Regulatory Reform Task Force

Back in 2017, the President signed an Executive Order (EO) requiring, among other things, each Federal agency to establish a Regulatory Reform Task Force. One of the duties of these task forces is to evaluate existing regulations and make recommendations to their agency heads regarding repeal, replacement, or modification. Specifically, these task forces were to focus on regulations that (i) eliminate jobs or inhibit job creation, (ii) are outdated, unnecessary, or ineffective, (iii) impose costs that exceed benefits (iv) create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies, or (v) derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

So how is everyone doing?

OMB's (Office of Management and Budget) Office of Information and Regulatory Affairs, recently published a summary of regulatory reform results for Fiscal Year 2019. Here's their report card:

• Agencies eliminated $23 billion in overall regulatory costs across the Government
• Deregulations outpaced new regulations by a ratio of 12:1. There were a total of 176 deregulation actions compared to 14 new significant regulatory actions

How does that $23 billion in savings break down by Agency. For the full breakout, see Final Accounting for Fiscal Year 2018. Half of the savings are attributable to Health and Human Services. The Defense Department saved a paltry $67.9 million with four deregulatory actions (about 0.3 percent of the total).

What about the FAR (Federal Acquisition Regulations)? The FAR Councils implemented two deregulatory actions with estimated savings of $0.

For the current fiscal year, the Office of Information and Regulatory Affairs estimate an additional $18 billion in savings from final rulemaking.

Read more about activities of the Regulatory Reform Task Forces here.

Insurance - Professional Liability

We've been working our way through various types of insurances to see what FAR (Federal Acquisition Regulations) has to say about the allowability of their costs and also to highlight, where we can, the audit procedures that contract auditors might employ to assess the reasonableness and propriety of such costs.

We began early this year with War Hazard Insurance, a type of insurance coverage that most Government contractors don't need (see War Hazard Premium Payments). We wrote a couple of posts on "self-insurance" because this is an area with potential 'cost' issues (see FAR Provisions Covering Self-Insurance and  Self-Insurance Plans - What Contract Auditors Will Look For). Next, we asked the question of whether it is necessary to insure Government property in contractors' possession (see Should You Insure Government Property in Your Possession). And last week we discussed the need for product liability insurance (see Insurance - Product Liability Insurance). Today we will look at Professional Liability insurance.

The cost or professional liability insurance is allowable, subject, of course, to tests of reasonableness and allocability. The allocability test is where some contractors run afoul of Government oversight.

If a professional liability insurance policy provides coverage for its general practice, allocation of premiums to all contracts through overhead or G&A (general and administrative) expense is usually acceptable. However, if the policy is written to provide unique liability coverage for a particular business segment or product, costs should be directly allocated to the benefiting cost objective.

Consider Boeing. Boeing builds airplanes for commercial customers and for the Government. It is safe to assume that the company's its potential liabilities for commercial customers is much greater than that for its Government customers. One only needs to consider the on-going 737-Max saga to realize that is true.

Where a plain reading of the policy does not clearly establish the general nature of the coverage or the contract auditor has reason to believe that unique liability coverage is involved, the Government will examine the types of services being rendered to both the Government and commercial customers. If the services are essentially similar, a broad-based allocation is acceptable. On the other hand, where the services are dissimilar, examination should be made of the claims and loss experience.

In determining premiums for a contractor, the insurance carrier usually considers such factors as location of the business, size of the firm, professional discipline being practices, and loss experience. The proper allocation of premium costs should be determined primarily by the terms of the coverage. If the coverage between commercial and Government is similar, a broad based allocation method is probably appropriate.

Contractor Settles Overpayment Allegations for (an additional) $6.4 Million

The Air Force awarded CH2M Hill Inc two A&E (Architectural and Engineering) contracts to support construction efforts at multiple Air Force installations across the continental United States. These were T&M (Time and Material) contracts where labor costs are billed as work progresses at pre-determined billing rates. As is the nature of T&M contracts, individuals billed for various labor categories must meet minimum educational and/or experience requirements for the position being billed.

In 2014, DCAA (Defense Contract Audit Agency) conducted an audit of CH2M Hill's 2008 billings on these contracts and found that at least eight engineering employees did not meet labor qualification requirements. That prompted CH2M Hill to conduct its own internal audit where they discovered the problem was much more significant than just eight employees. Internal audit discovered more than 300 instances of unqualified labor billed against the two contracts.

In 2015, CH2M Hill notified the Defense Department through a mandatory contractor disclosure program that an external review of its billing system identified weaknesses in validating their employee's qualification requirements when billing the Air Force for work performed. An investigation ensued and ultimately, CH2M Hill voluntarily repaid $10.5 million (of which $2.2 represented interest) to the Air Force.

That wasn't the end of the story. The Justice Department kept the case open because CH2M Hill failed to notify the Government of the billing issue when it first became aware of them.

