Defense Department Planning to Liberalize Contract Financing Policies

Under current procurement regulations, there are several different ways that the Government is able to help contractors with financing. These include (i) advance payments (rare), (ii) progress payments based on costs incurred as the work progresses, (iii) loan guarantees, among others.

Prudent contract financing can be a useful working tool by expediting the performance of essential contracts. Contracting officers determine whether to include contract financing in solicitations and contracts. Government financing is generally limited to situations where financing is actually needed. While financing is certainly beneficial to contractors, it simultaneously increases the contract administration workload as financing methods must be monitored as well as contractors' financial viability.

Where contractors will not be able to bill for the first delivery of products for a substantial time after work begins (generally six months or four months for small businesses), and the contractor must make expenditures for contract performance during the pre-delivery period that will have a significant impact on its working capital requirements, contract financing is often automatic. If the contract doesn't meet that criteria, the contractor must demonstrate actual financial need or the unavailability of private financing.

Being able to demonstrate actual financial need or unavailability of private financing became a very high bar to cross over and contractors and prospective contractors spent inordinate time in preparing justification only to be denied in the end. In fact, DoD found that the lack of contract financing discouraged many businesses from participating in the Government procurement arena.

With that background, DoD is now proposing to amend the FAR (Federal Acquisition Regulations) through its Supplemental Regulations (DFARS or DoD FAR Supplement) to remove the requirement to demonstrate actual financial need or unavailability of private financing. That's one less drag on contractor and contracting officer resources. The proposed rule reads as follows:

For fixed-price contracts with a period of performance in excess of a year that meet the dollar thresholds established in FAR 32.104(d) - generally $2.5 million or more - and for solicitations expected to result in such contracts, in lieu of the requirement at FAR 32.104(d)(1)(ii) for the contractor to demonstrate actual financial need or the unavailability of private financing, DoD has determined that (i) the use of customary contract financing (see FAR 32.113) is in DoD's best interest and (ii) no further justification is required from either the contracting officer or the contractor.

DoD has determined that the use of such customary contract financing provides improved cash flow as an incentive for commercial companies to do business with DoD, is in DoD's best interest, and requires no further justification of its use.

Brand Name or Equal

In a "brand name or equal" procurement, a product offered as an equal need not meet unstated features of the brand name product, and where the Government does not include a list of salient characteristics in the solicitation, it may not reject an "equal" quotation for noncompliance with a specific performance or design feature unless the offered item is significantly different from the brand name product.

In a recent bid protest decision, the GAO (Government Accountability Office) denied Pitney Bowes protest of an award to a competitor for the FBI's new mail tracking system. The GAO found that the FBI's determination that products offered by Neopost through its FSS (Federal Supply Schedule) contract satisfied the solicitation's requirement that the items be brand name or equal. The FBI wanted a mail and tracking system that had the capability to capture a signature - thereby showing proof of delivery - and retain a record of that signature. The FBI evaluated the functionalities of the items quoted by each vendor and reasonably found that both vendors had quoted items that met the FBI's requirements.

Pitney Bowes pointed out that Neopost's offering - in this case a portable scanner - lacked certain features that were available on its product. For example the Pitney Bowes scanner could take pictures. But, the GAO pointed out that the ability to take pictures was not necessary or required by the solicitation because the FBI was not planning to use such features. As a result, the GAO saw nothing unreasonable with the FBI's determination that Neopost's scanner was equvalent to the one listed in the solicitation.

Because an agency - the FBI in this case - has broad discretion in evaluating quotations and there was nothing in the solicitation that defined salient characteristics for each item being procured, the GAO found no basis for sustaining the protest.

You can read the entire case here.

Government Contractor Suspensions and Debarments on the Decline

The Inter-agency Suspension and Debarment Committee (ISDC) recently issued its annual report summarizing agencys' suspension and debarment activities from fiscal year 2015. The purpose of the ISDC is to help agencies build and maintain the expertise necessary to consider suspension and debarment as necessary to protect contract and program integrity. The annual report is mandated by the 2009 National Defense Authorization Act (NDAA).

From 2009, when the ISDC began collecting suspension and debarment data until 2014, the number of suspensions and debarments increased. In fiscal year 2015, however, the data shows slight reductions in suspensions and debarments.

Is this a positive trend or are agencies becoming lax in maintaining systems to flag incidents of improper business conduct? The report doesn't provide such analysis. However, the committee reported that the use of administrative agreements increased by 25 percent from 2014 to 2015. This, the report suggests, results from an emphasis on the use of proactive engagement tools, such as pre-notice engagement letters, which give contractors an opportunity to discuss the steps they are taking to address issues, that, if left unremediated, would likely result in suspension and/or debarment.

The agency with the most suspensions and debarments, unsurprisingly since they issue the most contracts, is the Defense Department. Housing and Urban Development (HUD) and Homeland Security (DHS) come in second and third, respectively. Four agencies didn't issue any suspensions or debarments in fiscal year 2015; Labor, National Geospatial Intelligence Agency, Nuclear Regulatory Commission, and Social Security.

