Government Acquisition Personnel Can Chat with Contractor Personnel

The FAR (Federal Acquisition Regulations) Councils have proposed an amendment to "clarify" that Government agency acquisition personnel are permitted and encouraged to engage in responsible and constructive exchanges with industry, so long as those exchanges are consistent with existing law and regulation and do not promote an unfair competitive advantage to particular firms. That's well and good but your average acquisition person is not going to know what the existing laws and regulations are, much less permit, and they're too busy anyway to stop and try to figure it out. In addition, they're also too busy to take the time to have meaningful discussions with contractors or wannabe contractors. This regulation, if adopted, will become a field day for bid protests - one little slip-up and you've got a bid protest to deal with.

The proposed rule will amend FAR 1.102-2(a)(4) to specifically state that Government acquisition personnel are permitted and encouraged to engage in responsible and constructive exchanges with industry, so long as those exchanges are consistent with existing laws and regulations, and promote a fair competitive environment. This revision, according to the FAR Councils, will better equip Federal acquisition officials with the information needed to issue high-quality solicitations.

In fairness to the FAR Councils, this change is required by the 2016 NDAA (National Defense Authorization Act). How it made its way into the NDAA is a matter for someone else to research but the idea has been discussed for several years.

In 2011, the OFPP (Office of Federal Procurement Policy) launched a campaign to address misconceptions commonly held by industry and Government regarding the role of communication during the acquisition process in order to encourage early, frequent, and constructive engagement with industry to achieve better acquisition outcomes. There were two memoranda were issued, one in February 2011 focusing on misconceptions on the part of Federal agencies and the other in May 2012 addressing misconceptions held by industry.

The FAR Councils are seeking input into the proposed regulations. Specifically, they are requesting information regarding the following:

• Which phase(s) of the Federal acquisition process - i.e., acquisition planning/market research; solicitation/award; post award - would benefit from more exchanges with industry and what specific policies or procedures would enhance communication during these phases?
• Is there a current FAR policy that may inhibit communication? If so, what is the policy, and how could this policy be revised to remove barriers to effective communication?
• Might it be beneficial to encourage, or require, contracting officers to conduct discussions with offerors after establishing the competitive range for contracts of a high dollar threshold? If so, what would be the appropriate dollar threshold?

Read more about the proposed regulation and instructions for providing feedback here.

Federal Fumbles - 2016 Edition

Oklahoma Senator James Lankford just released "Federal Fumbles Vol. 2, 100 Ways the Government Dropped the Ball". It represents the second annual edition of this football themed publication. We covered the first edition about a year ago (see 100 Examples of Wasteful Government Spending).

The latest publication documents 100 new examples of wasteful, duplicative, and inefficient use of tax dollars. Many of them are examples of wasteful contracts and grants. Its not necessarily the contractors/grantees that are being called out on these programs - its the Government agencies that will fund studies to find out that kids don't like to eat food that has been sneezed upon or a grant to purchase custom "Snuggies". Some agencies should be embarrassed by publication of the kinds of research and contracts they award. The Senator is hopeful that those agencies be forced to make more responsible decisions. Ultimately, the Government decides on what to buy or what research to fund. Contractors are only responding to agencies' so-called needs.

Here are a few examples of questionable spending identified in the report.

• National Institute of Health (NIH) spent more than $1 million on a campaign to tell mothers not to let their teenage daughters use tanning beds.
• Three agencies combined to spend a half million dollars to support a temporary exhibit to share the best of medieval smells.
• The EPA allows federal grant money be used for lobbying effort.
• NIH spent a half million dollars to send text messages that discourage chewing tobacco.
• GSA awarded a $1 million contract for a photograph of Yosemite falls to be hung in a new federal courthouse in California.
• NIH (again) paid $10 million for a series of studies to learn that stress plays a role in illegal drug use.

Anytime the Government wants something, there are plenty of firms willing to take the Government largess. Can't really blame contractors for this kind of spending.

You can access the complete Federal Fumbles #2 report here.

Court Orders Injunction on New Overtime Threshold Rules

The U.S. District Court for the Eastern District of Texas issued a preliminary injunction last week preventing implementation of the Labor's (the Department of Labor) final rule increasing the executive, administrative, and professional exemption thresholds for overtime pay requirements.

The new regulations doubled the threshold from $455 per week ($23,660 per year) to $913 per week ($47,476 per year). It was set to take effect this week on December 1st.

The Court found that DOL had exceeded its delegated authority and ignored Congress's intent by raising the minimum salary threshold by replacing a "duties" test with a de-facto salary only test.

Contractors that have been preparing for the final rule need make any changes at this time. For contractors operating under the Service Contract Act (SCA), coverage will remain unchanged.

It is expected that DOL will file an appeal to stay the decision. We'll let you know if that happens.

The other uncertainty here is what the new Administration plans to do with this and other rules based on Executive Orders. It is possible that many will be overturned come January. Stay tuned.

