Internal Controls Over Approving and Issuing Company Credit Cards

How are your internal controls over the issuance of company credit cards? Does it rest with a single company employee or are there approvals required by someone higher up in the organization. We're reminded to consider these questions after learning of a scheme within the Drug Enforcement Agency (DEA) where an employee had too much power and authority over the approval and issuance of credit cards to DEA employees and abused it.

According to a plea agreement, the DEA employee was a program manager and responsible for the approval and issuance of government credit cards to DEA employees. She admitted that while serving in that position, she submitted dozens of fake credit card applications for fictitious DEA employees, using names and identifying information of individuals who did not work at the DEA. Through this scheme, she obtained at least 32 fraudulent credit cards which she then used to withdraw more than $113 thousand from ATMs. What was she thinking? The chances of getting caught is likely to be 100%. The common denominator of these credit card bills, the phony employees and the approval thereof points right back to the DEA employee.

The (former) employee will now serve two years in prison and must repay the $113 thousand. (Something tells us there was a lot more money involved than just what the Government happened to catch). You can read more about the case here.

This was not a very sophisticated fraud scheme but if the DEA had instituted even the most rudimentary internal controls, it should never have happened. How about verifying the application to a current listing of employees? How about verifying that the employee needed the card? How about a supervisor approving his/her subordinate's need for a card. Nothing fancy, just some common sense controls.

Government Sets Record for Service-Disabled Veteran-Owned Small Business Contracts

Late last week, the U.S. Small Business Administration announced the the Federal Government had met its goal for awarding federal dollars to Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). Better yet, they announced that a record had been set - in fiscal year 2014, 3.68 percent of all federal contracting dollars went to SDVOSBs. That 3.68 percent works out to $13.5 billion.

The SBA has a number of programs to help SDVOSBs and VOSBs (Veteran-Owned Small Business). Most of the SBA's area offices have a PCR (Procurement Center Representative) to assist small businesses in obtaining federal contracts. The PCRs can help by initiating small business set-asides, reserving procurements for competition among small business firms, providing small business sources to Federal buying activities and most importantly for SDVOSBs, counseling services.

There are other SBA sources and services as well. A very good place to start is SBA's site for veterans, the Office of Veterans Business Development.  Also, for local hands-on help, there are Veteran Business Outreach Centers,

Regular readers of this blog will recall several fraud cases prosecuted recently where contractors obtained SDVOSB set-asides under false pretense. The SBA is beefing up its activities to validate the status of prospective contractors bidding and in some cases winning contracts reserved for SDVOSB companies. Usually the schemes involve finding a front company that would qualify for SDVOSB status. The front company usually secures a small commission for allowing a non-SDVOSB company to use its name.

Costs Related to Defending Against Employee Whistleblower Complaints

The Department of Defense made permanent an interim rule from 2013 regarding the allowability of legal costs incurred by contractors defending against employee whistleblowers.

Specifically, costs related to legal and other proceedings incurred by contractors in proceedings submitted by a contractor employee submitting a complaint under 10 USC 2409 (Whistleblowing) are unallowable if the result is an order to take corrective action, even if the proceeding does not involve an allegation of fraud or similar misconduct.

This rule represents a potentially significant liability for contractors. Sometimes contractors settle complaints without admitting guilt to minimize their financial exposure. It seems to us that contractors might resist settlements that require corrective action if they cannot recover their legal and other related costs.

On the other hand, this new regulation is good for whistleblowers. It encourages contractors to settle early as a means of minimizing legal costs that cannot be recovered.

You can read more about this new regulation and its genesis in the NDAA (National Defense Authorization Act) for 2013 by clicking here.

Former DCAA Director Hits the Revolving Door

One of our very first postings when we started this blog back in 2009 was to announce that DCAA had selected a new Director to replace the one that was dethroned after running afoul of Senator McCaskill. Patrick Fitzgerald with 30 years of Army Audit experience stepped in amid turbulence and ran the Agency for the next five years, retiring last Fall.

It was announced yesterday on Business Wire that Mr. Fitzgerald has joined the accounting and advisory firm of Baker Tilly Virchow Krause, LLP (Baker Tilly) in their specialized government contractor advisory services practice.

Meanwhile, the Director he deposed toils away as the COO (Chief Operating Officer) of DOE's Loan Programs Office.

Fitzgerald was succeeded by Ms. Anita Bales, who was previously DCAA's Deputy Director.

OPM Data Breach - Contractor Employees at Risk

The number of individuals affected by the Office of Personnel Management's (OPM) data breach continues to grow and grow. Initially, OPM estimated the breach affected 4.2 million Government workers. Since then, the estimate rose to 14 million people and yesterday, CNN reported the breach has reached 18 million people - current and former Government employees, applicants for Government jobs, and contractor personnel applications for security clearances.

