SBA Expands its Mentor-Protege Program

The U.S. Small Business Administration (SBA) amended its regulations last week to implement provisions of the Small Business Jobs Act of 2010 (takes awhile to go from statute to regulation, it seems) and the 2013 NDAA (National Defense Authorization Act). The new rule establishes a Government-wide mentor-protege program for all small business concerns, similar to the SBA's own mentor-protege program for participants in SBA's 8(a) business development program.

The 2010 Jobs Act was designed to protect the interests of small businesses and increase opportunities in the Federal marketplace. Congress recognized that mentor-protege programs serve an important business development function for small business and authorized SBA to establish separate mentor-protege programs for service disabled veterans, HUBZones, and women-owned small businesses.

The 2013 NDAA authorized SBA to establish a mentor-protege program for all small business concerns. This section provided that small business mentor-protege programs must be identical to the 8(a) mentor-protege program, with a few exceptions. It also prohibits individual agencies from setting up their own mentor-protege programs unless the SBA approves.

The regulations themselves are quite voluminous. You can read them here. One of the provisions allows any small business to form a joint venture with any larger, for-profit mentor business that is in sound financial condition thereby giving them access to advice and assistance, while, at the same time, maintain their eligibility for federal small-business set-aside contracts.

Some have asked the benefits of the program to the mentor. There are a few. Mentors can enter into joint-venture arrangements with proteges to compete for, and perform on, certain federal government contracts that wouldn't have been open to them as a stand-alone firm. Also, mentors can own up to 40 percent of the protege to help it raise capital.

Another Case of Alleged Contract Fraud in the Middle East

Iraq and Afghanistan continue to be cesspools of Government contracting. Urgent requirements, huge amounts of money, and lax oversight contribute to an endless parade of contractors, subcontractors, and their employees engaged in or accused of fraud, waste, and abuse. Its a feeding frenzy over there. Many workers see what's going on, notice huge risk/reward imbalances and decide to get a piece of the action.

Another case hit the DoJ press release trumpeters last week. This one involved DynCorp and its State Department contract.

In April 2004, the State Department awarded a contract to train Iraqi civilian police forces to DynCorp. The contract not only called for training but also other services need to support that effort including trainers, guards, translators, vehicles and living quarters for contractor personnel. DynCorp was the prime contractor but a significant portion of the work was subcontracted.

In a False Claims Act complaint, the United States alleged that DynCorp knowingly allowed one of its main subcontractors to charge excessive and unsubstantiated rates for hotel lodging, translator, security guard and driving services and overhead expenses and included these charges in claims submitted to the State Department. Additionally, DynCorp added its own markup to these excessive subcontract costs thereby further inflating the claims it submitted to the Government.

In this case, DynCorp subcontracted some of the labor and lodging costs and knew, at the time it awarded the subcontract that the rates were not competitive with the market. DynCorp chose to protect its relationship with the subcontractor at the expense of the "public fisc" by accepting uncompetitive and unsupported rates from the subcontractor and passing them forward to the State Department. In doing so, DynCorp ignored its contractual obligation to ensure that its subcontractor's prices were reasonable and misrepresented the bases for its proposed pricing.

Although the amount of the fraud has yet to be determined, the court filing states that it is in the millions of dollars. No word on how the fraud was uncovered. In matters like these, it is oftentimes a whistleblower that brings these matters to the Government's attention.

Senate Wants DoD to Cut Senior Executive Positions by 25 Percent

One provision in the Senate's version of the fiscal year 2017 NDAA (National Defense Authorization Act) would require the Department of Defense to cut the number of Senior Executives (SES positions) by 25 percent before January 1, 2019. There are currently 1,000 such positions in the Defense Department so the cut would mean 250 positions. The House version of the 2017 contains no such provision and the two bills are now in compromise committee so the fate of this provision is unknown at this time.

That didn't stop the Secretary of Defense from sending a 23 page letter to the Senate (and a similar letter to the House) objecting to the provision. The Secretary called the provision arbitrary and without justification and would have widespread negative consequences on the Department's mission-critical programs and services. It would demoralize the DoD's civilian workforce when opportunities for promotion to SES are severely eliminated. The Secretary also noted that the Department has already cut the size of its SES workforce by 100 positions since 2010.

So what would a 250 person cut to the Defense's top executive ranks mean to Defense contractors? Well, it means fewer people to handle the same workload. There is nothing in the NDAA that would relieve the Department from some of its existing responsibilities. In the abstract, that means response times will increase. How's the responsiveness of your contracting officers working out for you now? It could get worse, if that's possible. What about the "demoralizing" statement. The opportunities for promotion are strong motivators to perform well. Take those opportunities away and the Secretary is concerned that the Department cannot continue to attract and retain experienced workers.

