DoD's Proposal Adequacy Checklist - A Clarification from DoD

As we work through and gain more experience with DoD's new proposal adequacy checklist, we find elements that just don't make sense. Checklist Item No. 19 is one of those.

Checklist Item No. 19, one of three questions falling under the subheading "Exceptions to Certified Cost or Pricing Data, asks, "Does the proposal include a price analysis for all commercial items offered that are not available to the general public?". The source for this requirement is specified as FAR 15.408, Table 15-2, Section II, Paragraph A.

If anyone checks the reference for this requirement, they'll be confused because FAR 15.408, Table `5-1, Section II, Paragraph A says nothing about providing price analyses of commercial items offered but not available to the general public. It states:

Provide a consolidated priced summary of individual material quantities included in the various tasks, orders, or contract line items being proposed and the basis for pricing (vendor quotes, invoice prices, etc.). Include raw materials, parts, components, assemblies and the services to be produced or performed by others. For all items proposed, identify the item and show the source, quantity, and price. Conduct price analyses of all subcontractor proposals. Conduct cost analyses for all subcontracts when certified cost or pricing data are submitted by the subcontractor. Include these analyses as part of your own cost or pricing data submissions for subcontracts expected to exceed the appropriate threshold in FAR 15.403-4. Submit the subcontractor certified cost or pricing data and data other than certified cost or pricing data as part of your own certified cost or pricing data as required in paragraph II.A.(2) of this table. These requirements also apply to all subcontractors if required to submit certified cost or pricing data.

There's nothing in the foregoing that requires contractors to include price analysis for commercial items that are not available to the public.

We need to go back to the definition of "commercial item" in FAR 2.101 to find out what DoD means by commercial items not available to the public. Herein we find that "commercial items" includes any item, other than real property, that is of a type customarily used for nongovernmental purposes and that has been offered for sale, lease, or license to the general public. It also includes items that meet this definition but for minor modification of a type not customarily available in the commercial marketplace made to meed Federal Government requirements. Minor modifications cannot significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process.

So, what gives? When asked to clarify, DoD responded:

This is not a new requirement; it is a reminder that a price analysis is still required when certified cost or pricing data are not required.

Well, that's true of all costs. Contractors must be able to demonstrate the reasonableness of their proposed costs regardless of the basis of estimate. Why single out commercial items not available to the public and then why give it a nonsensical reference as authority? There is no FAR requirement to submit these justifications with the proposal and the omission certainly doesn't make the proposal inadequate.

Perhaps this confusion is why NASA left this question out of its draft proposal adequacy checklist.

Myth: Civilian Workers are Cheaper than Contract Employees

Federal workers are cheaper than contract workers. It seems that everyone thinks that.

An article in the Federal Times the other day caught our eye. It was written by J.David Cox Sr. who happens to be the national president of the AFGE (American Federation of Government Employees), a union representing 670,000 government workers. So, keep that in mind if you read the article.

Cox quoted former Defense Secretary Gates that federal workers cost the government 25 percent less than contractors (that's possible, and believable). Cox also quoted Comptroller Robert Hale before a Senate subcommittee last June that contractors are two to three times more expensive than civilians (a statement probably taken out of context, otherwise it would be demonstrably false). Cox then referred to other studies from the Army and GAO that concluded significant savings could be achieved by insourcing the work that is now being provided by contractors.

One reason that more work is not in-sourced is because DoD has capped the size of the civilian workforce. In a couple of studies from 2010 and 2012, it was found that in-sourcing saved quite a bit of money and could have saved more if the civilian workforce had not been capped. Another recently completed GAO study confirmed that civilian workers were cheaper than contract employees.

The problem with these studies is that they do not measure efficiency. There is ample anecdotal evidence to show that contractors can perform certain tasks more efficiently than a Government workforce. One good example is the Department of Energy's experiences in obtaining contract audit services. Until a year or so ago, DOE obtained its contract audit services from DCAA (Defense Contract Audit Agency). Then, the Department made a decision to contract for those services from private firms. The private firms are bringing in their audits much quicker and cheaper than DCAA, even though their hourly rates are higher than DCAA's billing rates. There are many other examples where the Government has been more pleased with contractor performance than with Government employees' performance.

And then there was the 16 furlough days we just went through. Government workers were furloughed alright but now they are going to get all their back pay. That is tantamount to extra paid vacation. How efficient can that be - driving up the overhead?

And then there was this recently completed study from the Bureau of Labor Statistics. Government workers are absent 50 percent more than private-sector workers. How efficient can that be?

Contractors have a profit motive whereas Government agencies do not. Contractors are more likely to push their employees a little more than Government supervisors and managers. Contractors are more likely we weed out poor performers more quickly than Governmental agencies. Finally, contractor employees are less likely to be represented by a bargaining unit than government workers, giving contractors more flexibility to "manage" their workforces than many Governmental agencies.

Insourcing decisions should not be made solely on the cost per hour for civilian employees versus contractor employees. One needs to also consider the staffing plans of both competitors.

NASA Wants Its Own Proposal Adequacy Checklist

Today, NASA published a proposed rule in the Federal Register which would require contractors (and prospective contractors) to complete and submit a proposal adequacy checklist along with its proposal whenever certified cost or pricing data is required. The proposed checklist is very similar to the DoD checklist which became effective last March and which we have already written about. The proposed NASA checklist has two fewer checklist items than DoD's checklist.

