New GAO Report on DCAA Incurred Cost Audits

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

The biggest contributing factor cited by agency officials in closing out flexibly-priced contracts is the delay in receiving audits of contractors' incurred cost proposals that are conducted by the Defense Contract Audit Agency. Digging a bit deeper, the GAO concluded that although DCAA has made some progress in reducing its backlog of incurred cost audits, it still took the Agency an average of two and a half years to push one out the door.

Since 2011, the Defense Contract Audit Agency (DCAA) has reduced its inventory of contractors' incurred cost proposals awaiting audit by about half to 14,208, and DCAA has significantly reduced its backlog of older proposals - those for 2013 and prior - as of September 2016. To do so, DCAA used a risk-based approach to reduce the number of audits and began conducting multi-year audits, in which two or more incurred cost proposals are closed under a single audit. Nevertheless, DCAA did not meet its initial goal of eliminating its backlog by fiscal year 2016. DCAA averaged 885 days from when a contractor submitted an adequate incurred cost proposal to when the audit was completed. The lag was due to limited availability of DCAA staff to begin audit work, as it took DCAA an average of 138 days to complete the actual work.

The GAO identified two areas in which DCAA may be missing opportunities or currently lacks information to help identify additional ways to reduce its inventory of incurred cost audits. These include (i) assessing actions for reducing the amount of time it takes DCAA to begin an incurred cost audit (nearly two years in fiscal year 2016) and establishing related performance measures to assess its progress and (ii) evaluating the use of multi-year auditing and establishing related performance measures.

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

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

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

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

Jury Finds Raytheon Not Guilty of Retaliation in Labor Charging Case

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

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

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

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

Defense Contract Management Agency Gets its Own Hotline

Not to be outdone by its sibling DCAA (Defense Contract Audit Agency), DCMA (Defense  Contract Management Agency) has rolled out its own internal Hotline. Doesn't there seem to be a lot of redundancy here. The Inspector Generals (IGs) have their own hotlines. Contractors should be well aware of these since there are contractual requirements to post hotline posters in prominent locations (or on an employee website). DCAA established its own hotline a couple of years ago, encouraging auditors and outsiders to report matters relating to contract and procurement irregularities, cost/labor mischarging, defective pricing, defective parts, bid rigging, and bribery and acceptance of gratuities. Why are so many hotlines necessary?

DCMA states that their hotline is to enhance accountability practices and improve incident response times. They say that their hotline aligns with calls to improve government transparency. Really? Is DCMA going to make all of the hotline calls public? Don't think so since one of the tenants of a hotline is to ensure confidentiality. How then can DCMA's hotline improve government transparency, except perhaps in some esoteric way.

In introducing the Hotline to DCMA employees, the Agency stated:

Throughout our climate and government surveys and new channels of communication, there is a lot of talk about holding the government employees and contractors accountable for their actions. With the implementation of our DCMA  Hotline, we are providing an independent means for individuals to report allegations of fraud, waste, and abuse, or general administration issues and concerns, as well as other wrongdoings pertaining to programs, personnel and operations.

Hotlines are useful for identifying instances of fraud, waste, and abuse. According to the Association of Certified Fraud Examiners (ACFE), tips were the most common detection method by a wide margin, accounting for 39 percent of cases. Internal audits were the second-most common at 16.5 percent. For organizations that maintain internal hotlines, schemes were detected through a tip in 47 percent of the cases. Without the hotline, only 28 percent of schemes were detected through tips.

DCMA suggests that its new hotline be used for such matters as (i) waste of funds, (ii) theft and abuse of government property, (iii) abuse of authority, (iv) conflicts of interest, (v) mismanagement, and (vi) a variety of personnel-related issues.

DCMA also states that employees can still refer matters relating to suspicions of contractor fraud, waste, and abuse to its FraudNet,

Read more about the DCMA Hotline here.

You Cannot be a Principal Investigator for Two Companies at the Same Time under SBIR Rules

While performing a pro-active review of  SBIR/STTR awards (Small Business Innovation Research/Small Business Technology Transfer), NASA (National Aerospace and Space Administration) found that an individual was listed as a PI (Principal Investigator) for contracts awarded to two separate companies. Investigation revealed that a group of scientists and engineers who had worked together at ATK, a defense contractor in Huntsville, Alabama, came to an agreement in 2006 with another company, Amtec, also of Huntsville, to work for Amtec with the understanding that they would eventually become their own company. These Amtec employees incorporated their own business, Scientic, Inc in 2008 and beginning in 2009 worked as dual employees of both Amtec and Scientic.

One of the dual employees began proposing SBIR projects for both Scientic and Amtec. In due course, both companies were awarded a variety of SBIR contracts with this employee acting as Principal Investigator for both.

