"Rent-a-Vet" Schemes Still Going Strong

The Justice Department just announced the indictment of a Michigan business owner for fraudulently obtaining nearly $12 million in Government construction contracts over an eight-year period by falsely claiming the company was owned and controlled by a service-disabled veteran.

CA Services is a construction company in Michigan. Mr. Kozerski and CA Services held out that a service-disabled veteran was the owner and primary manager of CA Service. However, an investigation by the FBI, the Department of Veterans Affairs, and the Defense Criminal Investigative Service (DCIS) found that this particular service-disabled veteran was not the owner of CA Services nor did he materially participate in the day-to-day management of the company.

Presumably, CA Services performed the work required by the contracts satisfactorily. Otherwise, the company would not have continued to be awarded contracts. The problem is that these contracts were set-aside for service-disabled-veteran-owned small businesses, of which CA Services was not one.

Its surprising to us that fraud involving misrepresenting one's status as a service-disabled, a woman-owned, or other "disadvantaged" class still happens. Its such an easy crime to identify. Qui-tam relators (whistleblowers who have a chance to share in recoveries), often employees of the company itself, have strong incentive to call the hotline. Competitors who have lost out to misrepresented companies often raise red flags. And the SBA is doing a much more thorough job of vetting companies seeking one or more of these special statuses.

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

Future 8(a) Status is not an Evaluation Factor if not Specifically Stated

The SBA's 8(a) business development program is designed to help small, disadvantaged businesses compete in the federal marketplace. It has helped thousands of aspiring entrepreneurs to gain access to Government contracts. To qualify, small businesses must be owned and controlled at least 51 percent by socially and economically disadvantaged individuals who are American citizens. It also helps to be able to demonstrate potential for business success and possess good character.

Participation in the 8(a) business development program is divided into two phases covering nine years - a four-year developmental stage and a five-year transition stage. The goal is to graduate businesses that will go on to thrive in a competitive business environment.

There are significant benefits to program participation not the least of which is the ability to bid on contracts that are "set-aside" specifically for 8(a) contractors. One such set-aside was a solicitation issued last year by the Energy Department for mission-oriented technical support services (whatever that term means). There were three 8(a) bidders for the work including Boston Government Services (BGS) who ultimately won the award based on its highest technical rating and lowest cost, and Redhorse Corporation.

When Redhorse learned that it had lost the bid, it appealed to GAO (Government Accountability Office) on the grounds that BGS would be graduating from the SBA 8(a) business development program within 14 months at which time it would be unable to fulfill the remainder of the 48 month contract. BGS would need to certify its 8(a) status each time an order was placed under the resulting BPA (blanket purchase agreement). Redhorse, on the other had would retain its 8(a) status throughout the 48 month period of performance.

How do you suppose the GAO ruled on this bid protest?

The GAO found no merit to Redhorse's allegation because the solicitation did not require the Energy Department to consider each vendor's future 8(a) eligibility when evaluating quotations. None of the six specific evaluation factors required it to consider a vendor's future 8(a) eligibility. GAO denied the protest.

The full GAO decision can be found here.

SDVO Status Requires Ownership and Control

To compete for a Government contract as an SDVO (service-disabled-veteran-owned) limited liability company (LLC), a service-disable veteran must own and control the company. SBA regulations define ownership and control for LLCs (see 13 CFR 125.12 and 13). To show ownership for an LLC, one or more service-disable veterans must "unconditionally and directly own at least 51 percent interest. Regarding control, an LLC demonstrates control by a service-disabled veteran by showing that the service-disabled veteran:

1. conducts the company's long-term decision making
2. conducts the company's day-to-day management and administration of the business operations
3. holds the company's highest officer position
4. serves as the company's managing member, and
5. controls all decisions of the limited liability company

XOtech is a company that tried to achieve SDVO status. The service disable veteran, Gary Marullo, owned more than 90 percent of the company. However the "operating agreement" gave equal voting shares to Gary, his wife and his son. The operating agreement granted the three "managers" responsibility for all XOtech business decisions including:

• opening bank accounts and making deposits and withdrawals
• binding XOtech to contracts
• hiring employees, consultants, and agents
• procuring insurance
• prosecuting or defending any proceeding in XOtech's name
• borrowing money from banks
• determining the amounts and timing of distributions to members
• approving tax methods and practices, and income tax elections.

The service-disabled veteran shares XOtech management authority equally by vote with two, non-service-disabled veterans (wife and son). The SBA (Small Business Administration) looked at this arrangement and determined that Gary, the service-disabled veteran lacked independent control over XOtech management because he needs the vote of one of the two non-service-disabled veteran Managers to make management decisions.

