Monday, August 31, 2015

Fair Pay and Safe Workplaces - Public Comments to Proposed Rule

Last May, the FAR Councils issued a proposed rule to implement the President's Fair Pay and Safe Workplaces Executive Order (EO) from July 31, 2014. The new rules will require prospective contractors to report every time they submit proposals, whether they have had any violations of any of 14 federal labor statutes in the preceding three years. When we last reported on the proposed regulation (see Fair Pay and Safe Workplaces dated June 3, 2015), we made a prediction that there would be plenty of public comments to the proposed regulation. Sure enough, the second extension to the public comment period ended on August 26, 2015 and there were a total of 918 public comments submitted. We pity the folks that will now have to sort through, categorize, and respond to these comments - its going to be a herculean task. (If you care to peruse them yourself, you can find them on-line here)

Over the next few postings, we intend to find a few of the substantive comments submitted by contractor organizations, employee organizations, and watchdog groups to assess the level of support for the regulations. We will start with comments submitted by the Project on Government Oversight (POGO). POGO counts itself as a nonpartisan independent watchdog that champions good government reforms. The Organization investigates allegations of corruption, misconduct, and conflicts of interest in hopes of achieving a more effective, accountable, open, and ethical federal government. POGO is well-known and carries a lot of influence in DC.

POGO supports the proposed rule. "To determine whether companies have a satisfactory record of integrity and business ethics as the FAR requires ... it is necessary for contracting officers to have information about the condition of companies' workplaces and how their workers are treated." But POGO also made a number of recommendations to "strengthen" the rule. One of those recommendations would have contractors disclose "settled" cases. POGO states:
According to the proposed Department of Labor guidance, a private settlement in which the lawsuit is dismissed without any judgment being entered is not considered a "civil judgment" that triggers disclosure. This will substantially weaken the final rule, as legal actions against companies often settle without a formal judgment by a court or tribunal. Nearly half of the thousands of civil, criminal, and administrative instances in POGO's Federal Contract Misconduct Database were settled without a final judgment or finding of liability. Contractors, especially those with substantial financial and legal resources at their disposal, will evade disclosure by settling labor cases before a judgment is entered.
Other notable recommendations from POGO include:

  • Make the information available to the public.
  • Increase the disclosure period from three years to five years prior to proposal submission.

Friday, August 28, 2015

National Labor Relations Board Decision Will Affect Many Government Contractors

Yesterday, the National Labor Relations Board (NLRB) issued a decision that refined its standard for determining joint-employer status. According to the Board's press release, the revised standard is designed to better effectuate the purposes of the Act in the current economic landscape. With more than 2.8 mullion of the nation's workers employed through temporary agencies (as of August 2014) the Board held that its previous joint employer standard has failed to keep apce with changes in the workplace and economic circumstances.

In the decision, the Board applied the long-established principles to find that two or more entities are joint employers of a single workforce if (i) they are both employers with the meaning of the common law; and (2) they share or co-determine those matters governing the essential terms and conditions of employment. In evaluating whether an employer possesses sufficient control over employees to qualify as a joint employer, the Board wil consider whether an employer has exercised control over terms and conditions of employment indirectly through an intermediary, or whether it has reserved the authority to do so.

The specific decision involved Houston-based BFI (Browning-Ferris Industries) and a Phoenix-based staffing agency, Leadpoint Business Services it hired to staff a recycling facility in California. In its decision, The Board found that BFI was a joint employer with Leadpoint, the company that supplied employees to BFI to perform various functions for BFI, including cleaning and sorting of recycled products. In finding that BFI was a joint employer with Leadpoint, the Board relied on indirect and direct control that BFI possessed over essential terms and conditions of employment of the employees supplied by Leadpoint as well as BFI's reserved authority to control such terms and conditions.

So what does this really mean? It could affect the growing number of temporary workers and independent contractors who do not receive the same protections as full-time employees. Many companies have been using staffing agencies to supply temporary works or contract with other companies to complete tasks. Now, both companies are responsible as joint employers because they share or co-determine those matters government the essential terms and conditions of employment.

Unions are happy with this ruling. Not too many other people or organizations willing to comment are pleased.

Thursday, August 27, 2015

New DoD Reporting Rule for "Cyber Incidents"

DoD published an interim rule this week requiring contractors and subcontractors to report cyber incidents that result in an actual or potentially adverse effect on a covered contractor information system or covered defense information residing therein, or on a contractor's ability to provide operationally critical support. It also allows DoD personnel access to equipment and information to assess the impact of reported penetrations. This rule implements a provision in the 2015 National Defense Authorization Act (NDAA) and you can read the full text by clicking here.

What are operationally critical contractors", "covered contractor information systems" and "covered defense information"? We need a few definitions.

Compromise means disclosure of information to unauthorized persons, or a violation of the security policy of a system, in which unauthorized intentional or unintentional disclosure, modification, destruction, or loss of an object, or the copying of information to unauthorized media may have occurred.

Cyber incident means actions taken through the use of computer networks that result in a compromise or an actual or potentially adverse effect on an information system and/or the information residing therein.

Covered contractor information system means an information system that is owned, or operated by or for, a contractor that processes, stores, or transmits covered defense information.

