Contractor Debarred Over $5 Thousand Dispute

The Department of Labor's Wage and Hour Division (WHD) performs routine (usually random) audits of Government contractor compliance with the Davis-Bacon and Service Contracting Acts and performs investigations when warranted such as those from whistleblowers. We've discussed the results of a few of those audits/investigations on these pages. Usually, when violations are discovered, contractors pay employees the shortages and life goes on. Companies that have been found to be in non-compliance however, are placed in a higher risk category where their chances of being audited more frequently, increase.

One recent WHD investigation found that a contractor filed to pay a total of $4,715 in back wages to eleven employees. As a result, the Labor Department "debarred' the contractor which means no further Government contracts for three years. That, to us, seemed a bit extreme - getting debarred over less than five thousand dollar noncompliance. There must be more to this story we surmised.

There was. The contractor, Pro-Fit Development Inc., was a repeat offender. The company had been found to be in violation of prevailing wage obligations back in 2017. A follow-up "visit" by the WHD found that the company had continued to short-pay its employees. Not only that, but Pro-Fit also failed to notify its subcontractors of their prevailing wage responsibilities, causing its subcontractors to pay their employees at rates lower than those that corresponded to the work they actually performed.

After Pro-Fit refused to pay back the $5 thousand to affected employees, WHD requested the contracting authority to Withhold funds due to the contractor under the contract. Those withheld funds will instead, be transferred to the employees who are owed back wages.

What is Contract Audit Followup - (CAFU) - Part 3?

This is the third and final posting on DoD's CAFU (Contract Audit Follow-Up) system. If you missed either of the first two segments, go to Part 1 and Part 2.

The Contract Audit Follow-Up system was established to ensure that the contracting officer had all pertinent evidential materials to assist in resolving the issues, that the resolution was documented and, in certain cases, approved by higher management, and that audit findings were timely acted upon so that the findings didn't become 'stale' or the audit report was misplaced or buried.

Reportable audits, as we discussed yesterday, are those with significant or material findings. After an audit report is 'reported' under the CAFU system, there are specific deadlines a contracting officer must adhere to. For reportable audits, there are two key milestone dates; resolution and disposition. The simplest way to think about this is to compare them with forward pricing activities. The resolution date corresponds to the pre-negotiation objective while the disposition date corresponds to the post-negotiation memorandum (PNM). Contracting officers have six months to "resolve" the issue and twelve months to "dispose" of the issue (unless there are other mitigating circumstances, of course).

The DoD Instruction on CAFUs, requires that dispositions of all reportable findings and recommendations must be documented in a signed and dated post-negotiation memorandum. The documentation must itemize each audit finding and recommendation, indicate whether the finding and/or recommendation is agree to, and if not, document the rational for the disagreement. If the reported findings or recommendations are based on interpretation of law or regulation, the contracting officer is required to consult with legal counsel.

So why should contractors be concerned about this internal DoD reporting mechanism? There are several reasons.

1. Extends the resolution process. If a contractor and auditor cannot reach an agreement on whatever issue is at stake, the resolution process is kicked upstairs to the contracting officer to resolve. This will add a minimum of six to twelve months before resolution.
2. Glib talk may not work. It used to be that where there was an impasse between contractor and auditor, contractors would opt to take the issue up with the contracting officer figuring that the contracting officer might be more reasonable since he/she has not been so heavily invested in the issue. Under the CAFU system, that strategy doesn't work as well as it once did because now the contracting officer must address each issue individually and specifically and document and seek approval if his/her decision is contrary to the audit findings.
3. Cost money. If the issue involves the allowability of incurred costs, the Government is going to keep the money until there is a resolution. This means that regardless of the outcome, there will be imputed interest on the amount withheld. For contractors borrowing working capital, this is a very real cost.

Sometimes auditors are (or can seem to be) unreasonable so there is no option other than taking the issue to the contracting officer. Our experience however is that resolution of audit issues is usually much quicker if resolved at the auditor level.

What is Contract Audit Follow-Up (CAFU) - Part 2?

Yesterday we began a short series on the CAFU (Contract Audit Follow-Up) System with a description of what the system does and the authority by which it was established. If you missed Part 1, read it here.

Contract audit reports, those issued by DCAA (Defense Contract Audit Agency), and to a lesser extent by the OIG (DoD Office of Inspector General) often deal with significant problems or controversial situations. At times, differences of opinion between the auditor and the contracting officer may arise during the settlement of such audit issues.

The Contract Audit Follow-Up system was established to ensure that the contracting officer had all pertinent evidential materials to assist in resolving the issues, that the resolution was documented and, in certain cases, approved by higher management, and that audit findings were timely acted upon so that the findings didn't become 'stale' or the audit report was misplaced or buried.

