Wednesday, November 22, 2017

GAO Publishes Fiscal Year 2017 Bid Protest Statistics

The Competition in Contracting Act of 1984 requires that the Comptroller General (i.e. the GAO or Government Accountability Office) report to Congress each instance in which a federal agency did not fully implement one of its recommendations in connection with a bid protest decided in the prior fiscal year and each instances in which a final decision in a protest was not rendered within 100 days after the protest was filed.

The GAO just published its Fiscal Year 2017 Bid Protest Annual Report to Congress and reported that there were no such instances in Fiscal Year 2017. The report also provided summary level data concerning the overall protest filings for the year and shows comparative data from previous years.

The number of bid protest cases filed dropped by almost 200 cases from Fiscal Year 2016. Perhaps one reason for this drop was the suspension of a prolific filer (see GAO Suspends Firm From Filing Bid Protests for One Year).

GAO issued 581 decisions (sustained and denied) of which 99 were sustained. That represents a sustention rate of only 17 percent - down from 23 percent the previous fiscal year. The effectiveness rate which measures a protestor obtaining some form of relief from the agency, either as a result of voluntary agency corrective action or the GAO sustaining the protest was 47 percent, up slightly from 46 percent the previous year.

The number of ADR (Alternative Disputes Resolution) cases totaled 81. The success rate for ADR cases was 90 percent. Seems like ADR might be the way to go with bid protests as the chances for success is almost double that of a formal GAO hearing.

You can read the full GAO report here.

Tuesday, November 21, 2017

Treasury Department To Pull Your Tax Returns Prior to Awarding a Contract

The Treasury Department has issued an interim rule to its Acquisition Regulations (DTARs) to permit contracting officials to obtain taxpayer tax return information as part of their responsibility determination - to determine whether prospective contractors are in compliance with tax laws or have unpaid liabilities. While this pertains only Treasury Department right now, these requirements could spread to other Executive Agencies. In fact, there are probably a bunch of regulators asking themselves right now, "why didn't we think of that?"

The Treasury Department determined that IRS information is needed for determining an offeror's eligibility to receive an award, including, but not limited to implementation of the statutory prohibition of making an award to corporations that have unpaid Federal tax liabilities.

This new regulation will be implemented through the Representations and Certifications section regarding responsibility matters identified by the term "Tax Check". Essentially, offerors will be authorizing the Treasury Department to pull income tax information.

Contractors (and prospective contractors) might find it beneficial to take steps to confirm that it does not have a delinquent Federal tax liability prior to submission of a proposal and/or obtain information to positively demonstrate to the contracting officer that it has no such liability. Its probably only a matter of time before faulty information is transferred from the IRS to a contracting officer somewhere and that information could jeopardize an offeror's chances for securing a contract.

Read more about the new interim rule here.

Monday, November 20, 2017

DCAA Must Report to Congress on the Education, Qualifications, and Certifications of its Staff

Of all the things that DCAA (Defense Contract Audit Agency) can be criticized for, the educational qualifications of its staff is not one. Virtually all auditors have Bachelor's Degrees and a 40 percent of them have advanced degrees. On top of that, a quarter of them (more than 25 percent) are CPAs (Certified Public Accountants). The Agency actively encourages its auditors to pursue advance degrees and CPA status. The Agency has a robust training program as well. In their first year, auditors can expect four or more weeks of intensive training and because the Agency is engaged in Yellow Book audits (i.e. GAGAS or Generally Accepted Government Auditing Standards), auditors are expected (and required) to meet minimum CPE (Continuing Professional Education) requirements at Government expense. Consider the following table that comes from DCAA's annual report to Congress.

With this in mind, one of the outcomes of 2018 NDAA Conference Committee seems somewhat odd. The conferees directed the DCAA Director, in consultation with the Under Secretary of Defense (Comptroller) to brief the Congressional defense committees in six months with the following agenda items:

  1. The current education, certifications, and qualifications of the Defense Contract Audit Agency workforce, by supervisory and non-supervisory levels and type of position.
  2. Shortfalls (if any) in education, qualification, or training in the DCAA workforce, by supervisory and non-supervisory levels and type of position and the reason for those shortfalls.
  3. The link (if any) between DCAA workforce skill and experience gaps and the Agency's backlog of audits.
  4. The link (if any) between the effectiveness of DCAA regional directors and their education, certifications, and qualifications
  5. The number of DCAA auditors who have relevant private sector experience, including from industry exchanges while at DCAA and from prior employment experiences, and the perspective of DCAA on the benefits of those experiences
  6. Ongoing efforts and future plans by DCAA to improve the professionalization of its audit workforce, including changes in hiring, training, required certifications or qualifications, compensation structure, and increase opportunities for industry exchanges or rotations.

DCAA does not need six months to write this report. It could do so right now. While auditor educational achievements and training programs are exemplary, turnover tends to be high - possibly because of better compensation opportunities - which creates an experience gap. Also, too much meddling by outside agencies such as the Inspector General and GAO has resulted in a degree of paralysis because of fear of criticism which in turn, has caused the Agency to jettison common sense risk assessments.

DCAA still predominately relies on homegrown staff - hiring them at entry level and progressing them through the organization. There are very few that come into the Agency with a significant level of auditing experience. Those that do often have other motives for joining. We know of two who joined because they had serious health issues and the Government's health insurance offered better benefits than that of their previous employers. Another sold his private CPA practice and needed a place to hang out for a couple of years until his covenant not to complete expired. A couple had bounced around numerous jobs and it became quickly apparent why they were not valued members of previous employers' staffs.

Its too bad there wasn't some kind of rewind button. We could go back to 2005 when DCAA was just fine and was considered a valued member of the procurement team.

Friday, November 17, 2017

A Few Contractors May Have to Reimburse DoD for Bid Protest Costs if Protest Denied

Here's an update to a post from last July where we wrote that the Senate version of the 2018 NDAA (National Defense Authorization Act) would require large defense contractors to reimburse the Defense Department for failed bid protests (see Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests). That provision has been greatly watered down in the newest version of the NDAA.

Sec 827 of the House and Senate NDAA compromise bill which has passed the House and is now waiting Senate passage replaced the Senate provision with one that calls for a three-year pilot program, a study and a report. Specifically, the provision requires the following:

  1. The Defense Department shall carry out a pilot program to determine the effectiveness of requiring contractors to reimburse the Department of Defense for costs incurred in processing covered protests (see below for definition of covered protests).
  2. The pilot program shall be three years beginning two years after the date of enactment of the NDAA and ending five years after the date of enactment.
  3. After the pilot program ends, the Defense Department must provide a report to Congress assessing the feasibility of making permanent such pilot program.

In the context of Sec 827, a covered protest means a bid protest that was denied in an opinion issued by GAO (Government Accountability Office) filed by a company with revenues in excess of $250 million during the previous year. The Senate version set the threshold at $100 million.

This current version is significantly different than the original Senate provision which provided detailed statutory mechanisms for the payment of costs for defined protests. This one does not provide details on what procedures that program should include. But, the Defense Department has a couple of years to work out those details - probably through DFARS (DoD FAR Supplement). Of course, two years to implement this provision also gives Congress two years to tinker with the requirement through future NDAAs.

Contractors with sales greater than $250 million (in its prior fiscal year) may find it more cost-effective to pursue bid protests though the U.S. Court of Federal Claims which carries no such requirement.

Thursday, November 16, 2017

Law Allowing Contractors to Procure Their Own Incurred Cost Audits Rescinded

Sec 804 of the 2018 NDAA (National Defense Authorization Act) repeals a provision that became law under the 2017 NDAA. 10 USC 190 was a new section that requires the creation of a Defense Cost Accounting Standards Board (DCASB). But appended to DCASB coverage was a new requirement that concerned the use of commercial auditors to perform audits of Defense contractors. Specifically, section (f) reads (paraphrased):
Defense contractors may present, and DCAA shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs and such audit was performed using relevant commercial accounting standards and relevant commercial auditing standards established by the commercial auditing industry.
Further, DCAA may audit direct costs and shall rely on commercial audits of indirect costs without performing additional audits, except in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.
The intent of this provision is to allow contractors to go out and retain their own auditors for purposes of expediting audits of incurred costs and closing old contracts. The provision becomes unnecessary with Sec 803 commercialization initiative we discussed the past three days. Anyway, no one could ever articulate a practical implementation of the provision. Its not practical to separate audits of direct and indirect costs. Auditors need to assess both in order to make recommendations concerning final indirect expense rates.

The remaining portion of 10 USC 190 dealing with the Defense Cost Accounting Standards Board has been retained.

Wednesday, November 15, 2017

DCAA to Share Audit Function With Commercial Firms - Part 3

This is the third part in our series on Section 803 of the 2018 NDAA (National Defense Authorization Act) which will require the Defense Department to begin utilizing private audit firms to augment the ability of DCAA (Defense Contract Audit Agency) to complete incurred cost audits in a timely manner. Though some may see it differently, this provision is not a rebuke of DCAA's performance in completing incurred cost audits in a timely manner. It is more a recognition that DCAA is not sufficiently staffed to conduct the full range of audits that the are required by procurement regulations.

