When DCAA's Independence is Questioned

What happens after you complain to DCAA (Defense Contract Audit Agency) management about the actions of one of their auditors? We're not talking about disputes over access to records or difference of opinion on the allowability of a certain expense item. We're talking about attitudes, innuendos, some kind of bias, conflicts of interest, socializing with contractor employees, and other such actions that call into question an auditor's objectivity.

DCAA takes such complaints very seriously. To have such a complaint lodged speaks to DCAA's independence. Maintaining independence in audits (both in fact and in appearance) is critically important to DCAA's credibility and is required by GAGAS (Generally Accepted Government Auditing Standards). DCAA expects its auditors to always act professionally, objectively, and without bias when conducting audits and interacting with contractor personnel.

When a contractor makes a complaint about circumstances or behavior that indicate, or appear to indicate, auditor bias, it also means that there may be a threat to that auditor's independence. When that happens, and it does happen more often than one might suspect, DCAA management will make a initial judgment call as to whether there is any substance to the allegation. If there is sufficient basis for inquiry into the contractor's complaint, management will immediately notify and temporarily remove the auditor from the affected audit(s).

If, based on the inquiry, DCAA management finds that no significant threat to independence exists and that the auditor's independence has not been impaired, the temporary removal will be lifted and the auditor will return to duties as usual. However, if management determines that there is a significant threat to independence, the auditor's independence is impaired, either of mind or in appearance, management will take immediate action to reduce the threat to an acceptable level. This usually means the auditor will be reassigned.

The reality is that once a contractor allegation has been lodged and an auditor temporarily removed from an assignment, the well is already poisoned. That auditor can never go back and be effective because the auditor cannot be objective any longer. That part is human nature. The auditor might go back in with a vengeance to "get even" or conversely, as a spineless milk toast afraid of the contractor's reaction. Either way, independence is compromised.

Contractors deserve impartial, independent, and objective audits and should be cognizant of, and report on, situations where an auditor's independence and objectivity is questionable.

Source: DCAA Contract Audit Manual (DCAAM) 1-509.

DCAA Compensation Reviews - Materiality Thresholds

This is the fourth and final part in our series of articles that examine the methodologies used by the Government to assess compensation reasonableness in the post JF Taylor/Metron era. There were two ASBCA (Armed Services Board of Contract Appeals) cases from 2012; JF Taylor (ASBCA Nos. 56105, 56322) and Metron (ASBCA Nos. 56624, 56751, 56752) that were (mostly) decided in favor of the appellants (i.e. the contractors). In deciding for the appellants, the ASBCA criticized the methodologies employed by DCAA in deriving its estimates of "reasonableness". You can refer to the following past articles for a recap of those decisions.

     Fatally Flawed Compensation Audit

     Fatally Flawed Compensation Audit - Part 2

     Executive Compensation - The Government Loses Again

In Part 1 of this series, we explained how DCAA continues to utilize the "fatally flawed" methodologies of the past to audit compensation costs. DCAA rationalizes that their methodologies were not repudiated - they just didn't have the right "expert" on the case to rebut the contractor's experts. In Part 2, we noted some cases where the contracting officers, rather than trying to defend the DCAA position on compensation, disregarded the audits and took matters into their own hands by performing their own analysis of compensation reasonableness. In Part 3, we discussed the difficulty in assessing the qualitative factors that enter into compensation levels and how DCAA often gives no consideration to such factors in deriving their "reasonableness" recommendations.

In Part 4, we want to address materiality. Materiality is a factor in setting the scope of any audit. Immaterial costs are less likely to be audited than significant items and may be omitted from audit coverage altogether. It makes business sense and audit sense to use scarce resources where the potential payback is most significant.

DCAA has set a threshold for executive compensation below which their compensation experts don't want to be bothered. DCAA keeps that threshold confidential but in 2011, the threshold was $165,000. DCAA wrote:

We use a materiality threshold that states that if the claimed cash compensation (base salary plus bonus) is less than $165,000 for the top paid executive, we determine the compensation to be reasonable based on a cursory review ... and do not need to perform a detailed review of this information.

Of course, that does not preclude other DCAA components from diving into reasonable determinations or contracting officers from doing the same. But, it seems unlikely that if the DCAA team in charge of compensation reviews is not interested in compensation below that threshold, no one else is going to get excited either.

Notwithstanding formal compensation reviews, auditors will typically scan positions and accompanying compensation levels to look for outliers. For example if a clerk/typist shows up at $160,000 per year, you can be assured that the auditor will ask questions and dig deeper.

DCAA Compensation Reviews - Qualitative Factors Affecting Compensation

This is the third part in our series of articles that examine the methodologies used by the Government to assess compensation reasonableness in the post JF Taylor/Metron era. There were two ASBCA (Armed Services Board of Contract Appeals) cases from 2012; JF Taylor (ASBCA Nos. 56105, 56322) and Metron (ASBCA Nos. 56624, 56751, 56752) that were (mostly) decided in favor of the appellants (i.e. the contractors). In deciding for the appellants, the ASBCA criticized the methodologies employed by DCAA in deriving its estimates of "reasonableness". You can refer to the following past articles for a recap of those decisions.

     Fatally Flawed Compensation Audit

     Fatally Flawed Compensation Audit - Part 2

     Executive Compensation - The Government Loses Again

In Part 1 of this series, we explained how DCAA continues to utilize the "fatally flawed" methodologies of the past to audit compensation costs. DCAA rationalizes that their methodologies were not repudiated - they just didn't have the right "expert" on the case to rebut the contractor's experts. In Part 2, we noted some cases where the contracting officers, rather than trying to defend the DCAA position on compensation, disregarded the audits and took matters into their own hands by performing their own analysis of compensation reasonableness.

