Why Contractors and Grantees Need Government Oversight

A professor of civil and environmental engineering from Washington State University (WSU) was arrested and charged with defrauding the Government out of $8 million in federal research fund last February. He has been charged with fabricating letters of support and investment, providing false information in research grant proposals and reports, and providing falsified reports and emails regarding how federal research funds were spent.

WSU, for its part, have initiated its own review of the evidence and will use that information to determine any disciplinary action it will pursue in this case. WSU officials said they were cooperating with federal investigators and working to help gather evidence for the investigators.

This professor received about 30 grants from the National Science Foundation (NSF) and the Energy, Transportation, and Agriculture Departments, to develop asphalt-composition technologies. The grant money was deposited into bank accounts and subsequently distributed for the professor's personal use, and not the technology development represented in their grant applications.

Grants and certain types of contracts such as research and development (e.g. Small Business Innovative Research), seem to be at risk for this type of fraud. The Government gives money to individuals or businesses with the hope of advancing the state of the art in various fields. Many times, the "experiments" fail or do not produce the intended result. That happens in research. The "deliverable" for these types of grants/contracts is typically a report summarizing the results of the research. If individuals or businesses are so inclined, it is easy to perpetrate fraud in these programs, especially if there is lax oversight.

Universities like grants for many reasons including financial reasons where the work on the grant helps absorb some of the overhead. WSU pulls in $330 million in grants every year. Universities sponsoring these grant-wielding professors however have a fiduciary duty to provide a certain level of oversight into what their staffs are doing and how they are performing,

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

Proposal Submissions that Exceed Page Limit Can Become Disqualified

The National Science Foundation (NSF) issued a solicitation for information technology services. Quotations were to be submitted in six volumes and the solicitation established page limit and format limitations for each volume. For example, Volume I had a limit of 35 pages, single-spaced, with stated font size and type. Bidders were instructed that NSF would evaluate only up to the page maximums as noted for each volume submission, and that any pages beyond the stated limits would not be considered.

After the initial offers and subsequent discussions with each offeror, NSF requested revisions from the competing vendors. In the request for revisions, NSF included the following instructions:
NSF is inviting your organization to submit a quote revision that is consistent with all instructions and requirements as noted in the [solicitation]. All quote revision material must be consistent with [the solicitation] instructions and requirements to be eligible for award consideration.

One of the bidders (Dell) asked for an additional page allocation in order to thoroughly address the concerns raised by NSF over the initial offer. The contracting officer denied the request.

One of the revised proposals (Tetra Tech) exceeded the page restriction. It's Volume I exceed the 35 page limit by 12 pages. So, NSF lopped off the final 12 pages of the proposal. As a result, the offeror's technical approach was considered unsatisfactory because NSF was not able to evaluate the bidder's response to the solicitation requirements.

Tetra Tech then filed a bid protest challenging NSF's decision to exclude from consideration the proposal pages that exceeded the page limitation. Tetra Tech alleged that NSF engaged in misleading discussions because it represented in its instructions to vendors that revisions to quotation submissions would not count against the page limit. NSF countered that the page limit instructions sent to all vendors were unambiguous. There was nothing in the instructions that conveyed a waiver of the page limits for the revised quotations.

The Comptroller General (GAO) agreed with NSF and denied the appeal. GAO concluded that there was no ambiguity in the instructions and that NSF properly excluded the portions of Tetra Tech's quotation that exceeded the page limitations stated in the solicitation.

You can read the full text of GAO decision here.

Buy American Act and Berry Amendment Act Violations

The Buy American Act is a law requiring the Federal Government to buy domestic articles, materials and supplies, primarily to protect American labor. The Berry Amendment prohibits the Defense Department from spending its funds on clothing, fabrics, fibers and yarns that are not grown, reprocessed, reused or produced in the United States. The purpose of the Berry Amendment is to protect the viability of the textile and clothing production base in the United States. The Buy American Act is included in contracts by FAR Clauses 52.225-10, -11, and -12 as applicable. If you have a DoD contract, the Berry Amendment is incorporated as DFARS (DoD FAR Supplement) 252-225-7012.

Unlike many contract clauses that are seemingly for "show", the Government takes these two prohibitions and restrictions very seriously, as one, Mr Burnett can now attest to.You see, Mr. Burnett was awarded contracts to supply the Army Recruiting Command to supply hundreds of thousands of baseball caps and backpacks for promotional items to be given to recruits. Between 2005 and 2009, Mr Burnett received three contracts worth $6.2 million. Not only were the Buy American Act and Berry Amendment Act clauses in Mr. Burnett's contracts but they also included the phrase, in capital letters, that the "Product must be 100% U.S. Made."

Once Mr. Burnett had his contracts, instead of providing American-made products, he negotiated and contracted directly with suppliers from China and with American companies who he knew were procuring the products from China. He used Chinese-made products to fill orders under all three contracts. Here's how he hid the fact that the baseball caps and backpacks were produced in China. He hired workers on a cash basis to remove all the Chinese labels and repackage the items that he sent to the Army recruiting command.

After the award of the second baseball cap contractor, a competitor protested the bid, claiming Burnett could only bid so low if he were using foreign suppliers. When the Government looked in to the matter, Burnett submitted documentation - fraudulent documentation - that he was using only American-made products and that he would comply with all aspects of the Buy American Act and the Berry Amendment.

