Performance Based Payments - Proposal to Remove Limitation to Cost Incurred

The Defense Department is proposing changes to its rules on Performance-Based Payments. These changes are required to implement provisions in prior NDAAs (National Defense Authorization Act).

Performance-based payments are a method of contract financing that are based on the achievement of objective, quantifiably measurable events, results, or accomplishments that are defined and valued in the contract prior to performance. It is the preferred method of contracting as many believe that it reduces oversight and compliance costs to the Government. It also has benefits for contractors as it should help cash flow, reduce the cost of oversight and compliance, and allow management to focus on technical and schedule progress.

One of the inherent problems with performance based payments however has been that performance based payments are limited to amounts not greater than costs incurred up to the time of payments. This restriction then requires contractors to accumulate costs in such a way that such comparisons can be made. It kind of defeats some of the attractions of performance-based payments.

Under the proposed rule, those restrictions will be lifted. Contractors will no longer be limited by their costs incurred. Contractors will be able to bill based on the milestones stipulated in the contract.

The requirement for contractors to report costs incurred when requesting performance-based payments is retained, not for purposes of capping payment requests, but in order to have the data necessary for negotiation of performance-based payments on future contracts. So, contractors will still require a cost accounting system hat accumulates costs by contract.

You can access the full text of the proposed change, including instructions on where to send comments here.

Be Prepared to Justify Your Capital Expenditures

Government contractors, like any business, have a responsibility to maintain their competitiveness and increase productivity by making capital investments. There might be a few contractors out there without significant capital investments in facilities, machinery, and equipment - like companies providing staff augmentation services - but most companies need to invest or they quickly find themselves at a competitive disadvantage.

Contract auditors are always interested in capital investment decisions and the process for budgeting capital improvements because expenditure for capital improvements turn in to depreciation expense which are charged to Government contracts. The auditors' concern is not so much with need for contractors to investment in capital projects but that the decision on what to invest in will somehow work to the Government's detriment.

Auditors will be looking to see that there are tangible benefits accruing to the Government from capital expenditures. They will examine cost-benefit aspects to see which investments produce cost benefits equal to the original cash outlay over the shortest time frame. If the investment is necessary for non-financial reasons, the auditor will be looking for improved qualify, mobilization capability, or enhanced competitiveness.

Contractor decisions in this regard are affected by a myriad of factors, some of which may not result in the most equitable treatment of Government work. For example,due to limitations on funds available for capital investments, the contractor might be required to choose between purchasing a piece of equipment for a commercial division or for a division working primarily on Government cost reimbursement type contracts. The contractor will undoubtedly attempt to produce increased profits and cash flow. Since the contractor will continue to recover its incurred costs in the Government division, it may be less inclined to increase the efficiency of that division. Thus priorities will be audited carefully.

To avoid audit related issues arising from capital expenditure decisions, budgeting, and implementation, it is important to have written procedures. It seems like we always begin recommendations with a need for written procedures but having (and following) written procedures is a basic internal control function. Such procedures should provide for the following:

• a well-defined organization with established decision authority and responsibility for pursuing capital investment opportunities which will improve the efficiency of operations, affect long-term economies, and make timely identification and replacement of deteriorated and obsolete items.
• a systematic approach for auditing processes, organizations and methods affecting improvements and detecting deteriorated, obsolete, and underutilized items.
• a standard procedure for identification of potential capital budgeting projects, estimation of project benefits and costs, evaluation of proposed projects and development of the capital expenditure budget based on project acceptance criteria
• a documented review and approval process which assures that the assumptions are correct, all relevant factors have been considered, and proposals are consistent with organization objectives
• a systematic follow-up to insure that project implementation is prompt and withing estimated costs
• a system for tracking and comparing planned to actual benefits.

Full Disclosure of Disciplinary Actions Required by CPA Firms Engaged in Government Auditing

Last month, the Defense Department issued a "Class Deviation" that affects contractors performing contract audits for the Department. Contracting officers are now required to use a new clause (described later) when contracting with accounting firms providing financial statement auditing or audit remediation services to the Defense Department in support of audits. Or, in other words, incurred cost audits that were once the sole bailiwick of DCAA (Defense Contract Audit Agency).