In this Part 3, we want to point out that there are both quantitative factors and qualitative factors that affect compensation levels (sometimes these are referred to as objective and subjective factors). DCAA's methodologies in assessing compensation relies heavily on quantitative factors (e.g. salary surveys). Qualitative (or subjective) factors that affect compensation levels require someone to exercise judgment as to how those factors affect compensation levels. DCAA is not prone to giving consideration to such factors. In fact, DCAA is more likely to argue against any qualitative factors than try to give recognition to them.

According to DCAA, "... there are two types of information to look at: quantitative and qualitative." The quantitative factors are easy for DCAA to determine - take the 50th percentile from two or more surveys of companies with comparable sales, job descriptions, and industry, average the results, add 10 percent and you have your reasonable compensation benchmark. The qualitative factors on the other hand are difficult to quantify and we don't recall a case where DCAA bumped the quantitative assessment of reasonableness for qualitative factors. That's not saying they haven't because, of course, we are not privy to all of their audits. But we have seen quite a few.

Examples of qualitative factors (the ASBCA calls them "discriminators that may explain variations in compensation) would include security clearances, customer satisfaction, company growth trajectories, performing multiple functions, awards and recognition, to name a few.

In one case, rather than trying to quantify the qualitative factors, DCAA simply advised the contracting officer to use her own judgment as to how those factors entered into the reasonableness equation.

It seems unlikely that DCAA is ever going to address qualitative factors affecting compensation reasonableness. Contractors that expect qualitative considerations should be prepared to address those factors with their contracting officers.

DCAA Compensation Reviews - Contracting Officer Involvement

This is a second in our series of articles that examine the methodologies used by the Government to assess compensation reasonableness in the post JF Taylor/Metron era. There were two ASBCA (Armed Services Board of Contract Appeals) cases from 2012; JF Taylor (ASBCA Nos. 56105, 56322) and Metron (ASBCA Nos. 56624, 56751, 56752) that were (mostly) decided in favor of the appellants (i.e. the contractors). In deciding for the appellants, the ASBCA criticized the methodologies employed by DCAA in deriving its estimates of "reasonableness". You can refer to the following past articles for a recap of those decisions.

     Fatally Flawed Compensation Audit

     Fatally Flawed Compensation Audit - Part 2

     Executive Compensation - The Government Loses Again

In Part 1 of this series, we explained how DCAA continues to utilize the "fatally flawed" methodologies of the past to audit compensation costs. DCAA rationalizes that their methodologies were not repudiated - they just didn't have the right "expert" on the case to rebut the contractor's experts.

Today we want to identify what we think may be a growing trend by contracting officers to come to their own conclusions regarding compensation reasonableness. Okay, maybe we don't have a trend - maybe its just a couple of anecdotes - but it could become a trend.

We know of a couple of cases where contracting officers' (DCMA contracting officers, in these cases) totally disregarded the DCAA recommendations (based on the three-survey average plus 10%) and performed their own analysis. In one case, the contracting officer asked the contractor to go out and "buy" a survey representative of its size, industry, location, etc and based on that survey, offered the contractor a compensation level at the 75th percentile. Although still less than claimed, the contractor accepted it. In the decision, the contracting officer specifically refused, in light of the J F Taylor case, to accept DCAA's position. The ACO considered DCAA's position dead on arrival. The other case was similar - the contracting officer used a single survey but was not quite as generous in the percentile offering.

The lesson here for contractors is to recognize that DCAA is very intransigent when it comes to defending its position so its best to go right to the contracting officer to resolve the issues. This is not to say that the contracting officer will give away the shop but they seem to be smart enough not to want to defend a position that doesn't comport with case law.

DCAA Compensation Reviews - Current Methodologies Used

Those of you following compensation issues as they relate to costs charged to Government contracts are no doubt familiar with the two ASBCA (Armed Services Board of Contract Appeals) cases from 2012; JF Taylor (ASBCA Nos. 56105, 56322) and Metron (ASBCA Nos. 56624, 56751, 56752). The ASBCA found for the contractor (mostly) in both decisions while criticizing the methodologies employed by DCAA in deriving its estimates of "reasonableness". Refer to the following postings for a brief summary of those decisions.

     Fatally Flawed Compensation Audit

     Fatally Flawed Compensation Audit - Part 2

     Executive Compensation - The Government Loses Again

Over the next few days, we will be reporting on our own post-JF Taylor/Metron observations and experiences. We have two general observations. DCAA has not substantively changed the way it audits compensation costs, even though the methodologies it continues to use were called into question in these cases.  Secondly, contracting officers seem to be less likely to follow or rely upon DCAA recommendations and in some cases, have become their own compensation "experts".

We will address the first observation today. The question we keep asking ourselves is why does DCAA continue to employ the same methodologies today, that were called "fatally flawed"  in the J.F. Taylor case. That methodology averaged two or three statistical studies (compensation surveys) and added a 10 percent range of reasonableness.

The short answer here is that DCAA does not believe it lost the J.F. Taylor case on its merits. In 2014 correspondence addressing the applicability of the J.F. Taylor case, DCAA wrote:

... as specifically noted in the Board decision, the JF Taylor expert's statistical arguments were accepted by the ASBCA because the evidence was "unrebutted" by the Government. Had we rebutted the evidence, the outcome may have been different. Therefore, we continue to utilize our methodology...

So there you have it. DCAA continues to add a ten percent range of reasonableness to the average (i.e. 50th percentile) of several surveys as benchmarks to assess the reasonableness of compensation.

The Government's Shoddy Market Research Practices

The Government says that it is continuously seeking ways to increase the participation of small businesses in Government contracting (how about streamlining the GSA Schedule process, for starters?). One of Defense's BBP (Better Buying Power) 3.0 initiatives that we discussed last April is to compile a new set of tools that will enhance market research:

The premise here in this initiative is that there is a lot of small businesses out there that could be solicited for work if only Government acquisition personnel had better market research tools. With the proper "tools", the Government could perform market research and ferret out those small businesses that are disengaged or not aware of Government contracting opportunities. With the proper "tools", the Government's acquisition corps could find small businesses to produce "innovative solutions for the Department". So, if some company has a better, more efficient, or more cost effective method of providing goods and services, the Government's market research activities will find them and bring them under contract.