The issue was finally settled last week when CH2M Hill agreed to pay an additional $6.4 million to settle the issue once and for all. According to the Justice Department press release, CH2M Hill knew of the overpayment as early as 2011, but attempted to keep the information secret by claiming that an audit of its labor practices was privileged information. That argument didn't hold up well. While CH2M Hill did not admit to any wrongdoing , it did agree to pay the additional $6.4 million to resolve all Government claims.

Contractors are reminded that they have a contractual obligation to timely disclose to the Government in connection with the award, performance, or closeout of a Government contract or subcontract, credible evidence of a violation of federal criminal law involving fraud, conflict of interest, bribery, or gratuity violations or violations of the False Claims Act and remit any significant overpayment amount.

Prompt Payment Interest Rate Drops by One Percent

Do you remember the early 1980s when prompt payment interest rates peaked at over 15 percent? A decade later, interest rates dropped to less than half that and a decade after that, dropped to less than half again. In the last few years, interest rates have been hovering around two to three percent. The all-time low was 1.375 percent in 2013.

The Treasury Department just announced the prompt payment interest rate (also used for the Contract Disputes Act) for the second half of this year. It has dropped a whole percentage point from 3.625 percent for the first half of 2019 to 2.625 percent for the second half.

This rate is used to calculate interest due contractors when payment is made late - usually after 30 days from receipt of "acceptable" billing documents. Most of the time, the Government calculates and pays this penalty regardless of whether the business concern has requested payment of such penalty. It is calculated from the day after the required payment is due until the date that payment is made.

The Prompt Payment Act was enacted in 1982 at a time when interest rates were high (greater than 15 percent) and the Government did not seem to regularly meet its 30 day goal for making payments. Contractors who had to borrow for working capital couldn't afford to "finance the Government" as well - a lot of them watched their anticipated profits wither away. Over the ensuing years, Government "paying offices" (like DFAS) have improved their systems so that late payments are relatively rare. Still, the 'Act' remains and because of it, contractors can count on prompt payments for cash flow purposes.

$300 Thousand Wasted on Useless Training

Do you think training is important? Do you think continuing education is important? Is there real value in remedial training?

The Government thinks so. Read any report by GAO (Government Accountability Office) covering the effectiveness, efficiency, or economy of a program, service, or contract and invariably, it will include a recommendation for more training. Same goes to reports by various OIG (Office of Inspector General) organizations. Even DCAA (Defense Contract Audit Agency) recommends more training whenever they find internal controls deficiencies in one of the few business systems the organization audits these days.

As if more training is going to solve whatever problems have been identified. Here's some examples:

• Contractor employees didn't fill out their timecards properly or on time - they need more training.
• An interviewer said something naughty during an employment interview - the entire organization needs more training.
• Congress passed a law prohibiting retaliation against whistleblowers - train everyone on how not to retaliate against whistleblowers.
• A contracting officer didn't check all the boxes she was supposed to check prior to awarding a contract - the entire organization needs more training.

Recommendations for more training are lazy recommendations. The auditor or evaluator doesn't need to drill down to root causes why something didn't happen the way it should have or the way the process was designed. Why don't employees fill out their timecards correctly? Is it from lack of training? Probably not. It doesn't take any particular skill to fill out a timecard. There must be some other reason.

One of the problems that organizations have when trying to solve a problem with more training is that they come up with a half-baked training plan, throw it at the people. The organization is happy because they can now check a box saying they've complied with a recommendation. And the trainers are happy because they collect their money.

A recent article published by POGO (Project on Government Oversight) illustrates the problem when the training is motivated by an arbitrary timeline rather than a well thought out curriculum.

The VA (Department of Veterans Affairs) opened an accountability office to change the Agency's culture of retaliation against whistleblowers, The article is interesting in that it points to a lot of mismanagement in the organization. But the salient point to this article is that the number two guy in the organization demanded that its staff be trained by a certain date so that the number one guy, scheduled for Congressional testimony one month later, could state honestly that everyone had been trained.

What transpired after that was a sole-source contract for the training that was ultimately cobbled together from other sources including VA materials, much of it that wasn't even on subject-matter, conducted by individuals who obviously didn't know the materials even though they were subject-matter experts who read from scripts.

There wasn't anything in the training that was remotely relevant or useful. one attendee reported. It was like nothing I've ever seen, and I've been in Government for 20 years, another reported.

At one point, attendees had to correct instructors who didn't know the legal definition of a whistleblower had changed in 2017.

You could feel the hostility in the room, an attendee recounted, as the instructors struggled to exert control over the training and respond to questions from increasingly frustrated attendees.

Whenever we see or hear of recommendations that more training is needed to solve a problem, we just roll our eyes and read on to see if the report includes other recommendations to show the auditor/evaluator even understood the root cause and had precise or specific solutions to correct whatever deficiency had been cited.

You can read the full POGO article here.

Insurance - Product Liability Insurance

In the normal course of doing business, contractors will want to insure themselves against bodily injury to others, and damage to, or loss of, property of others arising from the failure of its products.

Costs of such insurance is generally allowable. However, the Government believes that risks are often lower for military products than they are for commercial products.

With that in mind, contract auditors like DCAA (Defense Contract Audit Agency) will look into the possibility that whatever method a contractor is using to allocate product liability insurance costs may be inequitable to the Government.

