DoD Cancels Acquisition Streamlining Contract Clause

Back in February 2017, a Presidential Executive Order (EO 13777) established a Federal policy to alleviate unnecessary regulatory burden on the American people. In response to that EO, the Defense Department established a Regulatory Reform Task Force to review and validate DoD regulations, including DFARS (DoD FAR Supplement). DoD established a subgroup within the DoD Regulatory Reform Task Force to specifically review DFARS provisions and clauses.

It is difficult to make regulatory changes even when everyone knows and realizes that a particular regulation is redundant or of dubious value. This is especially true when regulations are implementing a statutory requirement. The statute must be changed first and that involves Congress and the President.

So far, the DoD Regulatory Reform Task Force has been concentrating on DFARS provisions that are redundant or closely approximate requirements stated elsewhere. This is the case published this week where DoD is removing DFARS Clause 252.211-7000, Acquisition Streamlining. Now why would DoD want to remove a clause that promotes "acquisition streamlining"? Isn't acquisition streamlining a good thing? A noble goal?

Perhaps. But in this case, the contract clause places the burden on contractors. DFARS 252.211-7000, Acquisition Streamlining (now deleted) requires contractors to prepare acquisition streamlining recommendations in accordance with the performance work statement and submit them to the Government. This particular clause was added to implement a requirement of a DoD Directive (DoDD 5000.43) that has since been cancelled. Moreover, FAR (Federal Acquisition Regulations) 7.1, Acquisition Plans, already includes similar provision involving industry engagement as considerations to be made when preparing written acquisition plans. Since the implementing DoD Directive and FAR 7.1 addresses acquisition streamlining, DoD considered its version of the clause unnecessary and therefore cancelled it.

In cancelling the requirement, DoD announced that it will continue to encourage industry participation during the design and development of contract requirements and through other methods.

Fiscal Year 2019 FAR Reissue

GSA (General Services Administration) has reissued the Federal Acquisition Regulations (FAR) as the FY (fiscal year) 2019 version. The previous reissue was in fiscal year 2005 and since then, has been amended 101 times - FAC (Federal Acquisition Circular) 2005-01 through 2005-101.

Periodically the FAR is reissued because of administrative necessity. Although reissues do not alter the language of the FAR, they do contain administrative updates to improve the user experience (its hard to type that with a straight face) and increase accessibility.

A few notes about the reissue.

• Future Federal Acquisition Circulars (FAC) will be renumbered so that the next issued FAC will be FAC 2019-01. This reissue will replace the prior numbering system which used FACs 2--5-01 through FAC 2005-101. Because of the reniumbering, the Foreword section of the FAR will be updated to reflect the current FAC number.
• The FAR looseleaf package will no longer be offered. Instead, a list of sections affected by each FAC will be included on the FAR website.
• The matrix will continue to be available in the PdF version of the FAR. However, the FAR website is promising to release a new "smart matrix" which will include a filterable clause matris, file saving options, improved search capabilities, as well as hyperlinked clauses, provisions and prescriptions to the current version of FAR.
• The FAR will be available in a number of formats including HTML, XML, Word, and PDF.
• FAR proposed rule publications that are open for comments are available at https://acquisition.gov/requesting_comments.
• The Federal Alert Notices (FAN) are available at https://acquisition.gov/fan_list. FANs were established by the Office of Federal Procurement POlicy (OFPP) in 2012 to help improve awareness of the regulatory changes.

Don't forget that there is a mobile version of FAR as well making it accessible on all devices (including smart phones). Instructions for downloading FAR to your device of choice can be found here.

Subcontractor Caught Passing Personal Expenses on to the Air Force

Earlier this month, the Justice Department announced a settlement with a Defense subcontractor near Sacramento, CA surrounding allegations that it inflated its indirect costs that were used in negotiating subcontracts with prime contractors including Boeing and Raytheon.

The settlement requires the subcontractor, Alpha Research & Technology, Inc. (ART) to pay $1 million to the Government to resolve allegations that it violated the False Claims Act by knowingly submitting inflated contract pricing to the Government.

According to the Justice Department, ART included millions of dollars in personal expenses of its owners which ART knew were unallowable in Government contracting. Those expenses included payments for the design and construction of the owner's luxury personal residence, luxury cars, a personal caretaker, and a weekend at a luxury hotel in San Diego. ART was able to perpetuate its alleged fraud for quite some time - at least six years - before the company was caught.

ART is a woman-owned company that develops and manufactures airborne-related command, control, communications and surveillance systems (according to its website). In 2015, the subcontractor employed about 87 people. It is not clear how the allegations were brought forward. Since ART is primarily a subcontractor and prime contractors are responsible for ensuring the reasonableness of subcontract costs passed along to the Government under their prime contracts, it would seem likely that someone at Boeing or Raytheon took note and passed the information along to investigators. There is no mention of a whistle-blower in the Justice Department press release.

Contractor Code of Business Ethics - A Reminder

We've written concerning this matter a couple of times but it bears repeating because some contractors have forgotten the requirement. What requirement? The requirement found in FAR (Federal Acquisition Regulations) 3.10, Contractor Code of Business Ethics and Conduct.

