Quarterly Limitation on Payments Statements (QLOPS)

There are certain contract clauses that require contractors to prepare and submit "Quarterly Limitation on Payments Statements" (QLOPS). These typically include Price Redetermination contracts (see FAR 52.216-5 and -6) and Incentive Price Revision contracts (see FAR 52.216-16).

A QLOP is a statement that shows

1. the total contract price of all supplies delivered or services performed and accepted by the Government and for which final prices have been established.
2. the total cost (estimated to the extent necessary) reasonably incurred for the items included in No. 1 above.
3. the portion of the total interim profit that is in direct proportion to the supplies delivered or services performed and accepted by the government and for which final prices have not been established and
4. the total amount of all invoices or vouchers for supplies delivered or services performed and accepted by the Government (including amounts applied or to be applied to liquidate progress payments).

QLOPS are required to be submitted quarterly to three groups; the contracting officer (CO), the administrative contracting officer (ACO) and the cognizant contract auditor (usually DCAA).

The purpose of QLOPS is to ensure that billing prices during contract performance are within a reasonable range of the expected final prices or estimates at completion (EACs). The Government does not want to ever be in a position where it has paid or reimbursed a contractor for more than the intrinsic value of the products delivered or services performed. To do so puts the Government at financial risk.

DCAA (Defense Contract Audit Agency) has a program for auditing QLOPS. Essentially, the audit will trace contractor representations back to accounting books and records and ensure that the reports are internally consistent with other reporting requirements such as progress payment requests, CPRs, budgets, and other management reports.

These audits can be intrusive and disputes sometimes occur regarding the "rights" of the auditor to view certain contractor information such as budgets and internal management reports. Contractors should find a way to satisfy the auditor however because he/she has certain audit objectives to meet. Disputes over access to records that are not resolved at the auditor level are usually elevated to the ACO or Contracting Officer level and that rarely works out well for contractors.

DCAA's Fiscal Year 2016 Report to Congress

DCAA (Defense Contract Audit Agency) recently made its fiscal year 2016 Report to Congress available on its public website. You can download it here.   This is the sixth annual report published by DCAA which is required by Statute and began during the time that DCAA was under intense scrutiny over the quality of its audits. This report, and all of the reports, highlights DCAA's audit performance, recommendations to improve its audit processes, industry outreach activities, and key accomplishments.

This year's report  offers a glimpse into DCAA's now organizational structure which had basically remained unchanged since the Agency was formed in 1965. There is still a Headquarters. The number of Regional Offices has been reduced from five to four. The most significant change however is the establishment of four Corporate Audit Directorates (CADs). CAD are responsible for overseeing the audits of select major contractors. Formerly, these major contractors were covered by many different branch and sub-offices throughout the country.

The report focuses heavily on DCAA's successes during the year which include reducing the incurred cost audit backlog from 21,000 in 2011 to 4,700 in 2016., achieving net savings of $3.6 billion and returning $5.70 to the Government for every dollar it spends.

The section of the report that we and most contractors are interested is recommendations to improve the audit process. This year, the Agency expressed a desire to become more involved in the legislative processes impacting the Agency. Also, they Agency yearned for assistance in maintaining a steady level of staffing. It takes a long time to recruit, train, and develop audit staff but the on-again off-again nature of hiring freezes presented a major barrier and hindered its ability to accomplish its mission. There is no sense of self-reflection in DCAA "recommendations". Apart from Congress's muddling, everything is fine.

DCAA's conclusion is this:

DCAA is an important member of the acquisition community with a unique and valuable mission. Our new organization structure will increase communication and coordination with major defense contractors while allowing our regional directors to focus on small and mid-sized contractors. We will continue to develop innovative ways to improve the audit process and make our services more responsive to the needs of acquisition community. We are ready for the challenges of the future and look forward to continuing to serve the warfighter and taxpayer.

State Income Tax Paid by S-Corp or LLC Shareholders

FAR (Federal Acquisition Regulation) 31.205-41 provides criteria on which taxes are allowable and which taxes are not allowable under Government contracts (see Allowability of Taxes Under Government Contracts). State income taxes required to be and are paid (or accrued) in accordance with GAAP (Generally Accepted Accounting Principles) are specifically called out as allowable costs.

 But what are the rules if you're a Subchapter S Corporation (S-Corp) or an LLC where the profits are passed directly to the shareholders or partners? The partners have to pay state income tax on their share of the profits. Can they pass the state income tax liability back to the company and claim it as an unallowable expense?

