Statute of Limitations on Incurred Costs?

Those who follow the Government contracting industry are no doubt aware that DCAA (Defense Contract Audit Agency) is significantly lagging in its audit production. There were some revelations last week that helped put some of this in perspective. POGO (Project on Government Oversight) followed by a number of other news organizations reported that the backlog of incurred cost dollars waiting to be audited now sits at $560 billion. the Commission on Wartime Contracting estimated this backlog will approach $1 trillion by fiscal year 2016.


DCAA has a five-year plan to address this deficiency. By the end of fiscal year 2016, it plans to have the backlog all but eliminated. However, judging from comments by current and former DCAA auditors, DCAA will need to drastically change the way in which it conducts audits if that goal is ever to be achieved. They believe that given the existing culture, the audit programs and procedures, the inordinate number of supervisory/managerial reviews, and the unrealistic demand for perfection, will conspire against the Agency ever achieving that goal.


There were some intriguing comments pertaining to a statute of limitations in the various news articles on this subject. According to the POGO source:

If DCAA audits occur more than six  years after a cost has been incurred and paid, the government may lack a basis for disallowing the costs even if it should not have been paid.

DCAA is evidently aware of this statute of limitations because the same article quoted a DCAA spokesperson saying that DCAA does not agree with the interpretation:

DCAA disputes this definition of the six-year limitation. In some cases, the exact nature of the charges cannot be determined until DCAA examines the underlying records.

There must be something to this six-year limitation because this same DCAA spokesperson adds:

DCAA is prioritizing the oldest audits to reduce the chances of exceeding the limitation.

If you've got incurred cost submissions pushing this six-year mark, it might be beneficial to consult with legal counsel to determine the propriety of DCAA performing an audit on costs for those years.

New CAS Board Chair Approved by Senate

The Senate recently confirmed Joseph Jordan as the Obama administration's Administrator of the Office of Federal Procurement Policy (OFPP). The OFPP Administrator is also the de facto Chair of the Cost Accounting Standards Board.

Before joining OFPP last December as a senior adviser on procurement issues, Jordan spent three years as the Small Business Administration's associate administrator of Government contracting and business development. That office oversees programs and services that help small business win government set-aside contracts.

Before joining the SBA, Jordan spent two years as a McKinsey manager, two years with a dot com startup, and two years as an associate producer for Chris Matthews.

During the confirmation hearings some Senators felt that Jordan did not have the requisite experience for the position. However, Jordan's predecessor, Daniel Gordon came to bat for him with a positive recommendation: "During his time in government, Jordan has shown he understands and knows how the work within the contracting community.

During the hearings, Mr. Jordan made the following statements:

• I will work to have federal agencies buy smarter
• I will redouble federal efforts to document and share contractor past performance information
• I will maximize contracting with small and disadvantaged businesses
• Our agencies must be prepared to give appropriate consideration to suspension and deparment to fight the waste and abuse of bad actors
• The acquisition workforce should be strengthened.

Where have we heard all that before?

Investigative Support

From time to time during the normal course of their audits, contract auditors turn up information (or indicators) of potential fraud, waste, or abuse. Since contract auditors are not "investigators", this information is turned over to one of the Government's investigative services such as the investigative arms of the various Inspector Generals, or the Army Criminal Investigative Command (CID), the Air Force Office of Special Investigations (AFOSI), or the Naval Investigative Service (NIS).

Although contract auditors are not investigators, they do offer investigative support services. Often times, indicators of fraud, waste, and abuse are based on intricate accounting or internal control irregularities where the assistance of an accounting expert is essential to understanding and successfully prosecuting contract irregularities.

In fiscal year 2011, the Defense Contract Audit Agency (DCAA) supported more than 160 investigations. These investigations resulted in more than $350 million cost recoveries for the Government. Of course that amount was not solely a result of DCAA effort. DCAA was but one of the "team" that secured these monies.

Most Government contractors are unaware of this cadre of investigative support auditors. That's a good thing. However, even if a contractor is under investigation, it might not ever encounter these auditors. That's because their work is usually conducted at the investigator's offices or the U.S. Attorney's office using data and records that have been subpoenaed.

There is supposed to be a firewall between the investigative support auditors and the regular auditors. Information acquired during an investigation (especially coming from a Grand Jury) cannot be used for any other purpose including contract audits. For this reason, agency's sequester their investigative support auditors to avoid any possibilities that investigative information might somehow flow back to the contract audit side of the organizations.

