Friday, December 14, 2018

Government Paid $13.6 Million to Hire Two Border Guards

Boarder patrol positions have been notoriously difficult to fill, in large part, because of the polygraph exam applicants are required to undergo. It must be a rigorous polygraph because two of three applicants fail the exam.

To assist in hiring border guards, the U.S. Customs and Border Protection (CPB) awarded Accenture Federal Services a five year contract for nearly $300 million to to recruit and hire 7.500 Boarder Patrol Agents. Now, 10 months into the contract, CPB has paid Accenture $13.6 million and what do they have to show for their efforts? Accenture has filled 2 positions (or $6.8 million per recruit).

The Department of Homeland Security (DHS), Office of Inspector General (OIG), initiated its audit of Accenture's performance after receiving "Hotline" complaints about the contractor's performance. The OIG's report, issued last week, found numerous problems and concluded that CBP management needed to address "serious performance issues on the Accenture hiring contract.".

Among the performance issues identified by the OIG are

  • Accenture has not provided the promised hiring process or results. Accenture has yet to demonstrate the efficient, innovative, and expertly run hiring process it promised.
  • Accenture relied on CBP resources to fulfill contract obligations. Accenture was supposed to provide a team of technical experts and tools to fulfill contract requirements. Instead, Accenture relied heavily on CBP resources to complete the hiring process.
  • Accenture has not provided the agreed-upon technological innovations.
  • Accenture used a retinal scanning tool to discern deception based on eye and face muscle movement to pre-screen candidates without regulatory approval.

The OIG made a series of recommendations which CPB concurred to.

The full report can be accessed here.

Thursday, December 13, 2018

Government Employee Guilty of Accepting Gratuities in Exchange for Official Acts

NASA's Wallops Flight Facility (WFF) is located on the Eastern shore of Virginia although to get there from Virginia proper, you would need to take a boat or drive through Deleware. WFF provides launch and range services for both the Government and commercial sectors.

Mr. Kremer was the Chief of the Range and Mission Management Office at NASA Wallops (a GS-15 position). In his position, Kremer was responsible for administering the Range Operations Contract (ROC) - a multi-year, $190 million, cost-plus Government contract to provide various services at Wallops' test facilities and launch control centers. The prime ROC contractor awarded numerous subcontracts. One of the subcontractors performed interior design and office furnishing services and equipment at WFF.  The subcontractor (identified as Firm #2 in court documents. One of Firm #2's employees, identified as 'SC" in court documents, was the primary point of contact between Firm #2 and Mr. Kremer. "SC" also owned a beach house in Cape Charles, VA that he made available for Kremer's use.

One week for eight consecutive summers, Kremer was allowed free use of SC's beach house. In exchange, Kremer steered the award of interior design and furnishing projects to SC and Firm #2. Ultimately, emails between Kremer and SC did them in. During one stay, Kremer emailed SC: "... after this week, I'm going to be searching for rooms even those that no one uses at Wallops and put new furniture in the. I owe u big time. This has been so super." After another week's free use, Kremer wrote: "Can I book a week like last year? I will give you some days this week if that is OK ... THANK YOU so much again. Your customer service is unmatched ... not to mention the summer fun you offer. LOL.."

The Justice Department estimated the value of these week long stays to be about $18 thousand. In addition, the Government's investigation also disclosed that Kramer asked SC to procure some personalized art and charge it to the contract. Together they conspired to call it a "whiteboard" with SC claiming that it was not her "first time at the rodeo". Investigators also found that Kremer instructed the ROC contractor to buy $7,000 in Amazon gift cards, ostensibly to use to purchase "electronic reference books" for WFF employees. Those gift cards however were used for Kremer's personal use.There were more irregularities uncovered in the investigation including $11 thousand in "promotional" items for Kremer's friends and family members.

Mr. Kremer plead guilty in Federal court to receiving gratuities in exchange for official acts performed in his capacity as a government official, and to stealing funds from a Government contract. Sentencing is scheduled for next March.

Wednesday, December 12, 2018

Proposed Changes to Progress Payment Rate - Public Meetings Rescheduled

Last August, the Defense Department proposed significant changes in the way that progress payment rates are established. Currently, FAR 52.232-16 sets customary progress payment rates of 80 and 85 percent for large and small businesses while the Defense Department bumps the small business progress payment rate to 90 percent. The change proposed back in August leaves the small business progress payment rate alone but drops the rate for non-small businesses from 80 percent to 50 percent with provisions to increase the base amount to 90 percent by meeting certain incentives (see Proposed Changes to Progress Payment Rate).

The idea behind these changes were to increase the effectiveness and efficiency of certain areas including (i) on-time deliveries, (ii) contractor quality, (iii) contractor business systems, (iv) increasing subcontracting opportunities for small businesses, and (v) improved estimating systems. The objective, while addressing valid DoD concerns, met with a lot of opposition. Initially DoD scheduled a public meeting in the DC area to obtain views of interest parties (see Proposed Changes to Progress Payment Rate - Public Meeting). Later on (in October 2018), the entire proposal was withdrawn and the public meeting was cancelled (see Proposed Changes to Progress Payment Rate - Withdrawn).

Withdrawn perhaps, but not forgotten. DoD withdrew the proposal to give it time to conduct additional outreach with industry regarding contract financing methods. but since the proposed rule is predicated upon a provision in the 2017 NDAA (National Defense Authorization Act), there will need to ultimately be some kind of change to contract financing reform.

The Defense Department has now rescheduled its public meetings (two in January and one in February) to obtain views of experts and interested parties regarding revising policies and procedures for contract financing, performance incentives, and associated regulations for DoD contracts. The fact that the Department is scheduling three meetings instead of one previously, gives some indication of the level of interest in this matter.

Pre-registration is required so hurry over to these registration instructions if interested in attending.

Tuesday, December 11, 2018

Resolving Proposal Inadequacies - Contracting Officers Failure to Document

The Defense Department Inspector General (IG) recently evaluated whether contracting officers took actions that were appropriate and complied with FAR (Federal Acquisition Regulations) 15.4, Contract Pricing, when the auditors (specifically DCAA or Defense Contract Audit Agency) determined that a contractor's price proposal was inadequate because those proposals did not comply with the specific requirements of FAR 15.4.

The good news is that the IG found that contracting officers did indeed take appropriate action to address proposal deficiencies identified by DCAA. In 23 of 23 proposals identified by DCAA as unacceptable as a basis for negotiations, contracting officers took the necessary actions to resolve the inadequacies.

The bad news however is that the contracting officers did not document the inadequacies or the actions taken to address the inadequacies in the contract file. Such documentation is required by FAR 15.406-3, Documenting the Negotiation.

The (Acting) Undersecretary of Defense for Acquisition and Sustainment recently sent out a reminder to contracting officers to, in essence, get their act together and comply with the documentation requirements. The memorandum reminded contracting officers that they have an affirmative requirement to document all DCAA identified inadequacies and to document why the actions taken appropriately address the contract price proposal inadequacies. By doing so, the memorandum concluded, contracting officers will have properly accounted for any issues of noncompliance or other discrepancies identified int he DCAA audit.

While we were auditors, we encountered many contractor proposals that were inadequate in not including the detail and support required by FAR 15.4. Some deficiencies were certainly more egregious than others but when the magnitude rose to a level where we didn't think the Government could achieve fair and reasonable pricing based on the garbage submitted, we would advise the contracting officer accordingly and recommend he/she not negotiate. Whatever actions contracting officers might have taken to resolve those inadequacies were rarely satisfactory to the audit community. Evidently contracting officers answer to a higher power than the contract auditor who are often viewed as an impediment to a smooth negotiation process.

The full IG report can be read or downloaded here.

Monday, December 10, 2018

Estimating Labor Hours on Price Proposals

Whenever cost or pricing data is required in connection with a Government contract or subcontract, whether certified or other than certified,  contractors (or subcontractors) are called upon to provide a significant amount of detail to back up their estimates. Then it is up to the Government - could be the Defense Contract Management Agency, the Defense Contract Audit Agency, or cost/price analysts in the buying activity - or the prime contractor to decide the level of review necessary to validate the propriety of the estimates. Today we will discuss some of the considerations that auditors might use to evaluate labor costs, and more specifically, labor hours.

Labor costs are comprised of labor rates and labor hours. Estimates for labor rates are fairly straight-forward. Usually labor rates are based on existing pay rates with escalation thrown in. Estimates for labor hours however create a big challenge to estimate and represent a significant risk area for the Government. Contractors need to answer the questions of how many hours will it take to perform a particular task and how does it know? The Government will come along and asked them to "prove it".

Historical data is usually the preferred method of forecasting future hours. Without historical data, labor hour estimates are usually based on judgmental estimates, or engineering estimates. Estimates cannot be evaluated with empirical data. Negotiations usually come down to decisions about reasonableness or who can put up the most convincing arguments.

The Government however wants to know about a contractor's historical experience in building whatever the item being built or assembled. For this reason, the Government will always ascertain the suitability of historical data for making estimates. (i.e. accurate, reliable and representative). If a contractor has not identified relevant historical labor hours in its basis of estimate, the Government is going to ask for historical hours and make that comparison.