The objective of NASA's proposed rule, like DoD's before it, is to ensure that offerors submit thorough, accurate, and complete proposals. It is expected that by completing the checklist, offerors will be able to self-validate the adequacy of their proposals which will improve the quality of their initial proposal submissions. This, in turn, will reduce the need for contractors to rework their initial proposal submissions which will save the Government time and resources in performing the evaluation of the proposal.

The NASA checklist adds the following to Checklist Item #3: "If your organization is subject to Cost Accounting Standards (CAS), does the proposal identify the current status of your CAS Disclosure Statement". Otherwise, Item #3 reads the same in both the DoD and NASA versions.

The NASA checklist omits Items #15 and #19 in DoD's checklist. Item #15 reads:

Has the offeror identified in the proposal those subcontractor proposals, for which the contracting officer has initiated or may need to request field pricing analysis (DFARS 215.404-3)?

Perhaps the omission is because the requirement references a DoD FAR Supplement requirement or because that particular DFARS makes no such requirement as we reported here.

The other DoD Checklist item not found in NASA's proposed checklist is Item #19 which reads:

Does the proposal include a price analysis for all commercial items offered that are not available to the general public (FAR 15.408, Table 15-2, Section II, Paragraph A)?

There is a 60 day comment period that ends on December 27, 2013 should you care to comment.

Are Small Businesses Feeling Flush Yet?

The Defense Logistics Agency (DLA) announced last week that it had exceeded its goals for awarding contracts to small businesses last fiscal year. Its goal was to award 32 percent of eligible dollars to small businesses and when the final tally was in, they found out small business awards totaled 35 percent of eligible dollars. This was the first time since 2006 that the Agency exceeded its small business contracting goals.

What is "eligible dollars" you ask? Eligible dollars in this case exclude dollars spent overseas, Foreign Military Sales, and Ability One (services) contracts. Eligible dollars for DLA in fiscal year 2013 totaled a little more than $20 billion. Of that $20 billion, 7.1 billion went to small businesses.

$20 billion represents a small fraction of U.S. Government procurements but still, this represents a positive step. The products that DLA buys is conducive to small business participation and DLA acknowledges that it has an easier time meeting (or in this case, exceeding) its small business goals than say the Army, Navy, and Air Force with their big ticket weapons systems.

DLA attributed its success to several factors:

• Make it easier for vendors to understand exactly what DLA wants to purchase
• Improve communication with small businesses
• Improve the website to help vendors find information easier
• Increase outreach efforts

According to DLA, one of its biggest challenges in the current year is to find new sources of supply for products and services. DLA believes that more sources mean better competition and should also improve quality.

Paying for Development Costs

When it comes to paying for intellectual property under negotiated contracts, the Government always seems to want something for nothing. Businesses might spend years and years and millions of dollars to design, develop, and patent a certain product or process. The Government comes along and want to buy it, but only wants to pay the actual cost of manufacturing. Under most costing techniques, those development costs, might not be allowed.

This is a real sticky area and extremely difficult to negotiate since there are no precedents, and the value is often at opposite ends of the spectrum for the contractor and the Government. The value is often determined by other factors - how badly does the Government want/need the item versus is the Government the only market in town or are there other alternatives (sources) for the Government. Most contracting professionals would advise contractors to seek legal counsel when it comes to such matters. FAR 31.109 would recommend these type of costs be subject to an advance agreement in order to preclude later disputes over the allowability, allocability, and especially the reasonableness of such costs.

No one would expect Microsoft to sell copies of its "Office" product (Word, Excel, Access, PowerPoint, etc.) at its production costs. What would that be, a few dollars for a DVD and a box, or nothing if the customer downloaded it? No one would expect Boeing to sell its commercial aircraft at production costs. The price of those aircraft include an amortization of development costs that were incurred long before the aircraft went into production. The same argument can be made for products that the Government buys where there was significant development effort required years before the purchase is made.

One thing that contractors should do is capture and accumulate development costs even if the costs are written off as a period expense each year. This shouldn't be too difficult with today's efficient web-based timekeeping systems and accounting software products. Once the costs are known, you at least have data to support your case. You might still argue over how many units those costs should be amortized over and how much of it the Government might have already paid for (through reimbursement of Independent Research and Development (IR&D) but at least you have a starting point from which to support your position.

$500 Per Gallon for Gasoline

Remember the procurement horror tales of the early 1980s? We do because we're that old and also because we were unwillingly and unwitting participants in trying to unravel and somehow justify why the Government paid $435 for claw hammers, $640 for toilet seats and $7,600 for coffee makers. Casper Weinberger had us scouring contracts to find purchases with excessive line item prices. It wasn't fun and it certainly wasn't productive.

Its back.

The Special Inspector General for Afghanistan Reconstruction (SIGAR) was looking into a hospital construction project in a remote Afghan province. The project was hopelessly behind schedule and over budget. Construction is being funded by USAID (Agency for International Development) or by us, the U.S. Taxpayer. The SIGAR found a number of alarming issues and cautioned that they were probably indicative of a much larger problem. SIGAR's report on their findings is available on the internet at SIGAR 14-6-IR/Gardez Hospital.

