Charging Capital Equipment Direct to Contracts

Contractors have been known to include the cost of capital equipment (or the unamortized value of capital equipment) in contract pricing proposals and incurred cost proposals. There may well be situations where this would be appropriate. Those situations are rare however and contract auditors have been instructed to question the cost of capital items except for:

1. Approved special tooling and test equipment that falls within the narrow definition of FAR 31.205-40, Special Tooling and Test Equipment., 
2. Specific contract authorization.

While there may be other situations where it would be appropriate to expense the cost of capital equipment directly to a contract, it would probably be a tough sell to the contracting officer, especially after the incurrence of the cost. Should such situations arise, we highly recommend that contractors pursue advance agreements with the contract officer to forestall future disagreements.

There is certainly financial incentives for contractors to "hide" the cost of capital items in materials, purchased parts, or supplies or elsewhere. If you can get the Government to pay for it under a contract, its free to use on other work once the Government contract ends (or even during performance of that contract). Please don't be tempted to try it. Contract auditors (e.g. Auditors of the Defense Contract Audit Agency) are trained to look for those types of transactions and if discovered, could and probably would result in a "suspected irregular conduct" referral to one of the many Government criminal investigative agencies.

Fast Cars, Easy Money - An Update

This is an update to an article we posted last August concerning DCAA's (Defense Contract Audit Agency) questioning of $50 million on an Army contract to mentor and train Afghan National Security Forces (see DCAA Questions $50 Million of a Contractor's Incurred Costs).

Yesterday, Senator McCaskill, as ranking member of the Senate Committee on Homeland Security and Governmental Affairs, released a report that provides considerably more details than was previously publicized, although the original DCAA audit report was not released.

The new report (available here) was issued in conjunction with yesterday's hearing where Senator McCaskill grilled the Secretary of Defense (and other officials) about that particular contract where she stated that "Somebody's head's got to roll on this".

Click HERE to watch McCaskill's questioning at yesterday's hearing and be prepared to be entertained.

McCaskill was not at all pleased that the subject of the audit was still under contract and drawing taxpayer funds to drive around in luxury automobiles and paying family members (and "significant others") exorbitant salaries but performing no work.

The Secretary of Defense acknowledged that there was an ongoing criminal investigation into the matter and he was not at liberty to discuss details in an open forum. That didn't mollify McCaskill however. She questioned why that contractor had not been immediately debarred from Government contracting which is an action independent of any criminal investigation.

McCaskill also demanded that the Pentagon identify the specific individuals responsible for awarding the contract and approving billings under the contract."Someone's head is going to roll".

The Five Requirements of Allowability

We often toss around the term "allowability" with little thought to its precise meaning in the Federal Acquisition Regulations (FAR) and in ways that assume everyone understands the parlance of Government contracting. Often when we use the term we are reflexively referring to the cost principles in FAR Part 31.205. But that is only one of the five requirements a cost must meet before it can be charged or billed to the Government. Now that a lot of contractors are in the midst of preparing their incurred cost proposals, it seems like a good time to review what it takes for a cost to be "allowable" on a Government contract.

The five requirements (or tests) for allowability are listed in FAR 31.201-2.

1. The cost must be reasonable. Several years ago, we wrote an article on "reasonableness" (see How to Determine Whether a Cost is Reasonable). The essential question is whether if in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of a competitive business (FAR 31.201-3). Some of the more contentious areas in recent years has been related to compensation.

2. The cost must be allocable.  We also covered cost allocability in a previous posting (see Cost Allocability). To be allocable, the cost must meet one of  three tests; (i) incurred specifically for the contract, (ii) benefit the contract and other work and can be distributed to them in reasonable proportion to the benefits received, or (iii) is necessary to the overall operation of the business, although a direct relationship to a particular cost objective cannot be shown (FAR 31.201-4). Examples of the latter include many G&A costs.

3. The cost must comply with Cost Accounting Standards (CAS), if applicable, otherwise GAAP (Generally Accepted Accounting Standards) and practices appropriate to the circumstances. For more information on CAS, see our CAS Index. This is requirement is where, for example, contractors are not allowed to base depreciation expense on accelerated methods under the Income Tax Code.

4. The cost must comply with the terms of the contract. Many contractors overlook cost limitations set forth in their contracts. For example, almost no one pays attention to FAR 52.222-2 which limits the cost of overtime usage. Keep in mind that while a contracting officer cannot make allowable costs that are specifically unallowable, they can place limitations on costs that are specifically allowable.