DCAA's First Annual Report to Congress

DCAA's (Defense Contract Audit Agency) first annual Report to Congress has now been released to the public. This isn't just a report that DCAA decided to publish because they thought it would be good PR. No, this report is required by Fiscal Year 2012 National Defense Authorization Act (NDAA) because Congress was concerned about DCAA's performance. Not only does the NDAA require DCAA to issue an annual report but it also specified specific areas that Congress wanted to see addressed in the report. One of those areas is "Significant Deficiencies and Recommended Actions to Improve the Audit Process".

The problems internal to DCAA have been well-documented and widely reported over the past few years; audits that do not comply with professional standards, Agency retaliation against whistle-blowers, chronic failure to issue timely audit reports, significantly increased backlog of incurred costs requiring audit, to name a few. We knew this report was coming and we were somewhat hopeful that it would address some of these major issues. Unfortunately, the section dealing with significant deficiencies barely touched on DCAA's problems. DCAA tries to place the blame elsewhere. Here's a recap of DCAA's four "significant deficiencies".

1. Its not our fault. DCAA stated that contractors are not submitting adequate proposal packages and thinks that contractors should improve their proposal preparation processes.
2. Contractors don't care about their internal control systems. DCAA believes that contractors need to be penalized by "invoking a payment withhold".
3. Contractors won't give us access to records. DCAA wants subpoena power.
4. We doesn't have enough auditors. DCAA has more auditors now than at any time in the last 12 years but that's not enough.

Bid Protests - Reimbursement of Costs

It should be fairly common knowledge that companies who prevail in a bid protest situation are entitled to reimbursement for reasonable costs related to the protest. This, is to relieve protesters, with valid claims, f the burden of vindicating the public interests which Congress seeks to promote. It is not intended to be a reward to prevailing protesters or as a penalty imposed upon the Government.

In a recent case, a company who won a bid protest, then applied for reimbursement for 93 hours of attorney's time. The Army refused stating that 93 hours was excessive because the protest issue was straightforward and simplistic in nature and should not have required that much effort. The company filed another appeal.

The Comptroller General (CG) examined the reasonableness of attorney hours to determine whether they exceed, in nature and amount, what a prudent person would incur in pursuit of his or her protest. In this case, the Army did not identify specific hours as excessive nor did it "articulate a reasoned analysis as to why payment for those hours should be disallowed". The CG stated that "...simply concluding that the hours claimed are excessive ... is inadequate to justify denying a claim for protest costs".

The CG's review furnished no basis for concluding that the number of hours exceeded, in nature or amount, what a prudent person would incur in pursuit of this protest. Nor did the CG find any basis to agree with the Army that the issue raised by the protester was a narrow, simplistic, and uncomplicated legal issue that did not justify the hours claimed.

The CG told the Army to pay the attorney fees and also to reimburse protest cost associated with the second appeal.

Companies filing bid protests need to segregate costs associated with their appeal in their accounting records in order to facilitate the preparation of reimbursement requests if/when they prevail. Remember, the rules of "reasonableness" apply.

Order of Precedence - Contract Modifications - Final

This isn't exactly a re-post of a previous update on this subject but it does come close. Back in January, we wrote that DoD had proposed to amend its FAR supplement (DFARS) to establish an order for application of contract modifications to resolve any potential conflicts that may arise from multiple modifications with the same effective date. The January proposal has now become regulation in DFARS 204.7007.

This is important for contractors to know because circumstances exist in which the numeric order of the modifications to a contract is not the order in which the changes to the contract actually take effect. In order to avoid conflict, confusion and potential litigation, DoD has now clearly established within its procurement regulations, an order of precedence.

• Modifications will be applied in the order of the effective date on the modification
• In the event of two or more modifications with the same effective date, modifications will be applied in signature date order.
• If the modification has the same effective date and the same signature date, PCO mods (those are modifications beginning with the letter 'P') will be applied in numeric order followed by ACO mods (those are the modifications beginning with the letter 'A') will be applied in numeric order.

In short, dates take precedence over numeric order unless there is a tie. Numeric order is the tie-breaker.

