Material Misrepresentation in Offeror's Proposal

The Coast Guard issued a solicitation for a fixed-price task order for project management, technical support, and logistics services for its Aviation Logistics Center. The solicitation required offerors to submit resumes for all positions, which the Government would evaluate to determine whether the qualifications and experience met or exceeded the position requirements. The Coast Guard received six proposals and after reviewing them, established a competitive range consisting of Sev1Tech and STI-TEC. Ultimately, the award went to STI-TEC whereupon Sev1Tech appealed contending that STI-TEC's proposal contained a material misrepresentation in that it proposed personnel for which it did not have a reasonable expectation would be available for performance under the task order.

Sev1Tech proposed a team comprised of 95 percent incumbent personnel, stating that it had met the current employees on two occasions and negotiated exclusive letters of commitment with incumbent personnel. STI-TEC provided the names and resumes for 10 of the same incumbent staff that Sev1Tech had proposed stating that it had "reached out to and negotiated contingent offers of employment with candidates for each position.

Sev1Tech called STI-TEC a liar. Sev1Tech stated that STI-TEC did not obtain permission to use the resumes of incumbent personnel in its proposal and did not contract the individuals concerning working on the task order until after the task order was awarded.

Sev1Tech's appeal did not go well for STI-TEC. The GAO (Government Accountability Office) noted that offerors may not represent the commitment of incumbent employees based only on a hope or belief that the offeror will ultimately be able to make good on its representation. A misrepresentation is material where an agency (the Coast Guard, in this case) has relied upon the misrepresentation and that misrepresentation likely had a significant impact on the evaluation. The GAO concluded that the STI-TEC materially misrepresented the availability of incumbent staff without receiving prior assurances that the incumbent staff was interested in continuing to work on the new task order and the Coast Guard relied on the resumes of the incumbent staff in its evaluation of proposals. Accordingly, GAO sustained the protest.

GAO recommended that the Coast Guard reevaluate STI-TEC's proposal, taking into consideration the awardee's misrepresentations and make a new selection decision. GAO also recommended that Sev1Tech be reimbursed reasonable costs of filing and pursuing the protest, including attorney's fees.

What Are Defective Pricing "Offsets"?

Since 1987, there has been statutory recognition for contractor offsets for defective cost or pricing data that resulted in understated costs. Whenever the Government challenges a contractor for failing to submit current, complete, and accurate cost or pricing data, the contractor is entitled to offset the cost impact of that defective pricing with other facts that went in the Government's favor.

Offsets must meet the same factual requirements that TINA (Truth in Negotiations Act) requires; must be factual data that existed at the time of agreement on price that was reasonably available to the contractor. Contractors cannot claim intentional understatements as offsets nor can contractors claim such things as unsupported "bottom-line" management adjustments.

To be considered, offsets against defective certified cost or pricing data

• must be certified to the contracting officer that, to the best of the contractor's knowledge and belief, the contractor is entitled to the offset in the amount requested,
• proves that the cost or pricing data were available before the date of agreement on the price of the contract (or modification), and
• proves that the data was not submitted before such date.

Offsets will not be allowed if

• the understated data was known by the contractor to be understated before the date of the Certificate of Current Cost or Pricing Data, or
• the Government proves that the facts demonstrate that the contract price would not have increased in the amount to be offset even if the available data had been submitted before the date of agreement on price.

So, for example, offsets are prohibited if the contractor intentionally withheld from the Government information showing a higher cost for an item or service.

Offsets are permitted among and withing various line items of certified cost or pricing data but never for more than the maximum defective overstated costs. Offsets can never result in an increased contract price.

One final note, generally, the Government will not entertain offsets unless and until the contractor certifies to its allowability. There have been a few exceptions for whatever reason but exceptions to certification are not the norm.

Whistleblower Protection for Contractor Employees - Legal Costs

As we discussed yesterday, contractors and subcontractors are prohibited from discharging, demoting, or otherwise discriminating against an employee as a reprisal for disclosing evidence of gross mismanagement of a federal contract, a gross waste of federal funds, an abuse of authority relating to a federal contract, a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a federal contract.

Most of the time, we suspect, when employees are discharged or demoted, its for reasons other than whistleblower activities. Sometimes however, when discharged or demoted, contractor employees will claim whistleblower status. When that happens, contractors must assume a defensive posture which will undoubtedly involve legal fees. Are those legal fees incurred to defend against claims of reprisal by an employee claiming whistleblower status allowable?  It depends. It depends on the outcome of the case and whether the contractor or subcontractor engaged in reprisal against a whistleblower.

FAR (Federal Acquisition Regulations) 31.205-47 is the 'go to' cost principle for determining allowability of legal fees in connection with employees submitting whistleblower complaints of reprisal.

Costs incurred in connection with any proceeding brought by a Federal, State, local or foreign government for a violation of or failure to comply with law or regulation by the contractor (including its agents or employees), a contractor or subcontractor employee submitting a whistleblower complaint of reprisal, or a third party in the name of the United States under the False Claims Act, are unallowable if the result is

• in a criminal proceeding, a conviction
• In a civil or administrative proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct, or imposition of a monetary penalty, or an order issued by the agency head to the contractor or subcontractor to take corrective action where the proceeding does not involve an allegation of fraud or similar misconduct.
• A final decision by an appropriate official of an executive agency to debar or suspend the contractor, rescind or void a contract or terminate a contract for default.
• Disposition of the matter by consent or compromise if the proceeding could have led to any of the previously described results.
• Not covered by the previous results but where the underlying alleged contractor misconduct was the same as that which led to a different proceeding whose costs are unallowable by reason of the forgoing.

So, it depends upon the outcome of the case and also illustrates why innocent contractors will fight rather than settle out of court. An out of court settlement will probably render the settlement costs and legal fees unallowable.

Whistleblower Protection for Employees of Government Contractors

The FAR (Federal Acquisition Regulations) Councils are proposing to amend the FAR to implement a provision in prior NDAAs (National Defense Authorization Acts) to strengthen and make permanent protections for disclosures of certain information. It also clarifies the prohibition on reimbursement for certain legal costs incurred by contractors and subcontractors in defense of employee whistleblower complaints.

A four-year pilot program created by the 2013 NDAA will become permanent under this new regulation. The new regulation however contains some enhancements to pilot program regulations. It provides more details about the nature of what constitutes whistle lower information and to whom it may be disclosed, as well as more detailed procedures for filing and investigation complaints and enforcing orders.

The prohibition against retaliating against contractor whistleblowers is found in FAR 3.9, Whistleblower Protections for Contractor Employees. It is quite expansive so we won't try to cover its essence in this short blog post. One new definition has been proposed - Abuse of Authority. Abuse of authority means an arbitrary and capricious exercise of authority that is inconsistent with the mission of the executive agency concerned or the successful performance of a contract of such agency.