Incidentally, the 2018 NDAA has now passed the House and its on to the Senate where passage is also expected.

Today we will focus on the implementation schedule for this new provision.

In Fiscal Year 2018, the Defense Department has to come up with a plan. The plan needs to include a description of the incurred cost audits that are appropriate to be conducted by qualified private auditors including the approximate number and dollar value of such incurred cost audits. Although not specifically prohibited, the large Defense contractors such as Boeing, Lockheed, Raytheon, United Technologies, General Dynamics, and Northrup Grumman will not be part of this list. DCAA will retain those contractors for itself. The plan must also include the number and dollar value of incurred cost audits for each of the following six fiscal years (fiscal years 2019 through 2025). By April 1, 2019, private audit firms must be under contract.

In order to improve the quality of incurred cost audits (and reduce duplication), the Defense Department is authorized to provide qualified private auditors with information on past or ongoing audit results or other relevant information on the entities the qualified private auditor is auditing.

The working papers generated by qualified private auditors will become the property of DoD except the qualified private auditor will be allowed to retain complete copies.

DoD is also required by Section 803 to implement numeric materiality standards for incurred cost audits to be used by auditors that are consistent with commercially accepted standards of risk and materiality. In developing such standards, DoD must consult with commercial auditors that conduct incurred cost audits, the Section 809 Panel, and other governmental and nongovernmental entities with relevant expertise. Whatever the outcome of this study, it is almost certain that the materiality and risk factors used by DCAA now, will change. Maybe that's good, maybe not.

So, who would you rather have come in and conduct your audits? Are you comfortable with the status quo (i.e. DCAA) or would you rather take your chances with a QPA (Qualified Private Auditor).

Tuesday, November 14, 2017

DCAA to Share Audit Function With Commercial Firms - Part 2

Yesterday we introduced the Section 803 provision in the 2018 NDAA (National Defense Authorization Act) that will require the Defense Department to begin farming out some of its incurred cost audit functions to commercial firms. Though the probable soon-to-be law does not specify a particular percentage or dollar value of audits to be shaved off of DCAA's (Defense Contract Audit Agency's) current workload, the general tenor of the provision sounds like the sharing will be substantial and on-going.

For example, yesterday we reported that the new provisions require that audits be completed within one year from submission of an adequate incurred cost proposal (for information on what constitutes an adequate incurred cost proposal, see Annual Incurred Cost Submissions - Adequacy or DCAA's Checklist for Determining Incurred Cost Proposal Adequacy). But what happens if the audit is not completed within a year? Section 803 contains a provision that states if audit findings are not issued within one year after the date of receipt of a qualified incurred cost submission, the audit shall be considered to be complete and no additional audit work shall be conducted. That would result in significant risk to the Government and will probably necessitate the transfer of a substantial number of audits from DCAA to commercial auditors - particularly since DCAA has not had much success in completing incurred cost audits in a year.

Another Section 803 provision that makes the number of commercialized audits substantial and on-going is the requirement that DoD maintain an appropriate mix of Government and private sector capacity to meet the current and future needs and to ensure that qualified private auditors perform incurred cost audits on an ongoing basis. Sounds to us like the program is to be set up for the long haul.

There are certain qualifications that commercial firms must meet in order to participate in the program. There can be no conflicts of interest, the auditors must be independent, they must sign non-disclosure agreements to protect proprietary or nonpublic data, they cannot use proprietary data for other purposes, and must protect it. Also, and significantly, the firms performing the audits must have a peer review with an "acceptable" rating ("acceptable" is as good as you can get in a peer review).

Monday, November 13, 2017

DCAA To Share Audit Function With Commercial Firms - Part 1

The 2018 NDAA (National Defense Authorization Act) Conference Report has been published. The Conference Report refers to the final version of a bill that is negotiated between the House and the Senate via conference committee. It will still need to be submitted to each Chamber for its consideration for approval or disapproval but in the past, NDAA conference reports are routinely passed by both the House and Senate. So, assuming the President signs the bill, it will become law.

Our coverage of the NDAA focuses on contracting matters - provisions that will affect contractors or prospective contractors. And this year's NDAA is going to change the way many Government contractors are audited. The Department of Defense will be making a major shift toward using commercial audit firms to conduct incurred cost audits instead of exclusively relying upon DCAA (Defense Contract Audit Agency) to perform their incurred cost audits. We can't foresee whether this is good news or not such good news for contractors.

The good news is that audits will be completed much quicker than they presently are. Audits will need to be completed within a year after the Government receives an adequate incurred cost submission from the contractor. More good news includes the fact that the Government and contractors will be able to close out contracts much quicker. The big uncertainty for contractors however is the unknowns that come with a new audit organization. Will the audits be more detailed or less detailed in scope? Will commercial auditors have the same materiality threshold as Government auditors?

We will spend a few days unpacking the content of the new bill. There's a lot to it. But here's the essence: To support the need of the Defense Department for timely and effective incurred cost audits, and to ensure that DCAA (Defense Contract Audit Agency) is able to allocate resources to higher-risk and more complex audits, the Secretary of Defense shall use qualified private auditors to perform a sufficient number of incurred cost audits;

  1. To eliminate any backlog of incurred cost audits by October 1, 2020.
  2. Ensure that incurred cost audits are completed not later than one year after the date of receipt of a qualified incurred cost submission
  3. Maintain an appropriate mix of Government and prive sector capacity to meet the current and future needs of DoD to perform incurred cost audits
  4. Ensure that qualified private auditors perform incurred cost audits on an ongoing basis to improve the efficiency and effectiveness of incurred cost audits
  5. Limit multi-year auditing (obviously you cannot perform multi-year auditing and achieve one year turn-around)

Privatization of the incurred cost audit function under this bill is not a one-time shot to help DCAA eliminate its backlog. The bill intends privatization to be a permanent, on-going, and substantial part of contract audits.

Friday, November 10, 2017

Calendar Days vs Work Days

Family Entertainment Services (FEI) was awarded a grounds maintenance contract for nearly 4,000 acres at Fort Campbell, Kentucky. One of the contract line items required the contractor to mow grass on a 21 day schedule. From the beginning of the contract, FEI fell behind in the mowing schedule and despite several cure notices from the Army, was unable to catch up. Ultimately, the Army deducted $82 thousand from the contract price because FEI did not meet the terms of the contract.

FEI appealed to the ASBCA on the basis that the term "day" should be defined as a work day instead, as the Army contends, a calendar day. On this basis, a 21 day schedule would equate to approximately 27 to 29 calendar days (depending upon how weekends fell) which means the Army withheld too much money. FEI asked the ASBCA to clear up the contract ambiguity.

The ASBCA has published guidance regarding ambiguities in a contract.
In resolving disputes involving contract interpretation, we begin by examining the plain language of the contract. We construe a contract "to effectuate its spirit and purpose giving reasonable meaning to all parts of the contract. the threshold question here is whether the plain language of the contract "supports only one reading or supports more than one reading and is ambiguous, as held by the Board. Ambiguity exists when contract language can reasonably be interpreted in more than one way.
Parties having a differing opinion of contract terms in not enough to show ambiguity. Rather, both interpretations must fall within a 'zone of reasonableness.
In this case, the ASBCA found that there is only one reasonable way to interpret the contract. FEI's opinion that "day" should mean "work day" is not a reasonable interpretation of the contract. The contract incorporates FAR 2.101 which defines "day" as a calendar day (unless otherwise specified in the contract). The Board found no exceptions in the contract that would lend credence to a different interpretation so denied the appeal.

The full decision can be found here.

Thursday, November 9, 2017

Whitefish Energy Contract to Restore Puerto Rico Electricity

As promised, we are bringing you an update to our October 30th posting concerning the contract awarded to Whitefish Energy by the Puerto Rico Electric Power Authority (PREPA) to help restore electricity on the island (see Whitefish Energy). This $300 million contract at rates exceeding $240 per hour for electrical linemen awarded to a company with two full-time employees raised a lot of concern by both Democrats and Republicans in Congress as well as several oversight agencies including Offices of Inspector Generals. One Congressman termed it a "sweetheart deal to a fly-by-night company".

The offending contract has now been terminated although the full cost through termination will not be known for some time. So far, Whitefish has racked up $60 million in charges and that doesn't include the cost of demobilization and other allowable termination costs.

PREPA defended the Whitefish contract by noting that the unknown, tiny company was the only bidder that didn't require a down payment, and would handle its own logistics. PREPA is bankrupt and $9 billion in debt, and other better-established companies required significant down payments in order to offset the risk that PREPA might not be able to pay off contract work. Whitefish didn't enhance its own reputation by threatening to pull its linemen out of the Mayor's hometown when it was called on to be more transparent.

Meanwhile, the investigations expand. Another Whitefish type contract has emerged - this time, a $200 million contract award to a firm named Mammoth Energy Services' Cobra Acquisitions LLC with similar contractual language.