Among the findings were two examples of excessive payments to the Afghan contractor. In one case, the Inspector General  found the contractor paid $300 thousand for 600 gallons of gasoline. That's $500 per gallon (I think our driving habits might change at that rate). In another case, the contractor paid $220 thousand for a temperature control devise that should have cost $2 thousand (or possibly up to $10 thousand for a real fancy unit). To make matters worse, the U.S. Government then reimbursed the contractor for these excessive costs. Where was the Government oversight in this matter?

We probably haven't heard the end of this story.

How Many Working Hours in a Year?

What is the standard man-year (woman-year, person-year, whatever) in number of hours? Most of you will probably guess 2,080 (40 hours per week times 52 weeks in a year). That might be close enough for a lot of purposes but not nearly precise enough for Government purposes. Wait! What about that old adage "Its close enough for Government work"? Well, that old adage doesn't apply when it comes to Excel equipped Government contracting officers and their auditors.

More than a few Government solicitations call out a CME (Contractor Manyear Equivalent) of 2,087 hours. How do they get 2,087 hours?

There are more than 52 weeks in a year. There are actually 52.14286 weeks per year (365 days divided by 7 days). Multiplying that by 40 hours gives you 2,085.6 hours per year - not quite to the 2,087 hours yet.

To get to the 2,087 CME, we have to factor in leap years. Every 4th year we get an extra day and that raises the average number of weeks per year (over a four year period) from 52.14286 weeks to 52.17857 weeks per year. Multiplying 52.17857 by 40 hours gives us the 2,087 Contractor Manyear Equivalent (CME).

So, now you know.

More on Electronic Record Retention

In the last two postings, we have discussed the FAR requirements for scanning your original source documents and saving them electronically and the Government's (namely DCAA's) procedures for ensuring that contractors meet those requirements. The Government's concern is primarily three-fold. Are the images accurate representations of the original, are they conveniently and readily retrievable, and are they secure.

Concerning the first point, accurate representations of the original document, the Government is worried about potential alterations somewhere along the line. In its latest audit guidance on the subject, DCAA makes the following point:

Without testing internal controls (access and storage controls) related to the contractor's imaging process, there is going to be a risk that the records to be reviewed could have been altered since the time the testing was performed. This risk is similar to the risk that the contractor has altered their hardcopy documents from the time of creation to the time of audit. Therefore, if no IT system audit has been performed to test the contractor's internal controls, the auditor must consider fraud risk indicators and other know risk factors in determining whether there is a material chance that the scanned images have been altered since the time of testing (similar to the thought process that would take place in considering the risk that hardcopy documents have been altered). Based on this determination, the auditor will need to make a decision as to whether a qualification relevant to the lack of testing access and storage controls will be necessary.

So, what will happen if the auditor finds fault in the scanning/archiving/retrieval process? In theory, the auditor won't be able to rely on the integrity of the scanned records. The auditor will then ask to review the original documents. If those are no longer available (i.e. its past one year after the scanning process), the auditor will complete the audit but "qualify" the report.

Funny thing about qualified reports. The contracting officer that receive qualified reports, absolutely don't care about qualifications. They just want to award their contract or settle some incurred costs. Qualifications might make the auditor more comfortable but qualifications have no impact on the ultimate resolution of the audit report.

Compliance Reviews for Scanned Records

Last Friday, we wrote about the FAR (Federal Acquisition Regulations) requirements for contractors who which to preserve their original source documents in an electronic format. Briefly, these requirements include:

1. Established procedures to ensure that the imaging process preserves accurate images of the original records
2. An indexing system to permit timely and convenient access to the imaged records, and
3. Retention of the original records for a minimum of one year after imaging (to permit periodic validation).

A question arises as to who is going to test contractors' compliance in this area? Well, DCAA (Defense Contract Audit Agency) will, for one. We don't know if DCAA was somehow assigned to task of testing for compliance or they took it upon themselves since (with DCMA's (Defense Contract Management Agency) ascendancy, DCAA is finding itself with reduced functionality) the Agency has extra time to do those things. But, DCAA recently issued guidance to its auditors on the need to validate contractor practices EVERY YEAR!.

The guidance provides that auditors should test the contractor's scanned images annually. The testing will cover the previous 12-month period and allow auditors to make easy determinations on whether reliance can be placed on the scanned images. If the auditors perform tests and do not identify any deficiencies, they can rely on the veracity of the scanned images.

Here are some of the steps that the auditor will perform as part of their annual testing.

• Test a sample of the images to original documentation from the preceding 12-month period
• Ensure the contractor is able to provide timely access to the imaged records to test whether the contractor maintains an effective indexing system to permit timely and convenient access.
• Ensure the scanned image accurately reflects the original record, including signatures and other written or graphic images.
• Ensure the contractor's transfer procedures maintain the integrity , reliability, and security of the original computer data
• Ensure the contractor retains an audit trail describing the data transfer.

To Scan or Not to Scan

There is no shortage of companies offering stand-alone, add-on, or "cloud" based applications that facilitate the task of scanning, archiving, and the ability to retrieve electronic (usually PDF) copies of original source documents. Their advertisements are everywhere. Some of you have probably forayed into this often hostile territory without a lot of success. Some of you have probably realized that the benefits of archiving records electronically exceed the cost of doing so. Electronic record archival might save storage space but it will do so at a cost.

FAR (Federal Acquisition Regulations) allows contractors to scan their original source documents and dump their hard-copy records. The policy is laid out in FAR 4.703(c).

