Proposal that Takes Exception to Solicitation Terms and Conditions is Unacceptable

A proposal that takes exception to a solicitation's material terms and conditions should be considered unacceptable and may not form the basis for an award. This is a fundamental contracting principle that the Comptroller General (GAO) has affirmed in many decisions. Material terms of a solicitation are those which affect the price, quantity, quality, or delivery of the goods or services being provided.

In a decision published yesterday, the Comptroller General (CG) affirmed it once again.

Last October, the Navy issued a solicitation to acquire support services for the Naval Surface Warfare Center. Ultimately, a contract was awarded to URS Federal Services. One of the other bidders appealed the award when it found that URS's proposal took exception to the solicitation's requirements.

In response to a direct question regarding whether any on-site working space would be provided by the Government, the Navy unambiguously stated: "No on-site space will be provided. Further, there was nothing in the solicitation to the contrary - no mention of any equipment to be provided by the Government.

URS's proposal however was based on the Government providing facilities and equipment. Specifically, URS's proposal was submitted based on the assumption that:

... the Government/Client will provide working space, computers, and telephone for the proposed staff at no cost to URS".

The CG sustained the protest and ordered the Navy to either revise its solicitation to reflect its actual requirements or terminate URS's contract and award to the offeror whose proposal complies with the terms of the solicitation and offers the best value to the Government.

I guess it pays to read the competitors' proposals.

You can read the full text of the decision by clicking here.

500,000 Page Views, and Counting

The PNWC Government Contracting Update blog reached a milestone or sorts yesterday. We reached 500,000 page views since we began keeping track of such information in May 2010. We strive to make our blog useful and keep it up to date. We appreciate feedback of all types - especially suggestions to enhance (or correct) something we've published. Thanks to all of our readers.

Documenting the Accounting System

When contract auditors perform a review of an accounting system, it is absolutely necessary for them to understand the system before they plan and perform the audit, They will ask you to demonstrate your accounting system in order to understand the internal control structure related to compliance with the 18 accounting system attributes listed in DFARS (DoD FAR Supplement) 252.242-7006, Accounting System Administration.

It is important to for contractors to understand that such understandings will typically go far beyond mere inquiry. In fact, audit guidance warns auditors in bold lettering: "Note - Inquiry alone is not sufficient to obtain an understanding of the contractor's internal control systems."

What audit techniques besides "inquiry" might a contractor expect. Here are a few:

• Observing the application of specific controls
• Inspecting documents and reports
• Performing walk-throughs of the system. Walk-throughs typically include tracing transactions trough the various processing steps.

If, for example, an internal control requires supervisors to review and approve weekly timesheets for subordinate employees (and it should), the auditor might request that you show them in the system how such approval is captured and for documentation to show the actual process used to comply with that particular internal control.

At this stage of the audit (pre-risk assessment stage), these inquiries, observations, inspections and walk-throughs will not be detailed or comprehensive. Those steps will come later. The auditor is also going to be assessing the level of segregation of duties for each of the key accounting processes/functions. Depending upon the size of the company, the lack of segregation of duties could be a fraud indicator which simply means that the audit risks are increased and the level of testing will increase correspondingly.

Mandatory Disclosure Rule Nets the Government $142 Thousand

Back in 2008, mandatory disclosure requirements involving fraud and overpayments on contracts (and subcontracts) over $5 million were added to Federal Acquisition Regulations (FAR) at Subpart 3.10 - Contractor Code of Business Ethics and Conduct. Among other requirements of this section and related contract clauses (e.g FAR 52.203-13), contractors must make timely disclosure of violations against criminal and civil laws. Criminal laws include fraud, conflict of interest, bribery, or gratuity violations. Civil laws include the False Claims Act. Contractors that fail to disclose credible evidence of such irregularities are themselves subject to penalties and sanctions (such as suspension and debarment).

The USS Ashland (LSD-48) is one of eight Whidbey Islad-class dock landing ships in the U.S. Navy fleet. A dock land ship is an amphibious warfare ship with a well dock to transport and launch landing craft and amphibious vehicles.

Fairbanks Morse Engine (FME) in Norfolk VA received two subcontracts to perform engine repairs on the USS Ashland; one a firm-fixed price and the other a time-and-materials subcontract. FME began charging supervisory hours to the time-and-materials subcontract. Sometime during subcontract performance, FME management came to the realization that supervisory time should have been charged to the fixed-price subcontract, not the time-and-materials subcontract. FME took corrective action (meaning that they ensured supervisory were property charging their time) once the improper conduct was revealed and refunded the overcharges. Additionally, in accordance with the mandatory disclosure rules of FAR (sometimes called the Contractor Business Ethics compliance Program and Disclosure Rule), made a disclosure to the Department of Defense's Office of Inspector General.

As a result of the disclosure and ensuing investigation, FME agreed to pay an additional $142,500 to settle alleged False Claims Act violations resulting from the disclosed conduct. This transaction settled the allegations - there was no determination of civil liability.

There is no public disclosure as to how the $142,500 settlement was derived nor do we know the magnitude of the labor mischarging. Given the size of the settlement, it was probably significant.

This is a reminder to contractors of their responsibilities to self-report any credible evidence of civil or criminal conduct occurring in their organization.

Automated Timekeeping - Still Haven't Made the Jump?

