Identifying "Holes" in Your Timekeeping System

Throughout the eight + years of this blog's life, we've discussed, in various fashions, the critical importance of timekeeping systems as well as contract auditors' floorchecks and labor interviews used to test the adequacy of those systems. An adequate timekeeping system is perhaps the most important system of internal controls for a contractor with cost-type contracts. One could argue that an accounting system is more important but an accounting system can be recreated whereas a timekeeping system which captures employee time charges contemporaneously with the work performed, cannot be accurately recreated.

The first thing a contract auditor needs to do when performing floorchecks and other timekeeping reviews is to develop an understanding of the system as it currently exists. To do this, contract auditors will gather a lot of information. This data gathering phase helps them to establish their audit scope; obviously, more robust controls will require less transaction testing. This series of "determinations" include the following:

1. Determine how attendance is controlled; through electronic systems, clock cards, timecards, or other suitable time and attendance records.

2. Identify the process for controlling employee time records at each timekeeping station or the electronic timekeeping input and related records. Electronic timekeeping should include procedures to ensure that employees do not share their access credentials.

3. Determine the procedures for notifying the employee of the assigned job number and whether the procedures provide that all changes are properly initialed/approved by the employee and the designated approving supervisor. This is extremely important to ensure that labor charges get tot he proper cost objective.

4. Determine whether hours shown on the timecards or input electronically are reconciled periodically with hours recorded on attendance and payroll records. Many contractors fail to include this reconciliation.

5. Determine whether there is a division of responsibility within the company between personnel responsible for the preparation and or approval of time and attendance records and those responsible for the preparation and distribution of payroll.

6. Determine whether there is a division of responsibility between personnel having a part in the preparation and/or approval of time and attendance records and those responsible for operating within budgets. If a division of responsibility does not exist, the risk increases for affecting payroll in proportion to the number of personnel the employee/manager can influence.

7. Determine whether procedures have been established for coding and recording idle time. The Government will insist that idle time be prorated among all work.

8. Determine whether records of piece work and work performed under wage incentive plans are checked and controlled independently from production counts, approvals for allowances, and other operations.

At this point, the contract auditor is only gathering information and not making any assessments as to the adequacy and sufficiency of a timekeeping system. That comes later in the audit. Contractors can use this listing however to identify where weaknesses might exist in their own timekeeping system.

SBA's Surety Bond Guarantee Program

Under the SBA's Surety Bond Guarantee (SBG) Program, the SBA guarantees bid, payment and performance bonds for small and emerging contractors who caqnnot obtain surety bonds through regular commercial channels.

SBA's guarantee gives Sureties an incentive to provide bonding for small businesses and thereby, assists small businesses in obtaining greater access to contracting opportunities. SBA's guarantee is an agreement between a Surety and SBA that SBA will assume a certain percentage of the Surety's loss should a contractor default on the underlying contract.

Pursuant to its statutory authority "to establish such fee or fees for small business concerns and premium or premiums for sureties as it deems reasonable and necessary", and to administer the SBG Program on a prudent and economically justifiable basis, SBA assess a guarantee fee against both the small business concern and the Surety and deposits these fees into a revolving fund to cover the program's liabilities and certain program expense.

Since 2006, the fee charged to the Sureties has been 26 percent of the bond premium and the fee charged to small businesses has been $7.29 per thousand dollars of the contract amount. Prior to that, the fees were less but the SBA determined that the program's revolving fund was insufficient to cover projected, unfunded liabilities.

Since the last fee increase in 2006, the fees have been more than sufficient to support the program and as a result, a surplus has accumulated in the fund. This means that the SBA can lower its fees until the surplus is depleted. Beginning in October, the Surety fee will decrease from 26 percent to 20 percent of the bond premium and the small business fee will decrease from $7.29 to $6.00 per thousand dollars of the contract amount.

This decrease will remain in effect for at least one year. During the year, SBA will study and analyze whether the lowered fees can be sustained. If not, the fees will revert to the previous schedules.

Good news for small businesses.

3M Sells the Government Defective Earplugs

A whistleblower suit alleged that 3M Company sold defective earplugs to the Defense Department. Apparently, these particular earplugs were too short for proper insertion into users' ears and the plugs could also loosen imperceptibly and cause them to fail. Apparently, 3M Company know about the defects but failed to disclose the design defects to the military.

This is a case where the Government might never have known the earplugs were defective had it not been for the whistleblower who had knowledge of the defective design and also knew that 3M had delivered the earplugs anyway.

3M agreed to pay $9.1 million to resolve the allegations although in doing so, made no concession of liability or admission of guilt. For his (or her) reward for raising the issue, the whistleblower will receive almost $2 million (or whatever is left of the $2 million after the attorneys take their cut).

