Accounting for "Special Facilities"

"Special Facilities" is a term commonly used to describe a process or operation that benefits only a select or limited portion of a contractor's overall operations. Special facilities might include wind tunnels, space chambers, research vessels, testing labs, etc. The name or type of facility is not important. What is important is that the cost of operating the facilities does not benefit the entire operations equally and a method is needed to allocate costs to only benefiting cost objectives. Also, the cost need to be significant otherwise its fine to find a less precise way to account for its costs.

The cost related to specialized facilities consists of direct and indirect costs. For example, indirect costs related to a research vessel might include depreciation, maintenance and repairs, supplies, and general support salaries. While it is in use however, costs tend to spike because not you have the salaries of research scientists, vessel operators, food and other sustainment costs.

There are several ways to account for the costs of the research vessel or special facilities in general. The first is to charge the readily identifiable direct costs directly to the contract and then allocate the indirect costs to benefiting cost objectives on a 'usage' basis. Using our research vessel example, if the vessel is out on the high seas for 200 days per year, the indirect costs would be allocated over those 200 days and charged to the benefiting projects. This is probably the most equitable method though challenges when trying to forecast usage.

A second method is the same as the first except that indirect costs are charged to one of the existing indirect rates, perhaps an overhead rate. This method would be open to challenges by the Government so care would be necessary to ensure that it results in an equitable distribution of costs.

A third method would accumulate both direct and indirect costs and distributed to final cost objectives through one of the contractor's appropriate categories of indirect expense. This is the least precise method and should only be used if the costs are immaterial or the indirect rate allocation base approximates the special facility's usage.

Contract auditors are always looking for ways to 'improve' cost allocations, that is, finding alternate methods of allocating indirect costs that reduce costs to the Government. Whatever method a contractor chooses to allocate special facilities costs, needs to be supported by evidence that it results in equitable allocations to final cost objectives including Government contracts.

New Standards for Should-Cost Reviews

Should-cost reviews are a specialized form of cost analysis. Should-cost reviews differ from traditional evaluation methods because they do not assume that a contractor's historical costs reflect efficient and economical operation. Instead, Should-cost revews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management.

Should-cost reviews are performed by a multi-functional team of Government contracting, contract administration, pricing, audit, and engineering representatives. The objective of such reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts. Additionally, by providing rationale for any recommendations and quantifying their impact on cost, the Government is in a better position to develop realistic objectives for negotiation.

There are two types of should-cost reviews; program and overhead. Program should-cost reviews are used to evaluate significant elements of direct costs while overhead should-cost reviews are used to evaluate indirect costs, including fringe benefits, shipping and receiving, real property, and equipment depreciation, plant maintenance, security, taxes, and G&A activities.

Under FAR 15.407-4, the Government has a right to perform should-cost reviews but since they are very costly and time-consuming to carry out, such reviews are usually limited to major weapons system acquisitions. From the contractors' perspective, should-cost reviews are also costly to support and sometimes, in the contractors' view, do not offer tangible benefits to either the Government or the contractor.

Under the Fiscal Year 2018 NDAA (National Defense Authorization Act), the Defense Department was required to amend its regulations to ensure that the use of should-cost reviews were performed in a manner that is "transparent, objective, and provides for the efficiency of the systems acquisition process". This week, the Defense Department finally got around to finalizing its regulations accordingly. Under the revised regulations, DoD must consider the following:

1. A thorough review of each contributing element of the program cost and the justification for each cost
2. An analysis of non-valued added overhead and unnecessary reporting requirements.
3. Benchmarking against similar DoD programs, similar commercial programs and other programs by the same contractor at the same facility.
4. An analysis of supply chain management to encourage competition and incentive cost performance at lower tiers.
5. A review of how to restructure the program team in a streamlined manner. The program team in this context include both Government and contractor representatives.
6. Identification of opportunities to break out Government-furnished equipment versus prime contractor-furnished materials.
7. Identification of items or services contracted through third parties that result in unnecessary pass-through costs.
8. Evaluation of ability to use integrated developmental and operational testing and modeling and simulation to reduce overall costs.
9. Identification of alternative technology and materials to reduce developmental or life-cycle costs for a program.
10. Identification and prioritization of cost savings opportunities
11. Establishment of measurable targets and ongoing tracking systems.