Section 1006 of the 2019 National Defense Authorization Act (NDAA) requires that any accounting firm providing financial statement auditing or audit remediation services to the Defense Department in support of audits required under 31 USC 3521 (i.e. incurred cost audits) to provide DoD with a statement setting forth the details of any disciplinary proceedings with respect to the accounting firm or its associated persons before any entity with the authority to enforce compliance with rules or laws applying to audit services offered by the accounting firm.

Most likely, disciplinary proceedings contemplated in this provision would include those administered by individual State Board's of Accountancy in the states where firms are licensed. In California, for example, the State Board of Accountancy's quarterly newsletter details disciplinary actions taken during the quarter. There were about 40 actions listed in that newsletter. A lot of these disciplinary actions resulted from acts discreditable to the profession and resulted in suspension, revocation of licenses, fines, and remedial training.

The Government has a vested interest in ensuring that its contractors, including those that provide professional audit services, adhere to the highest ethical, moral, and professional standards. What is not clear is whether this disclosure requirement applies to on-going or interim review status or whether it applies when the case is closed/finalized. The class deviation also ensures confidentiality if the contractor so-desires.

DoD's Annual FOIA Report

Each year the Defense Department prepares an annual report on its Freedom of Information Act (FOIA) activities. As its name implies, the 'Act' requires full (or partial) disclosure of previously unreleased information and documents controlled by the Government. There are nine exemptions to what must be disclosed including:

• classified information (obviously)
• related to internal personnel rules and practices
• prohibited from disclosure by another federal law
• trade secrets and other confidential business information (can't get your competitors bid information)
• inter agency communications protected by attorney work product or attorney client privilege
• matters of personal privacy
• compiled for law enforcement purposes that meet certain conditions (endanger a case or a life)
• information relating to the supervision of financial institutions
• geological information concerning wells (that's a weird one)

In Fiscal Year 2018, the Defense Department processed more than 54 thousand FOIA requests. Of those 54 thousand requests, only five percent or 2,652 requests were denied based on one of the foregoing exemptions. An additional 15,801 requests were partially granted and partially denied based on the statutory exemptions.

Looking at the data more granular, DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Audit Agency) processed 103 and 210 cases respectively. For DCAA, about half the cases were closed as having no data responsive to the request. Four requests were denied based on one of the exemptions (probably involving contractor proprietary data) and four other requests were denied because the source of the records sought belonged to another Agency.

For DCMA, 28 of its 210 requests were withdrawn while another 84 requests were denied because the information requested was not an Agency record. DCMA made no 'full' denials but did make 43 partial denials.

The ASBCA (Armed Services Board of Contract Appeals) received 21 requests. One was withdrawn, 15 were denied as having no 'responsive' records, and the remaining five were eight granted in full or in part.

More than half (26,415) of all FOIA requests were to the Army. The Navy was a distant second (10,025) followed by DLA (5,266), and the Air Force (4,216).

You can read the full Annual FOIA report here.

Illegally Obtained Contracts Results in Prison Time for Company Executive

This guy didn't just "rent-a-vet" to illegally win construction contracts set aside for disabled veterans. He also "rented" a minority and "rented" a woman to obtain contracts set aside for minority-owned and women-owned business respectively. Over a ten year period, Tomas Brock (and his company, Boykin Contracting), won more than $160 million in Government contracts to which he was not entitled. Programs set aside for minorities, women, and service veterans are intended to provide small businesses with an opportunity for growth and experience.

How was this guy caught? The discovery was a little different than what we're used to seeing. According to the Justice Department's press release, Mr. Brock's scheme fell apart when he fraudulently acquired loans to cover the company's losses and fell behind on the repayments, prompting a civil lawsuit and then, a criminal investigation. Why did the company lose money and why did the company need to borrow money? The same press release states that Mr. Brock siphoned off money from the company to support a "lavish lifestyle".

The investigation took five years and involved many investigative agencies. Mr. Brock was sentenced to five years in prison.

Perhaps Its Time to Examine Your Contract Portfolio Mix

The California Assembly has introduced legislation that would restrict the State and localities from entering into contracts with companies that work with Federal immigration agencies. The Bill, known as AB 1332, would specifically prohibit a state or local agency from entering into a new, amended, or extended contract or agreement with any person or entity that provides a federal immigration agency with any data broker, extreme vetting, or detention facilities services.