The basic policy remains essentially the same as that in the pilot program: Contractors and subcontractors are prohibited from discharging, demoting, or otherwise discriminating against an employee as a reprisal for disclosing, to (i) congress or a representative of a congressional committee (ii) inspector general (iii) GAO (Government Accountability Office), (iv) a federal employee responsible for contract oversight or management at the relevant agency, (v) an outhorized official of the Justice Department, (vi) a court or grand jury, or (vii) a management official or other employee of the contractor or subcontractor who has the responsibility to investigate, discover, or address misconduct the following:

1. Evidence of gross mismanagement of a Federal contract
2. A gross waste of Federal funds
3. An abuse of authority relating to a Federal contract
4. A substantial and specific danger to public health or safety, or
5. A violation of law, rule, or regulation related to a Federal contract.

Tomorrow we will examine the cost allowability of defending against whistleblower allegations.

Trafficking in Persons - Recruitment Fees - Methods of Payment

We finished up last week with a couple of posts on trafficking in persons. Thursday we discussed the general prohibition found in statutes and regulations (see Trafficking in Persons) and followed that up on Friday with definition of recruitment fees (see Trafficking in Persons - Recruit Fees). One of the prohibitions found in FAR 22.17 makes it unlawful for Government contractors and subcontractors to charge employees fees for the privilege of working.for the company.

Now we mentioned last week that a lot of firms might try to find some wiggle room in the regulations to, in effect, find a way to charge recruitment fees - finding ways to adhere to the letter of the law if not the spirit or intent of the law. There's a good reason because many of the laborers used to support the military in areas such as Afghanistan and Iraq (to name two) come from impoverished areas where people are unencumbered by any stigma attached to unethical conduct. If people want jobs, they're going to have to pay somebody.

The FAR makes it clear that the method of payment doesn't matter. Specifically, FAR states that a recruitment fee, as described last Friday, is a recruitment fee (i) regardless of whether the payment is paid in property or money, (ii) deducted from wages, (iii) paid back in wage or benefit concessions, (iv) paid back as a kickback, (v) bribe, (vi) in-kind payment, (vii) free labor, (viii) tip or tribute, or (ix) collected by an employer or a third party, whether licenses or unlicensed, including:

1. Agents
2. Labor brokers
3. Recruiters
4. Staffing firms (including private employment and placement firms)
5. Subsidiaries/affiliates of the employer
6. Any agent or employee of such entities, and
7. Subcontractors of all tiers.

There is one final point that we should discuss - the job has to be accurately described. The regulations prohibit the use of misleading or fraudulent practices during the recruitment of employees or offering of employment, such as failing to disclose, in a format and language understood by the employee, basic information or making material misrepresentations during the recruitment process regarding key terms and conditions of employment, including wages and fringe benefits, the location of work, the living conditions, housing and associated costs, any significant costs to be charged (excluding recruitment fees), and, if applicable, the hazardous nature of the work.

Trafficking in Persons - Recruitment Fees

Yesterday we discussed the FAR prohibitions against "trafficking in persons" and the underlying statutory basis for those regulations (see Trafficking in Persons). One of the prohibitions, as you recall, was one prohibiting contractors and subcontractors from charging employees recruitment fees. One of the problems with this prohibition has been that no one could agree on what constituted "recruitment fees". In fact, in 2015, GAO (Government Accountability Office) came out with a report recommending that agencies develop a more precise definition of recruitment fees. According to GAO, without a clear definition, agencies would face challenges enforcing the prohibition. So, through the regulatory process, the Government has done just that; defined in FAR 22.1702 the term recruitment fees. Here it is:

Recruitment fees means fees of any type, including charges, costs, assessments, or other financial obligations, that are associated with the recruitment process, regardless of the time, manner, or location of imposition or collection of the fee.

Recruitment fees include, but are not limited to, the following fees when they are associated with the recruiting process for:

• Soliciting, identifying, considering, interviewing, referring, retaining, transferring, selecting, training, providing orientation to, shills testing, recommending, or placing employees or potential employees
• Advertising
• Obtaining permanent or temporary labor certification, including any associated fees
• Processing applications and petitions
• Acquiring visa, including any associated fees;
• Acquiring photographs and identity or immigration documents, such as passports, including any associated fees
• Accessing the job opportunity, including required medical examinations and immunizations; background reference, and security clearance checks and examinations; and additional certifications;
• An employer's recruiters, agents or attorneys, or other notary or legal fees;
• Language interpretation or translation, arranging for or accompanying on travel, or providing other advice to employees or potential employees;
• Government-mandated fees, such as b order crossing fees, levies, or worker welfare funds;
• Transportation and subsistence costs for everything until disembarking at work site.
• Equipment charges
• Security deposits, bonds, and insurance 

This seems like a very comprehensive listing. Although some contractors and subcontractors might look for wiggle room to find ways to make employees pay some sort of fee for securing the job, the intent here is to not saddle employees with these otherwise allowable fees. Such fees, recruitment fees as they are called, must be charged direct to a contract or allocated though an indirect rate.

Trafficking in Persons

The degrading institution of slavery continues through the world. Trafficking in persons is a modern form of slavery, and it is the largest manifestation of slavery today. At least 700 thousand people annually, primarily women and children, are trafficked within or across international borders. Approximately 50 thousand women and children are trafficked into the United States each year. Many of these people are trafficked into the international sex trade, often by force, fraud, or coercion. But trafficking in persons is not limited to the sex industry. This growing transnational crime also includes force labor and involves significant violations of labor, public health, and human rights standards worldwide. (22 CFR 78).

This "trafficking" statute also applies to Government contractors and is implemented by FAR (Federal Acquisition Regulations) 22.17.  Now one would not think that trafficking would be an issue with Government contractors but there have been documented cases where contractors over in Kuwait, Iraq, and Afghanistan who provide various services to military, have used subcontractors to fill their staffing needs. These subcontractors have induced workers from different (often impoverished) countries to work for them in sometimes inhuman conditions. In one recently settled case, the subcontractor even took their passports away so they couldn't leave.

The FAR coverage prohibits contractors, contractor employees, subcontractors, subcontractor employees, and their agents from:

1. Engaging in severe forms of trafficking in persons during the period of contract performance
2. Procuring commercial sex acts during the period of performance
3. Using forced labor in the performance of the contract
4. Destroying, concealing, confiscating, or otherwise denying access by an employee to the employee's identity or immigration documents, such as passports or drivers' licenses, regardless of issuing authority
5. Using misleading or fraudulent practices during the recruitment of employees or offering of employments, such as failing to disclose, in a format and language accessible to the worker, basic information or making material misrepresentations during the recruitment of employees regarding the key terms and conditions of employment, including wages and fringe benefits, the location of work the living conditions, housing and associated costs, any significant costs to be charged to the employee, and if applicable, the hazardous nature of the work.requires certification and compliance plans
6. Using recruiters that do not comply with local labor laws of the country in which the recruiting takes place
7. Charging employees recruitment fees                     
8. Failing to properly return workers to their countries after the end of employment.
9. Providing or arranging housing that fails to meet the host country housing and safety standards

Contractors are required to periodically certify compliance and ensure that their subcontractors do the same. Enforcement of this is handled by the Labor Department.

