Another "Rent-a-Vet" Scheme Discovered

In the context of Government contracting, "Rent-a-Vet" schemes are those contractors who certify that they are owned and controlled by a service-disabled veteran when they are not. The incentive to deceive is monetary - companies owned and controlled by non-service-disabled obtaining contracts that are set aside for companies that are owned by service-disabled veterans. These contracts are often thought to be lucrative since there are fewer qualified bidders but Congress knew that might be the outcome when they passed enabling legislation.

The Justice Department has prosecuted many contractors posing as service-disabled veteran owed and surprisingly, it still happens. Its got to be one of the easiest crime to uncover and prosecute. There are too many interested parties willing to blow the whistle. For one, employees know who is really running operations and some see a big payday in their futures through whistleblower actions. Competitors also know who is and is not a service-disabled veteran and a couple of bid opportunities lost to non-qualified contractor will send them to the Hotline. Government employees quickly catch on who is really in charge of a project. Contract administration, inspectors, and other oversight agencies soon catch on who is really controlling the company.

The Justice Department just announced a civil settlement reached with a New Jersey company who posed as a service-disabled veteran and was awarded millions of dollars in Government contracts. The settlement against the company's owner, Daniel Hernandez, and the company Regiment Construction Corporation, was for $2.4 million. Hernandez improperly represented that Regiment was eligible to bid on contracts set aside for companies owned and controlled by service-disabled veterans when in fact, Hernandez was not a veteran and the veteran to whom ownership and control was attributed had no ownership or control of the company.

The Justice Department press release announcing this settlement can be accessed here.

DoD-Controlled Unclassified Information (CUI) - Contractors Need to Improve Compliance

The DoD FAR Supplement clause at 252.204-7012 requires that defense contractors who maintain DoD-controlled unclassified information (CUI) on their own networks and systems, to implement adequate security controls to protect such information. CUI is a designation for identifying unclassified information that requires proper safeguarding.

The DoD Office of Inspector General (OIG) recently published an audit report on how contractors are complying with these relatively new requirements - to determine whether contractors were protecting CUI on their networks and systems.

The report noted that from March 2015 through June 2018, 126 contractors reported 248 security incidents to the DoD cyber Crime Center including unauthorized access to contractors' networks by malicious actors, stolen equipment, inadvertent disclosure of information, data ex-filtration, and the exploitation of network and system vulnerabilities by malicious actors. That was enough to spur the Secretary of Defense into requesting the audit. The OIG's audit included an assessment of nine out of 12,705 contractors with DoD contracts worth $1 million or more. That seems like a pretty small sample size to assess global compliance rates.

The OIG found significant internal controls deficiencies at all nine contractors reviewed. But it attributed the root cause of those deficiencies to be the Government's fault. It noted that contracting officers have not established processes to

• verify that contractors' networks and systems meet security requirements before contract award
• notify contractors of the specific CUI category related to the contract requirements
• mark documents that contained CUI and notify contractors when CUI was exchanged between DoD agencies and the contract, and
• verify that contractors implemented minimum security controls for protecting CUI.

The report also noted that contracting offices did not know which contracts required contractors to maintain CUI because the DoD did not implement processes and procedures to track which contractors maintain CUI.

The OIG made a number of recommendations involving new controls and processes. In other words, it told DoD to get its act together and figure out whether contractors can comply prior to awarding contracts and set up tracking mechanisms to inventory CUI information.The OIG did not particularly care for DCMA's (Defense Contract Management Agency) response which fell short of stating how DCMA would verify contractor compliance and whether contractors corrected weaknesses identified in the report.

Government Settles Labor Mischarging Case for $485 Thousand

A California-based defense contractor has agreed to pay $435 thousand to settle false claims allegations involving labor mischarging and for including unallowable costs in its indirect rate computations.

The company, Silvus Technologies, specializes in wireless communications, and held at least three cost-reimbursable contracts with the Air Force. Somewhere along the line, the Government got word that Silvus was billing for work not performed and for including indirect costs that are unallowable under FAR Part 13 Cost Principles. We don't know how this was discovered because the Justice Department press release announcing the settlement did not get into that level of detail. However, since DCAA (Defense Contract Audit Agency) was assisting in the investigation, the genesis was likely a result of audit findings during one of the Agency's incurred cost audits.

According to the press release, the overpayments "were due to Silvus's failure to track accurately its direct labor costs and certain indirect costs (including tax payments). Silvus improperly attributed some employee labor costs to the contracts and included certain unallowable charges in its incurred cost proposals.

Were these "inappropriate" charges inadvertent? Based on the information available, it's hard to say. However, the press release also chastised Silvus for lacking adequate internal controls in place to ensure that cost-based billings are fair and accurate. Poor internal controls probably played a key role. Otherwise, the settlement might have been more significant.

GSA Violated Procurement Regulations in Awarding Contracts

McKinsey and Company offers management consulting services to improve performance issues related to strategy, organization, operations, and business technology under a GSA Multiple Award Contract. Between 2006 and 2019, McKinsey collected almost $1 billion dollars under the contract.