FAR 4.703(c) allows contractors to duplicate and store original records in electronic form. Contractors are not required to maintain or produce original records during an audit if they provide photographic or electronic images of the original records and meet certain requirements. Those requirements include

• Established procedures to ensure that the imaging process preserves accurate images of the original records, including signatures and other written or graphic images, and that the imaging process is reliable and secure so as to maintain the integrity of the records.
• An effective indexing system to permit timely and convenient access to the imaged records
• Retention of the original records for a minimum of one year after imaging to permit periodic validation of the imaging systems.

The biggest problem in meeting the foregoing requirements is the second bullet; maintaining an effective indexing system to permit timely and convenient access to the imaged records. Contractors will need to put a lot of thought and consideration into an indexing and retrieval system well before embarking on a record scanning program.

Take vendor invoices for example. In a traditional accounting system, vendor invoices are probably organized in a filing cabinet by name or by year then name. If an auditor asks to see Invoice 12345 from ABC Company dated January 1, 2011, it a simple matter to go to the file and find the invoice. Now consider how you would find an electronic (scanned) copy of the same invoice. You make a PDF copy of the invoice, you give it a descriptive name and put it into a folder (the electronic version of the filing cabinet). That, to us, sounds labor intensive and for small companies, not very practical. Its much easier to, at the end of the year, put your hard copies in a couple of storage boxes and throw those boxes into your back room for the next few years.

Some accounting software applications make this a little easier. QuickBooks, for example, allows you to link a scanned vendor invoice to a specific transaction. Third party add-ons make the process a little easier. Larger companies (where paper record storage can be a problem), can afford some of the higher-end (and costly) applications that streamline the electronic storage and retrieval process but even these require a fair amount of in-house labor.

If you are contemplating an electronic record storage and retrieval system, make sure you do your homework and decide whether there is a business-case for doing so.

DFARS Proposal Adequacy Checklist - Is Your Proposal Current, Complete, and Accurate?

Today we'll wrap up our series on DoD's proposal adequacy checklist which became effective last March and applies to proposals where certified cost or pricing data is required. This checklist came out of a project of the Department's Panel on Contracting Integrity and was designed to consolidate existing regulatory requirements into a common checklist with the goal of reducing the number of inadequate pricing proposals that the Department received, thereby making the acquisition process more efficient.

As we've stated before, the checklist should help contractors ensure that they haven't inadvertently forgotten to consider a requirement of FAR or DFARS, or the contract solicitation itself. Its to the contractors advantage as well as the Government's to expedite the contracting process. Efficiency in anything improves the bottom line and that goes for proposal preparation practices as well.

Today we want to address Checklist Question No. 4 and caution contractors (and prospective contractors) to be very careful when answering this question. The question states:

Does the proposal disclose any other know activity that could materially impact the costs? This may include, but is not limited to such factors as
1. Vendor quotations;
2. Nonrecurring costs;
3. Information on changes in production methods and in production or purchasing volume;
4. Data supporting projections of business prospects and objectives and related operations costs
5. Unit-cost trends such as those associated with labor efficiency
6. Make-or-buy decisions;
7. Estimated resources to attain business goal; and
8. Information on management decisions that could have a significant bearing on costs.

Some of you might recognize this listing as the examples of cost or pricing data found in FAR 2.101. It's the same list. And, by listing these items in the checklist, the Government is reminding contractors of their duty to affirmatively disclose current, complete, and accurate cost or pricing data including those items specifically identified.

But what happens is a contractor fails to disclose this information at the time of proposal preparation. It is well understood that cost or pricing data must be certified as of the date of agreement on price. But this places an emphasis at the beginning of the process when, perhaps, many of these facts and decisions have not yet been fully fleshed out. Answering questions wrongly in this checklist could help make the Government's defective pricing case or even result in a fraud referral.

Don't take this question too lightly.

DFARS Proposal Adequacy Checklist - Will One Noncompliance Render Your Proposal Inadequate?

For the past few days, we've been discussing various aspects of DoD's proposal adequacy checklist that, since last March, has been required of prospective contractors whenever certified cost or pricing data is required. As we've stated before, its not a bad checklist and can help contractors ensure that certain requirements are not inadvertently overlooked. With six months of experience under our belts, we thought we would take a look at how implementation is going.

There are 36 questions in the checklist. In most cases, not all of them will be applicable on any given pricing action. Some of the questions are objective requiring little or not judgment. For example, question 13 asks whether there is a Government forward pricing rate agreement. That's a simple yes/no question. However, most of the questions have a subjective element to them and require some thought and judgment in answering them. And that is where problems have arisen between contractors and contracting officers and/or auditors.

For example, question 26 asks, "Does the proposal indicate the basis of estimate for proposed indirect costs and how they are applied? (Support for the indirect rates could consist of cost breakdowns, trends, and budgetary data.)".  The question here is, how detailed must that basis of estimate be? A contractor might state that indirect rates are based on projections of year-to-date actual rates, adjusted for non-recurring type expenses. The contracting officer on the other hand may want to see all of the details behind that statement and narrative to explain the non-recurring expenses.

Invariably, there will be differences of opinion on what constitutes adequate responses to the questionnaire and contractors will be faced with the prospect of having their proposal determined inadequate. That raises the question of how many "no" answers can there be without having the proposal rejected. There is no concise answer to that question because we are dealing with people, personalities, experience levels, significance, risk, and bad hair days. We can report on the official DCAA policy when it comes to answering that question.

