"Bait and Switch" in Government Contracting

The term "bait and switch" in Government contract law sometimes refers to cases where awardees' listed certain key personnel in their proposals, then made extensive post-award submissions. For example, a Comptroller General case used the term in a case where the awardee proposed key personnel who never authorized the awardee to use their names.

A bait-and-switch has four elements: (i) the awardee represented in its proposal that it would rely on certain specified personnel in performing the services, (ii) the agency relied on this representation in evaluating the proposal, (iii) it was foreseeable that the individuals name in the proposal would not be available to perform the contract work, and (iv) personnel other than those proposed are performing the service.

The third element is the one that ends up in dispute. Does "foreseeable" require actual knowledge or is "negligence" sufficient to establish an improper bait-and-switch. Courts have ruled that negligence is the minimum level of knowledge necessary to establish the foresee-ability element of an improper bait-and-switch. Foreseeable has a plain meaning - being such as may be reasonably anticipated and lying within the range for which forecasts are possible. It requires that an offeror knew or should have know, at the time of proposal submission, that its proposed key personnel would be unavailable to perform.

In a recent bid protest decided by U.S. Court of Federal Claims, an offeror used the resume of a certain individual without that individuals permission. When it was awarded the contract, that individual declined the employment offer so the contractor substituted a different person. One of the unsuccessful bidders appealed on the bait-and-switch grounds and won the appeal.

What is the ASBCA's Jurisdiction?

Appendix A to the DFARS (DoD FAR Supplement) contains the charter and rules for the Armed Services Board of Contract Appeals (ASBCA). Contractors considering an appeal of a contracting officers' decision should become familiar with these rules, even where an attorney has been retained. Familiarization with the rules will assist in understanding the process and the purposes for which attorney's do what they do.

The Appendix leads off with the ASBCA's charter - the things that it can do. Often times, when reading through cases, you will see comments related to 'jurisdiction'. Sometimes the Board will need to establish that they are the correct entity to hear the appeal. Sometimes they refuse appeals because they are outside of their jurisdiction.

The first part of the Charter reads as follows:

There is created the Armed Services Board of Contract Appeals which is hereby designated as the authorized representative of the Secretary of Defense, the Secretary of the Army, the Secretary of the Navy and the Secretary of the Air Force, in

• hearing
• considering and
• determining appeals

by contractors from decisions of contracting officers or their authorized representatives or other authorities on disputed questions.

These appeals may be taken

1. pursuant to the Contract Disputes Act of 1978 (41 USC Sections 7101-7109
2. pursuant to the provisions of contracts requiring the decision by the Secretary of Defense or by a Secretary of a Military Department or their duly authorized representative, or
3. pursuant to the provisions any any directive whereby the Secretary of Defense or the Secretary of a Military Department or their authorized representative has granted a right of appeal not contained in the contract or any matter consistent with the contract appeals procedure.

The Board may determine contract disputes for other departments and agencies by agreement as permitted by law. The Board shall operate under general policies established or approved by the Under Secretary of Defense responsible for acquisition and may perform other duties as directed not inconsistent with the Contract Disputes Act of 1978.

The Board shall decide the matters before it independently.

That last sentence is comforting and informative. The Board will act independently meaning they will not be coerced, manipulated, or commanded to take certain positions by powerful people within the Government or contractors.

President Appoints New Cost Accounting Standards Board Chair

The President has nominated Dr. Michael E. Wooten to become the Administrator, Office of Federal Procurement Policy (OFPP). As OFPP Administrator, Dr. Wooten will also serve as the Chair of the CAS Board (Cost Accounting Standards Board). Currently, those positions are filled by Lesley Field, the 'Acting' Administrator of OFPP. This appointment is subject to Senate approval.

The CAS Board met three times in 2018 and once so far in 2019. We're not sure what exactly was discussed or decided because no minutes have been published. However, based on the Board's published agendas, it seems that their current focus is on trying to conform CAS to GAAP (Generally Accepted Accounting Principles).

Here is Dr. Wooten's biography as published on the Education Department's website where he is currently the Deputy Assistant Secretary for Community Colleges. The emphasis is ours to highlight his experience in Government contracting.

Dr. Michael Eric Wooten serves as the Acting Assistant Secretary and Deputy Assistant Secretary in the Office of Career, Technical, and Adult Education. He provides leadership, direction and management for over $2 billion dollars in initiatives supporting career and technical education, adult education, correctional and re-entry education, and community colleges. These initiatives collectively serve over 25 million students annually. Dr. Wooten leads the Divisions that administer the Adult Education and Family Literacy Act (AEFLA) under the Workforce Innovation and Opportunity Act (WIOA) and the state formula and discretionary grant programs under the Carl D. Perkins Career and Technical Education Act. Dr. Wooten establishes national leadership activities to enhance the quality and rigor of educational programs, and he promotes the development of strategies that support student success. He brings more than one third of a century of government experience to the department.

