DCAA Delays Cost the Government Significant Dollars

A recent decision by the Armed Services Board of Contract Appeals (ASBCA) lays bare some of the internal problems within DCAA (Defense Contract Audit Agency) and the resulting impact on Government operations and expenditures.

In late January 2009, the Army Corps of Engineers requested DCAA to audit a claim submitted by Vistas.

The audit appeared to progress without problems at first. On March 3, 2009, DCAA indicated that its field work would be completed by March 23, 2009 and an audit report would be issued by March 31, 2009. That plan soon fell apart because in April of that year, DCAA appointed a new auditor for the job.

Soon after the new auditor began work, Vistas began to complain to the Corps of Engineers and to DCAA management about the volume of information the new auditor was requesting as well as his inquiries into technical aspects of the contract. Vistas testified that the auditor came to Vistas' offices 18 times and described interactions with the auditor as "grinding dialogue. Further, Vistas stated:

We had to sit here and walk him through every aspect of the proposal. He went after layer after layer he would ask for one thing. We would have to support the thing with another thing below, below below. It got down to having to provide him cancelled checks... 

In July, DCAA informed Vistas that the audit would be completed by September. According to the ASBCA decision, the auditor finished up his field work on August 14, 2009 and held an exit conference on August 18, 2009.

By June 2010, the Corps of Engineers had reached the limit of its patience. It sent the DCAA regional manager a "scathing email" that concluded with the Corps requesting that DCAA cancel the audit and return the $127 thousand that the Corps had paid to DCAA so far. DCAA blinked and issued an audit report the following day.

What happened between the exit conference (August 2009) and the report issuance date (June 2010)? According to the decision, the reason(s) for taking so much time to issue a report were not clear. The Board noted that three levels of supervisors reviewed the auditors work and they were dissatisfied with some of his work product and conclusions. The supervisors identified problems in his report and pointed to departures from specific provisions in the FAR and the Audit Agency's own guidance. But the auditor "clung" to his positions based on his notion of "equity". The auditor wrote: "My disagreement is based on equity ... I don't think it is right to pay $3,000,000 that they have not incurred". The internal debates at DCAA with on for months. You can read DCAA management's frustration: "I've attached some emails sent to <the auditor> to have him explain some inconsistencies/errors in the audit report. I'm trying to get to the bottom on it but it is difficult. A lot of <the auditor's> numbers are not correct."

During this time frame, DCAA was being criticized by the IG and Congress (and others) for overriding auditor findings. Perhaps this contributed to the supervisor's paralysis in dealing with a stubborn auditor.

There is much more interesting material in this ASBCA decision and you can read it by clicking here. One example,, while the audit was ongoing, the FBI was running a concurrent investigation of the company that ultimately landed a couple of employees in prison. During the field work phase of the audit, the auditor met with the investigations several times and fed them information - information that was ostensibly requested and gathered to support an audit but was instead, used to support an FBI search warrant. Contractors should file that information away for times when auditors become furtive and/or expand their audit scope beyond what is normally expected.

The contractor was able to recover hundreds of thousands of dollars incurred to support the DCAA audit. Unfortunately for the Government, as the Board pointed out, by the time the report was issued, it was determined to be moot.

What are Cost Estimating Relationships (CERs)?

A cost estimating relationship (CER) is a technique used to estimate a particular cost or price by using an established relationship with an independent variable. If you can identify an independent variable (driver) that demonstrates a measurable relationship with contract cost or price, you can develop a CER.

Many contractors develop and use CERs in their cost estimates to avoid the time consuming necessity to prepare discrete estimates for every cost. Most CERs used in pricing Government contracts are cost-to-cost relationships. By establishing a relationship between different elements of costs, contractors can use a CER to reduce its estimating or analysis effort and at the same time, increase accuracy. For example, if a contractor can establish a relationship between senior engineering hours and engineering technician hours, it doesn't need to discretely estimate the number of engineering technician hours - it simply applies a rate.