While this employee was serving as PI for SBIR contracts at both companies, the two companies, Scientic and Amtec made certifications and representations to the Government in their contract proposals that the employee would be primarily employed during the performance of the contracts by the company submitting the documents. FAR requires that a PI be primarily employed by the company and requires that the PI spend more than half of his or her employment time during the performance of the contract with the company proposing the research.

During an interview with the NASA Office of Inspector General, the employee confirmed that he was the PI of the Amtec SBIR as well as two Scientic SBIRs. Thus, Scientic's certification that the PI was primarily employed by Scientic was false at the time of Scientic's contract performance with NASA and DoD. The Government alleged that Scientic's knowingly making this certification constituted a false statement under U.S. Code.

Yesterday, the Justice Department ordered Scientic to refund the full amount of the SBIR contracts with NASA and DoD totaling $250,000 and to pay a fine of $30,000. The Judge also placed Scientic on three years' probation. (Read more about the sentencing here.)

$2 Million Settlement in Small Business Subcontracting Fraud

The Department of Justice (DOJ) announced last Friday a partial settlement in a case involving questionable subcontracting practices by an Energy Department contractor and one of its subcontractors. The investigation is ongoing but one of the parties agreed to pay $2 million to resolve its part of the case.

The DOJ press release can be found here while a newspaper article with more detail can be read here.

Government contracts and subcontracts contain small business subcontracting goals. Although in most cases, contractors make diligent attempts to meet those goals, there is no real penalty for not meeting them. Except in the case of some DOE contracts. DOE is known to base a portion of award fees on contractors' successes in meeting those goals.Therefore in those cases, failure to meet those goals has a direct impact on profits.

In this case, the prime contractor was Washington Closure Hanford (WCH). The Federal case against that company continues. One of its subcontractors was Federal Engineers & Constructors (FE&C). Although admitting no liability, FE&C settled with the Government for $2 million to resolve its part in the affair.

FE&C, in turn, awarded two subcontracts totaling $19.5 million to a third company called Sage Tec cleanup work at DOE's Hanford site. Sage Tec is a small, woman-owned business and awarding $20 million worth of subcontract to a small woman-owned business counted significantly toward both WCH and FE&C meeting their small-business goals.

Things began to unravel when another woman-owned small business, Savage Logistics, called foul. Its owner, Salina Savage, filed a whistleblower suit claiming that Sage Tech was a front company and had no relevant experience, no equipment, and no employees other than its owner.

Turns out that was true. When FE&C awarded the first subcontract to Sage Tec, Sage Tec had no experience, equipment, or employees. When it awarded the second subcontract three years later, Sage Tec still had no employees or equipment although by then it must have had a little bit of experience.

So how did Sage Tec pull off $20 million worth of subcontracting without any equipment or employees? Easy, it "rented" trucks from its prime contractor, FE&C, and used FE&C employees to drive those trucks. So, Sage Tec certainly looks like a front company. It probably doesn't seem helpful to know that the owner of Sage Tec was also the wife of an FE&C Vice President.

For her part in blowing the whistle, Salina Savage gets $470,000 of the $2 million settlement. Also, FE&C agreed to reimburse her for $100,000 in attorney fees.

Technical Interchanges of IR&D Projects No Longer Required as a Condition of Allowability

Good news for major defense contractors.

The Department of Defense issued a class deviation regarding the requirement for Independent Research and Development technical exchanges. (See Class Deviation 2017-O0010 dated September 14, 2017).

Under the existing DFARS (DoD FAR Supplement) Cost Principle (DFARS 231.205-18(c)(iii)(C)(4), major contractors are required to engage in or document a technical interchange as part of the criteria for determining a contractor's annual independent research and development costs to be allowable.

This requirement has been controversial since it was enacted back in 2016 primarily because DoD didn't develop the internal structure to host or coordinate these technical exchanges. DCMA (Defense Contract Management Agency) backed away from any involvement early on saying it didn't have anyone qualified to engage in such technical interchanges. (see Enhancing the Effectiveness of Independent Research and Development for more information on requirement).

As a result of this deviation the actions require by DFARS (engaging in technical interchanges with a technical or operational DoD Government employee prior to the generation of IR&D costs and documenting those interchanges) are no longer part of the criteria a contracting officer must consider in determining a major contractor's IR&D costs to be allowable.

This class deviation is effective until it is incorporated in DFARS or until it is rescinded. Look for it to be incorporated into DFARS. It was bad policy from the beginning.

2018 NDAA - Increase in TINA Threshold

Earlier this week, the Senate passed its version of the NDAA (National Defense Authorization Act) for fiscal year 2018. The House passed its version earlier this summer. Now the differences will need to be worked out in a joint compromise committee before it is forwarded to the President.