There is really no reason any longer for Government contractors to use paper timesheets or timecards. The cost for a robust, DCAA compliant, automated timekeeping system is negligible and the benefits (more about benefits later in this post) far outweigh those costs. If your accounting system does not already include an integrated timekeeping system, you can sign up for one that integrates into most entry-level accounting systems (like QuickBooks) and most payroll programs for $25 per month plus $4 or $5 per employee and perhaps cheaper than that.

There are dozens of automated timekeeping systems on the market and there is not too much that differentiates one from another. Its considered a mature application and there's probably not much R&D money being spent there these days. To be considered adequate for Government contracting, the application must, at a minimum, have unique login/password combinations for each user, a feature where supervisors/managers can review and approve employee timecharges, and an audit trail. Most systems today have smartphone apps that allow users to complete their timecards from anywhere as well as automatic email notification to employees and supervisors when timecards have not been completed on a daily basis.

The biggest advantage that automated timekeeping systems have over manual systems is the elimination of manual, time-consuming processes, finding, penciling, collecting, reviewing, collating, tallying, distributing costs, etc. Such processes are streamlined with automated systems. Accuracy is improved - don't have to worry about transposing numbers and letters on a charge-line. Review and approval is expedited resulting in dramatically reduced time and effort. The integration with accounting and payroll systems offer additional accuracy and time savings. Finally, with the mobile apps capabilities, the process of submitting completed timecards is a one-click event.

 Automated timekeeping systems are easy to find (google "dcaa compliant timekeeping systems). There are plenty there that should fit your needs. For QuickBooks users, "tSheets" and "Replicon" seem to be very popular though neither one is optimized for a manufacturing environment. Most of these applications operate as SAAS (Software as a Service) so if you choose one and decide you don't like it or it doesn't do what you need, just cancel the service and move on to another - you won't be losing a big investment.

Contract Fraud, the Fraud Triangle, and Internal Controls

While perusing the Justice Department's press releases related to fraud, we were struck by the sheer numbers of reported fraud cases. Just this week, the was a company president pleading guilty to bribery at Tinker AFB, a woman sent to prison for trying to illegally export our latest fighter jet engines to China, Navy and contractor employees pleading guilty to taking and giving kickbacks, another Navy employee sentenced to 18 months in prison for accepting illegal gratuities, another contractor executive sentenced to prison for illegally exporting weapons parts, and a company using "front-companies" to obtain small-business set aside contracts.

Most of these cases involved owners or employees very high up in the organization. It doesn't matter then how good a company's ethics programs operate or the effectiveness of their standards of conduct if the top guy is the one committing the fraud. If no one is setting the proper "tone at the top", employees are less likely to care about integrity matters. In fact, employees with integrity are not likely to stay around or perhaps, stay around and blow the whistle.

The Association of Certified Fraud Examiners have developed a model for explaining the factors that cause people to commit occupational fraud. It consists of three components which, together, lead to fraudulent behavior. These three factors include:

• Perceived unshareable financial need
• Perceived opportunity
• Rationalization

If we had more details on the fraud cases just mentioned, we could probably fit the scenarios into the fraud triangle model.

The other attribute we noted concerning the latest batch of fraud cases and many cases preceding these is that none of them seem to stem from the oversight of DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency). With all of the emphasis on fraud and on developing tests to detect the existence of fraud, one would think that these Agencies would have something to show for their efforts. The lack or DCMA/DCAA originated fraud cases might mean that there is very little fraud going on at the transaction level because the Agencies are effective in ensuring the adequacy of internal control systems or that investigators don't want accounting-related cases because they're difficult to understand and too time-consuming to prosecute.

Contractors can go a long way to minimizing the occurrences of fraud in their organization by knocking out at least one leg of the fraud triangle - the perceived opportunity. Reduce the opportunities by implementing effective internal control systems, policies, procedures, and practices and take away opportunities.

GAO Suspends Firm From Filing Bid Protests for a Year

The GAO (General Accountability Office) has suspended a firm from filing bid protests for a year. This action comes after the company submitted 150 protests in this fiscal year alone and nearly 300 more protests in the four years preceding. None of the appeals were ever sustained, usually because the protester was not an "interested party" - a prerequisite to filing a bid protest. By anyone's measure, the company was abusing the system. GAO finally had enough and took the unprecedented action of suspending the company from filing bid protests for a year.

Many of the challenges, like the instant protest, have been attempts to challenge acquisitions where the contract in question was awarded years ago. The Company's protests have challenged the acquisitions of a wide range of federal agencies. In fiscal year 2016, the Company's protests included challenges to acquisitions conducted by the Department of Defense; Department of the Army; U.S. Army Corps of Engineers; Department of the Air Force; United States Marine Corps; Department of the Navy; United States Coast Guard; National Guard; Defense Logistics Agency; Defense Information Systems Agency; Department of Veterans Affairs; Department of Homeland Security; National Parks Service; Department of State; Broadcasting Board of Governors; and Department of Interior.

The contracts or orders awarded, or to be awarded, under the protested acquisitions include a similarly wide array of goods and services. In fiscal year 2016, a non-exhaustive list of the Company's protests includes acquisitions for engineering services, furniture, cell phone services, landscaping services, housekeeping and facilities operation services, printing and delivery services, antennas, laundry chemical services, portable generators, basic life support services, stevedoring and marine cargo handling services, industrial-size frequency converters and uninterruptable power supply batteries, passenger vehicles, refrigeration containers, industrial truck scales, the lease of barges, medical equipment and supplies, safety shoes and vests, anti-microbial medical privacy curtains, brake test machines, and the repair and alteration of an airfield in Bahrain.

