Colt vs Remington Showdown

Remington Arms Company filed a bid protest in the U.S. Court of Federal Claims (COFC) protesting the Army's decision to award a contract to produce M4 and M4A1 carbines to Colt Defense LLC. Remington's bid protest is focused on whether the contracting officer's decision to award a contract to Colt while Colt was still in bankruptcy and was labeled "High Risk" by the Defense Contract Management Agency (DCMA) was arbitrary, capricious, and an abuse of discretion.

As you probably know, DCMA is the agency responsible for performing financial capability reviews of prospective contractors - a function it grabbed away from DCAA (Defense Contract Audit Agency) a number of years ago. DCMA had performed a financial capability review of Colt and noted that Colt had recently filed for Chapter 11 bankruptcy protection and that its liabilities far exceeded it assets. DCMA expressed doubt that Colt would have enough working capital to fulfill the contract. An additional DCMA concern was that at the time of the award, Colt did not have a long-term lease for the facility where it intended to manufacture the M4s.

The contracting officer had the DCMA financial jeopardy report and other information from ongoing bankruptcy proceedings but found Colt "responsible" nevertheless. Remington argued that the contracting officer failed to properly evaluate DCMA's report or evidence she reviewed from the bankruptcy proceeding which showed that Colt faced possible liquidation and that its manufacturing facility lease was about to expire.

Upon receipt of the negative DCMA financial capability report, the contracting officer had a conversation with Colt and determined that Colt "does indeed possess the financial resources to perform under the current contract or will have the ability to obtain those resources. In testimony, the contracting officer explained that the "DCMA report was based on information submitted before Colt had submitted its bankruptcy petition" and so the DCMA report was out of date. The contracting officer also discounted the problematic lease extension based on a conversation where Colt representatives told her they had no intention of moving.

Remington appealed, arguing that the contracting officer's responsibility determination under FAR 9.104 was unsupported and therefore arbitrary and capricious. The COFC agreed with Remington. Although the Court did not call her responsibility determination arbitrary and capricious, the Court did conclude that it was not supported by the record. The contracting officer's stated reasons for disregarding DCMA's report were insufficient in light of the bankruptcy court records she reviewed. The fact that a bankruptcy court was monitoring Colt's finances does not mean that the bankruptcy court would or could ensure Colt's continued viability was highly in doubt at the time of the responsibility determination.

In addition, the Court noted, and equally important, the contracting officer's conclusions regarding Colt's ability to manufacture M4s at its facility are also unsupported. Although Colt informed the contracting officer that it intended to stay in the facility, the bankruptcy record shows that the decision did not appear to be in Colt's control. The contracting officer relied on Colt's stated expectations which were largely contradicted by Colt's filings in the bankruptcy case. This decision, the Court found was arbitrary and capricious.

You can read the entire decision here.

Defense Department Implements a Hiring Freeze for Civilian Workforce

The Department of Defense (DOD) has instituted a civilian hiring freeze for the Office of the Secretary of Defense, Defense Agencies and Field Activities. This freeze applies to both DCMA (Defense Contract Management Agency), DCAA (Defense Contract Audit Agency) among many other agencies in the Department.  The freeze affects all vacant full-time, part-time, temporary and permanent civilian positions.

What does this mean for contractors? It can't be good. DCMA contracting officers already have more work than they can reasonably handle. Freezing hiring will only exacerbate the situation. If you don't believe us, put in a call to your administrative contracting officer. Chances are it will go to voice-mail and any message you leave may never get returned.

DCAA is already struggling to meet its workload demands and starting this fiscal year, has had to jettison all of its work for other Federal Agencies until such time as it can become current in its audits of incurred cost. Freezing DCAA hiring will certainly not help reduce the backlog.

DoD is looking for each agency to present it a delayering plan. A lot of people, Senator John McCain being a notable example have made civilian reductions at the pentagon a high priority. Some have suggested that the reductions be commensurate with the draw down of military personnel. The military has seen a seven percent reduction while the civilian side less than half of that at 3.3 percent.

The hiring freeze provides for exemptions for mission critical requirements. DCMA has asked for an exemption but so far, even though still hopeful, has not been granted one.

DCAA Set to Undergo Significant Reorganization

You may have heard rumblings about an impending reorganization of the Defense Contract Audit Agency (DCAA). There is plenty of chatter but DCAA has not publicly announced anything yet (that we know of). Here's what we've been able to gleen.

DCAA is currently comprised of five regional offices; Northeastern, Eastern, Mid-Atlantic, Central, and Western - and a Field Detachment specializing in audits related to sensitive compartmented information and special access programs.

Under the reorganization, the number of regional offices will be reduced from five to three - Eastern, Central, and Western. But these three remaining Regions will not have cognizance over the Government's largest defense contractors. Those will form their own "special" regions and report to the Director, just like the Regional Directors do now. There will be five new special regions including:

• General Dynamics/Raytheon/BAE
• Lockheed Martin
• Boeing/Honeywell
• Northrup Grumman
• L-3

Any audit activity at any of the segments of these contractors will report to the Director of the respective Contractor regions.