Both bills have provisions that increase the threshold for the requirement to furnish certified cost or pricing data. Currently, the threshold sits at $750 thousand. Under the House version of the NDAA, the threshold will rise to $2.5 million (Section 803). Under the Senate version, the threshold will rise to $1 million.

We have no idea why the need to raise the TINA threshold as it is already adjusted for inflation every five years. The Senate committee report contains the following explanation that the provisions is intended to save money.

The committee recommends a provision that would amend Section 2306a of title 10, United States Code, to increase the threshold for certified cost or pricing data and truth in negotiation requirements to $1.0 million., Section 824 of the National Defense Authorization Act for Fiscal Year 2017 (Public Law 114-328) sets goals for the Secretary of Defense to follow in reducing reimbursable costs pertaining to bid and proposal submissions. This provision would aid the Department of Defense in realizing that goal.

The logic seems to be that if contractors are not required to submit certified cost or pricing data, the cost of preparing and submitting proposals will be reduced. Perhaps that's true. Without the requirement to certify that cost or pricing data is current, complete, and accurate, contractors can be less diligent in preparing their proposals. But, does the Government really want to encourage contractors to be less diligent in their estimating practices?

2018 NDAA Passed by Senate

By a wide margin, 89-8, the U.S. Senate passed its version of the fiscal year 2018 National Defense Authorization Act (NDAA) yesterday. The House passed its version back in July. Now conferees from the House and Senate will meet to reconcile the differences in the competing versions.

Although the total authorizations are not significantly different, $700 billion for the Senate bill and $696.5 billion for the House bill, there are substantial differences in what gets funded and other provisions.

According to reports, there is no threat of a Presidential veto to either the House or Senate version so we will expect to see a final bill on the President's desk in short order.

You can read about some of the provisions included in the Senate version in the following posts:

• Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests
• 2018 NDAA - Additional Work for DCAA?
• Have Contractor's Been Complaining About DCMA's "Should-Cost" Reviews?
• 2018 NDAA - Changes to DCAA's Annual Report to Congress

Progress Report on Other Procurement Reform Initiatives

We've been discussing the Section 809 Panel and everyone's hope that it brings significant reforms to the acquisition process. Ultimately, many of the recommended reforms are going to require legislative action to implement so this isn't something that will happen overnight. Also, we don't know how many sacred cows that might be sacrificed bringing real reform into the process so we'll just have to wait and see how it all develops.

The Section 809 Panel is not the only organization looking at simplifying the acquisition process however. The Department of Defense (DoD) has begun a review of 716 regulations including 350 acquisition-related rules in compliance with a White House executive order from last February that seeks to reduce the regulatory burden on citizens and businesses (see Executive Order on Enforcing Regulatory Reform).

Concerning the 350 acquisition-related regulations, DoD is implementing a multi-step process to assess the procurement rules and make its recommendations. It is being led by the Defense Federal Acquisition Regulations personnel and includes

1. Historical research an all 350 procurement-related regulations (presumably this is completed).
2. Determining the intended outcome of the regulations - the reasons for issuing them in the first place. The committee might discover that many of these regulations address problems that no longer exist.
3. Consulting with subject matter experts to assess whether a regulation offers benefits to the Department or to the acquisition process. This is intended to answer the question as to whether the regulation is still needed.

The Department expects that any changes will occur in fiscal year 2019 and 2020 since the rule-making process to alter or remove existing rules could take 18 to 24 months. That's a long time. Maybe the committee should recommend, as a first step in the reform process, ways to speed up the rule-making process.

Section 809 Panel and Texting While Driving

For the past couple of days, we've been discussing the activities of the Section 809 Panel (refer to Update on Section 809 Panel). Ultimately, the Panel will be "making recommendations, including actionable changes to regulatory and statutory language, to improve the acquisition process within DoD." For the purposes of the panel, regulations include not only regulations, but executive orders, directives, policies, and procedures as well. The Panel's goal is to take a comprehensive approach to weeding out regulatory and statutory underbrush that gets in the way of the DoD mission and to recommend entirely new pathways for approaching defense acquisition that promotes innovation, agility, and speed across the whole range of goods and services.

Last May, the Panel issued its first interim report that included several "problematic policies and requirements" that it highlighted as case studies of what's wrong the the procurement process. These, the Panel states, represent only a small sample of what bogs down the defense acquisition process. We will discuss one of those items here. For a complete listing, see the Panel's Interim Report Supplement.

Texting While Driving. Back in 2009, the President issued an Executive Order (EO) - Federal Leadership on Reducing Text Messaging While Driving - which included language to encourage contractors to employ practices and policies to ban texting while driving. Eventually, a section was added to FAR (Federal Acquisition Regulations) at 23.11 to implement the EO and a clause was required to be inserted in all contracts. We questioned the need for the  EO and the FAR change at the time (see FAR Now Says You Can't Text While Driving) because even back then, it seemed redundant to what States were already legislating.