There's a few new definitions here that need to be examined; data broker, detention facility, extreme vetting, and Federal immigration agency.

A data broker means the collection of information, including personal information about consumers, from a wide variety of sources for the purposes of reselling that information to their customers, which include both private sector businesses and government agencies. This definition also includes the aggregation of data that was collected for another purpose different from that for which it is ultimately used. This seems like a very broad definition that would include Google and a host of other web-based data mining companies.

Detention facilities means any private party that provides transportation, identification, processing, security, maintenance, or other operational support to a private or public facility intended or actually used for immigration detention purposes..

Extreme vetting means data mining, threat modeling, predictive risk analysis, or other similar service.

Federal immigration agency means any department, subdivision, agency, or agent of the United States government that provides immigration-related services, including, but not limited to, Immigration and Customs Enforcement (ICE), Customs and Border Protection (CBP), Health and Human Services Office of Refugee Resettlement, and the Department of Homeland Security (DHS).

For purposes of determining which person or entity provides a federal immigration agency with data broker, extreme vetting, or detention facilities services, the state or local agency shall consider all of the following:

• information published by reliable sources
• information released by public agencies
• a declaration under the penalty of perjury executed by the person or entity, affirming that they do not provide data broker, extreme vetting, or detention facilities services to a federal immigration agency
• \information submitted to the state or local agency by any member of the public, and thereafter duly verified.

Wonder how far this law will get? Wonder what the consequences will be if it is passed into law?

The full text of the proposed legislation can be found here.

$1.6 Million Settlement for Violations of the Service Contract Act

In yet another settlement involving failure to pay minimum wages - this one larger than other recent announcements - the Labor Department's Wage and Hour Division (WHD) announced that a California company agreed to pay $1.6 million in back wages and benefits.

This settlement was also unique in that the company, McKesson Specialty Distribution contacted WHD to self-report the infraction. WHD investigated and confirmed that McKesson failed to pay required prevailing wage rates to employees performing wok on a federal service contract. This meant that the company also failed to pay the correct overtime rates and the correct fringe benefits.

The Services Contracting Act (SCA) requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to pay service employees in various classes no less than the wage rates and fringe benefits found prevailing in the locality, or the rates, including prospective increases, contained in a predecessor contractor's collective bargaining agreement.

The Labor Department lauded McKesson for coming forward and self-reporting the violations and encouraged all employers to review their pay practices and to contact the WHD for compliance assistance.

You can read more about this case here.

Congressional Earmarks are Back

Citizens Against Government Waste (CAGW) is a private, non-partisan (perhps) non-profit organization with about a million members. Its purpose is to eliminate waste, mismanagement and inefficiency in the Government. It was co-founded back in 1984 by J. Peter Grace (the Grace Commission) and Jack Anderson. Some of your (older readers) may recall Jack Anderson, a syndicated columnist and considered by many to be one of the fathers of modern investigative journalism. Jack exposed such things as the Nixon administration's harassment of John Lennon, fugitive Nazi's living in South America, plots to kill Castro, and the Iran-Contra affair under the Reagan administration.

CAGW produces numerous publications highlighting wasteful government spending including "Government Wastewatch". Its most noteworthy (and highly anticipated) publication is the annual Congressional Pig Book which exposes the most glaring and irresponsible port-barrel projects in the 13 annual appropriations bill.

The 2018 Congressional Pig Book (download here) exposes 232 earmarks in fiscal year 2018 costing $14.7 billion (the record year was $29 billion in fiscal year 2006). To make it in the Congressional Pig Book, the appropriation must meet one or more of the following criteria.

• Requested by only one chamber of Congress
• Not specifically authorized
• Not competitively awarded
• Not requested by the President
• Greatly exceeds the President's budget request
• Not the subject of congressional hearings, or
• Serves only a local or special interest.

Read the report to see whether any of your Government contracts is the result of "blatant examples of pork".

Audited Financial Statements Do Not Provide Assurance that Cost Accounting System is Adequate for Government Contracting

Back in 2016, the National Institute of Health (NIH) issued a solicitation for "IT (Information Technology) Solutions and Services". Bidders were advised that proposals would be evaluated in two phases. In Phase 1, the Government would evaluate the proposals based on four go/no-go requirements, one of which was a verification of an adequate accounting system. The solicitation advised that proposals found to be unacceptable in any of the four Phase I requirements would be ineligible for further consideration for award.