One use of agencies market research is to determine whether there are sufficient number of small businesses available to meet an agency's needs and if so, the solicitation can be set aside (reserved) for small businesses. Sometimes however agencies get rather sloppy in their market research endeavors. Consider a recent GAO bid protest that ruled the VA's (Veteran's Administration) market research did not support a conclusion that at least two small businesses could meet the agency's needs.

The VA needed radiopharmaceuticals so it searched two databases for small businesses operating under a certain NAICS code. It found some and assumed that they were qualified and therefore set aside the solicitation for small businesses only. However, the particular NAICS code included a large array of different types of businesses manufacturing all types of pharmaceuticals, including cold medicines and lip balms.

One company, a competitor that couldn't bid because it wasn't a small business, challenged the adequacy and sufficiency of the VA's market analysis. The GAO sustained the protest, finding that the VA had not adequately focused its market research on radiopharmaceuticals manufacturers, and that the agency did not even consider whether the companies it identified could be considered manufacturers or simply suppliers of the product. Further, there was not indication in the market research report, or otherwise, that any of the identified companies have the required nuclear pharmacy licenses to perform under the contract.

You can read the entire GAO Bid Protest decision here.

The Doctrine of Superior Knowledge

Under the doctrine of superior knowledge, the Government has a duty to disclose critical information to potential contractors to prevent them from pursuing a ruinous course of action. Failure to do so may be a breach of a contractual duty.

The elements of proof of such a breach are;

1. the contractor undertook performance without the vital knowledge
2. the government was aware that the contractor did not have the knowledge and had no reason to seek it
3. the information that was supplied misled the contractor or did not put it on notice to inquire, and
4. the government failed to provide the relevant information

In a recent ASBCA (Armed Services Board of Contract Appeals) decision, this doctrine was put to the test. A contractor bid on and won a contract to operate concession stands on an Air Force base. Soon after contract award, it was evident that the contractor was losing a lot of money on the operations. It filed a claim on the basis that the Government did not disclose superior knowledge when it was preparing and submitting its proposal in response to the solicitation.

On July 12, 2011 (a date prior to contract award), the contractor requested the Air Force to provide it monthly financial statements for the previous contract for the past 12 months (presumably that would mean July 2010 through June 2011). The Air Force provided financial statements from a different 12 month period. It provided financial statements for fiscal year 2010 (October 2009 through September 2010) as that data was the most recent data available to the Air Force. The Air Force however did not tell the contractor that the data was from a different 12 month period than that requested.

The contractor argued that had it seen the financial statements for the requested 12 month period, it would have seen that the predecessor contractor was losing money and would not have bid on the contract.

The ASBCA however ruled that the different time-frames did not cause the problem. The problem was rooted in the contractors misinterpretation of the data that was provided. 

In this appeal, prior to bidding, appellant requested current financial information regarding performance of the prior contract and received accurate financial information but for an earlier undisclosed period. Appellant thought the data was "odd" but made no further inquiry. Further, it made serious misinterpretations and mistakes with regard to the data supplied by the government.

While it is clear that the government did not provide appellant with data for the time period requested, we cannot hold that this was what induced appellant to bid. Appellant did not properly treat the 40% cost of goods figure, nor did it properly take into account the monthly stipend or the 7% gross sales payments that it was to be responsible for paying to the government.

Therefore, the ASBCA denied the contractors claim. The full decision will be published soon on the ASBCA's website.

DFARS Proposal to have CPA Firms Audit Contractor Business Systems - Dead

A year ago, we published a seven-part series on the proposed DFARS (DoD FAR Supplement) rules to have contractors go out and procure their own independent audits of certain required business systems including accounting systems, estimating systems, and MMAS (materials management and accounting systems). See "Independent CPA Audits of Contractor Business Systems". This proposal was designed to relieve the Defense Contract Audit Agency of some of its required audit workload until the Agency could get caught up on its incurred cost audit backlog. The independent audits would be performed under DCAA's oversight with the Agency weighing in on the sufficiency of procedures employed by the independent CPA firms to attest to the adequacy of the systems and the related internal controls.

A public meeting was held in August 2014 and the public comment period ended September 15, 2014 with 23 submissions including ones from the AICPA (American Institute of Certified Public Accountants), the American Bar Association, the Aerospace Industries Association, and many other organizations and private individuals. The common theme among the respondents was that the proposal, as written, was unworkable and not viable.

The powers-that-be obviously agreed or had second thoughts themselves because on February 4, 2015, the DFARS Case was quietly closed without further action. That's not the end of the story however. The system reviews still need to be performed and the audit responsibility continues to reside with DCAA. Perhaps someday, DCAA will get around to auditing contractor business systems again.

Best Practices for Meeting Small Business Subcontracting Goals

Most Government contractors have difficulty meeting their small business subcontracting goals. The Government has its own set of goals for awarding contracts to small and disadvantaged contractors. Similar goals are inserted into prime Government contracts and in some cases, flow down to subcontractors who in turn have their small and disadvantaged subcontracting goals. Sometimes, these goals are incorporated into "award fee" criteria as a means of incentivizing contractors (and subcontractors) to do a better job of finding these small and disadvantaged firms and then awarding them subcontracts. Perhaps the  push to meet these goals causes the Government and its contractors to perform less than thorough verification that small and disadvantaged firms are truly that. We've reported many times on cases involving companies that fraudulently claim small business (or veteran-owned or minority-owned, or woman-owned) status. True, these firms are robbing others of the program benefits but in reality, its sometimes nearly impossible to find qualified small businesses for particular tasks.

