Labor Mischarging

The Department of Justice just issued another press release - this time about a settlement with a defense subcontractor who "allegedly" mischarged labor costs to Government contracts. The press release used the word "allegedly" because the subcontractor, by settling, did not admit any guilt. Nevertheless, the Government got back about $2 million, of which the whistleblower who initially raised the issue, received $361 thousand.

From 2001 to 2006, this subcontractor was systematically altering employee timecards thereby charging the prime contractor, and ultimately the Government, for hours not worked. One of the employees bacame cognizant of what was going on, didn't like it, and alerted authorities by filing a "qui tam" action under the False Claims Act. The evidence provide by the whistleblower was sufficient enough for the Government to intervene and ultimately settle and recover the $2 million. Although the press release doesn't state so, the initial estimates of the cost impact was probably much higher than $2 million. These cases are often settled for much lower than initial estimates.

Contractors that play around with timecard alterations or instructing their employees to charge something other than what they are actually working on are at higher risk from being outed by their own employees than they are though a Government audit. If an employee believes there can be a big payday in the future for blowing the whistle on unethical or fraudulent activity, that is sometimes all the incentive required. When there's a hotline poster and a 1-800 telephone number staring them in the face every day, they don't even have to look up the telephone number to report their suspicions.

Contractor Insurance/Pension Reviews (CIPR) - Risk Assessments

Last week we discussed a new provision that was added to the DoD FAR Supplement (DFARS) that required the Department to conduct CIPRs (Contractor Insurance/Pension Reviews) for contractors that had $50 million in qualifying sales in the previous year and where there is high risk to the Government. We stated then that we would continue the discussion with some of the factors that the Government considers in determining the level of risk. You can read our previous post here.

No set of canned risk assessment procedures or factors will be sufficient to assess the level of risk. The CIPR team must exercise a certain amount of judgment and common sense. The risk factors discussed below are like any other checklist - they are merely indicators that should be considered in assessing the overall risk and a tool in determining whether a CIPR is warranted. These risk factors were gleaned from information published by DCMA, the Executive Agency for conducting CIPRs.

High Risk

A high risk exists when there is a large likelihood that a significant cost is unallowable. This rating is appropriate where, for example:

• Segment Closing, Plan Merger or Spin-Off is anticipated or has occurred and the contractor maintains a defined benefit pension plan, self-insurance, and/or a reserve for a Post Retirement Benefit (PRB) plan;
• Forward Pricing Proposal has been submitted which includes a defined benefit pension plan, self-insurance or PRB plan;
• an Incurred Cost Audit is scheduled and the contractor has a defined benefit pension plan that is not fully funded;
• an Incurred Cost Audit is scheduled and the contractor maintains a reserve for funding a PRB plan;
• an Indemnification Agreement is to be reviewed and validated;
• the Qualifying Sales of a new or existing contractor reaches the $50 million threshold.
• A material change has occurred in the contractor's ratio for its Government-to-Commercial workload.

Moderate Risk

A moderate risk exists where there is medium likelihood that a significant cost is unallowable. This rating is appropriate where, for example:

• Forward Pricing Proposal has been submitted by a medium-size contractor with a fully funded defined benefit pension plan, or self-insurance, and the contractor also has been cited for minor non-compliances in the past;
• Forward Pricing Proposal has been submitted by a contractor with a defined benefit pension plan that is in full funding or is forecasted to reach full funding during the proposal period.
• an Incurred Cost Audit is scheduled for a contractor that maintains fully funded defined benefit pension plan; and
• a contractor maintains a self-insurance program that is experience rated.

 Low Risk

A low risk situation is one in which all costs and actions are likely to be allowable or, if they are unallowable, result in a minimal cost impact to the Government. This rating is appropriate where, for example:

• Forward Pricing Proposal has been submitted by a contractor that maintains only a defined contribution pension plan;
• Segment Closing has occurred and a contractor maintains only a defined contribution pension plan;
• an Incurred Cost Audit is scheduled and the contractor maintains only a defined contribution pension plan;
• a contractor does not sponsor a funded PRB plan; and
• contractor has relatively low incurred costs, does not maintain a defined benefit pension plan or self-insurance, and has not been previously cited for any non-compliances.  