A common base for allocating such premiums is sales but sales may not achieve an equitable result or allocation of costs to Government contracts.

Auditors are instructed to ascertain that contractors have "conscientiously" attempted to negotiate with its insurance carriers separate military (or Government) product rates commensurate with the loss experience of such products. If that hasn't occurred, auditors are to obtain the view of the contracting officer and proceed accordingly. Also, auditors are instructed to ensure that there is no absorption by Government contracts of premiums solely applicable to a contractor's commercial products.

Auditors will analyze Government and commercial loss experience for a representative period. Any allocation that exceeds loss experience may be unreasonable and therefore questionable. At this point, the auditor might delve in further by

• requesting detailed explanations from the insurance carriers on the basis of the premium split between commercial and Government and a breakdown of risk exposure. Note here, the audit will go directly to the insurance carrier and not necessarily rely on the contractor to provide the information.
• if possible, compare premiums and allocation bases with comparable companies.
• if possible, obtain independent quotes from insurance carriers on Government exposure only.

We've never seen the last two bullets followed. In the first case, finding comparable companies is not possible. There are always vagaries in the risk assessment that are unique to specific companies. In the later case, preparing a quote requires extensive fact finding and analysis. No insurance company is going to do this work without the possibility of writing a policy.

Expressly Unallowable Costs - Raytheon Court of Appeals Decision Broadens the Definition

The U.S. Court of Appeals for the Federal Circuit just upheld Raytheon's appealed a decision by the ASBCA (Armed Services Board of Contract Appeals) that unallowable salary costs associated with Raytheon's lobbying activities were 'expressly unallowable' under FAR 31.205-22 and thus subject to penalty under FAR 42.709-1(a)(1) (known as level 1 penalties).

Raytheon submitted its 2004 incurred cost proposal in 2005. DCAA (Defense Contract Audit Agency) completed its audit in 2006 and found, among other things, over $220 thousand of expressly unallowable lobbying salary costs. In 2011, DCMA (Defense Contract Management Agency) demanded that Raytheon repay the Government for these costs and additionally, assessed a penalty and interest under FAR 42.709-1(a)(1).

Raytheon appealed to the ASBCA and lost on this issue. Its argument was that salary costs associated with lobbying activities were not specifically referenced in FAR 31.205-22 and accordingly, were not "expressly unallowable". The ASBCA upheld the DCMA decision, finding that lobbying costs are subject to penalty because "costs associated with certain named lobbying activities are stated to be unallowable under FAR 31.205-22" and "they are ... expressly unallowable. (That Decision can be accessed here). The ASBCA also noted that FAR 31.201-9(a) and (e)(2) makes salary costs of employees who participate in unallowable activities are also expressly unallowable as directly associated costs of that activity.

Raytheon then appealed the ASBCA decision to the Court of Appeals. Raytheon argued that salary costs of employees who participate in lobbying activities are not expressly unallowable under a cost principle in FAR. Raytheon contended that an item of cost must be mentioned or identified by name to be expressly unallowable and that the generic language of costs associated with lobbying activities is insufficient. The Court of Appeals found no basis for such an interpretation and explains, in detail, why it came to that conclusion (The full Court of Appeals decision can be accessed here).

Perhaps a fallout of this decision will be that the Government may renew its aggressiveness on calling out costs as expressly unallowable and subject to penalties. The penultimate paragraph of the decision reads:

Finally, Raytheon relies on a decision in a prior proceeding where the Board held that neither bonus and incentive compensation costs nor compensation cost is specifically named and stated as unallowable under the cost principle (in FAR 31.205-22), nor are such costs identified as unallowable in any direct or unmistakable terms. That decision is not binding on this court, and in any event, is contrary to the plain language of Subsection 22 to the extent that it concludes that salaries in the form of bonus and incentive compensation for lobbying and political activities are not "expressly unallowable".

After the decision ASBCA decision referenced here, DCAA ratcheted back its guidance on what constitutes expressly unallowable costs. Perhaps we will soon see that guidance amended again.

New Guidance on Anti-Trafficking Regulations

FAR (Federal Acquisition Regulations) 22.17 requires Government contractors to work proactively to prevent human trafficking in their supply chains and take remedial steps if such activities are identified. The term 'human trafficking' encompasses many things but in the context of Government contracting, refers primarily to child labor and forced labor. The requirement applies to contracts greater than $500 thousand.

The Office of Management and Budget (OMB) released guidance yesterday to help contractors manage and reduce the burden of meeting their responsibilities. It describes anti-trafficking risk management best practices and mitigation considerations that acquisition officials can take into account when working with contractors to address their obligations.