XOtech appealed to the U.S. Court of Federal Claims to no avail. The Court stated that it is well-settled under SBA precedent that if any portion of a service-disabled veteran's decision-making authority over an LLC requires the vote of a non-service-disabled veteran, the service-disabled veteran lacks control over all decisions of the company.

XOtech argued that Gary's super-majority ownership gives him the power to fire either of the two other members. However, the Court noted that the problem with the removal authority argument is that authority does not undo binding decisions of either of those two managers before they are removed. The two non-service-disabled members could vote for and sign a five-year automobile lease over Gary's objection and although Gary could fire his wife, the contract remains valid.

Read the full decision here.

An Adequate Incurred Cost Proposal does not Prove an Adequate Accounting System

GSA issued a solicitation for information technology services. Award was to be made based on which offerors presented the highest technically rated proposals with fair and reasonable prices. GSA also noted that it would strictly enforce all of the proposal submission requirements and failure to comply with those requirements would result in rejection as being materially non-conforming to the solicitation requirements.

Offerors were required to include verification of an acceptable cost accounting system ("CAS") if they claimed points for possessing an acceptable CAS on the scoring worksheet. Specifically, offerors needed to:

provide verification from the Defense Contract Audit Agency [("DCAA")], Defense Contract Management Agency or any Cognizant Federal Agency [("CFA")] of an acceptable accounting system that has been audited and determined adequate for determining costs applicable to the contract or order in accordance with [Federal Acquisition Regulation("FAR")] 16.301-3(a)(3).

In lieu of submitting a letter from the auditing agency, an offeror could submit a statement of certainty in which it averred that it possessed an audited and adequate CAS (Cost Accounting System). The contracting officer would then be obligated to contact the auditing agency to verify that the offeror's CAS was acceptable.

Ultimately, GSA awarded IDIQ (indefinite-delivery, indefinite-quantity) to 81 contractors. Citizant, Inc. had submitted a proposal but was not one of the 81 contractors selected for the IT work. Citizant appealed the award on the grounds that the contracting officer made errors when evaluating proposals from other offerors who were subsequently awarded contracts.

Two of the offerors attempted to validate the adequacy of their cost accounting systems by submitting letters from DCAA addressing the adequacy of their incurred cost proposal (ICP). In those letters, DCAA stated that the ICP's were adequate and had not been selected for audit. The contracting officer reasoned that since ICPs are submitted for cost-type contracts and cost-type contracts cannot be awarded to a firm that does not have an adequate cost accounting system, the letters from DCAA were sufficient to conclude that the offerors had accounting systems that had been audited and determined adequate for cost-reimbursement contracting.

Citizant asserted that those offerors' submission of a letter from DCAA concerning their ICPs does not reflect that their accounting systems were audited and determined adequate for cost accounting purposes. GSA countered that the contractors provided the necessary information in the DCAA letters they submitted because an ICP is submitted by a contractor performing a cost-reimbursement contract, and can only be used if the contractor's CAS has been deemed adequate.

The U.S. Court of Federal Claims who decided the protest determined that GSA's contracting officer's conclusion was irrational for two reasons.
First, DCAA's review of an ICP is not unequivocal evidence that the contractor has an adequate CAS. ICPs are required for both cost-reimbursement and T&M contracts. An adequate accounting system is not required for T&M contracts. Since it was not evident that the ICPs pertained to cost-type contracts, it was unreasonable for the contracting officer to rely on DCAA letters that stated the ICPs were adequate. Secondly, and perhaps more damaging to GSA, the Court cited examples where government contractors had received cost-reimbursement contracts without having an adequate cost accounting system.

In sum, the contracting officer could not rationally conclude that DCAA letters unequivocally indicated that the contractors possessed cost accounting systems that DCAA had audited and deemed adequate. He therefore acted arbitrarily and capriciously when he relied on the letters to validate the points those offerors claimed for maintaining an acceptable cost accounting system.

The full decision is found here.

SAMMI's Coming - DUNS' is Leaving

Your DUNS (Data Universal Numbering System) number is about to be replaced with a SAMMI (System for Award Management Managed Identifier) number.

GSA has awarded a contract to Ernst and Young to take over the entity validation system from Dun & Bradstreet. The five-year contract is worth about $42 million.

Through the Integrated Award Environment, GSA issues every vendor or organization that does business with the Government, or wishes to do business with the Government, a unique DUNS number. Under the new SAMMI system, the numbering system will no longer be part of Dun & Bradstreet's proprietary system, that some consider monopolistic. Non-governmental entities have had to pay a fee to Dun & Bradstreet to download and use the DUNS numbers that they own.