Frequency of Risk Assessments

 

Guidance requires that risk assessments be performed at least once every other year. In practice, its not performed that frequently but may in the future given that the DoD Inspector General is monitoring this area more closely. Guidance also allows the Government to release the results of the risk assessments to contractors upon request. We recommend that contractors routinely request Government prepared risk assessments. We've seen cases where the Governmet's assessment was based on outdated and inaccurate data or faulty assumptions or other mis-used information.  Bringing that to the Government's attention could change the risk assessment rating.

 

Contractor Insurance/Pension Reviews (CIPR)

Back in June, we reported on a DoD proposal to move the requirement to perform CIPRs (Contractor Insurance/Pension Reviews) from Guidance to Regulation. You can read that posting here for details and background on the reason for the change (the DoD Inspector General found that guidance was ignored in a lot of cases and recommended that the requirement be upgraded from "guidance" to "regulation" to increase the liklihood that the Government would better assess risks in this area.

On November 24, 2010, the propsed rule became a final rule with essentially no changes. Here's a rundown on the requirements.

A CIPR is a DCMA/DCAA joint review that provides in-depth evaluation of a contractor's insurance programs, pension plans, deferred compensation plans, and all of the related policies, procedures, practices, and costs.

The administrative contracting officer (ACO) is responsible for determining the allowability of insurance/pension costs in Government contracts and therefore is responsible for determining the need for a Contractor/Insurance Pension Review (CIPR). DCMA is the DoD Executive Agency for the performance of all CIPRs. Because of the technical nature of these costs, DCMA has specialists in these areas. DCAA is the DoD agency designated for the performance of contract audit responsibilities related to Cost Accounting Standards administration as they relate to a contractor’s insurance programs, pension plans, and other deferred compensation plans.

An in-depth CIPR is conducted only when a contractor has $50 million of qualifying sales (essentially qualifying sales are negotiated contracts and subcontracts) to the Government during its preceeding fiscal year and the ACO (relying on advice from the DCMA insurance/pension specialists and DCAA auditors) determines that a CIPR is needed based on a risk assessment of the contractor's past experience and current vulnerability. Risk areas include such things as information that reveals a deficiency in the contractor's insurance/pension program and contractor proposals to implement changes to its insurance, pension, or deferred compensation plans.

Next week, we will look at the ACO's risk assessment procedures in more detail in order to identify some of the factors that weigh into his/her decision to proceed with a CIPR.

DoJ Announces 2010 Fraud Recoveries

The Department of Justice issued a press release this week announcing that it had recovered $3 billion in civil settlements and judgments in cases involving fraud against the Government during fiscal year ended September 20, 2010. Of the $3 billion in recoveries, $2.5 billion related to health care fraud claims. Also, of the $3 billion recovered, $2.3 billion came from lawsuits filed by whistleblowers - typically employees who didn't like what they were seeing from their employers.

Health care fraud is the new recovery bonanza for the Justice Department. They recently created the "HEAT" team (Health Care Fraud Prevention and Enforcement Action Team) to increase coordination and optimize criminal and civil enforcement. Besides health care fraud, the recoveries included wartime and other government procurement contracts, grants for small business, federally insured mortgages, mineral leases and other federal programs. Recoveries on cases related to Iraq and Afghanistan totaled $10.6 million, a surprisingly paltry amount given all the hearings and publicity surrounding wartime contracting deficiencies.

Government contractors are reminded of their contractual requirements to maintain effective ethics programs to prevent and detect fraudulent activity. We have written extensively on this blog about those requirements and obligations that vary depending upon the amount of contracting. At a minimum, all contractors must display an agency Hotline poster.

To read the entire press release from the Department of Justice, click here.

Today This Blog Celebrates Its First Anniversary



 Today marks a milestone for this blog - we are one year old. Every working day for the past year, we have posted something pertaining to Government contracting - some of it good, some not so good, but faithfully posted nonetheless. We have never lacked for content, but we sometimes stress over the time it takes to write something that is useful, clear, and concise. Maintaining an active blog along with out other work requires some perseverance and a certain restructuring of priorities. During the year, we've watched the number of visits to our blog slowly but steadily increase. Thanks to all of you who stop by to see what we have to say. Thanks also to those that take time to leave comments. We appreciate the feedback, questions, and corrections.

