What are Direct Commercial Contracts (DCCs)?

Get ready for a truckload of acronyms.

The Defense Security Cooperation Agency (DSCA) is the organization responsible for directing, administering, and supervising the Security Assistance Program. Its responsibilities are defined and authorized by the:

• Foreign Assistance Act (FAA) of 1961 (as amended)
• Arms Export Control Act (AECA) (as amended)
• Other applicable statutes.
• Executive Orders
• Directives

 Included within the Security Assistance Program is (i) the Foreign Military Financing (FMF) Program which provides loan and grant financing for Foreign Military Sales  and (ii) purchases from U.S. firms. The latter are considered Direct Commercial Contracts (DCCs). Under the FMS program, the Department of Defense acts as the agent for the purchasing country. These procurements are fully subject to the Federal Acquisition Regulations (FAR), including audit oversight.

In contract DCCs are procurements between foreign Governments and U.S. companies where DoD performs reviews, approvals, and audits as a function of providing the financing. These are not typical contracts and are not subject to the FAR or Cost Accounting Standards (CAS). The agreements are called "Contractor's Certification and Agreements" and are executed between the foreign governments and DSCA. DSCA publishes Guidelines for Foreign Military Financing of Direct Commercial Contract. The most current Guidelines can be downloaded here. An example of a Contractor's Certification and Agreement can be downloaded here.

What kind of "oversight" can a company expect if it enters into one of these DCCs?

In general, the Government will review contractors' compliance with the terms of the Certification and Agreement. This would include:

1. Flowdown of terms and conditions to subcontractors.
2. Assurance that no bribes, rebates, gifts, kickbacks or gratuities intended to secure the agreement were offered (directly or indirectly) contrary to US law or regulation.
3. Materials and components were manufactured and assembled in the US etc.
4. Disclosure of any advance payments received.
5. Export transportation will be paid only to companies of US registry.
6. Travel costs paid by purchaser.
7. Any refunds or reimbursements received by the contractor are passed back to the US Government.

The good news is that these instruments are exempt from FAR (and CAS) and as such do not include the rules and regulations that sometimes make Government contracting onerous.

Navy Relaxed Requirements to Detriment of Other Bidders

The Navy issued a solicitation under GSA's (General Services Administration) FSS (Federal Supply Schedule) for pressure washers. The RFQ (Request for Quotation) called for a Landa brand pressure washer with a specific manufacturer part number, or equivalent.

Specifically, the pressure washer must have a 20 horsepower engine capable of producing five gallons per minute stream at 5,000 psi, a 460 volt 3 phase engine, a trigger gun with stainless steel wand, a downstream chemical injector, a 50 foot hose, two 6-gallon fuel tanks, four 6-inch pneumatic tires and a high impact steel roll cage.

The Navy received quotations from nine vendors and awarded the contract to lowest offeror, Boarder Construction Specialists (BCS) for just under $20,000 for an alternative pressure washer. Savannah Cleaning Systems (SCS) submitted the second lowest bid at $20,500 - just five hundred dollars more - for the name brand washer.

Savannah appealed the award to BCS arguing that the pressure washers quoted by BCS were not equal or comparable to the name brand washers. The pressure washers offered by BCS had less horsepower (15 instead of 20), produced only a 4 gallon per minute stream, did not have a roll cage and only had two wheels instead of four.

After the quotations were received, the Navy determined that a less powerful pressure washer with few features would work just fine - it met the needs of the Navy. At that point, the Navy should have amended the solicitation to reflect that it did not require the horsepower or features of the solicited pressure washer. Failure to amend the solicitation prevented vendors from competing equally.

Savannah established a reasonable possibility that it suffered prejudice as a result of the Navy's failure to amend the solicitation. It could have offered an alternate product to meet the Navy's actual needs. Savannah stated that it sells a 15 horsepower pressure washer and that it can offer that model at a lower price than the solicited pressure washer.

The Navy's relaxation of a material requirement, and its failure to amend the solicitation, effectively precluded the protester from having an opportunity to compete. Since the Navy had already accepted delivery of the other pressure washers, the GAO could not direct the Navy to terminate the order and re-solicit for the actual requirements. In the circumstances, GAO directed the Navy to reimburse Savannah its quotation preparation costs and its costs of filing and pursuing the protest.

You can read the full GAO decision here.

2017 Freedom of Information Report

The Department of Defense recently published its Fiscal Year 2017 Freedom of Information Act (FOIA) Annual Report, a report that DoD prominently displays on the cover page as costing $583 thousand to prepare. That's only the beginning of the cost to administer FOIA requests in the Department. Department-wide, Defense spent nearly $81 million to respond to 54 thousand requests, an average of $1,500 per request. Is that a wise expenditure of Government funds? Depends on who you ask, we suppose.

Turning to a couple of procurement focused agencies within DoD, the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA), the report shows that they received 239 and 113 FOIA requests respectively. That must be very demeaning. Together they couldn't even muster up half a percent. The Army had the most requests (25,666) followed by the Navy (10,143), DLA (5,675) and the Air Force (4,594). The Armed Services Board of Contract Appeals (ASBCA) received the fewest requests (11).

Of the 54 thousand requests processed, about 20 thousand were considered full grants and another 15 thousand were partial grants/partial denials. Interestingly, a high percentage of denials by DCMA and DCAA were because the requests pertained to non-Agency records. That could mean a requester was trying to elicit proprietary information about a contractor, perhaps. A fair number of requests were denied on national security grounds.