You can read the entire committee report here.

Get Ready for the New Overtime Rules

Last week, the Labor Department published its final rules updating the overtime regulations which, Labor estimates, will automatically extend overtime pay protections to over 4 million workers within the first year of implementation. Or will it?  If you've been following the news on this topic, you've no doubt heard from many sources that the 4 million estimate is wildly overstated. Who knows? Perhaps we'll know in a year or so just how well the new rules are working.

According to the Labor Department, "this long-awaited update will result in a meaningful boost to many workers' wallets, and will go a long way toward realizing (the President's) commitment to ensuring every worker is compensated fairly for their hard work.

The Labor Department published proposed rules almost a year ago, July 2015, and received more than 270,000 comments in response to the notice of proposed rule-making (NPRM). That number of comments is very significant. Most NPRMs get a few comments, many less than ten. Labor didn't tell us how many of the 270,000 comments supported or disagreed with the proposed regulations. We suspect that there were a lot of comments on both sides - businesses generally against the new rule and labor groups in favor.

Here are the key provisions of the final rule. It focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt from the FLSA (Fair Labor Standards Act)

• Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wager Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker)
• Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004), and
• Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

There are, of course, many details that businesses will need to know to effectively implement the new rule. It becomes effective on December 1, 2016. Click here to read more about the new rules.

Contractor Officer Fined $166 Thousand for Lying to Government Investigators

Last February, the Justice Department announced that MCC Construction Company had agreed to pay $1.8 million in criminal penalties and forfeiture for conspiring to commit fraud by illegally obtaining government contracts that were intended for small disadvantaged businesses (e.g. 8(a) set-asides). Unfortunately, these kinds of cases are not rare - MCC used a couple of firms in SBA's 8(a) program to obtain contracts and then proceeded to do the work themselves. The scheme involved

• Allowing the two 8(a) companies to retain a guaranteed percentage of each contract for simply obtaining the contracts for MCC
• Allowing the two 8(a) companies to perform no labor on the awarded construction projects
• Performing the accounting and government reporting for the two 8(a) companies
• Falsely representing to the government that MCC employees were in fact employees of the 8(a) companies prior to bidding, and
• Conspiring with the 8(a) companies to hire straw employees for the 8(a) companies whose labor and salaries were paid for by MCC.

Over a four year period, MCC, through its 8(a) co-conspirators, was awarded 27 Government contracts totaling more than $70 million.

That's not the end of the story however. Earlier this week, GSA's (General Services Administration's) Inspector General announced another settlement in the case. The former owner and officer of MCC pled guilty to an obstruction of justice charge. Essentially, when the U.S. Attorney, the FBI, the SBA's Inspector General and GSA's Inspector General, and the Defense Criminal Investigative Service (DCIS) and the Army CID (Criminal Investigative Command) began investigating the relationship between MCC and the two "front" companies, the owner/officer lied. The Government calls this "obstructing a Government proceeding". 

Now the former owner/officer has agreed to pay restitution of $166 thousand and could face jail time when sentenced later this year. 

You can read the full February 2016 Justice Department press release here.

You can read this week's GSA press release here.

Pilot Program for Increased Cost or Pricing Data Threshold

The Fiscal Year 2016 National Defense Authorization Act (NDAA) authorized a pilot program to test the "efficacy" of using a risk-based approach to increasing the threshold for submission of cost or pricing data. Currently, the threshold sits at $750,000. Under the pilot program, that threshold significantly increases to $5 million.

The purpose of increasing the TINA (Truth in Negotiations Act) threshold is to make things easier on contractors and contracting officers. Auditors are generally opposed to the increased thresholds however, there is a probability that by October 2018 when the pilot program ends, the test will be rendered a success and the $5 million threshold will be made permanent.

The Department of Defense is now seeking candidates to test this authority and has requested the Army, Navy, and Air Force to each nominate at least one candidate program. The nominations must address the following six elements/questions.

1. Whether the Government received, within the previous 12 months, adequate certified cost or pricing data and completed cost analysis, with similar configuration, and quantity and delivery schedules.
2. Whether the price analysis demonstrates historical pricing stability with no significant expectation of future deviation.
3. Report any deficiencies with DFARS 252.215-7002 (estimating system requirements) or DFARS 252.242-7006 (accounting system administration)
4. Have contractors/subcontractors demonstrated a history of providing quality products in accordance with delivery terms?
5. Have contractors/subcontractors demonstrated a history of providing data required by the contracting officer to determine the proposed prices are fair and reasonable?
6. Identify any significant previous audit findings or other required previous contract adjustments.

If you think that you or one of your programs is a candidate for this pilot program, it wouldn't hurt to nominate yourself. Let your contracting officer know of your interest. 

You can read the entire guidance memorandum here.

Some "Simplified Acquisition Procedures" Thresholds to Increase

FAR (Federal Acquisition Regulations) Part 13 covers "simplified acquisition procedures" for purchasing supplies and services. The purpose of "simplified acquisition procedures" is to (i) reduce the Government's and the prospective contractors administrative costs, (ii) improve opportunities for small, small disadvantaged, women-owned, veteran-owned, HUBZone, and service-disabled veteran-owned small business concerns to obtain a fair proportion of Government contract, (iii) promote efficiency and economy in contracting, and (iv) avoid unnecessary burdens for agencies and contractors.

