National Defense Authorization Act for Fiscal Year 2016

Yesterday, the Chairman of the House Armed Service Committee announced that House and Senate negotiators have reached an agreement on the National Defense Authorization Act for Fiscal Year 2016 (NDAA). The Act authorizes $515 billion in spending for national defense and an additional $89.2 billion for Overseas Contingency Operations (OCO) for a total of $604.2 billion. Over the next few days, we will describe some of the provisions that will be of interest to Government contractors. We start with Section 893, Improved Auditing of Contracts. Its an interesting title inasmuch as it has nothing to do with improving the audit process. It simply reduces the amount of work that the Defense Contract Audit Agency (DCAA) performs.

Section 893 prohibits DCAA from providing audit support for non-Defense Agencies (e.g. NASA, Department of Energy) unless the Secretary of Defense certifies that the Agency's backlog for incurred cost audits is less than 18 months of incurred cost inventory. And just to make sure that DCAA doesn't try to hide some extracurricular activities, Section 893 also requires that the Defense Department reduce its funding for DCAA by an amount that equals any reimbursements for non-DoD work. At one time, reimbursable audit activities accounted for eight percent of the Agency's budget. This means that non-DoD agencies that have utilized and relied upon DCAA audits are now forced to find other sources for required contract audits.

Section 893 also adds a couple of new items for inclusion in DCAA's annual report to Congress. Congress now wants DCAA to report on the percentage of questioned costs sustained or recovered. It has long been suspected that the many of the Agency's reported findings have not been sustained by procurement (i.e. the Contracting Officers). This may be more a reflection on the contracting officer community and their unwillingness or inability to work hard at sustaining reported findings, than on DCAA itself. Also, the annual report must include a description of outreach actions toward industry to promote more effective use of audit resources. That should be interesting. We haven't met a Government contractor yet that doesn't have a few ideas of what DCAA can do with their auditors.

Finally, Section 893 requires the Department of Defense to conduct an internal review of the oversight and audit structure functions within DoD with the goals of enhancing the productivity of oversight and program and contract auditing to avoid duplicative audits and streamlining the oversight process. The report must include (i) a description of actions taken to avoid duplicative audits and streamline oversight reviews, (ii) a comparison of commercial industry accounting practices with CAS to determine if some portions of CAS compliance can be met through such commercial practices, (iii) a description of standards of materiality used by DCAA and the DoD-IG, (iv) an estimate of average delay and range of delays in contract awards due to the time necessary for DCAA to complete pre-award audits, and (v) the total costs of sustained or recovered costs both as a total number and as a percentage of question costs. Presumably, the last item will reconcile with the data that DCAA must now include in its annual report.

Failure to Report IR&D Expenditures May Render Such Costs Expressly Unallowable

Last week we spent a couple of postings on a proposal by DoD to require contractors to coordinate their IR&D (Independent Research & Development) plans with the Government (see: DoD Wants Contractors to Disclose Their IR&D Activities Before Incurring Any Costs) and the current rules that require contractors allocating more than $11 million of IR&D expenditures to Government contracts to report their expenditures in an online database (see: Disclosure of IR&D Projects Prior to Incurring Costs). The current rules have just begun to come into play - the DoD gave contractors until the end of 2014 to submit their initial reports.

The data submitted in on-line reporting facility are estimates and there is no expectation that they reconcile to actual costs. However, there is an expectation that the projects be reported in the database and this database will be accessible to both DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) for their review.

This reporting requirement should not be taken lightly. It is a condition for the allowability of those IR&D costs. DCAA, for one, will be testing contractor projects against the reporting database and will, at a minimum, question any costs not found in the database. DCAA's guidance on the matter reads as follows:

If the contractor fails to input the IR&D information into the DTIC database, the costs are expressly unallowable; audit teams should question the costs and recommend application of penalties. If the team identifies significant expressly unallowable costs, consider reporting a noncompliance with CAS 405, Accounting for unallowable costs. 

So, in addition to questioning unreported IR&D costs, DCAA will recommend that the Contracting Officer level penalties for claiming expressly unallowable costs and if the particular contractor is subject to full or modified CAS (Cost Accounting Standards), will cite them in non-compliance with CAS 405 (which will add interest to the amount disallowed).

Company Owned Aircraft

We have not written extensively about the FAR (Federal Acquisition Regulations) allowability criteria for costs related to corporate aircraft because historically, a relatively small number of Government contractors have or utilize corporate aircraft. Also, contractors that are affluent enough to afford such aircraft often voluntarily delete the cost from their billings and incurred cost submissions because of the added burden required to support such costs (more on that later). Historically, this has not been a contentious issue between contractors and the Government's cost allowability czars. However, we are aware that more mid-sized companies are increasingly chartering jets to take their executives and other staff to where they need to go. Obviously, the cost of private charters are considerably more than flying commercially so its time we take a look at the FAR allowability criteria applicable to corporate owned, leased and chartered aircraft. The coverage is found in FAR 31.205-46(c).

An "unrestricted" round trip coach fare from coast to coast and back is usually in the neighborhood of $2,000. A charter for the same round trip would cost $30,000 (or more). However, if you have a group traveling together, that $30 thousand can be amortized over the number of travelers. Put 12 people in a Gulfstream IV and suddenly the difference doesn't seem so great. When contractors consider the convenience and time-savings (from not having to go through airport security, etc), the prospect of chartering a private jet becomes easier to rationalize.