This is no small matter. Hearing loss from military weapons is painless, permanent, and progressive. But it is also preventable. It has been reported that 52 percent of combat soldiers have moderately severe hearing loss, or worse. Hearing loss and tinnitus (a ringing in the ears) is the single injury that affects military personnel more than any other. In many cases, hearing loss can affect survivability.

3M's deliveries of faulty earplugs to the military could result in more than just hearing loss. It could also affect soldier survivability. Wonder who in the organization thought that company profits were more important than soldier survivability?

New Checklists for Termination Settlement Proposals

DCAA (Defense Contract Audit Agency) recently posted several  adequacy checklists for termination settlement proposals for cost and fixed priced contracts.

• Cost type contracts
• Fixed price -inventory basis
• Fixed price - total cost basis (most common form of submission)

Checklists are useful tools for ensuring that proposals conform to the Government's basic expectations submissions. Some checklists are mandatory such as the DFARS (DoD FAR Supplement) Proposal Adequacy Checklist found at DFARS 252.215-7009. Most, including the termination settlement proposal adequacy checklists linked above and others such as the incurred cost adequacy checklists, are voluntary.

Whether voluntary or mandatory, it seems wise to us for contractors to utilize these checklists during the preparation of whatever submission will be presented to the Government. These checklists inform as to what the Government will be looking at and should reduce the change that submissions will be returned as inadequate.

Contractor Waives Its Rights to File a Claim

In 2014, the AAFES (Army and Air Force Exchange Service) awarded a contract to Team Hall Venture to operate a frozen yogurt concession at a food court on a military base. The contract period of performance was for up to ten years. The concession opened that November but had to close from time to time due to rodent infestation and flooding. About a year and a half after opening, the concession ceased operations and the contract was terminated.

As part of the termination agreement, Team Hall released AAFES from any and all obligations related to the contract and waived any claim against AAFES for monetary or other relief to the contract including any that may arise in the future.

In September 2015, about two months following termination, Team Hall presented a certified claim for $673 thousand representing lost profits for the eight years remaining on the contract. The contracting officer denied all but $30 thousand  of the $673 thousand. Team Hall appealed the contracting officer's final decision to the ASBCA (Armed Services Board of Contract Appeals).

The ASBCA denied the appeal, noting the plain language of the waiver signed by Team Hall. The ASBCA gave no credence to Team Hall's assertion that the Government slipped the language into the contract modification at a later date.

The ASBCA did not rule on the validity of the claimed amount - i.e. whether lost profits are recoverable under a contract termination. The Board didn't have to as the contractor had waived any rights to additional monies.

The full decision can be read or downloaded here.

Paid Voucher Audits

Most Government contractors with cost-type contracts have been subjected to "paid voucher" reviews. These are reviews where contract auditors (usually DCAA or Defense Contract Audit Agency) will take a voucher that has previously been paid in the last year and trace the amounts claimed, billed, and paid to source documents. This is a fairly recent program coming out of DCAA with dubious benefits. One former auditor speculated that after DCAA transitioned most of its important work to DCMA (Defense Contract Management Agency), it has been scrounging around looking for purposeful work. Whether paid voucher reviews provide a benefit to the Government or not, most of the testing steps do not require the skills of professional auditors (Certified Public Accountants). Many "testing" steps are those that anyone, with minimal training, could perform - e.g. did the contractor pay the vendor in 30 days?

The basic audit policy is to review one paid voucher per year at non-major contractors and one voucher per month at major contractors. The distinction between major and non-major is $100 million of costs charged to flexibly priced contracts in a year. Contractors with less than $100 million are considered non-major contractors.

One aspect of these reviews that sometimes becomes contentious concerns T&M (Time and Material) contracts and the requirement to compare employee qualifications to those specified in the contract. This is why auditors request contractors to provide personnel files - to ascertain whether their education, training, and experience qualifies them to perform the function at the level they are billed to the Government. For example, while an apprentice may perform a particular function just fine, the Government, by terms of the contract, wants and is paying for a Senior Engineer. Contractors, if you ever find yourself in a situation where you cannot meet the contractual requirements for a particular skill, contact your contracting officer and let them know the situation. It might require a reduction in a T&M rate but that is much better than finding yourself on the wrong end of an investigation.

Another issue that frequently arises concerns contractor oversight of cost-type subcontractors. For most non-major contractors, this is not a problem because there are no subcontract costs charged to the contract. But where there are subcontract costs, the auditors will want to know what controls are in place to manage those subcontracts and monitoring subcontract billings. Contractors do have the contractual requirement to ensure the propriety of subcontractor submitted costs and where those subcontracts are cost-reimbursable, the Government expects a level of oversight similar to what it performs for the prime contracts.

The DCAA audit program for paid voucher testing can be viewed or downloaded here.