DCMA (Defense Contract Management Agency) is the agency with responsibility for monitoring and reviewing Defense contractor progress toward meeting small business goals. The Agency has seen first hand many of the successes and failures in the program. Based on those reviews, DCMA has compiled a listing of the "best practices" within the prime contractor community for achieving small business subcontracting goals, and in particular, small disadvantaged subcontractors. These best practices, although directed to prime contractors, would equally apply to subcontractors who also need to meet small business subcontracting goals. Lets look at this list of best practices.

• Establish team or working group to assign advocates that act as extension of supplier diversity program office. This, according to DCMA will "spread the gospel" throughout the company.
• Utilization of manufacturing engineer to visit SDBs (Small Disadvantaged Businesses) that had contracted SBLO (Small Business Liaison Officer) regarding business opportunities. Develop a form to allow clear rating of capabilities of each prospective source visited. A high rating resulted in business opportunities on both commercial and Government contracts. Also, increased buyer confidence that new companies being added to the bid list will perform.
• Publication of supplier diversity news. Internal communication used to motivate staff to keep supplier diversity in mind. Articles are written and published regularly and targeted to reach those who often make sourcing decisions.
• Appointment of business advocate. A woman employee is appointed to a temporary, one-year term as the women-owned small business advocate for the company. Person attends procurement conferences and meetings. This rotational assignment increases awareness among employees.
• SBLOs formed a committee to better prepare subcontractors to do business with their companies. Group provides free training to small business on business etiquette, how to fill out interest applications, and any topic determined to help small businesses that attend. They have a graduation ceremony for small businesses that attended five of the six scheduled training sessions. The SBLOs have their Vice Presidents of Purchasing attend the graduation and the small businesses are given an opportunity to provide an oral presentation of the company to the audience.
• Inclusion of small, disadvantaged and woman-owned business in every procurement. Company procedures require solicitation of at least one company from each SB category on every procurement. If buyer doesn't solicit at least one, authorization to proceed can only be obtained by going through the SBLO.
• Identification of where expenditures occur so everyone, not only the buyer, knew to be on the lookout for small business sources in those areas. Analyzed procurement cycle and categorized purchases and suppliers involved. Identified opportunity areas and then focused outreach efforts to optimize spending impact.
• Approval to award to SDBs that were not low bidder. Approval given by a Corporate VP committed to success of the SDB program which gave approval to award to SDBs that were not the low bidder. Not an open checkbook, but reasonable application.
• Formation of re-sourcing team to establish policy and procedures to resource materials from one supplier to another. Team consisting of members from quality assurance, purchasing and SBLO evaluate parts to be re-sourced, analyze impact to subcontract goals and attempt to include at least one supplier capable of qualification in each of the small business categories.
• Technology utilization. Outreach to small businesses using the internet and electronic application processes to do business.

We cannot attest to the effectiveness of these practices but DCMA is convinced that they will help contractors achieve their small and disadvantaged business subcontracting goals. Who knows, maybe some of them will resonate with you.

Fly America Act

Since 1974, the Fly America Act has required federal employees and their dependents, consultants, Government contractors, grantees, and others must use U.S. flag carriers (i.e. an air carrier holding a certificate under section 401 of the Federal Aviation Act of 1958) for U.S. Government-financed international air travel and transportation of the personal effects or property, if available (see FAR 47.402).

The term "must use" is pretty straight-forward. The term "if available" is where contractors have sometimes run afoul of Government oversight.

A U.S.-flag air carrier is considered "available" even if it cost more than a foreign-flag air carrier. Cost seems to be no object here. Its also considered "available" if the foreign-flag carrier is more convenient for the agency or traveler. That gets in to some circuitous routing issues.

FAR 47.403-1(c) includes some scheduling principles to follow unless the application would result in the last or first leg of travel to or from the US being performed by a foreign-flag carrier:

1. U.S.-flag carrier service available at point of origin shall be used to destination or, in the absence of direct or through service, to the farthest interchange point on a usually traveled route.
2. When an origin or interchange point is not served by a U.S.-flag air carrier, foreign-flag air carrier service shall be used only to the nearest interchange point on a usually traveled route to connect with U.S.-flag carrier service.
3. When a U.S.-flag air carrier involuntarily reroutes the traveler via a foreign-flag air carrier, the foreign-flag air carrier may be used notwithstanding the availability of alternative U.S.-flag carrier service.

There are a couple of exceptions such as if the foreign-flag carrier can get the traveler to the destination 24 hours earlier than a U.S.-flag carrier, it is okay to use the foreign-flag carrier. Also, if the U.S.-flag carrier requires a six-hour (or more) layover somewhere in route, it is permissible to use a foreign flag carrier. Refer to FAR 47.403-1(d) and (e) for more specifics on these exceptions.

The penalties for not using U.S.-flag carriers, when available can be fairly steep. FAR 47.403-3 contains a formula for disallowance which is based on the loss of revenues suffered by U.S.-flag air carriers.

FAR 52.247-63, Preference for U.S.-Flag Air Carriers requires contractors who select a carrier other than a U.S.-flag air carrier for international air transportation to include a statement on vouchers involving such transportation, essentially as follows:

Statement of Unavailability of U.S.-Flag Air Carriers

International air transportation of persons (and their personal effects) or property by U.S.-flag air carrier was not available or it was necessary to use foreign-flag air carrier service for the following reasons (state reason).

This contract clause does not apply to contracts awarded using the simplified acquisition procedures (see FAR Part 13) or contracts for commercial items (see FAR Part 12).

Whistleblowers Convicted of Participating in a Fraud, Cannot Recover Under Qui Tam Provisions

A few years ago, a DOE contractor was charged with timekeeping irregularities - it's employees were charging overtime for hours they did not work and these overtime hours were passed right along to the Government under a cost-reimbursable contract. You can read more details about this case here and here.

