Data and Records Provided to Auditors Stays With the Auditors - Perhaps

Ever try to get a contract auditor to sign a non-disclosure agreement? Its nearly impossible. Contract auditors feel they are above reproach and bristle at the thought that someone might think so lowly of their personal integrity that a non-disclosure statement is necessary. And, in most respects, that's true. We do not recall a case where a Government contract auditor leaked or provided information for personal gain. There are many documented cases where Government employees did so but these employees were not auditors. We do know of cases where contractor proprietary information was requested by and provided to Congressional committees by auditors and subsequently made public by those committees. But such cases seem rare.

Contractors should be aware however that information provided to auditors could get circulated to and among other Government agencies. A lot of proprietary information provided to the auditor is routinely provided to the contracting officer to negotiate and administer contracts. This is a proper use of such information as the contract auditor is a representative of the contracting officer and acts under the contracting officer's authority.

Many contractors however are not aware of the relationship between the auditor and investigative agencies.  Audit files and contractor proprietary data is routinely provided to investigative agencies. According to the DCAA Contract Audit Manual,

Auditors will cooperate with representatives of the FBI (Federal Bureau of Investigation), DoD criminal investigators, and criminal investigators from other agencies (presumably that would include the IRS investigators). Written material and access to files or working papers already in the possession of the auditor will be made readily available to such investigators. It is not necessary to inform the contractor when information is provided to investigators (see DCAAM 1-405).

Contractors should understand that data and information collected by the contract auditors could wind up in investigative files.

With that bit of cheery news, we at Pacific Northwest Consultants wish everyone a happy and prosperous new year.

DoD's 100% Return on Investment

Alan Estevez has been the Principal Deputy Under Secretary of Defense for Acquisition, Technology and Logistics since his 2013 Senate confirmation. In that role, he helps develops and implement strategies, policies, and programs that increase the Department's warfighting capabilities, management efficiency, and buying power. He also supports his boss, the Under Secretary of Defense in matters related to acquisition, logistics and material readiness, research and engineering, weapon systems, operational energy, installations and environment and the defense industrial base.

Last June, he announced the Department's goal to shave $15 billion off of the amount they spend on service contracts. The Department spends more on service contracts than it does on weapon systems. Service contracts include such things as technical engineering, health care, shipping of materiel, tactical vehicle maintenance, and of course base maintenance.

But recently, Estevez said something else that got our attention. In a recent speech to DCMA (Defense Contract Management Agency), Estevez stated:

For every dollar I give DCMA, I get two dollars back as a return on investment. DCMA provides the best equipment to the best military on this planet. You should be proud of what you do every day. You are the independent eyes and ears of DoD.

Now that's pretty impressive don't you think. If fact, why stop at DCMA's $1.375 billion budget for this year? Why not double it, triple it? If Estevez quadruple's it, he'll spend $5.5 billion but he'll get back $11 billion.

One really wonders how Estevez calculates ROI (Return on Investment). Perhaps he learned his technique from the Beardstown Ladies.

What is "Source Selection Information"?

The Procurement Integrity Act implemented at FAR (Federal Acquisition Regulations) 3.104, has application for Government contractors (and prospective contractors). It provides for a ban on disclosing or obtaining procurement information (including source selection information), a requirement for Government procurement personnel to report on employment contacts by contractors, and a one year ban for certain personnel on accepting compensation from a contractor.

The primary provision that contractors sometime run afoul of is the ban on receiving source selection information. Often when such information leaks out, its because someone in the Government inadvertently forwarded an email or attached the wrong document to an email. However, there have been more than a few cases where contractors have paid money to Government officials in order to obtain source selection information.

The definition of source selection information is very broad and includes just about all information the Government uses to base its contract awards. It includes:

• Bid prices
• Proposed costs or prices
• Source selection plans
• Technical evaluation plans
• Technical evaluations of proposals
• Cost/Price evaluations of proposals
• Competitive range determinations
• Ranking of bids, proposals, or competitors
• Reports and evaluations of source selection panels, boards, or advisory councils.

Should you ever receive Government procurement information or information that a reasonable person would consider to be procurement information, you should immediately advise the contracting officer and request instructions for its disposition and mitigation of potential damage.

GSA Didn't Evaluate Proposals Correctly

GSA issued a solicitation for 20 fixed-price, indefinite-delivery, indefinite-quantity (IDIQ) construction contracts for repair and alteration services. The solicitation was set aside for small businesses. As typical of these kinds of solicitations, award was to be made on a best value basis among which was "total evaluated price or cost."

The "total evaluated price or cost" factor was somewhat unique because GSA only wanted the G&A rate from each of the bidders. Although unstated, the G&A rate may have been the only variable as Davis-Bacon probably applied to the labor portion. The other unique thing about the G&A rate was the requirement that the bidders provide either "certified financial statements" or DCAA report substantiating its proposed G&A rate. We're not sure what "certified financial statements" are in this context. If the solicitation meant "audited financial statements" its unlikely that the document would contain the level of detail necessary to substantiate a G&A rate. Nevertheless, that was the solicitation's wording.

Ultimately GSA asked eight of the offerors to verify and confirm their rates because those eight offerors proposed a G&A rate that was not supported by their certified financial statements or a DCAA audit.

One of the offerors whose proposal did not make the cut, protested the award on the basis that GSA's evaluation of price proposals was inconsistent with the RFP requirement that offerors' proposed G&A rate be verified and substantiated using certified financial statements or DCAA reports. The protester asserted that instead, GSA accepted from eight of the 12 awardees "post-bid commitments" of G&A rates that were either unsubstantiated or unexplained by financial data (and in some instances, directly contradicted by the financial data).

The Comptroller General (CG) sustained the appeal on the basis that the RFP unequivocally stated that the proposed G&A rates would be evaluated using a cost analysis based upon verification of the offerors' cost submissions for their G&A rates and confirming that the submissions are in accordance with the contract cost principles and procedures described in FAR Part 31. The CG found that GSA's acceptance of the unsupported G&A rates was unreasonable and inconsistent with the solicitation requirements.

You can read the entire case by clicking here.

Do Forward Pricing Rate Agreements (FPRAs) Require Certification?

Negotiated forward pricing rate agreements are very useful for facilitating contract negotiations. Often times, direct and indirect rates are sticking points in the negotiation process. FPRAs remove discussions of rates from the process because the contractor and the Government have already come to an agreement on what those rates should be.

Negotiation of forward pricing rate agreements (FPRAs) may be requested by the contractor or the contracting officer, or initiated by the administrative contracting officer (ACO). In determining whether or not to establish such an agreement, the ACO should consider whether the benefits to be derived from the agreement are commensurate with the effort of establishing and monitoring it. Practically, that means FPRAs should be negotiated only with contractors having a significant volume of Government contract proposals. Because of the time and effort associated with negotiating FPRAs, there needs to be a lot of pricing actions on the horizon to justify the expense.

When certified cost or pricing data re required, offerors are required to describe any FPRAs in each specific pricing proposal to which the rates apply and to identify the latest cost or pricing data already submitted in accordance with the FPRA. All data submitted in connection with the FPRA, updated as necessary f, form a part of the total data that the offeror certifies to be accurate, complete, and current at the time of agreement on price for an initial contract or for a contract modification.

Contracting officers will use FPRA rates as bases for pricing all contracts, modifications, and other contractual actions to be performed during the period covered by the agreement. Conditions that may affect the agreement's validity shall be reported promptly to the ACO. If the ACO determines that a changed condition invalidates the agreement, the ACO shall notify all interested parties of the extent of its effect and status of efforts to establish a revised FPRA.