The Government generally likes and often encourages the use of CERs because it makes everyone's tasks easier. During negotiations, the parties are less likely to get bogged down in minutia - arguing over a few hours here and a few hours there.

While widely accepted as estimating techniques, the Government will still evaluate the propriety of CERs. The Government will probably test the correlation between independent and dependent variables by running regression analysis techniques against the data.

Once a CER is established, contractors must use them consistently in their pricings. Since CERs are basically averages, it wouldn't be equitable to use CERs in one case and discrete estimates in another. Some jobs would be expected to cost more and others less.

There have been situations where a Government contract negotiator objected to contractors' use of CERs when others have accepted them. If that happens, contractors need to ensure that various components of the Government are talking to each other. In that regard, its useful to include CERs as part of negotiated Forward Pricing Rate Agreements.

You can read more about CERs by clicking here.

DCAA Has its Own Office of Inspector General (OIG)

The Defense Contract Audit Agency (DCAA) Office of Inspector General (OIG) was established about a year ago. The DoD OIG began encouraging the establishment of independent OIGs with Defense Agencies and DCAA was one of the first to do so. According to DCAA, the function of the independent OIG is critical because federal employees within the Executive Branch are required to report fraud, waste, abuse and gross mismanagement, which can come in may forms.

Previously, while DCAA has always had an internal review directorate set up to receive similar-type complaints, the process was not governed by statute. Converting the internal review practice to an OIG provides DCAA employees with processes governed by law, as opposed to internal regulatory requirements. DCAA employees can now disclose incidents of fraud, waste, abuse or gross mismanagement without fear of reprisal or retaliation.

Contractors should be aware that the DCAA OIG, besides matter relating to inter-Agency fraud, waste, and abuse, will also investigate contract related fraud, waste, and abuse. These include

• contract and procurement irregularities
• cost/labor mischarging
• defective pricing
• defective parts
• bid rigging
• bribery and acceptance of gratuities

DCAA's new OIG organization is comprised of auditors and investigating officers previously assigned to internal review responsibilities and are located throughout the continental United States. The organization now has its own hotline as well where "private citizens" are encouraged to report incidents of fraud, waste, and abuse.

It seems to us that this new organization is a duplication of the functions already performed by the DoD-IG. It seems like there might be some confusion over which hotline someone should call - the DoD-OIG hotline or the DCAA-OIG hotline. Additionally, it moves DCAA from a purely audit organization to one with investigative responsibilities. Contractors might want to clarify which arm of DCAA they're talking to - maybe legal counsel should be present.

You can read more about the new DCAA-OIG here.

Poor Internal Controls Lead to $1 Million Loss at Veterans Administration

One of the most fundamental internal controls in accounting is the three-way match. Before you pay a vendor invoice, you need to perform a three-way match. The three-way match is the purchase order (duly signed and approved by responsible officials), the original vendor invoice, and an independent receiving document from the shipping/receiving department confirming that the items ordered agrees with what was actually received. If the Accounts Payable department cannot perform a three-way match, the invoice does not get paid. Period.

So why doesn't the Government perform three-way matches on their purchases?

The Justice Department just announced that two men have been sentenced to 30 months in prison for defrauding the VA (Veteran's Administration) of $1 million - a fraud that could easily have been prevented had the VA performed a simple three-way match before paying its bills.

In this case, one of the two men worked for the VA and was given a credit card to buy medical supplies for the VA. His co-conspirator set up a fictitious medical supply company. The VA employee got the fictitious medical supply company company as an approved vendor for the VA and then for the next six years, created and issued fraudulent purchase orders to the fictitious company. The fictitious medical supply company created fraudulent invoices that corresponded to the fraudulent purchase orders. Then the VA employee used his Government issued credit card to pay the fraudulent invoices. The proceeds, more than $1 million consisting of 300 fraudulent invoices, were divided up and used for personal expenses.