You can read the full Court Memorandum Opinion and Order here.

Contractors Pay $125 Million to Settle Safety Concerns

A DOE (Department of Energy) contractor and its primary subcontractor have agreed to pay $125 million to settle allegations that they charged the Government for materials and work that did not meet standards required for nuclear facilities and used Government funds to pay for lobbying expenses. Bechtel National will pay $67.5 million and AECOM Energy and Construction Inc. will pay $57.5 million. AECOM, for its part, is a successor in interest to URS Energy and Construction Inc.and maintains that the events leading to the settlement occurred prior to its acquisition of URS. We wonder if this liability was reflected in the purchase price of URS.

This settlement resolved a qui tam suit (whistleblowwer suit) brought by three former contractor and Government employees. It had been sealed until last week when the Government decided to enjoin that action. When the Government jumped in, the contractors quickly moved to settle. The settlement is not an admission of guilt, it only resolves the issues. Nevertheless, $125 million is a hefty price and the whistleblowers (and their attorneys) will receive a cut of the proceeds, possibly as much as $31 million.

The case involved the construction of a vitrification plant on the Hanford nuclear reservation. The "vit" plan, which began construction in 2002 will process 56 million gallons of radioactive waste into a stable glass form for disposal. According to the lawsuit, Bechtel and URS did not comply with nuclear quality requirements. Examples included the use of grout not formulated to withstand high radiation levels, the acceptance of piping without the required harness to withstand a severe earthquake, and welds and duct work that could not be shown to meet nuclear quality requirements.

Allegations of lobbying effort paid with Government funds included money to pay a lobbyist in 2009 and 2010 to downplay the significance of technical concerns raised by the Defense Nuclear Facilities Safety Board and using funds to secure an extra $50 million in federal money when the company was fearful that the $50 million was in jeopardy because of safety concerns.

You can read the Justice Department's press release here. A local account from the Tri-City Herald can be found here.

A Matter for Contract Administration, Not for a Bid Protest

Dorado Services protested the award of an Air Force contract for waste collection services to a competitor, GEO International Management. Dorado argued that GEO's proposal was non-compliant with the solicitation's subcontracting limitations, making it ineligible for award.

 While Dorado argued that GEO's proposal did not comply with the solicitation's subcontracting limitation (i.e. at least 50 percent of the cost of personnel for contract performance will be spent for employees of the concern or employees of other HUBZone small business concerns), the Air Force responded that there was nothing on the face of GEO's proposal that should have or would have led the government to conclude that the awardee was not going to comply with the solicitation's subcontracting limitations. The Comptroller General found no basis to question the Air Force's evaluation. The Comptroller General stated:

An agency's judgment as to whether a small business offeror can comply with a limitation on subcontracting provision is generally a matter of responsibility. However, where a proposal, on its face, should lead an agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitation, the matter is one of the proposal's acceptability. In this regard, a proposal that fails to conform to a material term or condition of the solicitation, such as the subcontracting limitation, is unacceptable and may not form the basis for an award. An offeror, however, need not affirmatively demonstrate compliance with subcontracting limitations in its proposal.

The GAO reviewed the record and confirmed that GEO's proposal did not contain any information that should have led the Air Force to conclude the firm could not or would not comply with the relevant subcontracting limitations. Moreover, the protester, Dorado, has not shown any aspect of GEO's proposal that shows the firm will not comply with these subcontracting limitations.

The GAO concluded that whether GEO will, in fact, comply with these restrictions during contract performance is a matter of contract administration, and not for our Office's review.

You can read the full Comptroller General decision here.

CAS 404 Does Not Apply to Capital Leases

In a decision handed down last August, the ASBCA (Armed Services Board of Contract Appeals) ruled that CAS (Cost Accounting Standards) 404, Capitalization of Tangible Assets, does not apply to leases since leases are intangible assets, not tangible assets (see ASBCA No 60131).
 
Pursuant to Generally Accepted Accounting Principles (GAAP), contractors are required to characterize leases as either operating leases or capital leases for financial accounting purposes. There are a series of tests proscribed by FASB (Financial Accounting Standards Board) No. 13 to determine the proper treatment.

Exelis, a Government contractor subject to CAS accumulated and reported a building lease as an operating lease. The Government determined that the building lease should have been treated as a capital lease. Under an operating lease, a contractor can claim lease costs. Under a capital lease, a contractor must capitalize the fair market value of the lease and depreciate the imputed cost over the useful life of the building. In Exelis' case, the Government demanded $3.8 million (which included interest) representing the increased cost to the Government for Exelis' mischaracterization of the type of lease. Exelis appealed the contracting officer's decision.

Exelis asserted that CAS 404, by its terms applies only to "tangible capital assets" and does not apply to a lease because a lease is an intangible asset. The Government argued that, properly interpreted, CAS 404 applies to Exelis' lease.