What will this mean for contractors? Well, if you're one of the major contractors listed above, you should see improved consistency in audit positions. One major contractor frustration is auditors at a plant in Seattle taking different positions than auditors at the same contractor's plant in St. Louis. Since all of the segments will be reporting to the same director, consistency should be improved.

Don't expect a whole new cadre of auditors however. That will stay the same. Don't expect shifts in audit focus. There is only so many type of contract audits that can be performed. Do expect better access to top management. The special regional directors are only one level below the Director for all of DCAA.

If you're not one of the eight top defense contractors, you probably shouldn't expect to see any significant changes when interacting with contract auditors.

End of the Road Looming for Cost-Type Construction Projects

The Department of Defense is proposing a change to its Federal Acquisition Regulation Supplements (DFARS) that will prohibit any form of cost-plus contracting for military construction projects or military family housing projects. This prohibition will appear at DFARS 216.301-3. Currently, the prohibition applies to Cost-Plus-Fixed-Fee contracts. The new regulation broadens that to include all form of Cost-Plus contracting.

It seems to us that this is rather a DoD formality because cost-type contracts for military construction has been pretty much taboo for a long time. According to the Federal Procurement Data System, DOD awarded only 15 cost-reimbursement construction contracts in Fiscal Year 2015. 

The Hanford Waste Treatment Plant project illustrates the dangers of cost-plus contracting for construction projects. The Department of Energy (DOE). DOE has watched the cost of its Hanford Waste Treatment Plant balloon from $4.3 billion in 2000 to now over $12 billion and the project is still not finished. That latest estimate is going higher. Cost-type contracts for construction are not good for whoever is paying the bill and everyone knows it.

This new rule comes as a result of a provision in the Fiscal Year 2012 National Defense Authorization Act. Although it doesn't significantly change existing practices, the fact that it is not based on Statute (Public Law 112-81 and 10 USC 2306(c) makes it more difficult for DoD to seek a waiver or to otherwise find a way around the prohibition.

New Cost Principle Proposed for the DoD FAR Supplement

It has been a number of years since we've seen a new cost principle added to the Federal Acquisition Regulations. There have been many modifications to existing regulations but no new ones in at least 15 years. That is about to change. The Department of Defense (DoD) has just published a proposal to amend its FAR Supplement (the DFARS) to limit cost recovery when counterfeit electronic parts are incorporated into products the Government buys.

This provision/limitation was pretty much forced on DoD because it was included in the Fiscal Year 2016 National Defense Authorization Act. Counterfeit electronic parts have become a big deal in Government acquisition, primarily because of quality control issues. If a million dollar missile goes off course because of faulty electronic parts, you've wasted a million dollars and hit something you were not targeting.

Specifically, the new proposal provides that the costs of counterfeit electronic parts or suspect counterfeit parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts may be allowable if:

1. The counterfeit electronic parts or suspect counterfeit electronic parts were obtained by the contractor in accordance with applicable regulations.
2. The contractor discovers the counterfeit electronic parts or suspect counterfeit electronic parts, and
3. The contractor provides timely notice to the Government. Timely is defined as within 60 days after the contractor becomes aware of the counterfeit parts.

The applicable regulations mentioned in Item 1 above generally relate to buying from trusted suppliers. Contractors are required to obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers. If the pars are not in production, contractors must obtain the parts from trusted suppliers.

If all three conditions stated above are not met, the cost of rework and corrective action are not allowable.

This new cost principle will appear as DFARS 231.205-71.

Government Files False Claim Action Against DOE Contractor

The U.S. Government has filed a civil action against the contractor in charge of its Savannah River cleanup operations (Savannah River Nuclear Solutions, LLC or SRNS) and its parent company Fluor Federal Services, Inc. (FFS) for making false and fraudulent claims and statements to the Government and for knowingly including unallowable costs in inflated claims to the Department of Energy.

The contractor operates under a DOE (Department of Energy) M&O contract (Maintenance and Operations). These M&O contracts are designed to operated by stand-alone entities and therefore any cost allocations from a home office are not allowable under the contract. Any costs that may be allocable to the M&O contract from a home office are covered by the fee that the contractor earns.

The M&O contractor often "borrows" personnel from the parent company. These loaned employees are now commonly referred to as "corporate reachback" employees because employees are loaned from the M&O contractor's owners to conduct work directly for the M&O contractor. The M&O contract makes it clear that while the reachback program is fine, the costs allocated to the M&O contractor for reachback labor cannot include any home office allocations.

The problem from the Government's point of view was that the cost of reachback labor transferred from the SRNS's owner did include home office allocations. The Government's filing goes to great lengths in chronicling the contractor's duplicity in telling the Government one thing but doing quite another. In fact, the filing describes a "secret" modification to the cost transfer agreement between SRNS and FFS that deleted the phrase "For the term of this Agreement and any extensions thereof, allocations of home office expenses to FFS loaned employee costs are unallowable in accordance with the provisions of the SRNS Contract ..." to "For the term of this Agreement and extensions thereof, allocations of home office expenses to the SRNS segment costs are unallowable in accordance with the provisions of the SRNS Contract ..." That change is no small matter. Between 2008 and 2015, the amount of home office allocations on reachback labor ultimately billed to DOE totaled $5.2 million.