The short answer is 'no'. DCAA (Defense Contract Audit Agency) puts it this way in Chapter 68 of its Selected Areas of Cost Guidebook:

Contractors that elect Subchapter S Corporation tax status are not taxed at the corporation level and thus are not normally required to pay state or local income taxes or to accrue such tax liability. Instead, the corporate income passes through to the shareholders and is taxed on the shareholders’ personal income tax returns. Accordingly, state and local taxes that are passed through to the individual shareholders are not an expense of the corporation and as a result, are not allowable costs under Government contracts. Auditors should ensure that contractors who have elected Subchapter S tax status, or any other tax status (e.g., Limited Liability Corporation) in which taxes on the pass-through income of the corporation are required to be paid by the individual shareholders, are claiming only those taxes which are required to be paid or accrued by the contractor. Individual shareholder state and local income taxes claimed by the contractor on their pass-through income to the shareholders are unallowable in accordance with FAR 31.205-41, Taxes, and should be questioned. 

While this may seem unfair to companies that have chosen to organize as a Subchapter S Corporation or an LLC/LLP, we know of no other opinion or guidance or position that effectively refutes that taken by DCAA. Those companies could look at the positive side, the absence of state income tax expense gives them a competitive advantage when it comes to cost.

Administration's Plans to Cut Indirect Costs from Research Budgets

Earlier this month, PBS ran a story about the high cost of university research, noting specifically that indirect costs add appreciably to those costs. According to PBS, the President proposed a $7 billion budget cut for the National Institutes of Health (NIH) over the next 18 months while Tom Price, the President's Secretary of Health and Human Services said that he may find those savings in indirect expenses that funds the purchase of lab equipment and paying the electric bills.

The story goes on to describe how the NIH spent $16.9 billion in direct research last year and another $6.4 billion to cover overhead costs (i.e. indirect expenses). That means on average, for every dollar that universities receive for research, they receive another 38 cents to keep the lights on and for other indirect expenses.

Understandably, universities are a little nervous. The University of Pennsylvania called it unthinkable. MIT wrote to employees warning of staffing cuts if the President's plan were enacted. The University of Washington (UW) president went to Washington DC to lobby on behalf of the university stating that the proposed cuts would be devastating to the university. Last year, UW received $247 million in indirect costs including $138 million from the NIH. A large part of the balance was funded by the Office of Naval Research (ONR).

It is well known among those familiar with Government procurement regulations that the cost principles applicable to Universities are very generous. For example, universities can depreciate donated assets. So you have instances where Stanford University receives a $100 million donation from Hewlitt Packard for an engineering building is allowed to depreciate that $100 million against Government research. So in effect, the University receives a double donation, one from Hewlitt Packard and the other from the Government.

Or consider libraries. The cost principle allow universities to allocate the cost of libraries to Government grants on the premise that researchers use those libraries to further their research activities. In some cases, research activities absorb more than half the cost of those libraries. But wouldn't the universities incur the same library expense irrespective of the research activities being performed on their campuses?

Expect to hear more on the administration's plans to cut indirect expenses out of research budgets in the coming months.

Another "Rent-a-Vet" Scheme Uncovered

Late last week, owners of two San Diego area companies were arraigned in federal court on charges they fraudulently obtained more than $11 million in federal contracts that were set aside for service-disable veteran-owned businesses (SDVOBs).

The two individuals  "allegedly" participated in a conspiracy to defraud the Government by forming a joint venture and falsely representing the JV as an SDVOB, thereby obtaining set-aside contracts. However, it seems that there was more to this Joint Venture than met the eye.

A&D General Contracting was not an SDVOB. Action Telecom was an SDVOB. Together, they formed a JV where Action would be the managing venturer, would employ a project manager for each of the set-aside contracts, and would receive the majority of the JV's profits. Everything looked fine on paper and the Government bought off on the JV's status as an SDVOB.

However, as was later disclosed, there was a second agreement (DOJ called it a secret side agreement) that made it clear that the entire JV was a sham. This agreement stated on its face that it superseded the original agreement. The SSA (Secret Side Agreement) actually stated that the parties created the JV so that A&D General Contracting could used the Disabled Veteran Status of Action Telecomm to bid on contracts. The SSD also provided that A&D - not Action - would run the construction jobs and that A&D would keep 98 percent of every payment while Action would get only two percent.

The Government investigators accumulated a lot of other evidence that showed A&D Construction was indeed acting as the JV controlling party. You can read about this additional evidence in the DOJ Press Release. Now the individuals face very serious charges including violations of the false claims act.

It seems to us that it is very difficult these days to get away with such rent-a-vet schemes. Not only is the VA and other agencies working to cut down on this type of fraud, its to easy to investigate and find the truth. A simple visit to a job site and a few interviews will reveal a lot. Plus, competitors (i.e. real SDVOBs) are always suspicious and have a pretty good idea of their real competitors. Finally, there is a thriving whistle-blower industry out there with the prospect of sharing recoveries.