This particular section begins with an overall policy: Government contractors must conduct themselves with the highest degree of integrity and honesty and should (not must) have a written code of business ethics and conduct. To promote compliance with such a code, contractors should (not must) have an employee business ethics and compliance training program and an internal control system that (i) is suitable to the size of the company and extent of its involvement in Government contract, (ii) facilitates timely discovery and disclosure of improper conduct in connection with Government contracts and (iii) ensures corrective measures are promptly instituted and carried out.

The foregoing was general policy guidelines. There's more however. There is a "must" provision. All Government contractors, regardless of size, must display a Hotline Poster (see FAR 52.203-14). Your contracting officer will tell you which one to post and where to obtain it. The Hotline poster must be prominently displayed in a common work area. It can also be displayed on an employee website. There is another "must" provision that applies to contracts greater than $5.5 million with period of performances greater than 120 days - a written code of conduct.

This written code of business ethics and conduct must be made available to every employee. Contractors must exercise due diligence to prevent and detect criminal conduct and otherwise promote an organization culture that encourages ethical conduct and a commitment to compliance with the law. Further details can be found in FAR 52.203-13, Contractor Code of Business Ethics and Conduct.

Contracting officers are responsible for enforcing these provisions (see FAR 42.302(a)(71).

Routine Labor Department Audits - What Could Go Wrong?

The Department of Labor's Office of Federal Contract Compliance Programs (OFCCP) conducts routine compliance evaluations at Government contractors. The scope of these evaluations include contractor compliance with:

• Executive Order 11246 (President Johnson) - prohibits federal contractors from discriminating in employment decisions on the basis of race, color, religion, sex, or national origin.
• Rehabilitation Act
• Vietnam Era Veterans' Readjustment Act

Refer to Federal Contracts Compliance Advisor for more details.

A company in Minnesota found out about OFCCP's power the hard way. A'viands Food & Service Management recently agreed to a settlement with the Labor Department requiring it to pay nearly $400 thousand in back pay and interest to 98 female employees to resolve pay discrimination violations.

The OFCCP determined that going back to at least 2011, the company paid female employees working in food service positions less than similarly situated male employees. Reaching back seven years should give you some idea of the statute of limitations on labor violations.

As part of the settlement, A'viands also agreed to review employee compensation practices to determine whether those policies have a disproportionately negative effect on compensation for females, and agreed to make adjustments to those policies as necessary. Other non-monetary forms of relief contained in the settlement agreement include compensation monitoring and equal employment opportunity training.

The settlement agreement comes from a Labor Department press release so we haven't heard the contractor's side of the story. There was no admission by the contractor of guilt in failing to follow laws and regulations. Sometimes these settlements are made for expediency purposes.

Proposed Commercial Product Must Meet Salient Characteristics

The Department of Veterans Affairs (VA) issued a solicitation back in April for commercial item quotations to provide analytical balances to VA facilities. The RFQ (Request for Quotation) identified nine specific models of a particular brand of balances (Mettlier Toledo) corresponding to nine separate contract line item numbers (CLIN) and then listed nine salient characteristics - each of which was labeled as being applicable to all nine balance models. The salient characteristics included a touchscreen display, capacities up to a minimum of 220 grans, a means to prevent air currents from affecting results, a resolution of 0.1 mg or better, accuracy at a combined maximum error of 2 divisions, a check-weighing function and more.

The VA received quotations from four firms, including GSSI (Government Scientific Source, Inc) and Kanawha (the ultimate winning bidder). The VA rejected GSSI's bid based on a review of literature included in the technical proposal that showed the proposed balance models did not meet minimum specifications. Specifically, the proposed models did not (i) provide a status light to indicate "ready", "warnings", and "errors" and (ii) did not have removable trays. Due to those weaknesses, the VA found the quote technically unacceptable and ineligible for award.

GSSI appealed VA's award to Kanawha arguing that the VA had misevaluated the GSSI quotation. Essentially, GSSI argued that indicator lights and removable trays have been standard equipment on all commercial scientific balances for decades, that every modern balance has bot features, and that both features were evident in the photographs in the descriptive literature submitted as part of its quotation.

GAO (Government Accountability Office) took the unusual step of calling GSSI to have the company show them that illustrations in the printed material depicted removable pans. GSSI had to confess then that the illustrations did not show removable pans and the text of the literature did not indicate the presence of removable pans.

A vendor is responsible for submitting a well-written quotation, with adequately detailed information, that clearly demonstrates compliance with the solicitation requirements and allows a meaningful review by the procuring agency. An offeror must include sufficiently detailed information in its proposal to establish that the equipment offered will meet the solicitation requirements. Under a brand name-or-equal specification, with respect to the offer of an "or equal" product, an offeror's proposal must demonstrate that its product conforms to the salient characteristics listed in the solicitation.

GAO's review provided no basis for objecting the VA's evaluation because GSSI's quotation did not demonstrate that its products met at least one of the required salient characteristics in the RFQ. Therefore GAO denied the protest.

The full GAO decision is available here.

What is CBAR (Contract Business Analysis Repository)?

The Contract Business Analysis Repository (CBAR) is Defense Department database that collects business system information on its contractors. The information is not available to the public and even contractors, baring a FOIA request (Freedom of Information Act) have difficulty in finding out exactly the information that DoD is collecting on them.

The CBAR system was created prior to 2010 but significantly enhanced in 2012 to collect the following information.