Previously, Dr. Wooten served as the Deputy Chief Procurement Officer for the District of Columbia where he managed $5.2 Billion in annual contract spending through a workforce of 166 professionals. He also served as the Chief Learning Officer (CLO) for District of Columbia’s Office of Contracting and Procurement. As CLO, he designed and implemented a competency-based certification program for the District’s contract specialists. Additionally, Dr. Wooten served for seven years as a member of the Northern Virginia Community College Board; he was elected chairman of the board from 2014 through 2016. He was also selected to serve as an interim school board member for Prince William County Public Schools..

Prior to joining the District’s Office of Contracting and Procurement, Dr. Wooten served for ten years in various academic posts at Defense Acquisition University. Chief among these posts, he served as a professor of contract management, deputy department chair, and special assistant to the President of Defense Acquisition University. Mike Wooten is a 20 year veteran of the U.S. Marine Corps. His Marine Corps career culminated with service in Afghanistan followed by command of a unit of 1,200 Marines. He was retired at the rank of major.

Dr. Wooten first earned an associate’s degree from Georgia Perimeter College before earning a bachelor’s degree in psychology from Chapman University. He also holds master’s degrees from Norwich University (leadership and organizational management), the Naval Postgraduate School (acquisition and contract management), and the George Washington University (education and human development). He earned his doctorate from the University of Pennsylvania in higher education management.

DCMA and DCAA Criticized for Lack of Progress in Auditing Contractor Business Systems

Here's a post that will be of interest to major contractors - those contractors charging $100 million or more to cost type (CPFF, CPIF, FPI, T&M, etc) contracts annually.

DCAA (Defense Contract Audit Agency) is about to shift 250 auditors from performing incurred cost audits to performing audits of contractor business systems. DCAA's responsibility for oversight of contractor business systems (CBS) include (i) accounting, (ii) estimating, and (iii) MMAS or material management and accounting systems.

GAO (Government Accountability Office) recently published a report critical of the progress made by DCAA in completing these audits and of DCMA's oversight in ensuring that issues raised in those audits are resolved in a timely manner. In fiscal years 2015 through 2017, DCAA completed only three accounting system audits (none of those reported deficiencies) and nine estimating system audits (seven of which reported significant deficiencies). Some of these reviews took two to three years for DCAA to complete. Some took four and five years to resolve reported deficiencies.

According to the GAO Report, the effort expended by DCAA in auditing contractor business systems has been negligible. Normally these reviews are to be conducted on a three-year cycle however DCAA has abandoned any pretense of maintaining such a schedule. Instead, the Agency has focused on completing incurred cost audits - arguably a higher priority for the contracting community.

GAO noted that DCMA and DCAA do not have mechanisms to monitor and ensure that CBS audits are conducted in a timely manner. DCMA relies on the DCAA offices that perform the reviews of the three systems (accounting, estimating, and MMAS) to maintain the information on the reviews completed and to plan for future reviews, but DCMA does not centrally track its reviews or whether audits conducted by DCAA are being completed within the required time-frames (i.e. 70 days).

GAO recommended that DCMA and DCAA collaborate to develop a mechanism to monitor and assess whether contractor business systems reviews are being completed in a timely manner. DoD concurred.

Award Overturned Where Government Didn't Follow Stated Evaluation Criteria

NOAA (National Oceanic and Atmospheric Administration (part of the Commerce Department)  issued an RFQ (Request for Quotation) for weather and climate computing infrastructure services. The solicitation was issued as an SBA 8(a) small business set-aside and award was to be made to the vendor whose quotation represented the best value to the Government, considering (i) technical approach, (ii) corporate experience, and (iii) price.

NOAA received two quotations, one from Ace and the other from Cyberdata. NOAA's Technical Evaluation Team (TET) reviewed the quotations and assigned equal adjectival ratings to both; technical approach - acceptable; corporate experience - good; overall - good. Based on these equal adjectival ratings, NOAA's selection official concluded that price would be the determining factor and awarded the contract to Ace, whose proposal was about $2 million less than Cyberdata's.

Cyberdata protested the award, contending that NOAA failed to look behind the adjectival ratings in making its selection decision. The Comptroller General's office hearing the appeal agreed. The CG stated that adjectival ratings are not dispositive metrics for an agency to express a proposal's merit. What is important is not the scores themselves, but the underlying substantive merits of the proposals as embodied in, or reflected by the scores. Agencies must explain the basis for why proposals are considered technically equivalent.