Contractor Retaliates Against Whistleblower

The Justice Department Office of Inspector General (OIG) investigated a complaint by a former employee of a contractor for the Federal Bureau of Prisons (BOP) that he suffered reprisal from the employer/contractor for making a protected disclosure under Federal whistleblower statutes.

Contractor employees, just like Government employees are protected against reprisal for making protected disclosures specified under 41 USC 4712(a). These protected disclosures include information that the employee reasonably believes is evidence of:

• gross mismanagement of a Federal contract or grant
• a gross waste of Federal funds, 
• an abuse of authority relating to a Federal contract or grant,
• a substantial and specific danger to the public health or safety, or
• a violation of law, rule, or regulation related to a Federal contract or grant.

The (former) contractor employee alleged that he was harassed, subjected to retaliation, and ultimately terminated  for reporting to the BOP certain violations that he believed were not being adequately addressed by the contractor. The Justice Department press release announcing this investigation did not provide the contractor name or the alleged impropriety.

The OIG determined that the former contractor employee did indeed make a protected disclosure and that the protected disclosure was a contributing factor in the subsequent imposition of a six-month probationary period and ultimate termination. The OIG did not find clear and convincing evidence that the contractor would have either imposed the probationary period on the employee or terminated the employee in the absence of the protected disclosure. Accordingly, the OIG concluded that the employee suffered reprisal at the hands of his employer, the Government contractor.

It is now up to the Bureau of Prisons (BOP) to resolve the matter. BOP could disagree with the OIG findings which as a practical matter, won't happen. Possible remedies include any or all of the following:

1. Order the contractor to take affirmative action to abate the reprisal
2. Order the contractor to reinstate the person to the position that the person held before the reprisal, together with compensatory damages *including back pay), employment benefits etc.
3. Order the contractor to pay the complainant an amount equal to the aggregate amount of all costs and expenses (including attorney's fees) that were incurred in connection with bringing the complaint.

Although details are sketchy, it sounds like the contractor engaged in disparate treatment with this whistleblower - the six-month probationary period was not something the contractor exacted on any other employee.

Specialized Experience Requirement does not Unduly Restrict Competition

The State Department issued a solicitation for a 'personal services contractor' to serve as the Justice Adviser to support the Bureau of International Narcotics and Law Enforcement Affairs (INL) in Costa Rica. The solicitation required that applicants have a law degree from an American Bar Association (ABA) accredited law school plus two years of work experience as a lawyer or judge.

The solicitation was challenged by an individual who maintained that the law degree and work experience requirements were unduly restrictive of competition. The protester's argument went something like this:

1. There is little correlation between being a lawyer with two years of legal work experience and successful performance of the Justice Adviser requirement.
2. The solicitation does not require the awardee to practice law or litigate cases
3. The State Department's position that only a lawyer can perform the work with the "requisite gravitas" is illogical.
4. A non-lawyer with "deep justice sector experience and ability" can also be successful.

The State Department had answers for all of these contentions but essentially argued that its minimum qualifications were reasonably necessary because the successful candidate should have the same credentials as the lawyers, prosecutors, and judges who the advisor will be mentoring, training, and advising. The advisor will be working directly with prosecutors and judges in case-based mentoring and acting as a subject matter expert. Further, the law degree ensures experience in the rule of law continuum, from education to professional accreditation, to practice and provide a backdrop for making recommendations and planning.

The Comptroller General handling the appeal concluded that the State Department articulated a reasonable basis for the law degree and experience requirement. A requirement for specialized experience is not unduly restrictive of competition where an agency reasonably concludes that the experience is necessary for the performance of the agency's requirements.

FedBizOps Has Been Replaced by Beta.Sam.Gov

FedBizOps has been retired and replaced by  beta.sam.gov. Even though it says "beta", it is currently active for contracting opportunities. Eventually, SAM (System for Award Management) will be integrated and 'beta' will be dropped out of the URL.

According to GSA (General Services Administration), the new system provides better security, data quality, and convenience, will reduce barriers for doing business with the Government, reduce reporting burden, and increase transparency into federal spending. We haven't had sufficient time to use the new system so we cannot attest to the added functionality.