This provision is more than just an internal cat-fight. It could have a direct impact on the Department's ability to effectively and efficiently award and administer contracts.

Material Breach of Contract - Government Doesn't Have to Pay

Laguna Construction Company was awarded a government contract in 2003 to perform work in Iraq. After the work was completed, Laguna sought reimbursement of past costs, a portion of which the government refused to pay. Laguna sued the government for these costs at the Armed Services Board of Contract Appeals (ASBCA). The government alleged that it was not liable because Laguna had committed a prior material breach by accepting subcontractor kickbacks, thereby excusing the government’s nonperformance. The ASBCA granted the government’s motion for summary judgment on this ground, and declined to consider the merits of Laguna’s motion. Laguna then appealed to the U.S. Court of Appeals for the Federal Circuit. The Court of Appeals agreed with the ASBCA that Laguna committed the first material breach by violating the contract’s Allowable Cost and Payment clause and affirmed the ASBCA's ruling.

So what is this "prior material breach" all about and why does that give a right to the Government to withhold payment for work performed? Or, does it? We need to dig a little deeper to understand these decisions.

In February 2009, DCAA (Defense Contract Audit Agency) began an audit of Laguna's 2006 incurred cost submission. A couple of years later, DCAA disapproved about $18 million in subcontract cost, primarily because Laguna could satisfy the auditors that the subcontract prices were fair and reasonable for the services provided. In 2012, DCAA held up fourteen vouchers totaling $3 million. Laguna appealed to the ASBCA after the contracting officer failed to issue a decision.

A year before DCAA began its audit, the Government began investigating allegations that Laguna's employees were engaged in kickback schemes with its subcontractors. One Laguna project manager pleaded guilty to conspiracy to pay or receive kickbacks. He worked with subcontractors to inflate billings and personally profited from the difference. Later, a federal grand jury issued criminal indictments against three principal officers of Laguna - also for accepting kickbacks. They eventually pleaded guilty as well.

After the guilty pleas, the Government amended its answer to the ASBCA to include the affirmative defense of fraud. The Government maintained that it was not liable for Laguna's claim because Laguna breached the contract when its principal officers and employees solicited and accepted kickbacks for awarding subcontracts which constituted fraud against the United States.

Laguna argued that the Government was not authorized to withhold funds where it has accepted the subcontractor prices as reasonable during contract performance. The Government argued that Laguna's claim be denied because Laguna committed the first material breach of contract by the fraud of its employees.

According to the ASBCA and Court of Appeals,  Laguna committed the first material breach under the contract which provided the government with a legal excuse for not paying Laguna's invoices. Laguna breached the duty of good faith and fair dealing because its employees criminal acts in engaging in a kickback scheme were imputed to Laguna.

The Board found that the breaches were material because kickbacks are fraudulent. The fact that the Government has not proven that kickbacks were paid under ever voucher does not render the fraud any less material.

You can read the entire decision here.

New Resource for Small Businesses Seeking R&D Funding

The SBA (Small Business Administration) has released a new set of online tutorials to help small businesses navigate the SBIR (Small Business Innovation Research) program. Small businesses can learn about the program through a combination of videos and text. Best of all, there is no registration, no fees and no restrictions on who can access the site.

Within the tutorials, there are ten courses comprised of more than fifty modules. The courses include:

• SBIR/STTR program basics
• Government agencies that use the program (including differences in implementations)
• Agency solicitations
• How to find R&D topics
• Registration requirements
• Preparing a responsive proposal (good topic for everyone, not just SBIR solicitations)
• Finding partners
• Accounting and finance (many companies find out too late their systems are not adequate)
• SBIR data rights
• Cybersecurity for small business

There are several modules under each course. The "Accounting and Finance" course, for example, includes the following four modules:

1. FAQ regarding budgeting basics
2. What are the requirements of an approved accounting system?
3. What are indirect rates and how do I develop them?
4. What are eligible and ineligible expenses?

While these modules tend to be somewhat basic, they are succinct descriptions and introductions to companies considering the opportunities afforded through the SBIR program. They at least set forth the Government's expectations of the business systems contractors will need before acceptance into the program. If you have innovative ideas from tinkering around in your garage but have no company or business infrastructure, you're probably not going to get too far. On the other hand,  the barriers to entry are not too high so that with a modicum of organizational structure, you might attract some Government funding for your R&D ideas.

Access the SBA tutorials here.