Government Procurement Satisfaction Surveys

The FAR (Federal Acquisition Regulation) Council is considering an addition to FAR to establish a survey to solicit voluntary feedback from companies who bid on Government contracts. They are seeking public input on the potential benefits and burdens of voluntary feedback surveys. There shouldn't be any burdens really. When we're asked to respond to a survey, we always answer 'no' or delete the email. That's not much of a burden. The real question concerns the benefits that can be derived from surveys and whether the Government is willing to, or is permitted to, take action or make changes to the procurement system based on survey results. A related question is whether the Government should make changes based on survey results. Voluntary survey results are not statistically valid, are they? We suspect companies that have issues with the procurement process are over-represented in the universe of participants.

In any event, the FAR Councils believe that establishing a standardized process for obtaining voluntary feedback following a contract award will provide more meaningful insight on ways to strengthen the contracting process than can be derived by relying on ad hoc or periodic agency satisfaction surveys. Voluntary participation would not bestow respondents any direct benefits or protections in the acquisition process or any subsequent protests. There are other mechanisms and protections for appeals.

The draft survey is available at this site for a time. We don't know how long the page will be active. The survey is divided into three sections; the requirements development process, the solicitation phase and the award execution and debriefings stage. Responses are on a scale of 1 to 5 ranging from extremely satisfied to extremely dissatisfied. There are also selections for 'not applicable' and 'no answer'. Survey questions include:

Requirements Development Process - How satisfied were you

• with the agency's vendor engagement methods (e.g. FRIs, draft RFP, pre-award conferences) in fostering early communication and exchange before receipt of proposals?
• That the exchange offered by any industry day(s) offered valuable information that improved your understanding of the agency's requirements?
• With the agency's understanding of your firm's marketplace?
• With the clarity of the final requirements?

Solicitation phase - How satisfied were you

• That the agency kept vendors informed about any delays in the solicitation process (considering both the initial release and any subsequent delays)?
• That the solicitation included clear proposal submission instructions that sufficiently guided offerors or respondents in preparing proposals or responses to requests for information?
• That the government chose an appropriate contract type?
• That the government chose an appropriate source selection methodology?
• That the agency answered questions regarding the solicitation is such a way that it helped you to prepare the proposal?
• With the opportunity to propose unique and innovative solutions (i.e., the solicitation promoted innovation)?
• With the clarity of the solicitation's evaluation criteria?
• With the amount of time the agency gave to submit a proposal?
• That the solicitation's evaluation criteria allowed for the best selection among competing proposals?

Award Execution and Debriefings - How satisfied were you

• with the agency's resolution of issues/concerns related to the contracting process?
• with the robustness of the agency's debriefing (i.e., it allowed you to understand how to improve on similar efforts in the future)?

The survey also asks the respondents for an assessment of their overall experience on this acquisition.

How Good Are Background Investigations for Security Clearances?

The National Background Investigations Bureau (NBIB) - part of OPM (Office of Personnel Management) provides background investigations for eligibility for access to classified information; eligibility to hold a sensitive position; suitability or fitness for government employment; fitness to perform work for or on behalf of Government as a contractor employee; and more.

NBIB has a staff of more than 9,900 federal and contract employees. Think of that. That number is more than double the number of contract auditors. Last fiscal year, according to the Justice Department, NBIB processed more than 2.5 million background investigations. That works out to more than 250 investigations per employee. That works out to an average of more than one investigation per day if the employee never took any vacation, sick leave or holidays. Is that even possible? Seems like NBIB employees might be overworked. Perhaps they are.

The Justice Department just announced a guilty plea by a background investigator who did work under contract for OPM. This contract worker falsified work on background investigations of federal employees and contractors. In 2014 and 2015, this investigator falsified information in more than two dozen "Reports of Investigations". She represented that she had interviewed a source or reviewed a rcord regarding the subject of the background investigation when in fact, she had not conducted the interview or obtained the records of interest. Her reports were utilized and relied upon by various agencies requesting the background investigations to determine whether the subjects were suitable for positions having access to classified information, for positions impacting national security, for receiving or retaining security clearances, or for positions of public trust.

The Government, of course, had to reopen those investigations and spent about $190 thousand to re-investigate. The Justice Department claims that OPM has "a robust integrity assurance program which utilizes a variety of methods to ensure the accuracy of reported information and that the falsification of investigative case work by this investigator was detected through the program. The Justice Department noted that since 2008, 24 other background investigators have been convicted of charges involving  false representations.

Safe-Harbor Indirect Expense Rate for Transportation Projects

The Federal Highway Administration (FHWA) is proposing to expand the use of a "safe harbor" indirect rate beyond the 10-state pilot program.