GSA (General Services Administration) has posted a Quick Start guide for using the new system. This guide links to training materials and videos regarding searching and following notices posted by the Government.

Migration is straight-forward. Your login/password credentials from FedBizOps works in the new beta.sam.gov system.

Deficiencies Identified in Audits of Subcontractors

Last March, the GAO (Government Accountability Office) issued a report soundly critical of DOE (Department of Energy) contractors' oversight of their subcontracts. GAO found that DOE did not always ensure that contractors audited their subcontractors incurred costs as required by contract terms. GAO's review of 43 incurred cost assessments and audit reports identified more that $3.4 billion in subcontract costs had not been audited and some subcontractors remained un-audited or un-assessed for more than six years (important due to the six-year statute of limitations. You can read our recap of that report which includes a link to the full GAO report here. GAO made a number of recommendations including one that would have DOE develop procedures to require its offices to step up its monitoring activities of prime contractors responsibilities to audit their subcontracts.

Last week, DOE's Office of Inspector General (OIG) issued its own report on this matter - focusing on its largest contractor, Bechtel National. Bechtel National is the prime contractor for DOE's $16.8 billion waste treatment plant that began in 2000 and is still under construction. Since inception, Bechtel has paid nearly $2 Billion in reimbursements under 400 flexibly-priced subcontracts. Bechtel's contract requires it to either conduct audits of subcontractors' costs or arrange for such an audit to be performed by the cognizant Government audit agency through the contracting officer.

You can probably guess what's coming. The OIG "determined" that Bechtel has not been fulfilling the requirement withing its contract to audit flexibly-priced subcontracts. Specifically, thee OIG found that since contract inception (2000), a significant number of flexibly-priced subcontracts have not been audited. The OIG also found that the few audits that have been performed have not always been effective or reliable. In fact, Bechtel did not even have an accurate inventory of subcontracts subject to audit. The OIG concluded that these deficiencies increased the risk of passing on unallowable costs from its subcontractors to DOE and ultimately the taxpayer.

The OIG's finding of ineffective and unreliable audits were based on findings from Bechtel's corporate internal audit staff and reviews by DOE that the audits did not comply with GAGAS (Generally Accepted Government Auditing Standards) and that there were deficiencies in performing the audits. GAGAS deficiencies included independence, auditor qualifications and continuing education, quality control and assurance, audit planning, supervisory review, and documentation of audit planning and results.

The OIG made a number of recommendations to which Bechtel concurred.

The full DOE-OIG audit report can be accessed here.

Financial Help for Small Businesses - Proposed Legislation

Last week, two bills were introduced in the Senate that are designed to ease financial burdens experienced by small businesses who contract with the Government. According to Senator McSally (AZ) who introduced these two bills, small businesses comprise more than 99 percent of all businesses and the U.S. economy depends upon their success. However, small business owners have been complaining about the length of time it takes to receive payment; "... they were being forced to shoulder the cost of federal work for up to a month...".

The Accelerated Payments for Small Business Act would require federal agencies contracting with small businesses to pay those businesses within 15 days, instead of the current 30-day standard. There are regulations in place already to expedite payments to small businesses and from our perspective, they are working fairly well but sometimes inconsistently. This Bill would add statutory authority to the practice and presumably, interest on late payments would begin accruing after 15 days which is not the case now.

The Small Business Payment for Performance Act would require federal agencies to make a partial payment of at least 50 percent to contractors when the project requires adjustments that differ from the original scope of work. This applies to construction contracts where, because of changes in the terms or scope of contract performance, contractors are required to submit REAs (Requests for Equitable Adjustment). This Bill, if enacted, would require the Government to prepay 50 percent of the amount of the equitable adjustment while the REA is being negotiated. Not sure that this Bill will progress too far as it represents significant exposure for the Government. Many (perhaps most) REAs are settled as less than contractors' requests. A lot of them are denied completely.

Contractor Pays $110 Thousand to Resolve Billing System Deficiencies

Eagle Alliance, a partnership involving Northrop Grumman, has paid $110 thousand to resolve FCA (False Claims Act) allegations that it improperly billed the Government for computer hardware. In doing so, the Company did not admit liability - the settlement only resolved some outstanding allegations.