The Whistleblower Protections for Contractors Act

A bipartisan group of representatives introduced legislation that will give the same whistleblower protections to subgrantees and personal services contractors that are currently afforded contractors, grant recipients, and subcontractors.

This proposed legislation will apply to both defense and civilian grants and protect any sub-grantee or personnel service contractor protections from reprisal for disclosure of certain information.

It also prohibits legal fees incurred (or accrued) in defense of reprisal claims. The standard here is the familiar one where proceedings relate to violations or or failure to comply with a Federal or State statute or regulation and results in several different dispositions - even if settled by consent or compromise.

This bill is similar to one proposed by Senate and it appears that its got enough support to send it on its way to the President's desk.

Organizations such as PSC (Professional Services Council) and POGO (Project on Government Oversight) are also supporting the initiative.

Sub-grantees and personal services contractors were probably inadvertently omitted during earlier whistleblower protection legislation and this could be seen merely as correcting an earlier oversight. To our knowledge, there has been no whistleblowers in these newly identified categories that have been retaliated against.

You can read the proposed legislation here.

Misleading Discussions

Yesterday we discussed a bid protest case where the Army erred in its past performance rating. It gave the same past performance rating of "relevant" to Delfasco who was the incumbent and had been producing the same parts for years as it did to the eventual winning bidder, GTI, who lacked relevant past performance with respect to two necessary skills identified in the solicitation and only somewhat relevant on another skill. The GAO blew the whistle on the Army and sustained the protest (see Nonsensical Past Performance Rating).

There was second appeal in the same case and this one involved misleading discussions. Delfasco challenged the Army's conduct of discussions, asserting that Army either failed to advise it of evaluated weaknesses or misled it into believing that previously raised weaknesses had been satisfactorily resolved.

Here's what happened. As part of the initial round of discussions, the Army issued 18 evaluation notices (ENs) identifying deficiencies and weaknesses, or requesting clarifications with respect to Delfasco's proposal. The offerors, including Delfasco, submitted revised proposals. In the second round of discussions, the Army told Delfasco that five of the original 18 ENs remained. In its final proposal, Delfasco specifically addressed each of the five enumerated remaining weaknesses as identified by the Army.

However, when awarding the contract, the Army identified six additional weaknesses that had not been brought up earlier. GAO called that practice misleading.

Where, as here, an agency provides an apparently exhaustive list of issues for an offeror to address in discussions, we will consider the conduct of discussions to be misleading and unreasonable where that list is incomplete. Additionally, if an agency identifies concerns during a reevaluation of proposals that should have been raised had they been identified before discussions were held, the agency is required to reopen discussion in order to permit the offeror to address those concerns. The agency's failure here to mention any of these six weaknesses in its list of remaining outstanding weaknesses effectively deprived the protester of the opportunity to address and resolve the weaknesses in its (proposal).

The GAO sustained the appeals and required the Army to reimburse Delfasco its costs associated with filing and pursuing the protest plus reasonable attorneys' fees.

You can read the entire GAO decision here.

Nonsensical Past Performance Rating

The Army issued a "best-value" solicitation to purchase some practice bombs under a five-year ID/IQ (indefinite-delivery/indefinite quantity). Three companies submitted bids including the incumbent, Delfasco. An award was ultimately made to a different company; GTI whereupon Delfasco appealed the award on a number of grounds including the adequacy and sufficiency of past performance evaluations.

The Army evaluated both Delfasco's and GTI's past performance as "relevant" meaning that both had previously produced like or similar items. Like or similar items are defined as items that have been produced using similar manufacturing processes. However, the Army's support for these ratings did not correlate to the ratings themselves. In contrast with Delfasco's extensive experience producing these same items, the Army found that GTI lacked relevant past performance with respect to two necessary skills identified in the solicitation, and only somewhat relevant experience with respect to another skill.

Delfasco asserted that given the evaluated limits on GTI's experience (as indicated in the Army's evaluation), it was unreasonable for the Army to assign the same "relevant" rating assigned to Delfasco which had extensive experience.

The GAO sustained the protest. The GAO wrote that

In our view, the agency has not adequately explained, nor is it otherwise apparent, why GTI's limited relevant experience warranted a "relant" rating ("similar scope and magnitude of effort and complexities this solicitation requires") rather than a lower rating. For these reasons, we sustain the protest.

You can read the entire GAO decision here.

Is Amazon Your Competition?

It never really occurred to us that Government agencies were buying supplies from Amazon.com so we were surprised to read that purchasing supplies from Amazon was a common practice among Government purchasing agents. Someone asked DoD if that was okay. DoD said sure: "GSA's federal supply schedules are not mandatory sources. Ordering officers are encouraged to use them before going on the open market but are not required to". The fact that the Government is ordering from Amazon most certainly mean that their prices beat out the GSA schedules.