The Government will also take that history and adjust it for learning/improvements. The Government might apply improvement curve techniques or regression analysis, or other trend-line techniques to historical hours.

The Government will also look at a couple of other areas. They will make sure that proposed direct labor is classified consistent with FAR 31.202 and 31.203(a). In other words, they do not want contractors to propose as direct labor, activities that are and should be charged indirect. Second, the Government will want to ensure that the proposed labor mix is consistent with past performance and company demographics. For example, there should be consistency in the proposed mix of various skill levels with that supported by historical evidence.

Sometimes contractors get a little sloppy in estimating their direct labor hours and are left scrambling when the Government begins inquiries into the propriety of historical hours. Be prepared.

Friday, December 7, 2018

Does Your Contract Contain the Clause at FAR 52.204-23 - the Kaspersky Prohibition?

FAR 52.204-23 is a relatively new contract clause that is appearing in a lot of contracts. It prohibits the Government from contracting for hardware, software, and services developed or provided by Kaspersky Labs and other covered entities. Covered entities includes successor entities to Kaspersky Lab, entities that controls, is controlled by or is under common control with Kaspersky Lab or another entity of which Kaspersky Lab has a majority ownership.

But whether the clause has been included in your contract, or not, the prohibition applies as it is based on a statutory authority that became effective last October (October 1, 2018).

So what's wrong with Kaspersky anti-virus software? The Department of Homeland Security (DHS) is of the opinion that Kaspersky software presents an information security risk because of Kaspersky's Russian connections. A report out of the University of Illinois College of Law provides these thoughts:
  1. Russian law outlines a legal obligation by Kaspersky to assist Russian FSB (their Federal Security Service) in the execution of their duties including counterintelligence and intelligence activity.
  2. Russian law also permits FSB personnel to be embedded in private enterprises
  3. Because Kaspersky qualifies as an organizer of the dissemination of information on the Internet, it is required to provide the FSB with metadata and is also required to provide Russian officials with decryption keys for its data transmissions.
  4. Under Russian law, Kaspersky is required to install equipment for the FSB to monitor data transmissions.
Those facts raises concerns that the Kaspersky is too closely tied to the Russian Government and creates an unacceptable risk to the U.S. Government.

Back in September, we reported on these pages a couple articles stating that many contractors are unprepared for October 1st 2018 deadline. In some cases, contractors are not even aware that Kaspersky is running on their networks because it came pre-installed with unrelated software. In other cases, contractors have attempted to remove Kaspersky but missed  some instances because complete removal is more complicated that simply uninstalling the program. There is even a concern that some contractors don't believe the ban applies to them, when it most certainly does. It applies to subcontractors too.

In the event a contractor finds that it has violated this prohibition, it is required to notify the contracting officer within one day along with its mitigation actions and must submit a full report within 10 days. This is how serious the Government is taking the prohibition.

Thursday, December 6, 2018

Limitation on Subcontracting - Simplifying the Calculations

The FAR (Federal Acquisition Regulations) Councils are proposing to amend the FAR to bring it into conformity with certain SBA (Small Business Administration) regulations regarding limitations on subcontracting.

Under various rules, sometimes prime contractors are required to perform a certain percentage of work itself whereas under other programs, prime contractors could include subcontracts to "similarly situated entities" in the percentage of work it performed. The methods for calculating compliance also varies across small business programs.

A previous NDAA (National Defense Authorization Act) changed the focus on limitations on subcontracting rules. Instead of requiring a percentage of work to be performed by a prime contractor, the limitation on subcontracting rules now limit subcontracting to a percentage of the overall award amount to be spent by prime contractors on subcontractors. This is a much easier calculation.

Contractors no long will need to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e. contract price) that it spends on subcontractors.

Additionally, the percentage of award amount that the prime contractor spends on subcontractors who are similarly situated entities is not considered subcontracted for purposes of complying with the limitation on subcontracting. "Similarly Situated Entities" are subcontractors that have the same small business program status as that which qualified the prime contractor for the award and is considered small for the NAICS code the prime contractor assigned to the subcontract for which the subcontractor will perform.

These changes, if adopted (and they no doubt will be adopted) will give small businesses greater flexibility on how they choose to comply with the limitations on subcontracting.

Read more about the proposed change here.

Wednesday, December 5, 2018

Board Decision Becomes Treatise on FAR 31.201-3 - Reasonableness

In 2001, the Army awarded a contract to Brown & Root Services, Inc (KBR) for support services during military operations in Iraq (commonly referred to as the LOGCAP III contract). KBR. Two of KBR's subcontractors filed REA's (Requests for Equitable Adjustment) with KBR. KBR paid the subcontractors and then in turn, requested reimbursement from the Army. The Army denied the cost so KBR appealed to the ASBCA.

The ASBCA also denied the appeal because it found the KBR's actions and the resulting costs to be unreasonable.

First, KBR agreed to the validity of its subcontractor's REA after concluding that performance delays were the Government's fault. However, after examining the facts and the contract language, the Board found that it was not reasonable for KBR to conclude the the Government failed to perform the prime contract.

Second, KBR did nothing to analyze the propriety of its subcontractor's claimed costs. Although KBR recognized that its subcontractor could only seek its actual costs, it did not require evidence of actual cost before paying out a $25 million settlement. Instead of determining the actual number of delay days, KBR relied on its subcontractor's unrealistic model of estimating delay days.

This is a lengthy ASBCA decision but is highly instructive for someone trying to understand how the Board might apply the FAR 31.201-3 "reasonableness" standard.

Tuesday, December 4, 2018

What is a Profit Margin Test?

Every DCAA (Defense Contract Audit Agency) audit, whether requested or self-initiated, begins with a risk assessment. A risk assessment is a set of tools auditors - all auditors - use to help decide where and what to focus on in an audit. So, for example, if only $100 of material costs have been charged against a $1 million contract, the auditor would probably conclude that his/her limited resources can be better spent on other than material costs.

For T&M (Time and Material) contracts, there are two inherent risks to the Government. First, did the Government really receive the services that it paid for and second, were those services rendered by personnel with the right qualifications? There have been some well-publicized criminal cases were contractors reaped windfall profits by not providing the requisite skill level that the Government paid for. For example, the Government contracted for Senior Engineers but the contractor performed the work with Junior Technicians.

One test the auditor might perform to determine whether there might be a risk for that happening is what DCAA refers to as the "profit margin test". The profit margin test compares booked cost (i.e. actual costs) to billed cost. If variances are significant, it might mean that the contractor is not paying employees the amount that it proposed and negotiated with the Government. And one reason why that might happen is because the contractor is utilizing lesser skilled employees for work that the Government desires (and pays for) higher skilled individuals. That's not the only reason for variances however. Variances could be cause by differences between negotiated and actual overhead rates.

If there is a significant variance between actual costs and billed amounts, auditors will perform further analysis to determine the reason for those variances. If it is caused by labor rate variances, Auditors will then assess the risk that the contractor is substituting less qualified employees. If substitution is occurring, auditors will most likely identify those personnel for detailed employee interviews.

Sometimes it becomes necessary to utilize different skills than what is contemplated on a T&M contract. The proper way to handle this is to notify the contracting office of the necessity and negotiate a contract rate adjustment. Don't wait for an auditor to find or a whistleblower to call the hotline.

Monday, December 3, 2018

OFCCP's Help Desk

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) mission is to protect workers, promote diversity. It performs audits of companies with Federal Government contracts to ensure compliance with requirements to take affirmative action and to not discriminate. We have written about the Office several times in past year or so, usually in the context where the Office has taken punitive action against a contractor for failing to follow a law or regulation.

OFCCP issued a new directive last week (see Directive 2019-03) for the purpose of providing compliance assistance and guidance in a manner that employees and employers can easily access and reasonably rely upon as they seek to understand their rights and obligations.

Specifically the OFCCP is enhancing its existing "Help Desk" which will allow contractors to make inquiries by phone or email regarding a variety of topics. Think of it as a "knowledge base". The OFCCP wants to make certain Help Desk inquiries and responses dynamically available and searchable as a self-service option on OFCCP's website. This self-service option would allow contractors (or contractor employees) to benefit from prior inquiries and lead to greater efficiencies in OFCCP Help Desk operations.

OFCCP also plans to incorporate the use of opinion letters as part of guidance to employers, employees and the public. It hopes that by making fact-specific guidance in opinion letters about OFCCP's jurisdictional coverage or application of regulations or guidance will provide more certainty about how the Agency exercises its authority.

Any one having experience using "knowledge base" information to solve a problem knows full well that solutions can be difficult to find and even then, are not sufficient or specific enough to take "bullet proof" actions. Let us know your experiences.

