Political Contributions

It is important to know that political contributions by federal contractors to any political party or candidate for Federal office would not only be unallowable under relevant FAR cost principles but are unlawful to make in the first place. Specifically 11 CFR 115 states:

It shall be unlawful for a Federal contractor ... to make, either directly or indirectly, any contribution or expenditure of money or other thing of value, or to promise expressly or impliedly to make any such contribution or expenditure to any political party, committee, or candidate for Federal office or to any person for any political purpose or use. This prohibition does not apply to contributions or expenditures in connection with State or local elections.

This prohibition works both ways. It is also unlawful for any such person to solicit contributions from a Federal contractor.

In the context of this law, Federal contractor is a person (including legal person) who enters into any contract with the United States or any department or agency thereof either for the rendition of personal services or furnishing any material, supplies, or equipment or selling any land or buildings.The funds for these purchases must have been appropriated by Congress.

The prohibition lasts as long as the contract.The prohibition also applies to active bids.

Contracts include sole-source, negotiated or advertised procurements and contract modifications.

Individuals or sole proprietors who are Federal contractors are prohibited from making contributions or expenditures from their business, personal, or other funds under their dominion or control. The spouse of an individual or sole proprietor who is a Federal contractor is not prohibited from making a personal contribution or expenditure in his or her name.

Here's the big loophole. Stockholders, officers, or employees of a corporation can make contributions from their personal assets. There have been many allegations over the years that Federal contractors give bonuses to their executives with the implicit understanding that those funds would go to targeted candidates.

Expanded Access to Records Clause for Some Contracts

The United States Central Command's (CENTCOM) area of responsibility (AOR) includes countries in the Middle East, North Africa, and Central Asia. This AOR, of course, includes Iraq and Afghanistan. The military operations that are occurring in Iraq and Afghanistan are often referred to as contingency operations. The United States is spending a significant amount of money on these contingency operations. Since 2001, the US has spent $1.6 trillion in Iraq, Afghanistan, and fighting ISIS. A good part of that money goes to contractors and subcontractors supporting the contingency operations.

Over the years, there have been many many allegations of fraud, waste, and abuse among contractors and subcontractors operating in CENTCOM's AOR. Funds paid to contractors (and subcontractors) are subject to extortion or corruption and in some cases, provided directly or indirectly to persons or entities that are actively supporting an insurgency or otherwise actively opposing US forces.

Most contracts give the Government certain access to records rights. However, the access is generally narrowly defined and, except for cost-reimbursable contracts, does not automatically give the Government access to incurred cost data. Even in the case of defective pricing (or TINA, Truth in Negotiations Act), the Government is only granted authority to access cost or pricing data that was known to the contractor as of the date of agreement on price, not to cost incurred during contract performance. So essentially, the Government has been somewhat hamstrung in its investigations that contract funds are being used for illicit purposes because it has no contractual authority to demand cost records.

That's about to change.

Earlier this week, the Department of Defense issued a new DFARS (DoD FAR Supplement) clause that will give the Government additional authority to examine records under certain circumstances. The new DFARS clause applies to all contracts and subcontracts over $100 thousand in CENTCOM's AOR. It states, in part, that "In addition to any other existing examination-of-records authority, the Department of Defense is authorized to examine any records of the Contractor to the extent necessary to ensure that funds available under a contract are not subject to extortion or corruption or provided, directly or indirectly, to persons or entities that are actively supporting an insurgency or otherwise actively opposing United States or coalition forces in a contingency operation."

To activate the clause, a contracting officer must issue a written determination based upon a finding by the CENTCOM commander that there is reason to believe that funds available under the contract may have been subject to extortion, corruption, or siphoned off to the opposition. Then, once the written determination is made, the investigators or auditors (or both) will have the legal authority to look at whatever records it determines necessary to follow up on the "reasonable belief".

It will be interesting to see what, if anything, will come of this expanded access to records authority.

Performance Bonds - Know Your Surety

Yesterday we published a primer on performance bonds as they relate to construction contracts awarded by the Federal Government. Click here to read it. One point we made is that a performance bond (or surety bond) on any construction contract over $100 thousand is absolutely required and must be approved by the contacting officer. The Treasury Department maintains a listing of certified sureties. If you stick with one of these, you probably won't get burned. However, the fraudsters are out there trying to peddle instruments that are not from approved sureties.

Here's a case in point. Earlier this week, the Justice Department posted a news release announcing that an individual had been sentenced to more than four years in prison for operating a multi-million dollar surety bond fraud scheme. This scheme resulted in financial losses, created delays in construction projects, and compromised bids allowing some contracts to be awarded to unqualified construction companies. You can read the press release here.

The defendant lied to contractors and Government agencies about his qualifications to issue surety bonds. For about a year up until July 2013, the defendant used several corporations to sell fraudulent surety bonds on construction projects. He held himself out to contractors and government agencies as having the authority to execute or issue surety bonds on behalf of the Federal Insurance Company and Pacific Indemnity Company (both Treasury approved sureties). He created fraudulent surety bonds, embossed the bonds using a counterfeit seal and forged the signatures of individuals from legitimate companies. Ultimately, he issued bonds with a face value of more than $100 million and received premium payments of more than $2.2 million.