Covered defense information means unclassified information that is provided to the contractor by or on behalf of DoD in connection with performance of the contract or collected, developed, received, transmitted, used, or stored by or on behalf of the contractor in support of the performance of the contract and is controlled technical information, operations security information, export control information, or any other information marked or otherwise identified in the contract.

There is significantly more to this interim rule than covered here. If you think you might be a covered contractor (or subcontractor) you need to become familiar with it and if necessary, contact your ACO (Administrative Contracting Officer) for assistance in understanding and complying with the new rules including the specifics for reporting cyber incidents.That's the ACO's job. Don't hesitate to call them. If you do not know your ACO, use the DCMA search app to find the name.

Wednesday, August 26, 2015

Who Says That Writing Regulations Can't Be Humorous?

In both fiscal years 2014 and 2015, the Defense Appropriations Acts included provisions prohibiting the use of funds made available under the acts for purchasing or manufacturing United States Flags unless those flags were manufactured in the United States.

In February, the Department of Defense published a proposed DFARS (DoD Federal Acquisition Regulation) provision to that effect. It proposed to amend the Barry Amendment which restricts the purchase of certain items of food, clothing, fabrics, and other items unless the items have been grown, reprocessed, reused, or produced in the United States, by adding the U.S. Flag to the list.

DoD requested public comments to the proposed regulation and received two. One commended the regulation. The other read as follows:
To be hello, and welcome. My name is Zlatan Gojkovic, and I make Flags of America. Real good. You understand, boss?
At the American Flag Corporation of Serbia, our flags have all the stars. Stripes too! Come on cowboys, lets make these flags for real. Buy them from us. We guarantee it.
Flags of America made in America cost lots of U.S. dollars. Thats no good, Jack. Flags made in Serbia cost much less money. Thats dollars in your pocket, and flag for every house.
How do we keep prices low? Thats easy, bub. For many hours a day, village women sew flags. They enjoy it! This, for them, is democracy. Conditions in workhouse are great. George Washington says, Yes, I approve this message!
You want a deal, Ill cut you a deal. Im a businessman, after all. Buy one flag, get one flag free. Double flags, double value for you, and your family. Believe me when Im honest, you wont find an offer like this on any Amazon.
Serbian American Flag Company--pretty nice flags, wouldnt you say?
One would suppose that the DFARS committee wouldn't even acknowledge such a response. It could very well have been a hoax. However, in typical bureaucratic fashion, the Council wrote:
Another respondent requested flags bye purchased from his company in Serbia; however, section 81233 and section 8119 of the DoD Appropriations Acts for 2014 and 2015, respectively, prohibit the use of funds made available under the acts for the purchase or manufacture of a flag of the United States, unless such flag is manufactured in the United States.

Tuesday, August 25, 2015

Done Something Bad? Come Up With a Corrective Action Plan and Everything Will Be Okay Again

It seems like daily we read about another Government contractor embroiled in some kind of legal disputed. Yesterday we discussed Lockheed and the payment it made to settle a False Claims Act investigation by the Government. Whistleblowers are prolific - some out of a sense of duty and others hoping for a big payday. Then there are hiring practices and workplace issues to contend with or defend against. It's enough to make any attorney smile.

So, if there is an on-going investigation of a contractor concerning fraud, false claims, or some other illegal activity, how (and why) does the Government continue to award contracts? FAR 9.104 requires that contractors have a satisfactory record of integrity and business ethics and the contracting officer is required to make an affirmative determination that the prospective contractor is responsible. One company decided to answer this question by appealing the award of a contract to a competitor who was under investigation for two significant FAC (False Claims Act) violations.

In this case, DynCorp claimed that the Army failed to consider the impact of two pending False Claims Act (FCA) cases against its competitor KBR and argued that those cases demonstrate that KBR lacks the requisite satisfactory record of integrity and business ethics to justify an affirmative responsibility determination. Specifically, DynCorp argued that the contracting officer failed to review copies of the complaints filed by the US Government in the two FCA cases and relied exclusively on KBR's general, self-serving reports to the Army Suspension and Debarment Office about those fraud claims.

The Army disagreed. It contended that its affirmative responsibility determination reasonably considered the pending FCA litigation within the broader context of the totality of KBR's present responsibility.

The GAO agreed with the Army. The GAO found that the Army had convened a team that was responsible for researching and collecting data regarding the LOGCAP IV contractors. The team prepared a Contractor Responsibility Report analyzing KBR's present responsibility under each of the FAR 9.104.1 factors and documented its review with source materials including a DCMA (Defense Contract Management Agency) pre-award survey and business system review.

Regarding KBR's record of integrity and business ethics, the team found that a September 2014 DCMA pre-award survey, which was prepared after DoJ filed complaints in the two FCA cases, concluded that KBR's record during the time frame of the survey was satisfactory and reflected no areas of concern, and that KBR was proactive in this area. The team also found that KBR had enhanced its government compliance program, including requiring training and implementing a voluntary disclosure program.

The GAO found that the Army contracting officer was aware of and reasonably considered the pending litigation relied upon by the protestor. For this reason, the GAO concluded that there was no basis to review the contracting officer's affirmative determination of KBR's responsibility.

The key take-away here is that the Government only needs to consider the negatives within the "totality" of the prospective contractors "present responsibility".

You can read the entire (lengthy) GAO decision here.

