Proposed Rules for Establishing Paid Sick Leave for Federal Contractors - Part 2

Last Friday we discussed newly proposed regulations that will require Government contractors to begin offering paid sick leave up to seven days a year or one hour for every 30 hours worked. If you missed that post, you can go back and read it by clicking here. The proposed regulations are quite voluminous and will require contractors to read, understand, and implement corresponding policies and procedures and hopefully stay out of trouble.

Following are a few more highlights of the proposed regulations.

Paid sick leave shall be provided upon the oral or written request of an employee that includes the expected duration of the leave, and is made at least seven calendar days in advance where the need for leave is foreseeable, and in other cases as soon as is practicable. The latter would include employees calling in sick.

Contractors may require employees to provide certification or documentation regarding the use of leave for absences of three or more consecutive workdays. Contractors are required to maintain confidentiality of verification information regarding domestic abuse, sexual assault, or stalking.

Contractors are not required to make a financial payment to an employee upon a separation from employment for unused accrued sick leave. However, as discussed last Friday, unused sick leave is subject to reinstatement if the employee is rehired by a "covered" contractor within a year of separation.

The new regulations apply to solicitations issued after January 1, 2017. This could result in implementation complexities as contractors will initially have a mix of covered and non-covered employees.

Paid sick leave will apply to all contracts and any subcontracts of any tier, whether negotiated or advertised, including any procurement actions, lease agreements, cooperative agreements, provider agreements, intergovernmental service agreements, service agreements, licenses, permits, or any other type of agreement, regardless of nomenclature, type, or particular form and whether entered into verbally or in writing. Additionally, it applies to notices of awards, job orders or task letters issued under basic ordering agreements, letter contracts, and orders such as purchase orders. In short, it applies to just about everything except Federal grants.

Tomorrow we will continue unpacking the proposed sick leave requirements.

Proposed Rules for Establishing Paid Sick Leave for Federal Contractors - Part 1

Last September, the President signed an executive order that will require Government contractors and subcontractors to provide a minimum of seven days of paid sick leave per year (see Establishing Paid Sick Leave for Federal Contractors). These new benefits are scheduled to become effective in January 2017 and is estimated to impact about 300,000 employees. That is a small subset of the employees working on Government contracts because most contractors already have sick leave policies that exceed the Executive Order minimums.

Yesterday, the Labor Department published draft regulations to implement the Executive Order. The proposed rule (i) describes the categories of contracts and employees the Order covers and excludes from coverage, (ii) sets forth requirements and restrictions governing the accrual and use of paid sick leave, (iii) prohibits interference with or discrimination for the exercise of rights under the executive order, (iv) describes the obligations of contracting agencies, the Department of Labor, and contractors, and (v) establishes the standards and procedures for complaints, investigations, and remedies, and administrative enforcement proceedings related to alleged violations of the Order.

This is a fairly extensive set of regulations so we will take a couple of days to summarize and pluck out the salient points that will affect small business Government contractors. First, we'll discuss the types of absences for which the seven days can be used.

Paid sick leave under the proposed regulations may be used by an employee for absence resulting from a variety of conditions and situations. These are about as broad as anyone can make them.

1. a physical or mental illness, injury, or medical condition
2. obtaining diagnosis, care, or preventive care from a health care provider
3. caring for a child, a parent, a spouse, a domestic partner, or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship who has any of the conditions or needs for diagnosis, care, or preventive care described above or is otherwise in need of care
4. domestic violence, sexual assault, or stalking, if the time absent from work is for the purpose of obtaining counseling, seek relocation, seek assistance from a victim services organization, or take related legal action, including preparation for or participation in any related civil or criminal legal proceeding or to assist an individual related to the employees as described in item 3 above.

Unused sick leave carries over from one year to the next (with limitations we'll discuss later) and reinstated by a "covered" contractor if rehired within twelve months after a job separation. Use of sick leave cannot be contingent upon finding a replacement to cover any work missed. Sick leave required by these new regulations are in addition to a contractor's obligations under the Service Contract Act (SCA) and Davis-Bacon Act (DBA) and contractors may not receive a "credit" toward their prevailing wage or fringe benefit obligations under those Acts for any paid sick leave provided under these regulations.

We will continue this discussion next week.

Government Uses Wrong "Standard" to Measure Damages

In 2013, the Department of Transportation awarded a contract to reconstruct 10 miles of highway and install utility conduits for six of those mile in a National Park. The contract included the "Differing Site Conditions" clause (see FAR 52.236-2).

When the contractor began work on the utility trench, it encountered what it considered to be a differing site condition. While attempting to excavate the utility trench, it encountered numerous large boulders which significantly slowed down work on the project. According to the contractor, the unusual size and concentration of the obstructions were unanticipated at the time of the bid. The Government did not agree that the unexpected boulders constituted a differing site condition.