Friday, November 30, 2018

Poor Internal Controls Lead to Embezzlement

The Armed Forces Foundation, a non-profit organization based in Washington D.C. was formed in 2002 by a former Navy Sea-bee to protect and promote the physical, mental, and emotional wellness of military service members, veterans, and their families. Within a year, Patricia Driscoll took over leadership of the organization. Driscoll resigned in June 2016 after media reports emerged alleging mishandling of funds. In October of that year, the Foundation announced they were ceasing operations after an audit into Driscoll's financial management and her indictment on federal charges of stealing from the non-profit, defrauding donors and lying to the IRS and the public about her compensation.j

This week, Driscoll was found guilty by a Federal jury of those charges. On the organization's tax return, Driscoll failed to include the fact that she received commissions from fundraising, the amounts of commissions that she received from fundraising, and other benefits that she received. She categorized expenses in the Foundation's books as being for the benefit of veterans, troops, and their families, when in fact, they were for her own private benefit. She concealed from the Foundations's accountants the money she took form the charity, such as rent that was paid for the use of office space in a building that she co-owned. She also falsified the amount of donations received by inflating the amount and incorrectly listing the types of donations.

In total, the Government estimated that Driscoll misappropriated $900 thousand to personal expenses such as shopping trips, legal fees, and other bills for her private security company business (Frontline Defense Systems, LLC). Personal expenses included vacations to Paris and Morocco, personal credit card bills, legal fees relating to child-custody and domestic violence.

Driscoll's schemes might never had been uncovered had it not been for an investigative reporter who obtained foundations records that raised questions about Driscoll's handling of Foundation funds. See (Tax document shows AFF's ex-leader accused of pilfering funds for personal use).

The Foundation claimed that 95 percent of all contributions went directly to those it intended to help. A news article indicated that only a small fraction of that percentage actually went to help military service members, veterans, and their families.

The lesson in this for Government contractors is to ensure that internal controls are in place and operating effectively. Make sure that there is oversight and that the board of directors are more than perfunctory rubber-stamps.

Thursday, November 29, 2018

Defense Department Preference for Fixed-Price Contracts

Section 829 of the 2017 NDAA (National Defense Authorization Act) directed DoD to establish a preference for fixed-price contracts (including fixed-price incentive contracts) when determining contract types and also to establish a required for "higher-level" approval for certain cost-type contracts.

How did DoD implement this directive? To comply with the fixed-price preference directive, DoD added the following words to its FAR Supplement (DFARS) through its class deviation process:
Contracting officers shall first consider the use of fixed-price contracts, including fixed-price incentive contracts, in the determination of contact type.
There, fixed that. That was easy. What about the higher-level approval requirement? DoD fixed that one as well by stating "heads of contracting activities" must approve cost-reimbursement contracts in excess of $25 million (which many contracting activities require now anyway).

Fixed that one as well.

Some statutes are really easy to implement.

Wednesday, November 28, 2018

Does CAS Compliance Require Companies to Depart from Generally Accepted Auditing Standards (GAAP)?

Last week, the CAS Board (Cost Accounting Standards Board) published an agenda for its November and January meetings. There are four topics on the agenda (see CAS Board Meeting) including a couple that we have decided to cover in more detail for its potential impact on small businesses. Even though small business contractors are exempt from CAS, most of the 19 existing standards have been folded in part or in whole into the FAR (Federal Acquisition Regulations) over the years. Yesterday we covered Agenda Topic #4 which consists of a discussion on the Section 809 Panel's recommendation to eliminate the Defense CAS Board, a Board that was created by the 2017 NDAA but has yet to organize (see Will the Newly Created Defense CAS Board Survive?). Today we will cover Agenda Topic #2, Conforming CAS to GAAP (Generally Accepted Accounting Principles).

Agenda topic #3 reads as follows:
Conformance of CAS to Generally Accepted Accounting Principles (GAAP). Section 820 requires the CAS Board to review and conform CAS, where practicable, to GAAP. The Board intends to discuss development of an SDP (Staff Discussion Paper) addressing conformance of CAS 404, Capitalization of Tangible Assets, and CAS 411, Accounting for Acquisition Costs of Material, to GAAP. This is the second SDP addressing CAS-GAAP conformance and will build on the first SDP (under final review for publication and public comment) that (i) lays out a proposed conceptual framework and guiding principles to prioritize the evaluation of whether and to what extent CAS may be conformed to GAAP and (ii) presents an initial comparison of CAS 408, Accounting for Costs of Compensated Personal Absence, and CAS 409, Cost Accounting Standard Depreciation of Tangible Capital Assets, for public comment. The Board intends to receive and review public comment on the first SDP before publishing the second SDP.
The Board has already identified four CAS standards that may or may not require deviation from GAAP. Two of them, the capitalization and depreciation standards (CAS 404 and 409), are not inconsistent with GAAP. It just that GAAP allows companies to be more flexible than CAS in their capitalization and depreciation practices. Whatever issues there are involving capitalization and depreciation however have very little impact on Government contracts. Its a "pay me now or pay me later" situation. If a contractor expenses something, it is reimbursed in the year of expenditure. If a contractor capitalizes an asset, it is reimbursed for the cost over a period of years through depreciation. But what about the time value of money, you ask? In theory, the Government benefits from capitalization because it defers the cost to future years. However, whatever imputed time value of money may accrue to the Government, is offset by FCCM (Facilities Capital Cost of Money) where Contractors earn interest on the undepreciated value of assets. So its a wash. One just doesn't see any capitalization/depreciation disputes brought to the Boards of Contract Appeals for that reason - there is no significant cost impact.

The Board identified two other CAS standards for discussion on aligning them with GAAP - material costs and employees absences - without any explanation as to how compliance might require deviation from GAAP.  We were unaware that these standards (409 and 411) involved departures from GAAP. Guess we'll have to wait for the SDP to learn the Board's concerns.

Tuesday, November 27, 2018

Will the Newly Created "Defense CAS Board" Survive?

We ended last week's blog with a news article about the CAS (Cost Accounting Standards) Board's upcoming meetings and the agenda topics for the Board's November and January meetings (see CAS Board Meeting). Today and tomorrow we want to take a closer look at two of the agenda topics for their potential impact on small Government contractors.

Agenda topic #4 reads as follows:
Review of Section 809 Panel Recommendation on Defense Cost Accounting Standards Board (Defense CAS Board). The Board will discuss the analysis and recommendation made by the Panel (in Volume 2 of its report) to repeal the provisions in Section 820 of the FY 2017 NDAA (National Defense Authorization Act) that created the Defense CAS Board. See Section 820(b), which amends title 10 by adding a new section 190.
Section 820 of the 2017 NDAA had several purposes:

  • Revive the Cost Accounting Standards Board
  • Establish a Defense Cost Accounting Standards Board (Defense CAS Board), and
  • Privatize some of the audit work being performed by the Defense Contract Audit Agency (DCAA)

With respect to item no. 2, the Defense CAS Board enumerated duties include (see Defense Cost Accounting Standards - Part 2 for more detailed information):

  1. review cost accounting standards established by the CASB and recommend changes to such cost accounting standards to the CASB
  2. has exclusive authority with respect to the Department of Defense to implement such cost accounting standards to achieve uniformity and consistency in the standards governing measurement, assignment, and allocation of costs to contracts with the DoD, and
  3. shall develop standards to ensure that commercial operations performed by Government employees at the DoD adhere to cost accounting standards that inform managerial decision-making.

Last June, the Section 809 Panel (officially the Advisory Panel on Streamlining and Codifying Acquisition Regulations) issued Vol. 2 of this three volume report. In that report, the Panel recommended abolishing the Defense CAS Board (even before it had a chance to organize). Concerning the Defense CAS Board, the report concluded:
Creation of the Defense CASB is an attempt to solve the problem of the non-functioning CASB. Adding another regulatory organization is the wrong solution. Government and industry representatives who spoke with the Section 809 Panel expressed they do not support creation of a Defense CASB. Stakeholders are concerned by the many unanswered questions raised by creating this board, including whether the new board will be biased toward DoD issues, and if the two boards will create competing sets of CAS. Creation of a Defense CASB would almost certainly be counter-productive.
We're not sure what the current CAS Board might discuss with respect to its new sibling, the Defense CAS Board other than give credence to and endorse the recommendation of the Section 809 Panel. The creation of the Defense CAS Board was statutorily derived so another statute will be necessary to abolish the Board. Its not something that the CAS Board can do on its own.

Monday, November 26, 2018

Secret Side Agreements and "Rent-a-Vet" Schemes

By all appearances, A&D General Contracting was a fairly successful Government contractor performing construction work for VA (Veterans Affairs) and the Army Corps of Engineers in California. Together in joint venture with another company, (Action Telecom), they pursued and were awarded more than $11 million in contracts set aside for service-disabled veteran-owned small businesses (SDVOSB). The problem was, neither A&D or its owner Andrew Otero qualified for those set-aside contracts.

Mr. Otero never served in the military, much less being disabled as a result. To "appear" qualified, Otero and a fellow named Ramsey (who was a service disabled veteran) entered into a joint venture agreement whereby Ramsey's company (Action) would be the managing venturer, employ a project manager for each of the set-aside contracts, and receive the majority of the JV's profits. So far, so good. However, there was the matter of the secret side-agreement.

Six months after forming the joint venture, Otero and Ramsey signed a secret side agreement that made clear the joint venture was ineligible under the SDVOSB program. It was pretty obvious since the side agreement specifically stated that the parties created the joint venture so that A&D could simply used the  Disabled Veteran Status of Action Telecom to bid on contracts. The side agreement also stated that A&D, not Action, would run the construction jobs. Thirdly, the side agreement stated that A&D wold keep 98 percent of every payment with Action receiving only two percent.