Monday, August 24, 2015

Lockheed Martin Pays $4.7 Million to Settle Unallowable Lobbying Cost Case

Here's a reminder that lobbying is lobbying and the cost of lobbying activities is unallowable. It does not matter that the lobbying serves other purposes than just lobbying - if it involves attempts to influence the outcome of elections, referendums, legislation, and other governmental actions, it's lobbying effort and unallowable. Just ask Lockheed Martin. To read a comprehensive series on FAR 31.205-22, Lobbying and Political Activity Costs, start here.

Since 1993, Lockheed Martin has operated the Sandia Corporation, a Government-owned, contractor-operated laboratory that is part of DOE's (Department of Energy's) nuclear weapons complex. The initial contract was awarded in 1993 and has been extended non-competitively several times. The contract was set to expire on March 30, 2014 however two weeks before that date, DOE announced that it was "moving forward with a noncompetitive extension for a period of 2 years whith an option for a third year" while it prepared for a full and open competition.

In 2014, DOE's Inspector General published a report that called into question $223 thousand in fees paid by Sandia to Heather Wilson LLC (the principle of which is a former member of the U.S. House of Representatives. That report concluded that Sandia, through this consultant, attempted to influence an extension to the contract and paid for these activities with taxpayer funds.

The IG found that Sandia used Federal contract funds to engage in activities that were intended to influence the extension of the Sandia contract valued at $2.4 billion per year. In particular, Sandia developed and executed a plan that involved meeting with and attempting to influence Federal and congressional officials to provide assistance in obtaining a noncompetitive extension of its contract. The IG found that these expenditures were unallowable under Title 31 U.S.C. 1352, FAR 31.205-22 and the terms of the contract.

Ultimately, the Justice Department opened an investigation into the matter. Last week, the Justice Department announced that Sandia had agreed to pay $4.7 million to resolve allegations that it used pubic funds for lobbying activity.  Sandia, in its defense, maintained that the activities were typical of those for any contract intent on continuing a relationship with its sponsor, especially a long-term relationship, and that it was preparing to demonstrate that it deserved a full 5-year extension as permitted by the FAR. Justice didn't buy that argument and ultimately, Sandia decided to settle. Although $4.7 million is a lot of money, it is no doubt a small fraction of the profits that Lockheed earned from the contract.

No word on how the costs were uncovered. It could have been through routine oversight by contract auditors or from a whistleblower. We do know that DCAA (Defense Contract Audit Agency) has emphasized reviews of lobbying expense in recent years.

Friday, August 21, 2015

Steps for Preparing Good and Defensible Cost Estimates

The sufficiency of your cost estimating system can mean the difference between doom and success. Failure to understand solicitation requirements or failure to accurately estimate the costs necessary to address those requirements could very well result in a loss contract. In extreme cases, it could jeopardize the financial viability of a company.

No one should ever be put in the position of "throwing together an estimate". Cost estimating requires the application of skillful analysis and experienced judgment in projecting labor and material contract requirements. Timing constraints are a constant. A company might have as little as 30 days to respond to a Government solicitation. The availability of historical data will also have an impact on the estimating process.

When it comes to estimating techniques, one size does not fit all. Selections of appropriate estimating techniques require extensive analysis by contractors. Appropriateness of selected estimating techniques should be reviewed periodically. The same technique used when the program is at the engineering-concept stage, or when no bill of materials exists, is usually not appropriate for ongoing production. Because cost estimating integrates technical as well as financial information, the process requires input from many diverse organizational elements.

Although contractor estimating systems differ in approach and philosophy, their basic objectives are the same. Cost estimates are a series of informed projections and assumptions based on available information existing at the time of proposal preparation.

Cost estimating is comprised of logical steps. Typical steps in cost estimating might include:

  1. Ensuring that all relevant background documents such as historical costs, drawings, and specifications are available to assist in understanding job requirements. 
  2. Determining which estimating techniques will be used, the level of detail required, and the amount of time available to generate and document a completed estimate. 
  3. Determining if quotes and other information will be required from outside sources. 
  4. Deciding if any elements require further clarification, redesign, or have potential manufacturing difficulties. 
  5. Determining if the capability and capacity to manufacture required components exist in-house. 
  6. Determining if further information is required to develop and complete estimates. 
  7. Coordinating the activities of departments participating in the estimating exercise. 
  8. Obtaining quotes, history, and other bases for material and subcontract items. 
  9. Assembling direct costs by cost element, and computing indirect expenses using appropriate factors and rates. 
  10. Consolidating proposal elements and documenting preparation rationale. 
Failure to follow a systematic approach to estimating could also lead to allegations of defective pricing. For example, if relevant history is available and was not used and the reason for not using it was not documented, a Government auditor might contend that the contractor did not submit current, complete, and accurate cost or pricing data. It is just as important to document why certain cost or pricing data was not used as it is to justify why other data was used.

Thursday, August 20, 2015

Fixed Price means "Fixed Price" - Contractor Assumes Risks

The U.S. Court of Federal Claims published a decision earlier this week involving a equitable adjustment claim for increased costs under a fixed price contract.

The entire decision can be found here.

The contract called for Agility Defense and Government Services (Agility) to dispose of surplus property received from the military services as troops were departing from Iraq, Afghanistan, and Kuwait. Agility sought   $6.9 million in labor costs it incurred to process property in excess of anticipated quantities.