Overall, it took agencies an average of 16 days to process a "simple" request and 156 days to process "complex" requests. DCMA and DCAA beat this average. It took both Agencies six days to process simple requests and 83 and 26 days respectively to process complex requests.

The report also details FOIA personnel and costs to process requests. DCMA spent $487 thousand to process its 239 requests while DCAA spent  $198 thousand to process its 113 requests. That's an average of $2,038 and $1,752 per request, well above the $1,500 average for all of DoD. Perhaps they're higher because they don't enjoy the economies of scale.

The full report can be accessed here.

Quick Closeout Procedures for Completed Contracts Gets a Boost

The David Packard Excellence in Acquisition Award recognizes organizations, groups, and teams that have demonstrated exemplary innovation using best acquisition practices that achieve acquisition excellence in the Defense Department.

Packard was co-founder and chairman of the Hewlett-Packard Company, a deputy secretary of defense in the Nixon administration and chairman of the Reagan's Blue Ribbon Commission on Defense Management. Each year since 1997, the Defense Department recognizes several groups as recipients of the award. This year, there were four recipients but the one that might be of most interest to Government contractors is the Defense Contract Management Agency's (DCMA's) Special Programs Quick Closeout Team (QCT)..

The QCT was recognized for innovation and creativity in the area of contract closeout. Previously, the rate of physically complete contracts coming due for closeout exceeded the number actually being closed, resulting an a 31.1 percent increase in overage contracts, further exacerbating the problem.

The QCT piloted new, quick closeout techniques that standardized risk factors and changed the paradigm in how contracts could be closed. This resulted in 4,805 contracts being closed using quick closeout  procedures and enabled a 32.8 percent improvement in overage contract reduction, creating a positive contract closeout rate and reducing the overage contract backlog.

In doing so, the QCT reduced the administrative burden to both industry and the government and limited the Defense Department's exposure to certain financial risks, ensuring the use of unliquidated funds from completed contracts before the funds could be canceled and returned to the Treasury Department.

The QCT continued to innovate by expanding application to subcontractors, opening up an additional 10 percent of contracts to quick closeout. The team also deployed multiple initiatives to encourage the practice to other federal agencies with potential significant improvements to the acquisition community at large.

DCMA blamed the increased backlog on DCAA's failure to complete incurred cost audits in a timely manner (see online source). By employing quick closeout procedures, DCMA could largely bypass the need for audit. The quick closeout process is not new and innovative. It has been part of the Federal Acquisition Regulations for decades. However, the procedures were not widely used until the QCT began its emphasis on employing the procedures.

Changes to Cost Accounting Practices - Unilateral and Desirable Changes

Last week, we highlighted the CAS Cost Impact Adequacy Tool published by DCAA to help its audit staff assess the adequacy of contractor-submitted CAS cost impact proposals. Today we want to continue the discussion by identifying different types of cost accounting changes.

Cost accounting changes can be classed into three basic categories. There are changes required when new Cost Accounting Standards are promulgated. Since new standards have not been promulgated in 30 years, we don't need to consider these kind of "required" changes. Another "required" change might occur if the Government found an existing cost accounting practice to be noncompliant. This does not occur very often either.

The other two categories are unilateral changes and desirable changes. Some unilateral changes can be desirable.

Contractors may unilaterally change their disclosed or established cost accounting practices at any time. However, the Government will not pay any increased cost, in the aggregate, as a result of unilateral changes.

Prior to making any contract price or cost adjustments, the CFAO (Cognizant Federal Agency Official, i.e. the contracting officer assigned by the cognizant federal agency to administer CAS) shall determine that the contemplated contract price or cost adjustments will protect the Government from the payment of the estimated increased costs, in the aggregate, and the net effect of the contemplated adjustments will not result in the recovery of more than the increased costs to the Government, in the aggregate. This "in the aggregate" wording frequently causes a lot of problems between services because for example, the Army might benefit to the detriment of the Navy but in the aggregate, there is no impact to the Government.

Sometimes accounting changes are "desirable". A desirable change is a compliant change to a contractor's established or disclosed cost accounting practice that the CFAO finds is desirable and not detrimental to the Government. Desirable changes are not subject to the no increased cost prohibition provisions of CAS-covered contracts (and subcontracts) affected by the change (see FAR 52.230-6).

Until the CFAO has determined a change to be desirable, the change is a unilateral change. Factors that the CFAO might consider in determining whether a change is desirable include:

• The contractor must change the cost accounting practices it uses for Government contract and subcontract costing purposes to remain in compliance with the provisions of FAR Par 31.
• The contractor is initiating management actions directly associated with the change that will result in cost savings for segments with CAS-covered contracts over a period for which forward pricing rates are developed and the cost savings are reflected in the forward pricing rates
• Funds are available if the determination would necessitate an upward adjustment of contract cost or price.

Obviously, contractors will want any changes to be considered "desirable". Sometimes it takes great effort and skill to convince the Government that a change is desirable because the presumption among auditors and contracting officers is that changes are always made to benefit the contractor. Otherwise, why make a change?

CAS Cost Impact Adequacy Tool

Here is a tool that contractors with CAS (Cost Accounting Standards) covered contracts might find useful.

DCAA (Defense Contract Audit Agency) has published a "CAS Cost Impact Adequacy Tool" to help auditors determine whether contractor submitted GDMs (Gross Dollar Magnitude) and detailed cost impact proposals are adequate for audit.

The CAS Cost Impact Adequacy Tool can be downloaded here.