In one instance, the defendant sent a letter on forged Pacific INdemnity letterhead and had a telephone conversation confirming validity of the Pacific Indemnity bonds with a Navy contracting officer. The Navy approved the bonds based on the forged letters and conversation with Campbell. That one bond netted him a $374 thousand premium. Not a bad payday for fake letter and a 10 minute phone call.

It is unlikely that any of the defrauded contractors will be able to collect damages. Most surety con artists simply pick up and move to other locations and other markets or change their names or company names and stay in business.

For contractors trying to cut costs, it might be tempting to respond to internet offers of cheap premiums. But beware of the risks. You might be better off by soliciting quotes from several of the "approved" sureties that are certified by the Treasury Department..

Performance Bonds

The Miller Act, enacted in 1935, provides that all federal construction contracts performed in the US must require contractors to furnish performance bonds in an amount satisfactory to the contracting officer. In 1994, the Federal Acquisition Streamlining Act (FASA) set a threshold for performance bonds at $100 thousand. Prior to that, all construction contracts required performance guarantees. The statutory requirements of the Miller Act, and FASA are implemented by FAR Part 28, Bonds and Insurance.

Surety bonds are guarantees in which the surety guarantees that the contractor will perform the obligation stated in the bond. Usually the obligation requires the contractor to complete the project on time and within cost. If the contractor fails to perform the obligation stated in the bond, both the contractor and the surety are liable on the bond. The amount in which a bond is issued is referred to as the penal amount. In the case of construction for the Federal Government, the penal amount is generally one hundred percent of the contract amount. The penal amount is usually increased whenever there are change orders.

The most common means of satisfying federal bonding requirements is purchase a bond issued by a corporate surety. Not just any surety will satisfy the requirement. The Department of Treasury maintains a listing of "approved" corporate sureties. That listing can be found here and it is updated whenever a new surety is added to the list.

The Treasury Department audits the financial strength of corporate sureties and establishes bonding limits. On Federal construction projects, the contracting officer is required to make certain that the surety has not exceeded its bonding limit. On very large construction projects, performance bonds are usually issued by several approved surety companies as co-sureties.

There are other ways of satisfying bonding requirements, in theory. Contractors could pledge enough of their own assets to support the penal amount. As a practical matter however, contracting officers prefer to deal with approved corporate sureties. For contractors that might not otherwise qualify for bonds issued by corporate sureties, this might be the only way to compete for a contract.

Performance bonds, of course, cost money. Bonding costs however are allowable contract costs when required by the contract or in accordance with sound business practices. The rates and premiums must be reasonable under the circumstances (see FAR 31.205-4).

The cost of bonding will vary based on many "underwriting" factors including past experience. Companies with less than stellar records will pay comparatively higher rates than good companies. That might put them at a competitive bidding disadvantage.

OFPP's Plan to Reform Federal Contracting

We picked up this story last week from the Federal Times.

It's a fairly long article so you should probably read it fully if you want to understand the grist of OFPP's (Office of Federal Procurement Policy) vision. Briefly stated, OFPP wants to "stovepipe" procurement, that is, centralize procurement across all agencies by categories of spending - information technology, professional services, construction, medical, etc. These categories of spending will be managed by dedicated executives whose job it will be to:

• smooth out pricing variability
• analyze spending data to optimize procurement strategies (whatever that means)
• culling duplicative contracts
• negotiating better deals based on overall government-wide demand

OFPP claims this concept - category management - is widely used in industry and in the UK. It helps ensure that agencies get the same competitive price and quality of performance, it frees up agency acquisition personnel to focus on complex agency specific procurements, and it give vendors one place to go and one person accountable for shaping the strategic direction of that one common category.

Each category will be headed up by a senior official (either from industry or the government) who is known to be an expert in that category. That manager would be able to understand buying trends, what drives cost, new innovations coming, and emerging companies.

To begin, the administration is focusing on 10 categories. By the end of fiscal year 2016, the government will have collected critical contract data for the $275 billion spent in those 10 categories and "tens of thousands of acquisition workers" will be able to access that data to make better decisions.

Sounds good. Will it reduce costs? Stay tuned.

GAO's High-Risk List - DoD Support Infrastructure Management

We are concluding our series on GAO's list of high-risk agencies and program areas that were selected for their vulnerabilities to fraud, waste, abuse and mismanagement, or are most in need of transformation. Although there are many more programs on the listing, we selected the ones that most affect or apply to traditional Government contractors. You can read the entire GAO report by clicking here. If you missed any of the earlier discussions, go to Part 1, Part 2, and/or Part 3.

DoD Support Infrastructure refers to the real property that the Department manages consisting of 562 thousand facilities including commissaries, data centers, office buildings, laboratories, and maintenance depots. These facilities are spread out to more than 5,000 sites worldwide and cover more than 28 million acres. Quite obviously, these facilities all need ongoing repair and maintenance as well as grounds maintenance and that is where contractors come in. DoD does not do the work themselves - they hire it out.

The GAO focus here is that DoD should do more to eliminate potentially excess facilities but it is hampered in doing so because it does not maintain complete and accurate data concerning the utilization of its facilities. Until is has reliable utilization data, it cannot assess the level of excess facilities and therefore is hampered in its ability to reduce excess infrastructure.