Despite the wide-ranging list of acquisitions for goods and services protested by the Company, an examination of data included in the Federal Procurement Data System (FPDS) shows that the Company has been awarded only one government contract; in 2011 the Department of the Army awarded the Company a contract for miscellaneous medical supplies. The value of the contract was approximately $113,000, and it was subsequently terminated for the convenience of the government (hmm, wonder why).

In a single week in fiscal year 2015, Latvian Connection filed 59 separate protests challenging what the protester termed were Air Force solicitations. All 59 protests were dismissed when it became evident that the 59 solicitations that the Company was challenging did not actually exist.

GAO found that the Company's protest filings typically are a collection of excerpts cut and pasted from a wide range of documents having varying degrees of relevance to the procurements at issue, interspersed with remarks from the protester. The tone of the filings is derogatory and abusive towards both agency officials and GAO attorneys. The most common allegations raised in the Company's protests are that the acquiring agency improperly failed to set aside an acquisition for SDVOSBs or small businesses, and/or that the agency has failed to publicize the procurement through the required government point of entry, www.fbo.gov.

While its protests typically revolve around the two central issues noted above, the Company also routinely makes baseless accusations. In recent months, the Company has claimed that agency and GAO officials are white collar criminals; that the actions of agency procurement officials have violated the Racketeer Influenced and Corrupt Organizations Act (RICO), that various federal agency officials have engaged in treason; that GAO has violated the Equal Access to Justice Act, and that agency and GAO officials have engaged in activities that amount either to engaging in, or covering up, human trafficking and slavery.

Abuse of Process and Suspension According to the GAO:

These filings reflect a larger pattern of vexatious protesting that dates back several years. As set forth above, these protests have challenged an array of acquisitions conducted by a host of contracting agencies worldwide. In the overwhelming majority of these protests, the record has demonstrated that (the company) either was not an interested party to challenge the agency’s actions, or raised challenges that were legally insufficient. In other words, (the company)--time and again--either has failed to demonstrate that it was capable of, or interested in, performing the solicited requirements, or that it had a legitimate basis to question an agency’s actions. Indeed, despite filing protests challenging hundreds of federal procurements, there is little or no evidence that this company has the requisite direct economic interest in any of these procurements. Publicly available information provides no evidence that (the company) has successfully performed even a single government contract, and there is no evidence in the many cases presented to our Office to suggest that (the company) engages in any government business activity whatsoever beyond the business of filing bid protests. It has become evident to our Office, and to procuring activities across the government, that (the company's) protests are not filed for the purpose of allowing the firm to compete on a relatively equal basis for a requirement that it is capable of, and interested in, performing. Moreover, the effect of (the company's) protests is to hector the acquiring activities--and our forum--with a stream of protests that divert our collective time and resources. In the cases described above, and in the many, many other cases (the company) has filed, attorneys for procuring agencies have prepared responses to (the company's) protests on the basis that (the company) is not an interested party to challenge these procurements; that its protests are procedurally infirm in one way or another; or that they simply are without merit. Correspondingly, our Office has expended significant resources to process (the company's) filings, review the facts and law, and respond meaningfully and equitably to (the company's) contentions. The wasted effort related to (the company's) filings is highlighted by its latest series of protests (including the current protest) challenging acquisitions that were conducted years ago, where performance is complete and there is no possible remedy available.8 These protests have placed a burden on GAO, the agencies whose procurements have been challenged, and the taxpayers, who ultimately bear the costs of the government’s protest-related activities. 

And with that, the GAO suspended the company from the ability to file bid protests for one year.

You can read the entire decision here.

Parametric Cost Estimating Techniques

There are many ways to estimate costs. The most common method is the discrete estimate method where, for example, a bill of material is created and vendor quotations are obtained to determine costs. Another method used - especially by large firms with ample historical data and a significant volume of proposals - is "parametrics".

"Parametric cost estimating" (or, parametrics), are techniques employing one or more cost estimating relationships (CERs) to estimate costs associated with the development, manufacture, or modification of an end item. You have no doubt seen or heard the national average cost for new housing construction expressed as an amount per square foot, e.g. $125 per square foot. That is an example of parametric cost estimating - it factors in labor and materials, plumbing, electrical, etc into a single rate.

A CER expresses a quantifiable correlation between certain system costs and other system variables either of a cost or technical nature. CERs represent the use of one or more independent variable to predict or estimate a dependent variable (e.g. a cost).

Parametrics can be simple or complex. For example, a simple arithmetic relationship using historical data to estimate scrap costs is a parametric cost estimating technique. Simple ratios are easy to compute and explain to the Government's satisfaction. However, the use of parametrics are often based on more advanced or complex applications.

Advanced applications included cost-to-noncost CERs, multiple independent variables related to a single cost effect or independent variables defined in terms of weapon system performance or design characteristics.

Parametric estimating techniques may be used in conjunction with any of the following estimating methods:

• Detailed --- also known as the bottom-up approach. This method divides proposals into their smallest component tasks and are normally supported by detailed bills of material. 
• Comparative --- develops proposed costs using like items produced in the past as a baseline. Allowances are made for product dissimilarities and changes in such things as complexity, scale, design, and materials. 
• Judgmental --- subjective method of estimating costs using estimates of prior experience, judgment, memory, informal notes, and other data. It is typically used during the research and development phase when drawings have not yet been developed. 

