Failure to Pay Subcontractors Results in Fraud Indictment

The Justice Department announced yesterday the indictment of Chester Neal of Fresno, California on two counts of mail fraud. Two counts? That's only a tiny fraction of the charges he is potentially facing. There is a lot more to this case than the Justice Department has so far acknowledged. And, the court documents remain sealed and unavailable to the public.

Consider the cast of characters assembled to make the announcement:

• Assistant Attorney General of the Justice Department's Criminal Division
• U.S. Attorney of the Eastern District of California
• Department of Interior Office of Inspector General
• Western Region Office of Investigations, U.S. Army Criminal Investigation Command
• Pacific Fraud Field Office, FBI
• Air Force Office of Special Investigations, Office of Procurement Fraud Investigations, and
• Defense Criminal Investigative Service, Western Field Office

Really? This many individuals for two counts of mail fraud, or more specifically, because one rogue Government contractor didn't pay its subcontractors?

Here's the facts that the Justice Department has disclosed concerning the case.

Chester Neal established several companies through which he secured at least 105 Government contracts. Neal subcontracted the work to other vendors who provided all of the goods and services required under the contracts. Neal made several misrepresentations in order to induce the subcontractors to perform. Neal did not pay his subcontractors even though the Government paid Neal for the work. Between July 2008 and December 2017 (nine and a half years), Neal is alleged to have bilked 35 subcontractors out of $2.6 million.

As we stated at the beginning of this post, there is a lot more to this case than has been revealed so far. Stay tuned for further developments. Pressure to meet socio-economic contracting goals coupled with a charismatic individual may have contributed to this problem. Or, not. Just speculating.

You can read the full Justice Department press release here.

DCAA's Financial Liaison Advisory Services

DCAA (Defense Contract Audit Agency) employs a cadre of individuals that act as Financial Liaison Advisors (FLAs). These individuals are generally auditors with a significant amount of audit experience and are assigned to support DoD procurement and contract administration offices to assist them in achieving the objectives of sound contracting by providing onsite accounting and financial advice to contracting officers, negotiators, and buyers. While contract auditors are independent under GAGAS (Generally Accepted Government Auditing Standards), FLAs are not. They sit side by side with Government procurement and advocate on behalf of the Government. Perhaps you've met some when sitting at the negotiating table.

FLA have been assigned four major and significant responsibilities.

1. Facilitate effective communication and coordination between procurement officers and auditors
2. Provide advice to the procurement office in connection with contractors' cost representations and related matters, in consultation with the auditor.
3. Provide information back to the auditor regarding specific awards, trends in the type and volume of awards and other data impacting on immediate or long-range DCAA responsibilities.
4. Provide DCAA management with information as to the adequacy, responsiveness and timeliness of the advisory audit reports being submitted by auditors (many auditors do not appreciate the FLA's tattle-tale role).

For more information on DCAA's FLA program, refer to Chapter 15 of the DCAA Contract Audit Manual.

Only One New Procurement Rule Published in 2017

How many new rules were published in the FAR in 2017?

One. It rescinded a previous rule - see Fair Pay and Safe Workplaces.

The President ordered agencies to rescind two old rules for every new one. Guess they couldn't find any old rules to eliminate.

DoD Restrictions on Fringe Benefits

Here's a reminder to everyone that when reviewing the FAR cost principles to determine whether a particular cost is allowable or unallowable (or amount is capped) it is also necessary to consider cost principles in the individual FAR supplements for whatever Agency issued the contract. Most Agencies have a FAR supplement and some of those include revisions or further restrictions on costs.

Take, for example, the Cost Principle on Compensation, FAR 31.205-6 and specifically Section (m) concerning fringe benefits. FAR includes the following provision:

Fringe benefits are allowances and services provided by the contractor to its employees as compensation in addition to regular wages and salaries. Fringe benefits include, but are not limited to, the cost of vacations, sick leave, holidays, military leave, employee insurance, and supplemental unemployment benefit plans. Except as provided otherwise in Subpart 31.2, the costs of fringe benefits are allowable to the extent that they are reasonable and are required by law, employer-employee agreement, or an established policy of the contractor (underscore added).

That seems pretty clear. But look what the DoD FAR Supplement adds (see DFARS 231.205-6(m)(1).

Fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.

So why is the added DFARS language necessary? Probably because the  FAR language is not restrictive. It states that fringe benefits required by law, employer-employee agreement, or established policy are allowable but it doesn't specifically state that in the absence of law, agreement, or policy that the costs are unallowable. The DFARS adds that restriction.

Contractors must have their fringe benefit policies documented in writing or run the risk that a contract auditor will come in and question fringe benefit costs that are not documented. This applies to all contractors, no matter the size. Smaller contractors without full-time HR (Human Resource) departments are most at risk because of their inherent informality. But it shouldn't take Herculean effort to document and give to employees a listing of their fringe benefit entitlements. Do it now.

Defective Pricing Indicators

Government contractors know and understand that where they were required to submit certified cost or pricing data and where the Government relied on that certified cost or pricing data when negotiating the contract price, are also subject to "defective pricing" audits after the contract is awarded. A defective pricing audit looks for factual information that existed at the time negotiations were completed, were not disclosed to the Government, but if had been disclosed, would have had a significant impact on the negotiated price.