Eagle Alliance had (has?) a contract to provide new computer hardware to NSA (National Security Agency). According to the settlement agreement, in 2012 and 2013, Eagle Alliance billed the Government twice for the same equipment. Moreover, investigations alleged that Eagle Alliance had billed the Government for used computer equipment as if they were new.

These allegations were filed by a former Eagle Alliance employee under the qui tam (whistleblower) provisions of the FCA. Those provisions permit private individuals with knowledge of fraud to sue on behalf of the Government for false claims and share in any recoveries. The former employee will receive nearly $19 thousand of the settlement.

As fraud cases go, this is a very small one and it seems to us like it was a billing issue rather than a scheme to defraud the Government. After all, no individual person benefited, it didn't go on for years and years, and what is $110 thousand to Northrop Grumman?

This case does illustrate the importance of maintaining an adequate billing system, especially for companies in the Government contracting environment. It also illustrates that fact that employees are aware of the qui tam provisions of the FCA and are constantly looking for transgressions that can yield a bit payday for themselves.

GAO Publishes Fiscal Year 2019 Bid Protest Statistics

The Competition in Contracting Act of 1984 requires that the Comptroller General (i.e. the GAO or Government Accountability Office) report to Congress each instance in which a federal agency did not fully implement one of its recommendations in connection with a bid protest decided in the prior fiscal year and each instance in which a final decision in a protest was not rendered within 100 days after the protest was files. The Act also requires a summary of the most prevalent grounds for sustaining protests during the preceding year.

The GAO just published its Fiscal Year 2019 Bid Protest Annual Report to Congress and reported that there we no instances in which a Federal agency did not fully implement one of its recommendations or in which a final decision was not rendered within 100 days. As for the most prevalent grounds for sustaining protests, the GAO reported the following:

• Unreasonable technical evaluation
• Inadequate documentation of the record
• Flawed selection decision
• Unequal treatment
• Unreasonable cost or price evaluation

The GAO also pointed out that a significant number of protests filed do not reach the decision stage because agencies voluntarily took corrective action in response to the protest rather than defend the protest on its merits.

Overall, the number of bid protests filed in fiscal year 2019 were down 16 percent from the prior fiscal year. Correspondingly, the number of cases heard and the number of protests sustained also decreased from the prior fiscal year. Even the sustention rate wen down from 15 percent in fiscal year 2018 to 13 percent in fiscal year 2017.

The GAO report did not attempt an analysis of why the reduced number of bid protest filings. There are probably many factors affecting these percentages. Perhaps the Government is doing a better job at awarding contracts; improving its technical evaluations, improving documentation, performing reasonable cost or price evaluations, etc. In all cases, a bid protest is alleging that someone in the Government did not do an adequate job when awarding a contract. The obvious solution is to improve the source selection process by whatever means available; employment retention, training, etc.

Capital Assets as Direct Contract Costs

According to the Defense Contract Audit Agency (DCAA), auditors have found, on many occasions, contractors who have included the cost of unamortized value of capital equipment in contract cost presentations. Unfortunately, the Agency isn't any more specific as to what transpires. Perhaps a contractor has bought something specific for its Government contracts and has been depreciating the cost but finds that the asset is no longer needed so it simply charges whatever has not yet been depreciated direct to a Government contract. Ours is a little bit of conjecture but the example seems to fit DCAA's cautionary note. In any event, the Agency is directing its auditors to question the costs - the undepreciated balance of capital equipment.

Not so fast. There could be situations where charging unamortized costs direct to a contract (or contracts) is appropriate. For example, a contracting officer might have approved the accounting practice. There might be specific contractual coverage that allows the practice. The costs could be related to special tooling and test equipment that was duly approved by the Government for allocation to Government contracts.

In the case of special tooling and test equipment, the Government has already approved the purchase and contractors are required to find an allocation methodology that allocates those costs to all benefiting contracts. If a contractor allocates the cost over the anticipated production run but production is curtailed for some reason, it might be totally appropriate to charge the remaining costs to the final contract.

$18.8 Million Settlement for Winning a Contract Under False Pretense

The U.S. sells defense articles and services to foreign countries when the President finds that to do so will strengthen the security of the U.S. and promote world peace. These are called Foreign military sales or FMS for short. FMS contracts require prime contractors to be American companies and also, requires that the American companies perform a substantial portion of the work.