Wednesday, November 8, 2017

GAO To Begin Charging a Filing Fee for Bid Protests

Beginning sometime next year (2018), the GAO (Government Accountability Office) will begin charging $350 to anyone filing bid protests. Currently, there is no charge for filing. For some contractors, the cost may be even higher. There is a provision in the Senate version of the 2018 National Defense Authorization Act (NDAA) that would require unsuccessful bidders to pay the cost for unsuccessful protests filed against the Defense Department (this applies to companies with revenues in excess of $100 million).

The ostensible reason for levying this new fee is to help offset the cost of development, operations, and maintenance of a new electronic protest docket system (EPDS). $350 per filing will bring in about $1 million a year based on historical filing totals - not nearly enough to cover the costs but every little bit helps. Besides, Congress mandated that GAO begin charging fees.

Some cynics suggest that the real purpose behind the new filing fee is to discourage frivolous protests. You will recall that last August, the GAO took the unprecedented step of suspending a firm from filing protests for one year because it had filed 300 bid protests over a four-year period and 150 protests in fiscal year 2016 alone (see GAO Suspends Firm From Filing Bid Protests For a Year). None of these protests were sustained and most were dismissed without merit. Since that suspension was lifted, the formerly suspended firm has already filed five new bid protests. For a protestor filing hundreds of protests per year, a $350 filing fee may be a deterrent.

For most companies filing bid protests, a $350 filing fee will not be a deterrent to filing. When tallying up the costs of a bid protest, especially if outside counsel is engaged, $350 will be represent a very immaterial portion of the total costs.

Tuesday, November 7, 2017

Fair Pay and Safe Workplaces Rules - Dead

This week, the FAR (Federal Acquisition Regulation) Councils issued a final rule implementing a public law that disapproved a previous final rule. The rule, called Fair Pay and Safe Workplaces, was based on an Executive Order (EO) that was ultimately overturned by Congress. To read what the regulations would have required, see Fair Pay and Safe Workplaces).

In 2014, the President issued EO 13673, Fair Pay and Safe Workplaces. In August 2016, implementing rules were published. In October 2016, several industry organizations filed a lawsuit seeking to overturn the final rule. That same month, the Court issued a preliminary injunction against the Government preventing them from enforcing most of the rules.

In March 2017, under the Congressional Review Act, Congress passed House Joint Resolution 37 which disapproved the entire FAR rule that was published back in August 2016. The President signed the Resolution into law that same month. By statute, the rule was to be treated as if it had never taken effect.

Had the rules remained in effect, the cost to contractors and the Government would have been significant. The Regulatory Impact Analysis (RIA) that included a detailed discussion and explanation about he assumptions and methodology used to estimate the cost of the final rule, calculated the cost to be in excess of $470 million the first year, $458 of which was to be born by contractors and subcontractors. That figure doesn't include the defense of litigation, some of it frivolous, that most people figured would occur as a result of alleged noncompliances with the rules.

No contractor we know of is disappointed that these onerous rules have been abolished.

Monday, November 6, 2017

Failure to Submit "Responsive" Offer Leads to Lost Opportunity

Offerors must avail themselves of every reasonable opportunity to obtain solicitation documents. Otherwise, they risk being eliminated from consideration.

The Department of Homeland Security (DHS) issued an RFQ (Request for Quotation) to provide armed and unarmed detention officer services in California. Nu-Way security and Investigative Services (Nu-Way) was one of the bidders. DHS issued four solicitation amendments. Three of the four extended the deadline for proposal submissions. Amendment No. 2 made several changes including three modifications to the pricing spreadsheet including a transition period line item, a project manager for San Diego, and increased mileage reimbursement rates. All of these changes were summarized on page one of the amendment.

Nu-Way did not use the revised spreadsheet as its proposal submission. DHS noted that the proposal lacked a line item for the San Diego project manager and failed to update the mileage reimbursement quantities. The contracting officer then notified Nu-Way that its quotation had been found non-responsive and would not be evaluated for award.

Nu-Way protested to the GAO alleging that the revised pricing spreadsheet was not available for download. DHS responded that the modification description clearly stated changes were made to the pricing spreadsheet and other offerors were able to download and submit the revised pricing spreadsheet. Nu-Way argued that the front page of Amendment 2 did not explicitly state that there were changes made to the pricing spreadsheet such that a new pricing spreadsheet was required. Therefore, the requirement was ambiguous.

GAO did not sustain the appeal. GAO found that Amendment 2 specifically stated that changes were made to the pricing spreadsheet. Regardless of whether Nu-Way could download or received the revised pricing spreadsheet, the company was on notice that DHS had revised the spreadsheet. As a result, Nu-Way should have availed itself of every reasonable opportunity to obtain the spreadsheet.

DHS was correct (acted reasonably) in rejecting Nu-Way's proposal because it failed to acknowledge a material amendment.

Read the entire decision here.

Friday, November 3, 2017

Fraud Friday - Government Employee Solicited and Accepted Bribes from Contractor

Now they're both in a heap of trouble.

There is not that much different in the relationship between a Government contracting officer and his contractor and that of a purchasing agent and his suppliers. In both cases, management places a great deal of trust that the person will act with integrity in carrying out his duties - namely buying at the best possible prices and terms. Trust is crucial but is not a substitute for good internal controls.

One reason we discuss allegations of contract fraud on these pages is to examine what went wrong in a given situation, what internal controls were nonexistent or were not adequate to prevent. We know from research that within a five year period, most small businesses will be affected by occupational fraud. And we also know that where there is a financial need, an opportunity, and rationalization, fraud is more likely to occur. So one way to prevent (or reduce) the occurrence of fraud is to take away the opportunity and that means implementing a robust system of internal controls.

So consider the recent Justice Department press release announcing the arraignment of Elvis, a supervisor with the U.S. Food and Drug Administration (FDA) and a business owner named Ivan on charges of bribery and kickbacks. Although this occurred at the FDA, it could have occurred in any governmental or contractor organization.

Elvis was the senior facilities officer at FDA's Atlanta field office and in that role, influenced the selection of businesses that perform building maintenance work. Ivan was the owner of P&E Management, a firm that performed building maintenance work. Ivan need work to sustain his company and Elvis was there ready to give him work ... for a price.

According to the press release, Ivan gave Elvis a debit card tied to Ivan's bank. Elvis used this card for shopping sprees, vacations, and dining out. On one occasion, Elvis used the card to pay for official government business trip and later sought reimbursement from the Government for that trip. To top it off, Ivan bought Elvis a Cadillac Escalade worth somewhere in the neighborhood of $80 thousand.

This bribery/kickback scheme went on for six years before it was discovered. We don't know how it was discovered - whether someone blew the whistle or perhaps an internal audit review. For the same firm to win contracts time after time over an extended period of time is inherently a red flag. But we know that there was a massive breakdown in internal controls that allowed this to happen and to persist for such a long time. It seems that Elvis had the ability to spend the Government's money without any oversight at all. And, if we've come to understand Government procurement regulations at all, we know that is not the way procurement is supposed to be done. Government procurement is characterized by market research, solicitations, evaluations, selections, negotiations, review and approvals accompanied by mountains of paperwork. For one person to wield so much power and influence to circumvent all of these controls suggests an internal control breakdown.

So how did Elvis circumvent the controls? Elvis always kept his purchases of building maintenance services under the micro-purchase threshold (currently set at $5,000) where speed and efficiency can streamline the procurement process but can also be easily exploited by persons such as Elvis.

You can read the entire Justice Department press release here.

Thursday, November 2, 2017

2018 NDAA - Public Comment Submitted to Congress

The Professional Services Council (PSC) has weighed in on some of the provisions of the 2018 National Defense Authorization Act (NDAA) now that the House and Senate bills have moved on to conference committee for reconciliation. Among their concerns is the provision in the Senate version requiring losing bid protesters to pay the processing costs incurred by DoD (see Large Contractors May Need to Reimburse DoD for Bid Protest Costs). The PSC "strongly objects" to this provision. But PSC's letter also covers major concerns over provisions related to DCAA's (Defense Contract Audit Agency's) incurred cost backlog. PSC writes:
The backlog of incurred cost audits under the Defense Contract Audit Agency (DCAA) has wide-ranging, consequential, and negative impacts for the government and the contractor community— both of whom have an interest in moving rapidly to close out contracts. For the contractor, the government commonly withholds significant funds that should be reconciled and paid in a more timely manner. The government should be able to collect any money that might be determined to be due from the contractor, while there is still time and funds available to be collected. Unfortunately, DCAA’s backlog—and improper accounting of the backlog—prevents either from meeting these goals. GAO’s September 2017 major report confirms the current unacceptable backlog still remains. 
PSC goes on to recommend that Congress take further actions to reduce the backlog of incurred cost audits by including targeted reforms that allow for the use of independent, third-party auditors. The House version repeals provisions of the 2017 NDAA that allowed for commercial auditor findings for certain DoD contractors to be submitted and accepted by DCAA if the audit adheres to Generally Accepted Government Auditing Standards (GAGAS). But, as PSC noted, that provision contradicts Section 802, the goal of which is to expand the use of supplemental audits performed by public accounting firms.

Whatever happens, it is obvious that no one has confidence that DCAA can reduce its backlog of incurred cost audits while diligently watching over the taxpayer dollar. Civilian agencies are not encumbered with contract audit arms and are free to go out and procure their own contract audit services from private/commercial firms. It seems like some parties would like the Defense Department to go the same way.