For cost reimbursement purposes however, justifications and rationalizations do not matter - the cost to the Government is limited to the to the lowest priced airfare available to the contractor during normal business hours (there are some exceptions which we will discuss later). And, in addition to documenting the "lowest priced airfare", contractors using corporate owned, leased, and chartered aircraft are required by FAR 31.205-46(c) to maintain manifests/logs that indicate:

1. Date, time, and points of departure
2. Destination, date and time of arrival
3. Name of each passenger and relationship to the contractor
4. Authorization for trip, and
5. Purpose of trip

As mentioned, the cost of utilizing corporate owned, leased, or chartered aircraft is limited to the lowest priced airfare available to the contractor during normal business hours. The contracting officer however can approve a higher amount. The contracting officer can approve a higher amount when commercial flights would require circuitous routing, travel during unreasonable hours, excessively prolong travel, or other factors that would offset differences between private and commercial flights. Any of these exceptions must be justified and documented to the contracting officers satisfaction.

Its not an easy sell to persuade a contracting officer to approve the higher cost of corporate owned, leased, or chartered aircraft. Auditors as well, are going to consider such costs, which include personnel, maintenance, depreciation, insurance, etc as "high risk" and subject it to added scrutiny. One aspect they concentrate on is whether there is a business reason for everyone on the plane. There is always the suspicion that contractors add a few extra travelers just to get the Government to pay for more of the flight cost.

Justice Plans to Hold Individuals Responsible for Corporate Wrongdoing

The Department of Justice (DoJ) issued a memorandum on September 9, 2015 calling for a new emphasis on holding individuals accountable fraud. In DoJ's words:

One of the most effective ways to combat corporate misconduct is by seeking accountability from the individuals who perpetrated the wrongdoing. Such accountability is important for severl reasons: it deters future illegal activity, it incentivizes changes in corporate behavior, it ensures that the proper parties are held responsible for their actions, and it promotes the public's confidence in our justice system.

The DoJ however, recognizes that there are substantial challenges unique to pursuing individuals for corporate misdeeds. DoJ stated:

In large corporations, where responsibility can be diffuse and decisions are made at various levels, it can be difficult to determine if someone possessed the knowledge and criminal intent necessary to establish their guilt beyond a reasonable doubt. This is particularly true when determining the culpability of high-level executives, who may be insulated from the day to day activity in which the misconduct occurs. As a result investigators often must reconstruct what happened based on a painstaking review of corporate documents, which can number in the millions, and which may be difficult to collect due to legal restrictions.

The memorandum lays out six key steps to strengthen the Department's pursuit of individual corporate wrongdoing. These are:

1. In order to qualify for any cooperation credit, corporations must provide to the Department all relevant facts relating to the individuals responsible for the misconduct.
2. Criminal and civil corporate investigations should focus on individuals from the inception of the investigation.
3. Criminal and civil attorneys handling corporate investigations should be in routine communication with one another.
4. Absent extraordinary circumstances or approved department policy, the Department will not release culpable individuals from civil or criminal liability when resolving a matter with a corporation.
5. Department attorneys should not resolve matters with a corporation without a clear plan to resolve related individual cases, and should memorialize any declination as to individuals in such cases.
6. Civil attorneys should consistently focus on individuals as well ass the company and evaluate whether to bring suit against an individual based on considerations beyond that individual's ability to pay.

You can read the entire guidance paper by clicking here.

Disclosure of IR&D Projects Prior to Incurring Costs

Earlier this week we discussed DoD's recent "white paper" describing its plans to require contractors, as a condition of IR&D (Independent Research and Development) cost allowability, to notify the Government prior to expending any funds on the project. If you missed that posting, click here. Similar provisions already exist for "major contractors". Major contractors are those allocating more than $11 million of IR&D/B&P costs per year to DoD contracts. Regulatory coverage is found in DFARS (DoD FAR Supplement) 231.205-18, Independent research and development and bid and proposal costs. Section (c)(3)(C) of that cost principle states:

For a contractor's annual IR&D costs to be allowable, the IR&D projects generating the costs must be reported to the Defense Technical Information Center (DTIC) ... The inputs must be updated annually and when the project is completed. Copies of the input and updates must be made available for review by the cognizant administrative contracting officer (ACO) and the cognizant Defense Contract Audit Agency auditor to support the allowability of the costs.

Additionally, the ACO must determine whether IR&D/B&P projects are of potential interest to DoD and provide the results of the determination to the contractor.

The existing regulation differs from the proposed regulation in two major areas. First, the new regulations will apply to all DoD contractors; not just those allocating more than $11 million of IR&D costs to DoD contracts (and subcontracts). Second, the existing provision does not include a requirement to notify the Government prior to the expenditure of funds. It only requires annual reporting of projects and costs incurred.

Although the annual reporting is currently a condition for allowability and copies of inputs must be made available to DCAA, the Agency has not revised its guidance for auditing IR&D/B&P costs to require auditors to request such information. Since the $11 million threshold is very high, the reporting requirements affect relatively few contractors and DCAA management can ensure adequate audit coverage with a few phone calls. However, if the threshold is taken away so that all contractors must report, corresponding audit guidance might be needed.

