Friday, December 14, 2018

Government Paid $13.6 Million to Hire Two Border Guards

Boarder patrol positions have been notoriously difficult to fill, in large part, because of the polygraph exam applicants are required to undergo. It must be a rigorous polygraph because two of three applicants fail the exam.

To assist in hiring border guards, the U.S. Customs and Border Protection (CPB) awarded Accenture Federal Services a five year contract for nearly $300 million to to recruit and hire 7.500 Boarder Patrol Agents. Now, 10 months into the contract, CPB has paid Accenture $13.6 million and what do they have to show for their efforts? Accenture has filled 2 positions (or $6.8 million per recruit).

The Department of Homeland Security (DHS), Office of Inspector General (OIG), initiated its audit of Accenture's performance after receiving "Hotline" complaints about the contractor's performance. The OIG's report, issued last week, found numerous problems and concluded that CBP management needed to address "serious performance issues on the Accenture hiring contract.".

Among the performance issues identified by the OIG are

  • Accenture has not provided the promised hiring process or results. Accenture has yet to demonstrate the efficient, innovative, and expertly run hiring process it promised.
  • Accenture relied on CBP resources to fulfill contract obligations. Accenture was supposed to provide a team of technical experts and tools to fulfill contract requirements. Instead, Accenture relied heavily on CBP resources to complete the hiring process.
  • Accenture has not provided the agreed-upon technological innovations.
  • Accenture used a retinal scanning tool to discern deception based on eye and face muscle movement to pre-screen candidates without regulatory approval.

The OIG made a series of recommendations which CPB concurred to.

The full report can be accessed here.

Thursday, December 13, 2018

Government Employee Guilty of Accepting Gratuities in Exchange for Official Acts

NASA's Wallops Flight Facility (WFF) is located on the Eastern shore of Virginia although to get there from Virginia proper, you would need to take a boat or drive through Deleware. WFF provides launch and range services for both the Government and commercial sectors.

Mr. Kremer was the Chief of the Range and Mission Management Office at NASA Wallops (a GS-15 position). In his position, Kremer was responsible for administering the Range Operations Contract (ROC) - a multi-year, $190 million, cost-plus Government contract to provide various services at Wallops' test facilities and launch control centers. The prime ROC contractor awarded numerous subcontracts. One of the subcontractors performed interior design and office furnishing services and equipment at WFF.  The subcontractor (identified as Firm #2 in court documents. One of Firm #2's employees, identified as 'SC" in court documents, was the primary point of contact between Firm #2 and Mr. Kremer. "SC" also owned a beach house in Cape Charles, VA that he made available for Kremer's use.

One week for eight consecutive summers, Kremer was allowed free use of SC's beach house. In exchange, Kremer steered the award of interior design and furnishing projects to SC and Firm #2. Ultimately, emails between Kremer and SC did them in. During one stay, Kremer emailed SC: "... after this week, I'm going to be searching for rooms even those that no one uses at Wallops and put new furniture in the. I owe u big time. This has been so super." After another week's free use, Kremer wrote: "Can I book a week like last year? I will give you some days this week if that is OK ... THANK YOU so much again. Your customer service is unmatched ... not to mention the summer fun you offer. LOL.."

The Justice Department estimated the value of these week long stays to be about $18 thousand. In addition, the Government's investigation also disclosed that Kramer asked SC to procure some personalized art and charge it to the contract. Together they conspired to call it a "whiteboard" with SC claiming that it was not her "first time at the rodeo". Investigators also found that Kremer instructed the ROC contractor to buy $7,000 in Amazon gift cards, ostensibly to use to purchase "electronic reference books" for WFF employees. Those gift cards however were used for Kremer's personal use.There were more irregularities uncovered in the investigation including $11 thousand in "promotional" items for Kremer's friends and family members.

Mr. Kremer plead guilty in Federal court to receiving gratuities in exchange for official acts performed in his capacity as a government official, and to stealing funds from a Government contract. Sentencing is scheduled for next March.

Wednesday, December 12, 2018

Proposed Changes to Progress Payment Rate - Public Meetings Rescheduled

Last August, the Defense Department proposed significant changes in the way that progress payment rates are established. Currently, FAR 52.232-16 sets customary progress payment rates of 80 and 85 percent for large and small businesses while the Defense Department bumps the small business progress payment rate to 90 percent. The change proposed back in August leaves the small business progress payment rate alone but drops the rate for non-small businesses from 80 percent to 50 percent with provisions to increase the base amount to 90 percent by meeting certain incentives (see Proposed Changes to Progress Payment Rate).