The governing document, DoD Instruction 7640.02 lists nine types of audit reports that are subject to CAFU tracking (ten, if you count the category called 'other'). The list includes:

• Business system audits
• Claims and equitable adjustments
• Defective pricing
• Cost accounting standards (non compliance with cost accounting standards, adequacy of CAS disclosure statements, and cost impact statements)
• Operations audits (those reports dealing with efficiency, effectiveness, and economy of operations)
• Incurred cost audits and settlement of final rates
• Preaward accounting system reviews.
• Contract terminations
• Earned Value Management Systems (EVMS)

Notice what is not included in this list:

• Audits of forward pricing proposal
• Forward pricing indirect rates
• Provisional billing rates

For an audit to be reported under the CAFU system, the report must contain material (i.e. significant) findings. There is a certain amount of judgment involved in determining whether a finding is significant but in today's environment, any reported finding is by definition, significant.

Tomorrow, in Part 3, we will include some final thoughts on DoD's CAFU system.

What is Contract Audit Follow-up (CAFU) - Part 1?

The Contract Audit Follow-up System or CAFU  (pronounced 'ka fu'), is a Defense Department tracking system, administered by the Department's Office of Inspector General (OIG) to monitor the resolution of contract audit reports (usually those issued by DCAA but also those issued by Independent Public Accountants (IPAs) hired by DoD to conduct contract audits.

Contract auditors perform audits, write reports, and send them to the contracting officer to resolve whatever findings have been reported. Contractors may think that the Government's position is a unified position but that is rarely the case. Contract auditors tend to be more aggressive in challenging costs or reporting on internal control deficiencies or recommending more efficient ways of doing things than are contracting officers though we can think of a few exceptions where contracting officers have taken more aggressive positions than contract auditors.

When contracting officers do not sustain audit findings, auditors tend to get upset. Back before the CAFU system was initiated (mid-80s, we believe), contracting officers were able to, and often did, dispense with audit findings with nary a thought to justifying their rationale. After all, they were the contracting officers and they made the final decisions.

The DoD OIG was probably the most instrumental in bringing changes to the wild west of audit finding resolutions. The OIG looked at audit reports and traced them to negotiation and resolution and found that often times, there was no documentation or the documentation was not sufficient to ascertain whether the 'right' decision had been made. Additionally, the OIG found that in many cases, audit reports 'slipped through the cracks' so that there was never a resolution - the reports just died.

The Contract Audit Follow-Up (CAFU) system (see DoD Instruction 7640.02) was designed to serve two purposes. First, it required that audits be tracked to ensure that none fall though the cracks any longer. DCAA (Defense Contract Audit Agency) is the Agency responsible for identifying reportable audit reports. Second, the CAFU system put some accountability back into contracting officer decisions when those decisions run counter to the audit report recommendations.

Tomorrow we will discuss the types of audit reports that are reportable under the CAFU system and why contractors should care.

Falsified Inspection Reports Leads to Company's Demise

What can happen because of forged signatures? Well, it can cause a company to fail and 35 employees to lose their jobs, for one. If the forgeries involved inspections of high-tolerance machining for flight critical aerospace parts used to build space flight vehicles, the outcome could be much more catastrophic.

The Justice Department announced charges against a quality assurance engineer at PMI Industries in Rochester New York for falsifying inspection reports for those kinds of parts. The company had contracts with SpaceX and other Defense Department aerospace contractors including SpaceX's Falcon launch vehicle family and the Dragon spacecraft family. Falcon and Dragon both deliver payloads into earth orbit for NASA, Air Force and other Governmental agencies.

In January 2018, SpaceX asked SQA Services Inc to perform an internal audit of PMI's quality control program. SQA is a company that specializes in quality assurance functions throughout the aerospace and other industries. The SQA audit revealed that PMI had falsified multiple source inspection reports and non-destructive testing (NDT) certifications on flight-critical parts. Source inspections and NDTs are key tools used in the aerospace industry to ensure manufactured parts comply with quality and safety standards. Specifically, SQA found that the signed source inspection reports had forged signatures of the SQA inspector.

One thing led to another, NASA was advised and its Inspector General opened an investigation. Ultimately, the OIG found 38 falsified source inspection reports and 76 individual piece parts that were rejected during source inspection but shipped to SpaceX nevertheless.

SpaceX terminated its contract with PMI which had to close its doors laying off 35 employees in the process. The quality assurance engineer is facing up to 10 years in prison and a $250,000 fine (though undoubtedly, actual punishment will be much lighter).

When one of the engineer's bosses asked him why he did it, the engineer replied that he just "wanted to ship more product for the company".

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

Inspector General Finds Billing Irregularities at EPA

The Office of Inspector General (OIG) for the Environmental Protection Agency (EPA) received a hotline complaint regarding possible irregularities with contract invoicing and payments on a particular contract that provided EPA with a broad range of information technology and information management technical and professional services (Task Order 12). This was a large cost plus fixed fee task order that grew from $100 million to over $1.2 billion by the time it ended in 2017.