When it came time to negotiate prices for option year pricing in 2016, McKinsey refused to provide auditors the records required to complete the preaward audit. Therefore, the audit report advised the contracting officer to obtain the necessary information or cancel the contract. However, instead of addressing the contractor's lack of cooperation during the preaward audit, a Federal Acquisition Service (FAS) division director removed the contracting officer from the contract negotiations and awarded the contract pricing with rates that were at least ten percent higher than those originally proposed.

GSA's Office of Inspector General (OIG) became aware of the situation and had concerns about how the contract pricing was awarded and how pricing was determined to be fair and reasonable. So it conducted an audit to determine whether FAS administered the contract in accordance with applicable laws.

The OIG found that FAS did not administer the contract in accordance with applicable laws, regulations, and policies. The OIG determined that the Division Director used invalid price comparisons, relied on unsupported information, and performed insufficient analyses to justify the awarded contract pricing. The OIG also found that the Division Director violated standards of conduct by advocating for McKinsey to other procurement officials. Finally, the Division Director impeded the audit by failing to take appropriate action as required by the FAR to obtain required data to complete the preaward audit.

According to the OIG, the Division Director's action to justify and award this pricing action violated federal regulations and the trust placed in him as a Government employee with fiscal responsibilities to the federal government and taxpayers. As a result of these actions, the OIG estimated that GSA customers could pay an addition $69 million per year over the five-year option period.

The OIG made a number of recommendations including one to cancel McKinsey's contracts. Other recommendations including a variety of improvements to internal controls, ethical training, and steps to ensure that independence is maintained at all times between contracting officials and contractors.

GSA concurred with most of the recommendations however instead of cancelling the contract with McKinsey, the GSA is attempting to renegotiate prices. No word on whether that will work.

The full OIG report can be accessed here.

Recent article on the GSA OIG report and recommendations.

Do Incumbent Contractor Possess an Unfair Advantage for Follow-on Work?

Earlier this year, the Navy solicited bids for custodial services at its Portsmouth Naval Shipyard. The solicitation required pricing for labor to include health benefits for employees and their families based on a collective bargaining agreement between the incumbent contractor and a workers union.

The contractor shall provide the employees covered by this agreement with health insurance equal to or greater than the policies now being offered at no cost to the employees and to the family members of these employees where applicable at no cost to the employees.

As part of the solicitation package, the Navy provided a list of the incumbent contractor's 31 employees and a breakdown of the medical, dental, and vision insurance rates currently being provided by the incumbent contractor.

One potential contractor, Integrity National Corporation protested the terms of the solicitation because it did not contain sufficient information for offerors to calculate required health benefits. Integrity contended that the Navy should be required to provide more specific information regarding which medical, dental, and vision insurance plans have currently been selected by each of the incumbent's employees. Depending upon which mix of benefits each employee selects, the difference in cost to Integrity could be $667 thousand per year. Integrity complained that only the incumbent contractor knows the actual costs and unless the Navy provides the current plan selection information, it is impossible for any offeror other than the incumbent to offer a realistic price and compete under the solicitation's selection criteria.

The Navy responded by asserting that there is no federal regulation that requires disclosure of such information and further contended that such information would be of limited value because the collective bargaining agreement provides for employees to have the opportunity to change plans every year. In this regard, the Navy argues that all prospective offerors, including the incumbent if it chose to bid, will have to estimate projected costs and balance risks.

The GAO (Government Accountability Office) ruled that the solicitation did, in fact, provide sufficient detailed information to allow offerors to compete intelligently and on a relatively equal basis. While the incumbent is benefited by having more information about current plan selections, GAO noted that an agency is not required to compensate for every competitive advantage gleaned by a potential offeror's prior performance of a particular requirement. An incumbent contractor's functional knowledge of the costs related to a requirement is not generally considered to constitute an unfair advantage that the procurement agency must eliminate.

The full GAO decision can be accessed here.

Contract Auditors to Work Under New Professional Practice Guide

Government contractors (and subcontractors) should become familiar with DoD's 'Professional Practice Guide for Audits and Oversight of Defense Contractor Costs and Internal Controls (First Edition - January 2019). We've covered this guide previously (see for example Section 809 Panel - Recommendation to Adopt an Audit Professional Practice Guide). This guide is intended to provide consistency in the way DCAA and Independent Professional Accounting (IPAs) firms consider risk and materiality in the conduct of their audits and other oversight activities. The PPG is included in the Panel's Third Report beginning on Page 79).

How does DCAA intend to use the Guide? DCAA provides that answer in its latest Annual Report to Congress. DCAA states:

This guide will provide consistency in the way DCAA and Independent Professional Accounting Firms consider risk and materiality. The guide will be important to IPAs when they perform select incurred cost audits for contractors previously audited by DCAA. Internal to DCAA, we plan to use the PPG to meet Congressional requirements to establish, codify, and implement these new materiality thresholds.