In this case, the CG found that NOAA's selection decision did not demonstrate that the selection official meaningfully looked behind the adjectival ratings and beyond the number of strengths assessed to each vendor's quotation to determine  that the vendors' quotations were technically equal. To remedy the situation, the CG recommended that NOAA terminate Ace's contract for convenience and issue a new solicitation where where NOAA can do things correctly. Also, Cyberdata is to be reimbursed its protest costs including attorney's fees.

You can read the entire bid protest decision here.

Compensation for Professional Employees

The Service Contract Act of 1965 was enacted to ensure that Government contractors compensate their blue blue-collar workers and some white-collar service workers fairly. However, the SCA does not cover bona fide executives, administrative, or professional employees.

Professional employees are those having a recognized status based upon acquiring professional knowledge through prolonged study. Examples include accountancy, actuarial computation, architecture, dentistry, engineering, law, medicine, nursing, pharmacy, and the sciences. To be a professional employee, a person must not only be a professional but must be involved essentially in discharging professional duties.

It is the Government's policy that all professional employees be compensated fairly and properly. To this end, contracting officers will sometimes include in solicitations a requirement for offerors to submit for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees working on the contract. This solicitation clause is found at FAR 52.222-46, Evaluation of Compensation for Professional Employees. This is a required clause when the contract is expected to exceed $700 thousand and the service to be provided will require meaningful numbers of professional employees.

If this clause is included in a solicitation, offerors must submit for evaluation a total compensation plan setting forth proposed salaries and fringe benefits for professional employees who will be working on the contract. Supporting information will include data such as recognized national and regional compensation surveys and studies of professional, public, and private organizations, used in establishing the total compensation structure. Plans indicating unrealistically low professional employee compensation may be assessed adversely as one of the factors considered in making an award.

The Government has a right to be concerned about unrealistically low wages. Re-competition of service contracts may in some cases result in lowering the compensation paid to professional employees and lower wages can be detrimental to obtaining the quality of professional services needed for adequate contract performance. Therefore it is in the Government's best interest that professional employees be properly and fairly compensated.

So what does the Government look for when evaluating compensation plans? The Government will evaluate plans to assure that they reflect a sound management approach and understanding of contract requirements including an assessment of offerors' ability to provide uninterrupted high-quality work. It will be evaluated in terms of its impact on recruiting and retention, its realism, and its consistency. Other factors that the Government might consider when evaluating a compensation plan include:

• The capability of the compensation structure to obtain and retain suitably qualified personnel to meet mission objectives.
• Salary rates or ranges that take into account differences in skills, complexity of various disciplines, and professional job difficulty.
• Where proposed compensation levels are lower than those of predecessor contractors, evaluating on the basis of maintaining program continuity, uninterrupted high-quality work and availability of replacements.

Unrealistic compensation plans will probably be viewed as evidence of failure to comprehend the complexity of contract requirements and failure to submit a plan at all, will cause the rejection of a proposal.

The Government estimates that about 10,000 (or so) compensation plans are submitted for evaluation each year.

Violations of Davis-Bacon Results in Three-Year Suspension for One Contractor

The Labor Department's Wage and Hour Division (WHD) who routinely conducts 'audits' of contractor compliance with various labor laws including the DBRA (Davis-Bacon and Related Acts) recently found four contractors working on a construction project in violation of the DBRA. Each of the four contractors were found to have shorted employees and all have agreed to pay those employees affected by the violations.

One of the contractors agreed to pay $69 thousand to 19 employees for failing to pay finishers, painters, and carpenters prevailing wage rates required by the DBRA. The contractor also failed to pay the required fringe benefits. This wasn't the first time this particular contractor ran afoul of the WHD investigators. Back in 2017, WHD investigators found other violations of DBRA and  had to pay back $99 thousand to 95 employees. Because of the repeat and willful nature of the violations, the contractor and its owner have been declared ineligible to bid on federal DBRA contracts for a period of three years. We didn't know that WHD had such authority but evidently someone other than a contracting officer can make such decisions.

The other three contractors caught up in this investigation each agreed to pay back wages and fringe benefits as well. In total, these payments reached a quarter of a million dollars.

Government contractors receive detailed agreements that include prevailing wage and fringe benefits rates, required to be paid by all contractors working on a federally funded project. Prime contractors must assure that their subcontractors adhere to these rules as well. Many times, violations are the result of contractors (and subcontractors) down-grading the skill classification of their employees and paying them lesser amounts.

The WHD press release on this case can be found here.

Relocation Tax Gross-Ups

Relocation costs are those incident to a permanent change of assigned work location of an existing employee or upon recruitment of a new employee. FAR 31.205-35 lists the type of relocation costs that are allowable under Government contracts and the limitations on some of the costs. One restriction that is sometimes forgotten is that the relocation must be for a period of twelve months or more. If shorter than 12 months, the costs are unallowable and if not excluded from billings or incurred cost proposals, are subject to penalties.