Ultimately, contractor filed an equitable adjustment proposal for an additional $81 thousand for what it considered to be extra work associated with the unanticipated boulders. The contracting officer denied the claim on the basis that the unexpected boulders did not constitute a differing site condition. The contractor appealed the final decision to the Civilian Board of Contract Appeals (CBCA).

During discovery, it was learned that the contractor's actual cost was less than its anticipated cost for the utility trench work. Upon learning this, the Government moved to dismiss the appeal, arguing that even if a differing site condition was encountered, the contractor is not entitled to recover because it failed to demonstrate that it experienced an increase in costs due to "alleged" differing site conditions. The Government asserted that the contractor must show that it experienced an increase in cost due to the physical conditions of the site and that the contractors actual costs were less than either its bid amount or its anticipated cost for the work.

The contractor countered that the appropriate way to measure damages is the additional costs incurred due to the differing site condition, not whether the project was still profitable despite encountering the condition. The contractor maintained that it is entitled to recover the additional costs directly attributable to the differing site condition regardless of whether those costs increaced the originally estimated cost of the project. Moreover, the contractor argued that its ability to perform for less than its bid price for the project and obtain a profit is not a basis to deny it the right to claim compensation for damages associated with the differing site condition.

The CBCA agreed with the contractor. It stated that the appropriate measure of damages for a differing site condition is the additional cost incurred by the contractor as a result of the differing site condition. More specifically, the equitable adjustment for a differing site condition is the difference between what it cost it to do the work and what it would have cost if the unforeseen conditions had not been encountered. The CBCA specifically ruled that the Government was using the wrong standard to measure damages.

You can read the full text of the CBCA decision here.

Be Sure That You're Paying Your Subcontractors and Vendors in a Timely Manner

Contractors need to examine their contracts to determine when they can bill for payments made to subcontractors and for material purchases. Typical contract clauses allow contractors to seek reimbursement for accrued expenses as long as those expenses are paid in the normal course of business, "usually 30 days". It is not the Government's policy or intent to provide all of a contractor's working capital. Contractors need to have some skin in the game as well.

Yesterday the Department of Justice issued a press release concerning a contractor who tried to skirt the billing rules. A company hired to renovate warehouses at a Naval facility hired 17 subcontractors to work on the project. The work began in May. The following month and the month after that, the company submitted progress payment requests to the Navy for work performed. Attached to the progress payment requests were signed certifications stating that all of the subcontractors had been paid for their work. Relying on the contractor's representations, the Navy paid the contractor $1.2 million for the two progress payment requests.

There should have been a red flag right away. To liquidate 25 percent ($1.2 million out of a $4.4 million contract value) of a construction project in the first two months of performance would be highly unusual. But the Navy did not make any inquiries. The Navy realized something was amiss in September (four months into the project) when all of the subcontractors walked off the job. Turns out that none of the subcontractors had been paid for anything.

The contractor plead guilty to making a false statement and is now awaiting sentencing which carries a maximum sentence of five year in prison and a $250 thousand fine. In all likelihood, it will be much less than that. In addition, the contractor agreed to make restitution to victims in the amount of $1.2 million.

You can read the full DOJ press release here.

"Late is late" for This Proposal Submitter

Last week we posted an article on the Court of Claims overturning a GAO bid protest decision that didn't go in the company's favor. The case involved a proposal received after the deadline established for proposal submission. The GAO essentially took the position that "late is late" and the bidder should have followed up to ensure that the Government receive its proposal (See Court of Claims Overturns GAO Late Proposal Decision). The U.S. Court of Federal Claims found that GAO did not have all the facts when rendering its decision. It found the Government's email systems had some fundamental flaws that prevented quite a few proposals from reaching their intended recipient.

Another "late is late" decision hit the streets today; this one also from the U.S. Court of Federal Claims but the results were different. The offeror did not prevail in this case as the Court determined that it was the offerors fault that the proposal was not received on time (see Johnson Controls v. United States).

The process of submitting a proposal in the "FedConnect" electronic system involved two steps. First, the user must upload the file and second, when the upload is complete, the user must click the "submit" button. In the latest case, the Johnson Controls employee responsible for submitting the proposal was not aware of the two step process. When the upload started and a message was returned that indicated the upload was in progress, the employee took no further action. The employee should have hung around until after the upload was complete and clicked the "submit" button.

FAR 52.215-1 provides an exception permitting consideration of an otherwise late proposal, so long as four conditions are met: (i) the proposal must be received before award is made, (ii) the contracting officer must determine that accepting the late offer would not unduly delay the acquisition, (iii) if submitted electronically, it must be received at the initial point of entry to the Government infrastructure not later than 5:00 p.m. one day before the date specified for receipt of proposals and (iv) there must be acceptable evidence that the proposal was under Government control prior to the time set for receipt of offerors. Government control in this context occurs when the offeror relinquishes control over the proposal such that the offeror can no longer modify the proposal.

