnesses testified that additional reforms are needed - reforms like more people, more training, and more appreciation. To read all of the prepared testimonies, go here.


One of the law firm witnesses discussed a topic that resonated with us. She identified three of what she believed were the three most significant challenges facing procurement. This first of the three, and the one she spent the most time discussing was the Defense Contract Audit Agency. She testified that:

"Over the past several months, ...(DCAA) ... has adopted aggressive new audit policies that are wreaking havoc on the Government procurement world.... DCAA has strayed far a field of its primary mission, and appears to be focusing its efforts on 'systems' audits that are time-consuming and disruptive and often have little if anything to do with actually protecting the Government against unallowable costs."

The attorney was referring to a policy that DCAA revised in December 2008 that significantly altered the manner in which DCAA reports on contractor internal control systems. Prior to December 2008, DCAA reported significant deficiencies or material weaknesses in a contractor's internal control system only when the deficiency adversely affected the contractor's ability to initiate, authorize, record, process, or report on Government contract costs in accordance with applicable laws and regulations and the deficiency resulted in a reasonable possibility that unallowable costs will be charged to the and Government and the potential unallowable cost is not clearly immaterial. Under the new guidance, auditors are required to report significant deficiency/material weakness whenever the contractor fails to accomplish any control objective tested, regardless of whether the control objective is directly related to charging costs to Government contracts and even when the deficiency has not resulted in nor will unlikely result in any questioned costs.

Of course, no contractor could want or afford an "inadequate" opinion on one or more of its internal control systems. The consequences are too great including ineligibility for award of contract if the accounting system is inadequate or the loss of direct bill authority is the billing system is inadequate. The attorney noted that there is no statutory, regulatory or contractual basis for many of the control objectives that DCAA uses to conduct its audits. She also stated that many of the control objectives are subjective, and reasonable minds can differ about what is or is not adequate. Not only are some of the control objective very subjective but we would add that some auditors do not consider "materiality" before asserting a contractor's failure to comply nor do they assess whether such a failure might result in unallowable costs ending up on a Government contract.

The attorney concluded by stating that the net result of this new audit policy is that systems audits are consuming a tremendous amount of time and resources for both DCAA and contractors. We can attest to that. Sadly however, taxpayers are not being well-served by these efforts. While DCAA has a very important mission in helping to ensure the propriety of costs charged to Government contracts, focusing on system audits is not an effective or efficient method for protecting the Government against unallowable costs.

To read DCAA's new audit guidance, go here. To read the attorney's full written testimony, go here.

Consider the Impact on Cash Flow when Implementing New Accounting System

Many Government Contractors participate in the Direct Bill Program (DBP). Essentially, the DBP allows contractors to submit billings for cost-reimbursable contracts directly to the finance office, bypassing the provisional approval review steps of various Government agencies. Contractors benefit by quicker payment and reduced paperwork. To qualify for the DBP, contractors must have adequate billing and accounting systems and not be deliquent in submitting their annual incurred cost proposals.

Participation in the DBP is contingent on DCAA's determination that contractors' existing accounting and billing systems are "adequate". New or significantly revised systems that have not been reviewed for adequacy, do not qualify for DBP. As a result, DCAA is telling its auditors to rescind Direct Bill authority for contractors who are implementing significant changes to their systems, until such time as an audit of the new system is completed and a determination of adequacy is made.

Having Direct Bill authority rescinded can have serious consequences for contractors. Cash flows are disrupted and this could increase financing costs. Additionally, the process of manually submitting vouchers for reimbursement will increase administrative effort and cost and reduce efficiencies.

If you are considering upgrades to your accounting and billing systems, you need to also consider the impact that a recension of Direct Bill authority will have on your operations.

Prime Contractor Surveillance of Subcontractors

Government contracting officers are responsible for determining price reasonableness of prime contracts. Those contracts often include subcontract costs. It is the prime contractors' responsibility to fulfil certain obligations related to those subcontracts including performing adequate subcontract pricing and monitoring.