These streamlined procedures for acquiring goods and services are especially beneficial to small businesses where in most cases, the requirements are reserved for companies in SBA's 8(a) program, HUBZone companies, SDVOSBs and WOSBs.

There is a dollar threshold for using simplified acquisition procedures. Currently, that threshold is $150,000 with two exceptions. The first exception applies when acquisition of supplies or services that are determined by the head of the agency  to support a contingency operation or to facilitate defense against or recovery from nuclear, biological, chemical or radiological attack. The threshold for that category of purchases is $300,000. The second applies to contracts awarded and performed, or purchase to be made, outside the United States meeting the same criteria. That threshold is $1 million.

The FAR Councils have just proposed a change to the exception thresholds.  For domestic contingency operations, the threshold, if enacted, will more than double from $300,000 to $750,000. For international contingency operations, the threshold will increase from $1 million to $1.5 million.

There is little doubt that these threshold will not be implemented as they are based on statutory provisions in this year's (Fiscal Year 2016) NDAA (National Defense Authorization Act).

Refer to FAR Part 13 for more details on "Simplified Acquisition Procedures".

Wait a Minute, What? A Defense Cost Accounting Standards Board?

The Senate Armed Services Committee has included a provision in the 2017 NDAA (National Defense Authorization Act) that would establish a new Cost Accounting Standards Board within the Department of Defense.

The Committee expressed concern that the current cost accounting standards favor incumbent defense contractors and limit competition by serving as a barrier to participation by non-traditional, small business, and commercial contractors. To level the competitive playing field to access new sources of innovation, it is in the government's interest to adopt more commercial ways of contracting, accounting, and oversight. According to the committee, the provision requires that cost accounting standards developed shall to the maximum extent practicable align with Generally Accepted Cost Accounting Principles (whatever that means), thereby minimizing the requirement for government-unique cost accounting systems.

The Committee expressed disappointment that the Federal Cost Accounting Standards Board does not currently have a quorum of members and has not met in over three years. Due to this situation, it is doubtful that any credible reform will emanate out of the CAS Board in the future and believes that a DoD board will be better suited to meet national security needs.

There are other aspects to the NDAA proposal such as a requirement for indirect costs to be audited by commercial firms, rather than by the Defense Contract Audit Agency (DCAA) for most contractors. Pretty soon, DCAA is not going to have a mission.

The White House opposes the proposal. They believe that the action would result in unnecessary overlap and duplication with the functions of the existing Government-wide CAS Board and could result in contractors with both Defense and civilian contracts having to comply with two different standards for the same cost issue. Additionally, requiring the use of Generally Accepted Auditing Principles (GAAP) would impose inappropriate constraints on the Board's ability to carry out its responsibilities. GAAP focuses on reporting the financial results of overall operations and addresses neither the allocation of costs to individual contracts nor the allowability of contract costs. Finally, the White House believes that the proposal imposes inappropriate limitations on DCAA despite its historical success in savings.

This provision, to us, seems like a long shot, simply because it was sprung on an unsuspecting constituency so suddenly. Chances are good that defense contractors are lobbying hard to have it dropped.

Small Exception for Prohibition against Reimbursable Audit Wrok

The National Nuclear Security Agency (NNSA) is a semi-autonomous agency within the U.S. Department of Energy responsible for enhancing national security through the military application of nuclear science. NNSA maintains and enhances the safety, security, and effectiveness of the U.S. nuclear weapons stockpile without nuclear explosive testing, works to reduce the global danger from weapons of mass destruction, provides the U.S. Navy with safe and effective nuclear propulsion, and responds to nuclear and radiological emergencies in the U.S. and abroad.

As we reported on these pages, the 2016 National Defense Authorization Act included a provision that prevented the Defense Contract Audit Agency (DCAA) from performing any services (both audit and non-audit services) for any reimbursable customers until it cleared out its backlog of incurred cost audits of defense contractors. Reimbursable customers in this case is any agency that is not part of the Department of Defense.

One of the unfortunate side-effects of that new statute is agencies having an obvious defense mission, like the National Nuclear Security Agency, were suddenly bereft contract audit services. NNSA, because it had been tucked under the Department of Energy rather than the Department of Defense, was one of those Agencies.

The Senate version of the Fiscal Year 2017 National Defense Authorization Act (NDAA) seeks to remedy that situation, at least as it pertains to NNSA. DCAA is continues to be precluded from performing any reimbursable audit services except for the NNSA. The specific exception reads:

(2) Exception for National Nuclear Security Administration. Notwithstanding paragraph (1), the Defense Contract Audit Agency may provide audit support on a reimbursable basis for the National Nuclear Security Administration.

We have heard (unofficially, of course) that DCAA is making steady progress in reducing its incurred cost backlog. If so, DCAA may soon be back performing reimbursable audit services.