 As a result of the hotline tip, the OIG conducted an audit to determine whether Task Order 12 had effective controls over billing and funding to prevent fraud, waste and abuse. The audit found a number of deficiencies including:

• Required contractor performance reports were not finalized
• There were no official contract or task order modifications for some of the Contracting Officer (CO) and Contracting Officer Representative (COR) changes
• COR appointment memorandums were missing
• COs did not perform required periodic invoice reviews.

The last cited deficiency, failure to perform invoice reviews, gets the most attention and has the highest potential for overbilling the Government. FAR and EPA regulations require that invoices be thoroughly reviewed prior to payment. Despite this requirement, there was not documentation to show that invoices were adequately reviewed prior to payment. As a result, the OIG concluded that EPA did not have reasonable assurance that costs or fee billed under Task Order 12 were allowable, allocable and reasonable. In fact, in its limited sampling, the OIG found more than $5 million in overbilling. Some of the overbilling issues would have been caught had EPA done its required invoice reviews such as where fee was billed at eight percent when the contract limited fee to six percent.

The OIG made seven obvious recommendations (e.g. do a better job, follow regulations, etc) to which the EPA concurred (obviously). The full OIG audit report is available here.

OFPP Proposals for the Fiscal Year 2020 NDAA

The Office of Procurement Policy (OFPP) was established by Congress in 1974 to provide overall direction for government-wide procurement policies, regulations and procedures and to promote economy, efficiency, and effectiveness in acquisition processes. Where ten percent of every dollar spent by the Government going to contractors, it is imperative that contract actions result in the best value for the taxpayer. The CAS Board (Cost Accounting Standards) board resides within the OFPP and OFPP's Administrator (currently Lesley Field) acts as the Board's Chair.

Recently, the OFPP sent six recommendations to Congress for the FY2020 NDAA (National Defense Authorization Act). The stated intent of these recommendations is to streamline and improve the agility and efficiency of the federal acquisition process. These recommendations include:

1. Establish an "Acquisition Modernization Test Board to accelerate work on a "contemporary acquisition state through testing, feedback, re-testing, and scaling of ideas that have been show to work". The proposal would authorize the OFPP's Administrator to exercise a waiver of one or more acquisition or procurement laws as part of a pilot program to evaluate how changing the statutory requirement(s) might facilitate more efficient achievement of the purpose underlying the law. We can thing of a few statutes that, if waived, would save the Government significant amounts of money; the Davis-Bacon Act and the Service Contracting Act.
2. Disestablish the Defense Cost accounting Board. We've written several times about the DCASB (Defense Cost Accounting Standards Board). See, for example, Will the Newly Created Defense CAS Board Survive? Its creation was most a result of inaction by the CAS Board. The OFPP believes that the Defense CAS Board will create a more complicated regulatory framework for cost accounting standards.
3. Increase the applicability of CAS from $2 million to $15 million. This would, of course, reduce the number of contractors required to comply with CAS Standards.
4. Increase the micro-purchase threshold from $3,000 to $10,000. Basically this would allow Government credit card holders to use their cards for purchases up to $10 thousand.
5. Increase the task and delivery order protest threshold for civilian agencies from $10 million to match the Defense agency threshold of $25 million.
6. Remove the requirement for federal contractors to estimate the percentage of the total recovered material content for EPA designated items delivered and/or used in contract performance and submit certified reports to the contracting officer.

These recommendations may very well appear in the NDAA markups now working their way through Congress. The recommendation giving the OFPP Administrator the authority to waive Statutory requirements (on a test basis) may not receive great reception as it might be viewed as giving too much authority to OFPP.

Contractor Pays $200 Thousand in Back Wages for Failing to Pay Prevailing Wages

The Department of Labor's Wage and Hour Division (WHD) announced late last week that a Government contractor violated the Fair Labor Standards Act (FLSA) and the Service Contract Act (SCA) and has agreed to pay nearly $200 thousand in wages and fringe benefits to twenty-two of its current and former employees.

The contractor, Day & Zimmerman Federal Services holds contracts for IT (Information Technology) services at two Marine Corps installations. Their contracts required them to pay prevailing wages for the skill sets required by the contracts. As a result of WHD's investigation, Day & Zimmerman was found to have misclassified those 22 employees resulting in the company paying less than prevailing wage.

As a result of failing to pay prevailing wages, Day & Zimmerman also short-changed these employees their overtime entitlements. And finally, WHD also charged Day & Zimmerman with failing to keep accurate records reflecting the required SCA wage rates and correct work classifications.

The WHD was hardly sympathetic to what appears to have been a misunderstanding or unintentional oversight by Day & Zimmerman. WHD stated that it is the contractor's responsibility to ensure compliance with all the statutes, rules and regulations applying to Government contractors.

