Costs Incurred During a Strike Period

FAR (Federal Acquisition Regulations) does not provide specific guidance with respect to the allowability of costs during strike periods.

FAR 22.101-1(b) requires that Governmental Agencies (e.g. DCMA and DCAA) remain impartial concerning any dispute between labor and contractor management and not undertake the conciliation, mediation, or arbitration of a labor dispute. Later provisions in the same FAR section, contracting officers are instructed, in the event that labor disputes give rise to work stoppage, to impress upon contractors that they shall be held accountable for reasonably avoidable delays. Further, all costs incurred during strikes will be carefully examined to ensure recognition of only those costs necessary for performing the contract in accordance with the Government's "essential interest".

Despite its stated neutrality in resolving labor disputes, the Government will be anything but neutral when in comes to paying for strike related costs. Costs directly attributable to the strike, which would not have been incurred otherwise, such as extra security guards, special legal expense, arbitration costs, etc. will all come under close scrutiny and may not be fully reimbursable (even as an indirect expense). Costs which are abnormally higher during the strike period, such as recruitment, training of new employees, etc is another category that will get a lot of attention by contract auditors. Remember, contractors have an affirmative duty to mitigate all strike-related costs.

Costs of a continuing nature will be evaluated based on a number of factors including reasonableness, the extent to which subsequent production makeup operations were undertaken to maintain production schedule, the actions taken to minimize costs during the period and any other factors that have a bearing on the expeditious settlement of the labor dispute.

Sometimes the Government will insist that a contractor accumulate strike related costs and allocate them over the period of the resulting collective bargaining agreement. For example, if the collective bargaining agreement is three years, strike related costs would be accumulated and allocated over production for the next three years.

New Professional Practice Guide (PPG) for Performing Incurred Cost Audits

Section 809 of the 2016 NDAA (National Defense Authorization Act) established the Section 809 Panel to research and recommend improvements to the acquisition process. Section 803 of the 2018 NDAA required the Defense Department to adopt commercially accepted standards of risk and materiality in the performance of incurred cost audits. The Section 809 Panel, with the help of DCAA (Defense Contract Audit Agency) and others, drafted a Professional Practice Guide (PPG) to develop a risk assessment framework intended to 'manage' DoD's risk and materiality approaches to incurred cost audits.

DCAA has now uploaded part of the the PPG to its public website. The Agency included only Chapters 1 and 2 plus Appendix A. It did not include Chapter 3 which deals with internal controls. The PPG has been publicly available for many months but has been buried in the Section 809's 600-page volume 3 final report. DCAA intends to adopt the new risk-based sampling framework for sampling incurred cost proposals and to adopt the materiality standards for performing the incurred costs audits found in the PPG. The first materiality criteria involves the selection of contractors to audit. Once the selection has been made, the second materiality criteria involves what cost elements withing the incurred cost proposal should be audited.

The Professional Practice Guide can be found under the Guidance tab at dcaa.mil. Or, go directly there by clicking here.

Contractor Charged for Selling Chinese-Made Body Armor to Federal Agencies

Arthur Morgan got himself a GSA (General Services Administration) contract to supply ballistic vests, helmets, riot gear, and other items to the military and to law enforcement agencies. All GSA contracts are subject to the Trade Agreements Act which requires that all products listed on GSA contracts must be manufactured domestically or in a designated country. China is one of many countries not on the "designated country" list.

Various agencies placed orders with Mr. Morgan, nine orders in fact totaling $640 thousand. The Navy was one of those agencies that bought helmets from Mr. Morgan. The problem however was that Mr. Morgan was not manufacturing the helmets nor was he purchasing them from domestic suppliers or from suppliers in a designated country. He was purchasing them from China.

In a series of email exchanges with the Navy over meeting agreed upon delivery schedules, Mr. Morgan falsely advised the Navy that he had a factory in southern Virginia, that the helmets for the order were in production there and the the delays were due to a back-order of materials need for helmet production. However, on the same day that the Navy sent Morgan a partial payment of $127 thousand, Morgan made a payment to a Chinese company that manufactures the exact same helmet as Morgan ultimately delivered to the Navy in the amount of $68 thousand. Now that's a nice profit - based on just the partial payment amount, Morgan earned nearly 100 percent profit. We wonder what the profit percentage amounted to after the Navy made the full payment.