Soliciting Donations for Charities - While on the Job

During sentencing, a judge questioned why a high-level civilian employee of the Federal Government, who was well compensated, felt the need to steal from the charities for who he was ostensibly raising support. A rhetorical question, of course - one for which no answer was proffered. He should have plenty of time now to mull it over, he will be spending the next year and two months in a Federal prison. He'll also need to cover a $5 thousand dollar fine and pay $50 thousand in restitution from the charities he stole from.

According to the plea agreement, this former fire chief for the U.S. Air Force, knowingly disclosed Department of Defense bid information to give a competitive advantage to a defense contractor. According the Department of Justice press release however, that was not his most serious crime. He also pocketed some money belonging to charities.

For four year leading up to 2013, this individual used his position as Chief of Air Force Fire Services to defraud approximately 25 business entities or individuals out of tens of thousands of dollars per year that was intended for charity. He organized award banquets and charity golf outings to coincide with conferences sponsored by the International Association of Fire Chiefs. He actively solicited donations for his golf outing from contractors and subcontractors who sought to do business with the Air Force and Department of Defense.

Some of the donations were forwarded to charities as intended however many donations were deposited in his personal bank account. According to the plea agreement, he used these funds to pay off credit card debt, vacations, and gambling. Sounds like he may have had a gambling problem.

The Justice Department did not disclose how either of these frauds were uncovered however it is likely that the investigation of one lead to another - because the investigations would be reviewing bank records to follow the source of funds deposited in his account.

Anyone with procurement responsibility, whether in the Government or employed by Government contractors, has no business soliciting funds for charities or for any other purpose, from firms that hope to benefit from their relationship with procurement. We don't know about the Air Force Fire Chief's department or organization, but most Government agencies have policies against such practice. We know of one Government agency that doesn't even allow parents to sell Girl Scout cookies to co-workers.

You can read the full DoJ press release here.

GAO Issues Exposure Draft of New "Yellow Book"

Earlier this month, The GAO (Government Accountability Office) published proposed changes to its Yellow Book, also known as Generally Accepted Government Auditing Standards or GAGAS and invited public comments. These Government Auditing Standards are followed by auditors performing audits of Government programs including contract audits performed by the Defense Contract Audit Agency (DCAA). Whether Government contractors realize it or not, whenever they are being audited, the auditors are following the auditing principles embodied in GAO's "Yellow Book".

Because of the requirement for auditors to adhere to the Yellow Book, contractors should be aware of the requirements and should also become cognizant with any changes that might impact audits, especially requirements that will result in additional time and company resources. Contractor support for audits and auditors is not free. There is a cost associated with supporting an audit and those costs are usually passed on to the Government. So it is to everyone's benefit (including taxpayers) to make the audit process as efficient as possible

Here are some of the proposed changes:

1. Tightens up and clarifies independence requirements. Contractors should be alert for situations where the auditor may have "independence" issues.
2. Clarifies impairments to independence rules. Don't expect auditors to offer free advice.
3. More CPE (Continuing Professional Education) requirements - probably a good thing.
4. Enhancing peer review program - the prospect of peer reviews cause auditors to gild the lily.
5. New definition of "waste" and new requirement to report "waste". Previously, the focus was on fraud. Waste is something that cost the Government a lot of money but does not necessarily rise to the level of fraud.
6. Enhancements to the requirement for evaluating the sufficiency of internal controls. This has the potential of increasing auditor time at the contractor facility.

Read more about the changes here.

Buy American - Hire American

Yesterday, the President issued an Executive Order stating that "It shall be the policy of the executive branch to buy American and hire American". The focus of this EO is on the American steel industry and the H1-B visa program.

Buy American Laws. In order to promote economic and national security and to help stimulate economic growth, create good jobs at decent wages, strengthen our middle class, and support the American manufacturing and defense industrial bases, it shall be the policy of the executive branch to maximize ... the use of goods, products, and materials produced in the United States.

Hire American. In order to create higher wages and employment rates for workers in the United States, and to protect their economic interests, it shall be the policy of the executive branch to rigorously enforce and administer the laws governing entry into the United States of workers from abroad.

 The EO requires that every executive agency "scrupulously monitor, enforce, and comply with Buy American Laws" and minimize the use of waivers. The EO includes requirements for goals, studies and related deadlines designed to show how well executive agencies are meeting the Buy American laws. It also tightens up the approval process for granting waivers to the Buy American Act.