FAR (Federal Acquisition  Regulations) 8.002, 8.003, and 8.004 contain a hierarchy of mandatory supplies and services sources. These include existing inventories, excess inventories from other agencies, Federal Prison Industries, people who are blind or severely disabled, and wholesale supply sources. Other mandatory sources would include public utility services, printing, vehicle leases, and metals/ores from the national stockpile.

But, if agencies are unable to satisfy requirements for supplies and services from the mandatory sources, they are encouraged to consider satisfying requirements from or through the non-mandatory sources such as the Federal Supply Schedules (also called GSA Schedule). Notice the two qualifiers; "encouraged" and "non-mandatory". The Federal Supply Schedules are not mandatory sources and agencies are not required to buy from them. Agencies are only encouraged to do so.

But if prices are more favorable from sources other than the Federal Supply Schedules, there is every reason for Agencies to use those alternate sources - they're saving taxpayer money. How widespread is this practice. We don't know. Perhaps Amazon could tell us. Can anyone really compete with Amazon's prices any more? Brick and mortar stores are continuing to close at alarming rates. How then are small Government supply contractors expected to compete with the likes of Amazon?

If you are offering supplies on a Federal Supply Schedule, you might want to check the on-line competition. If you sales are flat or dwindling, Amazon could be to blame.

Don't Assume the Government Received Your Email Proposal - Verify

The Treasury Department issued a "best value" solicitation for cybersecurity services. Blue Glacier was one of the bidders but its bid, according to the Treasury Department, was late. Bids were due at 2:00 PM (Eastern). Blue Glacier submitted its bid via email around 11:00 AM, approximately three hours before the cut-off. There was a problem however. Blue Glacier's email bid, it was eventually discovered was quarantined in Treasury's email filtering system due to suspected "phishing". Blue Glacier assumed that its bid was received since previous correspondence to the same email address was received and responded to. After a couple of months and not hearing anything from Treasury, Blue Glacier contacted Treasury to inquire the status of the procurement. Treasury told Blue Glacier that it had never received its bid and was not in contention for the contract. When Treasury awarded the contract to another bidder, Blue Glacier appealed stating that:

• The failure of  its email quotation to arrive at the email address specified in the solicitation was due to problems with the Treasury's email system.
• Treasury should consider its late quotation under the "government control" exception.

According to the GAO, it is the vendor's responsibility, when transmitting its quotation electronically, to ensure the delivery of its quotation to the proper place at the proper time. Quotations that are received in the designated government officer after the exact time specified are late and generally may not be considered for award. While this rule may seem harsh in some circumstances, it alleviates confusion, ensures equal treatment of all vendors, and prevents one vendor from obtaining a competitive advantage that may accrue where a vendor is permitted to submit a quotation later than the deadline set for the competition.

Basically, the GAO said that Blue Glacier should followed up with Treasury the same day to ensure that its email proposal had been received - not wait a couple of months. The primary evidence establishing that Blue Glacier properly submitted its quotation is Blue Glacier's copy of an email. This copy does not demonstrate that a quotation was received by Treasury in a manner consistent with the solicitation.

Blue Glacier's argument that the email proposal was under "government control" didn't persuade GAO either. GAO has consistently held that in determining whether a quotation was under the Government's control prior to the time set for receipt of quotations, a vendor must have relinquished custody of the quotation to the Government so as to preclude any possibility that the vendor could alter, revise, or other wise modify its quotation after other vendors' competing quotations have been submitted. In this case, Treasury dumps undelivered messages after 30 days and there is no longer any evidence to confirm that Blue Glacier's bid was received prior to the cutoff.

GAO denied the protest. If only Blue Glacier had followed up the very same day that it submitted its proposal, it would have at least been considered for the award and this protest would not have been necessary.

You can read the entire Bid Protest Decision here.

FAR Updates References to OMB Circulars

Back in December 2013, the OMB (Office of Management and Budget) published new guidance a 2 CFR Part 200 entitled Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (OMB Uniform Guidance). The new guidance is often referred to as the "Super-Circular" even though technically, its not a circular. Its now part of the Code of Federal Regulations.

The new guidance became effective a year later, December 2014. The new OMB Uniform Guidance supersedes and streamlines requirements from OMB Circulars A-21 (Cost Principles for Educational Institutions), A-87 (Cost Principles for State, Local and Indian Tribal Governments), A-89 (Catalog of Federal Domestic Assistance), A-102 (Grants and Cooperative Agreements with State and Local Governments), A-122 (Cost Principles for Non-Profit Organizations), and A-133 (Audits of States, Local Governments and Non-Profit Organizations). Cost principles under OMB's Uniform Guidance apply to contracts with non-profits, educational institutions, state and local governments, and Indian tribal governments.