You can read the entire PSC letter here.

Wednesday, November 1, 2017

At Last, Some Relief for DOE Contractors

For the past few years, the Department of Energy (DOE) has taken an extremely literal approach to contractors claiming overtime for employee training purposes. FAR 31.205-44(a) , Training and Education Costs, states that overtime compensation for training and education is unallowable. DOE has taken the position that there can be no exceptions to this rule. It didn't matter whether a contractor could show that it was more cost effective to pay overtime for training than to hire additional staff to cover contract-required services. It didn't matter that certain training was specifically mandated by contract and not discretionary. It didn't matter that the training contributed significantly to contractor employee health and safety. Contractors had to find a way to do all of this without incurring overtime.

More than a few DOE contractors have conducted specific analyses showing that there are circumstances where incurring overtime cost the Government less in the long run. When presented to DOE contracting officers however, they have stood firm in their interpretation that overtime for any kind of training was unallowable. Actually, some contracting officers were sympathetic and wished that they had the discretion to authorize overtime for training thus saving taxpayer dollars but found that there was no way to satisfy their overseers if they broached the subject.

Someone in DOE headquarters finally took some initiative and authorized a Class Deviation to FAR 31.205-44(a). You can read all of the details here but essentially, it authorizes overtime for training purposes so long as the contractor has written approval from an agency approving official (typically a contracting officer). Additionally, approval is required before the costs are incurred. Contractors are expected to submit requests with sufficient justification to gain contracting officer approvals.

The Class Deviation applies to existing contracts as well as future contracts so that contractors in the midst of a multi-year contract will be able to benefit.

No word yet on whether other agencies will follow suit. Possibly not because we are not aware of any other agency that has taken similar positions to that of DOE rank and file.

Tuesday, October 31, 2017

Memo to Employees: Save All Information Related to Time Charging

The Department of Energy is building a $17 billion vitrification plant at its Hanford site in order to turn 56 million gallons of radioactive waste into a stable glass form. The waste is left from the cold war production of plutonium for America's nuclear weapons program. The contract is cost reimbursable and projected costs have grown significantly over its initial budget.

A recent article appearing in the hometown newspaper, the Tri-City Herald, stated that the paper had obtained copies of emails sent to workers at the vitrification plant instructing them to preserve all information and emails regarding charging for labor, recording time worked, overtime and related matters. The article went on to not that the preservation request was related to a civil investigative demand issued by the Justice Department to the prime contractor on the project, Bechtel National (see Feds may be investigating timecard issues at Hanford vit plant for the complete article). We're not sure what types of timekeeping records might exist. The company uses an electronic timekeeping system and employees do not normally retain paper.

This sounds serious though. Another email from a Bechtel attorney instructed employees that if they were contract by federal investigators they could speak with them, they could decline to speak with them, they had a right to have their attorney present, or could request that a Bechtel attorney be present.

The Justice Department, the Department of Energy, and Bechtel all declined comment on the matter (of course).

There have been serious timecard problems among contractors at Hanford. In 2013, one contractor paid $18.5 million to resolve civil and criminal allegations of defrauding taxpayers through timecard fraud. Earlier this year, another contractor forked over $5.3 million to settle allegations of timecard fraud.

Monday, October 30, 2017

Whitefish Energy

Last week, it was announced (or revealed) that a tiny company in Montana called Whitefish Energy Holdings had been awarded a $300 million contract from the Puerto Rico Electric Power Authority (PREPA) to restore electricity on the island. That massive size of the contract given the experience and size of Whitefish, has been met with skepticism by Republicans and Democrats alike and amid the outcry, PREPA is now moving to cancel the contract (after a plea from the Governor of Puerto Rico).

Whitefish is a small company which according to reports has been in existence for two years and until recently, had just two full-time employees. Whitefish's CEO disputed that number claiming that the company had 20-40 full-time employees working projects in Arizona, Montana and Washington State. It now has 350 workers on site in Puerto Rico however most of these workers are actually subcontractors. It has been widely reported that the Interior Secretary, friends with Whitefish's CEO had something to do with the award. Whitefish denies this maintaining that contract was made with PREPA through Linked-In.

The contract which has now been made public, will make the controversy even more poignant.  Whitefish charges $240 per hour for a general foreman and $227 per hour for a lineman. Per diem allowances are set at $80 per day for meals and $332 per day for lodging. Airfare is billed at $1,000 each way. For subcontractors (most of the labor), the rates are even higher. A general foreman costs $336 per hour and a lineman $319 per hour. Given that the medium rate for electrical linemen is about $36 per hour, these contracted rates seem beyond the pale.

The contract also has a nice little "no audit clause". The clause reads:
In no event shall PREPA, the Commonwealth of Puerto Rico, the FEMA Administrator, the Comptroller General of the United States, or any of their authorized representatives have the right to audit or review the cost and profit estimates of the labor rates specified herein.
No doubt all Government contractors would like to have this clause in their contracts.

By the way, PREPA is $9 billion in debt, filed for bankruptcy last July and has had a long history of maintenance problems and corruption allegations.

This will be an interesting story to follow and events unfold. Obviously, there is a lot more to the story that what has been made available so far.

Friday, October 27, 2017

Senator Wonders How DCAA is Progressing in Reducing its Backlog of Incurred Cost Audits

On Monday of this week, Senator Clair McCaskill in her position as ranking member of the Senate Committee on Homeland Security and Governmental Affairs, sent a letter to the Defense Department requesting "detailed information regarding the audit backlog at the Defense Contract Audit Agency (DCAA)".

Last month, GAO (Government Accountability Office) issued a report that was somewhat critical of DCAA's progress in reducing the backlog of annual incurred cost proposals waiting for audit (see New GAO Report on DCAA Incurred Cost Audits).

In response to that report, DoD promised a number of corrective actions that did little more than resolve to study the issue. Specifically, DoD stated that it would (i) assess and implement options for reducing the length of time to begin incurred cost audit work and (ii) conduct a comprehensive analysis regarding the use and effect of multi-year audits.

This is a very non-committal response and everyone probably hoped the report would end up in a dead letter office somewhere.

But Senator McCaskill wasn't about to let that happen. She has asked for a status of DoD's implementation of the corrective actions it promised the GAO. Specifically, the Senator requested that the Defense Department provide the following data:

  1. The current inventory of incurred cost audits at DCAA.
  2. The plans and expedited timeline for reducing DCAA's audit backlog to 18 months of inventory.
  3. The current status and timeline for completion or previous promises (the was a specific reference to DoD's response to a GAO report critical of DCAA's timeliness that it plans to assess and implement options for reducing the length of time to begin incurred cost audit work and to conduct a comprehensive analysis regarding the use and effect of multi-year audits by March 31, 2018).
You can read more about the Senator's concerns here. A copy of the Senator's letter is here.

Thursday, October 26, 2017

Offeror Made three Attempts to Deliver its Proposal to Air Force - To No Avail

The Air Force issued a RFTOP (Request for Task Order Proposals) under its IDIQ contracts for cyber security and information systems technical tasks. Proposals were to be submitted electronically no later than 1:00 p.m. Central Time on July 17, 2017. The solicitation provided that proposal receipt would be acknowledged by return email.

ManTech Advanced Systems submitted a proposal in response to the RFTOP. In fact, ManTech submitted its proposal several times. The first time was at 1:25 p.m (EDT). ManTech received confirmation of completed delivery through its Outlook delivery receipt feature. Seven minutes later, ManTech, after not receiving an acknowledgement from the Air Force that it had received the proposal, contacted the Air Force and was told the proposal had not been received. So ManTech resent its proposal to the designated mailbox, the person it had spoken to, and the contract specialist. Again, ManTech received electronic confirmation that its email had gone through to its destination but once again, no email confirmation from the Air Force. ManTech sent it again at 1:59 p.m. (EDT) with the same result. At 2:01 p.m. the contracting officer instructed ManTech to forget about it - time for receipt had expired. Subsequently, the Air Force informed ManTech that since the Air Force had not received ManTech's proposal, ManTech was not considered for award.

ManTech filed a bid protest with the GAO, asserting that the Air Force should have considered its proposal because the proposal was timely sent to the Air Force's designated mail box and ManTech had received confirmation from its Outlook delivery system that it had been received.

The Air Force contended that ManTech's proposal was not received in the mailbox designated in the solicitation. The Air Force explained that when an email is sent to any recipient that is at an organization that is part of DoD, it is scanned by the enterprise email security gateway for malicious content. The email is then delivered to the recipient's email exchange server if no malicious content is found. The recipient's email exchange server then performs additional scans based on the specific policies of the recipient organization. The recipient's server can block, quarantine, drop, or deliver the email to the recipient's email box. The Air Force determined that based on content, ManTech's proposal was rejected by the Air Force server.