Novation Agreements - Part II

Novation agreements are required whenever a contractor is acquired by a third party. Sometimes the Government will block such moves as in such notable cases involving Lockheed and Northrup, General Dynamics and Newport News, and Litton Industries and Newport News. The Government has also blocked some acquisitions of DoD contractors by foreign entities. If the Government is not convinced that an acquisition is in its best interests, it is not bound to novate contracts to the new or to the acquiring company.

When a contractor asks the Government to recognize a "successor in interest", the contractor must submit to the Government

• The proposed novation agreement
• The document describing the proposed transaction, e.g. purchase/sale agreement or memorandum of understanding
• A list of all affected contracts between the transferor and the Government, as of the date of sale or transfer of assets showing 
• contract number and type
• name and address of the contracting office
• total dollar value, as amended,, and
• approximate remaining unpaid balance
• Evidence of the transferee's capability to perform
• Any other relevant information requested by the contracting officer.

Several years ago, there was an acquisition involving a contraction contractor. The acquiring company did not perform adequate due diligence and after the transaction was finalized, discovered that several large Government construction contracts were in significant loss positions, so significant that it drove the acquiring company into bankruptcy. (Although the bonding companies stepped in to finish the work, completion was significantly delayed as a result). Since then, the Government has been heavily emphasizing reviews of the financial capability of acquiring companies when considering novation agreements.

The requirement to provide "any other relevant information requested by the contracting officer" is the gateway for requiring voluminous amounts of additional detail. This might include such information as board of directors meeting minutes, shareholder meetings, articles of incorporation, legal counsel correspondence, financial statements, security clearances, and many others.

Companies who are contemplating acquiring Government contractors and Government contractors who are seeking to be acquired, need to expect and anticipate a prolonged determination process.

Novation Agreements - Part 1

A novation agreement, as used in Government contracting, is the act of replacing a party to an contract with a new party. A novation is valid only with the consent of all parties to the original contract (both the Government and the contractor). A contract transferred by the novation process transfers all duties and obligations from the original contractor to a new contractor.

While Government contractors are prohibited from transferring their Government contracts to a third party (see 41 U.S.C. 15) there are times the Government will, when it is in their interest, recognize a third party as the "successor in interest" to a Government contract. Its never a sure thing that the Government will go along with the deal however. There are many factors that the Government needs to consider and there are a few hoops that contractors will need to jump through as well.

A "successor in interest" arises out of the transfer of

• All the contractor's assets to a different entity (Company A acquires Company B)
• The entire portion of the assets involved in performing the contract.(Company A acquires a "segment" of Company B). Some examples include:
• Sales of these assets with a provision for assuming liabilities
• Transfer of these assets incident to a merger or corporate consolidation
• Incorporation of a proprietorship or partnership, or formation of a partnership.

A novation agreement is unnecessary when there is a change in the ownership of a contractor as a result of a stock purchase, with no legal change in the contracting party, and when that contracting party remains in control of the assets and is the party performing the contract. However, whether there is a purchase of assets or a stock purchase, there may be issues related to the change in ownership that appropriately should be addressed in a formal agreement between the contractor and the Government. For example, if the new owners have been suspended or debarred from contracting with the Government, the Government would obviously have issues with the new ownership team.


Sometimes, the Government will determine that it is not in their interest to concur in the transfer of a contract from one company to another company. In those circumstances, the original contractor remains under contractual obligation to the Government, and the contract may be terminated for reasons of default, should the original contractor not perform.

When considering whether to recognize a third party as a successor in interest to Government contracts, the responsible contracting officer must identify and evaluate any significant organizational conflicts of interest. If the responsible contracting officer determines that a conflict of interest cannot be resolved, but that it is in the best interest of the Government to approve the novation request, a request for a waiver may be submitted.

Tomorrow we will discuss contractor data requirements and contracting officer considerations.

New CAS Board Member

Laurie Schmidgall, Director of Cost Policy at the Boeing Company Corporate Office in Chicago, IL has been appointed to replace Bruce Timman as the Industry Representative on the Cost Accounting Standards Board. Mr. Timman, Director, Government Accounting Compliance, Honeywell, Inc's term expired March 31, 2012.

The following information comes from Ms. Schmidgall's bio:

Ms. Schmidgall has extensive expertise in interpreting the Cost Accounting Standards and Federal Acquisition REgulations, providing guidance to ensure compliance to these regulations for Government contracting, and responding to regulatory activities. Ms. Schmidgall works directly with Department of Defense personnel, including the Defense Contract Management Agency and the Defense Contract Audit Agency to address Government compliance concerns. She is also experienced with the preparation and negotiation of forward pricing rates and final indirect costs.