The WHD offers quite a number of compliance tools. These can be accessed at www.dol.gov/whd/.

DCAA Updates Its Guidance on Identifying Expressly Unallowable Costs

DCAA (Defense Contract Audit Agency) has updated its audit guidance for identifying expressly unallowable costs. This update comes as a result of recent court cases and wording changes to the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement).

The issue of expressly unallowable costs is significant because such costs are subject to a penalty if found by an auditor in an incurred cost claim or any other billing to the Government. It has also been controversial because contract auditors often clash as to whether a particular cost is expressly unallowable. DCAA's position historically has been that even if the cost principle does not include the word "unallowable" or the phrase "not allowable" does not mean that costs questioned based on that cost principle are not expressly unallowable. That was before the Raytheon case however, where the ASBCA (Armed Services Board of Contract Appeals) ruled that costs must be specifically named and stated as unallowable in order for them to be considered expressly unallowable.

The new guidance pars the listing of expressly unallowable costs from 110 examples to 91 cost principles identifying expressly unallowable costs. It also updates the guidance so as to be consistent with the Raytheon case. It now reads:

In order for a cost to be expressly unallowable, the cost principle must state in direct terms that the costs are unallowable, or leaves little room for interpretation or differences of opinion as to whether the particular cost meets the allowability criteria. The Government must show that it was unreasonable, under all the circumstances, for a person in the contractor's position to conclude that the costs were allowable.

The updated guidance can be downloaded here.

DoD Recovers More Than $7 Billion from Procurement Fraud in a Five Year Period

The 2018 NDAA (National Defense Authorization Act) required the Defense Department to submit a report on defense contracting fraud for the previous five fiscal years (2013 through 2017). That report has not been published and shows some surprising results. We are all aware that there is significant fraud occurring in Government contracting and in DoD contracts in particular. We report on some of those on these pages from time to time. What we did not know was the magnitude of the occurrences and recoveries, until now.

The report, entitled "Report to Congress, Section 889 of the FY 2018 NDAA, Report of Defense Contracting Fraud was issued last December and reported the following:

• During the five year reporting period, there were 1,059 cases resulting in a criminal conviction of 1,087 defendants. 678 of those were individuals while the remaining 409 were business entities. As a result of these convictions, a total of $369 million was recovered in fines and penalties, $370 million was recovered through restitution, and $53 million was recovered through forfeiture of property (total: $792 million).
• Those recoveries, while impressive, pale in relation to recoveries from civil judgments and settlements. Over the same five year period, a total of $5.8 billion was recovered in civil judgments and settlements. Comprising these cases were 546 defendants (or respondents) of which 111 were individual persons and 435 were business entities.

Another interesting statistic coming from the report indicates that a handful of contractors are responsible for the majority of the fraud.  The total number of individuals or entities indicted for, settled charges of, been fine by any Federal department or agency for, or have been convicted of procurement fraud, involved 168 contractors with 16 million contract actions valued at $334 billion. Ninety-four percent of the 16 million contract actions was from a single contractor and 76 percent of the $334 billion was from two contractors.

Procurement fraud includes such things as cost and labor mischarging, defective pricing, price fixing, bid rigging, and defective and/or counterfeit parts.

EPA Now Requires Contractors to Submit Invoices and Public Vouchers Electronically

The EPA (Environmental Protection Agency) has joined many other civilian agencies now in requiring its contractors to use the Treasury Department's Invoice Processing Platform (IPP) to submit invoices, public vouchers, and other payment requests. The IPP is a "secure" (insofar as anything can be secure) web-based service that manages Government invoices. Currently the EPA requires contractors and vendors to submit paper invoices, which are inefficient, costly, and outdated.

The requirement is found at EPAAR (EPA Acquisition Regulation a.k.a. the EPA FAR Supplement) 1552.232-70. Here's a few notes regarding the IPP.

• Scanned documents are acceptable when they are part of a submission of a payment request. This would include the traditional SF 1034 and SF 1035 forms.
• The contractor's government business point of contact as listed in SAM (System for Award Management) will receive enrollment instructions via email from the IPP. The contractor must register within 3 to 5 days or receipt of the email.
• Waiver requests are available if the contracting officer determnes in writing that the IPP would be unduly burdensome for the contractor.
• Invoices can be submitted more often than monthly if the contracting officer approves more frequent billing.

The new clause contains detailed instructions for preparing and submitting public vouchers under the new IPP system. One major difference between the IPP and the old paper system is that the IPP has no provision for suspending costs. Cost suspension occurs when the Government needs more information to support a particular cost before paying an invoice. It does retain the capability of disallowing costs which essentially serves the same purpose.