Well, there was the matter of the side agreement but how did the joint venture work in practice. Not so well. Ramsey, the disabled vet, had a full-time job at another telecommunications company. Otero, not Ramsey, controlled the day-to-day management, daily operations and long-term decision making of the joint venture. Also, Otero, not Ramsey appointed A&D employees as project managers for each and every contract and task order.

Last week, a federal jury convicted Mr. Otero on charges of fraudulently obtaining federal contracts specifically set aside for SDVOSBs. Sentencing is scheduled for next February.

Friday, November 23, 2018

What? The Moribund CAS Board is Meeting?

The OFPP (Office of Federal Procurement Policy (OFPP), Cost Accounting Standards Board (CAS Board) published notification of planned meetings this month and January 2019. The public notification is required but the meeting itself is closed to the public. The last meeting of the CAS Board was more than seven years ago - October 5th, 2011.

The current slate of CAS Board members include three Government reps, one industry rep and one rep from academia:

  • Lesley Field, Chair, Acting Administrator, OFPP
  • Anita Bales, Director DCAA
  • Laurie Schmidgall, Director of Cost Policy, Boeing
  • Evan Farley, CFO for GSA
  • Yvonne Hinson, Senior Director & Academic in Residence, Association of International CPAs
The agenda topics include the following:
  1. Review of Advanced Notice of Proposed Rulemaking for Pension Adjustments for Extraordinary Events - such as CAS pension segment closing adjustment requirements.
  2. Conformance of CAS to GAAP (Generally Accepted Accounting Principles) - The 2017 NDAA requires the CAS Board to review and conform CAS, where practicable, to GAAP.
  3. CAS Applicability Threshholds - Consider the recommendation by the Section 809 Panel to increase certain CAS Applicability thresholds.
  4. Eliminate the Defense CAS Board - Consider the recommendations made by the Section 809 Panel to eliminate the Defense CAS Board. The Defense CAS Board was created by the 2017 NDAA.

Wednesday, November 21, 2018

Too Many Minority Employees?

We wonder how many companies survey their workforce and think that there is no way they could be in noncompliance with any form of employment discrimination. They might conclude that since they employ a ton of this minority and a ton of that minority and plenty of women employees, what could go wrong? Plenty, as one Government contractor found out. If you're a Government contractor, beware of "routine compliance evaluations" by OFCCP (Labor Department's Office of Federal Compliance Programs).

During one such "routine evaluation", the OFCCP observed that a Government contractor, Oldcastle Building Envelope (Oldcastle) seemingly had a significant ratio of make Hispanic employees. Upon further evaluation, the OFCCP determined that Oldcastle was discriminating against white, black, and female applicants in favor of Hispanic males. OFCCP found that Oldcastle's hiring practices violated relevant Federal laws which prohibit federal contractors from discriminating in employment based on race, national origin, religion, or gender.

What was the penalty for this violation? Oldcastle must pay $395 thousand in back wages and interest to "eligible class members" - presumably those who had applied but were turned down for employment based on discriminatory practices. Additionally, the company had to agree to provide job opportunities to 38 affected white makes, black males and female applicants as positions become available. Thirdly, Oldcastle must take steps to ensure its personnel practices, including recruitment, record-keeping, and internal audit procedures, comply with laws. Finally, Oldcastle must conduct anti-discriminatory training for its HR (human resources) training.

The Oldcastle settlement was the result of a routine evaluation. In other words, there was not whistleblower involved or anything else that might draw the OFCCP's attention to this company. OFCCP also actively solicits whistleblowers to come forward and report allegations of discriminatory hiring practices.

Tuesday, November 20, 2018


Many companies, including Government contractors and subcontractors, spend significant amounts of money to fight fraud, waste, and abuse within their organizations. Not only do companies spend resources to establish internal controls that help prevent (or reduce) fraudulent activities but they spend significant sums for internal audit functions such as auditing travel vouchers.

Fraud, or the potential for fraud, is a significant problem for all companies. Read the 2018 Report to the Nations published by the Association of Certified Fraud Examiners and you might be surprised as to how pervasive occupational fraud really is and who the perpetrators tend to be.

Within the past couple of years, new tools have come to market that should help companies identify occupational fraud. These tools, somewhat expensive and designed for larger companies at this time, utilize AI (artificial intelligence) algorithms to identify fraudulent claims and forged receipts that are often undetectable to human auditors without hours of tedious labor. This is sometimes referred to as "robo-auditing".

Two of those companies are AppZen and Oversight Systems. AppZen claims it has already saved its clients $40 million in fraudulent expenses. Oversight also claims significant ROI (return on investment).

Travel and expense embezzlement typically accounts for about 14 percent of employee fraud and it is becoming easier to fool finance departments thanks to websites such as "" that make it easy to create a bogus paper trail. AppZen and Oversight claim that their algorithms can identify those kinds of excesses.

Here's a listing of what these products claim to be able to expose:

Expense report fraud

  • travel and booking violations
  • excessive meal and alcohol spending
  • weekend purchases
  • unnecessary upgrades
  • out-of-policy spending
  • suspicious merchants
  • anti-bribery and corruption
  • duplicate expense claims

Invoice and contract fraud

  • discount term violations
  • non-applied rebates
  • duplicate invoices and charges
  • tiered pricing violations
  • suppliers and vendor fraud
  • most favored nation pricing
  • payment term violations
  • anti-bribery and corruption
As we stated earlier, these products are cutting edge and probably not cost-effective for small contractors at this time. But it might be, depending upon whether your company reimburses a lot of travel or purchases significant materials. 

Monday, November 19, 2018

Bid Protest - Plain Reading of Solicitation Prevails

The GSA (General Services Administration) issued a solicitation to procure information technology services. GSA required that offerors submit proposals in seven volumes. and a "document Verification and Self Scoring Worksheet. In the scoring worksheet, offerors were required to claim points for meeting specific criteria in the solicitation and for every claimed point, offerors were required to include supporting documentation in the appropriate volume of the proposal. GSA also set forth specific substitution rules for points claimed by joint-ventures.

For example, for relevant experience, joint venture offerors were required to list relevant experience projects in the name of the joint venture or in the name of an individual member of the joint venture. For past performance, JVs were required to provide examples in the name of the joint venture or in the name of an individual member of the joint venture. For systems certification, JVs were required to provide evidence of the system certification, or clearance being in the name of the joint venture or in the name of every member of the joint venture. Note the difference. In the first two examples, JV offerors could provide evidence in the name of the joint venture or in the name of one member of the joint venture. But for the system certification criteria, JV offerors had to provide evidence in the name of the joint venture or each and every member of the joint venture.

Metrica Tem Venture (MTV), a joint venture, submitted a bid under the solicitation. But the contracting officer took away points because MTV did not provide evidence of system certification for the joint venture as a whole or for each of the joint venture partners. MTV appealed to the U.S. Court of Federal Claims arguing that it was entitled to those points because it proposed that one of its members, which possessed an acceptable Cost Accounting System (CAS) would perform all of MTV's accounting under the contract.

The Federal Claims court dismissed the appeal because based on the plain reading of the solicitation, there was only one reasonable interpretation and it was not MTV's interpretation. The Court ruled that offerors were entitled to points only for having a certified cost accounting system if the credential is possessed by the joint venture or each member of the joint venture. Because neither MTV nor each member of the joint venture possessed a certified cost accounting system, GSA was correct in deducting points for a certified cost accounting system.

The full Federal Claims court decision can be accessed here.

Friday, November 16, 2018

Contractor Responsibility Determinations

The Government will award contracts to responsible prospective contractors only and no award can be made unless the contracting officer makes an affirmative determination of responsibility (see FAR 9.103(a) and (b)). Why is contractor "responsibility" so important? Because the award of a contract to a supplier based on lowest evaluated price alone can be false economy if there is a subsequent default, later deliveries, or other unsatisfactory performance resulting in additional contractual or administrative costs (see FAR 9.103(c)).

When making responsibility determinations, contracting officers can and will consider a number of sources of information about bidders and/or offerors. The common sources of information alread collected and readily available to the contracting officer includes the Federal Awardee Performance and Integrity Information System (FAPIIS), System for Award Management (SAM), and Past Performance Information Retrieval System (PPIRS).

Information in FAPIIS will identify affiliates, immediate owners, subsidiaries, and predecessors that have held previous Government contracts. It contains comments on how the contractor (or subcontractor) performed on previous contracts and whether there has been any administrative actions such as debarment or suspension. It contains information regarding criminal or civil proceedings, terminations for default or cause, and determinations of non-responsibility because the contractor does not have a satisfactory performance record or a satisfactory record of integrity and business ethics.