Government Awards No-Cost Contract and Competitors Appeal

HUD (Housing and Urban Development) needed a commercial off-the-shelf (COTS) web-based payroll tracking service to monitor compliance with Davis-Bacon wage rates. Essentially, about 6,000 users would be entering data into an on-line database for HUD to use in monitoring compliance with Davis-Bacon. Three offers were submitted ranging from zero dollars to just over a million dollars. The Government awarded the contract to the offeror with the zero dollar bid. The two unsuccessful offerors appealed the award on the basis that the no-cost contract should be considered void for lack of consideration.

The GAO (General Accountability Office) determined that the successful contractor did receive consideration. To be enforceable, a contract with the Government requires an offer, acceptance of the offer and consideration. A contract is supported by adequate consideration if it involves mutual promises of the contracting parties whereby each party obtains a benefit. Consideration for a contract need not be monetary. The GAO has repeatedly concluded that adequate consideration exists where a contractor promises to perform certain services, the Government promises to grant the contractor the right to perform the procured services, and both parties obtain benefits from the arrangement.

In this case, the benefit accruing to the successful bidder is exposure of its product to more than 6,000 users nationwide. The winning bidder expected to benefit from this exposure through an "elevated competitive position in the national marketplace, and further expects to reduce the marketing costs that it would otherwise incur". In other words, the contractor projected that the extensive visibility it will obtain through performance of the HUD contract will substantially increase its share of the national market, and that this market share increase, along with marketing cost savings, will more than offset its costs to perform the requisite services without monetary compensation.

Accordingly, GAO denied the appeal. You can read the entire decision here.

DoD Wants Contractors to Disclose Their IR&D Activities Before Incurring Any Costs

The Department of Defense (DoD) issued a white paper on August 26, 2015 entitled "Enhancing the Effectiveness of Independent Research and Development (IR&D)". The Department's idea of enhancing effectiveness in this case is requiring contractors to notify the Department prior to initiating an IR&D project. Failure to notify the Government will render the costs potentially unallowable.

"... the Department and the Industrial Base need to work together to ensure the department has visibility into the opportunity created by government-reimbursed IR&D efforts performed by defense contractors. "

Contractor investments are not directed by the Government. They are identified by contractors to advance a particular ability to develop and deliver superior and more competitive products. According to DoD however, contractor IR&D efforts can have the best payoff when the Government is well informed of the investments that contractors are making and when contractors are well informed about related investments being made elsewhere in the Government's R&D portfolios and about Government plans for potential future acquisitions where this IR&D may be relevant.

To ensure that a two-way dialogue occurs and to provide some minimum oversight of IR&D expenditures, DoD believes that proposed new IR&D efforts should be communicated to appropriate DoD personnel. The Department's intent is not to reduce the independence of IR&D investment selection, nor to establish a bureaucratic requirement for Government approval prior to initiating an IR&D project. Instead, the objective of this engagement is to ensure that both IR&D performers and their potential DoD customers have sufficient awareness of each other's efforts and to provide industry with some feedback on the relevance of proposed and completed IR&D work.

The intent of this new policy is that by fiscal year 2017, every new IR&D project will be preceded by an engagement with appropriate DoD technical or operational staff to ensure that the department is award of the goals and plans for the effort. To document this interchange, DoD will require contractors to record the name and Government party with whom, and date when, a technical interchange took place prior to the IR&D project initiation.

Allowability Determinations.  Under DoD's proposal, the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA) will use the coordination information to make allowability determinations. Projects that haven't been "coordinated" prior to initiating work, may very well be determined unallowable. Expect auditors to test whether any costs were incurred prior to the coordination date. If they find any pre-agreement costs, expect the auditors to question them.

New Incurred Cost Adequacy Checklist

Last week, we highlighted DCAA's (Defense Contract Audit Agency) latest revisions to its checklist for determining whether contractors' incurred cost proposals were adequate and ready for audit. (See DCAA Revises its Incurred Cost Proposal Adequacy Checklist). We will have to wait and see whether it improves the auditor's adequacy determination process until the Agency has used it for awhile. Meanwhile, there is one aspect of the checklist that didn't change, except for the way the wording is structured. The checklist is roughly organized to correspond to the submission requirements of FAR 52.216-7(b)(iii). FAR Schedules B, C, and D which correspond to checklist items B, C, and D, related to schedules showing the make-up of the General and Administrative Pool (G&A), Overhead pools, and Occupancy pools (or Intermediate Indirect Cost pools), respectively.

In the previous checklist, each of these sections included the following:

Verify the contractor included explanatory notes for any adjustments from expenses booked per G/L to claimed costs.

Under the newly revised checklist, the checklist item is rephrased as a question:

Did the contractor include explanatory notes for any amounts contained in an adjustment column or amounts omitted from the claim?

Either way, the intent is clear. DCAA expects contractors to describe any adjustments made to booked costs. Now we could point out that FAR does not require such explanations and a few contractors have steadfastly refused to provide such explanations as part of their incurred cost submissions because there is no specific requirement. However, such information is usually necessary during an eventual audit so contractors are going to be compelled to provide it sooner or later. In our opinion, it is more efficient to provide it as part of the incurred cost proposal while the details are fresh and/or the people preparing the proposal are still around.

