Accepting Gifts from Outside Sources

The U.S. Office of Government Ethics (OGE) has proposed revisions to the Standards of Ethical Conduct for Executive Branch Employees that are designed to identify situations where Government employees should not accept what would otherwise be permissible gifts. Most Government contractors are required to have ethics and standards of conduct programs and many pattern theirs after the OGE's authorities and materials. Staying abreast of what the Government is doing in this area should help contractors keep their own policies and procedures fresh and current.

The proposed rules are quite lengthy and contain many situational examples of ethical conduct and ethical dilemmas. To read and study (and perhaps comment on) the entire proposal, click here.

One of the new sections proposed for addition to the guidance is entitled "Considerations for declining otherwise permissible gifts." The OGE wants to add this section because, in its experience, employees and ethics officials sometimes focus on whether a regulatory exception permits the acceptance of an otherwise impermissible gift, and no on whether acceptance of the gift could affect the perceived integrity of the employee or the credibility and legitimacy of the agency's programs.

To counter this tendency, the proposed regulations sets out a flexible, non-binding standard that employees are encouraged to use when deciding whether to accept a gift that would otherwise be permitted. Specifically, the new section encourages employees to consider the potential that a reasonable person would question their integrity if they were to accept the gift. In circumstances where an employee concludes that a reasonable person would question his or her integrity, the employee is encouraged to consider declining the gift.

Such considerations include:

• Whether the gift has a high or low market value
• Whether the gift was provided by a person or organization who has interests that may be affected substantially by the performance or nonperformance of the employee's official duties
• Whether acceptance of the gift would lead the employee to feel a sense of obligation ot the donor
• Whether acceptance of the gift would reasonably create an appearance that the employee is providing the donor with preferential treatment or access to the Government
• With regard to a gift of free attendance at an event, whether the Government is also providing persons with views or interests that differ from those of the donor with access to the Government
• With regard to a gift of free attendance at an event, whether the event is open to interested members of the public or representatives of the news media
• Whether acceptance of the gift would cause a reasonable person to question the employee's ability to act impartially and
• Whether acceptance of the gift would interfere with the employee's conscientious performance of official duties.

Of course, the fail-safe policy is never to accept gifts, period.

What is the "Ostensible Subcontractor Rule"

The "ostensible subcontractor rule" is a concept that arises when the SBA (Small Business Administration) is determining whether a firm is considered a small business for purposes of bidding on Government contracts.

The ostensible subcontractor rule treats a prime contractor and its subcontractor as joint ventures and therefore affiliates, for size determination purposes when the subcontractor performs primary and vital requirements of a contract or the prime contractor is unusually reliant upon the subcontractor. This rule is designed to prevent other than small firms from forming relationships with small firms to evade SBA size requirements.

To determine whether the relationship between a prime contractor and a subcontractor violates the rule, SBA considers all aspects of the relationship including the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance of the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation.

The SBA evaluates ostensible subcontractor affiliation on a case-by-case basis. Factors that may be relevant include prime contractors that rely upon the subcontractor to provide key personnel, the relative inexperience of the prime contractor, the subcontractor supplying critical bonding, financing, or equipment, the subcontractor drafting the proposal, profit sharing arrangements, and hiring subcontractor rank and file employees, among many others.

A recent SBA size determination case illustrates the application of some of these concepts (see Size Appeal of Giacare and Medtrust JV (Giacare/Medtrust) versus Global Dynamics (GDL). In a solicitation issued by the Army Material Command, GDL submitted a proposal whereby it would perform 51 percent of the effort and OMV, a subcontractor, would perform the remaining 49 percent. GDL would also supply the full-time senior project manager to be responsible for day-to-day contract management and communication with the Government.

When the Army announced that GDL was the winning bidder, Giacare/Medtrust appealed on the basis that GDL was in violation of the ostensible subcontractor rule. Giacare/Medtrust alleged that GDL was a young company that began conducting business in 2010, had modest revenues, fewer than 10 employees, and little experience with contracts as large as the subject ID/IG (up to $200 million).

The SBA denied the protest based on three considerations. First, OMV (the subcontractor) employees will be under GDL's supervision. Second, GDL is not dependent on OMV for financial resources because GDL has sufficient financial resources to run the contract. Finally, GDL has experience in the health care industry (the nature of the contract).

New Emphasis on the Sufficiency of Audit Evidence

Most long-time Government contractors have faced situations where over-zealous contract auditors or contracting officers make spectacularly wild conclusions based on little or no evidence to back it. It happens way too often and once the Government has dug in its heels on a matter, it takes a lot of time and energy to resolve.