DOJ's press release did not disclose how the fraud was uncovered. Many such cases are brought by a hotline report to the Inspector General's office or a whistleblower (or both). Obviously, the VA's internal control system was insufficient to prevent such a fraud - especially given that it occurred repeatedly over a six year period.

Although this case involved a Government agency, contractors with inadequate internal control systems, are equally susceptible to similar frauds.

You can read the full Department of Justice press release here.

DCAA Bails on non Non-DoD Audits

Section 893 of the 2016 National Defense Authorization Act prohibits DCAA (Defense Contract Audit Agency) from providing audit support for non-Defense Agencies (e.g. NASA, Department of Energy) until the Agency becomes "current" on its audits annual incurred cost submissions. Current is defined as less than 18 months of inventory. See further details here.

DCAA's extraction process has now begun and evidently, this prohibition includes in-process audits as the following email extract from a DCAA auditor to a contracting officer demonstrates:

We received some recent guidance that informed that we cannot continue working on non-DoD assignments. We are going to issue a formal memo to you stating why we can't work on the assignment. But basically, the NDAA requires us to not work on reimbursable non-DoD audits until our incurred cost audit backlog is less than 18 months, which the agency's backlog is currently not. Therefore, it looks like we can't continue work on non-DoD work until the NDAA language is updated for 2017 or we meet the requirement.

We can send you our current audit work and contractor supporting documents if you would like. When I stopped work I did not have many working papers completed but has a lot of supporting documents from <deleted> and its subcontractor <deleted>. I had not yet made it out to the other major subcontractor <deleted>. A few areas where we can still provide support for non-DoD customers are negotiation support, litigation support, and requests for cost/rate information. This will all be in the memo. Please contact me if you have any questions.

The guidance referred to in the email exchange is probably DCAA Audit Guidance Memorandum 16-PPD-001(R) discussing the impact of the NDAA on DCAA's audit support to non-Defense agencies. This guidance has yet to be published on DCAA's public website and we haven't seen a copy. If you have a copy and care to send it along it would be appreciated.

This new policy and guidance is going to impact a lot of DCAA's "customers" who have no internal contract audit function and will need to go out into the private sector to fill their audit requirements. Agencies that have privatized their contract audit needs already are experiencing mixed results. One official informed us that compared to Government auditors, independent CPA firms performing audits under contract have fewer findings but produce more timely audit reports. Also, the cost of an audit tends to be higher for private firms.

This temporary prohibition could become irreversible. If the private firms do good work, non-DoD agencies may find that they prefer privatization to audits conducted by Government auditors.

Contractors Cannot Stop Employees from Whistleblowing

Last February, we reported on new a DoD prohibition against awarding contracts to companies that have had their employees sign non-disclosure agreements restricting them from reporting fraud, waste, and abuse to a Government representative authorized to receive such reporting. That prohibition was incorporated in the DoD FAR Supplement (DFARS) at 252.203-7998.

Evidently, the rest of the Government thought that this was a pretty good thing so the FAR Councils are proposing to amend the Federal Acquisition Regulation (FAR) similarly an make it applicable to all Governmental Agencies. Well, perhaps the impetus came from Congress and the President in the Consolidated and Further Continuing Appropriations Act of 2015 that required Government-wide implementation of the prohibition.

If the proposal becomes regulation, and there is no doubt that it will since the prohibition is now law, Agencies will not be able to use funds, appropriated or not, for a contract with an entity that requires employees or subcontractors to sign an internal confidentiality agreement that restricts such employees or subcontractors from lawfully reporting waste, fraud, or abuse to a designated Government representative authorized to receive such information.

Contractors must self-certify that it does not require employees or subcontractors to sign non-disclosure agreements and if they've done so in the past, contractors are required to notify those employees or subcontractors that previous agreements are no longer valid.

 Finally, the "Government representative authorized to receive such information" is a designated investigative or law enforcement representative of a Federal department or agency. Presumably, this will be the investigative arm of one or more of the various Inspector Generals (IGs) but it could also be other Federal law enforcement like the NCIS, the Army CID, or the Air Force OSI.