5. The cost must comply with the limitations set forth in FAR Subpart 31.2. This would include the cost principles set forth in FAR 31.205-1 through 52. It would also include additional cost principles found in Agency FAR Supplements like DFARS (DoD FAR Supplement), DEAR (Energy FAR Supplement), NFS (NASA FAR Supplement), and others.

Its Not our People, Its our Processes

We've written a couple of posts recently concerning Representative Thornberry's proposals to reduce the size of the Defense Department's "fourth estate". See, for example, Proposal to Cut $25 Billion from DoD Support Agencies and Comprehensive Pentagon Bureaucracy Reform and Reduction Act.These proposals have garnered a lot of attention in the press. The idea that you could abolish seven major Defense agencies and no one would notice or the persistent stories in the press that fourth estate workers were standing around with their hands in their pockets has got to have had a demoralizing effect on affected staffs.

Yesterday, Patrick Shanahan, the Deputy Secretary of Defense, went on the offensive against such notions. While welcoming Thornberry's interest in the "fourth estate", Shanahan announced that he too has been working to reform the Department. He believes that there is tremendous opportunity for reform and reforms would significantly boost productivity and modernization in the Department. And, the fact that Thornberry is also approaching this issued gives support to DoD's efforts.

But the main point of Shanahan's comments was to ensure that his and Thornberry's efforts were not viewed as a "people problem" or as a way to reduce the workforce. "What we find is we have processes and management systems ... that have evolved over years and years that were never designed to scale to the size that we are, and so people are stuck in processes that ... aren't as productive as they could be."

Shanahan added: "People are the solution, not the problem. From a management standpoint, the easiest thing to do is redraw the lines and boxes on an org chart, but it is actually the hardest thing to implement." The Department must look at processes. "It's our processes, not our people".

Was that enough to inspire a demoralized workforce?

Due Date for Annual Incurred Cost Submissions Approaching

For Government contractors whose fiscal years end on December 31st, the June 30th due date for submitting required annual incurred cost proposals is rapidly approaching.

If you need more time, you can always request an extension from your administrative contracting officer. Do not request an extension from DCAA (Defense Contract Audit Agency) - they have no authority to grant extensions (refer to FAR 42.302 and FAR 42.705-1(b)(1)(ii)).

Some administrative contracting officers (ACOs) perfunctorily approve such requests. Others expect the requests to include justification for the extension. All ACOs will expect the request to be in writing. Before submitting any due date extension request, we suggest you contact you ACO and find out their expectations.

The Government is definitely tightening up its practices for handling these submissions. Once received, DCAA's got only 60 days to figure out whether the submissions are adequate and only a year to complete the audit (see Policy Shift for DCAA Adequacy Reviews).

If you need an extension and don't know who your ACO is (surprisingly many contractors don't know) you can find him or her by performing a search at DCMA's (Defense Contract Management Agency) Contract Management Team Search. You need a contract number or your company's CAGE code.

If you need assistance in preparing your incurred cost submission, give us a call at 866-849-4887, extension 2 (for Bill Vermie) or extension 3 (for Doug McAlpine).

Comprehensive Pentagon Bureaucracy Reform and Reduction Act

Last week we wrote about a proposal by Congressman Thornberry, the Chairman of the House Armed services Committee, to cut $25 billion from DoD support agencies (agencies he refers to as the "fourth estate" (see Proposal to Cut $25 Billion from DoD Support Agencies). This proposal will in all likelihood become part of the 2019 NDAA (National Defense Authorization Act).

Another aspect of the proposed legislation that we didn't include in our prior discussion is the impact on the Defense Contract Audit Agency (DCAA) and the Defense Contract Management Agency (DCMA). These "fourth estate" Agencies are not on Thornberry's target for elimination but are specifically called out for consolidation.

Specifically, the proposal calls for DoD to conduct a review of the functions of the Defense Contract Audit Agency and the Defense Contract Management Agency (DCMA) to determine whether there are functions being performed by either Agency that could more appropriately be performed by the other Agency.

The review shall include

1. a determination of whether there are functions performed by either Agency that could more appropriately be performed by any other organization or element of the Department of Defense including the military departments or commercial providers.
2. an assessment of the potential benefits and challenges associated with combining the Agencies into one agency with oversight for defense contracting.

That doesn't sound too drastic, does it? A little tweaking here and there to satisfy the intent of the legislation should it become law. But consider Part 2 of the proposal.

By March 1, 2020, the Secretary of Defense shall submit to the congressional defense committees a report that includes

• the results of the review

• a plan to combine the functions of DCAA and DCMA into one agency by not later than January 1, 2021.