Process for Closing Government Cotnracts

The process for closing out Government contracts is often times arduous and usually time-consuming. There are many steps in the process for both the contractor and the Government. The ACO (typically someone within DCMA - Defense Contract Management Agency) leads the contract closeout process. The ACO coordinates with other DCMA personnel, DFAS (or other appropriate payment offices), Buying Activity personnel, DCAA (or other audit agencies), the contractor, and as necessary, the office of Counsel, Defense Criminal Investigative Service, Inspector General, and the Department of Justice (ref. FAR 4.804-1(b)).

There are FAR mandated timeframes for closing out contracts. For fixed price contracts, the deadline for closing them out is six months after physical completion. For cost-type contracts, the deadline is 36 months after physical completion. Cost type take longer due to the need for a final audit. For all other contracts, its 20 months.

DCMA uses DD Form 1597 to ensure that all close-out actions have been satisfactorily accomplished. The action items include

1. Disposition of classified material completed
2. Final patent report submitted
3. Final royalty report submitted
4. Final patent report cleared
5. Final royalty report cleared
6. Issuance of report of contract completion
7. No outstanding value engineering change proposal
8. Plant clearance report received
9. Property clearance received
10. Settlement of all interim or disallowed costs
11. Price revision completed
12. Settlement of subcontracts by the prime contractor
13. Prior year overhead rates completed
14. Contractor's closing statement received
15. Final subcontracting plan report submitted
16. Termination docket completed
17. Contract audit completed
18. Contractor's closing statement completed
19. Final voucher submitted
20. Final paid voucher received
21. Final removal of excess funds recommended
22. Issuance of contract completion statement

Once this checklist is completed, the ACO notifies the Buying Activity in writing that the contract closeout process is complete.

Cost Realism Analysis - Part II

Last Wednesday, we began a series on Cost Realism Analyses. Cost realism analyses are not audits - they are typically much less in scope than a full audit or even audits of parts of a proposal. They usually happen when the Government is evaluating competitive bids. Sometimes they happen without the bidders' knowledge. They usually occur when the Government is concerned that one or more of the bids submitted are unrealistically low. Unrealistically low bids occur for a variety of reasons; failure to understand contract requirements, failure to properly coordinate proposal preparation, and consciously understating the proposed cost/price with the hopes of "getting healthy" later on through contract modifications. Bids that are found to be unrealistically low based on cost realism analyses, are usually excluded from futher consideration.

There have been many protests to the Comptroller General (GAO) challenging Government cost realism analyses. GAO generally sustains the contracting officer's judgment on cost realism as long as that judgment is informed, accurate, sufficiently thorough for the acquisition situation, reasonable - not arbitrary, and performed in accordance with the evaluation criteria stated in the solicitation.

The cost realism process generally goes something like this:

1. The Government must assure that the solicitation states how cost realism analysis will be used in the contract award decision.
2. The Government compares bids with its own in-house estimate of the likely cost of the project (the IGE or Independent Government Estimate).
3. The contracting officer obtains information other than cost or pricing data needed to support cost realism analysis
4. If necessary, the contracting officer obtains other information to support his/her analysis
5. If necessary, the contracting officer obtains analysis support from other members of the acquisition team. This could be in-house personnel, audit support, and field support.
6. The contracting officer identifies costs/prices that are understated for the required contract effort.

When performing cost realism reviews, the Government will focus on those areas that appear to have significant variances from the "probable costs" - however "probable costs" were determined. It could be labor hours, labor dollars, material quantities, material prices, indirect rates or a combination of these, or all of these.

So be forewarned, just becuase you submit a bid on a competitive procurement, does not mean that someone from the Government won't come poking around your records. You need to be ready to support the reasonable of your bid.

Payment Recapture Audits

Here's an update on our post from last March regarding the Administration's "Payment Recapture Audits". By way of background, you can read that post here.

Earlier this week, the Office of Management and Budget (OMB) issued a memorandum to all executive departments and agencies challenging them to increase their efforts to recapture improper payments by intensifying and expanding payment recapture audits. The memorandum makes some astonishing assertions such as "One of the biggest sources of waste and inefficiency is the nearly $110 billion in improper payments made in Fiscal Year (FY) 2009 it individuals, organizations, and contractors." Now that's a lot of money. The goal for this year is to reduce that amount by $50 billion.

All agencies are now required to submit a payment recapture audit plan to the OMB that describes current and planned efforts. If an agency does not have a plan, they need to submit a timetable and plan for implementing such a program.