In addition to consulting the FAPIIS, contracting officers, when making responsibility determinations have other sources of information to help make those determinations. These include

  • Records and experience data, including verifiable knowledge of personnel with the contracting office, audit offices, contract administration offices and other contracting officers. In other words, contracting officer will often query those around them for whatever information they might hold on a particular contractor or offeror.
  • The prospective contractor - including bid or proposal information, questionnaire replies, financial data, information on production equipment and personnel information.
  • Commercial sources of supplier information of a type offered to buyers in the private sector.
  • Preaward survey reports - usually performed by DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) - including accounting system adequacy and financial capability reviews.
  • Other sources such as publications, suppliers, subcontractors, and customers of the prospective contractor, financial institutions, Government agencies, and business and trade associations.
Contractors and prospective contractors should never underestimate the impact of negative information or a negative perception by someone within the Government. Sometimes all it takes is an off-hand comment bubbling up to the contracting officer to influence award decisions.

Thursday, November 15, 2018

$236 Million Settlement in Bid-Rigging Scheme

Back in the mid-70s, the Army began to realize that it was paying excessive prices for military construction projects in South Korea. In fact, many of these projects cost more than comparable construction projects would cost back in the States. Given that Korean labor at the time was earning $2 to $4 per day, something was obviously off balance. The Army CIC (Criminal Investigative Command) conducted an extensive investigation and found wide-spread collusion among contractors as well as Korean Government involvement in directing which contractor would win each bid. The solution at the time was to move from competitive bidding process to negotiated procurements complete with certified cost or pricing data and full pricing audits. It worked. Costs for construction projects fell significantly. Over the intervening years however contracting shifted back to competitive procurements. The Korean economy boomed and the U.S. Government's was not as significant economic influence as it once was. There was presumption that contractors' ethics had improved. The Army wanted to streamline its acquisition processes - it requires a lot more work to negotiate a contract based on certified cost or pricing data than it does to award based on competition. It didn't take too many years for the shift from negotiated competitive procurements to become complete.

For those involved in ferreting out the graft and corruption of that era, yesterday's announcement by the Justice Department of a massive collusion scheme by Korean suppliers of fuel to the Army, Marines, and Air Force in South Korea was not shocking. Three South Korean companies agree to plead guilty to bid rigging on Defense Department fuel supply contracts. Together the companies have agreed to pay $236 million in fines and damages. The three suppliers agreed to pay $82 million in criminal fines for their involvement in a decade-long bid-rigging conspiracy that targeted fuel supply contracts and $154 million in restitution. This bid-rigging conspiracy went on for more than ten years discovery and the $154 million settlement is less than the amount of the overcharging. The Government rationalized this by stating that it reflected the value of defendants' cooperation commitments and the cost savings realized by avoiding extended litigation. These three companies have also been barred from further Government contracts.

The Justice Department press release alluded to the fact that additional charges in this matter would be forthcoming. The press release did not indicate how the scheme was uncovered or specifically how the collusion occurred. Perhaps we'll learn more about this case later on.

Wednesday, November 14, 2018

Double Jeopardy - Incurred Cost Audits

DCAA's (Defense Contract Audit Agency's) policies and procedures for sampling low-risk incurred cost proposals, while certainly helping to reduce the Agency's incurred cost backlog, has not been without its detractors in the contract administration community. There are anecdotal stories out there where contracting officers try to initiate their own reviews of incurred costs after receiving notification from DCAA that a particular contractor submission has been deemed low risk and should be relied upon to close contracts for that year. Contractors were understandably upset because of the apparent "double audit". The problem became significant enough that the Defense Department amended its FAR Supplement (DFARS) to, in effect, tell contracting officers to knock off the second-guessing of audit results.

DFARS 242.705, Final indirect cost rates was added as follows:
DCAA Policy and Procedure for Sampling Low-Risk Incurred Cost Proposals issued on Junly 24, 2012. Effective immediately, for the purposes of satisfying the audit requirements at FAR 4.804-5(a)(12), 42.705-1(b)(2), and 42.705-2(b)(2)(i), Department of Defense contracting officers shall continue to rely on either a DCAA audit report or a DCAA memorandum documenting that, based on a risk assessment and a proposal adequacy evaluation pursuant to FAR 42.705-1(b)(1)(iii), DCAA deemed the incurred cost proposal to be low-risk and did not select it for further audit in accordance with its policy.
This policy certainly doesn't mean that DCAA can make its determination in a vacuum without consulting the contract administration office. Before DCAA makes its high risk/low risk determination on a particular year at a particular contractor, it requests that the contracting officer provide them with a list of any known significant risk factors. The notification typically follows this wording:
Please notify us of any significant risk factors you are aware of that would impact the low-risk determination for the subject contractor and fiscal year. A negative response is requested. We request that you provide a response to our office no later than ten business days from the date of this letter.
Contracting officers are always given the opportunity to weigh in on what they view as risk factors at a particular contractor. And, the contract auditors are obligated to consider these views when assessing whether to perform an audit or to close it out with no audit because the risk factors did not justify a full audit.

Tuesday, November 13, 2018

Notice of Intent to Disallow Costs

The Government cannot arbitrarily withhold contract funds. There is a due process involved that consists of written rationale in the form of a proposed action but also gives contractors ample opportunity to state their case as to why that action should not be taken.

The procedure is laid out in FAR 42.801. Briefly, it goes like this:

At any time during the performance of a contract (typically a cost-reimbursable contract), the contracting officer responsible for administering the contract may issue the contractor a written notice of intent to disallow specified costs incurred or planned for incurrence. However, before issuing the notice, the contracting officer shall make every reasonable effort to reach a satisfactory settlement through discussions with the contractor (FAR 42.801(s)).

A notice of intent to disallow such costs usually results from monitoring contractor costs. The purpose of the notice is to notify the contractor as early as practicable during contract performance that the cost is considered unallowable under the contract terms and to provide for timely resolution of any resulting disagreement. In the event of a disagreement, the contractor may submit to the contracting officer a written response. Any such response shall be answered by withdrawal of the notice or by making a written decision within 60 days (FAR 42.801(b)). A notice of intent to disallow can also be the result of a report by the contract auditor.

At a minimum, the notice shall

  1. Refer to the contract's Notice of Intent to Disallow Costs clause
  2. State the contractor's name and list the numbers of the affected contracts
  3. Describe the costs to be disallowed, including estimated dollar value by item and applicable time periods, and state the reasons for the intended disallowance
  4. Describe the potential impact on billing rates and forward pricing rate agreements
  5. State the notice's effective date and the date by which written response must be received
  6. List the recipients of copies of the notice, and
  7. Request the contractor to acknowledge receipt of the notice

Recently, the U.S. Court of Federal Claims took the Department of Energy to task for not following these procedures. DOE withheld costs from a contractor who had given employees a pay raise. DOE requested the contractor to provide information necessary for it to determine whether the pay raises were justified and if the information was not provided, DOE planned to take appropriate action to protect the Government's interests. The contractor did not provide the requested data so DOE withheld two percent of billed direct labor costs.

The contractor argued that DOE had not complied with the FAR criteria for disallowing costs. It had not issued a notice of intent to disallow costs nor had it afforded the contractor the opportunity to responded to the notice.

The Federal Claims court agreed with the contractor and ordered DOE to repay the $1.1 million withheld plus any additional amounts that may have been withheld in the interim.

The full decision can be read here.

Monday, November 12, 2018

Inter-Company Transfers - Limitations

Material costs, including such items as raw materials, parts, sub-assemblies, components, whether manufactured by the contractor or purchased are, of course, allowable costs on Government contracts (see FAR 31.205-26, Material Costs). There are limitations however, when those materials are being purchased from an affiliated company.

Paragraph (e) of the aforementioned FAR (Federal Acquisition Regulations) Cost Principle provides the following:
Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred. That means, no profit can be added. However, allowance may be at price when (i) it is the established practice of the transferring organization to price inter-organizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate under a common control and (ii) the item being transferred qualifies for an exception under FAR 15.403-1(b) and the contracting officer has not determined the price to be unreasonable.
Note the two conditions; there must be an established practice that is followed for both commercial and Government customers and the item(s) must qualify for some kind of exemption. What are those exemptions? FAR 15.403-1(b) lists the exceptions to certified cost or pricing data requirements. Among them are

  1. When the contracting officer determines that prices agreed upon are based on adequate price competition
  2. When the contracting officer determines that prices agreed upon are based on prices set by law or regulation
  3. When a commercial item is being acquired
  4. When a waiver has been granted, or
  5. When modifying a contract or subcontract for commercial items.
The idea behind these limitations is to avoid doubling up on profit, to pay a contractor profit on top of a material item for which it has already received profit. Contract auditors are very aware of this potential and will closely scrutinize any estimates or costs incurred under cost-type contracts for inter-company transactions to ensure that costs are consistent with the FAR limitations.

Friday, November 9, 2018

What Contractors Might Expect with the New Democratic Controlled House

It should be clear to everyone that given the divided control of Congress, there will not be much legislating during the 116th session. Perhaps that's a good thing. However, that doesn't mean things will be peaceful. With Democrats taking control of the committees, we could see a significant amount of activity in the committees tasked with Government oversight. In fact, certain individuals have already promised to shake things up a bit. While Government oversight doesn't necessarily mean contractor oversight, contractor representatives are often drug into these matters - especially if it involves a scandal where some Government agency has dropped the ball in its own administration and oversight responsibilities.