SBA - Size Restrictions Now Based on 5-Year Averaging

On Monday, this week, the President signed into law several bills, one of which was H.R. 6330, the Small Business Runway Extension Act of 2018" (SBREA). The SBREA modifies the method for prescribing size standards for small businesses. Basically, this is a one-word change but it will, in most cases, benefit small businesses. The Law amends 15 USC 14A, Section 632(a)(2)(C)(ii)(iii) by changing the number '3' to '5'.

For purposes of 15 USC 14A, a small-business concern is one that is independently owned and operated and is not dominate in its field of operations. To be a small business, the firm must not exceed certain size standards consisting of employment numbers and average annual average gross receipts over a period of time. Previously, the average was calculated over a period of three years. Under the new law, the average is to be calculated over a five-year period.

The objective of the legislation is to allow small business to stay small businesses longer. Instead of calculating revenues based on the trailing three-year average, small businesses can calculate average revenues based on the last five years. This works for growing companies - those who the Government has chosen to benefit. However, the converse is also true. Companies that are losing revenues may well stay in the non-small business category longer.

Calculating annual revenues based on averages, whether three or five years, smooths out a lot of the volatility in revenue recognition inherent in small businesses and start-ups. Far more companies will benefit from a five-year averaging scenario than those that might be harmed by it.

Unsealing "Qui Tam" Cases

The publicizing of a "Qui Tam" suit happens at the time the Government decides whether to intervene. The underlying investigation took months, and sometimes years, to complete.U

Under the False Claims Act (FCA), private parties may bring suit in the name of the United States. The private parties, known as qui tam relators, must initially file the complaint under seal. Sealing protects the United States' investigation while the Government determines whether to intervene in the action. Once the United States decides whether to intervene, the qui tam complaint is unsealed. This is keeping with the general presumption that the public enjoys free and unfettered access to Court records.

To justify continued sealing of qui tam court records, the risk of disclosure must outweigh the public benefits in access to court records. What might those risks be? Such risks for continued sealing would be a showing that the particular pleading either includes confidential investigative techniques, jeopardizes an ongoing investigation or risks injury to non-parties. By contrast, if the pleading merely discloses routine investigative procedures which anyone with rudimentary knowledge of the investigative process (i.e. someone who watches crime shows on television) would assume would be utilized in the regular course of business and contains no information about specific investigatory techniques, then the pleading would be unsealed.

Sometimes the Government will try to maintain pleadings under seal. Perhaps the real reasons for trying to do do are not disclosed but the Government still tries and usually fails. In one recent case, the Government cited motions for extensions of time, routine investigative matters such as the numbers of subpoenas issued, witnesses interviewed, and pages of documents reviewed. as justification for continued sealing. The Court ruled that none of the pleadings implicate specific people or provide any substantive details about the investigative or decision-making efforts beyond memorializing routine investigative steps involved in any such process.

SBIR/STTR Contracts - Know Cost "Eligibility" Rules

We use these pages to keep readers up to date on FAR (Federal Acquisition Regulation) cost principles (i.e. FAR Part 31) and supplemental cost principle regulations from individual agencies (e.g. DFARS or DoD FAR Supplement). Contractors need to understand however that there are many other factors that affect the allowability and eligibility of costs. Contracts and grants often contain specific limitations while agencies themselves impose their own limitations. When it comes to SBIR/STTR programs, things can get very confusing and its necessary to fully understand allowability and eligibility criteria when negotiating contract prices. Here are some examples of competing or conflicting guidance pertaining to SBIR/STTR contracts.

• Some agencies allow you to purchase equipment as a direct cost on a Phase 1 project while others do not.
• Some agencies prohibit travel in Phase 1 while others strongly encourage it and even others require it. This leads to "consistency" issues in estimating, recording, and reporting costs.
• NIH (National Institute of Health) limits Phase 1 indirect rate to 40 percent of all direct costs unless there is an approved rate on a recent Federal project. This 40 percent limitation can result in a significant hardship to small businesses.
• NSF (National Science Foundation)  limits the combination of fringe benefits and indirect costs to not more than 150 percent of direct labor.
• All agencies allow profit and commonly refer to 7 percent of total cost. However, some agencies take that to mean that profit cannot exceed 7 percent, others say that means "normally" profit should not exceed 7 percent, while still others say 7 percent is an agency average.

The eligibility of costs is usually mentioned in the agency's SBIR/STTR solicitations but usually requires some "digging" to find them. Before entering into an SBIR/STTR contract, be certain that you fully understand any unique cost eligibility requirements and restrictions that apply and query the contracting officer for others that might not be evident. Phase 1 projects are usually fixed price while Phase 2 are typically cost-reimbursable. Once Phase 1 costs are negotiated, contractors can pretty much spend the contract amount as it sees fit. Not so with Phase 2 projects. Phase 2 projects can cause the most problems to contractors because those contracts become subject to audit.

For some free training resources from the SBIR/STTR folks, see New Resources for Small Businesses Seeking R&D Funding.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

Poor Internal Controls Lead to Embezzlement

The Armed Forces Foundation, a non-profit organization based in Washington D.C. was formed in 2002 by a former Navy Sea-bee to protect and promote the physical, mental, and emotional wellness of military service members, veterans, and their families. Within a year, Patricia Driscoll took over leadership of the organization. Driscoll resigned in June 2016 after media reports emerged alleging mishandling of funds. In October of that year, the Foundation announced they were ceasing operations after an audit into Driscoll's financial management and her indictment on federal charges of stealing from the non-profit, defrauding donors and lying to the IRS and the public about her compensation.j

This week, Driscoll was found guilty by a Federal jury of those charges. On the organization's tax return, Driscoll failed to include the fact that she received commissions from fundraising, the amounts of commissions that she received from fundraising, and other benefits that she received. She categorized expenses in the Foundation's books as being for the benefit of veterans, troops, and their families, when in fact, they were for her own private benefit. She concealed from the Foundations's accountants the money she took form the charity, such as rent that was paid for the use of office space in a building that she co-owned. She also falsified the amount of donations received by inflating the amount and incorrectly listing the types of donations.

In total, the Government estimated that Driscoll misappropriated $900 thousand to personal expenses such as shopping trips, legal fees, and other bills for her private security company business (Frontline Defense Systems, LLC). Personal expenses included vacations to Paris and Morocco, personal credit card bills, legal fees relating to child-custody and domestic violence.

