Thursday, February 4, 2010

Accounting System Adequacy - Part II

This is a contuation of our discussion on two contractors who protested a contracting officer decision to reject their bids due to inadequacies in their proposals. If you missed the first part, read it here first.

After declaring both MD and PMO’s proposals to be technically acceptable, the FTA contracting officer sent the proposals out for audits. FTA requested audits of proposed costs including direct labor rates, escalation and indirect rates in order to determine if the proposals were acceptable for negotiating a price. FTA sent MD’s proposal to DCAA on March 18, 2009 and sent PMO’s proposal to BMC on June 9, 2009. [Incidentally, DCAA issued its report on September 21, 2009, six months after the request while BMC issued its report on September 24, 2009, about three and a half months after the request. This is not really relevant to this discussion but for those of you who despair of the time it takes DCAA to conduct audits and issue reports, it is illustrative of DCAA’s demise. At one time, DCAA endeavored to issue those kinds of reports in 30 days.] In both cases, the auditors concluded that the proposals submitted by MD and FTA were not adequate to negotiate fair and reasonable prices. Based on these audit reports, the contracting officer determined that both proposals were unacceptable and advised the companies. FTA advised MD of its rejection on September 22, just one day after the date of DCAA’s audit report. FTA advised PMO of its rejection on October 5, about two weeks after the date of BMC’s audit report.

So what was so terrible about these proposals that they were rejected? Here’s where the two cases diverge a bit so we’ll look at them individually.

MD’s proposal

In advising MD that it was rejecting its proposal, FTA identified the following deficiencies as noted in the DCAA audit report.

  1. Since the accounting system was to be maintained in Canada, there was no assurance that it would be maintained in accordance with U.S. generally accepted accounting principles (GAAP) as required by FAR.  
  2. There is no evidence that the joint venture is an independent entity with its own employees and indirect rates.
  3. The joint venture did not prepare budgets for the entire performance period but used the same indirect rate for each year.

During the appeal process, there was correspondence between GAO, FTA, and MD in an effort to get to the real issues. Ultimately, FTA abandoned its contemporaneous basis for rejecting MD’s proposal (the three issues listed above) stating that “The basic failure of [MD] is compliance with Cost Accounting Standard (CAS) 401”. The real problem, according to FTA (and later on, the DCAA) was with the indirect rate(s). The MD joint venture was comprised of two companies. Each of those companies proposed to contribute labor to the joint venture, burdened by their respective overhead rates. FTA alleged that the joint venture should have its own overhead (indirect) rate as required by Cost Accounting Standard (CAS) 401. This was the first time that CAS 401 was raised as an issue. DCAA had not mentioned it in its audit report and FTA had not mentioned it in its rejection notice.

To buoy its position, FTA requested DCAA corroboration. On December 15, almost two months after it issued its audit report and nearly a month and a half after FTA propounds its CAS 401 theory, DCAA provided FTA a memorandum stating that MDs failure to submit a unique indirect rate was a violation of CAS 401. The DCAA memo is troubling for two reasons. First, it is rendered without an audit opinion. The initial report had an opinion that MD’s proposal was inadequate for the reasons stated above. DCAA did not retract this opinion. It appears that once it became evident to FTA and DCAA that the initial position was not defensible, they had to cobble together a different reason. The new basis, however, did not come with a duly formulated audit opinion based on sufficient evidential matter. The second problem with DCAA’s memo is that it appears that DCAA lacked independence in formulating its CAS 401 position. FTA came up with the CAS 401 angle six weeks before DCAA issued its memo. It appears to the casual reader of the protest decision that FTA influenced the contents of that memo.

We will continue this series tomorrow with a discussion of FTA’s rejection of PMO’s proposal and the basis that GAO used to sustain the appeals of MD and PMO.

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