Contract auditors routinely perform defective pricing audits - not on every contract but on select contracts. The larger the contract, the higher probability it will be selected for a defective pricing audit. The type of contract also has a bearing on the audit selection. Fixed price have a higher probability of being selected because of the potential for a greater return. On a fixed price contract, defective pricing findings will result in a dollar for dollar reduction in the contract price. On a cost-reimbursable contract, the impact only affects how much fee a contractor is entitled to.

In order to expend resources wisely, contract auditors perform risk assessments designed to identify and explore conditions suggesting possible defective pricing. Items normally examined for indications of defective pricing include historical unit cost records, vendor quotes, purchase orders, voluntary refunds or credits from suppliers, cost trend records, sales and manufacturing volume projections, profit and loss statements, and product cost and profit analyses. Over the years, auditors have developed a corpus of "indicators" that if present, suggests a possibility (not a probability) that defective pricing occurred. These indicators include the following:

a. Significantly lower actual cost of individual items and cost elements as compared with the amounts included in the last submitted proposal. When this condition exists, auditors will perform additional tests to determine whether the lower costs reflect defective data.

b. Operations not actually performed or items of cost not incurred, although included in the contractor's proposal. (For example, changes made in the make-or-buy program, a special testing program not performed, or Government-owned equipment rental not paid.) Contract auditors will explore the reasons for not incurring the cost.

c. Items of direct cost included in the contract pricing proposal at prices higher than appropriate based on information available to the contractor (and not disclosed to the Government) at the time of contract price agreement. Examples include

• After submitting the original proposal but before price agreement, the contractor receives a firm quote from an established source which is significantly below the cost included in the original proposal. 
• A previously used supplier not solicited this time but who normally submits a low bid. The contractor later purchases the material from this vendor at a price lower than proposed. 

d. Closing or cutoff dates for recording transactions or for computing summary indirect cost rates or production cost data that did not coincide with the date negotiations concluded. For instance, the contractor's proposal included indirect or other cost data as of a prior cutoff period. In this case, the contractor is responsible for the currentness of its certified cost or pricing data, if a cutoff date for this information was not agreed to and identified on the Certificate of Current Cost or Pricing Data, the Government would consider significant matters in the books or records on the date of price agreement as reasonably available to the contractor for purposes of defective pricing.

If advised that the Government plans to perform a defective pricing audit of a particular contract, these indicators can be used by contractors as a self-assessment prior to the audit.

External Restructuring Costs

Defense contractors sometimes consolidate and then restructure to reduce operating costs. Reducing operating costs will then reduce contract costs. At least that's the theory. Back in 1994, Legislation was passed whereby the Defense Department would pick up some of the increased costs so long as contractors could demonstrate either (i) a 2:1 return on investment or (2) that the return would exceed the cost and the business combination would result in the preservation of critical capability that might otherwise be lost to the Defense Department. DoD formulated procurement regulations to go along with the legislation. Those regulations can be found in the DoD FAR Supplement at 231.205-70, External Restructuring Costs.

Recently, Bloomberg published an article discussing Lockheed Martin's proposal for reimbursement of restructuring costs and some of the difficulties Lockheed is encountering is demonstrating a 2:1 return on the Government's investment . You can read the Bloomberg article here.

In 2015, Lockheed Martin purchased Sikorsky Aircraft from United Technologies for $9 billion. Lockheed then submitted a proposal asking DoD to reimburse $212 million in restructuring costs. In return, Lockheed said that it would save taxpayers eight times that amount over the next five years.

DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) are now auditing the proposal and have raised some concerns. According to DCMA, Lockheed's "rationale for proposed savings does not appear to meet the required definition of external restructuring activities". Lockheed has not been able to demonstrate those projected savings are truely the result of external restructuring. The Government thinks that many of the savings are routine or ongoing repositions and deployments of workers or facilities - which do not meet the definition of restructuring activities.

According to DFARS 231.205-70, restructuring costs must be identified as a direct outgrowth of a business combination. A restructuring activity  must be a nonroutine, nonrecurring, or extraordinay activity to combine facilities, operations, or workforce in order to eliminate redundant capabilities, improve future operations, and to reduce overall costs.

It will be interesting to watch this matter develop and find whether the Defense Department is comfortable forking over $212 million in exchange for an estimate of projected savings.

Contractor's Risk of Being Audited Jumps Significantly

It appears that DCAA (Defense Contract Audit Agency) has quietly and significantly increased the number of incurred cost audits it intends to perform. In its most recent edition of the DCAA Contract Audit Manual, Section 6-104 (December 2017), DCAA lays out its policy for performing incurred cost audits. In short, it classifies contractors as either high risk or low risk. 100 percent of incurred cost submissions from high risk contractors will be audited and 33 percent of incurred cost submissions from low-risk contractors will be audited.

The Agency has always audited 100 percent of incurred cost submissions from high-risk contractors, but the 33 percent threshold for low-risk submissions marks a significant increase in numbers of audits. Consider the previous sampling criteria in the following chart. The term "ADV" refers to Auditable Dollar Volume and represents the total costs charged to flexibly priced contracts in a given year. Flexibly priced contracts include CPFF, CPIF, FPI, and T&M. If you're a Government contractor and charged less than $1 million to flexibly-priced contracts (and you're a low-risk contractor), your chances of being selected for audit just increased from zero percent to 33 percent.