The scheme finally unraveled but the Justice Department is not saying how. Mr. Morgan has been criminally charged and is currently under house arrest (perhaps a flight risk?). Criminal charges do not mean he is guilty. A trial or plea agreement will determine his guilt or innocence at a later date.

The Justice Department press release on this matter can be read or downloaded here.

Senator Rand Paul Releases Fall 2019 Edition of "The Waste Report"

Late last month, Senator Rand Paul, who is also the chairman of the Federal Spending Oversight and Emergency Management Subcommittee for the Homeland Security and Governmental Affairs Committee, released the Fall 2019 edition of "The Waste Report". This periodic report looks at how the Government spends taxpayer dollars and identifies eight examples of wasteful spending totaling $230 million. Outside of salaries and wages, social security, medicare, and other social program payments, the primary vehicle for the Government's spending is through contracts and grants. The eight examples of wasteful spending in this current report are rooted in Government contracts and grants. Here's a couple of examples.

The Government purchased textbooks for Afghan schoolchildren to develop, implement, and scale up a nationwide early grade reading curriculum and instruction program. An audit by the Office of Inspector General for Afghan Reconstruction found that the textbooks had significant quality deficiencies, such as loose or blank pages, misspellings, and low-quality paper. A few hundred thousand were still sitting in warehouses but the OIG learned that there were no plans to distribute them. Moreover, many schools reported that because of the poor quality, the books were no longer in usable condition. The grantee responsible for printing and distributing the books blamed parents, students, and school officials for the problem of books falling apart.

The NIH (National Institute of Health) has spent $4.6 million studying the connection between drinking alcohol and winding up in the emergency room. The connection between drinking and driving should be common sense but NIH doesn't trust common sense and doled out money to study the connection between drinking alcohol, hurting yourself or somebody else, and winding up in the ER. So what have scientists concluded? That there is a correlation between drinking and getting hurt. Who in the Government thought that spending $4.6 million for this study was an good use of taxpayer dollars?

The Waste Report is only 16 pages and makes some interesting reading. Don't blame the contractors though. They're just providing a service for what the Government wants to buy.

NDAA 2020 - Post-Award Explanations for Unsuccessful Offerors

The President has now signed the 2020 NDAA (National Defense Authorization Act). A 19 page summary of its key provisions prepared by the Senate Armed-Services Committee can be read or downloaded here. We have been discussing some of the procurement related provisions buried in the bill. So far we've discussed a new requirement for sole-source offerors to provide cost or pricing data it the Government determines that it is necessary to ensure fair and reasonable pricing, a requirement for GAO to study the extent to which DoD is awarding contracts when contractors refuse to provide adequate support, and the repeal of the Defense Cost Accounting Standards Board (DCASB).

Today we will continue the series with a new requirement concerning feedback to unsuccessful offerors. The provision reads, in part:

... FAR shall be revised to require that with respect to an offer for a task order or delivery order in an amount greater than the simplified acquisition threshold and less than or equal to $5,500,000 issued under an indefinite deliver-indefinite quantity contract, the contracting officer for such contract shall, upon written request from an unsuccessful offeror, provide a brief explanation as to why such offeror was unsuccessful that includes a summary of the rationale for the award and an evaluation of the significant weak or deficient factors in the offeror's offer.

There are several things to note here. First, the simplified acquisition threshold currently sits at $150 thousand but there is a FAR proposal on the table that will increase that threshold to $250 thousand. Second, the request must be in writing. It will take a little more than a phone call to get the contracting officer to act. Thirdly, only a "brief explanation" from the contracting officer is required. Don't expect a comprehensive report on the weaknesses found in your offer. Finally, don't expect a comparative analysis of your offers with other offers or with the winning offers. Only a summary of weak or deficient factors is required.

This could reduce the number of bid protests because sometimes, information secured through a bid protest is the only way for offerors to fully understand why they were not selected for a particular contract.

Security Services - In-House or Outsourced?

For contractors employing in-house security protection, DCAA (Defense Contract Audit Agency) thinks you might be paying too much for the services provided. In guidance to its auditors, DCAA writes:

There are now a number of commercial companies that provide plant security protection services, including well-trained uniformed guards. These security service companies often provide efficient plant protection services for less than the cost of such services performed by the contractor's own security employees. Accordingly, evaluation of costs of security guards at the contractor's facilities should include a comparison between the cost of the in-house services and the cost of engaging an outside security service firm. When excessive or unreasonable costs are questioned as a result of the above cost comparison, it is the contractor's responsibility to demonstrate the reasonableness and to justify the costs.