The Section 809 Panel noted that since the EO was issued, the norms surrounding cell phone use while driving have evolved, making the provisions of FAR 23.11 and 52.223-18, no longer necessary. DoD already prohibits the use of cell phones while driving on all military installations while 46 states, Washington DC, Puerto Rico, Guan and the U.S. Virgin Islands ban text messaging for all drivers. Because most states and DoD now ban cell phone usage and/or texting while driving, the FAR provisions are no longer necessary and should be deleted, according to the Panel's recommendation.

Although many acquisition regulations, including the prohibition against texting while driving, are designed to further arguably laudable public policy objectives, The Section 809 Panel wishes to emphasize that the aggregate effect of hundreds of similar regulations is costly for DoD.

Section 809 Panel - Team 9 - Cost Accounting Standards

The Section 809 Panel, created by section 809 of the 2016 NDAA (National Defense Authorization Act) was tasked with finding ways to streamline and improve the defense acquisition process. The Panel has two years to do it.

In order to cover every aspect needed to improve the defense acquisition process, the Section 809 Panel is broken up into 10 teams that analyze specific topics. Today we want to discuss Team 9 that was set up to review the Cost Accounting Standards Board (CASB) administrative and accounting requirements in the context of significant changes in what is being acquired, contracting methods, acquisition methods, and contractor operations.

Most Government contractors are not CAS covered or even subject to modified CAS coverage. However, most of the CAS standards, which were first promulgated back in the 70s, have now been incorporated into FAR cost principles in one form or another. Therefore, any recommendations coming out of the Section 809 Panel could easily impact all DoD contractors.

Team 9 has sent out a request to interested parties on recommended issues to address and potential solutions to those issues, with a particular emphasis on concerns that are significant and widespread enough that addressing them will noticeably improve the effectiveness and efficiency of DoD procurement.

So far, CAS matters under review by Team 9 include the following 10 areas:

1. CAS applicability, exemptions, and thresholds focusing on expanding existing exemptions
2. Conformance of GAAP and CAS where GAAP offers a suitable basis for fulfilling CASB objectives
3. Cost impact measurement and administration (contractors especially will benefit from changes here)
4. Materiality - more objective criteria for determining materiality
5. Improved definition of terms such as "cost accounting practice" and "change to a cost accounting practice
6. Allocation standards 403, 410, 418, and 420 (including accounting for allocated direct costs)
7. Disclosure statement structure and requirements
8. Accounting for unallowable costs - especially definitions and illustrations concerning expressly unallowable cost and directly associated costs
9. Pension costs
10. Insurance costs - self insurance and postretirement benefits

If you have any ideas, comments, complaints, or recommendations or are just curious about the process, find a way to become involved in the Section 809 Panel.

Update on Section 809 Panel

It is time for an update on the activities of the Section 809 Panel, an advisory panel formed to streamline the Defense Department's acquisition regulations. The name 'Section 809 Panel" comes from Section 809 of the Fiscal Year 2016 NDAA (National Defense Authorization Act). For more information on this panel, refer to "New Advisory Panel to be Formed to Streamline Acquisition Regulations". Briefly, the Section 809 Panel's overarching objective has been to make recommendations that, if adopted, will enable DoD to more consistently buy what it needs in a timely and cost-effective manner - whether that be commercial items, information technology, services, weapon systems, or the full range of tools and equipment on which war-fighters depend.

One thing for certain, the Section 809 Panel has been very active, holding monthly meetings and frequent stakeholder meetings. Its 18 appointed commissioners have been augmented by 30 or so professional staff members. Its got its own website (section809panel.org) with plenty of information on its activities and research. This past May, the Panel published its first interim report where it set forth the framework under which it intends to focus its work and recommendations. These include:

1. Adapt at the speed of a changing world
2. Leverage the dynamic defense marketplace
3. Allocate resources effectively
4. Simplify acquisition
5. Enable the workforce

The one that we're most interested in is number 4, simplifying the acquisition process but all five are tightly integrated. For example, you can simplify the acquisition process now but if you are not adaptable to the speed of a changing world, the acquisition process will soon feel cumbersome once again.

There have been many failed attempts at acquisition reform so what makes the likelihood that the Section  809 Panel will succeed (or have some modicum of success). The committee recognizes the fact that past reform initiatives have not had much success. That is why one sees the word "Bold" used liberally in their publications and website. In its Interim Report, the Panel makes the following observation:

In the last 50 years, there have been more than 100 reports, studies, and analyses of how DoD acquires goods and services. From these reports, the lesson learned is clear. Tinkering and incremental approaches to acquisition reform have not provided the necessary results and are especially ineffective in today's rapidly changing environment. In fact, incremental approaches have exacerbated problems with the acquisition system by adding more layers of sign off, mountains of paperwork, and hundreds of additional regulations. DoD must implement bold approaches and bold solutions to produce true reform (underscore added).