Every Company Needs an Accounting Manual

Do you have an accounting policy and procedure manual? Have you documented the processes and responsibilities for timekeeping, identifying and excluding unallowable costs, preparing billings, budgeting, and estimating? From our experience and observations, most small business (including Government contractors) have not. Is it necessary or does it fall into the "nice to have but I can get by without it" category?

There are a lot of reasons why an accounting manual with documented policies and procedures is necessary, regardless of the size of the company.

First and foremost, if you have ever been subjected to a pre-award or post-award accounting system audit by DCAA (Defense Contract Audit Agency), DCMA (Defense Contract Management Agency) or other contract auditors and contracting officers/specialists, one of the first things they ask for is a copy of your accounting policies and procedures. Failure to have them, while not necessarily fatal as far as being awarded a Government contract, will result in system deficiencies that will need to be corrected, monitored, and reported upon.

There are other reasons as well. A written accounting policy and procedure manual

• provides a road map for new accounting personnel on what tasks need to be performed and when,
• helps to clarify for the existing accounting personnel what is required and when.
• helps to reduce the number of errors in reports produced.
• provides management with better reporting to assist in decision making.
• provides financial information more timely including data necessary to prepare billings for services
• helps detect and prevent fraud.

A policy manual, unlike the U.S. Constitution, is intended to be a living, breathing document. At a minimum, it should be reviewed annually and updated as appropriate. It should be designed and written by someone with the requisite skill, knowledge, and expertise to effectively document the processes, procedures, and related internal controls.

If you're unsure on where to begin, begin by documenting what you are currently doing in each of your accounting/budgeting/billing functions. If you need help, most CPA firms have the expertise to guide you through the process.

Lax Contract Compliance Practices Costs Contractor $750,000

A publishing company based in Wisconsin has agreed to pay $750 thousand in civil penalties to resolve claims arising from allegations that it sloppily complied with the terms of its Government, particularly requirements related to safeguarding personally identifiable information. These claims were only allegations and the contractor admitted no liability in paying the $750 thousand.

The company specialized in print solutions like retail inserts, publications, catalogs, direct mail, packaging, books, and directories. In 2013, the company received a contract from the GPO (Government Publishing Office) that involved printing forms for the Social Security Administration that contained personally identifiable information. The information was protected from disclosure under the Federal Privacy Act, among other laws. The contract called for the company to meet security requirements involving the handling of documents, including the handling of waste.

Somewhere along the line - we don't know if it was based on an audit of some kind or a whistle-blower - the GPO's Office of Inspector General got wind of an allegation that the contractor was not complying with some of the security requirements. The allegations included failing to dispose of waste according to GPO procedures (did they dump social security numbers in the dumpster?), used malfunctioning security cameras to monitor production, and allowed unauthorized employees who had not undergone required background checks to work on the contract access to the facilities. The contractor exacerbated the situation by altering sign-in sheets to conceal the fact of unauthorized access of secure facilities.

In addition to the $750 thousand find, the contractor now has to send its employees through remedial training on handling documents containing personally identifiable information and in the actual physical layout of its printing facility to maximize security of personal identification information.

This incident underscores the seriousness with which the Government ensures that information remains private. You can read the Justice Department's press release here.

Department of Labor Publishes Updated Sex Discrimination Rules

The Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) issued final rules yesterday updating sex discrimination regulations for the first time in over 40 years. The new rules are intended to reflect the current state of the law and the "reality of a modern and diverse workforce". Updated rules on workplace sex discrimination will mean clarity for federal contractors and subcontractors (we'll see about the "clarity" claim in time) and equal opportunities for both men and women applying for jobs with or already working for, these employers.

The final rules, which implements the President's Executive Order 11246 updates OFCCP's sex discrimination regulations to make them consistent with current law. It makes explicit the protections against compensation discrimination, sexually hostile work environments, discrimination based on pregnancy, childbirth or related medical conditions; and discrimination based on unlawful sex stereotypes, gender identity and transgender status. The new regulations also promote fair pay practices.

The final rules are divided into eight sections and together, total nearly 200 pages. Not everyone is going to want to slog through 200 pages so it will most likely fall to the HR Departments to figure out implementation strategy. The first section covers the rule's purpose.

The second section sets forth the general prohibition of sex discrimination, including discrimination on the bases of pregnancy, childbirth, related medical conditions, gender identity, transgender status, and sex stereotypes. It also describes employment practices that may unlawfully treat men and women disparately. Finally, it describes employment practices that are unlawful if they have a disparate impact on the basis of sex and are not job-related and consistent with business necessity.

The third section covers circumstances in which disparate treatment on the basis of sex may be lawful - i.e. those instances when being a particular sex in a bona fide occupational qualification reasonably necessary to the normal operation of the contractor's particular business or enterprise. Presumably sperm banks would fall withing this category.

The fourth section covers sex-based discrimination in compensation and provides illustrative examples of unlawful conduct.

The fifth section deals with discrimination on the basis of pregnancy, childbirth, and related medical conditions. This section also discusses application of these principles to the provision of workplace accommodations and leave.