We are not Government contract attorneys but on the surface, it seems like the Government has made a very compelling case against the actions of SRNS. You can read the Government's complaint here.

Contractors Are Responsible for the Actions of Their Employees

During the wars in Iraq and Afghanistan, the military and its contractors disposed of garbage and anything it didn't want to ship back to the States, in open-air burn pits. According to the GAO (Government Accountability Office) there were at least 230 burn pits in Iraq and Afghanistan. It wasn't too long before veterans were claiming health issues as a result of inhaling smoke and fumes from the fires. They have now begun suing contractors alleging that the smoke from the burn pits was toxic and made them sick. Today the Department of Veterans Affairs is tracking veteran's exposures to burn pit dust, fumes and other pollution generated from the use of burn pits. Some are calling it the new "agent orange".

ERKA Construction was a Turkish company who was awarded a contract in 2007 to operate one of the burn pits in Iraq. The contract provided for the government to furnish ERKA fuel to perform contract work. Fuel was provided on the honor system because there was no oversight to ensure that ERKA took only the amount reasonably required to perform their contract work. In 2009, the AFOSI (Air Force Office of Special Investigations) was alerted through a contract fraud tip line that theft was occurring at the fuel farm.

An investigation ensued. Ultimately the AFOSI proved that contractor employees, with or without the contractor's knowledge, were systematically stealing fuel and taking it off base. The Government calculated that about $480 thousand worth of fuel was lost and demanded repayment. ERKA filed an appeal with the ASBCA.

Although the Air Force had not proven whether the fuel theft scheme was an enterprise that benefited ERKA or simply the people who were involved, it had little difficulty in determining the ERKA's project level management staff had knowledge of the theft. And because a Government contractor must adequately staff a project and supervise its employees, ERKA's claim of innocence didn't work.

Ultimately, the Board ruled that the responsibility should fall on ERKA for the stolen fuel. ERKA put in place people who were dishonest, and whose general manager failed to stop the theft even after it was brought to his attention.

The full text of the case can be found under ASBCA Nos. 57618, 58515.

What Does the Drug-Free Workplace Clause Require?

Most contractors are well aware of the drug-free workplace clause found in their Government contracts. Too often however, we forget that there is an on-going requirement imposed on contractors in order to stay in compliance. This isn't one of those "hang a poster in the break-room and be done with it" requirements. Today we're going to review the basic requirements of the drug-free workplace clause (FAR 52.223-6).

First, contractors must publish a statement notifying its employees that the unlawful manufacture, distribution, dispensing, possession, or use of a controlled substance is prohibited in the contractor's workplace and specifying the actions that will be taken against employees for violations of such prohibition. The clause does not specify what actions should be taken or provide a menu of available actions. Needless to say however that the actions must be sufficient to deter such activity. Many contractors use a scale of increasing severity for repeat offenders. For example, oral reprimand, written reprimand, suspension, and finally termination.

After publishing a statement, contractors must establish an ongoing drug-free awareness program to inform employees about (i) the dangers of drug abuse in the workplace, (ii) the contractor's policy of maintaining a drug-free workplace, (iii) any available drug counseling, rehabilitation, and employee assistance programs, and (iv) the penalties that may be imposed upon employees for drug abuse violations occurring in the workplace. This is where many contractors fail. The Government is prone to believe that anything less than an annual update is not "ongoing". Documentation showing employees participated in awareness programs is essential in this regard.

Contractor employees also have an affirmative duty under this clause. The must agree to abide by the terms of the statement and notify the contractor in writing if they are convicted under a criminal drug statute for a violation occurring in the workplace no later than five days after conviction.

After receiving notification from an employee, the contractor has 10 days to notify the contracting officer in writing of the conviction. The contractor must also notify the contracting officer if it becomes aware of a conviction by other means.

Within 20 days after receiving notice of a conviction, the contractor must take one of the following actions with respect to any employee who is convicted of a drug abuse violation occurring in the workplace:

1. Taking appropriate personnel action against such employee up to and including termination or
2. Require such employee to satisfactorily participate in a drug abuse assistance or rehabilitation program approved for such purposes by a Federal, State, or local health, law enforcement, or other appropriate agency.

The clause provide for penalties when contractors do not comply with drug-free workplace requirements. These include suspension of contract payments, termination of the contract for default, and suspension or debarment.

Government Policy on Accelerating Payments to Small Businesses Still Exists

Back in 2011, the Office of Management and Budget (OMB) began requiring agencies, to the fullest extent permitted by law, to accelerate payments to small business contractors with the goal of making payments within 15 days (instead of 30 days). This requirement was conditional upon contractors submitting all of the proper documentation, including invoices.

In 2012, realizing that there were a lot more small business subcontractors than there were small business prime contractors, the OMB required agencies to temporarily ensure that all prime contractors are able to pay their small business subcontractors in a prompt fashion. This temporary policy has been extended a few times and is now good until the end of 2016. More than likely, it will be extended again before this year ends.