The real concern we have with this checklist item is the auditors' expectations as to the amount of detail to be included in the explanatory notes. Frankly, auditors are all over the place in their expectations. Some are satisfied with simple explanations like "Represents amounts unallowable per FAR 31.205-xx" while other auditors expect contractors to write tomes about the adjustments or the excluded costs. It can be very frustrating to contractors because rarely is there continuity in the auditor completing the checklist from one year to the next and each one brings a different set of experiences and skills to the exercise.

Contractors truly want to satisfy their contractual requirements but on the other hand, there is a cost associated with contract compliance and anything seen as extra-contractual, simply increases cost to the contractor. Unreasonable demands should be elevated to the auditors' supervisor or the contracting officer.

DCAA Revises Its Incurred Cost Proposal Adequacy Checklist

Contractors with flexibly priced contracts are well aware that FAR 52.215-7(d)(iii), Allowable Cost and Payment, requires an annual submission of costs incurred under those contracts. The clause specifies 15 items/schedules that contractors must include in these annual submissions. DCAA (Defense Contract Audit Agency) has a few resources that are intended to assist contractors in preparing these proposals.

First, there is the Information for Contractors pamphlet. The latest version is dated June 26, 2012. Specifically, Enclosure 6 to that pamphlet contains some instruction and also, sample schedules that if followed, would satisfy the requirements.

Second, DCAA has developed an Excel-based model that it calls ICE (Incurred Cost Electronically). This is intended to be a "fill-in-the-blanks and out pops an adequate incurred cost proposal" tool. Unfortunately, this model is cumbersome, not user-friendly and hasn't been significantly updated in 15 years. Most contractors find it too onerous to implement and end up developing their own incurred cost model tailored to their own business environment.

Third, DCAA published a PowerPoint presentation that covers the essential requirements of an incurred cost submission as well as provides insight into the audit process of reviewing the submission.

Finally, DCAA publishes a checklist for its auditors to help them determine whether a contractor's incurred cost proposal is adequate. Although intended for auditors' use, it is also a very useful tool for contractors to assess the adequacy of their proposals prior to submission to contracting officers.

The most recent Adequacy Checklist was issued last month (August 2015) and represents a significant revision to the previous version of April 2012. The Agency revised it ensure that the effort expended to judge adequacy more closely aligned to the specific requirements of FAR 52.216-7(b)(iii). Previous versions were requiring auditors, in order to determine whether a submission was adequate, to request additional data and information from contractors that was not required by FAR. In some instances, auditors practically performed the entire audit just to determine whether a submission was adequate to begin an audit. Many contractors complained about these extra-regulatory requests and it seems that DCAA has acknowledged, in part, that its auditors were over-reaching.

Minimum Wage Rate for Government Contractors Will Rise in January

The Department of Labor announced yesterday that the minimum wage for workers performing work on Government contracts will increase from the current $10.10 per hour to $10.15 per hour beginning January 1, 2016. This action is in keeping with the indexing provisions in the President's Executive Order from February 2014 that established the minimum wage for Government contractors.

The minimum wage is indexed to the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). Increases are rounded to the nearest $0.05. The Labor Department determined that the annual percentage increase in the CPI-W was 0.345 percent. Applying that percentage to the current minimum wage rate results in a new wage rate of $10.13 per hour ($10.10 times 0.345%). However, since the EO requires rounding to the nearest $0.05, the new rate is rounded up to $10.15 per hour.

There is certain to be some grumbling about the paltry pay raise - approximate 1/2 percent. Especially when Government workers are scheduled to receive 1.3 percent in January.

The minimum wage provision affects approximately 560,000 contractor employees (and that five cent increase will cost contractors and ultimately the Government, $58.2 million per year).

Responsibility Determinations of Prospective Subcontractors

When submitting proposals to the Government, there are two things a prospective contractor must concern itself when proposing subcontract costs; cost/price reasonableness and subcontractor "responsibility". This post is about the latter, subcontractor responsibility.

Prospective prime contractors are responsible for determining the responsibility of their prospective subcontractors (see FAR 9.104-4). Determinations of prospective subcontractor responsibility may affect the Government's determination of the prospective prime contractor's responsibility. Accordingly, a prospective contractor's deficient subcontractor responsibility determination procedures and practices may influence the Government's responsibility determination of the prime contractor. The logic goes something like if the prime cannot or will not determine whether its proposed subcontractors are responsible, then how can the prime contractor be responsible since FAR requires such determinations. Sometimes, the Government will require a prospective contractor to provide written evidence of proposed subcontractor's responsibility. If that happens, prime contractors must be prepared to furnish such evidence and not wait until requested before compiling such evidence.

So how does a contractor (or prospective contractor, or higher-tier subcontractor, or higher-tier prospective subcontractor) go about determining a subcontractor's "responsibility". Essentially, the prime contractor must perform the same steps that the Government performs when determining whether the prime contractor is responsible. These seven considerations are also found in FAR at 9-104.1. To be determined responsible, a prospective subcontractor must

1. Have adequate financial resources to perform the contract, or the ability to obtain them.
2. Be able to comply with the required or proposed delivery or performance schedule, taking into consideration all existing commercial and governmental business commitments.
3. Have a satisfactory performance record.
4. Have a satisfactory record of integrity and business ethics.
5. Have the necessary organization, experience, accounting and operational controls, and technical skills, or the ability to obtain them.
6. Have the necessary production, construction, and technical equipment and facilities, or the ability to obtain them.
7. Be otherwise qualified and eligible to receive an award under applicable laws and regulations.