This shouldn't happen. For audits performed by DCAA (Defense Contract Audit Agency), auditors are required by GAGAS (Generally Accepted Government Auditing Standards, aka Yellow Book) to obtain sufficient, appropriate evidence to provide a reasonable basis for their findings. Appropriateness is the measure of the quality of evidence that encompasses its relevance, validity, and reliability while sufficiency is the measure of the quality of evidence used to support the findings and conclusions (GAGAS 6.57).

The DoD Inspector General has, from time to time, called into question the sufficiency of the audit evidence used by DCAA to back up its findings. In fact, in its latest peer review of DCAA, the DoD-IG criticized DCAA because of a lack of documented supervisory review of the sufficiency of audit evidence. Seemingly, no one in the supervision and management chain of command was validating the sufficiency of auditors' work to support their conclusions and recommendations.

Thankfully, DCAA has now amended its internal procedures to require supervisors to make affirmative statements that the  audit evidence gathered during the audit is sufficient to support the objectives of the audit and the resulting conclusions and recommendations. Perhaps this change will reduce the occurrence of audit findings that have no merit.

The new guidance can be viewed or downloaded here.

Voluntary Defective Pricing Disclosures - Proposed Rule Will Limit Audit Rights

DoD published a proposed rule last week that would require DoD contracting officers to request "limited-scope" audits in the interest of promoting voluntary contractor disclosures of defective pricing.

Currently, FAR 15.407-1(c) requires that whenever contracting officers learns or suspects that certified cost or pricing data furnished in support of contract negotiations were not current, complete, or accurate, or were not adequately verified by the contractor as of the time of negotiation, to request an audit (by DCAA) to evaluate the propriety of the data furnished.

 DoD is proposing to revise the DFARS (DoD FAR Supplement) to "stipulate" that contracting officers shall request a limited-scope audit when a contractor voluntarily discloses defective pricing after contract award (unless, of course, a full-scope audit is appropriate for the circumstances). This proposal is a response to an initiative to eliminate requirements imposed on industry where costs outweigh benefits.

Specifically, contractors recommended that DoD clarify policy guidance to reduce repeated submissions of certified cost or pricing data. Frequent submissions of such data are used as a defense against defective pricing claims by DoD after contract award, since data that are frequently updated are less likely to be considered outdated or inaccurate and, therefore, defective. This proposed rule impacts the regulatory guidance regarding the requirement for contracting officers to request an audit even if a contractor voluntarily discloses defective pricing after award. If this new rule is implemented, contracting officers will request a limited scope audit on just the data that has been disclosed by the contractor and its impact on the negotiated contract price.

This proposed rule will have no impact on DCAA's current program of auditing contracts for compliance with TINA (Truth in Negotiations Act). That program (which has become dormant because of "higher risk" audits) randomly samples contracts for in-depth defecting pricing audits.

University Pays $20 Million to Settle Improper Charging Allegations

It was about 21 years ago that Stanford University settled a fraud case involving research expenses. The Government settled for a small fraction of of the Navy's original claim. Initially, the Office of Naval Research wanted the University to pay back more than $200 million. The parties finally settled for $1.5 million (or perhaps a bit more as the settlement included some small claims that Stanford had against the Government). It was an embarrassing time for the University and its President though. The President was dressed down before Congress trying to explain why silk sheets for his private home were charged to Government contracts among other indiscretions. And, he was forced to resign. Although the Government did not recover much money in the end, the episode brought about significant changes in the way the Government conducted oversight of university conducted research.

A couple of decades go by and once again, a prestigious university is on the hot seat for overcharging the Government for improper research expenses. In this case, the University of Florida has agreed to pay the United States about $20 million to settle allegations that it improperly charged the Department of Health and Human Services (DHHS) for salaries and administrative costs on hundreds of federal grants.

The overcharging occurred in several ways. First, the University charged the Government for salary costs of employees where it did not have documentation that the employees actually worked those hours. Secondly, the University charged costs directly to the grants that were improper under federal regulations. And finally, the University inflated costs for services performed by an affiliated entity.

As is typical in settlements by the Justice Department, the claims resolved by this settlement are only allegations and the University did not agree to any liability in the matter.

You can read the DoJ press release by clicking here.