What are these new materiality standards that DCAA, and by extension IPAs, must adhere to? The new materiality standards are addressed in the PPG and include 'materiality' in audits of incurred costs and 'materiality in audits of internal controls. This is where the quantification of materiality becomes complex and formulaic driven. But since they are formula driven, contractors (and subcontractors) should be able to replicate materiality thresholds calculated by contract auditors.

The PPG however cautions that the application of quantified materiality is not limited to certain thresholds as "auditor judgment  with consideration of qualitative factors, risk, and variability have an impact".

You can learn more about quantifiable risk or materiality factors in Chapters 2 and 3 of the PPG.

NASA Resolves Whistleblower Case Using ADR

Alternative Dispute Resolutions (ADRs) are any method of resolving disputes without litigation. When negotiations fail, ADR kicks in. Arbitration and mediation are two major forms of ADR but within these broad categories, there are many methods and techniques available for the disputing parties. Mediators are individuals trained in negotiations, who bring opposing parties together and attempt to work out a settlement or agreement that both parties accept or reject. Mediation is not binding. Arbitration is more formal than mediation and resembles a trial with limited discovery and simplified rules of evidence. The results of arbitration is usually binding.

The NASA (National Aeronautics and Space Administration) OIG (Office of Inspector General) recently announced the results of whistleblower case where it acted as an ADR mediator. This happened down in Houston and involved a NASA contractor and one of its employees (the OIG report did not disclose the contractor name).

The whistleblower initiated his case after managers at the NASA contractor him for 'allegedly' texting threatening messages to a fellow employee. The whistleblower claimed the contractor's explanation for the termination was pretext and that he was really terminated because he disclosed issues to NASA constituting "... a substantial and specific danger to public health and safety" related to the space program. Because of the threatening texts, NASA also permanently suspended the whistleblower's access to Agency facilities.

The NASA-OIG became involved and determined that the whistleblower's potential damages were limited since contract he was working on was near its end. The NASA-OIG suggestion that the contractor and the former employee engage in ADR with the NASA-OIG acting as the mediator. Both parties agreed. As a result of the ADR process, the contractor and the whistleblower reached a settlement agreement satisfactory to both parties. The whistleblower, presumably, got a little money and withdrew his whistleblower accusation.

If you have not used ADR to resolve disputes, you should consider doing so before expending significant resources to litigate the matter.

NDAA 2020 - Study the Applicability of Section 809 Panel Recommendations to Energy Department

This is another installment of our coverage of the 2020 NDAA (National Defense Authorization Act). The Senate and House have passed their respective versions of the 2020 NDAA and differences in the two bills are now being reconciled in conference committee. Although there is no certainty that the provisions we have been highlighting, including this one, will make it to the President's desk, they do not seem overly partisan so we think they will likely make it to the final legislation.

A lot of the provisions in both the Senate and House bills call for more studies including the following study to determine whether the recommendations from the Section 809 committee can be applied to the Department of Energy.

The Section 809 Panel was established under the 2016 NDAA to study and make recommendations on streamlining and codifying acquisition regulations for the Department of Defense. The Panel issued three reports containing recommendations related to improving the defense acquisition process. While these recommendations were not aimed at the Department of Energy (DOE), the Panel believed that DOE faces a number of the same acquisition challenges. Therefore, the Senate included a provision in the 2020 NDAA that directs the Government Accountability Office to assess the application of some of the recommendations.

First, GAO is to review issues affecting DOE's acquisition workforce. Specifically, the Senate is interested in DOE's workforce planning efforts, particularly related to (i) how it determines the number of acquisition professionals needed and the skills and training required for those positions, (ii) whether DOE's acquisition professionals attain the needed training and skills, (iii) any challenges in recruitment and retention of DOE's acquisition workforce and (iv) any systemic challenges for those professionals in performing their acquisition oversight responsibilities.

Second, the Senate finds the portfolio management framework recommended by the Section 809 Panel compelling and therefore directs GAO to study whether it can be ported over to DOE.

Finally, the Section 809 Panel provided examples of essential audit and non-audit services provided by DoD agencies across the contract life-cycle. Most of these services are performed pursuant to FAR requirements which are generally applicable to all agencies, including DOE. The Senate directs GAO to review how DOE obtains the required audit and non-audit services and whether there are any opportunities for improvement or efficiency in how DOE obtains these services.

What is the "Election Doctrine"?

Under the Contract Disputes Act (CDA), in lieu of appealing a decision of a contracting officer to one of the Boards of Contract Appeals (e.g. ASBCA), a contractor may bring an action directly on the claim in the United States Court of Federal Claims.

Courts have consistently interpreted the CDA as providing the contractor with an either-or choice of forum. Once a contractor makes a binding election to appeal the contracting officer's final decision to a board of contract appeals or to the Court of Federal Claims however, the contractor can no longer pursue its claim in the other forum.

A contractor is deemed to have made a binding election when i) it has sought to avail itself of one forum over another and ii) that forum has the ability to exercise jurisdiction at the time the election is attempted.