Its not too late to get in on the action. The stakeholder meetings are open to the public and there are ample opportunities for present their reform ideas for consideration. At one recent Panel meeting, a presenter offered five recommendations for reform:

• Give contractors a total contract price range in the solicitation. It would be helpful to know whether the Government wants and can afford a Mercedes or whether it just has the budget for a used Yugo with ripped upholstery.
• Make GAO the only forum for bid protests. Have you ever been the awardee who has to stop work as the protester ties up the award through multiple forums?
• GSA cannot be on the leading edge of technology because it requires contractors to have previously sold the product or service before it can add it to a GSA Schedule. So, GSA is always looking backwards and not forward.
• Eliminate the use of cost reimbursable contracts for low tech services when the end product is just the service.
• Post awarded (redacted) contracts to a common website rather than make people go through the burdensome process of requesting them under the Freedom of Information Act.

These are just a few of probably hundreds, if not thousands of ideas that have been proffered for consideration by the Panel. If you've got some, this is the time to let the Panel know. Spend some time on their website and see whether you can contribute.

The SBA's Certificate of Competency (COC) Program

The SBA's Certificate of Competency (COC) program allows a small business to appeal a contracting officer's determination that it is unable to fulfill the requirements of a specific Government contract on which it is the apparent low bidder. When the small business applies for a COC SBA specialists conduct a detailed review of the firm's capabilities to perform on the contract. If the business demonstrates the ability to perform, the SBA issues a COC to the contracting officer requiring the award of that specific contract to the small business. The COC program helps ensure that the small business, especially those which are newly entering into the Federal procurement arena, are given a fair opportunity to compete for and receive Government contracts.

Note here that the COC focus is on a firm's ability to perform. The contracting officer might be concerned about the firm's technical expertise, its financial capability, or its capacity. Whatever the responsibility related concern might be, the small business has the right to appeal a contracting officer's determination.

A recent bid protest decision illustrates the difference between being responsible and not complying with the requirements of a solicitation.

Sea Box, a small business, protested the award of a contract to a competitor under a RFP (Request for Proposal) issued by GSA (General Services Administration) for relocatable simulator shelters (RSS) for the Air Force. GSA considered Sea Box's proposal to be unacceptable. Sea Box argued that GSA was required to refer its unacceptable proposal to the SBA (Small Business Administration) because the basis for eliminating Sea Box's bid from competition was related to responsibility.

The solicitation contained two pass/fail criteria. One of those criterion specified that GSA would reject any proposal that did not include a statement confirming that the RSS solution had been rated to operate at a secret classification level in accordance with characteristics specified in the solicitation. In order to demonstrate that they met the criterion, bidders were required to submit documentation that demonstrated in writing how the offerors' solution complied with the standards and documentation that demonstrated that its product had been previously certified/accredited by a Government security agency.

After reviewing Sea Box's proposal, the contracting officer determined that it failed to satisfy the pass/fail requirement because Sea Box did not submit a statement that confirmed its solution had been rated to operate at a secret classification level. As a result, GSA did not give further consideration to Sea Box's proposal.

Sea Box protested arguing that GSA eliminated its proposal from consideration based on a responsibility-related criteria, such that its unacceptable proposal should have been referred to the SBA. GSA argued that its rejection of Sea Box's proposal was not based on Sea Box's responsibility, but was instead based on whether Sea Box's product met the requirements of the solicitation.

The Comptroller General (CG) agreed with GSA finding that Sea Box did indeed fail to provide the required certification. As for Sea Box's contention that GSA was required to refer the proposal to SBA, the CG disagreed.

Where an agency finds the proposal of a small business to be unacceptable under a responsibility-related factor, that is, a factor pertaining to its ability to perform, such as whether it has adequate corporate experience or production equipment and facilities, the determination is essentially one of non-responsibility, meaning that referral to the SBA, which has the ultimate authority to determine the responsibility of small business concerns, is required. Where an agency rejects a proposal as technically unacceptable on the basis of factors not related to responsibility, however, referral to the SBA is not required. Likewise, where an agency rejects a proposal as technically unacceptable on the basis of a factor that is arguably responsibility related, but the finding of unacceptability is based on the offer's failure to submit specific documentation required by the solicitous, referral to the SBA is not required.

You can read the entire GAO decision here.

What is the Anti-Deficiency Act (ADA)?

The Anti-Deficiency Act is not something that Government contractors need to worry about but contractors, subcontractors, and grantees have most certainly heard of it and perhaps have felt the impact of it. Government shutdowns and the potential for shutdowns have brought the Anti-Deficiency Act to light. The inability to obligate and spend money has affected the awarding of contracts and grants and modifications and extensions.