Under the contract, Agility was responsible for disposing all property received at designated locations regardless of quantity. There was a lot of risk in this contract because if quantities were significantly higher than expected, as they turned out to be, the chances of exceeding the firm-fixed-price were great. Mitigating this risk somewhat, was the contract provision that Agility could keep the proceeds of the sale of scrap material. Thus, if contract quantities were higher than expected, theoretically the contractor's revenue from the sale of scrap would also be higher.

Bottom line, the Court found that the Government's estimated quantities provided to prospective offerors were based on accurate historical data. Even though these estimates proved to be low in comparison to the actual quantities encountered during contract performance, the Government was not negligent in furnishing the historical data. "To be sure, Agility assumed a higher than normal risk in agreeing to a contract of this type, but that was a choice it voluntarily made. In a firm-fixed-price contract like this one, the contractor assumes the risk of controlling its costs of performance, unless it can show that the Government's estimates of quantities were negligent in some respect. The evidence does not support Agility's attempt to shift the risk to the Government and therefore Agility's claimes are denied"

Agility based its claim on three theories. First, the Government did not disclose its "superior knowledge" about scrap estimates and troop movements. Second, the historical data provided to the offerors was negligent. And third, the Government estimates were not reasonable accurate. The court denied each of these theories and denied Agility's claim for an equitable adjustment.

Wednesday, August 19, 2015

Contractor Employee Indicted in $1.9 Million Kickback Scheme

The Department of Justice released a press release earlier this month noting the Federal Grand Jury indictment of a contractor employee accused of accepting kickbacks (and tax evasion). The company he worked for (identified as Company A) furnished supplies, materials, equipment, and services to the Government. He approached a subcontractor to Company A and solicited kickbacks in exchange for:

  1. Refrain from conduct that would unfavorably affect the subcontractor's business relationship with Company A, and
  2. Help ensure that the subcontractor obtained additional subcontracting business.

Between June 2009 and December 2014, the employee accepted 57 kickbacks totaling $1.9 million. That might not have been the extent of the kickbacks - it only represents the amount that the Government investigators found.

In January and February of this year, the employee met with the subcontractor and accepted two more kickbacks totaling $30,000. However, by this time, the Government was on to the scheme and the transaction was "documented".

The contractor employee, whose title is Logistics Manager, maintains his innocence.
I've never done anything illegal in my life. I have a clear record, education wise, work wise, I give 100 percent to everything I do. I wouldn't do something stupid to jeopardize my family.
This is a reminder to contractors that according to the Anti-Kickback Act of 1986, there is a requirement to have in-place, policies and procedures to detect and prevent kickbacks. Read more about the Anti-Kickback Act here.

Tuesday, August 18, 2015

GSA Releases Per Diem Rates for Fiscal Year 2016

The General Services Administration (GSA) has just released Government per diem rates for fiscal year 2016. As most Government contractors are aware, travel costs charged to Government contracts are reasonable and allowable only if they do not exceed these rates. See FAR 31.205-46. FAR contains mechanisms to claim higher than Government per diem when justified and contemporaneously documented. Most contractors though try to avoid the extra Government scrutiny that comes with claiming lodging and meals that exceed the GSA maximums.

The basic per diem rate is $140 per day broken down between lodging at $89 and meals and incidental expenses at $51. This rate represents an 8 percent bump from the fiscal year 2015 rate and applies to about 2,600 locations throughout the lower 48. However, those 2,600 locations are not places where contractor are likely to travel. The preponderance of contractor travel is to the 400 or so locations that justify higher rates based on higher cost of lodging and meals. These 400 locations include all of the major U.S. cities.

Most of the cities have different rates depending upon the time of the year. For example, the lodging rate for Las Vegas is $108 per night from September through January dropping to $93 from February through August. Seattle's lodging rate is $157 from November through March, increasing to $202 per night during the summer tourist season, May through October. Going to New York at certain times of the year gets you $304 per night.

All of the fiscal year 2016 per diem rates are now available. Click here and follow the instructions.

Monday, August 17, 2015

What are "Fraud Indicators"

Following our posting on Courtesy Bids last week and how such bids might be considered a fraud indicator to a contract auditor, the Inspector General (IG) or the General Accountability Office (GAO), we were reminded that a fraud indicator does not necessarily lead to a fraud referral or an investigation. According to the DoD-IG who publishes listings of fraud indicators tailored to the type of audit being performed or the nature of the cost incurred, fraud indicators are designed to get auditors thinking - thinking for one, about the circumstances under which a fraud referral may be made.