Judicious use of parametric estimating can save a lot of time and effort over traditional methods. Just remember though that CERs invite a higher level of Government scrutiny as they become more complex.

 

Overtime Compensation for Employees Being Trained

The FAR cost principles contain a very brief and straight-forward statement concerning the payment of overtime to training and education. FAR 31.205-44 states that the cost of training and education that are related to the field in which the employee is working or may reasonable be expected to work are allowable except that overtime compensation for training and education is unallowable. There are also a few other exceptions that fall outside of this discussion.

The Government has been very inconsistent in applying this prohibition against paying overtime compensation however. In some cases, contracting officers have maintained that the training contemplated by this cost principle applies to discretionary training and not to training required by the terms of the contract (e.g. ethics, standards of conduct, safety, etc). Other contracting officers have asked contractors to demonstrate that overtime compensation for training is the most cost-effective way to achieve its training goals. For example, if you have to pay someone else overtime so that a person can leave his/her position for training on regular time, there is no cost impact to the contract. The Department of Energy has taken the extreme position that overtime payments for training purposes - any kind of training - are never allowable under any circumstances regardless of whether the outcome costs the Government more money.

Recently, someone posed a question to the Department of Defense's "Ask a Professor" website noting the general FAR prohibition against overtime for training stating that a contractor provided convincing evidence that paying overtime for training would ultimately save the Government significant costs.

Here's DoD's answer:

Many of the cost principles that relate to allowability of personnel costs mirror treatment of similar costs for Federal employees. In this case Title 5 CFR 410.402(a) states for Federal employees "Prohibitions. Except as provided by paragraph (b) of this section, an agency may not use its funds, appropriated or otherwise available, to pay premium pay to an employee engaged in training by, in, or through Government or non-government facilities." Section (b) that follows provides a list of exceptions that may be useful in requesting a waiver to FAR 31.205-44.

What are those exceptions referenced?

1. Continuation of premium pay. An employee given training during a period of duty for which he or she is already receiving premium pay for overtime, night, holiday, or Sunday work shall continue to receive that premium pay.
2. Training at night. An employee given training at night because situations that he or she must learn to handle occur only at night shall be paid by the applicable premium pay.
3. Cost savings. An employee given training on overtime, on a holiday, or on a Sunday because the costs of the training, premium pay include, are less than the costs of the same training confined to regular work hours shall be paid the applicable premium pay.

There are eight exceptions in total but these three are the ones most likely to apply to Government contractors.

So, according to DoD, there is a little wiggle-room in the prohibition against overtime for training purposes. That's good to know. Contractors just need to build a business case to show the efficacy of their decisions.

GAO Is Not Sympathetic towards Contractors Submitting Late Proposals

There are a high number of GAO bid protests involving late submissions of proposals. Bidders who have been disqualified because their proposals were not received in the time and manner specified in the solicitation often protest the Government's actions - usually on the grounds that they tried to comply with the submission instructions but the bid got stuck in the Government's email system or the guard at the gate wouldn't let them in to hand-deliver a proposal. It is very rare that the Comptroller General (CG) will sustain such protests. The CG pretty much takes the position that its the bidders responsibility to figure things out. One recent exception involved an email glitch that quarantined several bidders on the same solicitation. That time, according to the CG, it was the Government's fault.

The Comptroller General (CG) just published another bid protest decision involving a late bid. In this latest case, the bidder argued that its proposal was improperly rejected as late for reasons primarily due to the Government's fault.

The solicitation specified that the closing date and time for receipt of proposals was 3:00 P.M local time on May 24, 2016.

On the day that the proposals were due, the protestor placed a series of calls (perhaps 13 calls) to the contracting officer and contract specialist leaving messages. The contracting officer was working off-site that day but did receive a couple of voice messages regarding the bidders attempt to deliver its proposal. After the cut-off time, the contracting officer returned the calls and reiterated that any proposal received after 3:00 PM was be considered late.

Two days later, DLA received a FedEx package with the bidder's proposal with tracking information showing that it had been shipped a day earlier. Subsequently, DLA notified the bidder that its proposal was late and would not be considered.

In its appeal, the bidder argued that the unavailability of the contracting officer and contract specialist prior to the proposal deadline resulted in its inability to submit its proposal on time because it was not given direction as to where to deliver its proposal. The bidder also stated that its courier went to three different security checkpoints, but ultimately was unable to deliver its proposal because the security guards could not contract either the contracting officer or the contract specialist to provide an escort to deliver the proposal.

DLA disputed the bidder's contention that it had left voice mails prior to the cut-off time.. Additionally, DLA noted that the bidder did not send an email requesting assistance to deliver its proposal until after the 3:00 PM cut-off time. Thirdly, DLA's business office was open and had personnel available to serve as escorts. Finally, DLA noted that several other offerors were able to hand carry their proposals prior to the deadline.

Based on the record, the CG found no evidence of any improper agency action and concluded that the protester's actions in not following the solicitation instructions were the paramount cause for the late delivery and accordingly, denied the protest.

The full text of the CG decision can be found here.

Attempted Bribe of Contracting Officer

The Air Force issued a solicitation for the purchase of $1.4 million worth of electronic door locks to be used on Air Force facilities in Afghanistan. This fellow from Dubai wanted the contract so badly that he attempted to bribe the Air Force contracting officer for $90 thousand in order to secure the contract.

The contracting officer did the right thing and reported the attempted bribe. The FBI set up a sting operation and when the Dubai guy met the contracting officer in Czech Republic to make the bribe payment, the FBI was waiting for him. They arrested him, extradited him to the U.S where he pleaded guilty to bribing a public official.