Yesterday, the OPM Director Katherine Archuleta, testifying before Congress stated that no one at OPM was responsible for the breach. She blamed a Government contractor who performed background checks on people applying for security clearances of carelessly guarding the keys to data. She also blamed antiquated computer systems in OPM that are badly in need of upgrades. Don't know how far those excuses are going to get the Director - many in Congress are calling for her resignation.

The actual number of people affected by the data breach is undoubtedly much higher than any current estimate. The hacked database that stores information used for security clearances (e.g. the SF86 questionnaires) contains private information of family members and other associates for every Government official affected.

Government contractors need to be cognizant of the fact that they too are at risk. Not only do they have "cleared" employees but their ranks are full of former Government employees whose personal information has probably been compromised. One of the great fears expressed by various pundits expounding on the matter is the fact that Government workers and contract employees holding security clearances might be susceptible to blackmail if those purloined records contain any compromising information.

Contractors should consider what, if any, actions they need to take to mitigate possible adversities from having employees' information compromised.

Make Sure Your SAM Profile is Current, Complete, and Accurate

We've heard of companies - contractors and prospective contractors - who give short shrift to the accuracy of data submitted to SAM (System for Award Management). Everyone knows that you need to be SAM registered in order to be considered for award. SAM can be confusing and even intimidating for some. If you can somehow plow through the many layers of data, representations, and certifications and be presented with "completed", you might consider yourself a victor. The question is, did you get everything right? Did you enter the correct NAICS codes? How about socio-economic status? One might be tempted to think, made it through, close enough, good to go.

A recent Comptroller General (GAO) bid protest decision underscores the importance of making certain your information is accurate, current, and complete. Nationwide Value Computer (Nationwide) protested a Navy award to a competitor alleging that it had the lowest price and should have received the contract. The solicitation was a small-business set-aside acquisition.

The Navy, in evaluating the offers, consulted Nationwide's SAM profile and found that Nationwide had certified itself as a non-small-business. As a result, the Navy disqualified Nationwide from the procurement. Nationwide objected to the Navy's determination that it was not an eligible small business concern. Nationwide noted that its Dun and Bradstreet listing noted its small business status.

Since the record reflects that at the time the Navy checked SAM, Nationwide had affirmatively represented that it was not a small business, the GAO had not basis to conclude that the Navy acted unreasonably when it eliminated Nationwide from the competition on the basis that it was not a small business.

SAM will prompt administrators to update their profiles once per year. It may be advisable for companies to establish procedures to update their profiles more frequently.

Proposal Rejected for Contractor's Administrative Oversight

Here's a bid protest that underscores the importance of ensuring that your proposals comply with all the solicitation requirement, else it might get rejected.

The U.S. Navy issued a solicitation for professional support services for its program executive office. The solicitation contemplated the issuance, on a best value basis, of a task order to the form submitting the proposal deemed most advantageous to the Government. There were several non-cost evaluation factors, as well as cost considerations. The solicitation required, among other things, that offerors include resumes for all proposed key personnel. Resumes would be evaluated as the second most important sub-factor under the most important non-price factor. The most important non-price factor was "technical capability and experience.

CACI Technologies Inc. (CACI), who was the incumbent contractor for these services, failed to include the required key personnel resumes. The Navy in turn, rejected CACI's bid, find that its proposal was noncompliant, and therefore ineligible for award. This requirement and omission by CACI were both pretty big deals because the Navy wrote:

CACI's failure to follow the instructions to submit the key personnel resumes prevents the Government from fully evaluating its proposal. The omission is particularly problematic where Key Personnel is the second most important sub-factor within the most important factor for evaluation purposes.

CACI appealed the Navy's action to the Comptroller General (GAO). CACI conceded the fact that it failed to include the required resumes, .....but,

• The omission was an administrative error
• Despite the absence, its proposal nonetheless included much of the information that would have been found in those resumes
• The Navy should have found its proposal acceptable.
• The Navy unreasonably failed to engage in discussions with the firm in order to afford it an opportunity to correct its proposal.

The Navy responded stating,

• The key employee information included in the proposal did not include educational background, professional job experience, training, special experiences, qualifications, and certifications.
• Allowing CACI to submit the resumes after the fact would constitute discussions rather than clarifications.

The GAO found no merit in CACI's argument. In the final analysis, the Board ruled that CACI's position essentially is that it is in the government's best interest to engage in discussions because doing so will allow CACI to continue to participate as a competitor. While it may be in CACI's best interest, it is not in the Government's best interest.

Integrity of Unit Prices

Did you know that FAR (Federal Acquisition Regulations) contains a solicitation provision that requires offerors and contractors, when requested by the contracting officer, to identify in their proposals, any supplies which they will not manufacture or to which they will not contribute significant value (see FAR 52.215-14). Specifically, the clause reads:

Any proposal submitted for the negotiation of prices for items of supplies shall distribute costs within contracts on a basis that ensures that unit prices are in proportion to the items' base cost (e.g. manufacturing or acquisition costs). Any method of distributing costs to line items that distorts unit prices shall not be used. For example, distributing costs equally among line items is not acceptable except when there is little or no variation in base costs. When requested by the Contracting Officer, the Offeror/Contractor shall also identify those supplies that it will not manufacture or to which it will not contribute significant value.