Sometimes contractors (or prospective contractors) succumb to the temptation to perform superficial responsibility determinations. We've seen some that take the form of negative assurance, i.e. nothing came to our attention that would lead us to believe the prospective subcontractor is not responsible. After all, it takes a lot of time and effort to request supporting data and document the review steps and conclusions. And, in many cases, the Government never asks for the data anyway. While such a gamble may have been worth the risk up until a few years ago, contracting officers are coming under increased scrutiny (by the Inspector Generals and other oversight) to document their own responsibility determinations and that will include steps to ensure that prospective contractors have performed their own required responsibility determinations.

Contractors Cannot Discriminate Against Employees Who Chat About Their Compensation

Yesterday we brought you the first installment on the new regulations that prevent discrimination on the basis that contractor employees decide to chat about the compensation levels. If you missed it, click here to begin your reading.  The idea behind the President's Executive Order (EO) was that if employees know how much each other makes, the pay disparity that exists between men and women performing the same work, will narrow and perhaps reach parity. No one really knows whether such prohibitions will have an impact. By the Government's own admission, it is based on untested theories. Additionally, no one has come forth with even anecdotal evidence that employees have been discriminated against for divulging their compensation level to fellow employees. Regardless, Government contractors have a new set of regulations to deal with.

The salient part of the new regulation reads:

(3) The contractor will not discharge or in any other manner discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant. This provision shall not apply to instances in which an employee who has access to the compensation information of other employees or applicants as a part of such employee's essential job functions discloses the compensation of such other employees or applicants to individuals who do not otherwise have access to such information, unless such disclosure is in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing, or action, including an investigation conducted by the employer, or is consistent with the contractor's legal duty to furnish information.

Contractors must post in conspicuous places, available to employees and applicants for employment, notices to be provided by the contracting officer setting for the provisions of this nondiscrimination clause.

If there is ever an allegation of discrimination, contractors must furnish all information required by the rules, regulations, and orders of the Secretary of Labor and will permit access to its books, records, and accounts by the contracting agency and the Secretary of Labor for purposes of investigation to ascertain compliance with such rules, regulations, and orders.

If a contractor becomes noncompliant with these rules, the contracting officer may cancel, terminate, or suspend the contract and the contractor may be declared  ineligible for further Government contracts. That doesn't seem likely to happen, but it is part of the regulations.

There is more to these new regulations than we can cover here. For more information, click here for the complete rules.

Employees Can Discuss Their Compensation Levels With One Another

Back in April 2014, the President issued an Executive Order entitled "Non-Retaliation for Disclosure of Compensation Information" which prohibits Government contractors from discharging or discriminating in any way against employees or applicants who inquire about, discuss, or disclose their own compensation or the compensation of another employee or applicant. Read our posting back when the EO was issued by clicking here.

Last week, the Office of Federal Contract Compliance Programs (OFCCP) issued final regulations implementing the Executive Order. The prohibition against discriminating because of race, color, religion, sex, sexual orientation, disability, etc has been on the books for awhile. The EO adds a provision that prohibits Government contractors from discriminating against employees who disclose, inquire, or discuss their own compensation or that of others.

The purpose of this EO is to try and close the compensation gap between men and women. According to the Government, a pay gap between men and women persists today. When stratified by racial group, the statistics are the same, men earn more than women. According to a BLS (Bureau of Labor Statistics) survey from 2013, women make 82 percent of what men make. Among the possible contributing factors to the enduring pay gap is the prevalence of workplace prohibitions on discussing compensation.

Whether communicated through a written employment policy or through informal means, restrictions on revealing compensation can conceal compensation disparities that exist among employees. One recent survey found that 51 percent of female respondents and 47 percent of male respondents reported that the discussion of wage and salary information is either discouraged or prohibited and could lead to punishment.

The Government believes that prohibitions on discussing pay prevent employees from knowing whether they are underpaid in comparison to their peers. Underpaid employees will remain unaware of the disparity if compensation remains hidden.

Now how does this affect Government procurement?

First, Government contractors with pay secrecy practices are subject to enforcement actions and, as a result, may face a higher risk of disruption, delay and expense associated with contract performance. Allowing discussions of pay by employees of these contractors will contribute to minimizing these risks.

Second, Government contractors with pay secrecy policies may also experience a decrease in worker productivity. Workers, due to a lack of compensation information, may experience a reduction in performance motivation and are likely to perceive their employer as unfair or untrustworthy. Both reduce work productivity.

The Government even admits that these potential impacts are only theories that have not been investigated but nevertheless, are serving as the basis for the new policy. The OFCCP notes that in addition to these benefits, this final rule is expected to result in increased wage payments to employees and recognizes that it could very well result in increase costs to Government contracts.

 Tomorrow we will discuss the specific requirements that Government contractors must adhere to under these new rules.

Contractor Employees Plead Guilty for Bribing Government Official

 The Department of Justice (DoJ) issues many press releases every week and some of them deal with contract fraud in some fashion. It is not often that we get to find out how the fraud came to light - whether it was because of Government oversight, a tip, a whistleblower, or an honest fed. Usually, the press releases say that so-and-so has been charged or has plead guilty to this or that. Last week however, the DoJ via the U.S. Attorney's Office for the District of Alaska, issued a notification that was surprisingly detailed in describing how an attempted bribe of a Government official was uncovered.

