Past Performance Reporting - Contractor Rebuttal Period to be Shortened

The FAR Councils are proposing to amend FAR to implement a provision of the 2013 NDAA (National Defense Authorization Act). The Act requires revisions to the acquisition regulations on past performance evaluations so that contractors are provided up to 14 calendar days from the date of delivery of past performance evaluations to submit comments, rebuttals, or additional information pertaining to past performance, for inclusion in the Government's database. The Act also requires that agency evaluations of contractor performance, including any information submitted by contractors, be included in the relevant past performance database not later than the date that is 14 days after the date of delivery of the information to the contractor.

This is a big change from current regulations. Under current regulations, contractors have a minimum of 30 days to submit comments, rebuttals, or additional information pertaining to past performance. Contractors frequently request and are granted extensions to this time period. Under the new regulations, the minimum of 30 days is reduced to a maximum of 14 days.

Under the current rules, many past performance evaluations never make it to the database or are so late that they're not considered current. To be sure, there has been a low compliance rate among contracting officers in preparing and uploading these evaluations. Compliance is improving but far from 100 percent. Another issue has been the ability of contractors, with poor evaluations, to drag things out for an extended period. So for example, a contracting officer might send a poor evaluation to a contractor for comment. The contractor asks for and receives extensions beyond 30 days, sometimes multiple extensions. The contracting officer, before posting the evaluation, must "adjudicate" any differences and adequately respond to contractor comments. This can take a long time, depending upon the response. Once there's a nice tidy package, the evaluation gets posted.

Under the revised regulation, the past performance evaluation goes live in 14 days or less. Contractors can send in their comments, complaints, rebuttals, or additional information at any time. However, the initial evaluation is still available for all to see. The system will also allow contracting officers to modify their initial evaluations, but how likely is that?

Past performance information is valuable for source selection officials. The idea behind this new regulation is to get such information to those officials while it is still current and useful. The Government's stated objective here is to enable current information to be shared quickly throughout the Government and ultimately ensure the Government does business with high performing contractors.

What is a "Sensitive" Consultant?

We feel that we're talking about consultant costs too much on these blog pages. But every time we think we have the guidance nailed down, something new comes up. The other day, some contract auditors informed a contractor that it was going to review "sensitive" consultant costs as part of their incurred cost audit. Of course we asked them what "sensitive" meant in the context of consultant costs. There answer was somewhat vague but went along the lines of "we'll know it when we see it". So, they proceeded to ask for details of all consultant costs as well as all of the 1099s the contractor issued (see our previous posting on 1099s).

Had the auditors known their own guidance, they would have been prepared to list "sensitive" consultant costs. According to the DCAA Standard Audit Program for reviewing consultant costs, sensitive consultants are defined as follows:

Prior audit experience and professional judgment must be exercised in determining which consultants are sensitive. Overall Agency audit experience in this area has resulted in the following ranking of consultant services (shown in decreasing order of sensitivity)

• lobbyists

• sales/marketing

• management services (excluding CPA firms)

• legal

• technical/engineering

• accounting, CPA firms, actuary, and insurance

• other

Regarding the highest risk category, lobbyists, DCAA (and other contract auditors) will access public websites to determine whether any registered lobbying firms are working on behalf of particular contractors. Just because a contractor shows up on a lobbying firm's list of clients however, doesn't mean that the lobbying firm engaged in lobbying activities on behalf of the contractor. Most lobbying firms perform non-lobbying activities in addition to lobbying activities so it is important to show the actual activities performed.

Formula for Measuring Compliance with the Limitations on Subcontracting Requirement

Here's a quick and easy formula to determine whether your proposal satisfies the limitation on subcontracting criteria, if such a limitation applies to the particular solicitation you're responding to. This one applies to contracts for supplies.

FAR 52.219-14(c)(2) requires that a contractor shall perform work for at least 50 percent of the cost of manufacturing the supplies, not including the cost of material. In a recent U.S. Court of Federal Claims case, the Court established with some finality, the formula for determining whether the limitation has been (or will be) complied with. We quote:

"What is obvious from this regulatory text is that the cost of materials is not included in the comparison of the cost of the work performed by the contractor to the overall cost of manufacturing of the the finished product.... What is less obvious from the text of this regulation, however, is the formula which should be used to determine compliance with the requirement. The parties vigorously dispute the issue; unfortunately for plaintiff, the only persuasive authority on this issue favors the government's ... position."

The GAO has adopted the following formula for determining whether a contractor is in compliance with the limitations on subcontracting clause in FAR 52.219-14(c)(2).

The total contract cost (including profit) less materials and subcontracting costs is to be compared with all subcontracting costs less the subcontractor's materials.

This means that the contractors total costs figure should include overhead costs, general and administrative (G&A) costs and profit. Thus, although the text of FAR 52.219-14(c)(2) might be assumed to require a simple comparison of the labor costs of the prime contractor and the labor costs of all of its subcontractors, both the GAO and the Small Business Administration (SBA) have found that a more comprehensive formula is required to determine compliance with this regulation.

In this case, the plaintiff attempted to rebut this formula by reference to various accounting standards set forth in the FAR or developed by the Financial Accounting Standards Board (FASB). None of the plaintiff's arguments are supported by case lae, decisions of the GAO, or decisions of the SBA. The general accounting principles cited by the plaintiff were less pertinent to this case than the decisions of the GAO and the SBA which have specifically addressed compliance with FAR 52.219-14(c)(2). The Court recognized the GAO's expertise in the area and deferred to its interpretation.