So, how's it working? Are small businesses getting paid more quickly now than they were a few years ago? We don't know. And OMB doesn't know either. Anecdotal evidence suggests a mixed bag. We've talked with small business contractors that are surprised with the quickness they're receiving payment. We've talked with others that tell us that it's still taking close to 30 days. We've talked to still others who tell us the time for payment uexplainedly fluctuates between 15 and 30 days. That's for the prime Government contractors. For small business subcontractors its a different story. From what we can discern, accelerated payments are not significantly affecting them. Sometimes its because of subcontract terms such as "payments to subs will be made after the Government pays the prime".

OMB is planning to gather some data on how well the programs are working. It's asking each agency to provide quarterly reports on its progress in making accelerated payments to prime contractors and the progress of the agency's twenty-five largest prime contractors are making in accelerating payments to small business subcontractors. It will be interesting to see those reports. If you are a top twenty-five contractor for any Governmental agency, you can expect to be pinged by those agencies for data necessary to prepare these mandated reports.

Compensation Caps Cross the $1 Million Threshold

The Office of Management and Budget (OMB) announced the compensation caps for certain executives and contractor employees for fiscal years 2013 and 2014. These caps apply to both defense and civilian agencies for their respective applicable periods for contracts awarded before June 24, 2014.

These benchmarks are:

     2013:  $ 980,796
     2014:  $ 1,144,888

Contractors that submitted incurred cost proposals for 2013 and 2014 with compensation capped at the 2012 amount of $952,308 may need to revise their submissions if the new caps result in a material difference in amounts charged to Government cost-reimbursable contracts.

These benchmark amounts apply to contracts awarded prior to June 24, 2014 and limit the reimbursement or allowability of compensation under Federal Government contracts at FAR 31.205-6(p). For covered contracts awarded after June 24, 2014, a new cap applies pursuant to the Bipartisan Budget Act of 2013. That cap is currently set at $487,000  but will be adjusted annually based on the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics.

Since enactment of the statutory formula in 1998, the "old" cap has increased by more than 300 percent and Congress became duly alarmed not only by the amount  but by the adverse perception of the public finding out that contractors were paying out huge salaries at taxpayer expense. A number of proposals were proffered as part of the fiscal year 2012 and 2013 National Defense Authorization Acts, some as low as $200 thousand. The final compromise at $487 thousand came about as part of the Bipartisan Budget Act of 2013.

Each of these statutory formula cap amounts limits reimbursement of compensation at the beginning of the contractor fiscal year that begins January 1st for the respect year (or pro-rated over that portion of the contractor fiscal year that includes January 1st for the respective years). So, for example, the statutory formula cap for fiscal year 2013 is applicable to compensation costs incurred on contracts during the period January 1, 2013 through December 31, 2013.

The 2014 compensation cap of $1.1 million applies to years after 2014 as well, until OMB revises it.

Contractors, of course, can compensate employees at any level they deem appropriate. These caps only limit the amount the Government will pay.

Next week, we will look at DCMA (Defense Contract Management Agency) guidance on blending the old and new compensation caps.

Fair Pay and Safe Workplaces

Last week, the Federal Acquisition Institute released an awareness video to help the acquisition workforce and current and prospective Government contractors to acclimate to the Fair Pay and Safe Workplaces Executive Order from July 2014. It provides a high-level overview of the basic requirements and is worth the 20 minutes it takes to watch.

The video may be viewed at https://www.acquisition.gov/?q=fair-pay-eo. It points out in so many words that the Government believes that contractors that consistently adhere to labor laws are more likely to have workplace practices that enhance productivity and increase the likelihood of timely, predictable, and satisfactory delivery of goods and services to the Federal Government.


The regulations to implement the executive order have been published in draft form, the public comment period and ended and the regulatory agencies are putting the final touches on a final regulation.

We spent several postings discussing the some of the public comments. See Fair Pay and Safe Workplaces - Public Comments and suspect that it will take some time for the Government to read, distill, analyze, and respond to all 918 comments received

Submitting Data to the Government that Contains Proprietary Information

The Government is required to protect contractors' proprietary information from unauthorized disclosure. Contractors are responsible for deciding what data is proprietary. FAR 52.215-1 provides specific language for marking information that contractors consider to be proprietary. There is specific wording for a cover page and for each page that contains proprietary data. To read more about these protections, see "Protect Your Proprietary Information".

In a case that underscores the importance of protecting proprietary data as well making the point that it is the contractors', not the Government's responsibility to clearly identify proprietary data, the U.S. Court of Federal Claims denied a contractor's protest that the Air Force mistakenly included its proprietary data - specifically its indirect rate and fee structures - in solicitation materials. The contractor, who was also the incumbent contractor for the work, stressed that other bidders having knowledge of its proprietary data, had a baseline from which to prepare their own bids. The contractor asked for a five-year extension of its current contract as a remedy for the inadvertent release of its proprietary data.