In other words, DCAA thinks it would be cheaper to outsource security guard services then to hire and maintain in in-house security force.

Perhaps the Agency is correct but its certainly not a universal phenomenon.  We have seen a case where a contractor replaced in-house security guards with outsourced services at lower costs. However, the in-house guards were part of a collective bargaining agreement (i.e. "unionized") while the outsourced guards were not. That differential alone represented most of the savings. But all things being equal, outsourced services might be more expensive because the company providing the services need to make a profit.

We would also note that cost is not the only consideration in deciding whether to build an in-house security function or outsource it. Sometimes, contractual requirements may dictate security requirements. Also, in many cases, security personnel serve multiple roles within the company (such as fire protection or drivers).

We recommend that contractors employing in-house security personnel be prepared to demonstrate the reasonableness of the method chosen to provide those services. Without such analysis, its too easy to be "second-guessed" by a contract auditor.

Incumbent Contractor Thinks the Energy Department Released its Proprietary Data

The Department of Energy issued a request for offers (RFO) for integrated facilities management services. Included in that RFO was information related to the incumbent contract and contractor such as listings of facilities management personnel with details concerning their names, positions, basis of pay (i.e. Service Contract Act (SCA) wage employees, collective bargaining agreement employees or salaried/exempt employees), brief descriptions of their duties and work locations.

Centerra Integrated Facilities Services, LLC, the incumbent contract for part, but not all of the work, filed a GAO bid protest arguing that the Energy Department improperly published its proprietary information as part of the solicitation and that such release will cause it competitive harm in its effort to win the solicited requirements.

GAO didn't buy Centerra's argument.

The GAO recognizes the right of a firm to protect its proprietary data from improper release in a solicitation. However, the record must show (i) that the information is proprietary in nature, (ii) that it was submitted to the Government in confidence, (iii) that its development involved significant time and expense, (iv) that it includes material or concepts that could not be independently obtained from publicly available literature or common knowledge and (v) that the protester will be competitively prejudiced by the release of the information.

In its decision, the GAO discussed its findings with regard to each of these conditions. For example, it noted that the information was not proprietary. Of Centerra's 32 employees, nine were listed as key employees whose names and positions were publicly available in the existing contract. The remaining 23 employees were SCA or collective bargaining agreement employees who's wages were also publicly available. Centerra further argued that its staffing strategy was exposed and this provided insight into how it configured its staff to perform the predecessor contract. The GAO found that the information provided by the Energy Department did not include the number of hours worked by each employee, whether they are full-or part-time, or how the staff is actually configured on a day-to-day basis.

Finally, GAO noted that the contemplated contract is estimated to be four times that of Centerra's existing contract as the Energy Department is consolidating facilities management services at all of its Pacific Northwest facilities while Centerra's existing contract involves one headquarters building in Portland, OR. Thus, the limited data pertaining to Centerra's work "cannot provide any realistic competitive advantage to any other firm in light of the vastly different scale and complexity of the solicited requirements.

DoD Inspector General to Audit the Award of a Border Wall Contract

How often does the DoD Office of Inspector General get involved with the source selection process? Not often, we guess, but the Agency has decided to review a case where outside influences may have tainted a contracting decision. This isn't your typical GAO bid protest where a losing bidder challenges the award of a contract to a competitor but is based on a request coming from Congress.

Earlier this month, Representative Bennie Thompson, Chairman of the Committee on Homeland Security sent a letter to the DoD-OIG (Office of Inspector General) requesting a review of a $400 million contract awarded by the Army Corps of Engineers (COE) to Fisher Sand and Gravel Company to design and build border infrastructure in Arizona. The contract was awarded on December 2, 2019 and the Chairman's request came two days later on December 4th.

The Chairman's letter noted that the President had personally repeatedly urged the Corps to award construction contracts to Fisher and that one of his key aides leading border construction projects also supported Fisher's selection. However, up until the most recent selection, Fisher had not received any of the $2.5 billion in border wall construction projects because its proposals "did not meet the operational requirements of U.S. Customs and Border Protection and its prototype project came in late and over budget. The Chairman's letter went on to note that the President's actions raise concerns about the possibility of inappropriate influence on the Corps' contracting decisions.