ABS Development Corporation is a Delaware corporation based in New York. It is also a subsidiary of Ashtrom International, Ltd. of Israel. The Army awarded an FMS contract to ABS for renovation of the Haifa shipyard in Israel without realizing that ABS was not American owned but instead owned by an Israeli conglomerate. It fact, ABS when out of its way to hide its true ownership.

To exacerbate matters, ABS didn't perform any of the work, allowing its parent company, Ashtrom, to do it all.

When the allegation of foreign ownership surfaced, investigators from DCIS (Defense Criminal Investigative Service) and from the Army CIC (Criminal Investigation Command) initiated investigations

As a result of these investigations, ABS agreed to pay $2.8 million and forgo $16 million in potential administrative claims to settle allegations it violated the False Claims Act by fraudulently obtaining FMS contracts. ABS agreed to the $18.8 million settlement without admitting liability.

More information on this case is available through the Justice Department press release.

Three Guilty Pleas in Bribery Scheme

Here's a guy that both paid and accepted bribes.

Last September, John Winslett, a construction manager for an unnamed contractor performing work at Schofield Barracks (Hawaii) pleaded guilty to paying bribes totaling more than $100,000 to two Army contracting officials in exchange in order to steer more than $19 million in contracts to his company. He also pleaded guilty to accepting $723 thousand in kickbacks from a subcontractor in exchange for assigning work to that subcontractor (online source).

The two Army contracting officials got nailed as well. Last May, an Army civilian at Schofield Barracks pleaded guilty to accepting "tens of thousands" of dollars in bribes from Mr. Winslett. in exchange for sensitive internal DoD procurement information and otherwise use his position to benefit Mr. Winslett's company (online source).

Then, most recently, a third person involved in this scheme also pleased guilty to accepting more than $100 thousand in bribes from Mr. Winslett consisting of automobiles, cash, and firearms, in exchange for favorable treatment toward the contractor (online source).

Do you know what your employees are up to? How much autonomy do you give employees to carry out the purposes of your company? Is there any accountability? Is there any oversight? Too often, company representatives that are "bringing in the business" are left alone and even heralded. Later, some of them are exposed for their less than honest dealings, like Mr. Winslett was.

The Government has similar problems - employees who accept 'gifts' or even outright bribes in exchange for steering work to a certain contractor and usually, these schemes flourish because of a lack of oversight.

Contract Awards based on Best-Value Trade-off Criteria

When a solicitation provides for a best-value trade-off, the source selection official retains discretion to select a higher-priced, but technically higher-rated submission, if doing so is in the Government's best interest and is consistent with the solicitation's stated evaluation and source selection scheme. The source selection official has broad discretion in determining the manner and extent to which he/she will make use of technical, past performance, and cost/price evaluation results, and this judgment is governed only by the tests of rationality and consistency with the stated evaluation criteria. A protester's disagreement with an agency's determinations as to the relative merits of competing proposals, or disagreement with its judgment as to which proposal offers the best value to the agency, does not establish that the source selection decision was unreasonable.

A recent GAO decision illustrates this point. GSA issued a solicitation for janitorial services. The award was to be made on a best-value trade-off basis considering two factors, price and past performance with past performance significantly more important than price. Ultimately, an award was made to Sparkle Janitorial Services whose bid was about a percent higher than the Government estimate and whose past performance rating was excellent. Another bidder, Richen Management LLC protested the award arguing that GSA's best-value trade-off and source selection decision was unreasonable. Richen's bid was significantly less than either the Government estimate or Sparkle's winning bid by 24 percent. However, its past performance rating, which according to the solicitation's evaluation criteria was only rated at satisfactory.

Sparkle had been assigned a past performance rating of excellent based on two reference ratings of excellent and one of very good. In contrast, Richen's past performance rating of satisfactory was based on two reference ratings of satisfactory, one of very good, and one unsatisfactory. The unsatisfactory rating was based on a contract that had been terminated for cause (usually meaning failure to perform).

Richen challenged GSA's best-value trade-off analysis, arguing that GSA failed to justify its decision to select a higher-rated, higher-priced proposal as the best value to the Government. GAO however did not agree and did not sustain the protest, citing the inherent judgmental and discretionary aspects to best-value trade-off procurements. GAO noted that GSA analyzed both price and past performance, and ultimately determined that it was willing to pay a higher price for a higher-rated past performance.

