Seven Individuals Indicted in $14 Million Scheme to Defraud the Government

The Telecommunications Act of 1996 added a statutory objective for the FCC (Federal Communications Commission) to provide advanced telecommunications services to schools and libraries in economically disadvantaged areas. This became known as the "E-rate" program and it provides subsidies ranging from 20 percent to 90 percent of the cost of telecommunications services, internet access, and related equipment. FCC raises about $3 billion per year by tacking on a fee to everyone's phone bill (you've all noticed it, we're sure). Over 30,000 applications from schools and libraries seeking funds under this program are received each year. It's no surprise then that every year, requests exceed the availability of funds.

In order to obtain funds under the E-rate program, education institutions and libraries certify that they are purchasing equipment and services from a private vendor. Schools are required to enter into an open bidding process in order to select a vendor. The schools and vendors are also required to submit a series of certifications that they comply with program requirements. Some schools don't have people knowledgeable in the process of preparing and submitting applications. The program allows them to hire consultants to put together the applications. The only stipulation in hiring consultants to do the work is that the consultants must be independent of the vendors competing to sell E-rate funded equipment and services.

Three billion per year is a lot of money but when you consider the cost of administering the program (it is administered by a contractor for the FCC) and the 50 million or so kids in public schools, it amounts to only $50 per student per year. Obviously that is not going to buy very much technology so it is imperative that the funds are spent wisely.

But, wherever there's Government money to be had, there are also scammers and the Justice Department released yesterday a press release about several individuals who have been indicted on charges of defrauding the E-rate subsidy program. Evidently, these conspirators comprised of vendors, consultants, and school officials were more interested in lining their own pockets than they were helping underprivileged kids.

According to the Press Release, Mr. Klein, his wife, his nephew, and five other individuals have been arrested and charged with a $14 million fraud where they secured funds from the E-rate program but never provided the equipment and services they had promised. One school, a private religious school in New Jersey received over $1 million in E-rate funds for the purpose of paying Klein but those services and equipment were never provided. In another case, E-rate funded $500 thousand for video conferencing and distance learning systems at a pre-school that cared for 2 - 4 year old children. That equipment was never installed at the preschool. There were other purchases of equipment not authorized by the program such as cell phones for personal use.

The conspiracy worked because school officials signed off that they had received the services and equipment. In return, the school officials received benefits, including cash.

Its difficult to establish internal controls that prevent conspiracies - when two or more people conspire to override the controls put in place. We don't know how this particular fraud was uncovered. Perhaps someone stepped forward and blew the whistle. Perhaps the FCC decided to conduct an audit of program expenditures.

Contractor Agrees to Pony Up for Shortchanging its Workers

A Government contractor, performing work funded by the Department of Transportation, has agreed to pay back wages, overtime, and fringe benefits to 77 employees. This agreement was the culmination of an investigation by the Labor Department's Wage and Hour Division (WHD). The WHD found that the contractor violated requirements of the Davis-Bacon Act, the Contract Work Hours and Safety Standards Act (CWHSSA), and the Fair Labor Standards Act (FLSA). We do not know why the WHD initiated its investigation. It could have been a result of a whistleblower or other complaint (as is often the case in these investigations) or the contractor could have been randomly selected as part of WHD's ongoing oversight responsibilities.

The Labor Department investigators determined that the contractor, Hoytt Reinforcing Inc., "inaccurately classified" employees as "laborers" when they were really doing the work of "reinforcing ironworkers". That sounds pretty bad, right? Because a common laborer is about the lowest skill level - an entry level position. As a result of the misclassifications,  Hoytt was able to pay the workers less than the prevailing rate for ironworkers, violating the various aforementioned laws. The investigators also found that Hoytt violated the FLSA by failing to maintain accurate time records, a violation of record-keeping requirements. Accurate timekeeping is as important here as it is under regular cost-type contracts.

Hoytt agreed to pay back wages and benefits to 77 employees. There was no mention as to whether civil or criminal penalties would be assessed. The problem here is twofold. Employees are not being paid the wages they are legally owed under Federal construction projects and second, it results in unfair competition for contractors who do play by the rules - i.e. estimate their costs based on prevailing wages.

File a Claim First, Then File Your Appeal

The ASBCA (Armed Services Board of Contract Appeals) dismissed, for lack of jurisdiction, an appeal by a contractor because there was insufficient evidence to show that the contracting officer ever received the claim.

The Board ruled that it is up to the appellant (i.e. the contractor) to demonstrate by a preponderance of the evidence that it first presented its claim to the contracting officer before appealing to the Board.

The contractor, Starwalker PR LLC, identified an email addressed to the contracting officer (and others) that referenced an attached certified claim. That email however did not provide the referenced attachment. Furthermore, the contracting officer testified under oath that she did not receive the claim.

The Government moved to dismiss the appeal for lack of jurisdiction. The contractor didn't request that the Board deny the Government's request but merely asked for a stay of proceedings to give the contracting officer time to decide the claim.