The "Order Limitation Clause"

FAR (Federal Acquisition Regulation) 52.216-19, Order Limitations, is found in solicitations and contracts when a definite-quantity contract, a requirements contract, or an indefinite-quantity contract is contemplated. The clause provides for minimum orders, maximum orders and procedures when the Government exceeds its maximum order limitation.

Concerning minimum orders, if the Government places an order less than the minimum order, the contractor is not obligated to furnish those supplies or services under the contract.

For maximum order, the contractor is not obligated to honor (i) any order for a single item in excess of (dollar figure or quantity), (ii) any order for a combination of items in excess of (dollar figure or quantity) or (iii) a series of orders from the same ordering office within a specified number of days that together call for quantities exceeding the limitation specified above.

Notwithstanding the maximum order limitation, contractors must honor any order exceeding the maximum order limitations  unless that order (or orders) is returned to the ordering office within a set number of days (usually three days) after issuance with written notice stating its intent not to ship the item called for and the reasons. At that point, the Government may acquire the supplies or services from another source.

In a recent Board case (Armed Services Board of Contract Appeals), WIT Associates files a claim with the Navy for additional costs related to orders that exceeded the maximum quantity specified in the Order Limitation clause, presumably because WIT incurred additional costs to honor the Navy's order.

The Board threw out the appeal, noting that WIT could have (and should have) denied the order within three days according to the contract terms - especially if honoring the order would cause it to incur costs it would not have otherwise incurred. There are a lot of reasons why a company might incur extra costs. Suppose the Government wanted some extra lawn-cutting services performed but to provide those extra services, required the contractor to incur overtime costs that were not factored into its contract price. Or suppose the Government's orders were for supplies that the contractor did not have in inventory and to meet the delivery date, the contractor was required to pay expedited fees to its vendor.

Remember, you don't have to honor orders in excess of the maximum quantities specified in the contract. You can and its often to your benefit but if the order(s) put you in a situation where you wold lose money, it might be better to return the order.

The Buy American Act of 2019

Companion Bills were introduced in the House and Senate this month to strengthen "Buy American" requirements. It is uncertain whether these bills which are likely to pass will result in increased buying of U.S. goods or whether its just more oversight on what is already happening.

The Act begins with a "Sense of Congress" as follows:

Every executive agency should maximize through terms and conditions of Federal financial assistance awards and Federal procurements, the use of goods, products, and materials produced in the United States and contracts for outsourced government service contracts to be performed by United States nationals. Every executive agency should scrupulously monitor, enforce, and comply with the Buy American Laws, to the extent they apply, and minimize the use of waivers. Every executive agency should implement processes to routinely audit its compliance with Buy American laws using data from the Federal Procurement Data System.

So what does this proposed legislation really accomplish? Lots of reporting, for one.

• Annual reports from OMB (Office of Management and Budget) on compliance with Buy American laws including monitoring and enforcement
• Listings of each waiver used and an assessment of the waivers' impact on domestic jobs and manufacturing
• Annual reports from each executive agency on compliance with the Buy American Act.
• Assessment of the impact that free trade agreements have on the Buy American Act.
• A new website to include information on all waivers and exceptions to Buy American laws.
• And a few more.

It seems to us that what this legislation intends to accomplish is to discourage or make it more difficult for procurement to waive the requirements of the various Buy American laws. There is no indication that such has been a significant problem historically so perhaps its just Congress trying to appease a constituency. The real problem it seems is that contractors who supply the Government are able to conceal the origin of their products - like the company that supplied baseball caps to the Marine Corps from China that should have been produced and acquired by domestic manufacturers. No waivers were granted in that case - the contractor simply sewed in "Made in USA" labels.

Is Your DSO Too High?

Days Sales Outstanding (DSO) is a metric that measures the average number of days it takes for accounts receivable to be collected. DSO can be calculated by dividing the total accounts receivable during a certain period (e.g. month, quarter, year) by the total credit sales multiplied by the number of days in the time period. Note, there are other more precise ways to calculate DSO but this one is the most widely-used. Best-Possible Days Sales Outstanding (BPDSO) is a related metric that measures what DSO should be if all credit customers paid exactly according to the terms of their invoice. So, for example, for a Government contractor with one cost-type contract, the Government should pay an "adequate" invoice within 30 days. The BPDSO in this case would be 30 days. If payment were received in 40 days, the DSO would be 40 days. The 10 day spread between DSO and BPDSO is where contractors should  be concerned.

The Government is usually pretty efficient in paying invoices (these days). Initiatives designed to assist small businesses has significantly reduced the time it takes for payment to be made - some reports as quickly as ten days. The Government however measures the time it takes to pay an invoice once an adequate invoice is received. And there is the rub. When an invoice does not match contract terms or omits certain required information and/or attachments, the invoice is rejected, payment is delayed and DSO increases. To correct a rejected invoice, involves hours of time from multiple departments to manually locate the missing information needed to "correct" the invoice - causing further inefficiencies within the company.