"Eliminating Requirements" Study - Reduce Overlaps between DCAA, Internal, and SOX audits

We are now on our fifth and final installment covering the results of a recent study conducted jointly by the Department of Defense and one of the Departments FFRDCs (Federally Funded Research and Development Company). The title of this study is "Eliminating Requirements Imposed on Industry Where Costs Exceed Benefits" and the full report can be downloaded and/or read by clicking here. Although this study covered several areas such as acquisition of commercial items, application of earned-value management (EVM), the Truth in Negotiations Act (TINA), and application of the Buy American Act (BAA), we are limiting our coverage to the topic called "Contract Auditing and Management" of which there were five recommendations. Previously we covered Reducing the Time for Record Retention, Eliminating Duplicative Effort in Reviewing Forward Pricing Rates, Eliminating Contract Closeout Backlogs, and reducing the incurred cost audit backlog. Today we will be covering a recommendation to reduce DCAA's (Defense Contract Audit Agency's) incurred cost backlog. In this final installment, we will cover a recommendation that would have the Government rely on other auditors work besides DCAA (Defense Contract Audit Agency).

Many of the 12 contractors participating in this study asserted that many sub-processes examined in SOX (Sarbanes Oxley) duplicate or overlap with DFARS (DoD FAR Supplement) business system processes. In particular, one contractor identified multiple SOX-DFARS overlaps for the Accounting System and some overlaps for the Purchasing System and Material Management and Accounting System). Other participants noted that their internal audit staffs' work overlapped to varying degrees the audit procedures performed by DCAA. 

DCAA, of course, would readily agree that the potential for overlap exists. In fact, the Agency has been trying for years to access both SOX audits and internal audits. We know first hand that some of the largest DoD contractors have steadfastly refused to share SOX audits with the Government, claiming that there is no statutory or regulatory requirement that they do so. Additionally, DCAA has been trying for years to obtain routine access to internal audit reports and working papers, going so far as to introduce legislative proposals to that effect. So on one hand, contractors claim that there is duplicative effort but on the other hand, will not share the results of other audits with the Government in order to assess what can and cannot be relied upon during audits of contractor business systems.

The recommendation bears this out. The study recommended that DoD put together a team to engage with willing contractors on proposed approaches and provide an assessment. The key phrase here is "willing contractors". It is obvious that there is not a statutory or regulatory requirement that compels contractors to provide Government access to other audits so in order for this recommendation to proceed, the DoD must find "willing contractors" who will voluntarily share their audit reports.

"Eliminating Requirements" Study - Reduce Incurred Cost Backlog

This is the fourth of our five part series covering the results of a joint study conducted by DoD and the Institute of Defense Analysis (IDA). Each part examines one of the five recommendations put forth by the panel impacting contract audit and contract management. Previously, we covered Reducing the Time for Record Retention, Eliminating Duplicative Effort in Reviewing Forward Pricing Rates, and Eliminating Contract Closeout Backlogs. Today we will be covering a recommendation to reduce DCAA's (Defense Contract Audit Agency's) incurred cost backlog.

There is not doubt that contractors are financially impacted by Government delays in meeting their contractual obligations. However, it is difficult to quantify the cost of delays, disruptions, and other encumbrances. The responses received from participating contractors did not include quantitative costs associated with specific inefficiencies associated with DCAA auditing or DCMA contract management. Therefore, the study group could not perform a cost-benefit analysis of recommended changes. Instead the study identified what it felt to be the most promising recommendations based on a subjective assessment of their merit.

Study participants asserted that given DCAA's limited resources that are being deployed to cover a wide breadth of areas, there have been many starts and stops in audits. The result has been for audits to be cancelled at various stages after the company and DCAA have invested resources to start the reviews. The consensus among participants was limit DCAA audits to incurred costs and audits ob business systems.

DCAA, of course, did not agree with this recommendation. The Agency noted that its resources are focused on risks to the Department and the taxpayer. DCAA uses its entire portfolio of audits (incurred cost, forward pricing, business, systems, truth in negotiation, cost accounting standards, etc.) to focus resources on what it believes to be the highest risk audits. DCAA also noted that it has significantly reduced its incurred cost audit backlog. From fiscal year 2012 to mid fiscal year 2015, DCAA has reduced its backlog by nearly one-half.

While acknowledging DCAA's recent progress in reducing incurred cost audit backlog, the study group recommended that DCAA continue to analyze and assess progress of on-going Agency efforts to decrease backlogs of incurred costs and report on its efforts to both the Government and industry. DCAA agreed to continue to look for ways to reduce the backlog more quickly.

"Eliminating Requirements" Study - Eliminate Contract Closeout Backlogs

We've been working our way through a report on a study conducted by DoD in conjunction with one of its captive FFRDCs (Federally Funded Research and Development Centers), the Institute for Defense Analysis. We've been focusing on recommendations pertaining to contract auditing and management - the topic that seemed to be of most interest by the 12 largest DoD contractors that were part of the study. So far we've looked at contractor recommendations to eliminate the one year record retention period for documents that have been scanned (that's a no go) and recommendations to eliminate duplicate efforts by DCAA and DCMA in reviewing forward pricing indirect expense rates (that's been sent back for further study). You can read Parts 1 and 2 of this series by clicking here and here, respectively.