Mr. Berry has now been indicted by a Grand Jury and the indictment seeks to have Burnett forfeit all $6.2 million the Government paid him as proceeds from illegal sales. He also faces a maximum penalty of 20 years in prison and a $250 thousand fine.

The Department of Justice press release on this matter can be read here. It does not mention how the    suspected fraud came to the Government's attention.

GAO Denies Protest that Bid was Too Low

The GAO (Government Accountability Office) recently published its decision on a protest filed be URS Federal Services of an award made by the Army to VSE Corporation. URS, the incumbent contractor for the work, alleged that the Army should have rejected VSE's bid as unrealistically low-priced (among other charges). GAO denied the protest.

URS complained that VSE's price was unrealistically low, asserting that VSE's low price should have caused the Army to reject its proposal. URS asserted that the terms of the solicitation should be construed as requiring the Army to perform, and document, a price realism evaluation under which VSE's proposal should have been rejected as unacceptably low.

The Army responded that the terms of the solicitation neither contemplated nor permitted it to reject a proposal on the basis of its low price. More specifically, the Army noted that the solicitation did not contain any reference to a price realism evaluation. Instead, proposals would be evaluated based on (i) affordability, (ii) reasonableness, and (iii) completeness. In short, pursuant to the terms of the solicitation, a low price could not form a basis for rejection of a proposal.

The GAO agreed with the Army. The GAO noted that as a general rule in awarding fixed-price contracts, agencies are only required to determine that prices are not unreasonably high. While an agency may conduct a price realism analysis in awarding a fixed-price contract for the limited purposes of assessing whether an offeror's low price reflects a lack of technical understanding or risk, offerors must be advised that the agency will conduct such an analysis. That is, the solicitation must contain either an express price realism provision or a statement warning offerors that a business decision to express price realism provision or a statement warning offerors that a business decision to submit low pricing may form the basis for rejecting the low-priced offeror's proposal. Absent such provisions, agencies are neither required nor permitted to conduct a price realism analysis in awarding a fixed-price contract.

The GAO did not view any of the solicitation provisions as warning offerors that proposals may be rejected on the basis of low price. Therefore the protest was denied.

Many incumbent contractors have been faced with similar dilemmas as new bidders come in and significantly undercut what incumbents know what it takes to perform the contract. In some cases, the difference is so extreme that incumbents legitimately wonder how the new contractor will be able to perform to specification. A lot of bid protests have been levied as a result. Sometimes those protests are successful where the agency deviated from the evaluation criteria. Sometimes those victories are hollow as the agency re-evaluates offers but awards to the same contractor anyway.

Will the use of Blended Labor Rates Create a CAS Noncompliance?

We spent a few postings last month discussing DoD's "blended rate" approach to implementing the lowered compensation cap that affects contracts awarded on or after June 24, 2014. There are different methodologies to calculating blended rates depending upon whether the rates are for forward pricing purposes or incurred cost purposes. Incurred cost blending is rather straight forward because all of the factors needed to blend two compensation caps are known. Forward pricing is not so straight forward as it requires an estimate of work to be performed in future periods. You can learn more about these blending methodologies by reading our previous coverage in Part 1, Part 2, Part 3, and Part 4.

A question was posted on DoD's official Q&A website concerning contractors who wished to implement the new $487,000 cap for forward pricing purposes in lieu of using the blended method but wished to use the blended method for incurred cost purposes. The question concerned whether such a practice would constitute a noncompliance with CAS (Cost Accounting Standard) 401, Consistency in Estimating, Accumulating and Reporting Costs.

We understand why a contractor might want to implement such a practice - its simpler and avoids Government auditors and contracting officers from tearing into and second-guessing assumptions as to how much work in future years will be on pre-June 24, 2014 contracts and post-June 24, 2014 contracts. Keep in mind however that the approach will most likely have a negative impact as fixed price contracts will be understated, cost-type contracts will have a lower fixed fee, and resulting overruns will be unfunded. Given these downsides, it might still be in a contractor's best interest to forego the forward pricing aspects of blended rates.

According to DoD, the use of a blended rate versus implementing the new cap from the outset is not a CAS 401 noncompliance because any inconsistency does not involve a cost accounting practice as defined by the CAS Board. According to CAS, a cost accounting practice is any disclosed or established accounting method or technique which is used for allocation of costs to cost objectives, assignment of cost to cost accounting periods, or measurement of cost. Either the blended rate approach or the specified amount approach is none of these three. It is not a method or technique used for allocation of costs to cost objectives, not a method or technique used for assignment of cost to cost accounting periods, and not a method or technique used for measurement of cost.

Keep in mind that the use of the blended rate methodology requires an advance agreement and potential inconsistencies such as the one described above will be sorted out during the advance agreement process.One thing it is not however, is a CAS 401 noncompliance.

Registering in SAM - Before Proposal Submission or Before Contract Award?

The language in FAR (Federal Acquisition Regulations) is inconsistent in terms of whether offerors need to be registered in SAM (System for Award Management) prior to submitting an offer, or prior to award of a contract.