How Long Do You Spend Preparing for a CPSR?

The objective of a contractor purchasing system review (CPSR) is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when buying materials and for subcontracting some of the required effort. The review provides the administrative contracting officer a basis for granting, withholding, or withdrawing approval of the contractor's  purchasing system.

DCMA (Defense Contract Management Agency) is the Agency responsible for conducting CPSRs. Among other things, the Agency looks at the adequacy of the system description (e.g. policies, procedures, and operating instructions) and that those policies and procedures are being followed.

These CPSR reviews are far from routine or perfunctory. DCMA's own guidebook for performing CPSRs is 40 pages by itself. The DCMA Instruction adds another 40 pages. DCMA's notification of a pending review also requests that the contractor compile and submit reams of data prior to the initiation of fieldwork. Understandably, a CPSR notification begins a flurry of contractor activity to prepare for the review.

With this background, we were amused at the Government's estimate of the time required by contractors to prepare for and support such a review. The FAR councils estimate that it takes an average of 25 hours of contractor time for "reading information and preparing for a CPSR". That estimate is laughably and significantly understated, perhaps intentionally so. In our own past involvement in CPSR activities, both as team members on the Government side and support for the contractor's side, we know that contractor effort alone will run into the hundreds of hours by the time the review is completed.

When promulgating regulations, it seems to us that the FAR councils consistently underestimate the true cost of compliance. Perhaps if the estimates were more realistic, someone might question the cost/benefit of these regulations.

New Self-Reporting Rule for Contractors

The FAR councils are proposing to amend the Federal Acquisition Regulation to implement a provision of the Small Business Jobs Act of 2010. That statute requires contractors to self-report to the contracting officer in writing if the contractor pays a reduced price to a small business subcontractor or if a payments to a small business subcontractor is more than 90 days past due. The proposed modification also requires contracting officers to record the identity of contractors with a history of late or reduce payments to small business subcontractors in the Federal Awardee Performance and Integrity Information System (FAPIIS). This provision applies to all contracts, even commercial items.

This new rule is intended to help (i) create greater cash flow certainty which is critical for small business subcontractors and (ii) reduce a potential barrier to their participation in federal contracting.

The proposed regulation provides two new definitions:

Reduced payment means a payment that is for less than the amount agreed upon in a subcontract in accordance with its terms and conditions, for supplies and services for which the Government has paid the prime contractor.
Untimely payment means a payment to a subcontractor that is more than 90 days past due under the terms and conditions of a subcontract, for supplies and services for which the Government has paid the prime contractor.

Presumably, under these definitions, if the Government hasn't paid the prime, this provision does not apply.

The FAPIIS reporting requirement kicks in when the contracting officer has determined that reduced and untiely payments are unjustified to small business subcontractors, based on an evaluation of a contractor's written explanation for a reduced or an untimely payment when determining whether the reduced or untimely payment is justified. A history of unjustified reduced or untimely payments occurs when it happens three or more times in a 12-month period.

The proposed regulation does not address the consequences for non-reporting.

You can read the full text of the proposed regulation here.

Applicability of FAR Cost Principles to Fixed-Priced Contracts

Every once in awhile we encounter someone proclaiming that the cost principles found in FAR 31.102 do not apply to fixed price contracts. Such assertions would be incorrect. The FAR cost principles are considerations when negotiating fixed-priced contracts. Once the contract is awarded however, no one in the Government should care about the allowability, allocability, or reasonableness of the costs charged to the contract.

The Federal Acquisition Regulations (FAR) 31.102 addresses the applicability of the FAR Part 31 Cost Principles to fixed-price contracts. It states that the "applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever a cost analysis is performed or where a fixed-price contract clause requires the determination or negotiation of costs.

