Standardizing Past Performance Ratings

The FAR Councils have published a proposed rule that will provide Government-wide standardized past performance revaluation factors and performance ratings and to require all past performance information be entered into a centralized database (CPARS - Contractor Performance Assessment Reporting System). We've written in the past about past performance ratings and the various rating factors. Some agencies have been serious about them while others, not so much. Under the proposed rule, all federal agencies will standardize under common rating factors and their compliance with these requirements will be assessed on an annual basis. The government is getting serious about keeping the "bad guys" out of the contracting business.

Inputs into past performance ratings come from the technical office, the contracting office, and where appropriate, the end users of the product or service. Evaluations must reflect how the contractor performed. The report must include clear relevant information that accurately depicts the contractor's performance, and be based on objective facts supported by program and contract performance data. The evaluations should be tailored to the contract type, size, content, and complexity of contractual requirements.

Evaluation factors for each assessment must include, at a minimum, the following:

• Technical or quality
• Cost control
• Schedule/timeliness
• Management or business relations
• Small business subcontracting

Each of these factors must be rated on a scale of one to five; exceptional, very good, satisfactory, marginal, and unsatisfactory. Once entered into the system, it stays for three years and is available for agencies to utilize.

Comments from interested parties must be received by the FAR Council by August 29, 2011 to be considered in the final rule.

Increasing Small Business Role in the Defense Marketplace

Yesterday, we reported on SBA's small business contracting goals and fiscal year 2010 report cards. DoD, by far the largest buyer of goods and services of any agency, scored a 'B', meaning they achieved 90 to 99 percent of their overall targets. On Monday, DoD issued instructions to its acquisition community to strive harder to meet its 2011 targets.

Specifically, DoD instructed contracting officers to use market research to identify the capabilities of small businesses and new entrants into the marketplace. Additionally, contracting officers were reminded to follow specific FAR procedures to ensure that agency small business specialists and SBA procurement center representatives are fully engaged in the acquisition planning process. Reviewing future acquisition requirements at least annually with the small business specialists should assist in identifying procurement opportunities for small businesses.

Finally, contracting officers were reminded to review the small business subcontracting plans of prime contractors and incorporate those plans (i.e. goals) into prime contracts. Fee arrangements are sometimes predicated on meeting small business subcontracting targets.

All in all, with so much emphasis these days on increasing small business participation in the acquisition of goods and services, it is a good time to be a small business.

More Contracts Awarded to Small Businesses

The SBA (Small Business Administration) just released its 2010 "Goaling Report" and "Agency Scorecards" and was pleased with the results. The report found that the federal government awarded nearly $100 billion in federal contracts to small businesses in fiscal year 2010. Fiscal year 2009 also showed an increase but prior to that, there were four years of decline.

The overall small business contracting goal is 23 percent. The fiscal year 2010 awards totaled 22.7 percent of eligible contracting dollars. Within the overall small business category, there are subcategories for specific segments, including women-owned, small disadvantaged, service disabled veteran owned, and HUBZone. Except for small disadvantaged, the government did not meet its contracting goals for those sub-groups.

Overall, SBA gave the Government a 'B' meaning that it met 90-99 percent of its goal. DoD, which accounted for 60 percent of the dollars, also got a B. Thirteen agencies received 'As' (more than 100% of their goal). Two agencies received 'Ds' (70 to 79 percent of goal).

Over the past year, the SBA has been focused on a number of initiatives to help the government meet the 23 percent goal including;

1. Implementation of the Small Business Jobs Act of 2010
2. Interagency Task Force on Federal Contracting Opportunities for Small Businesses
3. Collaboration with White House and Senior Agency officials
4. Women-Owned Small Business Federal Contract Program (set-asides designated specifically for these businesses).
5. Revised the 8(a) Business Development Regulations.

IRS Increases Standard Mileage Rate to 55.5 Cents

Last week, the Internal Revenue Service announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes. Many Government contractors use this rate to reimburse their employees for mileage.

The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51.

In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.

"This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers."

While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs.

The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many businesses to reimburse their employees for mileage.

Taxpayers and contractors always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

Purpose	Rates 1/1 through 6/30/11	Rates 7/1 through 12/31/11
Business	51	55.5
Medical/Moving	19	23.5
Charitable	14	14

Making Sure Your Proprietary Information Stays Protected

Contractors (or prospective contractors) that include data in their proposals that they do not want disclosed to the public for any purpose, or used by the Government except for evaluation purposes, must mark the title page with the following legend (see FAR 52.215-1):

This proposal includes data that shall not be disclosed outside the Government and shall not be duplicated, used, or disclosed - in whole or in part - for any purpose other than to evaluate this proposal. If, however, a contract is awarded to this offeror as a result of - or in connection with - the submission of this data, the Government shall have the right to duplicate, use, or disclose the data to the extent provided in the resulting contract. This restriction does not limit the Government's right to use information contained in this data if it is obtained from another source without restriction. The data subject to this restriction are contained in sheets (insert numbers or other identification of sheets).