The full GAO decision can be accessed here.

Nondiscrimination Rules for Spouses of Protected Veterans

Here's something else to be mindful of when the Labor Department shows up to perform compliance reviews.

The Labor Department's Office of Federal Contract Compliance Program (OFCCP) released a new directive related to the employment of military spouses, to ensure that federal contractors are not discriminating against spouses of protected veterans.

Protected veteran are those who are disabled, recently separated, active duty wartime or campaign badge, or an Armed Forces service medal veteran.

Military service usually requires multiple and frequent relocation, often creating an employment history that can add challenges to a spouse's ability to obtain and maintain employment and to achieve career goals. While discrimination safeguards for spouses of protected veterans are not new, they can be overlooked. That is why the OFCCP will require its compliance officers to inquire with federal contractors during onsite investigations about their treatment of veteran spouses.

Here are the questions that employees of federal contractors can expect during a compliance examination.

1. Are you a spouse of a protected veteran?
2. Do you have any coworkers who are spouses of protected veterans?
3. Do you have any observations concerning the treatment of spouses of protected veterans?

In addition, the OFCCP's compliance officer (CO) will offer compliance assistance with drafting a written policy and ensure that the contractor understands its obligations with respect to spouses of protected veterans.

The sample compliance policy provided with the new directive reads as follows:

It is [Federal Contractor, Inc.’s] policy not to discriminate because of a person’s relationship or association with a protected veteran. This includes spouses and other family members. Also, [Federal Contractor, Inc.] will safeguard the fair and equitable treatment of protected veteran spouses and family members with regard to all employment actions and prohibit harassment of applicants and employees because of their relationship or association with a protected veteran.

Suspensions and Debarments in Fiscal Year 2018

The suspension and debarment (S&D) process is one of the tools used to protect the federal government from fraud, waste and abuse by preventing non-responsible contractors from doing business with the Government. Suspensions, proposals for debarment, and debarments are visible to the public (through SAM) as well as terminations of such actions.

Both suspension and debarment have the same effect - no more Government contracts (or subcontracts, for that matter). A debarment is considered more serious than a suspension because of its duration. A suspension is a temporary measure that doesn't usually exceed 12 months and is used pending the completion of an investigation or legal proceeding. Debarment usually lasts three years and is usually based upon a conviction.

Causes for suspension or debarment include such things as fraud, embezzlement, theft, falsification of records, false statements, violating Federal criminal laws, violation of antitrust statutes, willful, or a history of, failure to perform, knowingly failure to disclose violation or criminal law, or any other cause that affects 'responsibility'.

The Inter-agency Suspension and Debarment Committee (ISDC), among its various responsibilities, compiles annual statistics of each agency's suspension and debarment activities. The Committee just published stats for fiscal year 2018. The tally included 480 suspensions and 1,334 debarments. The Defense Department accounted for about a quarter of the suspensions about a third of the debarments - unsurprising given that significance of the Department's contracting dollars. Two agencies had no debarments or suspensions during the fiscal year; Nuclear Regulatory Commission and the Social Security Administration. Of course, this doesn't mean there were no contractors worthy of suspension and debarment, as the Committee pointed out in its report. It could mean that the contracting community was not adequately trained to utilize such tools.

The number of debarments has more than doubled since 2009 when the Committee first began tracking the numbers. The number of suspensions, on the other hand, has not changed significantly.

The full report is available here.

Transparency and Fairness in Civil Administrative Enforcement Actions

The President issued three executive orders recently that will have some impact on Government contractors and Government contracting in general. On Tuesday, we reported on a new Executive Order (EO) rescinding a previous EO that gave incumbent employees the right of first refusal when a successor contractor takes over on a service contract (see New Executive Order Rescinds Rules on Offering Incumbent Employees Right of First Refusal). Yesterday, we reported on one designed to ensure that agencies don't circumvent the regulatory process by issuing guidance that have the effect of law or regulation (see Improving Agency Guidance Documents). Today we intend to cover the essence of the third EO entitled "Promoting the Rule of Law Through Transparency and Fairness in Civil Administrative Enforcement and Adjudication".