Today we will look at a recommendation by multiple contractors for DCAA and DCMA to aggressively address contract closeout backlogs through a risk-based approach. These contractors have noted that despite renewed attention to the problem by DCAA and DCMA, contract closeout backlogs have not improved.

DCMA and DCAA both disagree with contractors' assertions that no progress has been made in reducing the contract closeout backlog. Even so, both Agencies admit that contract closeout backlogs continue to be an issue and both DCAA and DCMA are "open to considering additional initiatives" to clearing out the contract closeout backlog. To this end, the study recommends that DoD establish a team to assess contract closeout initiatives proposed by contractors.

Two of the initiatives recommended by contractors include (i) "en masse closeouts" that gives the Government 0.005 percent (i.e. one half percent) of contract values as protection against potentially unallowable costs and (ii) give authority to the head of an agency to close out contracts that are administratively complete, was entered into 10 or more years ago, and has an unreconciled balance of less than $100 thousand.

Go to Part 4.

"Eliminating Requirements" Study - Reduce Duplicative Efforts in Rate Reviews

Yesterday we began a series discussing the recently issued "Eliminating Requirements" report (as it has become known). If you missed Part 1, click here to begin your reading. As we mentioned, this series will be focusing on recommendations pertaining to contract auditing and management, the topic that garnered the most comments from industry. Yesterday we discussed contractor complaints about the FAR requirements for maintain original paper copies of scanned images for a period of one year. The report did not find the requirement onerous and is not seeking changes to the regulations.

Today we want to discuss a complaint raised by multiple contractors (recall that the 12 largest DoD contractors participated in the study) over the duplication of efforts by DCMA (Defense Contract Management Agency) and DCAA (Defense Contract Audit Agency) in reviewing/auditing FPR (Forward Pricing Rate) proposals. These contractors asserted that having both DCMA and DCAA review forward pricing rates is generally unnecessary since payments based on estimates are corrected when actuals become available.

The report authors submitted the contractor concerns to DCMA and  DCAA. Both Agencies noted the recent workload realignment policies that gave DCMA the single agency responsible for issuing all forward pricing rate recommendations for contractors where DCMA is the cognizant contract administration office. That should reduce duplicative effort. DCMA noted that forward pricing rates are used for more than just billing purposes. They are used to establish fair and reasonable cost determinations on fixed priced contracts and profit/fee considerations on all contracts.

DCMA noted that the contracting officer may need to request audit assistance from DCAA but if it has the capability necessary to perform the required analysis, it does not seek assistance from DCAA.

Nevertheless, both DCMA and DCAA agreed that additional (but unspecified) streamlining opportunities appear possible so with that admission, the report recommended that these opportunities be addressed by the Directors of DCMA and DCAA and be provided to DoD. Now both DCAA and DCMA are on the hook to conjure up some "opportunities for streamlining" that they can present to DoD.

Go to Part 3.

"Eliminating Requirements" Study - Reduce Records Retention Periods

In 2013, DoD, along with the Institute for Defense Analyses (IDA), a Federally Funded Research and Development Center, initiated a study to identify unnecessary requirements for which costs exceed benefits with the goal of reducing unnecessary and costly statutes and regulations. The study focused on six broad areas based on industry input including (i) acquisition of commercial items, (ii) contract auditing and management, (iii) component specific supplements to DFARS, (iv) application of earned value management, (v) TINA (Truth in Negotiations), and (vi) application of the Buy American Act (BAA).

Twelve of DoD's largest suppliers were invited to participate in the study which ended in December 2014. Each of these companies provided input into the areas they chose to address. None of the companies provided input into the component specific supplements to DFARS area. Two areas, earned-value management and contract auditing and management, generated the most responses.

Over the next few days, we will be posting highlights of this study, focusing primarily on topics contract audit and management topics. Today we will discuss the contractor recommendations to change record retention policies related to original scanned images.

Two of the 12 contractors participating in this study recommended changes to the retention of original paper records. The crux of their arguments that that requiring originals of scanned images to be retained for one year is unnecessarily burdensome.

FAR 4.703 includes language that states original records need not be maintained or produced in an audit if the contractor provides photographic or electronic images of the original records and meets certain requirements. One of those requirements is for Government contractors to maintain their original records for a minimum of one year after imaging to permit periodic validation of the imaging system.