Then, following the cover page, offerors must mark each sheet of data it wishes to restrict with the following legend:

Use or disclosure of data contained on this sheet is subject to the restriction on the title page of this proposal.

Once these markings are affixed to the title page and the pages containing proprietary data pages, no person or other entity may disclose contractor bid or proposal information to any person other than a person authorized, in accordance with applicable agency regulations or procedures.

Many times, contractors simply classify everything as proprietary when it may not be so. We have seen extreme usage of proprietary markings that include blank or separator sheets. FAR 3.104-4 contains provisions for resolving disagreements as to whether particular data is proprietary or not.

First, the contracting officer must notify the contractor in writing if the contracting officer believes that proprietary information, contractor bid or proposal information, or information marked proprietary has been inappropriately marked. The contractor that has affixed the marking must be given an opportunity to justify the marking.

If the contractor agrees that the marking is not justified, or does not respond within the time specified in the notice, the contracting officer may remove the marking and release the information.

If the contractor continues to hold firm on its positions, it must submit additional justification. The contracting officer will review the additional justification and either concur or not. If the contracting officer determines that the marking is not justified, he/she must notify the contractor in writing before releasing the information.

Justification and Approval (J&A)

Justification and Approval (J&A) is a document used to justify and obtain appropriate level approvals to contract without providing for full and open competition as required by the Federal Acquisition Regulation (FAR).  J&As are required for contracts over $550 thousand except for those awarded to 8(a) small businesses (including Native Enterprises). The threshold for 8(a) small businesses is $20 million.

Under certain conditions, the Government may contract without providing for full and open competition. This authority is found in 10 U.S.C. 2304(c) for the Department of Defense, Coast Guard, and NASA and in 41 U.S.C. 253(c) for all other executive agencies. Contracting without providing for full and open competition or full and open competition after exclusion of sources, is a violation of these statutes unless permitted by one of the seven exceptions listed in FAR 6.302. These exceptions include;

1. Only one responsible source and no other suppliers or services will satisfy agency requirements
2. Unusual and compelling urgency
3. Industrial mobilization, engineering, developmental, or research capability or expert services
4. International agreement
5. Authorized or required by statute
6. National security
7. Public interest

JUSTIFICATION FOR NON-SMALL BUSINESSES

Each justification must contain, at a minimum, the following 12 elements,

1. Identification of the agency and the contracting activity, and specific identification of the document as a “Justification for other than full and open competition.”
2. Nature and/or description of the action being approved.
3. A description of the supplies or services required to meet the agency’s needs (including the estimated value).
4. An identification of the statutory authority permitting other than full and open competition.
5. A demonstration that the proposed contractor’s unique qualifications or the nature of the acquisition requires use of the authority cited.
6. A description of efforts made to ensure that offers are solicited from as many potential sources as is practicable,
7. A determination by the contracting officer that the anticipated cost to the Government will be fair and reasonable.
8. A description of the market research conducted and the results or a statement of the reason market research was not conducted.
9. Any other facts supporting the use of other than full and open competition,
10. A listing of the sources, if any, that expressed, in writing, an interest in the acquisition.
11. A statement of the actions, if any, the agency may take to remove or overcome any barriers to competition before any subsequent acquisition for the supplies or services required.
12. Contracting officer certification that the justification is accurate and complete to the best of the contracting officer’s knowledge and belief.

JUSTIFICATION FOR SMALL BUSINESSES

The justification requirements for 8(a) small businesses are greatly reduced. Contracting officers need to address only five elements:

1. A description of the needs of the agency concerned for the matters covered by the contract
2. A specification of the statutory provisions providing the exception from the requirement to use competitive procedures in entering into the contract
3. A determination that the use of a sole-source contract is in the best interest of the agency concerned,
4. A determination that the anticipated cost of the contract will be fair and reasonable,
5. Such other matters as the head of the agency concerned shall specify.

The aforementioned Statutes require that J&As must be made available to the public within 14 days after contract award. If you believe that you have been inappropriately excluded from consideration, you should check with FedBizOpps to see whether a J&A has been issued.

Draft Executive Order Requiring Disclosure of Political Contributions

A couple of months ago, we alerted you to a draft Executive Order (EO) that if enacted, would require all companies submitting proposals to disclose political contributions and expenditures that they and certain individuals withing the organization have made during the two years previously. This disclosure would have to be completed prior to proposal submission or it would be rejected.

Last month, we reported on a hearing by the House Committee on Oversight and Government Reform on the draft EO. Essentially, the committee was lined up against the draft EO, maintaining that taxpayers must be protected from the kinds of corrupt spoils system that could develop if federal contract awards were tied to partisan political affiliations.

If interested, you can read these two previous postings here and here.

Recently, a group of Senators introduced a bill (S. 1100) entitled "Keeping Politics Out of Federal Contracting Act of 2011". The Bill is designed to prohibit inserting politics into the Federal acquisition process by prohibiting the submission of political contribution information as a condition of receiving a Federal contract.