Now that OMB has consolidated and re-titled its administrative requirements, cost principles and audit requirements, the FAR (Federal Acquisition Regulations) require updating to replace obsolete references. The FAR Councils did that earlier this month. The first thing they set about doing was to find a shorter title than the official 2 CFR Part 200 title; Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards. They did this by adding a new definition under FAR 2.101. It is now simply referred to as "OMB Uniform Guidance".

In addition to the new definition, the final rule makes about twenty additional changes, removing specific references to OMB circulars and replacing them with the term "OMB Uniform Guidance". A goodly number of these changes impacted the cost principles found at FAR Part 31.

You can read the full text of the changes here.

New FAR Rules for Small Business Subcontracting Plans

A little over a year ago, DoD, GSA, and NASA (the FAR Councils) published a proposed FAR rule to implement small business subcontracting improvements among Government contractors. A number of commentators provided written comments and suggestions to the proposed regulations, most of them positive. Yesterday, the FAR Council's made it formal by publishing the rules in final form.

The new rule in intended to provide for the following items (among many other provisions).

• It will require prime contractors to make good faith efforts to utilize their proposed small business subcontractors during performance of a contract to the same degree the prime contractor relied on the small business in preparing and submitting its bid or proposal. In other words, if you proposed it, you've must award it. If the prime contractor cannot make a good faith effort, it must explain, in writing, to the contracting officer the reasons for its failures.
• The rules authorize contracting officers to calculate subcontracting goals in terms of total contract dollars in addition to the required goals in terms of total subcontracted dollars.
• It provides contracting officers with the discretion to require a subcontracting plan in instances where a small business represents its size as an other than small business.
• It requires subcontracting plans for modifications under the subcontracting plan threshold if the modification causes the contract to exceed the plan threshold.
• It restricts prime contractors from prohibiting a subcontractor from discussing payment or utilization matters with the contracting officer.
• It allows contracting officers to establish subcontracting goals at the order level on ID/IQ (Indefinite-delivery, indefinite-quantity) contracts.

Perhaps the most problematic of the foregoing requirements is the "good faith effort" provision because it, by its very nature, requires the exercise of judgment. Whenever the exercise of judgment is involved, two sides can have differing opinions and they can both appear reasonable positions.

FAR does not provide a definition for the phrase "good faith effort" but FAR 19.705(d) offers some insight into the Government's thinking. FAR states:

In determining whether a contractor failed to make a good faith effort to comply with its subcontracting plan, a contracting officer must look to the totality of the contractor's actions, consistent with the information and assurances provided in its plan. The fact that the contractor failed to meet its subcontracting goals does not, in and of itself, constitute a failure to make a good faith effort. For example ... factors such as unavailability of anticipated sources or unreasonable prices may frustrate achievement of the contractor's goals. However, when considered in the context of the contractor's total effort in accordance with its plan, the following, though not all inclusive may be considered as indicators of a failure to make a good faith effort:

• a failure to attempt to identify, contact, solicit, or consider for contract award small businesses

• a failure to designate and maintain a company official to administer the subcontracting program and monitor and enforce compliance with the plan

• a failure to maintain records or otherwise demonstrate procedures adopted to comply with the plan

• the adoption of company policies or procedures that have as their objectives the frustration of the objectives of the plan.

If your company is required to develop and implement a subcontracting plan, you need to ensure that you have someone in charge of compliance to preclude a non-good-faith effort assessment.

Only 1 Percent of Government Contractors are CAS-Covered

Prospective Government contractors often panic when they hear the term "CAS" (Cost Accounting Standards). CAS has a reputation of adding onerous layers of regulations to an already overloaded regulatory system for Government contractors. Yet, with many exemptions from CAS available - the small business exemption being the most significant - very few contractors will ever need to concern themselves with Cost Accounting Standards.

A year or so ago, a Congressman from Maryland asked the Congressional Budget Office (CBO) a the number of Government contractors. The CBO didn't know, stating that it was no aware of any comprehensive information about the number of Government contractors. There are plenty of listings of the top 10, the top 100 or the top 200 Government contractors but there doesn't seem to be a comprehensive listing of the number of contractors. Perhaps one could search the SAM (System for Award Management) databases for a number but those would include wannabes, companies that have registered but do not yet have Government contracts. The NCMA (National Contract Management Association) estimates that in fiscal year 2014, there were 97,000 contractors winning federal dollars. Of course, there were probably many more contractors that this figure if you consider contractors performing work on contracts awarded prior to fiscal year 2014. Undoubtedly, this figure would increase beyond 100,000 active Government contractors.