Some of you might be thinking, 30 days or 40 days, what's the big deal? Eventually we'll get paid. If that's your situation, congratulations. You are in a minority. Most contractors operate with lines of credit that come with interest payments. Adding 10 days over and over and over will result in increased interest payments that impact their bottom lines.  Run DSO metrics periodically and plot the trends. You might be surprised and you might find that a few changes to your billing system can bring down your DSO.

FAR Councils Propose to Broaden the Definition of "Commercial Item"

The FAR Councils have proposed a new rule, based on requirements of the 2018 NDAA (National Defense Authorization Act) that will expand the definition of "commercial items" appearing in FAR (Federal Acquisition Regulations) 2.101.

Under the proposed rule, NDI (non-developmental items) that are developed exclusively at private expanse and sold in substantial quantities to multiple foreign governments may be treated as commercial items.

Because commercial items, which include commercially available off-the-shelf items, are sold to the Government in the same way as NDIs, the Government can take advantage of the previous testing and general acceptance of the product in the commercial marketplace or by a state, local, or foreign government.

Here are some examples of NDIs that would be considered commercial items under the expanded definition:

• Protective vests used by police departments and rescue equipment used by fire and rescue units
• Defense products previously developed by defense agencies of U.S. allies and used exclusively for governmental purposes by Federal agencies, state or local governments, or a foreign government
• Items that require only minor modifications to meet the requirements of the procuring agency; and
• A mechanical dereefer (mechanism for releasing parachute reefing lines) used with the U.S. Army's cargo parachutes that was developed for and first used by the Canadian Army.

It is expected that the new expanded definition will achieve savings for both contractors and the Government. According to an analysis published by the Section 809 Panel, commercial item acquisitions are subject to up to 138 contract clauses, while acquisitions for NDIs that do not meet the commercial item definition as well as acquisitions for non-commercial items could be subject to nearly 500 clauses, depending on the principal type and purpose of the contract.

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

Contractor Couldn't Deliver under $30 Million Contract - Update

This is an update to our post from December 7, 2017 wherein we described how FEMA (Federal Emergency Management Agency) awarded $30 million in contracts for tarps and plastic sheeting needed for recovery efforts after Hurricane Maria damaged large parts of Puerto Rico to a company who couldn't deliver. The contract was terminated for default and re-solicited but in the meantime, precious time was lost in the Puerto Rico recovery efforts (see Contractor Couldn't Deliver under $30 million Contract).

Seven U.S. Senators asked the DHS (Department of Homeland Security) Office of Inspector General to look into the matter - to determine whether FEMA followed procurement laws, regulations, and procedures when awarding these contracts to Bronze Star LLC, a newly-formed company operating out of a private residence in a Florida subdivision. The Inspector General issued it's findings and recommendations in a report yesterday whose title says it all: FEMA Should Not Have Awarded Two Contracts to Bronze Star LLC.

The OIG found that FEMA did not follow procurement laws, regulations, and procedures when awarding more than $30 million in contracts to Bronze Star for tarps and plastic sheeting. Specifically, FEMA

• did not fully determine Bronze Star's or its supplier's compliance with the contract terms because it did not verify that Bronze Star could meet either contract's delivery schedule. It also did not perform steps necessary to determine whether Bronze Star's supplier could provide the necessary roof coverings withing contractually specified timelines;
• Performed inaccurate technical reviews of the Bronze Star proposals;
• used incorrect FAR clauses and did not reissue the original solicitations because FEMA personnel believed that a 5-hour response window for the tarp modification was sufficient, and the plastic sheeting solicitation had already closed; and
• did not consult the Disaster Response Registry, as required, because it lacked guidance and procedures.

FEMA's failure to comply with procurement regulations delayed delivery of crucial supplies and impeded Puerto Rican residents' efforts to protect their homes and prevent further damage. Overall, FEMA wasted personnel resources, time, and taxpayer money by issuing, cancelling, and reissuing contracts for tarps.

The full OIG report that includes details on inadequate technical evaluations and the use of incorrect FAR clauses can be found here.

Cooperate with Government Investigations to Secure Reduction in Penalties

The Justice Department release new guidance to its FCA (False Claims Act) litigators which explains the manner in which the Department awards "credit" to defendants who cooperate with the Department during a FCA investigation. It includes a comprehensive list of the types of cooperation eligible for credit.