Shivoy Inc was one of 552 bidders for the work but NIH found the its proposal unacceptable at Phase 1 because it did not include verification that its CTA member (Contractor Team Arrangement) had an adequate accounting system. Thus, Shivoy's proposal was rendered ineligible for further consideration.

Shivoy appealed to the GAO (Government Accountability Office) arguing that NIH unreasonably found its proposal unacceptable because its CTA member had in fact, submitted documentation that complied with the solicitation's requirement for the verification of an adequate accounting system.

NIH responded by noting that the documentation submitted by the CTA member was not verification of an adequate accounting system but only a standards auditors' report for a financial audit of the CTA's parent company and subsidiaries. A standard financial statement audit report simply indicates that an accounting system utilized to prepare audited financial statements was operated in accordance with generally accepted accounting procedures. Such a report does not assert, either implicitly or explicitly that the accounting system was adequate for determining costs applicable to a cost-reimbursement contract in accordance with FAR.

The GAO sided with NIH and denied Shivoy's appeal. The GAO found that NIH's evaluation reasonable and consistent with the solicitation. The solicitation clearly required verification on an accounting system that had been audited and determining costs applicable to the contract in accordance with FAR. Audited financial statement fall far short of assuring that the (cost) accounting system has such capabilities.

Contract Funds Withheld for Non-Conforming Deliveries

There's a contract clause included in all firm-fixed price research and development contracts that allows the Government to reject non-conforming work and make an equitable price reduction if its not fixed. FAR 52.246-7, Inspection of Research and Development - Fixed Price requires, among other things, that contractors implement and maintain an inspection system acceptable to the Government and maintain complete records of such inspections and make those records available to the Government during contract performance and for as long afterwards as the contract requires. This clause also give the Government the right to perform its own inspections.

But here's the hammer. After delivery, the Government either accepts or rejects the work. The Government has the right to reject nonconforming work. If the Contractor fails or is unable to correct or to replace nonconforming work within the delivery schedule, the Contracting Officer may accept the work and make an equitable price reduction. Failure to agree on a price reduction shall be a dispute. So, the Government withholds payment and its up to the contractor to appeal that decision if it wants additional contract funds.

How does this work in practice? A recent ASBCA (Armed Services Board of Contract Appeals) case involving a fixed-price research and development contract, illustrates how the Government applied this clause to withhold funds from a contractor.

NASA awarded a SBIR (Small Business Innovation Research) contract to Energia for photo-chemical remediation of sites contaminated with hazardous solvents at the Kennedy Space Center. The contract was for a fixed price of $597,960. The research contract was not fully completed and the Government withheld about $160,000 from the contract price based on the aforementioned contract clause. Energia appealed back in 2016 but lost the appeal on entitlement grounds. The ASBCA (Armed Services Board of Contract Appeals) remanded the case back to the parties for quantum (i.e. figuring out what the withhold should be).

The parties  couldn't reach agreement. Energia wanted it all. The Board found that Energia had no basis for its claim for the full amount and found credible, NASA's calculations of the equitable price reduction. Ultimately, the Board ruled that the Government was entitled to an equitable price reduction of $160,000 which exceeded the amount previously withheld by NASA. The Board found that Energia was not entitled to payment of any additional contract amounts.

Contractor (and its Owner) Ordered to Pay $48 Million in Clean-up Costs

Lawrence Aviation Industries located in Long Island, New York was an aircraft parts manufacturer making titanium parts for military aircraft. The company is now out of business but its location is now an EPA (Environmental Protection Agency) Superfund Site.

In 1980, county health officials visited the site and were alarmed by what they saw. They found an accumulation of drums, many improperly stored and in disrepair, in seven areas of the site. They also noted unpermitted discharges of liquid waste, unlined cesspools and lagoons where liquid waste was stored.

Since then, no one has been permitted to drink groundwater near and down-gradient from the site as it has serious contamination issues resulting from the contamination.

Yesterday, a federal court ordered Lawrence Aviation and its former owner to pay more than $48 million in cleanup costs and penalties for discharging hazardous substances at the site. It seems unlikely however that the Government will ever recover that amount. Not too many people have those funds lying around and the company is out of business. Perhaps there might be insurance coverage but if history is any indication, the insurance companies will find ways not to pay.