The FHA (as well as state transportation departments) have long recognized that the process of establishing indirect rates is costly and a barrier to for firms wanting to participate in engineering and design service contracts.

Contractors providing services under cost-reimbursable contracts using FAHP (Federal-aid Highway Program) funds are required to account for, and bill, costs in accordance with FAR cost principles. In addition, Federal law and regulations for the FAHP require contracting agencies to accept indirect cost rates for the purposes of contract estimation, negotiation, administration, reporting, and contract payment. As such, contractors are required to develop indirect cost rates in accordance with the Federal cost principles on an annual basis. Similarly, contracting agencies must provide reasonable assurance that consulting firm costs are allowable in accordance with the Federal cost principles.

Adhering to these accounting requirements can place a significant burden on some consulting firms and may create a barrier for otherwise eligible and qualified firms to compete for FAHP-funded contracts. For example, small firms, including many disadvantaged business enterprise firms, may lack the financial expertise to develop an indirect cost rate that would be acceptable to a cognizant Federal or State government agency, or lack the resources to hire a Certified Public Accountant to conduct an audit to provide assurance as to the development of an indirect cost rate compliant with Federal requirements. Often, a CPA audit is cost-prohibitive given the size and scope of the federally funded contracts for which the firm could compete. In addition, new or start-up firms generally do not have a contract-related cost history to use as a base for development of an indirect cost rate. Other well-established firms may not have previous experience with federally funded contracts for which a compliant indirect cost rate could be developed. Currently, these firms are prohibited from participating in FAHP-funded contracts without the development and application of a provisional indirect cost rate for the specific contract, which is adjusted based upon a contracting agency conducted final audit at the completion of the contract. Even the smallest final audit requires a significant commitment of contracting agency audit resources.

To remove these barriers, the FHWA developed the Safe Harbor Indirect Cost Rate Test and Evaluation pilot giving firms the option of using a rate of 110 percent in lieu of establishing their own rate. The 110 percent rate is significantly lower than the industry average rate which means most companies would lose money by using the safe harbor rate. FHWA's logic here is that the safe-harbor rate provides an incentive for firms to develop their actual rate in accordance with Federal cost principles.

The FHWA is now looking to adopt the safe-harbor rate as a permanent tool in its oversight process and is seeking public comment on the expansion. Specifically, FHWA is interested in receiving quantifiable estimates of the burden associated with the annual development of an indirect cost rate, hiring a CPA to conduct necessary audits, and any other costs that owuld be avoided by a firm (or contracting agency) in utilizing a safe-harbor indirect cost rate.

Instructions for submitting comments can be found here.

CAS Board Published Final Rule on Exemption from CAS

The Cost Accounting Standards Board (CASB) published a final rule yesterday revising the exemption for contracts and subcontracts for the acquisition of commercial items. This final rule clarifies the types of contracts that are exempt from the application of CAS when acquiring commercial items. It becomes effective on August 16, 2018.

The new rule is designed to remove inconsistencies between the list of contract types recognized for use in acquiring commercial items in the CAS administration rules (48 CFR 9903.201-1(b)(6)) with the contract types reflected in FAR (48 CFR 12.207).

For example, FAR 12.207 allows the use of firm fixed price contracts in conjunction with award fee incentives or performance or delivery incentives known as FPI contracts when the award fee or incentive is based solely on factors other than costs. However, the CAS exemption does not expressly recognize FPI contracts on the enumerated list of exempt contracts.

Under the new rule, the CAS Board simply replaced the existing exemption language with a reference to the FAR reference covering contracts available for commercial items.

Old provision: Firm fixed-priced, fixed-price with economic price adjustments (provided that price adjustment is not based on actual costs incurred), time-and-materials, and labor hour contracts and subcontracts for the acquisition of commercial items.

New provision: Contracts and subcontracts authorized in 48 CFR 12.207 for the acquisition of commercial items.

Read more about the new rule including public comments and the Board's responses thereto here.

Proposed Legislation - Fitness Information Transparency Act

Last February at a hearing in front of the Oversight and Management Subcommittee of the House Homeland Security Committee, representatives of contractors for the Department of Homeland Security (DHS) complained about losing money while waiting for clearances form DHS. The contractors cited a number of problems including

• differing security standards across components
• opaque internal processes, and
• slow communications from DHS to contractors

One contractor testified that his employees wait, on average, 213 days for a DHS fitness determination even though the company has worked with DHS for more than ten years. Another contractor complained that DHS had approved an employee in June but didn't bother conveying that information to the contractor until the following February, eight months later. Other contractors complained that different components within DHS had their own unique standards for clearing contractor employees. Many other anecdotal fumblings by DHS came out in that hearing.