In its decision, the ASBCA stated the following (paraphrased). By its terms, CAS 404 applies to "Tangible Assets". The CAS defines "tangible capital assets" as assets that have physical substance, more than minimal value, and are expected to be held by an enterprise for continued use or possession beyond the current accounting period for the services it yields. A lease on the other hand is an "intangible" rather than a tangible asset because the lease itself is a legal right to use and occupy the building and does not have physical substance. This concept is consistent with accounting standards. The building has physical substance but Exelis did not acquire the building. It has an intangible right to use and occupy the building.

Incidentally, the Government didn't lose the case yet. It will continue as a FAR based appeal rather than a CAS based appeal. Final decisions based on CAS, when applicable, if often preferred over FAR since CAS carries an interest provision calculated from the time the noncompliance occurred.

It is Okay for Government to Extend Proposal Submission Due Date After Initial Due Date Has Passed

Suppose your company has worked very hard and spent many hours - some of them overtime hours -to prepare and submit a proposal by the solicitation's cut-off date and time. But then, after the cut-off date has passed, the Government unilaterally extends the due date. Would you be upset? Would you be suspicious? Readers of this blog know that the Government can reject proposals received as untimely - happens all the time. But what circumstances would prompt the Government to extend the due date after the initial due date had closed? To enhance competition? Because they didn't like your bid and other bids submitted prior to the cut-off date? Because they had a personal contractor preference and that contractor did not submit a timely bid? There could be all manner of reasons but we would be among the first to cast a wary eye on the deal.

According to the Comptroller General in a recently published bid protest decision, there is nothing improper about such an activity.

...the protestor argues that the agency's extension of the closing date for receipt of initial proposals was improper because it occurred after the initial closing date has passed. This assertion fails to state a valid basis for protest because there is no prohibition against a procuring agency issuing an amendment to extend the closing time for receipt of proposals after that time has passed to accommodate even one offeror, where the motivation for the extension is enhanced competition.

The key here is that the post-closing date extension must be motivated by a desire to "enhance" competition. If there was only one bidder, that might be justified. If there were multiple bidders however, that justification may not fly. Hopefully, Government contracting organizations have sufficient controls in place where such extensions must be approved by upper management so as to preclude improper practices.

You can read the entire bid protest decision here.

No Longer Permissible to Communicate with the Government Via Telegram

One hundred and sixty years ago, the technology of the telegraph was very hot. Imagine, being able to send cross-country messages is less than a day. Western Union built its first transcontinental telegraph line in 1861 which, at the time, was as incredible as the computer when it first arrived. But technology doesn't stay relevant forever and Western Union sent its last telegraph 10 years ago - back in 2006.

The FAR (Federal Acquisition Regulations) have not kept pace with the demise of the telegram. It is replete with references to the obsolete technology. FAR Part 14 (Sealed Bidding) contains at least eight references to telegrams. Part 49 dealing with contract terminations contains many references including instructions for the Government to expedite a termination notice using telegram. Additionally, many contract clauses (Part 52) contain references to telegrams.

The FAR Councils are finally getting around to removing references to outdated technology. It published a final rule today (November 18, 2016) to replace terms such as "telegram" and "telegraph" with more generic references to "electronic communications".

Someday the term "electronic communications" will seem as quaint as word "telegram" does today. When we are all using telepathy to communicate with one another, the FAR councils will be at it again, replacing "electronic communications" with a more up-to-date term.

You can read the final notice here.

Accounting Systems - GAAP Compliance

Defense contractors are required by DFARS (DoD FAR Supplement) 252.242-7006, Accounting System Administration, to establish and maintain an acceptable accounting system. The clause defines "acceptable" by listing eighteen criteria. (By the way, these eighteen criteria closely mirror the requirements of the SF Form 1408, Preaward Survey of Prospective Contractor Accounting System which most contractors are aware of). The eighteenth criteria states that the accounting system must provide for accounting practices in accordance with standards promulgated by the Cost Accounting Standards Board, if applicable, otherwise, Generally Accepted Accounting Principles (GAAP). The SF 1408 phrases the requirement a bit differently but with the same intent. It asks the question; Is the accounting system in accord with Generally Accepted Accounting Principles applicable in the circumstances?

So what is GAAP?  That's a complex question but in general, GAAP is a collection of commonly-followed accounting rules and standards for financial reporting. The rules and standards are mandated for the creation of uniform financial reports. GAAP ensures consistency, fairness, honesty and accuracy in measuring and disclosing financial information. One of the fundamental tenants of GAAP is that financial statements are maintained on an accrual, rather than a cash basis. So for example, revenue is recognized when a sale is made even though payment has not been received.

How does one know if their accounting system is GAAP compliant? If you have had your financial statements "audited" or "reviewed" by an independent public accountant (i.e. a CPA), there is a strong likelihood that your financial statements are GAAP compliant. A "review" report will state something like the following:

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in accordance with the accounting principles generally accepted in the United States of America.

