Friday, October 30, 2015

ASBCA's Annual Report

The Armed Services Board of Contract Appeals (ASBCA) issued its Fiscal Year 2015 Annual Report summarizing the adjudication of appeals of DoD agencies as well as CIA, NASA, and the Washington Metropolitan Area Transit Authority. (There are other Boards of Contract Appeals; the CBCA (Civilian Board of Contract Appeals) being the second largest behind the ASBCA).

This annual report provides some statistical insight into the activities of the Board. In summary, 668 appeals were docketed during Fiscal Year 2015 and 647 were disposed. That was a net increase of 21 cases indicating that the Board didn't lose too much ground in disposition cases during the year. At the end of Fiscal Year 2015, the backlog of appeals pending numbered 1,087 cases.

Of the 647 appeals dispositioned during the year, 64 were sustained and 57 were denied. The remaining 526 cases were dismissed. There was no indication in the report concerning the reasons for dismissal. Often times, dismissals are the result of settlement between the parties prior to trial.

During the year, there were 41 elections to have appeals processed under Rule 12, Expedited and accelerated procedures, 8 applications under the Equal Access to Justice Act (attorney fees), and 13 motions for reconsideration.

Parties requested the Board's non-binding ADR services 37 times. During the year, 31 ADR requests were concluded. 29 of the 31 requests were successful and only two were unsuccessful.

Of the 121 appeals disposed on merit, 53 percent were decided in favor of the appellant.

You can read the entire annual report here.

Thursday, October 29, 2015

Reminder to File Subcontract Reports

Contractors receiving a contract for more than the simplified acquisition threshold (currently $150 thousand) agree to utilize small businesses, small disadvantaged businesses, women-owned small businesses, historically underutilized business zone small businesses, veteran-owned small businesses, and serviced-disabled veteran-owned small business concerns participate in the performance of the contract to the extent practicable. Contractors receiving a contract or a modification to a contract expected to exceed $700 thousand must submit a subcontracting plan that provides maximum practicable opportunities for those types of businesses (see FAR 19.702).

In conjunction with these subcontracting plans for contracts greater than $700, contractors are required to submit semi-annual reports of the small business subcontracting progress to the Government. These semi-annual reports must be entered into the Individual Subcontract Report (ISR) module in the Electronic Subcontracting Reporting System (eSRS). The ISR is the electronic equivalent of the Standard Form 294, Subcontracting Report for Individual Contracts. The SF 294 is still used for certain contracts (e.g. classified contracts) but the electronic version is generally required.

These reports compare actual dollars awarded to the various classifications of small businesses with the contractor's goals for awards to those categories. Where do the goals come from? Usually the contractors goals conform to the Federal Government's goals. If they do not, contractors will probably be receiving a call from their contracting officers asking why not. Refer to the SBA website for the current goal percentages.

The cost to comply with the subcontract reporting requirements is not insignificant. The Government estimates that contractors will expend 40 hours per year to comply. This, in our opinion, is significantly understated however some larger contractors have implemented systems to facilitate the collection and reporting process.

Wednesday, October 28, 2015

Your Employees May Be Real Good, But Not Qualified

Here's a recent case where the Navy awarded a contract to a company whose proposal was technically unacceptable. An appeal by a losing offeror was sustained by the GAO (Government Accountability Office).

The Navy issued a solicitation for field engineering services in support air control tracking systems at various Fleet Area Control and Surveillance Facilities (FACSFACs).  The solicitation identified the labor category of Engineering Technician VI as key personnel for whom offerors were to submit resumes demonstrating the person's experience and specialized qualifications. The solicitation also specified minimum educational and experience requirements for these key personnel including an associate degree in electronics or engineering technology and 16 years of practical experience in electronics or engineering technology. Within that 16 years of experience, there were sub-requirements for specialized experience. The solicitation also allowed offerors to substitute the associate degree with two additional years of experience.

The Navy awarded the contract to Honeywell. Another offeror appealed arguing that five of the eight engineering technician VIs proposed by Honeywell did not meet the minimum experience requirements of the solicitation. The Comptroller General (CG) looked into the matter and found that the experience of the Honeywell technicians did not meet the minimum requirements specified in the solicitation despite the fact that the Navy argued that these employees were highly qualified for the tasks. The CG noted that the key personnel qualification requirements may have been excessive for the work required.