The idea behind these changes were to increase the effectiveness and efficiency of certain areas including (i) on-time deliveries, (ii) contractor quality, (iii) contractor business systems, (iv) increasing subcontracting opportunities for small businesses, and (v) improved estimating systems. The objective, while addressing valid DoD concerns, met with a lot of opposition. Initially DoD scheduled a public meeting in the DC area to obtain views of interest parties (see Proposed Changes to Progress Payment Rate - Public Meeting). Later on (in October 2018), the entire proposal was withdrawn and the public meeting was cancelled (see Proposed Changes to Progress Payment Rate - Withdrawn).

Withdrawn perhaps, but not forgotten. DoD withdrew the proposal to give it time to conduct additional outreach with industry regarding contract financing methods. but since the proposed rule is predicated upon a provision in the 2017 NDAA (National Defense Authorization Act), there will need to ultimately be some kind of change to contract financing reform.

The Defense Department has now rescheduled its public meetings (two in January and one in February) to obtain views of experts and interested parties regarding revising policies and procedures for contract financing, performance incentives, and associated regulations for DoD contracts. The fact that the Department is scheduling three meetings instead of one previously, gives some indication of the level of interest in this matter.

Pre-registration is required so hurry over to these registration instructions if interested in attending.

Tuesday, December 11, 2018

Resolving Proposal Inadequacies - Contracting Officers Failure to Document

The Defense Department Inspector General (IG) recently evaluated whether contracting officers took actions that were appropriate and complied with FAR (Federal Acquisition Regulations) 15.4, Contract Pricing, when the auditors (specifically DCAA or Defense Contract Audit Agency) determined that a contractor's price proposal was inadequate because those proposals did not comply with the specific requirements of FAR 15.4.

The good news is that the IG found that contracting officers did indeed take appropriate action to address proposal deficiencies identified by DCAA. In 23 of 23 proposals identified by DCAA as unacceptable as a basis for negotiations, contracting officers took the necessary actions to resolve the inadequacies.

The bad news however is that the contracting officers did not document the inadequacies or the actions taken to address the inadequacies in the contract file. Such documentation is required by FAR 15.406-3, Documenting the Negotiation.

The (Acting) Undersecretary of Defense for Acquisition and Sustainment recently sent out a reminder to contracting officers to, in essence, get their act together and comply with the documentation requirements. The memorandum reminded contracting officers that they have an affirmative requirement to document all DCAA identified inadequacies and to document why the actions taken appropriately address the contract price proposal inadequacies. By doing so, the memorandum concluded, contracting officers will have properly accounted for any issues of noncompliance or other discrepancies identified int he DCAA audit.

While we were auditors, we encountered many contractor proposals that were inadequate in not including the detail and support required by FAR 15.4. Some deficiencies were certainly more egregious than others but when the magnitude rose to a level where we didn't think the Government could achieve fair and reasonable pricing based on the garbage submitted, we would advise the contracting officer accordingly and recommend he/she not negotiate. Whatever actions contracting officers might have taken to resolve those inadequacies were rarely satisfactory to the audit community. Evidently contracting officers answer to a higher power than the contract auditor who are often viewed as an impediment to a smooth negotiation process.

The full IG report can be read or downloaded here.

Monday, December 10, 2018

Estimating Labor Hours on Price Proposals

Whenever cost or pricing data is required in connection with a Government contract or subcontract, whether certified or other than certified,  contractors (or subcontractors) are called upon to provide a significant amount of detail to back up their estimates. Then it is up to the Government - could be the Defense Contract Management Agency, the Defense Contract Audit Agency, or cost/price analysts in the buying activity - or the prime contractor to decide the level of review necessary to validate the propriety of the estimates. Today we will discuss some of the considerations that auditors might use to evaluate labor costs, and more specifically, labor hours.

Labor costs are comprised of labor rates and labor hours. Estimates for labor rates are fairly straight-forward. Usually labor rates are based on existing pay rates with escalation thrown in. Estimates for labor hours however create a big challenge to estimate and represent a significant risk area for the Government. Contractors need to answer the questions of how many hours will it take to perform a particular task and how does it know? The Government will come along and asked them to "prove it".

Historical data is usually the preferred method of forecasting future hours. Without historical data, labor hour estimates are usually based on judgmental estimates, or engineering estimates. Estimates cannot be evaluated with empirical data. Negotiations usually come down to decisions about reasonableness or who can put up the most convincing arguments.