Sadly, the discovery of this fraud did not come from the many oversight agencies whose jobs were to prevent and detect such activities. The discovery of the fraud came from a whistleblower who himself, had engaged in the fraud. The question that has been rattling around the court system for awhile is whether that whistleblower, who participated in the fraud to an insignificant degree, can share in the Government's $18.5 million recovery under the Qui Tam provisions of the False Claims Act. The U.S. Court of Appeals just ruled that he could not share in the recovery:

"... the False Claims Act requires the dismissal of a qui tam relator convicted of the conduct giving rise to the fraud, even if the relator only played a minor role."

The relator argued that applying the prohibition to minor fraud participants undermines the FCA's (False Claims Act's) purpose of encouraging qui tam plaintiffs to help uncover fraud. The supposition here is that if there is no chance of reward, fewer whistleblowers will come forward. The Court did not buy this argument.

You can read the entire Court decision here.

The Difference Between "Clarifications" and "Discussions"

FAR Part 13 prescribes policies and procedures for the acquisition of supplies and services that do not exceed the simplified acquisition threshold (currently $150,000). There is a special authority under FAR 13.500 for acquisition of commercial items that exceed the simplified acquisition threshol but not exceeding $6.5 million.

Simplified acquisition procedures are designed to reduce administrative expenses, promote efficiency and economy in contracting, and avoid unnecessary burdens for agencies and contractors. When using these procedures, an agency must conduct the procurement consistent with a concern for fair and equitable competition and must evaluate proposals in accordance with the terms of the solicitation.

It is important for an agency, when conducting simplified acquisitions to ensure that the procurements are conducted consistent with a concern for fair and equitable competition with the therms of the solicitation. Although an agency is not required to conduct discussions under simplified acquisition procedures, where an agency avails itself of negotiated procurement procedures, the agency should fairly and reasonably treat offerors in the conduct of those procedures.

FAR 15.306 describes a range of exchanges that may take place when the agency decides to conduct exchanges with offerors during negotiated procurements. The two broadly stated exchanges are "clarifications" and "discussions". Clarifications are limited exchanges between an agency and an offeror for the purpose of eliminating minor uncertainties or irregularities in a proposal. Clarifications do not give an offeror the opportunity to revise or modify its proposal. Clarifications are not to be used to cure proposal deficiencies or material omissions, or materially alter the technical or cost elements of the proposal, or otherwise revise the proposal.

Discussions on the other hand, occur when an agency communicates with an offeror for the purpose of obtaining information essential to determine the acceptability of a proposal, or provides the offeror with an opportunity to revise or modify its proposal in some material respect. As a general matter, when an agency conducts discussions with one offeror, it must afford all offerors remaining in the competition an opportunity to engage in meaningful discussions. Further, it is the actions of the parties that determines whether discussions have been held and not merely the characterization of the communications by the agency.

A recent bid protest decision handed down by the Comptroller General illustrates the difference between "clarifications" and "discussions". The Air Force issued a solicitation for a solid waste incinerator for use at Wake Island. Award was to be made to the vendor submitting the lowest-priced technically acceptable quotation that conformed to the terms of the solicitation. The solicitation advised that the Government intended to evaluate offers and award without discussion, but reserves the right to conduct discussions.

During the course of evaluating proposals, the Air Force communicated with the company that ultimately won the award in two critical areas. First, the offeror proposed progress payments instead of Net 30 upon delivery and second, the offeror proposed one line item as cost-reimbursable when the solicitation required firm-fixed price. The Air Force inquired concerning these discrepancies and the offeror was allowed to revise its bid.

The Air Force contended that its communications with the awardee were clarifications, not discussions. The Comptroller General disagreed. The contractor "...was permitted to revise portions of its quotation that did not comply with the solicitation's terms." When the Air Force communicated with the offeror about these discrepancies, the offeror altered its quotation,

The Air Force's communications with the awardee invited a response that was necessary to determine the acceptability of the quotation and , in fact, resulted in the offeror being permitted to supplement or alter its quotation. This is quintessentially the nature of discussions, not clarifications.

The Comptroller General (CG) concluded that the Air Force, having conducted discussions with the awardee, was required to also conduct discussions with all other vendors in the competition. The CG sustained the protest on that basis.

You can read the full text of the CG's decision here.

Government Consent to Subcontract - Does the Requirement Serve a Useful Purpose?

It’s been some time since we last wrote about the requirement for contractors to notify contracting officers before the award of certain subcontracts and obtain their consent to subcontract. In fact, it was back in 2010 that we discussed these requirements in some detail. To read those timeless postings, see Part 1 and Part 2.

Federal Acquisition Regulation (FAR) 52.244-2, Subcontracts, requires prime contractors to provide contracting officers notification before the award of any cost-plus-fixed-fee subcontract, or certain fixed-price subcontracts. This requirement for advance notification is driven by statutory requirements in 10 U.S.C. 2306 and 41 U.S.C. 3905. FAR clause 52.244-2 also requires prime contractors to get consent to subcontract for cost reimbursement, time-and-materials, labor-hour, or letter contracts, and also for unpriced actions under fixed-price contracts that exceed the simplified acquisition threshold. 

The objective of requiring consent to subcontract, as discussed in FAR Part 44, is to evaluate the efficiency and effectiveness with which the contractor spends Government funds, and complies with Government policy when subcontracting. The Government requires a contractor to provide certain information (e.g., subcontractor’s name, type of subcontract, price, description of supply or services, etc.) reasonably in advance of placing a subcontract to ensure that the proposed subcontract is appropriate for the risks involved and consistent with current policy and sound business judgment. The information provides the Government time and a basis for granting, or withholding consent to subcontract. 

These requirements should be addressed in every contractors' purchasing system description, policies, and procedures. In fact, if they're not covered and DCMA decides to perform a CPSR (Contractor Purchasing System Review), the lack of coverage would probably be written up as a deficiency.