Under the new entity validation system, users will provide their registration information at SAM.gov and that information will be validated against the new contractor's data. The Government will have unlimited rights in perpetuity to the validated results and there will be no charge to SAM.gov registrants.

Defense Department Fails its Audit

Last November, the Pentagon announced that it had failed its financial audit - the first audit that it ever had to undergo. The auditors hired to conduct the audit "disclaimed" an audit opinion meaning they were unable to render an opinion because the records were, in some cases unavailable, and in other cases, nonexistent.

The Defense Department has struggled for many years to comply with the law that mandates an audit. It is the largest of all Federal agencies with more than $2.7 trillion in assets and more than two million personnel working all over the world.

One of the problems is that the military was not built for accountability but was built incrementally over time to win wars. Today, it finds itself composed of a multitude of overlapping and diverse financial and inventory systems and processes.

We do not know what the final cost of the audit totaled. One estimate last year was $918 million - $367 million for the audit and $551 million to correct problems disclosed by the audit (that's enough to buy nine F-35 fighters).

The Heritage Foundation made the following recommendation concerning future audits of the Defense Department:

To make the audit more effective, Congress must take the lead. Lawmakers must engage with  the Pentagon and, together with the Federal Accounting Standards Advisory Board, implement commonsense changes to the audit. For example, Congress could remove non-value-added areas such as balance-sheet valuation and accounting for the existence and completeness of major military equipment - an area in which no problems were found in the 2018 audit.

It would probably be an unsuccessful defense for contractors to cite DoD's failure to pass an audit as justification for its own deficiencies. We don't think that contract auditors will buy the argument that we are no worse than you are.

Stipends Paid for Business Use of Personal Cell Phones

We recently encountered a situation where a Government contracting officer questioned stipends paid to two employees to cover the business use of their personal cell phones. We do not know whether the contracting officer is acting on recent guidance or if he/she is acting on his/her own accord. We did note that the challenge was made without benefit to a regulatory basis such as the FAR Part 31 cost principles.

Contrary to this particular contracting officer's challenge, the practice of paying a stipend to employees for business use of personal cell phones is very common among small businesses and small business Government contractors. Paying stipends for such use benefits the Government because the cost of a stipend is usually significant less than the cost for the contractor to purchase a separate cell phone plan and assign it to the employee. It also benefits the employee who otherwise, would need to carry around multiple cell phones. Stipends do not represent windfalls to employees. Using personal phones for business use often requires employees to increase their usage limits at extra cost. A stipend then is simply a reimbursement for business expenses borne by the employee(s). Stipends for business use of personal cell phones is very similar to someone using their POV (privately owned vehicle) for business use and obtaining reimbursement from their employer. No one has ever questioned the propriety of that.

The questions that contractors should ask themselves before paying stipends are these:

1. Is a cell phone necessary for the conduct of contractor business?
2. If yes, is the employee willing to use his/her personal cell phone for business purposes in exchange for a stipend?
3. If yes, is the stipend reasonable, that is, is it less than the cost of a company sponsored plan?

The costs, whether in the form of a stipend or a new business-only service must be allocated correctly. A determination needs to be made whether to charge the costs direct to a contract or to an indirect cost pool for allocation across multiple cost objectives.

Unless the employee remains tethered to a desk full time, the practicalities of a cell phone should be rather obvious. Cell phones make employees more efficient in a lot of ways. They can conduct business while driving between clients. They can conduct business during down time. They can return phone calls more expeditiously and not have to wait until they return to their desks before checking messages.

Are we off base here? Let us know.

Internal Control Noncompliances in Purchase Card Program

Just like commercial companies including Government contractors, the U.S. Government issues purchase cards to selected employees to streamline the acquisition process. Purchase cards provide a low-cost, efficient way to obtain goods and services directly from vendors. All companies have (or should have) effective internal controls to manage the cards and ensure the propriety of purchases paid through such cards. Larger companies often have internal audit departments that periodically assess employee compliance with such controls. Smaller companies may not have the resources available to dedicate to such internal auditing. As a result, they may be at more risk for fraud, waste, and abuse than larger companies. No company (or Government contractor) that we know of shares the results of their internal auditing publicly. So we never really know the effectiveness of controls put in place by contractors or the level of compliance achieved. We don't have that problem with internal audits by Government entities. Most of their internal control reports are available to the public. And these reports are often instructive for companies to review and find out what works and what might not be effective when it comes to protecting company assets.