One of the items specifically allowable under the relocation provisions are payments for increased employee income taxes incident to allowable reimbursed relocation costs (see FAR 31.205-35(a)(10). Relocation reimbursements are taxable to the employee and the intent of the provision is to make the employee whole so that he/she won't owe additional income tax as a result of the relocation. These payments for increased taxes are commonly referred to as "gross-up" although you won't find that term in the FAR.

The Gross-Up calculation is not as obvious as one might expect. Suppose for example that relocation reimbursement is $50 thousand and the employee is in the 25 percent tax bracket. The additional taxes would be $12,000 ($50,000 times 25%). But wait a minute. The $12,000 is also taxable so you need to add tax on that amount - $12,000 times 25% = $4,000. But that's not enough. The $4,000 is also taxable so you need to add tax on that amount. And on and on.

There is a common two-step method of calculating tax gross-up. Step one is to calculate the tax gross-up factor. Step two is to apply the factor to reimbursed relocation costs. Here's an example:

1. Tax gross-up factor = employee marginal tax rate divided by 1 minus the marginal tax rate. Assuming a marginal income tax rate of 25 percent per the above example, the tax gross-up factor is 0.25/(1.0-0.25) or 0.3333.

2 Tax gross-up amount = reimbursed relocation costs times tax gross up factor. Assuming reimbursed relocation costs total $50,000, the tax gross-up amount is $16,997 ($50,000 times 0.3333).

One final note. Marginal tax rates are going to vary from employee to employee based on other non-employee features like spousal income, investments, and retirement distributions. The marginal tax rate used for gross-up calculations should be based solely on the employee's compensation from the contractor employer. In most cases, under current tax law, this will be 24 percent.

Undefinitized Contract Actions? Government May Lower Profit Percentages

Undefinitized Contract Actions (UCAs) are those contract actions for which the contract terms, specifications, or price are not agreed upon before contract performance begins (see DFARS 217.7401). UCAs are used when the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements and the Government's interest demands that the contractor be given a binding commitment so that contract performance can begin immediately.

Normally, UCAs must be definitized withing 180 days (six months) but there are provisions for a 90 day extension, if warranted. UCAs however cannot be definitized until the contractor submits a "qualifying proposal".

A "qualifying proposal" means a proposal containing (i) sufficient data for the DoD to do complete and meaningful analyses and audits of the data in the proposal and (ii) any other data the contracting officer has determined DoD needs to review in connection with the contract (definition at DFARS 217.7401(c)). . So, for example, if a contractor's proposal passes the proposal adequacy checklist found at DFARS 252-215-7009, we would presume it to be a "qualifying proposal".

Contractors need to submit their qualifying proposals as soon as possible. Waiting runs the risk of reduced profits. Why? Because the longer you wait, the less uncertainty there is in final cost of the contract. Costs are more likely to be based on actual costs because they've already been incurred rather than estimates of future costs.

Under the proposed regulations, the contracting officer shall assess the extent to which costs have been incurred prior to definitization of the contract action. When costs have been incurred prior to definitization, contracting officers are instructed to generally regard the contract type risk to be in the low end of the designated range. If a substantial portion of the costs have been incurred prior to definitization, the contracting officer may assign a value as low as zero percent, regardless of contract type. Zero percent profit seems pretty extreme and probably is. We've never seen a negotiated profit rate that low, regardless of circumstances.

But suppose that the reason for not definitizing a contract in a timely manner is the Government's fault. It happens. Is it fair to penalize a contractor under those circumstances? No, and the proposed regulations provide for that.

However, if a contractor submits a qualifying proposal to definitize an undefinitized contract action and the contracting officer for such action definitizes the contract after the end of the 180-day period beginning on the date on which the contractor submitted the qualifying proposal, the profit allowed on the contract shall accurately reflect the cost risk on the contractor as such risk existed on the date the contractor submitted the qualifying proposal. 

For this reason, as we stated above, it is important for contractors to submit "qualifying proposals" as soon as possible. Failure to do so jeopardizes the profit potential of the contract.

New Rule Requires Anti-Terrorism Training for Some Contractors

The proposed DFARS (DoD FAR Supplement) rule requiring mandatory anti-terrorism training for Government contractors and subcontractors that we wrote about last September (see Mandatory Antiterrorism Training for Government Contractors), has been finalized.

This new rule applies to contractors and subcontractors who require routine physical access to a Federally-controlled facility or military installation. Routine access is considered more than intermittent access, such as when a contractor employee is required to obtain a CAC card (common access card).