In 2007, Congress required the Department of Defense to set up a Panel on Contracting Integrity. The purpose of the panel was to conduct a department-wide review to identify vulnerabilities that might lead to contracting fraud, waste, and abuse. In 2008, the Panel issued its report identifying 28 actions for implementation in 2009. One of those actions required the Panel's Adequate Pricing subcommittee to review and assess the current regulations related to contracting officer surveillance over prime contractor's pricing of its subcontracts. This recommendation was spurred by an IG report which identified cases where the Government failed to ensure fair and reasonable prices because the prime contractors failed to fulfill their responsibilities.

The Adequate Pricing subcommittee's initial assessment concluded that existing subcontract pricing coverage in FAR, DFARS, and applicable policies, guidance, and instructions appear adequate. The committee was very concerned however that these regulations have not been implemented effectively.

Contractors should be aware that there will be increased emphasis on requiring them to fulfill their pricing and monitoring obligations with respect to their subcontractors.

Government Begins Testing Contractor Compliance with New Ethics Rules

In late 2008, FAR was amended to require Government contractors to implement or beef up their ethics programs. Last summer, DCAA revised its audit guidance to test contractor compliance with the new regulations, particularly compliance with FAR 52.203-13. This Fall, DCAA began requesting contractors to gather up all of the evidence supporting compliance and provide it to the Government. DCAA is concentrating on the larger contractors first but undoubtedly, will expand to include most contractors since the implementation threshold for some of the requirements kick in with a $5 million contract. Specifically, the Audit Agency is requesting:

• Verification of the existence of a written code of conduct that adequately covers expected standards of conduct affecting significant internal and external business and employee relationships.
• Verification that there are policies and procedures for an ethics training program for all employees.
• Verification that the written codes of conduct are periodically communicated to all employees, are formally acknowledged and cite consequences for violations.
• Verification that the contractor performs periodic reviews (e.g.internal audits) for compliance with standards of conduct.
• Verification that the contractor is performing all of the self-governance activities required by FAR 52.203-13
• Verifying that the company has properly displayed the Hotline Poster.
• And many other items.  

We recommend contractors review FAR 52.203-13 to ensure that their ethics programs comply with the new regulations.

Open Government Directive

On December 8, 2009, the OMB (Office of Management and Budget) issued its long-awaited "Open Government Directive". This memorandum directs executive departments and agencies to take specific actions to implement the principles of transparency, participation, and collaboration. Go here to read the full directive.

The directive requires executive departments and agencies to take specific actions within specified timeframes toward the goal of creating a more open government. It is going to be fascinating to see how agencies within the acquisition community respond to this directive.

One of the core requirements of the directive requires each agency to expand the public's access to information by making it available online in open formats. The most interesting aspect of this is item 1.d. which states:

Within 45 days, each agency shall identify and publish online in an open format at least three high-value data sets... These must be data sets not previously available online or in a downloadable format.

Additionally, with 60 days, agencies must create on Open Government Webpage as a gateway for agency activities relgated to the Open Government Directive.

We will be monitoring the activities of acquisition-related agencies under this directive to ascertain whether the "high-value" datasets and other "open government" activities and information will be of any value or benefit to government contractors.

Revised Compensation Cost Principle - Post Retirement Benefits

Post Retirement Benefits (PRBs) typically include health, dental, and vision befenfits that continue after employees retire. This category of cost does not include pensions or deferred compensation plans. At one time, PRBs were very popular at large corporations but because of astronomical rises in health care costs and people living longer, the liabilities have become too great for many companies to absorb and still remain competitive. Thus, most companies are phasing them out. PRB liabilities are one of the challenges facing U.S. automakers. For Government contractors with PRB plans, FAR allows three different methods for charging costs to Government contracts. First, contractors can use a pay-as-you-go method (also referred to as the cash basis). Secondly, contractors can base the costs on the terminal funding method where a contractor sets the liability through the purchase of group annuity contract. Finally, there is the accrual basis. Under accrual basis, contractors must actuarily calculate their ultimate liabilities and fund certain portions of that liability each year. When the accrual basis is used, FAR currently requires that costs must be measured based on the requirements of Financial Accounting Standard (FAS) 106. But, that is about to change.

For income tax purposes, the deductability of PRB costs is determined using a different measurement criteria (IRC Sections 419 and 419a). Sometimes, the FAS 106 amount exceeds the cost measured under the IRC. When it does, contractors are faced with a dilemma.  - whether to fund the entire FAS 106 amount to obtain Government reimbursement of the costs, regardless of tax implications, or fund only the tax deductible amount and not be reimbused for the some of the FAS 106 amount under their Government contracts.