Justice wants to incentivize companies who voluntarily disclose misconduct and cooperate with its investigations. FCA defendants can merit a more favorable resolution by providing meaningful assistance to the Justice Department from voluntary disclosure (the most valuable form of cooperation) to various other efforts like sharing information gleaned from an internal investigation and taking remedial steps through enhanced compliance programs. Besides the formal voluntary disclosure program, the list includes"

1. Identifying individuals substantially involved in or responsible for the misconduct.
2. Disclosing relevant facts and identifying opportunities for Government to obtain evidence relevant to the Government's investigation that is not in the possession of the entity or individual or not otherwise known to the Government.
3. Preserving, collecting, and disclosing relevant documents and information relating to their provenance beyond existing business practices or legal requirements.
4. Identifying individuals who are aware of relevant information or conduct, including an entity's operations, policies and procedures.
5. Making available for meetings, interviews, examinations or depositions an entity's officers and employees who possess relevant information
6. Disclosing facts relevant to the Government's investigation gathered during the entity's independent investigation including attribution of facts to specific sources rather than a general narrative of facts, concerns, including rolling disclosures of relevant information.
7. Providing facts relevant to potential misconduct by third-party entities and third-party individuals.
8. Providing information in native format, and facilitating review and evaluation of that information if it requires special or proprietary technologies so that the information can be evaluated
9. Admitting liability or accepting responsibility for the wrongdoing or relevant conduct.
10. Assisting in the determination or recovery of the losses caused by the organization's misconduct.

Under the Justice Department's policy of "cooperation", the Department will take into account these kinds of activities in the form of a reduction in the damages multiplier and civil penalties.

Read more about the new or clarified policy here.

Defense Department to Increase Use of Quick-Closeout Procedures

FAR (Federal Acquisition Regulations) provide for quick closeout of contracts under certain circumstances. Delay's in closing out contracts is usually attributable to delays in finalizing indirect expense rates. To help reduce the backlog of cost reimbursement, time and material, labor hour, fixed-price incentive, and fixed-price re-determinable contracts, task orders, and delivery orders, the Government came up with quick-closeout procedures delineated in FAR 42.708. Briefly, quick-closeout procedures may be used if

• The contracting officer and the contractor bilaterally agree to its use
• DCAA (Defense Contract Audit Agency) is contacted and has no reason to recommend against quick closeout
• The contract is physically complete and all services and commodities have been accepted, and
• The amount of unsettled indirect cost to be allocated to the contract is relatively insignificant.

With respect to the "relatively insignificant" criteria, costs are insignificant when the total amount of unsettled direct and indirect cost to be allocated to any one contract does not exceed the lesser of $1 million or 10 percent of the total contract, task order or delivery order amount.

Under a new Class Deviation to FAR issued by the Defense Department (see Class Deviation - Quick-Closeout Procedures Threshold), the $1 million threshold is raised to $2 million and the 10 percent threshold is removed. The Class Deviation reads:

DCMA ACOs are further authorized to deviate from FAR 42.708(a)(2) (i.e. the $1 million or 10 percent threshold criteria) and negotiate settlement of direct and indirect costs for a specific contract, task order, or delivery order to be closed in advance of the determination of final direct costs and indirect rates ... regardless of the dollar value or percent of unsettled direct or indirect costs allocable to the contract.

Under this class deviation, there should be a much larger pool of contracts eligible for quick-closeout procedures. If you think you might have contracts that qualify, contact your ACO.

CORs Have a Role in Reviewing Incurred Cost

Typically, incurred cost audits and audits of interim requests for payment (i.e. voucher reviews) are performed by the contract auditor (DCAA or Defense Contract Audit Agency for DoD contracts) and reports are sent to the contracting officer for resolution if there are any findings noted.

There is another party that is often overlooked in the review process that is regularly called upon to render assistance in the audits. These are the COR's or Contracting Officer Representatives.

Contracting officer representatives (CORs) are individuals appointed by the contracting officer (CO) to assist in the technical monitoring or administration of a contract. Although CORs can be employed on any type of contract, they are more common in complex and long-term services, supply, and/or construction contracts. These are the on-site people charged with monitoring progress, performing inspections, correcting deficiencies among many other responsibilities. A COR does not have the authority to make any commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contracts.

A recent memorandum issued by the Under Secretary of Defense for Acquisition and Sustainment lists some additional responsibilities that CORs are to assume relating to review and approval of incurred costs. If you have a COR assigned to one or more of your contracts, you can expect the following procedures will be performed periodically to assist the auditors in their review process.

1. Ensure that costs included on an invoice are consistent with the COR's records of monitoring contract performance. For example, if a contractor is claiming overtime and the COR 'knows' from his monitoring activities that overtime was not worked, such information should be elevated to the CO.
2. Ensure that hours worked equal hours invoiced. This is probably not a precise calculation but one of general magnitude. If the COR knows that a contractor has 100 on-site, he/she would not expect to see a voucher with 5,000 hours for the month.
3. Verify that materials and services required by the contract were in fact delivered and accepted by the Government. So, for example, if the contractor bills for 1,000 yards of ready-mix, there should be contemporaneous records to show that 1,000 yards of ready-mix were delivered to the job site.

Any information developed from these procedures are to be elevated to the CO and the contract auditor for further consideration and evaluation.

