Contracting Officer Sentenced to Prison for Inducing Contractor to Hire Husband

Last March, we reported on a case where a former contracting official and her husband pleaded guilty to engaging in a nepotism scheme in which they conspired to fraudulently obtain employment from U.S. Government and private federal contractors with which the (former) GSA official had some form of official oversight (see Guy Just Can't Get a Decent Job - Even With Wife's Assistance).

Those two were just sentenced with the wife (the GSA contracting official) receiving an 18 month prison sentence and her husband a 12 month sentence (see Former GSA Official and Husband Sentenced for Nepotism Scheme). Another GSA co-conspirator who worked for the wife, received one year of probation for her role in the conspiracy.

The Department of Justice called this a "$200,000 scheme" but the whole matter seems a little bizarre. Not bizarre in the sense that the GSA official used her influence to induce a contractor to hire her husband for a job - that probably happens a lot - but bizarre in the sens that the husband submitted 139 applications for Federal Government employment that misrepresented his education and qualifications and certifications and couldn't get hired.

Even with resume embellishments, the guy couldn't get a Federal job after 139 tries. How is that even possible? We know of agencies that are desperate to fill open positions. With a masters degree and certifications in government contracting at Levels I, II, and III, one is almost guaranteed to land a job in federal contracting. What was it about this guy that 139 potential federal government employers took a pass on him?

Perhaps the guy was looking for a sinecure and he was the one turning down offers.

Failure to Obtain Consent to Subcontract - All Subcontract Costs Disallowed

We are in the process of bringing you synopses of a recent ASBCA decision that decided a number of issues related to DCAA's (Defense Contract Audit Agency) audit of Technology Systems, Inc (TSI) fiscal year 2007 incurred costs, the ACO's subsequent sustention of the DCAA findings and recommendations, and TCI's appeal of the ACO's decision before the ASBCA. Wednesday we discussed the issue of capitalization versus expensing costs. Bottom line on that one is you can't use IRS regulations to justify your capitalization and depreciation practices. Yesterday we discussed TCI's claim for travel expenses that exceeded the JTR (Joint Travel Regulations) maximums for lodging and per diem. In that one, TCI's arguments were unpersuasive. Today we look at TCI's failure to obtain "consents to subcontract" prior to awarding subcontracts.

The subcontracts clause, included in TCI's contracts (and almost every cost-reimbursement contract) requires that prime contractors that do not have an approved purchasing system, must obtain the contracting officer's written consent to enter into cost-reimbursement, time-and-materials, or labor-hour subcontracts (see FAR 52.244-2(d)).

TSI did not have an approved purchasing system (which is pretty typical of small Government contractors) and so, was required to obtain contracting officer consent to subcontract. TSI did not obtain consent so ultimately, the Government questioned the entire subcontract amounts because it was unable to ascertain whether the costs were fair and reasonable.

The ASBCA stated that it had no reason to doubt that the subcontract prices were allocable to the contract but there is no evidence elsewhere in the record with respect to the reasonableness of the subcontract charges. The problem for TSI - a problem that it didn't address - is that there was no support for the reasonableness of the costs of the subcontractors. "This omission is fatal to TSI's attempts to provide an after-the-fact justification of these subcontracts" The Board ruled that the Government properly disallowed the full costs of the subcontracts.

This ruling seems very unfair - to question the totality of the subcontract when everyone involved acknowledged that the  work was performed and allocable to the contract. It seems to us that equity would dictate that some portion of the costs should be allocable to the Government contracts.

Travel Costs in Excess of Federal Travel Regulation Maximums

We are in the process of bringing you synopses of a recent ASBCA decision that decided a number of issues related to DCAA's (Defense Contract Audit Agency) audit of Technology Systems, Inc (TSI) fiscal year 2007 incurred costs, the ACO's subsequent sustention of the DCAA findings and recommendations, and TCI's appeal of the ACO's decision before the ASBCA. Yesterday we discussed the issue of capitalization versus expensing costs. Bottom line on that one is you can't use IRS regulations to justify your capitalization and depreciation practices. Today we will look at TCI's claim for travel expenses that exceeded the JTR (Joint Travel Regulations) maximums for lodging and per diem.

We will be spending the next few days discussing an ASBCA decision involving incurred costs at Technology Systems, Inc. (TSI). DCAA issued a report on incurred cost for fiscal year 2007 noting a number of unallowable costs. The ACO (Administrative Contracting Officer) sustained many of the DCAA findings, issued a final decision, whereupon TCI appealed to the ASBCA.

TSI claimed travel costs in excess of the JTR ceilings for lodging and per diem expenses. There was no dispute on that fact and the ASBCA stated that TSI provided no good reason why the cost should not be challenged. Nevertheless, TSI came up with two arguments as to why this should not matter.

First, TSI argued that the ACO wrongly identified the applicable travel regulations. The ACO referenced the JTR which applies to travel outside of the Continental United States, instead of the FTR, which was truly applicable since all of the challenged travel was within the Continental United States. Second, TSI argue that its general travel policy saved the Government money.