Most contractors and offerors are unfamiliar with this provision and its rare that contracting officers will even request the information. When they do, its probably because they see something in the pricing data that doesn't look right (such as the $600 hammer) or some item where proposed cost exceeds the intrinsic value of that item. And, when the information is requested, contractors/offerors often look befuddled because, even long time contractors, have never been subjected to such a request and are not sure where to start.

This requirement does not apply to acquisitions below the simplified acquisition threshold, construction or architect-engineer services, service contracts where supplies are not required or commercial items (see FAR 15.408(f)).

National Procurement Fraud Task Force

Back in 2006, the Department of Justice established the National Procurement Fraud Task Force for the sole purpose of detecting and prosecuting fraud in government contracting. Its members include representatives of both the Criminal and Civil Divisions of the Department of Justice as well as the U.S. Attorney's Office and twenty-some agencies including the FBI, the CIA, Homeland Security, Inspector General's, GSA, SBA, and every defense-related investigative command (e.g. AFOSI, NSI, and Army CID).

Initially, the task force focused on the following areas of procurement fraud:

• Defective pricing
• Product substitution
• Misuse of classified and procurement sensitive information
• False claims
• Grant funds
• Labor mischarging
• Accounting fraud
• Fraud involving foreign military sales
• Ethics and conflict of interest violations, and
• Public corruption associated with procurement fraud.

Lately, it seems the Task Force has been working a lot of cases involving contractors misrepresenting their socio-economic status. One such case, announced yesterday, involved an individual who fraudulently obtained $2.8 million in Government contracts by representing to the U.S. Government that his business was veteran owned, a small disadvantaged business, a Hispanic-American owned business, a minority-owned business, and a service-disabled veteran owned business. In fact, the individual was not a member of any racial or ethnic minority, was not a disabled veteran and was not a member of a socially disadvantaged group. This fellow has been sentenced to 42 months in prison and must forfeit $700 thousand.

We don't have the statistics but it does seem to us, based on the number of Justice Department press releases we read, that the Government has been cracking down on abuses in its socio-economic programs - especially by contractors who misrepresent their status. Of course, it doesn't seem to be a particularly difficult crime to uncover and prosecute, especially with lots of competitors looking for ways to appeal awards they were unsuccessful in, disgruntled insiders, and whistle-blowers hoping to make a buck by filing Qui Tam actions.

What is "Credible" Evidence of Fraud?

Yesterday we discussed a case where the President of a contractor for the State Department had credible evidence of fraud but didn't report it to the Government. According to the press release from the Justice Department, FAR (the Federal Acquisition Regulations) required the contractor (the President in this case) to report credible evidence of fraud. Someone immediately asked where that requirement was found in FAR and another asked about the definition of "credible". So, we'll answer both of those questions here.

The mandatory disclosure rule has been around since 2008 and we've written about it a few times. See for example here and here. The policy guidance is found in FAR Part 3.10, Contractor Code of Business Ethics and Conduct. (FAR Part 3 in generally is a good place for contractors to find information when developing ethics programs). The associated contract clauses are FAR 52.203-13, Contractor Code of Business Ethics and Conduct, and FAR 52.203-14, Display of Hotline Poster.

Briefly, these contract clauses require contractors (and subcontractors) to disclose to the Government whenever they have obtained "credible evidence" of criminal violations, a violation of the civil False Claims Act, or a significant overpayment in connection with the award, performance or closeout of a Government contract or subcontract. As we saw from yesterday's posting, failure to do so could land a contractor in jail or, more likely, fined.

Now for the term "credible evidence" question. FAR does not define the term "credible evidence". However, the FAR Councils have noted that the term represents a higher standard than say, "reasonable grounds to believe". To go from "reasonable grounds" to "credible evidence" means that a contractor must have time to properly investigate matters. Once the matter has reached the "credible evidence" stage however, a contractor (or subcontractor) is required to promptly notify the Government.

While the term "credible evidence" is not defined in FAR, the DoD FAR Supplement (DFARS) provides a definition for "credible information" which may be helpful. DFARS 252.246-7003, covering a contractor's affirmative duty to disclose potential safety issues to the Government, defines credible information as information that, considering its source and the surrounding circumstances, supports a reasonable belief that an event has occurred or will occur.

Do You Allow Employees to Carry On Side Businesses?

Do you allow your employees to carry on side businesses or moonlight with another company? Some companies specifically prohibit such activity, some allow it, while most do not have a position one way or another. Side businesses can and have run afoul of ethics violations. We recall one instance where a DoD contract auditor was caught advising her husband's company on proposal preparation and indirect rate development for a DoD contract. She didn't last long in her position. A recent Department of Justice press release illustrates another potential problem when it comes to employees doing a little business on the side.