FAR 52.204-8(b) and (d) states that if clause 52.204-7, System for Award Management, is included in the solicitation (and it almost always is included), the the offeror verifies by submission of the offer that the representations and certifications in SAM are current and accurate.

The aforementioned clause instructs offerors to complete representations and certifications by registering in SAM prior to the submission of offers.

On the other hand, FAR 4.1102, System for Award Management - Policy, states that SAM registration (which includes the online representations and certifications (reps and certs) must be completed by the time of award.

This inconsistency has created no small amount of confusion. While most offerors are duly registered in SAM, there have been some companies whose offers were deemed non-responsive because of their failure to register in SAM prior to submitting their offers.

The FAR Councils have issued a proposed rule to fix this inconsistency. The proposal is a modification to FAR 4.1102 and 4.1103 to require offerors to register in SAM prior to submission of an offer.

But companies interested in bidding on Government contracts, if they haven't already done so, should just go ahead and register in SAM. Its not that big of a deal and no one should be paying money to have someone do it for them. Set aside a couple of hours and get it done.

DoD Database Contains Inaccurate Information on Audits of Contractors

The Department of Defense (DoD) Instruction 7640.02 establishes record-keeping and reporting requirements for"reportable" contract audits. In support of the record-keeping requirements, DCMA (Defense Contract Management Agency) maintains a database that DoD components use to track and record the action taken to resolve and disposition "reportable" contract audits. Contracting officers (including DCMA contracting officers) are required to promptly update the status of their actions of "reportable" audit reports assigned to them.

"Reportable" contract audits include business systems (e.g. accounting, billing, estimating, etc.), claims, equitable adjustments, defective pricing, Cost Accounting Standards, operations (efficiency, effectiveness, economy), incurred cost, preaward, terminations, and EVMS (earned-value management system) where some form of exception or recommendation has been rendered.

Each month, DCAA (Defense Contract Audit Agency) sends DCMA a list of new reportable audit reports to include in its database. The database includes 20 or so data elements including contractor name (of course), audit report number and date, amount of questioned costs and amount subject to penalty, and qualifications, to name a few.

DoD Instruction 7640.02 requires contracting officers to promptly update the status of their actions. Once they complete certain actions, contracting officers must enter the amount of questioned costs they sustain, the date they resolve the audit report, and the date they disposition the audit report. Eventually, the data gets rolled up into the DoD-IG's semi-annual report to Congress.

This accuracy of this CAFU (Contract Audit Followup) database should be of concern to contractors. We know that years ago, it was consulted for purposes of responsibility determinations. That practice may still go on. In any event, the database is "out there" and available to the DoD procurement community. Obviously, contractors included in the database have or have had significant audit findings leveled at them.

The Department of Defense Office of Inspector General (DoD-IG) recently published a report on its assessment of the accuracy of this CAFU database. The results were not encouraging. Of the 50 CAFU audit records tested, the DoD-IG found that 41 (or 82 percent) included inaccurate information in one or more data fields. In fact, the errors overstated the amount of questioned costs for those 50 records by $2.6 million.

We suggest that contractors contact their contracting officer for a listing of audits in the database and the status of each. Contractors should also validate the accuracy of the information contained therein. Contractors are not going to be able to change the results of an audit at this point but can at least ensure that it is current, complete, and accurate.

You can read the entire DoD-IG report here.

Statute of Limitations and "Sum Certain"

Most readers of this blog are aware of the Contract Disputes Act's six-year statute of limitations that begins from the accrual of a claim. The six-year statute of limitations became a big issue a few years back when contract auditors began auditing incurred cost submissions that had been piling up on their desks for more than six years. Although the auditors tried to get cute with their definition of "accrual of a claim", the efforts were feeble and they soon gave up trying to audit incurred cost submissions that were older than six years.

In a recent decision handed down by the U.S. Court of Appeals for the Federal Circuit, the court considered the concept of "sum certain". Claims against the Government must be for a "sum certain" and until the "sum certain" is known, the statute of limitations does not begin.

In 2001, the Army awarded KBR a cost-plus-award-fee contract for construction and operations of dining facilities in Iraq. On July 31, 2003, KBR terminated one of its subcontractors on the job for default. Later the termination for default was converted to a termination for convenience in September 2003. In January 2005, KBR and its subcontractor reached an initial settlement for costs under the contract for $17.4 million and an agreement to pay additional costs as supported by the subcontractor.

Ultimately, the claim made its way to the ASBCA (Armed Services Board of Contract Appeals) who dismissed KRB's case finding that the dispute fell outside of the Contract Disputes Act's six-year statute of limitation. KBR filed its claim in May 2012 and the ASBCA ruled that the claim accrued either in September 2003 when the termination for convenience was issued or January 2005 when KBR reached its initial settlement with the subcontractor. Either date would have made the claim late.

The Federal Circuit however ruled that the ASBCA erred by finding the claim accrued before KBR could state the claimed amount in a "sum certain". The Federal Circuit found that the claim did not actually accrue until August 2006 when the subcontractor billed KBR for all outstanding costs in dispute. In January 2005, KBR did not have the exact amount for those additional amounts. It didn't have the final amount until more than a year later. KBR could not actually submit a claim to the Government in either 2003 or 2005 because claims must be presented in a "sum certain".