It depends on the significance of the noncompliance(s). Multiple "no" answers can result in an overall adequate proposal. Or multiple "no" answers can render the proposal inadequate. The auditor should apply professional judgment in making the determination by considering the materiality and significance of the noncompliance(s) identified and their relationship to the overall proposal.

Our advice when questioned about adequacy of a response to one of the checklist items follows:

• If the information is readily available, provide it.
• If the information is readily available but too voluminous to include in the proposal (remember, some solicitations have page limits), tell them and offer to make it available at your location.
• If the information is not readily available, look for alternative methods of satisfying the requirement.
• If the auditor is being unreasonable, elevate the disagreement to the contracting officer. Ultimately, adequacy determination are made by the contracting officer, not the auditor.

DFARS Proposal Adequacy Checklist - Subcontracts Requiring Audit

Last March, the DoD published a proposal adequacy checklist in their FAR Supplement (DFARS). This checklist must be completed by DoD contractors whenever they submit proposals where certified cost or pricing data is required. The checklist does not specifically apply to subcontractors however some contractors have flowed down the requirement as part of their own solicitation instructions. Additionally, some contracting officers and auditors are pushing it on to non-DoD contractors. Although not specifically required, its often easier to complete it than to fight over whether it is applicable. Its not a bad checklist nor is it onerous. It should help contractors to ensure certain things are not omitted due to oversight.

Now that the checklist has been required for about six months, we're beginning to see a pattern emerge on the level of detail required when responding to some of the checklist questions. As is typical, the Government has an insatiable appetite for details, supporting data, and explanations while contractors tend to look at things in a more "matter of fact" view - is it there? Yes or No.

One of those questions that is causing a bit of friction is Question No. 15. That question, referencing DFARS 215.404-3 asks: "Has the offeror identified in the proposal those subcontractor proposals, for which the contracting officer has initiated or may need to request field pricing analysis?"

The problem here is that DFARS 215.404-3 makes no such requirement. It merely tells contracting officers to refer to PGI (Procedures, Guidance, and Information) 215.404-3 when reviewing subcontract proposals. (PGIs are internal DoD policies and procedures and do not apply to contractors) PGI 215.404-3 states that contracting officer should consider the need for field pricing analysis and evaluation of lower-tier subcontractor proposals, and assistance to prime contractors when they are being denied access to lower-tier subcontractor records. It also offers some things for contracting officers to consider when deciding to accept the results of the prime contractor's review and analysis of subcontractor proposals. It may be that the Government is not comfortable with the results of the prime contractor's review and wants to go out and get its own field pricing support in addition to what the prime contractor has done.

Providing a list of subcontractors that need to be audited might facilitate the contracting officer's offer to assist prime contractors and may expedite the eventuality, but such a list is not required by FAR or DFARS.

Just saying.

Proposed Subcontract Costs - Cost/Price Analyses

Last week, we wrote on DoD's  new proposal adequacy checklist. This week, we'll dig deeper into some of the questions with the intent of explaining why a particular question is relevant to determining the adequacy of a proposal using certified cost or pricing data.

Question 17 of the proposal adequacy checklist, referring to FAR 15.408, Table 15-2, Note 1, Section II, Paragraph A, requires that contractors include a price/cost analysis establishing the reasonableness of each of the proposed subcontracts included with the proposal. If Those are not completed at the time the prime contractor submits its own proposal to the Government, the proposal must include a matrix identifying (i) dates for receipt of subcontractor proposal, (ii) completion of fact finding for purposes of price/cost analysis and (iii) submission of the price/cost analysis. Failure to provide this matrix will render the proposal inadequate.

At the end of the day, the Government needs to ensure that the cost or price proposed by the contractor is fair and reasonable. It cannot make such a determination if a contractor's proposal includes significant subcontract costs and the contractor has not performed any kind of analysis to ensure, in turn, that its subcontractor prices are fair and reasonable. On the other hand, sometime the procurement timeline does not allow sufficient time for prime contractors to complete their subcontractor cost/price analysis. In those cases, the Government wants to see the timeline for completing those, so at a minimum, they'll be completed by the time prime contract negotiations commence.

If the completion of subcontractor cost/price analysis will occur before negotiations, as per the matrix, the contractor's proposal will be determined to be adequate for this checklist item. That doesn't mean that the auditor, during his/her audit will not take exception to the subcontract costs. Those costs may be categorized as unsupported because the contractor has not completed its cost/price analyses. In addition to unsupporting the costs, the auditor might also apply "decrements" to proposed subcontract costs to reflect anticipated reductions that contractors typically achieve when negotiating subcontracts. Usually, these positions disappear once the cost/price analysis is completed.

Everyone's life is a bit easier if subcontract cost/price analysis is completed prior to the proposal submission date; the Contracting Officer's, the auditor's, and the prime contract negotiator's. Repeated incidences of incomplete cost/price analyses could lead to an estimating system deficiency, particularly where there is sufficient time in the contracting schedule for prime contractors to complete their analyses.

Proposal Adequacy Checklist - Redux

Back in March of this year, DoD added a new DFARS Proposal Adequacy Checklist at DFARS (DoD FAR Supplement) 215.408(6). This change requires contractors to complete the Proposal Adequacy Checklist (DFARS checklist) and submit it with their proposals whenever the submission of certified cost or pricing data is required.