 

Last week, as a direct result of that hearing, two Congressmen introduced a bill in the House that would require the Department of Homeland Security (DHS) to streamline "fitness determinations" for people working under contract for the Department. This is not a bill that addresses fitness as in physical fitness but one that addresses character and conduct.

This Bill, if passed, would require DHS to:

1. coordinate with the heads of components of the Department to review and consolidate all Federal contractor fitness standards used by the Department and its components in order to issue a uniform set of fitness standards that reflect public trust concerns which correspond to each position risk level
2. require the Department to use such uniform fitness standards that corresond to the relevant position risk level as the basis for fitness determinations for a contractor employee; and
3. publish the standards that correspond to each such position risk level on the public website and the Federal Register.

You can read the full text of the proposed legislation here.

Hiccup in GAO's New Electronic Docketing System Resulted in Untimely Bid Protest

The Department of Housing and Urban Development (HUD) entered into a one year contract with P.K Management Group (PKMG) for field service management services and HUD managed properties in the Pacific Northwest. The contract was awarded on a sole source basis citing unusual and compelling urgency that had arising from HUD's decision not to exercise an option to extend the incumbent contractor. HUD need to provide continuous services so that approximately 500 HUD-owned properties in the Pacific Northwest could be marketed, preserved and protected, and so that the risk of adverse occupants, vandals, and thieves could be managed.

One company, CWIS LLC did not think that the sole source justification was adequate and that HUD lacked a valid legal and factual basis to award a contract to PKMG. CWIS argued that 12 months was too long and exceeded the time necessary to conduct a competition for the requirement and moreover, the unusual and compelling urgency cited by HUD is negated by its own failure of reasonable planning.

CWIS then filed a bid protest. At least it thought it filed a bid protest. One minute before the closing time for submitting protests, counsel for CWIS attempted to file a protest using EPDS (Electronic Protest Docketing System). The attempt was unsuccessful. One minute after the closing time, CWIS counsel notified the GAO by email that its attempt to file using EPDS had been unsuccessful and 15 minutes after closing time, CWIS counsel submitted the protest by email to the GAO protest inbox.

GAO showed no sympathy for CWIS stating that CWIS had, by regulation, 10 days to file its bid protest and 10 days should have been more than sufficient. Since the protest was untimely (by 15 minutes), GAO dismissed it.

Read the full decision here.

Significant Deficiencies Found in Government Credit Card Program

Contractors often complain that it takes a lot of time and effort to manage company-issued credit cards. The Government has the same issue but on a grander scale. In a six month period ending March 31, 2017, Government charge card holders in just 20 Agencies, racked up more than 1.8 million purchases totaling $941 million using Government issued credit cards.

Twenty Federal Offices of Inspector General (OIGs) got together to conduct an analysis of Government purchase card transactions. The OIGs tested transactions using data analysis tools to identify purchase card transactions that were potentially illegal, improper, or erroneous, such as transactions that were made with prohibited or questionable merchants, transactions with sales tax, transactions with unauthorized third-party merchants, and transactions indicating they were split transactions. From this universe of 562 thousand high risk transactions totaling $588 million, the OIGs selected 1,255 totaling $1.3 million for further analysis.

Of the 1,255 transactions sampled, the OIGs found problems with 501 transactions. Some transactions were identified with more than one deficiency. The most significant deficiency related to purchases from questionable merchants like caterers and florists. Many lacked approval by an approving official. Split transactions, where a card holder will split a transaction into multiple payments to skirt limitations (such as the micro-purchase threshold) was a significant problem. The OIGs found many transactions where the cardholders improperly paid sales tax and found many transactions where cardholders made internet purchases to avoid mandatory sources.

The OIG's recommendations were very generic. They recommended that agencies should take steps to improve controls such as training, policies and procedures, separation of duties, and supervisory reviews to mitigate risks from potentially illegal, improper, or erroneous transactions.

The report, which can be downloaded (or read) at this link, contains useful information for contractors that desire to enhance their employee credit card policies and procedures.

Government Caused Delay - Contractor Inflates its Equitable Adjustment Proposal

A contractor for the Department of Veterans Affairs filed an appeal with the Civilian Board of Contract Appeals (CBCA) for additional costs incurred as a result of extending the contract by five days because of altered and added work.

The amount of the claim was only $5,633 and included indirect costs that the contractor tried to claim as direct and some other items that were largely unsupported. The Government calculated that the contractor was only due $603, an amount the CBCA ultimately awarded the contractor.

 The contract stated that overhead and fee percentages include field and office supervisors and assistants. The contractor claimed costs for such individuals as direct costs. The contractor also claimed cost for a portable toilet that it could not support and cost for a forklift and fuel which it was unable to demonstrate a direct relationship to the work required by the contract.

The CBCA was rather critical of the contractor's approach.