Now, how many of these 100,000 Government contractors are subject to full or modified CAS-covered (Cost Accounting Standards)? Not very many really - less than one percent according to the FAR (Federal Acquisition Regulations) Councils.

Based on information gleaned from DCAA (Defense Contract Audit Agency) databases, the FAR Councils estimate that there are about 650 contractors who are either subject to full or modified CAS coverage. Additionally, according to the Council's estimates, there are an additional 250 CAS covered contractors for civilian agencies that are not under the audit cognizance of DCAA. That brings the total number of CAS covered contractors, either full or modified coverage, to approximately 900 contractors, a figure that represents less than one percent of all Government contractors. The remaining 99 percent of Government contractors need not worry about Cost Accounting Standards except to the extent that many of the requirements that originated with CAS have wormed their way into the FAR cost principles (FAR Part 31) over the years.

If you're not a small business and happen to negotiate more than $50 million dollars in contracts in a year, you can start thinking about CAS implementation - CAS Standards, CAS Disclosure Statements, and Notification of Accounting Changes, and Cost Impact Studies. Until then, find other things to do.

Incurred Cost Submissions using Blended Rates but No Advance Agreement Will Get Bounced

Back in April, we published a four-part series on the use of blended labor rates to implement the new $487 thousand compensation cap that applies to all employees charging to Government contracts awarded after June 24, 2014. For a comprehensive look at the blending methodology, refer to that series Part 1, Part 2, Part 3, and Part 4. The Department of Defense came up with the blending methodology as a means of streamlining implementation of the lowered compensation cap while there is a mix of contracts under the old and the new caps. As a prerequisite to using a blended approach, a contractor must enter into an advance agreement with the ACO (Administrative Contracting Officer). The advance agreement includes detailed methodologies to calculate blended rates - which differ for incurred cost proposals and for forward pricing proposals.

DCAA (Defense Contract Audit Agency) is the Government organization tasked with determining whether contractors' annual incurred cost submissions (commonly referred to as ICE) are adequate. (By the way, if you're not familiar with the incurred cost adequacy checklist, download it here). Now that contractors have begun submitting their fiscal year/calendar year 2015 incurred cost proposals, DCAA has noticed that many of them are using a blended approach to cap compensation costs. That would be fine except the Agency is also noting that some of them have been submitted without the requisite Advance Agreement.

DCAA is now instructing its auditors to reject any incurred cost proposal that uses blended rates but lacks an advance agreement:

When the proposal is determined adequate and there is no executed advance agreement, the audit team should return the proposal and require the contractor to resubmit the proposal only after executing an advance agreement with the ACO.

The guidance includes some other steps such as coordination with the contractor and/or the ACO to determine whether an advance agreement is in process and if its issuance is imminent. In that case, the auditor is allowed to wait a little while before rejecting the submission.

Rejected incurred cost submissions run the risk of becoming delinquent. If you are nearing that six-month after year-end due date, you need to request an extension of time from the ACO.

Allowability of Legal and Accounting Costs - Grants

The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) authorizes FEMA (Federal Emergency Management Agency) to provide grant assistance to State or local governments for the repair, restoration, reconstruction, or replacement of a public facility damaged or destroyed by a major disaster and for associated expenses incurred by the government. FEMA's regulations concerning cost allowability are based on OMB Circular A-87.

St. Tammany Parish Government, Louisiana claimed reimbursement of costs for hiring lawyers and accountants to analyze, defend, and ultimately settle claims against the Parish by debris removal contractors. The Parish maintained that such costs were allowable, FEMA maintained that such costs were categorically unallowable. So, the dispute wound up at the CBCA (Civilian Board of Contract Appeals). The CBCA agreed with the Parish. The CPCA stated that FEMA can reimburse legal and accounting fees in appropriate circumstances (the costs are "allowable" in principle) but the costs must still be allocable and reasonable.

FEMA's argument hinged on 44 CFR 13.36 which states that grantees "alone will be responsible, in accordance wiht good administrative practice and sound business judgment, for the settlement of all contractual and administrative issues arising out of procurements." The Board rules that this particular regulation was not a cost-reimbursement regulation, and "responsible" here does not mean "financially responsible".

This is not the first time that we've seen or heard of agencies pulling regulations out of context to make their point. Unfortunately, it often works, especially at small contractors with limited resources or experience to research and counter a a Government position.