There's no qualification on that second bullet. It requires a plan to combine DCAA and DCMA. It does not say depending on the results of the review, consider whether it is beneficial to combine DCAA and DCMA. It requires a plan to combine the two Agencies as if the efficacy of such combination has already been established.

Prime Contractors Called Upon to Release Subcontractor Past Performance Ratings

Past performance information is one indicator of an offeror's ability to successfully perform the contract and is often considered by agencies when making contract awards. While there is a mechanism to log and retrieve past performance information for prime contractors (e.g. Past Performance Information Retrieval System (PPIRS)), there is no comparable system to track past performance for information for subcontractors. That is about to change.

The SBA (Small Business Administration) is initiating a pilot program to establish past performance ratings for small business subcontractors. Under this program, a small business concern without a past performance rating as a prime contractor, may request a past performance rating if it is a first-tier subcontractor under a covered Government contract with a contractually required subcontracting plan (see FAR 19.702(a)).

Here's how it will work.

1. The small business concern submits a request to SBA for a past performance rating within 270 days after completing the work for which a past performance rating is sought. The application will include the subcontractor's "suggested ration". We can't imagine that any subcontractor would suggest a rating of anything less than "Exceptional".
2. The SBA will forward the request to the prime contractor and the contracting agency's Office of Small Business Utilization (OSDBU).
3. The prime contractor and the OSDBU will work together to agree on a rating and then post it into the Government's CPARS (Contractor Performance Assessment Reporting System).

The pilot program includes procedures to follow if there is disagreement at any level over the final rating.

This will be additional work for Prime Contractors who will now be called upon to make past performance information on their first-tier subcontractors readily available to the Government. Certainly, most prime contractors have information relative to subcontractor past performance in their records however its one thing to have the information available for internal use and quite another to make that information available to the Government. We expect that ratings for public consumption will be a lot less candid and informative than ratings used for internal purposes.

You can read more about SBA's pilot program here.

Section 809 Panel Wants DCAA to Reduce the Scope of Its Incurred Cost Audits

We are returning once again to our coverage of the Section 809 Panel's first of three reports. The first one was issued back in January of this year. Volume 2 is scheduled to be released in June and the final report, Volume 3 is scheduled for January 2019. Previous coverage of Volume 1 recommendations can be found at the following links.

• Section 809 Panel Issues First Report
• What Gets Measured, Gets Done
• Statutory Due Dates for DCAA Audits
• Outsourcing Contract Audits

The Panel's Recommendation #15 is to clarify and streamline the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of DoD's oversight.

The term "incurred cost proposal is not defined in FAR. The term has become the government contracting community's shorthand way of referring to a contractor's "final indirect cost rate proposal", the elements of which are defined in FAR 52.216-7(d). A "final indirect cost rate proposal" is necessary for the contractor and the Government to establish final indirect cost rates for the purposes of settling provisionally billed indirect costs on flexibly priced contracts. A "final indirect cost rate proposal" however, is not a claim for direct costs incurred and billed during contract performance.

Recently, DCAA began auditing direct costs as well as indirect costs during its audits of "final indirect cost rate proposals". That was never the intent and has increased the time it takes DCAA to complete incurred cost audits and has increased the time it takes contracting officers to address and resolve the DCAA audit findings.

The Panel believes that the timeliness of final rate settlements and consequent contract closeouts will substantially improve if DCAA refocus its oversight on the purpose of the final indirect cost rate proposal to reasonably ensure the allowability of contractors' actual indirect costs, not direct costs. DCAA should not be auditing direct contract costs unless requested to do so by the contracting officer.

The Panel further recommended that several mandatory schedules under FAR 52.216-7(d)(2)(iii) be made optional because they have no bearing on evaluating or settling final indirect costs rates. These schedules include:

• Schedule I - Schedule of cumulative direct and indirect costs claimed and billed by contract and subcontract.
• Schedule J - Subcontract information
• Schedule K - Summary of each time-and-materials and labor-hour contract information
• Schedule L - Reconciliation of total payroll per IRS Form 941 to total labor cost distribution
• Schedule M - Listing of decisions/agreements/approvals and description of accounting/organizational changes
• Schedule O - Contract closing information for contracts physically completed during the fiscal year.

The problem with this recommendation, as we see it, is that without assurance that direct costs are properly stated and allocable, allowable, and reasonable, there can be no assurance as to the propriety of the indirect expense rates since direct costs are integral to rate calculations.