The other aspect of this is that where facilities have consolidated (e.g. Joint Bases), there is little if any data showing whether cost savings resulted from combining facilities. If fact, there is anecdotal evidence showing that in some cases, costs have increased as a result of base consolidations. Moreover, DoD has not established any action plans to make certain savings are achieved. The GAO identified snow removal standards at two installations that combined. The Air Force and Army had different standards, yet when the two combined, the combined facility applied the higher standard, thus actually increasing costs.

Contractors should expect to see increased effort by DoD activities to reduce historical levels of support thereby achieving savings in contracted services.

GAO's High-Risk List - NASA Acquisition Management

We are continuing our series on GAO's list of high-risk agencies and program areas that are so-named because of their vulnerabilities to fraud, waste, abuse and mismanagement, or are most in need of transformation. There are 32 programs on the list and as you might guess, programs dealing with medicare, medicaid, improving VA care, and tax law enforcement are well represented. In this series however, we are limiting our discussion to just those areas that pertain to Government contracting. Yesterday, we discussed DoD's Contract Management (click here if you missed it). Today we focus on GAO's coverage of NASA's acquisition practices.

According to GAO, NASA plans to invest billions of dollars in the coming years to explore space, understand earth's environment, and conduct aeronautics research. GAO designated NASA's acquisition management as high risk in 1990 because of its persistent cost growth and schedule slippage in the majority of its major projects. GAO identified a number of factors that contributed to this; antiquated financial management systems, poor cost estimating, and underestimating risks associated with the development of its major systems.

GAO is particularly critical of management risks when it comes to estimating what resources are needed to complete a project, assessing whether projects are ready to move forward, and enabling sound management and oversight. According to GAO, NASA must make improvements in forecasting costs for its largest projects. And, as we well know, forecasting costs for projects is based heavily on information and data provided by contractors.

If anything, contractors are not always forthcoming with bad news, be it cost growth or schedule slippage. Most of what NASA (and other agencies) pass on to Congress is based on data supplied by contractors. Contractors are symptomatically optimistic when it comes to contract performance or they just don't want to pass on bad news. NASA needs to better understand the risks and improve acquisition policies to obtain better insight into performance on its major programs.

Next Week, DoD support infrastructure management.

GAO's High-Risk List - DoD Contract Management

Yesterday we introduced the topic that we'll be spending a few days discussing - GAO's (General Accountability Office) High-Risk List of agencies and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse and mismanagement, or are most in need of transformation. Today's high-risk area is DoD's Contract Management functions. This area was added to GAO's high-risk list for 23 years (since 1992) and has been on the list ever since. How many procurement reforms have we gone through since 1992? Seems like a lot. The current administration is on its third incarnation alone (Better Buying Power 3.0). Not much seems to change though and GAO continues to focus on DoD procurement.

Ensuring DoD has the people, skills, capacities, tools, and data needed to make informed acquisition decisions is essential if DoD is to effectively and efficiently carry out is mission in an era of more constrained resources. GAO has identified four challenges that DoD faces:

1. The acquisition workforce
2. Contracting techniques and approaches.
3. Service acquisitions, and
4. Operational contract support.

Acquisition workforce: Although DoD increased its civilian worforce from 126 thousand to 150 thousand between 2008 and 2013, the GAO believes that in the area of cost estimating and systems engineering, DoD does not have adequate resources to fully implement recent weapon system reform initiatives. Further, DoD has not determined the appropriate size of the workforce and has not allocated sufficient funds to meet is workforce requirements. As a result, DoD cannot fully monitor its progress in meeting its goals for the acquisition workforce.

Contracting Techniques and Approaches (CTA). CTA encompasses the broad array of options available to DoD acquisition and contracting personnel to acquire goods and services. This includes choosing the most appropriate contract type and the effective use of competition. Although GAO acknowledged progress in this area, it intends to maintain its focus on identifying challenges and proposing solutions.

Service Acquisition. DoD does not have an action plan that would enable it to assess progress toward achieving its goals. GAO continues to find that DoD faces challenges in meeting its statutory requirement to prepare an annual inventory of contracted services - one that could help it manage its acquisition of services, make more strategic decisions about the right workforce mix of military civilian, and contractor personnel, and better align resource needs through the budget process to achieve that mix.

Operational contract support: The GAO has identified long-standing issues in DoD's use of contractors to support contingency operations, such as those in Iraq and Afghanistan. Although DoD has made some progress in integrating operational contract support through policy, planning, and training there are still plenty of areas that require management attention. For example, DoD regularly identifies shortfalls in the number of dedicated civilian operation contract support analysts and planners yet fails to address those needs.

Tomorrow, NASA Acquisition Management

GAO's High-Risk List

Every two years, at the start of a new Congress, GAO calls attention to agencies and program areas that are high risk due to their vulnerabilities to fraud, waste, abuse, and mismanagement, or are most in need of transformation. The latest report contains 32 high risk areas. So, what is high risk to GAO, how does an area become high risk and how can it be removed from the high-risk list?

Programs or areas become high-risk based on GAO's research on issues that are of "great national concern". In other words, programs get put on the list not because of some objective criteria but based on GAO's subjective assessment that something belongs on the list. Perhaps getting on the list is not so hard but getting off the list appears to be darn near impossible. To get booted off the list, agencies must satisfy five key elements.