Contracting officers shall not require certification at the time of agreement for data supplied in support of FPRAs or other advance agreements. When a forward pricing rate agreement or other advance agreement is used to price a contract action that requires a certificate, the certificate supporting the contract action shall cover the data supplied to support the FPRA or other advance agreement, and all other data supporting the action.

When a contractor certifies the completeness, currency, and accuracy of its cost or pricing data as of the date of agreement on price, it is also certifying the same for its FPRA rates. It doesn't matter that the rates were negotiated months earlier. The contractor still has an affirmative duty to ensure that the rates are still valid and based on current, complete, and accurate cost or pricing data.

Privacy Training for Contractor Employees

Twice a year the FAR Councils issue a regulatory agenda summarizing regulations under development. The Report issued last week lists two regulations at the "proposed rule stage", 15 items at the "final rule stage" and three items considered "completed actions". We have reported on most of these upcoming changes at one time or another but there was one item that we had forgotten about. We didn't realize that it was still an active case. The public comment period to the proposed rule ended four years ago, December 2011.

The case deals with privacy training for contractors, contractors with employees who require access to a Government system of records, handle personally identifiable information, or design, develop, maintain, or operate a system of records on behalf of the Federal Government.

Under the proposed regulation, contractors are responsible for conducting initial privacy training and annual privacy training thereafter. The training shall, at a minimum, address the following seven topics:

1. The protection of privacy, in accordance with the Privacy Act
2. The handling and safeguarding of personally identifiable information
3. The authorized and official use of a Government system of records
4. Restrictions on the use of personally-owned equipment to process, access, or store personally identifiable information
5. The prohibition against access by unauthorized users and unauthorized use by authorized users, of personally identifiable information or systems of records on behalf of the Federal Government
6. Breach notification procedures (i.e. procedures for notifying appropriate individuals when privacy information is lost, stolen, or compromised) to minimize risk and to ensure prompt and appropriate actions are taken should a breach occur; and 
7. Any agency-specific privacy training requirements.

There are two versions of the applicable contract clause, one for contractor-developed training and the other for Agency-developed training. The option to have the contractor provide the training or the Government to provide the training is up to the Agency.  If Government provided, it will be the same training the Government provides to its own employees.

Buying-in is Risky but Not Prohibited by FAR

The term "buying-in" is defined in FAR 3.501-1 as "...submitting an offer below anticipated costs, expecting to increase the contract amount after award (e.g. through unnecessary or excessively priced change orders) or (2) receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.

Although that definition falls under a section entitled "Other Improper Business Practices", FAR does not expressly prohibit buying-in. Rather, FAR instructs contracting officers to take appropriate action to ensure buying-in losses are not subsequently recovered by the contractor through change orders or follow-on contracts subject to cost analysis.

There are two general risks to the Government associated with contractors who are buying-in. First, it is generally felt that the practice decreases competition. Second, buying-in could, and often does result in poor contract performance as contractors try to shave expenses to minimize losses.

Contracting officers are instructed to decrease the Government's risk associated with buying-in. One method is to seek a "price commitment" covering as much of the entire program concerned as is practical. For example, in a multi-year procurement, contract for the requirements for all years, not just the first year while leaving subsequent years open for pricing. To illustrate, the Air Force estimated that it needed 186 cranes. Concerned about a buy-in, notified bidders that quantities in excess of its best estimate of 186 cranes would be procured under a new competitive action. This precluded the winning bidder from the opportunity of receiving follow-on contracts at artificially higher prices.

Buying-in applies only to fixed price contracts. In the case of cost type contracts, the Government will be performing cost realism analyses because it needs realistic estimates of its potential expenditures.

Government Employee Conspires with Son to Obtain $2 Million in Contracts

During the Iraq war, the Government deployed Provisional Reconstruction Teams (PRTs) to support economic development, promote reconciliation, and help the Government of Iraq to hasten the transition to self-sufficiency. PRT units included personnel from the military, the State Department, the Corps of Engineers, Agency for International Development, and the Department of Agriculture, among others. PRT units worked closely with Iraqi provincial leaders and Iraqi communities, to oversee and dispense U.S. Government funds appropriated for reconstruction projects in Iraq.

Another program, this one called the Commander's Emergency Response Program (CERP) authorized and provided funding to United States military commanders in Iraq to carry out small-scale projects designed to meet urgent humanitarian relief or urgent reconstruction requirements within their area of responsibility and provide an immediate and direct benefit to the people of Iraq. PRTs were involved in identifying potential CERP projects, developing the scope and statement of work. When possible, CERP projects were supposed to be awarded competitively through a competitive bid process. In some cases, competition was not possible (in theory) so the PRTs wrote up sole-source justifications for DOD to rely upon.

One CERP project was called the Hawijah Micro Dairy Processor project. Micro-dairy processors are self-contained mini-factories that are used to process milk into cheese and yogurt. This project was intended to enable local production of milk products, thereby reducing reliance on costly imports, expanding the market for local farmers, and creating jobs for local Iraqis who would operate the processors.

One of the PRTs was located in Kirkuk, Iraq. One of the team members was an agriculture adviser assigned to the State Department. In 2009, he helped his son set up a company to pursue micro-dairy processor contracts in Iraq. He sent his son insider-information including templates on how to prepare proposals, rendered advise on how to hide the true company ownership, and ultimately, wrote up a sole-source justification for his son's company.

Before the whole scheme unraveled, the Government had awarded more than $2 million in contracts to the son's company - a son that had no previous experience in micro-dairy products. The son received at least $230 thousand in profits from the scheme. He plead guilty last November and is scheduled for sentencing next February. The father has now been indicted for his role in the scheme and, because of his "trusted" position in the Government, faces potentially greater punishment (up to 20 years versus 5 years for the son).

Behind the Scenes - Labor Floorchecks

Most Government contractors (with cost-type contracts) have experienced the labor floorcheck circus. The contract auditor drops by, often unannounced, and informs the contractors that he is there to interview some employees to make sure they are complying with timekeeping policies and procedures (e.g. daily timecard postings) and that there is consistency between the work they are actually performing and what is indicated on their timecards. A listing of employees is produced and everyone heads out to the plant to find and interview those employees.

Contractors might wonder how the particular employees were selected. Auditors tend to be circumspect and might respond that they were randomly selected. The next question a contractor should ask is, randomly selected from what universe? You see, before the auditor shows up, he has undoubtedly performed some kind of risk assessment based on analysis of historical data and trends. Selections are not made haphazardly. Selections of employees to interview are usually made because the auditor wants to focus on a particular contract, or department, or charging practice.

Here are a few things that go on behind the scenes before an auditor shows up to conduct a floorcheck.

• Trend analysis - the auditor will perform trend analyses to disclose an significant increases in the ration of direct to indirect labor accounts. According to DCAA, significant fluctuations in the ratio of direct to indirect costs should be explained. If there is no apparent explanation, this are should be further evaluated to ensure that the contractor is not misclassifying direct contract costs to selling and marketing costs or to IR&D/B&P costs).
• Comparative analysis - the auditor will perform a comparative analysis of sensitive labor accounts and request contractors to explain significant fluctuations. The auditors are instructed to be alert to situations where labor is being excluded from overhead allocation bases or transferred from the allocation base to the indirect cost pool. Both situations would increase indirect rates.
• Overrun contracts - the auditor will determine contracts that are currently in an overrun position or projected to be in an overrun position. According to DCAA, labor effort associated with contracts at or near an overrun position is more likely to be mischaged. 
• Funding - Like overrun contracts, the unavailability of funding may cause the contractor to divert costs that are over the contract funds or budget to other cost objectives.

These are just a few of the factors an auditor will consider in making his selection of employees to floorcheck. An appreciation of these factors should help contractors better understand the auditors' focus when conducting floorchecks.