One recent article by the Federal News Network discussed the expected changes likely to occur. Rep. Cummings who is the likely chairman of the House Oversight and Government Reform Committee has requested 64 subpoenas over the past two years for more agency information about a variety of topics. The Republican majority hasn't upheld any of them. Expect that floodgate to open. Cummings plans to "shine a light" on waste, fraud and abuse in the Trump administration.

Democrats will also focus on Government reform including strengthening whistleblower statutes, reversing the trend that makes it harder for federal employees to be represented in the workplace and other advocacy effort on behalf of federal employees. Cummings also wants to be more involved in Executive Agency reorganizations.

One major concern right now involves the recommendations coming out of the Section 809 Panel that require statutory changes to effect. Without bipartisan support, many of these recommendations may not even be brought to the table, much less implemented.

Thursday, November 8, 2018

What is the "Christian Doctrine"?

What is the "Christian Doctrine"? We discussed the basis of the Christian Doctrine back in 2010. You can find that post here.

Briefly stated, under the Christian doctrine, a court may insert a clause into a Government contract by operation of law if that clause is required under applicable federal administrative regulations. In "Christian", the Court of Claims concluded that the standard termination clause required by ASPR (Armed Services Procurement Regulations, since replaced by FAR) must be read into the contract, even though the contract lacked a termination clause. For a court to incorporate a clause into a contract under the Christian doctrine, it generally must find (i) the clause is mandatory and (ii) that it expresses a significant or deeply ingrained strand of public procurement policy.

A recent Appeals Court decision illustrates how the Christian Doctrine is applied to the absense of the Bonding clause in a construction contract.

The Army awarded a contract to K-Con, Inc. that lacked the standard bonding clause for construction contracts. FAR 52.228-15 requires offerors in construction contracts valued at $150 thousand or greater to furnish performance and payment bonds. Through probably an oversight, the Army failed to include that clause in the solicitation or the resulting contract.

The Appeals Court ruled that the clause was "read into" the contract under the Christian Doctrine because it is required by statute. The statute, 40 USC 3131-34 (formerly known as the Miller Act) requires that before any contract of more than $100 thousand is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government performance and payment bonds which become binding when the contract is awarded.

Under the second prong of the Christian doctrine, the Appeals Court ruled that performance and payment bonds express a significant or deeply ingrained strand of public procurement policy. Payment bonds are intended to provide security for those who furnish labor and materials in th e performance of Government contracts. For private contracts, subcontractors and suppliers can obtain a mechanic's lien against the improved property to ensure that they are paid. Government property however, cannot be subject to subcontractors' and suppliers' liens. Thus the payment bond requirements was created to provide, in Government contracts, an alternative remedy to protect those who supply labor or materials to a contractor on a Federal project.

Wednesday, November 7, 2018

Guilty Plea in Product Substitution Case

Granite Bay is an unincorporated area northeast of Sacramento California located along the north shore of Folsom Lake. It began as Granite Bar when gold miners first settled the banks of the American River. At its peak, there was 37 gold mines along both sides of the river.

Granite Bay (formerly Granite Bar) has a long and unique history. Besides the gold found there, it happened to be located along the supply line that was used to bring goods to the gold miners and carry gold nuggets to the banks in San Francisco. It was also a place for bandits to hang out - laying in wait to relieve travelers of their belongings. One brazen and famous robber along the stretch was known as "Rattlesnake Dick", so named, not because he was sneaky but because he was once an honest gold miner upriver at Rattlesnake Bar before turning outlaw.

Granite Bay is still home to thieves. The Justice Department just announced a guilty plea by a Granite Bay man accused of product substitution fraud. The scope of his fraud would probably leave Rattlesnake Dick jealous however. Between 2011 and 2017, Mr Meron used two office supply businesses he operated to defraud federal government agencies out of $3.5 million. He did this by substituting and delivering cheaper, generic versions of expensive, name-brand products his customers ordered, and pocketing the price difference.

Meron's two companies contracted to sell office supplies to federal agencies through two web-based government sales portals; GSA Advantage and DoD EMall. After Meron received payments for the premium products his customers ordered, he obtained compatible products from his suppliers that cost him a fraction of what his customers paid for the brand-name products they ordered. Meron then substituted and delivered those cheaper products for the more expensive products and retained the difference in cost. Over time, Meron extended his substitution scheme to nearly all orders for those name-brand products, and never intended to deliver what his customers ordered.

The use of knockoff products is significant because the United States Trade Trade Agreement Act requires federal agencies to buy products made or designed in the US. It bans federal agencies from buying products made in China. Meron's suppliers used cheaper products made in China.

Tuesday, November 6, 2018

Contractors Need to Avoid Even the Appearance of a Conflict of Interest

An anonymous source tipped off the Mayor of Nashville Tennessee that one of its public works contractors was improperly entertaining city officials who were responsible for directing city business to that contractor. The Mayor immediately requested an audit. The now completed audit concluded that there was an "appearance of preferential treatment" to that firm who has more than tippled its average yearly revenue from the City. Since 2010, it has received nearly $50 million in contracts for street paving, sidewalks, and other work.

City officials responsible for awarding those contracts were spotted (and photographed) in the Contractor's suite at sporting events (Bridgestone Arena) and according to the audit, those City employees did not appear to have paid for their own tickets. Photographic evidence also showed City employees having drinks after hours with the Company Vice President.

While the audit concluded that there was an appearance of a conflict of interest, the audit did not produce evidence that the Contractor received a benefit from the city in exchange for the entertainment. Most of the employees involved denied taking any tickets for free. One employee admitted to failure to reimburse the contractor for two of his tickets. With regard to the after-hours entertainment, claimed they paid cash for their drinks.

Other allegations the audit was unable to substantiate included:

  • Invoices with no support
  • Only inspectors on good terms with the Contractor were allowed to perform inspections
  • City officials "directed" the Contractor to work with specified subcontractors
  • There was a conflict of interest because the City's senior procurement officer once worked for the Contractor.

So what was the outcome of this audit?

  • The mayor returned the Contractor's campaign contributions
  • The Contractor agreed to pay for certain re-work for which it was trying to obtain an equitable adjustment
  • City employees will undergo ethics training.

Monday, November 5, 2018

Northrup Grumman to pay $31 Million for Time-card Fraud

Northrop Grumman has agreed to pay the Government $31 million to resolve criminal and civil charges for over-billing the Air Force on a couple of contracts. The over-billings were a result of employees being paid for work not performed and occurred over a three-year period ending in 2013. In exchange for admitting its employees' misconduct, making full restitution, and agreeing to cooperate in the ongoing criminal investigation, no criminal charges will be filed against Northrup Grumman. The employees involved in the mischarging are no doubt concerned however.

According to the Justice Department press release, Northrup Grumman employees deployed to an air base in the Middle East defrauded the Air Force by over-billing time charged to a Government contract. Those employees charged exactly 12 or 13.5 hours per day, seven days a week, despite the fact that the employees were not working those hours. What were they doing? Following are some representative acts of what those employees were doing while charging time to the contract.

  • Went for ice cream and a movie
  • Went golfing
  • Watched the Super Bowl from their hotel
  • Went to a local amusement park
  • Went skiing
  • Laid by the pool
  • Did not show up for work
  • Was drunk
  • Went to a music festival
  • Couldn't get on the base because of an expired badge (yet claimed 13.5 hours of work)
  • Shopped for a Chanel purse
  • Picked up wife and children at the air port and went out to dinner

Some of the employees involved in this mischarging earned 3.6 times their base pay.

Among the corrective action that Northrup Grumman agreed to take are the following.

  1. Issue periodic reminders of the latest time-charging guidance and policies, and provide repeated training sessions to help ensure proper time-charging by employees
  2. Create a dedicated compliance manager position specifically to monitor time-charging.
  3. Install a bio-metric reader at the program site to track employees' time on base.

Additionally, Northrup Grumman must use its best efforts to make available, and encourage, the cooperation of present and former officers and employees for interviews and testimony, consistent with their rights and privileges of such individuals. Most likely however, any employee involved in this mischarging is long gone from the company.

There is no indication in the Justice Department materials as to how this fraud was uncovered. More information on this case can be found here.

Friday, November 2, 2018

What are Improper Payments?

Under OMB (Office of Management and Budget), Federal agencies are required to periodically review payments under contracts, awards, grants, and other expenditures for improper payments. Within DoD, many agencies have programs in place to test for improper payments. DCAA (Defense Contract Audit Agency), for example, checks for improper payments in connection with "Testing of Paid Vouchers".

What are "improper payments"? Here's the OMB definition (which comes from Public Law No. 107-300).

  1. Any payment that should not have been made or that was made in an incorrect amount (including overpayments and underpayments) under statutory, contractual, administrative, or other legally applicable requirements, and includes any payment to an ineligible recipient, and
  2. Any payment for an ineligible service, any duplicate payment, any payments for services not received, and any payment that does not account for credit for applicable discounts.

One primary purpose of an adequate billing system is to minimize improper payments. That's why contract auditors place so much emphasis on billing systems and associated internal controls. Many improper payments are inadvertent and could be avoided with a good billing system.