The case involved a State Department contracting officer's representative (Chandler) and a contractor employee (Halsey). Halsey had a little business going on the side, selling nutritional supplements (a multi-level marketing company) to other contractor employees under his supervision. The sweet part of this deal was that the employees were reimbursed for their purchases by their employer, the State Department contractor. Halsey then conspired with Chandler (the State Department employee) to approve the billings that contained the reimbursements.

Before this scheme was disrupted, reimbursements totaling $170 thousand had been billed to the State Department and reimbursed to the contractor. For his part, Halsey earned more than $25 thousand in commissions. The State Department guy (Chandler) knew that Halsey was personally profiting but approved the billings anyway. There was no mention in the press release whether Chandler profited but he did plead guilty to charges of conspiracy to commit wire fraud and a conflict of interest related to his conduct as a State Department employee.

There was also another side to this story. The president of the contractor learned about the scheme and tried to cover it up. He know that he had a responsibility under the Federal Acquisition Regulations to timely disclose to the Government, credible evidence of fraud, but failed to do so. For his failure, he now faces a maximum penalty of five years in prison, if convicted. That will never happen, of course. He will probably face a nominal fine.

If you have credible evidence that fraud is going on in your organization, you have an affirmative duty to disclose it to the Government.

Proposed Exceptions to Cost or Pricing Data

Over the past few weeks, we have been providing periodic updates to provisions included in the respective Senate and House versions of the fiscal year 2016 NDAA (National Defense Authorization Act). The House passed its version of the 2016 National Defense Authorization Act late last week. After the Senate passes their version, its on to conference committee to iron out the differences.

10 U.S. Code 2306a, also known as "truth in negotiations" sets forth the requirement for certified cost or pricing data. Section (b) of that statute lists the exceptions to the requirement including adequate price competition, prices set by law or regulation, commercial items, and certain contract modifications.

The House-passed fiscal year 2016 NDAA adds two additional exceptions to the requirement for certified cost or pricing data.

Section 804 adds the following:

(4) Commercial Item Determination - For purposes of applying the commercial item exception under paragraph (1)(B) to the required submission of certified cost or pricing data, the contracting officer may presume that a prior commercial item determination made by a military department, a Defense Agency, or another component of the Department of Defense shall serve as a determination for subsequent procurements of such item.

 Section 852 adds the following:

(5) Use of Recent Prices Paid by the Government - A contracting officer shall consider evidence provided by an offeror of recent purchase prices paid by the Government for the same or similar commercial items in establishing price reasonableness on a subsequent purchase if the contracting officer is satisfied that the prices previously paid remain a valid reference for c comparison after considering the totality of other relevant factors such as the time elapsed since the prior purchase and any differences in the quantities purchased or applicable terms and conditions.

Both provisions are generally good for contractors in that it may lessen the situations where expensive preparation of cost or pricing data is necessary. The provision in Section 852 will require offerors to do a bit of homework to provide evidence of recent purchases to the Government for the same or similar items.

TINA Threshold May Raise to $5 Million (from $750 thousand)

We've been discussing some of the contracting provisions included in the House and Senate versions of the fiscal year 2016 National Defense Authorization Act (NDAA). The House and Senate have different versions and at some point, the two Bodies will have to come together and compromise on a final bill to send the President. So, at this point, there's no guarantee that some of these provisions will survive the compromise committee. But, it's interesting nonetheless to see which legislative proposals have made it through to the final versions of the respective House and Senate bills.

One provision that will have significant impact on contractors and the contracting community is a proposal to raise the threshold for cost or pricing data from $750 thousand to $5 million. Now that's a big jump. Here's what the Senate Armed Services Committee reported concerning the increased threshold:

The committee recommends a provision that would amend the Truth in Negotiations Act (Public Law 87–653; 10 U.S.C. section 2306a) to raise the threshold for the requirement to provide certified cost or pricing data in non-price competitive procurements on non-commercial items from the current $750,000 to $5.0 million. For non-price competitive procurements valued at less than the new threshold of $5.0 million but more than the current threshold of $750,000, the Department of Defense (DOD) would be required to establish a riskbased contracting approach, under which certified cost or pricing data would be required for a risk-based sample of contracts, to ensure that DOD is getting fair and reasonable prices for such contracts. 

The committee believes that a 100 percent review of certified cost or pricing data on thousands of small contracts is not the best use of DOD’s limited acquisition and auditing resources, particularly for those contracts that have been awarded based on a technical competition. By enabling DOD to adopt a risk-based contracting approach, this provision should free up significant resources to be applied in areas where they are likely to achieve a better return.