This formula really makes it a simple test to determine compliance with the regulations. The only possible unknown would be the breakout of material costs from your subcontractors' proposals. Generally, you would have required this level of detail during the bidding process.

Consultant Costs - Ensure the Completeness of Your Listing and Supporting Detail

Here's a "heads-up" for Government contractors that are about to go through an incurred cost audit by DCAA (Defense Contract Audit Agency) or another contract audit organization. The auditors will probably be asking for copies of the 1099s you issued.

As we've reported on these pages a number of times, the Government considers consulting costs to be a high risk audit area. The sensitivity of this area hearkens back to the 80s when several major contractors were caught up in scandals involving consulting costs and other were hard-pressed to demonstrate allocability of many consultant costs to Government contracts. This sensitivity resulted in a revision to the FAR cost principle governing consultant cost allowability (FAR 31.205-33) by adding a "minimal support" requirement. Whereas formerly the principle required "evidence of the nature and scope of the service furnished", the revised principle specifically required details of agreements, invoices, and work products.

Auditors, being the clever people that they are, have been using these requirements ever since to question any consulting costs that are not supported by the three-legged support test. And for many years, this are represented "easy-pickens'" as contractors worked to improve their internal control systems over the sufficiency of supporting data. It remains a lucrative area for questioned costs even today. The backlog of incurred cost audits are problematic in many ways for contractors (e.g. delayed payments). One issue facing contractors is employee turnover, upgraded accounting systems, and record retention. Although contractors may have been able to provide adequate support when the costs were booked, i.e. in 2005 and 2006 and 2007, it is always more difficult to find today. You can almost be certain that any audit will include testing of consultant costs.

Auditors will typically ask contractors for a listing of consulting costs, either as part of an initial data request or perhaps during the "walk-through". Now, auditors are being instructed to compare the consultant listing provided by contractors to the 1099s issued during the year and look for discrepancies. Specifically, the instructions read:

Obtain vendor listing and 1099-Misc. (block 7) forms and review for possible consultants not included on the listing provided by the contractor.

That's actually not a bad audit step and one that contractors can do themselves prior to the auditors' arrival to insure the completeness of any consultant listing provided the Government.

Gains and Losses on Disposition of Assets - Part III

Today we will conclude our series on how Government contractors are to treat gains and losses on disposition of assets by looking at a few miscellaneous events and considerations. Before we begin that however we should point out that when it comes to gains and losses, the Government also closely considers whether any losses are truly "allocable" to its contracts. Allocability is always a consideration in contracting but never more so than when contractors claim losses when disposing assets.The Government will do its best to determine whether those losses are proportional to the Government's use of those assets.This would involve historical and current analysis of both Government participation and contract type mix in the pool in which depreciation and gains are charged.

Paragraph (g) of FAR 31.205-16 covers mass or extraordinary sales, retirements and dispositions. It simply states that gains and losses shall be handled on a case-by-case basis. This means that you had better secure an advance understanding with your contracting officer before the event.

Paragraph (h) prevents contractors from charging gains and losses on non-depreciable property (e.g. real property) to the Government. Back in the 60s, a major Government contractor bought 80 acres of prime Silicon Valley land. It developed 40 of those acres for a plant and held the remaining 40 acres for future use. Every year, the contractor tried to include property tax (and other "upkeep" expenses) for the 40 vacant acres in its indirect expense rates. Every year, the Government questioned the amount. The contractor never did develop that land and many years later sold it to Intel at a huge gain. Too bad the Government didn't get to share in that gain.

Finally, paragraph (i) of FAR 31.205-16 covers "write-downs" of long-lived and identifiable intangible assets. Due to environmental damage, idle facilities arising from a declining business base, or other impairment, contractors sometimes write-down the carrying value of assets to a fair value. Once those assets are disposed of, the question arises as to whether the gain/loss should be calculated based on the original book value or the new fair value. FAR answers that by requiring that measurement be based on the original book value, before write-down.

To read the other parts in this series, see Part I and Part II.

Gains and Losses on Disposition of Assets - Part II

Involuntary conversions occur when a contractor's property is destroyed by events over which the owner has no control, such as fires, windstorms, hurricanes, floods, accidents, thefts, etc. Essentially the assets are destroyed or in the case of theft, gone.

If there is no insurance to cover the loss, there is most likely a loss on the disposition of the asset, assuming the asset(s) still had book value. Paragraph (e) of FAR 31.205-16 covers involuntary conversions when an insurance award is recovered.

When there is a cash award and the converted asset is not replaced, gain or loss shall be recognized in the period of disposition (or involuntary conversion). The gain recognized for contract costing purposes shall be limited to the difference between the acquisition cost of the asset and its undepreciated balance. The contractor gets to keep the "excess" insurance proceeds.

When the converted asset is replaced, the contractor shall either

1. Adjust the depreciable basis of the new asset by the amount of the total realized gain or loss, or
2. Recognize the gain or loss in the period of disposition.

There are a couple of situations where gains and losses on the disposition of depreciable property shall not be recognized as a separate charge or credit. These are very rare situations but include cases where

1. Gains and losses are processed through the depreciation reserve account and reflected in the depreciation allowable under 31.205-11 or
2. The property is exchanged as part of the purchase price of a similar item, and the gain or loss is taken into consideration in the depreciation cost basis of the new item.

Tomorrow we will look at "mass or extraordinary" sales and assets held for future use.