The Board granted the Government's motion to dismiss. The Board noted that the preponderance of the evidence before it did not demonstrate that the contractor had first presented its claim to the contracting officer.

Guess that's one way for the Board to get rid of its backlog. It doesn't solve the long-term problem however since the contractor can simply resubmit its claim to the contracting officer and if necessary, re-file an appeal with the ASBCA.

Rule Prohibiting Retaliation for Disclosure of Compensation Information Becomes Final

The FAR (Federal Acquisition Regulations) have converted an interim rule to a final rule, without change. This new rule, based on an Executive Order (EO) from the previous Administration prohibits Federal Contractors from discriminating against employees and job applicants who inquire about, discuss, or disclose their own compensation or the compensation of other employees or applicants. This rule applies to all contractors, both small (fewer than 500 employees) and large.

The regulation contains definitions of "compensation" and "compensation information" which are rather intuitive as you might expect (those definitions can be found in FAR  52.222-26(a)). The fundamental requirements of the regulation are these:

1. The contractor shall not discharge or in any other manner discriminate against any employee or applicant for employment because such employee or applicant has inquired about, discussed, or disclosed the compensation of the employee or applicant or another employee or applicant.
2. This prohibition against discrimination does not apply to instances in which an employee who has access to the compensation information of other employees or applicants as part of such employee's essential job functions discloses the compensation of such other employees or applicants to individuals who do not otherwise have access to such information, unless such disclosure is in response to a formal complaint or charge, in furtherance of an investigation, proceeding, hearing, or action.
3. The contractor shall disseminate the prohibition on discrimination to employees and applicants by incorporation into existing employee manuals or handbooks and electronic posting or by posting a copy of the provision in conspicuous places available to employees and applicants for employment.

We suppose that this regulation was a nod to some interest group but we have never heard of an instance where an employee or applicant was discriminated against for disclosing compensation information.We were kind of surprised that the current administration let this interim rule become final but perhaps it was the easiest path and its a "do-nothing" regulation. But in the current environment with the Section 809 Panel trying to weed out useless procurement regulations, it would have been a logical one to drop.

Contractors, don't forget to disseminate this new prohibition.

DoD Formally Rescinds IR&D Technical Discussion Regulation

The Defense Department amended it FAR Supplement (DFARS) back in November 2016 to require contractors to engage in and document a technical interchange as part of the criteria for determining the allowability of IR&D (Independent Research and Development) expenses. Before IR&D costs could be considered allowable under Government contracts beginning in 2017, contractors were required to engage in a technical interchange with a technical or operational DoD Government employee before the costs were incurred.

DCAA (Defense Contract Audit Agency) published guidance telling its auditors to question any IR&D expenses that were not supported by documentation that a technical interchange occurred prior to the costs being incurred.

The requirement was essentially unworkable since on one within DoD knew what technical exchanges were supposed to look like. Additionally, there wasn't enough technical people within the procurement community to engage in deep technical discussions with contractors, and tirdly, no one with DoD was volunteering to step up and have such discussions.

Less than a year later, in September 2016, the Defense Department issued a class deviation directing contracting officer to not require contractors to engage in technical exchanges as a condition of cost allowability. DCAA issued conforming guidance that instructed its audit staff to no longer question IR&D costs for lack of technical interchange documentation. This guidance applied to all current and future audits of any type.

Last week, the Defense Department formally and quietly rescinded the requirement.

DoD is amending the DFARS to remove the text at DFARS 231.205-18(c)(iii)(C)(4) which requires major contractors to engage in and document a technical interchange with the Government, prior to generating independent research and development (IR&D) costs for IR&D projects initiated in fiscaal year 2017 and later, in order for those costs to be determined allowable.

DoD further stated that

...the DFARS coverage was outmoded and recommended removal, since requiring a technical interchange between the Government and major contractors is unnecessary. The objective of the interchange can be met through other means.

This is perhaps the quickest that any regulation has become "outmoded" in the history of procurement regulations - 10 months from a necessary regulation to becoming outmoded.

Proposed Changes to Progress Payment Rate

Significant changes are coming to progress payment contract financing for DoD Contracts.

Currently, FAR 52.232-16 sets customary progress payment rates of 80 percent and 85 percent for large and small businesses, respectively. DFARS (DoD FAR Supplement) 252.232-7004 gives small businesses an added boost to 90 percent.

A proposed change just published, leaves the customary rate for small businesses intact but reduces the 80 percent rate to 50 percent but provides incentives for contractors to increase the rate to 90 percent. These incentives are designed to increase the effectiveness and efficiency in five "domains"

1. On time or accelerated contract deliveries
2. Contractor quality
3. Contractor business systems
4. Increasing contract opportunities for small buisnesses
5. Receipt of timely quality proposals (i.e. good estimating systems)

So how does DoD propose to incentivize these goals? By adding percentages to the base rate as follows:

• 10% for meeting the contract delivery dates for contract end items and contract data requirements lists or performance milestone schedules
• 10% for not having open level III or IV corrective action requests (corrective action requests are sent to contractors when an item or process is in nonconformity and a remedy is required. These are usually associated with quality assurance activities)
• 10% when all applicable business systems are acceptable and have no significant deficiencies.
• 7.5% when at least 95 percent of the time during the preceding Government fiscal year, when responding to solicitations that required submission of certified cost or pricing data, met the due date in the request for proposal and complied with the Proposal Adequacy Checklist
• 5% for meeting small business subcontracting goals during the preceding Government fiscal y ear.
• 2.5% for providing subcontracting opportunities for the AbilityOne program.