An "audit" will make a more affirmative statement concerning GAAP. An "audit" opinion might state the following:

In our opinion, the financial statements present fairly, in all material respects, the financial position of X Company as of [at] December 31, 20XX, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

Now if you have neither a review report or an audit report, you're at the mercy of a contract auditor or a contract specialist, or a contracting officer in making an informed (or uninformed) decision as to whether your accounting system is GAAP compliant. And good luck with that. While contract auditors have the requisite education and skills to assess whether a system is GAAP compliant, it is our experience that they do not perform the necessary tests to conclude one way or another. And if it is a contract specialist or a contracting officer making the determination, there is absolutely no way such a determination is based on anything more than their desire to check the "yes" box. But perhaps that's a good thing. If a GAAP compliant accounting system were truly required as a condition of contract award, the entire Government procurement system would grind to a halt.

Board of Contract Appeals Denies Contractor Claim for Insurance Costs

The Department of Energy (DOE) and Mission Support Alliance LLC (MSA) entered into a contract to provide support services to DOE's environmental cleanup mission. Although the contract did not require MSA to do so, MSA submitted an application to the Department of Homeland Security (DHS) to become a seller of Qualified Anti-Terrorism Technology (QAAT). As a condition for receiving QAAT status, DHS required MSA to have liability insurance coverage of up to $30 million for acts of terrorism.

MSA charged the insurance premiums to its DOE contract. MSA did not seek contracting officer approval for the premiums, as per contractual requirements and by the time DOE became aware of that the premiums had been billed to its cost-reimbursable contract, they had grown to $1.36 million.

The contracting officer concluded that the preiums were unallowable under the contract and demanded that MSA refund the amount paid. The contracting officer's position was threefold: (i) the insurance was not required by contract, (ii) MSA knew the costs were unallowable, and (iii) MSA did not seek approval from the contracting officer to treat them as allowable.

MSA appealed the contracting officer's decision to the Civilian Board of Contract Appeals (CBCA). MSA argued that the DOE contract required adequate insurance against liability. MSA reasoned that a terrorist attack at the DOE site could result in liability for damages. MSA further maintained that the purchase of such insurance was reasonable. Third, even if the contract did not require the insurance, MSA was entitled to exercise reasonable judgment to purchase such insurance. Finally, MSA pointed to the benefits that DOE might derive because of the insurance.

DOE countered noting that the contract did not require MSA to receive QATT status, DOE also noted that in its application for QATT designation, MSA certified, under penalty of perjury, that insurance costs were not allowable under its DOE contract. Finally, MSA did not request or receive contracting officer approval for the insurance costs, as required by contract.

CBCA agreed with DOE. CBCA essentially affirmed DOE's arguments. Concerning the benefits that DOE might derive from the insurance, CBCA ruled that although the government may benefit, the contracting officer never had a chance to evaluate the policy to decide whether the insurance would be worthwile.

Contractors need to know that FAR (or a FAR supplement) are not the only consideration for determining cost allowability. A cost may meet all FAR requirements (i.e allowable, allocable, and reasonable) but they must also meet the explicit terms of the contract to be allowable.

You can read the full text of the decision here.

Does CAS (Cost Accounting Standards) Coverage Matter?

For purposes of CAS (Cost Accounting Standards), Government contractors fall into one of three categories, exempt, modified coverage, and full coverage (see CAS Coverage, Full, Modified, or Exempt). Only one percent of contractors fall under modified or full CAS coverage (see Only 1 Percent of Contractors are CAS Covered). The remaining 99 percent are exempt. But that statistic is a bit misleading to the 99 percent. Since the last last CAS Standard was promulgated 37 years ago, most of the CAS standards have been incorporated into the FAR (Federal Acquisition Regulations) either directly or conceptually.

To illustrate, consider CAS 402, Consistency in Allocating Costs Incurred for the Same Purpose. The fundamental requirement of this Standard includes the following:

No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost or that or any other final cost objective. 

Compare this to the language of FAR 31.203 Indirect Costs:

No final cost objective shall have allocated to it as an indirect cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included as a direct cost of that or any other final cost objective.

Note that the wording of CAS and FAR are identical.

Now look at the CAS 420 language as it pertains to direct costs:

Further, no final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose, in like circumstances, have been included in any indirect cost pool to be allocated to that or any other final cost objective.

Compare that with the language in FAR 31.202, Direct Costs:

No final cost objective shall have allocated to it as a direct cost any cost, if other costs incurred for the same purpose in like circumstances have been included in any indirect cost pool to be allocated to that or any other final cost objective. 

Again, CAS and FAR have exactly the same language and requirements.

So if you are complying with FAR Part 31 (and all contractors are required to comply), you are, for all intents and purposes, already in compliance with the CAS standards. And, if you are fortunate to grow out of your CAS exemption, do not despair over the prospect of having to comply with CAS -  you are most likely already in compliance with existing CAS Standards.