One area that has come into focus regarding improper payments is provisional billing rates. Contractors with cost-type contracts are reimbursed their actual direct costs and reimbursed their indirect costs at provisional billing rates. Provisional billing rates are trued up after the end of the year when contractors submit their annual incurred cost proposals. But it is contractors' responsibility to ensure that their provisional billing rates accurately reflect their best estimate of the final rate. At the beginning of the year, indirect rates are just educated guesses but as the year progresses, it becomes easier and easier to see what the final rate will look like. If the provisional billing rate is significantly higher than what the final rate is expected to be, contractors have an affirmative duty to revise those rates downward. Billing excessive provisional rates for too long will land contractors in the improper payment pool.

Thursday, November 1, 2018

Has the Labor Department Stepped Up Its Investigations?

Is it just us or has the Labor Department been stepping up its compliance activities regarding labor laws and regulations?

The Labor Department has two offices established to ensure compliance with various laws and regulations related to labor. There is the Office of Federal Contract Compliance Programs (OFCCP) with responsibility for ensuring that contractors comply with laws and regulations requiring nondiscrimination in all of its many forms. There is also the Wage and Hour Division (WHD) who enforces Federal minimum wage, overtime pay, record-keeping, FLSA, Davis-Bacon, and SCA (Service Contracting Act), among many others. Additionally, the Labor Department Office of Inspector General (OIG) also dabbles in compliance matters.

Last week we reported on the case of a contractor in Minnesota who had to pay $400 thousand to female employees for systemic pay discrimination violations. (See Routine Labor Department Audits - What Could Go Wrong?)

A couple of months ago, we reported on a case where as a result of an investigation by WHD, a contractor was found to have misclassified worker skill levels thereby shortchanging them in violation of the Davis-Bacon Act (see Contractor Agrees to Pony Up for Shortchanging its Workers).

Back in June, we reported on another case, brought by a whistleblower, where the OIG found a contractor was underpaying its employees and had submitted false certified payroll reports for work it performed on several construction projects (see Davis-Bacon Act Violations Cost Company $625 Thousand).

Just yesterday, the Labor Department announced another settlement where a contractor was found to have shortchanged its workers by failing to correctly calculate and pay the proper health and welfare fringe benefits to employee accounts. That resulted from a WHD investigation that ultimately cost the contractor $2.8 million (see Labor Department Recovers $2.8 Million for 443 Employees).

But wait, there's more. Two days ago, the OFCCP announced another settlement involving a contractor who agreed to pay $410 thousand in back wages to settle allegations of systemic hiring discrimination. The company was alleged to have discriminated against women for security guard services (see Federal Contractor Agrees to Pay $409,947 in Back Wages to Settle Hiring Discrimination Allegations).

Government contractors should periodically self-assess their level of compliance with the various labor laws that apply. There are many and a good place to learn about them is with Labor Department on-line resources (See Wage and Hour Laws - Compliance "Toolkit").

Wednesday, October 31, 2018

DoD Cancels Acquisition Streamlining Contract Clause

Back in February 2017, a Presidential Executive Order (EO 13777) established a Federal policy to alleviate unnecessary regulatory burden on the American people. In response to that EO, the Defense Department established a Regulatory Reform Task Force to review and validate DoD regulations, including DFARS (DoD FAR Supplement). DoD established a subgroup within the DoD Regulatory Reform Task Force to specifically review DFARS provisions and clauses.

It is difficult to make regulatory changes even when everyone knows and realizes that a particular regulation is redundant or of dubious value. This is especially true when regulations are implementing a statutory requirement. The statute must be changed first and that involves Congress and the President.

So far, the DoD Regulatory Reform Task Force has been concentrating on DFARS provisions that are redundant or closely approximate requirements stated elsewhere. This is the case published this week where DoD is removing DFARS Clause 252.211-7000, Acquisition Streamlining. Now why would DoD want to remove a clause that promotes "acquisition streamlining"? Isn't acquisition streamlining a good thing? A noble goal?

Perhaps. But in this case, the contract clause places the burden on contractors. DFARS 252.211-7000, Acquisition Streamlining (now deleted) requires contractors to prepare acquisition streamlining recommendations in accordance with the performance work statement and submit them to the Government. This particular clause was added to implement a requirement of a DoD Directive (DoDD 5000.43) that has since been cancelled. Moreover, FAR (Federal Acquisition Regulations) 7.1, Acquisition Plans, already includes similar provision involving industry engagement as considerations to be made when preparing written acquisition plans. Since the implementing DoD Directive and FAR 7.1 addresses acquisition streamlining, DoD considered its version of the clause unnecessary and therefore cancelled it.

In cancelling the requirement, DoD announced that it will continue to encourage industry participation during the design and development of contract requirements and through other methods.

Tuesday, October 30, 2018

Fiscal Year 2019 FAR Reissue

GSA (General Services Administration) has reissued the Federal Acquisition Regulations (FAR) as the FY (fiscal year) 2019 version. The previous reissue was in fiscal year 2005 and since then, has been amended 101 times - FAC (Federal Acquisition Circular) 2005-01 through 2005-101.

Periodically the FAR is reissued because of administrative necessity. Although reissues do not alter the language of the FAR, they do contain administrative updates to improve the user experience (its hard to type that with a straight face) and increase accessibility.

A few notes about the reissue.

  • Future Federal Acquisition Circulars (FAC) will be renumbered so that the next issued FAC will be FAC 2019-01. This reissue will replace the prior numbering system which used FACs 2--5-01 through FAC 2005-101. Because of the reniumbering, the Foreword section of the FAR will be updated to reflect the current FAC number.
  • The FAR looseleaf package will no longer be offered. Instead, a list of sections affected by each FAC will be included on the FAR website.
  • The matrix will continue to be available in the PdF version of the FAR. However, the FAR website is promising to release a new "smart matrix" which will include a filterable clause matris, file saving options, improved search capabilities, as well as hyperlinked clauses, provisions and prescriptions to the current version of FAR.
  • The FAR will be available in a number of formats including HTML, XML, Word, and PDF.
  • FAR proposed rule publications that are open for comments are available at
  • The Federal Alert Notices (FAN) are available at FANs were established by the Office of Federal Procurement POlicy (OFPP) in 2012 to help improve awareness of the regulatory changes.
Don't forget that there is a mobile version of FAR as well making it accessible on all devices (including smart phones). Instructions for downloading FAR to your device of choice can be found here.

Monday, October 29, 2018

Subcontractor Caught Passing Personal Expenses on to the Air Force

Earlier this month, the Justice Department announced a settlement with a Defense subcontractor near Sacramento, CA surrounding allegations that it inflated its indirect costs that were used in negotiating subcontracts with prime contractors including Boeing and Raytheon.

The settlement requires the subcontractor, Alpha Research & Technology, Inc. (ART) to pay $1 million to the Government to resolve allegations that it violated the False Claims Act by knowingly submitting inflated contract pricing to the Government.

According to the Justice Department, ART included millions of dollars in personal expenses of its owners which ART knew were unallowable in Government contracting. Those expenses included payments for the design and construction of the owner's luxury personal residence, luxury cars, a personal caretaker, and a weekend at a luxury hotel in San Diego. ART was able to perpetuate its alleged fraud for quite some time - at least six years - before the company was caught.

ART is a woman-owned company that develops and manufactures airborne-related command, control, communications and surveillance systems (according to its website). In 2015, the subcontractor employed about 87 people. It is not clear how the allegations were brought forward. Since ART is primarily a subcontractor and prime contractors are responsible for ensuring the reasonableness of subcontract costs passed along to the Government under their prime contracts, it would seem likely that someone at Boeing or Raytheon took note and passed the information along to investigators. There is no mention of a whistle-blower in the Justice Department press release.

Friday, October 26, 2018

Contractor Code of Business Ethics - A Reminder

We've written concerning this matter a couple of times but it bears repeating because some contractors have forgotten the requirement. What requirement? The requirement found in FAR (Federal Acquisition Regulations) 3.10, Contractor Code of Business Ethics and Conduct.

This particular section begins with an overall policy: Government contractors must conduct themselves with the highest degree of integrity and honesty and should (not must) have a written code of business ethics and conduct. To promote compliance with such a code, contractors should (not must) have an employee business ethics and compliance training program and an internal control system that (i) is suitable to the size of the company and extent of its involvement in Government contract, (ii) facilitates timely discovery and disclosure of improper conduct in connection with Government contracts and (iii) ensures corrective measures are promptly instituted and carried out.

The foregoing was general policy guidelines. There's more however. There is a "must" provision. All Government contractors, regardless of size, must display a Hotline Poster (see FAR 52.203-14). Your contracting officer will tell you which one to post and where to obtain it. The Hotline poster must be prominently displayed in a common work area. It can also be displayed on an employee website. There is another "must" provision that applies to contracts greater than $5.5 million with period of performances greater than 120 days - a written code of conduct.

This written code of business ethics and conduct must be made available to every employee. Contractors must exercise due diligence to prevent and detect criminal conduct and otherwise promote an organization culture that encourages ethical conduct and a commitment to compliance with the law. Further details can be found in FAR 52.203-13, Contractor Code of Business Ethics and Conduct.

Contracting officers are responsible for enforcing these provisions (see FAR 42.302(a)(71).