The study concluded that there is no compelling evidence to make changes to to policies. The FAR 4.703 requirement to retain original hard copies of scanned images to allow verification that scanned copies are accurate seems reasonable. The study noted that DCAA (Defense Contract Audit Agency) has no policies that add to this requirements but did recommend that DCAA might want to revisit it's policy on the frequency of testing scanned images to original documents.

The full Eliminating Requirements Imposed on Industry Study report can be downloaded here.

Go on to Part 2

Prison Time for Falsely Claiming "Service-Disabled" Status

Warren Parker falsely claimed to be a disabled veteran and war hero . He claimed to have been awarded three Silver Stars, four Bronze Stars, eleven Air Medals, a Presidential citation, and three Purple Hearts in the Vietnam War. Military records however showed that he only served in the Missouri National Guard and was never deployed outside of the Missouri.

Warren Parker, his wife Mary, and son Michael used this "stolen valor" to secure Veteran's Administration and Defense Department Contracts totaling $7.5 million that had been set aside for SDVOBs (Service Disabled Veteran Owned Businesses).

They were caught, plead guilty, and are now serving time in Federal prisons; Warren (who's already in his 70s) received an 87 month sentence, his wife Mary, 20 months, and his son Michael, 41 months. Its probably not where Warren and Mary expected to spend their "golden years".

In addition to the prison sentences, the Parkers will also be paying restitution of some unspecified amount. Their reputations have been destroyed - one was immediately kicked off the city planning commission. Their construction company is now referred to in the past tense.

Yet to be sentenced in the case is Thomas Whitehead who used Parker's company as an illegal pass-through for his own construction company.

Misrepresenting "status" in order to obtain Government contracts has got to be one of the dumbest procurement fraud scenarios. It seems like there is almost a 100 percent certainty of being caught. There is so much information available on the internet and in social media that it becomes difficult to maintain a ruse for any length of time. There are the unsuccessful bidders that will poke around to see if there are flaws in the procurement process so that they can appeal the award. If it involves a set-aside contract, you can be sure they will be checking up on the winning firm's qualifications. There is also risk from insiders (i.e. employees) who are ready to blow the whistle so that they can get a big payday (qui tam actions). Finally, the Government is beefing up its vetting process to reduce the occurrences of businesses falsely claiming a "status" to which they are not entitled.

As we learned from the Parker case, the consequences for falsely claiming small business, veteran-owned business, woman-owned business, minority-owned business, etc, can be swift and severe.

New Advisory Panel to be Formed to Streamline Acquisition Regulations

 One of the provisions in the Fiscal Year 2016 National Defense Authorization Act (NDAA) is a requirement for the Department of Defense to convene an advisory panel on streamlining and codifying acquisition regulations. Although the President vetoed the bill last month and it is being reworked, the advisory panel provision will undoubtedly remain. It is not one of the disputed items. The duties of the advisory panel are two-fold:

1. Review the acquisition regulations applicable to the Department of Defense with a view toward streamlining and improving the efficiency and effectiveness of the defense acquisition process and maintaining defense technology advantage and
2. Make any recommendations for the amendment or repeal of such regulations that the panel considers necessary to: 

• establish and administer appropriate buyer and seller relationships in the procurement system
• improve the functioning of the acquisition system
• ensure the continuing financial and ethical integrity of defense procurement programs
• protect the best interests of the DoD and
• eliminate any regulations that are unnecessary. 

25 years ago, a similar panel was convened and became known as the Section 800 panel. Recommendations from this panel led to a few acquisition reforms such as the Federal Acquisition Streamlining Act (FASA) and the Clinger-Cohen Act. In the intervening years, the Senate Armed Services Committee believes that the acquisition system is again burdened by unnecessary laws and regulations that are creating incentives to slow down acquisition and not obtain the best value when purchasing goods and services for the Defense Department and the taxpayer.

The panel will be composed of nine recognized experts in acquisition laws, regulations, and policy. Persons appointed to the advisory panel must be able to devote a substantial amount of time to the effort, not operating as a board that directs the work of a staff but actually performing the primary work.

The panel will have two years to complete its work.

Organizational Conflicts of Interest (OCIs) - Definition and Meaning

The purpose of the Organization Conflicts of Interest rules that were established in the Federal Acquisition Regulations (FAR) back in 2010 were to avoid, neutralize, or mitigate organization conflicts of interest that might otherwise exist in some contracting situations (See Organization Conflicts of Interest (OCI) for further background).