The Dubai guy is scheduled to be sentenced this coming November and faces up to 15 years in prison and a $250 thousand fine although he is not likely to serve those maximums.

Bribery and corruption is the norm in many countries. The Dubai guy probably thought he was being a shrewd businessman. While the U.S. is certainly not immune, the level of public corruption is no where near what it is in most other countries.

This is a good reminder that Government contractors need strong ethical standards of conduct beginning with setting the proper "tone at the top" to prevent the acceptance of bribes by their own employees (such as from desperate subcontractors). It only takes one instance to end up in the Government's "excluded parties" database.

You can read the Justice Department's press release on this case by clicking here.

Man Falsely Claiming Disabled Veteran Status Goes to Prison

A few years back, companies were able to claim small business or one of the disadvantaged social groups based nothing more than their self-assertion that they qualified. Of course this led to all kinds of fraud involving contract awards to companies who were not entitled to receive contracts reserved for disadvantaged firms. We've chronicled many such cases in these pages. A few years back, the Government began requiring companies to prove their small or disadvantaged status, undertaking "audits" to validate contractor claims. The Government even allows companies to challenge certain assertions, including size, of their competitors - something that has led to many disqualifications.

Even though the number of awards made to contractors under false pretense has diminished, there are still companies out there that try to game the system - perhaps thinking that the potential rewards outweigh the risks. Sometimes, the consequences lead to prison time however, as in the case of Mr. Page.

Mr. Page used a stolen name and social security number of a service disabled veteran to create a fraudulent SDVOSB (Service Disabled Veteran Owned Small Business) for the purpose of obtaining contracts that were set-aside for SDVOSB firms. The stolen identity happened to be Mr. Page's father who was indeed a disabled veteran but Mr. Page (the junior) was not. Before his fraud was uncovered, he had received 14 contracts valued at $2.7 million.

Mr. Page was found guilty by a jury and earlier this month was sentenced to 69 months in Federal Prison. Bet he's not feeling so crafty right now.

You can read the Justice Department's write-up of the case here.

GSA Released Per Diem Rates for Fiscal Year 2017

The General Services Administration (GSA) has just released Government per diem rates for fiscal year 2017. As most Government contractors are aware, travel costs charged to Government contracts are considered reasonable and allowable only if they do not exceed the maximum rates in the JTRs (Joint Travel Regulations) and the FTRs (Federal Travel Regulations). FAR 31.205-46 contains provision whereby higher rates may be claimed but those rates must be justified and contemporaneously documented. Most contractors try to avoid the extra Government scrutiny that comes with claiming lodging and meals that exceed the GSA maximums.

The basic per diem rate is $142 per day broken down between lodging at $91 and meals and incidental expenses at $51. This rate represents a nominal increase from the current $140 per day and applies to about 2,600 locations throughout the lower 48. However, those 2,600 locations are not places where contractors are likely to travel. The preponderance of contractor travel is to the 400 or so locations that justify higher rates based on higher cost of lodging and meals. These 400 locations include all of the major U.S. cities.

Most of the cities have different rates depending upon the time of the year. For example, the lodging rate for San Francisco ranges from $172 per night to $242 per night, depending upon month, while New York ranges from $168 to $301.

Fiscal Year 2017 is a bit unusual in that lodging rates have dropped from fiscal year 2016 in many instances. For example, October in New York dropped from $306 per night to $301 per night.  So contractors need to adjust the travel policies to ensure they don't incur excess lodging costs when the new rates go into effect. We know of a case a few years back where contract auditors (not the DCAA) cited a contractor for a system deficiency when it implemented a per diem reduction one month late.

All of the fiscal year 2017 per diem rates are now available. Click here and follow the instructions.

Some Matters Are Simply Beyond the Contracting Officer's Control

When preparing a proposal, its always a good idea to read the full solicitation. It just might save you a lot of time and wasted effort.

The Army Corps of Engineers issued a solicitation for construction support services in Afghanistan. The solicitation included a clause that required contractors to has "access eligibility" to U.S. military installations and to remain eligible throughout the contract period of performance. To be eligible for military installation access, the contractor must have been registered and approved in a database called the Joint Contingency Contracting System (JCCS) prior to award. The clause also provided that failure to show up in the JCCS database would render the offeror ineligible for award and therefore non-responsible.

A company called Sohail Global Group (SGG) was one of 70 companies submitting bids for this effort. Before reviewing bids, the contracting officer checked the JCCS data base and excluded every company not registered. SGG was one of those companies. SGG appealed.

The Corp of Engineers stated that a determination of installation access is a matter if inherent command authority and is not at the discretion of the contracting officer. Thus the contracting officer had no other choice but to find SGG's offer non-responsive. The Comptroller General agreed. Their decision stated:

We recognize that, under these circumstances, the contracting officer's judgment is limited by a military command decision to deny SGG access to a military installation. It is well established that the commanding officer of a military base has wide discretion as to whom he can exclude from the base. Moreover, as the Court of Federal Claims has stated, the requirements of due process vary given the circumstances and, in the environment of a war zone, when the reqired notice would necessarily disclose classified material and could compromise national security, normal due process requirements must give way to national security.

You can read the entire GAO decision here.