The State Department's Office of Inspector General recently concluded an audit of the Department's purchase card program to determine whether (i) card holders used their Government card only for purchases allowed by laws and regulations, (ii) card holders recorded purchases, documented purchases, and reconciled monthly statements as required by Department policy, and (iii) the Department administered the purchase card program in accordance with established policies. Contractors with purchase card programs should study this report and assess their level of vulnerability in inappropriate purchasing.

The IG reviewed 580 purchase card transactions selected from nearly 2,000 State Department card holders and noted only 17 exceptions. Three purchases had been split into six separate transactions to circumvent micro-purchase limitations. Eleven transactions were used to inappropriately pay for catering services. Most notably however, the IG did not find any instances of cardholder fraud, wast or abuse.

The IG did find that record keeping was a mess. They found that 27 percent of the 580 transactions were missing one or more pieces of required documentation and nine percent failed to provide evidence that monthly statements were reconciled (as required). These record keeping deficiencies were attributable to the fact that cardholders did not maintain required documents.

Had this failure occurred at a Government contractor, there wold be a strong likelihood that contract auditors would have questioned the costs for lack of support and equally likely that the contracting officer would have sustained the finding. Would you want that to happen?

Read the full State Department report here.

GAO Criticizes DOE for Subcontractor Oversight Practices

Prime contractors are responsible for oversight of their subcontracts. That is a well grounded and established principle of Government contracting. The Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) dedicate a significant number of resources to ensuring the propriety of subcontract costs passed along to the Government through prime contractor billings. These include pre-award policies and procedures involving purchasing systems and consent to subcontract requests all the way to incurred cost audit procedures.

The GAO was asked to review contracting at DOE, the largest civilian contracting agency where 90 percent of their appropriations are spent on contracts. The review focused on (i) the parties that participated in DOE's largest prime contracts and the extent to which they subcontracted their work, (ii) the extent to which DOE ensured that those contractors audited subcontractors' costs, as required, and (iii) the extent to which DOE ensured the contractors met other subcontract oversight requirements.

GAO reviewed the 24 largest prime contracts which totaled $23.6 billion in fiscal year 2016 obligations. Of that $23.6 billion, prime contractors subcontracted about $6.9 billion (30 percent) to thousands of subcontractors.

GAO found that DOE did not always ensure that contractors audited subcontractors' incurred costs as required in their contracts. GAO's review of 43 incurred cost assessment and audit reports identified more than $3.4 billion in subcontract costs that had not been audited and some subcontractors remained unaudited or unassessed form more than six years (important due to the six year statute of limitations).

GAO blamed this lax oversight on DOE headquarters lack of procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the six year statute of imitation period preventing DOE from recovering those costs.

GAO made several recommendations that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits. DOE concurred with most of the recommendations.

You can read the full GAO report here.

Bid Protest Costs must be Adequately Supported to be Reimbursable

When companies are successful in winning a bid protest before the GAO (Government Accountability Office), the GAO often also recommends that the successful protester be reimbursed reasonable costs of filing and pursuing its protest. Such a recommendation to reimburse successful protesters however, is not a blank check. A protester seeking to recover the costs of pursuing its protest must submit sufficient documentation to support its monetary claim.

Although the GAO has recognized from time to time that the requirement for such documentation may entail certain practical difficulties, it does not consider it unreasonable to require a protester to document in some detail the amount and purposes of activities associated with the claimed effort and establish that the claimed hourly rates reflect the concerned individuals' actual rates or compensation. Ultimately, the burden is on the protester to submit sufficient evidence to support its claim. That burden is not met by general, inadequately-supported statements that particular costs have been incurred.

A company name AeroSage LLC learned about the need to adequately support its claim the hard way. AeroSage won its bid protest and was invited by GAO to submit a proposal for its cost in pursuing the protest. AeroSage submitted a claim totalling $26 thousand. Ultimately, all it got was the $350 EPDS (Electronic Protest Docketing System) fee. AeroSage's claim consisted primarily the hours incurred by its President in pursuing the bid protest (110 hours) at $250 per hour. The problem for AeroSage however was that there was no data to back up the number of hours or the hourly rate other than general statements that the amounts represented accurate data or data that was inconclusive as to its relevance to the claim.

The full GAO decision can be found here.

Government may be Awarding Too Many OTAs (Other Transaction Agreements)

The Project on Government Oversight (POGO) published a new asking whether the benefits of using "Other Transaction Agreements" (OTAs) are commensurate with the risks (see: Other Transactions: Do the Rewards Outweigh the Risks?). OTAs have been around for a long time but are being used more frequently these days to streamline the procurement process. POGO wonders whether the increased use of OTAs is putting the Government (and taxpayers) at undue risk.