The ASBCA called both arguments unpersuasive. Concerning the FTR/JTR argument, the Board called it a defect of form rather than substance. Concerning the argument that its travel policies saved the Government money, the Board rule it undeveloped and would not excuse it from compliance with travel regulation limits on per diem in any event.

TSI's arguments are rather silly and should never have risen to the ASBCA level.

Computer Equipment - Capitalization versus Expensing

We will be spending the next few days discussing an ASBCA decision involving incurred costs at Technology Systems, Inc. (TSI). DCAA issued a report on incurred cost for fiscal year 2007 noting a number of unallowable costs. The ACO (Administrative Contracting Officer) sustained many of the DCAA findings, issued a final decision, whereupon TCI appealed to the ASBCA.

This case touches on a number of issues not uncommon to small Government contractors and that is why we want to understand the issues and the bases for the decisions.

Today we will discuss the issue of capitalization/depreciation versus expensing capital equipment.

TSI expensed $26 thousand in computer supplies in 2007. The ACO (Administrative Contracting Officer) disallowed the expense based on her position that the amounts should have been capitalized and depreciated over several years.

TSI testified that some computers were for research and were taken apart, components soldered on, sensors added in and built into systems that would go out on a vehicle or boat for testing. They were heavily modified. After testing was complete the computers were of no further use to TSI and therefore expensed. The problem with TSI position however was that only one or a few of the computers in question were heavily modified. The rest were used in the day to day operations of the business. As the ASBCA decision states it:

As far as we can tell, TSI completely expensed every computer that it purchased in 2007 ... and explained its practice to the ACO by asserting that was a leading edge software Research and Development firm for which most computing equipment was obsolete within a year of purchase. In this communication, TSI made no mention of the heavy modifications that allegedly made the computes useless after a year. Based upon the evidence before us, we conclude that some of the computer equipment completely expenses by TSI was likely so modified that it could not be used beyond FY 2007, and that other computer equipment obtained in FY 2007 and also expensed by TSI was not so modified. Indeed, Mr. Fletcher's testimony is completely lacking with respect to explaining what efforts TSI undertook to identify which computer expenses went to the heavily modified computers consumed in research and which computer expenses went to computers more routinely used by the company.

The Board (Armed Services Board of Contract Appeals) rejected TSI's arguments. The Board found that TSI's depreciation practices in 2007 were inconsistent with its prior long-term practices and its rationales for the new approach to be unpersuasive: being a cutting edge technology company does not appreciably change the useful lives of desktop computers used for office work.

Moreover, TSI was unable to demonstrate the portion of computers that were modified. Finally, the IRS Code's allowance for earlier write-off, for tax purposes, does not have any effect on the proper depreciation for Government contracting purposes.

Computers and computer equipment are to be depreciated at the same rate as in prior years.

Inadequate Sole-Source Justifications

A former employee of a U.S. Government contractor in Afghanistan pleaded guilty earlier this month to accepting over $250 thousand in kickbacks from an Afghan subcontract. What did this Government contractor employee have to do to get his $250 thousand kickback? He assisted the subcontractor in obtaining subcontracts - the classic kickback scheme.

The employee admitted that he and an Afghan executive agreed that in exchange for illicit kickbacks, the employee would ensure that the Prime Contract awarded lucrative subcontractors to the executive's companies. The employee repeatedly told his supervisors that these companies should be awarded sole source subcontracts, which allowed them to supply services to the prime contractor without have to competitively bid on them.

The kickbacks represented roughly 15 percent of the subcontract values. The employee carried the cash payments back to the States himself and began depositing them in amounts less than $10,000 to avoid scrutiny.

As typical of Justice Department press releases, unless there is a whistleblower involved, there was no indication of how the fraud was uncovered.

Similar to yesterday's fraud posting, this incident screams a lack of internal controls. Obviously there was insufficient sole-source justification to award subcontracts to the particular Afghan subcontractor. The guy told his boss that they needed to be awarded sole source. What kind of purchasing policy is that? Where is the inherent internal control that would catch this kind of scheme. Was the boss culpable as well? What was the contractor paying the boss's salary for if all he does is nod when someone comes and tells him something.

Contractors, if you're not focusing on internal controls in your organization, you could be the next one fighting off a criminal investigation.

You can read the full Justice Department Press Release here.

Fraud in the Purchasing Department

The Association of Certified Fraud Examiners (ACFE) reported the results of a recent study that revealed the typical organization loses a median of five percent of revenues annually. The same study found that while both large and small companies fall victim to occupational fraud, companies with fewer than 100 employees are particularly vulnerable compared to their larger counterparts. Why is this? Essentially because larger companies have better internal controls and more likely to have anti-fraud practices in place - such as hotlines, employee fraud training and internal audit departments.

We regularly read the Justice Department's press releases on fighting crime - especially those that pertain to Government contracts. We do this because we like to figure out where the internal controls broke down and figure out what could have been done to prevent (or at least deter) fraudulent activity.

Recently, the Justice Department announced sentencing of a former employee of Honeywell (a large corporation, by the way) used a company card to purchase items and sell them on eBay. This wasn't a one-time deal - the employee did this for more than four years before being caught. The press release doesn't say how he was caught but it shouldn't have been too hard to uncover with some basic transaction testing.