Concerning the "Hire American" features, the EO requires the Secretary of State, the Attorney General, the Secretary of Labor, and the Secretary of Homeland Security to develop new guidance related to administering the immigration system, including methods to prevent fraud and abuse. The H-1B visa program was specifically called out for reform. The Administration desires to ensure that H-1B visas are awarded to the most skilled or highest-paid petition beneficiaries.

So what does this new EO mean for Government contractors and Government contracting, in particular. Perhaps not much in the near term. There have been many expressed concerns that the EO will make infrastructure more expensive. Some believe that it will be more difficult for federal contractors to use cheaper imported products - notably steel - when building infrastructure projects. Limiting competition, they contend, will result in increased costs.

The corruption associated with the H1-B program is well documented. Many related to fake letters promising jobs, a necessary prerequisite to obtaining the visa. And there is a perception that many foreigners coming into the U.S. under the H1-B program do not have the skills (e.g. hi-tech) envisioned by the program. Perhaps new policies for administering the program will reduce fraud in the system. However, no one really knows the extent to which foreigners on H1-B visas are working under contracts with the U.S. Government or whether they are taking away jobs from highly qualified Americans.

Plant Protection - In-House or Outsourced

Back in 2012, we discussed the FAR (Federal Acquisition Regulation) 31.205-29 cost principle on plant protection costs (see Plant Protection Costs). While such costs are categorically allowable, we noted that the growing significance of such costs in the post 9/11 era was drawing increased scrutiny by contract auditors. At that time, the concern seemed to be one of allocation - should the cost be charged direct or indirect?

Recently we because aware of another angle that DCAA (Defense Contract Audit Agency) is using to probe the propriety of plant protection costs - that being the concept of "reasonableness". The Agency's guidance states:

Reasonableness. There are now a number of commercial companies that provide plant security protection services, including well-trained uniformed guards. These security service companies often provide efficient plant protection services for less than the cost of such services performed by the contractor's own security employees. Accordingly, evaluation of costs of security guards at the contractor's facilities should include a comparison between the cost of the in-house services and the cost of engaging an outside security service firm. When excessive or unreasonable costs are questioned as a result of the above cost comparison, it is the contractor's responsibility to demonstrate the reasonableness and to justify the costs (see FAR 31.205-6(b)(1)).

Auditors are now being directed to perform a cost comparison of out-sourcing plant protection costs with the cost of performing those services with in-house staff. Where will the auditors obtain such comparative data? Obviously from contractors' books and records. What if the contractor has not performed a study? The auditor will challenge the costs because the contractor has not demonstrated "reasonableness". What if contractors' selection of plant protection coverage turns out to be more expensive than the alternative? The auditor will challenge the costs as unreasonable.

We recommend that contractors incurring significant plant protection costs be prepared to demonstrate the reasonableness of their choice of implementing plant protection. Sometimes it might not come down to pure dollars and cents decisions. There could be intangible or non-quantifiable benefits to one method over the other.

DCAA Publishes 2017 Version of the FAR Cost Principles Guide

The FAR (Federal Acquisition Regulation) Cost Principles Guide was recently updated through FAC (Federal Acquisition Circular 2005-95 (January 2017) and is available for download here. The previous update was September 2014 (through FAC 2005-76). Here's how DCAA (Defense Contract Audit Agency) introduces the guide:

The FAR Cost Principles Guide – a chronology of revisions to FAR Part 31 since 1984 – is used to determine the cost principles in effect at time of contract award that may be necessary for audits of historical costs (e.g. Incurred Cost audits or Claims audits).

The FAR Cost Principles Guide traces all of the changes to the Federal Acquisition Regulation cost principle through the inception of the FAR system in 1984. It is useful for determining the precise cost principle or the precise version of the cost principle in effect at the time a particular contract was awarded.

While a few cost principle have never changed since the initial promulgation (e.g. bad debt expenses and alcoholic beverages), most have undergone some form of revision. Sometimes these revisions are frequent and significant. . The Compensation cost principle (FAR 31.205-5) for example has been revised 40 times, most recently in September 2016. Some FAR cost principles have been eliminated (e.g. ADP equipment FAR 31.205-2 and Civil Defense Costs - FAR 31.205-5).

Remember, in most cases, the cost principles that apply are those that are in effect as of the date of contract award. Without a good cross-reference of the cost principles and their effective dates, it would be very easy to apply incorrect standards. Compensation is a good example. The lower compensation cap (discussed here) applies to contracts awarded after June 24, 2014. Many contractors (and subcontractors) are working  on contracts awarded prior to that date and are not subject to the lower caps.

Is Your Contract Subject to a TINA Audit?