Under the revised cost principle, contractors will have the option of measuring accrued PRB costs using criteria based on IRC 419/419a rather than FAS 106, thereby permitting the contracor to fund the entire tax deductible amount without having a portion potentially disallowed because it did not meet the FAR's current measurement criteria.

The effective date for this change is January 11, 2010.

Revised Travel Cost Principle

The FAR Councils have amended the FAR travel cost principle to tighten up language that has led to inconsistent interpretations on the allowability of air fares. The current standard limits allowability to "the lowest customary standard coach, or equivalent airfare offered during normal business hours" (see FAR 31.205-46(b)). The new standard, which becomes effective on January 11, 2010, limits allowability to "the lowest priced airfare available to the contractor during normal business hours.

The FAR Councils identified three problems with the current standard. First, the Councils believed that the reasonable standard to apply in determining the allowability of airfares is the lowest priced airfare available to the contractor. They reasoned that it is not prudent to allow the cost s of the lowest priced airfares available to the general public when contractors have obtained lower priced airfares as a result of direct negotiation (often referred to as "city-pairs"). Secondly, the Councils believed that the cost principle should be clarified to omit the term "standard" form the description of the classes of allowable airfares since that term does not describe actual classes of airline service. Thirdly, the Councils believed that the term "coach or equivalent" given the great variety of airfares often available, may result in cases where a "coach or equivalent" fare is not the lowest airfare available to contractors, and should be omitted.

Implementation of the revised principle should be fairly straight-forward. At the time travel reservations are made, contractors simply book the lowest-priced available airfare - whether it is a negotiated rate with an airline, a published fair, or some kind of special (sale) rate. Supporting the cost (demonstrating compliance with the cost principle) however, could be problematical. How will a contractor prove to the Government that it booked the lowest available fare? There is no repository of historical information showing all the fares that were available/offered on a given date that one could refer to for comparison purposes. This is one area that will benefit from contemporaneous record keeping - documenting all the fares offered at the time the reservations were made.

Resolving Contract Audit Recommendations

DoD issued guidance concerning the resolution of significant audit report recommendations when the contract auditor and contracting officer disagree on those recommendations. In cases where the contracting officer does not include at least 75 percent of the audit recommendations in his/her negotiation objectives, the issues can be elevated to succesively higher levels until there is agreement. The policy, however, makes it very clear that it is the contracting officer, not the contract auditor, who is responsible for determining fair and reasonable prices:

It is neither expected nor necessary that the contracting officer and the contract auditor agree on every issue. They have different, yet complementary, roles in the process. It is expected that the auditor and contracting officer will work together recognizing that it is the contracting officer's ultimate responsibility to determine fair and reasonable contract values.

This policy only applies to proposals greater than $10 million and does not address many other types of audits where there are significant disagreements between contracting officers and contract auditors. For example, audits citing deficiencies in contractor internal control systems would not fall under these guidelines. Yet, the resolution of systemic deficiencies are often times difficult because of the subjective nature of the audit "findings". Other examples of contract audits not covered by this policy are audits for compliance with TINA (Truth in Negotiations) and audits of incurred costs.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 4

The Government has proposed regulations to ensure that its acquisition process is not compromised with personal conflicts of interest by contractors and contractor employees engaged in buying goods and services for the Government. Existing regulations that help prevent personal conflicts of interest by Government employees engaged in the acquisition process, do not extend to contractor employees performing the same or similar contracting function. As the Government increases its reliance on contractors to assist in procurement-related matters, the risks associated with personal conflicts of interests (PCIs) by contractor employees increase as well. To close this loophole, the OFPP in concert with the FAR councils have proposed new regulations requiring certain contractors to implement policies to identify and prevent PCIs. These new regulations will add a new Part 3.11 to the FAR. In Parts 1, 2, and 3 (go here, here, and here), we discussed background information related to the perceived need for such a regulation, the fundamental requirements of the proposal, definitions, and contractor and contractor employee responsibilities under the regulation. In this final post on the subject (for now), we will provide our own commentary on the proposed regulation and some of the considerations for implementation.