Under this bill, the Government may not require a contractor or prospective contractor to submit political information related to the contractor or a subcontractor at any tier, or any partner, officer, director, or employee of the contractor or subcontractor as part of a solicitation, request for bid, request for proposal, or any other form of communication designed to solicit offers in connection with the award of a contract for procurement of property or services

Further, the same restrictions apply during the course of contract performance as part of the process associated with modifying a contract or exercising a contract option, or for that matter, at any time prior to contract completion and final contract closeout.

Additionally, the contracting officer may not use political information, whether obtained from a contractor or prospective contractor or from an independent public or nonpublic source, as a factor or consideration in the source selection process used to award a competitive or non-competitive contract at any value or in making any decision associated with the modification of a contract or the exercise of a contract option.

Finally, the bill prevents the Government from including political information in the contracting past performance database or any database designed to provide information to a contracting officer for purposes of supporting the responsibility determination by such offer.

No word yet on the Bill's chances for passage.

SBA's Certificate of Competency Program

Suppose you submitted the apparent low bid for a particular government contract but the contracting officer, for whatever reason, has determined that you are unable to fulfill the requirements of the contract. Small businesses that find themselves in this situation, may appeal that determination under SBA's Certificate of Competency (COC) program.  When the small business applies for a COC, SBA industrial and financial specialists conduct a detailed review of the firm's capabilities to perform on the contract. If the business demonstrates the ability to perform, the SBA issues a COC to the contracting officer requiring the award of that specific contract to the small business. Thus, the COC program helps ensure that small businesses, especially those which are newly entering into the federal procurement arena, are given a fair opportunity to compete for and receive government contracts.

SBA is authorized by the Congress to certify as to a small company's

• capability,
• competency,
• credit,
• integrity,
• perseverance and
• tenacity

to perform a specific government contract. If a contracting officer proposes to reject the offer of a small business firm which is a low offeror because of questions related to the firm's ability to perform the contract on any of the above grounds, the case is referred to SBA. SBA personnel then contact the company to inform it of the impending decision, and to offer the firm an opportunity to apply to SBA for a COC, which, if granted, would require award of the contract to the firm in accordance with the Small Business Act.

The COC program is carried out by a specialized SBA field staff of individuals with technical, engineering, and government procurement backgrounds in cooperation with financial specialists, also of the field organization. Upon receipt of a COC application, the SBA notifies the contracting officer of the purchasing agency that the prospective contractor has applied, and a team of financial and technical personnel surveys the firm’s potential for the specific acquisition in question. During the evaluation, SBA considers credit ratings, past performance, management capabilities, management schedules, and the prospects for obtaining needed financial help or equipment.

The team's findings are presented to a COC Review Committee composed of legal, technical and financial representatives, which makes a detailed review of the case and recommends approval or disapproval.

• If the decision is negative, the firm and the purchasing agency are so informed
• If the decision is affirmative, a letter certifying the responsibility of the firm to perform the contract (the Certificate of Competency) is sent to the purchasing agency.

By the terms of the Small Business Act, the COC is conclusive on questions of responsibility, and the contract is awarded.

A COC is valid only for the specific contract for which it is issued. A business concern which is capable of handling one contract may not be qualified to handle another. Each case is considered separately, and each case is considered only if and after the contracting officer has made a negative determination of responsibility or eligibility. Firms may not apply for a COC until a contracting officer makes a non-responsibility determination and refers the matter to the SBA.

Audits - Return on Investment

Government auditing organizations love to tell everyone how much money they return to the U.S. Treasury. They all do it; the GAO, the Offices of Inspector Generals (IGs), Defense Contract Audit Agency (DCAA), the Army, Navy, and Air Force Audit Agencies, down to state and local audit agencies. Get one of them in front of a Congressional committee and invariably, as part of their introductory comments, some high-ranking agency official will proclaim what a great job they do as evidenced by the "return on investment". It goes something like this; "In fiscal year 2010, our Agency returned $15 to the Treasury for every dollar incurred." The problem is that most of these figures have not been independently verified.

DCAA has been pretty quiet on its savings statistics as of late because it has watched its returns drop precipitously over the last few years. There are a number of reasons for this but essentially, it is because the Agency now issues significantly fewer audit reports than it once did - fewer reports means less cost savings. For this particular audit agency, the trend will only continue as it has abandoned most of its pricing activities. 

DCAA recently announced a plan to reverse the trend. In a June 2, 2011 memorandum, DCAA instructed its staff to project cost savings from operations audits over a six year period, rather than one year. That is a six-fold increase in reported savings with the "stroke of a pen".

Operations audits are those that assess the efficiency, effectiveness, and economy of a contractors operations. If DCAA makes a recommendation and the contractor agrees and implements the recommended change, DCAA would calculate and report the cost savings for a one year period. Under this new guidance, DCAA will be calculating and reporting the cost savings for a six year period - presto, improved statistics.

The next time you hear someone brag about his/her agency's return on investment, don't be impressed.

New Quick Link to Maximum Per Diem Rates

We have added a quick link to the maximum per diem rates allowed under Government contracts (per FAR 31.205-46).