A recent decision by the ASBCA (Armed Services Board of Contract Appeals) illustrates the application of the 'Election Doctrine'.

In 1987, the Army Corps of Engineers awarded a contract to Melville Energy Systems (MES) to replace boilers in buildings at McGuire Air Force Base. Two years later, in 1989, the Army terminated the contract for default for failure to complete contractually required work. In 1995, appealed the default termination to the United States Court of Federal Claims and lost its appeal. In April of this year (24 years later!) MES appealed the default termination to the ASBCA asking that it be converted to a termination for convenience. MES also asked for recovery of an alleged unpaid contract balance and other contract price adjustments.

The ASBCA didn't have to decide on the merits of the case. It dismissed the appeal based on the Election Doctrine. MES already had its day in court when it filed its initial appeal with the U.S. Court of Claims.

Small Business Acquisition Transparency Act of 2019 - A Bill

We've had this experience and so have most readers of this blog. You spend a lot of time and resources preparing a proposal to submit to the Government and later find that your were among the unsuccessful bidders. That's not so unusual because many more unsuccessful bidders than there are successful bidders for any given contract. The frustrating part however is the inability to obtain feedback on how the Government viewed your proposal, how it stacked up against the competition, and what deficiencies were noted. These are important questions for which answers and feedback would assist in improving future proposal submissions.

FAR (Federal Acquisition Regulations) do contain provisions for post-award debriefing of offerors. The conditions are somewhat restrictive (e.g. requests for debriefings must be made with three days of being notified that the bid was unsuccessful) and its is up to the contracting officer as to method of debriefing - orally, in writing, or any other method acceptable to the contracting officer (see FAR 15.503 and 15.506). Sometimes these debriefings are conducted en masse so the Government needs to protect against release of trade secrets, privileged or confidential manufacturing processes and techniques, commercial, financial, and past performance information.

A bill introduced in the House earlier this month is intended to ensure that unsuccessful offerors, especially small businesses, get the feedback they need to improve their processes for preparing proposals. The proposed legislation differs from current regulations in that it requires contracting officers to put the information in writing. The legislation reads:

Not later than 180 days after enactment, FAR (Federal Acquisition Regulation) shall be revised to require that with respect to an offer for a task order or delivery order in an amount greater than the simplified acquisition threshold (currently set at $150,000) and less than or equal to $5.5 million issued under an ID/IQ (Indefinite Delivery/Indefinite Quantity) contract, the contracting officer for such contract, upon written request from an unsuccessful offeror, provide a brief explanation as to why such offeror was unsuccessful that includes a summary of the rational for the award and an evaluation of the significant weak or deficient factors in the offeror's offer.

No idea as to whether this bill will get very far in the legislative process. But it is a good idea. It would be even better if the requirement applied to prime contractors in relation to their unsuccessful subcontract offerors.

Cost Incurred in Defending Against Third Party Lawsuits are Probably Unallowable

For 47 years between 1943 and 1990, the Government produced plutonium for nuclear weapons at the Hanford site in Washington State, leaving behind about 56 million gallons of nuclear waste stored in underground tanks. If all of that sludge were put in tanker trucks, the line of trucks would extend from Philadelphia to New York.

In 2000, Bechtel was awarded a cost-plus-incentive fee contract by the Energy Department for the design, construction, and operation of a nuclear waste treatment plant to process the waste. Now, 19 years later, the construction phase is yet to be completed.

During contract performance, two former Bechtel employees at the Hanford site sued Bechtel alleging sexual and racial discrimination and subsequent retaliation for raising their complaints. Bechtel settled these lawsuits out of court and then sought $500 thousand in reimbursement from the Energy Department for costs it incurred in defending against the two suits. Bechtel did not seek reimbursement for the settlement payments, presumably because those were covered by insurance.

In 2016, DOE (Department of Energy) disallowed the $500 thousand based on the standards set forth in a prior Federal Court of Appeals decision (the 'Tecom decision'). Bechtel then brought a suit in the Federal Claims Court challenging the contracting officer's decision. The Claims Court sided with DOE, concluding that Tecom was the proper standard for determining whether defense costs were allowable. Bechtel then appealed the Claims Court decision to the Federal Court of Appeals. The Appeals Court affirmed the Claims Court decision.

So what is the 'Tecom Standard'?

The Tecom case involved a similar dispute over whether costs associated with settling an employment discrimination lawsuit were allowable costs under a Government contract. A former employee had sued Tecom under Title VII, alleging sexual harassment and firing in retaliation for filing a sexual harassment charge. The allege conduct, if proven, would have violated Title VII. After settling the suit, Tecom sought reimbursement from the Government for (i) defense costs and (ii) settlement payments associated with the lawsuit.

One of the allowability criteria for costs on Government contracts is that they comply with the terms of the contract (see FAR 31.201-2). The Tecom contract included a clause that prohibited the contractor from discriminating against any employee or applicant for employment because ro race, color, religion, sex, or national origin (see FAR 52.222-26).