DoD Proposing to Amend Rules on Commercial Pricing

The Department of Defense issued a proposal to amend it DFARS (DoD FAR Supplement) to, essentially, make it more difficult for contracting officers to request certified cost or pricing data or data other than certified cost or pricing data in lieu of awarding contracts based on commercial item determinations. The proposed regulations were required by sections of the NDAAs (National Defense Authorization Acts) from fiscal years 2013 and 2016.

One of the key provision should alleviate many contractor frustrations. Under the proposed regulations, contracting officers may presume that a prior commercial item determination made by a military department, a defense agency, or another component of DoD shall serve as a determination for subsequent procurements of such items. Too many times, contractors have to prove over and over again that the items it sells to the Government are commercial items. Now if that happens, contractors should be able to direct the contracting officer to prior determinations and satisfy the requirement.

Unfortunately, some contracting officers believe that they alone possess the holy grain of commercial item determinations and do not want to rely on what some other person has done. The new regulations answers that situation by stepping the determination up a level:

If the contracting officer does not make the presumption  and instead chooses to proceed with a procurement of an item previously determined to be a commercial item using procedures other than the procedures authorized for the procurement of a commercial item, the contracting officer shall request a review of the commercial item determination by the head of the contracting activity that will conduct the procurement.

Perhaps that will work, perhaps not. Another key provision of the proposed regulations are new definitions of "market research" and "nontraditional defense contractors". These read as follows:

Market research means a review of existing systems, subsystems, capabilities, and technologies that are available or could be made available to meet the needs of DoD in whole or in part. The review may include any of the techniques for conducting market research provided in section 10.002(b)(2) of the FAR and shall include, at a minimum, contacting knowledgeable individuals in Government and industry regarding existing market capabilities (section 855 of the National Defense Authorization Act for Fiscal Year 2016 (Pub. L. 114-92)). 

Nontraditional defense contractor means an entity that is not currently performing and has not performed any contract or subcontract for DoD that is subject to full coverage under the cost accounting standards prescribed pursuant to 41 U.S.C. 1502 and the regulations implementing such section, for at least the 1-year period preceding the solicitation of sources by DoD for the procurement or transaction (10 U.S.C. 2302(9)).

You can read the full text of the proposed regulations here.

Fraud Indicators Related to Professional and Consulting Services

We have discussed on these pages several times about the importance of compiling and maintaining documentation to support professional and consultant service costs. This is one of the FAR cost principles where auditors often find "low hanging fruit" because the principle requires three forms of documentation; an agreement, an invoice, and evidence of work performed. Although auditors have been told recently to lighten up a bit with respect to "evidence of work performed", consulting costs continue to be a "high risk" area for potential audit findings and cost recoveries.

Professional and consultant services are those services rendered by persons who are members of a particular profession or possess a special skill and who are not officers or employees of the contractor. Contractors hire consultants for a multitude of services (such as legal, economic, financial, or technical).

But did you know that the Department of Defense Office of Inspector General (OIG) considers it to be a high risk for contract fraud? It is one of the few cost principles that has its own listing of fraud indicators - conditions that if existing will require the contract auditor to dig deeper or expand its audit coverage and make referrals for investigation, if warranted. Contract auditors are, in turn, required to "consider" these fraud indicators when planning their audit procedures.

According to the OIG, contractors may be hiding payments for illegal activities by charging them as consultant fees and maintaining no or only minimal supporting documentation. The contractor's possible objective in not maintaining adequate support is to encourage the auditor to question the cost rather than spend the time identifying the true nature of the payments.

These seven fraud indicators include the following:

1. No formal signed agreements or contracts; however, large sums paid for "services rendered" based on invoices with few specifics.
2. Formal agreements or contracts exist but are vague as to the services to be rendered, and no other documented support, such as detailed invoices, trip reports, or studies, exists to justify the expenses.
3. Services paid for were used to improperly obtain, distribute, or use information or data protected by law or regulation.
4. Services paid for were intended to improperly influence the content of a solicitation, the evaluation of a proposal or quotation, the selection of sources for contract award or the negotiation of a contract, modification or claim. It does not matter whether the award is from the Government, a prime contractor, or any tier subcontractor.
5. Services paid for were obtained or performed in some way that violated a statute or ergulation prohibiting improper business practices or conflict of interest.
6. Services paid for violated a Federal, state, or local statute or regulation.
7. Services paid were recorded in unusual accounts or cost objectives.

DOE Trying to Limit Costs Related to Whistleblower Activities

The Department of Energy (DOE) is known for their gigantic cost-type contracts where all of the financial risks are ascribed to the Agency and ultimately American taxpayers. DOE spends billions of dollars every year cleaning up nuclear production sites across the land. It is dangerous work where safety is paramount. DOE contractors seem to generate more than their fair share of whistleblowers. Most of these whistleblowing events relate to safety issues though more than a few relate to financial improprieties (e.g. timecard mischarging or overtime pay for hours not worked).

Whistleblowing has become a huge industry (try "Googling" "whistleblower lawyers" and you will be amazed). One can attend seminars on how to blow the whistle with emphasis on how to increase the odds of getting the employer to ignore your concerns, thus opening the door to filing a "Qui Tam" action. Whistleblowing has costs (becoming a pariah in the organization or losing one's job) and rewards (the potential of a big payday).

Contractors, of course, must defend against whistleblower suits and the cost, in terms of legal expense alone, can be significant. For DOE cost-type contractors, these costs are often billed directly to the contract and reimbursed by the Government. Sometimes the parties will try to reach a settlement - you know, pay the whistleblower some money and he'll drop the case. Contractors justify this on the basis that a payoff is cheaper than the legal fees to properly defend the company. Or, they cite "litigative risk". Again, payoffs, like legal fees, are charged to the Government contract and reimbursed.