Proposal to Cut $25 Billion from DoD Support Agencies

The Chairman of the House Armed Services Committee, Mac Thornberry, announced a proposal yesterday to cut 25 percent (more than $25 billion) out of the Defense Department's support agencies by eliminating some and cutting back on others. If adopted, thousands of civilian jobs would be cut and it would certainly result in significant changes to Defense contractors.

The proposal specifically calls for the elimination of the following seven Agencies.

• Defense Information Systems Agency (DISA) whose mission would be folded into the U.S. Cyber Command
• Defense Technical Information Center (DTIC) which acquires, stores and disseminates scientific and technical information to aid R&D.
• Office of Economic Adjustment which aids communities hurt by defense program changes, including base closures.
• Defense Technology Security Administration which guides policy on arms transfers overseas
• Test Resource Management Center, which coordinates among DoD test and evaluation facilities
• Defense Human Resources Activity which guides and implements human resource initiatives, budgets, policies and programs
• Washington Headquarters Services which provides operational and administrative services

In announcing his proposal, which will likely be included in the 2019 NDAA (National Defense Authorization Act), Thornberry made the following statement.

Over the years, Congress has focused most of its attention on the military services and on weapons and equipment, personnel, and policy issues. We have paid relatively little attention to the rest of DoD that make up the 'Fourth Estate.' In fact, one expert has said, 'the Fourth Estate is untouched by human hands.' Yet, this portion of the Department of Defense spends about 20 percent of the budget, includes about 25 percent of the civilian workforce, and hires about 600,000 contractors.

We are working to get more value for the taxpayer dollar, to get more resources into the hands of the warfighter faster, and to make the Department more agile and innovative in facing the wide array of security challenges before us, we cannot neglect to examine this large portion of DOD

Besides specifically calling for the elimination of these seven agencies, there was no mention of the other agencies comprising Thornberry's 'fourth estate'. Presumably, agencies such as DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) would be included in these cuts. Agencies having a national security mission (e.g. NSA) would be exempt.

Oh, and by the way, the American Federation of Government Employees (AFGE) condemned the proposal as "foolish and shortsighted".

Hiring, Wage, and Employment Subsidies

There exists a variety of Federal, state and local programs intended to reduce unemployment. These are commonly known as hiring subsidies, wage subsidies, or employment subsidies, and compensate employers for a certain percentage of their wages for a specific period of time. Whether such programs are effective in the near term or over the long haul in reducing unemployment or reducing the number of chronically unemployed, is subject to much debate. A lot of companies eschew such programs, thinking the cost (increased training and reduced productivity) outweigh the benefits. Others find great benefit in hiring subsidized labor. A lot depends upon the skills needed for a particular position and the level of training and supervision required.

For Government contractors (with cost type contracts), there is little monetary incentive to join a subsidized labor program. If the subsidy is a cash payment from a Governmental entity or even a tax credit, it must be treated as a credit in accordance with the FAR (Federal Acquisition Regulations) credit clause (see FAR 31.201-5) and passed back to the Government. Federal contracting rules will not allow contractors to obtain double reimbursement for the same cost.

To illustrate, consider the Workforce Investment Act (WIA) of 1998. This Act was intended to help turn the "hard-core" unemployed into productive wage earners. One incentive to industry to participate in the program is a partial subsidization of these new workers' wages, up to 50 percent for the first weeks or months of their employment. According to the law, this subsidy was intended to compensate employers for the increased training costs and reduced productivity associated with hiring.

If a contractor includes costs in its proposals or billings that are subject to reimbursement under the WIA, an appropriate credit should be given the Government as required by the FAR credit clause. To read more about the FAR credit clause, click here.

TINA Threshold Rises to $2 Million on July 1st 2018

A lot of people have been wondering and writing to this blog about the effective date of the new TINA (Truth in Negotiations Act) threshold. For DoD (Defense Department) contracts (at least), the new threshold takes effect on July 1, 2018.

Section 811 of the fiscal year 2018 NDAA (National Defense Authorization Act) increased the threshold for obtaining certified cost or pricing data under 10 USC 2306a (also known as the Truth in Negotiations Act or TINA) from $750,000 to $2 million. With little hope of pushing through a change to the Federal Acquisition Regulations (FAR) in time, the Defense Department has issued a "class deviation" which effectively does the same thing as a FAR change. A copy of the class deviation can be downloaded (or read) here. This deviation remains in effect until its incorporated into the FAR (or otherwise rescinded).

The increased TINA threshold also increases the CAS (Cost Accounting Standards) threshold as well. 41 USC 3502 equates the CAS threshold to the TINA threshold. The class deviation for TINA therefore acts to increase the CAS threshold as well.

Good news all around.