The consent to subcontract exercise comes at a cost however and this is another one of those areas where unique Government contracting requirements adds cost to the process. The Government estimates that each Government contractor will submit an average of three advisories/consent to subcontract per year and each of those submissions will take about two hours to prepare. We think that two hours per submission significantly understates the actual time required. Multiply that out by your hourly rate and you'll get an estimate of the cost to comply. 

The FAR Councils are now asking for public input on the efficacy of these procedures to produce the results intended when Congress passed the law. If you care to comment or wish to read more, click here.

Allowability of B&P Costs to Prepare Cost Overrun Proposal

Bid and Proposal (B&P) costs are addressed in the FAR cost principles under FAR 31.205-18, Independent Research and Development and Bid and Proposal Costs (IR&D/B&P). The definition of B&P is given in Section (a):

"Bid and proposal (B&P) costs” means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract.

The allowability of B&P costs is given in Section (c):

Except as provided in paragraphs (d) and (e) of this subsection, or as provided in agency regulations, costs for IR&D and B&P are allowable as indirect expenses on contracts to the extent that those costs are allocable and reasonable.

Given this background, we come to a situation where a contracting officer was faced with a contractor that was overrunning a contract baseline due to no fault of the Government and was wondering whether the cost for the contractor to prepare a cost overrun proposal was allowable.

Obviously, the contracting officer did not want to reimburse the contractor for costs that wouldn't have been incurred had the contractor not overrun the contract in the first place. It seemed to the contracting officer that the contractor was being rewarded when it should have been penalized.

The response from DoD to the contracting officer's plea was not very helpful (at least for the contracting officer). DoD essentially stated that if the contracting officer needed a basis for disallowing the costs, it should look to the FAR 31.201-2(a), Determining Allocability. Forget about FAR 31.205-18 because that is not going to help.

DoD concluded that there is no specific limitation in FAR subpart 31.2 that make bid and proposal costs expressly unallowable. But in order to determine if the bid and proposal costs you are concerned with are allowable, a thoughtful examination of the Allocability clause is in order. Then, DoD goes on to paraphrase the allocability cost principle.

DoD also instructed the contracting officer to compare the proposed accounting practice for the bid and proposal costs at issue with the established accounting practices of the contractor. If different, the contractor could be cited for noncompliance with FAR 31.202 which imposes the requirement that costs incurred for the same purpose and under the same circumstances be accounted for as either direct or indirect, but not both methods. That guidance could be problematical because there are situations where contractors are allowed to charge B&P costs direct and indirect both. For example, a contract with a line item that requires contractors submit a proposal for a follow-on production would be a situation where contractors can (and have) deviate from their regular charging practices.

Transportation's Disadvantaged Business Enterprise (DBE) Program

The Department of Transportation (DOT) has established a Disadvantaged Business Enterprise (DBE) program to provide a vehicle for increasing the participation by Minority Business Enterprises (MBEs) in state and local procurement. DOT's DBE regulations require state and local transportation agencies that receive DOT financial assistance, to establish goals for the participation of DBEs. Each DOT-assisted State and local transportation is required to establish annual DBE goals, and review the scopes of anticipated large prime contracts throughout the year and establish contract-specific DBE subcontracting goals.

In addition to establishing goals, state and local recipients also certify the eligibility of DBE firms to participate in DOT-assisted projects. Some groups are presumed to be socially and economically disadvantaged for the purposes of participation in this program. For example, women-owned businesses are presumed to be disadvantaged for the purposes of participation in this program.

To be certified as a DBE, a firm must be a small business owned and controlled by socially and economically disadvantaged individuals. Certifiers make the determinations based upon on-site visits, personal interviews, reviews of licenses, stock ownership, equipment, bonding capacity, work completed, resume of principal owners and financial capacity.

Last week, the Department of Justice announced a settlement of allegations of false claims related to this program. The company agreed to pay more than $140 thousand to settle allegations it submitted false records to the Washington State Department of Transportation related to a federally-funded interstate highway improvement project.

The contractor claimed that from 2010 to 2014, it was leasing specialized equipment used to process and clean waste water generated by construction projects from a certified DBE. In fact, the machine was owned by the contractor who used a lease/purchase agreement to make it appear, consistent with DBE set-aside requirements for federally-funded highway projects, that a subcontractor (or supplier) owned the machine.

In paying the $140 thousand to settle allegations, the contractor did not admit to misconduct. The DoJ press release did not state the source of the allegations - whether from a whistleblower or someone within a transportation agency doing their job.

Over the past few weeks, we have been bringing you updates on provisions in the House and Senate versions of the National Defense Authorization Act for 2016. The differences between the respective bills are being ironed out in conference committee so we do not know at this time which provisions will survive the final cut.

In the meantime, various interest groups have been weighing in on different aspects of the proposed legislation. Earlier this week, for example, the Professional Services Council (PSC), representing Government service contractors, released a letter written to Chairmen of the House and Senate Armed Services Committees expressing concern with "a small number of proposals" included in the bills.

One of their concerns addresses the proposal to limit DCAA's (Defense Contract Audit Agency's) ability to perform audits for other Governmental agencies on a reimbursable basis until such time as the Agency eliminates its own backlog of audits for the Department of Defense. We wrote concerning this provision back on June 3rd, 2015.

In PSC's view:

PSC supports many elements of this provision and shares the Senate Armed Services Committee’s concern about DCAA audit backlogs. However, we recommend that paragraph (a), which limits the ability for DCAA to assist non-Defense agencies with audit support, be deleted. Paragraph (a) is likely to exacerbate audit backlogs across all government agencies and may not improve DCAA’s capacity to support its work on DoD-related audits.

