Friday, December 6, 2019

Adequate Support and Record Retention

On Wednesday, we reported on a DoD-OIG (Department of Defense, Office of Inspector General) audit report that found contracting officers had not sustained the findings in DCAA audit reports based on claimed costs that were not adequately supported (see DCMA May Have Reimbursed Contractors $219 Million without Any Support for Amounts Claimed). The basis for the DCAA (Defense Contract Audit Agency) findings was FAR (Federal Acquisition Regulation) 31.201-2(d) which reads as follows:
A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable [FAR] cost principles … The contracting officer may disallow all or part of a claimed cost that is inadequately supported.
This particular provision was added to the cost principles in 1996 (FAC 90-39). The drafters commented that although the requirement, and the contracting officer's authority to disallow inadequately supported costs were considered to be implicit in the cost principles, explicit guidance was necessary because agencies were having difficulty because the FAR was silent on the issue.

FAR 4.7 contains contractor record retention requirements. It requires contractors to make available records and other supporting evidence to satisfy contract negotiation, administration and audit requirements for three years after final payment, or the period specified in FAR 4.705, whichever period expires first. So, for example, FAR 4.705-2(a) requires contractors to maintain payroll records for four years. Obviously, for most contracts, four years will lapse before the "three years after final payment" milestone. The minimum period can also be extended by contract clause. So, for example, the Allowable Cost and Payment clause at FAR 52.216-7 provides for an extension to record retention minimums when a contractor fails to meets its due date for submitting incurred cost proposals.

Contract auditors sometimes apply FAR 31.201-2(d) inappropriately. We have seen situations where this clause was cited, not because the contractor failed to retain records, but because the auditor was not satisfied with the sufficiency of the supporting data that was provided. Most of the time this involved a judgment call by the auditors because they don't want to take the time or make the effort to consider "alternative evidence" that may be available. The thing to keep in mind here however, is that if the Government invokes 31.201-2(d), it is well established that the burden is on the Government to prove that inadequately unsupported costs are unallowable.

Thursday, December 5, 2019

Allegation that Contractor Overcharged the Government by $1.3 Billion

The Justice Department announced yesterday that it was enjoining a whistleblower suit charging Navistar Defense LLC with FCA (False Claims Act) violations by submitting fraudulent invoices to support inflated prices for commercial parts under its contract to supply MRAP (mine-resistant, ambush-protected) vehicles to the Government. Although the Justice Department press release made no mention of the amount in question, other news articles have reported the fraud could be an eye-popping $1.3 Billion on contracts totaling $9 Billion.

In 2007, the Marine Corps awarded Navistar a contract to build several hundred MRAP vehicles to replace the Humvee, which proved to be vulnerable to roadside explosive devices. Navistar ultimately provided nearly 3,000 MRAPs under the contract. In 2009, as the focus of the war effort transitioned from the paved roads and flat terrain of the Iraqi deserts to Afghanistan's rocky terrain, the Marine corps sought to upgrade its MRAP vehicles with a modified Independent Suspension System (ISS). During the course of contracting negotiations for the ISS, the Marine Corps asked Navistar to provide evidence of prior commercial sales of the various parts that made up the ISS to ensure that the prices paid were fair and reasonable. The lawsuit alleges that Navistar Defense knowingly submitted fraudulent invoices that falsely purported to show prior, comparable commercial sales to conceal the inflated prices it was charging the Marine Corps. In reality, these "prior sales" never occurred.

The lawsuit was initially filed under the qui tam or whistleblower provisions of the False Claims Act by a former contracts manager for Navistar. He alleged that on more than one occasion, Navistar employees "created forged sales histories to support the inflated prices it charged the Government". Moreover, this deliberate fraud was known to and supported by Navistar's executive leadership. Navistar, it is alleged, didn't just mark these parts up a little bit. The company charged the Marine Corps double the commercial prices and double the prices it sold under other contracts.

The claims alleged in the lawsuit are allegations only. The fact that the Government enjoined the lawsuit suggests that there is substance to the allegations.

Wednesday, December 4, 2019

DCMA May Have Reimbursed Contractors $219 Million Without Any Support for Amounts Claimed

The DoD's Office of Inspector General (DoD-OIG) released a report this week that evaluated how Government contracting officers resolve audit reports issued by the Defense Contract Audit Agency (DCAA) when the Agency "Disclaims" an audit opinion. For non-auditors reading this post, a disclaimer of opinion is issued when the audit firm or audit agency is unable to perform all procedures necessary to obtain sufficient appropriate evidence to form a conclusion on whatever is being audited. In the context of incurred cost audits, this usually means that the contractor could not or would not provide the necessary supporting documentation for amounts claimed.

This OIG report (dated November 26, 2019 but not publicly released until December 2, 2019) concluded that contracting officers (namely the Defense Contract Management Agency or DCMA) may have reimbursed $219 million to DoD contractors that were not allowable costs on Government contracts.

DCAA questioned $219 million based on the contractor's failure to provide supporting documentation for claimed costs as FAR 31.201-2, Determining Allowability, requires. The DCMA contracting officer gave the money back for the following reasons:

  • The required time periods for the contractor to retain any of the records had lapsed
  • The amounts questioned in the audit report were identical to those disputed before the ASBCA (Armed Services Board of Contract Appeals) which rendered the costs allowable.
  • No action was required because DCAA had disclaimed an audit opinion.