You can read more about this proposed change including how to participate in public meetings on the subject here.

Interim Rule on Paid Sick Leave Becomes Final - No Change

The interim FAR (Federal Acquisition Regulation) rule on sick leave from December 2016 has now become final and the permanent rule didn't change from the interim rule.

Under this sick leave rule, contractors must allow employees, both full and part-time, one hour of sick leave for every hour worked. Alternatively, they can accrue 56 hours at the beginning of the year and allow employees to take it throughout the year.

Most contractors were not likely impacted by the interim rule and won't be impacted by the final rule either as their sick leave policies already exceed the minimum required by the rule. Also, many states have adopted or are adopting minimal sick leave benefits for all employers so the Federal rule covering Government contractors becomes a moot point.

This rule was initially based on an Executive Order from the previous administration and there was speculation for awhile that the current President would retract it. However, he let it stand, probably because no one was clamoring for its repeal plus the fact that many states had already adopted similar rules.

Details of the Sick Leave rule can be found in the publication of the interim rule.

Federal Register details of the final rule can be found here.

Be Certain to Keep Your CAGE Codes Straight

DLA (Defense Logistics Agency) issued a solicitation for "stability damper assemblies" (i.e. helicopter parts). Bidders had to have been pre-approved as a source for these parts. The RFP identified four approved sources. For a company named LSL (Logistics Support LLC), the solicitation listed CAGE code (Commercial and Government Entity Code) 55064 and part number 2020H-9.

LSL submitted a proposal but did so under CAGE code 1HFE7. DLA noted the discrepancy and asked LSL for clarification. LSL stated that both CAGE codes belong to the same facility; one belonged to the production facility and the other for administrative purposes. DLA then went ahead and awarded the contract to LSL.

The only other bidder on the contract, United Valve Company, appealed to the GAO (Government Accountability Office) on the basis that LSL was not an approved source for the parts because of the CAGE code used by LSL was not an approved source. United stated that it was "unreasonable" for DLA to conclude that the approved source and LSL were the same legal entity because each was identified by a different CAGE code (and different DUNS numbers).

GAO sustained the protest.

In our view, the record does not clearly establish that the offeror LSL is the same legal entity as the approved source or that this LSL was qualified to offer a source control item ... Moreover, (DLA) does not explain how it concluded that the entities being co-located at the same facility allowed LSL to use the approved source's CAGE code, other than (DLA's) conclusory statements that the administrative CAGE code approach was permissible.

GAO recommended that DLA determine and document whether the awardee, LSL, is qualified and thereby eligible for award. If not, DLA should terminate the contract and make an award to United. GAO also recommended that United be reimbursed for its bid protest costs.

You can read the full GAO decision here.

Acquisition Workforce Competency Survey Report

Every company that contracts with the Federal Government will come into contact with the Government's acquisition professionals. These would include the contracting officers, contract specialists, contracting officer's representative, and people in the program office including project managers. And lets not forget the contract auditors.

Every contractor develops their unique impressions and opinions as to the overall skills and competency of their Government counterparts. And the Government acquisition professionals do  contractors likewise. Sadly, there is room for improvement on both sides of this most highly regulated process. We know. We've been on both sides.

The Government just published the results of its 2018 Acquisition Workforce Competency Survey (AWCS) administered by the Office of Federal Procurement Policy (OFPP) and the Federal Acquisition Institute (FAI). This survey was limited to 23 Civilian agencies (the Defense Department performs its own surveys).

The FAI's goal is to ensure the acquisition workforce professionals broaden their skills and capabilities to become more effective and efficient in their roles to meet government-wide needs and their organizations' missions. To that end, this new survey revealed several key findings about current acquisition workforce strengths and competency gaps. Among the key findings were:

Proficiency in competencies rated highest included

• Issuing changes and modifications, awarding contracts, and competition
• Inspection and acceptance and business acumen and communication (by contracting officer representatives)
• Leadership

Proficiency in competencies rated lowest included

• Negotiating forward pricing rate agreements
• Pre-award communication and contract negotiations
• System engineering

Workforce satisfaction increased from the last survey performed in 2016

There was a strong correlation between time spent in a given area and the level of competency proficiency.

The full report is available on-line here.