The Government however wants to know about a contractor's historical experience in building whatever the item being built or assembled. For this reason, the Government will always ascertain the suitability of historical data for making estimates. (i.e. accurate, reliable and representative). If a contractor has not identified relevant historical labor hours in its basis of estimate, the Government is going to ask for historical hours and make that comparison.

The Government will also take that history and adjust it for learning/improvements. The Government might apply improvement curve techniques or regression analysis, or other trend-line techniques to historical hours.

The Government will also look at a couple of other areas. They will make sure that proposed direct labor is classified consistent with FAR 31.202 and 31.203(a). In other words, they do not want contractors to propose as direct labor, activities that are and should be charged indirect. Second, the Government will want to ensure that the proposed labor mix is consistent with past performance and company demographics. For example, there should be consistency in the proposed mix of various skill levels with that supported by historical evidence.

Sometimes contractors get a little sloppy in estimating their direct labor hours and are left scrambling when the Government begins inquiries into the propriety of historical hours. Be prepared.

Friday, December 7, 2018

Does Your Contract Contain the Clause at FAR 52.204-23 - the Kaspersky Prohibition?

FAR 52.204-23 is a relatively new contract clause that is appearing in a lot of contracts. It prohibits the Government from contracting for hardware, software, and services developed or provided by Kaspersky Labs and other covered entities. Covered entities includes successor entities to Kaspersky Lab, entities that controls, is controlled by or is under common control with Kaspersky Lab or another entity of which Kaspersky Lab has a majority ownership.

But whether the clause has been included in your contract, or not, the prohibition applies as it is based on a statutory authority that became effective last October (October 1, 2018).

So what's wrong with Kaspersky anti-virus software? The Department of Homeland Security (DHS) is of the opinion that Kaspersky software presents an information security risk because of Kaspersky's Russian connections. A report out of the University of Illinois College of Law provides these thoughts:
  1. Russian law outlines a legal obligation by Kaspersky to assist Russian FSB (their Federal Security Service) in the execution of their duties including counterintelligence and intelligence activity.
  2. Russian law also permits FSB personnel to be embedded in private enterprises
  3. Because Kaspersky qualifies as an organizer of the dissemination of information on the Internet, it is required to provide the FSB with metadata and is also required to provide Russian officials with decryption keys for its data transmissions.
  4. Under Russian law, Kaspersky is required to install equipment for the FSB to monitor data transmissions.
Those facts raises concerns that the Kaspersky is too closely tied to the Russian Government and creates an unacceptable risk to the U.S. Government.

Back in September, we reported on these pages a couple articles stating that many contractors are unprepared for October 1st 2018 deadline. In some cases, contractors are not even aware that Kaspersky is running on their networks because it came pre-installed with unrelated software. In other cases, contractors have attempted to remove Kaspersky but missed  some instances because complete removal is more complicated that simply uninstalling the program. There is even a concern that some contractors don't believe the ban applies to them, when it most certainly does. It applies to subcontractors too.

In the event a contractor finds that it has violated this prohibition, it is required to notify the contracting officer within one day along with its mitigation actions and must submit a full report within 10 days. This is how serious the Government is taking the prohibition.

Thursday, December 6, 2018

Limitation on Subcontracting - Simplifying the Calculations

The FAR (Federal Acquisition Regulations) Councils are proposing to amend the FAR to bring it into conformity with certain SBA (Small Business Administration) regulations regarding limitations on subcontracting.

Under various rules, sometimes prime contractors are required to perform a certain percentage of work itself whereas under other programs, prime contractors could include subcontracts to "similarly situated entities" in the percentage of work it performed. The methods for calculating compliance also varies across small business programs.

A previous NDAA (National Defense Authorization Act) changed the focus on limitations on subcontracting rules. Instead of requiring a percentage of work to be performed by a prime contractor, the limitation on subcontracting rules now limit subcontracting to a percentage of the overall award amount to be spent by prime contractors on subcontractors. This is a much easier calculation.

Contractors no long will need to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e. contract price) that it spends on subcontractors.

Additionally, the percentage of award amount that the prime contractor spends on subcontractors who are similarly situated entities is not considered subcontracted for purposes of complying with the limitation on subcontracting. "Similarly Situated Entities" are subcontractors that have the same small business program status as that which qualified the prime contractor for the award and is considered small for the NAICS code the prime contractor assigned to the subcontract for which the subcontractor will perform.

These changes, if adopted (and they no doubt will be adopted) will give small businesses greater flexibility on how they choose to comply with the limitations on subcontracting.

Read more about the proposed change here.