The contractor's broad-brush approach, and failure to point to specific tasks or related dollars, results in an unsupported position. Impacted work may, not must, result in a change in value. Not all remaining work is necessarily impacted by a change order because non-change order work perhaps is performed as originally scheduled, or is performed earlier or later with no change in value or cost to the contractor

Contract auditors are guided to ensure that costs included in equitable adjustment claims have a strong nexus to the event giving rise to the equitable adjustment proposal or claim. It is the auditors concern that some contractors use the equitable adjustment process to "get healthy" by including costs that bear no relationship to the delay or disruption. This particular claim fell well short of the threshold for an audit so it had to have been some woke person in the contract administration department that figured out what was going on.

You can read the entire CBCA decision here.

Section 809 Panel - Government's Acquisition Workforce Needs Reforming

Why should Government contractors care about the Government's acquisition workforce? Well, for one, the acquisition workforce (AWF) is pivotal to acquisition and the efficiency of Defense acquisition depends on and is determined by the people who are responsible for all phases of the acquisition. Long-time Government contractors know - they know that acquisitions, be they easy or long drawn-out affairs, are greatly influenced by the competency of the Government's AWF.

The Section 809 Panel recently released its second of three reports on streamlining acquisition regulations and the Panel was specifically requested to address the needs of the AWF. Here's a paraphrase of their assessment and the things that need to be done to ensure that the workforce is capable of implementing much-needed acquisition reforms in the 21st Century.

Challenges faced by the acquisition workforce (AWF) are well known. They include a cumbersome hiring process, budgetary constraints that hinder recruitment incentives, training and development and a professional certification process that is increasingly disconnected from the practical skills and experience requirements. There are cultural challenges as well that include a personnel system that fails to incentivize success, political and administrative decisions that promote adherence to process and procedure instead of creativity and innovation, and a lack of authority on on the part of key players in the acquisition system to properly perform their duties. Underlying all of these challenges are rigid, bureaucratic rules, overly prescriptive regulations, and a slow process of integrating new technologies into existing processes. DoD recognizes these problems and has called for a new emphasis on critical thinking, risk management, flexible decision-making that would constitute a significant cultural shift away from existing regimented process and zero-risk mentality.

In this report, the Section 809 Panel made several AWF recommendations and promised more recommendations in its third report. These recommendations include:

• Simplify and expedite hiring authority - right now it takes seemingly forever to bring someone on board and the Government is not necessarily attracting the best qualified candidates.
• Convert a pilot project that provides DoD with greater control over personnel processes and functions that enable DoD to attract and retain employees who contribute most to successful organizational mission outcomes to a permanent personnel system.
• Enhance the Defense Acquisition Workforce Development Fund - monies used for recruitment, training, and retention of acquisition personnel.

These recommendations do not seem to address the Panels main criticism, that being the adherence to process and procedure instead of creativity and innovation. As long as there are IG (Inspector General) organizations running around beating up on workforce personnel for not complying with some obscure and unimportant procedure, innovation will always take back seat to adherence to procedures. Perhaps the additional recommendations promised in the Panel's third report will be to redirect the IG's activities.

Why Audits of Government Contracts and Grants are Important for Taxpayers

Back in 2009 and 2010, the Federal Government was spending seemingly endless amounts of cash on stimulus projects (remember the American Recovery and Reinvestment Act). While everyone quickly realized that the jobs promised by spending a trillion dollars on what were supposed to be "shovel ready" projects, didn't materialize as hoped. There are plenty of examples questionable expenditures. In one such case, the Energy Department decided to use stimulus money to expedite nuclear facility cleanup. A lab needed to test soil samples was told to hire fourteen new employees in anticipation of a significant workload increase. The project was not exactly shovel-ready and so excavation never materialized and no soil samples were sent to the lab. When the stimulus money ran out, the lab laid off the fourteen chemists.

In another stimulus case that is finally reaching its conclusion, the Energy Department gave North American Power Group (NAPG) and its owner, Mike Ruffato a $10 million grant for a Carbon Site Characterization Project to collect and analyze data and to design and implement carbon sequestration wells at the Two Elk Energy Park in Wyoming. The problem was that there was no operational energy plant there so there was nothing to carbon sequestration to study. So, Mr. Ruffato spent the money on other things, things like personal legal fees, car payments, jewelry, international travel and other personal items. The Energy Department suspended the agreement in 2012 after discovering the fraudulent claims but by then, Ruffato had spent $5.7 million out of the $10 million grant.

Mr Ruffatto plead guilty and was sentenced last month to 18 months in prison, three years supervised release, a $50 thousand fine, and $14.4 million in restitution.

Read more about Mr. Ruffatto's activities here.

Read the related Justice Department press release here.