How To Improve Internal Controls over Credit Card Usage

Many companies struggle with balancing the benefits of issuing charge cards (i.e. credit cards or p-cards) to employees with the risks that those cards will be used to make purchases for goods and services that contractors disapprove of. There have been many noteworthy embezzlement schemes over the years (see "Embezzlement Through Corporate Credit Card Purchases", for one example. The Government certainly has the same concerns. The Government employs rigorous oversight to a degree that most companies cannot afford. The Government has no profit motive so there's that. And the Government has a ton of oversight. For example, the Government Accountability Office (GAO) frequently reviews Agency's charge card practices. But a major concern not really faced by contractors is that nefarious purchases by Government employees using Government charge cards tend to become public, creating quite an embarrassment.

 The Department of Defense's instructions pertaining to charge cards runs 160 pages (see Department of Defense Government Charge Card Guidebook for Establishing and Managing Purchase, Travel, and Fuel Card Programs). We wouldn't recommend that companies (contractors) emulate something that big - no one would bother reading it anyway. But such a document is useful as a guide to what's important as far as internal controls and oversight. In fact, companies should be guided by the five components of effective internal controls - environment, risk assessment, control activities, information and communication, and monitoring - when devising a credit card program.

One of the key components of effective controls over credit card usage is to put some limits on how much can be charged (dollars per month and single purchase limits). Another key component would be to clearly define what are proper charges. Often this is expressed in the way of prohibited uses of credit cards. DoD has such a list which is probably not a bad list to emulate, if you're thinking of drafting credit card policies. Some of these makes us wonder why anyone would think such a charge would be ever be appropriate (dating services). Here is DoD's list from the January 2018 guide.

• Appliances acquired for personal use in a work environment
• Bail and bond payments
• Betting, casino gaming chips and off-track betting
• Cash advances
• Construction services over $2,000
• Contractor purchases
• Court costs, alimony, and child support
• Dating and escort services
• Equal Employment Opportunity (EEO) settlements
• Fines
• Food and meals
• Foreign currency
• Gift certificates and gift cards
• Long-term lease of land and buildings
• Salaries and wages
• Savings bonds
• Service acquisitions greater than $2,500
• Split purchases
• Telecommunication systems
• Travel advances, claims, or expenses
• Vehicle-related expenses
• Weapons, ammunition, and explosives
• Wire transfers

Recently, two more prohibitions were added:

• Video surveillance cameras
• Commercial unmanned aerial systems

Contractors that do not have strong internal controls over employee credit card usage are at risk for unauthorized and inappropriate purchases. There is a good chance that such purchases will not be reimbursed by the Government.

GSA Publishes 2019 Travel Per Diem Rates

The U.S. General Services Administration (GSA) this week released the fiscal year (FY) 2019 travel per diem rates, which will take effect on October 1, 2018. By law, GSA sets these rates for travel in the continental United States each year.

Based on local market costs of mid-priced hotels, lodging per diem rates provide caps, or maximum amounts, that can be reimbursed to federal employees for lodging and meals while on official travel. As an additional savings measure, GSA's lodging per diem rate methodology includes taking five percent off of the final average daily rate in each location.

But these rates don't just apply to Government workers. They also represent caps on what the Government is willing to reimburse contractors. These rates, of course, are limit costs on cost-type contracts but are also used in pricing fixed-price contracts. The regulatory authority comes from FAR (Federal Acquisition Regulations) 31.205-46:

...costs incurred for lodging, meals, and incidental expenses (as defined in the [Federal Travel Regulations]) shall be considered to be reasonable and allowable only to the extent that they do not exceed on a daily basis the maximum per diem rates in effect at the time of travel as set forth in the --

The 2019 rates have not changed significantly from the 2018 caps. A few have gone up a couple of bucks and some have actually decreased by a few dollars (the peak season in San Francisco dropped from $302 per night to $299 per night but good luck finding that rate - Bloomberg reports that the average price for a hotel room in San Francisco is now $397 per night).

Contractors need to prepare to implement the new rate schedule beginning October 1st. To view the new per diem rates, visit the GSA website.

NDAA 2019 - Commercial Products and Commercial Services

The President signed the 2019 NDAA (National Defense Authorization Act) named for Senator John McCain on Monday this week. We've covered a couple of the provisions in the legislation that are of interest to Government contractors, especially small businesses. Monday we discussed the prohibition against contracting officers arbitrarily withholding consent to subcontract just because they didn't like the price or the estimated cost and yesterday we took a look at a provision designed to enhance the effectiveness of PTACs (Procurement Technical Assistance Centers). Yesterday we discussed a new requirement  that allows the Defense Department to pay small businesses in 15 days rather than the traditional 30 days. Today we will look at the new definition of "commercial items". There are two definitions now, one for commercial products and the other for commercial services. These will become important distinctions as the Government's stated preference is to buy commercial first and if commercial items are not available, then to utilize some other procurement mechanism.