DCAA (Defense Contract Audit Agency) recently published a version of the checklist with different column headings. The DFARS checklist has two columns; "Proposal page No." and "If not provided EXPLAIN (may use continuation pages)". The DCAA checklist has "Adeqate Yes, No, or N/A" and "Comments". DCAA is calling theirs an optional version of the DFARS checklist with modified columns to assist auditors with documenting contractor compliance with the DFARS requirements for an adequate proposal.

Contractors should not use the DCAA checklist in lieu of the DFARS checklist. The DFARS checklist contains a reference to a specific proposal section or page number where the checklist adequacy item is contained or documented. The DCAA checklist does not include it. The DFARS checklist also requires an explanation when a checklist item is not satisfied. In most cases, the explanation will be because the cost element is not proposed. For example, checklist items 15, 16, and 17 are going to be N/A if there are no subcontracts proposed. The DCAA checklist does not solicit such information.

Note that this DFARS requirement does not automatically flow down to subcontractors but contractors would be wise to flow it down as part of their subcontract solicitation requirements. Its not a bad checklist and should help contractors and subcontractors to ensure the adequacy of their proposals.

We would appreciate feedback from anyone who has experience in completing this new checklist. Particularly, we are interested in how long it takes to complete it, problems in cross-referencing to a particular page in the proposal, and difficulties in understanding the questions.

DCAA's new checklist is available here.

How Good Are Your Purchasing System Internal Controls?

When companies first start out, the entrepreneur/founder does just about everything him/herself - engineering, manufacturing, purchasing, estimating, accounting, billing, and on and on. As the company grows, specialists are hired to take over these functions. As a sole proprietor, internal controls are not critical. But as employees are added and systems become more complex and vulnerable to fraud, internal controls become absolutely necessary.  Purchasing is a system that is highly vulnerable to fraud. Purchasing agents have a lot of opportunity and methods in which they can enrich themselves at the expense of the employer (e.g. the Government contractor) and ultimately the Government. All you need to do is peruse the DoJ's press releases to find dozens, perhaps hundreds of incidences involving procurement fraud by Government and contractor employees alike.

So one would think that a company like Boeing would have internal controls that would be impervious to procurement fraud. After all, their business systems are considered the gold standard for Government contractors, they are publicly held and responsible to stockholders and they are subject to all of the internal control requirements of the Sarbanes-Oxley Act. They probably have enough policies and procedures to fill a semi truck trailer.

But Boeing is not immune to fraud committed by employees and neither are you. Last Monday, a Federal grand jury in St. Louis indicted a Boeing procurement office on charges he gave inside information to a Washington state shop owner and others, netting the subcontractors more than $3.5 million in orders for aircraft parts. In this case, the Boeing employee gave the shop owner information about the competitors bids and also, historical price information in exchange for cash.

According to the indictment, the shop owner used the information from Boeing to prepare and submit bids to Boeing on behalf of his company. Ultimately, the shop was awarded seven purchase orders totaling $2 million. The Boeing employee also perpetrated his scheme with other suppliers.

FBI raided the shop owner's facility in Washington last May and hauled away lots of records. At that time, FBI refused to discuss what they were up to. Now we know.

The shop owner also appeared on a Bank of America promotional video in which he and employees talked about how the business grew with help from the bank. That video, which has since been taken down from Bank of America's website, included the following quote:

I just got into this trade without a formal business background. High school had a metal shop. It was a great place to fix my dirt bike. Couldn't afford to really go buy parts all the time. And this led to a job in a machine shop. Twenty-five years or so, it kind of just flies by, and here you are.

We guess he should have also mentioned the help he got by bribing Boeing purchasing agents for the company's growth.

So, how effective are your internal controls over purchasing?

Contractors to Get Double Teamed on Forward Pricing Rate Proposals

DCMA (Defense Contract Management Agency), not to be confused with DCAA (Defense Contract Audit Agency) recently implemented a policy to encourage its contract administration staff to complete reviews of forward pricing rate proposals (FPRP) within 30 days of receipt and commence negotiations of forward pricing rate agreements (FPRA) within 60 days of receipt.

DCMA is growing their cost monitoring function because they can no longer rely on DCAA to provide timely reporting on FPRPs.  DCMA is gearing up its capability to make sound and timely assessments of contractor submitted FPRPs and they will be performing their reviews at the same time DCAA is conducting their audit(s). This means that contractors will need to prepare themselves to be responsive to simultaneous reviews, one from DCMA and the other from DCAA.

The DCMA policy emphasizes that input from DCAA is not necessary to complete its review unless someone in their chain decides that audit input is necessary to close a critical gap of information. That begs the question, doesn't it, as to why DCAA's audit is necessary to begin with. Who in DCMA is going to say that he/she can't finish their review of an FPRP because it needs information from DCAA. That will never happen.

But, DCAA is going to plug along and do their review anyway. At such time as they're comfortable with the sufficiency of their audit tests, they'll issue their report to DCMA. DCMA, in turn, will look it over and do one of two things (according to a recent DCAA memo). DCMA will look it over and see if there is something in there that would cause them to bail on the rates that they had negotiated and re-open the rate determination process or, they will read it and file it for future use. Guess which of the two options will prevail most often.

Notwithstanding the fact that we have two Agencies wasting resources by performing the same reviews, but we have contractors already complaining that they have to provide the same information, sometimes formulated slightly different to appease the respective staffs, at additional cost to them (and ultimately the Government).

This dual approach to reviewing FPRAs can't last too long. Complaints will be heard at a high enough level for someone in the Defense Department to make an executive decision and call off one of the Agencies.