According to OMB, a payment recapture audit is a review and analysis of the agency's books, supporting documents, and other available information supporting its payments that is specifically designed to identify overpayments due to payment errors. Also, according to OMB, effective payment recapture audits are investigations in which specialized auditors use cutting-edge technology and tools to scrutinize government payments and then find and reclaim taxpayer funds made in error or gained through fraud.

These audits are definitely going to affect contractors. $110 billion is a significant part of the Federal budget and agencies will be scurrying around to show progress toward the $50 billion target. Of course they'll be going after the "low-hanging" fruit first which probably means they be looking at contractors receiving the most Federal dollars. This is probably a good time for contractors to assess the adequacy of their own billing systems to ensure that requests for payments (public vouchers, progress payments, commercial invoices, etc) are prepared consistent with the terms and conditions of its contracts, grants, or agreements.

Cost Realism Analysis

When negotiating a contract price, the Government's primary concern is the price that it will pay to obtain the required supplies or services from a responsible contractor. The Government's objective is to negotiate a contract type and price (or estimated fee and cost) that will result in reasonable contractor risk and provide the contractor with the greatest incentive for efficient and economical contract performance.

In a competitive bid situation, the Government is keenly sensitive to unrealistically low offers. Unrealistically low offers generally occur, because the offeror:

• Does Not Understand Contract Requirements. Government requirements may not be clearly stated or the offeror may be unfamiliar with common product terminology. If the offeror underestimates the magnitude or complexity of a proposed task, the estimated costs could be far below the probable cost of successful contract performance.
• Did Not Properly Coordinate Proposal Preparation. The cost proposal may not be consistent with the offeror's technical proposal. The inconsistency may occur as the result of inadequate coordination between the team preparing the technical proposal and the team preparing the cost proposal.
• Consciously Understated The Proposed Cost/Price. In the face of competitive pressure, an offeror may submit an unrealistically low price in order to win a contract (i.e., use a buy-in pricing strategy).
• On cost-reimbursement contracts, the contractor may expect to recoup all or most of the costs related to any cost overrun that may occur.
• On fixed-price contracts, the contractor may hope to:
• Increase the contract amount after award (e.g., through unnecessary or excessively priced contract modifications), or
• Receive follow-on contracts at unrealistically high prices to recover losses on the buy-in contract.

If there appears to be one or more unrealistically low bids for a given procurement, the Government will perform a cost realism analysis. Cost realism analysis is discussed in FAR 15.101, FAR 15.401 and FAR 15.404-1(d). Cost realism is the process of independently reviewing and evaluating specific elements of each offeror's proposed cost estimate to determine whether the estimated proposed cost elements:

• Are realistic for the work to be performed;
• Reflect a clear understanding of contract requirements; and
• Are consistent with the unique methods of performances and materials described in the offeror's technical proposal.

Sometimes cost realism analyses are performed in-house by the contracting officers' staff. Sometimes the work is farmed out to auditors or contract administrators. Tomorrow, we will look at some of the specific steps that are performed in a cost realism review. 

Protections for Data Submitted to the Government

Have you ever wondered where the financial data, pricing information, and other proprietary materials that you submit to or furnish the Government in connection with a proposal or to support an incurred cost claim ends up? Have you ever wondered whether it could be inadvertently furnished to a competitor? Or, a newspaper? Or, find its way into a Congressional hearing? Have you ever had reservations about furnishing certain requested information (like employee social security numbers)? Have you ever queried a Government auditor on the protections he/she will afford? You probably don't need to be overly concerned. The Government (excluding Congress) does a pretty good job of protecting contractor propriety information.

First of all, there are protections built into the law. Unauthorized disclosure of proprietary information violates 18 U.S.C. 1905 and, if the information is contractor bid or proposal or source selection information, 41 U.S.C. 423. Any person who unlawfully discloses such information is subject to penalties such as fines, imprisonment, and/or removal from office or employment. How does the Government know what information is proprietary? It wouldn't be practical for the Government to make proprietary decisions on ever piece of data gathered. It makes those determinations only when there is an external request for access. And, when there is such a request, the Government often confers/coordinates with the contractor if there is any doubt.

We recommend that any propriety information provided the Government routinely contain appropriate markings (e.g. company proprietary, company sensitive, procurement sensitive, etc.) in order to assist the Government in making "proprietary" determinations in the event a request is ever made.