The CG recommended that the Navy re-examine the key personnel qualification requirements established in the RFP to determine whether they accurately reflect the agency's needs. If so, the Navy should reject Honeywell's proposal as unacceptable under the specific terms of the solicitation and make a new source selection consistent with the solicitation. If, on the other hand, the Navy determines that the specifications overstate (or otherwise fail to reflect) the agency's actual minimum requirements, the Navy should amend the solicitation requirements and re-open the bidding process.

You can read the entire Comptroller General decision here.

Tuesday, October 27, 2015

Guilty Plea for Filing False Timesheets

Labor costs charged to Government contracts represents the single biggest cost element on most contracts. It is the cost element that represents the highest risk to the Government, not only because of its significance but because it is not generally subject to third party verification. Unlike material costs where support includes purchase requisitions, purchase orders, vendor invoices and receiving reports that corroborate the charge, labor is supported only by a time sheet. That is why Government auditors spend so much time and energy performing floorchecks (interviewing employees at their place of work) and that is why auditors spend so much effort in reviewing policies and procedures over timekeeping and testing contractor/employee compliance with those policies and procedures.

Falsifying time cards (to use the old vernacular) is serious business. People have been reprimanded, suspended, fired, fined, and some have even gone to prison for falsifying timecards. Their employers (e.g. Government contractors) have had to pay restitution and fines. Falsification takes many forms. It might be that an employee charges time to one project and works on another. It might mean that the employee charges time for hours not worked. It could be that an employee charges hours to tasks that they are not qualified to perform. Whatever the case, the Government is not getting what it paid, or is paying, for.

Yesterday, for example, the Department of Justice issued a press release announcing that an employee of a Government contractor had plead guilty of filing false time sheets. In this case, the employee, working as a linguist, made false statements concerning the number of hours worked for a NSA (National Security Agency) contractor. Over a two year period, this employee charged 736 hours on his time sheet than he actually worked, resulting in overcharges to the Government, by the time indirect costs were added, of $69 thousand. He now faces a maximum five year prison sentence and a $250 thousand fine in addition to paying restitution (he'll probably be put on probation).

DoJ's press release did not say how the fraud was uncovered. As a linguist working in an NSA facility, he probably did not have a significant amount of management oversight from his employer, a significant internal control weakness in itself. His supervisor was probably signing off on timecards without having first-hand knowledge of his work habits and patterns.

You can read the full DoJ press release here.

Monday, October 26, 2015

Plans for Reducing the Number of EVMS Certification Reviews

FAR (Federal Acquisition Regulations) 34.2 requires contractors that receive awards for major acquisitions for development to have an EVMS (Earned Value Management System) that complies with ANSI/EIA (American National Standards Institute/Electronic Industries Alliance) Standard 748. The idea here is that if implemented properly, the EVMS will provide an early warning of cost overruns and schedule delays.

Contractors required to implement ANSI/EIA compliant EVMS however know full well that the cost of compliance is significant. By OFPP's (Office of Federal Procurement Policy) own estimate, the cost of certification can exceed $1 million. In addition, some contractors are finding that once they achieve certification of its system from one agency, find that other agencies will not recognize that certification and will insist on performing their own certification at additional cost to the contractor (and to the Government program).

Contractors have observed that the certification processes used by some agencies are very similar. They should be because they all work off of essentially the same "audit" program. Last year's Open Dialogue on Improving Federal Procurement raised many concerns over eliminating or reducing duplicative processes as one avenue for improving the Federal procurement process. Chief among those concerns was the repetitive and expensive EVMS certification processes borne by contractors.

To reduce such repetitive and expensive certifications, the OMB's Office of Federal Procurement Policy, is encouraging agencies to share the details and results of their EVMS certifications and enter into reciprocal agreements with other agencies and to post their EVM processes and procedures on their public websites. Sharing such information should help identify redundancy in the certification processes. If an agency determines that its certification process is substantially similar to the certification process of another agency, the agency should consider whether it is feasible to enter into an agreement with the other agency for the mutual recognition of the EVMS certification.

There is a role for contractors in this new procedure. The procedure does not establish a central repository for EVMS certifications and agencies are not likely to poke around in other agencies websites to determine whether any certifications have been completed. Therefore, contractors need to alert pending EVMS certification teams if a previous certification has been completed and ask that they consider relying on the results of that certification.