Ms. Schmidgall is active in several industry organizations, including the Aerospace Industries Association, National Defense Industrial Association, and Financial Executives International. As an industry representative, she has analyzed the impacts of a number of regulatory changes, drafted many comment letters on proposed rules, and briefed interested Government parties. She has also held leadership roles on various committees of these associations.

Prior to joining The Boeing Company, Ms. Schmidgall worked for a few other companies, such as Zenith Electronics, where she developed broad experience in a variety of accounting and related disciplines, including preparation of financial statements, SEC filings, asset management, tax filings, ERP system conversions, inventory management, internal audit, accounts payable, compensation plans, medical insurance plan administration, corporate liability risk management, mergers and acquisitions, and pensions. 

Ms. Schmidgall completed her accounting education at DePaul University in Chicago and is registered in Illinois as a Certified Public Accountant. She is also a member of the Illinois CPA Society. 

What are "Audit Leads"?

We've warned on a number of occasions that contractors should never assume that when auditors arrive at their facilities, they are focused exclusively on the particular audit that they've been assigned. The good auditors are ever-alert for conditions that, while not within the scope of their particular audit, are nevertheless situations that might somehow or somewhere along the line, result in increased costs to the Government.

When those situations or conditions are observed, and they are outside the scope of the audit at hand, the auditor will write up "audit leads" to be followed up at a later date. For example, while performing a labor floorcheck, the auditor might observe idle capacity or idle facilities. While that observation has nothing to do with timesheets, it may affect indirect costs charged to Government contracts. The audit lead simply alerts the incurred cost auditor of a potential cost issue to follow up during an incurred cost audit.

The specific procedure preparing audit lead sheets goes something like this:

• Auditors will prepare audit lead sheets when an issue arises that an auditor believes needs to be addressed, but is not an area within the scope of the current audit. Auditors will provide a brief description of the audit lead, identify areas potentially impacted, and suggest audit steps, if appropriate.
• Supervisors will review draft lead sheets and provide guidance for appropriate action/follow up. 
• If a lead is part of the scope of the current assignment, the supervisor will assist the auditor in designing tailored audit steps to adequately cover the area of concern. 
• If a lead is not part of the scope of the current assignment, appropriate follow up may include
• (1) documenting specifically where the lead will be addressed in a future assignment(s) or 
• (2) immediately establishing a new assignment to review the lead. 
• Supervisors are responsible for ensuring that audit leads are addressed and dispositioned appropriately and well documented.
• Final approved audit lead sheets are to be maintained in the originating assignment working papers, as well as in a central file.

Historically, the preparation of audit leads have been infrequent. However there is renewed emphasis by contract auditors to be alert for audit leads and prepare the associated lead sheets. There is also a new policy that requires management to review audit leads from time to time to ensure they have been appropriately considered and dispositioned.

Adequacy Checklist for Incurred Cost Proposals

Yesterday we mentioned that DCAA (Defense Contract Audit Agency) recently revised its adequacy checklist for incurred cost proposals. It represents a major rewrite of the previous adequacy checklists (there have been several over the years). This one is organized so that it closely corresponds to the requirements of FAR 52.216-7. However, in some cases, the checklist requirements go beyond the FAR requirements.

For example, FAR 52.216-7 requires a schedule that shows claimed G&A (General and Administrative) expenses by element of cost as identified in accounting records. DCAA takes this requirement much further by requiring explanatory notes for any adjustments from booked expenses. Now the auditor will certainly need to have this information in order to conduct his/her audit. Its a valid inquiry. However, the contract clause simply does not require the information as part of an adequate claim. There are several other checklist items that require information or analyses beyond what FAR requires.

We would advise contractors to provide the information identified in the checklist. Its a "provide it now or provide it later" situation. It will expedite things to provide it now and not face the prospect of having your incurred cost proposal returned as inadequate.

As you review the checklist, if you have any questions about the propriety of a checklist item or just want clarification, call us or drop us an email.

Are You High Risk or Low Risk?

DCAA has a method for determining whether contractors' annual incurred cost proposals (sometimes called ICE) are high risk or low risk.