Secondly, every Government audit report contains restrictions on who should be privy to the report. For example, on a report issued to someone in the Department of Defense, the restriction reads as follows:

The contents of this report should not be released or disclosed, other than to those persons whose official duties require access in accordance with DoD 5200.1-R, Information Security, January 1997, Appendix 3, paragraph AP3.2.3. This document may contain information exempt from mandatory disclosure under the Freedom of Information Act. Exemption 4, of the Freedom of Information Act, which addresses proprietary information, may apply.

Finally, each audit report contains a cautionary statement that the information included in the report should not be used for any other purpose. Audit reports can often be misused if the person relying on it doesn't understand the specific situation that the report is addressing.

Do not use the information contained in this report for purposes other than action on the subject of this report without first discussing its applicability with the auditor.

Be Responsive to the Solicitation Requirements

When responding to a Government solicitation (e.g. an RFP or RFQ), it is always the contractor's (or vendor's) responsibility to submit a well-written quotation with adequately detailed information, that clearly and concisely demonstrates compliance with the solicitation requirements. Failure to do so will result in the bid being declared not responsive and excluded from further consideration. Appeals of contracting officer actions in throwing out non-responsive bids rarely succeed. Only in rare instances where the Government's actions were egregious will a bidder have a hope to sustain an appeal. And even if sustained, the contractor has no certainty that it will win the award.

A recent GAO decision on just such an appeal, illustrates this point (TechStart, LLC, B-403515, November 10, 2010). A contractor's bid was not responsive to the solicitation requirements. The contracting officer, although not required to do so, made several attempts to contract the bidder by phone and by email for clarification. When the bidder failed to respond, the contracting officer made the award to another bidder.

Upon appeal, the bidder asserted that the alleged ambiguities in its quotation were insignificant, and that a reasonable review of the quotation should have led the contracting officer to regard the issues as minor discrepancies. GAO reviewed the record and sided with the contracting officer. When the GAO reviewed the facts, they agreed that the contracting officer did not have enough information to determine whether the bid was responsive to the solicitation requirements.

The bidder also claimed to have not received the contracting officer's queries. The GAO ruled that was irrelevant because the contracting officer was under no obligation to seek to resolve issues. The GAO ruled that it is the vendor's responsibility to submit a well-written quotation, with adequately detailed information, that clearly demonstrates compliance with the solicitation requirements. Under these circumstances, the contracting officer properly concluded that the bidder's quotation was unacceptable and that award should be made to another company.

Potential Award Fee Reductions

There are a lot of ways for the Government to reduce award fees - many of them subjective. Now comes another. DoD just issued an interim rule, amending the DoD FAR Supplement (DFARS) to require contracting officers to consider reduction or denial of award fee if contractor (or subcontractor) actions jeopardize the health or safety of Government personnel (both military and civilian personnel).

The basic requirement reads as follows:

If, in the performance of this contract, the Contractor's or its subcontractor's actions cause serious bodily injury or death of civilian or military Government personnel, the Government may reduce or deny the award fee for the relevant award fee period in which the covered incident occurred, including the recovery of all or part of any award fees paid for any previous period during which the covered incident occurred.

The question then is, what is a "covered incident". The new DFARS defines that term as well. A covered incident is any incident in which the Contractor, through a criminal, civil, or administrative proceeding has been determined in the performance of this contract to have caused serious bodily injury or death of any civilian or military personnel. The term "death" is obvious but what is a "serious bodily injury"? DFARS defines that term also. Serious bodily injury means a grievous physical harm that results in a permanent disability.

DoD didn't think this one up on its own. It was required as part of the National Defense Authorization Act for Fiscal Year 2010.

Veterans Day - 2010

Today we celebrate the great and many sacrifices our war veterans have made over the years in service to our nation. The History Channel recently created this short video to tell the story of when and why November 11th became the day for remembering our veterans, and what changes the holiday has seen since that time. Take three mintues to watch.