Was the GAO sympathetic to ManTech's plight? Not at all. The GAO wrote that it is an offeror's responsibility to deliver its proposal to the proper place at the proper time. Moreover, an offeror has the burden of showing that it timely delivered its proposal to the agency at the specified address. An agency is not required to consider a proposal where there is no evidence that the proposal was actually received. In this case, ManTech failed to establish that its proposal was actually delivered to the Air Force's designated email prior to the time set for the receipt of proposals, and thus, failed to meet its burden of showing that its proposal was timely delivered to the Air Force.

You can read the full decision here.

Wednesday, October 25, 2017

Get Your Voice Heard - Section 809 Panel Wants to Hear From You

Over the past several weeks, we've written a few times about the activities of the Section 809 Panel whose job is to figure out how to ensure the Defense Department (and by extension, Civilian agencies) to more consistently buy what it needs in a timely and cost-effective manner (see, for example, Update on Section 809 Panel).

The Panel sincerely wants to hear from people and organizations affected by the current state of procurement regulations and they've made it very easy to submit your dirty dozen (except that they call it the "50 Worst"). The Panel needs your help in identifying and tallying the 50 worst regulations, laws, and policies that frustrate you and must go.

The Panel has created an on-line form with two basic questions:

  1. What regulatory roadblock are you encountering? Is there a policy that frustrates you and must go? Know a law that doesn't make sense and costs you time and money? Describe it here
  2. How does it specifically get in your way? How would you change it, get rid of it, or make it simpler?
There is no limit to the number of contributions one can make to the "50 Worst" regulations, laws, and policies. The Section 809 Panel may be the best shot at improving the Government's procurement regulations for many many years so please contribute.

The 50 Worst on-line form can be accessed here.

Tuesday, October 24, 2017

GSA Drafting Guidance to Assist Civilian Agencies in Procuring Contract Audit Services

The General Services Administration (GSA) is leading an inter-agency working group to develop a guide to assist civilian executive agencies in selecting private firms to perform required contract audits. The inability of DCAA (Defense Contract Audit Agency) to perform timely audits has been reported here and elsewhere and the subject of several GAO (General Accountability Office) and Inspector General reports. Civilian agencies, unlike the Defense Department are not required to utilize DCAA for their contract audit services. Agencies that do utilize DCAA, reimburse DCAA for those services thus there has developed a strong consensus within civilian agencies that they can receive more timely services by contracting with commercial firms rather than relying upon DCAA. Some even contend that the cost for commercial audits are less than the cost for comparable DCAA audits. That contention is difficult to assess. The hourly rates charged by private firms are generally higher than the hourly rates charged by DCAA so the other variable is the number of hours it takes to perform the work. It might be that DCAA, unbound by a profit motive, spends too many hours while a private firm, needing to make a profit, spends too few hours. A number of years ago, the Energy Department moved away from DCAA and contracted with private firms for its contract audit services. Though we have not seen a comprehensive assessment of how that is working, we do know that in some circumstances, the Energy Department has been concerned with the cost growth of these services - especially when contracted firms are called upon to assist "extra-scope" activities such as helping to resolve audit issues that arose from their audits.

The GSA is now requesting feedback on their draft "Civilian Contract Audit Services Ordering Guide". One of the problems facing Civilian Agencies is to determine what contract audit services are required. Heretofore, those agencies have relied upon DCAA to tell them what audit services are needed. So the guide lays out the different audit services that may be needed including (i) audits of final indirect cost rate proposals, (ii) evaluation of provisional billing rate proposals, (iii) audits of forward pricing rate proposals, (iv) business system audits including accounting systems, (v) floorchecks, and more. The guide identifies best practices among Government agencies that have used or are currently using commercial auditors for their contract audit needs. The draft guide includes considerations for what makes for a quality audit, sample documents to attach to RFQs (Requests for Quotations), recommendations for evaluating contractor responses, and pricing considerations. It also includes examples of helpful non-price evaluation factors.

The time for submitting comments to the draft guidance ends October 27th. Instructions for submitting comments can be found under FedBizOps. The draft guide can be downloaded there as well.

Monday, October 23, 2017

ASBCA Reduced Its Backlog During Fiscal Year 2017

The Armed Services Board of Contract Appeals (ASBCA) recently published its annual report for fiscal year 2017. It shows that the backlog of pending cases has decreased by about 10 percent from the prior year, from 1,077 to 970 cases. During the year, 524 new cases were docketed, 47 cases were reinstated and 678 cases were dispositioned.

Of the 524 new cases, 57 percent originated from the Army and the Army Corps of Engineers. The second highest agency in terms of new cases was DCMA (Defense Contract Management Agency) coming in at 18 percent (92 new cases). This was the lowest number of new cases in the past five years for DCMA and less than half the number of cases from fiscal years 2014 and 2015.

Of the 678 dispositioned cases, 80 appeals were sustained (in whole or in part), 59 appeals were denied, while 539 cases were dismissed. Dismissed cases include those that were resolved by the parties prior to hearing, withdrawn by one of the two parties, or failure to meet the rules of the ASBCA.

The ASBCA is not necessarily the final authority in contract appeals but it has an excellent track record. Of the 139 cases sustained or denied, only eight were appealed to the U.S. Court of Appeals for the Federal Circuit (CAFC). Seven of those are still pending. The CAFC disposed of 10 appeals of ASBCA decisions during fiscal year 2017. Only one of the ASBCA decisions was reversed.

The Board's annual report did not provide statistics on how long a case takes to resolve. The quickest way to resolve contract disputes is to negotiate a fair and reasonable settlement with the contracting officer. Second quickest is to consider whether ASBCA Rule 12 proceedings (Optional Small Claims (Expedited) and Accelerated Procedures) might work. Rule 12 usually means that both parties will have to give up something in order to reach settlement. If the dispute goes to formal hearing, expect a the process to take a year or more.

Friday, October 20, 2017

What is the "Law of Bailment"?

The Navy leased three boats from Assessment and Training Solutions Consulting Corporation (ATSCC) for training purposes. The lease extended 18 months and required the contractor to provide routine preventative maintenance. Any repairs from damages that were the Government's fault would be paid for separately. At lease end, the Navy returned the boats in damaged condition. ATSCC tallied the damages and submitted a claim for about $58 thousand.

The Navy failed to issue a final decision on the claim for more than a year so ATSCC appealed to the ASBCA (Armed Services Board of Contract Appeals) based on a "deemed denial".

ATSCC argued that the nature of the damage was sufficient to prove negligence on the part of the Navy. However, the Board ruled that the record does not clearly show that the Navy operated the vessels negligently. That would normally resolve the appeal in favor of the Navy. However, ATSCC pointed to "common law bailment" and argued that it may rely on a presumption to meet its burden of proof. The Navy countered that since negligence is specifically addressed in the PWS (Performance Work Statement), common law bailment principles are inapplicable to ATSCC's claim.

The Board ruled that ATSCC was correct.

When the Government rents property from a contractor, a bailment for the mutual benefit of the parties is created. The law of bailment imposes upon the bailee (the Navy in this case) the duty to protect the property by exercising ordinary care and to return the property in substantially the same condition, ordinary wear and tear excepted. When the Government receives the property in good condition and returns it in a damaged condition, a presumption arises that the cause of the damage to the property was the Government's failure to exercise ordinary care or its negligence.

Overcoming the presumption requires a preponderance of the evidence. The Navy filed to overcome the presumption that the damages were caused by its negligence by a preponderance of the evidence. The Board stated: "The evidenced in the record, when fairly considered, produces the stronger impression, and has the greater weight, and even though not free of doubt, is more persuasive as to its truth when weighed against evidence in opposition thereto."

The Board ruled in favor of ATSCC. You can read the entire Board decision here.

Thursday, October 19, 2017

Government Employees are (Generally) a Happy and Contented Bunch

OMP (Office of Personnel Management), the Government's HR Department, recently published the results of its 2017 Federal Employee Viewpoint Survey. This survey measures how Government employees feel about their jobs, their supervisors, and their agencies. It also allowed employees to share their opinions on what matters most to them.

Nearly a half million employees responded to the survey representing 80 different agencies. Overall satisfaction rose 3 percentage points from 61 to 64 percent. The questions in the 2017 survey were identical to those in the 2016 survey.

The survey results have been published here and can be searched for additional details. It includes links to even more details, if one is so inclined to study them. Overall DoD agencies are right around the norm for overall satisfaction (64 percent). The Department of Energy is higher (68 percent) and NASA is much higher (80 percent).

From a Government contractor's point of view, its usually much better to deal with Government counterparts that enjoy their work, are helpful, solve problems, and seek better ways to do things.

Wednesday, October 18, 2017

Contractor Pays $2.6 Million to Settle False Claims Act Violation

What do you do when you are awarded a Government contract and you find that you are unable to find qualified applicants to fill the positions? Or, what do you do when you are awarded a Government contract and you find that qualified applicants cost a lot more than you bid for those positions? In one case, you risk defaulting under the contract. In the other, you put your company in financial jeopardy. Or, you could falsify employee qualification records and carry on.

Triple Canopy in Reston VA faced that dilemma with a security guard contract in Iraq. The company was to provide security support to the Government's relief and reconstruction efforts in Iraq by providing a variety of security services at the second largest air base in Iraq. However, the security guards it employed, did not meet the minimum qualifications specified by the Army.