Now that DCAA (Defense Contract Audit Agency) is nearly current in its audits of contractor incurred cost proposals and the new Administration has lifted it federal hiring freeze, the Agency is preparing to hire as many as 500 new auditors and may be turning its attention to other types of audits that have been curtailed in favor of higher priority assignments. One of those program areas where DCAA has been eager to resume, with the DoD Office of Inspector General's active encouragement, is contractor compliance with the Truth-in-Negotiations Act (TINA).

The Truth-in-Negotiations Act applies to negotiated contracts where contractors submitted certified cost or pricing data to the Government. You can determine whether TINA applies by looking for the contract clauses at FAR 52.215-10, 11, 12, or 13. The absence of one or more of these four clauses doesn't necessarily mean the contract is not subject to TINA however. The Government makes mistakes from time to time in drafting their contracts and has been know to inadvertently omit the TINA clause. Since TINA is a statutory requirement, the Government sometimes invokes the Christian Doctrine to "read" the clause into the contract. Refer to DCAA's Contract Audit Manual (CAM) 14-112.1 for information on the Christian Doctrine.

Just because a contractor submitted certified cost or pricing data and the respective clauses are included in the contract however, doesn't mean the contract is subject to TINA. The Government must also have relied on the certified cost or pricing data. In many negotiations, the Government does not rely on submitted certified cost or pricing data in arriving at a fair and reasonable price, but instead, relies on other factors such as previous prices paid. DCAA has been burned many times where alleged TINA violations have been discarded by contracting officers because either the contractor or contracting officer has shown that the agreed-to price was based on something other than certified cost or pricing data. Here's where contractors can be pro-active when DCAA begins a TINA review - someone knowledgeable about the negotiations should assess whether certified cost or pricing data, even though submitted, was relied upon by the Government in establishing the negotiated price.

The Government PNM (Price Negotiation Memorandum), which is the Government's view of what transpired during negotiations, usually includes a statement as to whether the Government negotiator relied upon certified cost or pricing data. DCAA will rely on this statement when initiating its TINA review however that particular statement is usually "boilerplate" verbiage and can and should be refuted if it is not true. Contractors will not usually have access to the Government PNMs but should be in the practice of writing up their own view of negotiations, giving clear narrative as to what was submitted and what was relied upon in arriving at a negotiated price.

To learn more about TINA (i.e. Defective Pricing) refer to our eight part series from 2010.

Fair Chance Act - Proposed Legislation in the Senate and House

An estimated 70 million people in the United States - nearly one in three adults - have a prior arrest or conviction record. Congress believes that a conviction in one's past shouldn't be a life sentence to joblessness and is following many states lead by introducing legislation to give everyone an opportunity to work for a better life.

Two bills have been introduced that, if passed, will prohibit Federal agencies and Federal contractors from requesting that applicant for employment disclose criminal history record information before the applicant has received a conditional employment offer. These bills are Senate Bill S.842 and House Bill H.R. 1905.

A "conditional offer" means an offer or employment in a position that is conditioned upon the results of a criminal history inquiry.

Application to Government Contractors

Under these bills, executive agencies;

1. May not require that an individual or sole proprietor who submits a bid for a contract to disclose criminal history record information regarding that individual or sole proprietor before determining the apparent awardee and
2. Shall require as a condition of receiving a Federal contract and receiving payments under such contract that the contractor may not verbally, or through written form, request the disclosure of criminal history record information regarding an applicant for a position related to work under such a contract before the contractor extends a conditional offer to the applicant.

There are exceptions where consideration of criminal history record information prior to a conditional offer with respect to the position is required by law. There are also exceptions with respect to contracts that required access to classified information or involve law enforcement or national security duties.

Should contractors violate these prohibitions, the bills contain penalties of increasing severity ranging from written warnings to suspending payments, to contract termination.

Under this law, Government contractors would make employment decisions without regard to an applicants criminal background. After a conditional offer, the contractor would request criminal background information and judge, based on the severity of that criminal background, whether to withdraw the conditional offer.

Something more for HR departments to worry about.

Contractors Cannot Anticipatorily Adjust Statutory Compensation Caps

Section 702 of the Bipartisan Budget Act (BBA) of 2013 significantly reduced the cap on compensation charged to Government contracts. The old statutory formula applicable to contracts awarded prior to June 24, 2014 now sits at $1,144,888. The new cap applicable to contracts awarded after that date is $487,000 and applies to all contractor employees on contracts awarded by all executive agencies.

The BBA also required that the compensation cap be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics. That has not been done - yet.

The BBA also required the Office of Management and Budget to figure out whether any alternative benchmarks and industry standards for compensation would provide a more appropriate measure of allowable compensation. The OMB solicited feedback on alternative measures and after reviewing the feedback, decided not to recommend any changes to the BBA process.