The PSC did not explain how the provision would likely exacerbate the audit backlog across all Government agencies but we can guess. When DCAA conducts incurred cost audits, they include audit coverage for all flexibly-priced contracts regardless of the agency awarding the contract. In reality, it takes very little additional audit effort to include non-DoD contracts as part of the scope of audit. If DCAA were prohibited from including those contracts, the awarding agencies would have to find someone else to audit their contracts. Since most agencies do not have contract auditors, it means that they'll have to contract with outside firms to perform their contract audits. So, instead of a single audit, the Government will end up performing multiple audits, incurring higher audit costs.

Not only will it likely cost the Government more money overall to conduct multiple audits, but contractors will be subjected to multiple audits and that obviously results in additional costs and inefficiencies for contractors.

Prompt Payment Act Interest Rate Rises

The Department of Treasury, Bureau of Fiscal Service just announced the Prompt Payment Act interest rate for the second half of calendar year 2015. It will increase from 2.125 percent to 2.375 percent. This is the highest the rate has been since 2011 but no where near where it peaked in 1982 at 15.5 percent.

 This is the Treasury Rate that is used to compute FCCM (Facilities Capital Cost of Money). It's also used to calculate the Government's liability when they are late in paying contractors. An agency that has acquired property or service from a business concern and has failed to pay for the complete delivery of property or service by the required payment date (generally within 30 days) shall pay the business concern an interest penalty. Also, the Contract Disputes Act of 1978 and the Prompt Payment Act provide for the calculation of interest due on claims at the rate established by the Secretary of the Treasury.

The Secretary of the Treasury has the authority to specify the rate by which the interest shall be computed for interest payments under section 12 of the Contract Disputes Act of 1978 and under the Prompt Payment Act. Under the Prompt Payment Act, if an interest penalty is owed to a business concern, the penalty shall be paid regardless of whether the business concern requested payment of such penalty. Agencies must pay the interest penalty calculated with the interest rate, which is in effect at the time the agency accrues the obligation to pay a late payment interest penalty. The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made.

Contractors who submit public vouchers or progress payments requests are entitled to interest if the Government doesn't pay them in a timely manner. Late payments don't happen often but when they do, the "paying office" usually adds the interest penalty automatically.

(Fraud), Waste, and Abuse

We often rattle off the phrase "fraud, waste, and abuse" when were really describing fraud. Sure, fraud can lead to waste and abuse but the Department of Defense has a separate definition of "waste and abuse". It comes from the 2011 report to Congress by the Commission on Wartime Contracting (COWC), and is really a bullet listing of examples of waste and abuse:

• Requirements that were excessive when established and/or not adjusted in a timely fashion
• Poor performance by contractors that required costly rework
• Ill-conceived projects that did not fit the cultural, political, and economic mores of the society they were meant to serve
• Security and other costs that were not anticipated due to lack of proper planning
• Questionable and unsupported payments to contractors that take years to reconcile
• Ineffective Government oversight
• Losses through lack of competition

The Government (and the taxpayers) lose billions of dollars every year due to waste. According to the aforementioned COWC report, the Government lost somewhere between $31 billion to $60 billion because of contract waste during recent contingency operations in Iraq and Afghanistan. Waste and abuse can be subjective and often more difficult to prosecute than fraud but contractors should make every effort to prevent and ultimately avoid waste and abuse of their own resources as well as the Government's.

In 2009, the DoD-IG (Inspector General) reported that a contracting officer approved invoices for underutilized contractor personnel responsible for tactical-vehicle field maintenance at a joint base. For more than a year, the actual utilization rate was only 10 to 15 percent of the requirement. The contractor did the right thing by alerting Government officials that the actual utilization was far below that of the contractor personnel being paid. The Government did not act on the information and as a result, the IG estimated that $400 million was lost due to under utilization. This is a good example of waste occurring on a Government contract. (By the way, the IG was unable to uncover any rationale for continuing to pay for under utilization.

Limitation of Cost and Limitation of Funds - You Need the Right Tools

Prospective Government contractors are generally aware that they must satisfy the Government that their accounting systems are adequate for accumulating and reporting costs incurred under their contracts. The requirements vary somewhat depending upon the type of contract contemplated - cost type contracts have a few requirements that other types of contracts do not have.

Most of the time, prospective contractors have their systems in shape before the Government comes in to review. For DoD procurements, these accounting system reviews can be conducted by either DCAA (Defense Contract Audit Agency) or DCMA (Defense Contract Management Agency). For civilian contracts, they are generally conducted by an agency within the respective departments. Generally, those agencies will follow the DCAA practices for auditing contractor accounting systems.

Among the various attributes required for an "adequate" system is that it be able to provide cost accounting information as required by contract clauses concerning limitation of cost (FAR 52.232-20), and limitation of funds (FAR 52.232-22). Essentially, these clauses require contractors to notify the Government whenever it is approaching estimated costs or funds allotted to the contract. In the -20 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days (may vary from 30 to 90 days), when added to all costs previously incurred, will exceed 75 percent (may vary between 75 and 85 percent) of the estimated cost specified in the schedule. In the -22 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the total amount so far allotted to the contract by the Government.

If an accounting system is to fail audit, its often because contractors do not have adequate systems in place to meet the limitation of costs/limitation of funds notification requirements. To meet these requirements, contractors will need a set of tools and be able to demonstrate that they are operational and well understood by management. These tools must provide an estimate of the costs that will be incurred in the next 60 days (often referred to as the "burn rate"). Audit assessments will consider such things as:

1. The nature and adequacy of controls which govern the establishment of budgets.
2. The procedures for accumulating incurred costs by budget element
3. The actual cost compared to budgeted costs
4. The means provided for comparing incurred costs to the percentage of contract completion
5. The development of estimates to complete (ETCs)

The one question that prospective contractors should ask themselves is whether their accounting system is capable, on a continuous and systematic basis, that it can meet the limitation of costs/limitation of funds reporting requirements - i.e. will the costs expected to be incurred in the next 60 days, when added to costs already incurred, exceed 75 percent of the estimated costs of the contract (or estimated funding on the contract).