The Department of Energy (DOE) adds clarification to this regulation. In its DOE FAR Supplement (DEARS), the DOE included the following verbiage at DEAR 931.102:

The intent of FAR 31.102 is that applicable sub-parts of FAR Part 31 shall be used by the Government in pricing fixed-price contracts and modifications, evaluating the reasonableness of a prime contractor's proposed subcontract prices, and determining the allowability of contractor payments to subcontracts that are cost-reimbursable, fixed-price incentive, or price-redeterminable (paraphrased).

The key difference between the FAR and the DEAR on this matter is the absence of the phrase "whenever a cost-analysis is performed" in DEAR's coverage. This recognizes that fixed-priced contracts can be awarded without cost-analysis being performed.

The FAR provision also contains a "however". FAR 31.102 states:

"However, application of cost principles to fixed-price contracts and subcontracts shall not be construed as a requirement to negotiate agreements on individual elements of cost in arriving at agreement on the total price. The final price accepted by the parties reflects agreement only on the total price. Further, notwithstanding the mandatory use of cost principles, the objective will continue to be to negotiate prices that are fair and reasonable, cost and other factors considered.

The Government has a lot of tools at its disposal for determining whether prices are fair and reasonable and sometimes cost is only one factor to consider. So, there could be a situation where a contractor proposes indirect rates that have not been scrubbed for unallowables but if the Government can assure itself that the bottom line is fair and reasonable, it shouldn't matter.

Contractors are also expected to apply the FAR cost principles when negotiating fixed-price subcontracts.

Compliance With Contract Terms - Will Comply or Has Complied

The GAO issued a bid protest decision earlier this week that illustrates how small businesses can compete for Government contracts even though they do not currently have the requisite number of employees necessary to perform the contract. In short, companies can always go out and hire more employees.

The issue related to a VA solicitation that included limitations on subcontracting. Specifically, the solicitation required that 15 percent of the cost of the contract performance incurred for personnel will be spent on the concern's employees or the employees of other eligible SDVOSB (Service Disadvantaged Veteran Owned Small Businesses). A contract was ultimately awarded to a company called ISS whereupon one of the unsuccessful bidders, a company called GSZ, appealed, arguing that it is impossible for ISS to spend 15 percent of the cost of the contract performance on its own employees because it had only four employees and would have to spend $1.3 million on those employees resulting in an hourly rate that was not sustainable in the construction industry.

GAO concluded that nothing on the face of ISS's proposal should have led the VA to conclude that ISS would not comply with the subcontracting limitation. There was no indication that ISS would not hire additional personnel as needed to complete the project or to comply with the subcontracting limitations.

The key point for GAO's decision is this. "As a general matter, an agency's judgment as to whether a small business offeror will comply with the subcontracting limitation clause is a matter of responsibility, and the contractor's actual compliance is a matter of contract administration." The agency awarding the contract was satisfied that ISS was responsible and could and would comply with the terms of the contract.

You can read the entire decision here.

Better Buying Power's (BBP) Underlying Principles

The "Better Buying Power" (or BBP) catch-phrase used to label the Department of Defense's recent rounds of acquisition reforms should be familiar to most Defense contractors. The somewhat evolving list of initiatives began with BBP 1.0 in 2010. In 2012 more initiatives were added under BBP 2.0. Last year, the Department rolled out its current iteration of initiatives, BBP 3.0.

The DoD employees that comprise the Department's acquisition corps however do not fully appreciate these latter rounds of faddish fluff. To most of them, their daily lives are business as usual. The 2,000+ pages in the Federal Acquisition Regulations, the 1,000+ pages in the DoD FAR Supplement (DFARS) and the 500+ pages in DoD Procedures, Guidance, and Information, leave little room for them to be quick, nimble, lean and mean or time for contemplating ways to improve the Department's buying power.

Recently, the Under Secretary of Defense for Acquisition, Technology, and Logistics, Frank Kendall, felt compelled to issue a set of 10 BBP principles - principles that underlie the specific initiatives found in the BBP programs. Here they are and if you want to read more details, click here.