The concept of Federal appropriations law is framed by three major fiscal limitations; purpose, time and amount. A Government agency may obligate and expend appropriations only for a proper purpose. The expenditures must be made within the time limits applicable to the appropriations (that's why there is always a push to spend funds at year-end). And an agency may not obligate more than the amount appropriated by Congress. The Anti-Deficiency Act generally addresses the "amount" limitation. In short, agencies may not;

1. obligate more funds than are made available to them in an appropriation or in a form subdivision of funds (allocation, allotment, sub-allotment, or other formal designation of a limitation)
2. make obligations that exceed the amount permitted by agency actions/regulations
3. obligate funds in advance of receiving an appropriation or allotment.

Violations of the Anti-Deficiency Act are taken seriously. Unintentional violations can result in reassignment or suspension without pay. Intentional violations can result in a fine and imprisonment. Responsibility for Anti-Deficiency Act violations is usually fixed at the highest level that know about or should have known about the violation.

Examples of ADA violations include:

1. Actions, including clerical recordings or reporting errors, which result in an over-commitment, over-obligation, or over-expenditure of funds in any appropriation.
2. An official involves the Government in a contract or obligation either in advance of appropriations or without adequate funding authority.
3. Attempts to avoid an over-obligation or over-expenditure 

• by failure to post to accounting records, 
• by delay in posting until funds are received; 
• by not properly charging he appropriated fund or by transferring charges or funds between accounts

Agencies that violate the Anti-Deficiency Act must report to the President, Congress, and the GAO all relevant facts and a statement of actions taken. In Fiscal Year 2016, there were about 15 such reports submitted to the GAO (see Anti-deficiency Act Reports - Fiscal Year 2016).

Interestingly enough, the Anti-Deficiency Act also prohibits federal employees from accepting voluntary services for the United States. We doubt this would ever be a problem and we haven't seen reported violations of this prohibition in any of the GAO summaries. 

Debarred But Still Selling Under Shell Companies

Company and company president get debarred from Government contracting for selling defective parts to the Air Force. Then, the president promptly sets up several new companies, obscures his involvement/ownership and keeps on selling defective parts. How often does this happen? Probably more often than we think and certainly more often than we know about.

For 10 years, from 2003 to 2013, Aerospec, Inc. sold fasteners (e.g. rivets) to the Air Force. Somewhere along the line, the company started selling fasteners that did not meet specifications. Given that these fasteners were used on B-52s and C-5s, specifications are a big deal and consequently, there is a big price difference between parts that meet spec and those that don't.

Eventually, the company got caught selling these defective parts to the Government and was debarred from further Government contracts. Poor Mr. Skiscim, the President of Aerospec finds himself without the means to keep up his lifestyle including his yacht club membership. So what's he going to do?

No problem, he reasons. He'll just start up some new companies and sell the same old nonconforming parts. So he set up Sun Tech Air Parts, Aerocon Corp, and Specialty Components. But he couldn't use his own name showing ownership because he was already on file as a debarred person. So he used the names of family members as owners of these companies (and fictitious persons, according to the Department of Justice).

Now it would have been one thing if, after his initial debarment, Mr. Skiscim got honest and started selling conforming parts to the Air Force. But he didn't. He continued to sell defective components from his new companies. Then he gets caught again. .Not too surprising, really, given that the Government performs QC testing on what it buys.

This time, Mr. Skiscim doesn't get off so lightly. He has just been sentenced to 26 months in Federal prison for fraud for selling nonconforming parts through his shell companies. He is also required to pay the Government $1 million.

You can read the entire Justice Department press release here.

New Website Consolidates All Inspector General Reports

Last month, the Council of Inspectors General on Integrity and Efficiency (CIGIE) launched a new website called oversight.gov which will be a central repository for OIG (Office of Inspector General) reports authored by participating OIGs. These reports will go back 17 years to 2000 and will consist of audits, investigations, semiannual reports, and other reviews.

Participation in Oversight.Gov is not required. So far only 36 of the 73 Federal OIGs are participating. The Inspectors General Act of 1978 requires all OIG audit, evaluation, and inspection reports be made available to the public by posting them to individual OIG websites. However, you can imagine the difficulty of searching 73 different websites to find something. Each website is different and many lack a keyword search function. Additionally, it would be difficult to compare report findings and recommendations across OIGs for similar issues such as agency compliance with the Improper Payments Act that we've discussed on this blog a few times.

As of today, the new website reports 3,770 reports have been upload to this website, about half related to audits. There are graphical representations on the potential savings by year and the number of OIG recommendations by year. There is even a "button" to click if you want to report fraud, waste, and abuse.