Policy Shift for DCAA Adequacy Reviews

The Defense Contract Audit Agency (DCAA) recently updated its policy regarding adequacy determinations of contractor submitted annual incurred cost submissions (see Audit Alert on 2018 NDAA Section 803 Timeliness Requirement for Incurred Cost Adequacy Reviews and Audits).

The new policy requires incurred cost submissions to be reviewed for adequacy within 60 days of receipt. This was not something DCAA did on their own. The Agency was forced to adopt this policy based on the 2018 NDAA (National Defense Authorization Act) that was enacted on December 12, 2017. To conform to this law, the Agency quite emphatically states that audit teams must complete the adequacy review and notify the contractor of the results of the adequacy review within 60 days.

Adequacy reviews are not audits. Adequacy reviews primarily check to see whether all the information required by FAR 52.216-7, Allowable Cost and Payment, are included and that data included on the various schedules are internally consistent.

The adequacy checklist is available on line and we recommend contractors complete the checklist themselves prior to submitting the incurred cost submission to the Government. Using the checklist internally should increase the likelihood of getting an "adequate" score from DCAA.

Section 803 of the 2018 NDAA also requires DCAA to complete audits of incurred cost submissions within 12 months of receiving a qualified submission. It will be interesting to see whether DCAA can meet that challenge. They've never been able to consistently do so heretofore but now that the requirement is a law rather than a regulations or a goal, there is a lot more motivation to do so. We just hope that DCAA does not kick back incurred cost submissions for minor infractions just to start the one-year clock over again.

Ownership Rules Relaxed on HUBZone Businesses

The Small Business Administration (SBA) amended its regulations recently to incorporate provisions in the 2018 NDAA (National Defense Authorization Act). Among those provisions is a rule that takes effect next month relating to ownership requirements of HUBZone (Historically Underutilized Business Zone) businesses. The new regulations will allow indirect ownership by United States citizens.

This indirect ownership provision  has been made to more accurately align with the underlying statutory authority and recognizes that the HUBZone program is focused on the location of the business and its employees, rather than the socioeconomic status of the business owner.

The new rule deletes the requirement that ownership by US citizens in the HUBZone program must be direct to one where small business concerns must be at least 51 percent owned and controlled by US citizens.

Read more about the HUBZone ownership rule changes here.

See the current SBA HUBZone map here.

Contractor Teaming Arrangements (CTAs) versus Prime/Subcontractor Relationships

Under a Contractor Team Arrangement (CTA) two or more GSA Schedule contractors work together to meet ordering activity needs. By complementing each other's capabilities, the team offers a total solution to the ordering activity's requirements.

CTAs differ significantly from Contract/Subcontract relationships. For example:

Contractor Teaming Arrangement (CTAs) are potential areas of misunderstanding between contracting parties. As noted above, under a CTA, each team member bills the Government based on its own GSA Schedule rates. Conversely, if a prime contractor/subcontractor relationship exists (rather than a CTA), the prime contractor should bill for services (i.e. labor) performed by subcontractors at the prime contractor's GSA Schedule rates, rather than at the subcontractor's rates.

It is important then to clearly establish the exact nature of the relationship that exists when bidding on GSA Schedule work. There have been cases where contract auditors have found billing issues related to how CTAs bill for their work and how GSA contractors bill for subcontractor efforts.

Another complication is FAR 52.232-7(b)(4)(ii), which, if included in the GSA contract, specifically limits the reimbursement of costs in connection with subcontracts to the amounts paid by the prime contractor for the effort of the subcontractor. This means that prime contractors cannot pay a subcontractor less than its GSA Schedule rates.

Validating Self-Certifications of No Outstanding Tax Liabilites

It is well established that Government contractors must be "responsible" and there is a self-certification requirement to indicate that there are no outstanding income tax liabilities. This self-certification has been abused because everyone knows that there is no way to positively validate such a certification. The Defense Department, for example, cannot run over to the IRS to validate a self-certification.

But can an IRS contracting officer obtain information available only to the IRS?

Now they can.

It is in the interest of the Government to only award contracts to entities that are responsible and law abiding. FAR 9.104 requires contracting officers to perform a responsibility determination prior to each contract award by using the standards listed in FAR 9.104-1, as well as consider information submitted by the contractor and information they research or acquire from other sources.

The IRS (Internal Revenue Service) administers the Internal Revenue Code. Since fiscal year 2012, language in various appropriations acts have prohibited the Government under various conditions from using appropriated funds to enter into a contract with a prospective contractor unless the prospective contract certifies in writing that it has not been notified of any unpaid Federal tax assessment.