Defective Pricing Lead Sheets - Part 4

This week we have been discussing the Government's practices and methods for selecting contracts to perform defective pricing reviews. The Government's selections of contracts to review for defective pricing are not ramdon. The selection is based on a number of risk factors that include contract value, audit leads, and prior experience. In this series of posts, we've been concentrating on the audit lead sheets and the methods used by the Government to assign "probability" ratings to specific contracts. If you missed the earlier posts in this series, you can read them here: Part 1, Part 2, and Part 3.

Contractors with effective estimating systems will generally have lower probability ratings than those that do not. And, since the estimating system is one of the six business systems subject to payment withholds when found to be inadequate, there is extra incentive to ensure that an adequate system has been developed and implemented.

Here are a few tips that should be incorporated into your estimating system policies and procedures and should help lower your "Defective Pricing Probable" rating at the same time.

1. Recognize that the requirement to submit costs or pricing data is a process, not an event. The process extends from the initial stages of proposal preparation right up until the date of agreement on price.

2. When you provide cost or pricing data subsequent to submitting the proposal, inform the Government its impact on the proposed price.

3. Submit everything in writing. That way there can never be an argument about whether it was submitted or not.

4. Explain why certain cost or pricing data was not used. For example, if there is history available but that history is not relevant to the current proposal, disclose the fact that history exists but was not used and state the reason for not using it.

5. If you make any accounting system changes, describe for the Government the impact that those changes will have on all active proposals.

6. If there is any uncertainty regarding make/buy decisions, make certain that you inform the contracting officer of that uncertainty and the potential impact on the contract price of going one way or the other.

7. Perform a "sweep". Just prior to settling on a price, go back to your company and involve anyone that had anything to do with preparing the proposal to make one last check to ensure that the most current, complete, and accurate cost or pricing data was submitted.

Defective Pricing Lead Sheets - Part 3

We've been discussing the "lead sheets" that the Government uses to aid in selecting contracts to review for compliance with the Truth in Negotiations Act (TINA). In Part 1, we discussed the preparation and use of the Defective Pricing Lead Sheet. Yesterday in Part 2 we discussed Section A of the form that is completed at the time a proposal is evaluated by the Government. Today we discuss Part B which is completed after receipt and analysis of the PNM.

A PNM or Price Negotiation Memorandum is the Government's view of the events that transpired during a negotiations and justification for negotiating a fair and reasonable price. It is usually quite detailed and explains the contractors proposal and the extent that it used audit results and technical reviews in establishing the price. There are ten questions that the reviewer must answer regarding the negotiated price. After answering the questions, the reviewer must rate the probability of defective pricing from a 1 to a 10 with 10 being the highest probability.

1. Was there a significant amount of elapsed time between proposal audit and negotiations? A contractors responsibility to submit current, complete, and accurate cost or pricing data does not end when it submits its proposal. It continues right up to the date of agreement on price. The longer the period of time between the proposal and the conclusion of negotiations, the more chance there is that updated cost or pricing data became available.

2. Has there been a major change in the accounting system between the date the proposal was prepared and the date of agreement on price? Accounting system changes could affect the nature of direct and indirect charging patterns among other things.

3. Was the contractor's proposal updated to the date of agreement on price? See item 1.

4. If the proposal was revised prior to or during negotiations but not reaudited, does the PNM state whether the supporting data were also updated? There have been many cases where contractors have provided ostensibly updated cost or pricing data during negotiations that was not supported.

5. Does the PNM identify any supporting data introduced by the contractor subsequent to the audit but not submitted for audit review? Auditors get very suspicious when this happens. They sometimes believe that the contractor is withholding information from them on the assumption that it will undergo less scrutiny by the contracting officer or price analyst.

6. Is there a material difference between the negotiated amount and the audit recommended amount? There are a number of reasons why this might happen. This may indicate the submission of additional data subsequent to the audit. Or, quantities change from the numbers proposed.

7. Does the PNM identify any other conditions such as changes in design, production methods, make-or-buy decisions (etc) that might indicate potential defective pricing? Sometimes contractors propose to make parts in house but decide late to buy them (or vice versa). Maybe they didn't have the sufficient in-plant capacity or perhaps they determined later that it was cheaper to buy. Whatever the reason, the auditors will likely inquire as to when the decision to change from make to buy (or vice versa) was made.

8. Any peculiarities in the contract type or method? Was work started under a letter contract? Is this the last buy under a production or spares contract? If work was begun under a letter contract, some history should be available by the time negotiations commence. That historical data should be disclosed.

9. Does the PNM indicate what data the contracting officer relied upon? This is absolutely critical to any assertion of defective pricing. The contracting officer must have relied upon cost or pricing data to negotiate the contract price. There are situations where the contracting officer will not rely on cost or pricing data.

10 Does the PNM indicate any potential defective pricing on subcontracts or interdivisional work? Contractors are responsible for ensuring the reasonableness of subcontract and interdivisional pricing and should essentially follow the same steps in negotiating with its subcontractors that the Government takes in negotiating with its prime contractors. When negotiations with subcontractors have not been concluded at the time of prime contract negotiations, the Government is at risk.