Johnson Controls argued that its proposal was in Government control since it had been entered into the FedConnect system. The Court ruled that the Government had no way of knowing a proposal existed or accessing the proposal until someone clicked the "submit" button. Therefore, to contend that the Government had control is "stretching the language of the FAR beyond reason".

Offerors must read and understand how to submit quotes using FedConnect or any other electronic portal specified by the terms of the solicitation and make sure that the steps necessary for delivery of a proposal are taken precisely.

Cost of Political Campaign Activities at Contractor Facilities

Election season is upon us (and has been forever, it seems) and so it would be a good time to review the allowability of costs associated with candidate campaign stops at contractor facilities.

Political candidates pose at diners to show their ordinariness and ability to mingle with common folk, on college campuses among throngs of energetic student bodies to demonstrate their youthful appeal, and at rallies among throngs of diverse sign-waving supporters to show their broad-based appeal. Candidates have even been know to show up at Government contractor facilities. Such visits take up resources in time and money. Are such costs allowable under Government contracts? Does it matter whether the candidate was invited to attend or asked to visit?

The Federal Acquisition Regulations (FAR) do not address such activities directly. However, the Government, namely contracting officers and contract auditors, have taken strong positions against allowing such costs be charged to Government contracts.

DCAA's (Defense Contract Audit Agency) audit guidance on this matter follows:

Costs associated with political campaign activities, such as candidates' appearances and speeches at contractor facilities, are unallowable in accordance with FAR 31.205­ 22(a)(1), Legislative Lobbying Costs, when such activities are clearly an attempt by the contractor to influence the outcome of an election by soliciting votes. The key considerations in this determination are how the candidate is portrayed by the contractor and the subject matter of the candidate's speech. When questioning such an event all costs associated with these activities including applicable burdens should be questioned (see DCAA Audit Manual 7-1102.5)

We're not quite sure how a visit by a "presidential" candidate fits into the "Legislative Lobbying" cost principle but don't expect contract auditors to try and make such a distinction. In the Government's view, the only reason a candidate would be invited to a contractor facility is to influence the outcome of an election.

In one case involving a political candidate and the assembling of contractor employees, the auditors were very aggressive in tallying up unallowable costs. They asked for a listing of every employee who attended and the time it took for them to drive to the event. In some cases, a 30 minute event turned into two hours of down-time. The auditors also asked the contractor to compile the administrative costs for hosting the activities including publicizing and disseminating the event, refreshments, protocols, and clean-up and tear-down.

Court of Claims Overturns GAO Late Proposal Decision

Back in 2014, Federal Acquisition Services Team, LLC (FAST) submitted a proposal to the Air Force that was ultimately rejected as undeliverable by the agency's server for exceeding the applicable size limitation (20mb). FAS appealed the Air Force's decision not to consider its proposal but the GAO (Comptroller General or CG) denied the protest on the grounds that it is the offeror's responsibility to deliver its proposal to the proper place at the proper time. Moreover, the CG didn't want to consider arguments that there was a systematic failure of the Air Force's systems even though FAST cited one additional company whose proposal was similarly rejected. You can read the entire GAO bid protest decision here.

That was not the end of the story. FAST appealed the CG decision to the U.S. Court of Federal Claims. Ultimately, the CoFC overturned the CG decision based on its findings that the CG decision was based on incomplete facts. Based on evidence provided to the CG by the Air Force, there were two other examples where a bidder's proposals were rejected as too large. Those two bidders were able to submit smaller file sizes prior to the cut-off date.

However, after the CG decision, the Air Force determined that there were seven other bidder rejections, none of which were rejected based on file size. That changed everything and it appeared that there was a systemic problem with the Government's email systems.

The CoFC granted injunctive relief to FAST ordering that

...the United States ... its Contracting Officer, its other officers, agents, servnats, employees, and representatives, and all persons acting in concert and participating with them respecting the procurement under Solicitation No. .... are hereby PERMANENTLY RESTRAINED AND ENJOINED from making an award under Solicitation No. ... unless the proposal sent by (FAST) ... is accepted and evaluated on the same terms as other proposals already accepted.

That doesn't mean FAST will ultimately be awarded the contract - it only means that the company now has a fair shot at the competition.

You can read the entire Court of Federal Claims decision here.

DCAA Guide for Small Businesses

The Department of Defense, Office of Small Business Programs offers a DCAA (Defense Contract Audit Agency) Resource Guide for Small Business Innovation Research/Small Business Technology Transfer (SBIR/STTR) Programs.

This guide is available for download by following this link.

The purpose of these programs is to strengthen the role of innovative small business concerns in Federally-funded research or research and development. Specific program purposes are to (i) stimulate technological innovation (ii) use small business to meed Federal research and development needs, (iii) foster and encourage participation by socially and economically disadvantaged small businesses and by women-owned small businesses, in technological innovation, and (iv) increase private sector commercialization of innovations derived from Federal research and development, thereby increasing competition, productivity and economic growth.