You can read the entire CBCA decision here.

Contractors May be Required to Have Third Party Audits Performed on their Business Systems

Yesterday we discussed DOE's decision to withdraw its proposed rules for ensuring contractor business systems are capable of providing timely, reliable information for the management of contracts and programs by contractors and the Department (see Department of Energy Withdraws its Proposed "Business System" Rules). The Department of Defense (DoD) has had similar rules in place through its FAR Supplement (DFARS) for a number of years and although the expectation by now was that DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) would have reviewed or audited those systems for compliance with the standards laid out in the rules, not much has happened. A previous proposal that would require contractors to hire outside auditors to conduct those compliance reviews under the eyes and direction of DCAA were previously withdrawn as unworkable.

The Senate version of the 2017 National Defense Authorization Act (NDAA) contains a provision that would require DoD to develop a program to ensure contractor business systems are reviewed and comply with the standards established in DFARS. Key to this provision is that whatever program DoD comes up with, must result in reduced burden and price to the Government and the contractor. The program must meet five criteria:

1. It must include system requirements for each type of contractor business system covered by the program. The system requirements already established in the DFARS should satisfy this goal.
2. It must establish a process for reviewing contractor business systems and identifying significant deficiencies in such systems;
3. It must identify officials of the DoD who are responsible for the approval or disapproval of contractor business systems.
4. It must provide for the approval or conditional approval of any contractor business system that does not have a significant deficiency and
5. It must provide for the disapproval of any contractor business system that has a significant deficiency and reduced reliance on, and enhanced and effective analysis of data, provided by a contractor business system that has been disapproved.

The draft NDAA provision contains an element that is bound to be problematic and controversial. In the event that a contractor business system is conditionally approved or disapproved, DoD will be available to work with the contractor to develop a corrective action plan defining specific actions to be taken to address the significant deficiencies identified in the system and a schedule for implementation of such actions ("Hi, we're from the Government and we're here to help). We can't imagine DCAA wanting to do this as it would undoubtedly impair auditor independence if it were to become involved in helping contractors implement corrective action plans. DCMA could "work with the contractor" perhaps but currently, the Agency does not have the CPA type skills that would give corrective action plans credibility, especially concerning deficiencies in contractor accounting systems where deficiencies are most likely to occur.

This new program will apply to contractors where its Government contracts (not just DoD contracts) are 30 percent or more of its commercial sales and having a cost-type contract accounting for one percent or more of its commercial sales. That seems like a very low bar for implementation.



Provide for the approval or conditional approval
.  that would require contractors to

Department of Energy Withdraws its Proposed "Business System" Rules

Department of Energy Withdraws its Proposed "Business System" Rules

Back in 2014, not to be outdone by the Defense Department, the Department of Energy proposed its own Contractor Business System rules (see 79 FR 18415). These proposed rules were similar in scope to those being considered and ultimately adopted by DoD. They covered five of DoD's six business systems: accounting, estimating, purchasing, EVMS and property management. DOE's contractor business systems did not cover MMAS (Material Management & Accounting Systems), perhaps because DOE's contractors are not typically in the manufacturing business. The proposed rules included compliance enforcement mechanisms that would, like the DoD rules, allow contracting officers to withhold a percentage of payments when one or more of the business systems contained significant deficiencies.

Yesterday's Federal Register included the announcement that the Energy Department has withdrawn its proposed rules (see 81 FR 43971) . It gave no explanation for withdrawing the proposed rules other than a terse statement that read "... the Department has determined that it will not proceed with the rulemaking and, as such, is withdrawing the proposed rule.".

Perhaps DOE learned something from DoD's implementation problems. Although the rules exists, there are scarcely any audits being performed to determine the state of contractor compliance with those rules. DCAA (Defense Contract Audit Agency) is not making such audits a priority and some proposed rules a year or so ago that would require contractors to hire outside audit firms to perform the reviews (under DCAA supervision) was withdrawn as unworkable.

Notwithstanding the starts and stops, DoD has not given up on auditing contractor business systems. Tomorrow, we will discuss a provision in the FY 2017 NDAA (National Defense Authorization Act) that attempts to restore audit coverage of the six DoD contractors' business systems.

In a Certified Claim, a "Sum Certain" can be Based on Estimates

In 2013, DLA (Defense Logistics Agency) awarded a contract to Government Services Corp (GSC) for fuel deliveries. Evidently, GSC did something to displease DLA because in 2015, GSC received a negative rating in CPARS (Contractor Performance Assessment Report System. Every Government contractor is or should be familiar with the CPARS.