Tomorrow we will conclude this series by offering some advise on how contractors should approach their responsibility to furnish current, complete, and accurate cost or pricing data thereby minimizing the chance of being rated highly probable for defective pricing.

Defective Pricing Lead Sheets - Part 2

The Government has a program for reviewing contractor compliance with the Truth in Negotiations Act (TINA). They're called post-award audits because the audits are initiated after contract award. Contracts are selected based on risk factors. Aside from contract value, there are other factors that play into the selection of specific contracts. One of those is the Defective Pricing Lead Sheet. The lead sheet is a two-part form. Part A is prepared when a contractor's proposal is evaluated and Part B is prepared when the PNM (Price Negotiation Memorandum) is finished. We began this series yesterday. If you missed that part, go here.

Today we will cover Part A of the form. There are nine questions that the reviewer must answer regarding the state of the contractor's proposal. After answering the questions, the reviewer must rate the probability of defective pricing from a 1 to a 10 with 10 being the highest probability.

1. Was there adequate lead time for the contractor to prepare the proposal? Its a simple fact that when people are in a hurry, they make mistakes. Contractors that are not given sufficient lead time to prepare their proposal, are more at risk for failing to submit all of the cost or pricing data available to it.

2. Was there adequate time for audit review? In the old days, Government auditors strove to be responsive to contracting officer requests. Sometimes these requests did not provide sufficient time for auditors to conduct an audit in the detail that was considered necessary to do a adequate job. Usually, this resulted in a qualified audit report but at the same time, generated an audit lead so that the auditors could take another look at the information down the road. In today's environment, the auditor is not as responsive to the contracting officer and generally takes whatever time is necessary to conduct its review, regardless of contracting officer need. Therefore, this question should always be marked "yes".

3. Was the contractor's supporting data generally adequate, complete and current? If not, did the contractor remedy the deficiency? Did deficiencies in the proposal necessitate a qualified opinion on the audit report? Some proposals are good and some are badly assembled and supported. The ones that have math errors, where summary numbers do not trace to supporting detail, where significant costs are unsupported, and where supporting information is out dated, have a higher probability of being defectively priced.

4. Was there any indication of potential defective pricing on subcontracts or interdivisional work? Prime contractors are responsible for determining the price reasonableness of their proposed subcontracts. Government auditors usually review the work of the prime contractor to ensure that they have done an adequate review and determination process. If the prime contractor has not yet completed its review of the subcontractor, there is no assurance that the subcontract price is based on current, complete, and accurate cost or pricing data.

5. Were any questioned or unsupported costs attributable to an estimating system defect? If so, was a flash report issued? Has the contractor corrected or initiated action to correct the defect? An estimating system is foundational to being able to consistently prepare and submit current, complete, and accurate cost or pricing data. This question focuses on the adequacy of the system, not inadvertent omissions or mathematical errors.

6. Has the contractor's estimating system been reviewed within the past three years? Have any noted defects been corrected? Could the defects lead to defective pricing? This question focuses on past reviews of contractor estimating systems. If prior reviews disclosed deficiencies, those deficiencies should have been corrected in a timely manner.

7. Is this a proposal for a follow-on contract? If so, was the prior (historical) experience considered in pricing this proposal? If deficiencies were noted, did the contractor submit an amended proposal? Did the circumstances require a qualified audit opinion? Was all the prior (historical) experience made available to the auditor? If so, was it audited? If it was not furnished, was a qualified opinion rendered? The use of prior "relevant" history is a solid estimating technique and should always be disclosed and considered in pricing follow-on contracts.

8. Are the contractor's estimating policies and procedures compatible with its method of recording data (is the contractor, whether or not CAS-covered, in substantive compliance with CAS 401)? Contractors must propose costs in a manner consistent with the way they record, accumulate, and report costs.

9. Were any other conditions indicative of potential defective pricing noted? This is the "catch-all" question to cover any concerns, conditions, or risks that might indicate an increased probability of defective pricing.

Defective Pricing Lead Sheets - Part 1

Contract awards that are based on cost or pricing data are subject to TINA (Truth in Negotiations Act) if they exceed $700 thousand. Essentially, TINA requires contractors to submit to the Government, current, complete, and accurate cost or pricing data in connection with negotiating contract prices. If it is discovered later that the contractor withheld or didn't otherwise submit all cost or pricing data that could have impacted the negotiated price, TINA gives the Government the right to take back some of the contract price.

The Government has a program to review awarded contracts to see if they are in compliance with TINA. Obviously the Government cannot review each and every award so they use a risk-based approach to select contracts for review. Awards that exceed a certain threshold, currently $100 million or more, are automatically selected for review. Everything else is thrown into buckets for judgmental sampling. Note the term "judgmental". Contracts are not randomly selected - there's usually some reason why a particular contract is selected for a review.