The situations in which OCIs arise, as described in FAR 9.5 can be broadly categorized into three groups: biased ground rules, unequal access to information, and impaired objectivity. Since adoption, unsuccessful bidders have had another weapon at their disposal to use when protesting awards to competitors and there have already been a plethora of protests that have included OCI challenges (See for example Organizational Conflicts of Interests (OCIs) - Strong and Direct Linkage Needed).

Many of the OCI protest decisions so far have involved unequal access to information. Unequal access to information OCI exists where a firm has access to nonpublic information as part of its performance of a Government contract, and where that information may provide the firm a competitive advantage in a later competition for a Government contract. This is rather difficult for a protestor to prove however. The identification of conflicts of interest is a fact-specific inquiry that requires the exercise of considerable discretion. A protestor must identify hard facts that indicate the existence or potential existence of a conflict. Mere inference or suspicion of an actual or potential conflict is not enough.

In a recent bid protest case, Unsuccessful Bidder (UnB) protested a Department of Labor (DOL) contract because the Winning Bidder (WB) had previously performed contract work in DOL Headquarters which provided WB with intimate details of a wide range of information that was highly relevant to the procurement. This familiarity, UnB alleged, gave WB an unfair competitive advantage that DOL failed to identify and mitigate.

The problem with the allegation is that UnB had no specific facts to back its claim. When the Comptroller General looked into the situation, it found that the contracting officer had indeed looked into the matter prior to awarding the contract and determined that there was no potential of a significant OCI arising from the work that WB had performed. Absent specific facts, the Comptroller General is not going to second-guess the determination.

Second National Dialogue to Improve Federal Procurement

The Office of Federal Procurement Policy has launched its second National Dialogue to improve the federal procurement and grants processes with the objective of reducing reporting compliance costs for Federal contractors and grantees. The Agency is looking for ideas on how to reduce the costs associated with obtaining and managing tax dollars awarded through Federal contracts, grants, subcontracts, and sub-awards. The dialogue will be open for two years and if you register, you can comment on or share thoughts on emerging ideas and identify those you believe to be most impactful.

Last year's campaign ended May 2014. Click here to read the results of that dialogue. 118 ideas were posted, 190 comments were received. 548 people/organizations registered. The sharing of EVMS certification reviews that we discussed a couple of weeks ago (see Plans for Reducing the Number of EVMS Certification Reviews) came out of last year's open dialogue.

The popular suggestions in this year's campaign so far, include the following. You can read more detail for each of these by visiting the National Dialogue website:

• Raising the micro-purchase threshold from $3,000 to $10,000. The lower threshold creates a cost of compliance that far exceeds any potential reduction in waste, fraud and abuse that might occur from establishing a higher threshold.
• Require agencies to adopt common research terms and conditions. While NSF, NIH, DOE, NASA, and other agencies have adopted common research terms and conditions, some agencies have opted out. the Council on Government Relations has recommended that the opt-out option be eliminated.
• Eliminate prime recipient monitoring of subs-recipients subject to audit. Where a subrecipient has a current Single Audit report, prime recipients should be able to rely on the subrecipient's auditors and cognizant agency oversight for routine audit follow-up and management decisions.
• Common Federal proposal and award management system. Consolidate federal proposal and award management systems, including payment systems, optimally with significant input from stakeholders.

Contractors are encouraged to participate in this dialogue, if nothing more than casting votes for what will make their jobs easier and reduce the cost of compliance.

Contractor Purchasing Systems - Source Selection Considerations

FAR (Federal Acquisition Regulations) 52.244-2 requires prime contractors to provide contracting officers notification before the award of many subcontract and to obtain contracting officer consent to subcontract. See Government's Consent to Subcontract for more information on this subject. The objective of requiring consent to subcontract is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when subcontracting.

With this in mind, Government agencies have devised a variety of checklists they use when reviewing contractor notification and consent packages. One of the most important aspects in determining contractor compliance with Government policy is in the source selection process. Following is a compendium of items taken from several of those checklists. Contractors would do well to ensure that their own purchasing systems address these areas.

• Adequately address make-or-buy considerations.
• If procurement is from a contractor-controlled source, provide adequate justification.
• Consider soliciting labor surplus areas and small business sources, including small business owned and controlled by disadvantaged individuals.
• Compliance with contract requirements regarding small business subcontracting, including, if applicable, plans for subcontracting with small, veteran-owned, service-disabled veteran-owned, HUBZone, small disadvantaged and women-owned small business concerns.
• Agreement to provide progress payments on fixed-price subcontracts with small business concerns in conformity with FAR 32.502-3 and not consider such payments as an adverse factor in selection.
• Ensure adequate price competition or properly justify the absence of adequate price competition.
• Ensure a sound basis for determining the responsibility of a particular subcvontractor.
• Ensure that the proposed subcontract type is appropriate for the risks involved and consistent with current policy.
• Ensure that the proposed subcontract does not appear on the Excluded Parties List System (see FAR 9.404).
• Ensure that OCI (Organization Conflicts of Interest) analysis has been performed.