Government contractors are required to post information in readily available locations informing employees on how to report fraud, waste, and abuse and "hotline" phone number of the applicable Federal OIG. For contractors that have contracts from multiple agencies, it might be useful to point employees to this website and let the Government try to figure out which OIG should lead the investigation.

We're not certain how well the search function works. Typing in "DCAA" yields one result, typing in "Defense Contract Audit Agency" yields three results, typing in "DCMA" yields no results, and typing in "Defense Contract Management Agency" yields five results. Certainly there have been more reports covering the activities of these two Agencies over the past 10 years.

While the search functionality of Oversight.gov didn't provide robust results, a reader passed along this technique for searching the website. We appreciate the tip.

With regards to your search, from my limited “testing” the search function only looks at the title of the report.  I found that out when looking for reports regarding DCAA on the DoD IG’s website.  The way around this is our friend Google.  If you go to google and put the following in the search box:

site:oversight.gov/ "defense contract audit agency"
 Using this search term returns 77 results for “oversight.gov” with DCAA mentioned.  Putting “defense contract audit agency” in quotation marks returns only those results with that phrase.  You don’t have to capitalize google search terms.  If you want just PDF files use the following:              site:oversight.gov/ "defense contract audit agency" filetype:pdf This returns 71 PDFs with "defense contract audit agency" mentioned.
 Using Google to search the DoD IG’s website using site:www.dodig.mil/pubs/ "defense contract audit agency" filetype:pdf returns 189 results whereas searching defense contract audit agency on the DoD IG site returns approximately 50 hits.
 You can use the same approach for dcma.mil, dcaa.mil, etc.  I recommend searching with and without the www in front of the address.  If something is buried in a subdomain it won’t be returned in the results.  For example, if DoD IG had subdomains for audits (audits.dodig.mil) and another for misc (misc.dodig.mil) then searching for www.dodig.mil won’t return audits and misc subdomains.  

The Contract Closeout Tsunami

What does it take to close out a contract? A lot, actually. FAR (Federal Acquisition Regulations) 4.804-5 lays out the steps that must be completed before a contract can be officially closed. Although the process is within the responsibility of the contract administration office, most of the steps require some involvement or input by the contractor. Let's look at some of the steps:

1. Disposition of classified material is completed
2. Final patent and royalty reports are cleared
3. There are no outstanding value engineering change proposals
4. Plant clearance report is received
5. Property clearance is received
6. All interim or disallowed costs are settled
7. Price revision is completed
8. Subcontracts are settled by the prime contractor (don't underestimate this requirement)
9. Prior year indirect cost rates are settled
10. Termination docket is completed
11. Contract audit is completed
12. Contractor's closing statement is completed
13. Contractor's final invoice has been submitted, and
14. Contract funds review is completed and excess funds deobligated.

It hasn't been too long ago that DCAA (Defense Contract Audit Agency) was sorely behind in completing incurred cost audits (see number 11, above). In fact, DCAA had to write off hundreds of contractor's submissions because they were beyond the six-year statute of limitations. DCAA has largely worked off the backlog now but not because they are performing audits. They've developed systems to identify high risk contractors and have accepted the proposed final rates for non-high risk contractors.

Of course, the huge backlog of unaudited incurred cost proposals created a huge backlog in contracts waiting to close and contractors, through no fault of their own, are now finding themselves scrambling to close out their old contracts. The Government (contract administration) is also feeling the effects of the closeout tsunami as their resources become burdened. Some of these contracts have been completed seven, or eight or more years ago now and companies are finding that records are incomplete or have been archived, personnel have changed, and memories have faded. The Government's records are equally incomplete or outright wrong. Contractors are finding out that the Government did not necessarily exercise due care when recording invoices and payments as CLINs and ACRNs often do not align with contractor records.

Is it going to end soon? Not soon enough.

Bid Protest Denied - Limitation on Subcontracting

The Department of Veterans Affairs issued an RFP (Request for Quotation) for courier services for the Boise VA Medical Center lab, pharmacy, and radiology departments. Six offerors submitted bids and ultimately, the VA awarded the contract to FG Management Group(FGMG). Crosstown Courier Service Inc (Crosstown), one of the other five bidders protested the award to FGMG alleging that FGMG was not in compliance with applicable limitations on subcontracting requirements.

Crosstown argued that FGMG had only one employee, was not a courier services company, and had no prior Government contracts for medical courier services of similar scope. Crosstown asserted therefore that FGMG's quotation "strongly evidences" the awardee's noncompliance with FAR 52.219-14, Limitation on Subcontracting. Beyond a general representation that FGMG would provide 51 percent of the labor, no other support was given that the subcontracting limitation would be met.