New Survey on Government Job Satisfaction

The Partnership for Public Service recently announced the results of its 10th annual survey of the best places to work in the Federal Government. While this may not interest a lot of readers of this blog, it offers some insight on how the folks we deal with on a regular basis view their work. The survey reflects the views of 433,300 civil servants from 391 federal organizations on a wide range of workplace topics.

Overall federal employee job satisfaction and commitment increased 1.2 points from 2014 for a score of 58.1 out of 100. This doesn't sound too good but at least the number is increasing. By comparison, the job satisfaction rate for private sector employees is 76.7 so the Government has a ways to go.

The first agencies we turned to in the survey were, of course, the Defense Contract Management Agency (DCMA) and the Defense Contract Audit Agency (DCAA). Overall, the Agency's rankings were 194 and 122 out of 320 agencies. Both Agencies recorded a decline from 2014. Still, DCAA ranked above medium. DCMA however ranked below medium.

Both Agencies scored low in the category of Employee Skills - Mission Match which measure the extent to which employees feel that their skills and talents are used effectively and the level to which employees get satisfaction from their work and understand how their jobs are relevant to the organizational mission. We know that auditors - many of whom are CPAs - feel like their skills are underutilized. By contrast, both Agencies scored well in the category of effective leadership.

If you are an auditor, you might want to check out jobs at the Inspector General's office at the Department of Interior (satisfaction rating of 86.2) or the Treasury's Alcohol and Tobacco Tax and Trade Bureau (satisfaction rating of 90.6). DCAA finished in the middle of the pack, slightly below the medium at 63.6. Surprisingly, the DoD Inspector General finished dead last for the Auditor category at 38.0. The Agency that other agencies fear most must really have some issues. The GAO (Government Accountability Office) is a pretty good place for audits. Their satisfaction rating was 78.5.

Recovering Bid Protest Costs Requires Adequate Supporting Documentation

GAO bid protest regulations provide for reimbursement, in appropriate circumstances, of reasonable proposal preparation and protest pursuit costs. Generally, in order to recover proposal preparation and protest pursuit costs, the protestor must be the prevailing party. There have been a few exceptions based on extraordinary circumstances but essentially, losing a bid protest is not going to result in the Government reimbursing the cost of the protest.

In a recent bid protest, the GAO laid out its expectations concerning the adequacy of support for claimed bid protest costs. Claims must include:

1. Evidence sufficient to support its claim
2. The costs were incurred and are properly attributable to filing and pursuing the protest
3. At a minimum, claims for reimbursement must identify and support the amounts claimed for each individual expense (including cost data to support the calculation of claimed hourly rates)
4. The purpose for which that expense was incurred
5. How the expense relates to the protest.

This level of detailed support can be difficult to compile but the GAO has set a high standard so there's no getting around it. The burden is on the protestor to submit sufficient evidence to support the claim. And, the burden is not met by general, inadequately-supported statements that particular costs have been incurred. Failure to file an adequately-supported claim in a timely manner will result in the loss of the protester's right to recover costs.

In the case at hand, (Ryan P. Slaughter - Costs, Case No. B-411168.4), the GAO stated that while it had no doubt that the protester spent time in preparing the protest and responding to the agency report, it found that the protester did not provide adequate documentation to support the claim. Specifically, the hours claimed were based on desk calendar notations and the protestor did not provide any support for its calculations of hourly rates.

In this case, the protester lost the opportunity to recover some of its costs relating to filing a bid protest. It didn't have to end that way. It may not have been a simple matter to compile supporting data bur the potential rewards was certainly worth the cost.

GAO Publishes Fiscal Year 2015 Bid Protest Statistics

The GAO (General Accountability Office) just published its Fiscal Year 2015 bid protest annual report to Congress summarizing data concerning overall protest filings for the year. It also shows comparative data from four earlier fiscal years.

The number of bid protest cases filed during the year rose three percent to 2,639 cases from fiscal year 2014. All of the data was presented without analysis so there is no explanation given for why the number of cases increases each year. From 2011 to current, the number of cases has risen by 12 percent. We know the Government is trying hard by better training, leadership, and documentation to reduce the number of bid protests so this trend runs counter to those efforts.

GAO closed about as many as were filed during the year. Most of the close cases were resolved prior to a GAO hearing however. Of the 2,647 cases closed, GAO rendered decisions on only 587 cases. Of the 587 cases decided on merit, 68 were sustained. So one way for contractors to assess their chances of sustaining an appeal is to note that only 11.5 percent of cases that go to hearing are decided in favor of the contractor. The sustention rate has dropped off from earlier years. In fiscal year 2013, it was 18.6 percent. Again, since the GAO provided no analysis as to why the drop, we don't know the cause for the sharp decline in number of sustentions. The statistics do suggest that the number of meritless filings are increasing.

The GAO report also includes an "Effectiveness Rate" which is the measure of protesters obtaining some form of relief from the agency, as reported to the GAO, either as a result of voluntary agency corrective action or GAO sustaining the protest. The effectiveness rate for fiscal year 2015 was 45 percent which means that protesters might be better off making a deal with the agency than pursuing a case through to a formal decision. The effectiveness rate has increased slightly over prior years.

It would be very interesting to see these statistics cut by law firm.

Jail Time for Timekeeping Fraud

If you know of a crime, you had better report it. Two former employees of Ingalls Shipbuilding have plead guilty of "misprision of felony" meaning that they had knowledge of a crime but deliberately concealed such knowledge and failed to report it. One was sentenced to six months in prison and a $20 thousand fine. The other was fined $17,500. Twenty other Ingalls' employees were fired from their jobs for their participation in the scheme.

It's not clear from news accounts the exact nature of the crime. Court papers state the pair repeatedly failed to report the fraudulent time employees under them submitted for work on hulls on Navy and Coast Guard vessels. All of this was done to meet unrealistic budgets.

From this we can surmise that employees were probably working on fixed price contracts that were at or close to overrunning their budget. but charging their time to cost-type contracts or some other type of contract with flexible pricing. The attorney for one of the pair stated that what the two were doing was common in the industry. That statement is disturbing.

The fraud occurred between 2010 and 2013 and was first reported earlier this year as costing the Government one million dollars. Now, the amount of the fraud is up to $11 million. It was discovered by Ingalls' own internal review program and subsequently turned over to NCIS for investigation.

The elephant in the room here that no one wants to talk about is the failure of Government oversight to prevent this type of fraud or at least catch it before it festers for three years. It doesn't speak well for efforts of dozens of contract auditors on-site whose job it is to perform floorchecks to make sure such things do not happen. The comment by the attorney that the practice is common in the industry should at least cause the minders of auditors to rethink their audit approach.

The Government is Keeping Track of Billing Rejections

Most Government contractors have had billings rejected by a contract auditor, a contracting officer and/or someone from the paying office. Rejections happen frequently and for many different reasons; an incorrect voucher number, a wrong date, a mathematical error, outdated billing rates, reference to an incorrect contract line item or billing code, Most rejections are administrative in nature, rather mundane and have no impact on the amount claimed and owed the contractor . Sometimes, billings are rejected through no fault of the contractor because someone in the Government's approval chain didn't have the right paperwork. One common example is where contract modifications increasing funding did not get to the person needing that modification so the billing request (e.g. public voucher) is rejected as exceeding contract funding.

Most billing rejections are easy to fix. It might be as easy as changing a voucher number by one number. Perhaps it only requires a file upload to WAWF (Wide Area Work Flow). After fixing whatever it was that needed to be changed, contractors go about their business, ultimately get paid, and put the incident out of their minds.