When Lawrence Aviation was ordered to come into compliance, the company ordered its employees to use a front-end loader to crush 55-gallon drums containing hazardous substances (the owner already spent a year in jail for that one). There were 1,600 such drums scattered across the site. This resulted in a massive discharge of waste directly onto the ground. Samples from these drums revealed extraordinarily high levels of pollutants.

EPA's clean-up of the site is now into its 19th year. The Justice Department's press release on this case can be viewed here.

Government Settles Product Substitution Case for $545 Thousand

Fortinet is a Silicon Valley based cybersecurity vendor with significant Government sales. Jay Fang was a logistics specialist working out of Fortinet's Vancouver, Canada offices. In 2016, Fang filed a lawsuit under the qui tam provisions of the False Claims Act, accusing Fortinet of mislabeling some of the products it sold as manufactured in the United States when in fact, the products were manufactured in Taiwan and China. These products were in turn, sold to the Government or resold to other vendors for ultimate use by the Government. Mislabeling products is a violation of the TAA (Trade Agreements Act) which mandates that products on Government contracts be manufactured or substantially transformed in the U.S. (or another designated country).

The Justice Department intervened in the qui tam lawsuit and just recently announced a settlement whereby Fortinet agreed to pay the Government $400 thousand plus provide $145 thousand in TAA compliant equipment to replace non-compliant equipment.

Fortinet blamed the problem on a "rogue" employee who has since been fired.  The employee directed certain other employees and contractors to change product labels so that no country of origin was listed, or to include the phrases "Designed in the United States and Canada", or "Assembled in the United States". That doesn't ring entirely true. Why would an employee take such illegal action upon himself when there was no apparent incentive for him to do so. Why would a "rogue" employee involve other employees in the scheme knowing that to do so would increase the chances of someone blowing the whistle, when there was no apparent incentive for him to do so. We suspect there is more to this story. We suspect company management exerted some kind of pressure on the "rogue" employee.

The Justice Department press release can be found here.

Labor Department Looking Into Discrimination at Law Firms

The substance of the following post come from an article published by Bloomberg Law on April 10th.

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) plans to take a closer look at diversity and discrimination at law firms. According to OFCCP's Director, "There is a big problem at law firms for women and women of color. Law firms need to get their houses in order". Six lawyers at one large law firm sued the firm alleging female attorneys are systemically paid less than their male colleagues for the same work. Similar lawsuits have been filed against two other large law firms.

The OFCCP enforces pay, hiring, promotion, and other discrimination protections for workers employed by Government contractors. Enforcement is done primarily through random audits but are also initiated when there are whistleblower or hotline complaints. Several national law firms were among the 3,500 Government contractors notified by OFCC that they could be selected for random audits in fiscal year 2019.

According to OFCCP, the issue of promotion will be a key focus of future reviews, not only at law firms but also financial firms, universities, and tech companies. It seems like the OFCCP has already reached foregone conclusions. The agency stated that discrimination and paid family leave issues are likely to blame for the relatively low share of female partners in many firms. Really? Perhaps they should perform their audits first and then report on the results.

Some firms that do business with the Government argue that OFCCP has no jurisdiction to investigate potential discrimination against partners since partners are consider owners of the firm and not employees. OFCCP counters this arguments by saying they have jurisdiction over employees who are not being promoted.

The OFCCP also intends to look at contractors for possible discrimination against workers with disabilities. OFCCP's director stated that the average law firm has no disabled partners.

Man Sentenced in Contract Bribery Case

John and Danielle Kays and Matthew Barrow were classmates at Westpoint. After completing their military service, John and Danielle went on to become civilian employees in the Army Communications-Electronics Command (CECOM) at Aberdeen Proving Grounds where they eventually rose to leadership positions. Barrows meanwhile formed a company called MJ-6.

In 2006, the U.S. Army Contracting Command at Aberdeen awarded a 10-year, $19.2 billion contract to seven prime contractors to provide technology services to support the integrated engineering, business operations, and logistics needs for the Army. Mr. and Mrs. Kays were involved in those awards and within two years, were steering work to Barrows and his MJ-6 company in exchange for kickbacks. The couple used their official positions to add MJ-6 as a subcontractor acceptable to the Army, , steer potential employees for Government contractors to work for MJ-6, approve MJ-6 employees to work on various tax orders, approve pay rates, approve status reports, and approve travel reimbursements for MJ-6 employees. Over a six year period, the Kays' steered $21 million in contracts to Barrows and MJ-6. In return, the couple received (at least) $800 thousand.