Triple Canopy hired security guards who could not pass contractually required firearms proficiency tests. The tests were designed by the Army to ensure that the guards hired to protect U.S. and allied personnel were capable of firing their assigned weapons safely and accurately. To avoid getting caught, Triple Canopy created false test scorecards that it was required to maintain for Government review. Ultimately, the Government paid for the unqualified guards.

Triple Canopy's scheme fell apart when a company whistle-blower came forward and filed a Qui Tam action. The Government intervened and Triple Canopy agreed to pay $2.6 million to settle the suit. Of the $2.6 million, the whistleblower will receive approximately $500,000.


Tuesday, October 17, 2017

Procurement Fraud Prevention Act

Senate Bill 938 would require GSA (General Services Administration) in consultation with the Office of Management and Budget (OMB), to ensure that any direct communications with small businesses about providing goods and services to the Federal Government contain a notice that technical assistance from the Federal Government on the procurement process is available to small businesses at no cost.

We explained this bill in some detail back in May (see Proposed Legislation to Notify Small Businesses of Free Procurement Assistance). The intent is to help protect small businesses from falling victim to fraud when they register to sell their products and services to the Government. We're not sure what kind of procurement fraud that SAM (System for Award Management) registrants are susceptible to. Neither of the Senate sponsors (Peters and Collins) provided any studies or anecdotal evidence of procurement fraud. We know from personal experience that SAM registration will result in many offers of assistance for a fee. Sometimes such paid assistance is no better than what is available for free through DLA's Procurement Technical Assistance Centers (PTAC) or SBA assistance. However, we would not call that procurement fraud.

The Congressional Budget Office (CBO) reported that the Bill, if enacted, would have negligible impact on spending or revenues for the next 10 years, and would impose no costs on state, local, or tribal governments. That is intuitively obvious.

The Bill took another step toward enactment earlier this month when the Senate Committee on Homeland Security and Governmental Affairs reported favorably in support of the legislation.

Finding and utilizing free resources is a good place to start for small businesses just getting started in Government contracting. The PTACs in particular have a lot of resources and a good track record in helping companies through the maze of procurement regulations.

Monday, October 16, 2017

40 Months in Prison for Accepting $35,000 in Gratuities

We read this Justice Department Press Release from last Friday about a former Navy comptroller from the Norfolk Ship Support Activity being sentenced to 40 months in prison because he accepted $35,000 in gratuities over a four year period from a Government subcontractor. These gratuities were not paid in cash but consisted of cell phone service for he and his wife, and some other personal electronic items. We thought the punishment (3 plus years in prison plus restitution) seemed severe and certainly not typical of what we have come to expect based on similar prosecutions. That is, until we dug a little deeper than just the Justice Department's press release.

Why would a high-ranking Government employee, making somewhere around $150,000 a year, jeopardize his job, his career, his reputation, and his future by accepting a few thousand dollars of trinkets and junk jewelry? How does that even fit into the fraud triangle concept (perceived unshareable financial need, perceived opportunity, and rationalization)? Turns out, the case was not so much the gratuities he received but more about what he was setting himself up to receive after he retired from the Government.

The comptroller found a company that would collaborate with him to misuse Government funds; Global Services Corporation (GSC). He then directed that a certain (unnamed) prime contractor to award a subcontract to GSC. He then directed the prime contractor to pass Government funds to GSC. He then directed GSC to withhold unexpended funds that should have been returned to the  Government via the prime contractor. Obviously, the Navy comptroller had a lot of undue influence over the operations and activities of GSC. The complaint called GSC a willing participant in the scheme.

When all was said and done, the Navy controller, through the prime contractor parked about $5 million with GSC for which no services were ever rendered. What did the Navy comptroller get out of it besides $35 thousand in electronics? The promise of post-retirement employment at $150,000 per year to be paid out of the $5 million slush fund. He never got there. The scheme was uncovered before he retired by a routine audit by the Naval Audit Service. Now he will be spending the next few years of his retirement in prison.

The President of Global Services Corporation (GSC) also pleaded guilty on related charges. He is set to be sentenced later this year.

Friday, October 13, 2017

Company President Found Guilty of Fraud Against the Government

A jury has found the owner of Armet Armored Vehicles Inc. guilty of defrauding the U.S. Government on a contract for 32 Gurkha armored gun trucks. The company (and by extension the owner) lied about the ballistic and blast protection capabilities of their Gurkha gun trucks as well as only delivering seven of the promised 32 vehicles contracted for and delivering those seven vehicles long after the contract delivery date.

Evidence at trial demonstrated that the owner executed a scheme to defraud the United States by providing armored gun trucks that were deliberately under-armored. Although the gun trucks did not meet contractual specifications, the company and its employees represented that the trucks were adequately armored.

After the verdict, the Judge in the case took the unusual step of remanding the owner into custody pending a full bond hearing. Perhaps he was considered a flight risk. A sentencing date has not yet been scheduled.

This case began with a whistleblower suit by a company employee.

The Gurkha is an armored military and law enforcement vehicle. It is based on a Ford F550 chassis with a 6.7 liter diesel engine but is typically customized to the user's needs.

A previous civil action involving this incident was settled in favor of Armet. Read more about this case in the Justice Department press release.

Thursday, October 12, 2017

Subcontractor Pays $235 Thousand to Settle False Claims Charges

Late last month, we wrote about a $2 million settlement involving a DOE (Department of Energy) subcontractor who subcontracted some of its work to a third company who, it turned out, was a small  woman-owned business but had no employees or equipment (see $2 Million Settlement in Small Business Subcontracting Fraud).

This week, the Justice Department announced settlement with the other company, Sage Tec LLC. Sage Tec and its owner agreed to pay $235,000 to resolve allegations that it violated the False Claims Act (FCA) in connection with two small business subcontracts.

The prime contractor, responsible for environmental remediation at Hanford, was required to award a certain percentage of subcontracts to eligible and qualified small and disadvantaged businesses, including woman-owned small businesses. The requirement flowed down to its subcontractors as well. One of the subcontractors, FE&C (Federal Engineers and Constructors) awarded two subcontracts to Sage-Tec, an entity that purported to be a small, disadvantaged business. 

Initially, a lawsuit was brought forth by a whistleblower. The Government later enjoined the suit. The basic charge was that the prime contractor, FE&C, and Sage Tec knowingly misrepresented Sage Tec to be a qualified disadvantaged small business in order to be eligible for two multi-million  dollar subcontracts that were designated for truly qualified small disadvantaged businesses. Sage Tec, it turns out, was not a legitimate small, disadvantaged business; rather it was a pass-through front company for FE&C, which performed substantially all of the work that should have been performed by Sage Tec.

The Government continues to investigate the Prime contractor for its role in the matter. The original whistle-blower stands to make a lot of money. On this Sage Tec settlement, the whistleblower will receive $47 thousand. On the aforementioned FE&C settlement, the whistleblower earned $470 thousand. If the prime contractor settles, the whistleblower will probably get a cut of the settlement amount as well.

You can read the full Justice Department press release here.

Here's a link to a related article appearing in the local newspaper.

Wednesday, October 11, 2017

Contractor Recovers Termination Costs Even Without Receiving a Notice to Proceed

In 2011, the Corps of Engineers awarded a contract to Pro-Built Construction to build a police station in Afghanistan. The Corps did not issue a notice to proceed however, and in 2012 (about seven months later), issued a TforC (Termination for Convenience) due to "negative security conditions.. Pro-Built submitted a TforC claim for about $1.1 million. In a final decision, the Contracting Officer determined that Pro-Built was entitled to a mere $49 thousand. Pro-Built appealed to the ASBCA.

While waiting for the notice to proceed, Pro-Built prepared its pre-construction submittal, a quality control plan, accident prevention plan, and security plan. It also sent staff and subcontractors to see the site, talk with the local people and talk with the village elders, and considered elements for the design including building codes and specifications.

The Corp asked DCAA (Defense Contract Audit Agency) to audit Pro-Built's $1.1 million claim. DCAA questioned the entire amount because the company incurred the costs prior to receiving a notice to proceed (FAR 31.201-2 and FAR 52.211-10). DCAA piled on more allegations; it was unreasonable for Pro-Built to have incurred any costs, other than to meet bond, insurance, or administrative requirements prior to receiving the notice to proceed, that Pro-Build did not have a formal accounting system; the Pro-Built's proposal was not an acceptable basis for settlement, and that Pro-Built had not properly calculated its G&A (General and Administrative) rate.

Ultimately the Board awarded Pro-Built $339,000 for a variety of reasons but most importantly, because they found, given the labor market and security situation in Afghanistan, it was reasonable for Pro-Built to incur standby costs prior to the notice to proceed. The Board allowed three months of stand-by costs rather than the eight months proposed by Pro-Built. The Board also noted that the Corps strung Pro-Built along with multiple correspondences stating, to the effect, that it would be issuing a notice to proceed imminently.

The entire Board decision can be read here.

