Cost or Pricing Data under New FAR Rule - Submit It Only When Required

The revised FAR coverage on cost or pricing data, certified cost or pricing data, and information other than cost or pricing data, which we began discussing yesterday, is designed to supplement existing coverage to "clarify ... and achieve greater understanding by contracting officers and contractors". The new rule neither expands nor diminishes the existing rights of contracting officers to request cost or pricing data (whether certified or other than certified) or other information, or the existing responsibilities of the offeror to submit such data or other information. It is important to note that the rule does not require, encourage, or authorize contracting officers to obtain cost or pricing data or other information unless it is needed to determine that prices offered are fair and reasonable, which may include the request for such data in connection with a cost realism analysis. As the rule strongly cautions, requiring contractors to submit more data than what is needed can ``lead to increased proposal preparation costs, generally extend acquisition lead time, and consume additional contractor and Government resources.'' Contracting officers must request only the amount of data necessary to make a determination that the price of whatever they are buying/negotiating, is fair and reasonable; no more and no less.

 

Whether a contractor must submit ``certified cost or pricing data'' is based on the requirements of TINA and its stated exceptions. With respect to ``data other than certified cost or pricing data,'' the introductory policy statement in FAR 15.402(a) has been clarified to tie together the contracting officer's longstanding statutory responsibility to request the data and information necessary to establish a fair and reasonable price--as stated in TINA at 10 U.S.C. 2306a(d)(1) and 41 U.S.C. 254b(d)(1)--with the caution that, in doing so, the contracting officer must not request more data than is necessary. By doing so, the FAR will provide a more complete articulation of the policy underlying the use of ``data other than certified cost or pricing data'' in establishing price fairness and reasonableness, in furtherance of the contracting officer's duty to serve as a responsible steward of the taxpayer's resources.

Some commentors responding to the proposed rule in 2007 expressed concern that it will result in contracting officers by-passing normal market research and pricing techniques and require contractors to submit full cost or pricing data as if the Truth in Negotiations Act (TINA) applied.

 

The FAR Councils addressed this concern. The Councils wrote that the current FAR, as well as the new rule, protect against this practice. Contracting officers must generally follow the order of preference at FAR 15.402, and are required by that section to ``obtain the type and quantity of data necessary to establish a fair and reasonable price, but not more data than is necessary.'' In theory, this could include all of the elements prescribed under FAR 15.408, Table 15-2. However, in most cases the data necessary for a contracting officer to determine cost fairness and reasonableness, or cost realism, will fall short of this level of data. The rule should not result in contracting officers requiring contractors to submit full cost or pricing data as if certification will be required when it is not necessary.

The "order of preference" used to determine the type of information required is

1. No additional information from the offeror, if the price is based on adequate price competition
2. Information other than cost or pricing data - pricing
3. Information other than cost or pricing data - cost data that does not meet the definition of cost or pricing data
4. Cost or pricing data.

 

Revised FAR Definition for Cost or Pricing Data

The FAR Councils just published extensive revisions to FAR regarding cost or pricing data, certified cost or pricing data, and data other than cost or pricing data. We are going to spend a few days to discuss these changes because while on one hand they appear minor and perhaps inconsequential, there are nuances to them that could have significant impact on the way that the Government awards contracts and on contractor responsibilities when submitting data in support of negotiations. This change has been in the works for several years. It was first published as a proposed rule in 2007 and the public comment period closed in November of that year. In fact the proposed rule has been fallowing for so long that we nearly forgot about it.

The premise behind the revision is to make FAR consistent with TINA (Truth in Negotiations Act).

The Councils believe that the implementation of TINA in FAR subpart 15.4 is not sufficiently clear. In particular, there is confusion regarding the right of the Government to request ``data other than certified cost or pricing data,'' the obligation of the offeror to provide this data, and the definition of this term.

This lack of clarity is due, in large part, to definitions that overlap and are not identical to TINA. For example, the term ``cost or pricing data'' is defined in the FAR to mean certified cost or pricing data, whereas TINA does not make certification part of the definition of this term. This regulatory refinement has led to confusion regarding the level of information that a contracting officer may request to establish fair and reasonable pricing including a misunderstanding by some that the data elements that comprise cost or pricing data cannot be requested by the Government unless the data are required by law to be submitted to the contracting officer in a certified form. This confusion has been exacerbated by the FAR's use of the phrase "information other than cost or pricing data,'' which has made it difficult for contracting officers to understand the circumstances when data other than certified cost or pricing data should be obtained to protect the Government from paying unreasonable prices.

 
The revised definition of "cost or pricing data" at FAR 2.101 is as follows. To make it easy to compare to the previous method, we have used the "line-out" method to show language that has been dropped and the "bold underline" method to show added language.

Cost or pricing data (10 U.S.C. 2306a(h)(1) and 41 U.S.C. 254b) means all facts that, as of the date of price agreement, or, if applicable, an earlier date agreed upon between the parties that is as close as practicable to the date of agreement on price, prudent buyers and sellers would reasonably expect to affect price negotiations significantly. Cost or pricing data are data requiring certification in accordance with 15.406-2. Cost or pricing data are factual, not judgmental; and are verifiable. While they do not indicate the accuracy of the prospective contractor's judgment about estimated future costs or projections, they do include the data forming the basis for that judgment. Cost or pricing data are more than historical accounting

data; they are all the facts that can be reasonably expected to contribute to the soundness of estimates of future costs and to the validity of determinations of costs already incurred. They also include, but are not limited to, such factors as--

The omitted language is now part of a new definition on "certified cost or pricing data". The added language was probably inserted because of contractor tendency to sometimes assert (in a defective pricing situation) that the examples of cost or pricing data that follow this definition was an inclusive listing.