1. Continuous improvement will be more effective than radical change.
2. Data should drive policy. It is difficult to manage something you cannot measure.
3. Critical thinking is necessary for success; fixed rules are too constraining.
4. Controlling life-cycle cost is one of our jobs; staying on budget isn't enough.
5. People matter most; we can never be too professional or too competent.
6. Incentives work - we get what we reward.
7. Competition and the threat of competition are the most effective incentives.
8. Defense acquisition is a team sport.
9. Our technological superiority is at risk and we must respond.
10. We should have the courage to challenge bad policy.

Proposal Gets Caught Up in Government's Spam Filters

If you're submitting a proposal via email, be sure to call the intended recipient and verify receipt. Make that call before the deadline for proposal submission. Its a simple step and will help preclude unfortunate circumstances like the following.

The GAO recently issued a decision regarding a late proposal submission. The GAO denied the appeal of a bidder whose proposal was sent on time, to the correct email address, but got caught up in the Agency's spam filter and never made it to the contract specialist. The GAO acknowledged that a message was received by the Agency from the bidder but since it was blocked and subsequently deleted, the Agency had no way of knowing whether the message received from the bidder contained a proposal attachment.

The Agency explained the problem this way:

The agency relies on an “extensive” series of email security services that sit between the DHS headquarters email servers and the internet. Some of these security services--what DHS refers to as the Edge-- include anti-virus, spam, and spyware interdiction that scrutinize “many millions of inbound messages daily” prior to the emails moving forward to the DHS email servers. In this respect, the Edge prevents spam and other malicious emails from ever reaching the DHS email servers and purges these potentially contaminated emails. The agency reports that an “exhaustive” search of the Edge spreadsheet logs revealed what the DHS IT team referred to as an “artifact” that showed the “tracking of an email” from the bidder addressed to the contract specialist. That is, the logs showed that an email from the bidder may have reached the Edge level of IT security on September 8; however, no email from the bidder passed through the Edge firewall to the DHS email servers. Moreover, because DHS purges potentially malicious emails within a week, by the time the bidder filed its protest and the IT team conducted its search, the Edge no longer included a copy of any actual email from the bidder.

That would seem like an honest mistake, right? One that the Government should rectify, right? Nope. The GAO wasn't at all sympathetic. The GAO concluded:

We agree with the agency that whether the bidder timely uploaded its quotation to the GSA e-Buy portal--and it appears that the vendor did--is of no consequence here. In this regard, it is the responsibility of each vendor to deliver its quotation to the proper place at the proper time. 

Like we advised earlier, make the phone call to verify receipt of your proposal.

You can read the entire decision by clicking here.

DCAA Updates its Incurred Cost Model

DCAA quietly revised its ICE (Incurred Cost Electronically) Model last month to require additional information on Schedule J. Schedule J contains information on subcontracts awarded under flexibly priced contracts. Schedule J in DCAA's ICE Model is its interpretation of the requirement in FAR 52.216-7(d)(2)(iii)(J) which requires a -

Listing of subcontractors awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract number, subcontract value and award type, amount claimed during the fiscal year, and the subcontractor name, address, and point of contact information.

The "new" Schedule adds the following data elements:

• Prime contract value
• Subcontractor's DUNS number
• Subcontract performance period

DCAA did not explain why the additional information is necessary. It certainly is not required by the FAR clause we quoted above. DCAA mentioned that it was in the process of updating its ICE User's Guide so perhaps that revision will provide some clarity as to why the information is deemed necessary. Also, DCAA will need to update its Incurred Cost Proposal Adequacy checklist because as the checklist is currently written, it does not address the added data elements.

Don't Over-Propose the Number of Available Hours

The Department of Justice recently issued a press release summarizing its prosecution of a university professor who didn't disclose all factual matters to various Government agencies when he applied for research grants and contracts. Here we have a case where a full-time research professor at the University of California at San Diego also owned a company that performed similar research effort. This professor took advantage of his trusted positions at the University and at his company to deceive Government agencies into awarding federal grants and contracts. Essentially, he didn't disclose to his potential Government customers (e.g. NASA and the Air Force) the full extent of his previous commitments. He would tell the Government that he had two or three months worth of work when all of his personal commitments added together totaled 19 months per year. Had the Government known the full extent of his commitments, it wouldn't have awarded the contracts that it ultimately awarded. As a result of his act of omission, the professor was awarded contracts totaling $6.4 million over a period of nine years of which $1.9 million was paid to him as salary.