The OIG, acknowledged the request on December 12th, indicating that it has "decided to initiate an audit of the solicitation and award of this contract" to determine whether the Corps of Engineers made the award in accordance with federal procurement law and regulations. Elsewhere, the OIG noted that it had significant experience evaluating the award of DoD contract and that it would conduct a full audit of the award of this particular contract.

For his part, Mr. Fisher, the President and CEO of Fisher Sand and Gravel "... hopes the DoD sees the decision came down to two things including the value and technical aspect of the proposed project". He also added: "I have no relationship with the President".

Man Gets 78 Months in Prison for Fraudulently Obtaining Small Business Set Aside Contracts

This is an update to a posting from last year where we reported a Federal Grand Jury indictment of a Government contractor who used companies with "straw owners" who qualified as disadvantaged individual or as a service-disabled veteran but who did not actually control the companies. See Large Contractor Awarded $200 Million in Contracts Set Aside for Small Businesses. Brian Ganos operated three construction companies with straw owners and was able to fraudulently obtain small business program certifications to with more than $260 million (up from the $200 million previously reported) in contracts to which they were not entitled.

Mr. Ganos was just sentenced to six and a half years in federal prison for his role in the scheme. The sentencing also involved fines, restitution, and supervised release after he serves prison time. See Wisconsin Man Sentenced to 78 Months for Fraud Scheme Involving Over $260 Million in Small Business Contracts.

The scheme went on for a long time - about 12 years. During the investigation, Mr. Ganos and his co-conspirators also actively engaged in efforts to conceal the scheme and obstruct investigators. Five of those co-conspirators, four individuals and one corporation, have also pleaded guilty to felony charges in connection with Ganos's scheme.

As a result of the scheme, Ganos undermined the small business programs and deprived honest small businesses of opportunities to become established. Additionally, Ganos used various means to launder proceeds of the fraud to enrich himself. He agreed to forfeiture of $2 million, a ski condo, an office building, two timeshares, and five classic cars.

Contractor Loses Out on Significant Profits due to "Marginal" Performance Reports

The U.S. Department of Energy's Office of Inspector General's latest Semiannual Report to Congress (April 1 - September 30, 2019) included CPAR (Contractor Performance Assessment Ratings) summaries for the contractor responsible for building its $17 billion vitrification plant at the Hanford Nuclear Site, Bechtel National. Specifically, the report included the following summary:

Downgraded Contractor Performance Rating in False Claims Act Investigations: As a result of ongoing OIG (Office of Inspector General) criminal and civil investigations, the Department’s Office of River Protection issued and published downgraded Contractor Performance Assessment Ratings for calendar year (CY) 2018 and the beginning of CY 2019 regarding a prime contractor at the Hanford Site’s Waste Treatment and Immobilization Plant. Specifically, the prime contractor was downgraded from “satisfactory” to “marginal” for the “schedule” category. Consistent with the previously issued CY 2017 Contractor Performance Assessment Ratings, the prime contractor’s “cost control” category was evaluated and remains at a “marginal” rating. The assessing official also stated that “given what is known about the contractor’s ability to perform in accordance with the contract or order’s most significant requirements, I would NOT recommend them for similar requirements in the future.” The ongoing investigations are being coordinated with the U.S. Attorney’s Office, Eastern District of Washington. 

We don't know what those ongoing investigations entail but we do know back in 2017 that the Justice Department notified all Bechtel (and employees of its subcontractors) to preserve all information and emails regarding charging for labor, recording time worked, overtime, and related matters.

Perhaps another factor in these downgraded ratings is Bechtel's failure to audit its subcontracts as required by the terms of its prime contract. The OIG issued a report last September that found Bechtel had failed to audit subcontracts as far back as 18 years putting taxpayers at risk for overpayments. The OIG estimated the potential overpayments could approach $160 million.

What do these downgraded classifications mean to Bechtel (or any Government contractor, for that matter). It could jeopardize future work and it could reduce incentive payments (profits).

In this case, as noted above, the contracting officer stated that he/she would not recommend Bechtel for similar requirements in the future. Perhaps this threat is a bit hollow as there are not too many $21 billion vitrification plant construction projects going on right now or planned.