Inverted Domestic Corporations - Status Change During Contract Performance

Inverted Domestic Corporations (IDCs) are companies that used to be incorporated in the US (or used to be partnerships in the US), but are now incorporated in a foreign country, or are subsidiaries whose parent corporations are incorporated in a foreign country. The technical definition of an inverted domestic corporation is codified in 6 U.S.C. 395(b):

(b) Inverted domestic corporation For purposes of this section, a foreign incorporated entity shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—      (1) the entity completes before, on, or after November 25, 2002, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership; 

     (2) after the acquisition at least 80 percent of the stock (by vote or value) of the entity is held—

         (A) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; or 

          (B) in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership; and 

     (3) the expanded affiliated group which after the acquisition includes the entity does not have substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group. 

Since 2008, the Federal Acquisition Regulations (FAR) have prohibited the award of contracts using appropriated funds to any foreign incorporated entity that is treated as an inverted domestic corporation or to any subsidiary of such entity.

But, what happens when, after contract award, the contractor becomes an inverted domestic corporation or a subsidiary of an inverted domestic corporation? Well, nothing really, but the Government wants to know if that happens. Last week, the FAR Councils (DoD, GSA, and NASA) published a final rule that requires two things.

First, offerors (and contractors) will be required to represent their current status at the earlier of an offer submission or the annual anniversary of the registration in the System for Award Management (SAM). In SAM's representations and certifications section, there are now check boxes to represent whether an offeror or contractor is or is not an inverted domestic corporation and is or is not a subsidiary of an inverted domestic corporation.

Second, FAR 52.209-10, Prohibition on Contracting with Inverted Domestic Corporations, now requires affirmative notification by contractors if they become inverted domestic corporations. The provision reads:

In the event the Contractor becomes either an inverted domestic corporation, or a subsidiary of an inverted domestic corporation during contract performance, the Contractor shall give written notice to the Contracting Officer within five business days from the date of the inversion event.

The new provision does not address the actions to be taken by a contracting officer in the event a contractor becomes an inverted domestic corporation during contract performance. It seems logical that contracts will be allowed to run their course. However, contract modifications and perhaps IDIQ contracts may be in jeopardy of continuance.

Threshold for Certified Cost or Pricing Data Will Increase to $750,000

The FAR Councils released a final rule today that will, among other acquisition related thresholds, will increase the threshold for submission of certified cost or pricing data from $700,000 to $750,000. The change will become effective on October 1, 2015.

The certified cost or pricing data threshold as well as other inflation related thresholds are required, by statute to be adjusted every five years for inflation using the Consumer Price Index for all urban consumers. The last adjustment was in 2010 when the threshold was raised from $650,000 to $700,000. By adjusting thresholds, the relative risks to the Government remain essentially the same and the Government does not end up doing more work simply because of inflation.

Other thresholds impacted by the final rule include:

• The micro-purchase base threshold of $3,000 (FAR 2.101) is increased to $3,500.
• The simplified acquisition threshold (FAR 2.101) of $150,000 is unchanged.
• The FedBizOpps preaward and post-award notices (FAR part 5) remain at $25,000 because of trade agreements.
• The threshold for use of simplified acquisition procedures for acquisition of commercial items (FAR 13.500) is raised from $6.5 million to $7 million.
• The statutorily equivalent Cost Accounting Standard threshold are raised from $700,000 to $750,000 (FAR 30.201-4(b)(1).
• The prime contractor subcontracting plan (FAR 19.702) floor is raised from $650,000 to $700,000, and the construction threshold of $1,500,000 stays the same.
• The threshold for reporting first-tier subcontract information including executive compensation will increase from $25,000 to $30,000 (FAR subpart 4.14 and section 52.204-10).

Contractors Repay $75 Million for Overcharging the Government

Here's something for contractors with GSA Multiple Award Contracts to consider. Every company that has ever received a GSA contract knows full-well that the prices offered the Government must be the best prices offered any commercial contractor. That requirement is well entrenched into the process. If you want to sell to the Government, fine, just don't try to gouge the Government because it has deep pockets, because you can get away with it, because the oversight is lax, or just because you can.

Under the Multiple Award Schedule (MAS) Program, prospective vendors agree to disclose commercial pricing policies and practices to the GSA in exchange for the opportunity to gain access to the broad federal marketplace and the ease of administration that comes from selling to any government purchaser under one central contract.  GSA regulations require that, during contract negotiations with GSA, prospective vendors seeking an MAS contract make “current, accurate and complete” disclosures of the standard and non-standard discounts they offer to commercial customers.  The GSA relies on the accuracy of these disclosures in order to negotiate fair pricing for government purchasers.  Additionally, after the MAS contract is awarded, regulations require that MAS Program vendors disclose to the GSA changes in their commercial pricing practices, including improved discounts that are offered to commercial customers, after the MAS contract is in place.

The Department of Justice recently announced a settlement with two MAS contractors who agreed to pay back a staggering $75 million to resolve allegations that they violated the (Civil) False Claims Act by misrepresenting their commercial pricing practices thereby overcharging the Government (it would be interesting to see how the companies footnote these events in their audited financial statements).

The settlement resolves allegations that the two companies made false statements to the government in connection with the sale of their products and services under MAS contracts.  These false statements allegedly concealed the companies’ commercial pricing practices and enabled the companies to overcharge the government from 2007 through 2013. 

The civil settlement resolves a lawsuit filed under the whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and obtain a portion of the government’s recovery.  Looks like a very good payday for the whistleblower (a former president of one of the companies). Although the Justice's press release did not disclose how much of the $75 million will go to the whistleblower, it will be sizable.

The claims resolved by the settlement are allegations only; there has been no determination of liability.

You can read the full press release here.