Apportioning Costs Before Making Allowability Determinations

Transactions and activities must be reviewed to ascertain whether the related costs are allowable under Government contracts. Most contractors have at least a passing familiarity with the cost principles of FAR 31.205 addressing the allowability of costs under Government contracts. While these principles address most of the costs likely to be incurred by companies, they do not cover every possible situation. Some costs or activities do not fit nicely into these "buckets". That is why FAR cautions that the omission of any particular item from the FAR cost principles "...does not imply that it is either allowable or unallowable." The determination of allowability shall be based on basic principles and standards in FAR Part 31 and the treatment of similar or related cost principles.

Some transactions have allowable and unallowable components. Travel is a common example where purpose of the trip often covers allowable activities (meeting with the PCO) and unallowable activities (lobbying a legislator). Another example is the company website we discussed earlier this week that serves both allowable (employee information) and unallowable (advertising) purposes. When more than one subsection in 31.205 is relevant to a particular cost or activity, FAR 31.204(d) requires that the cost be apportioned among the applicable subsections, and the determination of allowability of each portion shall be based on the guidance contained in the applicable subsection.

FAR also states that when a cost, to which more than one cost principle is relevant, cannot be apportioned, the determination of allowability shall be based on the gidance contained in the subsectin that most specifically deals with, or best captures the essential nature of the cost at issue.

When apportioning costs between allowable and unallowable activities, it is often necessary to exercise judgment and make assumptions. Obviously, the less subjective, the easier it will be to defend your position when questioned by an auditor. Therefore, when using apportioning techniques, be sure the "split" is based on clear, concise, logical, defensible, and adequate supporting detail and rationale.

Banked Vacations

"Banked vacations" refers to situations where employees can accumulate (or “bank”) all or a portion of their vacation time that they earned but did not take during the year. Typically, companies that have “banked vacation” policies allow that vacation to be taken at a later date or “cashed out” when the employee terminates. Sometimes contractors write up the vacation liability on the books to reflect employees' pay raises received subsequent to the periods in which vacation was earned.


There are a few contractors that do not limit the amount of vacation that employees can “bank”. However, most contractors that we know of have placed limitations on the amount that can be accrued or don’t allow it at all. For contactors that allow some “banking”, the most common period is one year – the employee must use accrued vacation within the next calendar year.

Contractors that have policies and procedures that provide for banked vacations, should be aware of the Government’s concerns in this area, the propriety of the method of accounting for banked vacation accruals and the reasonableness of the policy (and costs) as a component of total compensation.

A contractor normally accrues vacation liability as each employee earns vacation. It is appropriate for a contractor's books to reflect the liability that will have to eventually be paid. Therefore the contractor, for financial accounting purposes, may need to write up the vacation accruals; otherwise the accruals on the books may be understated.

If banked vacation deferrals extend beyond one year and related write-ups are significant, we recommend that contractors seek an advance agreement under FAR 31.109 to establish mutually agreeable criteria for calculating banked vacation accruals in order to reduce the potential for later issues with the auditors.

Quick Closeout Procedures

Note: some of this information has changed. Go here for updated eligibility information.


Direct and indirect costs incurred on an individual contract in the last fiscal year of its performance may be relatively small in amount, particularly if the contract is physically completed early in the year. In such cases it is generally mutually advantageous to the Government and the contractor to close such contracts as soon as possible without waiting until after the end of the fiscal year and the subsequent final determination or negotiation of the indirect expense rates for the entire period.


FAR 42.708 provides quick-closeout procedures which allow the contracting officer to negotiate a settlement of indirect costs for a specific contract in advance of the determination of final indirect cost rates under specified circumstances. The provision for quick closeout procedures can be applied not only to the final fiscal year of a contract but also to all other open fiscal years with unsettled indirect cost rates if the criteria contained in FAR 42.708 are met.

To encourage the use of quick-closeout procedures, FAR 42.708 was revised effective August 1996. The revised procedures require that the contracting officer negotiate the settlement of indirect costs for a specific contract in advance of the determination of the final indirect cost rate if the criteria in FAR 42.708 are met. The FAR 42.708 criteria for applying quick-closeout procedures are:

1. the contract is physically complete;
2. the total unsettled indirect cost allocable to that contract does not exceed $1 million,
3. the cumulative unsettled indirect costs allocated to all contracts closed using quick closeout procedures in a single fiscal year do not exceed 15 percent of the estimated total unsettled indirect costs allocable to cost-type contracts for that year; and
4. agreement can be reached on a reasonable estimate of allocable dollars.

The contracting officer may waive the restriction on the amount of cumulative unsettled indirect costs based upon a risk assessment that considers the contractor’s accounting, estimating, and purchasing systems; other concerns of the auditor; and any other pertinent information.

If you have a cost-type contract and can meet these criteria, we recommend you contact your contracting officer to explore the quick closeout route.

Cost of Developing and Maintaining Company Websites

Not too long ago while conducting one of our training sessions, we were asked whether the cost of developing and maintaining contractor websites could be considered unallowable advertising under FAR 31.205-1. We hadn’t encountered this question before so we did not have a complete answer. The cost of developing and maintaining a company website is significant in many cases. Medium sized companies can spend tens of thousands of dollars and larger companies, significantly more. So, we sent the question on to DPAP (Defense Procurement Acquisition Policy), the DoD organization responsible for all acquisition and procurement policy matters in the Department of Defense (DoD). Here is the question and the response.

Question: Do company websites meet the FAR 31.205-1(b) definition of "advertising". The definition does not explicitly list "websites" as advertising media but the listing of included media is not an all-inclusive listing. If company websites meet the definition of advertising, it would have to meet the primary purpose criteria discussed in FAR 31.205-1(f) to be unallowable. It seems to us that most websites have multiple purposes. Advertising is certainly one purpose but there are others such as communications with shareholders, customer ordering, customer support, and contact information.

Response: FAR 31.205-1 defines advertising to mean:

the use of media to promote the sale of products or services and to accomplish the activities referred to in paragraph (d) of this subsection, regardless of the medium employed, when the advertiser has control over the form and content of what will appear, the media in which it will appear, and when it will appear. Advertising media include but are not limited to conventions, exhibits, free goods, samples, magazines, newspapers, trade papers, direct mail, dealer cards, window displays, outdoor advertising, radio, and television.