What is this all about?

The rule of law requires transparency. Regulated parties must know in advance the rules by which the Federal Government will judge their actions. The Freedom of Information Act generally prohibits an agency from adversely affecting a person with a rule or policy that is not correctly promulgated - to avoid the inherently arbitrary nature of unpublished ad hoc determinations.

The EO points out that "Unfortunately, departments and agencies in the executive branch have not always complied with these requirements. In addition, some agency practices with respect to enforcement actions and adjudications undermine the APA's (The Administrative Procedure Act) goals of promoting accountability and ensuring fairness."

Under the new EO, no person should be subjected to a civil administrative enforcement action or adjudication absent prior public notice of both the enforcing agency's jurisdiction over particular conduct and the legal standards applicable to that conduct. Moreover, the Federal Government must foster greater private-sector cooperation in enforcement, promote information sharing with the private sector, and establish predictable outcomes for private conduct.

There are a number of definitions included in the EO. One that caught our attention was "unfair surprise" meaning a lack of reasonable certainty or fair warning of what a legal standard administered by an agency requires.

There are many more requirements placed upon Executive Agencies in this EO. For example, guidance documents (discussed yesterday) cannot be used to impose new standards of conduct on persons and any agency seeking to collect information from a person about the compliance of that person must ensure that such collections of information comply with the provisions of the Paperwork Reduction Act.

The full EO can be accessed here.

Improving Agency Guidance Documents

Yesterday we reported on a new Executive Order (EO) rescinding a previous EO that gave incumbent employees the right of first refusal when a successor contractor takes over on a service contract (see New Executive Order Rescinds Rules on Offering Incumbent Employees Right of First Refusal). There have also been two other recent EOs that will be of interest to Government contractors. Both are aimed at reigning in executive agency regulatory powers. We will discuss one today and the other tomorrow.

Agencies adopt regulations that impose legally binding requirements on the public. The Administrative Procedure Act (APA) generally requires agencies, in exercising their responsibility, to engage in notice-and-comment rule-making to provide public notice of proposed regulations. This allows interested parties to have their concerns and comments considered prior to final regulations.

Agencies may clarify existing obligations through non-binding guidance documents, which the APA exempts from notice-and-comment requirements. Yet agencies have sometimes used this authority inappropriately in attempts to regulate the public without following the rule-making procedures of the APA. The new EO notes that even when accompanied by a disclaimer that it is non-binding, a guidance document issued by an agency may carry the implicit threat of enforcement action if the regulated public does not comply. Sometimes the public has insufficient notice of guidance documents, which are not always published in the Federal Register or distributed to all regulated parties.

Under this new EO, agencies must develop processes and procedures for issuing guidance documents. These policies and procedures must, at a minimum, (i) clearly state on each guidance, that it does not bind the public (except as authorized by law or incorporated into a contract), (ii) provide for the public to petition for withdrawal or modification, and (iii) provide for a period of public notice and comment if the guidance is considered significant. Note, the term "significant guidance is defined in the EO).

DoD contractors are probably aware of the "DOD Procedures, Guidance and Information document; 400 pages of guidance to supplement the FAR and the DOD FAR Supplement. This document would presumably be an example of the type of guidance called out under this EO.

The full EO can be accessed here.

New Executive Order Rescinds Rules on Offering Incumbent Employees Right of First Refusal

Last week, the President issued an Executive Order (EO) that revoked one of President Obama's first Executive Orders; Nondisplacement of Qualified Workers Under Service Contracts.

This EO is called "Improving Federal Contractor Operations by Revoking Executive Order 13495.

The now rescinded EO required that successor Federal contractors in certain circumstances offer a right of first refusal of employment to employees employed under the predecessor contract.

The new EO requires the Labor Department, the FAR Councils and heads of all executive departments and agencies to promptly move to rescind any orders, rules, regulations, guielines, programs, or policies implementing or enforcing the old EO. Also, the Labor Department must terminate, effective immediately, any investigations or compliance actions based on the old EO.

The 'right of first refusal' has been criticized by some contractors for being unnecessary. As a matter of practice, successor contractors would naturally want to hire qualified employees of the incumbent contractor. However, the rule also discouraged contractors from hiring workers that might be better suited for a particular job. Additionally, successor contractors felt compelled to offer employment to unsuitable candidates just to avoid a Labor Department investigation.  That concern was born out by some extreme Labor Department enforcement actions.