Proposed VA Veteran-Owned Small Business (VOSB) Verification Guidelines

The Department of Veterans Affairs (VA) is seeking to find an appropriate balance between preventing fraud in it's contracting programs and providing a process that would make it easier for more VOSBs (Veteran-Owned Small Businesses) to become verified.

The VA verification program has been the subject of audits by the GAO (Government Accountability Office) and the VA's Office of Inspector General. Both have found that fraud exists and continues to exist in the verification program.

To help prevent fraud, the VA has issued proposed amendments to its regulations governing the verification program. The proposed regulations are quite voluminous but if you are a VOSB needing verification, it is important reading. The proposed rules;

• Clarify the eligibility requirements for businesses to obtain "verified" status
• Adds and revises some definitions,
• Reorders requirements
• Redefines the definition of "control", and
• Explains the examination procedure and review process.

The definition of "ownership and control" is where most of the fraud occurs. A small business concern must be owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses.  Control means the strategic policy, long-term decision-making authority, and the management of daily business operations for the VOSB. Control is not the same as ownership. Individuals managing the concern must have managerial experience of the extent and complexity needed to run the concern. A veteran need no have the technical expertise or possess a required license to be found to control an applicant or participant if he or she can demonstrate that he or she has ultimate managerial and supervisory control over those who possess the required licenses or technical expertise.

Regular readers of this blog will be aware that many fraud cases involving the VOSB program are the result of a non-veteran firm using the credentials of a VOSB in order to secure a contract. Whether these new rules will reduce fraud in the program remains to be seen.

Audits of Business Systems at DoD Contractors - Update

This is a follow-up to a posting last July concerning DoD's decision to kill the proposed rule that would allow Government contractors to go out and hire independent auditors to perform reviews of the three business systems that DCAA normally audits (i.e. accounting, estimating, and material management and accounting). Under Generally Accepted Government Auditing Standards, DCAA has not been able to keep pace with demands and needs some help to maintain currency. (See DFARS Proposal to have CPA Firms Audit Contractor Business Systems - Dead.)

The proposed rule received many comments. While some supported the idea, many were wary of the implementation. Supporters liked the idea that their systems could get audited in a timely manner but the implementation appeared onerous with too much involvement and oversight by DCAA. DCAA for its part, considered that the design of the oversight process would result in fewer audit resources expended then if it were to perform the audit themselves.

While the proposal has been withdrawn, DCAA is not giving up. The rule was withdrawn so that the Agency could consider the comments received and determine a path forward. Its possible that the proposed rule will be resubmitted with modification or some other alternative will be pursued.

In the meantime, DCAA is experimenting with an Agency-wide Business System Audit Team that will be performing business system audits at high risk contractors. High risk contractors are generally the largest contractors. The team is comprised of experienced auditors who are specifically trained to perform business system audits. As they travel from contractor to contractor, the teams will be augmented with local audit staff who are familiar with the particular contractor business systems. DCAA admits that this team approach is not the ultimate answer. It only covers the highest risk contractors and will not cover all the business system audits that need to be performed.

Company Pays $4 Million to Resolve False Claims Allegations

Coast Produce was awarded a contract to provide fresh fruits and vegetables to military dining facilities and Navy ships in the Southern California area. Under the terms of the contract, Coast Produce was to have charged the Government its cost (i.e. the prices it paid to its suppliers) plus an additional $1.50 per unit "distribution fee" that included Coast's overhead, packaging, transportation, profit, etc. The distribution fee did not vary with the price of the item. Thus, whether the price of vegetables or produced went up or down, the amount which Coast was paid for its role in sourcing and delivering them did not. Evidently, $1.50 per unit was not enough for Coast.

Coast began overcharging the Government for the cost of the produce in several ways. First, they instructed suppliers to provide inflated quotes for produce, which the company then submitted to the Government as pricing support while simultaneously instructing the two suppliers to actually bill at their regular lower prices. Second, Coast charged the Government more than it paid for bananas and pineapples under long-term fixed-price supply contracts. Finally, Coast submitted artificially high quotes to the Government from vendors it hand no intention of buying from - in order to set a payment rate, but then actually purchasing the produce it supplied at lower prices and pocketing the difference.