Attorney-Client Privileged Information

Many contractors retain professional and consultant services such as accountants, lawyers, actuaries, and marketing consultants. The cost principle covering these services is primarily in FAR 31.205-33, Professional and Consultant Service Costs, but is covered elsewhere, depending on the nature of the service. We have discussed in the past the importance of adhering to the strict documentation requirements of this standard. FAR 31.205-33(f) contains three specific documentation requirements that must be met for professional and consultant service costs to be allowable. These are:

1. Details of all agreements (e.g., work requirements, rate of compensation, and nature and amount of other expenses if any) and details of actual services performed.
2. Invoices or billings submitted by consultants, including sufficient detail as to the time expended and nature of the actual services provided.
3. Consultant work products and related documents, such as trip reports indicating persons visited and subjects discussed, minutes of meetings, and collateral memoranda and reports.

Government auditors often focus on this area because many contractors have less than stellar record-keeping practices and fail to maintain the required level of detail. This area is considered "low hanging fruit" by the audit community - a failure to provide documentation in just one area will render the cost unallowable. Therefore, it is absolutely essential that contractors set up policies and procedures to collect and retain supporting data. Consider how far behind auditors are in auditing incurred costs. We know of companies with five years of contract costs yet unaudited. Those contractors will someday have to support professional service costs that were incurred five years earlier. If that is your company, could you find consulting agreements, invoices, and work product?

 

And speaking of work product, there is a special category of work product that is considered attorney-client privileged information. The question then is whether the information must be provided to the Government. There are many valid reasons for refusing to provide privileged information to the Government. Failure to provide it does not necessarily render the associated costs unallowable. Although a work product satisfies the requirement to provide evidence of services rendered, other evidence may also suffice. The DoD audit guide (DCAA Contract Audit Manual) provides the following guidance to auditors:

 

Although a work product usually satisfies this requirement, other evidence may also suffice. If the contractor provides sufficient evidence demonstrating the nature and scope of the actual work performed, the FAR 31.205-33(f)(3) requirements are met even if the actual work product (for example, an attorney’s written advice to the contractor) is not provided. The auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.

If you find yourself in a situation where you cannot release a work product due to attorney-client privilege, auditors are required to consider alternative evidence to demonstrate the nature and scope of the actual work performed. The success of prevailing in these situations depends a whole lot on how comfortable the auditor is in exercising professional judgment, and his/her training and experience. If you seem to be getting nowhere with an auditor, request a meeting with his/her supervisor.

6th Annual QuickBooks "Awesome Add-On" Winners Announced

According to Intuit, the publisher of QuickBooks, more than 94 percent of small business enterprises choose QuickBooks for their accounting software (and no, we don't know Intuit's definition of "small business enterprises"). Whatever the market penetration, QuickBooks is well-represented among Government contractors as well. Each year, for the past six years, the Sleater Group, a provider of technical reference materials, software expertise, and QuickBooks training materials for accounting solutions consultants, has studied the marketplace of add-on software and services that enhance the systems and processes of small businesses and has come up with a list it calls "Awesome QuickBooks Add-ons. The 2011 winners were announced yesterday at Sleeter Group's National Conference in Las Vegas. We always wait expectantly for each year's winners, hoping to find software and services that will enhance processes for our clients, many of who use QuickBooks.

In order to qualify for an Awesome Add-on award, the product and/or service must be developed and sold by a solid company with a reputation for outstanding customer support, and the product must have the following attributes:

• Show superior design, implementation and features.
• Integrate with QuickBooks using best practices of the QuickBooks SDK or IPP programming guidelines
• Use appropriate transaction types and field population for recording data into QuickBooks so as to preserve and/or enhance the standard reporting features in QuickBooks
• Conform to good accounting principles and operating standards

We were somewhat disappointed in this year's winners insofar as there being a "must-have" add-on for Government contractors. The paperless document management solution has great potential for enhancing systems and processess but there are quite a few of those already on the market. If you are using QuickBooks payroll, there is an employee web portal (that's free from Intuit) where employees can go to review their leave and earnings statements and download W-2s.

To see all the winners and read about their products, go here. There are also links to past winners, most of whose products continue to be available.
 

It Takes Time and Money to Win Government Contracts

We came across an interesting survey not long ago from the small business division of American Express. Last April, American Express released a government contracting survey of 1,500 small businesses. These businesses include active contractors, inactive contractors, and some that are simply registered in the CCR but have not yet landed a contract.

This survey revealed some best practices for small businesses to succeed in government contracting. The two most important pieces of advice that successful contractors offered are to start with small contracts since they can lead to larger opportunities, and to be persistent.