In the Tecom case, the Court articulated a standard for determining when costs incurred by a contractor in defending and settling third party claims are allowable under a Government contract. First, "... we ask whether, if an adverse judgment had been reached, the damages, costs, and attorney's fees would be allowable and second, if not, we ask whether the costs of settlement would be allowable". In the Tecom case, the Court found that a violation of Title VII would not be allowable under the contract because sexual harassment is a form of sex discrimination and the alleged discrimination would have clearly violated the contract. As for the second step, where damages or penalties paid in the even of an adverse judgment are disallowed, settlement costs are also unallowable unless the contractor can establish that the plaintiff in the discrimination suit had very little likelihood of success on the merits.

Since Bechtel did not provide evidence that the plaintiffs in its case had very little likelihood of success, the Court affirmed the contracting officer's decision and the Claims Court's ruling.

You can read the full Federal Appeals Court's decision here.

NDAA 2020 - Contracting Out DCAA and DCMA Functions - Study Required

The House passed its version of the 2020 NDAA (National Defense Authorization Act) late last week. Previously, the Senate passed its own version so now it on to a compromise committee to iron out the differences. And there are some significant differences which will probably make it difficult (but not impossible) to reach a compromise on a final bill. House members offered more than 430 amendments to the NDAA and a large number of those were adopted. In the coming days, we will take a look at some of the procurement related provisions that made their way into the Bill.

Congress is still on the 'commercialization-is-better' bandwagon as it applies to contract audits. The committee noted the following:

The committee is also aware that the Secretary of Defense is required to conduct joint reviews and submit reports regarding the Defense Contract Audit Agency, Defense Contract Management Agency, and Defense Finance and Accounting Service pursuant sections 925 and 926 of the John S. McCain National Defense Authorization Act for Fiscal Year 2019 (Public Law 115–232). Therefore, the committee directs the Secretary of Defense, acting through the Chief Management Officer of the Department of Defense, to submit risk assessments to the congressional defense committees not later than March 1, 2020, to supplement the reports required by sections 925 and 926 of Public Law 115–232.

The risk assessments should reflect the Department’s analysis of potential combination of functions with each other or the use of commercial providers, as applicable. The risk assessments should include analysis of the legal and ethical implications of:
conflict of interest considerations;

1. the risks posed to governmental interests and the public when ‘‘closely associated with inherently governmental’’ functions as defined in section 2383 of title 10, United States Code, are performed by commercial providers; 
2. the risks to mission failure when ‘‘critical’’ functions as defined in section 2461 of title 10, United States Code, are performed by commercial providers; 
3. the risks of creating an ‘‘employer-employee relationship’’ through the use of ‘‘personal services contracts,’’ whether authorized by statutory exception (e.g., section 129b of title 10, United States Code) or otherwise prohibited; and 
4. the application of each of the general ethical principles in 5 Code of Federal Regulation section 2635.101(b).

While this provision only calls for reports at this time, it does show that Congress doesn't quite trust DoD to do the right thing when it comes to using in-house resources versus contracting out for contract oversight programs and audits.

Hiring Government Employees as Part-Time Consultants - There May Be Prohibitions

Government contractors need to be careful about who they hire and Government employees need to be discerning about the companies from whom they take part-time employment.

In a recent Justice Department press release, a "former" employee of the Army Corps of Engineers pled guilty to lying to law enforcement agents. What did she lie about? She lied about her part-time employment from Army contractors who she had oversight responsibilities as a Government employee.

Ms Sellers was a civilian employee of the Army Corps of Engineers. She was a biologist who's duties included coordinating and advising on environmental issues related to Army Corps projects. Part of her responsibilities included reviewing products from environmental consulting companies.

Federal ethics laws and regulations prohibit federal employees from engaging in outside employment that conflicts with employees' official duties. For about five years, while employed with the Army Corps, Sellers engaged in outside employment with a consulting company despite being part of a team that oversaw that company's work for the Corps. Ms Sellers used her personal non-Government email account to share sensitive, internal draft Government documents that she received in her official capacity with her part-time employer. She also used her personal email accout to participate in private email conversations with employees of the company and used her personal email and social media accounts to assist the company in contract negotiations.

Ms Sellers kept this part-time employment a secret from colleagues and management and tried to keep it a secret from investigators. Earlier this year, Ms Sellers falsely and willfully misled federal agents about her outside involvement with the consulting company. Where the federal agents got the information in the first place is not part of the publicly available documents. What is interesting to note however is that investigators seemed to have real time access to her private email because right after the interview where she lied to investigators, the investigators discovered another email she sent to the contractors stating "I can't do any of this work for you. I am on admin  leave from usace. Conflict of interest. May be fired."

Implementing NDAA Provisions - GAO Review

The 2019 NDAA (National Defense Authorization Act) contained a provision for GAO to review DoD's regulatory implementation of acquisition-related provisions between 2010 and 2018. There were about 180 of them. The purpose of the review was to determine how DoD implements acquisition-related  NDAA provisions in its DFARS (DoD FAR Supplement). Congress, of course, was concerned about the length of time it takes for a provision to go from law to implementing regulation.