While contractors might put such events out of their mind however, contract auditors are keeping track of such incidences. In the auditors' view, frequent billing errors may be indicative of systemic billing system deficiencies. It can be somewhat disconcerting for contractors to have three years of billing rejections dropped on them during a billing system audit and prodded for explanations. It may be impossible to explain; contractors do not usually retain and track such information, lack of employee continuity, and the perception that such events are inconsequential.

Sometimes auditors do not believe that anything is inconsequential. The standard audit program for contractor billing system audits contains the following procedure:

Review billings that were rejected by DCAA, other approving officials, and paying offices in order to identify trends and errors which are frequently repeated. Consider the trends and errors when designing the audit procedures to test contractor billings. If there are a significant number of errors (e.g., high percentage of rejected billings) this could be an indication of systemic problems. A deficiency report should be issued when sufficient evidence has been obtained and the auditor can demonstrate compliance with other GAGAS (e.g., adequate planning and supervision).

Whenever a payment request is rejected, contractors should document the situation and preserve it somewhere within the billing system. That way, ready responses are available should anyone inquire.

Minimum Wages - Holding Back Records Will Lead to Payment Withholds

One of the finer points of the new minimum wage provisions for Government contractors is the requirement for contractors to make their payroll records available to a representative of the contracting officer or a representative of the Administrator of the Department of Labor's Wage and Hour Division.

The Contract clause at FAR 52.222.55 requires contractors to "make and maintain" payroll records for three years after completion of the work. We're not sure what "completion of the work" means. It could mean the completion of the contract but some have speculated that it could mean completion of the task or completion of the pay period for which the employee was paid. Whatever the case, payroll records must be maintained for at least three years after they are prepared.

The payroll records must include the following information:

1. Name, address, and social security number
2. Worker's occupation(s) or classification(s)
3. The rate or rates of wages paid
4. The number of daily and weekly hours worked by each worker
5. Any deductions made, and
6. Total wages paid.

Not only must contractors maintain such records but they must also make them available for inspection and transcription by Government representatives. Note this important requirement. FAR states "inspection and transcription". It does not require contractors provide copies of the records.

What happens if a contractor refuses to provide the Government access to its payroll records? FAR warns that failure to comply with the record production requirements shall be a violation of 29 CFR 10.26 and the contract. And, the contracting officer can act on his/her own to withhold payment until the noncompliance is corrected. The payment withhold provision is not discretionary. The clause states that the contracting officer (or the Administrator) shall withhold payment, though it doesn't specify the withhold amount. Presumably the withhold amount would cover the period for which payroll records have been requested.

Allowable Compensation Costs

Here's a quick primer on applying the compensation caps found in FAR 31.205-6(p).

For contracts awarded after June 24, 2014, the cap is straight-forward. Compensation for all employees is limited to $487,000 annually. This ceiling on compensation comes from the Bipartisan Budget Act (BBA) of 2013 and has been incorporated into FAR 31.205-6(p)(3) as an interim rule. This compensation level is subject to annual adjustment based on the Employment Cost index for all workers. For the latest cap amounts, refer to OMB's Contractor Employee Compensation Cap per BBA webpage. We call this the "new cap". So far, the new cap has not increased from its initial setting at $487,000. The BBA and the corresponding regulations allows agency chiefs to create narrowly-targeted exemptions for scientists, engineers and other specialists where the cap might not be high enough to acquire needed skills. Note, these are specialty skills and it is unlikely that the Government would entertain waiver requests for company executives.

For contracts awarded prior to June 24, 2014, application of the compensation cap becomes more complicated. The statutory cap itself is found in OMB's Contractor Compensation Cap per Statutory Formula webpage. We call this one the "old cap". In 2004, the cap was $432,851 and it increased steadily (and rapidly) to $952,308 in 2012. The application of the cap is where things get tricky.

If you hold a DoD, Coast Guard, or NASA contract awarded after December 31, 2011 and before June 24, 2014, the cap applies to all employees.

If you hold a DoD, Coast Guard, or NASA contract awarded after January 1, 1998, the cap applies to senior executives.

If you hold a contract awarded by an executive agency other than DoD, Coast Guard, or NASA between January 1, 1998 and June 24, 2014, the cap applies to senior executives only.

To further complicate matters, the definition of "senior executive" changes. Prior to January 2, 1999, senior executive meant the CEO and the four most highly compensated employees in management position. After January 1, 1999, the definition changed to mean the five most highly compensated employees in management positions at each home office and each segment of the contractor.

The compensation amounts listed under the old cap ends with calendar year 2012 and the new cap begins on June 24, 2014. This raises the question of what cap applies to costs incurred in 2013 and in 2014 prior to June 24, 2014. It is DoD's position that the 2012 cap of $952,308 applies to costs incurred in all subsequent years (e.g. 2013, 2014, 2015, etc) for contracts awarded prior to June 24, 2014.

Competition in Contracting

Competition is the Government's preferred method for contracting. In fact, for most Governmental agencies, internal justification must be prepared for procurements not based on competition. Have you ever wondered about the Government's scorecard for awarding contracts based on competition versus other contracting methods (like negotiated procurements)? Well, we doubt that question and its answer is foremost on anyone's mind. But, the Department of Defense tracks such information and recently published the results for the fourth quarter of fiscal year 2015.

The Department's fiscal year 2015 goal was to achieve a contracting by competition rate of 59 percent (in terms of dollars). During the fourth quarter of fiscal year 2015, the Department achieved only 55 percent competitively awarded contracts.

Within that data, the Air Force and Navy fell short, at 39 and 43 percent respectively. That's understandable as the Air Force and Navy buy large ticket items where the competitive market is limited. Defense Logistics Agency achieved a competition rate of 83 percent which is somewhat indicative of the common items the Agency tends to buy. The United States Transportation Command was the winner at 99 percent competitively awarded contracts.

The report did not analyze why the various agencies fell short of their goals. It did report that it will continue to emphasize the importance of competition at various levels.

To read the entire report, click here.

Government Recovers $1.1 Billion of Contract Fraud in Fiscal Year 2015

We frequently post articles about fraud, waste, and abuse in Government contracting programs. Most of these come directly from Department of Justice press releases. While many of these reported cases involve Government contractors acting alone, a significant number of cases involve a level of "cooperation" from someone within Government contracting circles. Although typically bereft of details as to how the fraud was uncovered, these press releases usually contain enough information to see some aspects of the fraud triangle at work; pressure, opportunity, and rationalization. As auditors concerned foremost with adequate internal control systems, it is apparent that many fraudulent activities were allowed to develop because of weak or non-existent internal controls.

The Department of Justice recently reported its recoveries from false claims act cases that were settled in fiscal year 2015. The Department obtained more than $3.5 billion in settlements and judgments from civil cases involving fraud and false claims against the Government. The report also noted that from January 2009 to present, it has recovered $26.4 billion.

More than half of the recoveries ($1.9 billion) came from companies and individuals in health care industries. These cases typically involved unnecessary or inadequate care, paying kickbacks to health care providers to induce the use of certain goods and services, or overcharging for goods and services paid by Medicare, Medicaid, and other federal health care programs.

The second largest category behind health care involved Government contracts. Settlements and judgments in cases alleging false claims for payment under Government contracts totaled $1.1 billion in fiscal year 2015 ($4 billion since January 2009). Notable cases included contracts for food, water, fuel, and supplies for American soldiers in Afghanistan, and two cases involving allegations that contractors were not providing qualified employees to perform contract work.

The report noted that most false claims actions are filed under the Act's whistleblower, or qui tam, provisions that allow individuals to file lawsuits on behalf of the Government. If the Government prevails in the action the whistleblower receives up to 30 percent of the recovery. Whistleblowers filed 638 qui tam suits in fiscal year 2015 and the Government recovered $2.8 billion. Whistleblower awards during the fiscal year totaled nearly $600 million. As you might guess, there is an entire legal industry devoted to filing whistleblower suits.