OMB's guidance on this matter can be found here.

. , These observations have reached the attention of the OMB's Office of Federal Procurement

Friday, October 23, 2015

President Veto's the Fiscal Year 2016 NDAA

Yesterday, the President vetoed the Fiscal Year 2016 National Defense Authorization Act (NDAA). His message accompanying the veto and his rationale for doing so can be read here. The reasons for rejecting the bill did not include objections to any of the procurement related provisions that we discussed last month (for example, see here, here, and here). 

It is not clear what will happen next. News reports project that the Senate has enough votes to override the veto but not the House. The Chairmen of the Senate and House Armed Services committees have both stated that there is no backup plan for the authorization bill so until someone blinks, the defense bill languishes.

Thursday, October 22, 2015

Growing Out of Small Business Size Status

A recent Comptroller General decision highlights what should happen under procurement regulations when a company grows out of its small business status and holds a contract that was awarded prior to growing out of its small business status.+

In 2009, the Air Force issued a solicitation for  IT services. The solicitation was set aside for service-disabled, veteran-owned small businesses (SDVOBs) holding ID/IQ (Indefinite-Delivery/Indefinite-Order) contracts with GSA. The solicitation called for a base period of five years and a five year option.

A company named OBXtek won the award. Five years later (in 2014), the Air Force exercised the five year option. However, when the Air Force exercised the option, OBXtek was no longer a small business - it had grown.

Another company protested the Air Force's option exercise on the basis that OBXtek was no longer a small business and the award was set aside for small businesses. The protestor argued that the contracting officer failed to exercise due diligence with respect to OBXtek's SDVOSB status (among other things).

The Comptroller General (CG) denied the protest. Essentially, the CG (with help from the Small Business Administration) ruled that an offeror's size status is determined at the time it submits its proposal, not at the time that it is issued a task order.

Wednesday, October 21, 2015

Billing Rates - Revise Them Whenever Necessary

We've written about billing rates (see FAR 42.704) before but this isn't a re-post. We are seeing a lot of misinformation passed around and frankly, some goofy positions taken by Government contracting and audit personnel regarding billing rates. Here's the deal with billing rates. Billing rates should be adjusted as often as necessary to reflect contractors' best estimates of final year-end rates. Billing rates are not sacrosanct. They must be adjusted whenever necessary to prevent substantial overpayment or underpayment of indirect costs (see FAR 42.704(c)).

Billing rates established at the beginning of the year can be based on the prior year's actual rates, the prior year's actual rates adjusted for known changes in workload and other factors, discrete forecasts, budgetary data, or some combination of these methods. As the year progresses, estimates become "actual costs" and indirect rates can be derived from actual costs. In all likelihood, actual rates are not going to mirror billing rates. If actual rates are materially different than billing rates, an adjustment is necessary.

If billing rates are higher than "actuals", the Government ends up temporarily paying too much. We say "temporarily" because billing rates are eventually adjusted to final year-end rates and ultimately to negotiated or settled rates.

If billing rates are lower than "actuals", the contractor is not being reimbursed all of its allowable, allocable, and reasonable indirect costs. While adjustment at year-end will also take care of underbillings, contractors are losing out on cash-flow but more importantly, the Government doesn't know what the contract is really costing and may have allocated funds away from the contract.

So, contractors should be monitoring their actual incurred cost rates, measuring them against provisional billing rates. When the difference - either higher or lower - becomes material, send a letter to your contracting officer and/or contract auditor revising those billing rates.

Don't let the Government tell you that you cannot revise your billing rates. Revisions are absolutely required by FAR when billing rates are no longer equitable to either the contractor or the Government.

Tuesday, October 20, 2015

Pay Your Taxes or Don't Get a Contract

The Department of Defense yesterday issued a directive that prohibits the award of any contract using Fiscal Year 2016 funds to firms with unpaid delinquent tax liabilities or a felony conviction under Federal law.