The Government was interested in this case because the costs were passed along to the Department of Energy under cost-type contracts.

What is revealing from this press release was the statement: "... without the permission or knowledge of either Honeywell or the (Energy Department)." So Honeywell allowed this to go on for four years and never caught on. Why? Was it because they had this huge cost-type contract with little incentive to implement strong internal controls since they get reimbursed dollar for dollar anyway? Was it because they had this huge cost reimbursable contract but the Energy Department, who micro-manages its contracts anyway, didn't want to pay for added layers of internal controls?

The former employee, after paying full restitution, will now spend the next year in Federal prison.

You can read the entire Justice Department press release here.

2018 NDAA - Changes to DCAA's Annual Report to Congress

Since 2011, the Defense Contract Audit Agency has published an annual report to Congress. This report was mandated by an earlier NDAA (National Defense Authorization Act) and codified in 10 USC 2313a(a)(2). We've reported on these reports about the time they were issued (see the latest discussion: DCAA's Fiscal Year 2016 Report to Congress).

One of the required elements for DCAA's annual report has been for a statistical table showing an "...assessment of the number and types of audits pending for a period longer than allowed pursuant to guidance of the Defense Contract Audit Agency."

That requirement turned out to be poorly worded because DCAA did not have such guidance. So, the Agency did not need to fess up as to how long it takes them to complete audits. In its latest report, DCAA, in lieu of statistical information, included the following narrative to the requirement to disclose the number of overdue audits:

The timeline for an audit is based on audit type, dollars involved, level of risk, and needs of the requester. As a result, DCAA does not have specific or mandatory time requirements for audit completion; instead, we assess what is necessary to conduct an audit that will meet professional audit standards and provide value to contracting officials. DCAA works closely with contracting officers to set reasonable due dates based on the requirements of the audit and the needs of the buying commands. Additionally, DCAA and contracting officers work as a team to set priorities, create milestone plans, and decide on agreed-to dates. Once these agreements are reached, DCAA assesses timeliness based on meeting those targets.

And that brings us to the Senate's version of the fiscal year 2018 NDAA. The NDAA contains a provision that replaces the requirement that DCAA disclose the number of audits pending longer than allowed pursuant to its guidance with the number of audits pending for a period longer than 18 months. The provision reads:

... the total number and dollar value of audits that are pending for a period longer than 18 months as of the end of the fiscal year covered by the report including a breakdown by type of audit.

That language is still not as tight as it could be as it leaves open the determination of the start date for an assignment. For example, for an incurred cost audit, is the start date the date that DCAA receives the contractor's submission or the date that it starts the audit of that submission? Historically, those two dates have been years apart. DCAA's answer has been, the date that audit work begins.

Have Contractor's Been Complaining About DCMA's "Should-Cost" Reviews?

Unless you're a very large contractor, you may not have heard of "should-cost" reviews. Should-cost reviews are a specialized form of cost analysis. They differ from traditional evaluation methods in that they don't assume that historical costs reflect efficient and economical operation. Instead, should-cost reviews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management.

These reviews are conducted by a multi-functional team of Government contracting, contract administration, pricing, audit and engineering representatives. The objective of should-cost reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts.

There are two types of should-cost reviews - program reviews and overhead reviews. A program review focuses on significant elements of direct costs, usually associated with the production of major systems. You can read about should-cost reviews more fully in FAR 15.407-4.

We have not had direct experience with should-cost reviews but we've been around the fringes enough to know that contractor's dread them, not for the potential findings and recommendations but because they require a tremendous amount of contractor resources to support and the "team's" lackadaisical approach to completing the engagement is the exact antitheses to what the Government wants to accomplish - i.e. improvements in economy and efficiency.

Which brings us to the Senate's fiscal year 2018 National Defense Authorization Act (NDAA) and a provision designed to make the Government more accountable in performing should-cost reviews - to use the tool appropriately in a manner that his transparent, objective, and provide for the efficiency of the acquisition process.

The NDAA provision, if passed, will require DoD to amend its FAR Supplement (DFARS) to include the following:

1. A description of the features distinguishing a should-cost review and the analysis of program direct and indirect costs.
2. Establishment of a process for communicating with the contractor the elements of a proposed should-cost review.
3. A method for ensuring that identified should-cost savings opportunities are based on accurate, complete, and current information and are associated with specific engineering or business changes that can be quantified and tracked.
4. A description of the training, skills, and experience, including cross functional experience, that Department of Defense and contractor officials carrying out a should-cost review should possess.
5. A method for ensuring appropriate collaboration with the contractor throughout the review process.
6. Establishment of review process requirements that provide for sufficient analysis and minmize any impact on program schedule.
7. A requirement that any separate audit or review carried out in connection with the should-cost review be provided to the prime contractor under the program.

We think these proposed enhancements to the should-cost program are reasonable and a positive step in ensuring that should-cost reviews are well-planned and staffed with trained and qualified individuals.

2018 NDAA - Additional Work for DCAA?

Yesterday we began a four-part series on provisions in the Senate version of the fiscal year 2018 National Defense Authorization Act. (Click here to read Part 1 concerning the provision that might require large contractors to reimburse the Department of Defense for its cost of administering bid protests).