After each NDAA is enacted, the staff of the Defense Acquisition Regulations System identify which provisions to implement through regulatory changes and which to implement through other means. Sometimes, rather than changing the DFARS, DoD can issue a 'class deviation' which allows its buying organizations to temporarily diverge from the acquisition regulations. Other changes can be implemented through its less formal PG&I (Procedures, Guidance, and Information) system.

GAO completed its review and found that on average, it took DoD about a year to implement an NDAA provision. In a few cases, it took more than two years. That didn't seem to concern GAO at all. The thing that did concern GAO was the lack of a mechanism to clearly communicate to Congress, industry, and other interested parties the status of regulatory or other changes based on NDAA provisions. Using only publicly-available reports and information, it is difficult for an interest party to find the implementation status of any given acquisition-related NDAA provision. As a result, interested parties are not always aware of what provisions have been implemented and when. This information is important for congressional oversight and to industry for planning and compliance purposes.

GAO recommended that DoD develop a mechanism to better communicate the implementation status of acquisition-related NDAA provisions, particularly those that direct a change or consideration of a change to the DFARS. DoD concurred with GAO's recommendation. It will be interesting to see how long it takes DoD to implement such a system.

Production Surveillance

Production surveillance is a function of contract administration (e.g. DCMA or Defense Contract Management Agency) used to determine contractor progress and to identify any factors that may delay performance. It involves Government review and analysis of

• Contractor performance plans, schedules, controls, and industrial processes; and
• The contractor's actual performance under the plans.

Contractors are responsible for timely contract performance. However, the Government will sometimes feel it necessary to oversee that performance to protect its interests. It's up to the contracting officer to decide the extent of such surveillance.

Factors that contracting officers are to consider when developing a surveillance plan are laid out in FAR 42.1104 and include

• The criticality (degree of importance to the Government) assigned by the contracting officer to the supplies or services
• Contract requirements for reporting production progress and performance
• The contract performance schedule
• The contractor's production plan
• The contractor's history of contract performance
• The contractor's experience with the contract supplies or services
• The contractor's financial capability

Contractors sometimes view these surveillance requirements as impediment to efficient production. That is why FAR also cautions contracting officers to avoid any action that may result in claims of waivers, of changes, or of other contract modifications. FAR also cautions contracting officers to avoid actions that may be inconsistent with contract requirements.

Contractors are not going to have much success in dissuading the Government from its surveillance activities. Its the Government's call. However, contractors can minimize a lot of extra work on their part by making available internal production control or data management information. Contracting officers are required to make maximum use of 'reliable' contractor developed information.

DCAA's 2018 Annual Report to Congress - Part 2

We turn once again to DCAA (Defense Contract Audit Agency's) Annual Report to Congress for a glimpse of what that organization has been up to in its last fiscal year. See "Where Have All the CPAs Gone" for previous coverage (Part 1) of DCAA's annual report to Congress.

Today we cover the section where DCAA describes its most significant fiscal year 2018 activities and their impact on the audit process. This annual report to Congress is the opportunity for DCAA to tell its story to Congress - to let the members know what is important to the Agency and what taxpayers get for their $1.4 billion in annual appropriations.

DCAA found three "significant" activities to report.

1. We sent 22 supervisors and managers - many with graduate degrees and most having a CPA designation - to leadership training.
2. We had meetings with customers including some big shots in the Pentagon
3. We prioritized audits of contracts with 'cancelling funds'.

That's it! Those are the three most significant activities that DCAA could conjure up for their annual report to Congress. On a positive note for the Agency, its unlikely that anyone in Congress will ever read the report.

What Has the CAS Board Been Up To Lately?

The Cost Accounting Standards Board (CASB) recently published the agenda for its forthcoming meetings on July 25th and August 21st. These are closed meetings so the public is not invited. Guess we'll have to wait until the minutes are published before we learn whether any significant actions will have been taken.

Agenda topics include:

1. Conformance of CAS to GAAP (Generally Accepted Accounting Principles). The 2017 NDAA (National Defense Authorization Act) requires the CAS Board to review and conform CAS, where practicable, to GAAP. The CAS Board will discuss a Staff Discussion Paper (SDP) addressing conformance of CAS 411 (Materials) and CAS 404 (Capitalization of Tangible Assets) to GAAP.
2. Review of CAS applicability recommendations by the Section 809 Panel. Specifically, the CAS Board will discuss two legislative proposals that were advanced by OMB; the elimination of the Defense CAS Board (which has never gotten off the ground anyway) and decoupling the monetary threshold for CAS applicability from the threshold for TINA (Truth in Negotiations Act). The Section 809 Panel recommended that CAS applicability threshold be raised from $2 million to $15 million.
3. Review of Court and Board Decisions Related to CAS. The FY 2017 NDAA also requires the CAS Board to review on an annual basis disputes before the various BCAs (Board of Contract Appeals) or Federal courts involving its standards to determine whether greater clarity in CAS could avoid such disputes. The Board will discuss recent decisions.
4. CAS Board Working Groups. The Board will assess the need for additional support on its pension harmonization working group and evaluate the need for a dedicated working group to support ongoing work associated with the CAS-GAAP conformance project.