In addition, the provision will enable non-traditional contractors to participate in innovative DOD research projects valued at less than $5.0 million without triggering government-unique contracting procedures, enhancing DOD’s access to cutting-edge technologies developed by companies that might otherwise be unwilling to do business with the government. Limitation of the use of reverse auctions

We're not at all sure what the committee has in mind in proposing a "risk-based contracting approach under which certified cost or pricing data would be required for a risk-based sample of contracts" because they don't define risk factors.

We guess this is one of those cases where we have to wait until the law passes to learn what it all means.

Contracting Officers' Decisions Must be Timely

How long does a contracting officer have before making a decision on a claim? Sixty days or a good reason why it should take longer. But the extension must be a definite date and "reasonable". A recent Board case illustrates this principle.

Brad West and Associates (Brad West) filed a request for equitable adjustment (REA) with the Department of Transportation (DOT) in June 2013. DOT granted some of Brad West's  claim but denied other portions. In February 2014, Brad West submitted a certified claim to DOT for $1.375 million. According to the Contract Disputes Act (CDA), a contracting officer has only 60 days to issue a decision or to notify the contractor of the time within which a decision will be issued. This time period is not limitless. The CDA imposes the requirement that the decision be issued within a reasonable time, taking into account such factors as the size and complexity of the claim and the adequacy of the information provided by the contract in support of the claim. In this case, the contracting officer advised Brad West in March 2014 (roughly two weeks after the claim was submitted) that it "anticipated" issuing a contracting officer's decision by December 2014, about 10 months after Brad West submitted its claim.

In May 2014, Brad West filed an appeal from the failure of a contracting officer to issue a decision on its claim ("deemed denial"). In June 2014, the Board (Civilian Board of Contract Appeals) directed DOT to issue a decision within 30 days or advise the Board as to why such a decision could not be issued.

DOT tried to rationalize its actions. DOT maintained that (i) the claim was complex, representing over half of the original contract price, (ii) the contracting officer was very busy, and (iii) the contracting officer needed more time to review the claim because of no prior involvement in the claim.

The Board thought that DOT's excuses were nonsense. It was not a new claim. Over six months prior to the claim submission, DOT had reviewed Brad West's REA. Thus it was familiar with the claim. Secondly, the idea that DOT was too busy was unpersuasive. And thirdly, the statute requires a decision be provided in a reasonable time and if DOT was too busing, it should have assigned other personnel to the review. Finally, the Board found that DOT's "anticipated" date was indefinite and not in accord with the intent of the statute to provide a date certain when the decision will be issued.

Unsolicited Proposals - In General

It is Government policy to encourage the submission of new and innovative ideas. One way the Government encourages such ideas is to "consider" unsolicited proposals. Unsolicited contractor proposals often allow unique and innovative ideas or approaches that have been developed outside the Government to be made available to Government agencies for use in accomplishment of their missions. Such proposals are offered with the intent that the Government will enter into a contract with the offeror. Usually, unsolicited proposals represent a substantial investment of time and effort by the offeror.

In order to be considered valid, unsolicited proposals must meet the following criteria:

1. Be innovative or unique
2. Be independently originated and developed by the offeror
3. Be prepared without Government supervision, endorsement, direction, or direct Government involvement
4. Include sufficient detail to permit a determination that Government support could be worthwhile and the proposed work could benefit the agency's research and development or other mission responsibilities
5. Not address a previously published agency requirement.

FAR 15.6 contains guidance for receiving, performing an initial review, performing a comprehensive review and negotiating unsolicited proposals. In addition, every agency has their own procedures for controlling the receipt, evaluation, and timely disposition of unsolicited proposals. Unsolicited proposals could be rejected at any one of these steps.

Favorable comprehensive evaluations of unsolicited proposals do not necessarily justify the awards of contracts without providing for full and open competition. Reasons to reject unsolicited proposals, even where the Government likes the idea, include,

• The substance is available to the Government without restriction from another source
• It closely resembles a pending competitive acquisition requirement
• It does not related to the activity's mission, or
• It does not demonstrate an innovative and unique method, approach, or concept, or is otherwise not deemed a meritorious proposal.

Keep in mind the term "innovative and unique". This is the first criteria that the Government considers and if the Government is not convinced of a proposals uniqueness or inventiveness, it will be rejected.

Abusing the SDVOSB Program

The Department of Justice issued a press release late last week announcing a Grand Jury indictment of three people for abusing the SDVOSB (Service-Disabled Veteran-Owned Small Business) program in Puerto Rico. The press release calls it a multi-million dollar fraud against the U.S. Government but it provides no further specifics on the magnitude of the fraud (or alleged fraud, at this point).

There was this man who owned a construction company called IRC Air Contractors. He had a brother who was a Service Disabled Veteran. Together they decided to take advantage of the disabled brother's status so they created a new company called Belko General Contractors. Turns out however that Belko was just a front company for IRC Air Contractors, created solely to obtain contracts that were set-aside for SDVOSBs.

This went on for quite some time. Between 2007 and 2014 Belko received a bunch of non-competitive, set-aside and sole-source government contracts. All of these were awarded to Belko under false pretense.