In pursuing the NDAA, we came across a new requirement impacting the Congressionally Directed Medical Research Program (CDRP). The CDRP manages Congressional Special Interest Medical Research Programs encompassing breast, prostate, and ovarian cancers, neurofibromatosis, military health and other specified areas and since 1992, has managed over $7.7 billion in Congressional appropriations. Through fiscal year 2013 (most recent year data is available) approximately 12,423 awards have been made. You can read more about the CDRP program here.

The provision in the NDAA requires a three audits by DCAA (Defense Contract Audit Agency); two before award is made and one before payment is made. The two audits before award include (i) accounting system adequacy and (ii) audit of the proposal. The third audit is an incurred cost audit where the amounts claimed are traced back to the books and records of the awardee.

We don't know what prompted this provision. Perhaps there was an audit that found deficiencies in the way that the Defense Department administered the program. Perhaps scandals were uncovered.

Currently, as far as we can discern, DCAA does not have any guidance on how these audits should be conducted. It is no doubt a new audit area for the Agency and one that will give auditors some work to as commercial auditors begin to take over much of the Agency's traditional incurred cost audits.

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Here's the provision in its entirety:

SEC. 893. OVERSIGHT, AUDIT, AND CERTIFICATION FROM THE DEFENSE CONTRACT AUDIT AGENCY FOR PROCUREMENT ACTIVITIES RELATED TO MEDICAL RESEARCH.
The Secretary of Defense may not enter into a contract, grant, or cooperative agreement for congressional special interest medical research programs under the congressionally directed medical research program (CDMRP) of the Department of Defense unless the contract, grant, or cooperative agreement meets the following conditions:
     (1) Prior to obligation of any funds, review by and certification from the Defense Contract Audit Agency regarding the adequacy of the accounting systems of the proposed awardee, including a forward pricing review of the awardee’s proposal.
     (2) Prior to any payment on the contract, grant, or cooperative agreement, performance by the Defense Contract Audit Agency of an incurred cost audit. 

Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests

Both the House and Senate have passed their own versions of the 2018 National Defense Authorization Act (NDAA). Thee are, as always, differences in the two bills which will now have to be worked out in conference committee. The provision in the House version requiring the Defense Department to contract out 25 percent of its incurred cost audits in lieu of performing them in-house by DCAA (Defense Contract Audit Agency) is not in the Senate version (see 2018 NDAA Passes House). For the rest of this week, we will examine a few provisions that appear in the Senate version that are not in the House version.

A provision that will certainly cause some contractors to think hard about their bid protest strategies is a requirement to reimburse the Defense Department for the Department's cost in processing a protest at the Government Accountability Office (GAO).  Two things have to happen. First, all of the elements of the protest are denied in an opinion issued by the GAO. And second, it applies only to contractors with revenues in excess of $100 million in the previous year. That is $100 million in total revenues, not $100 million in revenues from Government contracts or $100 million in revenues from cost-type contracts.

No one really knows how much it cost the Government to process a bid protest case. The Government does not collect the hours spent on such activities. However, one would suspect that it is significant. And what is the Government's billing rate? DCAA's billing rate is greater than $150 per hour so that might give a clue. So if the Government spends 100 hours processing a case, the bill to the contractor, assuming it is a large contract and its claims are denied, would be $15,000 (that estimate is probably significantly understated). Perhaps this provision will be a deterrent to frivolous bid protests.

The precise wording the Senate bill reads as follows:
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‘‘§ 2340. Government Accountability Office bid protests

     ‘‘(a) PAYMENT OF COSTS FOR DENIED PROTESTS.—

          ‘‘(1) IN GENERAL.—A contractor who files a protest described under paragraph (2) with the Government Accountability Office on a contract with the  Department of Defense shall pay to the Department of Defense costs incurred for processing a protest at the Government Accountability Office and the Department of Defense.

          ‘‘(2) COVERED PROTESTS.—A protest described under this paragraph is a protest—

               ‘‘(A) all of the elements of which are denied in an opinion issued by the Government Accountability Office; and
               ‘‘(B) filed by a party with revenues in excess of $100,000,000 during the previous year.

     ‘‘(b) WITHHOLDING OF PAYMENTS ABOVE INCURRED COSTS OF INCUMBENT CONTRACTORS.—

          ‘‘(1) IN GENERAL.—Contractors who file a protest on a contract on which they are the incumbent
contractor shall have all payments above incurred costs withheld on any bridge contracts or temporary contract extensions awarded to the contractor as a result of a delay in award resulting from the filing of such protest.

          ‘‘(2) DISPOSITION OF WITHHELD PAYMENTS ABOVE INCURRED COSTS.—

               ‘‘(A) RELEASE TO INCUMBENT CONTRACTOR.—All payments above incurred costs of a protesting incumbent contractor withheld pursuant to paragraph (1) shall be released to the protesting incumbent contractor if—
                    ‘‘(i) the solicitation that is the subject of the protest is cancelled and no subsequent request for proposal is released or planned for release; or
                    ‘‘(ii) if the Government Accountability Office issues an opinion that upholds any of the protest grounds filed under the protest.