• Indirect and direct cost information (e.g. forward pricing rates).
• Status of contractor business systems (e.g. accounting and estimating systems)
• Status of compliance with CAS (Cost Accounting Standards)
• Information about costs and financial condition of the parent entity of major corporations

It also includes contracting officer's negotiation experiences with contractors so that those experiences can be shared among contracting officers negotiating with the same contractor. DoD feels that sharing experiences will result in contracting officers being better prepared for realizing better deals for the Government.

We don't know the number of DoD personnel with access to CBAR. In 2013, the number was reported at 1,900 users though by now, that figure has probably grown.

There have been instances where CBAR information is not up to date. Like all databases, procedures need to be in place to ensure that data is current, complete, and accurate. So, for example, the Government might identify deficiencies in a contractor's estimating system and report those deficiencies in the CBAR system. Meanwhile, the contractors makes the required corrective actions and the Government considers those actions to be responsive but fails to update the CBAR system. Whatever procedures DoD has in place to ensure the accuracy of CBAR data does not always work in a timely manner.

Contractors should know what information is being collected about the company to ensure its accuracy. Start by asking your contracting officer to provide you such information. Many contracting officers will oblige. If that fails, try the FOIA route.

Wage and Hour Laws - Compliance "Toolkit"

Running a business brings many responsibilities, including the responsibility for complying with various federal labor and employment laws. The Wage and Hour Division (WHD) within the Labor Department administers and enforces these laws. Business owners have the responsibility to pay employees properly, maintain certain records, provide eligible workers with unpaid family or  medical leave and to notify employees of their rights in the workplace. WHD has more than 200 offices across the U.S. with personnel available to assist companies (and workers) wade through the complexities of the many laws and regulations. For the "do-it-yourselfers", the Labor Department has may on-line resources as well.

One such useful online resource is the "Compliance Assistance Toolkits" page. These toolkits are designed to help employers understand their rights and responsibilities and provide a series of interactive step-by-step tools to walk employers through a variety of scenarios, in-depth guides to help employers navigate the requirements of the FMLA (Family and Medical Leave Act), and fact sheets that detail how the FLSA (Fair Labor Standards Act_ applies to many specific types of employments.

Currently, the WHD has six toolkits, four of which will be of interest to Government contractors:

1. Basic Compliance Assistance Toolkit
2. FLSA Toolkit
3. FMLA Toolkit, and 
4. Government Contracts Toolkit

The Government Contracts Toolkit covers topics that are specific to Government contractors. These include such things as:

• Davis-Bacon Act (DBA)
• Service Contract Act (SCA)
• Displace employee rights
• Paid sick leave for federal contractors

These toolkits also contain the required notices that need to be place in a prominent area of the company.

The WHD performs compliance reviews on how well companies (especially Government contractors) adhere to these rules and regulations. Many companies have been the recipient of these compliance reviews. Some compliance reviews are regularly scheduled reviews. Others are initiated based on employee complaints. It is not uncommon to find instances where employees are better versed in labor laws than the employer/company.

For more information on the various toolkits, click here.

DCAA's Annual Report to Congress - Part IV

Today is the final post in our series on DCAA’s latest performance report. If you missed any of the earlier installments, you can find them here: Part I, Part II, and Part III. Part I discussed DCAA return on investment. Part II discussed DCAA’s professional staffing, the cost of performing audits and some insight on sustention rates. Part III dealt primarily with DCAA’s progress in reducing its incurred cost backlog. In this final installment, we will cover the average length of time required to complete audit, a couple of recommendations to Congress on how the audit process can be improved, and DCAA efforts to assist small businesses in various aspects of Government contracting.

No matter how you look at it, the time it takes for DCAA to complete and audit and issue a report is long. When evaluating forward pricing proposals, it takes DCAA an average of 83 days. That’s a far cry from 30 days just a few years ago. For incurred cost, the length of time, measured from the date that an adequate proposal is received until an audit report is issued or it is administratively closed out because it is low-risk is 143 days. Remember, we’re dealing with averages. DCAA did not specifically report the number of days to close out an incurred cost year when an audit is required. If they did, the elapsed days would be significantly higher than 143 days.

DCAA made two recommendations to improve the audit process. One is not so much of a recommendation as it is a plea to a better working relationship with Congress. The other deals with a need to facilitate or expedite hiring authority for new auditors. Neither one of these would seem to have a direct impact on improving the audit process.

DCAA is one of several agencies required to proactively engage with industry to improve the acquisition process. Specifically, DCAA was tasked with the requirement to clarify audit requirements, understand and address contractor concerns and improve the audit process. DCAA reported a number of meetings with industry leaders and reports that it is encouraging auditors to “be more flexible, responsive, and proactive in addressing industry concerns”. We’re not sure that such “flexibility” has worked its way down to the audit staff yet. One thing we have noticed is that DCAA seems to be taking a more active role in small business outreach such as participating in PTAC (Procurement Technical Assessment Center) seminars.

If you wish to read the full DCAA performance report yourself, it can be accessed here from DCAA’s public website.

DCAA's Annual Report to Congress - Part III

Today we bring you Part III of our series on DCAA’s (Defense Contract Audit Agency) performance report – a statutorily required report where DCAA provides a self-assessment on how it is meeting customer expectations. In Part I, we discussed the Agency’s impressive return on investment. In Part II, we discussed the Agency’s professional staff, the cost of performing various types of audits, and the unimpressive sustention rate for incurred cost audits. If you missed either Part I or Part II, click here and here, respectively. Today we will focus on how DCAA is reducing its backlog of contractor submitted incurred cost proposals.