When a contractor with CAS covered contracts makes a change to its cost accounting practices, there is a strong presumption that costs will somehow shift between final cost objectives. Costs could shift from government contracts to commercial contracts and vice versa. Costs could shift from fixed-price contracts to cost-type contracts, and vice versa.

Examples of cost accounting changes from CAS regulations include:

• Contractor changes its actuarial cost method for computing pension costs
• Contractor uses standard costs to account for its direct labor. Labor cost at standard was computed by multiplying labor time standard by actual labor rates. The contractor changes the computation by multiplying labor time standard by labor-rate standard.
• Contractor changes its established criteria for capitalizing certain classes of tangible capital assets.
• Contractor changes its methods for computing depreciation for a class of assets.
• Contractor changes its general method for determining asset lives.
• Contractor changes its method of allocating G&A expenses.
• Contractor changes the accounting for hardware common to all projects
• Contractor merges operating segment A and B which use different cost accounting practices.

We always advise contractors to utilize any available DCAA checklist. That is a good way to self-assess the adequacy and sufficiency of internal processes and reduce the chances of "surprises" during the audit.

Mother Bribes Daughter - Daughter Gives Insider Information to Mother

Subsystem Technologies, Inc., an information technology company doing business primarily with the Defense Department and other Government agencies has been around for more than 30 years but from 2012 to 2015, nearly tripled in size to more than 220 employees. Over the years, Subsystem Technologies has been awarded "numerous" multi-million dollar contracts from the Department of Defense.

We now know one of the reasons for the company's rapid growth. The company bribed a number of civilian employees working at Picatinny Arsenal, a U.S. Army installation in New Jersey in exchange for "favorable treatment" in awarding contracts. This favorable treatment included passing along information on competitors' bids to Subsystem Technologies representatives.

Irene Pombo was the contracts manager for Subsystem Technologies. Her daughter, Nicole Pier was an Acquisition Analyst and a Contracting Officer's Representative (COR) at Picatinny Arsenal. As COR, Ms. Pier had the responsibility and authority to monitor all aspects of the day-to-day administration of her contracts, to include the ordering of materials needed to accomplish the contract. These two individuals have now admitted their roles in a scheme that traded bribes and other gratuities for favorable treatment on Government contracts. There are three other, as yet unnamed co-conspirators working as Government employees that will be facing charges.

This bribery scheme went on for 12 years, from January 2006 through December 2017. Ms. Pombo would give items of value to her daughter Ms. Pier and the other co-conspirators in exchange. Subsystem Technologies would then bill the U.S. Government for the items of value given to these Picatinny Arsenal employees. This added another charge to the indictment of making false, fictitious or fraudulent claims against the Government.

Pier and her co-conspirator employees of Picatinny Arsenal would order luxury and electronic items including lots of Apple products from Subsystem Technologies and have the contractor bill the Government for the cost of these items under various contracts. None of the items were authorized to be purchased under the terms of the contract.

The value of these "gifts" are estimated at $250,000 but that figure could rise as the co-conspirators are charged. The mother/daughter combo will be sentenced in June.

Read more about this case in the Justice Department press release.

Punitive Damages and Missed Opportunities

Have you ever wanted to sue the Government for punitive damages? If so, you better find a legal jurisdiction other than one of the Boards of Contract Appeals.

Have you ever thought that the Government's action or inaction caused your firm to lose out on opportunities? If so, you had better be prepared to show a strong nexus between the actions of the Government and the consequential damages.

In 2010, the Air Force at Eielson Air Force Base near Fairbanks Alaska contracted with Shaw Building Maintenance (Shaw) for janitorial services. The contract ended in 2013.

Nearly four years later, Shaw presented a certified claim to the contracting officer consisting of:

1. $9,045 in equipment losses
2. $2,010 in Prompt Payment Act interest
3. $408,725 for punitive damages, and
4. $1,882,002 for "missed opportunities" from contracts not obtained from third-parties, allegedly because of the Government administration of the janitorial service contract.

The Government denied the claim so Shaw appealed to the ASBCA (Armed Services Board of Contract Appeals).

The Government moved for dismissal of the punitive damages and missed opportunities claims.

Regarding the "missed opportunities" claim, the Board wrote:

... the attenuation of the connection between the government's administration of the contract and appellant's claim, essentially for monies allegedly lost under contracts that appellant did not enter with third parties, is one for a type of consequential damages that are too remote and speculative to be recovered against the government.

Consequently, the  $1.9 million "missed opportunities" claim was dismissed.

Concerning the punitive damages part of the claim, the Board wrote that it had no authority to award punitive damages. Awarding punitive damages was not part of its charter.

Consequently, the $409 thousand punitive damages claim was dismissed.

That left about $11 thousand remaining on the claim which hopefully the parties can settle on without spending too much time, effort, and money.

The Board decision can be downloaded here.

Limits on Micro-Purchases and Simplified Acquisition Thresholds Increased

The National Defense Authorization Act (NDAA) for 2018 increased the micro-purchase threshold from $3,000 to $10,000 and the simplified acquisition threshold (SAT) from $150,000 to $250,000 (see 2018 NDAA Sections 806 and 805 respectively). Until the Federal Acquisition Regulations (FAR) can be formally amended, Government agencies have been authorized to issue class deviations implementing these provision. The Energy Department has already issued its class deviation to raise these thresholds and most likely, other agencies will soon issue their own class deviations.

This is good news for both the Government and contractors because it will expedite the process and reduce the amount of work involved in procuring small dollar purchases. However, it comes at a risk as many have pointed out. We have reported on several instances of contract fraud where contracting officers and willing contractors have taken advantage of the reduced oversight that comes with purchases under the simplified acquisition threshold. These $250,000 purchases can add up to big money after awhile.