This work should stay with DCAA. That Agency has the auditors who are first and foremost, accountants, who understand the vagaries and intricacies of indirect rate analysis and complex cost accounting systems, DCAA just needs to stop trying to "audit" everything and develop non-audit processes for some of its "products". If they forget about GAGAS (Generally Accepted Government Auditing Standards) for a moment and get back to being nimble and responsive to customer needs, they can provide an extremely valuable service to the Government.

There's a Difference Between "Lowest-Priced Technically Acceptable" and "Best Value"

When bidding on solicitation that is to be awarded based on "best value", be aware that there will be a number of subjective elements that go into the award decision. And, those subjective elements will be very difficult to challenge should an award be protested. A recent GAO (Comptroller General) illustrates this point.

It was plain based on the award criteria, that the award would be made on a best value basis. As a result, the solicitation afforded the Government the discretion to make trade offs between price and non-price factors when making its award decision.

The protestor (AWD in this case) argued that its proposal represented both the overall best value because its price was lower, and that it also submitted the lowest-priced, technically acceptable offer. The protestor argued that the Agency was not justified in paying a five percent premium, which it asserted was simply a price for convenience so the agency could keep on with the incumbent contractor.

The agency countered that it was justified in awarding to a company with a technically superior proposal. The Comptroller General agreed with the agency. "When a protester challenges an agency's award decision, we will review that decision solely to determine if it was reasonable and consistent with the solicitation's evaluation scheme, procurement statutes, and regulations. Proposals with the same adjectival ratings are not necessarily of equal quality, and agencies may properly consider specific advantages that make one proposal of higher quality than another. In conducting such an analysis, agencies may reasonably consider the underlying bases for ratings and assess advantages and disadvantages associated with the content of competing proposals.

In this case, the agency reasonably considered the underlying merits of each proposal and identified qualitative differences between the two, even though both proposals received the same overall adjectival ratings for technical capability and past performance. In weighing the differences, the contracting officer reasonably determined that the successful bidders proposal offered technical strengths not found in the protestor's proposal and the protestor's proposal contained evaluated weaknesses not present in the successful bidders proposal.

You can read the entire case here.

Contractor Access to Government Facilities Likely to Become More Cumbersome

In the aftermath of the NAVSEA (Naval Sea Systems Command) shooting last month, the Department of Defense is looking into its procedures for granting access to military installations to contractor personnel. This study will encompass both physical access and logical access (i.e. computer systems). "There are a ton of contractors running around military installations these days and its often difficult to distinguish them from civilian employees".

DoD has initiated a review of the procedures in place to allow through contract actions, logical and physical access by DoD contractors to its facilities and information technology systems. It is the Department's intent to ensure that DFARS (DoD FAR Supplement) and other guidance and information, adequately address and communicate the processes and controls required to secure its systems and facilities to both contractors and DoD representatives.

DoD is requiring every department that issues contracts, to submit the full text of all solicitation provisions and contract clauses that they currently include in their organization's solicitations and awards to address the procedures used to allow DoD contractors physical access to DoD facilities and logical access to DoD information technology systems. The Department will use this information to develop a framework for common language that can be used and implemented throughout DoD.

One of the biggest concerns, we were told, is the inability to recover access credentials (e.g. badges or CAC cards) from contractor personnel who no longer require access because their work was completed, the contract ended, or the employee was terminated or resigned. That weakness potentially allows unauthorized individuals access to Government facilities.

Contractors need to consider the cost associated with gaining access to Government facilities when preparing cost proposals. Its not usually an insignificant cost.

Deficient Subcontractor Oversight

The Department of Energy's Inspector General Office issued a report late last week that was highly critical of the Departments financial oversight and management of its contractors and grantees. The Department had reimbursed contractors/grantees for unallowable costs and found that some of its contractors were not performing adequate oversight of their subcontractors.

Specifically, the report noted the following three issues:

1. DOE had reimbursed $5.3 million in unsupported and/or unallowable costs at nine recipients for unsupported subcontractor or partner costs, potentially unallowable and/or unsupported travel and meal costs and other expenses that were not supported by detailed invoices. In other words, the prime contractors were simply passing along subcontractor invoices without having determined the costs were allowable, allocable and reasonable to the Government.

2. DOE was unaware that one recipient included unallowable costs of approximately $700,000 in its indirect cost rate calculation, a practice that resulted in higher than allowable reimbursements estimated at over $64,000. Contractors need to ensure that unallowable costs are identified and excluded from any billings to the Government.

3. DOE had not ensured that recipient procurement practices were adequate to fully protect the Government's interests and that these practices complied with applicable policies, procedures and best practices. For example, one recipient non-competitively awarded approximately $1 million for subcontract work to two companies that shared common ownership interests with the recipient. In addition, recipients had not always utilized competition to obtain the best possible prices for goods and services purchased with Federal funds. At two of the recipients, we found examples of purchases valued at about $210,000 for materials, equipment and services that were not supported by competitive bidding procedures. Accordingly, we questioned approximately $1.2 million of procurement costs that may not have provided the best value to the Government.

We guess that the IG had to blame somebody for these oversights but to us, the emphasis should have been on the contractors, not the Government. Contractors are required to have adequate accounting, purchasing, timekeeping, and billing systems as a condition for contracting. Lacking support for expenditures, claiming unallowable costs, and having poor purchasing policies and procedures are contractor issues, not DOE issues. While Government oversight is built into the system, the corrective action should focus on getting contractors to improve their systems, not blaming a Government agency for lack of oversight.