The Department of Energy recently issued new guidance concerning costs related to whistleblower activities. Essentially it removes the decision making process over what is allowable from local contracting officer authority to its General Counsel's office. Tomorrow we will unpack that guidance and see what it means for contractors.

Proposing to Hire Incumbents at Lower Wages? - Be Prepared to Demonstrate Price Realism

A recent bid protest decision handed down by the Comptroller General sustained the incumbent contractors appeal that the Government did not evaluate the realism of the awardee's pricing. The awardee had proposed to hire incumbent employees at lower compensation levels than they were currently earning. The Government should have looked into the matter - especially since the solicitation stated that price realism would be considered.

The Department of Veterans Affairs issued a solicitation to provide out-patient services in Pennsylvania. There were four evaluation factors - the least important was "price". Evaluation criteria for "price"included price realism, explained as follows:

Realism is evaluated by assessing the compatibility of proposed costs with proposal scope and effort. For cost (price) to be realistic, it must reflect what it would cost the offeror to perform the effort if the offeror operates with reasonable economy and efficiency. Proposals unrealistically high or low in price, when compared to the Government estimate, and market conditions evidence by other competitive proposals received, may be indicative of an inherent lack of understanding of the solicitation requirements and may result in proposal rejection without discussion.

Valor Healthcare was the incumbent on the program. Award was made to Sterling Medical who's $17.5 million bid was almost nine percent lower than Valor's. Valor alleged that the VA failed to evaluate the realism of Sterling's pricing in accordance with the terms of the solicitation. And, Valor was correct. The Comptroller General agreed. There was nothing in the record to show that a price realism assessment occurred.

Valor maintained that if the VA had evaluated Sterling's pricing for realism, the firms pricing would have been found unrealistic and/or a risk would have been ascribed to the firm's technical approach. Since Sterling was proposing to utilize the incumbent employees at much lower cost, Valor contended that the VA should have considered the risk that Sterling would be unable to recruit the necessary talent and staff to perform at the required level.

The Comptroller General found that neither the contemporaneous record, nor the contracting officer’s post hoc assertions, provides a basis for it to conclude that the VA evaluated the realism of Sterling’s pricing in a way that was consistent with the terms of the solicitation. Moreover, the record shows that there is at least one area of Sterling's proposal that raises an obvious price realism concern. Specifically, the record shows that the VA understands the majority of Sterling's proposed staffing candidates to be serving under Valor's incumbent contract. Yet, Sterling's price show Sterling's labor costs to be significantly below Valor's.

The Comptroller General sustained Valor's appeal. You can read the entire decision here.

How Good is Your Insurance Coverage?

The U.S. Government filed civil claims against a Department of Transportation (DOT) contractor and its subcontractor for fire damages to the Wichita Mountains Wildlife Refuge (Oklahoma). Those two companies just settled the allegations by agreeing to pay $1.4 million to resolve the claims.

In September 2011, employees of the subcontractor were working on a road improvement project to widen roads, berms, and extending culverts. These employees were using a chop saw to cut rebar. At the time, the fire danger was extremely high and there was a burn ban in effect which included the county where the wildlife refuge was located.

The burn ban prohibited certain activities without necessary precautions being taken. However, necessary precautions were not taken and sparks from the chop saw ignited a fire which quickly spread and burned 28,000 acres on the Refuge.

As a result of the fire, the United States suffered resource damages and incurred significant fire suppression costs. The U.S. alleged that the subcontractor employees were negligent in failing to take precautions when cutting rebar and further, did not have means available to extinguish the fire once it was started. The U.S.also blamed the prime contractor for failing to adequately supervise and monitor the work done by its subcontractor.

In reaching the settlement, the Prime and subcontractor did not admit liability - a critical aspect of the case for pursuing potential insurance recoveries of the $1.4 million. This agreement allows the parties to avoid the delay, expense, inconvenience, and uncertainty involved in ligating the case.

Government Property - Cannibalizing is Generally Prohibited

When Government property is furnished to contractors for use on or incorporation into a Government contract or contract deliverables, the contract clause at FAR (Federal Acquisition Regulations) 52.245-1 - Government Property, applies. This clause requires, among many other things, that contractors develop and maintain a system of internal controls to manage, control, use, preserve, protect, repair, and maintain Government property in their possession. This required internal control system is rather extensive in scope and you can read more details here.

Within the FAR clause, Part (c) tells what contractors can and cannot do with Government property. First, and fundamentally, contractors may use Government property, either furnished or acquired under this contract, only for performing this contract, unless otherwise provided for in this contract or approved by the Contracting Officer.

Second, the contractor cannot make modifications or alterations to Government property unless reasonable and necessary due to the scope of work under the contract, required for normal maintenance, or, again, authorized by the contracting officer.

Third, contractors cannot cannibalize Government property unless otherwise provided for in the contract or approved by the contracting officer.

What is meant by cannibalizing? FAR defines the term at FAR 52.245-1(a)). "Cannibalize" means to remove parts from Government property for use or for installation on other Government property.