With micro-purchases, Federal agencies can bypass many of the ordinary competitive requirements under FAR. Authorized purchasers can make contract awards without soliciting competitive quotations. The FAR rules on micro-purchases are set form in FAR Subpart 13.2.

FAR Part 13 also governs purchasing below the simplified acquisition threshold. It sets forth shorter terms and conditions, especially in the areas of reporting requirement and subcontracts. Simplified acquisition transactions above the micro-purchase threshold are reserved for small businesses.

The new rules also provide for increased simplified-acquisition thresholds for contracts to support humanitarian or other peacekeeping operations and for contracts to be awarded and performed or purchases to be made outside the United States.

DHS' Suspension and Debarment Procedures Need Improvement

Last January, the Office of Inspector General (OIG) for the Department of Homeland Security (DHS) issued a report entitled "DHS Needs to Strengthen Its Suspension and Debarment Program". The report was requested by Congressman Bennie Thompson (Mississippi) in 2016. Here's what the OIG found.

We've discussed the Government's suspension and debarment processes several times on these pages. Essentially, suspensions and debarments are used to exclude individuals, companies, and organizations from receiving future contracts, subcontracts, grants, loans, and other Federal assistance. The Government does not like to refer to suspensions and debarments as punishments (though they are) but as tools to ensure that the Federal Government only does business with responsible entities.

Suspensions are temporary exclusions usually limited to 12 months while debarment can go on for up to three years. Debarment is used when an investigation or legal proceedings have concluded and there has been a civil judgment or a conviction, or, in the absence of a court decision, evidence leading a person to believe it is more probably  than not that the wrongdoing actually occurred. See FAR Subpart 9.4 for detailed information on the Government's suspension and debarment procedures.

Here is what the DHS OIG found in its audit:

• DHS suspension and debarment instruction is outdated and is missing needed definitions, as well as detailed requirements and procedures for documenting decisions on administrative agreements, which mandate improvements rather than suspending or debarring companies and organizations.
• DHS did not adequately document five of seven administrative agreements approved from fiscal years 2012 to 2017.
• DHS does not have a centralized system to track suspension and debarment activities, which may have contributed to DHS' innacurate reporting of suspension and debarments
• For an 8-month period Federal Emergency Management Agency (FEMA) suspension and debarment staff did not promptly update government-wide systems to reflect debarments and administrative agreements.
• Department-level staffing issues may have hindered efficient and effective handling of suspensions and debarments.

The OIG made several obvious recommendations (e.g."do better") to which DHS concurred and by all accounts, has already begun to implement corrective action.

But that's not the end of the story.

Last week (March 16, 2018), Senator McCaskill under her position as the ranking member of the  Committee on Homeland Security and Governmental Affairs wrote a letter to DHS taking them to task for neglecting the suspension and debarment process thereby allowing the Government to enter into contracts with non-responsible contractors. Specifically noted in her letter was the situation we've discussed before where a one-person company was awarded a $156 million contract to provide 30 million emergency meals to victims of the recent Puerto Rico hurricane and the contract was terminated for default after providing only 50 thousand meals.

The Senate Committee found it "troubling" that DHS appears to neglect the suspension and debarment process. "The absence of coordination between components and headquarters to provide accurate information to contracting officials and other government agencies puts the government at serious risk for waste, fraud, and abuse." The Committee has requested DHS to provide it a report addressing the same deficiencies identified in the OIG's report including:

1. A list of companies that have been suspended and debarred by DHS and how long it took DHS to initiate those actions
2. Why DHS has not updated its procedures since 2012.
3. The DHS officials responsible for ensuring that suspended and debarred contractors are not awarded new contracts (Senator McCaskill wants names).
4. The reason why DHS declined to adopt a recommendation by TSA to debar a company.

That report is due back to the committee by April 4th.

Fewer Regulations Saved $913 Million for Small Businesses

Every year, the Small Business Administration (SBA) Office of Advocacy reports on efforts to relieve the burden of new regulations on small businesses. These efforts are the result of the Regulatory Flexibility Act (RFA) that requires federal agencies to evaluate the impact of new rules on small businesses and to consider flexible approaches to complying with those rules.

Here's the good news, according to the SBA. In fiscal year 2017, changes to proposed federal regulations saved small businesses $913 million in regulatory costs. How did they achieve such savings? The savings are explained in the Annual Report which you can download and read here. The report details how 16 regulatory and (more significantly) deregulatory actions by six agencies achieved the $913 million in savings.

Chief among the reasons really had nothing to do with SBA's. It was the result of a couple of executive orders (EOs) designed to reduce the number of new regulations (see below). Recall the President's order that every agencies must repeal two regulations for every new regulations that it proposes. Because of this EO, there have been only two changes to the Federal Acquisition Regulations under the current administration.

Whether you believe SBA's cost savings estimate or, like us, believe it to be based on subjective non-quantifiable estimate, the point is that fewer regulations will result is tangible cost savings and those cost savings are more significant to small businesses who typically lack economies of scale and do not have the resources of larger businesses to comply.

EO 13771 Reducing Regulation and Controlling Regulatory Costs: Whenever an executive department or agency publicly proposes for notice and comment or otherwise promulgates a new regulation, it shall identify at least two existing regulations to be repealed.