The incumbent contractor had included indirect cost and award fee data in its management reports to the Air Force. The Air Force, in turn, included those reports in the solicitation without redacting the contractor's proprietary data. Upon learning of this from another potential bidder, the Air Force took reasonable steps to mitigate the disclosure including removal from the solicitation information and removing other offerors' ability to propose individual indirect rates and fees in a new competition.

The Court of Federal Claims found that the Air Force had taken reasonable steps to mitigate the damage however the Court also found that it was ultimately the contractor's fault, not the Government's, because the contractor had the affirmative duty to clearly mark data that was proprietary and by failing to do so, had waived its rights.

To read the entire decision, click here.

Unsatisfactory Conditions - Part 2

Yesterday we introduced this topic by discussing voluntary refunds which can be requested by the Government or offered by the contractor. Voluntary refunds typically originate where there has been a windfall profit based on events that were unforeseen. If you missed that post, you can read it here. Today we will look at other forms of "unsatisfactory conditions".

The term "unsatisfactory condition" has no definition in the Federal Acquisition Regulations and could refer to almost anything that the contracting officer or contract auditor disapproves of. It is commonly used in connection with poor internal control systems or failure to consistently follow good accounting or internal control practices.

The DCAA (Defense Contract Audit Agency) audit manual provides a few examples of unsatisfactory practices (see CAM 4-803.1(b)) including (but not limited to):

• An estimating system and related practices so deficient that price proposals are consistently unreliable, resulting in widespread defective pricing.
• Significant and chronic violations of Cost Accounting Standards.
• Internal control weaknesses of a magnitude that could cause significant monetary loss to the contractor and excessive cost to the Government.
• Excessive or premature contractor reimbursement because of inappropriate applications or review of economic price adjustment provisions.
• Failure to pay the minimum wages required by the Davis-Bacon Act, Walsh Healey, Public Contract Act, or the Service Contract Act.

The Government's primary objective when unsatisfactory conditions are encountered is to resolve them quickly and at the lowest level possible. Where local resolution is not possible, there are procedures in place to elevate them - even as high as Headquarters level. Of course, no contractor should allow things to progress that far - where both sides dig in their heels and refuse to compromise. There are very few situations where unsatisfactory conditions identified by a branch of the Government doesn't have some merit. And contractors should be willing to take whatever remedial action is necessary to satisfy or allay the Government's concerns. Government officials are generally reasonable people and even if their recommendations seem onerous at first, they are usually amenable to a resolution that is commensurate with the perceived risk to the Government.

Unsatisfactory Conditions - Part 1

We've talked often about contracting officer and contract auditors' responsibilities for detecting and reporting suspected contractor irregularities, whether it be fraud, unlawful activity, awareness of fraud indicators, procedures for referring suspicions up the chain, and providing assistance to those charged with investigating suspicions and allegations.

Sometimes however there are situations that don't rise to the level of "fraud, waste, and abuse" but still might not pass the smell test as far as the Government is concerned. The existence of windfall profits falls into this category. serious internal control weaknesses, mismanagement, and negligence are other examples of concerns that may not be fraud indicators but could and probably would be reviewed in some fashion. The Government lumps these items into a category called "Unsatisfactory Conditions".

Today we'll take up the subject of voluntary refunds. Tomorrow we'll address a few other "unsatisfactory conditions".

Voluntary refunds are payments (or credits) to the Government from a contractor (or subcontractor) that is not required by any contractual or other legal obligation. Voluntary refunds may be initiated by the contractor or requested by the Government. Voluntary refunds are rare and are most likely to occur when the Government notices that a contractor is reaping a windfall profit on a contract. We suppose there have been cases where a contractor's conscious has gotten the best of it and it wants to voluntarily refund money to the Government but we do not know of any specific cases.

Now there is nothing wrong with making a profit. The Government attempts to negotiate fair and reasonable profits on its contracts. However, if the Government notices that a contractor is reaping a windfall profit on a contract, it will undoubtedly look into the circumstances giving rise to that profit. Probably the first thing it will do is to initiate a defective pricing audit (i.e. compliance with the Truth in Negotiation Act or TINA) to see if the contractor failed to disclose current, complete, and accurate cost or pricing data.

Windfall profits however could arise from circumstances not related to defective pricing. For example:

• The Government was inadequately compensated for the use of Government-owned property or equipment.
• The Government was inadequately compensated for the disposition of contractor inventory.

Before the Government agrees to accept a voluntary refund or solicits a voluntary refund, it must ensure that there are no readily available contractual remedies available to obtain the refund. The Government would not like to be beholden to anyone, you know.

"Incurred" and "Paid" are Two Different Things

"Incurred Costs" and "Paid Costs" are two different events. We've mentioned this fact in our blog posts a time or two but it is worth repeating because we continue to see and hear of cases where contract auditors and more recently, contracting officers, question costs that were paid "outside" the contract period of performance.

Costs incurred on flexibly-priced Government contracts must have been incurred during the period of performance. There are exceptions to this such as pre-contract costs that have been approved in advance by the contracting officer. But incurred doesn't necessarily mean paid. Consider these events

Payroll. Suppose a contract ends on December 31 and coincides with a payroll period ending on the same date. Work performed on the contract in December has been incurred but the employees have not been paid until sometime after the payroll period ends - like January 5th. These payroll costs as of December 31 have been incurred but not paid.