The key elements needed to make progress in high risk areas are top-level attention by the administration and agency lead, grounded in the five criteria for removal from the high risk list as well as any needed congressional action. The five criteria includes:

1. Leadership Commitment. Demonstrated strong commitment and top leadership support.
2. Capacity. Agency has the capacity (i.e. people and resources) to resolve the risk(s).
3. Action Plan. A corrective action plan exists that defines the root cause, solutions, and provides for substantially completing corrective measures including steps necessary to implement solutions recommended by the GAO.
4. Monitoring. A program has been instituted to monitor and independently validate the effectiveness and sustainability of corrective measures.
5. Demonstrated Progress. Ability to demonstrate progress in implementing corrective measures and resolving the high-risk areas.

Over the next few days, we are going to take a look at some of GAO's high-risk programs that pertain to Government contracting. We will be looking at the reasons for the high-risk rating and what departments and agencies are doing to progress toward satisfying the five key elements. Some of these programs have been on the list since the first one was published 25 years ago.

Bill Introduced to Cut Salaries of Government Employees Earning $100 Thousand or More

In something of a head-scratcher, a Congressman has introduced legislation that would reduce the salaries of any Government employee earning more than $100 thousand (including congress and the president) by 8.7 percent. This would affect more than 300,000 Federal employees. These "federal bureaucrats are making up regulations that restrict recovery, causing every day expenses like gas, groceries, and electricity to eat up families' budgets. This reduction, according to the sponsor, would give "federal bureaucrats" incentive to get government out of the way so the free market system can work.

On February 26, 2015, Congressman Tom Rice (South Carolina) introduced HR 1137, a bill to provide for an 8.7 percent reduction in the annual rate of pay for Government employees earning more than $100 thousand. The Bill was promptly referred to the House Oversight and Government Reform Committee. Realistically, the Bill isn't going anywhere. The "Govtrack.us" website gives it a six percent chance of getting out of committee and less than one percent of being enacted.

According to Congressman Rice, the cut would remain in effect until the economy recovers to pre-recession levels. When the economy tanked, middle-class families and mid-level American workers were hit the hardest. When take-home pay for everyday Americans returns to pre-2007 levels, so should federal government salaries.

At a time when the Government is already challenged to retain their senior managers with years of experience, training, knowledge, and skills, this Bill seems counter-productive. Wouldn't such an action hasten their exodus? And why blame the lack of recover on Government employees. It is Congress and the Executive Branch that make the restrictive regulations. Government employees only implement what Congress and the President has decreed.

There is a point here however. Government employees were largely untouched by the recession. In fact, Government employment increased during the recession. Government employees enjoy much greater job security than do their private counterparts.

How Many Contractor Employees Working Under Government Contracts? No Clue

Last week, the Congressional Budget Office (CBO), in response to a request from Congressman Van Hollen to provide him an analysis of the size and cost of the federal Government's contracted workforce, wrote that "regrettably" there is no comprehensive information about the size of the contracted workforce and further stated that it was unable to come up with a realistic estimate given the sparsity of available data.

This admission is hardly surprising. Folks have been trying for years to figure out the numbers of contractor personnel under Government contracts - not only the numbers of employees but also the salaries earned by those employees. There is long-held suspicion that contractor employees make a whole lot more than there Government employee counterparts.

The CBO reported that federal agencies spent over $500 billion for contracted products and services in 2012, an amount that grew faster than inflation since 2000 and grew as a percentage of federal spending from 11 percent to 15 percent. But that includes everything from a gardener to an aircraft carrier. Of that $500 billion, $260 billion represents purchase of services for professional, administrative, management, facilities, construction, information communications and equipment related services. But this data still does not give FTE (full-time equivalent) headcount.

Recently, DoD began collecting and reporting the number of FTE positions funded by some of its service contracts. However, the CBO found that it excluded service contracts related to facilities, some data is reported by contractors, and some data is estimated by DoD officials. The CBO could not rely on its accuracy or completeness. In fact, the database would probably lead to erroneous conclusions. For example, it reported that $129 billion was spent on service contracts for 670,000 FTEs. That would average to about $193 thousand per contractor employee. However, that average does not account for other costs included in the $129 billion including materials needed to do the work, capital equipment, structures, training, etc.

The full CBO letter can be obtained here.

The Privacy Act of 1974

Have you ever wondered about the security of the information you provide the Government - Information such as tax returns, proposals, cost or pricing data, or data and records in support of an audit? How safe is it, really? Is it accessible by a competitor? By a news organization?

For the most part, contracting records given to contracting officers, contract auditors, GAO, Inspector Generals, etc are safe from further dissemination within the Government and from public disclosure. Such records are protected by the Privacy Act of 1974. Briefly, the Privacy Act states that no agency shall disclose any record which is contained in a system of records by any means of communication to any person, or to another agency, except pursuant to a written request by, or with the prior written consent of, the individual (or company) to whom the record pertains.

There are some exceptions to this general rule including

• For statistical purposes by the Census Bureau and the Bureau of Labor Statistics
• For routine uses with a U.S. government agency
• For archival purposes "as a record which has sufficient historical or other value to warrant its continued preservation by the United States Government
• For law enforcement purposes
• For congressional investigations
• Other administrative purposes.