 A Tennessee company was awarded several subcontracts to install and upgrade fiber optic cables on Joint Base Elmendorf Richardson (JBER) in 2014. In June 2014, company representatives met with an Air Force official to complete quality assurance inspections on two project locations. During the inspections, the Air Force official discovered numerous discrepancies, informed the company, and requested the discrepancies be fixed.

Instead of fixing the problems, which would have cost the company $60 thousand, they offered a $10 thousand bribe to the Air Force official knowing that the Air Force official would make the final decision on whether to accept the work as complete and wanting the official to overlook the discrepancies.

The Air Force official declined the $10 thousand bribe and reported the attempt to law enforcement. When the company again offered the bribe, the Air Force official was "wired" and was meeting with the company at the direction of the Air Force Office of Special Investigations (AFOSI). This time, the entire conversation was recorded and the rest, as they say, is history. The company's representatives plead guilty and now face significant jail time.

The investigation of this case began when the public official reported to law enforcement that the subcontractor had offered him $10 thousand to look the other way on faulty work and accept their deficient work on behalf of the Air Force.

You can read further details about this case by clicking here.

Bidders Have Only Five Days to File a Size Protest

Under SBA (Small Business Administration) regulations, a size protest of a sealed bid procurement is timely if it is received by the contracting officer prior to the close of business on the 5th day, exclusive of weekends and legal holidays, after bid opening (see 13 CFR 121.1004(a)(1)). An untimely protest will be dismissed (see 13 CFR 121.1004(d)).

Last April, VA (Veterans Affairs) issued an invitation for bids for a construction project. The procurement was set aside for service-disabled veteran-owned small business concerns. In May, VA publicly opened bids and determined that a company named C3T was the low bidder.

Subsequent to award, an unsuccessful bidder for the construction project, American Patriot Construction Services files a size protest with the contracting officer challenging C3T's status as a small business. American Patriot alleged that C3T was affiliated with several other concerns through common ownership. The contracting officer forwarded the protest to the SBA Office of Government Contracting (OGC).

The OGC dismissed American Patriot's protest as untimely as it had not been submitted to the contracting officer with five business days after bid opening.

American Patriot was not going to take that dismissal lying down so it filed another appeal, this time to SBA's Officer of Hearings and Appeals (OHA). American Patriot maintained that OGC erred in applying the SBA rules. It should have applied FAR 33.1 which gives it 30 days to file a protest. American Patriot argued that it did not file a challenge to the legality or ability of C3T to bid the solicitation, but rather the legality of awarding this contract to C3T based upon misrepresentation of business size in its Representations and Certifications. American Patriot asserted that C3T illegally obtained the contract by falsely claiming to be a small business and therefore, the contract should be terminated.

OHA affirmed that the size appeal was properly dismissed and gave no credence to the argument that FAR, rather than the SBA rules, applied to the current situation.

Unsuccessful bidders must realize that five days from bid opening rolls around very fast and if there is to be a size protest, they need to act very quickly.

Earned Value Management System Compliance Review Threshold Increased

Last week the Department of Defense raised the Earned Value Management System (EVMS) compliance review threshold from $50 million to $100 million - good news for some contractors. This change affects only DoD contracts and does not affect other agencies such as NASA or the Department of Energy.

The new $100 million threshold applies to cost or incentive contracts and subcontracts for which the contractor is required to have an earned value management system that has been determined by the Government - typically by the Defense Contract Management Agency (DCMA) - to be compliant with EIA-748,

The new compliance review threshold does not increase the threshold for EVMS requirements. That threshold still sits at $20 million. It does mean that no compliance surveillance activities will be routinely conducted by DCMA on cost or incentive contracts and subcontracts valued between $20 million to $100 million.

In its announcement of the increased threshold, DoD warned that it reserves the right to review contractor EVM systems if the EVM reporting data quality "appears suspect" such as when a contracting officer, program office, or buying command asks for DCMA assistance due to concern about the quality of EVM data reported on a given contract, or when the EVM data is not in compliance with one or more of the 32 EIA-748 guidelines.

You can read more about this subject by clicking here.

Establishing Paid Sick Leave for Federal Contractors

Yesterday, the President signed an Executive Order (EO) requiring Government contractors to provide a minimum of seven days of paid sick leave per year. This action follows a growing trend among states that have begun requiring employers to offer similar benefits. Connecticut already has a similar plan and California began requiring employers to provide sick leave coverage beginning last July.

Under the President's EO, contractors and subcontractors must offer all employees, in the performance of the contract or subcontract, at least one hour of paid sick leave for every 30 hours worked up to seven days per year. We're not sure how this math works. 2,080 hours divided by 30 hours comes to 69 hours or about 81/2 days. We guess that this will be clarified in the forthcoming regulations.

Contractors cannot set a limit on accrued sick leave at less than 56 hours. Earned sick leave can be used for physical or mental illness, injury, or medical condition, obtaining diagnosis, care, or preventive care from a health care provider, caring for a child, a parent, a spouse, or a domestic partner who has any of those conditions, and domestic violence, sexual assault, or stalking.

Paid sick leave carries over from one year to the next and must be reinstated for employees rehired by a covered contractor within 12 months after a job separation. Contractors may be absorbing a new liability if they hire employees with accrued sick leave on the books.