As most readers know, contractors with flexibly priced contracts (e.g. CPFF, CPIF, FPI, and T&M) are required to prepare and submit an annual summation of costs charged to those contracts. The content of these proposals (commonly referred to as ICE submissions), is prescribed in FAR 52.216-7, Allowable Cost and Payment. Every year, the Agency receives 6-7 thousand of these submissions. So, if the Agency is not clearing out that many, they quickly fall behind in their responsibility and a backlog is created.

DCAA does not have sufficient staffing to conduct 6-7 thousand GAGAS-compliant incurred cost audits each year. So, it developed a risk-based approach to selecting those that they will audit. Contractors are divided into high-risk and low-risk. High risk contractors are audited while indirect rates and incurred costs on submissions from low-risk contractors are simply accepted as proposed. In fiscal year 2017, DCAA closed out 6,786 incurred cost submissions but only 1,527 of those were audited. The remaining 5,259 were simply closed without any audit effort performed. Expressed in terms of contract costs, the 1,527 submissions that were audited totaled $326 billion whereas the 5,259 submissions that were not audited totaled $25.4 billion. So, DCAA effectively audited 90 percent of the contract costs while auditing only 23 percent of submissions. So, while $25 billion might be a lot to leave on the table, and contractors knowing their chance of being audited are negligible might be tempted to less diligent in excluding unallowable costs from their submissions, the bottom line (90 percent coverage) does seem to be an acceptable risk to the Government.

Overall, as a result of this risk-based approach to auditing incurred costs, the Agency has reduced the incurred cost backlog from 21,000 in fiscal year 2011 to a manageable 2,860 at the end of fiscal year 2017

DCAA has been often criticized for taking too long to complete audits. One of the metrics that Congress wanted DCAA to track was its ability to meet due dates. DCAA reported that it met agreed-to due dates 78 percent of the time (by comparison, it met due dates only 32 percent of the time in fiscal year 2012 and has been steadily improving each year. The key to this metric is the definition of “agreed-to” due date. That is different that “requested” due date. Say, for example, a contracting officer requests an audit to be completed in 30 days. DCAA acknowledges the request but says that it cannot complete the audit in 30 days but can complete it 45 days. The contracting officer agrees to accept the audit in 45 days. The requested due date was 30 days but the agreed-to due date was 45 days.

Tomorrow, we will finish this short series on DCAA’s annual performance report to Congress by looking at how long it takes DCAA to complete its work, its recommendations to Congress on how the audit process can be improved, and its activities with respect to assisting small businesses. If you wish to read the full DCAA performance report yourself, it can be accessed herefrom DCAA’s public website.

DCAA's Annual Report to Congress - Part II

This is Part II of our series on DCAA’s (Defense Contract Audit Agency’s) latest annual performance report to Congress. If you missed Part I, click here. Yesterday we discussed the overall ROI (return on investment) that DCAA achieved – DCAA returned more than $5 for ever dollar it spent. Today we will cover sections of the report that deal with staffing and what it cost to conduct the average audit.

DCAA has probably the most educated and professional staff of any major Governmental organization. The Agency employs more than 4,100 auditors. All of them have at least a bachelor’s degree. More than 40 percent have advanced degrees and nearly a quarter of them are Certified Public Accountants.  These are very impressive and enviable stats. However, one thing the report does not assess is employee turnover. Based on our interactions with the Agency, DCAA experiences significant turnover which means that its rank and file staff, on average, do not have a whole lot of experience to go along with their educational and professional backgrounds.

DCAA reported that it cost nearly $114 thousand on average to evaluate a forward pricing proposal and $297 thousand to complete an audit of incurred costs. This works out to somewhere around 70 hours and 185 hours respectively. Of course, these are only averages. At major contractors, auditors will spend many thousands of hours to complete an incurred cost audit and at smaller contractors, audits might be knocked off in just a few hours with a desk review. These two audit areas by the way represent the preponderance of DCAA’s workload.

One troubling statistic is the sustention rate for incurred cost. Sustention rate is measured by comparing audit exceptions identified in audit reports against what the contracting officers were able to sustain when negotiating or settling audit exceptions. That ratio was only 28.6 percent in fiscal year 2017. It seems to us that that ratio should be much higher. Something is going on. Perhaps auditors are not adequately supporting their positions. Perhaps auditors can’t decide on a particular issue and simply throw it over the transom for someone else to decide. Perhaps contracting officers are not aggressively supporting audit positions. Perhaps contracting officers are not taking the time necessary to understand the issues. Every audit issue raised by an auditor require time and effort to respond. Contractors usually need to make multiple responses, one to the auditor and another to the contracting officer. With only a 25 percent sustention rate, it seems like contractors are wasting a lot of time and money to fight what are ultimately unsupported Government positions. DCAA really needs to do a better job of vetting their positions before publishing reports of findings.

Tomorrow, we will look into other aspects of DCAA’s annual performance report to Congress – namely how DCAA is clearing out its incurred cost backlog. If you wish to read the full performance report yourself, it can be accessed here from DCAA’s public website.