The new OMB guidance:

• Reviews key responsibilities of the regulations
• Highlights best practices that have been shown to contribute to effective deterrence
• Describes mitigation actions that should be given appropriate consideration by contracting officers in evaluating the suitability of steps taken by a contractor that has reported a trafficking incident and
• Provides a FAQ section

The FAR regulations (and the underlying statute) contain express prohibitions on certain types of trafficking related activities. These include prohibition on charging employees recruitment fees, and destroying, concealing, confiscating or otherwise denying access to identity or immigration documents. The regulations also require contractors to implement risk management practices such as an employee awareness program, a recruitment and wage plan, and a housing plan. FAR also requires contractors to take appropriate action against employees, agents, or subcontractors that violate prohibitions. Additionally, contractors now have an affirmative duty to report violations to the OIG (Office of Inspector General).

While this new guidance is primarily aimed at contracting officers, the section on best practices contains a good bit of advice on what a contracting officer might consider when assessing contractors' compliance with the anti-trafficking regulations.

Legislation Proposed to Repeal the Davis-Bacon Act (DBA)

Senator Mike Lee (Utah) has introduced (or should we say 're-introduced') legislation last week to repeal the Davis-Bacon Act. Six other Senator's signed on as co-sponsors of the proposed repeal.

The Davis-Bacon Act is a wage subsidy law requiring all federally-funded projects (greater than $2,000) to pay workers the "prevailing wage" rate on non-federal projects in the same locality. The problem with the prevailing wage law is, as everyone knows and understands or at least suspects, that the prevailing wage schedules coming out of the Labor Department, are significantly higher than the real prevailing wages. To illustrate with an anecdote, a plumber working for $33 per hour on new residential construction, was temporarily deployed by his employer to a project at a local military installation where he earned more than $40 per hour. After the military job was completed, he returned to his previous job site and began working again at $33 per hour.

According to Senator Lee's press release announcing the legislation,

The Davis Bacon Act exemplifies how big government hurts the people it purports to help, gives unfair advantages to favored special interests (e.g. unions), and squeezes the middle class. The Davis-Bacon Repeal Act would remove these government-imposed obstacles to economic opportunity facing low-skilled workers, and return wasted taxpayer dollars back into the hands of the American people.

There is no doubt that Federally funded construction projects would cost less without the prevailing wage law. However, we don't expect the proposal to get very far in Congress. Also, the Labor Department's Wage and Hour Division (WHD) would lose half its case load.

Read more about the proposal here.

Should You Insure Government Property in Your Possession?

Continuing on with our discussion of insurance costs and the allowability of such, we move now form our discussion of self-insurance to a few other types of insurance that have conditions upon whether associated costs are allowable.

Many Government contractors have Government property in their possessions for various reasons - usually temporary. The question often arises over whether the risks of loss of Government property should be insured and then if insured, whether the costs are allowable. FAR 31.205-19(e)(2)(iv) answers that question. FAR states that the cost of insurance for the risk of loss, damage, destruction, or theft to Government property are allowable only when three conditions are met:

1. the contractor is liable for such loss, damage, destruction or theft
2. the contracting officer has not revoked the Government's assumption of risk (in accordance with FAR 45.104(b). The contracting officer can revoke the Government's assumption of risk when the property administrator determines that the contractor's property management practices are noncompliant with contract requirements, and
3. such insurance does not cover loss, damage or destruction which results form willful misconduct or lack of good faith on the part of any of the contractor's management personnel. Contractor's managerial personnel are defined in FAR 52.245-1(a) as directors, officers, managers, superintendents, or equivalent representatives who have supervision or direction of the company's business, plant, or separate location.

DFARS (Defense FAR Supplement) adds one other consideration to the allowability question. DFARS 231.205-19(e)(7) states that in addition to the FAR limitations listed above, the allowability of insurance costs are also subject to other limitations. These limitations are listed in DFARS 252.217-7012 and essentially related to contractor negligence.

The key to ensuring the allowability of insurance costs related to Government property is to maintain close coordination with your contracting officer as to what is insurable and to make sure your internal controls over Government property in your possession are adequate.

Motions for Reconsideration of Previous Decisions

A 'motion for reconsideration' asks the judge to reconsider his/her decision in light of other facts, circumstances, or law that wasn't brought up in the original hearing on the matter.

In the context ASBCA (Armed Services Board of Contract Appeals) decisions, Rule 20 allows such motions to be filed by either party and must set forth specifically the grounds relied upon to grant the motion. Motions must be filed within 30 days of receiving the Board's decision. Opposing parties have 30 days after a motion has been filed to file any cross-motion for reconsideration. Extensions to these times are not granted.

It is well established that motions for reconsideration are not granted lightly. In order to prevail on a motion for reconsideration, a contractor or the Government must demonstrate a compelling reason for the Board to modify its original decision. There are three bases upon which the ASBCA will reconsider a previous decision:

• Newly discovered evidence
• Mistakes in finding of fact
• Errors of law.

Motions for reconsideration are not intended to provide either party, the contractor or the Government, with another chance to again argue its position that was previously raised and denied. In some decisions where motions for reconsideration have been heard, the ASBCA is highly critical of parties that try to do just that - rehash the same arguments.

The probability of success in filing motions for reconsideration are slim. A brief scan of ASBCA decisions involving motions for reconsideration during the last couple of years found none that were not denied. There was one case where the Government argued that an opinion included factual errors as well as legal errors that stemmed from the factual errors. The ASBCA agreed that its decision included one factual error but it viewed the error as immaterial in the circumstances so denied the motion for reconsideration.