The original idea behind OTAs is that nontraditional vendors might be interested in entering the Government marketplace with a streamlined procurement process. OTAs are not subject to FAR or DFARS, or CAS, or really, any type of Government oversight. Nontraditional contractors that were unable or unwilling to gear up to understand, implement, and comply with procurement regulations and open themselves up to Government oversight, would be willing to come to the table and bring with them innovative solutions that traditional contractors were not offering. The reality, however is that these speedy buying procedures are being leveraged by large traditional contractors that are looking to boost their bottom line by avoiding normal contract administration, oversight, and accountability protections.

The POGO report cites a number of flaws inherent in the OTA process. First, the Government is at a disadvantage with determining price reasonableness. There is no requirement to furnish cost or pricing data which means that in order to determine price reasonableness, the contracting officer must rely totally on outside sources. Second, because OTAs are not subject to FAR (and related regulations), the Government (and public) lose a degree of transparency in the process. The Government must take the word of contractors as to the propriety of claimed costs - there are no audit clauses in OTAs.

POGO argues that OTAs are not serving the stated intent of luring non-traditional contractors to the Federal marketplace. It nots that 72 percent of research OTA funding and 97 percent of prototype OTA funding went to traditional DoD contractors while a DoD IG (Inspector General) report concluded that OTAs have not attracted a significant number of  nontraditional defense contractors to do business with the Government.

POGO includes some recommendations that include scaling back the use of OTAs to truly nontraditional contractors (as initially envisioned), adding a layer of oversight to ensure taxpayers are protected and renegotiate some OTA as FAR contracts.

The full report can be found here.

Timecard Fraud Cost the Government $1.4 Million

This fraud was allowed to go on for 17 years. How?

Michelle Holt was a DoD employee at Joint Base Langley-Eustis. She was a salaried employee and as such, was entitled to overtime pay if authorized by her employer as well as other forms of holiday and vacation pay and premium pay for holidays worked.

The fraud was first identified by the DoD-IG during a routine audit that identified anomalies in Michelle's time and attendance records. The matter was turned over to investigators (the Air Force Office of Special Investigations (AFOSI) and the Defense Criminal Investigative Service (DCIS)) who ultimately found that from December 2001 to July 2018, Michelle falsely claimed more than 42 thousand hours in unauthorized overtime for hours she did not work as well as other amounts of unauthorized holiday leave, sick leave and annual leave.

In case you're trying to do the math, 42,000 hours equates to 2,470 hours per year. When the normal worker is paid for about 2,080 hours per year (40 hours times 52 weeks), this is almost twice as much as a normal work week. Stated another way, Michelle would have to work 17 hours a day, five days a week for 11 years to book that many hours.

How is this allowed to go on for 17 years? Where was her supervisor? Where were the finance people in charge of managing budgets? Where were the controls in payroll processing? There were serious internal control deficiencies in the process.

According to the Justice Department press release, Michelle accomplished the fraud by making manual retroactive adjustments to protected computer time and attendance systems to add overtime, reverse leave taken and reverse holiday leave. In doing so, she used another employee's log-in information without that employee's knowledge or authorization.

The Government calculated that over the 17 year period, Michelle's enriched herself by $1.4 million. She has been ordered to prison for four years and has been ordered to pay restitution. Good luck getting the restitution - "she used the money she received from the fraudulently obtained overtime and leave payments to buy items for herself and for her family" - and when she's released at age 56, won't have much opportunity to earn enough to ever pay back the $1.4 million. At the court ordered payment plan of $200 per month, it will only take her 7,000 months (or 583 years) to pay it all back.

Contractors, are you vulnerable to such a scheme? Do you have internal controls in place to reduce the likelihood of something like this happening in your location?

White Paper on Conforming CAS to GAAP

The Cost Accounting Standards Board (CASB) released a Staff Discussion Paper (SDP) today on conforming CAS to GAAP (Generally Accepted Accounting Standards). The full text of the SDP is available here. Comments are welcome and must be received by May 13, 2019 (60 days from now). This SDP is the first step in the rule-making process. Next would be the advanced notice of proposed rule-making, a proposed rule, and a final rule.

The 2017 NDAA required the CAS Board to review CAS and conform them, where practicable to GAAP in order to minimize the burden on contractors while at the same time, protecting the interests of the Federal Government.