DCAA's Annual Report to Congress - Part I

Each year since 2011, DCAA (Defense Contract Audit Agency) has prepared and submitted an annual report to Congress. The basic content of these statutorily required performance reports are fundamentally unchanged but in the 2017 NDAA (National Defense Authorization Act), Congress directed the Agency to provide additional details to support its self-assessment. The most recent report, the 2017 Report to Congress released earlier this year is the first to include the “enhanced” details required by Congress.

DCAA might be the only Governmental audit agency in the Federal Government that has to justify its existence based on cost savings. The IGs (Offices of Inspector Generals) report on cost savings occasionally but that is a small part of what those organizations do. The GAO (Government Accountability Office) conducts audits but they focus on compliance issues or ways to make the Government more efficient, effective, or economical.

It is not surprising then that DCAA’s performance report is peppered with references pertaining to ROI (return on investment). DCAA does a great job of assessing contract costs or forecasted costs against the FAR (Federal Acquisition Regulations) cost principles (FAR Part 31) and contract terms and conditions. It does a great job in assessing the reasonableness of forecasted costs as well – making sense out contractors’ forecasting methodologies. One thing it hasn’t done very well historically is assessing the adequacy of contractor internal control systems, whether any identified internal control deficiencies rise to the level of significant, and the impact that those deficiencies have on the propriety of costs charged by contractors to Government contracts. If you think back to the genesis of DCAA’s so-called scandals ten years ago, they originated when someone higher up in the organization disagreed with the significance of internal control deficiencies identified by an auditor. Internal control deficiencies are not quantifiable into cost savings for the Government. Adherence to FAR cost principles are quantifiable.

DCAA reported that in fiscal year 2017, it examined $281 billion in contract costs and saved $3.5 billion in defense spending. That’s a little better than one percent but it also represents more than five times what it cost to run the organization. That’s not a bad return on investment at all. DCAA states that the $3.5 billion can be reinvested in the warfighter or returned to the Treasury. Cynics might say that it can be wasted elsewhere.

The trajectory of DCAA’s reported return on investment (ROI) has been falling. In fiscal years 2012 through 2014, the ROI was close to or exceed $7 for every dollar spent. In fiscal year 2015, it dropped to less than $5 per dollar spent. The latest year was just over $5 per dollar spent. There are, of course, many factors that go into calculating cost savings and ROI but DCAA did not try to analyze why ROI has been falling.

Tomorrow, we will look into other aspects of DCAA’s annual performance report to Congress. If you wish to read the full performance report yourself, it can be accessed here from DCAA’s public website.

You Cannot Protest an Award Until After the Government Debriefing

Celeris Systems filed a bid protest with the GAO (Government Accountability Office) over the award of a task order to a competitor, INDUS Technology. Celeris was the incumbent contractor on this particular work and argued that the Navy "misevaluated" its task order proposal.

The GAO dismissed the protest on the basis that it was premature.

GAO bid protest regulations preclude it from considering a protest challenging a procurement conducted on the basis of competitive proposals, where a debriefing is required , if the protest if filed before the debriefing date offered to the protester. Instead, protests should be filed not later than 10 days after the debriefing.

This rule is designed to:

• encourage early and meaningful debriefings and
• to preclude strategic or defensive protests.

In this case, Celeris's debriefing began on September 24th. Celeris then submitted questions to the Navy on September 26th, but then filed a bid protest on September 28th. The Navy filed a dismissal request on October 2nd, stating that it had not yet responded to Celeris's questions, thus the debriefing was not completed.

The GAO agreed with the Navy, ruling that the protest was premature until the conclusion of the entire debriefing process.

Celeris will have the chance to refile its protest within 10 days after the debriefing is completed. However, it is also possible that the Navy will conduct a "meaningful debriefing" making such a bid protest unnecessary. We'll have to wait and see on that one.

The complete GAO decision is available here.

Organization Costs

Organization costs are those made in connection with planning or executing the organization or reorganization of the corporate structure of a business, including mergers and acquisitions. These costs are unallowable under FAR 31.205-27 Organization Costs.

Such expenditures include, but are not limited to, incorporation fees and costs of attorneys, accountants, brokers, promoters and organizers, management consultants, and investment counselors, whether or not they are employees of the company. This would also include costs related to changes in the financial structure which may result from divestitures or the establishment of joint ventures or wholly-owned subsidiaries.

One rule of thumb in deciding whether a cost meets the FAR definition of organization costs is to consider its impact on the balance sheet. It it involves the equity section of the balance sheet (e.g.stock, equity, retained earnings, etc) it most like an organization cost.

In establishing the coverage at FAR 31.205-27, the Cost Principles Committee relied on the following definition of an organization and reorganization and the costs thereof:

1. A major change in the financial structure of a corporation or a group of associated corporations resulting in alterations in the rights and interest of security holders; a recapitalization, merger, or consolidation. 
2. Any costs incurred in establishing a corporation or other form of organization; as, incorporation, legal and accounting fees, promotional costs incident to the sale of securities, security-qualification expense, and printing of stock certificates. 

In the event a contractor creates or acquires a new segment or business unit through an acquisition or reorganization, the auditor should review the activity associated with the transaction to determine if any unallowable or unallocable costs are assigned to Government contracts. These activities are often performed by an in-house business planning group, an acquisition and divestiture committee, and by the corporate legal and accounting departments.

