Know Your Contract Terms

The allowability of costs under Government contracts are generally covered by the cost principles contained in FAR Part 31 and the FAR supplements issued by various departments. For example, the DOD FAR Supplement (DFARS) adds additional coverage for public relations, compensation, independent research and development and bid and proposal costs, insurance and indemnification, legislative lobbying costs, external restructuring costs and most recently, costs related to counterfeit electronic parts and suspect counterfeit electronic parts. The Department of Energy FAR Supplement (DEAR) contains additional coverage for independent research and development and bid and proposal costs, insurance and indemnification, pre-contract costs, professional and consultant service costs, and costs relating to legal and other proceedings. The NASA FAR Supplement (NFS) adds additional coverage for compensation and pre-contract costs. And we could go on and discuss other agencies added requirements.

But if you stop at the FAR and the FAR Supplements, you might be setting yourself up for potential cost disallowances because often times, contracts will contain provisions that restrict contractors from claiming certain types of costs on Government contracts.

One of the first things a Government contract auditor will do upon commencing an audit, oddly enough, is to brief the Government contracts to determine whether there are any restrictions on costs that go beyond FAR Part 31 cost principles. And, such restrictions are not difficult to find. Take for example FAR 52.222-2 regarding the Government's willingness to pay overtime. The clause itself requires contracting officers to insert an amount. Usually the amount is zero and if its left blank, the wording of the clause means the amount is "zero".

Facilities Capital Cost of Money (FCCM) is generally allowable but there are certain contracts (SBIRs, for one) that do not allow contractors to claim FCCM. A lot of contractors are unaware such restrictions exist and indiscriminately apply FCCM to all of their contracts.

Some agencies set salary caps for key individuals working on their contracts (or allocated to their contracts) and when they set such caps, also require contractors to obtain pre-approval for any salary increases. In all cases, these caps are set well below the FAR ceiling limitations. Contractors are still free to pay whatever they want, they just can't claim the entire amount on Government contracts of the particular agency.

Another common restriction found in contractual documents involves insurance costs. Often times, the Government will indemnify contractors for certain risks making additional insurance coverage unnecessary. When that happens, contracts will specify that insurance is unallowable even though according to FAR, insurance costs are allowable. Sometimes however, insurance costs are still allocated to contracts through a home office allocation where details are not readily discernible. Contractors need to be aware of such prohibitions and need to understand the components that comprise home office allocations to avoid allocating unallowable costs to Government contracts.

Know the Solicitation Provisions - Convict Labor

A contractor filed a $1.4 million claim against the Army Corps of Engineers due to differing site conditions. The claim was denied and has been appealed to the ASBCA.

The contract was for construction of military housing. The contractor alleged that it was unable to get qualified carpenters onto base due to a change in base access policies. The contractor asserted that when it bid, it intended to use people with felony convictions and those in a pre-release program at a nearby prison. However, the Convict Labor clause (FAR 52.222-4) was included in the contract. The contractor claimed that it incurred increased administrative costs resulting from the need to process "hundreds" of applicants and perform "hundreds" of job interviews, all because it could not employ convict labor.

The problem with the claim was not that the allegations were not true but with the difficulty by the contractor to support the charges. During the course of the Government's review, the contractor

• could not support its contention that there was a change in base access policies
• its intentions to employ carpenters with felony convictions
• increased costs due to processing and hiring new employees.

Claims are a tricky business where contractors must prove entitlement and quantum and the burden of proof rests solely upon contractors. In this case, the contractor may have been unfamiliar with the prohibition concerning convict labor. Had it included such intentions in its bid, the Government probably would have called them out - perhaps give them a chance to modify their bid. In any event, the costs related to interviewing and processing new hires would be the same regardless of the labor pool source.

Watch your Contract Periods of Performance

During a recent incurred cost audit, DCAA (Defense Contract Audit Agency) took exception to about $300 thousand in costs charged to Government Contract Task Orders. These charges were booked to the Task Orders after the period of performance had ended. The auditor cited FAR 31.201-2(a)(4) as a basis for taking exception to the costs. That particular FAR provision states that a cost is allowable only when the cost complies with, among other things, the terms of the contract. The terms of the contract specified a specific period of performance so the auditor reasoned that any costs incurred outside the period of performance did not comply with contract terms.