The phrase, “regardless of medium employed,” is sufficiently broad enough to make the definition of advertising include company websites. As stated by the questioner, “advertising is certainly one purpose” of company websites. In accordance with the requirement of FAR 31.204(d), the cost to develop and maintain company websites should be apportioned among the contractor’s accounts that best capture their essential nature to the extent company websites are used for multiple purposes. FAR 31.204(d) states:

When more than one subsection in 31.205 is relevant to a contractor cost, the cost shall be apportioned among the applicable subsections, and the determination of allowability of each portion shall be based on the guidance contained in the applicable subsection.

We recommend that contractors assess the purpose of their websites and if there is a component of advertising involved, apply a logical (defensible) method apportioning the costs between the relevant cost accounts.

AIA "Jumps the Shark"

The Aerospace Industries Association (AIA) issued a response last week to the Pentagon’s call for ideas to restore affordability and productivity in defense spending. Culled from among a larger listing of 97 initiatives that AIA published last July are three ideas that AIA believes can be accomplished within current DoD authorities, hence the title “Ways to Reduce Costs Immediately”.


These are not new ideas – we’ve seen them all before. The first of AIA’s three proposals is to employ better contracting methods by using more multi-year procurements, increasing the use of long term performance and outcome based product support contracts and expanding the definition of commercial products. The second idea is to cut down on the amount of cost or pricing data the contracting officer needs or requires in order to justify a fair and reasonable price, use pre-established direct and indirect forward pricing rates, eliminate serial reviews of contractor proposals prior to negotiation and reinvigorate the use of weighted guidelines to develop profit objectives.

The third idea is not new either but resonates with us because of frustrations we experienced when we were Government auditors. The oversight process makes multiple, sometimes contradictory, demands on contractors that drive up overhead costs. Agencies in the DoD are providing different interpretations of policy that cause contractors who have common systems, to make agency-specific adjustments. The lack of consistent policy interpretations result in determinations of inadequate proposals due to immaterial fact finding questions and adverse audit reports for contractor failure to supply unavailable information. Sometimes paper records are stored at a central storage facility and retrieval of the paper record cannot be made within the time frame demanded by the auditor. It is not clear to the contractor, or often to the government officials, where responsibility, accountability, and authority lie when conflicts take place. Such conflicts can delay contract award and drive up costs. DCAA has wrestled with this problem for many years – trying to apply consistent positions form a geographically dispersed work force.

AIA’s solution to this problem is for DoD to combine multi-agency compliance reviews, establish a single point DCMA/DCAA authority at major prime contractors to drive commonality and consistency, and base audits on materiality and risk. Its probably not realistic to believe that these ideas will save taxpayer dollars. The single point DCMA/DCAA authority will never fly as long as those Agencies remain separate. DCAA must remain independent to comply with GAGAS (Generally Accepted Government Auditing Standards). The idea that audits be based on materiality and risk is already integral to DCAA policy and Governmental auditing standards. The criticism of DCAA lately has hinged on the Agency taking too much risk. Finally, FAR and DFARS already specify lead agency status for multi-agency compliance reviews. For example, DCMA is lead agency for EVMS (earned value management) and CIPR (insurance/pension) reviews while DCAA is lead agency for ESS (estimating system) and CAS (cost accounting standards) reviews.

Access to Recods - Statutory and Regulatory Requirements

Statutes, implementing regulations, and contract terms provide the Government access to contractors' books and records for purpose of audit. The definition of books and records is very broad and include policies, procedures, systems, management reports, personnel, minutes of board meetings, charters, bylaws, and any other information source which affects and reflects the incurrence, control, and allocation of costs to contracts. There needs to be some kind of nexus between the review or need and the nature of the records requested. If the data requested by the Government is not intuitively related to the audit/review being performed, you should inquire as to the propriety of the request. Government representatives are required to be ready to discuss the basis for the request, if asked (see CAM 1.504.3(a)).

The statutory and regulatory requirements that allow Government access to contractor books and records follow:

• Statutory
• 10 U.S.C. 2313(a) - Examination of Records of Contractors
• 10 U.S.C. 2306a - Truth in Negotiations
• 41 U.S.C. 422(k) - Cost Accounting Standards
• Regulatory
• FAR 15.209(b)(1) - Requires the audit clause in negotiated procurements
• FAR 52.215-2 - The contract audit clause
• FAR 15.408 Table 15-2 - Requirements for Cost or Pricing Data
• FAR 52.215-20 and -21 - Requirements for Cost or Pricing Data
• FAR 52.230-2 and -3 - Cost Accounting Standards
• FAR 52-216-4 - Economic Price Adjustments
• FAR 52.232-16 - Progress Payments

DoD's New Handbook for Contingency Contracting Officer Representatives

The DoD just issued the electronic version of its long-awaited "Defense Contingency Contracting Officer (COR) Representative Handbook". It was published as a pocket-sized book and can be ordered through the Government Printing Office. The electronic version can be downloaded here. Although this handbook was written with a particular bent toward contracting challenges in Iraq and Afghanistan, it is a really fine primer on contracting in general. If you have a curiosity about how Government contracting works (or should work), download (or buy) the book for your reference library. Here is the table of contents for selected chapters:

 

Chapter 3 Ethics

• REVIEW OF STANDARDS
• WORKING WITH CONTRACTOR EMPLOYEES
• Transportation and Travel
• Awards and Certificates
• PROCUREMENT INTEGRITY
• Compensation after Leaving Federal Employment
• Penalties
• PERSONAL CONFLICTS OF INTEREST
• ORGANIZATIONAL AND CONSULTANT CONFLICTS OF INTEREST
• Bribery
• Gratuities
• Gifts
• ANTI-KICKBACK ACT
• EXCEPTIONS TO GIFT PROHIBITION
• REPORTING GIFTS
• Protecting the Integrity of the Acquisition Process