Subcontractor billings. Subcontractors typically bill after their work is accomplished. Suppose a contract ends on December 31 and a subcontractor submits an invoice the following January. The prime contractor will include it in its own request for reimbursement in January or perhaps February - well after the contract performance period ended. The subcontract costs were incurred in December but not paid. The subcontract costs are still allocable to the contract.

Adjustments for indirect rates. Contractors use provisional indirect billing rates for billing costs on flexibly-priced contracts. Within six months after the close of the fiscal year, contractors are required to submit final indirect expense rates and true-up the billing rates to those final rates. That could occur six months or more after contract performance ends. When contract auditors get around to auditing the final indirect rate submission there may be another adjustment required. That could be several years after the contract performance period.

Materials. Contractor sometimes issue purchase orders for materials and supplies late in the contract. Vendor invoices are sometimes received after the performance period ends. Sometimes terms are "net 30" which means payment is expected within 30 days of invoice date. That could put it close to two months after performance period before a check is cut.

These are just a few examples of costs "paid" after a contract performance period ends but are nevertheless properly allocable, allowable, and reasonable under the contract. Sometimes Government personnel speak with such authority and confidence that unwitting contractors assume they are correct.

Abuses in the Bid Protest System?

Can the bid protest system be abused? It seems like it can. One company, Phoenix Environmental Design has filed 23 bid protests in the last fifteen months (although some were later withdrawn). Is it possible for one company to be victimized so many times in such a short period? Or is something else going on?

In the latest published case involving Phoenix Environmental Design (PED) the company protested the issuance of a purchase order to a competitor for the provision of herbicide chemicals for use on public lands for BLM (Bureau of Land Management). Phoenix alleged that it was prevented from bidding because the Department of Interior (DOI) did not provide adequate notice of the solicitation.

In this case, the amount of the award that the protestor felt cheated out of was a paltry $22 thousand. We don't know what it cost the contractor to submit a protest nor do we know what it cost the Government to respond to a bid protest nor do we know what it cost the Comptroller General to hear the case and write the decision. But, it wouldn't surprise us if those costs exceeded $22 thousand. The DOI provided two attorneys and the GAO provided two attorneys and we don't know the level of effort expended by DOI contract administration to prepare and submit documentation in response to the protest.

How much profit might have been contemplated or included in a $22 thousand purchase order? Given that the solicitation was competitive, probably not much. Bidders were probably sharpening their pencils. The solicitation isn't designing and producing the next generation bomber. All that was required in this case was for some company to order up some herbicide and deliver it to the Bureau of Land Management. That would be as low a risk contract as one could imagine.

So, what is PED's track record with its 23 bid protests? Eight were denied, six were dismissed, seven were withdrawn, one is as yet undecided, and one was sustained. The one that was sustained was an appeal that a purchase order to deliver bags of fertilizer to a Veteran's cemetery should have been set aside for SDVOSBs (service-disabled, veteran-owned small businesses). We don't know whether PED ultimately received that delivery order. The Comptroller General simply asked the VA to re-solicit and limit bidders to SDVOSBs.

Probably a sure bet that now, when a bid protest arrives from PED, those attorneys in the Comptroller General's office roll their eyes and run the other way as fast as they can.

Government Publishes Listing of Contractors with Overdue Incurred Cost Submissions

DCAA (Defense Contract Audit Agency) recently issued its annual listing of contractors who have not submitted their annual incurred cost proposals for fiscal/calendar years 2014 and earlier. As you know, annual incurred cost submissions are due within six months following the completion of the fiscal year. For calendar year contractors, that would be June 30th. Therefore, contractors on the "list" are pushing nine months overdue for the 2014 submissions and longer for submissions prior to 2014.

These listings of "recalcitrant" contractors have had inaccuracies in the past so contractors are encouraged to review the listing. Discrepancies should be discussed with the cognizant auditor and/or contracting officer.

The listing also discusses the process for unilaterally establishing contract costs/indirect rates when submissions are not received.

Whether to apply a unilateral cost decrement, and how much to apply, are judgments at the discretion of the Contracting Officer. Upon request, audit teams should provide support to assist the Contracting Officer with applying a unilateral contract cost decrement. Audit teams should provide the Contracting Officer with all information that is relevant to the contractor's delinquent CFY (contractor fiscal year), including billing deficiencies, incurred cost audit experience, etc. Upon request, audit teams may offer for the ACO's consideration a calculated unilateral contract cost decrement based on relevant historical questioned costs.

As a last resort, (DCAA) is furnishing DCMA with a total contract cost decrement that the Contracting Officer may consider when no relevant history exists. The current rate, updated this year is 16.4 percent, based on an Agency-wide analysis.

 Contractors need to avoid situations where the Agency-wide decrement is applied. This decrement is not simply a reduction of an indirect rate but is applied to the total costs billed by the contractor under its cost-type contracts. Obviously, a 16.4 percent decrement will eat up any fees earned on the contract(s) and then some.