For purposes of tax administration, the IRS has access to taxpayer return information that is not otherwise available to other Federal Agencies. The Treasury Department has determined that an IRS contractor's compliance with the tax laws is a tax administration matter. The tax code authorizes the IRS to disclose a taxpayer's return information to such person(s) as the taxpayer may designate in a consent to such disclosure. In many cases, however, the official signing a contract proposal on behalf of an offeror will not be an official to whom the IRS is authorized to disclose the offeror's tax information. Thus, in order to ensure that the IRS is authorized to discuss the offeror's own tax information with an authorized official of the offer, a consent to disclosure is required. This consent to disclosure must be in the form of a separate written document pertaining solely to the authorized disclosure and must be signed and dated by an authorized person.

With this in mind the Treasury Department has amended its regulations (DTARs or Department of the Treasury Acquisition Regulations) to establish policies and procedures that facilitate successful, timely, and economical execution of IRS contractual actions in compliance with the FAR and various appropriation restrictions. Specifically, the interim rule established an express requirement for IRS contracting officers to use taxpayer return information that is available only to IRS to perform a tax check on the apparent successful offeror for purposes of determining eligibility to enter into a contract with the IRS.

Cost Realism Analysis Could Increase Your Proposed Costs

Don't try to "buy in" on a Government cost-reimbursement contract and then complain that the Government increased your proposed costs. It might work sometimes (e.g. there is only one bidder) but the Government has resources to determine the propriety of proposed costs. Its a very simple task to line up the cost detail of the bidders and look for cost elements that are significantly higher or lower than others.

Here are some key facts to remember when you feel that the Government has not adequately assessed your cost proposal (i.e. has increased your proposed costs).

1. When the Government evaluates a proposal for the award of a cost-reimbursement contract, an offeror's proposed costs are not dispositive because, regardless of the costs proposed, the Government is bound to pay the contractor its actual and allowable costs (FAR 15.305(a) and FAR 15.404-1(d).
2. Consequently, the Government must perform a cost realism analysis to determine the extent to which an offeror's proposed costs are realistic for the work to be performed (FAR 15.404-1(d)(1).
3. The Government is not required to conduct an in-depth cost analysis, or to verify each and every item is assessing cost realism; rather, the evaluation requires the exercise of informed judgment by the contracting agency (FAR 15.404-1(c).
4. If an offeror protests the adequacy and sufficiency of the Government's cost-realism analysis, the GAO's (Government Accountability Office) review is limited to determining whether the cost analysis is reasonable. A protester's disagreement with a contracting agency's judgment, without more, does not provide a basis to sustain the protest.

In one recent case, an offeror low-balled its fringe benefit rate by excluding employer 401(k) matching contributions and bonuses. The Army, noting that whichever offeror won the contract was required by solicitation to hire incumbent employees and that those incumbent employees were already receiving 401(k) matches and bonuses, were concerned about the continuity of the existing workforce. The Army concluded that the offeror's proposed approach to these fringe benefit components was unrealistic because it would be unlikely for the offeror to obtain and retain qualified personnel.

In evaluating the offeror's proposal, the Army adjusted the fringe benefit package to match the incumbent's projected rate with the 401(k) and the bonus pool. This adjustment increased the offeror's estimated cost by more than $5 million and concomitantly, increased its estimated costs so that it was no longer the low bidder. Ultimately, the award went to another company.

A protest ensued but the GAO found no basis to disagree with the Army's evaluation citing the above listed factors. One of the offeror's contention was that the Government should have told them specifically what its concerns were with respect to the fringe rate. The GAO stated however that "The Government is not required to "spoon-feed" an offeror during discussions by identifying every possible area where a proposal might be improved or suggesting alternative approaches, agencies need only lead offerors into the areas of their proposals that require amplification or revision consistent with the requirements of the FAR".

Legal Cost to Defend Against Third-Party Lawsuits

Bechtel National operates a nuclear waste treatment plant in the state of Washington. In 2010 and 2012, two former Bechtel employees filed lawsuit against the company, alleging, among other things, sexual and racial harassment and discrimination. Bechtel and the former employees settled the lawsuits out of court. Bechtel then sought reimbursement of its litigation costs under its contract with the Energy Department.

Are those costs allowable, or not?

The Energy Department didn't think so. Although the Department provisionally approved the reimbursement at first, after further consideration, it disallowed the costs. After the contracting officer issued a final decision upholding the disallowance, Bechtel appealed to the U.S. Court of Federal Claims alleging breach of contract.

