Suspension and Debarment - Part IV

We're working our way through a couple of "effective" tools the Government has at its disposal to exclude or preclude certain firms from doing business with the Government. In Parts I and II, we discussed "suspensions" where the Government can suspend a company for up to 18 months, In Part III, we discussed the causes that can lead to "debarment" for up to three years. In this part, we will discuss the procedures set forth in the Federal Acquisition Regulations that the Government must follow when debarring or contemplating debarment and some other aspects. We will conclude this series on Monday with ways that contractors can avoid suspension and debarment (its not that hard).

Each Federal agency has established procedures governing the debarment decision making process that are as informal as is practicable, consistent with principles of fundamental fairness. These procedures must afford the contractor an opportunity to submit, in person, in writing, or through a representative, information and argument in opposition to the proposed debarment.

If the Government decides to proceed with the debarment action, it sends a notice of proposed debarment to the contractor giving the reasons for the proposed debarment in terms sufficient to put the contractor on notice of the conduct or transactions upon which it is based. The contractor has 30 days  to submit information and argument in opposition to the proposed debarment, including any additional specific information that raises a genuine dispute over the material facts. The debarring official will consider this information and also the remedial and the same mitigating factors we discussed earlier when we discussed "suspensions". At this point, the debarring official can call the whole thing off or proceed with the final notice.

FAR gives some latitude over how long a debarment period should last. It must be for a period commensurate with the seriousness of the causes. Generally it should not be for a period exceeding three years. If the debarment is based on violations of the Drug Free Workplace Act, the period is extended to five years. The debarring official can extend the period for an additional period if that official determines that an extension is necessary to protect the Government's interest.

A debarred contractor cannot receive a contract from any executive agency and, based on reciprocity agreements, with many states as well. Debarred contractors are identified in the Government's "Excluded Parties" list that all contracting officers must refer to prior to awarding contracts.

Suspension and Debarment - Part III

Today we continue this short series on suspension and debarment. For the past two days, we've been dealing with "suspensions". A "suspension" is bad enough but being "debarred" is much worse. Debarment is sometimes referred to as the "kiss of death" - it excludes a contractor from Government contracting and Government-approved subcontracting for a specified period - for up to three years.

Contractor actions that can lead to debarment are similar to those that lead to suspension. The Government debarring official may debar a contractor for a conviction of or civil judgment for

• Commission of fraud or a criminal offense in connection with
• Obtaining
• Attempting to obtain; or
• Performing a public contract or subcontract.
• Violation of Federal or State antitrust statutes relating to the submission of offers;
• Commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, violating Federal criminal tax laws, or receiving stolen property;
• Intentionally affixing a label bearing a “Made in America” inscription (or any inscription having the same meaning) to a product sold in or shipped to the United States or its outlying areas, when the product was not made in the United States or its outlying areas (see Section 202 of the Defense Production Act (Pub. L. 102-558)); (note the word "intentionally" is in the cause for debarment but not for suspension) or
• Commission of any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor.

Additionally, the debarring official may debar a contractor based on a preponderance of the evidence for any of the following:

• Violation of the terms of a Government contract or subcontract so serious as to justify debarment, such as
• Willful failure to perform in accordance with the terms of one or more contracts; or
• A history of failure to perform, or of unsatisfactory performance of, one or more contracts.
• Violations of the Drug-Free Workplace Act of 1988 (Pub. L. 100-690), as indicated by
• Failure to comply with the requirements of the Drug-Free Workplace clause; or
• Such a number of contractor employees convicted of violations of criminal drug statutes occurring in the workplace, as to indicate that the contractor has failed to make a good faith effort to provide a drug-free workplace. 
• Intentionally affixing a label bearing a “Made in America” inscription (or any inscription having the same meaning) to a product sold in or shipped to the United States or its outlying areas, when the product was not made in the United States or its outlying areas (see Section 202 of the Defense Production Act (Pub. L. 102-558)).
• Commission of an unfair trade practice.
• Delinquent Federal taxes in an amount that exceeds $3,000.
• Knowing failure by a principal, until 3 years after final payment on any Government contract awarded to the contractor, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract or a subcontract there-under, credible evidence of—
• Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations found in Title 18 of the United States Code;
• Violation of the civil False Claims Act (31 U.S.C. 3729-3733); or
• Significant overpayment(s) on the contract, other than overpayments resulting from contract financing payments.

Finally, a contractor can be debarred based on a determination by Homeland Security or the Attorney General for failing to comply with the Immigration and Nationally Act employment provisions and for any other cause of so serious or compelling a nature that it affects the present responsibility of the contractor or subcontractor.

Tomorrow we will look at procedures and period of debarment.

Suspension and Debarment - Part II

Suspension and debarment are two classifications that contractors never want to have associated with themselves. To be suspended or debarred from Government contracting affects profitability and in some cases, even the continued existence of a going concern.