Driscoll's schemes might never had been uncovered had it not been for an investigative reporter who obtained foundations records that raised questions about Driscoll's handling of Foundation funds. See (Tax document shows AFF's ex-leader accused of pilfering funds for personal use).

The Foundation claimed that 95 percent of all contributions went directly to those it intended to help. A news article indicated that only a small fraction of that percentage actually went to help military service members, veterans, and their families.

The lesson in this for Government contractors is to ensure that internal controls are in place and operating effectively. Make sure that there is oversight and that the board of directors are more than perfunctory rubber-stamps.

Defense Department Preference for Fixed-Price Contracts

Section 829 of the 2017 NDAA (National Defense Authorization Act) directed DoD to establish a preference for fixed-price contracts (including fixed-price incentive contracts) when determining contract types and also to establish a required for "higher-level" approval for certain cost-type contracts.

How did DoD implement this directive? To comply with the fixed-price preference directive, DoD added the following words to its FAR Supplement (DFARS) through its class deviation process:

Contracting officers shall first consider the use of fixed-price contracts, including fixed-price incentive contracts, in the determination of contact type.

There, fixed that. That was easy. What about the higher-level approval requirement? DoD fixed that one as well by stating "heads of contracting activities" must approve cost-reimbursement contracts in excess of $25 million (which many contracting activities require now anyway).

Fixed that one as well.

Some statutes are really easy to implement.

Does CAS Compliance Require Companies to Depart from Generally Accepted Auditing Standards (GAAP)?

Last week, the CAS Board (Cost Accounting Standards Board) published an agenda for its November and January meetings. There are four topics on the agenda (see CAS Board Meeting) including a couple that we have decided to cover in more detail for its potential impact on small businesses. Even though small business contractors are exempt from CAS, most of the 19 existing standards have been folded in part or in whole into the FAR (Federal Acquisition Regulations) over the years. Yesterday we covered Agenda Topic #4 which consists of a discussion on the Section 809 Panel's recommendation to eliminate the Defense CAS Board, a Board that was created by the 2017 NDAA but has yet to organize (see Will the Newly Created Defense CAS Board Survive?). Today we will cover Agenda Topic #2, Conforming CAS to GAAP (Generally Accepted Accounting Principles).

Agenda topic #3 reads as follows:

Conformance of CAS to Generally Accepted Accounting Principles (GAAP). Section 820 requires the CAS Board to review and conform CAS, where practicable, to GAAP. The Board intends to discuss development of an SDP (Staff Discussion Paper) addressing conformance of CAS 404, Capitalization of Tangible Assets, and CAS 411, Accounting for Acquisition Costs of Material, to GAAP. This is the second SDP addressing CAS-GAAP conformance and will build on the first SDP (under final review for publication and public comment) that (i) lays out a proposed conceptual framework and guiding principles to prioritize the evaluation of whether and to what extent CAS may be conformed to GAAP and (ii) presents an initial comparison of CAS 408, Accounting for Costs of Compensated Personal Absence, and CAS 409, Cost Accounting Standard Depreciation of Tangible Capital Assets, for public comment. The Board intends to receive and review public comment on the first SDP before publishing the second SDP.

The Board has already identified four CAS standards that may or may not require deviation from GAAP. Two of them, the capitalization and depreciation standards (CAS 404 and 409), are not inconsistent with GAAP. It just that GAAP allows companies to be more flexible than CAS in their capitalization and depreciation practices. Whatever issues there are involving capitalization and depreciation however have very little impact on Government contracts. Its a "pay me now or pay me later" situation. If a contractor expenses something, it is reimbursed in the year of expenditure. If a contractor capitalizes an asset, it is reimbursed for the cost over a period of years through depreciation. But what about the time value of money, you ask? In theory, the Government benefits from capitalization because it defers the cost to future years. However, whatever imputed time value of money may accrue to the Government, is offset by FCCM (Facilities Capital Cost of Money) where Contractors earn interest on the undepreciated value of assets. So its a wash. One just doesn't see any capitalization/depreciation disputes brought to the Boards of Contract Appeals for that reason - there is no significant cost impact.

The Board identified two other CAS standards for discussion on aligning them with GAAP - material costs and employees absences - without any explanation as to how compliance might require deviation from GAAP.  We were unaware that these standards (409 and 411) involved departures from GAAP. Guess we'll have to wait for the SDP to learn the Board's concerns.

Will the Newly Created "Defense CAS Board" Survive?

We ended last week's blog with a news article about the CAS (Cost Accounting Standards) Board's upcoming meetings and the agenda topics for the Board's November and January meetings (see CAS Board Meeting). Today and tomorrow we want to take a closer look at two of the agenda topics for their potential impact on small Government contractors.

Agenda topic #4 reads as follows:

Review of Section 809 Panel Recommendation on Defense Cost Accounting Standards Board (Defense CAS Board). The Board will discuss the analysis and recommendation made by the Panel (in Volume 2 of its report) to repeal the provisions in Section 820 of the FY 2017 NDAA (National Defense Authorization Act) that created the Defense CAS Board. See Section 820(b), which amends title 10 by adding a new section 190.

Section 820 of the 2017 NDAA had several purposes:

• Revive the Cost Accounting Standards Board
• Establish a Defense Cost Accounting Standards Board (Defense CAS Board), and
• Privatize some of the audit work being performed by the Defense Contract Audit Agency (DCAA)

With respect to item no. 2, the Defense CAS Board enumerated duties include (see Defense Cost Accounting Standards - Part 2 for more detailed information):

1. review cost accounting standards established by the CASB and recommend changes to such cost accounting standards to the CASB
2. has exclusive authority with respect to the Department of Defense to implement such cost accounting standards to achieve uniformity and consistency in the standards governing measurement, assignment, and allocation of costs to contracts with the DoD, and
3. shall develop standards to ensure that commercial operations performed by Government employees at the DoD adhere to cost accounting standards that inform managerial decision-making.

Last June, the Section 809 Panel (officially the Advisory Panel on Streamlining and Codifying Acquisition Regulations) issued Vol. 2 of this three volume report. In that report, the Panel recommended abolishing the Defense CAS Board (even before it had a chance to organize). Concerning the Defense CAS Board, the report concluded:

Creation of the Defense CASB is an attempt to solve the problem of the non-functioning CASB. Adding another regulatory organization is the wrong solution. Government and industry representatives who spoke with the Section 809 Panel expressed they do not support creation of a Defense CASB. Stakeholders are concerned by the many unanswered questions raised by creating this board, including whether the new board will be biased toward DoD issues, and if the two boards will create competing sets of CAS. Creation of a Defense CASB would almost certainly be counter-productive.

We're not sure what the current CAS Board might discuss with respect to its new sibling, the Defense CAS Board other than give credence to and endorse the recommendation of the Section 809 Panel. The creation of the Defense CAS Board was statutorily derived so another statute will be necessary to abolish the Board. Its not something that the CAS Board can do on its own.