The take-away from this case is that contractors, when proposing specific individuals (e.g. key persons) should be careful not to propose more hours than reasonably available from those persons. Its easy to do because often, contractors bid on contracts where there is no certainty of award, Knowing that you'll never get every solicitation you bid on, its probably okay to over-propose certain individuals. However, if the key individual is already committed to more hours than are available and contractors' continue to bid those individuals, there is going to be a problem.

Proposing specific individuals is not the same as proposing positions or skills. If the solicitation merely required a particular skill, contractors can hire off-the-street to fill those positions. That would not pose a problem. The problem arises when the Government believes it is hiring the services of a specific individual when ultimately, that individual is "booked out" for the contract period of performance.

You can read the Department of Justice press release concerning this case by clicking here.

What are "Incidental Expenses"?

Every Government contractor with a cost-reimbursable contract is aware of the FAR (Federal Acquisition Regulations) limitations on lodging, meals, and incidental expenses. FAR 31.205-46 bases these limitations on the Federal Travel Regulations (FTR) for travel within the continental United States, the Joint Travel Regulations for travel to (or in) Alaska, Hawaii, and outlying areas of the United States and the Standardized Regulations for foreign travel.

Each of these regulations have separate limitations for lodging and for meals and incidental expenses. Contractors are not bound to the separate cap requirement - they can combine the separate limitations into a single cap. Nor are contractors bound to all of the other hundreds of pages of JTR and FTR regulations. Only the maximum per diem rates (i.e. the sum of lodging, meals, and incidental expenses), the definitions of lodging, meals, and incidental expenses, and the regulatory coverage dealing with special or unusual situations are incorporated (see FAR 31.205-46(a)(4)).

It is not uncommon for contractors - especially small contractors without robust internal controls systems - to run afoul of the "incidental expenses" provisions. And, the definitions are not the same between the JTR and the FTR.

Under the JTR, incidental expenses include fees and tips given to porters, baggage carriers, hotel staff, and staff on ships. Under the FTR, the definition of incidental expenses includes those listed in the JTR plus laundry, baggage tips and ATM fees. DoD expanded the definition in 2014 and estimated savings of $15.6 million per year.

Now, GSA (General Services Administration) is proposing to expand the definition of incidental expenses in the JTR to include ATM fees. Essentially, that means that contractors will not be able to reimburse employees for ATM charges as a separate miscellaneous expense. Although this does not appear to be a significant change, failure to implement it could become the basis for contract auditors to question costs and recommend penalties for expressly unallowable costs. Its best to be proactive in these matters.

Further details of the proposed change can be found here. The comment period ends on March 8, 2016.

Privately Owned Vehicle (POV) Mileage Rates Drop

This is just a reminder that the standard mileage rates for 2016 have dropped to $0.54 per mile from last year's $0.575 per mile. The 2016 is the same whether contractors are following the GSA (General Services Administration) benchmark or the IRS benchmark. Both are set at $0.54 per mile. That has not always been the case however. There have been situations where the rates are slightly different.

FAR does not specify that contractors follow a particular guideline - only that costs (reimbursements) be reasonable. For convenience and because no auditor will question the rate, contractors usually choose one or the other.

Click here for more information on the GSA reimbursable mileage rate.

Click here for more information on the IRS standard mileage rate.

Product Substitution Case Cost a Contractor $3 Million

The Department of Justice announced yesterday that a contractor from Wisconsin has agreed to plead guilty and pay $3 million to settle civil and criminal charges involving product substitution and a whistleblower in the case gets a $400 thousand payday.