The sixth section sets out the general principle that sex discrimination in the provision of fringe benefits is unlawful, with pertinent examples, and clarifies that the increased cost of providing a fringe benefit to members  of one sex is not a defense to a contractor's failure to provide benefits equally to members of both sexes.

The seventh section covers employment decisions on the basis of sex stereotypes and discusses four types of gender norms that may from the basis of a sex discrimination claim under the Executive Order; dress, appearance, and/or behavior; gender identity, jobs, sectors, or industries within which it is considered appropriate for women or men to work; and care-giving roles.

Finally, the eighth section concerns sexual harassment, including hostile work environments based on sex, articulates the legal standard for sexual harassment based on the EEOC's guidelines and relevant case law and explains that sexual harassment includes harassment based on gender identity; harassment based on pregnancy, childbirth, or related medical conditions; and harassment that is not sexual in nature but that is because of sex or sex-based stereotypes.

To all contractors and subcontractors out there that must implement these new regulations, good luck.

Possible Exemption for DoD Contractors from the Fair Pay and Safe Workplace Executive Order

The President's Fair Pay and Safe Workplace Executive Order 13673 has, to say the least, been very controversial, not for what it tries to achieve, but for the extreme record-keeping and reporting burden it places on businesses doing work for the Government. One of the recurring criticisms is its application to all contractors including those who have never had issues with of violations of pay and safety regulations. The implementing regulations by themselves are extensive. The Department of Labor's is 103 pages. The FAR Council's draft is 131 pages on top of Labor's. Other Agencies of the Federal Government have their own.See our post from last March, Fair Pay and Safe Workplaces with links to other postings on our coverage of the subject.

The 2017 NDAA (National Defense Authorization Act) is attempting to overturn much of this Executive Order. There is a provision in both the Senate and House versions of the 2017 NDAA that will exempt most Defense contractors from the provisions of the Executive Order and its implementing regulations. One could probably call this NDAA provision "contentious" because the President has already threatened a veto of the NDAA if it remains.

Specifically, Section 829H of the Senate Version states:

APPLICABILITY OF EXECUTIVE ORDER 13673 4 ‘‘FAIR PAY AND SAFE WORKPLACES’’ TO DEPARTMENT OF DEFENSE CONTRACTORS.

(a) LIMITATION.—The Secretary of Defense shall apply any acquisition regulations promulgated pursuant to Executive Order 13673 or any successor executive order only to contractors or subcontractors who have been suspended or debarred as a result of a Federal labor law violations covered by Executive Order 13673.

(b) COMPLIANCE REQUIREMENTS.—The Secretary shall ensure that Department of Defense contractors or subcontractors who are not described under subsection (a) are not compelled or required to comply with the conditions for contracting eligibility as stated in any acquisition regulations promulgated to implement Executive Order 13673.

Based on this provision, only contractors (and subcontractors) that have been suspended or debarred as a result of a Federal labor law violation will be required to comply with any acquisition regulations promulgated as a result of the Fair Pay and Safe Workplaces Executive Order.

We wonder whether any contractor has been suspended or debarred as a result of Federal labor law violations. There can't be many.

DCAA Still Trying to Dig Out from Under Its Incurred Cost Audit Backlog

DCAA (Defense Contract Audit Agency) recently revised its audit guidance concerning incurred cost audits with ADV (auditable dollar volume) under $5 million that will help reduce the backlog of incurred cost submissions requiring audit. By way of background, when contractors submit their annual incurred cost submissions to the contracting officer, DCAA performs an adequacy check to ensure they meet all of the specific requirements of FAR 52.216-7, Allowable Cost and Payment. Once the adequacy check is completed, DCAA conducts a high-risk/low-risk determination. There are a number of factors that could lead to a high-risk determination. Most of these factors are based on something in the past, such as questioned costs in prior years, audit leads from other audits, or concerns expressed by a contracting officer. Incurred cost submissions that are considered high-risk are subject to audit. Those that are low-risk, are dumped into a pool for random selection. Those that are not selected are "administratively" accepted and closed, meaning there will be no audit.

Auditors being auditors however, it was difficult for them to realistically assess risk and an inordinate number of annual incurred cost submissions under $5 million were classified as high-risk, sometimes based on the "gut instinct" of the auditor performing the high-risk/low-risk determination. So DCAA decided to tighten up on the risk assessments - leaving less discretion to the auditor. In DCAA's words, the "... changes will ensure that we are effectively identifying incurred cost proposals that have relevant and substantial risk that would warrant an audit, specifically in the area of proposals with less than $5 million in auditable dollar volume (ADV).

The new guidance will require that auditors reassess all assignments that are classified as high-risk with an adequate incurred cost submission and ADV less than $5 million. If, based on that reassessment, an audit is warranted based on significant relevant risk, the auditor, supervisor, and manager will have to submit justification to regional management before it is authorized to proceed with an audit. In reality, who in their right mind is going to endure the rigors of writing up justification to for everyone in the chain of command to second-guess, scrutinize, and return for rework when they can take a pass and call the incurred cost submission low-risk. It's pretty obvious that DCAA no longer wants to expend audit effort on low-dollar, low-risk proposals.