Secret Side Agreements and "Rent-a-Vet" Schemes

By all appearances, A&D General Contracting was a fairly successful Government contractor performing construction work for VA (Veterans Affairs) and the Army Corps of Engineers in California. Together in joint venture with another company, (Action Telecom), they pursued and were awarded more than $11 million in contracts set aside for service-disabled veteran-owned small businesses (SDVOSB). The problem was, neither A&D or its owner Andrew Otero qualified for those set-aside contracts.

Mr. Otero never served in the military, much less being disabled as a result. To "appear" qualified, Otero and a fellow named Ramsey (who was a service disabled veteran) entered into a joint venture agreement whereby Ramsey's company (Action) would be the managing venturer, employ a project manager for each of the set-aside contracts, and receive the majority of the JV's profits. So far, so good. However, there was the matter of the secret side-agreement.

Six months after forming the joint venture, Otero and Ramsey signed a secret side agreement that made clear the joint venture was ineligible under the SDVOSB program. It was pretty obvious since the side agreement specifically stated that the parties created the joint venture so that A&D could simply used the  Disabled Veteran Status of Action Telecom to bid on contracts. The side agreement also stated that A&D, not Action, would run the construction jobs. Thirdly, the side agreement stated that A&D wold keep 98 percent of every payment with Action receiving only two percent.

Well, there was the matter of the side agreement but how did the joint venture work in practice. Not so well. Ramsey, the disabled vet, had a full-time job at another telecommunications company. Otero, not Ramsey, controlled the day-to-day management, daily operations and long-term decision making of the joint venture. Also, Otero, not Ramsey appointed A&D employees as project managers for each and every contract and task order.

Last week, a federal jury convicted Mr. Otero on charges of fraudulently obtaining federal contracts specifically set aside for SDVOSBs. Sentencing is scheduled for next February.

What? The Moribund CAS Board is Meeting?

The OFPP (Office of Federal Procurement Policy (OFPP), Cost Accounting Standards Board (CAS Board) published notification of planned meetings this month and January 2019. The public notification is required but the meeting itself is closed to the public. The last meeting of the CAS Board was more than seven years ago - October 5th, 2011.

The current slate of CAS Board members include three Government reps, one industry rep and one rep from academia:

• Lesley Field, Chair, Acting Administrator, OFPP
• Anita Bales, Director DCAA
• Laurie Schmidgall, Director of Cost Policy, Boeing
• Evan Farley, CFO for GSA
• Yvonne Hinson, Senior Director & Academic in Residence, Association of International CPAs

The agenda topics include the following:

1. Review of Advanced Notice of Proposed Rulemaking for Pension Adjustments for Extraordinary Events - such as CAS pension segment closing adjustment requirements.
2. Conformance of CAS to GAAP (Generally Accepted Accounting Principles) - The 2017 NDAA requires the CAS Board to review and conform CAS, where practicable, to GAAP.
3. CAS Applicability Threshholds - Consider the recommendation by the Section 809 Panel to increase certain CAS Applicability thresholds.
4. Eliminate the Defense CAS Board - Consider the recommendations made by the Section 809 Panel to eliminate the Defense CAS Board. The Defense CAS Board was created by the 2017 NDAA.

Too Many Minority Employees?

We wonder how many companies survey their workforce and think that there is no way they could be in noncompliance with any form of employment discrimination. They might conclude that since they employ a ton of this minority and a ton of that minority and plenty of women employees, what could go wrong? Plenty, as one Government contractor found out. If you're a Government contractor, beware of "routine compliance evaluations" by OFCCP (Labor Department's Office of Federal Compliance Programs).

During one such "routine evaluation", the OFCCP observed that a Government contractor, Oldcastle Building Envelope (Oldcastle) seemingly had a significant ratio of make Hispanic employees. Upon further evaluation, the OFCCP determined that Oldcastle was discriminating against white, black, and female applicants in favor of Hispanic males. OFCCP found that Oldcastle's hiring practices violated relevant Federal laws which prohibit federal contractors from discriminating in employment based on race, national origin, religion, or gender.

What was the penalty for this violation? Oldcastle must pay $395 thousand in back wages and interest to "eligible class members" - presumably those who had applied but were turned down for employment based on discriminatory practices. Additionally, the company had to agree to provide job opportunities to 38 affected white makes, black males and female applicants as positions become available. Thirdly, Oldcastle must take steps to ensure its personnel practices, including recruitment, record-keeping, and internal audit procedures, comply with laws. Finally, Oldcastle must conduct anti-discriminatory training for its HR (human resources) training.

The Oldcastle settlement was the result of a routine evaluation. In other words, there was not whistleblower involved or anything else that might draw the OFCCP's attention to this company. OFCCP also actively solicits whistleblowers to come forward and report allegations of discriminatory hiring practices.

Robo-Auditing

Many companies, including Government contractors and subcontractors, spend significant amounts of money to fight fraud, waste, and abuse within their organizations. Not only do companies spend resources to establish internal controls that help prevent (or reduce) fraudulent activities but they spend significant sums for internal audit functions such as auditing travel vouchers.

Fraud, or the potential for fraud, is a significant problem for all companies. Read the 2018 Report to the Nations published by the Association of Certified Fraud Examiners and you might be surprised as to how pervasive occupational fraud really is and who the perpetrators tend to be.

Within the past couple of years, new tools have come to market that should help companies identify occupational fraud. These tools, somewhat expensive and designed for larger companies at this time, utilize AI (artificial intelligence) algorithms to identify fraudulent claims and forged receipts that are often undetectable to human auditors without hours of tedious labor. This is sometimes referred to as "robo-auditing".

Two of those companies are AppZen and Oversight Systems. AppZen claims it has already saved its clients $40 million in fraudulent expenses. Oversight also claims significant ROI (return on investment).

Travel and expense embezzlement typically accounts for about 14 percent of employee fraud and it is becoming easier to fool finance departments thanks to websites such as "fakereceipts.us" that make it easy to create a bogus paper trail. AppZen and Oversight claim that their algorithms can identify those kinds of excesses.

Here's a listing of what these products claim to be able to expose:

Expense report fraud

• travel and booking violations
• excessive meal and alcohol spending
• weekend purchases
• unnecessary upgrades
• out-of-policy spending
• suspicious merchants
• anti-bribery and corruption
• duplicate expense claims

Invoice and contract fraud

• discount term violations
• non-applied rebates
• duplicate invoices and charges
• tiered pricing violations
• suppliers and vendor fraud
• most favored nation pricing
• payment term violations
• anti-bribery and corruption

As we stated earlier, these products are cutting edge and probably not cost-effective for small contractors at this time. But it might be, depending upon whether your company reimburses a lot of travel or purchases significant materials. 