Tuesday, October 10, 2017

Whistle Blower Protections for Contractor Employees Extended

FAR (Federal Acquisition Regulation) 3.900(b) and 3.908 implemented a pilot program for the enhancement of whistleblower protections for contractor employees from July 1, 2013 to January 2, 2017. The pilot program was subsequently extended to July 2, 2017. Prior to expiring, the pilot program was made permanent by Public Law 114-261 on December 14, 2016.

The FAR Councils are presently processing FAR Case 2-005, Whistle blower Protection for Contractor Employees to revise the FAR to make the pilot program permanent. The FAR case will be finalized at some undetermined point in the future.

In the meantime, the Civilian Agency Acquisition Council (CAAC) has issued a letter authorizing agencies to issue deviations to FAR in order to continue the pilot program coverage and address potential confusion in the use of clauses in commercial contracts implementing the program.

Most civilian agencies are taking the necessary steps to implement the CAAC letter so that whistleblower protections for contractor employees remain viable. Additionally, the CAAC letter clarifies that the relevant contract clauses belong in commercial item contracts in addition to negotiated procurements.

You can read the full letter here.

Monday, October 9, 2017

Subcontractor Cost/Price Analyses Not Completed When Prime Proposal Submitted

DFARS (DoD FAR Supplement) 252.215-7009 is the Proposal Adequacy Checklist that companies should complete whenever a proposal to DoD requires the submission of cost or pricing data. The requirement is not mandatory, its only suggested as a means of facilitating submission of a thorough, accurate, and complete proposal (see DFARS 215.408(5). Although DFARS only suggests that it be prepared, often times procurement offices will make it a requirement for proposal submission thus making it effectively a mandatory document. Its a nice tool and we usually recommend contractors complete the checklist for any proposal. Whether prospective contractors choose to submit one or not, someone in the Government probably will prepare one so its best that contractors be prepared to respond to any queries that might result from a "no" answer.

One of the more problematic questions has been No. 17 which asks whether the prime contractor or higher-tier subcontractor has included the required cost or price analyses that establishes the reasonableness of each of its proposed subcontracts included with the Proposal. If not, the question further asks whether the offeror has included a matrix identifying (i) dates for receipt of subcontractor proposal, (ii) completion of fact finding for purposes of price/cost analysis, and (iii) submission of the price/cost analysis.

DCAA (Defense Contract Audit Agency) is playing hard-ball with this question. In recent guidance to its audit staff, it makes the following observation.
Question: If the prime contractor or higher-tier subcontractor has not completed the required cost or price analyses but has included a matrix identifying dates for receipt of subcontractor proposals, should Question No. 17 be marked as adequate or inadequate? Additionally, should the audit team consider the overall proposal adequate or inadequate for audit and proceed with the audit if this inadequacy exists?
Answer: FAR 15.404-3(b) requires the prime contractor or higher-tier subcontractor to conduct appropriate cost or price analyses to establish the reasonableness of the proposed subcontract prices and include the results of these analyses in the prime contractor’s proposal.
 As such, the inclusion of a matrix does not overcome the inadequacy of the prime contractor not submitting the cost or price analyses with the proposal. If the prime contractor or higher-tier subcontractor has not completed the cost or price analyses, as required by FAR 15.404-3(b), Question No. 17 ... should be marked as inadequate (i.e., answer “no” under “Adequate?”
We're not sure how the DCAA position serves any useful purpose. The DoD in its checklist has already allowed for a time-phased matrix when an offeror's cost/price analysis of subcontractor proposals cannot be completed by the proposal due date. If the offeror did not complete the cost/price analysis and did not supply a schedule for completing them, then the proposal might not be adequate for negotiating a price.

Friday, October 6, 2017

Contracting Officer's Alleged Misconduct Cost a Contractor $21 Million

L3 Technologies' Communication Systems-West Division (CSW) filed a suit against the Defense Contract Management Agency (DCMA) last month for $21 million alleging that DCMA's Divisional Administrative Contracting Officer (DACO) inappropriately directed the contractor to discontinue proposing its Material Adjustment Factor (MAF) on all proposals to the Government.

This case is about a DCMA DACO's unreasonable and improper administration of CSW's Government contracts and the "far-reaching harm" caused by that "maladministration". For more than two years, the DACO prohibited CSW from including otherwise allowable costs in its proposals for Government contracts. CSW, the complain alleges, had no viable choice but to accede to the DACO's directive because the DACO is the Government official with exclusive responsibility for determining CSW's compliance with Cost Accounting Standards (CAS), establishing final indirect cost rates and billing rates, and determining the adequacy of its accounting system and other contractor business systems (including estimating systems).

The MAF (Material Adjustment Factor) is a composite factor to propose material-related costs not included in any other bid element. It consists of four components: scrap, vendor rework, consumables, and residual material. From 1998 through 2006, CSW included the MAF factor in its negotiated Forward Pricing Rate Agreements (FPRAs). During those years, DCAA (Defense Contract Audit Agency) audited the factor numerous times and took no exception. During negotiations for a 2007-2011 FPRA, the Government and CSW could not come to agreement on one of the components of the MAF, residual materials. And so, the DACO excluded the MAF from the FPRA with the understanding that it would be included as an addendum to the FPRA when the parties resolved the residual material component.

In 2011, notwithstanding that the amount in dispute represented only a small part of the MAF and affected only certain contracts, the DACO directed CSW to discontinue proposing the MAF on all proposals until further notification. At no point prior to that did the DACO provide CSW written notice of any pontential noncompliances stemming from the use of the MAF nor did the DACO make any effort to reach a satisfactory settlement through discussions with CSW before peremptorily directing CSW to discontinue proposing the MAF. This action violated both FAR 30.605 and FAR 42.801.

The DACO compounded "her blunderbuss approach to the MAF with her erratic and unpredictable actions regarding the status of CSW's estimating system". The DACO disapproved the estimating system, then changed "disapproved" to "inadequate" and threatened CSW that it it proposed the MAF, she would consider the system to have a significant deficiency.

Because of the DACO's improper actions, CSW was unable to propose allocable, allowable, and reasonable costs totaling $21 million, the amount of the lawsuit.

Thursday, October 5, 2017

More Recommendations for the Section 809 Panel

From time to time, we provide updates to some of the activities of the Section 809 Panel, an advisory panel created by the 2016 NDAA (National Defense Authorization Act) to make recommendations on streamlining the Defense Department's acquisition regulations. The Section 809 Panel solicits recommendations and ideas from anyone that has an interest in Government procurement and wishes to offer up ideas for streamlining the acquisition process.

Last week, The Coalition for Government Procurement submitted a list of 30 specific recommendations for (i) reducing unnecessary regulations on industry, (ii) empowering successful acquisition management and (iii) strengthening inter-agency contracts to ensure that DoD contracting officers can make informed contracting choices. The Section 809 Panel is reviewing those recommendations now, The Coalition's report can be found here.

So what were some of their recommendations? Well, to be honest, we haven't read the full 94 page report ourselves. That seems a bit much to ask, no? But we did review the titles of the 30 recommendations, scanned through the document, and read the details of a few that sounded interesting. Here are some samples:

  1. There were a few suggestions that appear outside the scope of the Panel's mission. For example, the Coalition recommended that a change required by the 2017 NDAA - competition at the task order level - be expanded to civilian agencies as well.
  2. Permanent sun-setting - the Coalition recommend a procurement sun-setting on all procurement regulations not required by statute.
  3. Eliminating the requirement to report executive compensation - this will save contractors 55,000 hours every year and the requirement has dubious benefits.
  4. Increase the micro-purchase threshold to $10,000 (from $5,000). Affects only one percent of spending but would increase the speed of thousands of transactions.
  5. Streamline the cumbersome SAM (System for Award Management) registration process. The current process is intimidating for new businesses seeking to sell to the Government.
  6. More training for the acquisition workforce (a recommendation that comes up every year)
  7. Modernize FedBizOpps - it lacks many of the features found on comparable commercial market platforms.
  8. Change the auditing process - This recommendation is not a slam against DCAA.  Rather it is a recommendation that civilian agencies use organizations other than their own Inspector General offices to conduct contract audits.

You can read (or peruse) the full report here.

Wednesday, October 4, 2017

Another "Rent-a-Vet" Scheme Settlement

The New York Foundation for Fair Contracting (NYFFC) is a not-for-profit organization established to support, promote and encourage fair contracting by leveling the playing field in public works construction for the benefit of taxpayers, contractors and workers (online source). According to NYFFC, not all construction contractors play by the rules. Unfortunately a number of them skimp on safety, cheat workers out of wages and use shoddy materials. When this happens, the construction industry, the taxpayers and the local economy pay the price. The NYFFC works to ensure that only responsible contractors - contractors that pay the proper wages, perform quality  workmanship and complete projects on-time - are awarded the opportunity to perform wok on public works contracts.

The Foundation just became $450,000 richer. It blew the whistle on a couple of contractors who fraudulently obtained Federal Government contracts that were designated for service-disabled veteran-owned (SDVO) small businesses. The companies involved Zoladz Construction and Arsenal Contracting, and Alliance Contracting (along with the two owners, Zoladz and Lyons) service-disabled veterans and therefore were not eligible for the contracts.