In assessing the transactions, the auditor stated that they had "reviewed vendor invoices, purchase orders, payment records traced to (the contractor's) bank statements and conducted inquiries with (the contractor) regarding claimed expenses and documentation reviewed." Something did not ring true with that statement. If the auditor had really examined purchase orders, they would have noted that in all cases, the purchase orders were issued prior to the period of performance end. Although the vendor invoices were dated after period of performance, the binding obligation on the contractor was the date of the purchase order. Yet, no mention was made of these facts in the audit report.

The contracting officer, when shown the same information as was provided the auditor, immediately discarded the auditor's recommendations. So, other than wasting a lot of Government and contractor time, there was no cost impact to the contractor as a result of the audit finding.

The point we want to make here however is not that the Government was wrong, but to alert everyone to the potential that auditors will be comparing the dates of transactions to contact periods of performances. If you are aware of any such potential, we recommend that you contact your contracting officer, explain the situation, and obtain his/her approval before the auditors arrive.

Statement of Objectives (SOO)

Last week we posted a discussion differentiating between Statements of Work (SOW) and Performance Work Statements (PWS). If you missed that discussion, you can read it here and you probably should before reading the rest of this article. After publishing the blog, someone asked us about SOOs (Statement of Objectives) and wondered how SOOs differed from SOWs and PWSs. So, we thought we had better cover that subject as well.

Lets start with the FAR definition. Its found in FAR (Federal Acquisition Regulations) 2.101. FAR states that a Statement of Objective or SOO is " ... a Government-prepared document incorporated into the solicitation that states the overall performance objectives. It is used in solicitations when the Government intends to provide the maximum flexibility to each offeror to propose an innovative approach" to whatever it is the Government wants to buy.

So then, a SOO would be an alternative to a performance work statement (PWS). It is a summary of key agency goals, outcomes, or both , that is incorporated into performance-based service acquisitions in order that competitors may propose their solutions, including a technical approach, performance standards, and a quality assurance surveillance plan based upon commercial business practices. It gives contractors a lot of latitude in responding to a Government need.

SOOs do not normally address each work breakdown structure (WBS) element, but each WBS element should be traceable to do something in the SOO. For example, a SOO may instruct the bidder to address his engineering approach. That is not a particular WBS element, but several WBS elements might be created to break out the engineering tasks.

Compared to standardized formats for SOWs and PWSs, there is no predetermined catalog of content that must be included in a SOO. Contracting officers are instructed to make it be a "concise, cogent document of appropriate length".

Recall our grass cutting example from the aforementioned post. Under a SOW, the requirements might specify that the contractor cut the grass every two weeks. Under a PWS, the requirement might specify that the grass length be maintained at a height of one to two inches. Under a SOO, the requirement might simply state "do something with this piece of land to make it pleasing to the eye and inexpensive to maintain.

Statement of Work (SOW) vs Performance Work Statement (PWS)

Two terms that are sometimes confused and often used interchangeably are "Statement of Work" (SOW) and "Performance Work Statement" (PWS). We've used the terms interchangeably ourselves. These terms are not the same and in Government contracting, carry very specific meanings. Think of it this way; PWSs are SOWs for performance-based acquisitions. Not all SOWs are PWSs.

An SOW is the portion of a Government contract which establishes and defines all non-specification requirements for contractors' efforts either directly or with the use of specific cited documents. A PWS on the other hand is a statement of work for performance-based acquisitions that describes the required results in clear, specific and objective terms with measurable outcomes. We'll explain these terms further.

Statement of Work (SOW)

 An SOW specifies the work to be done in developing or producing the goods to be delivered or services to be performed by a contractor. According to DoD, the preparation of an effective SOW requires both an understanding of the goods or services that are needed to satisfy a particular requirement and an ability to define what is required in specific, performance-based, quantitative terms. A SOW prepared in explicit terms enables offerors to clearly understand the government's needs. This facilitates the preparation of responsive proposals and delivery of the required goods or services.

After contractor selection and contract award, the contract SOW becomes the standard for measuring contractor performance. As the contracted effort progresses, the government and the contractor will refer to the SOW to determine their respective rights and obligations. In this respect, the SOW defines the contract and is subject to the interpretations of contract law. In a dispute concerning performance, rights, or obligations, clarity in defining requirements is of utmost importance.

Performance Work Statement (PWS)

The PWS states requirements in general terms of what (result) is to be done, rather than how (method) it is done. The PWS gives the contractor maximum flexibility to devise the best method to accomplish the required result. The PWS must be written to ensure that all offerors compete equally. The Government must remove any features that could restrict a potential offeror. However, the PWS must also be descriptive and specific enough to protect the interests of the Government and to promote competition. The clarity and explicitness of the requirements in the PWS will invariably enhance the quality of the proposals submitted. A definitive PWS is likely to produce definitive proposals, thus reducing the time needed for proposal evaluation.