Contract auditors will ask to review any available documentation to identify activities and associated costs which are directly incident to establishing or altering the contractor's financial structure. Many times the employees involved in these activities do not maintain adequate time records to identify and support their effort expended on reorganizations and related work. This could present a problem. The auditor will most likely require that the contractor implements the necessary policy and procedures to properly identify and account for these activities.

Normal recurring expenditures associated with internal reorganizations of contractor segments and divisions are generally allowable costs to the extent they are reasonable and allocable. Such expenditures may be incurred for business planning and forecasting, developing policies and procedures, preparing a CAS disclosure statement, establishing an accounting system, etc.

Company Pays $7.8 Million for Illegally Obtaining Small-Business Contracts

A company in Savannah Georgia, Arena Event Services, Inc. has agreed to settle with the Government to resolve allegations that it wrongfully obtained small business set-aside contracts with the Department of Defense. As part of the settlement agreement, Arena will pay $7.8 million back to the Government.

According to the settlement agreement, Arena used another company, Military Training Solutions (MTS) to obtain small business defense contracts that were supposed to be performed by MTS, but in reality were performed by Arena. As a result this scheme, millions of dollars in contracts at Fort Stewart, GA and other military installations, were performed by Arena instead of by legitimate small businesses.

Arena paid MTS to bid and obtain small business contracts that would ultimately be performed by Arena. MTS, by the way, previously entered into its own settlement agreement with the Government to resolve its liability under the scheme.

There was no indication in the Justice Department press release that the work was not accomplished or that the work was not performed properly. So from that standpoint, taxpayers didn't lose out financially. The real problem was that these contracts should have been performed by small businesses in order to further the Government's role in encouraging small businesses to participate in Government contracting opportunities.

There have been many settlements over the years involving similar activities. "Rent-a-Vet" schemes once proliferated but seem to be on the wain now that the VA and SBA have tightened up their verification process. These schemes seem to be easily uncovered. Many are brought forward by internal whistle-blowers who might have a financial incentive to do so. One case a number of years ago was exposed by an alert COTR (Contracting Officer's Technical Representative) who noticed a lot of subcontractors working on a construction project but could never seem to find the prime contractor. 

The "Red Book" - GAO's Principles of Federal Appropriations Law

Researching Federal Contract law is not easy and is usually left to the professionals. Contract disputes are complicated as well because the law and the regulations that were in effect when the contract was created govern its applications. This means going through many books, current and superseded.

Today online sources make research a bit simpler but finding the laws, regulations, and case law is only the beginning. Interpreting the laws, and regulations requires a legal mind and a whole lot of experience in this highly specialized field.

Today there are a lot of online resources, many of which we have referenced from time to time. Online resources certainly make research easier and if you are inclined to perform your own legal research, there is a great free resource at the GAO.

Principles of Federal Appropriations Law, also known as the Red Book, is GAO's multi-volume treatise concerning federal fiscal law. The Red Book provides text discussion with reference to specific legal authorities to illustrate legal principles, their application, and exceptions. These references include GAO decisions and opinions, judicial decisions, statutory provisions and other relevant sources.

The Red Book's 2,500 or so pages is organized into fourteen chapters (chapters 1 through 15 with chapter 4 "coming soon". Chapter titles include:
Introduction

• The legal framework
• Availability of appropriations: purpose
• Availability of appropriations: time
• Availability of appropriations: amount
• Obligation of appropriations
• Continuing resolutions
• Liability and relief of accountable officers
• Federal assistance: grants and cooperative agreements
• Federal assistance: guaranteed and insured loans
• Acquisition of goods and services
• Real property
• Claims against and by the government
• Miscellaneous topics

GAO publishes a new edition every few years (currently its on edition 4) which represents a complete update and involves hundreds of hours of research and verification on the accuracy of every cited work. GAO also publishes an annual revision, which refreshes the Red Book content with new GAO appropriations law decisions or opinions that have been released in the preceding year.

What Happens When the Contracting Officer Disagrees with the Contract Auditor?

Contract auditors perform audits and issue reports, sometimes with recommendations or questioned costs, to the contracting officer. The contracting officer, in turn, resolves the audit findings with the contractor. Sometimes, the contracting officer does not agree with the audit findings; more so if the audit relates to pricing proposals than with historical costs. Why? When it comes to pricing proposals, everyone's dealing with estimates of future costs and judgement becomes a big part of estimating. Incurred cost on the other hand deal with historical evidence supporting the incurrence of costs. Contractors either have support or they don't. Judgement is not a major factor on the allowability of costs.

The Defense Department has made it very clear that when it comes to its contracting officers and its contract auditors (namely the Defense Contract Audit Agency), the contracting officer will rule the day. In a 2009 memorandum, the Defense Department states as official policy:

It is neither expected nor necessary that the contracting officer and the contract auditor agree on every issue. They have different, yet complementary, roles in the process. It is expected that the auditor and contracting officer will work together recognizing that it is the contracting officer's ultimate responsibility to determine fair and reasonable contract values.

That particular guidance anticipates that when the contract auditor and contracting officer disagree on particular issues, the matter be elevated  to successively higher levels until there is an agreement. That means one side or the other will need to give in.