John and Danielle are currently serving federal prison sentences of six year and eighteen months respectively and the couple also forfeited $1.5 million plus a boat and several vehicles. Matthew Barrows was sentenced today to 30 months in federal prison. The Kays' used the bribes for home renovations, two new automobiles, a powerboat, jewelry, a pool party at their country club, and charges to their credit cards.

No word on how this fraud was uncovered. The full Justice Department press release on the matter can be downloaded here.

Defense Department Not Making Sufficient Progress in Resolving GAO Audit Findings

Late last month, the GAO (Government Accountability Office) sent a letter to the Defense Department highlighting 91 high priority recommendations that they had made in past years that the Department has not yet implemented or taken action on. Twenty of the 91 recommendations pertain to acquisition and contract management.

GAO noted that the Department has 86 major defense acquisition programs with an estimated total cost of $1.66 trillion (an increase of $54.7 billion since 2017). Inefficiencies built into the acquisition system have caused significant cost and scheduling overruns. GAO noted: "DoD has tried to overcome its legacy of negative cost and schedule outcomes among its major defense acquisition programs by requiring extensive documentation to support program strategies and plans, as well as other information . Over time, this has resulted in a bloated, time-consuming, and cumbersome process." One of the recommendations, heretofore ignored, aimed at finding the right balance between providing effective oversight and meeting the competing demands that such a process places on program management. Most contractors we know would heartily endorse any reduction in mandatory (and seemingly innocuous) reporting requirements. In fact, it is well known that many "reports" are never read.

Another high priority recommendation concerns the need for additional data to better manage and forecast service contract requirements. It seems that no one in the Department has a clear understanding of the numbers and cost of service contracts - people hired to augment Defense Department staffing. Nor do top officials even know what they do or whether the need that justified augmentation in the first place still exists or will continue to exist in future years. Consequently, the Department has no idea on how much to project for spending on service contracts in future years.

You can read more about all 20 high priority recommendations in the GAO report.

The Equal Access to Justice Act - Essential Requirements

The Equal Access to Justice Act (EAJA) was enacted back in 1980 to allow individuals and companies to obtain representation in cases against the Government in the event they are successful. This applies to appeals by contractors to the ASBCA (Armed Services Board of Contract Appeals) and other boards and courts.

To be eligible, individuals must show that their net worth is less than $2 million and businesses must demonstrate that their net worth does not exceed $7 million and employed fewer than 500. That part is simple to demonstrate. Not so with another requirement - the "not substantially justified" requirement. Contractors must demonstrate that the Government's position in the dispute was not substantially justified.

Once that bar is crossed, contractors are limited to "reasonable" costs including attorney fees. However, attorney fees are statutorily limited to $125 per hour. Interestingly, the hourly rates for other "experts" involved in the appeals are not statutorily capped. Such costs only be deemed reasonable and reasonableness is determined, in cases before the ASBCA, by the Judge.

Not only are the costs incurred in prosecuting the appeal reimbursable under EAJA provisions, but also costs incurred in preparing the application for EAJA reimbursements. Again, the preparation costs must be reasonable and commensurate with the amounts requested.

Sometimes the Judge will make the determination as to what is reasonable. Other times, the Judge will request an audit of the claimed costs - particularly where the amounts are significant or where assurance is needed as to the propriety of amounts claimed.

Contractors that prevail in an ASBCA case should consider whether some of the costs of pursuing the case can be recovered under EAJA provisions.

See "The Equal Access to Justice Act (Briefly)" and "Contractor Asks For $706 Thousand EAJA Reimbursement - Receives $412 Thousand" for more background and illustration on how EAJA provisions are applied.

SBA Road Tour to Engage Small Businesses Working On Innovative Research

The SBA (Small Business Administration) announced last week that it will launch a 16 city road tour connecting entrepreneurs working on advanced technology to the country's largest source of early state funding - the SBIR (Small Business Innovation Research) and STTR (Small Business Technology Transfer) programs. These programs, also known as Americ's "Seed Fund" is led by the SBA with eleven participating federal agencies.