Yesterday, we listed the events and criteria that could eventually lead to a suspension as well as some of the circumstances that could stave off such a determination. The burden of proof is quite low. In some situations, an indictment is sufficient to suspend a contractor from further work with the Government. Today we will discuss the administrative procedures that must precede a suspension determination and opportunities for contractors to wage a defense. Tomorrow we will discuss "debarment".

Every agency has its own internal procedures governing the suspension decision making process. FAR only requires that these procedures be as informal as is practicable, consistent with principles of fundamental fairness. These procedures must afford the contractor an opportunity following the imposition of a suspension, to submit, in person, in writing, or through a representative, information and argument in opposition to the suspension.

If the Government decides to suspend a contractor, it sends written notification stating the basis for the suspension (e.g. an indictment or other adequate evidence that the contractor has committed irregularities of a serious nature in business dealings with the Government or serious reflecting on the propriety of further Government dealings with the contractor). While this notice may not be comprehensive, it must be sufficient to put the contractor on notice without disclosing the Government's evidence. Subsequent to official notice, the contractor has 30 days to respond and provide any information that raises a genuine dispute over the material facts described in the Government's suspension letter.

As a practical matter, if the suspension is based on an indictment or on the basis of the Department of Justice advice, or if the contractor's submission does not raise a genuine dispute over material facts, the notice of suspension becomes final - the "Suspending Official" makes a decision to suspend. For situations where additional proceedings are necessary as to disputed material facts, the suspending official will base his/her decision on the facts as found, together with any information and argument submitted by the contractor and any other information in the administrative record.

Based on review of all the data, the suspending official may modify or terminate the suspension or leave it in force. In no case may a suspension extend beyond 18 months unless legal proceedings have been initiated within that period. If so, the suspension continues until the proceedings are completed.

Suspension and Debarment

Two of the most dreaded words in Government contracting are "suspension" and debarment". Suspensions and debarment are invoked to preclude contractors that are not "responsible", from continuing to contract with the Government. The action to suspend or debar a contractor from performing work for the Government can be a fatal blow to the "going concern", especially for companies that relay primarily on Government business.

Suspension and debarment are two separate actions. A suspension is a temporary matter while a debarment is usually permanent. A suspension, under certain circumstances, can lead to a debarment. The consequences however are similar. Agencies are prohibited from doing business with suspended or debarred contractors. Additionally, agencies cannot place additional orders under previously awarded contracts (for example ID/IQ contracts) unless there is a compelling reason for doing so.

The regulations concerning suspensions and debarment are found primarily in FAR 9.406 and 9.407. Beginning today and continuing for the next few days, we will look at the Government's suspension and debarment processes.

A suspension is an action taken by "suspending official". A "suspending official" is defined as an agency head or a designee authorized by the agency head to impose suspension. A suspending official may, in the public interest, suspend a contractor (or subcontractor) for any of the following activities:

1. Commission of fraud or criminal offense in connection with obtaining, attempting to obtain, or performing a public contract or subcontract,
2. Violation of federal or state antitrust statutes relating to the submission of offers,
3. Commission of embezzlement, theft, forgery, bribery, falsification or destruction of records, making false statements, tax evasion, or receiving of stolen property,
4. Violations of the Drug-Free Workplace Act of 1988,
5. Intentionally affixing a label bearing a "Made in America" inscription (or any inscription having the same meaning) to a product sol in or shipped to the United States when the product was not made in the United States
6. Commission of unfair trade practices (as defined in FAR 9.403),
7. Delinquent federal taxes greater than $3 thousand,
8. Knowing failure by a principal, until 3 years after final payment on any Government contract, to timely disclose to the Government, in connection with the award, performance, or closeout of the contract, credible evidence of
• Violation of Federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations,
• Violation of the civil False Claims Act
• Significant over-payment(s) on the contract, other than over payments resulting from contract financing payments
9. Commission of any other offense indicating a lack of business integrity or business honesty that seriously and directly affects the present responsibility of a Government contractor or subcontractor

Due to the severe consequences of a suspension, Government agencies may only impose a suspension on the basis of adequate evidence. An indictment for any of the preceding causes constitutes adequate evidence for suspension purposes. A suspension applies to a contractor's entire business, not just the division involved in the activity leading to a suspension.