When a contract is awarded, the PWS is legally binding upon the contract and the Government. It provides an objective measure so that both the contractor and the Government will know when increments of work are completed and payments are justified.

Example

The Government issues a solicitation for grass cutting. Under a SOW, the requirements might specify the contract cut the grass every two weeks. The contractor has to mow the grass every two weeks, whether it grew or not. Under a PWS, the requirements might specify that the grass length be maintained at a height of between one and two inches. Its up to the contractor how to meet that requirement.

The Importance of Site Investigations - Construction Contracts

All construction projects have risks. Although participants in the process attempt to limit or minimize those risks, there is no contract that eliminates all risks. In Government contracting, the Government makes it incumbent upon bidders and winning contractors to take reasonable steps to understand the full scope and breadth of the project.

FAR 36.503 requires contracting officers to insert the "Site Investigation and Conditions Affecting the Work" clause in solicitations and contracts for fixed-priced construction. This clause, located at FAR 52.236-3 and states:

The contractor acknowledges that it has taken steps reasonably necessary to ascertain the nature and location of the work, and that it has investigated and satisfied itself as to the general and local conditions which can affect the work or its costs, including but not limited to

• conditions bearing upon transportation, disposal, handling, and storage of materials

• the availability of labor, water, electric power, and roads

• uncertainties of weather, river stages, tides, or similar physical conditions at the site

• the conformation and conditions of the ground

• the character of equipment and facilities needed preliminary to and during work performance.

The Contractor also acknowledges that it has satisfied itself as to the character, quality, and quantity of surface and subsurface materials or obstacles to be encountered insofar as this information is reasonably ascertainable from an inspection of the site, including all exploratory work done by the Government, as well as from the drawings and specifications made a part of this contract. Any failure of the Contractor to take the actions described and acknowledged in this paragraph will not relieve the Contractor from responsibility for estimating properly the difficulty and cost of successfully performing the work, or for proceeding to successfully perform the work without additional expense to the Government.

The Government assumes no responsibility for any conclusions or interpretations made by the Contractor based on the information made available by the Government. Nor does the Government assume responsibility for any understanding reached or representation made concerning conditions which can affect the work by any of its officers or agents before the execution of this contract, unless that understanding or representation is expressly stated in this contract.

The existence of this clause makes it very difficult for contractors to submit equitable adjustment claims when project costs increase because of conditions that were knowable, but unknown to the contractor, at the time of contract award. It makes it especially critical for bidders to conduct comprehensive site investigations in the process of estimating costs (and performance periods).

Contractor, Identify Yourself!

This is humorous and weird at the same time. We had to check to make sure it wasn't April Fools day. The Department of Defense just issued interim regulations (with a solicitation for comments) requiring contractor employees to proactively identify themselves. Specifically, DFARS 211.106 states:

Agencies shall require that purchase descriptions for service contracts and resulting requirements documents, such as statements of work or performance work statements, include language to provide a clear distinction between Government employees and contractor employees. Service contracts shall require contractor employees to identify themselves as contractor personnel by introducing themselves or being introduced as contractor personnel and by displaying distinguishing badges or other visible identification for meetings with Government personnel. In addition, contracts shall require contractor personnel to appropriately identify themselves as contractor employees in telephone conversations and in formal and informal written correspondence.

DoD issued the regulation, effective immediately, due to urgent and compelling reasons. Wonder what those were? For you contractor employees out there, look for an internal memo on proper (i.e. contractually required) telephone answering techniques. Read the entire regulation here.

What Takes Precedence - Contract Terms or FAR?

From time to time, we encounter situations where contract terms and the Federal Acquisition Regulation conflict with one another. When these conflicts involve costs charged or allocated to Government contracts, it becomes necessary to determine which document takes precedence.

The general rule is that the contract takes precedence if it is more restrictive than the FAR. If the contract is less restrictive, FAR takes precedence. In other words, the contract terms cannot allow a cost that is:

• Unreasonable;
• Improperly measured, assigned and allocated to the contract; or
• Unallowable in accordance with specific cost principles.

A recent case involved a contract that restricted certain kinds of insurance that the Government would reimburse. That particular insurance was allowable under FAR cost principles but since the contract contained the prohibition on reimbursement, the contractor voluntarily deleted it from its pool of G&A costs.