Bid Protest - Plain Reading of Solicitation Prevails

The GSA (General Services Administration) issued a solicitation to procure information technology services. GSA required that offerors submit proposals in seven volumes. and a "document Verification and Self Scoring Worksheet. In the scoring worksheet, offerors were required to claim points for meeting specific criteria in the solicitation and for every claimed point, offerors were required to include supporting documentation in the appropriate volume of the proposal. GSA also set forth specific substitution rules for points claimed by joint-ventures.

For example, for relevant experience, joint venture offerors were required to list relevant experience projects in the name of the joint venture or in the name of an individual member of the joint venture. For past performance, JVs were required to provide examples in the name of the joint venture or in the name of an individual member of the joint venture. For systems certification, JVs were required to provide evidence of the system certification, or clearance being in the name of the joint venture or in the name of every member of the joint venture. Note the difference. In the first two examples, JV offerors could provide evidence in the name of the joint venture or in the name of one member of the joint venture. But for the system certification criteria, JV offerors had to provide evidence in the name of the joint venture or each and every member of the joint venture.

Metrica Tem Venture (MTV), a joint venture, submitted a bid under the solicitation. But the contracting officer took away points because MTV did not provide evidence of system certification for the joint venture as a whole or for each of the joint venture partners. MTV appealed to the U.S. Court of Federal Claims arguing that it was entitled to those points because it proposed that one of its members, which possessed an acceptable Cost Accounting System (CAS) would perform all of MTV's accounting under the contract.

The Federal Claims court dismissed the appeal because based on the plain reading of the solicitation, there was only one reasonable interpretation and it was not MTV's interpretation. The Court ruled that offerors were entitled to points only for having a certified cost accounting system if the credential is possessed by the joint venture or each member of the joint venture. Because neither MTV nor each member of the joint venture possessed a certified cost accounting system, GSA was correct in deducting points for a certified cost accounting system.

The full Federal Claims court decision can be accessed here.

Contractor Responsibility Determinations

The Government will award contracts to responsible prospective contractors only and no award can be made unless the contracting officer makes an affirmative determination of responsibility (see FAR 9.103(a) and (b)). Why is contractor "responsibility" so important? Because the award of a contract to a supplier based on lowest evaluated price alone can be false economy if there is a subsequent default, later deliveries, or other unsatisfactory performance resulting in additional contractual or administrative costs (see FAR 9.103(c)).

When making responsibility determinations, contracting officers can and will consider a number of sources of information about bidders and/or offerors. The common sources of information alread collected and readily available to the contracting officer includes the Federal Awardee Performance and Integrity Information System (FAPIIS), System for Award Management (SAM), and Past Performance Information Retrieval System (PPIRS).

Information in FAPIIS will identify affiliates, immediate owners, subsidiaries, and predecessors that have held previous Government contracts. It contains comments on how the contractor (or subcontractor) performed on previous contracts and whether there has been any administrative actions such as debarment or suspension. It contains information regarding criminal or civil proceedings, terminations for default or cause, and determinations of non-responsibility because the contractor does not have a satisfactory performance record or a satisfactory record of integrity and business ethics.

In addition to consulting the FAPIIS, contracting officers, when making responsibility determinations have other sources of information to help make those determinations. These include

• Records and experience data, including verifiable knowledge of personnel with the contracting office, audit offices, contract administration offices and other contracting officers. In other words, contracting officer will often query those around them for whatever information they might hold on a particular contractor or offeror.
• The prospective contractor - including bid or proposal information, questionnaire replies, financial data, information on production equipment and personnel information.
• Commercial sources of supplier information of a type offered to buyers in the private sector.
• Preaward survey reports - usually performed by DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) - including accounting system adequacy and financial capability reviews.
• Other sources such as publications, suppliers, subcontractors, and customers of the prospective contractor, financial institutions, Government agencies, and business and trade associations.

Contractors and prospective contractors should never underestimate the impact of negative information or a negative perception by someone within the Government. Sometimes all it takes is an off-hand comment bubbling up to the contracting officer to influence award decisions.

$236 Million Settlement in Bid-Rigging Scheme

Back in the mid-70s, the Army began to realize that it was paying excessive prices for military construction projects in South Korea. In fact, many of these projects cost more than comparable construction projects would cost back in the States. Given that Korean labor at the time was earning $2 to $4 per day, something was obviously off balance. The Army CIC (Criminal Investigative Command) conducted an extensive investigation and found wide-spread collusion among contractors as well as Korean Government involvement in directing which contractor would win each bid. The solution at the time was to move from competitive bidding process to negotiated procurements complete with certified cost or pricing data and full pricing audits. It worked. Costs for construction projects fell significantly. Over the intervening years however contracting shifted back to competitive procurements. The Korean economy boomed and the U.S. Government's was not as significant economic influence as it once was. There was presumption that contractors' ethics had improved. The Army wanted to streamline its acquisition processes - it requires a lot more work to negotiate a contract based on certified cost or pricing data than it does to award based on competition. It didn't take too many years for the shift from negotiated competitive procurements to become complete.

For those involved in ferreting out the graft and corruption of that era, yesterday's announcement by the Justice Department of a massive collusion scheme by Korean suppliers of fuel to the Army, Marines, and Air Force in South Korea was not shocking. Three South Korean companies agree to plead guilty to bid rigging on Defense Department fuel supply contracts. Together the companies have agreed to pay $236 million in fines and damages. The three suppliers agreed to pay $82 million in criminal fines for their involvement in a decade-long bid-rigging conspiracy that targeted fuel supply contracts and $154 million in restitution. This bid-rigging conspiracy went on for more than ten years discovery and the $154 million settlement is less than the amount of the overcharging. The Government rationalized this by stating that it reflected the value of defendants' cooperation commitments and the cost savings realized by avoiding extended litigation. These three companies have also been barred from further Government contracts.

The Justice Department press release alluded to the fact that additional charges in this matter would be forthcoming. The press release did not indicate how the scheme was uncovered or specifically how the collusion occurred. Perhaps we'll learn more about this case later on.

Double Jeopardy - Incurred Cost Audits

DCAA's (Defense Contract Audit Agency's) policies and procedures for sampling low-risk incurred cost proposals, while certainly helping to reduce the Agency's incurred cost backlog, has not been without its detractors in the contract administration community. There are anecdotal stories out there where contracting officers try to initiate their own reviews of incurred costs after receiving notification from DCAA that a particular contractor submission has been deemed low risk and should be relied upon to close contracts for that year. Contractors were understandably upset because of the apparent "double audit". The problem became significant enough that the Defense Department amended its FAR Supplement (DFARS) to, in effect, tell contracting officers to knock off the second-guessing of audit results.