The existence of a cause for suspension does not necessarily require that the contractor be suspended. The suspending official should consider the seriousness of the contractor's acts or omissions and may, but is not required to, consider the following remedial measures or mitigating factors:

1. Whether the contractor had effective standards of conduct and internal controls or implemented such standards prior to the investigation of the activity cited for debarment,
2. Whether the contractor cooperated fully with government agencies during the investigation and any court or administrative action,
3. Whether the contractor has taken appropriate disciplinary action against the individuals responsible for the activity,
4. Whether the contractor has implemented or agreed to implement remedial measures,
5. Whether the contractor has conducted a full investigation and made the results available to the debarring official,
6. Whether the contractor has paid or agreed to pay all criminal, civil, and administrative liability associated with the incidents,
7. Whether the contractor has instituted or agreed to institute new or revised controls and/or procedures,
8. whether the contractor has  had adequate time to eliminate the circumstances within the organization that led to the debarment proceedings,
9. Whether the contractor's management comprehends the seriousness of the situation and has implemented programs to prevent recurrence,
10. Whether the contractor brought the debarring activity to the attention of the government in a timely manner

Simplified Acquisition Threshold Raised for Humanitarian and Peacekeeping Operations

For Government procurement under the Simplified Acquisition Threshold described in FAR 2.101, agencies are not required to prepare formal evaluation plans, establish competitive ranges, conduct discussions or score offers. Additionally, contracting officers usually have the authority to personally choose the "winner" without subjecting his/her recommendation to a source selection team. The Simplified Acquisition Threshold is currently $150 thousand.

The Department of Defense just published an interim rule in its FAR supplement (DFARS) raising the Simplified Acquisition Threshold from $150 thousand to $300 thousand for humanitarian and peacekeeping operations. Humanitarian or peacekeeping operations means a military operation in support of the provision of humanitarian or foreign disaster assistance or in support of a peacekeeping operation under the United Nations Charger. It does not include routine training, force rotation, or stationing.

The Simplified Acquisition Threshold was previously set at $300 thousand for acquisition of supplies or services that are to be used to support a contingency operation or to facilitate defense against or recovery from nuclear, biological, chemical, or radiological attack (or, $1 million if awarded or performed outside the United States). This  current action adds additional categories to those exceptions.

Recruitment Costs

The subject of recruiting costs is getting increased attention by Government auditors, especially as it pertains to the use of employment agencies and "head hunters". In past blog posts, we've danced around the allowability of certain types of recruiting costs. For example, see this one from March 2010 and this one from September 2010. However, neither of these posts dealt comprehensively with the cost principle.

The cost principle itself is fairly brief and straight-forward. Under FAR 31.205-34, the following types of recruiting costs are allowable:

1. Cost of help-wanted advertising as long as it describes specific positions or classes of positions and does not include extensive illustrations or descriptions of the company's products or capabilities.
2. Costs of operating an employment office needed to secure and maintain an adequate labor force.
3. Costs of operating an aptitude and educational testing program.
4. Travel costs of employees engaged in recruiting personnel.
5. Travel costs of applicants for interviews.
6. Costs for employment agencies, not in excess of standard commercial rates.

In reviewing costs for item 1, help-wanted advertising, auditors must often exercise judgment as to whether the cost is for advertising specifically to fill vacant positions or is more for advertising the company's products. Companies can be very clever and creative in dressing up general advertising to look like help-wanted. Auditors are pretty good at differentiating the two.

Item 6, employment agencies (and "head-hunters") is another area that auditors like to spend time. Auditors know from experience that contractors often fail to document that claimed costs do not exceed standard commercial rates. This failure could lead to questioned costs and possibly the application of penalties. Part of the problem is that there doesn't seem to be standard commercial rates in the employment agency industry and therefore it is difficult to fix a baseline for comparison purposes. Contractors then need to subject employment agency contracts to the same rigorous purchasing system practices that it would for purchased parts, subcontracted items, and other support services. There should be a complete audit trail showing how cost reasonableness was assured.

Incurred Cost Proposal Adequacy

Contractors' annual incurred cost proposals are to be completed and sent to the contracting officer and cognizant audit agency (usually DCAA) within six months of the end of the fiscal year. When those proposals arrive, the audit agency conducts an adequacy review. DCAA has an "offical" checklist for performing adequacy reviews of incurred cost proposals. The latest version can be found here. The checklist is pretty straight forward and essentially verifies that the "mandatory" schedules (but not the optional schedules) have been included in contractor submissions.

We've noticed and certainly many of you have noticed that adequacy reviews have become much more extensive and detailed than the steps indicated on the checklist. These added steps vary by field office. Some offices are requiring contractors to send in specific data to support information in the various schedules. For example, it is common now for DCAA to request copies of the IRS Forms 941 used to prepare Schedule L, Reconciliation of Total Payroll to Total Payroll Distribution. Additionally, many offices are requesting copies of the trial balance, presumably to see if amounts in pools and bases trace back to the accounting system. By the way, we strongly recommend against providing trial balances since it includes information to which audit agencies have no statutory rights of access - like revenues.