EO 13777 Enforcing the Regulatory Reform Agenda: The head of each agnecy shall designate an agency official as its Regulatory Reform Officer (RRO) Each RRO shall oversee the implementation of regulatory reform initiatives and policies to ensure that agencies effectively carry out  regulatory reform.

One of the first regulations to fall under the current administration was the onerous Fair Pay and Safe Wrokplaces rule, of which we have reported previously (see Fair Pay and Safe Workplaces Rules - Dead).

What Does It Mean to "Abandon Your Protest"?

In a bid protest situation, if you don't respond to the arguments raised by an agency, you might be declared to have abandoned your protest.

The Air Force issued a solicitation for launch operations and infrastructure support services at Cape Canaveral. The resulting contract was awarded to ASRC Communications. One of the other bidders, Yang Enterprises protested the award, arguing that the Air Force "misevaluated" its proposal and therefore mad an unreasonable source selection decision.

The Air Force provided a detailed report responding to Yang's protest including documentation of its cost realism evaluation of the ultimate winning proposal. In response to this report, Yang wrote:

Protester has carefully reviewed the Agency Report. It is Protester's position that the Report, and supporting documentation, do not contain sufficient analysis of the relation of the technical portions of ASRC's proposal (the winning bidder) to the cost analysis to justify the conclusion that the cost realism analysis performed by the Air Force was thorough, complete and accurate. For that reason, Protester continues to maintain the position set forth in its protest to your Office and requests the relief set forth therein.

What is wrong with that response? Yang did not rebut - or even respond to - the Air Force's procedural arguments. In responding to an agency report, protesters are required to provide a substantive response to the arguments advanced by the agency. Where a protester merely references earlier arguments advanced in an initial protest without providing a substantive response to the agency's position, the GAO will dismiss the referenced allegations as abandoned. Similarly, a protester's statement, without elaboration, that its initial arguments are maintained also will result in the dismissal of the arguments as abandoned.

The GAO noted that Yang's failure to respond to the Air Force's arguments led it to question the legal sufficiency of its filing. Under the circumstances, the GAO concluded that Yang had abandoned its protest and therefore dismissed the protest without considering the merits of its arguments.

Click here to read the full GAO decision.

Overtime Charged to Government Contracts Requires Pre-Approval - Part 2

Yesterday in Part 1 of this series, we discussed the FAR requirements for overtime approval, the valid purposes and uses of overtime and the considerations that the contracting officer mulls over in deciding whether to approve overtime. If you missed that posting, click here to read. The contracting officer often requests the contract auditor to weigh in on whether to approve overtime and the DCAA (Defense Contract Audit Agency) manual provides auditors with guidance to follow when making recommendations to the contracting officer. This audit guidance is the the subject of this Part 2. If you make a request for overtime approval, you should be prepared to respond to these inquiries.

The first question from the contract auditor will be for your policies, procedures, and internal controls on overtime. Those policies and procedures should comply with FAR 22.103 and ensure that overtime will be limited to the actual need for the accomplishment of specific work. The second question will be how you account for, distribute, or charge the premium portion of overtime pay. The auditor will need to ascertain that the amount of work performed at premium rates is equitably divided between Government and commercial operations and within Government contracts, equitably divided between fixed, cost-type, and T&M (Time and Materials) contracts.

Specific audit objectives might include the following determinations:

1. Is management is properly authorizing, scheduling, and controlling overtime, extra-shift, and multi-shift work?
2. Does the contractor obtain contracting officer's written approval when required by contract provisions? And, were overtime costs incurred consistent with such approval?
3. Are premium costs reasonable and properly allocable to the Government contracts?
4. Are adequate control exercised over productivity when overtime is worked?
5. Is compensatory overtime work by salaried personnel properly authorized, and application against subsequent working hours is properly monitored?

The auditor will, perhaps, be most interested in the accounting treatment accorded overtime premium pay. There are a lot of ways to account for overtime premium and the challenge is to find one that equitably distributes overtime premium to all work of the contractor. So for example, if an employee works two hours of overtime, that overtime should not be charged to the last job worked on that day. It should be pro-rated among all jobs worked on during that day.

Overtime premium pay may be treated as indirect expense or as a direct charge when it is the contractor's regularly established policy and when appropriate tests clearly demonstrate that this policy results in equitable cost allocations. Irrespective of disclosed practices, the question of whether or not, or the extent to which, overtime premium pay is allowable, allocable, and reasonable under a contract remains for consideration in each specific instance considering contractual requirements and applicable Government regulations.

 

Overtime Charged to Government Contracts Requires Pre-Approval - Part 1

This is the first of a two-part series on overtime. Today we will discuss the FAR (Federal Acquisition Regulation) requirements for overtime approval. Tomorrow we will discuss the Government's oversight activities at contractors who incur and charge overtime to the Government.

The Government does not want to pay for overtime costs. The fundamental contracting policy is for contractors to perform all contracts, so far as practicable, without using overtime, particularly as a regular employment practice, except (i) when lower overall cost to the Government will result or (ii) when it is necessary to meet urgent program needs (FAR 22.103).

For fixed price contracts, it is unlikely that the Government will negotiate consideration for overtime except perhaps in very unusual circumstances. We haven't heard of any cases which doesn't mean there hasn't been. For cost type contracts, FAR requires that overtime requests be in writing to the contracting officer and must include:

1. Identification of the work unit (e.g. department or section) in which the requested overtime will be used together with present workload, staffing, and other data of the affected unit sufficient to permit the Contracting Officer to evaluate the necessity for the overtime.
2. Demonstration of the effect that denial of the request will have on the contract delivery or performance schedule.
3. Identification of the extent to which approval of overtime would affect the performance or payments in connection with other Government contracts, together with identification of each affected contract.
4. Reasons why the required work cannot be performed by using multi-shift operations or by employing additional personnel.