The Federal Circuit set the date for a "sum certain" at August 2006 which also happened to be withing the six-year statute of limitations and remanded the case back to the ASBCA for a decision on the merits of KBR's claim.

Estimates Used for ID/IQ Contracts are not Guaranteed

In 2008, Evie's Catering entered into an indefinite delivery-indefinite quantity (IDIQ) contract with the National Guard to provide food and other catering services to personnel for the Washington Army National Guard and other DoD agencies at the Yakima facility in Washington State. Ultimately that contract lasted more than five years, ending in March 2013.

An IDIQ contract serves as a master contract setting forth the estimated number of meals and prices. The actual number of meals would be provided by individual task orders. In 2011, an active duty unit from Texas approached Evie's to provide meal and catering services for a training exercise at the Yakima Center. Because the Texas unit was not approved to use the IDIQ contract, it was negotiating directly with Evie's Catering. After Evie's initial proposal for $483 thousand, the Texas unit received authorization to use the IDIQ contract so the National Guard took over as the contracting agent and Evie's ceased its direct negotiations with the Texas Battalion.

Using Evie's initial proposal, it authorized the National Guard to spend a maxim amount of $483 thousand on its behalf. However, the National Guard was only to pay Evie's for services actually provided during the Battalion's exercise. The Battalion provided daily meal requirements to the National Guard and the National Guard calculated a cost of $317 thousand, $166 thousand less than the estimated costs.

In 2012, the National Guard issued Task Order 112 for the Yakima catering services. The task order total award amount stated $483 thousand "EST" while also containing spreadsheets showing $317 thousand. Evie's provided the catering and afterwards, the National Guard paid Evie's $317 thousand for the services rendered.

Evie's contended that the $483 thousand was not an estimate but a guaranteed payment amount and filed a claim with the National Guard. The National Guard contracting officer denied the claim so Evie's filed a complaint with the U.S. Court of Federal Claims for the difference between the estimate and the amount actually paid, $166 thousand.

The Court sided with the Government in this case. It stated that the plain meaning of "$483,061 EST" supports only one reading and was not ambiguous. It is an estimate. Contract terms that are qualified as an estimate are unambiguous and non-binding. To conclude that the $483 thousand was a guaranteed payment would require the Court to ignore the "EST" annotation and three pages of detailed spreadsheets included int he task order.

You can read the entire decision here.

Due Date for Annual Incurred Cost Submissions Rapidly Approaching

Here's our annual incurred cost submission due date reminder.

If you are a calendar year contractor (i.e. your accounting year ends on December 31st), and have a cost-type contract, your annual incurred cost submission is due on June 30th.

If you are not sure as to whether an incurred cost submission is required, check your contract for the contract clause at FAR 52.216-7, Allowable Cost and Payment. If this clause is in your contract, you are most likely required to prepare the annual submission. We say "most likely" because ever so often, the Government includes contract clauses that are not applicable to the contract in question. If still in doubt, contact your contracting officer.

DCAA (Defense Contract Audit Agency) has a few resources to help contractors prepare and submit these annual rituals. These include:

• ICE (Incurred Cost Electronically) Model - an Excel-based model that corresponds to the minimum requirements of FAR 52.216-7.
• Incurred Cost Submission Adequacy Checklist - used to assess the adequacy of final direct and indirect incurred costs.
• Information for Contractors - a guide that provides an overview of the types of audits including instructions for preparing incurred cost submissions
• Help for Small Business Contractors - specifically the information related to incurred cost submissions.

The contracting officer has the authority to establish unilateral indirect rates for contractors who do not submit rates in a timely manner. These unilateral rates are usually set at a level where the Government believes its interests will be protected. That typically means at a level far below the provisional billing rates for that year. Unilateral rates, when invoked, often create cash-flow issues for contractors.

New Rule for Safeguarding Federal Contract Information

The FAR Councils have published a final rule to address the safeguarding of contractor information systems that contain or process information provided by or generated for the Government. This new regulation does not apply to information that is public. It addresses basic and enhanced safeguarding procedures for the protection of DoD unclassified information. These new rules apply to all acquisitions, including acquisitions of commercial items other than commercially available off-the-shelf items, when a contractor's information system may contain Federal contract information. The effective date is about a month out, June 17, 2016.

This new rule applies to information systems that are owned or operated by a contractor that processes, stores, or transmits Federal contract information. Federal contract information is information that is not intended for public release, that is provided by or generated for the Government under a contract to develop or deliver a product or service to the Government. It does not include information provided by the Government to the public or simple transactional information, such as necessary to process payments.

Information includes any communication or representation of knowledge such as facts, data, or opinions, in any medium or form, including textual, numerical, graphic, cartographic, narrative, or audiovisual. Information system, in this context, means a discrete set of information resources organized for the collection, processing, maintenance, use, sharing, dissemination, or disposition of information.

So, what are the new expectations for safeguarding such information? Well, the FAR Councils have come up with a list of 15 basic safeguarding requirements and procedures.