In the meantime, the $487,000 cap still applies though by this time, it should have been adjusted a couple of times. We don't know why the holdup. But we do know that contractors should not be escalating the $487,000 benchmark on their own - even though the employment cost index has increased by two plus percentage points per year. The way that the cap works is that increases must first be published in the Federal Register before the Government is obligated to pay the higher amounts. As of today, there have been no Federal Register publishing of revised caps. Under the old methodology for example, the ceiling applicable to compensation costs incurred after January 1, 2014 was not established (i.e. posted in the Federal Register) until more than two years later, March 15, 2016.

Contractors that are most likely to feel the pinch are those trying to price out fixed priced contracts. The Government is not going to allow anything higher than the $487,000. Contractors operating under cost reimbursable contracts will also need to price out their labor under the current cap but should get some relief if the ceiling is adjusted before they submit their annual incurred cost submissions.

Organization Conflict of Interest Appeal Denied

Harkcon Inc was an unsuccessful bidder on a Coast Guard contract to provide training support services at Coast Guard training centers and support units throughout the country. When the award was made to Metris LLC, Harkcon alleged that Metris had an unequal access to information OCI (Organizational Conflict of Interest) that the Coast Guard failed to investigate. You see, Metris had hired a former Coast Guard employee who, while employed by the Coast Guard, was the chief of the Coast Guard's Forces Readiness Command's Training Division where Harkcon (the protestor) had worked as a subcontractor. His role as chief provided him access to nonpublic, competitively useful information about Harkcon.

Harkcon argued that this former Coast Guard employee had entered Metris's employ to assist it in proposal preparation for the training contract and to serve as its program manager (the Metris Program Manager or MPM) for the training effort. By way of his recent position, Harkcon alleged that the individual had access to competitively useful, nonpublic information about Harkcon and provided that information to Metris during proposal preparation efforts.

According to FAR 9.5, there are three broad categories of OCIs; biased ground rules, unequal access to information and impaired objectivity. Harkcon alleged the second of the three categories; unequal access to information. When appealed, the GAO reviews the reasonableness of a contracting officer's OCI investigation and where an agency has given meaningful consideration to whether an OCI exists, the GAO does not substitute its own judgment for the agency's, absent clear evidence that the agency's conclusion is unreasonable.

In this case, the Coast Guard performed an investigation in Metris's alleged OCI. The investigation found that the employee did not have access to procurement sensitive or competitively useful information either relating to performance of the training contract or to proposals that were submitted for the contract when it was competed. Further, the employee did not have access to any Coast Guard systems that contained procurement-sensitive, financial, proprietary, or performance information. Although the GAO stopped short of commending the Coast Guard OCI investigation, the decision made clear that the investigation was thorough.

GAO denied the protest. You can read the entire decision here. From a lessons learned standpoint, Harkness should have hired the retired Coast Guard guy before Metris did <grin>.

DoD Acquisition Workforce - Overworked or Under-Trained

In 2008, Congress established the Department of Defense Acquisition Workforce Development Fund (DAWDF) to provide a dedicated source of funding to recruit, train, and retain members of the DOD acquisition workforce. The purpose of DAWDF funding is to ensure that the DOD acquisition workforce has the capacity, in both personnel and skills to

1. Properly perform its mission
2. Provide appropriate oversight of contractor performance, and
3. Ensure that the department receives the best value for the expenditure of public resources.

So far, $4.5 billion has been deposited into the DAWDF account. As of September 2016, DOD has obligated $3.5 billion of these funds.

So how does DOD's various acquisition agencies spend these funds. The expenditures vary from one agency to the next but include such things as,

• relocation assistance
• signing bonuses
• merit awards
• tuition assistance
• recognition
• sabbaticals
• flextime
• services
• social media
• branding
• information technology
• culture (whatever that means)

Is it working? Are there tangible benefits derived from the expenditure of these funds? On that question, the jury is still out because no one really knows. The GAO performed a study (report issued last month) to try and answer that question but the closest they came to an answer was a recommendation that DOD needed to establish concrete time frames and metrics for measuring success. DOD agreed to do just that but it will take some time for results to become apparent.

Proposed Legislation Would Requiring Publishing the Full Text of Government Contracts

Last month, Senator McCaskill (MO) introduced the Contractor Accountability and Transparency Act of 2017. Despite its name, the only thing it requires is for the Government to post electronic versions of all contracts over $150,000 (the simplified acquisition threshold).

... machine readable, searchable copy of each covered contract entered into by a Federal agency after the date of the enactment ... posted not later than 30 days after the agency enters into the contract.