The new risk-assessment policy allows for a limited probe into a specific area when justified. These audits or reviews would be like surgical probes into specific areas that raised concern and thus justifying a high-risk rating. However, these would be very limited in scope and there would be no audit opinion on direct and indirect costs.

Feds Use Al Capone Precedent to Convict Procurement Fraudster

Al Capone is arguably one of the most notorious tax evaders in history. Although well-known as the king of Chicago gangsters, the Federal Government couldn't put together any criminal charges that would stick until they nailed Capone for failing to pay taxes in 1931. Capone was convicted of five counts of income tax evasion and sentenced to eleven years in prison.

Why the story about Al Capone? Well, the Justice Department announced that a federal jury convicted a man for omitting $56 thousand from his 2013 federal income tax return. Unfortunately, that's not really news, it happens all the time. But then we noticed that the Defense Criminal Investigative Service (DCIS, part of the DoD's Inspector General office) was involved in the investigation. That got us curious. Why would DCIS investigate income tax evasion. Upon further reading, we learned that the tax evader was a former contracting official for the U.S. Army at Redstone-Arsenal in Huntsville. Uh oh.

Digging a bit deeper, we found that this former "high level" contracting official was implicated (not charged or prosecuted) into a much larger investigation. He was suspected of helping steer helicopter contracts to a "flamboyant financier" in exchange for a lucrative consulting contract after  he retired from the Army.

The Feds probably didn't have enough information to convict the guy for taking bribes so they went after him "Al Capone" style.

Read the DOJ press release here.

Read about the underlying case here.

DoD Usage of Sole-Source Procurements to 8(a) Firms Continues to Decline

The Small Business Administration's (SBA's) 8(a) program is the Federal Government's primary vehicle for developing small businesses. Tribal 8(a) firms, such as firms owned by Alaska Native Corporations, can with sole-source contracts for any dollar amount in the 8(a) program, while other 8(a) firms generally must compete for contracts valued above certain dollar thresholds.

Back in March 2011, the FAR (Federal Acquisition Regulation) was amended to include a new requirement for a written justification for sole-source 8(a) awards over $20 million, where previously no justification was required.

The Appropriations Act of 2015 contained a provision requiring GAO to assess the impact of the 8(a) justification at the Department of Defense. That GAO assessment report was recently issued. It addresses (i) trends among DoD sole-source and competitive 8(a) awards from fiscal years 2006 through 2015 and (ii) the factors to which DoD officials attribute these trends. GAO reviewed 14 sole-source contracts over $20 million, nine of which were followed by additional contracts for the same requirement.

GAO found that the number of sole-source contracts over $20 million at the Department of Defense has been steadily declining since 2011 when the new requirement for a written justification for these contracts went into effect. In contrast, the number of competitive 8(a) contracts over $20 million has increased in recent years.

Since September 2014, DoD has awarded only two sole-sourced 8(a) contracts, one for vehicle maintenance and repair and the other for engineering services. The contracting officer for the vehicle maintenance and repair contract told that GAO that these services would not be needed in the future. The contracting officer for the engineering services contract indicated that the last time for a sole-source award - in the future, awards for engineering services competition.

Contracting officers interviewed for this study overwhelmingly cited an agency-wide emphasis un using competition to obtain benefits, such as better pricing, as a reason for the decline in the use of sole-source 9(a) contracts over $20 million. Other factors included declining budgets and contract values falling under the $20 threshold that didn't require justification.

The GAO made no recommendations. You can read the full GAO report here.

How to Get Around a Solicitation's Page Limitation

The Department of Energy (DOE) issued a solicitation for cyber security support services, information technology support services and policy and governance services. . The solicitation limited the technical proposal to 10 pages, single-spaced, using 12 point (or larger) Times New Roman, Courier, Geneva, Arial, or Universal font type. The solicitation stated that proposals in excess of the ten pages would not be evaluated.

One of the bidders got clever with the "single spacing" requirement and reduced the spacing between lines in such a manner that it was able to squeeze in 66 lines per page rather than the normal 44 lines per page. This effectively yielded three additional pages to the 10 page limitation. Here's a comparison of the the squeezed spacing versus normal spacing.

Ultimately, DOE awarded the three fixed-price task orders to the squishy paragraph contractor where upon the standard paragraph contractor appealed because the successful contractor had violated the solicitation's formatting requirements.

"... quotations for all three task orders violated the RFQ's explicit provisions regarding page limitations by compressing the line spacing of its ... quotation text to be less than the "single-spacing" that the RFQ required. The protester maintains that the agency's acceptance of [the squishy paragraph bidder] proposal afforded ... an unfair competitive advantage.

The GAO (Government Accountability Office) agreed and sustained the protest.

DOE argued that applying the common meaning of "single-spaced" simply requires that there be no blank lines between lines of text. Therefore, vendors were free to choose whatever word-processing application suited them. GAO didn't buy that argument, especially when they discovered that the squishy paragraph bidder had used standard formatting in two other volumes of its proposal that were not subject to page limitations. To conclude that squishy spacing was acceptable would not be consistent with the purpose of the quotation preparation instructions - to ensure that quotations are submitted in a similar format and are limited as to the amount of information and data they contain on an equal basis.