These programs provide over $3 billion in early state funding to small business each year in a wide variety of technology areas such as unmanned systems, advanced materials, health, cybersecurity and defense. The SBIR/STTR programs execute over 4,000 new awards annually which allow innovators to advance new technologies. The SBA claims that these new technologies have contributed to the creation of thousands of jobs.

To read about how the Air Force is expediting SBIR awards, see 'The Inaugural Air Force Pitch Day was Considered a Success'.

The 2019 Road Tour begins in May and ends in November. Stops include Oklahoma City (OK), Kansas City (KS), Des Moines (IA), Sioux Falls (SD), Fargo(ND), Tucson (AZ), El Paso (TX), Albuquerque (NM), Boulder (CO), Burlington (VT), Albany (NY), New Brunswick (NJ), State College (PA), College Park (MD), Miami (FL), and Puerto Rico.

These events are great opportunities for small businesses performing innovative research to learn about the programs and determine whether such opportunities might be a good fit for them. Read more about SBA's Road Tour including instructions for registering here.

Pilot Program to Accelerate Contracting and Pricing Processes

Section 890 of the 2019 NDAA (National Defense Authorization Act) authorized the Defense Department to conduct a pilot program with contracts in excess of $50 million (excluding those that are part of a major defense acquisition program) by

• Basing price reasonableness determinations on actual cost and pricing data for purchases of the same or similar products for the DoD and
• Reducing the cost and pricing data to be submitted.

The Defense Department sees this as an opportunity in a pilot setting to assess the impact of the efficiencies achieved under this pilot program including reducing contractor proposal costs and the time required to award contracts greater than $50 million.

As a condition of participating in this pilot program, the Contractor shall submit verifiable data documenting any savings (time and money) achieved as a result of the pilot program within three months after award.

The Defense Department is not waiting around for its FAR supplement (DFARS) to be amended through the regulatory process. It has issued a class deviation making the authorization effective immediately. Participation into the program must be approved by the Principal Director, Defense Pricing and Contracting.

Contracting officers using this authority to negotiate contracts are still required to determine that the costs are fair and reasonable for the Government. Now they can find means other than requiring cost or pricing data, to assist in making that determination.

This waiver applies, of course, to negotiated contracts and has no bearing on competitive awards or commercial item procurement. No word on how long the pilot program is to last.

Government Must Specify a "Sum Certain" When Issuing Final Decisions

A "claim" according to FAR (Federal Acquisition Regulation) 2.101 is a written demand or written assertion by one of the contracting parties (could be the contractor or the Government) seeking, as a matter of right, the payment of money in a sum certain, the adjustment or interpretation of contract terms, or other relief arising under or relating to the contract. Further, a written demand or written assertion by the contractor seeking payment of money exceeding $100 thousand is not a claim unless certified.

Its easy to think that term "sum certain" applies only to contractors because disputes that are thrown out are thrown out because the contractor did not specify a "sum certain". But the Government must also specify a "sum certain" if it is seeking remuneration from a contractor.

A recently published ASBCA decision illustrates this point.

In June 2018, DCMA (Defense Contract Management Agency) issued a COFD (Contracting Officer Final Decision) and demanded payment from L-3 Communications. In January 2019, DCMA withdrew its COFD and in February 2019 requested the ASBCA to dismiss L-3's appeal.

The ASBCA noticed a problem with the COFD. The COFD presented three distinct amounts demanded by DCMA; $292,634, $297,677, and $572,318. The question became, was this a "sum certain" (the COFD must have been a real cobbled together mess) .

The Board found that there was no way to reconcile the three amounts stated in the COFD through simple mathematical analysis or any other analysis. Therefore the Board ruled that DCMA's COFD failed to state a sum certain and dismissed the case.

The Importance of Flowing Down Required Contract Clauses to Subcontractors

Tishman Interiors was the prime contractor on a renovation project at the Federal Reserve Bank in New York. It subcontracted electrical and cable installation work to three different subcontractors. In came the auditors - auditors from the Labor Department's Wage and Hour Division (WHD). You know this story isn't going to go well for the contractor. We don't know what instigated WHD's investigation. It could have been random or it could have been based on a call to WHD's hotline. WHD's press release did not say.