You can read the entire report by clicking here.

New and Improved FAR Regulations

The FAR Councils unloaded a gaggle of interim and final regulations today.

We have discussed most of these changes on these pages including the prohibition on contracting with income tax deadbeats, prohibitions on discriminating against sexual orientation or gender identity, minimum wage for employees of federal contractors, and whistleblower protections for contractor employees.

Specifically, the new rules cover the following:

Prohibition on contracting with corporations with delinquent taxes or a felony conviction. This interim rule prohibits the Federal Government from entering into contracts with corporations having a delinquent federal tax liability or a felony conviction under any federal law, unless an agency has considered suspension or debarment of the corporation and has made a determination that this further action is not necessary to protect the Government's interests.

Prohibition on discrimination based on sexual orientation and gender identity. This finalizes an interim rule from April of this year.

Contractor reporting of veterans' employment. This is an interim rule that requires contractors (and subcontractors) to annually report the number of employees who belong to the categories of veterans protected under VEVRAA (Vietnam Era Veterans' Readjustment Assistance Act).

Enhancing contractor whistleblower protections. This is a final rule replacing an interim rule from 2013. Unless Congress intervenes, the rule expires in 2017.

Retention periods for contract files. This is a final rule that generally reduces the time period for retaining contract files. Contractors seeking FOIA information or records under discovery may have to act quicker.

Establishing minimum wage for contractors. This is a final rule replaceing an interim rule from 2014. The minimum wage for contracts awarded after January 1, 2015 is $10.10 per hour. The rule provides for adjustments based on changes in specified indices.

Mandatory Disclosure Program Nets the Government $1 Million

Back in 2008, FAR was amended to require contractors to disclose credible evidence of fraud and overpayments on contracts. This requirement is commonly referred to as the mandatory disclosure requirement and applies to contracts (and subcontracts) of more than $5 million and a performance period greater than 120 days. See "Mandatory Disclosure Requirements - A Reminder" for more details on the regulation.

Yesterday, the Department of Justice (DOJ) issued a press release announcing the resolution of just such a disclosure.

DRS Technical Services, Inc., was performing an internal compliance audit when it discovered that some of its employees working in Kuwait on Government contracts were directed to record more hours on their time sheets than they actually worked. As a result of this discovery, DRS took immediate corrective action and made a timely disclosure to the U.S. Government under the Contractor Business Ethics Compliance Program and Disclosure Rule (a.k.a. the Mandatory Disclosure Rule).

DRS calculated the mischarging resulted in overcharges of $544 thousand. Following an investigation by the Government, DRS agreed to pay $1 million to settle the case.

Incidentally, DRS was the defense contractor we reported on earlier who paid $13.7 million last October to settle another labor mischarging false claims allegation. See "Defense Contractor Pays $13.7 Million to Settle False Claims Allegation". That case was uncovered by a routine DCAA (Defense Contract Audit Agency) audit and not a voluntary disclosure.

The full DOJ press release can be viewed here.

100 Examples of Wasteful Government Spending

You can't always blame contractors for wasteful Government spending. The Government holds the public purse and decides what to buy. Contractors are there to offer their services by bidding on the contract. If the Government decides it needs to study the dating habits of senior citizens, there are plenty of contractors or grantees out there who are willing and able to conduct such a study.

Senator James Lankford, Oklahoma, released a compilation of questionable federal expenditures this week, identifying 100 ways that Government squandered taxpayer funds. The report, employing a football theme, is entitled "Federal Fumbles: 100 Ways the Government Dropped the Ball."

Some of the examples of wasteful spending have been previously reported such as the lead article in the publication describing the Pentagon's $43 million gas station in Afghanistan. The idea behind the gas station was to help build up the economy of Afghanistan. By taking advantage of the natural gas reserves within Afghanistan, the country could alleviate the need for importing fuel. Problem was, there was no natural gas distribution system in the country and the cost of converting vehicles to natural gas exceeded the annual income of the average Afghani. To make matters worse, the Pentagon is unable to explain the high cost of the project.

Senator Lankford's compilation pillories just about every Federal agency, not just the Department of Defense. The National Endowment for the Arts for questionable grants, the Immigration and Customs Enforcement that spent $6 million to renovate an unsafe building only to have it declared unsafe for occupancy, the National Institute of Health for truck driver weight-loss intervention program, and so forth.

Some of the waste boarders on the humorous. The State Department paid a contractor $500 thousand to train employees how to sit before a congressional committee and answer questions.  The National Science Foundation spent $1.2 million to teach robots how to choose outfit combinations for and dress the elderly. The National Park Service spent $65 thousand to find out what happens to bugs at night in rural areas when someone turns on a light. Sounds like a high school science project.

DCAA's Preaward Survey of Prospective Contractor Accounting System Checklist

DCAA (Defense Contract Audit Agency) publishes a number of checklists that can be used by contractors and prospective contractors to ensure compliance with procurement rules and regulations. We've highlighted and linked to a number of these over the years; forward pricing proposal adequacy, forward pricing rate proposal adequacy, and incurred costs proposal adequacy are a few that come to mind.

DCAA has published another checklist for determining the adequacy of a prospective contractors account system. You can download it by clicking here. DCAA recommends that prospective contractors (and subcontractors) complete this checklist and provide it to their contracting officers as soon as possible. The contracting officer may use the information in deciding whether to request a DCAA audit of the accounting system.

This checklist, for the most part, mirrors the Standard Form 1408 so familiarity with that form may make the DCAA checklist seem redundant. However, the checklist includes some other elements that may assist the contracting officer in determining whether an audit is needed, such as information on prior accounting system audits (whether by DCAA or someone else), CAS (Cost Accounting Standards) coverage, and an overall assessment as to whether the accounting system is ready for an audit.

Some prospective contractors find it useful to have an independent party perform a "mock audit" of the accounting system to identify any weaknesses or deficiencies that need correcting before the Government comes in and performs its own audit. If you're in that situation, give us a call - we can help.

Accepting Gifts from Outside Sources

The U.S. Office of Government Ethics (OGE) has proposed revisions to the Standards of Ethical Conduct for Executive Branch Employees that are designed to identify situations where Government employees should not accept what would otherwise be permissible gifts. Most Government contractors are required to have ethics and standards of conduct programs and many pattern theirs after the OGE's authorities and materials. Staying abreast of what the Government is doing in this area should help contractors keep their own policies and procedures fresh and current.

The proposed rules are quite lengthy and contain many situational examples of ethical conduct and ethical dilemmas. To read and study (and perhaps comment on) the entire proposal, click here.

One of the new sections proposed for addition to the guidance is entitled "Considerations for declining otherwise permissible gifts." The OGE wants to add this section because, in its experience, employees and ethics officials sometimes focus on whether a regulatory exception permits the acceptance of an otherwise impermissible gift, and no on whether acceptance of the gift could affect the perceived integrity of the employee or the credibility and legitimacy of the agency's programs.

To counter this tendency, the proposed regulations sets out a flexible, non-binding standard that employees are encouraged to use when deciding whether to accept a gift that would otherwise be permitted. Specifically, the new section encourages employees to consider the potential that a reasonable person would question their integrity if they were to accept the gift. In circumstances where an employee concludes that a reasonable person would question his or her integrity, the employee is encouraged to consider declining the gift.