"Pay to Play" Schemes

Back in the 1980s, the Government brought down a huge "pay to play" enterprise in the San Francisco bay area. Buyers (purchasing agents) for several large defense contractors required prospective subcontractors (in this case, machine shop proprietors) to pay up if they expected to get any business from these primes. The machine shops had to invite the buyers over for friendly neighborhood poker games and were expected to lose large sums of money to the buyer. The size of subsequent machining orders were based on the size of their poker losses. "Do you play poker" became the code word for the buyers' expectations. One machine shop decided not to play and blew the whistle to Government investigators. The Government was never able to calculate the full impact of the scheme but cost-type contracts were increased by millions of dollars.

We don't know how often these "pay to play" schemes occur. We read about them from time to time. Government contractors should be aware that rogue elements within their organization can engage in such activities. If contract costs were increased as a result, the contractors are responsible to reimburse the Government for the impact. The chances of recovering anything from the perpetrators is slim.

Last week, the Justice Department announced a conviction in a pay to play scheme. Here's how it worked.

Tony Belcourt (a former Congressman from Montanna) had control of $85 million in federal funds. Belcourt and other tribal officials required contractors to pay kickbacks and bribes to tribal officials in order to receive contracts and contract payments for work on an Indian reservation. Belcourt was caught and is now serving a seven year sentence in Federal prison.

One of the companies that paid bribes to Mr. Belcourt, CMG Construction and its owner, was also convicted by a federal jury for wire fraud and bribery. CMG funneled more than $1 million to Belcourt through various enterprises - often labeled as donations.

Contractors must realize that, when it comes to purchasing materials and awarding subcontracts, strong internal controls are paramount. Without robust controls, contractors are relying on their employees' integrity. Trust, as we've said many times, is not an internal control.

You can read the full Justice Department press release here.

ASBCA Compels Contracting Officer to Issue Final Decision

When a contracting officer receives a certified claim over $100 thousand, the Contracts Disputes Act (CDA) requires that within sixty days of receipt of the claim, the contracting officer shall either issue a decision or notify the contractor of the time within which a decision would be issued. The CDA also requires that the contracting officer's decision shall be issued within a reasonable time, taking into account such factors as the size and complexity of the claim and the adequacy of information in support of the claim provided by the contractor. If a contractor believes that the contracting officer is taking unreasonable time, the contractor can petition the court (including the ASBCA or Armed Services Board of Contract Appeals) to direct the contracting officer to issue a decision in a specified period of time as determined by the Board.

In May 2016, Volmar Construction submitted eight claims to the contracting officer totaling $2.6 million. In July 2016, the contracting officer issued a decision on one of the minor claims ($59 thousand) but sent a letter back to Volmar telling them that a decision on the seven remaining claims would be deferred until the end of March, 2017. Volmar believed that 10 months for the contracting officer to make a decision was unreasonable so it petitioned the ASBCA to direct the contracting officer to issue a decision no later than a reasonable time as set by the Board.

The Government maintained that the March 31, 2017 estimated decision date was reasonable based on two factors. First, the contracting officer had no exposure to the issues raised in Volmar's claims and second, an outside scheduling expert had to be hired to examine the delay and impact damages.

The Board did not find the Government's arguments wholly persuasive. While noting that bringing on a contracting officer who has had no exposure to the issue can be time-consuming, internal staffing matters are not one of the factors used to determine a reasonable time under the CDA. It is a matter wholly and exclusively with the control of the Government. The Board also noted that according to the Government's own calculations, a report from a scheduling expert could have been produce by mid-October 2016.

The Board was not persuaded that such a lengthy time period is required. Accordingly, the Board directed the contracting officer to issue a decision no later than January 13, 2017.

Some contractors have waited much longer than 10 months to get a contracting officer to render a final decision on a claim. This decision should give encouragement to contractors that are impacted by contracting officer indecisiveness.

You can read the full ASBCA decision here.

Whoa! DoD Wants to Eliminates an Acronym

Last week, DoD issued a final rule amending its FAR Supplement (DFARS or DoD FAR Supplement) to eliminate the acronym "CONUS" and replace it with a spelled-out version.

CONUS stands for "Contiguous United States" and means the 48 contiguous states plus the District of Columbia. Seems that a lot of people mistook the definition to mean "Continental United States" which would also include Alaska.

DoD asserts that "Spelling out the acronym in the DFARS will eliminate any confusion." What a relief that will be.

There is a problem however. FAR still uses "CONUS" (See, for example, FAR 2.101). Imagine the confusion that will ensue now.

Contractors typically deal with the term CONUS when implementing travel caps (FAR 31.205-46) but we've yet to hear of any confusion on the matter. Its rather simple;

• For travel within the 48 contiguous states and DC, use GSA's Federal Travel Regulations
• For travel to Alaska, Hawaii, and outlying areas, use DoD's Joint Travel Regulations (outlying areas include Puerto Rico, Northern Mariana Islands, American Samoa, Guam, Virgin Islands, and a bunch of minor outlying islands).
• For foreign travel, use the State Department's Standardized Regulations

Wonder how many man-hours were spent on this regulatory change?