The Privacy Act also requires that each Agency have administrative and physical security systems to prevent the unauthorized release of personal records. These administrative procedures include frequent training on unauthorized use or disclosure of personal information and criteria for disposing information that is no longer needed. So, for example, audit files that have no continuing relevance are boxed and sent to a federal records center where, after a few years, are destroyed. Similar procedures apply to electronic files. 

Notwithstanding the Privacy Act, there have been public (and not so public) disclosures of private information from time to time though it does not seem to be a significant problem. Back in the early 80s when the Government was buying $640 toilet seats, $7,600 coffee makers, and $436 hammers, a lot of contractor proprietary information was exposed. These disclosures came not from the Defense Department but through Congress who had gathered the information through one of the exceptions granted by the Privacy Act.

Generally, contractors need not worry about the security or public disclosure of routine information provided to Governmental agencies. There are sufficient protections in place to prevent that from happening.

Davis-Bacon Violations Cost Big Money

One contractor employee is $72 thousand richer today as a result of "blowing the whistle" on a practice of short-changing workers on a Government construction project.

Two Maryland companies agreed to pay a total of $400 thousand to settle False Claims Act allegations in connection with a contract to renovate a building being leased by the Government. This $400 thousand was a settlement only and there was no determination of civil liability.

The construction contract was awarded by GSA and subject to the requirements of the Davis-Bacon Act and the Contract Work Hours and Safety Standards Act (CWHSSA). The Davis-Bacon Act requires government contractors to pay the prevailing wage to workers as set by the Secretary of Labor for the corresponding class of laborers in the state in which they are employed. The CWHSSA requires time-and-a-half pay for hours in excess of 40 per week.

Lend Lease Construction was the prime on the job. Lend Lease hired Cindell Construction to to the drywall work. Cindell hired lower-tiered subcontractors to do the actual work. The lower-tiered subcontractors underpaid its workers (paid them less than prevailing wage) and did not compensate them for overtime. Then everybody, Lend Lease, Cindell, and the lower-tiered subcontractors, got together and submitted certified payrolls to the Government saying that they had complied with Davis-Bacon and CWHSSA.

These companies forgot to consider one thing. There was an insider lurking within one of the companies who knew what was going on and had the conscience to alert the authorities - well, conscience and the prospect of a big payday.

The U.S. Attorney stated concerning this case: "We encourage whistleblowers to come forward in instances where the government is a victim. This case exemplifies the important role whistleblowers can play in recovering money for the government." Maybe the Government was harmed in a round about way but it was really the underpaid workers that were harmed in this case. Perhaps the $400 thousand collected by the Department of Justice will be re-distributed to those workers.

You can read the DOJ press release on this case here.

Drug-Free Workplace

Did you know that as a Government contractor or subcontractor, you can be debarred for violations of the Drug-Free Workplace Act of 1988 (Public Law 100-690)? Debarment can occur by failing to comply with the Law's requirements or if there are a lot of contractor employees convicted of criminal drug statutes occurring in the workplace. The latter condition indicates that the contractor has failed to make a good faith effort to provide a drug-free workplace. Your contract can also be terminated for default and payments under the contract can be suspended.

So, what are the requirements of the Drug-Free Workplace Act as they pertain to Government contractors? The requirements are contained in FAR Subpart 23.5 and apply to pretty much all contracts with the exception of commercial items, contracts performed outside of the US, and contracts below the simplified acquisition threshold (currently $150 thousand). FAR 23.504 states that no offeror shall be considered a responsible source for a contract unless it agrees that it will provide a drug-free workplace. A drug-free workplace is characterized by the following:

1. Publishing a statement notifying its employees that the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance is prohibited in the contractor's workplace, and specifying the actions that will be taken against employees for violations of such prohibition.
2. Establishing an ongoing drug-free awareness program to inform its employees about the dangers of drug abuse in the workplace, the contractor's policy of maintaining a drug-free workplace, any available drug counseling, rehabilitation, and employee assistance programs, and the penalties that may be imposed upon employees for drug abuse violations occurring in the workplace
3. Providing all employees engaged in performance of the contract with a copy of the statement required by No. 1 above.
4. Notifying all employees in writing in the statement required by No. 1 above that as a condition of employment, the employee will abide by the terms of the statement and notify the employer in writing of the employee's conviction under a criminal drug statute for a violation occurring in the workplace no later than five days after such conviction.
5. Notifying the contracting officer in writing within 10 days after receiving notice of a conviction. The notice shall include the position title of the employee.
6. Within 30 days after receiving notice of a conviction, take disciplinary action against the employee up to and including termination, or requiring the employee to satisfactorily participate in a drug abuse assistance or rehabilitation program.
7. Make a good faith effort to maintain a drug-free workplace by implementing all of the foregoing requirements.

By the way, for contractors in Colorado and Washington State and soon to be Alaska, even though marijuana is legal in your states, it is still considered a "controlled substance" under this FAR provision. Controlled substances are those listed in Schedules I through V of 21 CFR 1308.11 to .15. Marijuana is listed in Schedule I.

