Accounting System Adequacy - Part III

This is the third and final post on our discussion of two contractors who protested a contracting officer decision to reject their bids due to inadequacies in their proposals. If you missed the first earlier posts, read Part 1 and Part 2 first.

In advising PMO that it was rejecting its proposal, FTA cited the following deficiencies, based on BMC’s audit report.

1. The cost proposal does not reflect that the JV is operating as an independent entity with an indirect rate structure that would be unique to the joint venture as required by FAR 31.203, and
2. The proposal was not prepared in all material respects in accordance with FAR and the Transportation Acquisition Regulations.

The three companies comprising the PMO joint venture proposed to contribute labor to the joint venture, burdened by the overhead rate from the “sending” company. The BMC auditors, like DCAA in the case of the MD joint venture, believed that the joint venture should develop a single rate specifically for the joint venture. BMC cited as authority for its position, FAR 31.203 [later refuted by GAO]. During the appeal process, FTA wrote that the arguments in PMO’s protest did not address the real issue in this case, and that is, by not submitting a single overhead rate, PMO is in non-compliance with CAS 401. Here again, FTA raises the specter of CAS 401 when it was not cited in the BMC audit report, two months after BMC’s audit report was submitted. A month after that, at FTA’s behest, BMC issues a memo stating that PMO’s failure to propose a single rate was a noncompliance with CAS 401. As we discussed concerning a similar DCAA memo related to MD, the BMC memo doesn’t carry the weight of an audit opinion and the sequence of events calls into question the audit firm’s independence.

GAO’s Decision

GAO upheld both protests. GAO ruled that FTA’s CAS 401 argument represented “…a misunderstanding of the CAS regulations.” There is nothing in CAS that requires a joint venture to establish indirect rates that are specific to the joint venture. Moreover, small businesses are exempt from CAS and FTA had previously determined both joint ventures to be small businesses.

GAO soundly criticized the depth of the support for the Government’s position. It called them “conclusory statements” without any analysis or legal authority as to why the proposed rate structure violated CAS 401. Nor could GAO conceive on its own how the proposed rate structures violated CAS 401 or any other authority. GAO also found it “notable” that the original audit reports and FTA’s determinations and findings supporting the rejections, made no mention of CAS 401 violations.

GAO concluded that FTA had not provided a reasonable explanation why the joint ventures accounting systems were unacceptable, and therefore, sustained both protests.

If you would like to read the complete GAO decisions, click here for the MD joint venture and here for the PMO joint venture.