The term "covered contractor" is a term used frequently in the EO although its not defined. We presume then that "covered contractor" means all contractors holding Government contracts. No size or small business exemption applies. That would be consistent with what the States are doing.

The provision will become effective on January 1, 2017. One estimate is that this will impact about 300,000 employees. That represents a small percentage of employees working on Government contracts, simply because most contractors have sick leave policies in place that exceed this new Executive Order.

To read the entire Executive Order, click here.

Fair Pay and Safe Workplaces - Public Comments - Part 5

This week, we have been recapping several of the 918 public comments submitted in response to draft regulations implementing the President's Executive Order (EO) called Fair Pay and Safe Workplaces. The EO is intended to punish Government contractors (or some would say is intended to incentivize Government contractors to do better) who engage in repeated offenses of fourteen different labor laws currently on the books. Under the proposed regulations, offending contractors (and subcontractors) will be at a disadvantage compared to their competitors, when responding to solicitations for Government work.

If you have not been following this series, you may want to go back and read Parts 1 through 4:

• Part 1 - Comments from the Project on Government Oversight (POGO) - Endorse
• Part 2 - Comments from the Associated General Contractors of America (AGC) - Oppose
• Part 3 - Comments from the American Bar Association - Oppose
• Part 4 - Comments from the Leadership Conference on Civil and Human Rights - Endorse

So far, we've looked at comments submitted by a public service organization (POGO), one that represents a certain segments of contractors (AGC), one that represents attorneys specializing in contract law (ABA) and one that represents workers in general (Leadership Conference on Civil and Human Rights). Today we will recap a response from an existing Government contractor; Lithko Contracting. Many of the 918 public comments came from Government contractors. There was no particular reason for choosing Lithko's submission other than it seemed to have been written by someone that had given some thought to the practicalities of trying to implement the regulations.

Lithko is a nationwide specialty concrete contractor employing 1800 people. It has been in business for 33 years and, according to its narrative, has an excellent safety record and a great relationship with OSHA and other Governmental agencies. Lithko opposes the proposed rules.

Lithko's first objection concerns the requirement to report non-final agency and court actions. Lithko pointed out that companies commonly undergo agency investigations and receive violation notices or court complaints, but a subsequent hearing or legal proceeding reveals the alleged violation is unfounded or is much less serious than the original claim. If non-final agency or court actions are considered by contracting officers as part of the responsibility determination process, quality companies could lose a contract as a result of cases or investigations that are not yet fully adjudicated or are eventually dismissed.

Secondly, adding reporting requirements and certifying compliance of subcontractors will force companies to hire more staff  (and attorneys) at great cost which will eventually be passed on to the federal government and taxpayers.

Third, there will likely be an increase in the number of bid protests, litigation against frivolous complaints and investigations, and lawsuits disputing the subjective responsibility determination or assertions made by federal contracting officers and prime contractors. These will create delays.

Finally, added cost, red tape, increased risk, delays and needless uncertainty will have a severe impact on small businesses and will prevent many small businesses from competing for federal contracts because they do not have the resources to comply with this substantial regulatory burden.

Lithko is certainly correct about added cost. The Government acknowledges that. It probably has not thought through the relative impact of the added cost on small businesses.

Fair Pay and Safe Workplaces - Public Comments - Part 4

Today we present the fourth segment in our series on examining the public comments submitted in response to the regulations implementing the President's Fair Pay and Safe Workplaces Executive Order (EO). The idea behind the EO is that by requiring employer's workplace violations be taken into consideration when the Government awards federal contracts, it will no longer be acceptable to award contracts to companies that routinely violate workplace health and safety protections, engage in age, disability, race, and sex discrimination or withhold wages, and other labor violations.

If you're just coming in to this series, you may want to start with Parts 1, 2, and 3.

• Part 1 - Comments from the Project on Government Oversight (POGO) - Endorse
• Part 2 - Comments from the Associated General Contractors of America (AGC) - Oppose
• Part 3 - Comments from the American Bar Association - Oppose

Today, we will summarize comments presented by The Leadership Conference on Civil and Human Rights. The Leadership Conference is a coalition  of more than 200 national organizations promoting and protecting civil and human rights of all persons in the United States. The Conference strongly supports the proposed regulations, maintaining that implementation will improve the lives of millions of workers  - helping to ensure they have access to fair pay, benefits, and working conditions.

The Leadership Conference stated that under current regulations, contractors that violate workplace laws have little incentive to come into compliance and companies with the most egregious violations of these laws continue to receive federal contracts. It cites as support for this claim, a 2013 Senate report showing the government awarded $81 billion in federal contracts in a single year to companies with the most egregious violations of wage and workplace safety laws.

The Leadership Conference also made some recommendations to "enhance" the proposed regulations. For example, it proposes to extend the rules to all employees of a company, not just those working on Government contracts (Actually, the regulations apply to contractors, not employees. Violations affecting non-Government contract employees are to be reported as well as those affecting employees working on Government contracts.)

The Leadership Conference wants to add "physical assault" by any employee against any other employee of the company to the list of unlawful harassment. It seems to us that a lot of physical assaults occurring in the workplace are well beyond violations of labor laws. They also want to significantly narrow the definitions of willful violations, repeated violations, and pervasive violations; lowering the bar for reporting violations.