Self-Insurance Plans - What Contract Auditors Will Look For

When submitting request for self-insurance plans to the contracting officer, contractors are required to provide, among a long list of other documents, self-insurance feasibility studies or insurance market surveys reporting comparative alternatives, loss history, premiums history, and industry ratios. The point of this is to insure that the costs of self-insurance does not exceed the cost of purchased insurance. Excess self-insurance costs exceeding the cost of comparable purchased insurance is unallowable under FAR 31.205-19(c)(3):

If purchased insurance is available, any self-insurance charge plus insurance administration expenses in excess of the cost of comparable purchased insurance plus associated insurance administration expenses is unallowable.

DCMA (Defense Contract Management Agency) has the responsibility under FAR 42.3 for reviewing contractors' insurance coverage. Those reviews are usually limited to verifying that the contractors' insurance program provides appropriate protection in consonance with the types of risks involved. Such reviews, by themselves, do not constitute a sufficient basis for accepting related costs. That's where DCAA (Defense Contract Audit Agency) or other independent contract auditors come in.

When reviewing a contractor's self-insurance program, contract auditors will consider whether the contractor has performed regular (and recent) comparative cost analysis of the self-insurance program with comparable purchased insurance costs. While the contracting officer may have initially approved a contractor's self-insurance plan, after time, the comparative analysis initially submitted may no longer be relevant. And here's where some contractor's have run afoul of the audit process - they have no evidence to show that its self-insurance plan(s) remain cost effective. That is, the costs plus administration expenses for self-insurance, do not exceed the costs of comparable purchased insurance.

Contract auditors will review other aspects of self-insurance plans as well, such as;

• The types of risks covered and the nature of contractors' risk assumptions
• Effectiveness of the claims procedures. For example, are there procedures in place to ensure that payments are made only to valid participants? Children eventually age out and should be removed from participation. In the case of divorce, the spouse should be removed from participation.
• Equity of the accounting treatment of self-insurance costs including how the costs are allocated to final cost objectives.
• Maintenance of the reserve in accordance with CAS 416 (if applicable).

Self-insurance can save contractors a lot of money. But self-insurance plans must be closely monitored to ensure that the costs meet the requirements of FAR 31.205-19 and that claims are not paid out to ineligible participants or for events that are not covered by insurance.

FAR Provisions Covering Self-Insurance

Many Government contractors have elected to provide coverage for certain risks from their own resources under a program of self-insurance. A decision to self-insure is typically based on a determination that coverage can be provided by self-insurance at a cost not greater than the cost of obtaining equivalent coverage from an insurance company, or in the case of workers compensation, a State fund. That makes some sense. With self-insurance, a contractor is not paying for the insurance company's profits. The larger the company, the more cost effective it is to be self insured since there is a much larger workforce to spread the risks.

Even with self-insurance programs, contractors will carry or maintain various forms of purchased insurance to cover major risks and catastrophic losses. For example, under a self-insured health plan, contractors will usually limit its self-insurance to routine hospital, surgical, and medical expenses and, at the same time, purchase insurance covering life, accidental death and dismemberment, disability income benefits and dreaded disease coverage.

Accounting for self-insurance programs requires a level of precision that is not so easy to estimate. Under a self-insurance program, a contractor must make a charge for each period (i.e. monthly). This charge must represent the projected average loss for that period. How does one project an average loss for a period? Obviously contractor's need good historical data and a sense of what might happen in the future.

Self-insurance charges plus insurance administration expenses may be equal to, but cannot exceed the cost of comparable purchased insurance (see FAR 31.205-19(c)(3)). This is where some contractors run afoul of contract auditors because they don't know, or haven't determined the cost of purchased insurance.

FAR 28.308 requires contractors to submit self-insurance programs to the contracting officer for approval when 50 percent or more of the self-insurance costs to be incurred at a segment will be allocated to negotiated Government contracts and are expected to exceed $200 thousand per year. That same FAR provision includes a list of what is required in the submission for contracting officer approval.

Tomorrow we will look at some of the things a contract auditor might review when it comes to self-insurance costs.

Contractor Pays Nearly $1 Million in Back Wages for Labor Law Violations

A division of the Labor Department, this time the Wage and Hour Division (WHD), announced the results of its investigation of General Atomics for compliance with Federal labor laws. The company, a California-based contractor providing aircraft systems and services to the Army, agreed to pay nearly $1 million to 1,100 employees for violating the Service Contracting Act (SCA).

According to the Labor Department, General Atomics failed to pay prevailing wages and required health and welfare benefits to employees performing services under several Government contracts. General Atomics paid aircraft mechanics and engineering technicians at hourly rates below the SCA minimums and also failed to pay minimum fringe benefits required by the SCA.

In making the announcement, the Labor Department reminded employers doing business with the Federal Government that they need to understand and abide by all applicable laws and to ensure that employees receive legally required pay and benefits. Easy to say but difficult to implement, we suppose.