The definition of "unpaid delinquent tax liabilities" reads:
Has any unpaid Federal tax liability that has been assessed, for which all judicial and administrative remedies have been exhausted or have lapsed, and that is not being paid in a timely manner pursuant to an agreement with the authority responsible for collecting the tax liability, where the awarding agency is aware of the unpaid tax liability, unless the agency has considered suspension or debarment of the corporation and made a determination that this further action is not necessary to protect the interests of the Government.
So, how is the contracting officer going to know that an offeror or prospective contractor has any unpaid delinquent tax liabilities? Do they have a pipeline into the Internal Revenue Service? Well, no. Not yet anyway. Contracting officers are going to find out because prospective contractors must now certify or represent that they do not have any delinquent unpaid federal taxes.

There is a new provision that will be included in all solicitations that require contractors to "represent" that they do or do not have any unpaid delinquent federal tax liabilities. That provision is located in DoD FAR Supplement 252.209-7991.

Presumably this prohibition applies only to contracts awarded by the Department of Defense.

Monday, October 19, 2015

Health Care Costs for Ineligible Dependents

The brouhaha over contractors paying for health care costs of ineligible dependents has largely died down since last year. The largest category of ineligible dependents are those who have "aged" out of the company plan. Employees often forget to notify HR when there is a change is status for healthcare eligibility and historically, many contractors did not have procedures in place to validate dependent eligibility. See Health Care Benefits Paid to/for Ineligible Dependents for further information on this subject.

But just because its not in the news any longer, doesn't mean that the subject is being ignored. Contract Auditors continue to test contractor policies and procedures for ensuring the eligibility of dependents. The standard audit program for audits of all incurred costs, no matter the contractor size, included the following:
Health Care Costs. As part of the review of health care costs, verify the contractor included only health insurance premiums and claims for “eligible dependents”. Request the contractor to demonstrate its procedures for ensuring only costs related to eligible dependents have been included in the claimed costs. Based on the understanding of the contractor’s processes and overall risk, design procedures to test claimed costs are related to only eligible dependents. 
The focus of this audit procedure is the contractor and the contractors procedures for ensuring only costs for eligible dependents have been claimed. If contractors do not have such procedures in place or do have but they are deficient in some respect, the auditor could make any number of recommendations. We saw one case where, in 2013, the auditor demanded a contractor prove that a listing of dependents from 2006 were eligible for medical care. The contractor couldn't so the auditor questioned all of the dependent health care costs, whether eligible or not. That disagreement is still pending with the contracting officer.

Friday, October 16, 2015

Past Performance Ratings - Government is Improving its Compliance Rate

Performance information (adjectival ratings and supporting narratives) about contractors' work on previously awarded contracts is used by the Government for future source selection purposes. The "Past Performance Assessments" cover such  aspects as

  • conforming to requirements and to standards of good workmanship
  • forecasting or controlling costs
  • adherence to schedules, including the administrative aspects of performance
  • reasonable and cooperative behavior and commitment to customer satisfaction
  • reporting into databases and reporting requirements in the solicitation provisions and clauses referenced
  • integrity and business ethics, and
  • business-like concern for the interest of the customer.

It is federal procurement policy for the contracting officer to prepare past performance appraisals at least annually and also, at the end of the contract (see FAR 42.1502). These assessments are posted to CPARS (Contractor Performance Assessment Reporting System) and are then available for just about anyone working in Government procurement to lookup and review.

For contractors, it is important that past performance data be prepared timely and made available for contractor selection and award purposes - especially for ratings of "exceptional" or "very good". Exceptional means that performance meets contractual requirements and exceeds many to the Government's benefit. Its good to go the extra mile and get noticed. The Government relies on this information to make best value source selection decisions.

The Government monitors contracting officer compliance with the Past Performance reporting requirements. The Department of Defense recently published departmental compliance statistics that show a compliance rate of 83 percent for the fourth quarter of Fiscal Year 2015 against a goal of 100 percent. Although slightly improving from the previous quarter, there is still need for improvement.

Contractors usually benefit by having past performance ratings on file. Contractors that don't receive them, should ask their contracting officers to prepare them.

You can read DoD's latest summary here.

Thursday, October 15, 2015

Where Were the Auditors for Eight Years?

The Department of Justice sent out a press release yesterday announcing that Boeing had agreed to settle false claims allegations for $18 million. DoJ press releases announcing multi-million dollar settlements are not unusual. And, in this case, Boeing did not admit liability - it only paid to move some allegations behind it. What fascinated us with this case is that the practice that gave rise to the whistleblower allegations had gone on for eight years - eight years when DCAA (Defense Contract Audit Agency) and DCMA (Defense Contract Management Agency) had platoon-sized cadres scurrying around the plant making sure Boeing wasn't charging the Government too much money. What makes the situation more dismal is that it wasn't the auditors or the contracting officers that discovered the practice - it came from a Boeing insider - a whistleblower.