Chapter 4 The Acquisition Team and Process

• THE ACQUISITION TEAM
• Contracting Officer 
• Requiring Activity
• Legal Counsel
• COR (Contracting Officer Representative)
• Resource Manager
• Quality Assurance Representative
• Framework for Team Success
• THE ACQUISITION PROCESS

 

Chapter 7 Contract Administration

• CONTRACTOR RESPONSIBILITIES KICKOFF
• Necessity of a Kickoff Meeting
• Scheduling and Inviting Attendees to the Kickoff Meeting
• Topics for Discussion at the Kickoff Meeting
• CONTRACTOR/SYSTEM COMPLIANCE
• Contractor Accountability through the SPOT Database
• PERFORMANCE MONITORING
• CONTRACT MODIFICATIONS
• The Changes Clause
• Reasons for Modifications
• Types of Contract Modifications
• Constructive Changes
• Unauthorized Commitments
• RATIFICATION OF UNAUTHORIZED COMMITMENTS
• Technical Evaluation
• CONTRACT OPTIONS
• CORRESPONDENCE AND NOTIFICATIONS
• Correspondence with the Contractor
• Notifications to the Contracting Officer
• COMPLETION/PAYMENT/CLOSEOUT
• Acceptance
• DOCUMENTING ACCEPTANCE
• Wide Area Workflow
• NONCONFORMANCE
• Remedies
• Invoice and Payment
• CONTENTS OF A VALID INVOICE
• VOUCHER AND INVOICE REVIEW
• OVERTIME
• Interest Penalties
• Warranties
• IMPLIED WARRANTIES
• EXPRESS WARRANTIES
• Past Performance
• Contract Closeout
• DO’S AND DON’TS FOR CONTRACT ADMINISTRATION

Chapter 8 Monitoring the Contractor

• CONTRACTOR PROGRESS REPORTS
• ASSESSING PERFORMANCE
• Acceptable Inspection Methods
• RANDOM OR STRATIFIED SAMPLING
• 100 PERCENT INSPECTION
• PERIODIC INSPECTION, JUDGMENTAL INSPECTION, OR PLANNED SAMPLING
• USER FEEDBACK
• DOCUMENTING PERFORMANCE
• REMEDIES FOR POOR PERFORMANCE
• Do’s and Don’ts for Remedies
• DELAYS
• Identifying and Verifying a Delay
• Notifying the Contracting Officer of the Technical Impact of a Delay
• Assisting the Contracting Officer with Evaluating the Contractor’s Response
• FRAUD
• GOVERNMENT PROPERTY
• Property Responsibilities
• Property Disposition
• CONTRACT TERMINATION
• Termination for Convenience of the Government
• Termination for Cause/Default
• DISPUTES AND APPEALS
• COR WORKING FILE
• DO’S AND DON’TS FOR CONTRACT MONITORING

DoD Relaxes Restrictions on Direct Submission of Interim Vouchers

Many DoD contractors enjoy the benefits of submitting their interim public vouchers direct to the finance office, bypassing the lengthy review and approval process of DCAA, the ACO, and others. The direct billing process improves cash flow and significantly reduces the Government's administrative burden. The authority to approve direct billing is delegated to the contract auditor (usually DCAA) and until yesterday, was limited to those contractors with "approved" billing systems.

DCAA established criteria for adequate billing systems. For non-major contractors, those with sales under cost-type contracts less than $100 million per year, the criteria included (i) maintaining an adequate accounting system, (ii) establishing billing rates, (iii) maintaining cumulative allowable costs by contract, and (iv) adjusting billing rates whenever appropriate. For major contractors, the requirements were even more stringent.

On August 17, 2010, DoD removed the requirement that contractors need to have an approved billing system in order to participate in the direct billing program. DoD did this to ease the requirement, especially for small business, to qualify for direct billing, thereby reducing DoD administration and conserving resources in processing low risk payment vouchers. Click here to read the entire text of DoD's new policy.

If you have been wanting to participate in the direct bill program but were precluded because of the "adequate billing system" standard, this might be the right time to hop on board. Contact your local DCAA for more information.

DoD Purchases Made With Earmarks

The Office of Management and Budget (OMB) defines an earmark as unrequested funding in an appropriation act in which Congress (i) circumvents a merit-based or competitive allocation process, (ii) specifies the location or recipient, or (iii) otherwise curtails the ability of the Government to control critical aspects of the fund's allocation. A Congressional earmark is a provision of law, a directive, or a report accompanying a bill that specifies the identity of an entity or project for which funds are authorized or made available in a conference report or bill that was not requested by the President in a budget submission to Congress.

In 2007, the DoD-IG initiated an audit to determine whether DoD activities awarded contracts using funds earmarked in the FY 2005 DoD budget in accordance with the Federal Acquisition Regulation (FAR) and DoD procurement regulations. The IG just issued its report on the study. The IG examined 17 judgmentally selected earmarks valued at $125 million and found that DoD activities did not always comply with the FAR and the DoD FAR Supplement when procuring services. The IG identified concerns with market research, competition, and fair and reasonable price determinations. Understandably, these conditions occurred because language in the appropriation committee report gave DoD little or no latitude in how to use the funding. Because many of the earmarks related to existing programs, DoD officials generally awarded contract actions to the incumbent vendors without considering whether competition between vendors for the products or services was viable. As a result, the IG concluded that Dod not conduct adequate market research that may have resulted in increased competition, and DoD may have paid more than it should have if competition occurred or if price reasonableness was properly documented.

As a result of this study, the DoD issued guidance to its procurement folks reminding them that contract actions associated with earmarks, unless otherwise noted in supplemental guidance, must comply with FAR and the DoD FAR Supplement. Additionally, in the case of all statutory earmarks, procurement officials should consult with legal counsel concerning what actions are required. It remains to be seen whether there will be any tangible differences in the awards of contracts based on earmarked funds.