If you're looking for someone to help prepare your incurred cost submission, give us a call.

Failure to Meet Specifications Results in $3 Million Settlement

ArmorSource, an Ohio company was awarded a contract to produce helmets for the Army. It subcontracted the work to Federal Prison Industries (FPI) also known as UNICOR. In 2010, a batch of 44,000 potentially defective helmets were recalled. According to a Congressman at the time, FPI did not meet protective standards, nor did it meet required deadlines in its production of helmets. The helmets failed ballistics testing.

From 2008 to 2010, FPI was awarded contracts for 100 percent of the military's needs, effectively shutting out private industry. Congressional investigations at the time concluded that FPI utilized poorly paid and often indifferently supervised prisoners to produce products that are in direct competition with private-sector businesses. As a result of the investigations, FPI no longer gets preferential treatment when it comes to helmet production (though it continues to receive preferential contracting treatment on many other products the Government buys).

Fast forward six years to this week when the Department of Justice (DoJ) announced that Armorsource has agreed to pay $3 million to settle false claims act allegations related to helmet subcontract to FPI. The investigation found that ArmorSource had delivered Advanced Combat Helmets (ACH) that were manufactured and tested using methods that did not conform to contract requirements and that failed to meet contract performance standards.

The DoJ press release noted that the allegations of poor performance were brought by two whistleblowers who worked for FPI (prisoners, we presume) and that as a result of the settlement, received $450 thousand as Qui Tam relators.

You can read the full DoJ press release here.

Predecessor and Successor Contractors Identified when Making Responsibility Determinations

The FAR Councils published a final rule that requires FAPIIS (Federal Awardee Performance and Integrity Information System) to include, to the extent practicable, identification of any immediate owner or subsidiary, and all predecessors of an offeror that held a Federal contract or grant withing the last three years. The objective of this new rule is to provide a more comprehensive understanding of the performance and integrity of the corporation before awarding a Federal contract (or grant).

The information required to populate the FAPIIS is already required by FAR 52.204-17, Ownership and Control of Offeror, which offerors provide when maintaining their SAM (System for Award Management) registration. This process simply moves that information from SAM to the FAPIIS system.

In making responsibility determinations, the contracting officer is required to consider information available through FAPIIS (see FAR 9.104-6) with regard to the offeror and any immediate owner, predecessor, or subsidiary identified for that offeror in FAPIIS.

FAPIIS collects certain information on contractors that could lead to nonresponsibility determinations. These include

• Terminations for default
• Terminations for cause
• Terminations for material failure to comply
• Non-responsibility determinations
• Recipient not qualified determinations
• Defective pricing determinations
• Administrative agreements
• DoD determinations of contractor fault reported to FAPIIS by federal government personnel.

Obviously, contractors do not want to appear in a FAPIIS report but the idea behind the new rule is to identify contractors that are guilty by association (so to speak). That's why its already being referred to as the "Guilty by Association" rule. Predecessor and successor contractors are defined as follows:

Predecessor means an entity that is replaced by a successor and incudes any predecessors of the predecessor.

Successor means an entity that has replaced a predecessor by acquiring the assets and carrying out the affairs of the predecessor under a new name (often through acquisition or merger).

This may be a start but it will not solve the problem where principles of companies who somehow get in trouble with the Government, simply create new companies and continue on with their bad practices.

You can read the full text of the new rule by clicking here.

Government Sets Contracting Record for Women-Owned Small Businesses

The U.S. Small Business Administration (SBA) recently announced that the Federal Government surpassed the five percent contracting goal for Women-Owned small Businesses (WSOB) for the first time ever.

Now, according to the SBA, the five percent threshold is no longer a goal - its a foundation from which to build. According to SBA, women-owned businesses already employ eight million American workers but when it comes to receiving Government contracts, women are still under-represented. To counter this, the SBA added 36 new industry categories where women can now compete for set-aside contracts and sole-source awards.

The SBA announcement included the following facts:

• In fiscal year 2015, 5.05% or $17.8 billion of all federal small business eligible contracting dollars were awarded to WOSBs.
• The Federal Government surpassed its 23 percent small business procurement goal for the third straight year, awarding an all-time high of 25.75 percent or $90.7 billion.
•  For the fourth consecutive year, the Federal Government exceeded its contracting goal for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs) and Small Disadvantaged Businesses (SDBs), achieving 3.93 percent or $13.8 billion and 10.06 percent or 35.4 billion respectively.

If you would like to read the complete SBA press release, click here.

Big Payday for Whistleblowers

The Natural Resources Defense Council and several former employees of Lockheed Martin filed a lawsuit under the qui tam, or whistleblower, provision of the False Claims Act (FCA) alleging that Lockheed misrepresented its compliance with the Resource Conservation and Recovery Act (RCRA) to the Department of Energy and as a result, knowingly submitted false claims for payment under its contracts with DOE. The whistleblower provision of the FCA permits private parties to file suit on behalf of the United States for false claims and obtain a portion of the Government's recovery. In this case, the Government recovered $5 million and the whistleblowers will collectively receive $920 thousand.