Agencies would be permitted to redact information related to national security, sensitive, or classified information or trade secrets or other proprietary information if approved by the contracting officer and OMB (Office of Management and Budget). Redacted information may not include information that would be available under FOIA (Freedom of Information Act) requirements.

On her website, Sen McCaskill wrote: "...I take very seriously my responsibility to shine a spotlight on government on behalf of taxpayers, to cut down on wasteful government spending, and uphold the highest ethical standards. That's why [I introduced] commonsense bills that boost transparency in government spending ... to prevent waste, fraud, and abuse. The more transparency we have, the better we know how to strengthen government efficiency and effectiveness."

Many agencies - Energy, for example - already post their major contracts and we don't see anyone clamoring to download and digest them. In truth, 95 percent of contracts are simply boilerplate content that is also available in the solicitations, which are already posted on line, or can be found in the FAR and respective agency FAR supplements.

It does not seem to us that posting complete contracts to a websight will offer any great insight into Government purchases and offers little more than what is already publicly available such as on USASpending.gov. Instead, it will result in increased labor costs to review and redact information that should not be made public.

Contractors, what do you think? Let us know.

DCAA - "We Help Folks Be Honest"

The Director, Defense Contract Audit Agency (DCAA), Anita Bales, testified this morning at a hearing of the House Subcommittee on Oversight and Investigations along with three other non-Governmental witnesses concerning the contract audit process at defense contractors.

This was a very short hearing, lasting only an hour and fifteen minutes but did have some interesting moments.

The concerns expressed by the Subcommittee centered around the significant backlog of incurred cost audits that still exist in DCAA's inventory and ways that the backlog could be reduced. The backlog creates problems for Government contract administrators and imposes economic burdens on contractors.

One topic of conservation involved multi-year auditing versus concurrent auditing. A couple of the industry panelists put forth strong arguments for concurrent auditing noting that financial statement auditors perform concurrent audits and within two months after the end of the fiscal year, are ready to issue reports. Multi-year auditing, while perhaps more efficient from a Government resource point of view, does not serve the customer (i.e. contract administration) well. Its also causes more peaks and valleys for contractor support personnel.

One of the Representatives tried to draw a distinction between "Risk Management" and "Risk Mitigation" noting that perhaps, DCAA is not managing risk but mitigating risk. They are probably right but getting beat up by the IG for so many years has created the climate where the Agency is afraid to risk anything away.

One topic of considerable discussion was that of privatizing the contract audit function or parts of it. Bales was steadfast in her position that privatizing was not appropriate, that there wasn't a good business case to be made for it, that contract auditing required specialized skills and knowledge that was not readily available in a CPA firm. Bales also mentioned that the Agency had put forth a legislative proposal to rescind a provision in last year's NDAA about privatizing some of the contract audit functions.

Bales complained about the Government-wide hiring freeze that is preventing DCAA from hiring 500 new auditors and the impact that this has on the Agency's ability to perform its mission. She testified however that the Government was still 30% cheaper than private industry and even though private industry might be cheaper initially, she knew of situations where private firms doubled their prices in the second year of performance.

In discussing materiality and whether it was necessary for all contractors to submit annual incurred cost proposals, Bales noted that even thought the Agency, in effect, writes off 14,000 incurred cost submissions annually, there is still a deterrent effect because a few proposals are randomly selected for a full audit. "We help folks be hones", she said with a smile.

You can watch the full hearing here.

Spring is Here - Prepare for ICE

PNWC would like to remind all Government contractors of an important deadline - annual incurred cost submissions are due on June 30th (or six months after fiscal year end for contractors whose fiscal years do not coincide with calendar years). Preparation for this annual ritual, commonly referred to as "ICE" meaning "Incurred Cost Electronically" after DCAA's Excel-based interpretation of the requirements of FAR 52.216-(d)(2)(iii), should begin now.

DCAA's (Defense Contract Audit Agency) ICE model is ponderous to comprehend and complete because DCAA has built it to accommodate many different situations and accounting systems, and indirect rate structures. That is why many contractors and their consultants, including PNWC, have developed streamlined versions specific to individual contractors.

Contractors need to ensure that their ICE submissions are adequate. DCAA will perform an "adequacy review" of each submission. Failing an adequacy review will certainly slow the process for settling indirect rates and if the deficiencies are egregious, could result in a higher risk category, meaning an increase in the probability that the submission will be audited. DCAA has developed and published an Incurred Cost Proposal Adequacy Checklist to assist contractors in preparing adequate proposals.

PNWC's professionals have been assisting contractors in preparing annual Incurred Cost Proposals for more than 10 years. We can help reduce the stress associated with Incurred Cost Submissions. Give us a call to reserve your slot.