DCMA on the Hot Seat

DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency), despite the name similarities, are two separate and distinct Agencies and report to different components within the Pentagon. DCAA reports to the Under Secretary of Defense - Comptroller while DCMA reports to the Under Secretary of Defense - Acquisition, Technology and Logistics. The Defense Contract Audit Agency (DCAA) is the audit arm of the Department of Defense (and for other Executive Agencies). The Defense Contract Management Agency (DCMA) is the Contract Administration arm of the Department of Defense. DCAA issues audit reports to DCMA. DCMA is charged for resolving whatever issues the auditors raise. Sometimes DCAA doesn't like DCMA because the auditors feel that DCMA does not do a good job of sustaining their findings. Sometimes DCMA doesn't like DCAA because they feel that audit reports are issued too late to be of any use or audit findings are not well conceived and therefore unsustainable.

DCMA is also the lead Agency for several oversight roles; EVMS (Earned Value Management Systems) and CIPR (Contractor Insurance/Pension Reviews) to name two major areas. Where DCMA is the lead organization, it typically asks DCAA to address certain financial-related aspects of the required oversight responsibilities. It is against this backdrow that DCMA now finds itself in the DoD-IG's cross-hairs.

In an Audit Report issued on July 28, 2010, the DoD-IG looked into allegations of unsatisfactory conditions regarding actions by DCMA. Specifically, during two reviews of a DoD contractor in 2008, DCMA (i) failed to allow DCAA sufficient time to perform an audit of the contractor's system, (ii) failed to adequately resolve DCAA findings and (iii) failed to demonstrate independence and objectivity in fulfilling its oversight responsibilities (because they teamed up with contractor personnel to perform joint reviews - brings to mind the fable where the fox was allowed to guard the hen house).

Although DCMA essentially disagreed with the DoD-IGs findings, it did agree to seven of the eight recommendations made in the report. You can read the entire IG report here.  Among those recommendations were a new policy to prohibit joint surveillance reviews with contractor personnel, a policy to always request DCAA participation in EVMS reviews, establish reasonable due dates from DCAA, and hold discussions with DCAA to help resolve auditor-reported deficiencies. A followup review by the IG is scheduled to see well how DCMA has implemented these recommendations.

Contractor Employees Joining the Government

Today we conclude our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue involves contractor employees who go to work for the Government.

Ethics questions can arise for contractor employees who enter Government service after working in the private sector.

Many former employees have continuing financial interests in their former employer such as post-retirement benefits, 401k plans invested in company stock, deferred compensation and ESOPs, to name a few. These continuing financial interests might pose a conflict of interest. These conflicts must be somehow resolved. Often times they are resolved by resolved by divestiture, recusal or other measures. Blind trusts are sometimes used for “high level” Government positions.

Even where conflicts are resolved, there is a general rule that prohibits contractor employee from working, for one year after leaving a former employer, on any contract or other Government matter in which his/her former employer is a party (or represents a party), particularly if either he/she or an agency ethics official determines that a reasonable person would question his/her impartiality.

Where to Get Help

The issues that arise when Government and contractor employees interact can be quite complex and no blog is going to give you the comprehensive answers for every question you might have.

Here are a few web links from the United States Office of Government Ethics (OGE) that you might find helpful:

Ethics and Working with Contractors---Questions and Answers

List of agency "Designated Agency Ethics Officials"

Link to Office of Government Ethics Home Page

Restrictions After an Employee Leaves Government Service

Today we present the fourth of our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue involves certain prohibitions that persons face when moving from the public to the private sector.

 

There are certain restrictions that apply to Government employees after they leave Government service.

 

Here are three of them:

• Lifetime ban on representing any other person before the Government on the same Government matter, such as a contract, on which they worked for the Government. This means the former employee may not sign a letter, attend a meeting, make a presentation, make a telephone call or make any other communication or appearance before the Government in connection with the same matter on which the employee worked.
• Two-year ban on representing another person before the Government on the same contract (or other Government matter) that was pending under the employee's official responsibility during the last year of the employee's Government service.
• One-Year "cooling-off" period for any matter involving the employee's former agency. This provision applies only to "senior" employees whose basic pay is above a certain level.

 "Behind-The-Scenes" Work

• If a former Government employee goes to work for a contractor and works "behind the scenes" on the same contract he worked on as a Government employee, he will not violate the criminal and post-employment provisions just described. But, former employees need to be careful! The post-employment rules apply even if the contract specifically requires contractor personnel to communicate with the Government.  
• Although certain non-controversial routine or administrative communications are not prohibited, many communications that a former employee might make while performing the contract may involve the intent to influence the Government, because the contractor and the Government have potentially differing views or interests on the matter being discussed.

Procurement Integrity Act - The Procurement Integrity Act contains restrictions on the post-employment activities of certain Government employees.

• If a former Government employee has served in certain contracting roles, or performed specific contracting functions, on certain matters over $10,000,000 involving a particular contractor, then the former employee is generally prohibited, for one year, from receiving compensation from the contractor for service as an employee, officer, director, or consultant. That means that if these criteria are met, a former employee may not even work "behind-the-scenes" for compensation.
• This prohibition does not prevent a Government employee from going to work for a division or affiliate of the contractor that does not produce the same or similar products or services as the division or affiliate of the contractor responsible for the contract in which the employee was involved.

 

 

 

Hiring Away Government Employees

Today we present the third of our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue involves the hiring of Government employees.

It is common for Government employees leave Government service and go to work for contractors. It's also true that employees working for contractors sometimes enter Government service. As a result, there are a number of ethics issues that arise from these changes in employers. This is sometimes called the "revolving door."

Not surprisingly, there are laws and regulations that cover these situations. There are several laws and regulations that govern what a Government employee must do while seeking or negotiating future employment with a contractor.

Seeking/Negotiating Employment with Contractors

Generally, Government employees may not work on Government matters affecting contractors with which they are seeking employment. Seeking employment includes (but is not limited to) unsolicited contacts about possible employment, such as sending a resume to a firm or contractor.