The essence of the allegation is that Boeing over-billed the Government for labor charged to maintenance contracts with the Air Force for the C-17 Globemaster. Employees came to work and left eight hours later and were paid for eight hours. The only problem was that withing the eight hours shifts, the employees enjoyed their lunch hour and took extended breaks. The Government did not receive eight hours of work from these employees but paid Boeing for eight hours of work.

One really has to wonder what the auditors were doing for those eight years?

Oh yes, the whistleblower received $3.2 million out of the $18 million settlement.

Wednesday, October 14, 2015

Independence of Mind vs Independence in Appearance

We do not write often on details of auditing standards. We have mentioned Generally Accepted Government Auditing Standards (GAGAS) in a broad sense such as Monday's posting where a Government solicitation for GAGAS audit services required offerors to have had a peer review or where a contract auditing agency is being criticized for not complying with GAGAS in the performance of an audit. Government contractors don't often concern themselves with why an auditor decides to sample 10 transactions in an account or interview a certain number of employees in a floorcheck - they're usually focused on satisfying and responding to auditor requests for data, information, and analyses.

There is one GAGAS requirement that contractors should be aware of because it could affect the outcome of an audit. The requirement is the first of the "General Standards" found in Section 3.02 of the GAO Yellow Book (a.k.a GAGAS). The General Standards establish a foundation for the credibility of the auditors' work. The first standard is the Independence standard and requires that in all matters relating to the audit work, the organization and the individual auditor, whether government or public, must be independent.

Independence comprises independence of mind and independence in appearance. Independence of mind is the state of mind that permits the performance of an audit without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity and exercise objectivity and professional skepticism.

Independence in appearance is the absence of circumstances that would cause a reasonable and informed third party, having knowledge of the relevant information, to reasonably conclude that the integrity, objectivity, or professional skepticism of audit organization or member of the audit team had been compromised.

There are many threats to audit independence including

  1. Self-interest (or the presence of financial interest)
  2. Familiarity and complacency
  3. Social bonding
  4. Economic bonds
  5. Management and employment
  6. Litigation

Auditors are required to self-assess their independence with every audit they perform. Often times, such self-assessments are perfunctory and there could be situations where contractors are very aware of threats to an auditor's independence. One contractor brought up the fact that it employed a close relative of an auditor assigned to perform an audit. While the auditor may have been independent in mind, she certainly was not independent in appearance (and she was re-assigned to another audit).

Contractors should be aware of the GAGAS independence requirements and question any impairments or potential impairments by any audit organization.

Tuesday, October 13, 2015

Whistleblower (and her attorney, of course) Have a $3.6 Million Payday

The Justice Department announced late last week that it had reached a settlement with a company and its former president in a case where the company misrepresented itself as a woman-owned small business. By misrepresenting its status, the company was awarded millions of dollars in subcontracts that were set aside for women-owned small businesses.

The former President went to great lengths to support its status as a woman-owned small business, even fooling DCMA's (Defense Contract Management Agency) Comprehensive Subcontracting Plan Group whose mission was to ensure that defense contractors and subcontractors meet all of the requirement for hiring small businesses, including WSOBs (Women-owned small businesses).

The fraud may never have come to light were it not for a former employee who blew the whistle on the scheme by filing a Qui Tam (or whistleblower) suit. The Government intervened in 2012 and settlement was just announced last week. The former company president agreed to a settlement of $20 million. For her part in the case, the whistleblower will receive $3.6 million - not a bad payday.

Through her attorney, the whistleblower said she was "pleased with the outcome." No doubt that is an understatement.

You can read more details of the Government's case by clicking here.

Monday, October 12, 2015

Unduly Restrictive Solicitation Provisions

One common bid protest scenario are challenges that a solicitation specification or requirement is unduly restrictive of competition. When a protestor challenges a requirement as such the procuring agency has the responsibility of establishing that the specification or requirement is reasonably necessary to meet the agency's needs. The Comptroller General will examine the adequacy of the agency's justification for a restrictive solicitation provision to ensure that it is rational and can withstand logical scrutiny. The fact that a requirement may be burdensome or even impossible for a particular firm to meet does not make it objectionable if the requirement properly reflects the agency's needs.