Low risk proposals are grouped together and a few are selected for audit based on statistical sampling. Assuming no audit issues are disclosed, the proposals not sampled are simply closed with no further work. DCAA will send contractors a rate agreement letter for signature and the process is complete.

High risk proposals are subjected to a full audit.

Once a proposal has been determined to be "adequate", the Government will proceed to classify it as high risk or low. DCAA has a new checklist for determining whether a submission is adequate. We will discuss that in a subsequent post.

The criteria for determining whether an annual incurred cost proposal is low risk include the following:

1. Is it less than than $ 15 million? In other words, did the contractor incur less than $15 million on Government flexibly priced contracts?
2. Are there audit leads or other significant risk identified (e.g. any known business system deficiencies that would have a significant impact on the final indirect rate proposal for this fiscal year, significant risk identified by the contracting officer, etc.)?
3. Is this a new “incurred costs” contractor? (i.e., a contractor where DCAA has no incurred cost audit experience).
4. Were there significant questioned costs in the prior year’s audit? Significance is defined as $15 thousand for proposals under $1 million and $25 thousand for proposals under $15 million.

An answer of  "yes" to any one of the four questions sends the proposal to the high risk pool and subject to full audit.

Lobbying Costs and Legislative Earmarks - Part 4

Today we're going to finish up this series on lobbying costs. As we indicated in our first post in this series, DCAA is increasing its oversight on this subject and has revamped its guidance for auditors when reviewing lobbying costs.

Any company with a "Washington Office" is almost automatically a target for a lobbying review. In the auditor's view, why would a contractor have a Washington office if not for lobbying activities? There was a big push to perform comprehensive reviews of contractors' Washington offices several years ago. Look for that to happen again.

Here are some specific procedures that auditor will perform.

• Plan appropriate audit procedures to determine whether the contractor properly identified and excluded unallowable lobbying and related costs from submissions to the Government. Recall from a previous post that these costs must be separately identified in the General Ledger and cannot be commingled with other accounts.
• Determine whether the contract is a registrant under the Lobbying Disclosure Act and if so, obtain copies of the quarterly reports filed by the contractor.
• Reconcile the quarterly report with the contractor's incurred cost submission.
• Ensure the list of employees and specific lobbying issued disclosed in quarterly reports are consistent with the incurred cost submission.
• Perform procedures to ensure the contractor has included directly associated costs.
• Consult the OMB website for appropriations earmarks.
• Consult the Taxpayers for Common Sense (TCS) website for appropriations earmarks (this should leave no doubt that auditors will check non-governmental sources for audit leads).
• For significant earmarks, contractors should be queried to determine the procedures used to identify and remove the costs associated with supporting earmarks from forward-pricing and incurred cost proposals.
• Look for "supporting costs" which may include program management, contracting, public relations, consultants and technical personnel.

Any unallowable lobbying costs found in a contractor's incurred cost submission are probably going to be subject to penalty. Additionally, if a contractor does not have documented policies and procedures for accumulating and identifying lobbying costs in its accounting system, the auditor will issue a deficiency report to the appropriate contracting authorities.

Lobbying Costs and Legislative Earmarks - Part 3

For the past two days, we have been laying out the general allowability criteria for lobbying costs by studying the FAR cost principle (FAR 31.205-22). On Wednesday, we looked at the activities that are unallowable and yesterday, we discussed some exceptions to the general prohibition against claiming lobbying costs on Government contracts. There are a few.

Besides the FAR cost principle, there are two other statutes governing lobbying activities that Government contractors need to be aware of.

31 U.S.C. 1352, Limitation on Use of Appropriated Funds to Influence Certain Federal Contracting and Financial Transactions. This statute prohibits a recipient of a Federal contract (including grants, loans and cooperative agreements) from using appropriated funds to pa any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with any covered Federal Actions. This prohibition is very similar to the FAR cost principle but would also apply to situations where the FAR cost principle does not apply.

2 U.S.C. 26, The Lobbying Disclosure Act of 1995. This statute significantly expands the registration and reporting requirement for those who engage in lobbying activities. Contractors must register with the Secretary of the Senate and the Clerk of the House if the organization has at least one employee who meets the statutory definition of lobbyist and lobbying expenses exceed $10 thousand per year. This is an extremely low threshold and most contractors who engage in lobbying activities, easily exceed it.