               ‘‘(B) RELEASE TO AWARDEE.—Except for the exceptions set forth in subparagraph (A), all payments above incurred costs of a protesting incumbent contractor withheld pursuant to paragraph (1) shall be released to the contractor that was awarded the protested contract prior to the protest.

               ‘‘(C) RELEASE TO DEPARTMENT OF DEFENSE IN EVENT OF NO CONTRACT AWARD.— Except for the exceptions set forth in subparagraph (A), if a protested contract for which payments above incurred costs are withheld under paragraph (1) is not awarded to a contractor, the withheld payments shall be released to the Department of Defense and deposited into an account that can be used by the Department to offset costs associated with Government Accountability Office bid protests.’’.

Be Prepared When You Go In To Negotiations With The Government

No one has a good count on the number of Government contractors. By one estimate, over 50,000 companies contract with the Department of Defense and there are many Governmental agencies besides DoD. Whatever the number, there are a lot of Government contractors but relatively few of them have had to go through the process of actually negotiating a contract price under FAR Part 15 procedures, Contracting by Negotiations.

Negotiating a fair and reasonable price is a complex process involving consideration of many factors including

• actual costs and completion estimates
• the amount of profit or fee in relation to the total cost, the complexity of the work, quality, efficiency, and ingenuity of the contractor's performance and the technical and financial risk assumed, and
• the competitiveness of the end price.

Costs constitute an important factor in the contract price negotiation and the discussion between the contractor and the contracting officer include the objective of arriving at a definitive agreement, to the maximum extent possible, on the amount of costs to be considered in the price.

Definitive agreement on each element of cost however may not always be possible because of honest differences of opinion or other considerations between the negotiating parties. As a result, negotiation involves a give and take proposition and the contracting officer usually cannot negotiate a price which includes cost considerations exactly in accordance with his/her "pre-negotiation objective" (PNO). Contracting officers develop their PNOs based on all available data and information including the contractor's certified cost proposal, the results of technical evaluations, and either audits or cost analyses performed by DCMA  (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency).

In some instances, a total end price may be negotiated without specific monetary resolution of all of the individual cost elements or other pricing factors involved. When this happens, the Government's "view" of negotiations can differ markedly from the contractor's "view".

Sometimes, the profit rate the Government is willing to pay is a hindrance to a speedy end to negotiating sessions. Cost or pricing data is typically based on factual matters. For example, a contractor solicits two quotes for a proposed material item and selects the lower of the two. But profit considerations largely rely on judgment. How does one measure "complexity of work", "ingenuity of contractor's performance", or "technical risk".

2018 NDAA Passes House - Now On to the Senate

Earlier today the House passed the fiscal year 2018 National Defense Authorization Act (NDAA) by a wide margin; 344-81. Now, the Senate needs to act on its version. The House version calls for $696 billion in spending while the Senate version sits around $700 billion. Both spending proposals exceed the President's $603 billion defense plan.

The bill that passed the House still contains the provision requiring DoD to subcontract at least 25 percent of its incurred cost audit workload in lieu of requesting DCAA (Defense Contract Audit Agency) to perform the audits (see Transitioning from Government Auditors to Commercial Auditors for Incurred Cost Audits for additional details on this provision).

It is not clear who will pay for these audits. It almost seems like an unfunded mandate. Audits conducted by DCAA are authorized in the NDAA (nearly $600 million in the Fiscal Year 2018 House budget). But if DCMA (Defense Contract Management Agency) must pay for the audits that it awards to commercial audits (perhaps as much as $100 million per year), it is going to need to find a source for those funds. It's unlikely that the Agency will want to fund them from operations.

Perhaps DCAA could pay for the audits. After all, they'll be able to save that amount by hiring fewer auditors since their workload will diminish when commercial auditors take over.

One note concerning the 25 percent target. It is measured on costs charged to flexibly priced contracts, not 25 percent of contractors. To get to 25 percent of incurred cost dollars, there will have to be at least a few of the major Defense contractors thrown into the mix.

Poor Internal Controls Leads to Theft of Government Property

All Native Group (ANG) is the federal contracting division of Ho-Chunk, Inc, the economic development corporation of the Winnebago Tribe of Nebraska. Besides being tribally owned, ANG carries SBA 8(a) certifiication, small disadvantaged, and a HUBZone status. They provide a wide range of services to the Government including staff augmentation, editorial services, IT, logistics, and professional services. One of ANG's contracts is with the Department of State (DoS) to provide training at the State Departments Diplomatic Security Interim Training Facility in Summit Point, West Virginia.

In 2011, All Native Group hired Richard Millette to be a "special-skills tactics instructor. Earlier this month, Mr. Millette was indicted by a Federal Grand Jury on theft charges (an indictment, of course, is only an accusation. A defendant is presumed innocent unless and until proven guilty). It seems that Mr. Millette was stealing (i) ballistic vests and (ii) combat helmets from the State Department's inventory and selling them online and trading them for other items. The thefts occurred in 2016.

The stolen equipment was found posted for sale on a Facebook private-group page titled "Shooters Lounge". The name on the Facebook account used to post the items for sale was not Mr. Millette's but an investigation determined that the photos accompanying the listings were taken from Mr. Millette's office desk. Additionally, the items were marked with the State Department's information tags.