The SBIR program is divided into three phases, I, II, and III. Under Phase I, there is very little Government oversight on how funds are spent. Awards are made competitively but once awarded, the recipients are given a pot of funds to see what they can do. If successful, contractors might be able to move on to Phase II (usually limited to $1 million and two years performance). Phase II contracts are very much like typical cost-reimbursable Government contracts and this is where SBIR contractors suddenly become aware of DCAA, the need for "adequate" accounting systems, provisional billing rates, and annual incurred cost submissions. Most are not equipped or prepared for the audit onslaught.

This is where the aforementioned DCAA Resource Guide may be helpful. Although most of the information in the guide is found on DCAA's website and there are numerous links to content on that website, the guide organizes and presents the information in a way that is useful to small businesses just getting started in Government contracting.


Topics include, preaward accounting system surveys, price proposals, incurred cost proposals, small business seminars (powerpoint slides), checklists, tools, and many other links.

By the way, DCAA maintains a small business focal point. You can call them at 571-448-2008 or email: DCAA-OAL-SmallBusinessFocalPoint@dcaa.mil. Based on anecdotal feedback, your mileage may vary when using this resource.

New Prohibition on Costs Related to Congressional Investigations or Inquiries Proposed

The Fiscal Year 2015 National Defense Authorization Act included a provision  to amend 10 USC 2324(e)(1) to disallow costs incurred by a contractor in connection with a Congressional investigation or inquiry into issues where legal costs are unallowable. Although the "Act" applies only to Defense, NASA, and Coast Guard, the FAR Councils are proposing to apply the requirements to all Federal contracts in order to promote consistency in the accounting systems of Federal Contractors.

Examples of proceeding where legal costs are unallowable and where related Congressional investigation and/or inquiry costs are also unallowable include:

1. In a criminal proceeding, a conviction
2. In a civil or administrative proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct or imposition of a monetary penalty , or an order issued by the agency head to the contractor to take corrective action
3. A final decision by an appropriate official of an executive agency to debar or suspend the contract, rescind or void a contract or terminate a contract for default by reason of a violation oor failure to comply with a law or regulation
4. Disposition of the matter by consent or compromise if the proceeding could have led to any of the outcomes listed above.

The proposed revision would add a new section to 31.205-47(f) to read:

A Congressional investigation or inquiry into an issue that is the subject matter of a proceeding resulting in a disposition as described in paragraphs (b)(1) through (5) of this section (see 10 USC 2324(e)(1)(Q)).

So, if you do something bad and a Congressional Committee (or two) wants to haul you in front of the American public to set an example or make it look like they're doing something, you will need to go at your own expense. The Government is not going to reimburse those costs.

Enhancing the Effectiveness of Independent Research and Development

About four years ago, the Department of Defense (DoD) revised its FAR Supplement (DFARS) to make the allowability of Independent Research and Development Costs (IR&D) contingent upon reporting IR&D projects and costs into on on-line system (see Allowability of IR&D Costs Now Contingent Upon Reporting). Last Fall, DoD issued a "White Paper" recommending an added condition that would require contractors to notify the Government prior to incurring costs on IR&D projects. (see DoD Wants Contractors to Disclose Their IR&D Activities Before Incurring Any Costs, Disclosure of IR&D Projects Prior to Incurring Costs, and Failure to Report IR&D Expenditures May Render Such Costs Expressly Unallowable).

In a step toward making its wish come true, DoD published a revision to its  IR&D cost principle today (DFARS 231.205-18 that, if adopted, will add the pre-notification requirement as a condition of making IR&D expenditures allowable under Defense contracts.

Specifically, the proposal adds the following requirement to the existing cost principle:

For IR&D projects initiated in the contractor's fiscal year 2017 and later, as a prerequisite for the subsequent determination of allowability, major contractors must (i) engage in a technical interchange with a technical or operational DoD Government employee before IR&D costs are generated so that the contractor plans and goals for IR&D projects benefit from the awareness of and feedback by a DoD employee who is informed or related ongoing and future potential interest opportunities and (ii) use the online input form for IR&D projects reported to DTIC to document the technical interchange, which includes the name of the DoD Government employee and the date the technical interchange occurred.

"Major contractors" in the foregoing requirement are those that allocate more than $11 million in IR&D and B&P (Bid and Proposal) costs per  year to DoD prime contracts.

According to the proposal, the intent of such engagement 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.

We can foresee some logistical issues when trying to engage a DoD technical person prior to incurring IR&D costs. Finding someone qualified or with the right clearances to discuss IR&D projects in a timely manner could be problematic. Who in DoD will be responsible for "designating" the responsible person?

If you care to weigh in on this proposal, comments are due by April 18, 2015. Fiscal year 2017 is not that far off. For many contractors, it begins on July 1st of this year.