Federal Prison Industries - Competition for Government Contractors

Federal Prison Industries (FPI) is a self-supporting wholly-owned Government corporation of the District of Columbia. FPI provides training and employment for prisoners confined in Federal penal and correctional institutions through the sale of its supplies and services to Government agencies. Federal agencies are encouraged to purchase FPI supplies and services to the maximum extent practicable (see FAR 8.6). In fiscal year 2016, FPI generated about $500 million in sales.

FPI's product line is extensive and includes apparel and accessories, electronics, eye-wear, food service, industrial storage, mattresses, linens, beds, and drapes, office furniture, and print products, to name a few. Services include CAD (Computer aided design), data services, call centers, printing and bindery services, and more.

Before purchasing an item of supply listed in the FPI schedule (the catalog of things FPI makes and sells), contracting officers must conduct market research to determine whether the FPI item is comparable to supplies available from the private sector that best meet the Government's needs in terms of price, quality, and time of delivery.

If the FPI item is comparable, contracting officers are required to purchase the item(s) from FPI (unless a waiver is warranted). If the FPI item  is not comparable in terms of either (i) price, (ii) quality, or (iii) delivery time, the contracting officer will acquire the items using competitive procedures. Contracting officers are required to consider timely offers by FPI for competitive award but it is unclear if this ever happens.

FPI should be able to compete on price. It pays its inmate workers between $0.23 and $1.15 per hour. Quality and delivery schedules can sometimes be a different story. As reported on these pages back in 2016, FPI had to recall 44,000 helmets that failed ballistics testing. Furthermore, FPI failed to meet delivery schedules on that order (see Failure to Meet Specifications Results in $3 Million Settlement).

Employee Falsifies Timecard - Government is Overbilled by $220 Thousand

Here's an example of what can happen when Government contractors and subcontractors do not effectively oversee work performed by their employees. The Justice Department press release on which this post is based, pins blame on the employee who charged the Government for more hours than he actually worked. We believe that his employer is also to blame for not implementing adequate internal controls over timekeeping. This story gets a little convoluted because the Government agency involved, NSA (National Security Agency) doesn't want to name its contractors and subcontractors.

NSA awarded two contracts to a contractor (Contractor A) for information technology (IT) services. Contractor A, in turn, awarded two subcontracts, one for each of their prime contracts. These were awarded to Subcontractor 1 and Subcontractor 2. Kyle Smego was an employee of both subcontractors 1 and 2. That's a little peculiar but not unheard of. Someone may work full time for one employer and 'moonlight' with another. The problem here is that Mr. Smego wasn't working the number of hours that he claimed to be working for either subcontractor.

The subject matter of these subcontracts involved classified information and required that Mr. Smego be physically present at his assigned duty location to perform his work. Between February 2016 and May 2018, Mr. Smego reported to Subcontractor 1 that he worked 3,289 hours on their subcontract and reported to Subcontractor 2 that he had worked 797 hours on their subcontract. What Mr. Smego failed to realize however that since the work had to be performed within classified work locations, it was an easy matter to correlate timecard information with key card information. And that's what NSA did. They compared Mr. Smego's timecards with key card information and found major discrepancies - 40 percent of the hours charged were not supported by access records and he did not even show up for 119 days in which he claimed to work an average of 8 hours per day.

These 'falsified' hours were billed by Subcontractors 1 and 2 to Contract A, who in turn billed NSA. The impact was calculated at $220 thousand. Once presented with the evidence, Mr. Smego plead guilty to submitting false claims and agreed to pay restitution and forfeit any assets derived from or traceable to the offense. He also faces a possibility of prison when sentencing occurs this coming October.

There should be more to this story. What about Mr. Smego's supervisor who signed off on the timecard? What about the two subcontractors who passed the charges on to the prime contractor? Where were their internal controls over timekeeping, labor distribution, and billing?

Contractor Pays $4.2 Million to Settle False Claims Allegations

Vance Air Force Base is located in Oklahoma about an hour and a half drive north of Oklahoma City. It is and always has been since it opened in 1941 a base for training Air Force pilots. Base support activities including aircraft maintenance, airfield management, aircrew life support and base operating support is contracted out. From 2009 to 2014, PAE Applied Technologies, LLC (PAE) held the contract on a cost-reimbursable/award fee basis.

The Government has alleged that during the time it held the contract, PAE systematically overcharged the Government for work performed by claiming worker wages in excess of the wage caps specified in the contract. This, according to the Government, amounted to false claims.