There are a couple of things to keep in mind regarding overtime requests. Just because the contacting officer is willing to authorize overtime, doesn't mean that there will be additional funds allotted to the contract. Using funds to pay overtime may mean that there is less funds to do the real work of the contract or the contract ends sooner than expected, or the scope is scaled back. Second, the contracting officer approval process varies widely ranging from a perfunctory nod to detailed analysis. Don't expect consistency among contracting officers for the approval process.

Contracting officers may be more inclined to approve overtime requests for the following events.

• Meeting essential delivery or performance schedules
• Make up for delays beyond the control and without the fault or negligence of the contractor
• Eliminate foreseeable extended production bottlenecks that cannot be eliminated in any other way.

When the use of overtime is authorized under a contract, the office administering the contract and the auditor will periodically review the use of overtime to ensure that it is allowable in accordance with the stated criteria. Only overtime premiums for work in those departments, sections, etc., of the contractor’s plant that have been individually evaluated and the necessity for overtime confirmed shall be considered for approval. Tomorrow we will discuss the audit procedures for ensuring the propriety of overtime.

Company Pays $12 Million to Settle False Claims Suit

The Small Business Innovation Research (SBIR) program is a highly competitive program that encourages domestic small businesses to engage in Federal Research and Development that has the potential for commercialization. Through a competitive awards-based program, SBIR enables small business to explore their technological potential and provides the incentive to profit from its commercialization. By including qualified small businesses in the nation's R&D arena, high-tech innovation is stimulated and the US gains entrepreneurial spirit as it meets its specific research and development needs.

The SBIR program has been referred to as America's seed fund. Each year, Federal agencies with R&D budgets that exceed $100 million are required to allocate 3.2 percent of their R&D budgets to these program. That works out to about $4 billion per year. Currently, eleven Federal agencies participate in the program and there are more than 300 active companies in the program.

As the name suggests, these awards are set aside for small businesses. In the context of SBIRs, small business must be organized "for profit", have 500 or few employees, and must be owned at least 50 percent by individuals who are U.S. citizens. Also, work must be performed in the U.S.

There are plenty of companies who (try and) abuse the system. Recently, the Justice Department announced that one firm has agreed to pay more than $12 million to settle false claims allegations regarding its eligibility for SBIR contracts.

TrellisWare Technologies of San Diego agreed to pay $12 million to settle allegations that it was ineligible for numerous SBIR contracts it had entered into with the Defense Department. Although on the surface it appeared that TrellisWare was a small business, turns out that it was a majority owned subsidiary of ViaSat, Inc, a global telecommunications company (and decidedly not a small business).

TrellisWare falsely self-certified that it was a small business and was able to garner multiple SBIR contracts over a seven-year period. Someone caught on, the Government began an investigation, and discovered the relationship between TrellisWare and ViaSat. No one has questioned the value of TrellisWare's research. Obviously, the Government believed in its value because it continued to award the company additional SBIR work. The problem was that the funds were diverted from the SBIR's intended beneficiaries.

Companies need to exercise due diligence when self-certifying eligibility for any Government program. The consequences of falsely certifying eligibility can be severe.

"... All Four Feet and their Snout in the Trough..."

The Senate Budget Committee held a hearing Wednesday on the DoD-wide financial audit that is now just getting underway. You can view that hearing here as well as download prepared testimony by the two DoD witnesses.

One of the notable quotes from the hearing came from Sen Kennedy, Louisiana. After the DoD representatives admitted that they didn't have an accurate tally of the number of Government contractors or the value of contracts, Sen Kennedy stated "We've got some hogs who have all four feet and their snout in the trough and we got to find out who they are, gentlemen". That was really besides the point of the hearing but entertaining nevertheless.

The DoD audit is a massive undertaking involving 1,200 auditors, 24 stand-alone audits and one over-arching audit. It is costing $367 million and the services have set aside $550 million to "fix" any problems that might arise. Of course, DoD anticipates that many issues will arise and does not expect to get a "clean" audit report this year. It might take 10 years to get a clean audit.

The DoD witnesses promised transparency throughout the process, not only to Congressional members but to the public as well. Any findings or issues raised during the audit process will be publicly available on a website dedicated to that purpose. Its not set up yet so we cannot link to it but we will when it goes live. We will also monitor the interim findings and report on matters that might be of interest to Government contractors.

DoD's Procurement Management Reviews Offer Good Advice for Contractors

The Defense Contract Management Agency (DCMA) conducts independent reviews of the procurement function of other Defense agencies and field activities that perform contracting operations. These reviews are designed to assess the effectiveness of the contracting function, analyze and assist in resolving identified problem areas (yes, we're from the Government and we're here to help), and identify noteworthy practices that may be beneficial to all organizations. These reviews are called "Procurement Management Reviews" or PMRs.

So what do these reviews have to do with contractors? Well, aside from the fact that Government contractors should appreciate well-run, efficient, and effective procurement departments that get the job done and don't dwell on minutia that bogs down procurement and cost contractors time and money, these reviews can help contractors improve their own procurement practices.

A recent summary of PMR reviews performed in fiscal years 2016 and 2017 included a listing of 22 recommendations appearing in more that 50 percent of the reviews. Many of these recommendations, resulting in identified deficiencies in the procurement process, apply equally to contractor purchasing departments. Contractors would do well to use this listing as a tool to assess the effectiveness of their own procurement functions.