Training must be completed with 30 days from whenever a contractor is awarded a contract with the requisite clause (DFARS 252.204-7004, Antiterrorism Awareness Training for Contractors) and annually thereafter. Training must be completed either through DoD-sponsored and certified computer or web-based distance learning instruction or under the instruction of a qualified Level 1 anti-terrorism awareness instructor. Its our guess that most contractors will go the on-line learning route for its convenience. And anyway, where would one go to find a 'qualified' Level 1 instructor?

Contractors are required to flow-down this training requirement to its subcontractors where the subcontractor personnel requires routine access to a military installation (which by definition includes almost any defense-related facility).

Level 1 training is the most basic of training regimens. Level 1 antiterrorism training includes:

• surveillance detection fundamentals
• government facility security fundamentals
• insider threat
• active shooter fundamentals
• residential security
• air travel
• ground travel
• hotel security
• hostage survival

Check your contract to see if it includes the DFARS 252.204-7004 antiterrorism clause. If it does, your contracting officer should be able to provide resources to meet the training requirements.

Labor Department Announces New Voluntary Compliance Program

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) announced yesterday a new voluntary enterprise-wide compliance program for high-performing Government contractors. Acceptance into the program means your company won't be audited for compliance with laws prohibiting discrimination on the basis of race, color, religion, sex, sexual orientation, gender identity, national origin, disability or status as a protected veteran for at least five years.

OFCCP conducts compliance evaluations and has recently expanded the number of reviews performed. However, the number of evaluations conducted annually covers a fraction of the total number of contractors that fall within OFCCP's jurisdiction. This new voluntary compliance program for high-performing contractors is intended to free up limited OFCCP resources for compliance effort at contractors who do not meet the high-performing criteria. Contractors that meet the top-performing criteria will be removed from the pool of contractors scheduled for compliance evaluations.

Here's some key elements of the program:

• It's voluntary
• It will recognized two tiers of contractors - a top tier and a tier that needs more assistance in becoming a top tier.
• Contractors must apply to the program.
• During the application process, OFCCP will perform a compliance evaluation.
• To participate, contractors will demonstrate that they meet established criteria that verifies not only basic compliance with OFCCP's requirements, but a demonstrated commitment to and application of successful programs on a corporate-wide basis.
• To remain in the program, contractors are expected to maintain a workforce free of discrimination or other material violations, and provide periodic reports and information to OFCCP through which OFCCP can confirm these efforts.

Decisions, decisions. Will contractors want to enter the voluntary compliance program with the guarantee of a compliance evaluation at the beginning and on-going reporting requirements or take their chances that they may be one of the unlucky ones selected for a periodic compliance review. 

Read the Labor Department Directive creating the voluntary compliance program here.

Four Plead Guilty to Making and Accepting Bribes

The Vocational Rehabilitation and Employment (VR&E) program is a Veterans Affairs (VA) program that provides disabled U.S. Military Veterans with education and employment-related services. VR&E program counselors advise veterans under their supervision which schools to attend and facilitate payments to those schools for veterans' tuition and necessary supplies. It is a significant program within the VA budget at about $1.8 billion per year.

Counselors are given wide latitude with apparently very little oversight on making recommendations to their clients for educational and career choices. One counselor, James King, figured out a way to get rich in the process. He demanded and accepted bribes from several "for-profit, non-accredited" schools (there's a red flag right there) in exchange for steering veterans to those schools. Of course, he called it a commission - a seven percent commission.

Mr. King plead guilty to bribery, fraud, and obstruction last October and is awaiting sentencing. Three others involved in the scheme - two owners and an employee of one of the schools - also plead guilty to their roles in the bribery schemes and yesterday, were each sentenced to 20 to 30 months in federal prison.

One of the "sham" schools, Atius, received $2.2 million from the VA's VR&E program and King received $155 thousand. Students complained about the poor quality of the education provided by Atius and even resisted attending. When the VA investigated the complaints, Atius falsified records to show that students had received 32 hours of class per week when in fact, had only received six hours per week.

One of the other defendants Michelle Stevens, heard about the VR&E program and set up her own "sham" school. King helped her out by facilitating the first payment and in return, demanded his seven percent commission. Later it was discovered that students resisted attending the school. In fact, the investigation disclosed that Stevens emailed an attendance sheet for eight students to the VA that included handwritten check marks purporting to represent the dates that the students attended class. In fact, as Stevens well knew, the students had not attended class on many of those dates nor was class even held on many of those dates.

Navy Cancels Several of its Unique Procurement Regulations

The Federal Acquisition Regulations (FAR) system is extensive and complex. Not only do we have the basic FAR regulations, but nearly every executive agency has their own FAR supplement. These include the DFARS (Defense) which we refer to often in these pages, DEARS (Energy), NFS (NASA), AGAR (Agriculture), DOLARS (Labor), DOSARS (State), GSAM (GSA) and many many more. There are about 33 FAR Supplements in total. Companies that are seeking work with a Governmental agency would do well to familiarize themselves with the particular regulations of that agency.