The Government got wind of the alleged fraud when a former whistleblower filed a lawsuit under the qui tam, or whistleblower, provisions of the False Claims Act. Qui Tam actions permit private individuals to sue on behalf of the United States for false claims and to share in the recovery. The Act also allows the government to intervene in the lawsuit. In this case, the Government intervened. The hope of most whistleblowers is that the Government will intervene. To pursue the suit privately would be cost prohibitive.

The Government and PAE reached a settlement without having the matter go to trial. Under the terms of the agreement, PAE will pay $4.2 million to settle the civil claims arising from the allegations. In reaching this settlement, PAE did not admit its liability, and the United States did not concede that its claims lack merit. The agreement allows both parties to avoid the delay, expense, inconvenience, and uncertainty of litigating the case.

Fewer Contractors Participating in SBA Programs Despite Increase in Dollars Awarded

Last week we reported on SBA's (Small Business Administration) scorecard for achieving small business contracting (and subcontracting) goals (see Federal Government Surpasses its Small Business Contracting Goals for Fiscal Year 2018). That's the good news. More than $121 billion dollars in contracts were awarded to small businesses in fiscal year 2018 which marked a $15 billion increase over fiscal year 2017 awards.

The not-so-good news however is that these dollars are being awarded to few and few small businesses. Fewer small businesses are benefiting from these programs designed to benefit disadvantaged business, service disabled veteran owned small businesses, and women-owned small businesses.

Why is that happening? That's one of the questions that the Senate Committee on Small Business and Entrepreneurship wanted answered at a hearing last month where they discussed the re-authorization of SBA's contracting programs. Witnesses testifying at the hearing identified the problem and some of the reasons why small businesses have been discouraged from entering the Federal marketplace. However these testimonies fell short of offering a quick fix to the problem of the shrinking number of small businesses.

The number of contractors working on prime contracts is at its lowest level despite a steady rise in Government contracting spending. In fiscal year 2018, the vendor count was about 115 thousand which is a 27 percent drop over the last 10 years. One reason for this has been a shift of emphasis from prime contracting to subcontracting (including teaming agreements, joint ventures, and mentor-protege strategies). Such subcontracting opportunities are not easy to find so small business are hampered in their ability to know which prime contractors to approach and which agencies to target for subcontracting opportunities.

One panelist did not support the recommendation of the Section 809 Panel to eliminate small business programs for readily available products and services under $15 million, and instead instituting a 5 percent price preference for small businesses. Rather than eliminate these programs, the panelist recommended changes to simplify and streamline small business purchasing programs. Easier said than done, we suppose.

One change that has already been passed but not put into regulations is the ability to count an average of five years of revenue instead of the current three years to determine size. This new law will geatly assist businesses experiencing growth in the federal marketplace.

One thing that no one has mentioned are the size standards. Perhaps the pre-determined revenue and headcount standards are too high. Lower them and the Government might just find some of the larger companies 'sizing out' of SBA's small business programs leaving opportunity for more small businesses to compete for the work.

Termination Settlement Expenses Disallowed Because They Were Not Reasonable

Sometimes the Government finds it  necessary to terminate contracts for convenience. When they do, contractors are entitled to reimbursement for certain costs related to the terminated contract including a special category called 'settlement expenses'. Settlement expenses (see FAR 31.205-42(g)) include accounting legal, clerical and similar costs reasonably necessary for the preparation and presentation, including supporting data, of settlement claims to the contracting officer and the termination and settlement of subcontracts. Settlement expenses also include reasonable costs for the storage, transportation, protection, and disposition of property acquired or produced for the contract as well as indirect costs related to salary and wages incurred as settlement expenses (e.g. payroll taxes, fringe benefits, occupancy costs, and immediate supervision costs).

Historically, the section on settlement expenses in a termination settlement proposal has been a fertile field for questioned cost by Government oversight. Contractors seem to have a propensity to load up this area of costs with scant supporting evidence. Sometimes contractors forget about the overarching cost principle of reasonableness. In addition to allowability criteria, as settlement expenses explicitly are, the costs must also be reasonable (see FAR 31.201-3). ALKAI Consultants LLc (ALKAI) was one of those contractors who learned the hard way.

ALKAI had a contract that was terminated for convenience. In its settlement proposal, it claimed $126 thousand in settlement expenses. The Government only wanted to pay ALKAI $27 thousand so ALKAI filed a claim with the ASBCA (Armed Services Board of Contract Appeals) for the difference (as well as for other cost elements).

Claimed settlement expenses included third party consultant and legal expenses, ALKAI employee wages, and estimated future costs. No one had an issue with the third part consultant and legal expenses. Concerning employee wages, the Board ruled that incurring costs to prepare a narrative requeisted by the contracting officer was reasonable in principle. It also found that claiming $77 thousand for this work was unreasonable. The Board allowed just $6 thousand. The Board also found that ALKAI had provided no back-up for future estimated cost being incurred subsequent to submission at any time. Therefore it disallowed another $10,500.

In this case, the ASBCA applied a reasonableness criteria based on what they believed was the intrinsic value of the services being performed. The full text of the ASBCA case can be read or downloaded here.