State Department special agents obtained a search warrant and went to Mr. Millette's house and found the stolen equipment - equipment that had been used by instructors for training exercises and safety demonstrations. One of the ballistic vests contained the identification of a former State Department employee.

Initially, Mr. Millette claimed that he obtained some of the equipment from the company that produced it because he was trying to start his own self-defense company. The equipment manufacturer however refuted that claim.

The Fraud Triangle is a model for explaining the factors that cause someone to commit occupational fraud. It consists of three components which together, lead to fraudulent behavior. These three components include (i) perceived unshareable financial need, (ii) perceived opportunity, and (iii) rationalization. We don't know enough of the facts of Mr. Millette's case to frame it against the fraud triangle. However, one thing is clear - there was opportunity and that opportunity was no doubt a result of poor internal controls over the accountability of Government property by All Native Group. Good internal controls would have reduced the "opportunity" risk.

DCAA's Help for Small Business Contractors

Everyone has heard the line that goes like this: Hi, we're from the Government and we're here to help". Its a humorous line because its antithetical to what really happens when the auditor comes knocking. Its unlikely that any contractor will get help from a DCAA auditor these days because the Agency takes the notion of being independent very seriously. That is not to say however that DCAA won't help - you just have to find the right person. It won't be an auditor but the Agency has a few non-audit staff dedicated to assisting small businesses.

To find these folks, go to the section on DCAA's public website containing resources devoted to helping small business contractors and subcontractors understand the audit requirements and common audit processes (see Audit Process Overview).

The site contains a link to its venerable Information for Contractors pamphlet that we've referenced a few times on this blog. The latest version is from 2012 but still relevant.

The site also contains contract information (phone and email) for the Agency's small business focal point. We have heard good things about the services offered by the focal point from contractors (or prospective contractors) who have chanced to contact them. If you're looking for some training, you might get lucky and find some nearby scheduled training. And its free.

If your comfortable with viewing training slides, there are eight PowerPoint presentations available for download. For new contractors, these are great introductions to managing and administering Government contracts. The eight presentations include:

1. Accounting system requirements - use this to self-assess whether your accounting system is ready for Government contracting
2. Contract briefs
3. Incurred cost submissions
4. Monitoring subcontracts - lots of emphasis lately on how well contractors manage their subs
5. Proposal adequacy - 
6. Provisional billing rates
7. Public vouchers
8. Real-time labor evaluations - highly recommended if you have or anticipate cost-type contracts.

If you're a small business and especially if you're a small business new to Government contracting, the resources on DCAA's "Help for Small Business" website is a great place to learn some of the fundamentals of Government contracting.

Reporting Requirement for Political Contributions and Correspondence Proposed

Most Government contractors, perhaps all of them, know and understand that contributions and donations, including cash, property and services, regardless of recipient, are unallowable (see FAR 31.205-8). The cost principle is simple, straight-forward, and contains none of the nuances found in many other cost principles.

As long as contributions are excluded from forward pricing estimates and incurred costs, the Government is satisfied, right? Not if Rep. Ellison gets his way. Rep Ellison has introduced an amendment to the 2018 NDAA (National Defense Authorization Act) that establishes a new reporting requirement for Defense contractors.

The amendment reads:

Not later than 30 days after a contract is awarded using funds authorized under this Act (i.e. the Fiscal Year 2018 NDAA), the relevant contractor and subcontract at any tier (and any principal with at least 10 percent ownership interest, officer, or director of the contractor or subcontractor or any affiliate or subsidiary with the control of the contractor or subcontractor) shall disclose to the Administrator of General Services all electioneering communications, independent expenditures, or contributions made in the most recent election cycle supporting or opposing a Federal political candidate, political party, or political committee, and contributions made to a third-party entity with the intention or reasonable expectation that such entity would use the contribution to make independent expenditures or electioneering communications in Federal elections.

We have no idea whether this amendment will be adopted into the NDAA. A requirement to send all electioneering communications to the GSA (General Services Administration) seems draconian. Then there is the question of what the GSA will do with the information. Who will have access to it? What will they do with it? How will it be cataloged and referenced? We hope this amendment dies.

Company Loses Chance for $200 Million Contract due to Its Clerical Error

The Navy issued a RFP (Request for Proposal) for engineering and logistics-support services for naval surveillance radar. Valkyrie Enterprises submitted a bid but it was thrown out (i.e. eliminated from the competition) by the Navy as noncompliant with the solicitation requirements. Valkyrie appealed to the GAO (aka Comptroller General). You see, the solicitation required a "senior acquisition manager" (SAM) with a minimum of 12 years of experience in acquisition management associated with combat systems. Valkyrie's proposed SAM reflected only 11 years of acquisition management experience, not the 12 years required by the solicitation.

Upon being notified of its elimination from competition, Valkyrie called the Navy to explain it had made a clerical error because the SAM resume had been truncated. The person proposed for the job had more than the requisite 12 years of acquisition management experience. The Navy didn't respond so Valkyrie protested.