Hmmm, wonder what the GAO would say about narrowing the margins on pages?

You can read the full text of GAO's decision here.

Multiple Bid Protests Lead to RFP Cancellation

In 2013, the Air Force issued a Request for Proposal (RFP) for comprehensive fleet management for various special-purpose vehicles and trailers to support base stand-ups and continued operations of the Saudi F-15 aircraft fleet. The Air Force initially selected SupplyCore's proposal for award. However that award held up because two "disappointed" offerors protested to the GAO (Government Accountability Office). The GAO sustained the protest so the Air Force had to conduct additional analyses and evaluations. After that, the Air Force, once again, selected SupplyCore's proposal for award. This time, three "disappointed" offerors protested the bid, which, in November 2015, the GAO sustained their protests. After the GAO tossed out the second award, the Air Force notified the offerors that it was cancelling the solicitation. The Air Force informed the offerors that, given the amount of time that has passed between the original solicitation and the second GAO protest decision, the program team was asked to perform a re-assessment of the needs and determined that the services were no longer required.

SupplyCore didn't like the Air Force's cancellation, calling it unreasonable. SupplyCore alleged that the cancellation was a pretext to avoid implementing corrective action in response to GAO's prior decisions. The Air Force contended that canceling the solicitation was reasonable due to material changes to the scope and timing of the services and supplies required under the solicitation.

This time, the GAO did not sustain the protest. GAO wrote "In a negotiated procurement ... a contracting agency has broad discretion in deciding whether to cancel a solicitation, and need only establish a reasonable basis for doing so.... A reasonable basis to cancel exists when .... an agency determines that a solicitation does not accurately reflect it needs."

The GAO found that the Air Force's decision to cancel the solicitation was reasonable. In fact, the GAO ruled that, under the circumstances, the Air Force took the only appropriate action by canceling the solicitation.

Presumably, if the Air Force had been forced to award a contract under the original solicitation, it could have simply terminated the contract for the convenience of the Government, thereby accomplishing the same thing.

FAR Proposal to Eliminate Telegrams as Preferred Method of Communication

Have you ever wondered why the Federal Acquisition Regulations (FAR) includes references to telegrams? Probably not. But there are dozens of them. Have you ever tried sending a telegram lately? When was the last time you received a telegram? Ever? Its been more than 10 years since Western Union ceased its telegram service yet the references to telegrams lives on in the Government's acquisition regulations. But perhaps not for long.

The FAR Councils are proposing to remove the dozens of references to telegrams and telegraph services from the FAR text and replace the terms with "electronic communication". In its proposed changes, it acknowledges this antiquated form of communication.

The word "telegram" emerged shortly after the invention of the electrical telegraph in the 1840s. This terminology and way of communicating was incorporated into the first issue of the FAR ... The emergence of electronic means of communication, starting with the facsimile machine, and then followed by email and mobile-phone text messages ... resulted in the sparing use of telegraph services and use of telegrams.

"Sparing use"? That's quite the overstatement. It's been impossible to send or receive a telegram for 10 years now. And its been a lot longer than that since anyone seriously considered telegrams were an efficient or effective means of communication.

The last day that Western Union offered telegram services, there were 6 telegrams sent worldwide - all from people who wanted to be the last person ever to send a telegram.

You can read the full text of the proposed FAR revisions here.

Price Reduction Clause in GSA Contracts

The General Services Administration Acquisition Regulations (GSAR, or sometimes referred to as GSAM) requires a price reduction clause (see GSAR 552.238-75) be included in each GSA Schedule contract. Just as the Government is assured that it secures the most favorable pricing during negotiations, the price reduction clause ensures that it continues to receive "best pricing" throughout the life of the contract. In effect, the clause ensures that the most favorable relationship that existed at the time of negotiations continues throughout the life of the contract.

There are three distinct events that will trigger a price reduction. A reduction is required if the vendor (or contractor):

1. Revises the commercial catalog, price list, schedule, or other document upon which contract award was predicated to reduce prices.
2. Grants more favorable discounts or terms and conditions than those contained in the commercial catalog, price list, schedule, or other documents upon which contract award was predicated, or
3. Granted special discounts to the customer (or category of customers) that formed the basis of award, and the change disturbs the price/discount relationship of the government to the customer (or category of customers) that was the basis of award.

Vendors have an affirmative duty to report all price reductions to the customer (or category of customers) that was the basis of award. Such reporting is to be made to the contracting officer. Failure to comply with the Price Reductions Clause can have (and has had) significant consequences. Thus it is important to fully understand the triggering events.

Consider what just happened to Deloitte Consulting LLP (Deloitte). Earlier this week, the Justice Department announced that Deloitte has agreed to pay $11 million to resolve allegations under the False Claims Act that it submitted false claims under a GSA contract.