These old percentages were probably only temporary anyway. DCAA had a huge backlog of incurred cost submissions subject to audit and took a lot of criticism from GAO and the DoD Inspector General as well as members of Congress over its inability to keep up with the workload. To catch up, simply agreed to or recommended that contracting officers accept claimed rates as proposed. No audits were performed on thousands of submissions. This approach certainly reduced DCAA's backlog but it also left the Government at risk for reimbursing contractors for potentially unallowable costs.

It will be interesting to see whether DCAA can stay current with the added workload. However, the Agency might not have to do it on their own. The 2018 NDAA (National Defense Authorization Act) contains a provision that requires DoD to utilize commercial audit organizations to accomplish 20 percent of incurred cost audits (see our coverage of this provision here).

B&P Effort Can Be Direct and Indirect, Depending ...

B&P (Bid and Proposal) costs is one of those rare cost elements that can be charged both direct and indirect at the same contractor.

The definition of Bid and Proposal (B&P) costs is found in FAR 31.205-18(a):

“Bid and proposal (B&P) costs” means the costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. The term does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract. (underscore added).

B&P costs are normally indirect. They are burdened with appropriate fringe and overhead and added to the G&A (General and Administrative) pool for allocating over all final cost objectives. If B&P effort is required by the terms of a contract however, the costs are not indirect but are charged direct to the specific contract.

So for example, a contract might have two line items. Line Item 1 calls for the production of 10 Widgets and Line Item 2 requires the contract to submit a follow-on proposal for 10 more Widgets. B&P costs incurred in preparing, submitting and supporting the proposal for Line Item 2 must be charged direct to that contract and may not be charged indirect.

There may be circumstances where contractors would like the option to choose whether to charge B&P costs direct or indirect.  For example, to charge the costs of a contractually required follow-on proposal indirect might preserve (or enhance) the profit margin on that contract. However, CAS (Cost Accounting Standard 402, Consistency in Allocating Costs Incurred for the Same Purpose, and by extension, FAR 31.203, Indirect Costs, does not allow that flexibility.

It is often in a contractor's interest to have a line item for proposal effort related to follow-on work. It probably carries profit or fee and doesn't increase indirect costs that would otherwise be allocated to a contractors other work.

Lockheed Pays $4.4 Million to Settle False Claims Charges

The Federal Government just announced a $4.4 million settlement with Lockheed Martin regarding defective communication systems the company installed in six new Cutters for the U.S. Coast Guard. The settlement resolves a whistleblower lawsuit filed in the U.S. District Court for the Northern District of California. An engineer who at one time worked for Lockheed Martin filed the case pursuant to the qui tam provisions of the False Claims Act. Under those provisions, private citizens, known as "relators", may file lawsuits on behalf of the United States and receive a portion of the proceeds of a settlement or judgment. In this case, the relator, the former Lockheed Martin employee, will be receiving almost $1 million as his share of the Government's recovery.

Lockheed Martin was under contract to manufacture and install communication systems on new Coast Guard Cutters. These systems are known as Radio Frequency Distribution Systems (RFDSs). The systems that Lockheed provided and installed on Cutters however, did not meet specifications. They were unable to transmit and receive several different radio signals at the same time without undue interference (i.e. simultaneous operations), an essential requirement of the contract. To settle the allegations, Lockheed agreed to pay $2.2 million as a penalty and to spend another $2.2 million to repair the RFDSs already installed on Coast Guard Cutters.

The Justice Department tends to herald the successes of the whistleblower program and these stories makes pretty good press - especially when, like here, the whistleblower walks away with a big payday. However, the real work of protecting the taxpayers is performed quietly every day by contract administrators and contract auditors who work tirelessly, quietly, and usually behind the scenes to ensure that contractors' business systems (accounting, billing, EVMS, purchasing, timekeeping, etc) are up to standards and that codes of conduct and ethics are present and adhered to, and the products meet contractual and technical standards. Without these individuals, Government purchases would undoubtedly cost a lot more than they do already.

Homecoming Celebrations

Desert Storm was a very short war. After 39 days of a devastating air campaign, the U.S. led coalition began to liberate Kuwait on February 24, 1991. A hundred hours later it was all over. Saddam Hussein's army was essentially destroyed. It was a moment of great national pride and the President's approval rating reached an unheard of 89 percent.

When the troops began returning home, many companies, including Defense contractors, hosted homecoming celebrations. A lot of these companies had employees who were also reservists and were called to duty. After some of those celebrations, contract auditors came along and questioned the cost of those celebrations as unallowable entertainment or public relations or whatever prohibitive FAR cost principle might apply to the cost in question.

That led to the not-so-famous DoD memo of June 3, 1991 which stated that Desert Storm homecoming activities are considered to be national celebrations and therefore the costs for participating in honoring the Desert Storm troops and celebrating the operation's success, was allowable (as long as the costs were also reasonable). This has remained the DoD policy ever since regarding the allowability of costs related to celebrating military service.

As a general rule, the costs of participation are allowable because participation costs related to national celebrations are considered as being incurred in different circumstances than public relations or advertising costs. However, cost which weld otherwise be specifically unallowable are still unallowable. Presumably this would include the cost of alcoholic beverages. Allowable participation costs would include material, labor and other direct costs. Employee time to participate in building floats or marching in parades would be allowable.

There is no specific limit on the number or location of celebration activities but reasonableness remains a criteria. Perhaps a week-long celebration might be considered unreasonable.