The contractor specializes in the design and construction of glass space frames used in roofs and atrium enclosures. However, on one particular contract, instead of using domestically produced materials required by the "Buy American Act", the company bought foreign materials, repackaged them, and falsified documents to hide the fact it was using foreign materials.

Domestic preference statutes are designed to promote American businesses and to protect U.S. economic interests. Unfortunately, it also tends to increase construction costs but that is the price the Government is willing to pay to accomplish its objectives. When companies subvert such requirements, the objectives of the Laws (i.e. protection of U.S. economic interests) are thwarted while the savings do little more than line contractors' pocketbooks.

Not only will the contractor pay a lot of money to settle the charges, as part of the settlement, it agreed to not contest debarment from pursuing future Government contracts.

The allegations were brought by a whistle-blower who will now share in the recovery. Whistle-blowing has become huge cottage industry. Google "whistle blower" and "attorney" and there will be dozens of firms willing to take a case.

You can read the full DoJ press release by clicking here.

Can the Government Unilaterally Change the Terms of Your Contract?

There are several types of formal contract changes available under Government contracts. Some of them can be issued unilaterally by the Government but unilateral changes cannot be made for anything that affects the substantive rights of the contractor. Following is a brief description of the formal contract changes available to the Government and the contractor.

Administrative changes. Administrative changes are almost always unilateral changes and do not affect the substantive rights of the parties. Administrative changes are defined in FAR 43.101 and might include a change in the "paying office", appropriation codes, or a new telephone number for an agency point of contact. Administrative modification numbers usually begin with the letter "A".

Change orders. A change order is a unilateral, written order, signed by the contracting officer, directing the contractor to make a change that the "changes clause" authorizes, with or without consent. Examples would be exercising options, suspending work, or terminating the contract. Some change orders lead to equitable adjustments which ultimately become bilateral modifications.

Bilateral modifications. Bilateral modifications, sometimes referred to as supplemental agreements, are contract modifications signed by the contracting officer and the contractor. According to FAR 43.103(a), bilateral modifications are used for negotiating equitable adjustments that result from the issuance of a change order, definitizing a letter contract, or reflecting other agreements of the parties affecting the terms of a contract.

Administrative changes are typically benign but other type of changes can result in adverse financial impact for contractors either because expenses will increase or reduction in scope that leads to higher indirect costs on other contracts. In such cases, contractors have recourse. Contractors can submit REAs (Requests for Equitable Adjustments) or file a claim under the Contract Disputes Act.

Procurement Assistance for Small Businesses

There are many procurement assistance programs offered by the Government to help small businesses wade through the process of offering their goods and services to the Government. One not-so-well known program is DLA's Procurement Technical Assistance Program.

The Procurement Technical Assistance Program was created in 1985 to help increase the number of small businesses participating in Government contracts at all Government levels including state, local and federal agencies. The program is administered by the Defense Logistics Agency (DLA) Office of Small Business Programs.

There are Procurement Technical Assistance Centers (PTACs) operating in all 50 states, the District of Columbia, Puerto Rico, and Guam. Additionally, there are eight PTACs specializing in providing procurement assistance to Native American owned small businesses.

These centers provide a variety of services, from identifying contracting opportunities, providing guidance on the bidding process and providing detailed instruction on registering in or using federal procurement systems, such as SAM (the System for Award Management), and www.fbo.gov, the website where DoD and other federal agencies post opportunities for contractors.

PTACs generally offer their services free although some charge a small fee for "bid-match" services where PTAC counselors will help identify opportunities that match a firm's business.

In theory, increasing the number of small businesses pursuing Government contracts promotes a stronger industrial base which will result in greater competition and higher quality goods at lower costs. That theory could be true but difficult to quantify.

The PTACs also offer training, some by counselors and sometimes through partnerships with Government agencies. Many PTAC counselors have themselves been contracting officers or have held relevant procurement related positions.

Its free, why not give it a try. To find your PTAC (or your Native-American PTAC), click here.