DoD Wants to Add IR&D Costs to "Evaluated" Cost of Proposal

Last Friday, we discussed the new DFARS (DoD FAR Supplement) provision that requires contractors to engage in "technical discussions" with someone withing DoD concerning their IR&D (Independent Research and Development) projects as a precondition to having costs associated with those projects, reimbursed by the Government (see Contractors Must Now Engage in Technical Exchanges with DoD Prior to Incurring IR&D Costs).

The controversies over this provision lies in the perceived bureaucratic obstacles that will get in the way of contractor efficiency and effectiveness in deciding when to initiate new IR&D programs. The Government doesn't seem to think it will be a big deal but such preconditions often become impediments.

Now, DoD is proposing regulations that will take these same IR&D costs and add them to contractors' cost proposals if the two are related. That way, a contractor cannot use IR&D funds to gain a competitive cost advantage over another contractor that is spending its IR&D funds on programs unrelated to the proposed program.

DoD is proposing to amend the DFARS to require contracting officers to adjust the total evaluated price of ... proposals, for evaluation purposes only, to include the amount by which the offerors propose that future independent research and development investments reduce the price of the proposals

The objective of this rule is to ensure that substantial future independent research and development expenses, as a  means to reduce evaluated bid prices in competitive source selections, are evaluated in a uniform way during competitive source selections.

Fortunately, for most contractors, this new requirement will apply only to major defense acquisition programs (10 USC 2430) and major automated information systems acquisitions (10 USC 2445a). Most small entities should not be impacted as major defense acquisition programs and major automated information systems acquisition policies normally apply to large contractors, because the cost, magnitude, and production requirements of such programs are generally beyond the capability or capacity of small entities.

Remember, DoD will already have reams of information concerning the technical direct of contractor IR&D projects as a result of the new requirement for contractors to engage in technical discussions prior to incurring any costs under the programs. You can be certain that that information will be available and used to ensure that contractors comply with this new regulation when it becomes final.

The Government's Contractor Responsibility Determination Process

To protect the Government’s interest and to ensure timely delivery of whatever quantities the Government needs, contracting officers, prior to award, must make an affirmative determination that the prospective contractor is "responsible" i.e..is capable of performing the contract.

Before making that determination, the contracting officer must have in his possession or must obtain information sufficient to satisfy himself that the prospective contractor

• has adequate financial resources or the ability to obtain such resources
• is able to comply with required delivery schedule
• has a satisfactory record of performance
• has a satisfactory record of integrity, and
• is otherwise qualified and eligible to receive an award under appropriate laws and regulations.

If the foregoing information is not already in the contracting officer's possession, he/she must obtain it through preaward surveys conducted by the contract administration office or contract audit office responsible for the plant or geographic area where the plant is located.

The necessary data is collected by contract administration personnel from available data or through plant visits, phone calls, and correspondence. This data is entered on Standard Forms 1403 (General Information), 1404 (Technical), 1405 (Production), 1406 (Quality Assurance), 1407 (Financial Capability), and 1408 (Accounting System) in detail commensurate with the dollar value and complexity of the procurement.

Although these forms are intended to be completed by the contracting administration folks, they are, in practice, often forwarded to the contractor (or prospective contractor) to complete. The Government then needs only to take minimal steps to validate the information or to somehow gain some assurance that the information is reasonably sufficient.

There is preparation costs associated with each of these Standard Forms. The Government estimates that it takes an average of 24 hours to complete each of the six forms. In our experience - primarily with the SF 1408 (Accounting System) this estimate is understated. Any contractor undergoing a preaward accounting system assessment by a contract audit organization will spend considerably more than 24 hours interacting and responding to auditors. The good news is that contractors must endure such reviews infrequently - once the Government has the information necessary to make a responsibility assessment on their own, there is no longer a need to have contractors furnish the same information every time it bids on a contract.

About three years ago, we presented a series detailing each of the preaward Standard Forms. You can read these posts by clicking on the following links.

     SF 1403 - General
     SF 1404 - Technical
     SF 1405 -  Production
     SF 1406 - Quality Assurance
     SF 1407 - Financial Capability
     SF 1408 - Accounting System

Man Sentenced to Five Years in Prison in Over-billing Scheme

Last March, a jury found an Idaho man guilty on 28 counts of wire fraud and theft of Government money. The man, Matt Ruck, was a contract administrator for a Moscow, Idaho company called Government Services Corporation although in this case, it is not possible to separate the man and the company.  The Company had a contract to supply fuel to DHS (Department of Homeland Security) and took advantage of that contract by billing the Government twice and in some cases, three times for the same product.

Mr. Ruck shouldn't have had a Government contract in the first place as he had been debarred from Government contracting for previous convictions for fraud and theft. He got around that prohibition by finding another fellow to front for him.