Later that year (2015), GSC submitted a certified claim to the contracting officer in the amount of $100,000 alleging that the negative rating constituted bad faith and a breach of the duty of good faith and fair dealing owed to it by the Government. GSC requested a final decision with respect to its claim.

DLA asked the contractor to provide detailed substantiating records to support the $100,000. GSC responded that the $100,000 was an estimate of the future administrative and legal expenses expected to be incurred to counter the negative CPARS rating.

DLA didn't respond so GSC filed a notice of appeal from the "deemed denial" of the claim. DLA argued that GSC did not file a proper claim because its submission to the contracting officer did not include a sum certain. According to DLA, GSC's failure to include a mathematical basis for any portion of its $100,000 claim or assign a specific dollar value to any component thereof meant that the claim did not meet the sum certain requirement.

The ASBCA (Armed Services Board of Contract Appeals) ruled that DLA's assertion was incorrect. The ASBCA stated that is is well-settled that neither the CDA (Contract Disputes Act) nor its implementing regulations require "submission of a detailed cost breakdown or other specific cost-related documentation with the claim. Instead, the contract need only submit in writing to the contracting officer a clear and unequivocal statement that gives the contracting officer adequate notice of the basis and amount of the claim.

The ASBCA has repeatedly held that use of estimated or approximate costs in determining the value of a claim is permissible so long as the total overall demand is for a sum certain.

The Government's motion to throw the case out because it lacked a sum certain was not sustained by the Board.

You can read the entire ASBCA decision here.

Justice Department Nearly Doubles Penalties under False Claims Act

Last week, the Department of Justice issued an interim rule (with request for comments) which, among other provisions, will nearly double penalties under the False Claims Act from a range of $5,500 to $11,000 per false claim to a range of $10,781 to $21,562 per false claim. Justice is calling this increase an inflation caused adjustment - the last increase came 20 years ago. Now, according to the Bipartisan Budget Act of 2015, the inflation adjustment will occur annually.

The new penalty amount apply to civil penalties assessed after August 1, 2016 whose associated violations occurred after November 2, 2015 (the date that the Bipartisan Budget Act was enacted). Violations occurring before November 2, 2015 and assessments made prior to August 1, 2016 whose associated violations occurred after November 2, 2015 will continue to be subject to the old penalty amounts.

This is a significant increase in penalties and some commentators have expressed concern that it will adversely affect contractors' willingness to settle disputes. While penalties under the False Claims Act are mandatory courts have discretion within the stated range. Additionally, courts have discretion in deciding what constitutes a false claim. In one very old case involving timecard improprieties, the Government argued that each questionable timecard entry was a false claim. The court sided with the contractor who argued that there could be no false claim until a voucher (i.e. an invoice) for the labor costs represented by those timecards were submitted to the Government. Thus, hundreds of potential false claims became one.

You can read the full text of the interim rule here. Although termed an interim rule, its unlikely that anything substantive will change between it and the final rule as it is essentially based on a statute (the Bipartisan Budget Act of 2015) with proscribed formula for determining and measuring increases in penalty ranges.

DCAA to Undergo Another Peer Review

The Department of Defense Office of Inspector General recently announced that it is initiating a new peer review on the quality and adequacy of DCAA (Defense Contract Audit Agency's) audit work. The last quality control report was issued back in August 2014 and covered DCAA's system of quality controls in effect as of June 30, 2013. Federal audit organizations can receive a rating of pass, pass with deficiencies, or fail. DCAA received a rating of "pass with deficiencies". The deficiencies related to lack of sufficient documentation where the peer review team could not discern the judgment and conclusions drawn by DCAA auditors. Additionally there were instances where the documentation did not support information in the audit report.

The objective of the peer review, according to the OIG's engagement letter includes the following:

Our objective is to determine whether the DCAA’s system of quality control was suitably designed and whether the audit organization is complying with its quality control system to provide it with reasonable assurance of conformity with the applicable professional standards. Government Auditing Standards require that an audit organization performing audits in accordance with Government Auditing Standards have an appropriate internal quality control system and undergo an external quality control review every three years by an organization that is independent of the organization being reviewed. We will review individual audits from DCAA headquarters and field offices, as well as internal quality assessment activities necessary to meet the review objectives. We will use the CIGIE Guide for Conducting Peer Reviews of Audit Organizations of Federal offices of Inspector General. 

DCAA is, of course, hoping the next peer review will result in an improvement from its last peer review. The Agency has certainly worked hard to improve its quality control systems and compliance with applicable policies and procedures. Perhaps now that a lot of the adverse publicity that has tailed DCAA for the past few years has diminished, the OIG can be more objective in its peer review.