In 2010, Bechtel notified Energy of potential litigation arising out of its work at the Hanford site. The Energy Department informed Bechtel in writing that it was authorized to proceed with defense of the case but that authorization was not a determination of the allowability of costs - that determination would be made at a later date pursuant to relevant statutes, regulations, terms of the contract and other considerations.

A few months later, a former employee filed a lawsuit against Bechtel arising out of her termination. The employee alleged that she had been subjected to a hostile work environment and racial and sexual harassment. Additionally, she alleged that Bechtel transferred and ultimately terminated her employment in retaliation for the actions she took to report and stop the alleged harassment. Finally, she asserted that Bechtel had engaged in disparate treatment and took adverse employment actions against her on the basis of her sex and race. Ultimately, the parties settled out of court.

A couple of years later, a second discrimination lawsuit was filed against Bechtel by another former employee. This employee alleged that Bechtel discriminated and retaliated  against him on the basis of race and disability.

Bechtel requested the Energy Department to reimburse it for defending those suits. It asked for $500 thousand and the Energy Department reimbursed those costs on a provisional basis.

The Energy Department moves slowly. Four years later, in 2016, the contracting officer disallowed the costs. The contracting officer determined that the costs incurred by Bechtel in defending the lawsuits were unallowable. He found that the plaintiff's claim had more than very little likelihood of success on the merits and therefore unallowable.

In short, the costs at issue which were incurred as a result of violations of the contract's anti-discrimination provision were not allowable under the terms of specific contract clauses. Accordingly the Court of Claims ruled that the Government is entitled to judgment as a matter of law as to Bechtel's claim that the Energy Department violated the contract by disallowing the costs it incurred to defend and pay for the settlement of the two discrimination complaints.

You can read the entire decision here.

What's the Difference between "Meritorious" and "Clearly Meritorious"?

What is difference between "meritorious" and "clearly meritorious"? In the case of a company protesting a contract award by the Navy, it meant the difference between getting reimbursed for its cost of protesting and not getting reimbursed.

In 2016, the Navy issued an RFP for contractor support services. Award was to be based on the offer representing best value to the Government following certain evaluation factors. Seven firms submitted proposals including Herren Associates, Inc. Ultimately the contract was awarded to another firm.

Herren appealed to the GAO challenging the Navy's evaluation on several aspects of its proposal. There was some back and forth between the GAO, the Navy, and Herren and ultimately, the Navy advised the GAO that it needed to take corrective action to address the supplemental protest. Specifically, the Navy decided to reevaluate Herren's proposal and make a new best-value tradeoff decision.

Herren then filed a request for the reimbursement of protest costs noting that its protest grounds were clearly meritorious. Herren further maintained that reimbursement of costs is warranted because the Navy unduly delayed taking its corrective action.

When a procuring agency takes corrective action in response to a protest, the GAO may recommend reimbursement of protest costs where, based on the circumstances of the case, it determines that the agency unduly delayed taking corrective action in the face of a clearly meritorious protest, thereby causing the protester to expend unnecessary time and resources to make further use of the protest process in order to obtain relief. As a prerequisite to recommending the reimbursement of costs where a protest has been settled by corrective action, the protest must not only have been meritorious, but it also must have been clearly meritorious. What's the difference? A protest is "clearly meritorious" where a reasonable agency inquiry into the protester's allegations would reveal facts showing the absence of a defensible legal position.

 In this case, the GAO did not find reimbursement of protests appropriate. It disagreed with Herren that the company had raised clearly meritorious allegations . While Herren raised come compelling concerns, Herren's arguments necessitated a substantive response from the Navy for the GAO to fully assess the merits of the protest grounds. In GAO's view, the Navy was not without a defensible legal position. Because the allegations raised, and the Navy's responses thereto, presented a close question that warranted further research and analysis to determine the merits of the issues presented, the reimbursement of costs was not warranted.

The full GAO decision can be downloaded here.

Large Contractor Awarded $200 Million in Contracts Set Aside for Small Businesses

The Justice Department just announced that a Federal Grand Jury indicted three men with a 12-year fraud involving over $200 million in Government contracts - contracts intended for small business but actually performed by large businesses. This latest case is hardly unique. We've been reporting for some time about large companies using using straw owners to get work intended for small businesses. What is surprising about this case is the magnitude ($200 million) and its duration (12 years).

The defendants were charged with a conspiracy to commit fraud. The conspiracy involved operating construction companies with straw owners who qualified as a disadvantaged individual or as a service-disabled veteran, but who did not actually control the companies. The conspirators fraudulently obtained small business program certifications to win Government contracts to which they were not entitled. Thus, they enriched themselves, undermined the small business programs, and deprived honest small businesses the opportunities for work.