 

This proposed rule, when implemented, will impose significant specific requirements on contractors that provide acquisition support to the Government and their employees. Employees will be required to prepare and maintain financial disclosure statements. Contractors will have to collect, review, and maintain these documents and then monitor them to ensure that no PCIs exist. If PCIs exist, contractors are required to disclose them to the contracting officer and also to take corrective action. These regulations could be problematic to administer. For example, what financial information will an employee be required to disclose? And, what is the definition of "close family members, or of other members of the household".

Financial Disclosure Statement

We believe that the Government's OGE Form 450 (go here to download a copy of the current Form 450) is a good starting place for determining the kinds of information that covered employees should disclose. This form is the Executive Branch's Confidential Financial Disclosure Report that is completed annually by Government employees whose duties and responsibilities require disclosure in order to avoid involvement in a real or apparent conflict of interest (e.g. by those involved in the acquisition process). Information required on this form include:

• Assets held for investment with a value of $1,000 or more and assets held for investment which produced income more than $200 for the employee, his spouse, and dependent children. All assets are required to be specifically indentified.
• Liabilities over $10 thousand including mortgages, student loans, credit cards, personal loans, auto loans, etc for the employee, his spouse, and dependent children.
• Outside positions (except for positions with religious, social, fraternal, or political entities)
• Agreements or arrangements such as continuing participation in a pension or benefit plan by a previous employer, a leave of absence, future employment, or continuation of payment by a former employer.
• Gifts and travel reimbursements for the employee, his spouse, and dependent children.

This form is prepared annually, reviewed and approved by the employee's supervisor and also, reviewed and approved by the Agency's ethics officials. There are considerable privacy issues involved when collecting this information. There could be considerable push back by contractor employees who are not accustomed to providing this kind of information. There certainly was within the Government circles when the requirement was first imposed on them. In many cases, Government employees left their positions (resignation or transfer) rather than disclose all their financial information.

Economic Impact on Contractors

There is no question that these regulations will impose a significant economic burden on contractors whose employees are performing acquisition functions closely associated with inherently governmental functions. The framers of the regulation indicated that they have attempted to reduce that burden. There is no requirement that the collected information be reported to the contracting officer, no certification requirement, no formal training requirements, and making provision for mitigation under exceptional circumstances. Nevertheless, we would expect to see some oversight. For example, contract auditors, in reviewing ethics programs, might include the contractor's compliance with this regulation. Recall from part 3 of this series, that there are serious ramifications for contractors who do not comply.

Applicability

Contracting officers are to include a clause in solicitations and contracts that include a requirement for services that involve performance of acquisition functions closely associated with inherently governmental functions for or on behalf of a Federal agency or department - even if only a portion of the contract is for the performance of such. We expect that each department will implement guidance as to what kind of work qualifies under this definition. Contractor's should be concerned that the Government might err on the side of caution and include the clause into solicitations and contracts that do not necessarily include activities involving acquisition functions. Contractors should be alert for the clause at FAR 52.203-16 and inquire as to its applicability, if not obvious.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 3

The Government has proposed regulations to ensure that its acquisition process is not compromised with personal conflicts of interest by contractors and contractor employees engaged in buying goods and services for the Government. Existing regulations that help prevent personal conflicts of interest by Government employees engaged in the acquisition process, do not extend to contractor employees performing the same or similar contracting function. As the Government increases its reliance on contractors to assist in procurement-related matters, the risks associated with personal conflicts of intersts (PCIs) by contractor employees increase as well. To close this loophole, the OFPP in concert with the FAR councils have proposed new regulations requiring certain contractors to implement policies to identify and prevent PCIs. These new regulations will add a new Part 3.11 to the FAR.

In parts 1 and 2 of this series, we discussed the the reasons the Government is proposing these regulations, the fundamental requirements imposed by the regulations, and some definitions that are necessary for understanding the requirements. Today, in Part 3, we discuss contractor responsibilities under this proposed regulation and Government responsibilities. 