A recent bid protest decision handed down by the Comptroller General illustrates this concept. NASA solicited bids for required financial audits of its Goddard Child Development Center and for its Goddard Employees' Exchange. The statements of work required audits to be performed in accordance with GAGAS (Generally Accepted Government Auditing Standards) and also included the requirement that offerors were required to provide evidence that they had a Peer Review withing the last three years in accordance with GAGAS.

One company challenged the peer review requirements contending that the peer review requirements were unduly restrictive of competition. The protestor argued that certain state statutes and regulations may provide an exemption from the peer review requirement.

The Comptroller General(CG) didn't buy the argument. The CG found that NASA had established a reasonable basis for the peer review requirement. NASA maintained that the requirements are necessary for compliance with federal law, explaining that the Inspector General (IG) Act of 1978 requires agency IGs to assure that work performed by non-federal auditors complies with GAGAS. GAGAS requires that organizations performing audits have an external peer review performed by reviewers independent of the audit organization being reviewed at least once every three years (see GAGAS 3.82(b). Therefore NASA asserted that contracting with a vendor that has not had a peer review would be in contravention of GAGAS and, by extension, the IG Act.

The CG concluded that the inclusion of the Peer Review requirement was reasonable.

By the way, if you would like to see what a Peer Review Report looks like, check out the reports for the Department of Defense Office of Inspector General (DoD-IG) or the Defense Contract Audit Agency (DCAA). To see an example of a Peer Review report issued for non-federal auditors, click here.

Friday, October 9, 2015

GSA Launches New Professional Services Schedule

GSA Multiple-Award Schedules are fast, easy, and effective contracting vehicles for both customers and vendors. Through the Schedule program, GSA has established long-term Government-wide contracts with commercial companies to provide access to millions of commercial products and services at volume discount pricing. Civilian and Defense Federal agencies can contract with pre-approved vendors and benefit from "most-favored customer" pricing with GSA.

On October 1, GSA consolidated seven disparate schedules into a single Professional Services Schedule (PSS). Schedules that are transitioning to the PSS include:

  • MOBIS Schedule 874
  • PEI Schedule 871
  • FABS Schedule 520
  • AIMS Schedule 541
  • LOGWORLD Schedule 874V
  • Environmental Schedule 899
  • Language Schedule 738 II

These schedules include advertising, marketing, business consulting, environmental solutions, financial and business solutions, language services, logistics and professional engineering.

Currently there are 5,000 professional service contracts with 4,500 vendors. After consolidation, there will be 3,100 contracts and the same number of vendors. This consolidation is good for vendors who had contracts under multiple schedules. Those vendors should be able to reduce their administrative costs associated with having multiple contracts. It is also good for the Government buyers who now have a single schedule to consult when procuring professional services.

You can read more about the new Professional Services Schedule by clicking here.

Thursday, October 8, 2015

Government's Cancellation of Solicitation was Reasonable

The Army issued a solicitation for pest control services at Fort Jackson, South Carolina. It was a total small business set-aside firm fixed price for a base year and four option years. Offerors were informed that the award would be made to the lowest-priced, technically acceptable proposal. To be technically acceptable, a proposal had to clearly meet the minimum requirements of the solicitation. Under the technically acceptable sub-factor, offerors were instructed to provide not more than five examples of contracts completed or ongoing within that past three years that were similar to the solicitation's size and scope.

Precise Management was one of three bidders however the Army rated its proposal as unacceptable because its work history did not demonstrate sufficient experience to meet all requirements of the statement of work. Additionally, the Army determined that all three proposals were unreasonable as to price so it cancelled the solicitation. Precise Management appealed contending that the Army's decision to cancel the solicitation was unreasonable. Precise Management alleged that the Army had miscalculated the dollar value of its prior contracts which led to the determination that the offeror lacked sufficient experience to perform the solicitation requirements.

The Comptroller General (CG) denied the protest, finding that the Army's cancellation was reasonable. None of the proposals received were technically acceptable and therefore all were ineligible for award. Additionally, the Army also found that the proposed prices were unreasonable by a significant amount when compared to the prices it was currently paying for the services.

You can read the entire decision by clicking here.