According to American Express, active contractors are more successful in winning government contracts in part because they are more vigorous in the bidding process. They take an average of 1.7 years to win their first federal contract, submit an average of nearly 7 federal prime contracting bids and win almost 3 contracts per year.

Active contractors made an estimated $86,000 investment in time and money in 2009 seeking federal contracts. The median sales for active small business contractors was between $1 and $4.9 million, and federal contracts accounted for 38% of their revenues.

Many small business owners who have not yet won their first prime contract are just getting started. Four in ten (42%) non-contractors have started pursuing federal contracting only recently, having registered on the CCR (a necessary first step in the federal procurement process) in 2008 or later. Thus, many of them will become successful -- if they keep bidding -- over the next year.

The survey also found that getting on the General Services Administration (GSA) Schedule can be an important strategy for winning federal government business. The GSA Schedule is a list of approved vendors for the products and services the government procures. One-third (34%) of active small business contractors are on the GSA Schedule while only 13% of currently inactive contractors are on it. There is a significant gender difference in the firms who are seeking procurement opportunities through the GSA Schedule: 40% of women business owners who are active contractors are on the GSA Schedule versus 31% of men business owners.

In another marker of success, fully 80% of active small business contractors who are on the GSA Schedule have annual revenues of $1 million or more and derive 47% of their annual revenues -- at least $500,000 per year -- from federal contracts.

If you wish to read more about this survey, go here.

Report Issued on Results of DCAA Management Harassment

The DoD Inspector Generals office issued its long awaited report on the results of its review of hotline allegations that DCAA management in the Western Region used various means to harass one of its employees. This situation was highlighted during 2008 and 2009 Congressional hearings and was a factor in some high-level Agency turn-over, including the Director of the Agency.

Among the IG substantiated allegations was the overarching allegation that management impeded the auditor's ability to comply with Generally Accepted Government Auditing Standards (GAGAS) by imposing unreasonable time constraints and excessive emphasis on metrics. In doing so, management hindered the auditor's ability to perform a quality audit. According to the report, DCAA management overemphasized metrics and imposed unreasonable time constraints while ignoring audit quality.

In response to this and the surrounding firestorm, DCAA eliminated 18 productivity measures and adopted performance measures that emphasized quality and adherence to GAGAS. From a Government contractor perspective, this could be a good thing, or not. Auditors are obviously taking a lot more time to complete their audits. They now take seemingly as long as they want on an audit and if management questions their progress or judgment, they just claim they're complying with GAGAS and management should not be impeding their ability to do so by questioning their judgment. So for contractors under audit, expect the auditors to stick around longer and perform more in depth reviews than previously. On the other hand, audit resources are finite. By taking extra time on assignments, something else is not getting done. One thing that was not getting done was pricing (reviewing contractor price proposals). DoD took care of that one last week by yanking the responsibility to audit cost-reimbursable proposals under $100 million away from DCAA.

Hubzone and SBA 8(a) Contracts

Under the Small Business Administration’s (SBA) 8(a) business development program, a business owned and controlled by socially and economically disadvantaged individuals can apply for certification from the SBA as an 8(a) business. A business certified as an 8(a) contractor can obtain certain preferences during the contracting process, and can bid on contracts that the agency has set aside for qualified 8(a) businesses. A business can remain in the 8(a) program for up to nine years.

Under the HUBZone program, companies that maintain their principal office in a designated HUBZone and employ 35 percent of their workforce from a HUBZone, among other requirements, can apply to the SBA for certification as a HUBZone small business company. A HUBZone company can then use this certification when bidding on government contracts. In certain cases, government agencies will restrict competition for a contract to HUBZone-certified companies. If you want to know where the HUBZone’s are or determine whether you are located in a HUBZone, go here. You might be surprised.

A recent case settled by the Justice Department illustrates the importance of ensuring the accuracy of self-certifications of eligibility for 8(a) and HUBZone status. A Maryland company agreed to pay the United States $200 thousand to settle claims it used false statements to obtain contracts from the Department of Defense. The contracts had been set aside for companies that qualified for the SBA 8(a) business development program as well as for businesses that qualified for the HUBZone program.

The SBA is cracking down on companies who seek to obtain government contracts intended for businesses run by socially or economically disadvantaged individuals or for companies located in areas that need jobs that are not "playing by the rules." "This case is one of a series that the government has pursued for false claims made to obtain HUBZone, 8(a), and other set-aside contracts.