In 2000, GSA awarded Deloitte a contract for technology services. The contract contained the price reduction clause which required Deloitte to reduce the prices it charged the Government if it offered lower prices to specific commercial customers during the course of the contract. Between 2006 and 2012, Deloitte failed to comply with the price reduction clause, resulting in Government customers paying more for Deloitte's services than comparable commercial customers.

There are a few exemptions to the price reduction clause. For example, orders outside the basis of award do not trigger the clause. Neither will orders above the maximum order threshold of the GSA contract. There are a few obscure other exemptions, all listed in the Price Reduction Clause.

Payment of Costs for Denied Protests

Yesterday we discussed the study that Congress wants performed on the impact of bid protests to the Government procurement process and particularly, the impact on DoD. If you missed that post, be sure to read it here. There is another provision in the Senate version of the 2017 NDAA that may have a profound impact on the number of protests. It's found in Section 821 and is entitled "Government Accountability Office Bid Protest Reforms.

There are two elements to the provision, contractors who loose the bid protest and incumbent contractors who lose the bid protest.

Contractors who lose a bid protest.

A contractor who files a protest with the Government Accountability Office (GAO) on a contract with the Department of Defense shall pay to the GAO costs incurred for processing a "covered" protest. A covered protest is one where all of the elements being protested are denied in an opinion issued by the GAO and filed by a party with revenues in excess of $100 million during the previous year. Because of the $100 million in revenue threshold, most small businesses will not have to pay processing costs, even if they lose their bid protests.

The proposal does not state how "processing" costs will be determined but attorneys (including GAO attorneys) are not inexpensive.

Incumbent contractors who lose a bid protest.

There is a feeling within the Government that incumbent contractors protest awards to successor contractors simply to pro-long their revenue streams. This provision applies to incumbent contractors without regard to revenue thresholds.

Contractors who file a protest on a contract on which they are the incumbent contractor shall have all payments above incurred costs withheld on any bridge contracts or temporary contract extensions awarded to the contractor as a result of a delay in award resulting from filing a protest.

All payments shall be released to the protesting incumbent contractor if the solicitation that is the subject of the protest is cancelled and no subsequent request for proposal is released or planned for release or the GAO issues an opinion that upholds any of the protest rounds filed under the protest.

If the protest is not sustained, all payments above incurred cost shall be released to the contractor that was awarded the protested contract prior to the protest.

If no contract is awarded, the withheld payments shall be released to the GAO and deposited to an account that can be used by the Office to offset costs associated with GAO bid protests in which the GAO issues an opinion in favor of a small business concern, either as a direct or third party beneficiary.

We've read some speculation that this Senate provision will not survive to final passage of the 2017 NDAA. There would seem to be a lot of implementation issues. What happens if a GAO decision is appealed? How does one calculate "processing costs". How does one determine "profit" on a competitively awarded contract? And so on.

Study to Determine the Impact of Bid Protests on Government Contracting

Its the time of the year when House and Senate committees are considering next fiscal year's National Defense Authorization Act. Right now, there are differences between the House and Senate versions and various committees are doing their "markups". Its impossible to predict the final version but it is interesting nonetheless to peer in and see what Congress is thinking.

One of the provisions that appears in the markup of the Senate Armed Services Committee is a requirement to study the GAO bid protest process. There's no doubt that some firms and individuals have abused the process and that it is costly from the Government's standpoint. However, there have been many "wrongs" that have been "righted" by the process.

Section 822 requires the Defense Department to contract out for a comprehensive study on the prevalence and impact of bid protests on DoD acquisitions including protests filed with contracting agencies., the GAO (Government Accountability Office), and the Court of Federal Claims (wouldn't it be ironic if the contract to perform the study was protested by an unsuccessful bidder?)

The study and accompanying report is to include the following elements.

1. A description of trends in the number of bid protests filed and the rate of such bid protests compared to contract obligations and the number of contracts.
2. An analysis of bid protests filed by incumbent contractors including (i) the ratee at which such protesters are awarded bridge contracts or contract extensions over the period that the protest remains unresolved, and (ii) an assessment of the cost and schedule impact of successful and unsuccessful bid protests filed by incumbent contractors on contracts for services with a value in excess of $100 million.
3. A description of trends in the number of bid protests filed and the rate of such bid protests on (i) contracts valued in excess of $3 billion, (ii) contracts valued between $500 million and $3 billion, and (iii) contracts valued between $50 million and $500 million and (iv) contracts valued under $50 million.
4. An assessment of the cost and schedule impact of successful and unsuccessful bid protests filed on contracts valued in excess of $3 billion.
5. An analysis of how often protesters win the protests contract.
6. A summary of the results of protests in which the contracting agencies took unilateral corrective action including (i) average time for remedial action and (ii) determination as to what extent such unilateral action was a result of a violation of law or regulation by the agency, or such action was a result of some other factor.
7. A description of the time it takes agencies to implement corrective actions after a ruling or decision

The report and related recommendations must be completed within one year of enactment of the NDAA. Although its possible that this provision of the draft NDAA may not make the final cut, it seems likely that it will since, at this point, its only a study.