Mr Ruck was sentenced last week to five years in prison, three additional years of supervised release and ordered to pay $206 thousand in restitution. His co-conspirator was sentenced to two years probation.

We were unable to determine how the fraud was discovered - the Department of Justice press release did not include that information. It took nearly four years before the fraud was exposed.

We discuss the importance of internal controls to prevent and detect fraud, waste, and abuse. But, when the fraud occurs at the top of an organization and the information flow is limited to just one or two people, there is no internal control system that will prevent fraud from occurring. That is why there will always be the need for auditors, investigators, and external oversight resources.

You can read the two related DOJ press release here and here.

Contractors Must Now Engage in Technical Exchanges with DoD Prior to Incurring IR&D Costs

Last February, DoD published a proposed regulation for its FAR Supplement (DFARS) that would require "major contractors" to engage in technical interchanges with DoD before IR&D costs (Independent Research and Development Costs) are generated. Major contractors in this context are defined as those that allocate more than $11 million in IR&D and B&P (Bid and Proposal) costs per year to DoD prime contracts (see Enhancing the Effectiveness of Independent Research and Development). The effective date of this new requirement is today, November 4, 2016.

The new regulation adds a provision to DoD's cost principle on IR&D costs at DFARS 231.205-18 that reads as follows:

For IR&D projects initiated in the contractor’s fiscal year 2017 and later, as a prerequisite for the subsequent determination of allowability, the contractor shall— 

1. Engage in a technical interchange with a technical or operational DoD Government employee before IR&D costs are generated so that contractor plans and goals for IR&D projects benefit from the awareness of and feedback by a DoD Government employee who is informed of related ongoing and future potential interest opportunities. If the contractor does not have a point of contact for the technical interchange, the contractor may contact the Office of the Assistant Secretary of Defense for Research and Engineering (OASD R&E). Contact information for OASD R&E can be found at http://www.acq.osd.mil/rd/contacts/; and 

1. Use the online input form for IR&D projects reported to DTIC to document the technical interchange, which includes the name of the DoD Government employee and the date the technical interchange occurred. 

This new provision is essentially unchanged from the proposed revision to which there were significant public concerns raised over the efficiency, efficacy, and practicalities of engaging in a technical dialog with a DoD employee prior to incurring any costs under the IR&D project.

DoD believes that this "dialog" will enhance the effectiveness of IR&D projects by ensuring that both IR&D performers (i.e. contractors) and their potential DoD customers have sufficient awareness of each other's efforts and provide industry with some feedback on the relevance of proposed and completed IR&D work.

DoD, in response to concerns of bureacratic bungling, downplayed such potential, promising that DoD would sufficiently have its act together so as not to pose an impediment to contractor plans. Time will certainly tell on that one. In the meantime, contractors should be aware that the contract auditors now have another tool to question costs - failure to engage in technical interchange.

Know the Purpose for Which Costs were Expended - Then Make Your Allowability Determination

When determining the allowability of costs under Government contracts, one needs to have a very good grasp of the FAR (Federal Acquisition Regulations) cost principles (Part 31), a copy of the tome close by and good reference material to consult when costs don't fit nicely into FAR classifications. Often it is necessary to consult several cost principles to determine whether a cost is allowable or unallowable. Sometimes, after exhausting all available resources, you just don't know and you would like some guidance from the Government before including the costs in a proposal or an incurred cost submission. Good luck on that. Contracting officers are not inclined to give "private letter rulings" like the IRS and contract auditors will certainly not go out on a limb and offer their opinions. And even if they did, it wouldn't be binding on the Government anyway. Only the contracting officer has that authority. When the cost is immaterial, especially when the inclusion or exclusion has no impact on an indirect expense rate, many contractors simply forgo the costs.

Some costs are specifically unallowable regardless of purpose. The cost of alcoholic beverages is unallowable period. There is no justification possible that would make alcohol cost allowable. Likewise, the cost of lodging and per diem in excess of GSA maximum rates is unallowable. The allowability of many costs however are determined by first understanding the purpose. Take advertising for example. Advertising that promotes the sale of products or services is unallowable. Advertising that is specifically required by contract to acquire scarce items for contract performance or disposing of scrap or surplus materials is allowable. Help wanted advertising is generally allowable as well.

Here's another example. The allowability of legal costs depends significantly on the "purpose" for which the costs were incurred. Under FAR 31.205-33, Professional and Consultant Service Costs, legal costs are allowable. However, if you look at FAR 31.205-47, Costs Related to Legal and Other Proceedings, there are several categories of legal costs that are unallowable for policy reasons. Or, for example, legal expenses incurred in connection with contract novations would fall under FAR 31.205-27, Organization Costs and therefore unallowable because the Government is not going to pay for organization, reorganization, mergers, and acquisitions. It can get even more complicated. Legal costs incurred in connection with contract terminations fall under FAR 31.205-42, Termination Costs, and not only are they allowable (if reasonable) but can be charged direct as settlement expenses even if other legal costs are charged indirect. We could further complicate this discussion by bringing in the concept of "directly associated costs" - if in-house counsel is engaged in unallowable activities, you would also need to capture the applicable fringe benefits as unallowable.