Responsibilities for Contractor and "Covered Employees"

1. Employee Financial Disclosure Statement. In order to comply with the proposed regulations, contractors will be required to develop and implement procedures to screen covered employees for potential personal conflicts of interest. These procedures must include:

• obtaining and maintaining a financial disclosure statement from each "covered employee" when the employee is initialy assigned to the task under the contract,
• ensuring that the disclosure statements are updated by the covered employees at least on an annual basis, and
• requiring each covered employee to update the disclosure statement whenever a new personal conflict of interest occurs

2. Prevention. Next, for each "covered employee", the contractor must

• prevent personal conflicts of interest, including not assigning or allowing a covered employee to perform any task under the contract if the contractor has identified a personal conflict of interest for the employee that the contractor or employee cannot satisfactorily prevent or mitigate in consultation with the contracting agency
• prohibit use of non-public Government information for personal gain; and
• obtain a signed non-disclosure agreement to prohibit disclosure of non-public Government information

3. Inform Employees. Contractors must inform "covered employees" of their oblications to

• disclosue changes in personal or financial circumstances and prevent personal conflicts of interest
• not to use non-public Government information for personal gain
• to avoid even the appearance of personal conflicts of interest

4. Internal Audits. Maintain effective oversight to verify compliance with personal conflict-of-interest safeguards.

5. Discipline. Take appropriate disciplinary action in the case of "covered employees" who fail to comply with policies established pursuant to this section; and

6. Report Violations to the Contracting Officer. Report to the contracting officer any personal conflict-of-interest violation by a "covered employee" as soon as identified. This report shall include a description of the violation and the actions taken by the contractor in response to the violation.

7. Flow Down the Provisions to your Subcontractors. Contractors must "flow-down" these requirements to subcontracts greater than $100 thousand where subcontractor employees may perform acquisition functions closely associated with inherently governmental functions.

Responsibilities of the Contracting Officer

Contracting Officer responsibilities kick in only when a contractor reports a PCI violation. When a contractor makes such a report, the contracting officer will review the actions taken by the contractor, decide whether the contractor has resolved the violation satisfactorily and take any other appropriate action in consultation with agency legal counsel.

The proposed regulation makes no provision where, for example, a violation arises from say, a whistle-blower, or an audit finding. Look for something addressing these omissions in the final regulation.

Mitigations and Waivers

In exceptional circumstances, contractors may be unable to satisfactorily prevent a personal conflict of interest. In those cases, contractors can submit a mitigation plan for the head of contracting activity approval or request a waiver from the requirements. The head of contracting activity authority cannot be redelegated.

Violations

If a contracting officer "suspects" violation of the PCI clause, he is to contact legal counsel for advise and recommendations on a course of action. If there is sufficient evidence of a violation, the contracting officer shall pursue remedies that incluce suspension of payments, loss of fee, termination for default or cause, disqualification for future contracts or suspension/debarment.

Tomorrow we will conclude this series with some thoughts on some of the difficulties that contractors might encounter in implementing these proposed requirements.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 2

In Part 1 of this series we discussed efforts by the Government to ensure that the acquisition process is not compromised with personal conflicts of interest by those engaged in buying goods and services for the Government. Existing regulations that help prevent personal conflicts of interest by Government employees engaged in the acquisition process, do not extend to contractor employees performing the same or similar contracting function. As the Government increases its reliance on contractors to assist in procurement-related matters, the risks associated with personal conflicts of intersts (PCIs) by contractor employees increase as well. To close this loophole, the OFPP in concert with the FAR councils have proposed new regulations requiring certain contractors to implement policies to identify and prevent PCIs. These new regulations will add a new Part 3.11 to the FAR.

Under the proposed regulations, contractors that have employees performing acquisition functions closely associated with inherently governmental functions to identify and prevent personal conflicts of interest for such employees. In addition, these contractors will be required to prohibit covered employees with access to non-public Government information from using it for personal gain. Note the highlighted words. Each of these terms has a precise meaning within the context of the proposed regulation and are defined within the new regulations as follows: 

Eemployee means an individual who

• is an employee of the contractor or subcontractgor, a consultant, a partner, or a sole proprietor
• performs an acquisition function closely associated with inherently governmental functions

Acquisition functions closely associated with inherently governmental functions means supporting or providing advice or recommendations with regard to the following activities;

• planning acquisitions,
• determining what supplies of services are to be acquired including developing statements of work,
• developing or approving any contractual documents, to include documents defining requirements, incentive plans, and evaluation criteria,
• evaluating contract proposals,
• awarding Government contracts,
• administering contracts (including ordering changes or giving technical direction in contract performance or contract quantities, evaluating contractor performance, and accepting or rejecting contractor products or services),
• terminating contracts, and
• determining whether contract costs are reasonable, allocable, and allowable.