If you feel you're being asked to provide more data than you should, or an auditors request seems unreasonable, pull out this checklist and ask the auditor to refer you to the specific adequacy step he/she is trying to accomplish.

IRS vs GSA Standard Mileage Rates

Go Here to View the 2012 Update.

By now, most everyone is aware that the IRS upped the standard mileage rates from 51 cents to 55.5 cents effective July 1, 2011. GSA (General Services Administration) however, did not. On their website, GSA states:

The IRS recently announced an increase to the standard automobile mileage rate from 51 cents to 55.5 cents effective July 1, 2011. Although the results of our internal evaluation do not support a change at this time, we plan to monitor the fuel costs monthly and will adjust the rate if warranted. Any adjustments will be posted in the Federal Register and on this web site.

This is an important distinction for contractors who have tied their own reimbursement policies and procedures to one or the other or, who might have contracts that require them to implement provisions of the FTR (Federal Travel Regulations). While the FTRs apply to Government employees, many contractors have tied their own policies and procedures to the FTR rules for expediency.

Many people mistakenly believe that the IRS and GSA rates are the same. Usually they are (with GSA often lagging a bit behind the IRS on the effective date), but not always. We are now in a period when they are not the same. Implementing the IRS rate when an internal travel policy is tied to the GSA rate could throw a contractor into a noncompliance situation.

The Federal Acquisition Regulations (FAR) do not require contractors to use a particular reimbursement rate. FAR 31.205-46 only requires that the method used to reimburse employees for business use of their privately owned vehicle "results in a reasonable charge". Based on this, both the IRS and the GSA would be presumptively reasonable.

More Pressure to Limit Employee Compensation

The American Federation of Government Employees (AFGE) sent a letter to the President recently, recommending a cap on taxpayer reimbursement for contractor salaries at the level of a cabinet secretary (currently $199,700).  In their view, while politicians have been attacking the compensation levels of civil servants, no one is addressing the elephant in the room, excessive compensation for private sector workers whose salaries are paid for in whole or in part by taxpayers. AFGE writes "...at a time of budget stringency, few parts of the budget or tax code should be off limits for scrutiny - and certainly not the lucrative salaries for contractors that are ultimately paid for through taxpayer dollars."

AFGE did not provide an estimation as to how much might be saved under their proposal. In the scheme of things, it may not be all that much. But as Senator Everett Dirkson once was reported to have said, a billion here and a billion there and pretty soon you're talking about real money.

AFGE wants all agencies to immediately include the following clause in each solicitation:

No funds obligated under this contract shall be used to pay compensation to any individual, either as a direct cost or as an indirect cost, or proration at a rate in excess of Level 1 of the Executive Schedule prescribed at 5 U.S.C. 5312. Proration means that the amount charged for less than full-time employee cannot exceed an annualized rate equal to the authorized Executive Level I rate. This applies to all functions performed using contract funds including subcontracts. (The Executive Schedule Level 1 rate is currently $199,700).

Further, AFGE wants to amend FAR 31.205-6(a) - Compensation, to add the same provision.

AFGE points out that this provision would not cap contractors' salaries. It would only limit the amount that contractors can be reimbursed by taxpayers.

The AFGE is a federal employee union representing 600 thousand federal workers. AFGE provides legal representation, legislative advocacy, technical expertise and information services.

More Caps on Employee Compensation Coming?

FAR 31.205-6(p) limits compensation paid to the five most highly compensated employees in management positions at each home office and each segment of government contractors. The limit is a benchmark amount determined by the Administrator, Office of Federal Procurement Policy (OFPP). For calendar year 2010, the cap is $693,951. The OFPP has not yet published the 2011 cap. You can view the yearly maximum amounts since 2004 at OFPP's website.

Since the cap applies only to the five most highly compensated individuals, there are more than a few Government contractors with employees earning more than the cap but not within the cadre of "top five".  As long as the contractor can demonstrate that compensation levels are reasonable, the OFPP caps do not apply.

This may change. There are provisions in both the House and Senate versions of the fiscal year 2012 Defense Authorization Act (Sections 806 and 803 respectively) that will extend the compensation cap to all employees. Essentially the proposed legislation replaces the term "top five senior executives" with "all employees".

Our guess is that this provision will survive the legislative process and get signed into law.

Improving Subcontractors' Cash Flows - Part III

This is the final part of our three part series on prime contractors behaving badly. You can read Parts I and II here and here.

Slow paying prime contractors (customers) are no small problem for many subcontractors who are dependent upon reimbursements to maintain profitability and in some cases, stay in business. Over-aged receivables means that the company is either incurring interest to finance those receivables or foregoing interest if they happen to have some cash on hand. Either way, profits suffer. We sense the significance of the problem as we're out and about with our clients and, as we reported yesterday, a GAO survey found significant issues as well - subcontractors responding to the GAO survey were experiencing an average of 146 days to get their invoices (e.g. progress payments or cost reimbursement vouchers) paid. In a purely commercial environment, this would be unacceptable - companies would not extend credit to customers with such poor payment history.