Here's something interesting. The disabled brother was also a full-time letter carrier for the U.S. Postal Service which calls into question the severity of his disability in the first place. Additionally, the disabled brother was not in charge of day to day operations and really had no role in anything connected to Belko or IRC Air Contractors. He was simply, as Justice put it, a "rent-a-vet".

These type of schemes are really not too hard to uncover. It just takes someone within the Government to be observant or a whistle-blower from inside the company. Based on the limited amount of detail presented in the press release, we don't know whether the Government was overcharged for the work performed. We do know that programs designed to benefit service-disabled veterans was abused and the awards did not benefit the targeted beneficiaries.

Costs Associated with Government Compliance

How much extra does it cost Government contractors to comply with acquisition regulations and other requirements unique to Government contracting? Probably a lot. However, if contractors have thought through their cost allocation systems, most of that increased costs are passed right along to the Government. Those costs are not being shared by non-Governmental work nor do those costs come out of contractors' profit or fees. When we were auditors, we often carried the brunt of accusations that we should just go away and the Government would save a bundle of money.

There is no doubt that Government regulations increase the cost of goods and services. Most of these regulations are born out of the necessity to protect the taxpayer. Every time there's a scandal, Congress comes up with a few more regulations. Incidentally, its many of those regulations that prevent serious acquisition reform.

Some of those contractor complaints must have landed on some Senators as the Senate Armed Services Committee has added a provision to the Senate version of  2016 National Defense Authorization Act that calls for a six-month study to determine just how many dollars that Government regulations are adding to the cost of procurement. The provision reads;

The Secretary of Defense shall conduct a survey of the top ten contractors with the highest level of reimbursements for cost type contracts with the Department of Defense during fiscal year 2014 to estimate industry's cost of regulatory compliance (as a percentage of total costs) with government unique acquisition regulations and requirements in the categories of 

• qualify assurance

• accounting and financial management

• contracting and purchasing

• program management

• engineering,

• logistics

• material management

• property administration

• and other unique requirements not imposed on contracts for commercial items.

It will be interesting to see the results of this study. We wonder how they will allocate the occupancy costs associated with various Government agencies in residence. Each one of these top 10 probably have 100 or more auditors and that many representing contract administration (e.g. DCMA). The cost of housing these folks is no small potatoes.

DCAA Under the Microscope Again

The Senate has finished its version of the Fiscal Year 2016 National Defense Authorization Act (NDAA) and, as usual and as expected, there are some differences from the House version. One of those differences impacts the Defense Contract Audit Agency (DCAA) and, if passed, will result in more of DCAA's work being performed by other groups.  The Senate Committee on Armed Services made the following statement:

The committee recommends a provision that would authorize the Defense Contract Audit Agency (DCAA) to provide outside audit support to non-Defense Agencies upon certification that the backlog for incurred cost audits is less than 12 months of incurred cost inventory. The committee understands that DCAA has made progress in reducing its incurred cost audit backlog but this has come at the expense of a reduction in the number of audits and increased backlogs in other areas of its responsibilities. The committee believes that DCAA management should not be distracted by directing and managing the audit responsibilities of other agencies until its own house is completely in order. The provision would require the Secretary of Defense to use up to 5 percent of the auditing staff of the Office of the Inspector General of the Department of Defense and the service audit agencies and, if necessary, augmented by private audit firms to help address DCAA's audit backlog. The provision would also require the Secretary to review the oversight and audit structure of the Department of Defense with the goal of improving productivity, avoiding duplicative program and contract audits, and streamlining oversight reviews.

The actual bill contains the following provisions:

Beginning October 1, 2016, DCAA may provide audit support for non-Defense Agencies once the Secretary of Defense certifies that the backlog for incurred cost audits is less than 12 months of incurred cost inventory.

 Adjustment in funding for reimbursements from non-Defense agencies. The amount appropriated and otherwise available to DCAA for a fiscal year beginning after September 30, 2016 shall be reduced by an amount equivalent to any reimbursements received by the Agency from non-Defense agencies for support provided in violation of the limitation under paragraph (1)

Use of Third Party Audits. The secretary of Defense shall use up to 5 percent of the auditing staff of the service audit agencies augmented by private sector auditors to help eliminate the audit backlog in incurred cost, pre-award accounting systems audits and to reduce the time to complete pre-award audits.

Use of Inspector General Auditing Staff - The Office of the Inspector General of the DoD shall make available 5 percent of its auditing staff to DCAA to help eliminate the audit backlog in incurred cost,  pre-award accounting systems audits and to reduce the time to complete pre-award audits.