1. Limit information system access to authorized users
2. Limit information system access to the type of transactions and functions that authorized users are permitted to execute.
3. Verify and control/limit connections to and use of external information systems.
4. Control information posted or processed on publicly accessible information systems.
5. Identify information system users, processes acting on behalf of users, or devices.
6. Authenticate the identities of those users, processes, or devices, as a prerequisite to allowing access to organization information systems.
7. Sanitize or destroy information system media containing Federal Contract Information before disposal or release for reuse.
8. Limit physical access to organization information systems, equipment, and the respective operating environments to authorized individuals.
9. Escort visitors and monitor visitor activity; maintain audit logs of physical access; and control and manage physical access devices.
10. Monitor, control, and protect organization communications.
11. Implement subnetworks for publicly accessible system components that are physically or logically separated from internal networks.
12. Identify, report, and correct information and information system flaws in a timely manner.
13. Provide protection from malicious code at appropriate locations within organizational information systems.
14. Update malicious code protection mechanisms when new releases are available.
15. Perform periodic scans of the information system and real-time scans of files from external sources as files are downloaded, opened, or executed.

These safeguards are basically fundamental internal controls for any information system. Most likely, larger contractors already have them (or their equivalent) in place. Smaller contractors may have a bit of work to do, providing they are covered by the new rule. Even if not covered, contractors would do well to use this as a checklist for assessing the adequacy and sufficiency of internal controls over their own information systems.

The new rule contains a flow-down provision to subcontractors.

DCAA Updates its Strategic Plan

DCAA (Defense Contract Audit Agency) recently published an updated strategic plan. The document addresses steps to create an ideal audit environment through 2020.

The new strategic plan has five overarching goals that focus on people, products and customers. These goals include:

• Embody a culture of one Agency, one team, one direction
• Support the acquisition community by providing quality audits and advisory services
• Foster a diverse workforce of highly motivated and valued professionals
• Enhance working relationships with DCAA external stakeholders
• Provide the workforce with the right information, business processes, and capabilities to successful accomplish the mission.

At heart, these goals are not so different than any of DCAA's previous strategic plans or the strategic plans of dozens of other federal, state, and local agencies and commercial customers. It seems like these five-year updates is simply a matter of rephrasing the language. Certainly every entity wants to support their customers and be a good place to work. Why not?

The agencies that rely on DCAA's audit work might be most interested in Goal 2, supporting the acquisition community by providing quality audits and advisory services. DCAA listed three objectives to support this goal;

1. Be responsive to the acquisition community
2. Perform the right services with the greatest value
3. Deliver quality products and services on time.

DCAA is wise to focus on this area and mend fences with it acquisition community customers. Sometimes the Agency's view of "right services" is vastly different than that of its customers.

You can read the new Strategic Plan here.

DoD Wants to Help Contractors Remove Clutter

The Federal Acquisition Regulations (FAR) and individual agency FAR supplements, contain several provisions requiring Government contractors to display posters advising employees of their rights and duties in certain areas. One well-known poster requirement is the Hotline poster where anyone (contractor or Government employee) can call to report suspicions of fraud, waste and abuse (see DFARS 252.203-7004 for example).  We've discussed this requirement numerous times on these pages.

A more recent requirement for contractors is the need to inform employees in writing of their whistleblower rights. The most common way to inform employees in writing of their whistleblower rights has become the "poster".

An even more recent poster requirement has been the Combating Trafficking in Persons poster (see DFARS 252.203-7004(c)).

Regulations require that these posters be prominently displayed. However, when there are so many poster requirements, its easy to run out of prominent places. When you add these three posters to the myriad state and local "poster" requirements for workers compensation, unemployment and some additional Department of Labor poster requirements, you have a jumbled mess where posters become just part of the landscape. Recently, we were conducting floorchecks for a Government contractor and one of the questions was whether employees were aware of the Hotline poster. Less than 50 percent replied in the affirmative, even though, in many cases, we could see the poster from where we were interviewing the employee.

The Department of Defense is proposing to help de-clutter those "prominent places". The DoD Office of Inspector General has consolidated the three posters (i.e. fraud, waste, and abuse, whistleblower protections, and combating trafficking) into one. The DoD is revising its FAR Supplement to update the contract clauses that require displays, accordingly.

The new combined poster is not yet available but keep watching the DoD-IG Hotline Poster Site for the new poster. Incidentally, there is no requirement that contractors use the DoD-IG poster. Contractors are free to develop their own. But why go to the expense of doing so when the IG posters are free.

Contractor Cannot Allocate Risks to the Government on FFP Contracts

In 2005, the Navy issued a solicitation for base operating support services at its Diego Garcia support facility. The scope of work included information technology, refuse collection, and recycling, to name a few of the varied services contemplated in the solicitation. The solicitation identified two categories of fuel under the contract. The first category was to be provided by the Navy at no cost and could be used for most of the services required by contract. The second category applied to all contractor base support vehicles and equipment. This fuel was also provided by the Navy but the contractors had to pay for that fuel at the prevailing DOD rate at the time of purchase. This arrangement was to encourage reductions in fuel usage - reductions which, if achieved, would increase the contractor's award fee pool each year.

A company named DG21 submitted a bid. Within its bid, was an estimate of contractor furnished fuel it expected to consume, The estimate was significantly lower than the amount reflected in the solicitation. DG21's proposal included a provision that if fuel rates varied from historical rates by more than 10 percent, it would seek an equitable adjustment.