Since this EO has immediate application, it is likely that there are solicitations on the street that contain the old EO provisions and FAR provisions implementing that EO. The now rescinded rules might have an impact on what offerors are willing to bid.

Real-Time Labor Evaluations

"Real-time labor evaluations" is just a fancy name for floorchecks. Most Government contractors with cost-type contracts are intimately familiar with the term 'floorchecks'. For those not familiar with either term, they refer to unannounced visits by contract auditors to interview employees as a means of testing the validity of labor charges.

We last wrote about floorchecks (or real-time labor evaluations) in 2014 but that particular post is buried very deep in the blog archives so its time to revisit the subject - particularly when DCAA (Defense Contract Audit Agency) has increased and is increasing the number of resources dedicated to the practice area.

Real-time labor evaluations focus on four elements of timekeeping and labor distribution.

• Evaluation of a contractors timekeeping procedures and internal controls.
• Employee interviews which encompass a discussion of the nature of work performed and observations of the employee's workstation.
• Analysis of employee timekeeping practices. In other words, how well do employees comply with established timekeeping procedures.
• Reconciliation of labor charges with subsequent payroll and labor distribution reports.

Everyone of the foregoing audit objectives is important. But perhaps the most important is the existence of an adequate timekeeping system. Without that, everything else will fail because the auditor will have no assurance that labor charges to Government contracts are proper.

Many companies have moved to an online platform for tracking time charges. Some of these are more robust than others. For example, it is important to the Government that whatever 'electronic' system is used retains an audit trail and requires supervisory review and approval before charges are processed against Government contracts. These modern systems are excellent but if a contractor is not enforcing policies that require employees to record their time as least once per day, or implement procedures that prevent users from sharing login/password combinations, the system will be determined to be inadequate.

Employee interviews can stress out employees. But the auditor focus is to make certain that the work being performed corresponds to the charge number being used. There have been many documented cases where that wasn't the case.

The reconciliation step is important to ensure that the physical observations of work being performed corresponds to the charges made against the contract. If the auditor has verified that the work being performed corresponds to the charge number but subsequently, the charge number was changed, the contractor will have some explaining to do.

For more information about timekeeping and timekeeping systems, check out these previous posts:

• Timekeeping Systems - Regulatory Requirements
• Identifying "Holes" in Your Timekeeping System
• DCAA Approved Timekeeping Systems (Hint: there is no such thing).

'Help Wanted' Advertising Costs

FAR (Federal Acquisition Regulations) 31.205-34, Recruitment Costs, contains an exception to the general prohibition against advertising costs found in FAR 31.205-1. It provides that the cost of help-wanted advertising is allowable so long as the advertising

• describes specific positions or classes of positions 
• does not include material that is not relevant for recruitment purposes, such as extensive illustrations or descriptions of the company's products or capabilities.

So you see, while the first bullet is an objective criteria, the second one requires the exercise of judgment. And this is why contract auditors consider help wanted advertising to be a "sensitive audit area". DCAA (Defense Contract Audit Agency) has developed some guidelines to assist in determining whether help-wanted advertising is allowable. Here are some of those:

1. Building up a backlog of resumes would be unallowable since it is not filling specific job openings. Auditors might ask to look at company responses to job applicants to determine whether the advertising is for specific job openings.
2. Advertising which is excessive in relation to the number and importance of the positions, or in relation to the practices of the industry is unreasonable and therefore unallowable. Auditors might review the size of the add, its length and frequency, effectiveness of the advertising in terms of responses by qualified personnel and the number of hires.
3. Help wanted advertising should be limited to the following. Anything more should be reviewed further.
• Position description
• Description of the compensation and fringe benefits
• Qualifications of the applicant
• Opportunities for advance
• Brief description of the company and its work
• Conservative illustrations that do not evidence promotion of the sale of products or fostering its image
• Name of the company, conservatively presented in relationi to the other information in the advertising.

Auditors are also instructed to review any corollary help-wanted advertising costs that might include the cost of photographs, art and design work, and radio and television tapes.The same criteria apply regardless of whether the work was outsourced or performed in-house.