So, what is a subcontractor to do? What kind of recourse does a subcontractor have when it is not receiving timely payments from the prime. We have a few suggestions. Some of these are preventative measures and won't do much good once problems arise. If you have other ideas, please feel free to leave a comment.

1. Find out everything you can about your customer (the prime contractor). There have been cases where the prime is experiencing its own financial and technical capability issues and is using amounts due to subcontractors for other purposes.
2. Know the payment terms of your subcontract. Don't agree to extraordinary terms like we saw recently - 90 days.
3. Treat the prime contractor like any other commercial customer. Send out dunning notices at 30, 60, and 90 days overdue. Alternatively, notify them, in writing, when they do not comply with payment terms and conditions.
4. Charge interest on overdue balances (if not precluded by the terms of the subcontract).
5. Offer discounts for early payments. We caution everyone on this because discounts may "cost" you more than late payments. A term of "2/10,n30" (two percent discount if paid within 10 days, otherwise balance due in 30 days), works out to 36 percent when annualized.
6. Solicit assistance from the contracting officer cognizant of the prime contract. See yesterday's posting for details on this strategy. This is especially recommended if there is a pattern of late payments.
7. If there is a dispute over the payment, agree to accept payment for the items not in dispute. Sometimes there are issues over indirect billing rates or a deliverable not meeting spec. Subcontractors should be able to resubmit an invoice with the disputed items omitted until resolution is reached. Some cash flow is better than no cash flow.

Improving Subcontractors' Cash Flows - Part II

This is the second of three parts on an all to frequent occurrence - prime contractors not making timely payments to their subcontractors. If you missed Part I, go here.

A number of years ago, the GAO (Government Accountability Office) sent out a questionnaire to 33 contractor organizations, asking them to survey their members about their experiences in receiving payments from prime contractors. There were 151 responses from subcontractors that complained about late payments. These late payments totaled $345 million or about 23 percent of the subcontractors' revenues. Payments took an average of 146 days from the time the subcontractors submitted their invoices to their prime contractors. This was not a scientific survey by any means and the GAO did not attempt to project these results. However, in absolute terms alone, the survey clearly identified some significant problems.

The National Defense Authorization Act for Fiscal Years 1992 and 1993 requires DoD to disclose payment information about prime contracts and allows contracting officers to respond to subcontractor assertions of nonpayment, even though these is no "privity of contract" between the Government and subcontracts. The act stated that under procedures established in regulations, when the prime contractor has not complied with subcontract payment terms, a contracting officer may encourage a prime contractor to make timely payment to the subcontractor; or reduce or suspend progress payments to the contractor if contract terms allow it. The act also authorizes the contracting officer to pursue administrative or legal action if the contractor's certification that accompanies a payment request is inaccurate.

The regulations coming out of these authorization acts eventually wound up in FAR (Federal Acquisition Regulation) 32.112. This FAR provision provides that, upon assertion by a subcontractor or supplier of a Federal contractor that the subcontractor or supplier has not been paid in accordance with the payment terms of the subcontract, purchase order, or other agreement with the prime contractor, the contracting officer may look into the matter and if the subcontractor assertion is found to be true can (i) encourage the prime to make timely payments to the subcontractor or supplier or reduce or suspend payment to the prime contractor. Additionally, if the contracting officer determines that a prime contractor's certification is inaccurate, the contracting officer shall initiate administrative or other remedial action.

A subcontractor has a regulatory right to payment information relative to the prime contractor. FAR 32.112 states that upon the request of a subcontractor or supplier under a Federal contract for a non commercial item, the contracting officer shall promptly advise the subcontractor or supplier as to whether the prime contractor has submitted requests for progress payments or other payments to the Federal Government under the contract and whether final payment under the contract has been made by the Federal Government to the prime contractor.

Tomorrow we will wrap up this series by offering some strategies to consider when subcontractors are faced with slow paying primes.

Improving Subcontractors' Cash Flows - Part I

Subcontractors depend on cash flow generated by progress or other periodic payments from prime contractors to meet payrolls and pay other bills. Payments to subcontractors sometimes constitute well over 50 percent of prime contract costs.

The federal government provides interim financing to prime contractors. On fixed-price contracts, the government uses progress payments, which can reimburse contractors for 75 to 100 percent of allowed incurred costs each month. On cost-reimbursement contracts, the government can reimburse contractors for all allowable incurred costs on a biweekly basis. Under both types of contracts, the prime contraators' payment requests to the government will often include costs incurred to pay subcontractors.