Sometimes, auditors become so entrenched in their positions that they seemingly refuse to listen to the contractors' side of an issue or acknowledge that there might be merit to the position. In those cases, it is often better to take the matter up with the contracting officer, knowing that in the end, the final decision rests with them.

Product Substitution Case is Settled

Ten years ago, the Treasury Department created TARP (Troubled Asset Relief Program) to help stabilize the economy during a financial crisis. Eight years ago, the Treasury Department created the BEP (Blight Elimination Program), one of several TARP programs. The BEP funded the demolition of abandoned and blighted residential properties in certain cities, including Fort Wayne, Indiana.

The City of Fort Wayne was a BEP program partner, using Federal funds to demolish houses in blighted areas of the city. One of the contractors hired to perform the demolition work was a company called Martin Enterprise, Inc.

Under the terms of the contract, Martin was required to fill in excavation sites with clean fill dirt. Instead of using clean fill dirt, Martin figured that it could save a lot of money by filling the excavation sites with construction debris. That was a problem. First of all, construction debris might contain hazardous materials which of course, public safety would be jeopardized. Secondly, the Government paid for clean fill dirt, not construction debris.

Somehow Martin got caught. The Justice Department press release on the matter did not disclose how Martin was caught. It could have been a site inspector (highly likely) or a whistleblower (less likely, in this case).

In order to settle False Claims charges for fraudulently submitting claims for work not performed properly, Martin agreed to pay the Government $61 thousand.

The Government had a lot of choice words for Martin:

• dishonest
• ill-gotten gains
• put residents and communities at risk
• fleecing taxpayers
• seek to enrich themselves

To read the full Justice Department press release, click here.

Free DCAA Seminar - Registration Required

This free seminar will be of interest for Government contractors and prospective contractors.

Proposals/Quotations Must Be Submitted to the Right Place at the Right Time

Here's another bid protest decision involving a late proposal. As often noted in similar cases, it is the offeror's responsibility to ensure that its proposal is submitted to the right person on the right date at the right time. Failing to do this, could result in the unnecessary risk that a proposal is eliminated from competition.

Last May, the Air Force issued an RFQ (Request for Quotation) for approximately 300 golf/utility carts. The RFQ required quotations be submitted by email by 12:00 p.m. on May 18th to the contracting officer and contract specialist whose names were included in the request. The solicitation included the clause at FAR (Federal Acquisition Regulations) 52.212-1 which provides that offerors are responsible for submitting  offers so as to reach the Government office designated in the solicitation by the time specified  in the solicitation. That provision further provides that any offer received after that date is late and will not be considered. Concerning electronic submissions, if an offer was received at the initial point of entry to the Government infrastructure not later than 5:00 p.m. one working day prior to the due date it would  be considered timely.

VS Aviation was one of several offerors submitting bids under the solicitation. However, the Air Force did not receive VS Aviation's bid and awarded the contract to another company on June 18th. When someone at VS Aviation reviewing awards in FBO (FedBizOps) noticed the award, the company requested a post-award debriefing from the Air Force. The Air Force replied that it had not received a quotation from VS Aviation and requested the VS Aviation re-send its previous emails. A few more tries to send the proposal were unsuccessful. Finally, on June 26, the Air Force received the proposal for the first time but not the "original, unaltered and unedited email submissions. Eventually, the problem was due to file size. VS Aviation's proposals were 21 and 24 megabytes in size while the Air Force limit on incoming email was 10 megabytes.. Therefore, the Air Force's system blocked VS Aviation's email. Not satisfied with this explanation, VS Aviation appealed to the GAO (Government Accountability Office).

GAO did not sustain the protest. It cited its much used precedence that it is the vendor's responsibility, when transmitting its quotation electronically, to ensure the delivery of its quotation to the proper place at the proper time. VS Aviation did not do that. It could have done so. It could have picked up the phone to inquire whether the Air Force received the proposal. As a result of its failure to make an inquiry, the GAO found unobjectionable the Air Force's decision not to consider VS Aviation's quotation (how could the Air Force have done otherwise in the circumstances?).

The GAO also highlighted for the record that in order for the Air Force to properly accept a late quotation pursuant to a couple of exceptions specified in the clause (i.e. the late proposal would not unduly delay award), the quotation must be received before award. Here, VS Aviation's quotation was not received until more than a week after contract award.

The full GAO decision can be accessed here.

Proposed Changes to Progress Payment Rate - Withdrawn

Back on August 24th, we reported a proposed rule by the Defense Department that would significantly slash the progress payment rate from 80 to 50 percent unless contractors were able to achieve certain milestones such as contract delivery, no significant corrective action requests, no significant business system deficiencies, meeting subcontracting goals, among others (see Proposed Changes to Progress Payment Rate).

Two weeks ago, we reported on a scheduled public meeting to obtain the views of experts and interested parties regarding the proposed changes (see Proposed Changes to Progress Payment Rate - Public Meeting Scheduled). We reported then that this proposed change has been meeting with a lot of concern and resistance. The Defense Department has valid concerns. Many contractors do not seem to care about improving their business systems, meeting subcontracting goals, or acknowledging corrective action reports because there is no penalty for failing to comply. Defense is trying to incentivize contractors to do the right things by disrupting their cash flows if they don't toe the line.