Some of the recommendation that seem most applicable to contractor procurement functions include the following:

1. Verify that contract files clearly demonstrate how source selection evaluations were conducted and decisions were made
2. Files must document adequate market research was performed to clearly record how research informed the acquisition strategy.
3. Documentation in contract (and subcontract) files must be sufficient to constitute a complete history of the traction.
4. Ensure small business subcontracting goals are considered.
5. For sole source awards, ensure there is adequate determination of fair and reasonable pricing.
6. For commercial items, ensure there is documentation of the commercial item determination.
7. Ensure that adequate and measurable performance standards are stated in contracts for services and that sufficient surveillance methods are identified.

As we stated, these recommendations arose in more that 50 percent of the PMR reviews. If the Government finds such deficiencies in its own house, its not difficult to conclude that similar deficiencies exist within contractor purchasing departments.

Cities and Municipalities Have Contracting Problems Too

We tend to focus our blog writings on Federal Government procurement but states, counties, and municipalities and their contractors face pretty much the same contracting challenges as the Feds. In some respects, they face even more challenges since many do not have contracting professionals nor adequate resources for contract oversight. While they're not buying major weapon systems (we hope), contracted services represent a significant portion of cities' budgets.  Purchasing decisions often rest with a single person with little, if any, internal controls or checks and balances to prevent or deter fraud, waste, or abuse. The vesting of responsibility with just a few individuals and the lack of adequate oversight is why cronyism tends to fester in many localities. Here's an example of what we're talking about.

The City of San Diego has a living wage ordinance that took effect back in 2006. It requires employers working within City limits to pay a "living wage" that is adjusted annually based on inflation. The current living wage is $14.95 per hour.

Prizm Janitorial Services was pretty successful in getting Government contracts. Since 2010, the firm had been paid $3.4 million by various Government agencies and municipalities for cleaning offices, rest rooms, etc. Based on hotline complaints, the Government conducted a couple of audits in 2014 and 2016. These audits disclosed a number of repeated violations of San Diego's living wage ordinance and other labor laws, including:

1. Prizm violated the living wage law by making all of its workers independent contractors rather than employees.
2. Prizm paid some employees in cash with handmade receipts. It didn't provide itemized pay stubs as required by state labor laws
3. Prizm claimed it didn't know or employ many workers whose name were listed on signup sheets as those doing work for Prizm.
4. Prizm failed to provide requested records inviolation of a city code and interfered with the investigation.
5. Prizm's address is a mailbox at PostalAnnex.

Prizm repaid back wages and social security liabilities, refunded the City for overpayments, and paid State required sick leave.

Despite all of these issues, another city close to San Diego, the City of Carlsbad, just awarded Prizm a $2.7 million contract over six years to clean city facilities and park restrooms. When asked about the San Diego problems, Carlsbad spokesperson declined to comment. Why? San Diego reported that it does not routinely share its problems with other cities. Why? From an audit and investigative standpoint, this situation certainly raises red flags. Could there be more here than meets the eye?

Update of DCAA's Incurred Cost Proposal Checklist

DCAA (Defense Contract Audit Agency) recently updated its incurred cost proposal adequacy checklist. Its available for download here. The fundamental requirements of the annual incurred cost proposal are found in the Allowable Cost and Payment Clause at FAR (Federal Acquisition Regulations) 52.216-7(d)(2)(iii). There are 15 items listed - numbered (A) through (O) - which correspond to Schedules A through O in DCAA's Excel Incurred Cost Model. DCAA has taken these 15 items and created a checklist comprised of 47 questions that auditors use while reviewing contractor submissions for adequacy. The Agency has made this checklist public so that contractors can self-assess their proposals prior to submitting them to the Government.

Some contractors have criticized the checklist for going beyond the intentions of the FAR councils when developing the regulations. And to be certain, they have a point. For example, Schedule J in FAR requires certain information concerning subcontractors. Schedule J in the checklist queries for not only subcontracts but for inter-divisional transfers as well. There are many others. However, we don't find DCAA's "additions" objectionable. DCAA has had a lot of experience auditing incurred cost submissions and they have a pretty good idea of what make a submission adequate for an efficient audit.

This latest checklist contains a few minor changes. It is now a Word document rather than a PDF which is nice and will facilitate collaboration among contractor team members responsible for ensuring proposal adequacy. Questioned are now numbered rather than bullets which improves referencing. Now one can simply refer to "question 22" rather than "Section J, second bullet". Overall, there is nothing in the new checklist that would render previous editions obsolete.

The checklist contains a cautionary statement concerning the use of blended rates. As you may recall, compensation under contracts awarded after June 24, 2014 is capped at an amount significantly less than pre-June 24th contracts. This creates a bit of an implementation problem for contractors that have both pre and post June 24th contracts. Refer to Using Blended Labor Rates to Implement New Compensation Caps. The Defense Department established a mechanism to allow contractors to implement the new caps by develop a weighted average of the old and new caps. Using blended rates requires an advance agreement between the Government and contractors. Absent such an advanced agreement, DCAA's checklist instructs auditors to consider proposals that use blended rates but don't have an advanced agreement attached, to be inadequate.

Concerns Surrounding Boarder Wall Contract

Last November, we learned that FEMA (Federal Emergency Management Agency) awarded a $300 million contract to a three-person firm from Whitefish Montana to restore electricity in Puerto Rico. That contract came under suspicion and was quickly terminated. Then, last month, we learned that FEMA awarded a $156 million contract to a one-person firm to provide 30 million emergency meals to Puerto Rico. That contract was terminated within three weeks when it became obvious the contractor had no hope of delivering that quantity.