Valkyrie contended that the Navy's decision not to seek clarification concerning the SAM's resume was unreasonable and contrary to law, regulation, and the terms of the solicitation. Specifically, Valkyrie argued that several factors, both intrinsic and extrinsic to its proposal should have alerted the evaluators to Valkyrie's clerical error and therefore the Navy erred in not seeking such clarifications. Valkyrie offered three arguments to support its position.

1. Valkyrie noted that other parts of its proposal were inconsistent with the resume in question which should have alerted the Navy to the need for clarification. Specifically, the staffing plan noted that the SAM had 31 years of related professional experience which was inconsistent with the 11 years of acquisition management experience displayed on the truncated resume.
2. Valkyrie aruged that its SAM currently works in in an acquisition management capacity on the incumbent contract, has done so since November 2004, and thus was well-known to the Navy
3. Valkyrie argued that its certification that all key personnel identified in its proposal met the required qualifications should also have alerted the Navy to the necessity of clarifications.

Valkyrie contended that when viewed in the context of these circumstances, the Navy's refusal to seek clarification was unreasonable.

The GAO didn't buy the arguments. First they noted that it is the offeror's responsibility to submit a well-written proposal, with adequately detailed information which clearly demonstrates compliance with the solicitation requirements and allows a meaningful review by the procuring agency, in this case, the Navy. Furthermore, the GAO pointed out that agencies may, but are not required to, engage in clarifications that give offerors an opportunity to clarify certain aspects of proposals or to resolve minor or clerical errors.

With respect to Valkyrie's specific arguments, the GAO addressed each one. The inconsistency mentioned in item 1 above was not necessarily inconsistent. The 31 years of related professional management experience did not necessarily equate to 12 years of acquisition management experience. In fact, as it turned out, the SAM had only 19 years of acquisition management experience, not 31, but that number was no discernible from Valkyrie's proposal.

The argument that the Navy should have recognized the name of the proposed SAM because he was the incumbent was groundless. That information was not "too close at hand to ignore".

The third argument that Valkyrie certified that all personnel met the requirements of the solicitation as part of the submission was dismissed also. The Navy is not obliged to parse the protester's proposal to try to determine whether the proposal offers comparable sources of information.

You can read the full text of the bid protest decision here.

Regulations involving Protections for Contractor Employee Whistleblowers Extended

Back in 2013, the FAR (Federal Acquisition Regulations) Councils added provisions for enhanced whistleblower protections for contractor employees. The coverage, codified at FAR 3.9 set forth the policy that Government contractors cannot discharge, demote or otherwise discriminate against an employee as a reprisal for disclosing information to a Member of Congress, or an authorized official of an agency or the Department of Justice, relating to a substantial violation of law related to a contract.

This was a four year pilot program and has now expired and according to the regulations, it is no longer in effect. However, it is the intent of everyone involved to make the regulations permanent. However, because of the moratorium on new regulations, the FAR Councils have not been able to complete the FAR case to make the 4-year pilot program permanent.

Earlier this week, the FAR Councils issued a Class Deviation from FAR to re-implement the contractor employee whistleblower protections. The effect of this is to revert back to the pilot program regulations as if they had not expired. This class deviation will remain in effect until FAR Case 2017-0005 is formalized.

By way of background, contractor employees who believe that they have been discharged, demoted, or otherwise discriminated against contrary to the policy may file a complaint with the Inspector General of the agency that awarded the contract. If the Government finds the allegations to be true, the Government can order the contractor to take affirmative action to abate the reprisal, order the contractor to reinstate the person to the position that the person held before the reprisal (with compensation) or order the contractor to pay the complainant an amount equal to the aggregate amount of all costs and expenses that were reasonably incurred by the complainant.

There have been many contractor employee whistleblowers and many of them also allege reprisal by their employer. We do not have any statistics on how the 4-year pilot program worked out for contractor employee whistleblowers but it probably had positive effect since the Government now wants to make the regulations permanent.

Lowest-Price Technically Acceptable (LPTA) Does Not Always Equate to "Best Value"

Rep. Mark Meadows (NC) introduced a bill last month that would extend certain prohibitions that now apply to DoD contracts, to all executive agencies. In short, the bill establishes a new policy to avoid using lowest price technically acceptable (LPTA) source selection criteria in circumstances that would deny the Government the benefits of cost and technical trade-offs in the source selection process.

The theory goes something like this. LPTA contracts have not always delivered the outcomes that were initially expected. Cheapest does not always equate to the best value in procuring professional services.

Under this bill, federal agencies will have flexibility to seek and obtain innovative solutions, better outcomes and ultimately the best value on behalf of taxpayers.

When it comes to applying LPTA in contract bids, federal agencies must:

1. Comprehensively and clearly describe the minimum requirements in terms of performance objectives, measures and standards that will be used to determine the acceptability of offers.
2. Establish that there is no value in a contract bid that might exceed the technical and performance requirements.
3. Require that technical approaches require no subjective judgment by the source selection authority for one proposal over another
4. That the source selection authority reviewing technical proposals have high confidence that bids other than the lowest would not result in identifying factors that could provide value or benefit to the executive agency
5. That the contract officer provide justification for the use of LPTA evaluation methodology in the contract file.
6. The agency determines that the LPTA reflects full life-cycle costs, including operations and support.