Be Certain to Deliver What the Government is Paying For

The Justice Department just announced a settlement in what has become an all-to-common situation - one where a contractor is not giving the Government what it is paying for. We're talking about T&M (Time and Materials) contracts where fixed hourly rates are based on particular skills, experience, and other qualifications. When contractor then bills those rates using individuals that do not meet the qualifications (i.e. those with lesser skills and experience), the contractor is securing windfall profit and the Government is getting less than it bargained for. Think of it as paying for a Maserati but driving away in a Ford.

Contract auditors are attuned to these situations. In fact, incurred cost audit procedures specifically identify this as a high risk audit area and auditors are required to develop procedures to specifically look into whether this is occurring. Some of you have probably already fielded auditor requests to review personnel files.

In the latest case to be publicized, CACI Technologies (CACI) agreed to pay the Government $1.5 million to settle an allegation that it billed and accepted payment from the Government for work performed by certain CACI employees who did not meet the required qualifications. The contract referenced attached labor categories that prescribed the type of experience and educational qualifications needed for classes of personnel billed under the particular labor category.

This scheme went on for at least three and a half years before coming to light. The Justice Department press release on the matter did not disclose how the alleged fraud was uncovered. It could well have been the result of an incurred cost audit. It could also have been the result of company whistleblower.

Section 809 Panel Issues Report No. 2 - CAS Thresholds

We reported yesterday that the Section 809 Panel (the Advisory Panel on Streamlining and Codifying Acquisition Regulations) had just issued is second of three reports with recommendations on streamlining the acquisition process. Yesterday, we began our coverage of the report with the Panel's recommendations to significantly enhance the functionality of the Cost Accounting Standards Board (CASB). If you missed that post, you can go back and read it by clicking here.

The Panel made a second recommendation concerning Cost Accounting Standards. They have recommended that certain monetary thresholds be raised. Recently, as a result of the 2018 NDAA (National Defense Authorization Act), the CAS-covered contract threshold was significantly increased from $750 thousand to $2 million. The CAS-covered contract threshold is tied into the requirement for certified cost or pricing data so that is why the threshold increased. The increase became effective just a few days ago; July 1, 2018. The Panel recommended that the CAS be de-coupled from the TINA threshold and set at $35 million.The Panel also made increased threshold recommendations to the "trigger contract", the full-coverage, and the disclosure statement events.

Trigger Contract. The trigger contract threshold is now $7.5 million. CAS does not apply until a contractor receives a CAS-covered award of $7.5 million or more. Once that threshold is reached, all CAS-covered contracts subsequently awarded to that contractor are subject to CAS. The Panel recommends eliminating this threshold entirely since it would no longer be necessary with the CAS covered contract monetary threshold were raised to $25 million.

Full CAS Coverage. The current full CAS-coverage threshold is a CAS-covered contract of $50 million or more. Contracts below this threshold are subject to modified CAS-coverage (Standards 401, 402, 405, and 406). The Panel recommends increasing this threshold to $ 100 million.

Disclosure Statement. Presently, the threshold for requiring a disclosure statement is $50 million in total CAS-covered contracts. A disclosure statement is not required, however, for individual business segments of a contractor that have CAS-covered contracts that are valued at less than $10 million and represent less than 30 percent of sales. The Panel is proposing to increase this threshold to $100 million and also eliminate the $10 million / 30% exemption.

The Panel estimates that these increased threshold would remove about 10 percent of DoD procurement dollars from CAS coverage but would remove a significantly higher percentage of contractors out of CAS requirements.

Section 809 Panel Issues Report No. 2 - Cost Accounting Standards

The Section 809 Panel (officially the Advisory Panel on Streamlining and Codifying Acquisition Regulations) has issued Vol. 2 of its three volume report. This report builds on the Panel's commitment to making "actionable" recommendations and providing the language necessary to implement those recommendations. Volume 2 contains recommendations addressing the acquisition workforce, commercial source selection, the Cost Accounting Standards Board, and service contracting. Volume 3 is schedule to be released later this year.

We thought that the Panel would recommend that the moribund Cost Accounting Standards Board be abolished. It hasn't done anything significant since 2011. We were wrong. The Panel want to revitalize the Board, move it our from under OFPP (Office of Federal Procurement Policy) and make it an independent board with adequate staffing and funding. The report summarizes:

The Cost Accounting Standards Board (CASB) and cost accounting standards (CAS) need to be restructured to provide necessary guidance and minimize the burden for government and contractors. The CASB should be reinvigorated by extracting it from the Office of Federal Procurement Policy and making it an independent Executive branch organization. The CAS program requirements should be modified to include raising the thresholds for full CAS coverage and the disclosure statement and adding guidance for CAS applicability to hybrid contracts and indefinite delivery contract vehicles.  