Certain costs remain unallowable even if associated with such celebrations. Any advertisement to the public of any nature is subject to FAR 31.20-5-1, Advertising and Public Relations, although the contractor is allowed to include its name and logo on a banner, sign, or float. DCAA takes the position that the costs of souvenirs, models, imprinted clothing, buttons, and other mementos distributed during the celebration are unallowable but that position is far from definitive. DCAA also takes the position that contributions to local governments or other third parties to pay for celebration activities are also unallowable.

This is a prime area for securing an advance agreement on cost allowability with your contracting officer prior to the incurrence of costs. Its a good idea to know up front what costs will be allowable and which ones may not be reimbursable. An advance agreement will also avoid conflicts later on when contract auditors review incurred costs.

Now That's a Lot of Copy Toner

Accenture is a pretty big company. It is a professional services company providing a range of services like strategy, consulting, digital, technology and operations. It has more than 400,000 employees throughout the world and its sales exceeds $30 billion annually. Among its customers are various components of the U.S. Government.

The Justice Department just announced that one of Accenture's segments, Accenture Federal Services LLC has agreed to pay $1.7 million to settle overcharges billed to a GSA (General Services Administration) multiple award schedule contract and more specifically, to the U.S. Army Contracting Command who purchased those services under the GSA schedule.

This agreement follows a self-disclosure by Accenture to the Army Contracting Command. Accenture's internal investigation found that it had overcharged the Government because of unauthorized purchases of copy toner that had been surreptitiously made by a subcontractor on the contract.

Accenture's disclosure to the Army was made pursuant to Accenture's Contractor Code of Business Ethics and Conduct, a requirement of FAR (Federal Acquisition Regulations). During the investigation by the Army's Criminal Investigation Command, Accenture provided assistance, as also required by FAR.

For more information on the Government Contractor Disclosure Program and to understand the requirements, click here. These requirements apply to Government contracts greater than $5 million. If your unsure about its applicability, search your contract for FAR Clause 52.203.11, Contractor Code of Business Ethics and Conduct.

VA Improperly Allowed Bidder to Revise Its Bid

What would you do if you found that you had made a significant mistake in a bid submitted to the Government? A mistake so material that it could jeopardize your financial position.Would you ask to be allowed to revise your bid? Would you request that it be disregarded? There is a provision in the FAR (Federal Acquisition Regulations) that allow bidders to correct mistakes. However, the criteria for allowing that is very restrictive.

In April of last year, the Department of Veterans Affairs (VA) issued a solicitation for renovation and expansion of the emergency department at its Palo Alto health care campus. Bids were due by June 8th. Four bids were submitted. Talion's was the lowest bid at $6.6 million and Herman's, the second lowest bid at $7.8 million. The day after the bid opining, June 9th, Talion informed the VA that it had made a mistake in its bid and requested that it be permitted to either correct its bid or withdraw it. Talon explained that it had underestimated its work for drywall services by $1 million. Ultimately, the VA allowed Talion to resubmit its bid up to $7.7 million, slightly lower than Herman's second lowest bid.

Herman protested the VA's action on the basis that it improperly permitted Talion to correct the "alleged" mistake in its bid.

A bidder may be permitted to upwardly correct its bid price prior to award where there is clear and convincing evidence that both a mistake was made and the intended bid price (see FAR 14.407-3(a). In situations where a bidder seeks upward correction but will remain the lowest-priced, a request for correction must be supported by statements and shall include all pertinent evidence, including original worksheets and other data used to prepare the bid, subcontractors' quotations, if any, published price lists, and any other evidence that establishes the existence of the error and the intended bid price. The requirement for clear and convincing evidence reflects the need to protect the integrity of the sealed bid procurement process, where, except for narrowly defined circumstances, award should be made on the basis of the bids as submitted.

In this regard, Herman maintained that Talion's bid did not provide clear and convincing evidence of a mistake or the intended bid. The GAO (Government Accountability) agreed. GAO ruled that the VA unreasonable determined that Talion could upwardly correct its bid because the evidence submitted does not show that a mistake was made or that Talion intended to include the "missing" subcontractor quotation as part of its bid price. The published decision includes on the nature of the omission and why it did not constitute clear and convincing evidence. You can read the full decision here.

Because the GAO found that the VA improperly permitted Talion to correct its mistake, it recommended that the contract awarded to Talion be terminated for the convenience of the Government and that it award a contract to Talion at the original bid price or consider whether it would be appropriate to allow Talion to withdraw its original bid. GAO also ordered the VA to reimburse Herman the costs associated with filing and pursuing its protest, including attorney's fees.

Congressman Wants Agencies to Compile More Data

Are contractors (and subcontractors) harmed financially because the Government can't (or won't) definitize change orders in a reasonable amount of time? Are small business contractors more harmed than non-small businesses? That seems to be the case based on legislation recently introduced in the House by Congressman Bacon (Nebraska).

According to Bacon:

Time is money for all businesses, but even more so for small businesses. Requests for equitable adjustments to a contract, more commonly known as change orders, are abundant on federal construction projects. Contractors and subcontractors currently lack visibility into agencies' change order processes prior to submitting a bid. This lack of transparency makes it difficult for federal contractors to prepare for the inevitable burden of change orders during the life cycle of the construction project. Federal construction contractors are increasingly frustrated by the slow approval process and lack of payment for change orders. While change orders wait to be made definite, contractors and subcontractors must pay their own bills - payroll, material costs, and even taxes - while payments from the federal government are delayed.