Commercial product. Commercial product means a product, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes and has been sold, leased, or licensed, or offered for sale, lease, or license, to the general public. It also means a product that evolved from a commercial product through advances in technology or performance and is not yet available in the commercial marketplace but will be available in the commercial marketplace in time to satisfy the delivery requirements under a Federal Government solicitation. Thirdly, it also includes a product that satisfies the above criteria were it not for modifications of a type customarily available in the commercial marketplace or minor modifications made to meet Federal Government requirements.

Commercial services. Commercial services means any of the following:

1. Installation services, maintenance services, repair services, training services, and other services if those services are procured for support of a commercial product, regardless of whether the services are provided by the same source or at the same time as the commercial product and the source of the services provides similar services contemporaneously to the general public under terms and conditions similar to those offered to the Federal Government.
2. Services of a type offered and sold competitively, in substantial quantities, in the commercial marketplace based on established catalog or market prices for specific tasks performed or specific outcomes to be achieved and under standard commercial terms and conditions.
3. A service described above even though the service is transferred between or among separate divisions, subsidiaries, or affiliates of a contractor.

 Note that for commercial services, if they are not procured to support a commercial product, must have been sold in substantial quantities in the commercial marketplace.

2019 NDAA - Accelerated Payments to Small Businesses

The President signed the 2019 NDAA (National Defense Authorization Act) named for Senator John McCain on Monday this week. We've covered a couple of the provisions in the legislation that are of interest to Government contractors, especially small businesses. Monday we discussed the prohibition against contracting officers arbitrarily withholding consent to subcontract just because they didn't like the price or the estimated cost and yesterday we took a look at a provision designed to enhance the effectiveness of PTACs (Procurement Technical Assistance Centers). Today we want to look at another provision that should benefit small businesses - prompt payments.

When submitting requests for progress payments (fixed price contracts) and claims for reimbursements (cost-type contracts), the Government is required by statute to pay within 30 days of receiving an adequate invoice or, if it does not pay within 30 days, it must add interest to the unpaid balance. The system works pretty good. We know of a few cases where the Government's payment office added interest to invoices that were paid beyond the 30 day deadline. Usually however, payments are made well before 30 days.

The 2019 NDAA shortens the payment cycle for Defense contracts (and subcontracts) to 15 days for small businesses. Specifically, the Defense Department shall, to the fullest extent permitted by law, establish an accelerated payment date with a goal of 15 days after receipt of a proper invoice for the amount due if a specific payment date is not established by contract. Additionally, non-small business prime contractors with small business subcontractors can benefit from the 15 day accelerated payment schedule it it agrees to make payments to the subcontractor in accordance with the accelerated payment date.

This new provision applies only to the Defense Department and specifically excludes non-Defense agencies. Also, there is no change to the interest on late payment rules, interest begins accruing after 30 days, not 15 days.

2019 NDAA - Funding for PTACs

The President signed the 2019 NDAA (National Defense Authorization Act) named for Senator John McCain yesterday. So this week we will be covering just a few of the provisions included in the legislation - those that might be of interest to Government contractors (and prospective Government contractors). Yesterday we discussed the prohibition against contracting officers arbitrarily withholding consent to subcontract just because they didn't like the price or the estimated cost. Today we want to take a look at a provision that has potential benefit for small businesses - enhanced PTAC (Procurement Technical Assistance Centers).

The House version of the 2019 NDAA contained a provision that would authorize PTACs to form an association to pursue "matters of common concern" (whatever that entails) and would direct DoD to recognize a PTAC association with a membership of the majority of PTACs and to fund the program. The Senate version had no such provision. In compromise committee, the House version prevailed.

The idea of PTACs is to offer no-cost procurement advise to small businesses looking to enter the Government market. The 94 PTACs across the US operate mostly autonomously and the heavy handed administration by DLA (Defense Logistics Agency) as to how PTACs can spend their Government funds has discouraged the Centers from coming together to share best practices and to otherwise improve their operations.

That's about to change. Section 859 of the 2019 NDAA authorizes DoD to pay costs relating to meetings of PTACs to discuss best practices for the improvement of the operations and for membership dues for any association of such centers, training fees and associated travel for training.

How much will these PTACs be funded for such purposes? We don't know yet. The legislation authorizes an amount determined appropriate by the Director so we'll have to wait and see.

If you are a small business and haven't taken advantage of the services available through your local PTAC, find them here and make an appointment.

2019 NDAA - Consent to Subcontract

The President signed the 2019 NDAA (National Defense Authorization Act) named for Senator John McCain today. So beginning today, we will be covering just a few of the provisions included in the legislation - those that might be of interest to Government contractors (and prospective Government contractors).

Section 824 of the NDAA deals with an inconsistency that has vexed many contractors. Contractors work very hard to maintain "approved" purchasing systems. We've discussed on this blog the process of becoming "approved". The Government conducts a CPSR (Contractor Purchasing System Review) every three years examining purchasing and subcontracting policies and procedures, deciding whether they are adequate (they usually are), and testing compliance with those policies and procedures (one can always find an infraction). At the end of this little dance, which usually takes several months, the Government will approve or disapprove the purchasing system. Most of the time, the systems are approved.