Now, the AP is reporting a similar incident involving a tiny Nebraska startup (SWF Constructors) with one employee having been awarded an $11 million contract to replace two miles of a boarder wall between California and Mexico. The AP reported that its investigation left unclear why SWF was listed as the contractor rather than its parent, Coastal Environmental Group, its owner. But its really not too hard to figure out. Coastal has been sued repeatedly for failing to pay subcontractors and was also accused in a 2016 audit of shady billing practices. A lawyer who represented one of Coastal's subcontractors speculated that creating a new company to dodge scrutiny of past legal problems is a relatively common practice in construction projects.

The Interior department audit of Coastal's contracts with the U.S. Fish and Wildlife Service to clean up two wildlife refuges in the wake of Hurricane Sandy resulted in about $200 thousand in billings that were not supported. Coastal agreed to repay the Government that amount. But according to the Interior IG (Inspector General), that audit required the Interior Department to file a negative "past performance report" that would have flagged it to other Government agencies. That report was never filed.

The AP also reported that Coastal's new company, SWF, is not registered in Nebraska which is required for any company doing business within the state. Nebraska officials are investigating whether SWF violated state registration requirements.

Its a good time to be a small business Government contractor. You can get millions of dollars in contracts with seemingly no questions asked about past performance, cost estimates, or ability to perform.

You can read the full AP article here.

Contracting Officer Accepted Bribes - Goes to Prison

Back in 2014, a couple of people were chatting while walking around a construction site at Joint Base Charleston. One was overheard saying to the other "someone needs to buy me a car". Other parts of the overhead conversation included references to monies being deposited into bank accounts. The participants included Barbara Ann Powell, a contracting officer at Joint Base Charleston and Richard Darnell of Residential Construction, a defense contractor performing work on the base under contracts awarded by Powell.

The person that overheard the conversation informed law enforcement and an investigation was opened. Search warrants were issued and offices were raided. Ultimately, investigators determined that the two had conspired to defraud the Government. Powell gave Darnell inside information on what the Government was estimating the price of certain work should cost via the IGE (Independent Government Estimate) and also provided information concerning what other bidders were offering. Powell, of course was relieved of her duties. It is not known what immediate action was taken against the contractor.

Then things got very quiet and most people forgot about the incident. Not so the FBI and the DCIS (Defense Criminal Investigative Service). They continued to work behind the scenes building and firming up their case against Powell.

Last week, more than three years after the initial allegations, a United States District Judge sentenced Powell to six months imprisonment, three years of supervised release, and a $12,500 fine for bribery of a public employee. Between 2011 and 2014, Powell had solicited and received "dozens of bribes from contractors at Joint Base Charleston. It is not known the total amount of these bribes. Suffice to say the amount was significant.

Powell's crimes may never have been exposed had not someone took the initiative to report suspicious happenings to the appropriate authorities. It should also compel Government agencies (and contractors) to assess whether there are vulnerabilities in their own procurement practices that might allow similar occurrences.

"Where's The Beef"...

... or rather, "Where's Beef's Proposal.

The GAO, citing FAR 52.212-1, has ruled time and time again that it is an offeror's responsibility to ensure that its proposal is delivered to the proper place at the proper time. There are exceptions to the rule and firms have tried many times to worm their situation into one of the few exceptions but they rarely succeed. Firms have blamed their late proposals on gate security, a malfunctioning internet, or UPS or FedEx failure to deliver on time. But they keep trying to find someone or something to blame.

The Defense Commissary Agency (DeCA) issued a solicitation seeking proposals to provide fresh and frozen beef products for commissaries located in the west and pacific areas and another solicitation seeking proposals for the east and central areas. The deadline for proposal submission for both solicitations was November 15, 2017 at 3:00 p.m. to the DeCA offices at Fort Lee, VA.

National Beef submitted proposals via UPS. They were picked up in Kansas City on November 14th and delivered at 3:27 p.m. on November 15th, about 30 minutes late. On November 21st, DeCA notified National Beef that its proposals had been rejected as untimely.

National Beef filed protests arguing that the proposals should have been considered timely because (i) the proposals should have been considered under the custody of the Government based on the time that the UPS driver entered the Government installation (about 9:30 that morning) and (ii) Government processes at Fort Lee were interrupted in a manner that made it impossible to deliver the proposals by the solicitation deadline (the latter notwithstanding that other bidders proposals were received before 3:00 p.m. that day via UPS and FedEx).

GAO did not sustain the protests.

Concerning National Beef's argument that the Government had control of the document once the UPS truck entered the base, GAO ruled that National Beef misstated the applicable standard for receipt and control. A hand-delivered proposal must be physically relinquished to Government control by the offeror or its agent; interaction between the offeror and an Agency's security personnel, or mere access to the installation does not establish Government control over the proposal. The GAO found no basis to conclude that the Government had control of National Beef's proposals prior to the 3:00 p.m. deadline.

Concerning the interruption of normal Government processes, the GAO found no evidence in the record that the UPS truck was actually delayed at the gate. Although National Beef contended that security and/or construction activities near the gate entrance delayed access by the UPS truck to the base, the protester did not provide any information that could possibly explain a six-hour delay. Even if there was a delay, National Beef did not provide adequate information to establish that there was an interruption of normal Government processes in a manner that precluded submission of proposals.

You can read the full GAO Bid Protest Decision here.