Improper Business Practices - Contingent Fees

This is the fifth installment in our periodic series on improper business practices under FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and antitrust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more.

In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. In Part 3, we discussed the prohibition against offering gratuities to Government personnel, a prohibitions that should be rather obvious to everyone. In Part 4 we alerted you to practices that might be reportable as violations of antitrust laws and contracting officers affirmative duty to report "suspected" violations of anti-trust  laws. Today we will be discussing the prohibitions against contingent fees.

What are contingent fees? Contingent fees are broadly defined in FAR as any commission, percentage, brokerage, or other fee that is contingent upon the success that a person or concern has in securing a Government contract. Contractors' arrangements to pay contingent fees for soliciting or obtaining Government contracts have long been considered contrary to public policy because such arrangements may lead to attempted or actual exercise of improper influence. Contractors are required to certify in each negotiated procurement that they have not paid any contingent fees.

There is one limited exception to the payment of contingent fees. Contingent fee arrangements between contractors and their bona fide employees are permissible.

 Like other violations of described in this series, contracting officers have an affirmative duty to report suspected violations of this prohibition. Misrepresentations or violations can lead to one or more of the following:

• If before award, a bid will be rejected.
• If after award, the Government can annul the contract or recover the fee.
• Additionally, the Government can suspend or debar the contractor from future contracts.
• Refer suspected fraudulent or criminal matters to the Justice Department.

Expansion of Definition of Commercial Item

FAR (Federal Acquisition Regulation) was amended today to expand the definition of "commercial item". The definition heretofore has been written broadly to include seven different scenarios or situations. Now there's an eighth. The eighth and newest category of commercial items reads as follows:

A non-developmental item, if the procuring agency determines the item was developed exclusively at private expense and sold in substantial quantities, on a competitive basis, to multiple State and local governments or to multiple foreign governments.

The first question when reading this definition is what is a "non-development item". Well, FAR has a definition for that as well. In FAR 2.101, we read:

A non-developmental item (NDI) means:

• Any previously developed item of supply used exclusively for governmental purposes by a Federal agency, a State or local government, or a foreign government with which the United States has a mutual defense cooperation agreement
• Any item described above that requires only minor modification or modifications of a type customarily available in the commercial marketplace in order to meet the requirements of the procuring department or agency
• Any item of supply being produced that does not meet the requirements above solely because the item is not yet in use.

Like any commercial item procurement, contractors should not assume that a contracting officer will know or would likely consider whether an item being offered qualifies as a commercial item. Offerors should be ensure that such distinctions are highlighted.

This change to FAR was necessitated based on a provision in the 2018 NDAA. FAR Part 12 creates a preference for buying commercial items and provides relief from certain record-keeping, reporting, and compliance requirements. According to an analysis performed by the Section 809 Panel, commercial acquisitions are subject to 138 contract clauses while acquisitions for NDI that do not meet the commercial item definition as well as acquisitions for noncommercial items could be subject to nearly 500 clauses, including TINA (Truth in Negotiations Act) which has long been recognized as one of the most costly statutes and regulations in Federal procurement.

The full text of the expanded definition of "commercial item" is available here.

GAO to Study DOE's Acquisition Workforce and Audit Needs

The Senate Committee on Armed Services released a report to accompany its 2018 NDAA (National Defense Authorization Act). The Senate and the House versions of the NDAA are currently in conference committee to resolve differences before going to a vote by the full chambers. The Committee report offers some insight into why the Senate added various provisions to the NDAA. One of the provisions called out in the NDAA (Senate version) is for the GAO (Government Accountability Office) to review the applicability of the Section 809 Panel to the Department of Energy. We last discussed this back in July (see NDAA 2020 - Study the Applicability of Section 809 Panel Recommendations to Energy Department) so today's blog represents a refresher and update to what we wrote previously.

Section 809 of the 2016 NDAA required DoD to establish an advisory panel on streamlining and codifying acquisition regulations for the Department of Defense. Between January 2018 and January 2019, the Section 809 Panel (as it came to be called) issued several reports containing recommendations related to improving the defense acquisition process. While these recommendations were not aimed at the Energy Department, the Senate Armed Services Committee believes that DOE face a number of the same acquisition challenges as the DOD. That is why the Committee inserted the requirement for GAO to assess the application of a subset of these recommendations to DOE.

If enacted, the GAO will be directed to review issues affecting DOE's acquisition workforce. Specifically, the Armed Services Committee is interested in DOE's workforce planning efforts related to (i) how DOE 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.

Volume 1 of the Section 809 Panel's final report provides 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 requirements in FAR (Federal Acquisition Regulation), which are generally applicable to all agencies, including the DOE. The Senate Armed Services Committee wants GAO to review how the DOE obtains the required audit and non-audit services and whether there are opportunities for improvement or efficiency in how the DOE obtains these services. Up until six or so years ago, DOE acquired its contract audit services through DCAA (Defense Contract Audit Agency) after which it began contracting with commercial accounting firms for the service. Whether the switch was beneficial to the Government is a question that the GAO will try to assess.