Bacon's bill is intended to provide prospective federal construction contractors and subcontractors with the information needed to plan their operations prior to submitting a bid on a contract. It would require the contracting agency to provide details on their change order procedures and their historical performance data as part of the solicitation.

Specifically, the following information must accompany solicitations for construction contracts anticipated to be awarded to small businesses. It must cover the prior three-year period.

• Information about the agency's policies or practices in complying with FAR requirements relating to the timely definitization of requests for an equitable adjustment and
• Information about the agency's past performance in definitizing requests for equitable adjustments.

While we can empathize with the cash flow concerns of small businesses, we do not believe such information will have an impact on whether a small business contractor decides to bid or forgo a bid on a construction contract. Most companies do not enter into a contract with the expectation that equitable adjustments will naturally follow. And if something occurs that would necessitate an equitable adjustment, will a small business contractor forgo the opportunity just because an agency takes 90 days instead of 60, or 30?  We think not.

This will create more work for acquisition agencies to compile and keep current and seems contrary to the work of the Section 809 Panel.

What is "Forensic Auditing"

The term "forensic audit" is tossed around a lot these days. The word "forensic" has an ominous ring to it - perhaps because of its use in popular crime shows. Most often, its use is a misuse of the term. Not all audits are forensic audits. In the context of Government contracting, a forensic audit is something that occurs when a contractor is suspected of committing fraud.

A "forensic audit" typically involves an evaluation of a company's financial information for use as evidence in court. It includes investigative activities related to fraud, embezzlement or other financial claims (e.g. claims filed by the Government under the False Claims Act (FCA).

Forensic auditing is a specialization within the field of accounting and auditors are called upon to render expert testimony during trial proceedings. Most large CPA firms have forensic auditing departments. Similarly, DCAA (Defense Contract Audit Agency) has its own cadre of individuals that specialize in forensic auditing.

 Most of the Justice Department fraud cases we report on these pages rely on forensic auditing. Of course there is an investigative agency that leads the charge (e.g. FBI, Inspector Generals, NCIS, AFOSI, or CID) but these investigators, in turn, must rely upon the work of experts to prove their case - someone with the expertise, understanding, and experience to determine how irregularities were buried.

The actual auditing process is not that much different than one would find in a financial statement audit or an audit of an incurred cost proposal. There are the typical planning, reviewing and reporting phases. It it pertained to fraud, there would be an attempt to determine impact.

During the planning stage, the auditor defines objectives such as determining whether fraud has been committed, it duration, the parties involved, calculating the loss, and recommending fraud prevention measures. The collection of evidence however is more important and perhaps more disciplined than one would find in a non-forensic audit as it may end up being used in a court case.

The types of fraud typically found in Government contracting involve timecard manipulation, product substitution, bribery, kickbacks, over-billings, and falsification of socio-economic status.

Government contractors have the right to know and understand the scope of any audit. Most contract audits are routine reviews of pricing proposals, progress payment requests, incurred costs, etc. But if an auditor cannot articulate his/her scope or is being evasive or circumspect as to why certain information is being requested, it may be more than a routine audit. That might be a good time to find an attorney.

Bid Protests on DoD Awards are Relatively Rare

The Department of Defense (DoD) commissioned a study by RAND Corporation, a federally funded research and development center, to assess the prevalence and impact of bid protests on DoD acquisitions.

Bid protests have been a feature of Government acquisition environment for decades. When interested parties that are providing goods and services to DoD believe that the department has made an error in choosing the winning bud, they have the right to file protests questioning the outcome with GAO (Government Accountability Office) or the U.S. Court of Federal Claims (COFC).

According to the published RAND report, DoD's bid protest process has come under increased scrutiny. Critics have argued that the department does not have a full understanding of the time and resources that it devotes to bid protests, the costs and schedule delays that it incurs throughout the process, or the incentives in the current process for companies to bid on defense business. Critics have also argued that the current process may encourage frivolous protests and that DoD needs better information on the number, nature, and disposition of protests that it receives.

The 2017 NDAA (National Defense Authorization Act) called for a comprehensive study on the prevalence and impact of bid protests on DoD acquisitions. The study found substantial differences between how DoD and the private sector view these issues. DoD personnel expressed a general dissatisfaction with the current bid protest system. They believed that contractors have an unfair advantage in the contracting process in that they are able to impeded timely awards with bid protests. The rules encourage this behavior by allowing protesters to make an excessive number of weak allegations by permitting contractors too much time to protest and ultimately resolve cases.

Such views are contrasted by contractors, trade associations, and private law firms. The private sector views bid protests as a healthy component of a transparent acquisition process because these protests hold the government accountable and provide information on how the contract award or source selection made.

RAND noted that the percentage of DoD contracts protested was very small, less than 0.3 percent. This small percentage implies that bid protests are exceedingly uncommon for DoD procurements. However, RAND also noted that overall protest activity is increasing and protests by small businesses represent the majority of protests.

RAND made a few recommendations among them including:

• Enhancing the quality of post-award debriefings.
• Don't reduce the time available for resolving protests.
• Consider an expedited process for contracts under $100 thousand.
• Consider collecting additional data to facilitate future research and decision-making.

You can read the full RAND report here.