Some of these FAR supplements contain cost principles not found in the FAR. Typically these supplemental cost principles are more restrictive than the corresponding cost principles found in FAR and address some particular element of cost that is not covered by FAR. The Defense, Energy, and NASA FAR supplements are three that have significant additional cost principles.

Its not often that regulations are rescinded or cancelled and so when it happens, we should perhaps celebrate. The Navy recently cancelled three of regulations found in its FAR supplement, NMCARS (Navy Marine Corps Acquisition Regulations Supplement). In each case, the regulations were determined to be duplicative of that found in FAR or DFARS. The Navy considered the rule "no longer used" (we suppose that could be the case for many procurement regulations) and "should be removed".

These removed regulations include:

• 48 CFR Part 5242 which establishes policy and procedures for requesting refunds for spare parts or items of support equipment.
• 48 CFR Part 5215 which establishes additional requirements for source selections, evaluation factors and proposal evaluations. These procedures were also found to be superseded by current FAR and DFARS guidance.
• 48 CFR Part 5252 which are solicitation/contract clauses referenced in the other cancelled provisions.

Keep the momentum going. It shouldn't be too difficult to find a lot of other regulations that are "no longer used or valid and should be removed".

Energy Department Contractor Sued by Justice Department

The Department of Justice filed a civil lawsuit last week against a contractor providing security, fire protection, utilities, and information technology at DOE's Hanford (Washington) site accusing it of defrauding DOE of tens of millions of dollars.

At the time the fraud occurred, the contractor, Mission Support Alliance (MSA) was principally owned by Lockheed Martin. Also named in the Justice Department suit was two other Lockheed divisions and the former President of MSA, a Lockheed employee.

In 2010, MSA awarded a $232 million subcontract for information technology services to Lockheed Martin Services, Inc. Between 2010 and 2015, MSA misrepresented billing rates charged to DOE which allowed MSA to obtain grossly inflated and improper additional profit on the subcontract. Lockheed was doubling up on profit. The subcontractor owned by Lockheed was earning profit on its work and MSA, owned by Lockheed, earned profit on the work performed by the Lockheed-owned subcontractor.

The Justice Department has accused MSA of using half-truths, omissions, kickbacks, and outright lies to get the Energy Department to consent to the subcontract with its sister division. The kickback charge is interesting. The President of MSA, Armijo, was also a vice president of Lockheed. He and other employees were paid millions of dollars in cash and stock as part of an incentive program for improperly using their MSA positions to provide favorable treatment for Lockheed.

For its part, MSA (now owned by a new company) and Lockheed deny the allegations of fraud, corruption, and self-dealing and vow to "defend this matter vigorously". One minor figure in this matter, the former CFO, has already paid $124 thousand to resolve his liability and agreed to cooperate in the federal investigation. In agreeing to the civil settlement, he denied any wrongdoing.

The Justice Department press release on this matter can be found here.

New Executive Order to Strengthen Buy-American Preferences

The President signed out a new Executive Order (EO 13858) late last month designed to strengthen buy-American preferences for infrastructure projects. The policy, simply stated, is to maximize the use of goods, products, and materials produced in the US, in Federal procurements and through the terms and conditions of Federal financial assistance awards.

This EO extends the essential requirements of the Buy American Act to the alteration, construction, conversion, demolition, extension, improvement, maintenance, reconstruction, rehabilitation, or repair of infrastructure projects in the United States.

Infrastructure projects are projects in the following sectors: surface transportation, including roadways, bridges, railroads, and transit,; aviation; ports, including navigational channels; water resources projects; energy production, generation, and storage, including from fossil-fuels, renewable, nuclear, and hydroelectric sources; electricity transmission; gas, oil and propane storage and transmission; electric, oil, natural gas, and propane distribution systems; broadband internet; pipelines; storm-water and sewer infrastructure; drinking water infrastructure; cybersecurity; and any other sector designated later.

Agencies administering covered programs have been instructed to "encourage" contractors to use, to the greatest extent practicable, iron and aluminum as well as steel, cement, and other manufactured products produced in the US in every contract, subcontract, purchase order, or sub-award that is chargeable to the Government. Agencies have also been tasked to report to the President any tools, techniques, terms or conditions that have been used or could be used to maximize the used of domestic sources.

It will be interesting to see whether "cost" is a factor when considering foreign vs domestic sources. What if domestically produced iron and aluminum were double the cost of foreign imports? Could the term "to the maximum extent practical" be used to justify the procurement of imports in such cases?