Why do auditors concern themselves so much with fraud when fraud is not the objective of their audit? Generally Accepted Government Auditing Standards (GAGAS) require them to do so. It is "baked" into the auditing standards (a.k.a Yellow Book). In fact, the word "fraud" shows up 117 times in the GAO Yellow Book. GAGAS requires the following:
when performing a GAGAS examination engagement, auditors should design the engagement to detect instances of fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements that may have a material effect on the subject matter or the assertion thereon of the examination engagement. Auditors should assess the risk and possible effects of fraud and noncompliance with provisions of laws, regulations, contracts, and grant agreements that could have a material effect on the subject matter or an assertion about the subject matter of the examination engagement. When risk factors are identified, auditors should document the risk factors identified, the auditors’ response to those risk factors individually or in combination, and the auditors' conclusion.
In other words, auditors cannot perform an audit that is compliant with Generally Accepted Government Auditing Standards without considering the potential for fraud and the impact of fraud on the audit subject.. To assist contract auditors in fulfilling its responsibilities, the DoD Inspector General's Office (DoD-IG) has published a listing of fraud indicators to help auditors understand the risks. According to the DoD-IG,
Auditors should familiarize themselves with the basic knowledge provided by the scenarios and creatively use it while performing any audit or review. ... auditors should review the full scenarios at least initially as they provide other valuable information such as examples of analytical procedures, management inquiries, and audit procedures and/or expanded audit procedures to address potential fraud indicators.
Built into every one of DCAA's standard audit programs is a requirement for the auditor to affirmatively consider and document the potential or existence of fraud. For example, the standard audit program for audits of incurred costs, states:
Based on the team's understanding of the criteria, subject matter, and the contractor and its environment, hold a planning meeting with the audit team (at a minimum, Supervisor and Auditor) to discuss and identify potential noncompliances, due to error or fraud, that could materially affect the subject matter. The discussion should include: 
  • relevant prior audit experience (e.g., questioned cost, relevant reported estimating or accounting system deficiencies)
  • relevant aspects of the contractor and its environment
  • risk of material noncompliance due to fraud (e.g., the extent of incentives, pressures and opportunities to commit and conceal fraud, and the propensity to rationalize misstatements)
  • other known risk factors
  • the audit team’s understanding of relevant internal controls. 
Document fraud risk factors/indicators that are present and could materially affect the subject matter. If fraud risk factors are present, document specific audit procedures designed to address the increased risk of material noncompliance due to fraud. Communication among audit team members about the risk of material misstatement due to error or fraud should continue as needed throughout the audit.
Back in the day, auditors did not specifically look for or consider fraud. If they stumbled across fraud during the course of their work, they were encouraged to report it as a suspected irregularity. Now however, they must affirmatively design audit procedures to detect fraud.

Contractors should be aware that every time an auditor steps through the door of their facility, they are actively engaged in considering whether fraud is occurring or has occurred.

Friday, August 14, 2015

Eight Ways to Improve Your Internal Controls Over Labor Charging

Almost every Government contractor with cost-type contracts has experienced or is at least aware of the possibility of "floorchecks". That's is the process where Government auditors interview contractor employees to determine whether they are familiar with and are following the contractors' timekeeping policies and procedures.

Before an auditor conducts interviews however, he/she must have a very good understanding of the timekeeping system itself and the system of internal controls necessary to ensure accurate recording of time. To accomplish this, there are eight considerations an auditor will undertake to establish whether the timekeeping, payroll, and labor distribution systems are sufficient for ensuring that the hours worked are converted to dollars and recorded against Government contracts.

These eight considerations include:

  1. Determine whether employee attendance is controlled by clock cards, timecards, other suitable time and attendance records, or are input and captured electronically.
  2. Identify the process for controlling employee time records at each timekeeping station or the electronic timekeeping input and related records. Employees should maintain their own timecards and if using an electronic system, should access with user identifications and passwords that are not shared.
  3. Determine the procedures for notifying the employee of the assigned job number and whether the procedures provide that all changes are properly initialed/approved by the employee and the designated approving supervisor.
  4. Determine whether hours shown on the timecards or input electronically are reconciled periodically with hours Master Document recorded on attendance and payroll records. Someone in the company needs to be assigned responsibility for this reconciliation.
  5. Determine whether there is a division of responsibility within the company between personnel responsible for the preparation and/or approval of time and attendance records and those responsible for preparation and distribution of payroll. Ensure a proper division of responsibility exists within the payroll department.
  6. Determine whether there is a division of responsibility between personnel having a part in the preparation and/or approval of time and attendance records and those responsible for operating within budgets. If a division of responsibility does not exist, the risk increases for affecting payroll in proportion to the number of personnel the employee/manager can influence.
  7. Determine whether procedures have been established for coding and recording idle time.
  8. Determine whether records of piece work and work performed under wage incentive plans are checked and controlled independently from production counts, approvals for allowances, and other operations. 
The sufficiency of these controls will greatly influence the number of interviews auditors will need to conduct in order to satisfy themselves as to the propriety of labor charged to Government contracts. Contractors will do well to implement systems to reduce the risks of improper labor charging.

Thursday, August 13, 2015

Whistleblower Settles for $4.1 Million

A Government contractor reached a settlement to a lawsuit brought by one of its former employees. The $4.1 million settlement ($2.5 to the employees and $1.6 to the law firm) came before the case was set for jury trial in Federal court.

In 2010, the Federal contractor employee raised concerns that technical issues had not been resolved in a plant being constructed to turn radioactive "sludge" into a stable glass form (a process called vitrification). The employee alleged that the contractor was pushing hard to meet a deadline. Meeting that deadline was necessary in order for the contractor to receive millions of dollars in award fees.

A few days after raising his concerns, the employee was removed from the project and escorted from his office. The former employee claimed that he was removed from his job in retaliation for raising those technical issues. He continued to work for the contractor but had no meaningful duties and was ultimately laid off 15 months later.

Construction on the key parts of the plant has been halted since 2012 to resolve those technical issues raised by the whistleblower.