What has happened all to frequently however is that even with an approved system, contracting officers sometimes withhold their consent to subcontract solely on disagreement with the proposed subcontract price. Well, if a contractor has an approved system, the Government has already satisfied itself that the policies for selecting and determining fair and reasonable subcontract prices are sound and satisfactory for Government contracting. So, in cases where approval has been withheld, was there something new to the contractor's process that hadn't been evaluated previously or did the contractor deviate from its approved practices. Sadly, no. A contracting officer is just being officious and wielding power.

Under the 2019 NDAA, a contracting office can no longer unilaterally withhold consent to subcontract merely because he or she disagrees with the proposed price.They can still withhold consent but now they must obtain written approval from the program manager prior to withholding consent. That should reduce the incidences of withholding consent - at least until contracting officers can conger up other reasons, other than disagreement with price, to withhold consent.

41 Months in Prison - Was it Worth It?

The President and CEO of Wellco Enterprises and Tactical Holdings was sentenced to 41 months in federal prison for his role in a contract fraud conspiracy. Two others involved in the conspiracy were previously sentenced last June to serve six months each in federal prison for the same crime. There is no parole in the federal system.

Wellco was once a proud and successful company and a leading manufacturer and supplier of military footwear to the Defense Department and to civilian customers. The company has been in business for more than 70 years. Between 2006 and 2012, the Defense Department alone paid $138 million to Wellco for combat boots.

For some reason, Wellco's executives decided to import military -style boots that were made in China into the U.S. and then deceptively market and sell those boots to DoD, government contractors, and the general public as "Made in the USA" and as compliant with the Berry Amendment and Trade Agreements Act (TAA). Wellco sold more than $8.1 million in fraudulent boots.

To conceal the fraud, Wellco required the Chinese manufacturers to include "USA" on labels of boot uppers. After two shipments of these deceptively marked boots were seized by the U.S. Department of Homeland Security's Customs and Boarder Protection, Wellco ordered the Chinese facility to stitch tear-away "Made in China" labels in Wellco boot uppers. After importation, Wellco instructed its factory workers to tear out the "Made in China" to shipping the boots to Government (and commercial) customers. That seems kind of dumb - how many witnesses to the fraud would there be if the entire factory is tearing out Made in China labels?

A Homeland Security spokesperson was quoted saying "Falsely selling our military millions of dollars of comb at boots by saying they were Made in the USA when they are actually Chinese-knockoffs not only defrauds the Government, but it also defrauds the American soldier. Our soldiers rely on their equipment from their guns to their boots to protect this country and counterfeit products could fail at a moment when they need them the most.

What Happens When You Don't Adjust Rental Costs for Property Under Common Control?

A marine maintenance company (IMIA) and a rental company owned by the marine maintenance company's executives (MES), have agreed to pay the Government $2.8 million to settle claims they improperly billed the Navy for rental equipment.

According to the settlement agreement, IMIA billed the Government for equipment rented from MES. Since the two companies are related, FAR (Federal Acquisition Regulations) 31.205-36, Rental Costs, limits rental costs to the actual cost of ownership.

IMIA did not disclose its relationship with MES when it billed the Navy for rental costs from MES. The Government calculated that IMIA had overbilled the Navy by $1.4 million, the amount in excess of the actual cost of ownership. The Government contends that IMIA knowingly presented such claims for unallowable costs to the Navy in violation of the False Claims Act.

The settlement agreement calls for the two companies to pay $2.8 million to the Government of which $1.4 million will go back to the Navy as restitution.

There was no mention in the Justice Department press release as to how the alleged fraud was uncovered. We think it very likely that it was uncovered as a result of an audit by DCAA (Defense Contract Audit Agency) since DCAA participated in the investigation.

Rental costs are typically a high-risk category for a contract auditor. Any time there are significant rental costs in a proposal or incurred cost submission, the auditor will undoubtedly make inquiries as to whether payments were made to related parties.

How Do You Accept a Bribe from Your Employer?

Is it a bribe, or a commission?

Richard Olsen, vice president of finance for Mission Support Alliance has agreed to pay triple the $41,480 in kickbacks he received from his own company, or $124,440.

The majority owner of Mission Support Alliance (MSA) at the time was Lockheed Martin. MSA had a contract to provide various site-wide services at the Energy Department's Hanford nuclear reservation including IT (information technology) services to other contractors performing work at Hanford. MSA did not have the resources to provide those IT services in-house so it subcontracted for those services another Lockheed Martin division.

The Justice Department, claims that Mr. Olsen, working for a Lockheed Martin division, accepted bribes from another Lockheed Martin division in exchange for "favorable treatment". He helped draft and submit false statements to the Energy Department regarding labor rates charged by the Lockheed subsidiary performing the IT subcontracted effort. The inflated labor rates were then passed along to the Energy Department and reimbursed under MSA's cost-reimbursable contract.

Mr. Olsen didn't admit any wrongdoing. His attorney said Mr. Olsen just wanted to put an end to a long-term Department of Justice investigation.