The Navy responded that historical fuel usage information and rates were provided for informational purposes only and clarified that the contractor assumes the full risk of consumption and/or rate changes. The Navy told DG21 to price its proposal accordingly.

DG21 did not adjust its fuel cost estimates, reasoning that while fuel prices fluctuate dramatically from year-to-year, fuel costs, in total should decrease as a result of its energy efficiency programs. DG21 also removed the provision from its proposal indicating that it would seek an equitable adjustment if fuel prices changes by more than 10 percent. DG21 was ultimately awarded the contract.

During contract performance, fuel prices rose dramatically, reaching a maximum of more than double the historical rated indicated in the solicitation. In 2011, DG21 requested an equitable adjustment to account for the unexpected increase in fuel costs.asserting that the change in fuel price was a "change" to the contract under the FAR 52.243-4 Changes clause. The contracting officer denied the request, noting again that historical fuel rates had been provided for information purposes only. DG21 appealed the contracting officer's determination to the ASBCA (Armed Services Board of Contract Appeals). The ASBCA denied the appeal for several reasons, the first being that the Changes clause did not apply to this situation since the contract language anticipated fluctuations in the market. DG21 was not happy with the ASBCA decision so it appealed to the U.S Court of Appeals.

The Appeals Court affirmed the ASBCA decision. The Court agreed with the Navy that the contract did not allocate the risk of market fluctuations in fuel prices to the Navy. The contract specifically states that DG21 would purchase fuel at the prevailing DoD rate at the time of purchase. By referencing the prevailing DoD rate at the time of purchase rather than a specific price, the contract conveyed  that the price for fuel could vary as the prevailing DoD rate varies. Accordingly, a variable fuel price was a specific part of the contract. The Appeals Court concluded:

Consistent with the general rule that the essence of a firm fixed-price contract is that the contractor, not the government, assumes the risk of unexpected costs, the prevailing DoD rate provision also allocates the risk of fluctuating fuel prices to DG21

What is a Certificate of Independent Price Determination?

There is certainly no shortage of certifications that accompany Government contracts. We've highlighted some of them on these pages; Certificate of Current Complete and Accurate Cost or Pricing Data, the certification required when submitting a claim and the certification that accompany's annual incurred cost proposals, to name a few. And consider all the representations and certifications you agree to when filing or updating your SAM (System for Award Management).

There is another certification required by FAR 3.103 that go along with fixed-price contracts. It a certificate designed to prevent (or perhaps discourage) collusive bidding and called the "Certificate of Independent Price Determination".

When submitting a firm-fixed price contract, the offeror must certify to the following three things:

1. The prices in its offer have been arrived at independently, without, for the purpose of restricting competition, any consultation, communication, or agreement with any other offeror or competitor relating to those prices, the intention to submit an offer, or the methods or factors used to calculate the prices offered
2. Except as otherwise required by law, the offeror has not and will not knowingly disclose the prices in the offer, directly or indirectly, to any other offeror or competitor before bid opening (for sealed bidding) or contract award (for negotiated procurement). 
3. The offeror has not made and will not make any attempt to induce any other concern to submit or not to submit an offer for the purpose of restricting competition.

Contracting officers are required to reject any offers suspected of being collusive. Not only is the contracting officer required to reject the offer but is also required, by law, to report the suspicion or fact to the Attorney General's office.

Collusive bidding practices have been real concerns for Government procurement in overseas contracting environments.

Contractor Pays $2.1 million to Settle Shipping Over-Charges

The U.S. Government contracted with a British company to provide blast walls (also known as Concertainer Units). The blast walls, produced in England were to be shipped to s U.S. Military base in Germany.

According to the terms of the contract, the price to ship a truckload of Concertainer Units from England to Germany would be based on actual costs not exceed $930 per truckload.

For ten years, from 2002 to 2011, the contractor transported the Concertainer Units using a third-party transportation subcontractor, charging the Government the not-to-exceed price of $930 per truckload. However, an investigation revealed that the contractor had paid less than that amount for each truckload, a fact that violated the terms of the contract, according to the Government.

When questioned about the shipping charges in 2009, the contractor "knowingly provided the Government false information concerning the amount that it had actually paid to the transportation subcontractor. The contractor submitted 47 false invoices that were made to appear to be authentic invoices from the subcontractor (Do you understand why contract auditors often insist on viewing original invoices and not copies?). The contractor also engaged in a kickback schemem by which it received "credits" from its transportation subcontractor.

When challenged, the contractor made things much worse by falsifying documentation. As a result, the Government contended that the contractor was in violation of the False Claims Act. Ultimately, the contractor agreed to pay $2.1 million to resolve the allegations (without admitting guilt).

You can read the entire DOJ press release here.

Energy Department Bans Overtime for Training

The Department of Energy (DOE) recently issued one of its Acquisition Letters concerning, this time, the allowability of overtime paid for training and education. See Acquisition Letter No. AL 2016-05 dated May 3, 2016, Subject: Determining if an activity is a FAR 31.205-44 training and education activity (and consequently rendering the overtime costs caused by the activity specifically unallowable); and Managing all overtime costs.