One of the primary tools the Government uses to select contracts for review is the "Defective Pricing Lead Sheet". This is a two part analysis. Part 1 is completed after the contractor's price proposal has been audited and Part 2 is completed after receipt of the Government PNM (Price Negotiation Memorandum). A PNM is the Government's view of what happened during contract negotiations. Each Part has a series of questions and concludes with a numerical "Defective Pricing Potential" score on a scale of 1 to 10 with 1 being "Not Probable" and 10 being "Probable".

Once completed, these Defective Pricing Lead Sheets are then used to decide which contracts should be audited for compliance with TINA - the higher the "probability" rating, the higher the potential for selection.

The Defective Pricing Lead Sheet is not the only basis for selecting contracts for post award reviews. Other factors include the adequacy of contractors' estimating systems and the frequency of past violations of TINA.

In the next two blogs, we will walk through the specifics of the Defective Pricing Lead Sheets, commenting on why certain questions, depending on how they're answered, could increase the probability of TINA violations.

Billing Procedures for DHS (Homeland Security) Contracts

The Department of Homeland Security (DHS) and the Defense Contract Audit Agency (DCAA) recently entered into a MOU (Memorandum of Understanding) on contract audit coverage to provide for DCAA review of interim public vouchers submitted under DHS cost reimbursement and T&M/LH contracts.

Under these new procedures, contractors must submit copies of its interim vouchers to DCAA at the same time as the original is sent to the contracting officer (or the contracting officer technical representative). The auditor has five business days to perform his/her review.

Vouchers selected for review include (i) the first voucher submitted under any contract, (ii) any voucher greater than $1 million, and (iii) a randomly selected sample of all others.

The specific steps in reviewing these vouchers consists of a seven point test including:

1. Comparison of the information shown on the voucher with the contract.
2. Verification that amounts claimed for reimbursement of indirect costs are computed using approved billing rates.
3. Verification that interim fees claimed are computed by the formula or basis in the contract.
4. Verification that billable labor costs on T&M/LH contracts have been reduced by five percent until the maximum withheld amount of $50 thousand is reached (when required by the contract).
5. Determination that the voucher has been properly prepared and that payment for the items is not precluded by any contractual provisions.
6. Test of the mathematical accuracy.
7. Reconciliation of billed costs to the contractor's accounting records.

The final test, reconciliation of billed costs to the accounting records, seems to be where the auditors spend most of their time. For contractors that prepare billings directly from accounting records, this should pose no problem.

Responsibility for Financial Capability Reviews Shifted to DCMA

On May 20th, the Defense Contract Audit Agency (DCAA) formally instructed its auditors to discontinue any self-initiated financial condition risk assessments and financial capability audits of Government contractors and prospective Government contractors.

From now on, DCAA will perform financial capability audits when specifically requested by the Contracting Officer and only when there are unique circumstances that require technical skills that only DCAA possesses. The guidance does not provide any explanation or examples of what those unique circumstance might be. Perhaps it will become evident in time.

To fill the void, DCMA (Defense Contract Management Agency) established its Financial Capability Group to perform all financial analysis for the Department including preaward financial analysis, post award financial surveillance, and monitoring of contracts receiving financing payments. We've seen examples of the data requested by DCMA when performing preaward financial capability reviews and its pretty much the same information that DCAA might have requested. The big difference is that the DCMA group sits in DC and requires the contractor (or prospective contractor) to mail in a boatload of data whereas DCAA required far less in the way of copies because it performed its reviews at the contractor facility. 

DCAA will continue to perform financial capability reviews for non DoD agencies where DCMA has not already performed a review of the particular contractor/prospective contractor.

Auditing the Auditors - A "Junk-Yard Dog" Index

Senator Grassley issued his second report card in two years on audit reports issued by the DoD Inspector General's Office during fiscal year 2010. Overall, he gave the organization a "D-" for its work.

His first report card, issued in 2010, showed that audit oversight capabilities, which cost taxpayers $100 million every year, were seriously degraded, leaving taxpayers' money vulnerable to fraud, waste, and outright theft. This year's card showed little, if any, improvement.

In the most recent report card, reports were reviewed, evaluated and graded using five rating categories:

1. Relevance - Were audit objectives fully aligned with the core IG mission - to detect, report, and deter fraud, waste, theft, illegal and improper activities, and abuse and misuse of the taxpayer's money?
2. Connecting the dots on the money trail - Did the audit connect all the dots in the cycle of transactions? Did the audit examine, match and verify all pertinent transaction data from contract requirements through actual payments? Did it determine whether the government received what it ordered at the agreed upon price and schedule?
3. Strength and accuracy of recommendations - Were the findings consistent with the evidence developed in the audit? Were the recommendations tough and appropriate? Were officials who were responsible for alleged fraud, waste and mismanagement held accountable through recommendations for administrative action or criminal investigations? Did the audit recommend steps be taken to recover fraudulent, unauthorized, erroneous or improper payments?
4. Fraud and waste meter - Did the audit carefully document the exact dollar amounts of alleged fraudulent, wasteful, unauthorized or improper payments and verify those dollar amounts at primary sources?
5. Timeliness - How quickly was the report issued? Did it take 6 months or a year or more to publish? Or did it take so long to complete that its findings and recommendations became stale or irrelevant?
6. Junk-yard dog index - This is the sum of grades awarded in each of the five above-mentioned rating categories divided by five for the overall average for the report.