The GAO (aka Comptroller General) denied the protest. The GAO noted first off that the solicitation did not incorporate FAR 52.219-14. Limitation on Subcontracting but instead incorporated VAAR (VA Acquisition Regulation) 852.219.10 which prohibits payment of more than 50 percent of the amount paid by the Government to non service disabled veteran owned small businesses. That is an important distinction; 51 percent of the direct labor versus 50 percent of the total cost reimbursed by the Government.

An agency's judgment as to whether a small business offeror can comply with a limitation on subcontracting clause is generally a matter of responsibility and the contractor's actual compliance is a matter of contract administration. Neither issue is one that the GAO would consider. However, where a proposal, on its face, should lead an agency to the conclusion that an offeror has not agreed to comply with the subcontracting limitation, the matter is one of the proposal's acceptability, which the GAO may consider.

In this regard, Crosstown had no evidence that FGMG's quotation included an intention no to comply with the RFQ's subcontracting limitations. The VA also noted that nothing on the face of FGMG's quotation led it to conclude that it would not comply with the RFQ's subcontracting limitations and the GAO's review gave it no basis to question the VA's judgment.

You can read the entire decision here.

Revolving Door - DCMA Commander Goes to KBR, Inc.

KBR, Inc. announced late last month the appointment of Lieutenant General Wendy Masiello, USAF (Ret) as a member of its Board of Directors, effective August 18th. That's about a month and a half after she retired as head of the Defense Contract Management Agency (DCMA) where she was responsible for the oversight of KBR's Government contracts. Ms. Massiello will serve on the Audit and the Health, Safety, Security, Environment and Social Responsibility  Committees of the Board. As a Board Member, she will earn at least $200,000 per year in cash and stock.

We wish it were not so. It looks really bad. According to the Commission on Wartime Contracting, KBR (and its subsidiary Halliburton) was paid at least $36.3 billion  over an eight year period. The Commission documented kickbacks from subcontractors, mechanics who worked as little as 43 minutes per month on average but received full pay, its inability to account for $100 million in Government-furnished property, hiring private security guards and passing the costs on to taxpayers, human trafficking, and $300 million in pay for unnecessary personnel. And this doesn't include the results of many DCAA audits and the findings that DCMA was responsible for resolving.

DCMA prides itself as being the independent eyes and ears for the Department of Defense. It seems like Ms. Masiello had eyes and ears all right, eyes and ears for her post retirement employment opportunities. Does DCMA really have an independent voice that provides timely and relevant oversight analyses to DoD like its mission statement reads? Is it possible that the "independence" might have been compromised to secure post-retirement employment?

Just Because You're Bankrupt Doesn't Mean You're Precluded from Government Contracting

Companies that desire Government contracts must meet a number of qualifications including an accounting system suitable for Government Contracting and enough financial resources to perform the contract. From a practical standpoint where a contractor is eligible for progress payments or other interim payments (e.g. public vouchers), a two to three months of working capital is sufficient until the billing/payment pipeline starts producing.

Prior to any contract award, the Government will perform a financial responsibility determination. Often times, the responsibility is assigned to someone in the procurement office. Sometimes it is farmed out to the Administrative Contracting Officer (ACO). Once in awhile, DCAA is requested to perform the review though that Agency is mostly out of the financial capability assessment business. These reviews are typically performed by someone who does not know a debit from a credit and the scope of the reviews are very superficial - never diving into the underlying data that makes up a financial statement.

Earlier this year, the Marine Corps awarded a contract for motorcycle safety training services. The contract was ultimately awarded to a company called Information Sciences Consulting, Inc (ISCI) whereupon a competitor, SaxmanOne, LLC protested the award. The protest alleged a number of deficiencies including an allegation that the Marine Corps improperly determined that ISCI was a responsible offeror. SaxmanOne contended that the contracting officer ignored ISCI's alleged debts and pending bankruptcy litigation.

As a general matter, the GAO (with whom the protest was filed) does not review affirmative determinations of responsibility by a contracting officer. It will, however, review a challenge to an agency's affirmative responsibility determination where the protester presents specific evidence that the contracting officer may have ignored information that, by its nature, would be expected to have a strong bearing on wither the awardee should be found responsible.

In this case, the contracting officer considered ISCI's alleged debts and pending bankruptcy litigation. The contracting officer specifically found that ISCI had adequate financial resources to perform the contract, or the ability to obtain them". The contracting officer specifically mentioned that an involuntary bankruptcy notice was provided to the Government. Further, the Marine Corps inquired with ISCI's current clients and determined that neither its debts nor pending bankruptcy litigation had an impact on its contract performance. Lastly, the Marine Corps checked the Federal Awardee Performance and Integrity Information System (FAPIIS) and identified no information indicating that ISCI had a history of failing to pay its subcontractors.

Given this level of detail, the GAO ruled that the Marine Corps did not ignore either ISCI's alleged debts or any pending bankruptcy litigation and denied the protest.