Wednesday, October 7, 2015

Previously Reported Audit Findings

Many times, contract auditors issue internal control deficiency reports with recommended corrective actions or, more likely, a comment or two on contractor corrective action plans. Sometimes its months or years before the auditor comes back to reassess that particular audit area (e.g. accounting system internal controls, billing system internal controls, etc.). In the meantime, no one has assessed whether the contractor's corrective actions are working as intended and even if effectively implemented, have solved the internal control problem. With auditor turnover, the next batch of auditors are unaware of the history of previous audits. According to a DoD-IG (Department of Defense, Office of Inspector General) report issued earlier this year, many of these "new" teams never bothered to assess promised contractor corrective actions to previous audit findings. According to the DoD-IG, this failure represented a departure from GAGAS (Generally Accepted Government Auditing Standards) Section 5.06 which requires auditors to obtain an understanding of contractor corrective actions to previous audit findings in assessing risk and determining the nature, timing, and extent of current work, including potential testing of the implemented corrective actions.

The Defense Contract Audit Agency (DCAA) recently issued an audit alert regarding the need to assess contractor corrective actions to previously reported audit findings. Audit findings in this case could pertain to DCAA audit findings and/or findings from audits or studies performed by other than DCAA that are relevant to the subject matter under audit. The "other" audits or studies would include contractor internal audit reports which the Agency has been trying to access, without much success, for many years, management letters issued by a firms independent public accountants, and reviews performed pursuant to the Sarbanes - Oxley Act.

DCAA has modified its audit programs to emphasis this audit step. The additional audit program language requires that auditors review permanent file to determine if previous audits included findings and recommendations that impact the subject matter under audit (GAGAS 5.06). If there were findings, auditors should document this information in the risk assessment and ask contractor management if corrective actions were taken to address findings and recommendations reported in previous DCAA audits (e.g., questioned costs, business system deficiencies, CAS audits) that are relevant to the subject matter of audit. If yes, have contractor explain corrective actions taken and determine if additional audit procedures should be included in the fieldwork to test the corrective actions.

Contractors should anticipate these additional queries during future audits.

Tuesday, October 6, 2015

Prime Contractors Must Self-Report Delayed or Reduced Payments Made to Small Business Subcontractors

The Small Business Jobs and Credit Act of 2010 requires prime contractors to self-report to the contracting officer when the prime contractor makes late or reduced payments to small business subcontractors. In addition, the Act also requires contracting officers to record the identy of contractors with a history of late or reduced payments to small business subcontractors in the Federal Awardee Performance and Integrity Information System (FAPIIS).

These requirements, although becoming effective back in August 2013, never made their way to the Federal Acquisition Regulations and as a result, seemingly very few contractors and government personnel were aware of the requirements.

That is about to change. The FAR Councils have just published an interim rule that revises FAR Part 42 to include in the past performance evaluation, reduced or untimely payments reported to the contracting officer by the prime contractor that are determined by the contracting officer to be unjustified. That's well and good but first, contractors are going to have to self-report late or reduced payments made to small business concerns. It seems unlikely that contractors will have systems in place to track such information. Second, contracting officers are going to have to make a judgment call on whether the late/reduced payments were justified. Quite probably, like most contract compliance issues, contracting officers will accept contractor supplied justifications. Third, contracting officers will need to report the information into FAPIIS. We already know from prior internal Government audits that the compliance rate for FAPIIS reporting is very low (but getting better).

There is no penalty for contractors who fail to self-report except perhaps as part of an accounting system or billing system review where such failure could be considered a deficiency.

Monday, October 5, 2015

Contractors Need Not Worry About Cited Business System Deficiencies

The Department of Defense, Office of Inspector General (DoD-IG) issued its report last week on how well the Defense Contract Management Agency (DCMA) has complied with DFARS (DoD Federal Acquisition Regulation Supplement) requirements when business system deficiencies are reported at DoD Contractors. The six contractor business systems that are of the most interest to the Government are Accounting (obviously), estimating, material management, purchasing, earned value management, and government property. The focus of the DoD-IG report was on accounting system deficiencies identified by the Defense Contract Audit Agency (DCAA).