How Much Time Does it Take to Comply with CAS Administration Requirements?

Contractors that must comply with CAS (Cost Accounting Standards) are required to submit notifications and descriptions of certain cost accounting practice changes, including revisions to their Disclosure Statements if they're required to have Disclosure Statements (see FAR 52.230-6, Administration of Cost Accounting Standards). In addition, contractors are required to submit a cost impact statement assessing the impact of accounting changes on Government contracts.

Cost accounting changes are usually implemented to improve the allocation of costs to final cost objectives. An example is where a contractor changes the manner in which it charges IT costs from inclusion in the G&A (General and Administrative) pool to a base that includes non-production headcount on the theory that non-production headcount are the predominate users of IT systems and support.

As any CAS-covered contractor can attest to, the resources required to comply with the CAS administration contract clause is significant. How significant you ask? Well, the Government estimates that collectively contractors spend 314,475 hours per year to comply. That works out to 175 hours for each of the 600 CAS covered contractors required to comply, or roughly, a month's worth of labor for each contractor.

Is this money well spent? In most cases, some or most of the funds required to prepare these notifications are simply passed on to the Government anyway. So the real question is whether the Government is getting a level of benefit commensurate with the extra cost of compliance. We know from experience, that many of these notifications, once received by the contracting officer, end up in the dead-letter file - no Government action is ever taken.

Improper Business Practices - Antitrust Violations

This is the fourth installment in our periodic series on improper business practices as laid out in FAR (Federal Acquisition Regulations) Part 3. FAR Part 3 includes sections on the prohibitions of gratuities to Government personnel, contingent fees, subcontractor kickbacks, buying-in and antitrust matters. It also offers whistleblower protections to contractor employees, requires contractors to establish and implement codes of business ethics and conduct, and more.

In Part 1, we discussed the requirement for contractors and subcontractors to implement reasonable procedures to prevent and detect violations of the Anti-Kickback Act. In Part 2, we discussed the practice of "buying in" and tools for contracting officers to use to prevent subsequent cost growth when contractors do buy in. In Part 3, we discussed the prohibition against offering gratuities to Government personnel, a prohibitions that should be rather obvious to everyone. Today we will focus on practices that might be reportable as violations of antitrust laws.

The antitrust laws are intended to ensure that markets operate competitively. Any agreement or mutual understanding among competing firms that restrains the natural operation of market forces is suspect. There are known behavior patterns that are often associated with antitrust violations. These 'indicators' are not necessarily improper by themselves but are sufficiently questionable to warrant a referral to "appropriate authorities", which for DoD is probably of the Office of Inspector General.

1. The existence of an industry price list or price agreement to which contractors refer in formulating their offers
2. A sudden change from competitive bidding to identical bidding.
3. Simultaneous price increases or follow-the-leader pricing
4. Rotation of bids or proposals, so that each competitor takes a turn in sequence as low bidder, or so that certain competitors bid low only on some sizes of contracts and high on other sizes.
5. Division of the market so that certain competitors bid low only for contracts awarded by certain agencies, or for contracts in certain geographical areas, or on certain products, and bid high on all other jobs
6. Establishment by competitors of a collusive price estimating system
7. The filing of a joint bid by two or more competitors when at least one of the competitors has sufficient technical capability and productive capacity for contract performance.
8. Any incidents suggesting direct collusion among competitors, such as the appearance of identical calculation or spelling errors in two or more competitive offers or the submission by one firm of offers for other firms.
9. Assertions by the employees, former employees, or competitors of offerors, that an agreement to restrain trade exists. Such assertions are not unusual in this age of whistleblowing.

When these or similar conditions are noted or suspected, contracting officers are required to report them. FAR Part 3 also includes specific reporting requirements. It is unlikely that contract auditors (e.g. DCAA or Defense Contract Audit Agency) would ever be in a position to identify suspected violations of antitrust laws as auditors are not typically involved in the award of competitive procurements. But the contracting officers and associated personnel are taught to be aware of such violations.

FAR Proposal to Restrict the Use of LPTA Source Selection

The FAR (Federal Acquisition Regulations) have issued a proposed regulation to limit the use of LPTA (Lowest Price Technically Acceptable) source selection criteria in many circumstances. This proposal is based on provisions in the FY 2019 NDAA (National Defense Authorization Act), specifically, Section 880.

LPTA source selection methodologies are widely used throughout the Government and one of the easiest ways to award contracts. Some have referred to LPTA as the lazy man's guide to contracting because the Government needs only to determine whether a bid is technically acceptable. After that, the lowest price wins.

There has been a growing realization within the Government however that the use of LPTA in many cases, denies the Government the benefits of cost and technical trade-offs in the source selection process. A contractor that is able to add enhancements to its 'product' or 'service' that exceeds minimum specifications, should be given consideration for those enhancements if they would prove useful to the Government.