Online source: Tri-City Herald

Wednesday, August 12, 2015

Organizational Conflicts of Interests (OCIs) - Strong and Direct Linkage Needed

FAR (Federal Acquisition Regulations) 9.5 provide rules for avoiding organization conflicts of interest (OCIs) and where the potential or OCIs exist, procedures for neutralizing and mitigating those risks. For example, a contractor that provides systems engineering and technical direction to the Government cannot be awarded a contract to supply the system or a contractor that prepares and furnishes specifications to be used in a competitive acquisition cannot be allowed to furnish those items. And there are more examples - see FAR 9.505-1 through 9.505-5.

FAR obligates an agency to conduct an organization conflict of interest analysis for significant conflicts, and contracting officers are given broad discretion in determining whether the potential conflict of interest is significant. A significant potential conflict is one which provides the bidding party a substantial and unfair competitive advantage during the procurement process on information or data not necessarily available to other bidders.

In a recently published bid protest decision by the U.S. Court of Federal Claims, an unsuccessful bidder protested the award of a contract to a competitor on the grounds that an OCI existed between the winning bidder and the Governmental agency awarding the contract (see Vion Corporation v. The United States and World-Wide Technology, Inc.)

The plaintiff, ViON Corporation, argued that the Defense Information Systems Agency (DISA) failed to properly evaluate a potential organization conflict of interest regarding the winning bidder, World Wide Technology or WWT. ViON contended that an OCI arose because another DISA contractor, the Evaluator Group, has a strong financial relationship with Hewlett Packard (HP), one of the subcontractors for WWT. An employee (and co-founder) of the Evaluator Group conducted training for DISA employees. The Evaluator Group also recommended HP products on its website. And so, ViON contended that the Evaluator Group's work with HP may have affected the contract award process by influencing DISA's expectations.

The Court ruled that ViON's allegation of a potential OCI was not substantiated by the facts. The administrative record shows that the alleged connection between the Evaluator Group and the ultimate contract was tenuous, at best. ViON provided no evidence to show that the Evaluator Group employee had any impact on the procurement process. In fact, DISA did not use the Evaluator Group as a consultant for any aspect of the procurement process.

Tuesday, August 11, 2015

Contract "Over and Above Work"

Contracts for the performance of maintenance, overhaul, modifications, and repair of various items (e.g. aircraft, engines, ground support equipment, ships) usually contain over and above work requirements. When they do, the contracting officer must establish a separate contract line item for the over and above work.

The over and above clause requires contractors to identify needed repairs and recommend corrective action during contract performance. The contractor submits a work request to identify the over and above work and, as appropriate, the Government authorizes the contractor to proceed.

The clause (DFARS 252.217-7028) also requires the contractor and the contracting officer responsible for administering the contract to negotiate specific procedures for Government administration and contractor performance of over and above work requests.

Not all over and above work requests are accepted. Most of us have had the experience of taking our car in for servicing only to have the mechanic call back to tell you that in addition to the problem you brought the car in for, he found some other items that needed fixing. The same applies to over and above requests. Contracting officers are inherently suspicious when told that something not in the initial scope of work had been discovered and needed fixing.

One of the biggest problems in this are involves disputes over what was considered base contract work and what is included in over and above work. In this regard, clearly written solicitations and contracts will help alleviate many of those issues.

Monday, August 10, 2015

What are Undefinitized Contract Actions (IUCAs)

 Undefinitized Contract Actions (UCAs) are contracting vehicles that allows contractors to begin work on a contract before a formal contract is issued. There are many reasons who UCAs are necessary but most of the time its because of an urgent need for a particular item or service. The process from drafting a solicitation to awarding a contract can take many months depending upon complexity. We've seen cases that exceed a year. Some UCAs are change orders where the Government needs to change some element of a contract specification but does not want to unavoidably delay production.

UCAs are generally considered high risk to the Government because by the time negotiations commence, many of the costs have already been incurred. That makes UCAs very similar ot cost-type contract.

Because of the high risk nature of UCAs, there is a high bar for contracting. The contracting officer must prepare an approval package that includes:

  1. Documentation for why a UCA is required,
  2. A detailed explanation for the need to begin performance before definitization,
  3. Address the adverse impact on agency requirements that would result from delays in beginning performance,
  4. Identify the risk of using a UCA and the means by which the Government will mitigate such risk,
  5. Identify and justify the specific contractual instrument to be used
  6. Establish limitations of the obligation of funds, and
  7. Provide the definitization schedule of agreed-upon events that support timely definitization.

Sometimes the Government will request the contractor to help prepare the documentation package - especially for establishing price ceilings (need estimates that only a contractor can provide) and definitization milestone schedules (need to make sure that the contractor will /can support the schedule). It wouldn't be prudent for the Government to establish a milestone schedule independent of the contractor.

Friday, August 7, 2015

Government Cannot Base Selection on Factors Outside the Solicitation

There are a variety of methods the Government utilizes to determine the reasonableness of prices. In the context of fixed-price contracts, the Government can perform Price Reasonableness Determinations and Price Realism Determinations. Simply stated, "reasonableness" considers whether the price is too high while "realism" considers whether the price is too low. Click here to read a previous posting on Price Reasonableness vs Price Realism. The Government can use either method or both but must also state in the solicitation its intent. If it does not list price reasonableness and/or price realism as evaluation factors, the Government cannot base its selection on the application of those factors.