DCAA's annual report to Congress will be expanded to include two new topics;

1. A description of actions taken to ensure alignment of policies and practices across the DCAA regional organizations, offices, and individual auditors
2. A description of outreach actions toward industry to promote more effective use of audit resources

Acquisition Oversight and Audits - The Secretary of Defense shall review the oversight and audit structure of the Department of Defense with the goal of enhancing the productivity of oversight and program and contract auditing to avoid duplicative audits and the streamlining of oversight reviews. The Secretary shall take all necessary measures to streamline oversight reviews and avoid duplicative audits and make recommendation for any necessary changes in law

Report - Not later than one year after the date of the enactment of this Act, the Secretary of Defense shall submit to the congressional defense committees a report on actions taken to avoid duplicative audits and streamline oversight reviews. The report will include:

1. A description of actions taken to avoid duplicative audits and streamline oversight reviews based on the review conducted.
2. A comparison of commercial industry accounting practices, including requirements under the Sarbanes-Oxley Act, with the Cost Accounting Standards (CAS) to determine if some portions of CAS compliance can be met through such practices or requirements.
3. A description of standards of materiality used by DCAA and the DoD-IG for defense contract audits (this will be very interesting)
4. An estimate of average delay and range of delays in contract awards due to time necessary for DCAA to complete pre-award audits.

Obstructing a Federal Auditor Could Cost You Fines and Prison Time

An Army contracting officer working for the Army Contracting Command - Redstone is in a heap of trouble for obstructing a federal auditor. Her arraignment is set for later this month, at which time she will plead guilty.

18 USC 1516 - Obstruction of Federal Audit makes it unlawful to obstruct, or attempt to obstruct a federal auditor. The statute dates back to 1988 during a time when the Government was auditing significant allegations of contractor fraud, waste, and abuse. We don't know how often this statute has been used to prosecute audit obstruction cases but probably not often.

The Statute states:

Whoever, with intent to deceive or defraud the United States, endeavors to influence, obstruct, or impede a Federal auditor in the performance of official duties relating to a person, entity, or program receiving in excess of $100,000, directly or indirectly, from the United States in any 1 year period under a contract or subcontract, grant, or cooperative agreement, ... shall be fined up to $250,000 for an individual or $500,000 for an organization or imprisoned not more than 5 years, or both.

For purposes of this section, the term Federal auditor means any person employed on a full or part-time or contractual basis to perform an audit or a quality assurance inspection for or on behalf of the United States.

 The defendant was a contracting officer assigned to the Army Contracting Command - Redstone (ACC-Redstone). Company 1 was a US company located in Alabama that contracted with the Government. Company 2 was a Lithuanian company that subcontracted with Company 1.

In September 2011, ACC-Redstone awarded a $9 million task order to Company 1 to perform cockpit modifications on Russian -made Mi-17 helicopters. In April 2011, ACC-Redstone modified the contract by $12.8 million for overhauling five Pakistan Mi-17 helicopters. In May 2011, the defendant modified the contract again, this time adding $9 million for replacement parts in the event that parts on the aircraft could not be overhauled.

In September 2011, Company 2 submitted to Company 1 a list of parts it proposed to provide Company 1 under the parts contract. The proposed price was $7 million. In December 2011, Company 1 submitted submitted to the defendant a proposal to purchase the parts set forth on that list at the quoted prices. Company 1's proposal was in excess of $8 million and consisted of $7 million to be paid to Company 2 plus other fees.

No written analysis was ever performed by Government personnel as to whether the parts on Company 1's December 2011 proposal were needed and/or would be needed and/or whether the prices Company 1 proposed paying Company 2 for those parts were fair and reasonable. The Government paid Company 1 approximately $8 million in 2012.

In December 2011, the Department of Defense Office of Inspector General (DoD-IG) began an audit of the contract to determine whether the Government paid a reasonable price for the parts, whether the parts that were purchased were needed, and whether the contracting officer and contracting personnel followed correct contracting procedures in connection with executing and implementing the parts contract.

Between January and August 2012, the defendant, with the intent to deceive and defraud the US, endeavored to influence, obstruct, and impede a Federal auditor, that is, auditors of the DoD-IG in the performance of their official duties.

In June 2012, the contracting officer directed a contracting specialist to prepare a pre-negotiation objective memorandum and back date it to May 6, 2011 and to prepare a price negotiation memorandum and back date it to May 7, 2011. There were many other altered documents as well. The dates on Company 1's price proposal was altered. So were the dates of a Government technical evaluation.

The statute was originally intended to prevent contractors from obstructing an audit. Here, it has been used to prosecute a Government employee who obstructed an audit.

Fair Pay and Safe Workplaces

Following is an update to prior postings on the President's Fair Pay and Safe Workplaces Executive Order (EO) from July 31, 2014. Prior coverage of this topic includes:

• New Executive Order - Fair Pay and Safe Workplaces
• Fair Pay and Safe Workplaces - First Steps to Implementation

DoD, GSA, and NASA (the FAR Councils) issued a proposed rule last week to implement the EO. In short, the new rules will require prospective contractors to report on every proposal, whether they have had any violations of any of 14 federal labor statutes in the preceding three years. Contracting officers, along with their LCA's (Labor Compliance Advisors), will then use that information to determine if the prospective contractor has demonstrated a pattern of pervasive and willful abuse of the 14 statutes. If the ACO and LCA determine that there has been a pattern of pervasive and willful abuse, the prospective contractor will be determined non-responsible and consequently not eligible for the contract.