The OIG reported that none of these reasons adequately justified the contracting officers' decision not to sustain DCAA questioned costs. First of all, regardless of the minimum record retention time periods specified in the FAR (Federal Acquisition Regulations), the contractor had an obligation to support its costs claimed on Government contracts. Second, contracting officers must take appropriate action in response to DCAA question costs, regardless of the type of audit opinion rendered.FAR 42.705 prohibits the contracting officer from resolving (or otherwise allowing) any questioned cost without obtaining adequate documentation on the costs.

Concerning the ASBCA precedent, the OIG stated that although the contracting officer stated the circumstances were identical, the contracting officer failed to include any evidence to demonstrate that the outcome of the ASBCA cases would apply to the amounts questioned by DCAA. Therefore, the contracting officer failed to adequately justify why he did not sustain the questioned costs.

As a result of this review, DCMA agreed to revisit the contracting officers' decisions to determine the allowablility of questioned costs and will take reasonable steps to recoup any unallowable costs identified during its review. In addition, DCMA will assess whether action should be take to hold the contracting officers accountable for non sustaining any DCAA questioned costs determined to be unallowable.

Tuesday, December 3, 2019

Federal Fumbles - 5th Edition

Oklahoma Senator James Lankkford has released the fifth volume in his Federal Fumbles series. These publications report on specific examples of wasteful federal spending and regulations that lead to wasteful spending.

This particular edition gives a lot of coverage to the "broken budget process" and the need to end Government shutdowns once and for all. That would be a goal that any Government contractor can endorse as Government shutdowns and the threat of shutdowns play havoc with the orderly conduct of contract performance.

Not every example in Volume 5 is related to wasteful contract spending. A lot of it relates to grants for questionable research (like $1.7 million to Russia to study the Steller seal lion in Russia or $114 thousand to study corporations that existed in Russia prior to the 1917 revolution). Some of the identified waste is not exactly spending but tax loopholes where the alcohol industry, racehorses, movies, and NASCAR have tax breaks written into the tax code. And then there's the Puerto Rican death scam where beneficiaries of social security recipients keep receiving social security payments after the recipient has died because Puerto Rico will not share death information with the Social Security Administration.

On the contracting side of wasteful spending, the report identifies a number of issues related to the Government's propensity to buy COTS (commercial off-the-shelf) items. In a number of cases COTS are lower priced but also lower quality and not equipped to do their intended jobs. The report sites one example where NSSA (National Nuclear Security Agency) purchased $5 capacitors for its nuclear weapon modernization program before finding they didn't meed quality control standards. The fix? Replacing the $5 capacitor in 370 nuclear weapons at a cost of $725 million. Also cited in the report is the Air Force expenditures related to keeping decades-old aircraft flying. Many parts are not longer in production so the Air Force needed to re-engineer those parts at significant cost.

FEMA (Federal Emergency Management Agency) gets special coverage for its "promptness over integrity" behavior. Just because FEMA is efficient in getting money out the door in the aftermath of disasters, doesn't mean that the money is being spent efficiently, effectively, or economically. This report recommends more training be given to FEMA employees on ways to detect fraud, wast, abuse, and how to reduce improper payments.

You can read this latest edition of Federal Fumbles as well as the four previous editions here.

Monday, December 2, 2019

Keeping Small Businesses "Small" for Longer Periods

There are many Government programs that accrue benefits to small businesses. One of the best, for small businesses at least, are the Federal Government's small business contracting and subcontracting goals and the contracts that are "set aside" for small businesses to help the Government achieve those goals. SBA loans are also at the top of the list of Government benefits for small businesses. SBA loans offer working capital at reasonable rates - sometimes to small businesses who might not otherwise qualify for loans.

Small businesses are determined by their size, either headcount or revenue. Those standards vary widely depending upon industry. for example, the SBA size standards for food service contractors, accounting offices, and roofing contractors are $41.5 million, $22 million, and 16.5 million respectively. Manufacturing and Wholesaling businesses tend to be stated in terms of number of employees while Construction, professional, scientific, and technical service industries tend to be stated in sales dollars.

The problem with these rigid measurements is that a company that wins one or two major contracts might suddenly be removed from SBA benefits because they "size out". Sometimes however, those peaks are only temporary and when the contract(s) end, the companies revert to their normal sizes.

Last month, two Congressmen (a Democrat and a Republican) introduced legislation designed to mitigate the effects of sudden growth, protecting small businesses from being prematurely forced out of the small business category. The bill would grant small businesses additional time to transition before competing in the open market. According to the press release accompanying this bill,
SBA's (Small Business Administration) programs are designed to support small businesses that fall below certain size standards. Once those thresholds are exceeded, businesses face new challenges such as no longer being eligible to qualify for SBA loans, contracts and other assistance, and having to compete in the open market against much larger businesses. Sudden growth in the form of receiving one or two sizable contracts results in spikes in employee count, which in turn may place a small business prematurely out of the size standard and limits their time to grow.
This new bill, entitled "Caputring All Small Business Act of 2019" provides a solution to this problem. It does so by lengthening the calculation period used to determine average employee count from the preceding 12 months to 24 months.