DFARS 242.705, Final indirect cost rates was added as follows:

DCAA Policy and Procedure for Sampling Low-Risk Incurred Cost Proposals issued on Junly 24, 2012. Effective immediately, for the purposes of satisfying the audit requirements at FAR 4.804-5(a)(12), 42.705-1(b)(2), and 42.705-2(b)(2)(i), Department of Defense contracting officers shall continue to rely on either a DCAA audit report or a DCAA memorandum documenting that, based on a risk assessment and a proposal adequacy evaluation pursuant to FAR 42.705-1(b)(1)(iii), DCAA deemed the incurred cost proposal to be low-risk and did not select it for further audit in accordance with its policy.

This policy certainly doesn't mean that DCAA can make its determination in a vacuum without consulting the contract administration office. Before DCAA makes its high risk/low risk determination on a particular year at a particular contractor, it requests that the contracting officer provide them with a list of any known significant risk factors. The notification typically follows this wording:

Please notify us of any significant risk factors you are aware of that would impact the low-risk determination for the subject contractor and fiscal year. A negative response is requested. We request that you provide a response to our office no later than ten business days from the date of this letter.

Contracting officers are always given the opportunity to weigh in on what they view as risk factors at a particular contractor. And, the contract auditors are obligated to consider these views when assessing whether to perform an audit or to close it out with no audit because the risk factors did not justify a full audit.

Notice of Intent to Disallow Costs

The Government cannot arbitrarily withhold contract funds. There is a due process involved that consists of written rationale in the form of a proposed action but also gives contractors ample opportunity to state their case as to why that action should not be taken.

The procedure is laid out in FAR 42.801. Briefly, it goes like this:

At any time during the performance of a contract (typically a cost-reimbursable contract), the contracting officer responsible for administering the contract may issue the contractor a written notice of intent to disallow specified costs incurred or planned for incurrence. However, before issuing the notice, the contracting officer shall make every reasonable effort to reach a satisfactory settlement through discussions with the contractor (FAR 42.801(s)).

A notice of intent to disallow such costs usually results from monitoring contractor costs. The purpose of the notice is to notify the contractor as early as practicable during contract performance that the cost is considered unallowable under the contract terms and to provide for timely resolution of any resulting disagreement. In the event of a disagreement, the contractor may submit to the contracting officer a written response. Any such response shall be answered by withdrawal of the notice or by making a written decision within 60 days (FAR 42.801(b)). A notice of intent to disallow can also be the result of a report by the contract auditor.

At a minimum, the notice shall

1. Refer to the contract's Notice of Intent to Disallow Costs clause
2. State the contractor's name and list the numbers of the affected contracts
3. Describe the costs to be disallowed, including estimated dollar value by item and applicable time periods, and state the reasons for the intended disallowance
4. Describe the potential impact on billing rates and forward pricing rate agreements
5. State the notice's effective date and the date by which written response must be received
6. List the recipients of copies of the notice, and
7. Request the contractor to acknowledge receipt of the notice

Recently, the U.S. Court of Federal Claims took the Department of Energy to task for not following these procedures. DOE withheld costs from a contractor who had given employees a pay raise. DOE requested the contractor to provide information necessary for it to determine whether the pay raises were justified and if the information was not provided, DOE planned to take appropriate action to protect the Government's interests. The contractor did not provide the requested data so DOE withheld two percent of billed direct labor costs.

The contractor argued that DOE had not complied with the FAR criteria for disallowing costs. It had not issued a notice of intent to disallow costs nor had it afforded the contractor the opportunity to responded to the notice.

The Federal Claims court agreed with the contractor and ordered DOE to repay the $1.1 million withheld plus any additional amounts that may have been withheld in the interim.

The full decision can be read here.

Inter-Company Transfers - Limitations

Material costs, including such items as raw materials, parts, sub-assemblies, components, whether manufactured by the contractor or purchased are, of course, allowable costs on Government contracts (see FAR 31.205-26, Material Costs). There are limitations however, when those materials are being purchased from an affiliated company.

Paragraph (e) of the aforementioned FAR (Federal Acquisition Regulations) Cost Principle provides the following:

Allowance for all materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates of the contractor under a common control shall be on the basis of cost incurred. That means, no profit can be added. However, allowance may be at price when (i) it is the established practice of the transferring organization to price inter-organizational transfers at other than cost for commercial work of the contractor or any division, subsidiary or affiliate under a common control and (ii) the item being transferred qualifies for an exception under FAR 15.403-1(b) and the contracting officer has not determined the price to be unreasonable.

Note the two conditions; there must be an established practice that is followed for both commercial and Government customers and the item(s) must qualify for some kind of exemption. What are those exemptions? FAR 15.403-1(b) lists the exceptions to certified cost or pricing data requirements. Among them are

1. When the contracting officer determines that prices agreed upon are based on adequate price competition
2. When the contracting officer determines that prices agreed upon are based on prices set by law or regulation
3. When a commercial item is being acquired
4. When a waiver has been granted, or
5. When modifying a contract or subcontract for commercial items.

The idea behind these limitations is to avoid doubling up on profit, to pay a contractor profit on top of a material item for which it has already received profit. Contract auditors are very aware of this potential and will closely scrutinize any estimates or costs incurred under cost-type contracts for inter-company transactions to ensure that costs are consistent with the FAR limitations.

What Contractors Might Expect with the New Democratic Controlled House

It should be clear to everyone that given the divided control of Congress, there will not be much legislating during the 116th session. Perhaps that's a good thing. However, that doesn't mean things will be peaceful. With Democrats taking control of the committees, we could see a significant amount of activity in the committees tasked with Government oversight. In fact, certain individuals have already promised to shake things up a bit. While Government oversight doesn't necessarily mean contractor oversight, contractor representatives are often drug into these matters - especially if it involves a scandal where some Government agency has dropped the ball in its own administration and oversight responsibilities.

One recent article by the Federal News Network discussed the expected changes likely to occur. Rep. Cummings who is the likely chairman of the House Oversight and Government Reform Committee has requested 64 subpoenas over the past two years for more agency information about a variety of topics. The Republican majority hasn't upheld any of them. Expect that floodgate to open. Cummings plans to "shine a light" on waste, fraud and abuse in the Trump administration.

Democrats will also focus on Government reform including strengthening whistleblower statutes, reversing the trend that makes it harder for federal employees to be represented in the workplace and other advocacy effort on behalf of federal employees. Cummings also wants to be more involved in Executive Agency reorganizations.

One major concern right now involves the recommendations coming out of the Section 809 Panel that require statutory changes to effect. Without bipartisan support, many of these recommendations may not even be brought to the table, much less implemented.

What is the "Christian Doctrine"?

What is the "Christian Doctrine"? We discussed the basis of the Christian Doctrine back in 2010. You can find that post here.

Briefly stated, under the Christian doctrine, a court may insert a clause into a Government contract by operation of law if that clause is required under applicable federal administrative regulations. In "Christian", the Court of Claims concluded that the standard termination clause required by ASPR (Armed Services Procurement Regulations, since replaced by FAR) must be read into the contract, even though the contract lacked a termination clause. For a court to incorporate a clause into a contract under the Christian doctrine, it generally must find (i) the clause is mandatory and (ii) that it expresses a significant or deeply ingrained strand of public procurement policy.