Government employees may not work on Government matters affecting the financial interests of a contractor if they make any response other than rejection to a contractor's unsolicited overture about possible employment. For example, a Government employee who just interviewed with your company for a job may not work on any procurement matter concerning your company.

The Procurement Integrity Act

The Procurement Integrity Act imposes requirements on Government employees who participate in procurement above a certain threshold.

Government employees who participate in such procurement must report to their supervisor and their agency's ethics officials if they contact, or are contacted by, a bidder or offeror regarding possible employment.

A Government employee must also either reject the possibility of employment or not participate in the procurement until the employee's agency has authorized the employee to resume participating.

Moonlighting for Contractors

Sometimes Government employees consider "moonlighting" by working for a contractor after-hours. Ethics regulations prohibit Government employees from holding outside employment that conflicts with their official duties. Government employees also may not hold outside employment that creates the appearance of using public office for private gain.

For example, a Government employee wants to get a part-time job with a contractor that does business with her agency. Her official duties involve work this contractor. This would be considered a conflict with her official duties.

Additionally, some agencies have specific rules requiring prior approval for outside employment, as well as restricting the types of outside employment that their employees may hold.

Gifts from Contractors to Government Employees

Today we present the second of our five part series on potential ethics issues that contractors may face when working with Government employees. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them. Today’s issue is gifts.

Ethics rules generally forbid Government employees from accepting gifts from "prohibited sources." If you are working as a contractor employee for a particular agency, you are considered to be a "prohibited source" of gifts to the employees of that agency. Contractors seeking to do business with an agency are also considered "prohibited sources."

There are several exceptions to this general prohibition.

The 20/50 Rule

One exception allows Government employees to accept non-cash gifts from a prohibited source if the gifts from the contractor and its employees have a value of no more than $20 per occasion and no more than a total of $50 per calendar year. A contractor and the contractor employees are considered the same source.

For example, you may buy lunch for a Government employee who works at an agency that does business with your company if the lunch is less than $20. If the lunch is more than $20, the Government employee must pay the full amount, not just the amount over $20.

If you’ve already taken that employee to lunch three times this year, and each lunch was worth $15 (for a total of $45), the employee may not accept any gift from you (or any other employee of the same contractor) worth more than $5.

Government employees may not use any of the gift exceptions to accept gifts from the same (or even different sources) so frequently that a reasonable person would believe they are using their public office for private gain. It is never inappropriate...and frequently might be prudent...for an employee to decline a gift, even if permissible under one of the exemptions.

Personal Relationships

Another exception allows Government employees to accept a gift from a friend (or relative) if it is clear from the circumstances that it was your friendship, and not the employee's official position, that motivated the gift.

In deciding whether the Government employee may accept the gift, relevant factors that are considered include the history of the relationship and whether the gift was actually paid for by you (as opposed to the company that employs you) and whether the nature of the relationship justifies a particular gift.

Sometimes friendships develop between Government employees and contractor employees who work together. Where the friendship developed on the job, a gift rarely is justified. This is especially true if the Government employee is in a position to oversee your work or otherwise participate in decisions affecting the interests of your employer.

Gifts of Travel and Transportation

"Transportation" and "local travel" provided by contractors are considered gifts under the ethics rules. In order to determine whether a gift of travel or transportation may be accepted, an agency must first determine whether the Government employee transportation is duty-related or for the employee's personal benefit.

If the transportation is for the employee's personal benefit (e.g., the cost of a taxi cab to a baseball game), then it is a personal gift covered by the ethics rules. In this case the gift of travel would have to fit under one of the gift exceptions for the employee to accept it.

However, if the transportation is provided in connection with the performance of the employee's official duties, it would not be considered a gift to the individual, but rather a gift provided to the agency. However, not all Government agencies accept gifts, so this might or might not be acceptable. A Government employee should receive approval from the employee's agency before accepting a gift of travel from an agency contractor.

Contractor Parties, Picnics, etc.

While Government employees can't receive gifts from "prohibited sources" such as contractors, the definition of gift excludes "modest" refreshments (such as soft drinks, coffee and doughnuts, as long as they are not part of a meal). However, most holiday parties aren't confined to such items. So, free attendance at a contractor party would be permitted only under an applicable gift exception.

One exception allows attendance where the value of food and entertainment offered is no more than $20. Another exception might allow an employee to attend if the employee's agency authorizes the employee's attendance as being in the agency's interest.

Interacting with Government Employees

Inevitably, Government contractors or potential Government contractors will find themselves face-to-face with Government employees. As a contractor or contractor employee, you might find yourself working at a Government site along side Government employees. At larger contractors, Government employees are working right there in your facility. You might find yourselves together at the same hotel for a conference (e.g. an NCMA conference) or for contract negotiation or some kind of performance review. .

 

It's important for you to know about the ethics rules and principles that apply to Government employees - particularly if you work closely together. It's important to ensure that your interactions with Government employees don't inadvertently trigger ethics problems for them.

 

This week, we are going to examine some of the more common ethics issues that come up when working with Government employees. Much of this information comes from materials published by the U.S. Office of Government Ethics. You can visit their website for more information. On Friday, we will link to some specific areas within that site that further address the issues we will cover this week. Those issues include

 

• Conflicts of interest, impartiality and related ethics issues
• Gifts that Government employees may accept from contractors
• Government employees seeking work as an employee of a contractor
• What happens after Government employees leave Government service to work as a contractor employee
• What happens when contractor employees enter Government service

 

The subject of ethics is important because Government employees hold their jobs as a matter of public trust. That trust is fulfilled when employees follow general principles of ethical conduct as well as specific ethical standards. Additionally, FAR requires contractors to maintain codes of ethics and business conduct.

 

Conflicts of Interest

 

Government employees are prohibited from having financial conflicts of interest with their official work. Generally, a Government employee may not work on a Government matter that will affect his financial interests, or the financial interests of:

 

• a spouse or minor child
• a general partner
• an organization he serves as an officer, director, trustee, general partner or employee, and
• a person with whom he is seeking or has an arrangement for future employment.