Wednesday, December 5, 2018

Board Decision Becomes Treatise on FAR 31.201-3 - Reasonableness

In 2001, the Army awarded a contract to Brown & Root Services, Inc (KBR) for support services during military operations in Iraq (commonly referred to as the LOGCAP III contract). KBR. Two of KBR's subcontractors filed REA's (Requests for Equitable Adjustment) with KBR. KBR paid the subcontractors and then in turn, requested reimbursement from the Army. The Army denied the cost so KBR appealed to the ASBCA.

The ASBCA also denied the appeal because it found the KBR's actions and the resulting costs to be unreasonable.

First, KBR agreed to the validity of its subcontractor's REA after concluding that performance delays were the Government's fault. However, after examining the facts and the contract language, the Board found that it was not reasonable for KBR to conclude the the Government failed to perform the prime contract.

Second, KBR did nothing to analyze the propriety of its subcontractor's claimed costs. Although KBR recognized that its subcontractor could only seek its actual costs, it did not require evidence of actual cost before paying out a $25 million settlement. Instead of determining the actual number of delay days, KBR relied on its subcontractor's unrealistic model of estimating delay days.

This is a lengthy ASBCA decision but is highly instructive for someone trying to understand how the Board might apply the FAR 31.201-3 "reasonableness" standard.

Tuesday, December 4, 2018

What is a Profit Margin Test?

Every DCAA (Defense Contract Audit Agency) audit, whether requested or self-initiated, begins with a risk assessment. A risk assessment is a set of tools auditors - all auditors - use to help decide where and what to focus on in an audit. So, for example, if only $100 of material costs have been charged against a $1 million contract, the auditor would probably conclude that his/her limited resources can be better spent on other than material costs.

For T&M (Time and Material) contracts, there are two inherent risks to the Government. First, did the Government really receive the services that it paid for and second, were those services rendered by personnel with the right qualifications? There have been some well-publicized criminal cases were contractors reaped windfall profits by not providing the requisite skill level that the Government paid for. For example, the Government contracted for Senior Engineers but the contractor performed the work with Junior Technicians.

One test the auditor might perform to determine whether there might be a risk for that happening is what DCAA refers to as the "profit margin test". The profit margin test compares booked cost (i.e. actual costs) to billed cost. If variances are significant, it might mean that the contractor is not paying employees the amount that it proposed and negotiated with the Government. And one reason why that might happen is because the contractor is utilizing lesser skilled employees for work that the Government desires (and pays for) higher skilled individuals. That's not the only reason for variances however. Variances could be cause by differences between negotiated and actual overhead rates.

If there is a significant variance between actual costs and billed amounts, auditors will perform further analysis to determine the reason for those variances. If it is caused by labor rate variances, Auditors will then assess the risk that the contractor is substituting less qualified employees. If substitution is occurring, auditors will most likely identify those personnel for detailed employee interviews.

Sometimes it becomes necessary to utilize different skills than what is contemplated on a T&M contract. The proper way to handle this is to notify the contracting office of the necessity and negotiate a contract rate adjustment. Don't wait for an auditor to find or a whistleblower to call the hotline.

Monday, December 3, 2018

OFCCP's Help Desk

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) mission is to protect workers, promote diversity. It performs audits of companies with Federal Government contracts to ensure compliance with requirements to take affirmative action and to not discriminate. We have written about the Office several times in past year or so, usually in the context where the Office has taken punitive action against a contractor for failing to follow a law or regulation.

OFCCP issued a new directive last week (see Directive 2019-03) for the purpose of providing compliance assistance and guidance in a manner that employees and employers can easily access and reasonably rely upon as they seek to understand their rights and obligations.

Specifically the OFCCP is enhancing its existing "Help Desk" which will allow contractors to make inquiries by phone or email regarding a variety of topics. Think of it as a "knowledge base". The OFCCP wants to make certain Help Desk inquiries and responses dynamically available and searchable as a self-service option on OFCCP's website. This self-service option would allow contractors (or contractor employees) to benefit from prior inquiries and lead to greater efficiencies in OFCCP Help Desk operations.

OFCCP also plans to incorporate the use of opinion letters as part of guidance to employers, employees and the public. It hopes that by making fact-specific guidance in opinion letters about OFCCP's jurisdictional coverage or application of regulations or guidance will provide more certainty about how the Agency exercises its authority.

Any one having experience using "knowledge base" information to solve a problem knows full well that solutions can be difficult to find and even then, are not sufficient or specific enough to take "bullet proof" actions. Let us know your experiences.