The DoD-IG scored an "F" in Strength and Accuracy of Recommendations and Fraud and Waste Meter. The other three factors were "D+", "D", and "D-". "Instead of being hard-core, fraud-busting contract or financial audits, most reports were policy and compliance reviews with zero fiscal impact. Some of this work might have been more appropriately performed as DoD staff or think tank studies rather than as independent audits".

The audits cost an average of $800 thousand each, taking seven auditors an entire year to complete. That is actually stunning information - it would be difficult to imagine that a private firm could stay in business with such low productivity.

Installment Payments - Part 2

Yesterday we alerted you to a program within the DoD finance office to allow contractors to refund amounts owed the Government on an installment payment basis. If you missed that, read it here. The only problem with this installment payment program is that it requires contractors to open up the financial records to Government auditors and to have a good story as to why they didn't just repay the amount overpaid right away. If a contractor maintains that it didn't know that it had been overpaid, it sort of implies that their billing system is not up to par. That would open another can of worms. But, if the installment payment approach is the best way to pay down this liability, DoD will first send in its auditors to determine whether the contractor has the "ability to repay" the debt. This is called a financial capability audit. Before the auditors begin the review, here is a likely list of documents that they will request.

• financial statements for the last three years
• a 12 month cash flow forecast reflecting the proposed installment amounts
• written confirmation that the financial statements disclose all off-balance sheet arrangements and related party transactions.
• any inquiries from their IPA (independent public accounting) firm related to off-balance sheet arrangements and related party transactions and their responses.
• the results and reports of any internal audits, reviews or other analyses of off-balance sheet arrangements and related party transactions.
• any analyses it has performed to assess its current and future financial conditions.
• details on prior, current, and forecasted events that have had or are forecasted to have a favorable or unfavorable impact on its financial condition
• written policies and procedures that require
• evaluation of current financial conditions in order to anticipate and avoid unfavorable or adverse conditions
• periodic assessments of accounts payable and accounts receivable, including analysis of accounts payable aging and the collectability of accounts receivable
• periodic assessments to ensure compliance with any loan covenants and debt payment schedules
• preparation of cash flow forecasts, including reasonable and supported assumptions
• monitoring, analyzing and managing its cash flow
• periodic assessments of contract cost performance.

This listing is only the beginning. The auditor will likely spend at least a couple of days analyzing the data and reaching conclusion about the contractors financial viability.

Installment Payments

From time to time, organizations find themselves in situations where they owe the Government money. Most often, this involves income tax and payroll tax liabilities but it can also result from instances where contractors have received overpayments on contracts. Contract overpayments can occur because of billing system inadequacies, payment mistakes (e.g. duplicate payments) or because of contract administration adjustments. Of course, as soon as an overpayment is discovered, contractors should immediately refund the amount of the overpayment back to the Government. Contractors that do not refund overpayments in a timely manner, do so at their own peril. We know of an instance where a Federal Government investigative organization opened a criminal investigation on one such case.

There may be cases however, where contractors are financially strapped and cannot repay the overpayment right away. If the overpayment involves a DoD contract, there may be some relief. The DoD Financial Management Regulation, Volume 10, Chapter 18 allows for a series of installment payments under certain circumstances. When a debtor to the U.S. Government can establish sufficient justification, a series of installment payments may be approved by DFAS (Defense Finance and Accounting Service) in amounts that will ensure liquidation of the debt within a reasonable time frame.

Prior to approving the installment agreement, DFAS will ask the contracting officer to perform a financial capability analysis, taking into consideration the proposed installment payments to ensure that the contractor has the financial capability to make the installment payments. In addition to determining the contractor's ability to repay, the contracting officer will also determine

• what the contractor did with the overpayment and
• why it is not currently in a position to return the overpayment to the Government.

Needless to say, contractors that embark down this road must have strong rationale to support its case and must expect and be prepared to have auditors poking around in their financials. Tomorrow, we will look at some of the specific things that the Government will request when performing its review.

Go to Part 2

Thinking Abount Hiring Former Government Employees?

The Department of Defense is proposing to amend its FAR supplement to require that any company bidding on one of their solicitations certify that all former DoD officials employed by the company are in compliance with post-employment restrictions.

There are several statutory and regulatory restrictions concerning post-government employment for DoD and other Federal employees after leaving Government service. 18 U.S.C. 207 prohibits an individual from representing a contractor to their former agency on particular matters involving specific parties that they handled while working for the Federal Government for defined cooling-off periods that vary according to the former officials involvement and position. 41 U.S.C. 2104 prohibits DoD and other Government acquisition officials from accepting compensation from a defense contractor during a one year cooling-off period if the official performed certain duties at DoD involving the contractor and a contract valued in excess of $10 million. Section 847 requires that senior DoD officials who have been personally and substantially involved in contracts over $10 million request a written post-employment ethics opinion before receiving compensation from a contractor.