Negotiated Profit or Fee Percentages Should Be Applied to Total Negotiated Cost

The Government wants its contractors to be profitable and it is the Government's policy to negotiate a fair profit on each contract. We have written several articles on profit over the years to help contractors understand how the Government develops its negotiation objectives for profit. Consider the following.

• Factors that the Government Considers in Considering Profit/Fee
• Government Approach to Profit/Fee Analysis
• DOD Weighted Guidelines for Determining Profit and Fee

To summarize some of the key points in those articles, it is in the Government's interest to offer contractors opportunities for financial rewards sufficient to stimulate efficient contract performance, attract the best capabilities of qualified large and small business concerns to Government contracts, and maintain a viable industrial base (FAR 15.404-4(a)(2)).

Both the Government and contractors should be concerned with profit as a motivator of efficient and effective contract performance. Negotiations aimed merely at reducing prices by reducing profit, without proper recognition of the function of profit, are not in the Government's interest. Negotiation of extremely low profits, use of historical averages, or automatic application of predetermined percentages to total estimated costs do not provide proper motivation for optimum contract performance (FAR 15.404-4(a)(3)).

FAR requires a "structured approach" for determining profit or fee. A structured approach provides discipline for ensuring that all relevant factors are considered. FAR leaves the development of structured approaches up to individual agencies. For DOD, the structured approach is commonly referred to as the "Weighted Guidelines Method". Agencies are allowed to use another agency's structured approach (see FAR 15.404-4(b)(2)) and as a result, many agencies have adopted the DOD model or slight variations thereof. The DOD weighted guidelines model is described in DFARS (DOD FAR Supplement) 215.404-4.

We recently became aware of a situation where a Government negotiator refused to apply profit to a contractor's negotiated G&A (General and Administrative Costs) because he had "learned" that to do so was inappropriate. We don't know where he "learned" this but his learning does show a lack of understanding of applicable FAR considerations.

For example, one of several common factors that require consideration in determining a profit percentage is "General Management" (see FAR 15.404-4(d)(1)(i)(D)). General Management ... measures the prospective contractor's other indirect costs and general and administrative (G&A) expense, their composition, and how much they contribute to contract performance. There it is, G&A specifically called out in the procurement regulations.

We always recommend that contractors perform their own structured approach to determining reasonable profit rates prior to negotiation and to ask the Government for their analysis as well. There is a lot of subjective elements to developing a profit objective but reviewing the Government's "weighted guidelines" analysis or another agency's structure approach could lend some clarity on what the Government considers important. Perhaps its not the same as what the prospective contractor believes to be important and resolving these differences could facilitate negotiations and result in a profit percentage that is more "reasonable".

But For the Lack of a Signature, An Opportunity was Lost

In May 2016, the Navy issued a solicitation for repair, renovations, new construction and alterations to shore facilities in the Washington DC area.  It was a typical RFP (Request for Proposal) where award would be made to the responsible offeror whose offer conforms to the solicitation and represented the best value to the Government. One of the RFP instructions included the following:

If the Offeror is a Joint Venture (JV) ... the Offeror shall submit a signed copy of the Joint Venture agreement indicating the proposed participation of each Joint Venture member. Failure to submit the required Joint Venture Agreement will be considered unacceptable.

CJW Desbuild, a Joint Venture, was one of twenty-four proposals submitted in response to the solicitation. However, the Navy excluded CJW's proposal from consideration because the Joint Venture did not provide a signed copy of the JV agreement as required by the solicitation.

After awards were made to other companies, CJW protested to the GAO. CJW contended that its failure to submit a signed copy of its joint venture agreement was a minor oversight and that it was unreasonable for the Navy to downgrade its proposal on that basis. CJW maintained that the JV was an established company with its won DUNS number and that it is currently working with the Navy on other contracts. CJW further argued that  the Navy should have used clarifications to permit it to correct its failure to provide a signed joint venture agreement.

The GAO did not buy CJW's arguments. The solicitation specifically required a signed copy of the JV agreement and warned that failure to submit the agreement would be considered unacceptable. Since the requirement for a signed JV agreement was specifically linked to technical acceptability, it could not be considered an informality or minor irregularity, subject to waiver.

The GAO also noted that the lack of a signed agreement could not have been remedied through clarifications. FAR limits clarifications to give offerors an opportunity to clarify certain aspects of proposals or to resolve minor or clerical errors. Clarifications cannot be used to cure deficiencies or material omissions in a proposal or otherwise revise a proposal.

GAO denied the protest. This case illustrates the importance of complying with solicitation instructions to the 'T".

You can read the full decision here.