This bill also limits LPTA use on the following:

• information technology services,
• cybersecurity services
• systems engineering and technical assistance services,
• advanced electronic testing
• audit or audit readiness services
• other knowledge-based training or logistics services for overseas contingency operations.

Sounds to us like this bill will result in a lot more work for contracting officers - primarily with a need to prepare more justification and documentation.

Transitioning from Government Auditors to Commercial Auditors for Incurred Cost Audits

The House Armed Services Committee (HASC) submitted its markup of the Fiscal Year 2018 National Defense Authorization Act (NDAA) last week. In the coming days, we will be reporting on some of the procurement related provisions included in the markup.

Section  802 of the 2018 NDAA concerns the performance of incurred cost audits. The 2018 NDAA folds in the proposed Defense Acquisition Streamlining and Transparency Act which we covered last May in three parts (see Part 1, Part 2, and Part 3). It does not include the DoD legislative proposal to repeal the provision in the 2017 NDAA that permits contractors to go out and hire their own auditors and present the results to DoD (see DoD Submits Legislative Proposal to Repeal Auditing Requirements for Commercial Auditors) though its possible that the Senate might consider the proposal in their version of the NDAA.

In brief, Section 802 would require DoD to adhere to commercial standards for risk and materiality when auditing costs incurred under flexibly priced contracts. The HASC is concerned that current incurred cost auditing processes in DoD are too slow, impede effective contract management, and may not provide good value to the taxpayer. The HASC also believes that commercial auditors used by other Federal agencies may cost less and complete incurred cost audits sooner. If we look at the Department of Energy's experience with commercial auditors, we can see that commercial auditors finish incurred cost audits quicker but we don't think there is much to support the idea that they are less costly. The hourly billing rates for commercial auditors are generally higher than that of DCAA (Defense Contract Audit Agency) but there is another variable to consider; hours required to complete the audit. We don't believe there is a good metric for comparing hours.

The section would require contract management to choose either the DCAA or a QPA (Qualified Private Auditor) to perform incurred costs, subject to guidelines of an audit planning committee. The goal is by 2020, to outsource 25 percent of incurred cost audits to QPAs.

The section would require DCAA to pass a peer review by a commercial auditor in order to continue to issue unqualified audit findings after fiscal year 2022. Currently, peer reviews of DCAA audits are conducted by the DoD Office of Inspector General who delights in beating up their brethren for no valid reasons. A commercial peer review might be good for DCAA.

The section would require incurred costs audits to be completed within one year after receipt of contractor incurred cost submissions. That will require some institutional changes in DCAA.

Finally, the section would require GAO (Government Accountability Office) to evaluate how the plan is working (timeliness, costs, and quality) and report back to Congress.

Is the 25 percent threshold for commercial audits achievable? Absolutely. DCAA better worry that it doesn't become 100 percent.

Is Your Purchasing System Adequate?

How do you know whether your purchasing system is good enough for Government contracting? There are guidelines in the FAR (Federal Acquisition Regulations) and various FAR supplements (e.g. the DoD FAR Supplement or DFARS) to help contractors make self-assessments as to whether their purchasing systems are adequate for Government purposes. Often, when people hear about purchasing systems they have subcontracting in mind. However, the term purchasing system can also encompass the full range of material purchases. Ultimately, the Government is most concerned that contractors spend Government funds most efficiently and effectively. To the extent that your purchasing system can provide that assurance, you should be good to go.

Perhaps the most comprehensive listing of the characteristics of a purchasing system are found in DFARS 252-244-7001. There are 24 of them but we'll just examine a few.

The most important thing about a "system" is its documentation. There needs to be a system description that includes policies, procedures, and purchasing practices. These policies, procedures, and practices must comply with FAR and DFARS (or other Agency supplements, although many Federal agencies defer to DoD anyway). If you don't have a system description, you will fail right out of the gate. Your purchasing system will not be adequate because no one will have the road map.

Flow-down clauses. Many of prime contract clauses are required to be flowed down to subcontracts. This is not as easy as it sounds because there is no centralized listing of what needs to be flowed down for each type of contract. At a minimum, contractors need to identify the mandatory clauses but that would not be sufficient for most purposes. For example, the Government's termination for convenience clause is not a required flow-down clause but a contractors would certainly want that clause in any subcontract that it awards if it is in their prime contract.

Lines of authority. Does the purchasing organization have clear lines of authority and responsibility? Is there a division of responsibility that reduces the likelihood of fraud in the purchasing organization? Many of the reported fraud investigations were the result of someone messing with the purchasing function. Many frauds could have been avoided with the proper internal controls, lines of authority, and division of duties.

Are purchase orders based on authorized requisitions and include a complete and accurate history of purchase transactions to support vendor selections, and prices paid. The Government will, at some point, request PO/Subcontract files and would expect to see this information/data.

Does the system show evidence that price, quality, delivery, technical capabilities, and financial capabilities of competing vendors were considered and properly evaluated to ensure fair and reasonable prices? Or, to state it differently, how do you prove to the Government that you got the best price?

Regardless of whether a company has Government contracts, the purchasing function is critical to the organization and will ultimately affect its bottom line.