There were at least three companies involved.

1. Nuvo Construction was misrepresented to be majority-owned and controlled by a person referred to as JL in order to obtain certifications as a Small Disadvantaged Business. In reality, JL worked full-time for a different company and did not actually control Nuvo.
2. C3T was misrepresented to be majority owned and controlled by a person referred to as TA to obtain verification as a Service-Disabled Veteran-Owned Small Business. In reality, TA had virtually no involvement in C3T.
3. Pagasa was misrepresented to be a majority owned and controlled by a person referred to as OM in order to obtain certification as a Small Disadvantaged Business. In reality, OM relied on the assistance of conspirators to form Pagasa.

When interviewed, the principles involved in the scheme made materially false statements to investigators. But in the end, the Government found enough information for the indictment. They laundered proceeds of the fraud scheme in order to disguise and conceal the nature, source, and location of those fraud proceeds. They transferred fraud proceeds from these company accounts to accounts that they controlled.

Now the individuals are faced with the prospect of significant jail time and fines. Already the Government has confiscated more than $2.2 million from bank accounts and a Corvette.

You can read more about this case in the DOJ press release.

The Importance of a Precisely Worded Final Decision

In 2014, the Army awarded a contract to a company called Protec for maintenance, inspection, and repair of fire alarm, fire suppression, and evacuation systems in Germany. In 2015, the contracting officer posted an unsatisfactory report in CPARS (Contractor Performance Assessment Reporting System) and also refused to pay some of Protec's invoices.

In 2016, Protec submitted a certified claim regarding the unsatisfactory CPARS reports and a certified claim for the unpaid invoices. In 2017, the contracting officer issued a COFD (Contracting Officer Final Decision) denying the claim for several reasons including (i) failure to maintain required professional certifications and (ii) failure to submit untimely maintenance schedules and condition reports and failed to comply with schedules, (iii) partial completion of some inspections, (iv) failure to provide a proper quality control program. The COFD concluded that the CPARS evaluation was accurate, and that the Government cannot pay invoices when the contract called for services that, even if attempted, did not comply with the performance work statement and certification requirements. The result of these failures cased any work performed by Protec to "be of no value to the Government.

Protec appealed to the ASBCA but the Government quickly moved to have the appeal dismissed for lack of jurisdiction. The Government argued that the COFD was invalid due to the fact that the COFD's basis for denying the claims purportedly was a suspicion of fraud and therefor the ASBCA lacked jurisdiction.

The ASBCA denied the motion calling the Government's position nonsense. The ASBCA stated that a suspicion of fraud was not the basis for the COFD. In fact, the COFD did not even mention fraud or a suspicion of fraud. Since the COFD was based upon rationales that the contracting officer was authorized to asset, the ASBCA has jurisdiction over the appeals.

Final Rule on GAO Bid Protest Changes

The GAO (Government Accountability Office) published its final rule establishing a new mandatory electronic filing and document dissemination system for filing bid protests. The rule becomes effective on May 1st (one month from now). Oh, and by the way, it comes with a filing fee - it will now cost your $350 each time you file a bid protest.

There were 19 comments pertaining to the proposed fee when the GAO published its proposed rule. Five of the 19 were in favor of the fee. Fourteen commentators opposed the fee on the basis that it creates a barrier to filing protests for small businesses, some of which stated that they lack the resources to pay the fee. In particular, one commentator argued that a $350 fee would make a protest economically infeasible for small businesses seeking the award of very small contracts.

GAO responded:

GAO does not intend for the fee to discourage or reduce the number of protests. Rather, the proposed fee will cover the costs of establishing and operating EPDS (Electronic Protest Docketing System). GAO does not agree with the proposals to charge a fee that is higher than necessary to address the costs of EPDS or for the purpose of discouraging protests. With regard to a lower fee or fee waiver for small businesses, GAO has concluded that the anticipated fee of $350 is appropriate given the costs of the system. Additionally, GAO has concluded that the interest of administrative efficiency supports imposition of a uniform fee for all protests.

GAO doesn't want to discourage protests, but at $350 per filing, it would have cost Latvian Connection $157,000 to file its 450 bid protests over a five year period. Perhaps we should refer to the $350 fee as the "Latvian Fee".

There are a few other significant revisions to the bid protest regulations including (i)due dates, (ii) requests for documents (iii) the ability to request relevant documents not in the Government agency's possession, and (iv) handling protected documents. Read the full final rule here.