WHD found that the Federal Reserve Bank did not include DBRA (Davis-Bacon and Related Acts) in its contract with Tishman. Tishman, in turn, did not include DBRA provisions in its subcontracts. This omission led to Tishman and the three subcontractors to pay its employees at hourly rates lower than the prevailing wages for the work they performed (a DBRA violaion). WHD also found that the prime and subs violated CHWSSA (Contract Work Hours and Safety Standards Act) when they failed to pay required prevailing wages for overtime. The groups failure to prepare and maintain certified payroll records and sign compliance statements in the payrolls resulted in violations of the Copeland Act.

Was this Tishman's fault? After all, the Federal Reserve Bank did not include these provisions in its solicitation or the resulting contract. How was Tishman to otherwise know that the contract was subject to DBRA provisions?  According to the Labor Department, Tishman was at least partly at fault. The Labor Department stated that "Contractors also bear a responsibility to exercise due diligence when bidding and working on federal contracts." Presumably this means that Tishman should have known that it was bidding on a Federal contract subject to DBRA.

As a result of the WHD investigation, Tishman was required to pay $420 thousand in back wages to its own employees and subcontractor employees. Wonder whether Tishman plans to submit an equitable adjustment proposal to the Federal Reserve Bank.

DoD Removes a Definition from its Procurement Regulations

Did you notice that the number of definitions listed in the Defense FAR Supplement (DFARS) is now shorter? The Defense Department just eliminated the definition of "General public and non-Governmental entities". The removed definition stated that "General public" and "non-governmental entities" as used in the definition of commercial item" at FAR 2.101, do not include the Federal Government or a State, local or foreign government.

The FAR reference states that commercial item means "any item ... that is of a type customarily used by the general public or by non-governmental entities  for purposes other than governmental purposes...". One would think that the phrase "non-governmental entities" is self-evident and would not require a DFARS clarification. But for some reason, Congress felt the need for such clarification ten years ago when it passed the 2008 NDAA.

With the passage of the 2019 National Defense Authorization Act, Congress removed more than 60 obsolete Defense acquisition laws, most of  which have been completed, have expired, or do not impact procurement regulations. Only one of the more than 60 rescinded laws impacted procurement regulations - the definition of "general public and non-governmental entities" and that has now been removed.

Getting rid of 60 DoD procurement laws is a pretty good start.

DoD Contracting Officers Cannot Withhold Consent to Subcontract where Purchasing System has been Approved

DoD issued a final rule amending its FAR Supplement (DFARS) that for Defense contractors with approved accounting system, contracting officers are not permitted to withhold "consent to subcontract" unless it has written approval from a program manager.

FAR 44.201 regarding subcontract consent and advance notification requirements, distinguishes between contractors with approved purchasing systems and those without. For contractors with approved purchasing systems, consent is required for subcontracts specifically identified by the contracting officer in the subcontracts clause of the contract.Why would a contracting officer call out a specific subcontract for consent?  When the contracting officer has determined that an individual consent action is required to protect the Government adequately because of the subcontract type, complexity, or value , or because the subcontract needs special surveillance. In other words, its a judgment call by the contracting officer.

For contractors without approved purchasing systems, consent to subcontract is required for cost-reimbursement, time-and-materials, labor-hour, or letter contract and also for unpriced actions under certain fixed-price contracts.

This new DoD provision applies to contractors with approved purchasing systems. Evidently, some contracting officers have been feeling their oats and have made life miserable for contractors - often for picayune reasons - so much so that programs were being impacted because contractors have been unable to award subcontracts in a timely manner. This problem came to Congress' attention and Congress included a provision in the 2019 NDAA (National Defense Authorization Act) to make it unlawful for contracting officers to withhold approval unless it receives concurrence from a program manager. 

Specifically, the new provision, applying only to DoD contracts, and appearing at DFARS 244.201-1, reads as follows:

In accordance with Section 824 of the National Defense Authorization Act for Fiscal Year 2019 (Pub. L., 115-232), notwithstanding the requirements in FAR 44-201(a), the contracting officer shall not withhold consent to subcontract without the written approval of the program manager, or comparable requiring activity official exercising program management responsibilities, if the contractor has a approved purchasing system as defined in FAR 44.101.