Prime contractors have primary responsibility for managing payments to subcontractors. Although the federal government has concerns about payment protection for subcontractors, the government does not have a contractual relationship with the subcontractors. As a result, the federal government has been a reluctant participant in resolving payment problems between its prime contractors and their subcontractors.

A number of statutes and regulations provide payment protection to subcontractors. For example, large business prime contractors working on non-construction projects are required to pay subcontractors before billing the government. In contrast, prime contractors working on federal construction projects are allowed to bill the government before paying their subcontractors, however, they are required to pay their subcontractors within seven days after receiving payment from the government and certify that they will make timely payment to their subcontractors.

Tomorrow we will look at some of the remedies available to subcontractors when they don't receive timely payment from their prime contractors.

CAS Threshold Raised

Not all contracts are covered by CAS (Cost Accounting Standards). There are a number of exemptions available that exclude certain contracts from CAS coverage. For example, contracts that are awarded based on sealed bidding are exempt. So are contracts awarded to small businesses. Another exemption is for contracts (and subcontracts) of $650,000 or less. There are ten different exemptions in all.

Today, the OFPP (Officer of Federal Procurement Policy) Cost Accounting Standards Board (CASB) issued an interim rule that revises the threshold for the application of CAS from $650 thousand to the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation. The TINA threshold for obtaining cost or pricing data was recently adjusted for inflation to $700 thousand in the Federal Acquisition Regulation (FAR). Until now, the CAS threshold was a stated dollar amount in the Code of Federal Regulations. The wording of the interim rule, "... in excess of the Truth in Negotiations Act (TINA) threshold, as adjusted for inflation..." will cause future changes to the CAS applicability threshold to self-execute upon any changes to the TINA threshold as they are implemented by FAR.

This change will preclude repeated rulemakings that only update the stated dollar amounts to maintain consistency with TINA. In the future, changes to the TINA threshold will automatically change the CAS applicability threshold.

Access to Records

An article in the latest Journal of Accountancy caught our attention. It seems that IRS has "rolled-out" a program to request the QuickBooks or Peachtree file from small business taxpapyers under examination. IRS revenue agents (i.e. auditors) are requesting the complete accounting software files from businesses under audit.

The AICPA (American Institute of Certified Public Accountants) has registered concern over the practice. In many cases, the software file contains data involving more than the year under examination, and the file may contain other data that could be considered private, confidential, and beyond the scope of the pertinent information for the audit. An accounting software file may contain taxpayer's client or customer list. In the case of an attorney or someone in the medical profession, it may contain information clearly considered confidential under the law.

The IRS is not deterred. In a written response to the AICPA, they stated that "it is important an exact copy of the original electronic data file be provided to the examiner and not an altered version. Only an exact copy of the original file includes the unaltered meta data which allows examiners to properly consider the integrity and veracity of the electronic files through use of such means as reports generated by the software program that may help to identify deleted or altered entries. For example, the original data file may provide the date a transaction was originally created, dates of subsequent changes, what changes were made, and the user name of the person who entered or changed that transaction. This type of information is directly relevant to the evaluation of the taxpayer's internal controls."

The IRS suggested that small businesses create a backup file immediately at the close of the audit year. In the even of an audit, the backup process will lessen the amount of data provided to the IRS, The IRS also suggested that prior year information be "condensed" so that it does not provide details. This response does not address the AICPA's concerns about the "proprietary" nature of data included in the the native data files.

This brings up the question concerning the contracting officer's (or the contracting officer's representative, DCAA) right to access the complete accounting system data file. In short, they do not have a right to the files. The data rights granted to the Government under the terms of the contract are limited to information relevant to determining the reasonableness, allocability, and allowability of costs charged to Government contracts. Accounting system files contain much more than that, revenues, profits, customer information, etc). Under no circumstances should a contractor be compelled to turn over its accounting system data files to a contract auditor. If an auditor needs a listing of transactions charged to a particular account, contractors can export to the data to Excel and provide it electronically. Exporting data from the accounting system in Excel format however is not the same as providing the complete data file.

There is also a practical aspect to such a request. The contracting community, and specifically the contract audit organizations) have not deployed accounting software for the purpose of "reading" contractor data files. They have not installed QuickBooks, Peachtree, or any other accounting software. Thus, there would be no way for them to "read" the files once they had them. It is likely then that if you encounter any such request, you are dealing with a rogue element within the organization.

You can read the AICPA letter and the IRS response here and here, respectively.

Interest Penalty for Late Payment

A Governmental Agency that has acquired property or services through contracting from a business concern and has failed to pay for the complete delivery of property or service by the required payment date must pay the business an interest penalty. The Government misses due dates from time to time. When it does, contractors are entitled to interest. Sometimes, the Government paying office calculates the interest and adds it to the amount remitted. But, not always. Contractors need to implement cash management polices and procedures to ensure timely receipt of monies owed it by the Government.