Well, contractors seem to have won this battle. Today, the Defense Department withdrew the proposed rule and cancelled the public meeting (see Performance-Based Payments and Progress Payments (DFARS Case 2017-D019)). According to DoD, the proposed rule was withdrawn in order for DoD to conduct additional outreach with industry regarding contract financing methods.

This isn't the end of the story however. The proposed rule was based on a provision in the FY 2017 NDAA (National Defense Authorization Act) so eventually, there will be some kind of change to existing policy.

What are Bid Guarantees?

A "bid guarantee" (sometimes referred to as a "bid bond") is a form of security assuring that the bidder will not withdraw a bid within the period specified for acceptance and will execute a written contract and furnish required bonds, including any necessary coinsurance or reinsurance agreements, within the time specified in the bid, unless a longer time allowed, after receipt of the specified forms (See FAR 28.001).

The purpose of a bid guarantee is to secure the liability of a surety to the Government by providing funds to cover the excess costs of awarding to the next eligible bidder in the event that the successful bidder defaults by failing to fulfill these obligations. The amount of the bid guarantee is specified in the solicitation and is expressed as a percentage of the bid price up to a maximum: "The amount of the bid guarantee shall be xxx percent of the bid price or $xxx, whichever is less." (see FAR 52.228-1(c)).

A bid bond or guarantee is a material part of the bid with which there must be compliance at the time of bid opening. When a bidder submits a defective bid bond or uncertainty exists at the time of bid opening that the bidder has furnished a legally binding bond, the bid itself is rendered non-responsive and generally requires rejection of the bid (see FAR 28.101-4(a)).

Bidders usually submit an SF 24 Bid Bond form to establish that the guarantee is enforceable however the use of a SF 24 is not mandatory as long as the alternate form (such as a "commercial" bid bond form, does not represent a significant departure from the rights and obligations of the parties as set forth in the SF 24. The determinative factor s whether the bond establishes unequivocally at the time of bid opening, that the bond is enforceable against the surety should the bidder fail to meet its obligations. If, for example, the contracting officer (or whoever is awarding the contract) cannot determine definitively from the bid bond documents that the surety would be bound, the bond is defective and the bid must be rejected.

Labor Department Scheduling Hundreds of Compliance Audits for Nondiscrimination

The Office of Federal Contract Compliance Programs (OFCCP) is part of the Labor Department and is responsible for ensuring that employers doing business with the Federal Government comply with the laws and regulations requiring nondiscrimination.

Late last month, the OFCCP announced two directives focused on providing more transparency in its activities as tools for promoting compliance.

1. Transparency in compliance activities. Over the last several months, OFCCP has taken several steps to improve transparency, cooperation, and communication with federal contractors. A new directive further extends OFCCP's transparency initiative to every stage of a compliance evaluation to facilitate consistency, improve efficiency and collaborative resolution, and also supports contractors' ability to conduct meaningful self-audits to proactively identify and address issues with their employment practices. You can read the full directive here.
2. Ombuds Service. The GAO (Government Accountability Office) found in a 2016 report that contractors were not using OFCCP compliance assistance because doing so would call attention to them and possibly make them a target for future OFCCP enforcement actions (do  you think?). OFCCP believes this perception can erode confidence and trust in OFCCP to effectively carry out its mission. A new initiative establishes a mechanism through which contractors can share their concerns about a particular open matter or provide general feedback or recommendations to improve the administration of the agency. You can read the full directive here.

Also, as part of OFCCP's initiative toward more transparency was the release of the names of contractors it intends to audit in the upcoming year. Actually there are two lists, one group of contractors selected last January and the other group selected last September. These lists are purportedly posted on OFCCP's official website but we were unable to locate them. The lists are available elsewhere on the Internet and easily found by searching. There are hundreds of names on these lists - contractors appearing on these lists have already been notified by OFCCP of the impending compliance audit..

DoD Not Making Sufficient Progress in Reducing Headquarters Costs

The Fiscal Year 2016 NDAA (National Defense Authorization Act) required the Defense Department to implement a plan to achieve not less than $10 billion in cost savings from headquarters, administrative, and support activities by 2019 and also required the Department to submit progress reports with its fiscal years 2017, 2018, and 2019 budget requests.

Recently, the GAO (Government Accountability Office) published a report on its observations of how the Defense Department is meeting its requirement. The GAO found that the Department has not fully met these requirements. Specifically, GAO reported:

• DoD has not fully met the requirement to save $10 billion by fiscal year 2019 (FY 2019 started today). DoD reported that it has identified $9.2 billion of the required $10 billion in cost savings but that figure is highly suspect in that DoD does not have a reliable cost estimate to support these estimated savings
• DoD was required to submit its first progress report when it submitted its fiscal year 2017 budget request in February 2016. However, DoD did not submit the estimate until May 2018, more than two years late.
• GAO found inconsistencies in DoD's May 2018 progress report that raise additional questions about the accuracy of its cost savings estimates. For example, in some sections, DoD refers to $5.3 billion i n savings whereas in other sections it refers to $8.25 billion in savings for the same period. DoD offers no explanation as to why the figures differ.

These DoD studies are probably just smoke and mirrors as the Department stated that its figures were not auditable. GAO couldn't figure out whether the cost savings estimates were any good and decided not to make any recommendations. That made things easy for the Defense Department as the Department simply said "no comment" when presented with a copy of the report.

The full GAO report is available here.