There is probably more to this story then is publicly known at this time. As part of the agreement, Mr. Olsen will cooperate with the ongoing investigation of the alleged fraud.

The Justice Department press release can be found here. A related article appearing in the local newspaper can be read here.

Contracting Issues Not Limited to Only the US

Sometimes we become very insular and begin to believe that contracting problems are limited to the United States. Probably because of the shear size of our procurement budget, no other country loses as much to fraud, waste, and abuse. But as a percentage of procurement budgets, its likely that other countries lose more that the US. There are probably cultural reasons for this but we don't believe that many countries have the level of oversight that the US enjoys (or not enjoys, depending upon your perspective).

Here's an example.

A audit report our of Nigeria identified a procurement agency that mismanaged about $3.6 million by making payments without evidence that work was performed, overpaying for abandoned projects and not getting value for their money on many other projects. Most of the funds were siphoned through ghost contracts, overpayment of mobilization fees, poorly executed/abandoned projects and unpriced work. In some cases, contractors were overpaid for work not completed or haphazardly done. Many payments were made without receipts and many projects were simply abandoned.

Here are a few examples.

1. A significant amount of payments for contract for the construction of water supply structures were made after the project was abandoned.
2. A contractor was paid 15 percent of the contract price to for mobilization effort but never mobilized and the project abandoned. No one ever asked for the money back.
3. Another water supply contract was awarded and paid for but then another contract for the same exact project was awarded and paid for again. When the auditor visited the site, there was no evidence that work had been performed on either contract.

Hearing things like these should make us, as taxpayers, appreciate contract oversight.

Deadline for Filing Appeal Could Be Extended

Under the Contract Disputes Act (CDA), a contractor has 90 days to appeal a contracting officer's final decision. The 90-day period in which to appeal a contracting officer's decision to the Board is jurisdictional and may not be waived.

But what if the contracting officer did something to lead a contractor to believe that its final decision was not so "final", that there was an offer to negotiate a resolution? Can that 90-day calendar start over?

Yes, the 90-day calendar can start over, in some cases. Its called "vitiating the finality" of the final decision (or notice of termination, or some other form of contracting officer final action).

The test for vitiation of the finality of a contracting officer's determination is whether the contractor presented evidence showing it reasonably or objectively could have concluded the contracting officer's decision was being reconsidered. In one ASBCA case, a lack of finality was found where the contracting officer met with the contractor after the issuance of the termination notice, discussed the default termination at the meeting, and requested the contractor to submit settlement alternatives in writing that were proposed at the meeting. The focus is on whether any Government actions could have reasonably led a contractor to believe that the subject matter was not yet final, thereby making an appeal to the Board unnecessary.

In another more recent case (ASBCA 61026, Aerospace Facilities Group, Inc.), after the contracting officer issued a notice of termination for default, it expressed willingness to engage the contractor to discuss the facts surrounding the termination on three separate occasions and discuss whether the contractor would deliver equipment required by the contact. This served to keep the matter open and destroyed the finality of the termination notice. The contractor was lead to believe that the Army was reconsidering the decision based on their emails and phone conversations. Ultimately the contractor filed a claim, the Government tried to get it thrown out because it was received later than 90-days after the notice of termination, but the ASBCA turned down the Government's attempt.

The best course of action is to file timely claims when appropriate. Don't let the Government's actions lead you to believe that it has stayed its final decision. The next court might not be so contractor-friendly.

Steganography Used to Steal Trade Secrets

Steganography is the practice of concealing a file, message, image, or video within another file, message, image, or video. It includes the concealment of information within computer files. In digital steganography, electronic communications may include steganographic coding inside of a transport layer, such as a document file, image file, program or protocol. Media files are ideal for steganographic transmission because of their large size. For example, a sender might start with an innocuous image file and adjust the color of every hundredth pixel to correspond to a letter in the alphabet. The change is so subtle that someone who is not specifically looking for it is unlikely to notice the change.

Steganography software is readily available and usually free. So is software for extracting the hidden files. But, as Mr. Zheng found out, software for detecting the presence of hidden files is readily available.

The Justice Department announced yesterday that a criminal complaint was filed and an arrest made in connection with a steganography case. According to the complaint, Mr Xiaoqing Zheng, an engineer employed by General Electric, used steganographic tools to remove files containing GE trade secrets involving its turbine technologies. Specifically, Zheng hid these data files into innocuous looking digital picture of a sunset and then emailed the digital picture, which contained the GE files, to himself at his private email account.

Mr. Zheng, if convicted of these crimes, faces up to 10 years prison, fines, and supervised releases. Of course sentencing is rarely meted out at maximums. He certainly lost his job and is probably not employable in any position of trust it the future.

The Justice Department did not disclose how the hidden file was detected but it doesn't take too much imagination to think that GE utilizes steganography detection tools on incoming and outgoing email traffic.