Why Auditors Do What They Do - Using Judgment

There are times, in our interactions with Government auditors, when we are left scratching our heads trying to figure out why they do some of the things that they do. When asked to explain or clarify, auditors often say that they are exercising professional judgment. Auditors typically begin an audit with a standard or pro-forma audit program. These programs are somewhat generic and the expectation is that they will add or delete audit steps based on a preliminary risk assessment. In planning and performing an audit and in reporting on the results, auditors are required by GAGAS (Generally Accepted Government Auditing Standards) to exercise professional judgment. Today we are going to look at "professional judgment".

Professional judgment includes exercising reasonable care and professional skepticism. Reasonable care concerns acting diligently in accordance with applicable professional standards and ethical principles. Professional skepticism is an attitude that includes a questioning mind and a critical assessment of evidence. Professional skepticism includes a mindset in which auditors assume neither that management is dishonest nor of unquestioned honesty.
Using the auditors' professional knowledge, skills, and experience to diligently perform, in good faith and with integrity, the gathering of information and the objective evaluation of the sufficiency and appropriateness of evidence is a critical component of audits. Professional judgment and competence are interrelated because judgments made are dependent upon the auditors' competence.

Professional judgment represents the application of the collective knowledge, skills, and experiences of all the personnel involved with an assignment, as well as the professional judgment of individual auditors. In addition to personnel directly involved in the audit, professional judgment may involve collaboration with technical experts and contracting officers.

Using professional judgment is important in determining the required level of understanding of the audit subject matter and related circumstances. This includes consideration about whether the audit team's collective experience, training, knowledge, skills, abilities, and overall understanding are sufficient to assess the risks that the subject matter under audit may contain a significant inaccuracy or could be misinterpreted.

Considering the risk level of each assignment, including the risk that they may come to an improper conclusion is another important issue. Within the context of audit risk, exercising professional judgment in determining the sufficiency and appropriateness of evidence to be used to support the findings and conclusions based on the audit objectives and any recommendations reported is an integral part of the audit process.

So, when an auditor tells you he/she is exercising professional judgment, you could ask to see the risk assessment that led to the query. But, since this is a "judgment" call, there is no easy way to refuse the request, unless it is clearly and unequivocally out of line (which happens from time to time).

DoD Stepping All Over Itself With Reforms

The Federal Times published an article this week on the plethora of reforms going on within DoD that are contradictory and have a propensity to undermine others. You can read the article here. First there was reform to ensure that contractors were not doing work that the Government should be doing. Then came a campaign to reduce reliance on contractors through in-sourcing. After that, the Secretary of Defense announced reforms to ferret out $100 billion in five years in excess overhead spending. In September, the Secretary  proposed measures to improve affordability and productivity. The article points out that the drive for affordability contradicts the campaign to reduce reliance on contractors and in-sourse work. Affordability, the Federal Times contends, means managing to cost and schedule, two things that government has never been good at but which are hallmarks of the American free enterprise system. (We're not so sure of that statement. Take a look at Lockheed's F-35 program - over budget and behind schedule and the company just had its EVMS certification withdrawn). Regardless, the article makes some very good points. You'll need a scorecard to track the progress of these reforms.

Significant Changes to Audit Thresholds

The Department of Defense has revised its procedures (Procedures, Guidance and Information or PGI) to limit contracting officers' requests for DCAA audit assistance to fixed-price proposals greater than $10 million and cost-type proposals greater than $100 million. This, according to DoD, is to "... align DCAA audit resources to those areas with greatest risk." This does not change the $700 thousand cost or pricing data threshold. Now, pricing support for proposals under the new thresholds will come from the Defense Contract Management Agency (DCMA) instead of through Defense Contract Audit Agency (DCAA). Some contracting officers are no doubt pleased with the change. They are hoping that DCMA will improve on the timeliness of pricing support they have been receiving lately.

Not everyone is pleased with the change. POGO (Project on Government Oversight) estimates using 2009 data, that there will be about $92 billion that will no longer be subject to audit. POGO is concerned that taxpayer interests might not be served by this move. Additionally, DCAA auditors are somewhat concerned about their own future. Pricing support represents a substantial portion of DCAA's workload. With $92 billion less to audit, current staffing levels may be too high.