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.

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.

Regulatory Reform Task Force

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Specifically, these task forces were to focus on regulations that (i) eliminate jobs or inhibit job creation, (ii) are outdated, unnecessary, or ineffective, (iii) impose costs that exceed benefits (iv) create a serious inconsistency or otherwise interfere with regulatory reform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policies, or (v) derive from or implement Executive Orders or other Presidential directives that have been subsequently rescinded or substantially modified.

So how is everyone doing?

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

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

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

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

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

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