We've known about the long-simmering feud between the Department of Energy and some of its major contractors at various clean-up sites throughout the States over contractor overtime payments to employees for training and education purposes. DOE has now taken the step of formalizing its position in a policy that applies to all DOE contractors.

The policy letter itself is long, rambling, repetitious, confusing, and contradictory. But we'll try to explain it.

FAR 31.205-44(a) states that overtime cost incurred during training or education related to the field in which the employee is working or may reasonably be expected to work is unallowable. DOE calls this an "absolute" ban on overtime and compares it to the prohibition on costs of alcoholic beverages at FAR 31.205-51. But perhaps it's not an "absolute" prohibition because the Acquisition Letter then states that if training is a "side effect" of another activity, overtime is okay. Try that logic on alcoholic beverages (my beer was only a side effect of a legitimate business luncheon so it is allowable). Then DOE describes situations where it may be in the Government's best interest to pay overtime for training. If so, contractors can ask for pre-approval from the contracting officer. So, the prohibition doesn't seem to be absolute after all. If it were absolute, a contracting officer could not allow overtime for training under any circumstances. A contracting officer cannot make allowable, costs that are expressly unallowable.

Perhaps the most significant issue in this brouhaha the Acquisition Letter does not cover is training that is a condition of the contract. Some DOE contracts require contractors to maintain minimum certifications and their employees to maintain certain certifications and competencies. Contractors have sought to minimize production interruptions through the judicious use of overtime. The alternative, everyone acknowledges, is to hire additional staff to cover absences due to training, something that would increase costs to the Government. DOE's response to that argument has been ostrich-like.

Another argument contractors have raised is that the "training and education" required as a condition of a contract is not the same definition of "training and education" contemplated in the FAR 31.205-44 cost principle. We would defer to attorneys to argue that position but it does seem to have merit.

Fortunately, this DOE Acquisition Letter only applies to DOE contracts and then, only until it is challenged and tossed out.

DCAA's Fifth Annual Report to Congress

Each March for the past five years, DCAA has prepared a report to Congress summarizing its activities for the most recently completed fiscal year. This reporting requirement was mandated by Section 805 of the Fiscal Year 2012 National Defense Authorization Act (NDAA) and came about at a time when the Agency was under intense Congressional, GAO, DoD-IG and media scrutiny over the conduct of its contract audits.

The first item called out in the 2012 NDAA for inclusion in DCAA's Report to Congress was for a section describing significant problems, abuses, and deficiencies encountered during the conduct of contractor audits. From the beginning, DCAA has not made this topic the premier lead-in to its annual report. Instead, it appears almost at the end of the report. And, the Agency never uses the term "abuse" in its report.

In 2011, the section was entitled "Significant Deficiencies and Recommended Actions to Improve the Audit Process. That year, DCAA was looking to improve the adequacy of contractors' forward pricing proposals, defining contractor business system rules, improving audit access to contractor records and the need to add additional resources to reduce the incurred cost audit backlog.

In 2012, the Agency was still concerned about the adequacy of contractor forward pricing proposals and access to records. There was no mention of business system rules or staffing levels.

In 2013, the same story; adequacy of forward pricing proposals and access to records.

In 2014, DCAA again cited forward pricing proposal adequacy and access to records including access to contractor internal audit reports and unfettered access to contractor employees.

In the latest report, 2015, the focus changed. The section is no longer entitled "Significant Deficiencies and Recommended Actions to Improve the Audit Process". Gone is the term "Significant Deficiencies". The section heading now reads "Summary of Recommended Actions or Resources to Improve the Audit Process". So, in five years, the Agency has evolved out the terms (i) significant problems, (ii) abuses, and (iii) deficiencies. Now it is simply a listing of things DCAA thinks will improve its audit processes.

 For 2015, gone are the concerns about access to contractor records and adequacy of forward pricing proposals. In their places is a plea for more auditors, auditors to perform business system reviews (including floorchecks) and defective pricing (i.e. compliance with the Truth in Negotiations Act or TINA) audits. The Agency stated that it should be conducting 675 business system audits per year but only performed 22. Similarly, DCAA completed only 26 defective pricing audits during the year which it considers woefully short of the number of audits it needs to perform.

Nice though, to see that there are no longer any abuses, significant problems, or deficiencies within the Agency.

You can read the entire Annual Report here.

Two Military Shipping Contractors Agree to Pay $13 Million to Settle False Claims

The Justice Department announced today that two military freight shipping contractors have agreed to pay $13 million to settle false claims allegations brought be two whistleblowers. The two whistleblowers will receive 22 percent of the settlement amount or $2.9 million (less what the law firm representing the whistleblowers keeps). One of the whistleblowers was immediately fired by the contractor when it learned of his involvement with investigators. The ensuing wrongful termination suit is still pending.

The fraud was not sophisticated. The two contractors,

1. Claimed reimbursement for shipments by air when trucks were used.
2. Inflated charges for fuel
3. Charged extra for over-sized freight when the freight did not meet the over-size standard.

It took about three years from when the whistleblowers made their allegations to the time of settlement. That's not bad for a "qui tam" action.