Jury Awards $8 Million to Fired DOE Contractor Employee

In 2015, Julie Atwood, a senior project manager with DOE (Department of Energy) contractor MSA (Mission Support Alliance LLC) filed a lawsuit against MSA alleging retaliation, discrimination, and wrongful termination. Also named in the suit was Steve Young, MSA's Vice President of Portfolio Management (also the mayor of a local city) and its COO (Chief Operations Officer). At the time of filing, MSA was a joint venture of Lockheed, Centera, and Jacobs Engineering. Lockheed has since sold its interest in the joint venture to Leidos.

In 2010, MSA hired Ms. Atwood as Project Manager of Environmental Regulatory and Waste Management. At that time, she had nearly 30 years in the field of regulatory compliance, waste management and environmental affairs. Three years later, she was terminated, despite having had excellent performance evaluations.

In her lawsuit, Ms. Atwood alleged that in September 2013, Mr. Young mistakenly believed that she was responsible for an anonymous report to MSA alleging that he was creating a hostile work environment. Before MSA began its own internal investigation of the anonymous report, the COO reported to DOE (Department of Energy) that it was investigating Ms. Atwood for timecard fraud (The investigation eventually cleared Ms. Atwood of any timecard fraud). Then, MSA forced Ms Atwood to sign a resignation letter on the threat that she would lose her benefits. After signing the resignation letter, she was escorted out of the building while co-workers looked on.

The matter finally went to trial last September and the Jury awarded Ms. Atwood damages in the amount of $8.1 million ($2.1 million in lost wages and $5 million in emotional harm damages). The Jury also found that Mr. Young aided and abetted in MSA's wrongful actions. The Jury found that she was fired in retaliation for statements made to investigators and that her gender was a substantial factor in her termination.

Earlier this week, a judge refused to reduce the $8.1 million verdict against MSA and Young and also denied them a new trial. The Judge noted that Ms. Atwood had endured mistreatment due to the corporate culture of MSA before her termination. Evidence was also presented of long-lasting emotional harm and physical side effects, which the jury evidently believed, according to the Judge. The evidence indicates that her mental suffering went far beyond 'simple disappointment' from losing her job.

Concerning gender discrimination, the Judge found that it did not have to be the only, or even the main motivation in the decision to fire Ms. Atwood. "There rarely is direct evidence in the form of a smoking gun to prove gender discrimination. Many cases are frequently based on circumstantial evidence. The evidence of the corporate culture at the contractor and some alleged off-color gender-based comments by Mr. Young, provided sufficient circumstantial evidence of gender discrimination to allow the issue to be submitted to the Jury.

1,200 Auditors and $847 Million

If you think that you have it bad when undergoing an audit, consider what the Defense Department is facing this year.

The Department of Defense, Office of Inspector General (IG) is about to embark on department-wide audit of the Defense Department. It is expected to employ up to 1,200 Government and outside auditors at a projected cost of $847 million. Some people think that is too expensive.

The financial statement audit coordinated by the IG's office will involve 24 stand-alone audits of every defense component including the Army, Navy, Air Force, Marine Corps, DCAA (Defense Contract Audit Agency), and many more.

The IG plans to make its findings public (transparency, you know) so that leadership will be accountable for correcting deficiencies and making improvements. By this means, taxpayers will be assured that money is being spent wisely and the Department is doing its best to to prevent fraud, waste, and abuse within the organization.

The stated objective of the audit is as follows:

Our objective is to determine whether the DoD Agency-Wide Basic Financial Statements as of September 30, 2018, and September 30, 2017, taken as a whole, were presented fairly, in all material respects, and in conformity with accounting principles generally accepted in the United States of America. In addition, we will determine whether these principles were consistently applied. We will review the DoD Agency-Wide Consolidated Balance Sheet as of September 30, 2018, and September 30, 2017, and the related Consolidated Statement of Net Cost, Consolidated Statement of Changes in Net Position, Combined Statement of Budgetary Resources, and related notes. We will also review the Required Supplementary Stewardship Information, Required Supplementary Information, and Other Accompanying Information. In addition, we will review internal controls related to the reliability of financial reporting and compliance with laws and regulations that apply to these financial statements. We will fully consider suggestions from management on additional or revised objectives.

The review of internal controls is probably where most of the findings will occur. We know from prior IG and GAO audits that there are significant problems in the accounting for Government property. Chances are good that the auditors will have to disclaim an opinion on the Balance Sheets.

Common Accounting System Deficiencies

 Most Government contractors and prospective contractors realize that an "adequate" accounting system is a necessary prerequisite to winning a negotiated contract. And, there is no mystery to what constitutes an "adequate" system. The attribute are listed on SF Form 1408 - Pre-Award Survey of Prospective Contractor Accounting System. We've covered these attributes on this blog several times. See, for example Preaward Surveys - SF From 1408 and Two Kinds of Accounting System Audits. Contractors (and prospective contractors) should not underestimate the importance of an adequate accounting system. Companies have lost out on opportunities by not having adequate systems. See, for example Accounting System Adequacy and Bidder Disqualified for Failing to Provide Evidence of an Adequate Accounting System.

DCAA (Defense Contract Audit Agency) is the Federal Agency most responsible for auditing accounting systems although other agencies perform such reviews and in the past few years, commercial firms have also gotten into the business. Implementing an adequate accounting system is not difficult but it does require discipline. Companies at risk include those without accountants - where the accounting function is performed by perhaps a founding member who is also responsible for other functions including direct work on a contract. Another group that seems to struggle are those that are moving from a commercial to a Governmental environment.