To illustrate, consider the bid protest decision handed down earlier this week by the Comptroller General (see Lilly Timber Services, B-411435.2).

Lilly protested the award of a fixed-price contractor to a competitor, challenging Agriculture's conclusion that Lilly's low prices created a risk of unsuccessful performance. The solicitation lacked any evaluation criteria that reasonably would have put vendors on notice that Agriculture intended to consider "price realism" of vendor prices. GAO sustained the challenge.

The solicitation stated that award would be made to the lowest reasonable price and responsive/responsible (past performance) vendor. According to the solicitation, past performance was considered equal in weight to price. In evaluating the prices, Agriculture noted that Lilly's prices were more than 30 percent lower than the Government estimate and therefore created a risk of unsatisfactory performance.

However, the solicitation did not furnish vendors with reasonable notice that Agriculture intended to perform a price realism analysis. Rather, the solicitation provided only for the evaluation of the reasonableness of the quoted price, that is, whether the price was unreasonably high. Below-cost prices are not inherently improper when vendors are competing for award of a fixed-price contracts. Because Agriculture's award decision "clearly relied" on its assessment of risk related to the protester's low fixed-price, the GAO concluded that Agriculture failed to reasonable evaluate Lilly's quotations.

Thursday, August 6, 2015

New Executive Order Coming on Sick Leave for Federal Contractor Employees

The New York Times reported yesterday that the President is preparing an Executive Order (EO) on paid sick leave for federal contractors.

See online source.

According to the article, the EO would set a minimum of 56 hours a year of paid sick leave (seven days) for not only employee illnesses but also caring for a child, parent, spouse, domestic partner "or any other individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship."

The EO would apply to absences from work resulting from domestic violence, sexual assault or stalking, if that time was used to seek medical attention, obtain counseling, seek relocation assistance from victim services organizations or prepare civil or criminal proceedings.

One other feature of the EO would allow federal contractor employees to carry over their unused sick leave indefinitely.

The EO is unlikely to impact major contractors like Boeing or Lockheed or Raytheon who already have sick leave policies in place that exceed 56 hours per year, but we don't know whether those policies allow unlimited carryover of unused sick leave. The EO, according to the article, will likely hurt the small contractors who will need to increase the sick leave benefits it offers its employees.

When the President used the EO mechanism to require Federal contractors to pay a $10 minimum wage, 300 thousand contractors were impacted.

California implemented its own sick leave law in July. Under California law, employees who work in California for 30 or more days within a year from the beginning of employment is entitled to paid sick leave. Sick leave accrues at the rate of one hour for every 30 hours worked. That will net the employee 69 hours per year - a little more than the EO plan of 56 hours. However, under California law there is a cap to the amount of sick leave that can be carried over. Unused sick leave carries forward to the following year and may be capped at 48 hours.

Wednesday, August 5, 2015

Avoid "Courtesy Bids" - Government Considers Them to be Fraud Indicators

Although the number is down from a few years ago, the Government still performs audits of contractor compliance with TINA (Truth-in-Negotiations Act). These audits are also referred to as Defective Pricing audits. Under TINA, contractors have the affirmative duty to ensure that the cost or pricing data submitted to support a proposal to the Government is based on data that is current, complete, and accurate. Under current audit guidance, all instances of defective pricing are considered for possible fraud referral. That does not mean that all instances of defective pricing are ultimately reported as potential fraud - it means that the auditors will discuss among themselves and consult the DoD-IG's (Inspector General's) listing of fraud indicators to assess whether the submission defective cost or pricing data was laced with fraud.

The DoD-IG maintains a listing of Fraud Red Flags and Indicators on its website. DCAA auditors, as part of every audit they perform, are required to consult one or more of the indicator listings as pertinent to the particular audit they are performing. One of the fraud risk indicators for defective pricing is the contractor's use of vendor "courtesy bids".

In a published case study, DCAA reviewed the contractor's estimate for material pricing and found that the contractor's estimates for five of 40 parts selected for audit were based on courtesy bids. Vendors confirmed to the auditors that they issued courtesy bids when requested but they refused to do business with the contractor because of the complicated Government regulations that would have to be followed. The contractor used these courtesy bids to price the material, but later, purchased the parts from other vendors at lower prices.

Requests for competitive bids sent to vendors that a contractor knows will be either too high to be considered or does not meet contract specifications are not current, complete, and accurate cost or pricing data. The purpose of these bid solicitations is to create the appearance of competition and conceal secretly inflated prices included in the proposal.

Now here's the bottom line. According to the DoD-IG, such courtesy bids (also called complementary, or cover bids) are a form of bid rigging. Bid rigging occurs when competitors conspire to raise prices or keep prices artificially high when competitive bids are solicited prior to contract or subcontract award. Auditors will now be specifically looking for instances of courtesy bids. Contractors will do well to avoid even the appearance of incorporating them into cost or pricing data.