DoD Needs to Enhance its Commercial Item Determination Process

The Department of Defense prefers to buy goods and services from the commercial marketplace to take advantage of new innovations and save on acquisition costs. However, DoD's process for determining whether an item can be purchased commercially - and at a fair and reasonable price - is often long and challenging. This was GAO's (Government Accountability Office) conclusion in a recent report (see Improved Information Sharing Could Help DOD Determine Whether Items Are Commercial and Reasonably Priced.

DoD's process for determining if an item is available for purchase in the commercial marketplace at a reasonable price includes (i) market analysis, (ii) commercial item determination, (iii) price reasonableness determination, and finally, (iv) contract award. Sounds simple but its not. It takes a long time and these steps are usually challenging. GAO found four interrelated factors, each with its set of challenges that influenced how and whether DoD determines if an item is commercial and if its price is reasonable. These factors include:

1. Availability of marketplace information. Market research is a key component that informs commercial item and price reasonableness determinations. However, GAO found that obtaining market-related information can be challenging because the products DOD requires may not be widely available in the commercial marketplace.
2. Ability to obtain contractor data: When adequate market information is not available, DOD officials turn to the contractor for information to support the commercial item determination or data to make a price reasonableness determination. In the case studies GAO reviewed, most contractors provided relevant information, but not without delays and challenges. For example, while pricing data is key to DOD’s ability to determine price reasonableness, several contracting officers reported that contractors were less willing to provide this data once an item was determined commercial.
3. Extent of modifications to an item: When a commercial item must be modified to meet DOD’s requirements, DOD officials may have to take additional steps, such as completing a comparative analysis of commercial items to the modified item. For example, in one case, a commercial navigation system had to be modified to withstand an explosion. To make the commercial item determination DOD officials had to make an on-site visit to the manufacturer to gain in-depth understanding of the services provided and to ensure they met DOD requirements.
4. Reliability of prior commercial item determinations: Contracting officers may presume that an item is commercial if a DOD component had previously made that determination. However, GAO found that, in some cases, contracting officers reviewing a prior determination discovered that it was based on inaccurate information.

It seems to us that prospective contractors are not doing themselves any favors by withholding information necessary for the Government to determine price reasonableness (factor no. 2, above). The only justification we can surmise is that prospective contractors do not want the public to know prices afforded to customers or perhaps they're trying to sell to the Government at a higher price.

GAO recommended that DoD develop a strategy for how information related to reasonableness determinations should be shared across the Department. DoD agreed.

Government Disapprove's Bechtel's Purchasing System

FAR Part 44 lays out the case for Government reviews of contractor purchasing systems. The objective of a "Contractor Purchasing System Review" (CPSR) is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when purchasing and subcontracting. CPSRs provide the contracting officer a basis for granting, withholding, or withdrawing approval of a contractor's purchasing system.

The Defense Contract Management Agency (DCMA) is the organization with primary responsibility for reviewing contractor purchasing systems. DCMA has a CPSR review team that specializes in performing these reviews. The basis threshold for performing CPSRs is $25 million in cost type contracts during the next twelve months but that is somewhat fluid. The ACO (administrative contracting officer) determines the need for a review and considers other risk factors beyond the $25 million. Generally, CPSRs are conducted once every three years (Note, DCMA's Guidebook for performing CPSR's is available here).

The CPSR team conducting these reviews perform a deep dive into the policies, procedures, and practices for purchasing and subcontracting. It's not often that the team finds issues with policies and procedures as most contractors have had years to develop and evolve those documents. It is very easy for them to find non-compliance issues however. No one or no company is perfect and its not uncommon to overlook a checkbox, omit some documentation, or fail to obtain a required signature. The CPSR team writes up these infractions, the contractor promises to do better, and everyone goes on with business as usual for the next three years when the cycle begins again. If the deficiencies are significant enough, the contracting officer can withhold approval of the purchasing system which then requires contractors to obtain contracting officer approval prior to purchasing materials or entering into contracts.

It is very uncommon for CPSR reports to become public but it happened recently as at least two newspapers ran stories about a CPSR review performed at Bechtel National Industries that resulted in the Government pulling the contractor's procurement authority. Bechtel is the prime contractor on a $17 billion project to design, construct and commission a plant to turn radioactive waste into glass logs (the process is called vitrification). The plant was initially budgeted at less than $5 billion but that is a different story.

Without an approved purchasing system, Bechtel must obtain consent from a Energy Department contracting officer to award any fixed price contracts in excess of $150 thousand. The Energy Department stated that the new process will stay in effect as long as Bechtel's purchasing system remains "disapproved". Purchasing system deficiencies reported in the press include:

• Missing paperwork to document that the subcontractor had not been suspended or debarred.
• Missing certifications that subcontracted funds would not be used for lobbying
• Missing information as to how subcontractor was selected.
• Failing to notify the Energy Department 24 hours in advance of awarding a subcontract.

Bechtel, for its part, promised to conduct additional oversight on its practices to ensure compliance but indicated the added burden of obtaining Energy Department approval for every new purchase would not affect the construction schedule.