Personal conflict of interest means a situation in which a covered employee has a financial interest, personal activity, or relationship that could impair the employee's ability to act impartially and in the best interest of the Government when performing under the contract.

• Among the sources of personal conflicts of interest are;
• financial interest of the covered employee, of close family members, or other members of the household
• other employment or financial relationships (include seeking or negotiating for prospective employment or business); and
• gifts, including travel
• Financial interest may arise from
• compensation, including wages, salaries, commissions, professional fees or fees for business referrals
• consulting relationships (including commercial and professional consulting and service arrangements, scientific and technical advisory board memberships, or serving as an expert whitness in litigation);
• services provided in exchange for honorariums or travel expense reimbursments;
• research funding or other forms of research support
• investment in the form of stock or bond ownership or partnership interest (excluding diversified mutual fund investments);
• real estate investments
• patents, copyrights, or other intellectul property interests; or
• business ownership and investment interests 

Non-public Government information means any information that a covered employee gains by reason of work under a Government contract and that the ocvered employee knows, or reasonably should know, has not been made public. In includes information that

•  is exempt from disclosure under FOIA or otherwise protected from disclosure by statute, Esecutive order, or regulation, or
• has not been disseminated to the general public and is not authorized by the agency to be made available to the public

In tomorrow's post, we will address some of the specific implementation issues associated with the proposed regulation.

Personal Conflicts of Interest (PCIs) of Contractors' Employees - Part 1

The Government's increasing reliance on contractors to assist in procurement-related matters has heightened concerns over potential connflicts of interest. For a number of years, the concerns focused on organizational conflicts of interest, e.g. preventing the existence of conflicting roles that might bias a contractor’s judgment or preventing unfair competitive advantage because a contractor has proprietary information or source selection information (see FAR 9.5). Recently, the focus has shifted to include concerns about personal conflicts of interest (PCIs) by contractor employees performing acquisition functions.

The 2009 National Defense Authorization Act (Section 841) directed the OFPP (Office of Federal Procurement Policy) to issue policies to prevent PCIs by contractor employees performing acquisition functions closely associated with inherently governmental functions. To implement the statute, OFPP collaborated with the FAR Councils to develop regulatory guidance to prevent personal conflicts of interest for contractor employees performing acquisition functions for or on behalf of a Federal agency or department. The results of this collaboration was published in the Federal Register on November 13, 2009, as proposed regulations.  The 60 day public comment period ends on January 12, 2010.

Pending finalization of new regulations, the Department of Defense issued guidance on November 24, 2009 instructing its "acqusition community" to follow the policies and procedures of FAR 9.5 (organizational conflicts of interest). Of course, this guidance does not require contracting officers to do anything they haven't already been doing but does serve to highlight the potential risk factors and increase employee awareness. The guidance instructs contracting officers to consider "risk" factors when performing acquisition functions closely associated with inherently governmental functions on behalf of DoD. According to DoD, "risk" increases when contractor employees are involved with substantially subjective judgmental work. Consider a case where a contractor employee is assisting a Governmental agency in source selection and his wife works for one of the offerors. That would constitute a personal conflict of interest.

Many contractors already have policies and procedures covering personal conflicts of interest as it relates to subcontractors and suppliers. It would seem a simple task then to extend those policies and procedures to cover situations where they perform acquisition functions on behalf of the Government. However, the proposed regulations have features and reporting requirements that are certainly not part of their existing practices and will probably be considered onerous by affected contractors.

Over the next few postings, we will be unpacking the proposed regulations to help readers understand the fundamental regulation requirements and to provide our assessment on ease (or unease) of implementation and the continuing cost of compliance. Keep in mind that these are proposed regulations at this point and the final regulations may look a lot different. We wouldn't be surprised to see a significant number of public comments - especially concerns over additional burdens placed upon contractors.