The reduced fee is a viable threat. For the last two years, Bechtel has received less than half of the available incentive fee pool which equates (if reports are accurate) to about $200 million per year.

NDAA 2020 - Repeal of the Defense Cost Accounting Standards Board (DCASB)

Back in 2015 when Congress was deliberating the 2016 NDAA (National Defense Authorization Act), it created the Defense Cost Accounting Standards Board (DCASB). The DCASB was to be an independent board within the Office of the Secretary of Defense. The seven-member board was to be chaired by the Department's CFO with three Government and three private sector members. Its purpose was to review and recommend changes to existing CAS standards (Cost Accounting Standards) and to implement new standards for Defense contractors to achieve uniformity and consistency in measuring, assigning, and allocating costs to DoD contracts.

The idea of a DCASB was essentially a shot at the CASB (Cost Accounting Standards Board), who, at the time, had become moribund. By 2017, the CASB had not met for more than five years. Recently however, the CASB has been resuscitated and is now meeting somewhat regularly. Hopefully those meetings involve more than getting together for a cup of coffee - we haven't seen substantive meeting minutes yet.

The Section 809 Panel last year recommended that the DCASB be eliminated. Volume 2 of its 3-Volume report included the following:

Creation of the Defense CASB is an attempt to solve the problem of the non-functioning CASB. Adding another regulatory organization is the wrong solution. Government and industry representatives who spoke with the Section 809 Panel expressed they do not support creation of a Defense CASB. Stakeholders are concerned by the many unanswered questions raised by creating this board, including whether the new board will be biased toward DoD issues, and if the two boards will create competing sets of CAS. Creation of a Defense CASB would almost certainly be counter-productive.

DCAA (Defense Contract Audit Agency) also recommended that it be abolished as did the original CASB.

The end has come. Section 810 of the 2020 NDAA repeals 10 USC 190 that authorized the DCASB. We're not entirely sure but we don't think that the DCASB ever formulated in the first place.

NDAA 2020 - GAP to Review Price Reasonableness Determinations

We are spending a few days reviewing provisions of the 2020 NDAA (National Defense Authorization Act) that just emerged from conference committee and which the President said that he would sign. Yesterday we began with a provision (Section 803) designed to severely curtail the situations where contractors can dictate prices by refusing to provide cost or pricing data necessary for contracting officers to establish that the quoted prices are fair and reasonable. If a contractor does not provide the requested data, it becomes ineligible for award. But there are exceptions to the rule as we noted in yesterday's post. But will contracting officers utilize those exceptions to any significant degree? Well, the very next section, Section 804, would certainly discourage its use.

Section 804 requires GAO (Government Accountability Office) of the success of securing data relating to the price reasonableness of sole-source offers. This required report must include the following:

1. the number of, and justification for, any waiver of requirements for submission of certified cost or pricing data for sole source contracts for spare parts.
2. the number of, and justification for, any exception to the requirements for submission of certified cost or pricing data for sole source contracts for spare parts.
3. the number of contracts awarded for which a request for cost or pricing data, including data other than certified cost or pricing data, to determine price reasonableness was denied by an offeror at the time of award
4. actions take by the Secretary (of Defense) if an offeror refused to provide requested data  including

• whether the contracting officer included a notation in the system used by the Federal Government to monitor or record contractor past performance regarding the refusal of an offeror to provide such data
• any strategies developed by the Secretary to acquire the good that was the subject of a contract for which the offeror refused to provide such data in the future without the need for such a waiver.

With this level of GAO oversight, it would seem to us that contracting officers will, or be urged to do everything in their power to avoid granting waivers.

NDAA 2020 - Offerors May Need to Provide Cost or Pricing Data to Support Commercial Pricing

The House and Senate conference committee have agreed on a final version of the fiscal year 2020 National Defense Authorization Act (NDAA). A 19 page summary of its key provisions prepared by the Senate Armed-Services Committee can be read or downloaded here. Over the next few posts, we will be discussing procurement related provisions that have been included in the compromise report - none of which, by the way, appear in the Senate's summary. We also intend to highlight some of the provisions that were included in the respective Senate and House versions of the 2020 NDAA but did not make the final cut.