Bill to Extend Whistleblower Protections to Employees of Government Grantees and Sub-Grantees

Last March, Senator McCaskill (Illinois) introduced a bill to expand whistleblower protections to employees of grantees and subgrantees and personal service contractors. Under current law, whistleblower protections apply to Government employees, contractors, grant recipients, and subcontractors, but not to employees of subgrantees. McCaskill's billl was sent to the Committee on Homeland Security and Government Affairs, who, earlier this week, approved the proposed legislation.

The Bill also makes legal fees associated with defending against whistleblower allegations unallowable under Government subcontracts. Currently, such expenditures apply only to contractors.

Thirdly, it would make permanent current whistleblower protections for Federal Government grantees, subgrantees and subcontractors. Current whistleblower protections are set to expire in 2018.

Senator McCaskill has been a consistently strong proponent of protections for whistleblowers whether they be Government employees or contractor employees.  Without statutory protections, many cases of fraud, waste, and abuse involving Government expenditures would probably go unreported.

You can read the entire text of the bill here.

Energy Department Still Reimbursing Excessive Legal Fees

About six years ago, the Department of Energy, Office of Inspector General (DOE-IG) revealed through an audit that the Energy Department was reimbursing contractors for legal costs that were questionable because of their association with an underlying fine or penalty, the costs of which are not allowable under Government contractors. This practice permitted contractors to incur costs for outside counsel that should not have been paid based on the terms of their engagement letters, and authorized settlement payments without performing required reviews. To state the obvious here, whatever contractors spent, were passed along directly to the Government under cost reimbursable contracts.

Earlier this month, The DOE-IG issued a follow-up report to their initial audit. In their words, "Although the Department's management of contractor fines, penalties, and legal costs had improved since our 2009 report, we found that problems with the management of these costs continue to exist. Specifically, our testing revealed that the Department was still authorizing settlement payments without documented evidence of settlement reviews to determine the allowability of costs. Furthermore, the Department had not always determined when post-settlement reviews were warranted. Our detailed review of 46 settlement agreements at six site contractors found 36 settlements (78 percent) valued at more than $62 million in which there was no documented evidence a settlement review had been performed."

The DOE-IG seems to be more aggressive on these matters than either the DOD-IG (Department of Defense Inspector General) or DCAA (Defense Contract Audit Agency) but it wouldn't be out of character for either one of those Agencies to use the DOE report as an audit lead to go out and assess the level of risk at DOD contractors - especially the larger ones with high percentages of cost reimbursable contracts. The benefits of putting allegations of improprieties behind them by settling with plaintiffs (while admitting no guilt or liability) outweigh the cost when the Government is picking up the tab.

Examples of DOE contractor settlements include allegations of discrimination, whistleblower complaints and other legal matters. To illustrate the IG concerns, discrimination is a violation of Federal and State law, DOE policy, and contract terms. Unless the contractor can establish during the settlement review process that the plaintiff had little chance of success on the complaint, settlement and outside legal costs associated with allegations of discrimination are not allowable.

You can read the entire DOE-IG followup audit report here.

Certificates of Competency (CoC)

A Certificate of Competency (CoC) is the certificate issued by the Small Business Administration (SBA) stating that the holder is responsible for the purpose of receiving and performing a specific Government contract. Thus, a CoC does not apply to any contract the holder might choose to bid on - only the specific solicitation for which it was granted. Responsibility includes, but is not limited to, capability, competency, capacity, credit, integrity, perseverance, tenacity, and limitations of subcontracting.

The CoC program empowers the SBA to certify to Government contracting officers as to all elements of responsibility of any small business concern to receive and perform a contract. It does not extend to questions concerning regulatory requirements imposed and enforced by other Federal agencies.

If a contracting officer determines an apparent successful small business offeror to be non-responsible, he/she must refer that small business to the SBA for a possible CoC.

Once a case has been referred to the SBA, there is an application process that the small business prospective contractor must go through for the purpose of furnishing sufficient competent evidential matter to support a competency determination. The SBA review is not limited to just the information included in the prospective contractors application. Most likely, the SBA will solicit information from other Government agencies with knowledge of and experience with the prospective contractor. The SBA will also query the contracting officer on the rationale for finding the company to be non-responsive.

If the SBA declines to issue a Certificate of Competency, the prospective contractor can appeal the determination to the United States Court of Federal Claims. It seems to us however that the chances of having an SBA CoC denial overturned is slim. We found three cases where determinations were appealed and in each case, the SBA decision was not overturned.

Accident Prevention Requirements under the Federal Acquisition Regulations

Contractors (as would any company) have a responsibility to maintain work environments and procedures which will (i) safeguard the public and Government personnel, property, materials, supplies, and equipment exposed to contractor operations and activities, (ii) avoid interruptions of Government operations and delays in project completion dates, and (iii) control costs in the performance of a contract (see FAR 36.513).