The lawsuit alleged that Lockheed violated the statute that establishes how hazardous wastes must be managed, by failing to identify and report hazardous waste produced and stored at the facility, and failing to properly handle and dispose of the waste.

Lockheed operated the Paducah Gaseous Diffusion Plant under contracts with DOE from 1984 to 1999. During that time, Lockheed was responsible for the facility's uranium enrichment operations and for environmental restoration, waste management, and custodial care at the site.

In announcing the settlement, the U.S. Attorney stated:

Government contractors are required to follow the same federal laws that apply to everyone else. These companies do not get a pass on compliance, especially when their responsibilities include managing and disposing of hazardous waste. Today's settlement should serve as a reminder that ...the Department of Justice will pursue all credible allegations of false claims and of environmental regulatory violations.

Whistleblowers provide a valuable service in ferreting out fraud, waste, and abuse. Whistleblowing is not the mother lode however. Relatively few whistleblower cases are enjoined by the Government (based on our anecdotal evidence) which means the whistleblower, if he/she wants to proceed, must go it alone. That cost money and many attorneys are unwilling to take such cases on contingencies and as a result, the law suits simply die.

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

Proposed Rules for Establishing Paid Sick Leave for Federal Contractors - Part 4

We are finishing up our series on the newly proposed rules requiring contractors and subcontractors at any tier, to provide a minimum number of sick leave hours to employees working on covered contracts. Covered contracts is just about anything awarded after the implementation date (probably January 2017). The minimum number of sick leave hours is one hour for each 30 hours worked.

Today we will discuss some of the benefits that the Government thinks will derive from the new sick-leave policy, the record keeping requirements imposed by the regulation and costs to implement the new rules.

Ancillary Benefits. The Department of Labor stated that there are a variety of benefits associated with this rule; however, due to data limitations, these are not monetized. No kidding. These so-called "benefits" are nothing more than figments of someone's imagination and have no substance or support to back them up. Want to hear them?

• Paid sick leave greatly reduces the chance of employee injury and exposure.
• A potential positive externality of the sick-day proposed rule making is its indirect effect on the health of an employee's dependents.
• There is a positive relationship between paid sick leave and profits.
• The cost of paid sick time will be offset by increased employee productivity.
• Providing paid sick leave will result in lower job turnover, resulting in higher productivity and lower hiring costs.
• Employees could mitigate future health costs by more frequently investing in preventive care

Record Keeping. The proposed rule mandates new record keeping requirements to ensure that contractors are following the intent of the regulations. Contractors and subcontractors will be required to maintain during the course of the contract and preserve for no less than three years thereafter, records containing the following information. Additionally, contractors and subcontractors must make these records available for inspection, copying, and transcription by authorized representatives of the Labor Department:

1. Name, address, and Social Security Number of each employee
2. Occupation or classification
3. Rate of wages paid
4. Number of daily and weekly hours worked
5. Any deductions made
6. The total wages paid each pay period
7. A copy of the notifications to employees of the amount of paid sick leave the employees have accrued.
8. A copy of employees' requests to use paid sick leave.
9. Dates and amounts of paid sick leave used by employees.
10. Copies of any written denials of employees; requests to use paid sick leave.
11. Records relating to the certification and documentation a contractor may require an employee to provide.
12. Any other records showing any tracking of or calculations related to an employee's accrual and/or use of paid sick leave
13. Copies of any certified list of employees' unused paid sick leave provided to a contracting officer
14. Any certified list of employees' unused paid sick leave received from the contracting agency
15. The relevant covered contract.

Cost to Small Businesses. The Department of Labor in its proposed rule making cost impact analysis concluded that the cost of compliance will not have a significant impact on small businesses. Its logic is as follows: Based on Survey of United States Business data, small Federal contractors had total annual revenues of $1.4 trillion in 2014 from all sources. The cost of implementing the rules for small businesses is estimated at $85.3 million. Since that is less than 0.01 percent of revenues, the Labor Department believes that this proposed rule making will not have a significant impact on small businesses.

We would look at that differently. Consider the small business that is awarded a $750 thousand two-year SBIR contract. Applying the 0.01 percent criteria to the contract value works out to $75 or $37.50 per year. There is absolutely no way that a contractor of that size can implement these regulations at that cost. It's laughably inadequate.

Concluding Comments. The proposed rule is extremely lengthy. Copied into a Word document at 11 Pitch, takes 190 pages. That will discourage all but the most hardy (and the HR folks whose job it is to understand the rules) from even attempting a pass at understanding the implications for their companies. Pity the small businesses.

One final comment, several Presidential candidates have promised to repeal all of the current President's Executive Orders on Day 1 of their presidency. That would be interesting. If the Executive Order upon which this regulation is based is repealed, what happens to the viability of the rule itself?

Related Links

     Previous posts in this series
          Part 1 - When Sick Leave May be Taken
          Part 2 - What is Required from the Employee
          Part 3 - Counting the 30 Hours for Purposes of Accruing Sick Leave

     Proposed Rule - Establishing Paid Sick Leave for Federal Contractors

     Executive Order - Establishing Paid Sick Leave for Federal Contractors