The report concludes that the CAS Board's current configuration within OFPP is ineffective at proficing for application of CAS to federal government contracts. CASB has only rarely met in recent y ears, and member positions often go unfilled for long periods. Meanwhile, changes to Government contracting require ongoing updates to the standards and resolution of question s about CAS applicability. Because CASB has not been responsive to these changes, contractors are overly burdened by the need for added layers of compliance to many rules that have not kept pace with new business models. CASB needs to be reinvigorated as an independent organization and removed from OFPP.

How long has this conditions existed? The panel says its been going on for 30 years. "For the past 30 years, CASB has failed to address urgent issues in a timely way." The most pressing problem with the current CASB formulation is the administration of the Board at the OFPP, partly due to a lack of leadership and subject matter expertise. The OFPP administrator position changes frequently and is often vacant, leaving the role in the hands of an acting administrator, most often a career civil servant versed in procurement policy, but without the requisite authority or experience in accounting and contract management to push forward needed CAS reforms (the current OFPP administrator position has been vacant since January 2016).

The Panel made several recommendations including the placement under GSA (rather than OFPP), a permanent staff, independent of any other agency, mandatory meetings, among a few others. The Board should consist of five members; a chair with extensive experience in administering and managing as a senior government official of major CAS-covered contracts, two members from the Government (not auditors or investigators), one member from a government contractor and one member from the accounting profession.

The full report is available here.

Would You Certify Cost or Pricing Data that was Never Intended to be Certified?

DoD is proposing to amend its FAR Supplement (DFARS) to implement a section in the 2017 NDAA to address the requirement for certification of cost or pricing data and potential submission of additional certified cost or pricing data when only one offer is received in response to a competitive solicitation.

For adequate price competition to exist, there must be two or more responsive and viable offers from independently competing offerors. Obviously, one bidder would not qualify as competition.

Under the newly proposed regulations, contractors may be required to certify cost or pricing data that was submitted as part of its competitive bid. This could be dangerous for the contractor because the data was never intended to be certified. Contractors need to be careful before agreeing to certify such cost or pricing data.

In any event, here is what the proposed regulation provides.

If only one offer is received when competitive procedures were used and it is not necessary to re-solicit, then

     a. If not additional cost or pricing data are required to determine through cost or price analysis that the offered price is fair and reasonable, the contracting officer shall require that any cost or pricing data provided in the proposal be certified if the acquisition exceed the certified cost or pricing data threshold.

      b. Otherwise, the contracting officer shall obtain additional cost or pricing data to determine a fair and reasonable price. If the acquisition exceeds the certified cost or pricing data threshold and an exception to the requirement for certified cost or pricing data does not apply, the cost or pricing data shall be certified.

     c. If the contracting officer is still unable to determine that the offered price is fair and reasonable, the contracting officer shall enter into negotiations with the offeror to establish a fair and reasonable price. The negotiated price should not exceed the offered price.

Most certainly, any contract awarded under the scenario described in 'a' above is at high risk for a planned defective pricing audit.

Read more about the proposed regulation here.

Reduced Profit Margins for Undefinitized Contract Actions

Sometimes, due to exigencies of Defense Department needs, the Government will authorize contractors to proceed with the work and submit the associated pricing proposal at a later date. These actions are typically referred to as "undefinitized contract actions" or UCAs.

As work progresses without a contract, a lot of the "risks" associated with performance evaporates. Ultimately, actual cost are rolled into the contract price while cost to complete remain the only uncertainty. The longer a contractor performs under a UCA, the less risk there is to that contractor.

Profit and Fees are based on risk perceptions. Fixed price contracts are awarded higher fees than cost-type contracts for obvious reasons. The Defense Department uses a tool called the "Weighted Guidelines Method" to calculate a reasonable fee range for each contract. See DoD Weighted Guidelines for Determining Profit or Fee. The concern has been, for some time, that contracting officers do not adjust the fee for UCA's where a substantial portion of the work has already been performed resulting in less risk for the contractor.

That's about to be corrected.

The Defense Department finalized a new rule last week to provide a more transparent means of documenting the impact of costs incurred during the undefinitized period of an UCA and to recognize when contractors demonstrate efficient management and internal cost control systems through the submittal of a timely, auditable proposal in furtherance of definitization.

According to the Defense Department, sometimes contracting personnel have not documented their consideration of the reduced risk to the contractor of costs incurred during the undefinitized period of a UCA. While such costs generally present very little risk to the contractor, the contracting officer should consider the reasons for any delays in definitization in making their determination of the appropriate assigned value for contract type risk.

Under the new rule, the weighted guidelines method adds two new factors; contract type risk based on incurred costs at the time of qualifying proposal submission and contract type risk based on government estimated cost to complete.

You can read more about the proposed rule here.