For Government contractors, these requirements are often explicit such as in the case of construction contracts and contracts for dismantling and demolition (see FAR 52.236-15). Under this clause, contractors must provide "appropriate" safety barricades, signs, and signal lights, comply with worker and workplace standards issued by the Secretary of Labor, and ensure that any additional measures the contracting officer determines reasonably necessary for the purposes be taken. In the last regard, there is often a difference of opinion between contractors and contracting officers on what is "reasonably necessary".

There is also an affirmative record-keeping requirement that goes along with the accident prevention clauses. Whenever the contracting officer becomes aware of any noncompliance with the requirements or any condition which poses a serious or imminent danger to the health or safety of the public or Government personnel, the contracting officer shall notify the contractor orally, with written confirmation and request immediate initiation of corrective action.

A contracting officer notice requires the contractor to take immediate corrective action. If the contractor refuses, the contracting officer has a great weapon - the stop-work order. Contractors are not entitled to any equitable adjustment of the contract price or extension of the performance period based on such stop-work orders.

IR&D Funds Used to Augment Development Contracts

In its "Implementation Directive for Better Buying Power 3.0 - Achieving Dominant Capabilities Through Technical Excellence and Innovation" the Defense Department noted a concern when "promised future IR&D (Independent Research and Development) expenditures are used to substantially reduce the bid price on competitive procurements. In some cases, the Government believes that price proposals for developmental work are reduced by using a separate source of Government funding - namely IR&D funds - to gain a price advantage in a specific competitive bid. IR&D costs are allowable under the Federal Acquisition Regulations (FAR) and the DoD FAR Supplement (DFARS) with a few exceptions and are spread across a contractor's total business (usually) through the application of the G&A (General and Administrative) rate. According to the Defense Department, using such activities to undercut the competition is not the intended purpose of making IR&D an allowable cost.

This concern is not new. Contractors have wide latitude on how to spend their IR&D funds and as long as their is some level of "relevance" to the Government, the projects and related costs are rarely questioned. For decades, the Government has known contractors use IR&D funds to augment their "funded" developmental contracts.

The Defense Department is now considering a proposed approach whereby solicitations would require offerors to describe in detail the nature and value of prospective IR&D projects on which the offeror would rely to perform the resultant contract. Then, as a standard approach, DoD would evaluate proposals in a manner that would take into account the reliance by adjusting the total evaluated price to the Government, for evaluation purposes only, to include the value of related future IR&D projects.

The Defense Department is seeking comments on such an approach in order to assist in the development of a proposed DFARS rule. Specifically, the department is

...interested in understanding whether the planned approach would achieve the objective of treating the proposed use of substantial future IR&D expenses as a means to reduce evaluated bid prices in competitive source selections in a uniform manner that is consistent with the objective of making IR&D an allowable cost.

We don't see how this will ever work. But, if you've got any ideas, you might want to attend DoD's meeting next month.

Customary Commercial Practices

The Federal Acquisition Streamlining Act of 1994 (FASA) established a preference and specific requirements for acquiring commercial items that meet an agency's needs. FAR requires market research by the acquiring agency to address, among other things, customary practices regarding the provision of the commercial item. Consistent with this approach, FAR bars the tailoring of solicitations for commercial items in a manner inconsistent with customary commercial practice unless a waiver is obtained. If a waiver is requested, it must describe the customary commercial practice found in the marketplace, support the need to include a term or condition that is inconsistent with that practice, and include a determination that the use of the customary commercial practice is inconsistent with the needs of the Government. That may be a lot of hoops to jump through but the purpose is to encourage acquisitions of commercial items when and where possible.

A recent bid protest decision passed down from the Comptroller General's office (i.e the GAO) sheds some insight on how the Government conducts its market research and determines customary commercial practices.

The Army issued a solicitation for waste management services (i.e. garbage pickup) at Fort Polk Louisiana. Offerors were required to submit fixed rices on a per-ton basis. Before the contract was awarded, one of the bidders protested on the grounds that the requirement to propose fixed prices on a per-ton basis was inconsistent with commercial practices.The Army agreed to take corrective action and so this appeal was dropped.

However, the Army's corrective action did not change the solicitation requirements for fixed prices on a per-ton basis. It set out to demonstrate that garbage pick-up on a per-ton basis was a commercial practice. And so, the offeror protested once again.

The offeror maintained that customary commercial practices for regular trash collection schedules are not priced on a per-ton basis since contractors' costs are driven by the number and frequency and distance between stops on a collection schedule. The costs a contractor incurs are essentially the same whether the refuse containers are full, partially full, or empty.

The Army responded that it had performed market research to justify its per-ton pricing. It reviewed other Army refuse contracts, requested feedback from industry in "Sources Sought Notice (SSN) and contacted a sales representative from a company in New York.

The Comptroller General didn't buy the Army's logic. It stated that the Army's market research failed to reasonably support its conclusion that pricing for refuse contracts on a per-ton basis reflects customary commercial practice.