Fair Pay and Safe Workplaces - First Steps to Implementation

Last July, the President signed Executive Order 13673, Fair Pay and Safe Workplaces intending to improve contractor compliance with Federal labor laws bu helping those contractors with serious, willful, repeated, or pervasive violations come into compliance. We reported on this Executive Order (EO) a couple of time previously (see here and here). Basically, it requires contractors to self disclose recent violations of labor related laws and requires Federal agencies to "consider" the violations when deciding on who gets contracts.

Last week, the Department of Labor (DOL) and the Office of Management and Budget (OMB) issued a joint memorandum directing agencies to hire within 90 days, labor compliance advisors (LCAs). LCAs are the one primarily responsible for implementing the EO within agencies. Specifically, the LCAs role is to promote awareness of and respect for the importance of labor law compliance through their interactions with senior agency officials, contracting officers, and contractors, while also meeting regularly with the DOL and LCAs from other executive departments and agencies to formulate effective and consistent practices government-wide.

LCAs must be career civil servants with sufficient authority to bring issues to the Deputy Secretary, Deputy Administrator, or equivalent official, the General Counsel, and other appropriate agency leadership as needed. Smaller agencies can share LCAs.

Among their various duties will be to develop guidance explaining when violations should be considered serious, willful, repeated, or pervasive. The FAR councils must also develop regulations that identify considerations for determining whether the serious, repeated, willful, or pervasive nature of the violations demonstrate a lack of responsibility.

The EO promises a measured level of assistance to contractors. Contractors (or prospective contractors) with labor violations will be offered the opportunity to receive early guidance from DOL and other enforcement agencies on whether those violations are potentially problematic, as well as the opportunity to remedy any problems. Agencies will be required to give appropriate consideration to any information offerors choose to provide regarding remedial measures or mitigating factors, including any agreements by contractors or other corrective action taken to address violations.

Finally, GSA (General Services Administration) is developing a website for federal contractors to use for reporting serious, willful, repeated, or pervasive labor violations.

No specifics yet on how serious, willful, repeated, or pervasive labor violations will affect the source selection process.

You can read the complete DOL/OMB guidance here.

"Freebies" Given to Purchase Card Holders

Contractors that issue purchase cards to employees for small purchases need to consider whether their policies and procedures cover the fairly common practice by retailers to offer something "free with purchase". Who gets the freebies? The card holder or the company?

So for example, on today's Office Depot website, you can get a free $15 gift card when you purchase $75 in HP (Hewlett Packard) ink. Does that $15 belong to the company or can the card holder retain it for personal use? What if the company didn't need $75 worth of ink? What if the company needed only $60 worth of ink but the card holder, in order to get $15 for himself, added another ink cartridge to his shopping cart. After all, its easy to rationalize that the ink will eventually be needed, right? Or suppose that the same cartridges that cost $75 at Office Deport were only $65 on Amazon but the card holder bought from Office Depot in order to secure that gift card. Its very easy to see that the prospect of gaining freebies can lead to poor purchasing decisions.

The very nature of purchases using purchase card - many small dollar items by many employees makes it difficult to monitor the activities for which the cards are being used. A "reviewer" - whatever that title brings - looking over a charge card statement would probably not even hesitate at a $75 dollar charge to Office Depot. Such a charge would be a reasonable use of purchase cards held by an employee responsible for office supplies. But that charge card statement would not have disclosed that a gift card had been issued.

Does it happen a lot? Is there a significant problem where purchase decisions are influenced with the promise of freebies and where the freebies are not going to the company but to private use? We have no way of knowing. But we will say this. Those gifts, gift cards, and other freebies should be considered company property. The company, not the employee, should be making the decision on how to dispose of the property. Gift cards can be used to defray the cost of future purchases. Other gifts, if not usable for business purposes, can be given to charities. There are other options but the thing companies need to avoid is situations where such gifts influence purchase decisions. Any time a purchase decision is so-influenced, bad things are likely to happen.

Contractor policies and procedures governing the use of purchase cards should directly address this matter. Gift cards, rebates, etc. are the property of the company and procedures should address the process for disposition of these items.

FAR 31.201-5 states that the applicable portion of any income, rebate, allowance or other credit relating to any allowable cost and received by or accruing to the contractor shall be credited to the Government. This FAR cost principle would likely extend to gifts accruing from purchase card transactions.

March 16, 2015 UPDATE:

Here's an example to illustrate our point.

Let's say you need some bond paper for your copier and printers. Your employee checks in on the Office Depot website and find it's only $27.99 per case and if you buy $75 or more, you get a free gift.

So, the employee buys three cases for a total of $83.97 and gets to choose a free gift.

However, if you look Office Depot's weekly add (found in the Sunday paper), you will find the same paper selling for $19.99. Buying three cases at that price totals $59.97, a $24 savings. That means you've paid 40 percent more than you should have just so your employee can obtain his/her free gift.

We say, avoid the freebies and go for the cheapest price.