Earmarks. Government auditors have taken the position that efforts expended to pursue legislative earmarks are a form of lobbying costs. That position may be eventually challenged on the basis that such activities are constituent services and do not meet the precise definition of lobbying activities. In any event, we would advise contractors to identify and exclude such costs from any submissions made to the Government. Usually such costs would not be significant enough to affect an indirect rate.

The OMB (Office of Management and Budget) describes earmarks as funds provided by Congress for projects, programs, or grants where the purported Congressional direction circumvents otherwise applicable merit-based or competitive allocation processes, or specifies the location or recipient..

Lobbying Costs and Legislative Earmarks - Part 2

Yesterday we began this series on lobbying costs by discussing the types of lobbying costs that are unallowable. Today we continue with a discussion of the types of lobbying activities that are (or could be, depending upon circumstances) exempt from the general prohibition against lobbying. There are a few.

Congressional Testimony: Costs related to providing a technical and factual presentation of information on a topic directly related to the performance of a contract through hearing testimony, statements or letters to the Congress or a state legislature, or subdivision, member, or cognizant staff member thereof, in response to a documented request provided

• such information is readily obtainable and can be readily put in deliverable form; and 
• costs for related transportation, lodging or meals are incurred for the purpose of offering testimony at a regularly scheduled Congressional hearing.

Cost Reduction: Any lobbying activities that would normally be unallowable but are necessary in order to directly reduce contract costs, or to avoid material impairment of the contractor's authority to perform the contract.

Statutory Authorization: Any activity specifically authorized by statute to be undertaken with funds from the contract.

Government contractors are sometimes subpoenaed or invited to testify at Congressional hearings. If the testimony relates directly to a specific contract, the costs might be allowable. But contractors must be prepared to carefully document the allowability criteria for any form of lobbying activity that they wish to claim on their Government contracts.

There was an ASBCA (Armed Services Board of Contract Appeals) case, later affirmed by a federal district court, involving lobbying costs that were incurred at the direction of an Army Program Manager. The courts ruled that the Army did not have the authority under the cost principle, to waive the prohibition against lobbying activities. Those costs were unallowable.

Lobbying Costs and Legislative Earmarks

Today we begin a short series on costs associated with lobbying and legislative earmarks. This is an area that is now receiving increased attention by the Government. DCAA (Defense Contract Audit Agency) recently revamped its audit guidance on the subject. It is also an area that we've discussed frequently in this blog but never in a comprehensive manner.

In general, lobbying costs represent amounts incurred to influence the outcome of elections, referendums, legislation, and other governmental actions at all levels of Government. Most of the time, these costs are unallowable on Government contracts however there are a few exceptions which we will be describing later (see FAR 31.205-22, Lobbying and Political Activity Costs). It is useful to note that this cost principle contains a provision that is unique among the many cost principles; it requires that contractors separately identify lobbying costs in their indirect rate submissions and maintain adequate records to affirm their certification of these costs as either allowable or unallowable. So, contractors should not be commingling lobbying costs with other expenses, such as legal and professional fees - they need to be specifically identified.

First, we'll take a look at what kinds of activities or costs are not allowable under Government contract.

Among the types of lobbying activities considered unallowable, are:

1. Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in-kind or cash contributions, endorsements, publicity, or similar activities (Note the term "in-kind". Some contractors have run afoul of this prohibition by "donating" employee time to such activities);
2. Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections;
3. Any attempt to influence
• The introduction of Federal, state, or local legislation, or
• The enactment or modification of any pending Federal, state, or local legislation through communication with any member or employee of the Congress or state legislature or with any government official or employee in connection with a decision to sign or veto enrolled legislation
4. Any attempt to influence
• The introduction of Federal, state, or local legislation, or
• The enactment or modification of any pending Federal, state, or local legislation by preparing, distributing or using publicity or propaganda, or by urging members of the general public, or any segment thereof to contribute to or participate in any mass demonstration, march, rally fund raising drive, lobbying campaign or letter writing or telephone campaign
5. Legislation liaison activities
6. Costs incurred in attempting to improperly influence an employee or officer of the Executive branch of the Federal Government to give consideration to or act regarding a regulatory or contract matter.

For contractors with DoD contracts, the DoD FAR Supplements adds an additional prohibition: costs incurred by DoD contractors for preparing any material, report, list, or analysis concerning the actual or projected economic or employment impact in a particular state or congressional district of an acquisition program for which all research, development, testing and evaluation has not been completed.