The SDP identifies the differences and similarities in the purpose and application of overlapping, but distinct, accounting standards. CAS is designed to provide protections to the Federal Government by achieving  uniformity and consistency in the cost accounting practices used by contractors for measurement, assignment, and allocation of costs to Government contracts. GAAP on the other hand, is a set of financial accounting standards established by the FASB (Financial Accounting Standards Board) for recording and reporting financial information. Financial statements produced using GAAP focus on the financial performance of segments of the company and the entity as a whole. The focus of CAS is at the contract level while GAAP is focused on a higher level - product line, segment, or entity level.

In developing the SDP, the CAS board followed these guiding principles:

1. Reduce CAS requirements where practicable to minimize the burden on contractors while protecting the interests of the Government
2. Consider whether the proposed action would result in a net burden reduction (would the benefits of eliminating a requirement in one cost accounting standard be outweighted by the burdens made by changes required in other CAS standards
3. Consider whether other CAS requirements may protect the Government's interests when evaluating the potential risk of any gaps created by relying on GAAP instead of CAS.

This initial SDP focuses on only two CAS standards; CAS 408 (compensated personal absences) and CAS 409 (depreciation of capital tangible assets). Presumably analysis of the remaining standards will come later.

You can read the entire SDP here.

The Government's Use-it or Lose-it Spending Spree

American Transparency (website: OpenTheBooks.com) is a public charity who's Government oversight reports present hard data so citizens can "follow the money". Its stated goal is to enhance public discourse with delineated facts.

The group recently published an oversight report entitled: The Federal Government's Use-It-Or-Lose-It Spending Spree - How the Federal Government Spent $97 Billion in One Month. True to its goal, American Transparency doesn't try to blame anyone or any organization in particular for wasteful spending but just points out the facts related to (fiscal)  year end spending. But the listing of items purchased does give one pause to wonder why the Government needs fidget spinners, alcoholic beverages, crab and lobster, and expensive furniture ($50 thousand chair).

American Transparency believes that the use-it-or-lose-it mentality has been a problem forever. Agencies feel that they need to spend their budgeted funds in order to secure at least the same amount the following year. That's not necessarily true. It could be that Agencies are holding back funds during the year to cover unforeseen contingencies and as the year progresses and those contingencies do not materialize, are comfortable spending the funds on other needs. Or, perhaps there is just more pressure on contracting officers to get contracts awarded by year-end. Some in the Government feel that contractors intentionally drag their feet in negotiations knowing that if they wait until year-end they will be able to negotiate a more favorable price because of pressure on contracting officers to finalize contracts by year-end.

The report contains two appendices that list the top 100 spending categories and the top 100 contractors receiving year-end spending spree funds. You can download and read the full report here

.

The Inaugural Air Force Pitch Day was Considered a Success

Last week, the Air Force awarded contracts to 51 companies in a matter of minutes at its inaugural "Air Force Pitch Day".

The Air Force Pitch Day is modeled after commercial investment pitch competitions that attempts to deliver a faster (and presumably smarter) approach to compete for ideas in technology. The process is a significant departure from the lengthy contractual process typically expected of the military. If focuses on rapidly awarding Phase I SBIR (Small Business Innovation Research) contracts to companies based on a simpler streamlined evaluation of white papers and in-person presentations.
.
How does a pitch day work?

Prior to the pitch day, Air Force contracting officials reviewed 417 submissions received during a 30-day application period and then invited 59 businesses to pitch their proposals in person. Of those 59 companies, 51 received an initial award of up to $158 thousand with an initial payment within minutes of their presentations.

The average amount of time to award contracts and pay companies (using a Government credit card) was a mere 15 minutes. Under traditional contracting practices, the average amount of time to award SBIR Phase I contracts is 90 days - a period where many small businesses and startups cannot survive through without funding.

Besides the 51 contracts awarded on the spot, the Air Force, the previous week, through a series of "rapid contracting sprints", awarded 122 Phase I SBIR contracts and 69 Phase II contracts. The Air Force wants to organize and do more of these type of activities all across the country where the Air Force performs acquisitions.

The prospect of obtaining funding immediately upon contract execution is a great benefit to small businesses who, with funding in place, can concentrate on contract performance rather than figuring out cash flow problems.

Navy Contracting Officer Accepted more than $1.2 in Bribes

A senior procurement official for the Navy has plead guilty to accepting more than $1.2 million in bribes over a ten-year period.

The Navy civilian (Mr. Barroso) held his trusted position as a Master Scheduler for 22 years. A Master Scheduler is an approving official responsible for approving material purchases, service contracts, vendors and payments to vendors. Allowing a single person to fulfill all of those responsibilities is a major (and obvious) internal control deficiency that the Navy should have been cognizant of and have adjusted its policies, procedures, and practices long ago.