Basic Requirements (proposed FAR 3.1102)

The new policy will require contractors that have employees performing acquisition functions closely associated with inherently governmental functions to identify and prevent personal conflicts of interest for such employees. In addition, these contractors will be required to prohibit covered employees with access to non-public Government information from using it for personal gain. The proposed rule also makes contractors responsible for

1. having procedures to screen for potential conflicts of interest,
2. informing covered employees of their oblications with regard to these policies,
3. maintaining effective oversight to verify compliance,
4. reporting any personal conflict-of-interest violations to the contracting officer, and
5. taking appropriate disciplinary action with employees who fail to comply with these policies.

In Part 2 of this series, we will cover "definitions". There are a number of terms used in the regulations that have very precise definitions. In order to understand the full scope and magnitude of the requirements, it is necessary to fully understand what the terms mean.

IRS Announces 2010 Standard Mileage Rates

The Internal Revenue Service today issued the 2010 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business.

Beginning on Jan. 1, 2010, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be 50 cents per mile for business miles driven.  This is a reduction from the 2009 rate of 55 cents per mile.  The mileage rate for 2010 reflect generally lower transportation costs compared to a year ago. It is based on an annual study of the fixed and variable costs of operating an automobile.

Decline in Customer Satisfaction with DCMA

The POGO blog (Project on Government Oversight) reports on the results of the Secretary of Defense's Biennal Survey of the Defense Contract Management Agency showing a significant declines in customer satisfaction from the previous survey. Customers, in this case, are the "users" of DCMA services. Read the summary here or the full report here.

DoD Contractors Must Inform Employees of their Whistleblowing Rights

Since 1994, FAR 3.9 has contained whistleblower protections for contractor employees. The policy, believed by some to be somewhat anemic, states that Government contractors shall not discharge, demote or otherwise discriminate against an employee as a reprisal for disclosing information to a Member of Congress, or an authorized official of an agency or of the Department of Justice, relating to a substantial violation of law related to a contract (including the competition for or negotiation of a contract). FAR also includes simple procedures for filing complaints, procedures for investigating complaints, and significant remedies imposed upon the contractor if found to have violated the regulation.

The policy just go beefed up, at least for DoD contracts. To implement provisions in the National Defense Authorization Acts of 2008 and 2009, the Department of Defense issued interim DFARS regulations in January 2009 that expanded upon the FAR regulations. The interim regulations just became final in November 2009. The differences between the FAR and the new DFARS policy are quite significant and include:

• Expansion of the types of information to which the protections apply
• Expansion of the categories of Government officials to whom information may be disclosed without reprisal
• Establishment of time periods within which the IG and the agency head must take action with regard to a complaint filed by a contractor employee
• Allow contractor employees a right of action in federal district court who have exhausted their administrative remedies
• Requirement for contractors to inform employees in writing of their whistleblower rights and protections.

 Following is a comparison between FAR and DFARS of the kinds of disclosures subject to protection:

And, here is a comparison of the categories of Government officials to whom information may be disclosed without reprisal:

As you will note, both the types of disclosure subject to protection and the number of Government officials to whom disclosures are protected are significantly expanded from the FAR coverage. The "mismanagement" and "waste" provisions introduce a level of subjectiveness into the process as well.

Employee complaints of reprisal are filed with the DoD-IG. The DoD-IG makes a determination as to whether a complaint is frivolous or merits further investigation. Either way, the DoD-IG has about six months to complete the investigation and issue a report.  If the DoD-IG misses its deadline, the compainant may bring a new action against the contractor for compensatory damages and other relief in a US District Court, regardless of the amount in controversy. Either party to the suit may request a jury trial.

The remidies available to the Government are unchanged by this DFARS. Remedies include orders to take affirmative action to abate the reprisal, reinstatement to position held before the reprisal, reimbursement for the complaintant's costs (including attorney fees). See FAR 3.906.

The new DFARS now requires contractors to inform their employees in writing of employee whistleblower rights and protections as described in DFARS 203.9. Contractors can accomplish this through a variety of means including (i) employee handbook, (ii) poster, or (iii) company intranet. We recommend that contractors include whistleblower protection coverage in periodic training sessions as well. This new regulation applies to all DoD contracts, regardless of value.