A recent Appeals Court decision illustrates how the Christian Doctrine is applied to the absense of the Bonding clause in a construction contract.

The Army awarded a contract to K-Con, Inc. that lacked the standard bonding clause for construction contracts. FAR 52.228-15 requires offerors in construction contracts valued at $150 thousand or greater to furnish performance and payment bonds. Through probably an oversight, the Army failed to include that clause in the solicitation or the resulting contract.

The Appeals Court ruled that the clause was "read into" the contract under the Christian Doctrine because it is required by statute. The statute, 40 USC 3131-34 (formerly known as the Miller Act) requires that before any contract of more than $100 thousand is awarded for the construction, alteration, or repair of any public building or public work of the Federal Government, a person must furnish to the Government performance and payment bonds which become binding when the contract is awarded.

Under the second prong of the Christian doctrine, the Appeals Court ruled that performance and payment bonds express a significant or deeply ingrained strand of public procurement policy. Payment bonds are intended to provide security for those who furnish labor and materials in th e performance of Government contracts. For private contracts, subcontractors and suppliers can obtain a mechanic's lien against the improved property to ensure that they are paid. Government property however, cannot be subject to subcontractors' and suppliers' liens. Thus the payment bond requirements was created to provide, in Government contracts, an alternative remedy to protect those who supply labor or materials to a contractor on a Federal project.

Guilty Plea in Product Substitution Case

Granite Bay is an unincorporated area northeast of Sacramento California located along the north shore of Folsom Lake. It began as Granite Bar when gold miners first settled the banks of the American River. At its peak, there was 37 gold mines along both sides of the river.

Granite Bay (formerly Granite Bar) has a long and unique history. Besides the gold found there, it happened to be located along the supply line that was used to bring goods to the gold miners and carry gold nuggets to the banks in San Francisco. It was also a place for bandits to hang out - laying in wait to relieve travelers of their belongings. One brazen and famous robber along the stretch was known as "Rattlesnake Dick", so named, not because he was sneaky but because he was once an honest gold miner upriver at Rattlesnake Bar before turning outlaw.

Granite Bay is still home to thieves. The Justice Department just announced a guilty plea by a Granite Bay man accused of product substitution fraud. The scope of his fraud would probably leave Rattlesnake Dick jealous however. Between 2011 and 2017, Mr Meron used two office supply businesses he operated to defraud federal government agencies out of $3.5 million. He did this by substituting and delivering cheaper, generic versions of expensive, name-brand products his customers ordered, and pocketing the price difference.

Meron's two companies contracted to sell office supplies to federal agencies through two web-based government sales portals; GSA Advantage and DoD EMall. After Meron received payments for the premium products his customers ordered, he obtained compatible products from his suppliers that cost him a fraction of what his customers paid for the brand-name products they ordered. Meron then substituted and delivered those cheaper products for the more expensive products and retained the difference in cost. Over time, Meron extended his substitution scheme to nearly all orders for those name-brand products, and never intended to deliver what his customers ordered.

The use of knockoff products is significant because the United States Trade Trade Agreement Act requires federal agencies to buy products made or designed in the US. It bans federal agencies from buying products made in China. Meron's suppliers used cheaper products made in China.

Contractors Need to Avoid Even the Appearance of a Conflict of Interest

An anonymous source tipped off the Mayor of Nashville Tennessee that one of its public works contractors was improperly entertaining city officials who were responsible for directing city business to that contractor. The Mayor immediately requested an audit. The now completed audit concluded that there was an "appearance of preferential treatment" to that firm who has more than tippled its average yearly revenue from the City. Since 2010, it has received nearly $50 million in contracts for street paving, sidewalks, and other work.

City officials responsible for awarding those contracts were spotted (and photographed) in the Contractor's suite at sporting events (Bridgestone Arena) and according to the audit, those City employees did not appear to have paid for their own tickets. Photographic evidence also showed City employees having drinks after hours with the Company Vice President.

While the audit concluded that there was an appearance of a conflict of interest, the audit did not produce evidence that the Contractor received a benefit from the city in exchange for the entertainment. Most of the employees involved denied taking any tickets for free. One employee admitted to failure to reimburse the contractor for two of his tickets. With regard to the after-hours entertainment, claimed they paid cash for their drinks.

Other allegations the audit was unable to substantiate included:

• Invoices with no support
• Only inspectors on good terms with the Contractor were allowed to perform inspections
• City officials "directed" the Contractor to work with specified subcontractors
• There was a conflict of interest because the City's senior procurement officer once worked for the Contractor.

So what was the outcome of this audit?

• The mayor returned the Contractor's campaign contributions
• The Contractor agreed to pay for certain re-work for which it was trying to obtain an equitable adjustment
• City employees will undergo ethics training.

Northrup Grumman to pay $31 Million for Time-card Fraud

Northrop Grumman has agreed to pay the Government $31 million to resolve criminal and civil charges for over-billing the Air Force on a couple of contracts. The over-billings were a result of employees being paid for work not performed and occurred over a three-year period ending in 2013. In exchange for admitting its employees' misconduct, making full restitution, and agreeing to cooperate in the ongoing criminal investigation, no criminal charges will be filed against Northrup Grumman. The employees involved in the mischarging are no doubt concerned however.

According to the Justice Department press release, Northrup Grumman employees deployed to an air base in the Middle East defrauded the Air Force by over-billing time charged to a Government contract. Those employees charged exactly 12 or 13.5 hours per day, seven days a week, despite the fact that the employees were not working those hours. What were they doing? Following are some representative acts of what those employees were doing while charging time to the contract.

• Went for ice cream and a movie
• Went golfing
• Watched the Super Bowl from their hotel
• Went to a local amusement park
• Went skiing
• Laid by the pool
• Did not show up for work
• Was drunk
• Went to a music festival
• Couldn't get on the base because of an expired badge (yet claimed 13.5 hours of work)
• Shopped for a Chanel purse
• Picked up wife and children at the air port and went out to dinner

Some of the employees involved in this mischarging earned 3.6 times their base pay.

Among the corrective action that Northrup Grumman agreed to take are the following.

1. Issue periodic reminders of the latest time-charging guidance and policies, and provide repeated training sessions to help ensure proper time-charging by employees
2. Create a dedicated compliance manager position specifically to monitor time-charging.
3. Install a bio-metric reader at the program site to track employees' time on base.

Additionally, Northrup Grumman must use its best efforts to make available, and encourage, the cooperation of present and former officers and employees for interviews and testimony, consistent with their rights and privileges of such individuals. Most likely however, any employee involved in this mischarging is long gone from the company.

There is no indication in the Justice Department materials as to how this fraud was uncovered. More information on this case can be found here.