First, it was unreasonable for the Army to rely on other Government refuse contracts as a basis for establishing customary commercial practice since contracts with the federal government are not generally considered to be part of the commercial marketplace.

With respect to the SSN (Sources Sought Notice), the Army received seven responses. Four stated that pricing should be on a monthly basis and three did not comment. The Army's reliance on three of the respondents who did not comment on this issue provides no basis for the Army to conclude that the solicitation's pricing terms were consistent with customary commercial priactice.

Finally, contacting a trash collector in another state did not provide an adequate basis for concluding that the price-per-ton approach constituted customary commercial practice. The record did not contain or even reference any particular commercial refuse contract to which the New York trash company was a party. Nor did the record contain any documentation from the company representative or support for the "expertise and knowledge" of the sales representative.

The Army was trying hard to award the contract to the incumbent contractor but was foiled, at least for the time being.

You can read the entire decision by clicking here.

Does a Contractor Name Change Require a Novation Agreement?

From time to time, companies are bought and sold, divisions are spun off or sold, and mergers and business combinations occur. Laws prohibit transfer of Government contracts from a contractor to a third party unless the Government, when it is in its interest, recognizes a third party as the successor in interest to a Government contract. The third party's interest must have arisen out of the transfer of all the contractor's assets or the entire portion of the assets involved in performing the contract. When it is not in the Government's interest and the assets are transferred anyway, the Government has the right to terminate the contract for default.

If the Government agrees to the transfer of assets, a "novation agreement" is required. A novation agreement is a legal instrument executed by three parties - the contractor (or the transferor), the successor in interest (or the transferee), and the Government - by which, among other things, the transferor guarantees performance of the contract, the transferee assumes all obligations under the contract, and the Government recognizes the transfer of the contract and related assets.

FAR (Federal Acquisition Regulations) 42.12 prescribes policies and procedures for recognizing a successor in interest to Government contracts when contractor assets are transferred (which requires a novation agreement) and recognition of a change in a contractor's name (which does not require a novation agreement but requires a "change-of-name" agreement). FAR 42.12 also contains examples of novation terminology and content.

A simple name change does not require a novation agreement so long as the contractor's rights and obligations remain unaffected. Nor does a change in organizational structure, say from a sole proprietorship to an LLC require a novation agreement. The Government however will require a "change-of-name" agreement which must include an authenticated document effecting the name change, an opinion from the contractor's legal counsel stating that the change of name was properly effected under applicable laws, the effective date of the name change and a listing of all contracts remaining unsettled between the contractor and the Government (see FAR 42.1205).

Contractors contemplating buying or selling business segments need to assess the Government's interest when conducting due diligence reviews.

New Federal Agency to Conduct Background Checks (NBIB)

The White House announced late last month its plans to establish a new Federal Agency to strengthen background investigations for Government employees and contractors. It'll be called the National Background Investigation Bureau or NBIB.

This new Agency will subsume the Federal Investigative Service (FIS) which already conducts 95 percent of total background investigations Government-wide. Government contractors that require background investigations might experience some procedural changes (and hopefully more timely actions) but beyond that, no significant changes should be expected.

Perhaps they could have or should have come up with a better title or acronym because the word "bib" lacks gravitas. "Hello, I'm from the National Bib. Can I ask you a few questions?" Perhaps the Agency's special agents will be easy to spot because they'll be wearing uniformed bibs. They can even emblazon a picture of a bib across their "special agent" badges.  And, the bib concept should save money - since background investigators do most of their work in doughnut shops and Starbucks, bibs should reduce soilage to neckties and scarves.

Like its predecessor, the FIS, the new NBIB will report to the OPM directors. However, the OPM will no longer be responsible for the security of the files. That task will be turned over to the Department of Defense (DoD) who will also be responsible for the design, development, security, and operation of the IT (Information Technology) systems.

Why DoD? It is generally believed that DoD has the latest modern technology in place to protect the sensitive information used to effectively adjudicate investigations, and can bring the fullest security resources to bear against increasingly sophisticated and evolving threats. OPM failed to prevent sensitive information from being hacked by who knows who and who knows how many times. Perhaps DoD can do a better job.

Sleeter Group Announces 2016 "Awesome Applications"

Each fall, the Sleeter Group, a leading provider of technical reference materials, software expertise, and QuickBooks training materials for small businesses, has recognized accounting products in the SMB (small to medium business) market place. For many years, this list was called "Awesome Add-Ons" as in adding to the functionality of QuickBooks. Beginning in 2012, the group opened the competition to non-QuickBooks related products and changed the name from "Awesome Add-Ons" to "Awesome Applications". There remains, however, a strong QuickBooks flavor to the annual "winners".