New Reference Guide to the Fair Labor Standards Act

Those of you who regularly follow this blog will recall several recent accounts where contractors have been fined and have had to make restitution to employees for a variety of labor law violations. Some of these violations were no doubt intentional to save costs but some, no doubt, were inadvertent because the company was not fully versed on applicable labor laws. Some violations were uncovered during routine (random?) audits by the Labor Department's Wage and Hour Division (WHD) while others came about because of whistleblower activity. In many cases, employees know their "rights" better than their employers and that makes it doubly hard on small companies and contractors who cannot afford a dedicated HR (Human Resources) position or department.

To assist employers in understanding their duties and obligations, the WHD recently launched an online version of its "Handy Reference Gide to the Fair Labor Standards Act (FSLA)". It covers minimum wage, overtime pay, record keeping, and child labor standards affecting full-time and part-time workers in the private sector and in federal, state, and local governments.

The chapters include:

• Basic wage standards
• Who is covered
• Minimum wage
• Exemptions
• Youth employment
• Record keeping
• Nursing mothers
• Overtime
• Enforcement
• Prohibitions against retaliation, and more

The Reference Guide is a PDF but contains dozens of links to other source documents, tools, videos, and instructions. 

It should be noted that in addition to the labor laws covered here, each state has its own spate of laws that in some cases are even more stringent that those enforced by the Labor Department. Sick leave and minimum wages are two that come to mind where many states have been more liberal than Federal laws.

More Recommendations for Contract Reform

Yesterday we alerted you to a recently published report from POGO (Project on Government Oversight) entitled "Baker's Dozen: 13 Policy Areas that Require Congressional Action". One of the 13 areas involve contract reform. Within the area of contract reform, POGO made six recommendations, one of which we discussed yesterday; the idea of creating a Federal Contract Audit Agency to replace the myriad of organizations - both public and private - now tasked with contract audit oversight.

Today we will briefly describe the other five recommendations that fall under POGO's contract reform initiative. Recommendation No. 3 below seems to run counter to current trends in Government contracting where the Government is pushing commercial item acquisition to the extent that justification is often required when an acquisition is not a commercial item.

1. Need for more information on service contracts. Congress should commission a study of the federal government's use of service contracts and the performance results achieved through them. Service contracting information must be used to inform budgeting and manpower decisions as well as mission and readiness capabilities.

2. Limit the definition of non-traditional contractors. Congress needs to restore the original intent of bringing innovation to the public from non-traditional government contractors, rather than throwing billions of dollars with no oversight controls to the government's top vendors. The definition of non-traditional contractors should be revised and the rules should be changed to prohibit any contractor who has accepted a FAR contract from being eligible to receive on OTA (Other Transaction Agreement).

3. Limit when agencies can use the "commercial item" acquisition process. Congress should redefine a "commercial item" to mean goods or services that are actually sold to the general public in like quantities. Congress should also require manufacturers to share certified cost or pricing data with the government when the government is acquiring commercial goods or services on a sole-source basis, even if the awarded contract contains no flexible pricing provisions. Without such data, there is no assurance that prices are fair and reasonable.

4. Require better preparation for responding to the new normal in disasters. Congress needs to oversee improved inter-agency coordination and more realistic budgeting that allows for expanded pre-established supply stockpiles and properly vetted contracts for rapid effective disaster response. Congress should also strengthen the federal suspension and debarment system so taxpayer money is not wasted on awards to poorly performing or corrupt vendors. Finally, Congress must engage in ongoing oversight of disaster-related spending to ensure timely and effective spending and to safeguard the money from fraud and improper diversion.

5. Improve federal spending data on USASpending.gov. Congress should work with the Department of the Treasury and the Office of Management and Budget to ensure the agencies have the authority , resources, and guidance necessary to improve USASpending. Congress should also closely review the data quality and level of detail for awards reported into USASpending and demand that agencies meet higher standards for critical information around data points such as award descriptions, place of performance, and sub-recipient awards.

What We Need is a Federal Contract Audit Agency

The Project on Government Oversight (POGO) is a nonpartisan independent watchdog that investigates and exposes waste, corruption, abuse of power and when the government fails to serve the public or silences those who report wrongdoing. Since its founding in 1981, it has investigated a number of high profile cases of fraud, waste, and abuse within the Government and has consistently been a strong supporter of DCAA (Defense Contract Audit Agency) activities.

In addition to highlighting problems, POGO desires to be part of the solution by making recommendations to Congress and the Executive Branch to address harms exposed by its findings. Last month, POGO published the "Baker's Dozen: 13 Policy Areas that Require Congressional Action". The seventh of the thirteen recommendations is entitled: Commonsense Contract Reforms to Protect the Taxpayer. Withing this recommendation, there are six sub-recommendations regarding the need for contract reform. We will look at a few of these recommendations beginning today with a recommendation to establish a federal contract audit agency to conduct all contract audits.