DCAA published the top five reasons why accounting systems fail the adequacy review. Prospective contractors should consider whether their accounting systems might have similar deficiencies:

1. Contractors not making interim (at least monthly) determination of costs charged through routine posting to books of account. This deficiency is quite common among small contractors without regular accounting help. The idea that someone will get around to it someday will not satisfy the auditor. If you find yourself in this situation and cannot afford an accountant, look to outsource the function - it doesn't have to be expensive.

2. Failure to properly segregate direct and indirect costs. This speaks to the design of the accounting system. Somehow, the accounting system must be capable of capturing direct and indirect costs as the costs are booked. Some companies set up their charts of account for that purpose. But there are other methods of accomplishing the same thing, depending upon which accounting software is used.

3. Improper timekeeping. This could mean a lot of things from no functional timekeeping system to one that has insufficient controls. For a rundown on what constitutes an adequate timekeeping system, see Timekeeping Systems - Regulatory Requirements.

4. Failure to exclude unallowable costs. FAR 31.201.6, Accounting for Unallowable Costs, requires contractors to identify and exclude unallowable costs (e.g. interest, advertising, bad debts, alcohol, etc) from any proposals, claims, billings, or progress payments submitted to the Government. Obviously to know what to exclude requires a basic understanding of the FAR Part 31 cost principles and then once identified, a system to ensure that those costs don't become part of any submission to the Government.

5. Procedures to ensure that subcontractor and vendor costs are only included in billings if payment to subcontractor or vend will be made in accordance with the terms and conditions of the subcontract or invoice and ordinarily within 30 days of the contractor's payment request to the Government. The key here is that contractors should not make payment to vendors and subcontractors contingent upon reimbursement from the Government. There is always some expectation that contractors will need a certain amount of working capital to pursue Government work in the same manner that it would require for commercial work.

Suspension of Work, Stop-Work Orders, and Government Caused Delays

Situations sometimes occur during contract performance where work is suspended for one reason or another. There are several categories of work suspension identified in the FAR (Federal Acquisition Regulations).

Suspension of work - A suspension of work - typically under a construction or architect-engineer contract may be ordered by the contracting officer for a reasonable period of time. If the suspension is unreasonable, the contract can submit a claim for increases in the cost of performance. Increased profit is not allowed.

Stop-work orders - Stop-work orders may be used in any negotiated fixed-price or cost-reimbursement supply, research and development or service contract is work stoppage may be required for reasons such as advancement in the state-of-the art, production or engineering breakthroughs, or realignment of programs.

Generally, stop-work orders will be issued only if it is advisable to suspend work pending a decision by the Government and a supplemental agreement providing for the suspension is not feasible. Often times, stop-work orders lead to contract terminations (e.g. termination for convenience or less likely, termination for default).

Government delay of work - FAR 52.242-17 provides for the administrative settlement of contractor claims that arise from delays and interruptions in the contract work caused by the acts or failures to act, of the contracting officer. It is kind of a catchall provision when there is no other explicit contract provision for an equitable adjustment when the "changes" clause applies. This doesn't apply if the contract otherwise specifically provides for an equitable adjustment.

The main point to keep in mind is that regardless of the reason or the vehicle used to order a delay or cause a delay, contractors are entitled to some kind of equitable adjustment.

What is "Waste and Abuse"?

We here the term "fraud, waste, and abuse" frequently and we ourselves use it often on these pages. The word "fraud" is well understood but what about the other two elements of this triad; waste and abuse? The GAO's (Government Accountability Office) Yellow Book (i.e. Government Auditing Standards) includes the following definitions for Waste and Abuse.

Waste is the act of using or expending resources carelessly, extravagantly, or to no purpose. Waste involves the taxpayers not receiving reasonable value for money in connection with any government-funded activities because of an inappropriate act or omission by parties with control over or access to government resources. Importantly, waste can include activities that do not include abuse and does not necessarily involve a violation of law. Rather, waste relates primarily to mismanagement, inappropriate actions, and inadequate oversight.

Abuse is behavior that is deficient or improper when compared with behavior that a prudent person would consider reasonable and necessary business practice given the facts and circumstances, but excludes fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements. Abuse also includes misuse of authority or position for personal financial interests or those of an immediate or close family member or business associate. Because the determination of abuse is subjective, auditors are not required to perform procedures to detect abuse in financial audits. Auditors may discover that abuse is indicative of fraud or noncompliance with provisions of laws, regulations, contracts, and grant agreements.

You can see that there is a fair amount of subjectivity in determining whether waste or abuse exists, more so for abuse than waste. That is why there is no specific reporting requirement for Government auditors for situations involving abuse unless that abuse also involves fraud or noncompliances with laws, regulations, and contracts. The reporting requirements for instances of waste however is another matter.

The 2017 Exposure Draft for the Yellow Book update will require that auditors perform audit procedures to ascertain the potential effect on the audit objectives if they become aware of waste that could be quantitatively or qualitatively significant to the audit objectives.

Then, based on these expanded audit procedures, the audit is required to report findings of waste when they conclude, based on sufficient, appropriate evidence that instances of waste have occurred. If the waste is not significant to the audit objective, the auditor is still required to communicate the information back to the contractor person charged with governance.

Since contract auditors will now have an affirmative duty to design audit procedures to determine whether "waste" exists, once the Exposure Draft becomes final, Government contractors will no doubt experience a significant uptick in the efforts by contract auditors to determine whether waste exists and, if so, whether it is significant. It will be interesting to see how DCAA (Defense Contract Audit Agency) or other contract auditors will implement this new requirement.