There are several statutes that require the Government to pay this interest penalty; 31 USC 3902(a), the Contracts Disputes Act of 1978, Public Law 95-563, and the Prompt Payment Act of 1982 are some of those.

The interest rate is established by the Secretary of the Treasury and changes every six months. The rate in effect now through the end of the years is 2.5 percent. (July 1 - December 31, 2011).

The interest period is calculated for the period beginning on the day after the required payment date and ending on the date on which payment is made.

Sometimes contractors submit vouchers or payment requests that are rejected by the auditor, contracting officer, or paying office for various reasons. This could be because of mathematical inaccuracies, incorrect billing rates, amounts in excess of contract funding limitations, etc. The contractor must correct the deficiency and resubmit the payment request. For interest penalty calculations, the "clock" begins when an adequate payment request (not the initial request) has been received by the Government paying office.

Interest on Defective Pricing Now Compounded Daily

DoD, GSA, and NASA issued a final rule amending the Federal Acquisition Regulation (FAR) to require compound interest calculations be applied to Government overpayments as a result of defective cost or pricing data.

On September 14, 2009, the U.S. Court of Appeals for the Federal Circuit (CAFC) issued a decision regarding the method of interest calculation on Cost Accounting Standards (CAS) cost impacts (see GATES v. Raytheon Co., 584 F.3d 1062 (Fed. Cir. 2009)). The interest on CAS cost impacts is set by reference in the enabling statute to 26 U.S.C. 6621. The CAFC ruled that the citation led to calculation of the interest using daily compounding.

The Truth in Negotiation Act (TINA) also references 26 U.S.C. 6621 for interest calculation. (See 41 U.S.C. 3507 and 10 U.S.C. 2306a) and so FAR needed to be modified so as to require compounding of interest on Government overpayments as a result of defective cost or pricing data.

This new rule replaces the term ``simple interest'' as the requirement for calculating interest for Truth in Negotiations Act cost impacts with the phrase ``Interest compounded daily as required by 26 U.S.C. 6622.'' Thus, compound interest calculations will be applied to Government overpayments as a result of defective cost or pricing data.

This could have a significant impact on contractors with TINA violations. Often, these issues take years to resolve and if the Government ultimately prevails, the difference between simple and compounded interest could be significant.

Annual Incurred Cost Submissions - Adequacy

Effective June 30, 2011, the FAR Councils modified the requirements for the annual incurred cost proposal required under FAR 52.216-7, Allowable Costs and Payments. Up until now, FAR required contractors to submit a certified incurred cost submission within six months of fiscal year end (e.g. June 30^th for calendar year contractors). These submissions are used by the Government to settle indirect rates, as well as other things. With this new change, the requirement was expanded to require an “adequate” certified incurred cost submission. The revised rule also defines what an “adequate” submission must contain.

To be considered “adequate”, the annual incurred cost submission must contain the following schedules (as applicable):

• Summary of all claimed indirect expense rates, including pool, base, and calculated indirect rate.
• General and Administrative expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts).
• Overhead expenses (final indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) for each final indirect cost pool.
• Occupancy expenses (intermediate indirect cost pool). Schedule of claimed expenses by element of cost as identified in accounting records (Chart of Accounts) and expense reallocation to final indirect cost pools.
• Claimed allocation bases, by element of cost, used to distribute indirect costs.
• Facilities capital cost of money factors computation.
• Reconciliation of books of account (i.e., General Ledger) and claimed direct costs by major cost element.
• Schedule of direct costs by contract and subcontract and indirect expense applied at claimed rates, as well as a subsidiary schedule of Government participation percentages in each of the allocation base amounts.
• Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
• Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers; subcontract value and award type; amount claimed during the fiscal year; and the subcontractor name, address, and point of contact information).
• Summary of each time-and-materials and labor-hour contract information, including labor categories, labor rates, hours, and amounts; direct materials; other direct costs; and, indirect expense applied at claimed rates.
• Reconciliation of total payroll per IRS form 941 to total labor costs distribution.
• Listing of decisions/agreements/approvals and description of accounting/organizational changes.
• Certificate of final indirect costs (see 52.242-4, Certification of Final Indirect Costs).
• Contract closing information for contracts physically completed in this fiscal year (include contract number, period of performance, contract ceiling amounts, contract fee computations, level of effort, and indicate if the contract is ready to close).

Essentially these schedules mirror what DCAA has been requiring for years. They mirror the form and substance of the model incurred cost submission found in DCAA Pamphlet 7641.90, Information for Contractors and the Excel based version of the pamphlet called ICE (Incurred Cost Electronically). Both the pamphlet and the Excel model are available on the DCAA website.