Cannibalizing should be no big deal, right? As long as the part is replaced, that is. Wrong. According to the Department of Defense, "Should a contractor cannibalize parts from Government property without contractual authorization or approval from the contracting officer, the contractor is subjecting its property management system to being found noncompliant with FAR 52.245-1(f)(1)." A non-compliant Government property management system, if you're a DoD contractor, could ultimately lead to payment withholds. Payment withholds can be nasty because they disrupt contractors' cash-flows (i.e. working capital) needed to perform the contract. While billing withholds are ultimately paid, interim shortfalls in working capital could cause contractors to have to borrow. Interest on borrowings is not allowable under Government contracts.

Former Commerce Employee Indicted on Bribery Charges

A former Commerce Department employee has been indicted on a conspiracy to pay and receive bribes.

Back in 2006, the computer systems at a Commerce Department agency were infected by a computer virus. The infection required Commerce to shut down internet access to many of its computers for an extended period of time and to construct a new computer network that had not been infected by the virus.

Some of the files on the old infected system were still needed so management decided that a number of files for each employee would be migrated from the old to the new computer network. This project required that the migrated files be free of any viruses or malicious code.

Mr Conrad was designated the project manager to oversee the data migration project. In his role as project manager, Mr. Conrad had the ability to control, either directly or indirectly by exerting pressure on or providing advice to other public officials, the design of the project, whether to hire an outside contractor or subcontractor to perform the work, which contractor or subcontractor to hire, whether to continue to provide that contractor or subcontractor additional work to perform as part of the data migration project, and whether to allocate funding to pay for data migration work. In short, Mr. Conrad had a lot of power and authority to decide on how to spend Government funds.

Mr. Conrad found a guy who owned a couple of companies who was willing to pay some money (and give other things having monetary value) in exchange for some work on the data migration project. And this was no small pocket change. It involved hundreds of thousands of dollars in bribes and extensive renovation of Mr. Conrad's personal residence.

To conceal the bribes, Mr. Conrad himself set up front companies to generate fictitious invoices for such items as "support services" or "engineering services". Then, Mr. Conrad, as a Government employee, approved the fictitious invoices created by his own company.

Things got more sloppy. Mr. Conrad forced the contractor to hire several independent contractor to perform the data migration work, several of whom had no formal computer-related training or experience. When complaints arose over the poor quality of work being performed under the contract, Mr. Conrad concealed those complaints and failed to forward them up the chain.

The Government is attempting to recover $1.08 million in this case.

The DoJ press release covering this indictment can be found here.

Estimating - Use of Percentages and Conversion Factors

When preparing price proposals, many - perhaps most - contractors attempt to develop discrete estimates for each direct cost element and for required activities or purchases within those cost elements. These methodologies, while sometimes unavoidable, require a great deal of judgmental estimates or engineering estimates that have no basis other than someone's imagination. It also leads to inefficiencies during the negotiating process if the Government requires additional support or specificity.

There might be a better way to estimate certain direct costs however - especially when historical cost data is available. That would be through the use of percentages and conversion factors.

Take, for example, the category of sustaining engineering. Sustaining engineers is loosely defined as the continuing engineering and technical support that follows release of requirements, specifications and drawings for fabrication, assembly, testing, and delivery of an end product. Everyone would acknowledge that some level of sustaining effort is required. But how much? Trying to discretely estimate the number of sustaining engineering hours requires a great deal of judgment. However, you might be able to develop a relationship between engineering hours and sustaining engineering hours; or between manufacturing hours and sustaining engineering hours, assuming your timekeeping system is adequate and these is sufficient historical experience. Now instead of wild judgmental estimates, you have tangible support for your estimate.

Other areas where application of percentages and conversion factors are commonly used are in packaging, field services, tooling, desktop IT support, and reproduction.

When using percentages and conversion factors, the Government will undoubtedly request support. In fact, for the contract auditor, guidance on auditing percentages and conversion factors is found in the DCAA Contract Audit Manual at 9-604.1. The auditor's focus in reviewing percentages and conversion factors is to evaluate the propriety of the percentage and conversion factors for applicability in the current proposal.

Contractors should consider how the use of percentages and conversion factors can improve their own estimating practices and procedures.

New Rules Regarding Government Employees Seeking Post-Government Employment

The Federal Government Ethics Office issued revised rules last week related to employees of the Executive Branch seeking other non-Federal employment. These new rules are certainly not controversial or difficult to understand and apply. They fall into the common sense category of regulations. In fact, when the Ethics Officer released it proposed rules back in February, no one bothered to respond.

The new rules contain a "recusal" requirement that applies to employees when seeking non-Federal employment with persons whose financial interests would be directly and predictably affected by particular matters in which the employees participate personally and substantially.

An employee may not participate personally and substantially in any particular matter that, to the employee's knowledge, will have a direct and predictable effect on the financial interests of a person with whom the employee is negotiating or has any arrangement concerning prospective employment.

The new rules also address issues of lack of impartiality that require recusal from particular matters affecting the financial interests of a prospective employer when an employee's actions in seeking employment fall short of actual employment negotiations. Additionally, it addresses both actual conflicts of interest and appearances of conflicts of interest. The "appearance" factor more than the "actual" is the thing that trips up a lot of unsuspecting Government employees seeking post-Government employment.

One thing to note here is that these rules apply to all Executive Branch employees, not just senior executives or a subset of employees that, for example, engages in procurement activities.

Government employees must, of course, be cognizant of these and other ethics rules. Contractors should also be familiar with them if considering employment of any current or recently separated Government employee. Although a prospective employer is unlikely to bear any direct consequences if a recruit runs afoul of these regulations, there are a lot of hidden costs related to extricating or untangling from a poor decision.