This is a very comprehensive listing and does not leave much "wiggle room". However, there are a few exceptions to these prohibitions that we will discuss tomorrow.

Is Your Proprietary Data Protected?

Companies, especially companies new to the Government contracting arena, are often wary of sending proprietary company data off to faceless, nameless bureaucrats. One never knows where that information could end up. Will it somehow end up in the hands of the competition? Will it be passed along to other Government agencies, where perhaps, you've submitted proposals with different costing information? Will it end up in a congressional hearing? Will it become public? What about company responsibility to safeguard employee personnel data?

We can't tell you not to worry, but you shouldn't worry too much.  Agencies have a responsibility to protect proprietary information from disclosure outside the Executive Branch. Intentional and inadvertent disclosures can harm the competitive position of contractors among their competitors and impair the ability of the Federal Government to maintain a robust and competitive marketplace. Disclosure is also illegal under a variety of statutes. For this reason, Government contracting personnel including contract auditors are trained from the very beginning of their careers the importance of safeguarding proprietary information.

While there are restrictions on the release of proprietary information outside the Government, there are no general limitations on the disclosure of information between agencies within the Government. As a matter of fact, agencies are encouraged to share pricing information to help ensure the Government is getting the best value for taxpayers. While the flow of information outside the Government can cause harm, the flow of information between agencies (within the Executive Branch) does not cause harm but helps "root out wasteful duplication and negotiate  better deals for the taxpayer."

Sometimes the Government relies on contractors to help award other contracts. These contract workers will have access to the proprietary data of other contractors including cases where those contractors are in direct competition with their own company. In these cases, the Government tries to build a firewall so that proprietary data is not communicated back to the employer. These procedures are covered in FAR 9.5 regarding organizational conflicts of interest.

There have been cases where company proprietary information has been demanded of an Executive Agency by Congress and subsequently made public during a Congressional committee hearing, for example. These are extreme cases and would be difficult to prevent, no matter how tightly a company's or an Executive Agency's policies were drafted.

Contractors should be routinely marking each document that contains proprietary information with a statement to that effect. This should at least reduce the risk of inadvertent disclosures.

If Your Bid's Too High, the Government Won't Buy

The Government has the authority to cancel a solicitation as long as it can provide a reasonable basis for doing so. If an agency cannot purchase something at a fair and reasonable price, as required by FAR (Federal Acquisition Regulations), cancelling the solicitation would be warranted.

A determination of "fair and reasonable" is a matter of agency discretion, involving the exercise of business judgment. In establishing price reasonableness, an agency may consider any number of factors, including prior contract history and the "independent government estimate" (IGE). There are bid protest cases on file where the GAO has sustained cancellations as proper when the lowest price exceeded the government estimate by 7.2 percent.

A recent bid protest case (Estrategy Inc., B-406466 and 467 dated May 4, 2012) illustrates this point. The government provided contemporaneous documentation that it prepared an in-depth analysis of the proposed price. Specifically, the contracting officer considered both the government estimate and the agency's prior contracting history, which included consideration of the price paid under an earlier contract as well as prices paid for prior contracts adjusted for inflation. As a result of this analysis, the contracting officer concluded that adequate price competition did not exist and that an award could not be made at a reasonable price.

Looking at this documentation, the GAO ruled that the Agency's determination was reasonable and the protester's assertions to the contrary were without merit.

Commercial Item Definition - Proposed Change

Each year, Government agencies prepare and send in "legislative proposals" to Congress for its consideration. Last year, for example, DoD sent in 12 different packages of legislative proposals for consideration under the National Defense Authorization Act (NDAA) for FY 2012. For the FY2013 NDAA, it has already submitted six packages with more expected before a June cut-off date. Not all of these proposals make it through the legislative process of course but many do.

One of the proposals submitted in a package on March 28, 2013 would revise the definition of the term "commercial pricing" by

1. eliminating the "of a type" criterion, 
2. eliminating items or services that are merely offered for sale but not yet sold, and 
3. adjust the threshold that requires prior sale of "substantial" quantities to one that allows prior sale of "like" quantities.

In DoD's view, this proposal would permit the Government to acquire commercial items at better prices by ensuring that such items are only those goods or services that actually have been sold, leased, or licensed in comparable quantities in the commercial marketplace and therefore have prices that clearly are based on competitive market pricing or established catalog prices.