The DoD-IG reviewed 21 audit reports issued by DCAA that identified deficiencies in contractors' accounting systems. In every single case, the DoD-IG found that DCMA contracting officer actions did not comply with one or more DFARS requirements when deficiencies were reported. For example, the audit found that DCMA contracting officers did not

  • Issue timely initial determinations,
  • Issue timely final determinations,
  • Obtain contractor responses,
  • Adequately evaluate contractor responses, and
  • Withhold a percentage of contractor payments.
In 17 of 21 cases, the contracting officer did not issue final determination letters within 30 days as required. On average, contracting officers took 252 days to issue final determinations. In 8 of 21 cases, contracting officers did not withhold a percentage of contractor payments as required by regulation. 

It didn't take a DoD-IG audit to tell us there are systematic deficiencies in DCMA's resolution process. Talk to just about any DCAA auditor and they'll have stories about how seriously audit reports sent over to DCMA are taken. "Like shooing flies off the dinner plate", according to one former DCAA auditor. There are many reasons for contracting officer ambivalence toward contractor business system deficiencies. For one thing, contracting officers do not usually appreciate the importance of sound internal controls to the extent that auditors do. It is not intuitively obvious to them that strong internal controls will result in cost savings and reduced oversight. Second, contracting officers have a lot on their plates. The listing on contract administration functions in FAR 42.302 is 71 items long.

DCMA's response to DoD-IG's cited deficiencies was to hold more training. Yep, we're sure that will take care of the problem. You can read the entire DoD-IG report by clicking here.

Friday, October 2, 2015

National Defense Authorization Act for Fiscal Year 2016 - Part 3

We are continuing our coverage of the Fiscal Year 2016 National Defense Authorization Act. Although not yet signed by the President, the Bill has emerged from Conference Committee and the Senate and House will be voting on it soon. As we mentioned yesterday, several sources have reported that the President is threatening a veto of the bill however, the President's objections do not impact the topics we have been covering. Those will most likely remain in whatever bill is finally agreed upon.

Today we will discuss a curious short provision that has been tucked into the NDAA, Section 887, Effective Communication Between Government and Industry. The provision reads as follows:
Not later than 180 days after the date of the enactment of this Act, the Federal Acquisition Regulatory (FAR) Council shall prescribe a regulation making clear that agency acquisition personnel are permitted and encouraged to engage in responsible and constructive exchanges with industry, so long as those exchanges are consistent with existing law and regulation and do not promote an unfair competitive advantage to particular firms.
This short provision was offered by Congressman Gerry Connolly (VA) back on May 14, 2015 and survived both the House Committee and the House/Senate Conference Committee deliberations.

The subject of better and more frequent communication between the Government and industry was a hot topic back in 2011. Back then, the Office of Federal Procurement Policy (OFPP) came out with its 13 page "Myth-buster" memorandum. There was (and apparently still are) wide-spread perception that contracting officer should not meet with vendors for fear of causing contract delays, or committing some kind of ethics violation. The OFPP unsuccessfully tried to dispel that notion but the problem with non-responsive contracting officers lingers.

Perhaps a FAR requirement to make communications more pro-active will be more successful than a letter from the OFPP administrator.

Thursday, October 1, 2015

National Defense Authorization Act for Fiscal Year 2016 - Part 2

The Fiscal Year 2016 National Defense Authorization Act has been agreed to by both the House and Senate however there were several reports yesterday that the President will veto the bill. While the $604 billion authorization is the number that the President asked for - there is disagreement on the allocation of those funds.

Yesterday we discussed Section 893 which prohibits DCAA (Defense Contract Audit Agency) from taking on any reimbursable work (i.e. contract audits for other Government agencies) until it clears up DoD's backlog of audits. Today we are highlighting Section 896 which attempts to determine the cost of regulatory compliance. This should be an interesting report.

Specifically, Section 896 requires DoD to conduct a survey of contractors with the highest level of reimbursements for cost type contracts with DoD during fiscal year 2014 to estimate industry's cost of regulatory compliance with Government-unique acquisition regulations and requirements in the categories of:

  • Quality 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.
Section 893 does not define the "highest level of reimbursements" so we are not sure how low the threshold will be set or how many contractors will be surveyed. Certainly the top ten defense contractors will be included. The provision also wants the Department to express the cost of regulatory compliance as a percentage of total contract costs. Such a percentage result could be applied more broadly for any Government contractor to assess the cost of compliance.

The report is due to Congress in six months.