As consultants with many clients using QuickBooks, we are always interested in and looking for improvements to the basic QuickBooks platform, as well as improved or added functionality provided by third-party add-ons. With hundreds (if not thousands) of add-ons available however, it is difficult to assess which ones are worthwhile. Reviews by independent organizations such as the Sleeter Group can help Government contractors in assessing a product's strengths, weaknesses, and value.

This year's "winners" that could be of interest to Government contractors include the following:

TSheets is a repeat winner from last year. TSheets is an employee time-tracking system that can be used on mobile devices and desktop computers. We've been recommending this product for a number of years for its ease of use, integration with QuickBooks, and its cost effectiveness (it runs about $20 per month plus $5 per month per employee with per-user prices decreasing as number of users increase). The publishers claim "DCAA Compliant" for this product - it requires supervisory review and approval, maintains an audit trail, and prompts for timely entries. For contractors looking to automate their timekeeping systems, this product is worth a look. Incidentally, there are many excellent timekeeping products on the market that provide similar functionality. If you (and the Government) are satisfied with what you have, there's no point in changing just for the sake of change. But if you're looking for a change, consider TSheets.

Expensify. "Travel and Expense tracking is a headache for companies ..." Expensify tackles this problem with a mobile app that provides digital receipt capture, automated expense report creation, routing for approvals and electronic reimbursement to employees and contractors.

Recently named one of FastCompany's Most Innovative Companies in 2015, Expensify does expense reports that don't suck! Combining user-centric design with powerful compliance features makes Expensify the best choice for both employees and the finance department, including over 13,000 companies worldwide across all industries from solo-preneur to the global enterprise.

Although we do not have experience with this particular product, we have recommended and implemented similar products including Concur which also integrates nicely with QuickBooks and many other software applications. If you haven't yet automated your expense reports, don't wait any longer.

Receipt Bank. This is a product that we are going to look at closely. The Sleeter panel of experts was "blown away" by Receipt Bank. "By capturing documents in digital form and storing those documents with accounting transactions, Receipt Bank automates a big piece of the process that is crucial to streamlining accounting solutions. Receipt Bank provides multiple document submission methods including smart phone app, dedicated email addresses and scan and upload. Receipt Bank than extracts key data from all source documents associated with the payables function - supplier bills, corporate and individual receipts, credit notes - and converts that data into transactions. It then sends the transaction data and an image of the source document directly to the accounting software."

SmartVault (a previous Sleeter mention) is a similar product but does not have the extraction and conversion feature. The extraction and conversion feature might be valuable for contractors with many transaction.

To review the complete listing of the 2016 "Awesome Applications", click here.

To see prior year's winners, follow these links:

2015 winners

2014 winners

2013 winners

2012 winners

2011 winners

2010 winners

Administration to Expand Labor Data-Collection Requirements

Last Friday, the President announced several new policies to "further advance equal pay for all workers and to further empower working families". The announcement contained four different initiatives including:

• The Equal Employment Opportunity Commission (EEOC) published a proposal to annually collect summary pay data by gender, race and ethnicity from businesses with 100 or more employees. This proposal would cover 63 million employees. This expands and replaces an earlier plan by the Department of Labor to collect similar information from federal contractors. See our earlier posting on that proposal: New Nondiscrimination and Affirmative Action Requirements for Contractors.
• Second, the President requested Congress to take up and pass the Paycheck Fairness Act that would give women additional tools to fight pay discrimination.
• Third, the Council of Economic Advisers is releasing a report that highlights that the U.S. gender wage gap is now 2.5 percent higher than the average for industrialized countries and points to progress made since 2000 by the United Kingdom to reduce their gap by almost nine percent and by other industrialized countries by around seven percent.
• Finally, the White House announced a summit coming in May to "create an opportunity to mark the progress made on behalf of women and girls domestically and internationally over the course of the last seven years and to discuss solutions to the challenges they still face.

Perhaps the most impactful one of these initiatives is the expansion of pay data collection. The EEOC is proposing revisions to its EEO-1 form to require all employers with 100 or more employees - and Federal contractors with a $100,000 contract - to submit additional summary data on wages paid to their employees including gender, race, and ethnicity.

What will the EEOC (and Labor Department) do with this data? They're going to mine the data and look for employers that are shortchanging workers based on gender, race, or ethnicity. In their words:

This new policy lays important groundwork for progress toward achieving equal pay, as it will encourage and facilitate greater voluntary compliance by employers with existing federal pay laws - such as by evaluating how they are currently paying their employees. It will also assist the EEoC, and in the case of contractors the Department of Labor's Office of Federal Contract Compliance Programs (OFCCP), in better focusing investigations on employers that are unlawfully shortchanging workers based on their gender, race, or ethnicity. 

Or, as one commentator put it, the expanded data will be used to "shame" non-Federal contractors and for law enforcement purposes on Federal contractors.

The effective date of the expanded reporting requirement is September 30, 2017. You can read more about these pending initiatives on the Whitehouse website.