How to Facilitate an Audit

Government contract audits (like audits from DCAA (Defense Contract Audit Agency) or KPMG (if you're a DOE contractor)) are different than tax audits (i.e. income tax, B&O tax, sales tax, unemployment tax, worker's compensation, etc) and definitely different than financial audits (e.g. audits of profit and loss statements and balance sheets). Contract audits arise because of some action that you (the contractor) initiated. You decided to pursue Government contracts and as a result, you've agreed to abide by the terms and conditions of the contractual instrument which, in many instances, requires audits. Contract auditors don't just show up based on some randomization. They show up because the contract and the procurement regulations require that they do so. If you've submitted certified cost or pricing data in support of a bid, the auditors may be requested to audit the proposal. If you have a cost reimbursable contract, the auditors will most likely audit the incurred cost to determine whether claimed costs are allowable, allocable, and reasonable. Its really a simple equation. If you don't want contract auditors poking around, don't pursue the type of work that requires them to delve into your books and records.

As far as the speed at which audits progress, the goals for both the auditor and the contractor are the same - get in and get out as efficiently as possible. For contractors, the presence of auditors disrupt the normal day-to-day routines of the office. Time spent with the auditor is time that cannot be allocated to perform other work. It is to the contractors advantage to facilitate the audit process. For the auditor, there is nothing more frustrating than to sit around waiting for data that should be readily available. Auditors also want to get in and get out and move on to their next assignment.

With this in mind, here are a few tips for facilitating an audit.

• Keep in mind at all times that the auditor is not there by happenstance. He/she has been requested to perform a specific review or is required by regulation to come in and perform an audit. Don't act "put upon".
• Always respond to auditor questions and queries in a timely manner. Also make certain that the answers are responsive, clear, and precise. Auditors will always have questions about documentation provided. It is best to answer all the questions while the auditor is on the premises. Answering them later by phone or email is less efficient and susceptible to misunderstanding.
• Designate a representative that is familiar with the subject of the audit. If the auditor is performing a review of the timekeeping system, the designated interface should be someone intimately familiar with the timekeeping system and the related system of internal controls. Don't choose the project manager of the contract to be the interface.
• Keep all books and records well organized and ensure that they can be readily accessed. It is embarrassing for contractors and frustrating for auditors to wait around while someone searches for a spreadsheet that a former employee put together to document this or that. "So and so prepared that spreadsheet, she's on maternity leave right now, her computer is password protected, we'll have to get hold of her, get her password, and see if she can recall where on her hard drive she might have saved that file".
• If for some reason you cannot provide the requested information during the audit, make certain that before the auditor leaves, you have an agreement as to what information is yet to be provided and the time frame in which it is to be provided. And then, stick to your end of the agreement.

New Reporting Requirements Proposed for GSA Contractors

Last fiscal year, Government agencies ordered about $39 billion in goods and services through various GSA (General Services Administration) contracts, supply schedules and IDIQs. While there are a number of policies in place to help buyers and agency users to secure best value for the taxpayer, GSA has discovered two impediments to make that happen: (i) lack of visibility into prices paid by other customers and ii) insufficient attention on horizontal pricing. Horizontal pricing is GSA's term for the ability to compare one vendor's pricing to that of other vendors.

FAR has long emphasized the need for contracting officers to conduct price analysis as part of their responsibility to establish that offered prices are fair and reasonable. Price analysis requires contracting officers to obtain and analyze data on the prices at which the same or similar items have been sold. Collection of such information has rested largely on the shoulders of each contracting officer. Until recently, little effort was made to share prices previously paid by agencies throughout the Government. Over the years, this lack of transparency contributed to large price disparities, where one agency may pay a significant amount more for the exact same product or commoditized service as another agency under the same or similar terms and conditions, sometimes even from the same vendor.

GSA has proposed to address this weakness through the use of a transactional data reporting clause. Under the clause, contractors would be required to report historical information encompassing the products and services delivered during the performance of the contract, including under orders and BPAs. Contractors would be required to electronically report contract sales monthly through an on-line reporting system. The report would include transactional data elements such as unit measures, quantity of items sold, universal product codes if applicable, price paid per unit, and total price.

GSA believes there would be multiple benefits to the use of the transactional data reporting clause including

• better pricing
• administrative savings
• increased opportunities for small business participation, and
• standardization of practice.

GSA estimates that it will take contractors six hours to figure out how to use the system and 30 minutes per month thereafter to prepare and submit reports. Like most Government estimates, these estimates are probably significantly understated. Six hours and 30 minutes per month may not sound like much but the cost to contractors for just FSS (Federal Supply Service) contracts works out to $15 million for the first year and $7.5 million for each year thereafter.

To read more about this proposed rule including directions for providing comments, click here.

Government Employees Accepting Bribes from Contractors

The Department of Justice (DOJ) announced yesterday that two Government employees (most likely "former" Government employees at this point) and a Government contractor were convicted by a Federal jury of bribery and fraud charges related to military trucking contracts. The magnitude of the fraud was staggering. Over a period of less than four years, the Government employees accepted $800 thousand in bribes in exchange for steering $37 million dollars in contracts to the trucking company. The two Government employees worked for DLA (Defense Logistics Agency) at the Marine Corps Logistics Base (MCLB) - Albany. The trucking company was also based out of Albany GA.

According to the press release, the company bribed the Government workers in order to obtain commercial trucking business from MCLB-Albany. The contracts however were loaded with plenty of "extras" including premium-priced requirements, expedited services, expensive trailers, and exclusive use that required freight be shipped separately from other equipment, even if it resulted in a truck not being filled to capacity. Sometimes shipments were delayed for a period of hours or days, thereby reducing the time available to fulfill the shipping request and assuring that a local trucking company would get the job. There was even "ghost shipments" where the contractor billed the Government for shipments that were never made.