The DoD Inspector General and the GAO have been critical of DoD's use of commercial item pricing. Those oversight agencies have found that DoD sometimes uses commercial item procedures to procure items that are misclassified as commercial items and therefore not subject to the forces of a competitive marketplace. Misclassification of items as commercial can leave DoD (as well as all Government agencies) vulnerable to accepting prices that are not the best value for the Government. Another DoD-IG report concluded that the commercial item definition is broad and has allowed contracting officials to award contracts for defense systems and subsystems that had no commercial market.

Service Contractors Must Hire Incumbent Employees

There is a proposed rule published today that will require, under "service contracts", successor contractors to hire the incumbent employees. A service contract is any Government contract where the principal purpose is to furnish services through the use of service employees.

Specifically, the proposed rule states that

When a service contract succeeds a contract for performance of the same or similar services at the sale location, the successor contractor and its subcontractors are required to offer those employees (other than managerial and supervisory employees) that are employed under the predecessor contract, and whose employment will be terminated as a result of the award of the successor contract, a right of first refusal of employment under the contract in positions for which they are qualified. 

This proposed regulation is being formulated to implement an Executive order for non-displacement of qualified workers under service contracts (E.O. 13495 dated January 30, 2009).

There would be a few limited exceptions to this proposed rule and there is also a waiver authority when the application of it would "impair the ability of the Government to procure services on an economical and efficient basis or would not serve the purposes of the Executive Order.

Thirty days before the old contract ends, the old contractor must provide a listing of employees qualified to work on the successor contract. The contracting officer, in turn, must provide the listing to the new contractor. There is also a lot of verbiage concerning the rights of the incumbent employees and avenues of recourse if they feel they have inappropriately lost their jobs.

We didn't see anything in the proposed rule that requires a successor contractor to match the pay and benefit levels of the old contractor but other rules might apply (such as Service Contracting Act) in some circumstances.

Fixed Fee on Reduced Scope Contracts

We became aware of a situation recently where a CPFF (Cost Plus Fixed Fee) contract with a twelve month period of performance (POP) was modified to reduce the POP from twelve months to ten months. The question raised by both parties (the Government and the contractor) was whether under these circumstances, the contractor was entitled to keep the entire fixed fee. The contractor has been billing the fee on a pro-rata basis (one-twelfth of the negotiated fixed fee each month). The Government had a notion that the contractor should not be allowed the full negotiated fee.

Unfortunately for the Government, the question of the fee was the least of its worries. By modifying the contract using the "changes" clause, the contractor was entitled to file a claims proposal for increased costs resulting from the change. These increased costs included unemployment/layoff related costs, cost of finding new employment, equipment storage, and lease termination. Ultimately, the Government ended up paying more as a result of reducing the POP by two months than it would have paid had they allowed the contract to simply expire.

Oh yes, and the Government did determine that the contractor was entitled to the entire fixed fee.

Past Performance - Again

When awarding contracts, FAR (Federal Acquisition Regulations) require agencies to consider firms' past performance records to help ensure that taxpayer dollars go to capable contractors. Past performance is not to be confused with prior experience. Prior experience refers to whether the firms have done similar work before, and past performance describes how well they have done that work.

While agencies have long been required to prepare a performance report at the conclusion of each contract, compliance with the requirement has always been problematical. Even when, in the relatively few cases where performance reviews were prepared, there was no central repository for these reports, making it impractical for contracting officers to consult past performance when contemplating the awards of new contracts.

The 2012 NDAA (National Defense Authorization Act) attempted to bring some structure to the program. It required DoD to develop a strategy for ensuring that timely, accurate, and complete information on contractor performance is included in past performance databases used for making source selection decisions, including standards for the timeliness and completeness of submissions and assigning responsibility and management accountability for the completeness of submissions.

For contractors, its important that past performance data be prepared timely and made available for contractor selection and award purposes - especially for ratings of "exceptional" or "very good". (Exceptional means that performance meets contractual requirements and exceeds many to the Government's benefit).

So, how is the Government doing? What is the Government's report card? Not too good, unfortunately. DoD just released its second quarterly report on past performance reporting. It didn't even hit 50 percent. For the three months ended March 30th, 2012, DoD prepared past performance reports for only 47 percent of completed contracts. This is actually worse than the previous three month period when the compliance rate was 59 percent.