Court Orders Contracting Officer to Make a Decision

In 2011, The Navy awarded a contract to Fluor Federal Solutions (Fluor) to provide base operations support services at four Navy installations in Florida. In 2015, Fluor submitted an REA (Request for Equitable Adjustment) proposal (actually a consolidated REA of previously submitted REAs). In 2016 (seven months later), the Navy denied Fluor's REA stating that the submission was insufficient to reverse the Navy's position on previously submitted REAs. Fluor then submitted the consolidated REA as a certified claim.

The Navy then requested DCAA (Defense Contract Audit Agency) to audit the claim but told Fluor that a final decision would be issued on or before April 28th, 2017. In April however, the Navy informed Fluor that it was still waiting on the results of the DCAA audit and expected it to be completed by July 31, 2017 and a contracting officer final decision by December 1, 2017.

In September 2017, DCAA repeated requests for information that Fluor had already responded in writing the previous January and March - that it did not maintain certain records in the manner DCAA requested but expressed its willingness to answer specific questions regarding the data used to price the claim and provide DCAA an additional walk-through of the data.

Without responding to Fluor's September request, DCAA slapped a "denial of access to records" charge against Fluor on October 23, 2017. Eight days later, Fluor again repeated its assertion that it had responded to all DCAA requests and offered once again to meet with DCAA representatives. DCAA never responded to Fluor's letter.

In November 2017, the Navy notified Fluor that it was still waiting on the DCAA audit and established a new COFD (contracting officer final decision) by March 2018. Later that month, DCAA notified Fluor that it was cancelling its audit.

Fluor appealed this lack of progress to the ASBCA (Armed Services Board of Contract Appeals).

The Board noted that the Contracts Disputes Act (CDA) requires that a contracting officer issue a decision within a reasonable time taking into account such factors as the size and complexity of the claim and the adequacy of the information in support of the claim provided by the contractor. In this case, Fluor's claim is large and complex however the Navy had the information regarding the consolidated REA and claim for over two years. Given the history and number of promised COFDs and the present situation where it is unclear when the Contracting Officer will be issuing a final decision, it seems the parties have reached a stalemate which most likely will not be broken by agreement.

Accordingly, the Board directed the contracting officer issue a decision on Fluor's claim by January 31, 2018.

Standard Mileage Rate Goes Up a Penny for 2018

The General Services Administration (GSA) just published the 2018 Privately Owned Vehicle (POV) Mileage Reimbursement Rates. Although it applies to Government workers, most contractors have adopted the GSA rates as a matter of convenience. Although there is nothing in the FAR cost principles that requires Government to utilize the GSA mileage rates, there is no logical reason for not following the GSA standards - who would want to go through the effort of developing their own set of rates and then have them subjected to some kind of audit? We should note that while FAR does not apply the GSA rates to contractors, sometimes individual contracts will invoke such a requirement (e.g. DOE contracts).

So the rate for calendar year 2018 is 54.5 cents per mile, up from 53.5 cents per mile in calendar year 2017. The following schedule shows how the rate has trended the past few years.

GSA also published rates for airplanes, motorcycles, and POVs used for relocation purposes. You can see all the latest rates at the GSA website should you need those rates.

Contractors Filing Bankruptcy

It's not often that a Government contractor files for bankruptcy. It is probably a less frequent occurrence among Government contractors than in the general population. First of all, prospective Government contractors must endure pre-award surveys which include a financial responsibility determination. If a contractor cannot satisfy the Government that it has the financial resources to complete the contract (or can acquire the financial resources), it will be disqualified from the selection process. And then there is the matter of contract financing. With the ability to to earn progress payments and/or obtain monthly reimbursements of cost, contractors need only two to three months of working capital before the cash pipeline begins flowing.

Nevertheless, contractors sometimes file bankruptcy for various reasons, usually catching the Government completely unaware of their going concern issues. Included in every Government contract (that exceeds the simplified acquisition threshold) is a notification clause (see FAR 52.242-13). The clause reads:

In the event the contractor enters into proceedings relating to bankruptcy, whether voluntary or involuntary, the contractor agrees to furnish, by certified mail or electronic commerce method authorized by the contract, written notification of the bankruptcy to the contracting officer responsible for administering the contract. This notification shall be furnished within five days of the initiation of the proceedings relating to bankruptcy filing. This notification shall include the date on which the bankruptcy petition was filed, the identity of the court in which the bankruptcy petition was filed, and a listing of government contract numbers and contracting offices for all government contracts against which final payment has not been made. This obligation remains in effect until final payment under the contract.

After receipt of this letter and forwarding it to legal counsel and anyone else that might be interested, the contracting officer must do two things (see FAR 42.9).

1. Determine the amount of the Government's potential claim against the contractor.
2. Take actions necessary to protect the Government's financial interests and safeguard Government property.

This is where a bankrupt contractor can help the contracting officer and ensure that having a contract terminated doesn't exacerbate the situation. A bankrupt contractor needs to quickly and efficiently ensure contracting officers that continued performance on its contracts are not in jeopardy. This is especially true of a Chapter 13 bankruptcy proceeding. At the time of filing, cash flow is perilous and to disrupt the cash flow that comes through progress payments (fixed price contracts) and claims for reimbursement (cost-type contracts), would not serve the contractor's (or the Government's) interest.