These Statutes were implemented into the FAR and DFARS (Federal Acquisition Regulation and DoD FAR Supplement, respectively) at FAR 3.104 and DFARS 203.104. However in 2008, the GAO reported that government contractors had under reported by half, the number of former DoD officials they had employed and that some of those had performed services under the same contract for which they had prior program responsibility.

To remedy this, DoD is now proposing to require that all offerors must submit representations at the time of contract award to the effect that all former DoD officials are in compliance with post-employment restrictions in FAR, DFARS, and the aforementioned Statutes. Based on the GAO study, this could affect about 7,500 "covered" officials leaving the Government and going to work for defense contractors each year. A third of these go to work for the top 50 defense contractors, about 50 percent end up a "small business" with the remainder scattered around at other contractors.

Under the proposed regulation, companies are not allowed to submit proposals or make offers if they cannot make a representation similar to the following:

To the best of our knowledge and belief, all covered DoD officials employed by or otherwise receiving compensation from the offeror are presently in compliance with DFARS ......

Defense Department Creates New Position - Director of Pricing

The Defense Department created a new position a few days ago, Director of Defense Pricing. This position falls within the Office of the Under Secretary of Defense for Acquisition, Technology and Logistics. Last Tuesday, May 31st, Defense Secretary Robert Gates announced that Shay Assad would fill the position. Previously Mr. Assad was the Director, Defense Procurement and Acquisition Policy.

The creation of this positions, according to the official press release is part of the Pentagon's quest to drive down the cost of weapons at a time when defense budgets are "constricting". Part of the administration's Better Buying Power imitative is to look beyond program cost estimates and determining what a program should cost.

The specific tasking for the new position is to help program managers hit these "should-cost" targets which will be set at levels below official budget estimates. Additionally, Mr. Assad has been tasked with improving the skills of the contracting and pricing work forces. For example, Mr. Assad hopes to transform DCMA (Defense Contract Management Agency) into a value-added resource in contract negotiations. DCMA recently hired 300 price analysts to assist contracting officers during contract negotiations. Mr. Assad estimates that it will take 18 to 24 months to bring this work force "up to speed".

Another of Mr. Assad's initiatives is to help DCMA develop a centralized database of pricing information. The idea is that when contracts are negotiated, detailed information is uploaded into the database so that any contracting officer can see what labor rates, indirect expense rates, and other pricing details  were negotiated previously. This should take some of the tedium out of the process of determining price reasonableness.

Initially, Mr. Assad will be focusing his attention on large procurements like the F-35 program.

Basic Billing System Requirements

Prior to awarding contracts to new contractors (or new to the particular government agency awarding the contract), the Government will perform a "Preaward Survey of Prospective Contractor Accounting System". This survey covers many aspects of the accounting system including questions about the system's capability to produce data to support billings. In general, the accounting system must be capable of producing data to support payment requests when payments to contractors are to be based on progress payments (fixed price contracts) or public vouchers (cost-type contracts).

In assessing the adequacy of a billing system, the Government will perform tests and conduct analyses in order to answer the following three questions.

1. Does the contractor have controls or procedures that would provide that interim billings of direct cost are prepared directly from the books and records, excluding unallowable costs? It continues to surprise us the number of contractors that do not prepare their billing statements based on their accounting records. Often times its because they have no confidence in the accuracy of the accounting data, the data is not up to date and they need to get paid, or the accountants are too "secretive" with their information.

2. Does the contractor have procedures to ensure that subcontractor and vendor costs are only included in billings if payment to the subcontractor or vendor will be made in accordance with the terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor's payment request to the Government? The Government is not in the business of advancing working capital.

3. Can billings be reconciled to the cost accounts for both current and cumulative amounts claimed? It is important to ensure that not only period costs are traceable to the accounting records but cumulative costs are as well. Sometimes adjustments are made to prior periods and these adjustments must be reflected in billings.

Contract Administration Office Functions

After a contract is awarded, it its usually, but not always, assigned for administration to a contract administration office (CAO). For DoD, the CAO is the Defense Contract Management Agency (DCMA).
DCMA maintains the Federal Directory of Contract Administration Services on its website.   If you are unsure as to the organization that administers your contract, you can search this site for that information.

FAR 42.302 contains a listing of 71 functions that the contracting officer (CO) normally delegates to the CAO. (The current versions of FAR list only 70 functions. The 71st fuction is the oversight of contract ethics programs that was added yesterday, May 31st.) The contracting officer may from time to time, retain some of the 71 functions based on different factors. However, three of the 71 functions must be delegated including,

1. negotiating forward pricing indirect expense rates
2. establish final indirect expense rates, and
3. administering Cost Accounting Standards (CAS)

It is beyond the scope of this posting to list the 71 delegable functions however it should be worth your while to peruse it. It would be hard to imagine any contract related matter that is not covered by these duties and responsibilities. It is becasue of the extensiveness of this listing that we usually advise clients to initiate discussions with the CAO (a.k.a. the ACO or Administrative Contracting Officer) for any contract matter.