You can read the full report here.

Pilot Program for Enhanced Whistleblower Protections

The FAR Councils just issued an interim rule announcing the implementation of a pilot program that is designed to enhance whistleblower protections for contractor employees. This pilot program which is effective now, effectively takes action away from the contractor and gives it to the Government. The law puts the remedies in the hands of the head of the agency and provides time lines for action.

If a contractor or subcontractor employee believes that he or she has been discharged, demoted, or otherwise discriminated against, he/she may submit a complain with the Inspector General of the agency concerned. Procedures for submitting a complaint are readily available of IG websites. The employee has three years in which to register the complaint.

Once received, the IG performs an investigation and makes a recommendation. The agency head must decide whether the IG report provides sufficient basis to conclude that the contractor (or subcontractor) employee has been subjected to reprisal. If sufficient evidence does exist, the agency head must either issue a written order denying relief or order the contractor to take one or more of the following actions:

1. Take affirmative action to abate the reprisal
2. Reinstate the complainant-employee to the position that the person held before the reprisal, toegther with compensatory damages (including back pay), employment benefits, and other terms and conditions of employment that would apply to the person in that position if the reprisal had not been taken
3. Pay the complainant-employee an amount equal to the aggregate amount of all costs and expenses (including attorney's fees and expert witnesses' fees) that were reasonably incurred for, or in connection with bringing the compliant regarding the reprisal. 

The law also provides that the complainants, after they are deemed to have exhausted all administrative remedies, may bring an action at law or equity against the contractor.

This pilot program almost seems like an alternative disputes resolution process where administrative processes in lieu of going to court will save everyone a lot of time and money.

If a contractor fails to comply with the agency head's order, the agency head must file an action for enforcement of the order in the U.S. District court. In any action, the court may grant appropriate relief, including injunctive relief, compensatory and exemplary damages, and attorney fees and costs. Most contractors will not want that to happen unless the order is grossly wrong or unfair.

Interim Rule Amends the FAR "Legal" Cost Principle

The FAR Committees issued an interim rule last week amending the Federal Acquisition Regulation (FAR) to address the allowability of legal costs incurred by a contractor (or a subcontractor) related to a whistleblower proceeding commenced by the submission of a complaint of reprisal by the contractor (or subcontractor) employee under applicable whistleblower statutes (e.g. 10 USC 2409).

This interim regulation was required to implement a provision in the National Defense authorization Act (NDAA) for FY 2013. According to the promulgation comments, this rule would only affect a contractor or subcontractor if a contractor or subcontractor employee commenced a proceeding by submitting a whistleblower complaint and that complaint resulted in  imposition of a monetary penalty or an order to take corrective action.

This interim rule changes section (b) and (b)(2) of FAR 31.205-47, Costs related to legal and other proceedings as follows. We have underscored the added verbiage.

(b) In accordance with 41 U.S.C. 4310 and 10 U.S.C 2324(k), costs incurred in connection with any proceeding brought by a Federal, State, local, or foreign government, or by a contractor or subcontractor employee submitting a whistleblower complaint of reprisal in accordance with 41.U.S.C. 4712 or 10 U.S.C. 2409, for violation of, or a failure to comply with law or regulation by the contractor (including its agents or employees), or costs incurred in connection with any proceeding brought by a third party in the name of the United States under the False Claims Act, 31 U.S.C. 3730, are unallowable if the result is - 

(2) In a civil or administrative proceeding, either a finding or contractor liability where the proceeding involves an allegation of fraud or similar misconduct; or imposition of a monetary penalty, or an order issued by the agency head to the contractor or subcontractor to take corrective action under 41 U.S.C. 4712 or 10 U.S.C. 2409, where the proceeding does not involve an allegation of fraud or similar misconduct;

In a whistleblower suit, the allowability of legal costs is dependent upon the outcome of the case. For this reason, contractors should segregate legal costs associated with whistleblower suits and hold them in abeyance until such time as the outcome is known.

1,000 Postings and Still Ticking

Today marks a milestone of sorts for this blog. This is our 1,000th posting. Every working day since November 23, 2009, we've posted something up here on this blog for our readers. Sometimes its news, sometimes analysis, and sometimes, when we get really busy, well, you know. Nevertheless, we put something up every day to keep our site dynamic and hopefully keep readers coming back.

We started this blog as a replacement for our quarterly newsletter. The main problem with a quarterly publishing schedule is that much of the "news" was already out of date by the time it was published. We needed a more responsive platform to get the word out. So we decided to experiment with blogging and we're still here. Our very first posting back in November 2009 announced the selection of Patrick Fitzgerald to be the new Director of Defense Contract Audit Agency, a position he still holds.

Our most popular postings have centered around the Cost Accounting Standards (CAS). Our all-time most frequently read posting was a discussion of the requirements of CAS 410, Allocation of Business Unit G&A to Final Cost Objectives. This is probably a reflection of the fact that there is not too much material on the Cost Accounting Standards on the Internet and our CAS postings rate pretty high on the search engines.

Anyway, thanks for reading and commenting. Feedback is important and always welcome.

  Ron Sabado
  Terry Nuzzo
  Bill Vermie
  David Koeltzow
  Paul Cederwall