Such considerations include:

• Whether the gift has a high or low market value
• Whether the gift was provided by a person or organization who has interests that may be affected substantially by the performance or nonperformance of the employee's official duties
• Whether acceptance of the gift would lead the employee to feel a sense of obligation ot the donor
• Whether acceptance of the gift would reasonably create an appearance that the employee is providing the donor with preferential treatment or access to the Government
• With regard to a gift of free attendance at an event, whether the Government is also providing persons with views or interests that differ from those of the donor with access to the Government
• With regard to a gift of free attendance at an event, whether the event is open to interested members of the public or representatives of the news media
• Whether acceptance of the gift would cause a reasonable person to question the employee's ability to act impartially and
• Whether acceptance of the gift would interfere with the employee's conscientious performance of official duties.

Of course, the fail-safe policy is never to accept gifts, period.

What is the "Ostensible Subcontractor Rule"

The "ostensible subcontractor rule" is a concept that arises when the SBA (Small Business Administration) is determining whether a firm is considered a small business for purposes of bidding on Government contracts.

The ostensible subcontractor rule treats a prime contractor and its subcontractor as joint ventures and therefore affiliates, for size determination purposes when the subcontractor performs primary and vital requirements of a contract or the prime contractor is unusually reliant upon the subcontractor. This rule is designed to prevent other than small firms from forming relationships with small firms to evade SBA size requirements.

To determine whether the relationship between a prime contractor and a subcontractor violates the rule, SBA considers all aspects of the relationship including the terms of the proposal (such as contract management, technical responsibilities, and the percentage of subcontracted work), agreements between the prime and subcontractor (such as bonding assistance of the teaming agreement), and whether the subcontractor is the incumbent contractor and is ineligible to submit a proposal because it exceeds the applicable size standard for that solicitation.

The SBA evaluates ostensible subcontractor affiliation on a case-by-case basis. Factors that may be relevant include prime contractors that rely upon the subcontractor to provide key personnel, the relative inexperience of the prime contractor, the subcontractor supplying critical bonding, financing, or equipment, the subcontractor drafting the proposal, profit sharing arrangements, and hiring subcontractor rank and file employees, among many others.

A recent SBA size determination case illustrates the application of some of these concepts (see Size Appeal of Giacare and Medtrust JV (Giacare/Medtrust) versus Global Dynamics (GDL). In a solicitation issued by the Army Material Command, GDL submitted a proposal whereby it would perform 51 percent of the effort and OMV, a subcontractor, would perform the remaining 49 percent. GDL would also supply the full-time senior project manager to be responsible for day-to-day contract management and communication with the Government.

When the Army announced that GDL was the winning bidder, Giacare/Medtrust appealed on the basis that GDL was in violation of the ostensible subcontractor rule. Giacare/Medtrust alleged that GDL was a young company that began conducting business in 2010, had modest revenues, fewer than 10 employees, and little experience with contracts as large as the subject ID/IG (up to $200 million).

The SBA denied the protest based on three considerations. First, OMV (the subcontractor) employees will be under GDL's supervision. Second, GDL is not dependent on OMV for financial resources because GDL has sufficient financial resources to run the contract. Finally, GDL has experience in the health care industry (the nature of the contract).

New Emphasis on the Sufficiency of Audit Evidence

Most long-time Government contractors have faced situations where over-zealous contract auditors or contracting officers make spectacularly wild conclusions based on little or no evidence to back it. It happens way too often and once the Government has dug in its heels on a matter, it takes a lot of time and energy to resolve.

This shouldn't happen. For audits performed by DCAA (Defense Contract Audit Agency), auditors are required by GAGAS (Generally Accepted Government Auditing Standards, aka Yellow Book) to obtain sufficient, appropriate evidence to provide a reasonable basis for their findings. Appropriateness is the measure of the quality of evidence that encompasses its relevance, validity, and reliability while sufficiency is the measure of the quality of evidence used to support the findings and conclusions (GAGAS 6.57).

The DoD Inspector General has, from time to time, called into question the sufficiency of the audit evidence used by DCAA to back up its findings. In fact, in its latest peer review of DCAA, the DoD-IG criticized DCAA because of a lack of documented supervisory review of the sufficiency of audit evidence. Seemingly, no one in the supervision and management chain of command was validating the sufficiency of auditors' work to support their conclusions and recommendations.

Thankfully, DCAA has now amended its internal procedures to require supervisors to make affirmative statements that the  audit evidence gathered during the audit is sufficient to support the objectives of the audit and the resulting conclusions and recommendations. Perhaps this change will reduce the occurrence of audit findings that have no merit.

The new guidance can be viewed or downloaded here.

Voluntary Defective Pricing Disclosures - Proposed Rule Will Limit Audit Rights

DoD published a proposed rule last week that would require DoD contracting officers to request "limited-scope" audits in the interest of promoting voluntary contractor disclosures of defective pricing.

Currently, FAR 15.407-1(c) requires that whenever contracting officers learns or suspects that certified cost or pricing data furnished in support of contract negotiations were not current, complete, or accurate, or were not adequately verified by the contractor as of the time of negotiation, to request an audit (by DCAA) to evaluate the propriety of the data furnished.

 DoD is proposing to revise the DFARS (DoD FAR Supplement) to "stipulate" that contracting officers shall request a limited-scope audit when a contractor voluntarily discloses defective pricing after contract award (unless, of course, a full-scope audit is appropriate for the circumstances). This proposal is a response to an initiative to eliminate requirements imposed on industry where costs outweigh benefits.

Specifically, contractors recommended that DoD clarify policy guidance to reduce repeated submissions of certified cost or pricing data. Frequent submissions of such data are used as a defense against defective pricing claims by DoD after contract award, since data that are frequently updated are less likely to be considered outdated or inaccurate and, therefore, defective. This proposed rule impacts the regulatory guidance regarding the requirement for contracting officers to request an audit even if a contractor voluntarily discloses defective pricing after award. If this new rule is implemented, contracting officers will request a limited scope audit on just the data that has been disclosed by the contractor and its impact on the negotiated contract price.

This proposed rule will have no impact on DCAA's current program of auditing contracts for compliance with TINA (Truth in Negotiations Act). That program (which has become dormant because of "higher risk" audits) randomly samples contracts for in-depth defecting pricing audits.

University Pays $20 Million to Settle Improper Charging Allegations

It was about 21 years ago that Stanford University settled a fraud case involving research expenses. The Government settled for a small fraction of of the Navy's original claim. Initially, the Office of Naval Research wanted the University to pay back more than $200 million. The parties finally settled for $1.5 million (or perhaps a bit more as the settlement included some small claims that Stanford had against the Government). It was an embarrassing time for the University and its President though. The President was dressed down before Congress trying to explain why silk sheets for his private home were charged to Government contracts among other indiscretions. And, he was forced to resign. Although the Government did not recover much money in the end, the episode brought about significant changes in the way the Government conducted oversight of university conducted research.

A couple of decades go by and once again, a prestigious university is on the hot seat for overcharging the Government for improper research expenses. In this case, the University of Florida has agreed to pay the United States about $20 million to settle allegations that it improperly charged the Department of Health and Human Services (DHHS) for salaries and administrative costs on hundreds of federal grants.

The overcharging occurred in several ways. First, the University charged the Government for salary costs of employees where it did not have documentation that the employees actually worked those hours. Secondly, the University charged costs directly to the grants that were improper under federal regulations. And finally, the University inflated costs for services performed by an affiliated entity.

As is typical in settlements by the Justice Department, the claims resolved by this settlement are only allegations and the University did not agree to any liability in the matter.

You can read the DoJ press release by clicking here.