In many cases, in order to make a determination of allowable or unallowable, it is necessary to first determine the purpose of the expenditure and weigh that against all applicable FAR Part 31 cost principles.

Audits of Paid Vouchers

DCAA (Defense Contract Audit Agency) recently implemented a program to systematically review paid interim vouchers. DCAA, of course, has always had that authority and would sometimes endeavor to perform such reviews as part of a larger billing system audit. But now, the program is much more structured. If you haven't yet been subjected to one, you will.

The purpose of paid voucher reviews is to test contractors' compliance with contract terms. The program calls for testing a minimum of one interim voucher per year at every contractor. Larger contractors will have a minimum of one voucher review per quarter. Any known risk areas will most likely increase the number of vouchers to be reviewed. Reviews will be limited to cost billed for the period - usually one month - and not cumulative over the life of the contract.

Paid voucher reviews generally focus on three areas; payables, labor, and Materials & ODCs (Other Direct Costs).

Accounts Payable - The audit program calls for the auditor to verify that the contractor is not delinquent in the payment of costs in the ordinary course of business. The auditor will request an accounts payable aging schedule and make inquiries concerning significant amounts over 30 days old. They usually select five or more items charged direct to the contract and trace the amounts to evidence of payment. If a contractor is delinquent in paying costs in the ordinary course of business, they're not reimbursable.

Labor -  The audit program calls for the auditor to select labor charges billed direct to the contract and trace the amounts from the interim voucher through the labor distribution system to the timecard (or electronic timekeeping system. Auditors are also directed to meet with or speak to the employee(s) and ask them to confirm the time charges. Finally, auditors will verify that direct labor charges agree with the contract requirements.

Materials and ODCs - Auditors are directed to select several ODC charges billed to the contract and trace the amounts from interim vouchers to accounting records and supporting documentation.

As we stated, this is a fairly new program area for DCAA and the auditors seem to still be finding their way on how to specifically address these objectives. Frankly, we've heard of a number of goofy audit requests coming out of these reviews - requests for information that have nothing to do with incurred costs and billing systems. Should you receive such a request, it is very appropriate to request the auditor to explain the purpose of the request and how it ties to their audit objectives. If the auditor cannot explain it to your satisfaction, it would be appropriate to talk with a supervisor.

Federal Conspiracy Statutes

Most companies at some point interact with independent public accountants (i.e. Certified Public Accountants or CPAs). CPAs perform audits, reviews, and compilations of financial statements, perform routine bookkeeping services, and consult on various financial matters. One thing that many companies are unaware of when engaging a CPA firm to perform an audit or review of its financial statements is that those auditors are required by professional standards to assess the likelihood of fraud that could materially misstate financial representations. Just to be sure these auditors are well-trained to detect fraud, most states require that they receive specific fraud training as a prerequisite to licencing renewals every two or three years. Bet many of you didn't know that your CPA doubles as a gumshoe.

We spend a lot of time discussing contract fraud on these pages with the idea that contractors will use the information and case studies to assess their own vulnerabilities (risk) to fraud and develop internal controls to first of all, prevent it from happening in the first place, but short of that, be able to detect it when it happens. Many Government contractors have been caught totally unaware of fraud occurring withing their organization. And, when fraud occurs, it doesn't take much to show that it impacted costs to the Government or circumvented one or more regulations. Next thing you know, the investigators arrive and your day (week, month, year) is ruined.

There are many Federal statutes that a company, principles, or employees can be charged for violating. One that comes up often in contract fraud is the federal conspiracy statute. The principle federal conspiracy statute provides that if two or more persons conspire to commit any offense against the United States or its agencies, and one or more of such persons do any act to effect the object of the conspiracy, each shall be fined or imprisoned, or both.

The essential elements of this statute are

• The conspiracy was willfully formed
• The accused willfully became a member of it
• At least one of the conspirators knowingly committed at least one overt act in furtherance of the conspiracy.

The essence of the offense is a combination or agreement of two or more persons to accomplish an unlawful purpose by lawful or unlawful means or a lawful purpose by unlawful means. The purpose of the conspiracy need not be accomplished for a violation to occur. However, at least one of the co-conspirators must have carried out at least one overt act in furtherance of the conspiracy. The overt act need not be criminal in itself and may be as innocuous as making a phone call or writing a letter.

Here is why conspiracy charges are popular. Conspiracy counts are favored by prosecutors because they provide evidentiary and pleading advantages. If a conspiracy is shown, the acts and statements of one co-conspirator may be admitted into evidence against all, and each co-conspirator may be convicted for the underlying substantive offense (e.g., destroying government property) committed by any one of its members.