Most government contractors (with cost type contracts) are already well aware of the DCAA incurred cost process/models and will find it easy to comply with the new requirement. Although DCAA never had a regulatory basis to require contractors to follow their models, most contractors found it expedient to do so. With this new regulation, DCAA has the regulatory backing that they have been seeking.

DCAA’s incurred cost models are divided into “required” schedules and “optional” schedules. The optional schedules are listed in the new FAR definition as "not required" but "may be required during the audit process", leaving the decision to provide the optional schedules up to individual contractors. In our practice, we typically leave out the optional schedules. Most of the optional schedules are of little value to an audit and if the information does become necessary, the auditor can develop it during the audit.

After receipt of contractor incurred cost submissions, DCAA performs an “adequacy” review of the submission. It is only after the submission has passed an adequacy review that it gets thrown into the hopper for an eventual audit. During the adequacy review, DCAA typically requests additional documentation. Most often, DCAA requests the trial balance so that it can trace amounts in the submission to the accounting records and copies of the IRS Forms 941 so that it can compare labor cost books with labor costs reported to the IRS. (The labor reconciliation is a required schedule but the actual forms are not required).

New Rules Now in Effect for Payment of Fee

A significant change regarding the payment of fees (profit) to contractors became effective last week. The three contract clauses (FAR 52.216-8, -9, and -10) regulating how the Government will pay fees under CPFF and CPIF contracts now requires mandatory rather than discretionary withholds. Under the old rules, contracting officers had the discretion of withholding fee if he/she thought it was necessary to protect the Government's interests. For contractors awarded after June 30th, that contracting officer discretion is taken away in favor of mandatory withholds.

For example, FAR 52.216-8(b) formerly read as follows: 

(b) Payment of the fixed fee shall be made as specified in the Schedule; provided that after payment of 85 percent of the fixed fee, the Contracting Officer may withhold further payment of fee until a reserve is set aside in an amount that the Contracting Officer considers necessary to protect the Government’s interest. This reserve shall not exceed 15 percent of the total fixed fee or $100,000, whichever is less.

Effective June 30, 2011, FAR 52.216-8(b) now reads:

(b) Payment of the fixed fee shall be made as specified in the Schedule; provided that the Contracting Officer withholds a reserve not to exceed 15 percent of the total fixed fee or $100,000, whichever is less, to protect the Government's interest.

This change will likely have significant cash flow ramifications for many contractors.

The other significant change to this clause affects the timing for releasing a portion of the amount of fee withheld. Under the old clause, the contracting officer shall release 75 percent of the fee withholds after receipt of a certified final indirect cost rate proposal covering the year of physical completion of the contract. Under the new clause, the word "adequate" was added. We will discuss that change tomorrow.

Getting Your Fixed Fee Paid

There are hundreds of small contractors that have been waiting years for DCAA to audit their annual incurred cost proposals. Right now, DCAA is hopelessly behind in performing these reviews and the Government is contemplating "outsourcing" these audits as a way of catching up. Because incurred cost audits have not been completed, contractors are unable to close out their contracts and collect fee withholds. In some cases, fee withholds are significant to a small company's cash flows.

There is some relief available under existing contract clauses and contractors should be aware of limitations on how much fee can be withheld. For example, FAR 52.216-8, Fixed Fee, states: 

(a) The Government shall pay the Contractor for performing this contract the fixed fee specified in the Schedule.

(b) Payment of the fixed fee shall be made as specified in the Schedule; provided that after payment of 85 percent of the fixed fee, the Contracting Officer may withhold further payment of fee until a reserve is set aside in an amount that the Contracting Officer considers necessary to protect the Government’s interest. This reserve shall not exceed 15 percent of the total fixed fee or $100,000, whichever is less. The Contracting Officer shall release 75 percent of all fee withholds under this contract after receipt of the certified final indirect cost rate proposal covering the year of physical completion of this contract, provided the Contractor has satisfied all other contract terms and conditions, including the submission of the final patent and royalty reports, and is not delinquent in submitting final vouchers on prior years’ settlements. The Contracting Officer may release up to 90 percent of the fee withholds under this contract based on the Contractor’s past performance related to the submission and settlement of final indirect cost rate proposals.

The first thing to note is that the contracting officer "may" withhold fee. The clause does not require that fee be withheld even though many contracting officers and government auditors believe (or assume) it does. If a contracting officer determines that fee must be withheld in order to protect the government's interests, it must modify the contract accordingly. We've written about this in the past. Assuming that fee has been withheld, the contracting officer must release 75% of the withheld amount after the contractor has submitted a certified final indirect rate proposal covering the year of physical completion of the contract.

Finally, the contracting officer may release up to 90 percent of the fee based on past performance.

If you are up to date on your incurred cost submissions but still have contracts with 15 percent of the fixed fee withheld, you should contact your contracting officer to get most of the contract fee released.