"Eliminating Requirements" Study - Reduce Overlaps between DCAA, Internal, and SOX audits

We are now on our fifth and final installment covering the results of a recent study conducted jointly by the Department of Defense and one of the Departments FFRDCs (Federally Funded Research and Development Company). The title of this study is "Eliminating Requirements Imposed on Industry Where Costs Exceed Benefits" and the full report can be downloaded and/or read by clicking here. Although this study covered several areas such as acquisition of commercial items, application of earned-value management (EVM), the Truth in Negotiations Act (TINA), and application of the Buy American Act (BAA), we are limiting our coverage to the topic called "Contract Auditing and Management" of which there were five recommendations. Previously we covered Reducing the Time for Record Retention, Eliminating Duplicative Effort in Reviewing Forward Pricing Rates, Eliminating Contract Closeout Backlogs, and reducing the incurred cost audit backlog. Today we will be covering a recommendation to reduce DCAA's (Defense Contract Audit Agency's) incurred cost backlog. In this final installment, we will cover a recommendation that would have the Government rely on other auditors work besides DCAA (Defense Contract Audit Agency).

Many of the 12 contractors participating in this study asserted that many sub-processes examined in SOX (Sarbanes Oxley) duplicate or overlap with DFARS (DoD FAR Supplement) business system processes. In particular, one contractor identified multiple SOX-DFARS overlaps for the Accounting System and some overlaps for the Purchasing System and Material Management and Accounting System). Other participants noted that their internal audit staffs' work overlapped to varying degrees the audit procedures performed by DCAA. 

DCAA, of course, would readily agree that the potential for overlap exists. In fact, the Agency has been trying for years to access both SOX audits and internal audits. We know first hand that some of the largest DoD contractors have steadfastly refused to share SOX audits with the Government, claiming that there is no statutory or regulatory requirement that they do so. Additionally, DCAA has been trying for years to obtain routine access to internal audit reports and working papers, going so far as to introduce legislative proposals to that effect. So on one hand, contractors claim that there is duplicative effort but on the other hand, will not share the results of other audits with the Government in order to assess what can and cannot be relied upon during audits of contractor business systems.

The recommendation bears this out. The study recommended that DoD put together a team to engage with willing contractors on proposed approaches and provide an assessment. The key phrase here is "willing contractors". It is obvious that there is not a statutory or regulatory requirement that compels contractors to provide Government access to other audits so in order for this recommendation to proceed, the DoD must find "willing contractors" who will voluntarily share their audit reports.

"Eliminating Requirements" Study - Reduce Incurred Cost Backlog

This is the fourth of our five part series covering the results of a joint study conducted by DoD and the Institute of Defense Analysis (IDA). Each part examines one of the five recommendations put forth by the panel impacting contract audit and contract management. Previously, we covered Reducing the Time for Record Retention, Eliminating Duplicative Effort in Reviewing Forward Pricing Rates, and Eliminating Contract Closeout Backlogs. Today we will be covering a recommendation to reduce DCAA's (Defense Contract Audit Agency's) incurred cost backlog.

There is not doubt that contractors are financially impacted by Government delays in meeting their contractual obligations. However, it is difficult to quantify the cost of delays, disruptions, and other encumbrances. The responses received from participating contractors did not include quantitative costs associated with specific inefficiencies associated with DCAA auditing or DCMA contract management. Therefore, the study group could not perform a cost-benefit analysis of recommended changes. Instead the study identified what it felt to be the most promising recommendations based on a subjective assessment of their merit.

Study participants asserted that given DCAA's limited resources that are being deployed to cover a wide breadth of areas, there have been many starts and stops in audits. The result has been for audits to be cancelled at various stages after the company and DCAA have invested resources to start the reviews. The consensus among participants was limit DCAA audits to incurred costs and audits ob business systems.

DCAA, of course, did not agree with this recommendation. The Agency noted that its resources are focused on risks to the Department and the taxpayer. DCAA uses its entire portfolio of audits (incurred cost, forward pricing, business, systems, truth in negotiation, cost accounting standards, etc.) to focus resources on what it believes to be the highest risk audits. DCAA also noted that it has significantly reduced its incurred cost audit backlog. From fiscal year 2012 to mid fiscal year 2015, DCAA has reduced its backlog by nearly one-half.

While acknowledging DCAA's recent progress in reducing incurred cost audit backlog, the study group recommended that DCAA continue to analyze and assess progress of on-going Agency efforts to decrease backlogs of incurred costs and report on its efforts to both the Government and industry. DCAA agreed to continue to look for ways to reduce the backlog more quickly.

"Eliminating Requirements" Study - Eliminate Contract Closeout Backlogs

We've been working our way through a report on a study conducted by DoD in conjunction with one of its captive FFRDCs (Federally Funded Research and Development Centers), the Institute for Defense Analysis. We've been focusing on recommendations pertaining to contract auditing and management - the topic that seemed to be of most interest by the 12 largest DoD contractors that were part of the study. So far we've looked at contractor recommendations to eliminate the one year record retention period for documents that have been scanned (that's a no go) and recommendations to eliminate duplicate efforts by DCAA and DCMA in reviewing forward pricing indirect expense rates (that's been sent back for further study). You can read Parts 1 and 2 of this series by clicking here and here, respectively.

Today we will look at a recommendation by multiple contractors for DCAA and DCMA to aggressively address contract closeout backlogs through a risk-based approach. These contractors have noted that despite renewed attention to the problem by DCAA and DCMA, contract closeout backlogs have not improved.

DCMA and DCAA both disagree with contractors' assertions that no progress has been made in reducing the contract closeout backlog. Even so, both Agencies admit that contract closeout backlogs continue to be an issue and both DCAA and DCMA are "open to considering additional initiatives" to clearing out the contract closeout backlog. To this end, the study recommends that DoD establish a team to assess contract closeout initiatives proposed by contractors.

Two of the initiatives recommended by contractors include (i) "en masse closeouts" that gives the Government 0.005 percent (i.e. one half percent) of contract values as protection against potentially unallowable costs and (ii) give authority to the head of an agency to close out contracts that are administratively complete, was entered into 10 or more years ago, and has an unreconciled balance of less than $100 thousand.

Go to Part 4.

"Eliminating Requirements" Study - Reduce Duplicative Efforts in Rate Reviews

Yesterday we began a series discussing the recently issued "Eliminating Requirements" report (as it has become known). If you missed Part 1, click here to begin your reading. As we mentioned, this series will be focusing on recommendations pertaining to contract auditing and management, the topic that garnered the most comments from industry. Yesterday we discussed contractor complaints about the FAR requirements for maintain original paper copies of scanned images for a period of one year. The report did not find the requirement onerous and is not seeking changes to the regulations.

Today we want to discuss a complaint raised by multiple contractors (recall that the 12 largest DoD contractors participated in the study) over the duplication of efforts by DCMA (Defense Contract Management Agency) and DCAA (Defense Contract Audit Agency) in reviewing/auditing FPR (Forward Pricing Rate) proposals. These contractors asserted that having both DCMA and DCAA review forward pricing rates is generally unnecessary since payments based on estimates are corrected when actuals become available.

The report authors submitted the contractor concerns to DCMA and  DCAA. Both Agencies noted the recent workload realignment policies that gave DCMA the single agency responsible for issuing all forward pricing rate recommendations for contractors where DCMA is the cognizant contract administration office. That should reduce duplicative effort. DCMA noted that forward pricing rates are used for more than just billing purposes. They are used to establish fair and reasonable cost determinations on fixed priced contracts and profit/fee considerations on all contracts.

DCMA noted that the contracting officer may need to request audit assistance from DCAA but if it has the capability necessary to perform the required analysis, it does not seek assistance from DCAA.

Nevertheless, both DCMA and DCAA agreed that additional (but unspecified) streamlining opportunities appear possible so with that admission, the report recommended that these opportunities be addressed by the Directors of DCMA and DCAA and be provided to DoD. Now both DCAA and DCMA are on the hook to conjure up some "opportunities for streamlining" that they can present to DoD.