Maintaining Impartiality and Integrity

 

Even when a Government employee doesn't have a financial interest that can be affected by a contract, situations may sometimes arise that can call his impartiality into question such that he may have to disqualify himself from working on a contract.

 

If the employee or his agency believes that a reasonable person, with knowledge of the relevant facts, might question the Government employee's impartiality, the employee must stop working on the matter and seek assistance from an ethics official.

 

Spousal Employment

 

Sometimes a Government employee has a spouse who works for a contractor that does business with that employee's agency. In this case, the Government employee may be prohibited from working on an agency contract with the contractor.

 

Representing Contractors

 

Government employees are generally prohibited from representing an outside party to the Government. This means that they may not represent any contractor in dealings with the Government whether or not they've been paid by the contractor to make the representation.

 

Example: A contractor wants to hire a Government employee to represent the company in negotiations with the Government on a new contract. The Government employee may not represent the company back to the Government...even to a different agency from the one where she/he is employed.

 

Personal Relationships

 

Under the ethics rules and laws, a Government employee is not automatically prohibited from working on a Government matter (such as a contract) involving a person with whom he has a personal relationship (e.g., dating, or someone who is a friend or relative). However, Government employees need to exercise caution and should consider whether a reasonable person, with knowledge of the relevant facts, might question their impartiality.

 

For example, an employee should not continue working on a Government contract if he were dating one of the contractor's employees and were in a position to review that person's work.

 

Transferring Records from Hard Copy to Computer Medium

Companies that offer solutions to transfer records from hard copy to electronic are proliferating and with good reason. It makes perfect sense to save records electronically as it reduces archival and storage costs and in most cases, facilitates the retrieval process. The offerings range from companies who will come in to your firm and do it for you to "add-ons" to your accounting software that will store and link electronic copies of documents to specific transactions. For government contractors contemplating a move to electronic archiving and storage, the key question to ask vendors is whether their offering is compliant with FAR 4.7. If they do not know what you are talking about, find someone that does. There are lots of them out there.

FAR 4.703(d), which was effective February 27, 1995, and Public Law 103-355 allow contractors to retain records in any medium or any combination of media if the following requirements are met:

1. The requirements of FAR Subpart 4.7 are satisfied.
2. The process used to create and store records must reproduce the original document, including signatures and other written or graphic images, completely, accurately, and clearly.
3. The procedures for data transfer, storage, and retrieval protect the original data from alteration.

 

To comply with this FAR requirement a contractor's system of transferring records from hard copy to computer medium should contain the following elements:

 

1. A reliable computer medium (typically, this includes vendor supported benchmark data). You don't want to copy your data to cheap CDs that last just a few years.
2. Documented procedures for data retention and transfer which provide reasonable assurance that the integrity, reliability, and security of the original hard copy data will be maintained.
3. An audit trail describing the data transfer.
4. A computer medium which cannot be destroyed, discarded, or written over. The contractor will need to consider appropriate transition, after exception reporting, to non-eraseable storage.
5. A transfer process that includes all relevant notes, worksheets, and other papers necessary for reconstructing or understanding the records (this also includes appropriate back-up procedures).
6. Adequate internal control systems, including segregation of duties, particularly between those responsible for maintaining the general ledger (and related subledgers) and those responsible for the transfer process.
7. A procedure prohibiting record destruction during the implementation phase until it can be shown that the system is actually providing acceptable copies of the records being transferred.
8. An acceptable system of continuing surveillance over the computer medium transfer system. This includes comparisons of the original records and the computer generated copies, as well as periodic internal control audits. The policies and procedures should provide for the maintenance of adequate evidence to support the nature and extent of the continuing surveillance.
9. A requirement to maintain all original records for a minimum of one year after the date of transfer.
10. Adequate procedures for periodic internal and external audit.
11. Adequate procedures for labeling and storing the computer medium in a secured environment. The storage procedures should meet the minimum standards prescribed by the National Archives and Records Administration for maintenance and storage of electronic records.
12. Adequate procedures for the random sampling and testing of all records retained in accordance with the requirements of the National Archives and Records Administration. Procedures should include provisions for notifying the contracting officer of any significant data losses on a timely basis.
13. Procedures for retrieving retained records at the time of audit. Procedures should include provisions for printing a hard copy of any record. In addition, policies should include provisions for access by Government representatives, at the time of examination, to the necessary computer resources (terminal access, printer, etc.) that are necessary for the production of the retained records.
14. Procedures for preventing the destruction of any hard copy records that are required to be maintained by existing laws or regulations.

Obviously, setting a temp worker down with a scanner to copy everything to .pdf format is not going to meet these requirements.

Although the foregoing requirements sound onerous, many vendor's offerings are already compliant. The price entry point for the major players in this industry (e.g. Iron Mountain) seems to be somewhat high for many smaller Government contractors but there are less costly alternatives. We haven't had enough experience with such offerings to make any recommendations. If your company is spending too much time to track down and retrieve hard copy records and spending too much money to maintain and store those documents, you might be able to build a business case to switch over to electronic media.

Unilateral Determinations for Delinquent Incurred Cost Proposals

Over the past two days, we have been discussing the importance of submitting timely annual incurred cost proposals. We mentioned the inconsistencies within the Government in granting extensions, some contracting officers freely grant extensions while others do not. Our advice is that unless there is some mitigating circumstance, contractors should prioritize work to ensure timely submission. We also cautioned that the contracting officer, based on audit recommendations, is authorized by FAR to reduce billings for contractors who are late in submitting their incurred cost proposals.  Today we want to discuss how the Government determines the deepness of those cuts.