The trucking company paid another $200 thousand in bribes to Government employees who used their positions to help steal more than $1 million in surplus equipment from the base, including bulldozers, cranes and front-end loaders. The employees removed the items from the surplus inventory list and arranged to have them transported off the base by the trucking company.

Like most of these DOJ press releases, there is no mention as to how the fraud was uncovered - which is too bad because knowing how the fraud was perpetrated would help companies establish internal control systems to help detect and prevent such things from happening in the first place. Contractors (and all companies for that matter) need to diligently monitor the effectiveness of their internal control systems to ensure that they are operating at peak efficiency.

A Single Offer Can Be Considered "Adequate Price Competition" in Some Cases

Under the Federal Acquisition Regulations (FAR), requiring offerors to furnish certified cost or pricing data is generally considered the least desirable method to contract. In fact, it is usually a last resort after competition, commercial item, or prices based on law or regulation techniques fail. Concerning competition, contracting officers are prohibited from requiring certified cost or pricing data when prices agreed upon are based on adequate price competition.

So, what is "adequate price competition"?

There are two standards in FAR for adequate price competition, one fairly obvious and the other, not so intuitive.

First the common-sense standard. A price is based on adequate price competition if two or more responsible offerors, competing independently, submit priced offers that satisfy the Government's expressed requirement and if award will be made to the offeror whose proposal represents the best value where price is a substantial factor in source selection and there is no finding that the price of the otherwise successful offer is unreasonable (see FAR 15.403-1(c)(1)(ii)).

The foregoing standard is straight forward - two or more responsible offerors and no shenanigans.

The second standard says that if you can't get two bidders, maybe one will do - but we'll still call it adequate price competition. The standard reads: A price is based on adequate price competition if there was a reasonable expectation, based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation's expressed requirement, even though only one offer is received from a responsible offeror and if based on the offer received, the contracting officer can reasonable conclude that the offer was submitted with the expectation of competition. For example, circumstances indicate that the offeror believed that at least one other offeror was capable of submitting a meaningful offer, and the offeror had no reason to believe that other potential offerors did not intend to submit an offer. Additionally, there must be a determination that the price is otherwise reasonable and the determination must be approved at a level above the contracting officer (see FAR 15.403-1(c)(1)(iii)).

Here are some rather obvious questions.

• How is the contracting officer going to reasonably conclude that the one offer was submitted with the expectation that other offers would be submitted? What kind of documentation is available to support this determination?
• How is the contracting officer going to document that the one offeror had no reason to believe that other potential offerors did not intend to submit offers?
• How is the contracting officer going to document that the one offeror believed that at least one other offeror was capable of submitting a meaningful offer?
• How is the contracting officer going to document that the one offer was otherwise reasonable?

Prime contractors should be thinking about these questions as they pertain to their subcontracting policies, procedures, and practices. Many prime contractors have based their own subcontracting methods on what FAR requires of the Government contracting.

Unbalanced Pricing

An unbalanced bid may be rejected from further consideration.

According to FAR 15.404-1(g), unbalanced pricing exists when, despite an acceptable total evaluated price, the price of one or more contract line items is significantly over or understated as indicated by the application of cost or price analysis techniques.

When evaluating offers with separately priced line items, FAR requires the Government to analyze each and every offer to determine whether prices are unbalanced. If cost or pricing analysis techniques indicate that an offer is unbalanced, the contracting officer shall:

• Consider the risks to the Government associated with the unbalanced pricing in determining the competitive range and in making the source selection decision, and
• Consider whether award of the contract will result in paying unreasonably high prices for contract performance.

An offer may be rejected if the contracting officer determines that the lack of balance posses an unacceptable risk to the Government (see FAR 15.404-1(g)(3)).

A recent Comptroller General's decision illustrates the application of this requirement. WW Contractors challenged GSA's determination that its price proposal was unbalanced and unrealistic.The solicitation stated that an offer might be rejected as non-responsive if it was materially unbalanced as to prices for the initial and option periods explaining that an offer is unbalances when it is based on prices which are significantly less than cost for some work, and prices which are significantly overstated for other work. Thus, under the terms of the solicitation, the contracting officer would have had to find both an understatement of price in some respect and an overstatement of price in another. Note here, the difference in the definition between FAR and the solicitation. In FAR, unbalanced pricing exists when there is a significant over or understatement of costs. In the solicitation, unbalanced pricing exists when there is offsetting over and understatements.

The Comptroller General stated that the record did not support a finding that WW Contractors' offer was unbalanced per the terms of the solicitation because there were no offsetting over and understatements within the bid. The first line item was reasonable and the succeeding line items were understated. There was no evident overstatement to offset the understatement.

WW Contractors' appeal was denied based on other factors. GSA found the option years to be unrealistically low compared to its own cost and price analysis, compared to historical prices, and compared to other offers. The Government was justifiably concerned that WW Contractors lacked understanding of the scope of work. The Comptroller General found no basis to question the contracting officer's concern that there was significant risk to the Government of non-performance or poor performance. Thus, while the offer could not be rejected based on unbalanced pricing, it could be rejected based on unreasonable pricing.