Section 803 of the House version did make the final cut. The purpose of Section 803 is to deal with the problem when contractors refuse to provide the Government with cost or pricing data to support their proposal prices. Last year, the GAO (Government Accountability Office) issued a report concluding that DoD's process for determining whether an item can be purchased commercially and at a fair and reasonable price, is often long and challenging. One of its findings was that the Defense Department was unable to obtain contractor data when adequate market information was not available. Ultimately, contracting officers need to determine that a price is fair and reasonable to the Government, irrespective of how the product or service was priced.

Section 803 attempts to deal with that problem by requiring contractors proposing commercial items to also provide cost or pricing data to the contracting officer when, based on market research, that item will be solely procured by the Defense Department. There are two key provisions within Section 803 and one exception.

Provision 1: Contracting officers shall not determine the price of a contract or subcontract to be fair and reasonable based solely on historical prices paid by the Government.

Provision 2: In the event the contracting officer is unable to determine proposed prices are fair and reasonable by any other means, an offeror who fails to make a good faith effort to comply with a reasonable request to submit data, is ineligible for award.

Exception: The contracting officer may still procure from a recalcitrant contractor if the head of the contracting activity determines that it is in the best interest of the Government to make the award to that offer based on consideration of pertinent factors, including

1. the effort to obtain the data
2. availability of other sources of supply of the item or service
3. the urgency or criticality of the Government's need for the item or service
4. reasonableness of the price of the contract, subcontract, or modification based on information available to the contracting officer
5. rationale or justification made by the offeror for not providing the requested data
6. risk to the Government if award is not made

Look for FAR regulations to implement this provision in the near future.

$100 Thousand Overpayment Resulting from 'Alleged' Timecard Fraud

There are two fundamental ways of engaging in timecard fraud. One method is charging hours to something other than is actually being worked. This isn't that uncommon, unfortunately. It usually involves the cooperation of management at some level and a breakdown in internal controls designed to keep that from happening. Having employees charge time to a cost-type contract when they are really working on a fixed-price contract is one example.

The second type of timecard fraud is charging time but not showing up for work, or arriving late, or leaving early. One well documented case involved a Government contractor who's employees charged overtime on their timesheets but were no where to be found at the work site. The increasing trend to allow employees to work at home is concerning here and employers (contractors) need to ensure robust internal controls and ways to measure performance (remember, 'trust' is not an internal control).

An example of a case involving the second type of timecard fraud was reported by the Justice Department yesterday in one of their press releases. The case involves a subcontractor employee who worked in a sensitive compartmented information facility (SCIF). On several occassions over a two-year period, this subcontractor employee reported to her employer that she was working inside the SCIF. However, the badge reader to gain access to the SCIF showed that she was not where she said she was. As a result, investigators estimate that the Government was overcharged by more that $100 thousand. That figure is likely significantly understated.

The unusual aspect of this case is that the indictment was handed down by a Federal grand jury. Hundred thousand dollar fraud does not usually involve a grand jury. Perhaps there is some national security implications involved here. The fact that the employee was also detained pending a detention hearing also suggests that there is more involved here than just timecard fraud.

More Contracting Opportunities?

Last week, companion bills were introduce in the House and Senate with the name "Freedom from Government Competition Act of 2019. The purpose of the two bills is to increase opportunities for private businesses to provide goods and services to the Federal Government without the threat of "unfair competition" from a Government agency.

According to the narrative accompanying the bills, 1.2 million federal Government employees are in positions that are commercial in nature. "At a time when the annual deficit is nearly $800 billion and the national debt is over $23 trillion, the Government cannot simply afford to prolong an inefficient bureaucracy and have the Government providing goods and services better left to private businesses.

This bill would codify an official Government policy that the Government should not compete with its citizens, but instead rely on the private sector for commercially available goods and services. It also requires that every federal agency review all commercial activities to assure performance is providing the best value to the taxpayer and to implement an appropriation action or reform, regardless of whether the activity stays in-house or is transitioned to the private sector. In other words, agencies must provide justification one way or another.

Although the stated purpose of the bill is not to mandate privatization, it should encourage a system where private businesses could compete alongside the federal Government for the opportunity to perform certain functions at a lower cost to taxpayers.

Can private industry do things cheaper, better (more thorough), and quicker than Government employees? That is really an unanswerable question. As they say, you can have some combination of two, but not three. The question is what is most important to taxpayers. And that's where someone will need to weigh costs and benefits.

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.

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.

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.

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.

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.