Contracting officers make their unilateral determinations based on advice from the contract auditor (usually DCAA). The basis for the auditor's recommendation depends upon whether there is relevant historical data available for the particular contractor. Where relevant historical data is available, the auditor will develop the rates. However, as a practical matter, this almost never happens because the definition of "recent, relevant historical data" is tough to meet. Recent, relevant historical data exists when all of the following criteria are met:

1. The prior year has been audited (almost never occurs)
2. All submissions received have been audited and settled (almost never occurs)
3. The indirect cost pool and base data for the delinquent year is readily available in the contractor's books and records.
4. There have been no significant changes in the contractor's business base from the last year audited.
5. There have been no significant reorganization of the contractor since the last year audited.

Where recent, relevant historical data does not exist, the auditor is directed to Plan B and this is where the auditor usually camps. When a contractor is more than six months delinquent, the auditor is directed by guidance to recommend the ACO apply a 20 percent decrement factor to total contract costs, both direct and indirect, for any physically completed contract and all active contracts. This is quite punitive and would adversely affect most contractors. Obviously, contractors should not let things get this far.

Annual Incurred Cost - Consequences for Late Submission

Yesterday we discussed the importance of submitting timely annual incurred cost submissions and why it is in everyone's interest to submit them by the due date. The due date is six months following the close of the contractor's fiscal year (usually the calendar year).

Contractors who do not submit timely proposals may have their billing rates unilaterally "set" (that means 'reduced') by the contracting officer. FAR 42.703-2(c)(2) gives the contracting officer the authority to unilaterally reduce rates when contractors fail to certify their final incurred cost rates. That provision states that rates established unilaterally should be based on audited historical data or other available data as long as unallowable costs are excluded and set low enough to ensure that unallowable costs will not be reimbursed.

DCAA, acting on behalf of the contracting officer is the organization tasked with keeping track of due dates and submissions. This is an administrative task that DCAA seems to excel at. DCAA sends out alerts 90 days prior to the submission due dates and contractors who fail to submit rates by the due date will receive a letter, generally within two weeks, advising them of the potential for unilateral rate reduction.

DCAA also make recommendations to the contracting officer on the unilateral rate reductions. Tomorrow we will discuss how these unilateral rate determinations are determined. The reductions could be significant and could place great strains on contractor cash flows.

Requesting Extensions to Due Date for Submitting Annual Incurred Cost Proposals

FAR 52.216-7.d requires contractors to submit adequate final indirect cost rate proposals to the Contracting Officer and auditor within six months following the end of its fiscal year. The same clause also provides for extensions to that date under certain circumstances. Specifically, FAR states:

Reasonable extensions, for exceptional circumstances only, may be requested in writing by the Contractor and granted in writing by the Contracting Officer. The Contractor shall support its proposal with adequate supporting data.

It has been our experience that contracting officers are inconsistent in applying the "exceptional circumstances" criteria. We have seen contracting officers agree to extensions for no stated reason to cases where contracting officers have probed and queried contractors on their stated justification and supporting data (and in some cases, ultimately denying the request). There is no consistency here at all. One recent DCMA denial for extension contained these words:

(Our) policy is not to grant extensions but simply to require Contractors to get their submissions in as soon as possible. The requirement for incurred cost submissions is very clear and (contractor) is not unfamiliar with this requirement.

The reason the Government is so insistent in receiving these proposals in a timely manner is not because they are chomping at the bit to start their audit. The Government is significantly in arrears in reviewing incurred cost claims - three and fours years behind. The primary purpose in getting these claims submitted timely is so they can compare final indirect rates with provisional billing rates and adjust billings as appropriate. If the final rates are significantly less than the provisional billing rates, the Government will expect contractors to process adjustments to their billings. Conversely, if final rates are significantly higher than provisional billing rates, contractors should process billing adjustments to recoup their additional costs.

Don't count on receiving extensions to the due date for submitting your final incurred cost submission. Work to complete them in a timely manner. Tomorrow we will discuss some of the implications for contractors who are significantly delinquent in submitting their claims.

Defective Pricing - Contractor Offsets

This is our eighth and final posting in our series on defective pricing. If you missed any of the previous ones, you can find them through these quick links.

• Part 1 - What is Cost or Pricing Data?
• Part 2 - Government's Burden of Proof
• Part 3 - Facts vs. Judgement
• Part 4 - "Submission" of Cost or Pricing Data
• Part 5 - Contractor Obligation to Continuously Update Cost or Pricing Data
• Part 6 - Remedies Available to the Government
• Part 7 - Successful and Unsuccessful Defenses to Defective Pricing
• Part 8 - Contractor Offsets (this posting)

The 1987 Defense Authorization Act amended the TINA to give statutory recognition to contract offsets for defective cost or pricing data that result in understated costs. The amended TINA places the burden of proof for such offsets on the contractor and disallows using any intentional understatements to offset defective cost or pricing data that resulted in a price increase.

Contractors must certify to the contracting officer that, to the best of its knowledge and belief, it is entitled to the offset in the amount requested and proves that the cost or pricing data were available before the date of agreement on price and that the data was not submitted before such date.

According to the statute, there are two situations where contractor offset proposals will not be considered. First, offsets shall not be permitted if the understated data was known by the contractor to be understated before the “as of” date specified on the Certificate of Current Cost or Pricing Data. Secondly, the Government proves that the facts demonstrate that the contract price would not have increased in the amount to be offset even if the available data had been submitted before the date of agreement on price.

Offsets are not vehicles to increase contract prices. There is a limit to the amount of offset available to the contractor. The amount of the offset may equal, but not exceed, the amount of the Government’s claim for overstated cost or pricing data arising out of the same pricing action.

The offset does not have to be in the same cost grouping as the overstated cost or pricing data. So, for example, understated material costs could offset overstated labor costs. Offsets must be for the same contract as the defective pricing allegation however.

The key to prevailing in an offset proposal situation rests on three key elements. First, the contractor must prove that the higher cost or pricing data was available before the “as of” date specified on the Certificate of Current Cost or Pricing Data. Secondly, the contractor must show (or prove) that the data was not known to it before the date of agreement on price. And finally, the contractor must prove that the data was not submitted to the Government.