Like many other respondents, both for and against the regulations, the Leadership Conference believes that the information regarding violations be made publicly available. Publicizing violations will increase incentives for contractors to comply with labor laws.

Fair Pay and Safe Workplaces - Public Comments - Part 3

We are in the midst of recapping public comments to the proposed regulations implementing the President's Fair Pay and Safe Workplaces Executive Order (EO). Who could possibly be opposed to fair pay and safe workplaces? No one, really. But the EO and the accompanying regulations have very little to do with fair pay and safe workplaces. Fair pay and safe workplaces are already ensured by 14 different labor laws already on the books. The proposed regulations require contractors to disclose violations of those laws (including non-judicial settlements) that occurred withing the three years preceding the submission of a proposal for a Government contract. If you're just coming in to this series, you may want to start with Parts 1 and 2.

• Part 1 - Comments from the Project on Government Oversight (POGO) - Endorse
• Part 2 - Comments from the Associated General Contractors of America (AGC) - Oppose

Today, we will look at comments from the American Bar Association's Section of Public Contract Law (PCL).  The purpose of the PCL Section is to seek to improve the process of public contracting for needed supplies, services, and public works. While agreeing that contractors and subcontractors must comply with U.S. labor laws, the PCL believes that the proposed rules as drafted would be

• difficult to implement
• significantly disrupt procurements
• impose significant costs and burdens on offerors, contractors, and subcontractors and the Government. 

The PCL calls for the FAR Councils and the Department of Labor to withdraw the proposed guidance and regulations.

The Proposed Rule and Proposed Guidance effect a major modification to the current acquisition process. This major modification creates a complex compliance regime that is new both to the Government and to contractors. Implementation of systems both within the Government and at the contractor and subcontractor levels throughout the supply chain will take time and require a significant expenditure of money and resources. Moreover, the labor-law compliance review includes a new agency participant, the Agency Labor Compliance Adviser ("ACLA"); new reporting requirements; and new responsibility reviews that will have to operate within the already-existing procurement environment governed by a complicated and layered system of statutes and regulations.

Like the AGC, the PCL believes that the cost om implementing the EO have omitted some forseeable costs and impacts from their cost-benefit analysis. This is a polite way of saying that the Government's estimates are grossly understated. The Government estimates that 26 thousand contractors and subcontractors will be impacted and each of those will spend eight hours during the first year and zero hours each year thereafter. The PCL points out that basing an estimate on the use of a single contractor employee to understand all the complex requirements is neither reasonable no realistic. The PCL believes that compliance with the reporting obligations will be a multi-disciplinary effort that involves such functions as human resources, legal, ethics and compliance, information technology, program management, business development, contract management, and subcontract or supply-chain management.

Also, like the AGC, the PCL recommended that the FAR Council should consider the impact of the proposed rule on small businesses. Not only is the new requirements onerous but small business subcontractors might be negatively impacted because a prime contractor may have difficulty evaluating labor violations for small contractors.

Fair Pay and Safe Workplaces - Public Comments - Part 2

Yesterday we began a series on summarizing some of the public comments submitted in response to the proposed regulations that will require contractors to report three years worth of violations of 14 different labor laws when submitting proposals to the Government. This is a highly controversial and emotionally charged proposal. There were 918 comments submitted during the public comment period - a number rarely seen related to procurement regulations. Yesterday, we summarized positive comments submitted by POGO (Project on Government Oversight). Today we will look at a contrary position submitted by the AGC.

The Associated General Contractors of America (AGC) is an association in the contruction industry, representing both union and non-union prime and specialty construction companies. It represents more than 26 thousand firms engaged in the construction of the nation's commercial buildings, shopping centers, factories, warehouses, highways, bridges, tunnels, airports, waterworks facilities, waste treatment facilities, dams, water conservation projects, defense facilities, and more.

The AGC is firmly opposed to the proposed regulations, believing the President's EO (Executive Order) and accompanying regulations are "unfounded, unnecessary, unworkable and unlawful. If implemented, these executive actions would improve neither economy nor efficiency in government procurement." The AGC goes on to state:

If implemented, the EO and proposed rule would be destined to malfunction. They are unreasonable and inconsistent, and would be ineffective, excluding from service to the government not only bad-actor contractors but also a far greater number of well-intentioned, ethical contractors. The EO and proposed rule would needlessly create a new, complicated and unmanageable bureaucracy to address problems that a host of federal laws, regulations and bureaucracies already address. Furthermore, they would lead to crippling delays in federal contracting, encourage unnecessary litigation, and increase procurement costs to the government and taxpayers.

Other points made by AGC include:

• The FAR Council's Economic Analysis of the Proposed Rule is Fundamentally Flawed. The estimated cost of compliance is significantly understated. Actually similar points were also made by other commentators.
• The Executive Order and Proposed Rule are Unworkable. Prime contractors do not have sufficient time and information to perform responsibility determinations of all proposed subcontractors. Prime contractors fear liability from denying subcontractors potential subcontracts based on their labor law violations. What recourse does a subcontractor have against a prime? Who will cover the cost of termination after an irresponsibility determination? Disclosing sensitive information to potential competitors would increase the number of bid protests. The proposed rule would increase contractor litigation of suits that would have otherwise settled. The EO and proposed rule will prove difficult for small businesses and create a further barrier to entry into government contracting.