Beginning in 2008, this employee conspired with Bauer, a Ventura County businessman who operated three entities that received Navy contracts. The two entered into an arrangement in which Barroso would issue and approve work orders and purchase orders to Bauer's companies. Bauer then submitted false invoices from his companies and then Barroso would approve those invoices and Bauer would receive payment. A nice tidy package - Barroso issued contracts and approved payment for services under those contracts. The trouble is, no work was ever performed.

Barroso's kickbacks amounted to 50 percent of the false invoices. Prior to 2011, kickbacks were paid in cash. After 2011, kickbacks were paid to a company that Barroso set up for the purpose of collecting bribes. Government investigators were able to identify $1.2 million in kickbacks. Obviously there could have been more. In addition to the kickback charges, Barroso also admitted to income tax violations.

Barroso's sentencing is scheduled for June. Last November, Bauer plead guilty for his part in the conspiracy and will be sentenced in June as well. You can read the Justice Department's press release on this matter here.

The Justice Department did not disclose how the fraud was uncovered. It probably was not a whistleblower. The Justice Department usually discloses fraud uncovered by whistleblowers. Perhaps it was just someone in the Navy finance office wondering what services the Navy was getting for all those payments.

UPDATE: On July 15th, 2019, Mr. Barroso was sentenced to 70 months in federal prison.

Solicitation Required Independent Verification - Not Self-Certification

Graham Technologies was one of 552 companies submitting proposals to DHHS (Department of Health and Human Services) for IT (Information Technology) supplies and services. There were a number of qualifying factors including verification that the company had an adequate accounting system.  DHHS fund Graham's proposal unacceptable under the verification of an adequate accounting system requirement and therefore ineligible for further consideration.

Graham appealed the disqualification on the basis that DHHS's actions were unreasonable because Graham felt that it had complied with the requirement. Well, it either did or did not, right. That should be easy enough to figure out - unless the solicitation was ambiguous. But the solicitation was not ambiguous, according to the GAO who heard the appeal. The solicitation contained the following provision:

... the Offeror must provide in its proposal a contact name and contact information . . . of its representative at its cognizant DCAA [Defense Contract Auditing Agency], DCMA [Defense Contract Management Agency], federal civilian audit agency, or third-party accounting firm and submit, if available, a copy of the Pre-Award Survey of Prospective Contracting Accounting System (SF 1408), provisional billing rates, and/or forward pricing rate agreements. 

Graham did provide an audit report number, the date of the report, and contact information for the cognizant DCAA office and representative. However Graham  did not include any verification from DCAA itself. DHHS concluded that the information Graham provided did not satisfy the requirements of the solicitation to provide verification from DCAA. Graham argued that the term "if available" indicated that additional information was not necessary to satisfy the solicitation's requirements.

The GAO (Government Accountability Office) didn't buy Graham's argument. GAO stated it found DHHS's interpretation of the solicitation, when read as a whole, is reasonable, whereas (Graham's) interpretation is not". The solicitation clearly instructed offerors to provide evidence or verification from DCAA (or another independent source).

The GAO denied the protest. The full text of the GAO decision can be found here.

Government Contractor Pays $250 Thousand to Resolve Discrimination Allegations

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) just reached a settlement with a Government contractor that will require the company to pay back pay and interest to settle hiring discrimination.

It all began in 2011 with a routine OFCCP compliance evaluation at GEO Group, a company specializing in privatized corrections, detention, and mental health treatment at its Joe Corley Detention Center. The OFCCP found that GEO systematically discriminated against female correctional officer applicants which, of course, is a violation of federal statutes prohibiting federal contractors from discriminating based on sex.

The settlement totaled $250 thousand and in addition to the back pay, GEO will provide job opportunities to 22 affected female applicants as correctional officer positions become available. Additionally, the contractor committed to taking steps to ensure its personnel practices, including record-keeping and internal auditing procedures, meet legal requirements.

The press release announcing this settlement did not detail specifically what GEO did that rose to the level of hiring discrimination. The fact that (i) it took about eight years to settle and (ii) it was a result of a routine audit rather than a complaint or whistleblower, indicates to us that the Government's position was not "slam-dunk". Perhaps the problem was one of record-keeping deficiencies where the contractors could not demonstrate based on records that it did not discriminate. Perhaps also the $250 thousand settlement was a business decision by GEO to get the Government off its back.

DoD Professional Practice Guide (Audit) - Part 2

This is the second in our series of unpacking the draft Professional Practice Guide (PPG) published by the Section 809 Panel to assist Government and commercial auditors in conducting audits of Government contracts. If you missed Part 1, click here. Yesterday's post discussed the risk assessment phase. Today we will look at the concept of 'materiality', and specifically, materiality as it relates to audits of incurred cost.