The proposed rule is out for comment for the next 60 days. Judging from the internet chatter, there should be plenty of comment. Concerns have been expressed from many interested parties. For example see here and here. Some have expressed concerns that under the proposed rules, patterns of pervasive and willful abuse includes arbitral settlements, administrative settlements, or simply allegations of wrongdoing.

With respect to making disclosures, the DOL guidance defines ther terms "administrative merits determination", "civil judgment," and "arbitral award or decision," for each of the fourteen enumerated labor laws and discusses what information related to these determinations must be reported byu contractors and subcontractors. The FAR rule creates solicitation provisions andcontract clauses that will include these disclosure triggers and explain when the required information described in the DOL guidance is to be submitted, how it is to be submitted, and to whom it is to be submitted.

The proposed rule applies to subcontractors as well. In fact, subcontractors have to make their own disclosures, then the prime contractors will have to decide whether the subcontractor has exhibited a pattern of pervasive and willful abuse, then report its findings to the Government and hope that the Government doesn't second guess its determination.

Implementing these new set of rules is going to be extremely costly for contractors.

New Definition Proposed for "Multiple-Award Contracts

The FAR councils are proposing to add a new definition to FAR 2.101 to define "multiple-award" contracts. One really has to wonder why a definition is needed here since we already have FAR Part 38, Federal Supply Schedule Contracting, and FAR 16.5, Indefinite-Delivery Contracts which covers those types of contract in detail. But, reading through the fine print, we find that it is a requirement embedded into the Small Business Jobs Act of 2010.

Although this is a proposed rule, the definition of multiple award has already been incorporated into the SBA rules at 13 CFR 125.1(k).

Here is the new proposed definition:

A Multiple-award contract means a contract that is

1. A Multiple Award Schedule contract issued by GSA (e.g. GSA Schedule Contract) or agencies granted Multiple Award Schedule contract authority by GSA as described in FAR part 38;
2. A multiple-award task-order or delivery-order contract issued in accordance with FAR subpart 16.5, including government-wide acquisition contracts; or
3. Any other indefinite-delivery, indefinite quantity contract entered into with two or more sources pursuant to the same solicitation.

For Contractors Contemplating the Award of T&M Subcontracts

T&M (Time and Material) contracts represent high-risk contracting vehicles to the Government. The Government has special requirements that Agencies must meet before awarding T&M contracts and many of these flow down to T&M subcontracts awarded under Government prime contracts (see for example FAR 16.601 and DFARS 216.601). The Government requires that procurement files justify and document the rationale for T&M award (prepare a D&F or Determination & Finding) and contractors would do well to implement similar requirements.

T&M contracts are high risk for a number of reasons. First, it does not incentivize contractors to control costs. In fact, just the opposite. The more labor hours a contractor can throw at a task, the more profit it will make. Secondly, and this happens a lot, contractors sometimes provide a lesser skill than contemplated in the T&M rate. For example, the rate may have been developed for an Electrical Engineer II but the contractor uses an Electrical Engineer I for the task and bills at the Level II rate. From the Government's perspective, it doesn't matter that the work was performed satisfactorily by a lesser qualified individual - the Government paid for a higher skill level than it received. By comparison, under a cost-type contract (also considered a high-risk contracting vehicle), if the contractor utilized a lower skilled worker, the Government would have reimbursed it for the lower skill, not something higher.

T&M contracts can also be high-risk for contractors. T&M rates are fully burdened rates and include fringe, overhead, and G&A allocations. If the contractor (or subcontractor) understates any of these factors, it will be at risk of losing money on the deal (which may be one reason that some contractors are tempted to substitute lower skilled workers for the higher-rate jobs.

When awarding (or contemplating) T&M subcontracts, contractors should insure that their files contain sufficient facts and rationale to justify that no other subcontract type is suitable. Subcontract files should

• Include a description of the market research conducted
• Establish that it is not possible at the time of placing the contract or order to accurate estimate the extent or duration of the work or to anticipate costs with any reasonable degree of certainty
• Address why a cost-plus-fixed-fee or other cost-reimbursement, incentive, or fixed-price contract or order is not appropriate. Generally, a cost-plus-fixed-fee contract is preferred over a time-and-materials (or labor hour) contract type
• Establish that the requirement has been structured to minimize the use of T&M requirements
• Describe the actions planned to minimize the use of T&M (and labor-hour) subcontracts on future acquisitions of the same requirements.

Government reviews of contractor purchasing systems will undoubtedly include reviews of T&M subcontracts. It would be beneficial for contractors to have their files, justification, and support in order.