Thursday, October 25, 2018

Routine Labor Department Audits - What Could Go Wrong?

The Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) conducts routine compliance evaluations at Government contractors. The scope of these evaluations include contractor compliance with:

  • Executive Order 11246 (President Johnson) - prohibits federal contractors from discriminating in employment decisions on the basis of race, color, religion, sex, or national origin.
  • Rehabilitation Act
  • Vietnam Era Veterans' Readjustment Act

Refer to Federal Contracts Compliance Advisor for more details.

A company in Minnesota found out about OFCCP's power the hard way. A'viands Food & Service Management recently agreed to a settlement with the Labor Department requiring it to pay nearly $400 thousand in back pay and interest to 98 female employees to resolve pay discrimination violations.

The OFCCP determined that going back to at least 2011, the company paid female employees working in food service positions less than similarly situated male employees. Reaching back seven years should give you some idea of the statute of limitations on labor violations.

As part of the settlement, A'viands also agreed to review employee compensation practices to determine whether those policies have a disproportionately negative effect on compensation for females, and agreed to make adjustments to those policies as necessary. Other non-monetary forms of relief contained in the settlement agreement include compensation monitoring and equal employment opportunity training.

The settlement agreement comes from a Labor Department press release so we haven't heard the contractor's side of the story. There was no admission by the contractor of guilt in failing to follow laws and regulations. Sometimes these settlements are made for expediency purposes.

Wednesday, October 24, 2018

Proposed Commercial Product Must Meet Salient Characteristics

The Department of Veterans Affairs (VA) issued a solicitation back in April for commercial item quotations to provide analytical balances to VA facilities. The RFQ (Request for Quotation) identified nine specific models of a particular brand of balances (Mettlier Toledo) corresponding to nine separate contract line item numbers (CLIN) and then listed nine salient characteristics - each of which was labeled as being applicable to all nine balance models. The salient characteristics included a touchscreen display, capacities up to a minimum of 220 grans, a means to prevent air currents from affecting results, a resolution of 0.1 mg or better, accuracy at a combined maximum error of 2 divisions, a check-weighing function and more.

The VA received quotations from four firms, including GSSI (Government Scientific Source, Inc) and Kanawha (the ultimate winning bidder). The VA rejected GSSI's bid based on a review of literature included in the technical proposal that showed the proposed balance models did not meet minimum specifications. Specifically, the proposed models did not (i) provide a status light to indicate "ready", "warnings", and "errors" and (ii) did not have removable trays. Due to those weaknesses, the VA found the quote technically unacceptable and ineligible for award.

GSSI appealed VA's award to Kanawha arguing that the VA had misevaluated the GSSI quotation. Essentially, GSSI argued that indicator lights and removable trays have been standard equipment on all commercial scientific balances for decades, that every modern balance has bot features, and that both features were evident in the photographs in the descriptive literature submitted as part of its quotation.

GAO (Government Accountability Office) took the unusual step of calling GSSI to have the company show them that illustrations in the printed material depicted removable pans. GSSI had to confess then that the illustrations did not show removable pans and the text of the literature did not indicate the presence of removable pans.

A vendor is responsible for submitting a well-written quotation, with adequately detailed information, that clearly demonstrates compliance with the solicitation requirements and allows a meaningful review by the procuring agency. An offeror must include sufficiently detailed information in its proposal to establish that the equipment offered will meet the solicitation requirements. Under a brand name-or-equal specification, with respect to the offer of an "or equal" product, an offeror's proposal must demonstrate that its product conforms to the salient characteristics listed in the solicitation.

GAO's review provided no basis for objecting the VA's evaluation because GSSI's quotation did not demonstrate that its products met at least one of the required salient characteristics in the RFQ. Therefore GAO denied the protest.

The full GAO decision is available here.

Tuesday, October 23, 2018

What is CBAR (Contract Business Analysis Repository)?

The Contract Business Analysis Repository (CBAR) is Defense Department database that collects business system information on its contractors. The information is not available to the public and even contractors, baring a FOIA request (Freedom of Information Act) have difficulty in finding out exactly the information that DoD is collecting on them.

The CBAR system was created prior to 2010 but significantly enhanced in 2012 to collect the following information.

  • Indirect and direct cost information (e.g. forward pricing rates).
  • Status of contractor business systems (e.g. accounting and estimating systems)
  • Status of compliance with CAS (Cost Accounting Standards)
  • Information about costs and financial condition of the parent entity of major corporations

It also includes contracting officer's negotiation experiences with contractors so that those experiences can be shared among contracting officers negotiating with the same contractor. DoD feels that sharing experiences will result in contracting officers being better prepared for realizing better deals for the Government.

We don't know the number of DoD personnel with access to CBAR. In 2013, the number was reported at 1,900 users though by now, that figure has probably grown.

There have been instances where CBAR information is not up to date. Like all databases, procedures need to be in place to ensure that data is current, complete, and accurate. So, for example, the Government might identify deficiencies in a contractor's estimating system and report those deficiencies in the CBAR system. Meanwhile, the contractors makes the required corrective actions and the Government considers those actions to be responsive but fails to update the CBAR system. Whatever procedures DoD has in place to ensure the accuracy of CBAR data does not always work in a timely manner.

Contractors should know what information is being collected about the company to ensure its accuracy. Start by asking your contracting officer to provide you such information. Many contracting officers will oblige. If that fails, try the FOIA route.

Monday, October 22, 2018

Wage and Hour Laws - Compliance "Toolkit"

Running a business brings many responsibilities, including the responsibility for complying with various federal labor and employment laws. The Wage and Hour Division (WHD) within the Labor Department administers and enforces these laws. Business owners have the responsibility to pay employees properly, maintain certain records, provide eligible workers with unpaid family or  medical leave and to notify employees of their rights in the workplace. WHD has more than 200 offices across the U.S. with personnel available to assist companies (and workers) wade through the complexities of the many laws and regulations. For the "do-it-yourselfers", the Labor Department has may on-line resources as well.

One such useful online resource is the "Compliance Assistance Toolkits" page. These toolkits are designed to help employers understand their rights and responsibilities and provide a series of interactive step-by-step tools to walk employers through a variety of scenarios, in-depth guides to help employers navigate the requirements of the FMLA (Family and Medical Leave Act), and fact sheets that detail how the FLSA (Fair Labor Standards Act_ applies to many specific types of employments.

Currently, the WHD has six toolkits, four of which will be of interest to Government contractors:
  1. Basic Compliance Assistance Toolkit
  2. FLSA Toolkit
  3. FMLA Toolkit, and 
  4. Government Contracts Toolkit
The Government Contracts Toolkit covers topics that are specific to Government contractors. These include such things as:
  • Davis-Bacon Act (DBA)
  • Service Contract Act (SCA)
  • Displace employee rights
  • Paid sick leave for federal contractors
These toolkits also contain the required notices that need to be place in a prominent area of the company.

The WHD performs compliance reviews on how well companies (especially Government contractors) adhere to these rules and regulations. Many companies have been the recipient of these compliance reviews. Some compliance reviews are regularly scheduled reviews. Others are initiated based on employee complaints. It is not uncommon to find instances where employees are better versed in labor laws than the employer/company.

For more information on the various toolkits, click here.

Friday, October 19, 2018

DCAA's Annual Report to Congress - Part IV

Today is the final post in our series on DCAA’s latest performance report. If you missed any of the earlier installments, you can find them here: Part I, Part II, and Part III. Part I discussed DCAA return on investment. Part II discussed DCAA’s professional staffing, the cost of performing audits and some insight on sustention rates. Part III dealt primarily with DCAA’s progress in reducing its incurred cost backlog. In this final installment, we will cover the average length of time required to complete audit, a couple of recommendations to Congress on how the audit process can be improved, and DCAA efforts to assist small businesses in various aspects of Government contracting.

No matter how you look at it, the time it takes for DCAA to complete and audit and issue a report is long. When evaluating forward pricing proposals, it takes DCAA an average of 83 days. That’s a far cry from 30 days just a few years ago. For incurred cost, the length of time, measured from the date that an adequate proposal is received until an audit report is issued or it is administratively closed out because it is low-risk is 143 days. Remember, we’re dealing with averages. DCAA did not specifically report the number of days to close out an incurred cost year when an audit is required. If they did, the elapsed days would be significantly higher than 143 days.

DCAA made two recommendations to improve the audit process. One is not so much of a recommendation as it is a plea to a better working relationship with Congress. The other deals with a need to facilitate or expedite hiring authority for new auditors. Neither one of these would seem to have a direct impact on improving the audit process.

DCAA is one of several agencies required to proactively engage with industry to improve the acquisition process. Specifically, DCAA was tasked with the requirement to clarify audit requirements, understand and address contractor concerns and improve the audit process. DCAA reported a number of meetings with industry leaders and reports that it is encouraging auditors to “be more flexible, responsive, and proactive in addressing industry concerns”. We’re not sure that such “flexibility” has worked its way down to the audit staff yet. One thing we have noticed is that DCAA seems to be taking a more active role in small business outreach such as participating in PTAC (Procurement Technical Assessment Center) seminars.

If you wish to read the full DCAA performance report yourself, it can be accessed here from DCAA’s public website.