The idea of establishing a federal contract audit agency is nothing new. We recall the recommendation being bandied about in the early 80's. DCAA was never officially in favor of it (wink wink) because DoD was opposed to it. In reality, there were many within the DCAA hierarchy that believed it was a good idea, not only for the empire building opportunities such an agency provided, but for consistency in auditing contracts across the full spectrum of Government purchases.

POGO has now resurrected the idea of a Federal Contract Audit Agency. In its report, POGO states:

Audits are among the most useful tools we have to check on federal contracts and ensure the money was spent wisely. But currently, contract audits are performed by numerous federal offices, including DoD's Defense Contract Audit Agency, small auditing offices in other agencies, contracted auditors, and various inspectors general. This sprawling fragmented system means missed opportunities, patchwork coverage, and limited effectiveness. A single consolidated federal contract audit agency could save more than it would cost to run by uncovering waste and fraud across the federal government.

Its recommendation to resolve this fragmentation issue and streamline the audit process is obvious:

Congress should establish a consolidated agency to provide all federal agencies with a needed check on contractors, ensuring by pre- and post-award audits that the government is not being overcharged for goods and services. Such an office would be more effective than provisions passed in the FY 2017 National Defense Authorization Act that allow defense contractors to choose their own private auditors. Those provisions should be repealed to maintain government oversight of federal defense contracts.

The reference to the FY 2017 NDAA includes a provision that DoD contract out a minimum of 20 percent of the incurred cost audit workload to private CPA firms.

See Baker's Dozen for the full report.

What is "Challenge-Based Acquisition (ChBA)?

Challenge-Based Acquisition (ChBA) is the concept where Government agencies present a need (the challenge) and potential providers are free to propose innovative solutions that fill that need.

Henry Ford once said, "If I had asked people what they wanted, they would have said 'faster horses'". But suppose that Henry Ford had heard, "I want to get to my destination  faster and with comfort and affordability". In that case, the users would have issued a concrete mission challenge - get there faster and with comfort - rather than a specified solution - a faster horse. Government acquisition tends to not think in terms of mission challenges but in terms of tighter specifications to define solutions.

ChBA is appropriate in situations where the Government's need us urgent and time critical, where no traditional solution seems viable, or where emerging technologies have the potential to provide non-traditional solutions. It may not represent a good approach for large, multi-year major system acquisitions however.

Mitre Corporation, a Federally Funded Research and Development Center (FFRDC) through the Defense Department and other Agencies publishes a ChBA handbook (now in its fourth edition) giving guidance on how agencies can and should implement ChBA. Mitre concludes that while FAR (Federal Acquisition Regulations) authorizes a broad range of approaches that support ChBA, agencies often do not take full advantage of these existing flexibilities. Some agency officials  may be reluctant to engage in innovative acquisition approaches out of fear of protests or binding the agency in an unauthorized manner. Others within the acquisition workforce may be unaware of alternative acquisition approaches that may be utilized under the current FAR. The "handbook" includes an analysis of how FAR supports the ChBA process.

There is certainly increased interest within the acquisition community on ChBA processes. It pays to be innovative.

Can the Government Consider Information that Occurs After Proposal Submission When Evaluating Proposals?

We all know that past performance and past performance evaluations play a significant role in the awarding of Government contracts. Most competitive solicitations include past performance as a significant evaluation factor and prospective contractors have the opportunity to put their best foot forward when compiling and submitting past performance information.

But what about past performance information that occurs after a proposal is submitted? That's the question that Federal Prison Industries (FPI) asked.

DLA (Defense Logistics Agency) issued a solicitation for shirts. Award was to be made on best-value trade-off basis considering (i) product demonstration models, (ii) past performance, and  (iii) price.

Proposals were submitted in February 2018 but between April and August, there were performance problems on one of FPI's other contracts. The contracting officer noted that the Marine Corps had to reduce the number of shirts issued to soldiers, which was a direct customer impact. Although the contracting officer recognized that this information was after the proposal closing date, he/she concluded that it would not be appropriate to ignore relevant past performance information. Ultimately the contracting officer decided that FPI warranted an overall marginal rating for the quality and past performance factor and an overall rating of low confidence.

Ultimately, someone other than FPI was awarded the contract so FPI appealed the award.

The protest was denied meaning that contracting officers are allowed to consider any and all information, even if that information was not available at the time of proposal submission. The GAO noted that DLA was aware of additional information pertaining to contracts that FPI itself identified as being relevant, and therefore, indicative of FPI's ability to perform the resulting requirements.GAO has consistently recognized that an agency may properly use information known by its own evaluators, as with any other references, to aid in the evaluation of proposals.

The full GAO decision is available here.