Tuesday, August 4, 2015

Cost Impact Proposals - Cost Accounting Standards

Under the FAR (Federal Acquisition Regulations) CAS (Cost Accounting Standards) clause (FAR 52.230-2), there are requirements for contractors to prepare and submit cost impact proposals is there are any increased costs to the Government resulting from (i) a failure to comply with CAS or (ii) a failure to follow consistently its disclosed cost accounting practices in estimating, accumulating, and reporting costs on CAS-covered contracts (and subcontracts). Additionally, cost impact proposals are required when a change from one accounting practice to another is required to comply with a cost accounting standard that subsequently becomes applicable to a contract or is necessary for the contractor to remain in compliance. Fourthly, cost impact proposals are required when a contractor wishes to change its methods for accumulating costs (voluntary accounting change). Some of those voluntary changes are fine. The CFAO (Cognizant Federal Agency Official) (usually the administrative contracting officer) may determine that an accounting change from one compliant practice to another is desirable and not detrimental to the Government. However, if the CFAO has not deemed the change desirable, the contractor may owe the Government some money if the change results in increased costs to the Government.

The purpose of this advisory is to alert contractors to the fact that if they fail to submit required cost impact proposals or fail to submit timely cost impact proposals, the Government is going to do it for you. And that is usually not a good thing.

FAR 52.230-6 provides that if the contractor fails to submit a cost impact proposal, the CFAO (Cognizant Federal Agency Official), with the assistance of the contract auditor (e.g. DCAA), shall estimate the cost impact on contracts and subcontracts containing the CAS clause. So realistically, the CFAO isn't going to have the information needed to estimate a cost impact so he/she will be relying upon DCAA to do it. But the auditor will not have all the information necessary to accurately estimate a cost impact so the auditor's estimates are sometimes nothing more than SWAGs.

The auditor will base his/her estimate on readily available data. The objective in such an exercise is not to relieve a contractor of its responsibility for preparing a required cost impact proposal, but to provide sufficient information upon which the CFAO can base a decision to withhold payment. Once the CFAO has made the decision to withhold payment, the burden of proof rests with the contractor to demonstrate, through a detailed analysis, the cost impact on each CAS-covered contract.

How much is the withhold? FAR provides that the CFAO can withhold up to 10 percent of each payment request until the cost impact has been recovered. That amount can seriously disrupt a contractor's cash flows.

If you owe the Government a cost impact, don't let it get to the point where the Government is going to estimate it for you.

Monday, August 3, 2015

Expressly Unallowable Costs - ASBCA Narrows the Definition

Expressly unallowable costs are particular items or types of costs which under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable (FAR 31.001). Contractors who include expressly unallowable costs in their final indirect cost rate proposals are subject to penalty equal to the amount of the expressly unallowable costs (FAR 42.709-1). The Government, and in particular DCAA (Defense Contract Audit Agency) are usually very aggressive in making a connection between unallowable costs they find during an audit and the "expressly" unallowable provisions of FAR. By doing so, the Agency can recommend that contracting officers assess penalties, and the Government recoups more money from contractors. Refer to our five-part series on expressly unallowable costs from 2013.

Late last year and earlier this year, DCAA (Defense Contract Audit Agency) issued a pair of audit guidance memorandums on the subject of identifying unallowable costs that are "expressly" unallowable. The first one was dated December 18, 2014, subject: Audit Alert Distributing a Listing of Cost Principles That Identify Expressly Unallowable Costs. This memorandum contained a 32 page matrix of FAR cost principles that identified expressly unallowable costs. The second was issued on January 7, 2015, subject Audit Alert on Identifying Expressly Unallowable Costs. This guidance differentiated between unallowable costs stated in direct terms and unallowable costs not stated in direct terms. Either way, according to DCAA, the unallowable costs were "expressly" unallowable. We wrote about these two memorandums when they first appeared on DCAA's website. The first posting was dated January 28, 2015 and entitled Cost Principles that Identify Expressly Unallowable Costs. The second was the following day and entitled Identifying Expressly Unallowable Costs. At the time of our blog posts, we expressed our concern that DCAA was taking liberties with the FAR cost principles by calling out unallowable costs not stated in direct terms as expressly unallowable. The crux of the Agency's position was that if the cost principle left little room for differences of opinion as to whether the particular cost meets the allowability criteria, any unallowable costs were "expressly" unallowable.

The ASBCA (Armed Services Board of Contract Appeals) recently issued a decision that should cause DCAA to rethink its guidance (Raytheon Company ASBCA Nos. 57576, 57679, 58290 dated June 26, 2015).

In the Raytheon case, the Government contended that Raytheon failed to identify and exclude from its cost submissions, the cost of bonus and incentive compensation (BAIC) for those persons engaged in activities that generate unallowable costs under several cost principles (i.e. FAR 31.205-1, -22, -27, and -47) and that are expressly unallowable under these principles. Under the Government's logic, these directly associated costs were expressly unallowable because they related to expressly unallowable activities.

The Board ruled that BAIC cost is an item or type of cost, but it is not specifically named and stated as unallowable under FAR. While portions of salaries and fringe benefits are stated as unallowable, the Government, as claimant, has not show that BAIC constitutes either one. The Board believed that BAIC costs are not expressly unallowable costs.

The key point from the Raytheon decision is that costs must be specifically named and stated as unallowable in order for them to be considered expressly unallowable. This differs significantly with DCAA's position that if the cost principle leaves little room for differences of opinion as to whether the particular cost meets the allowability criteria, the costs are expressly unallowable.

If you are facing penalties for expressly unallowable costs, we recommend you consider whether such costs meet the tight FAR definition of expressly unallowable costs, as confirmed by the ASBCA in the Raytheon case.