A whistleblower surfaced the allegations in 2008 when he filed a civil complaint in Federal court. The Government enjoined the suit and it took until last month to settle. Coast agreed to pay $4 million to resolve the civil allegations (admitting to no wrongdoing, of course) and the whistleblower received about $1 million of that amount. In should be noted that when the Government enjoins a whistleblower suit, most of the legal costs are subsumed by the Government resulting in the relator, not the attorneys, keeping most of the proceeds - in this case, most of the $1 million.

In a related matter, once the civil suit was settled, the Government slapped a criminal information against Coast alleging that the company altered or falsified records. The information alleged that Coast provided false invoices to the Government when it requested evidence concerning the prices Coast was paying for produce it provided the military. The criminal information was filed pursuant to a Deferred Prosecution Agreement in which the Government agreed to defer any criminal case against Coast for two years in return for the company's agreement to implement various compliance and remedial measures during that period.

What Does "Tangible Personal Benefit" Mean

The new Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (2 CFR 200) became effective last December. It applies to Federal agencies, non-Federal entities (states, local governments, Indian tribes, institutions of higher education , and nonprofit organizations) that receive Federal awards as a recipient or sub recipient, and their auditors. It more or less replaces a host of OMB Circulars including A-21, A-87, A-110, A-122, A-89, A-102 and A-133 and that's why these new requirements are commonly referred to as the "Super Circular".

One of the requirements of the Super Circular is to ensure that non-Federal entities have effective internal controls over conflicts of interest. In implementing such practices, some such entities have been beguiled by the term "tangible personal benefit". It appears in the section on Procurement Standards (2 CFR 200.318(c)(1)) as follows:

The non-Federal entity must maintain written standards of conduct covering conflicts of interest and governing the actions of its employees engaged in the selection, award and administration of contracts. No employee, officer, or agent may participate in the selection, award, or administration of a contract supported by a Federal award if he or she has a real or apparent conflict of interest. Such a conflict of interest would arise when the employee, officer, or agent, any member of his or her immediate family, his or her partner, or an organization which employs or is about to employ any of the parties indicated herein, has a financial or other interest in or a tangible personal benefit from a firm considered for a contract. The officers, employees, and agents of the non-Federal entity may neither solicit nor accept gratuities, favors, or anything of monetary value from contractors or parties to subcontracts. However, non-Federal entities may set standards for situations in which the financial interest is not substantial or the giftis an unsolicited item of nominal value. The standards of conduct must provide for disciplinary actions to be applied for violations of such standards by officers, employees, or agents of the non-Federal entity.

The Department of Education, in its implementation of the Super Circular is the first to provide a definition of "tangible personal benefit".

The phrase "tangible personal benefit" is new language added to the general conflict of interest section of the general procurement standards that existed previously under ... OMB Circular A-102. The language was expanded from just "financial or other interest in" to also include "or a tangible personal benefit from" a firm considered for a contract from the grantee. This new language stresses the importance of ensuring that employees who select, award, and administer contracts supported by a Federal award are free from any real or apparent conflict of interest, including financial interests and other non-financial benefits that result in a personal benefit that result in a personal benefit for the employee (such as improved employment opportunities, business referrals, political influence, etc.). (Source)

 Contractors might consider adding this language to their own employee standards of conduct and internal control procedures.

Extension of DoD Prohibition on Confidentiality Agreements Against Disclosing Fraud

Some contractors require employees who seek to report fraud, waste, or abuse, to sign internal confidentiality agreements or statements prohibiting them from lawfully reporting such fraud, waste, or abuse to designated investigative or law enforcement representatives of a Federal department or agency authorized to receive such information. Understandably, such requirements provide contractors the opportunity to perform their own internal investigations of the suspected fraud, waste, and abuse before the authorities are notified and a chance to minimize any adverse consequences. However, such confidentiality agreements are not permitted under DoD contracts.

We reported on a similar prohibition last February (see DoD Prohibition on Confidentiality Agreements Designed to Cover Up Fraud, Waste, and Abuse). That prohibition applied to Fiscal Year 2015 funds. The Department of Defense has not extended that prohibition to Fiscal Year 2016 funds, specifically, funds made available by the Continuing Appropriations Act, 2016 (Public Law 114-53) or any other Act that extends to FY 2016 funds.

There are three main points to the prohibition.

• First, contractors cannot require employees or subcontractors seeking to report fraud, waste, or abuse to sign or comply with internal confidentiality agreements or statements prohibiting or restricting them from reporting to investigative or law enforcement representatives.
• Second, contractors must notify employees that any previous agreements they may have signed are no longer in effect.
• Finally, the Government may seek any available remedies in the event the contractor fails to perform in accordance with the terms and conditions of the contract as a result of Government action under this clause.

You can read more about DoD's prohibition here.