The proposed regulation will significantly reduce the use of LPTA source selection. In fact, the requirements for using LPTA are conditional on meeting the following requirements:

1. An executive agency is able to comprehensively and clearly describe the minimum requirements expressed in terms of performance objectives, measures, and standards that will be used to determine acceptability of offers
2. The executive agency would realize no, or minimal, value from a contract proposal exceeding the minimum technical or performance requirements set forth in the solicitation (good luck justifying this condition).
3. the proposed technical approaches will require no, or minimal, subjective judgment by the source selection authority as to the desirability or one offeror's proposal versus a competing proposal.
4. The executive agency has a high degree of confidence that a review of technical proposals of offerors other than the lowest bidder would not result in the identification of factors that could provide value or benefit to the executive agency.
5. The contracting officer has included a justification for the use of an LPTA evaluation methodology in the contract file; and
6. The executive agency has determined that the lowest price reflects total costs, including for operations and support.

Additionally, section 880 requires that the use of LPTA source selection criteria be avoided, to the maximum extent practicable, in procurements that are predominantly for the acquisition of:

• information technology services,
• cyber-security services,
• systems engineering and technical assistance services,
• advanced electronic testing,
• audit or audit readiness services,
• health care services and records,
• telecommunications devices and services, or
• other knowledge-based professional services.

Proposed FAR Rule to Increase TINA Threshold to $2 Million

Section 811 of the 2018 NDAA (National Defense Authorization Act) increased the TINA (Truth in Negotiations Act) threshold from $750 thousand to $2 million. This threshold marks the point at which contractors must certify that the cost or pricing data they submit in support of a pricing action is current, complete, and accurate.

In May 2018, the Defense Department issued a class deviation to implement the new threshold for contracts awarded after July 1, 2018, The Civilian Acquisition Council issued a similar class deviation shortly thereafter, applicable to non-DoD contracts. In both cases, modifications to contracts awarded prior to that date were subject to the old lower threshold.

The FAR councils have just issued a proposed regulation that will make these class deviations permanent. The proposed regulations does not significantly differ from the provisions of the temporary class deviations which everyone has been operating under for the past 15 months.

The Government's estimate of cost savings that will result from this threshold is interesting, if true. The Government estimates that savings accruing to contractors will average $41 million per year and savings to the Government will average $6 million annually. Those figures represent the reduced work required to ensure the accuracy of cost or pricing data.

The full text of the proposed regulation can be accessed here.

DoD Ethics and Anti-corruption Act of 2019 - Part 2

Yesterday we briefed some of the contents of the proposed DoD Ethics and Anti-corruption Act of 2019. The legislation, if enacted, would create a four-year waiting period between the time an mid-level Government employees and higher could go to work in any capacity for a 'giant' contractor (a giant contractor being one with $1 billion in sales to DoD and DOE. If you missed that article, please refer to Part 1 of this series. There are several other aspects to this proposed legislation that might be of interest to Government contractors that we should briefly mention.

Section 102 of the proposed legislation lays out new annual reporting requirements for contracts greater than $10 million. Contractors will need to file reports that names of certain persons to which they paid some form of compensation within four year of those persons leaving the Government. Those persons include members of the Senior Executive Service, officers retiring at O-6 (Colonel) or higher, and any program manager, deputy program manager, procuring contracting officer, administrative contracting officer, source selection authority, member of the source selection evaluation board, or chief of a financial or technical evaluation team.

The report must list the department where the people served in DoD and their position and the extent they were involved in any acquisition greater than $10 million. But the requirements become much more onerous if the contractor is paying the individual(s) as non-employees. The report must then list each specific issue for which the contractor, any employee of the contractor, or any lobbyist paid by the contractor engaged in lobbying activities directed at DoD and for each lobbying activity, a listing of documents prepared, meeting attended, phone calls made and all electronic communication. That will become an administrative nightmare.

Finally the kicker, the proposed legislation will require DoD to make these reports publicly available on an internet website. Some call this transparency. Others call it intrusion. One thing for certain, it will drive down the market prices for retired Generals.

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

DoD Ethics and Anti-corruption Act of 2019 - A Bill

Last month, Rep. Speier from California introduced H.R. 4277, the Department of Defense Ethics and Anti-corruption Act of 2019. This Bill contains a number of provisions that will be of interest to Defense contractors.

Section 105 of the Bill would institute a four-year ban on hiring former senior officials by "Giant" defense contractors. Giant defense contractors are contractors that received an average of more than $1 billion in aggregate annual revenue from (i) the DoD or (ii) the Department of Energy for contracted work related to the U.S. nuclear program, in the previous three fiscal years.

Officials in the context of this prohibition include supervisor positions GS-15 and above, SES position, Executive Schedule positions and any military officer Grade O-6 (Colonel) and above.

This prohibition is to be implemented by contract clause and would prohibit giant contractors from hiring or paying (including as a consultant or lawyer) these (former) officials for a minimum of four years after they leave service with the DoD. The manner in which this Bill is worded prohibits payments regardless of whether the compensation is claimed on Government contracts or excluded from contracts.

There are several other provisions of this proposed legislation that will potentially affect Government contractors. We will look at those tomorrow.

The full text of the Bill can be accessed here.