Zoldaz recruited a service-disabled veteran to serve as a figurehead for Arsenal, which purported to be a legitimate SDVO small business but which was, in fact, managed and controlled by Zoladz and Lyons, neither of whom is a service-disabled veteran. The Government determined that Arsenal was a sham company that had scant employees of its own and instead relied on Alliance and Zoldaz employees to function. After receiving numerous SDVO small business contracts, Arsenal then subcontracted nearly all of the work to Alliance (owned by Zoladz and Lyons) and Zoladz (owned by Zoldaz). Neither Alliance nor Zoldaz were eligible to participate in SDVO small business contracting programs.

The principles agreed to pay $3 million to settle the allegations. NYFFC who blew the whistle in this case, will receive $450,000 of that amount. No word on the value of the contracts awarded to Zoladz or Alliance. Presumable, the $3 million was calculated to take away the profits that the companies made as a result of their false statements.

You can read more about this case in the Department of Justice's press release.

Tuesday, October 3, 2017

Former Contracting Officer Accused of Accepting $3 Million in Bribes

For the past 10 years, the U.S. Army has been upgrading Camp Humphreys to be its new flagship installation in South Korea. The bulk of U.S. forces and civilians stationed in South Korea, including those stationed at the current Eighth U.S. Army Headquarters in Yongson (Seoul) will be relocated to Camp Humphreys once the upgrades are completed. This will allow U.S. Forces to consolidate its footprint from more than 100 installations throughout South Korea to less than 50. Camp Humphreys has the added benefit of being located beyond the range of most of North Korea's 14,000 artillery pieces.

To call this project an upgrade significantly understates the scope of what is happening. The cost has been publicly acknowledged at  $13 billion but probably exceeds that by a significant amount. Its size exceeds that of Washington D.C. It will house 36,000 service members, dependents, civilian employees and contractors. It's an entire city with hospitals, schools, shopping, and recreation facilities including a golf course.

With a cost projected at $13 billion there are plenty of opportunities for fraud, waste, and abuse in and among contractors working on the project and the Army Corps of Engineers in charge of the project and related contracts. The Justice Department just announced charges in one case.

A former contracting officer for the Army Corps of Engineers and a former officer in the Korean Ministry of Defense were indicted for their roles in a scheme to direct over $400 million in DoD construction contracts to a South Korean construction company in exchange for $3 million in bribes. One has to believe that the expected profit on $400 million had to be significant in order to offset more than $3 million in bribes.

The former Corps of Engineers contracting officer, currently living the good life in Hawaii, has been charged in a nine-count indictment with mail and wire conspiracy, bribery, wire fraud, conspiracy to commit money laundering, and making false statements.

Between 2008 and 2012, the contracting officer solicited bribes from a large Korean engineering and construction company in exchange for directing contracts to the company related to the relocation and expansion of Camp Humphreys.

The former COE contracting officer hid the bribe money by purchasing real estate and putting it in bank accounts in the names of others, including two girlfriends. He quit his job with the Corps in 2012 and began lobbying the DoD for construction projects on behalf of the company that paid him the bribes.

You can read more in the Justice Department press release here.

Monday, October 2, 2017

The Bonus for Cost Cutters Act of 2017

A Bill that would authorize the head of a federal agency to pay a cash award to federal employees who identify unnecessary expenses (i.e. waste, fraud, and abuse) resulting in cost savings for the agency has been introduced in the House and referred to the Committee on Oversight and Government Reform. The maximum amount of the bonus would be $20,000 and certain Government employees would not be eligible including (i) an officer serving in a position at Level I of the Executive Schedule, (ii) the head of an agency, (iii) anyone employed by the Office of the Inspector General, and (iv) a commissioner, board member, or other voting member of an independent establishment.

The Congressional Budget Office (CBO) issued its report on this legislation, noting that there would be no significant additional cost to implement the bill since there are many tools at the Government's disposal under current law to report waste and mismanagement of funds. However, the CBO also said that it wouldn't do much to help reduce wasteful spending because there would be no significant reduction in federal spending because of increased identification of wasteful or fraudulent spending as a result of enacting the bill. The CBO is probably correct. The Government has a lot of priorities and if funds are not spent somewhere, they'll be spent somewhere else. The CBO failed to note however that money spent on wasteful projects means that something else will not get funding.

In the context of this bill, the term "unnecessary expense" means amounts identified by an employee as unnecessary that the CFO of the agency determines are not required for the purpose for which the amounts were made available and the rescission of which would not be detrimental to the full execution of the purposes for which the amounts were made available.

The "unnecessary expenses" would be deposited in the Federal Treasury to reduce the Federal deficit. The agency can retain up to 10 percent of the funds to pay for the cash awards or for other uses of the agency (consistent with other provisions of the law).

There is some concern that this bill, if enacted, could affect contract awards and contract funding - especially funds remaining at year end when the Government slips into its annual "spend it or lose it" ritual - where the Government will spend money on anything as long as it gets spent on something. Many of the "wasted" projects lambasted by Senator Flake in "Porkemon Go" or Senator McCain in "America's Most Wasted" or Senator Lankford in "Federal Fumbles - 2016 Edition" may not have received funding had a bonus incentive been in place at the time someone in the Government decided it was worthwhile to spend money to see if dinosaurs were able to sing.

Friday, September 29, 2017

New GAO Report on DCAA Incurred Cost Audits

The Government Accountability Office (GAO) was asked (by Congress) to review the extent of the contract closeout backlog at large federal agencies. It published its findings this month (see Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog). As the report title implies, the GAO was not satisfied that agencies have been effectively managing the contract closeout process. GAO attributed most of the problem to everyone's favorite whipping boy, the Defense Contract Audit Agency (DCAA).

The biggest contributing factor cited by agency officials in closing out flexibly-priced contracts is the delay in receiving audits of contractors' incurred cost proposals that are conducted by the Defense Contract Audit Agency. Digging a bit deeper, the GAO concluded that although DCAA has made some progress in reducing its backlog of incurred cost audits, it still took the Agency an average of two and a half years to push one out the door.
Since 2011, the Defense Contract Audit Agency (DCAA) has reduced its inventory of contractors' incurred cost proposals awaiting audit by about half to 14,208, and DCAA has significantly reduced its backlog of older proposals - those for 2013 and prior - as of September 2016. To do so, DCAA used a risk-based approach to reduce the number of audits and began conducting multi-year audits, in which two or more incurred cost proposals are closed under a single audit. Nevertheless, DCAA did not meet its initial goal of eliminating its backlog by fiscal year 2016. DCAA averaged 885 days from when a contractor submitted an adequate incurred cost proposal to when the audit was completed. The lag was due to limited availability of DCAA staff to begin audit work, as it took DCAA an average of 138 days to complete the actual work.
The GAO identified two areas in which DCAA may be missing opportunities or currently lacks information to help identify additional ways to reduce its inventory of incurred cost audits. These include (i) assessing actions for reducing the amount of time it takes DCAA to begin an incurred cost audit (nearly two years in fiscal year 2016) and establishing related performance measures to assess its progress and (ii) evaluating the use of multi-year auditing and establishing related performance measures.

DCAA attributed the delay in initiating audits to staffing shortages and the fact that the majority of incurred cost proposals are submitted all at once. DCAA uses a 6-24-6 framework for conducting incurred cost audits; 6 months for the contractor to submit its proposal, 24 months to complete the audit, and 6 months for the contracting officer to close the affected contracts. GAO noted however that the 6-24-6 framework is not being met in practice and needs to be revised to take into account the realities of the time-frames for contractors to submit adequate proposals and DCAA's own staffing issues.

At the end of FY 2016, there were 452 incurred cost proposals that were determined to be inadequate and thus not auditable. DCAA however does not have insight into the reasons why DCAA determined that a contractor's proposal was inadequate, the number of times that a contractor submits revised proposals until it is deemed adequate, or the length of time it takes to receive an adequate proposal. We know from personal experience that there is a lot of variability among DCAA's 80 or so field offices as to what constitutes an adequate incurred cost proposal. Sometimes proposals are rejected for the most inconsequential reasons.

GAO made a couple of recommendations to DCAA for improving its processes. Essentially the recommendations related to establishing performance measures to track its progress. DCAA concurred.

Click here if you want to plow through all 52 pages of the GAO report.

Thursday, September 28, 2017

Jury Finds Raytheon Not Guilty of Retaliation in Labor Charging Case

A former Raytheon engineer filed a $3.56 million lawsuit claiming that he had been fired from his job in retaliation for raising concerns about timecard fraud to company ethics officials. The former employee complained that the company refused to compensate employees for time worked in excess of 40 hours per week.

At trial, it was revealed that the former employee filed his complaint with a company ethics official only after learning that he himself was being investigated for his own timecard irregularities. Raytheon introduced records to show that the employee had only been on site at Raytheon facilities for four hours when he charged 10 hours on his timesheet and other records to show that the former employee had not logged in to Raytheon systems either which could have suggested that he was working remotely.

It only took an eight person jury a couple of hours to find that Raytheon did not fire the employee in retaliation for whistleblowing.

We wonder whether Raytheon has refunded or intends to refund the Government for this employee's labor charged to contracts for time not worked.