Army Civilian Employee Accepted Bribes in Exchange for Sensitive Procurement Information

REK Associates is a service-disabled veteran owned small business based in Williamsburg VA. It appears that the Company has a smattering of Government contractors and very little in the way of commercial work. It's website touts its expertise in range, construction and environmental projects.

Franklin Raby was an Army civilian range operations manager at Hawaii's Schofield Barracks until about a year ago. Yesterday, Mr. Raby pleaded guilty to accepting tens of thousands of dollars worth of bribes (somewhere between $40 and $95 thousand) from REK Associates, in exchange for providing the company with sensitive procurement information.

Bribes included a classic car (a 1969 Ford Galaxie), a hunting rifle, and diamond earrings. Mr Raby failed to disclose these bribes on his financial disclosure forms (duh).

According to court documents, Raby used his position of influence to assist REK Associates in receiving a Government contract by tailoring the contract's language so that the company had a better chance of winning the bid.

After leaving his Army job, Mr. Raby went on to work for REK Associates - probably as appreciation for all of the valuable service rendered to the company while an Army employee. He's probably no longer employed at REK either. His sentencing is scheduled for this coming August.

No word on how the crimes were uncovered.

Expedited Closeout for Contracts Greater Than 17 Years

Nearly a year ago, the Defense Department proposed a change to its FAR Supplement (DFARS or DoD FAR Supplement) that would allow contracting officers to close out contracts (or groups of contracts( without completing a reconciliation audit or other corrective action under certain circumstances (see DoD FAR Proposed Regulation to Expedite Closeout of Old Contracts). Although published as a proposed change, it followed a class deviation to FAR 4.804-5(a)(3) which effectively implemented the new policy (see Special Closeout Authority for Old Contracts).

Earlier this week, the Defense Department published its final rule on the subject. This special closeout authority applies to contracts that were (i) entered into on a date that is at least 17 fiscal years before the current fiscal year, (ii) that have no further supplies or services due, and (iii) for which a determination has been made that the contract records are not otherwise reconcilable because the contract or related payment records have been destroyed or lost or, even if available, the time or effort required to establish the exact amount owed to the U.S. Government or amount owed to the contractor is disproportionate to the amount at issue.

To accomplish the closeout process, the new regulations authorize a contract or groups of contracts to be closed out through a negotiated settlement with the contractor and the remaining contract balances to be offset with balances within the contract or on other contracts regardless of the year or type of appropriation obligated to fund each contract or contract line item, and regardless of whether the appropriation has been closed.  This is a very desirable feature to the new policy. We know from our own experiences in assisting Government contractors through the contract closing process what a nightmarish task it can sometimes be to correlate incurred costs to contract line items to specific appropriation.

One of the comments on the proposed rule included a recommendation to define "disproportionate" as it is used to compare the time it takes to accurately close out a contract versus the amount owed the contractor. The DFARS Council didn't add a definition. It stated that the term was used to establish that DoD's estimate of time and effort are determined to be greater than the amount owed to a level of imbalance. DoD stated that it is not its intent to identify a threshold, but to leave the determination of disproportion to the contracting officer's discretion.

The text of the new rule is available here.

Offerors' Failure to Furnish Data Requested by the Contracting Officer

Before awarding any contract, contracting officers must make an affirmative statement that the contract price is fair and reasonable. When competition exists, price reasonableness can usually be established without requiring any additional supporting data. However, for sole source acquisitions, contracting officers must obtain the data necessary to establish price reasonableness. For contracting actions subject to TINA (Truth in Negotiations Act), the requirement to furnish certified cost or pricing data serves this purpose. However, for actions not subject to TINA, contractors may be requested to prepare and submit additional data to support their proposed prices.

Before the Government requests additional data from a prospective contractor, it must fir obtain whatever data is available from Government or other secondary sources and use that data in determining a fair and reasonable price. If that information is insufficient to determine fair and reasonable pricing, the contracting officer will require submission of data other than certified cost or pricing data from the offeror to the extent necessary to determine fair and reasonable pricing. This data might be that from which the Government can perform a cost realism analysis or information related to prior sales.

When a contractor fails to comply with a contracting officer's request for data other than certified cost or pricing data to support a fair and reasonable price determination, the contractor becomes ineligible for award. From a contractor's perspective, being declared ineligible for award is not a good thing, and frankly, this probably doesn't happen very often. What does happen however is that the Government often 'overreaches' in its request for information to include requests for data that has nothing to do with establishing fair and reasonable pricing. If this happens, it is appropriate to ask the contracting officer how he/she intends to use the information to establish fair and reasonable pricing. Perhaps the request was poorly worded or a 'cut-and-paste' job from a prior request without any though given to the propriety of the request to the current situation. Most often, concerns about whether requested data is appropriate in the circumstances for the purposes intended can be resolved quickly.