The Justice Department credited the whistleblowers for their courageous action. The Department stated:

Without the courageous help of these two whistleblowers, the government might never have learned of the inflated charges for shipments.

The Justice Department also vowed to "vigorously pursue" the fired whistleblower's employment claims by "fully intending" to obtain for him the double damages and other remedies provided to whistleblowers who are retaliated against under the False Claims Act.

When All Else Fails, Go For a FAR Part 50 Bailout

There is a little known provision in the Federal Acquisition Regulations (FAR) that is used so infrequently that most Government acquisition personnel, while perhaps having heard of it, have never encountered it in their day-to-day tasks. It is found in FAR Part 50 and is entitled Extraordinary Contractual Actions. It is sometimes referred to as Extraordinary Contract Relief.

Government contractors encounter financial difficulties all the time. Its not unusual for contractors to lose money on a contract or file for bankruptcy. In most cases, life for the Government goes on. In the case of a bankrupted construction contractor, there is probably a performance bond allowing another company to step in and finish the contract. If it involves a supplier of commodities, the Government can find another supplier if the first one fails. But some contractors are too important to fail - they are essential to the national defense. When something happens to them, there is the possibility of a bailout.

We were first exposed to Extraordinary Relief when a company that guaranteed military housing ran into financial difficulties. The 20 year contract to provide military housing at a fixed rate started off good. The contract was profitable for a few years. However the estimates for repair and maintenance contemplated in the initial lease agreement were woefully inadequate for an aging housing complex and a "hot" economy. Eventually, the contractor was not even able to pay for basic utility costs. Tenant complaints (military officers) proliferated. The Government's attempts to enforce contract compliance didn't help. Eventually, the contractor filed a claim for extraordinary relief. Since there were no other alternatives to housing military officers, the Government considered it a national security issue and entertained and ultimately granted extraordinary relief to the contractor.

FAR Part 50 authorizes some agencies, to enter into, amend and modify contracts, without regard to other provisions of law related to making, performing, amending or modifying contracts, whenever the President considers that such action would facilitate the national defense.

When an actual or threatened loss under a defense contract, however caused, will impair the productive ability of a contractor whose continued performance on any defense contract or whose continued operation as a source of supply is found to be essential to the national defense, a contract may be amended without consideration but only to the extent necessary to avoid such impairment to the contractor's productive ability.

When a contractor suffers a loss (not merely a decrease in anticipated profits) under a defense contract because of Government action, the character of the action will generally determine whether any adjustment in the contract will be made, and its extent. When the Government directs its action primarily at the contractor and acts in its capacity as the other contracting party, the contract may be adjusted in the interest of fairness. Thus, when Government action, while not creating any liability on the Government's part, increases performance cost and results in a loss to the contractor, fairness may make some adjustment appropriate.

The provision may also be used to correct certain mistakes including

• a mistake or ambiguity consisting of the failure to express, or express clearly, in a written contract, the agreement as both parties understood it
• a contractor's mistake so obvious that is was or should have been apparent to the contracting officer
• a mutual mistake as to a material fact.

The likelihood of obtaining relief under FAR Part 50 is remote. But for contractors that are facing financial distress and can convince someone in the Government that there's is an underlying national security issue, it just might be the ticket to saving the company.

Government Employees and Contractor Employees Working Side-by-Side

There are many situations where Government employees and contractor employees share offices, occupy cubicles in the same office space, or otherwise work in close proximity with one another. Those situations are not at all uncommon. It's found in the Department of Defense a lot as well as in other Governmental agencies. This creates certain challenges that need to be confronted and mitigated especially where there may be concerns about organizational conflicts of interest.

Consider a situation where a Government employee reviews and processes invoices, develops scopes of work, prepares independent Government estimates - all pertaining to a contractor whose employee is practically looking over his/her shoulder or is otherwise in a position to glean, overhear, or make inquiries about matters that have a direct bearing on his/her employment and/or his/her employer.

The Government will need to do something about such situations or face consequences like bid protests and whistleblower claims. A couple of things the Government has done in the past include:

• Non-disclosure agreements. The value of these should not be understated. Although its just paper, it does places the contractor employee on notice not to divulge anything proprietary or sensitive that they learn from working within the program office - which would include not using it to the advantage of their company. Annual updates help reinforce the prohibition.
• Implement physical separation as best as possible. Usually, the Government will try locating a contractor workforce in their own section or if that is not physically possible move them as far away from potential conflicts as possible.
• Contractor standards of ethical conduct. This almost goes without saying. Every contractor with a contract in excess of $5 million is require to have written standards of ethical conduct and periodic (annual?) training to ensure compliance. While no one from the Government checks up on contractor compliance with this requirement very often, it would behoove the Government to be pro-active in making certain that contractors who work in close proximity with Government employees have compliant ethics programs.

The Government employee has some responsibilities as well. Based on the nature of some of the tasks the government employee is working on, the Government employee must safeguard the information he/she is working on.

Ultimately, the contractor is working as part of a Government team and should be acting in an ethical manner. At the end of the day however, there is only so much the Government can do to isolate proprietary information from individuals inside an acquisition office environment and beyond. It will come down to the integrity and ethics of the individuals supporting the Government as well as sufficient management oversight to ensure potential conflicts of interests are mitigated.