Contractors with flexibly priced contracts are required to submit annual incurred cost proposals (see FAR 52.216-7). The risk to the Government is that amounts are materially misstated due to contractors' noncompliance with contract terms or federal regulations (e.g. the Cost Principles in FAR Part 31).

The concept of materiality in the context of incurred cost audits expressly acknowledge that some degree of imperfection is acceptable to the users of financial information. There is an acceptable level of imprecision when determining or settling fair and reasonable contract prices.  This concept is often foreign to DCAA auditors who feel that no level of imprecision is acceptable - they want to audit everything and try to achieve absolute assurance.

One significant concept that auditors will need to comprehend is 'quantified materiality'. This is the numeric representation of materiality that is calculated based on the total audit subject matter. It is used in planning to identify significant cost elements. So, for example, what is the threshold over which a misstatement will effect economic decisions. On a $100,000 contract, five percent ($5,000) will unlikely influence economic decisions whereas the same percentage on a $1 billion contract ($50 million) such a misstatement would likely influence economic decisions of users.

Tomorrow we will look at how 'quantified materiality' affects the scope of audit.

DoD Professional Practice Guide (Audit) - Part 1

Back in January when the Section 809 Panel issued its third and final report, we briefly touched on their recommendation to develop a PPG (Professional Practice Guide) to guide Government auditors and commercial audit firms in conducting audits of Government contractors. This week we will dig deeper into the new guidance to see what it may portend for Government contractors. The guide itself is included in Vol 3 of the Section 809 Panel's report.

The PPG is intended to supplement existing guidance for auditors involved in DoD Procurement contract auditing. It provides additional information regarding how to interpret and apply specific auditing concepts for Government contract audits to assist auditors, contracting officers, and other stakeholders involved in the audit process.

Eventually, the PPG will address seven areas although the current draft version contains just coverage of the first three. Due to its limited statutory term, the Panel did not have time to address them all.

1. Risk assessment
2. Materiality
3. Audits of Internal Controls
4. Independence
5. Objectivity
6. Sufficient evidence
7. Reliance on the work of others

Risk Assessment

The risk assessment framework provides incentives for contractors to achieve and maintain compliant cost accounting and internal controls over Government contract compliance. It also provides disincentives for those contractors who have not.

The framework provides for three levels of risk: low, medium, and high risk strata based on a contractor's ADV (auditable dollar volume). ADV is the total costs charged to flexibly priced (i.e. CPFF, CPIF, FPI, T&M, etc) each year. For contractors with ADV of $1 billion or more, an annual incurred cost audit is mandatory. At the other end of the spectrum, contractors with ADV of less than $5 million, get dumped into a sampling pool if there were no significant questioned costs in the last completed incurred cost audit and there are no "concerns" expressed by someone in the Government acquisition community concerning the particular submission. Contractors with ADV between $5 and $100 million are also in the low-risk sampling pool if they have approved accounting systems. Contractors who don't make it to the "sampling pool" are audited.

Medium risk strata include contractors with ADV between $100 million and $500 million. To make it to the sampling pool, the contractors must meed the three criteria previously discussed  plus not have any business system deficiencies on the books, nor have had any accounting practice or organization changes. Contractors in this strata, even if they make it to the sampling pool, must be audited every four or five years.

The high risk strata includes contractors with ADV between $500 million and $1 billion. It uses the same criteria as the previous strata to determine whether it makes it to the sampling pool. The only difference is that contractors in this strata must be audited at least every other year.

Tomorrow we will discuss the PPG concept of materiality.

Compensation Caps - Update

Section 702 of the Bipartisan budget Act of 2013 (BBA) established a cap of $487,000 per year on the amount the Federal Government will reimburse contractors employee compensation on contracts with defense and civilian agencies. By law, this amount must be adjusted annually to reflect the change in the Employment Cost Index for all workers, as calculated by the Department of Labor, Bureau of Labor Statistics (BLS). This cap applies to all contracts awarded after June 24, 2014.

The cap has been adjusted each year since it was instituted. For costs incurred in 2018, the cap now sits at $525,000. See the table below for adjusted cap amounts for all years.

Note, these compensation caps limits the reimbursement of compensation costs for all contractor employees on all contracts awarded by all executive agencies of the Government after June 24, 2014. For caps on executive compensation on contracts awarded prior to that date, see Allowable Compensation Costs.

One final note, these caps do not limit what contractors can pay to their employees. It only limits was contractors can request reimbursement from the Government.