Go to Part 3.

"Eliminating Requirements" Study - Reduce Records Retention Periods

In 2013, DoD, along with the Institute for Defense Analyses (IDA), a Federally Funded Research and Development Center, initiated a study to identify unnecessary requirements for which costs exceed benefits with the goal of reducing unnecessary and costly statutes and regulations. The study focused on six broad areas based on industry input including (i) acquisition of commercial items, (ii) contract auditing and management, (iii) component specific supplements to DFARS, (iv) application of earned value management, (v) TINA (Truth in Negotiations), and (vi) application of the Buy American Act (BAA).

Twelve of DoD's largest suppliers were invited to participate in the study which ended in December 2014. Each of these companies provided input into the areas they chose to address. None of the companies provided input into the component specific supplements to DFARS area. Two areas, earned-value management and contract auditing and management, generated the most responses.

Over the next few days, we will be posting highlights of this study, focusing primarily on topics contract audit and management topics. Today we will discuss the contractor recommendations to change record retention policies related to original scanned images.

Two of the 12 contractors participating in this study recommended changes to the retention of original paper records. The crux of their arguments that that requiring originals of scanned images to be retained for one year is unnecessarily burdensome.

FAR 4.703 includes language that states original records need not be maintained or produced in an audit if the contractor provides photographic or electronic images of the original records and meets certain requirements. One of those requirements is for Government contractors to maintain their original records for a minimum of one year after imaging to permit periodic validation of the imaging system.

The study concluded that there is no compelling evidence to make changes to to policies. The FAR 4.703 requirement to retain original hard copies of scanned images to allow verification that scanned copies are accurate seems reasonable. The study noted that DCAA (Defense Contract Audit Agency) has no policies that add to this requirements but did recommend that DCAA might want to revisit it's policy on the frequency of testing scanned images to original documents.

The full Eliminating Requirements Imposed on Industry Study report can be downloaded here.

Go on to Part 2

Prison Time for Falsely Claiming "Service-Disabled" Status

Warren Parker falsely claimed to be a disabled veteran and war hero . He claimed to have been awarded three Silver Stars, four Bronze Stars, eleven Air Medals, a Presidential citation, and three Purple Hearts in the Vietnam War. Military records however showed that he only served in the Missouri National Guard and was never deployed outside of the Missouri.

Warren Parker, his wife Mary, and son Michael used this "stolen valor" to secure Veteran's Administration and Defense Department Contracts totaling $7.5 million that had been set aside for SDVOBs (Service Disabled Veteran Owned Businesses).

They were caught, plead guilty, and are now serving time in Federal prisons; Warren (who's already in his 70s) received an 87 month sentence, his wife Mary, 20 months, and his son Michael, 41 months. Its probably not where Warren and Mary expected to spend their "golden years".

In addition to the prison sentences, the Parkers will also be paying restitution of some unspecified amount. Their reputations have been destroyed - one was immediately kicked off the city planning commission. Their construction company is now referred to in the past tense.

Yet to be sentenced in the case is Thomas Whitehead who used Parker's company as an illegal pass-through for his own construction company.

Misrepresenting "status" in order to obtain Government contracts has got to be one of the dumbest procurement fraud scenarios. It seems like there is almost a 100 percent certainty of being caught. There is so much information available on the internet and in social media that it becomes difficult to maintain a ruse for any length of time. There are the unsuccessful bidders that will poke around to see if there are flaws in the procurement process so that they can appeal the award. If it involves a set-aside contract, you can be sure they will be checking up on the winning firm's qualifications. There is also risk from insiders (i.e. employees) who are ready to blow the whistle so that they can get a big payday (qui tam actions). Finally, the Government is beefing up its vetting process to reduce the occurrences of businesses falsely claiming a "status" to which they are not entitled.

As we learned from the Parker case, the consequences for falsely claiming small business, veteran-owned business, woman-owned business, minority-owned business, etc, can be swift and severe.

New Advisory Panel to be Formed to Streamline Acquisition Regulations

 One of the provisions in the Fiscal Year 2016 National Defense Authorization Act (NDAA) is a requirement for the Department of Defense to convene an advisory panel on streamlining and codifying acquisition regulations. Although the President vetoed the bill last month and it is being reworked, the advisory panel provision will undoubtedly remain. It is not one of the disputed items. The duties of the advisory panel are two-fold:

1. Review the acquisition regulations applicable to the Department of Defense with a view toward streamlining and improving the efficiency and effectiveness of the defense acquisition process and maintaining defense technology advantage and
2. Make any recommendations for the amendment or repeal of such regulations that the panel considers necessary to: 

• establish and administer appropriate buyer and seller relationships in the procurement system
• improve the functioning of the acquisition system
• ensure the continuing financial and ethical integrity of defense procurement programs
• protect the best interests of the DoD and
• eliminate any regulations that are unnecessary. 

25 years ago, a similar panel was convened and became known as the Section 800 panel. Recommendations from this panel led to a few acquisition reforms such as the Federal Acquisition Streamlining Act (FASA) and the Clinger-Cohen Act. In the intervening years, the Senate Armed Services Committee believes that the acquisition system is again burdened by unnecessary laws and regulations that are creating incentives to slow down acquisition and not obtain the best value when purchasing goods and services for the Defense Department and the taxpayer.

The panel will be composed of nine recognized experts in acquisition laws, regulations, and policy. Persons appointed to the advisory panel must be able to devote a substantial amount of time to the effort, not operating as a board that directs the work of a staff but actually performing the primary work.

The panel will have two years to complete its work.

Organizational Conflicts of Interest (OCIs) - Definition and Meaning

The purpose of the Organization Conflicts of Interest rules that were established in the Federal Acquisition Regulations (FAR) back in 2010 were to avoid, neutralize, or mitigate organization conflicts of interest that might otherwise exist in some contracting situations (See Organization Conflicts of Interest (OCI) for further background).

The situations in which OCIs arise, as described in FAR 9.5 can be broadly categorized into three groups: biased ground rules, unequal access to information, and impaired objectivity. Since adoption, unsuccessful bidders have had another weapon at their disposal to use when protesting awards to competitors and there have already been a plethora of protests that have included OCI challenges (See for example Organizational Conflicts of Interests (OCIs) - Strong and Direct Linkage Needed).

Many of the OCI protest decisions so far have involved unequal access to information. Unequal access to information OCI exists where a firm has access to nonpublic information as part of its performance of a Government contract, and where that information may provide the firm a competitive advantage in a later competition for a Government contract. This is rather difficult for a protestor to prove however. The identification of conflicts of interest is a fact-specific inquiry that requires the exercise of considerable discretion. A protestor must identify hard facts that indicate the existence or potential existence of a conflict. Mere inference or suspicion of an actual or potential conflict is not enough.

In a recent bid protest case, Unsuccessful Bidder (UnB) protested a Department of Labor (DOL) contract because the Winning Bidder (WB) had previously performed contract work in DOL Headquarters which provided WB with intimate details of a wide range of information that was highly relevant to the procurement. This familiarity, UnB alleged, gave WB an unfair competitive advantage that DOL failed to identify and mitigate.

The problem with the allegation is that UnB had no specific facts to back its claim. When the Comptroller General looked into the situation, it found that the contracting officer had indeed looked into the matter prior to awarding the contract and determined that there was no potential of a significant OCI arising from the work that WB had performed. Absent specific facts, the Comptroller General is not going to second-guess the determination.

Second National Dialogue to Improve Federal Procurement

The Office of Federal Procurement Policy has launched its second National Dialogue to improve the federal procurement and grants processes with the objective of reducing reporting compliance costs for Federal contractors and grantees. The Agency is looking for ideas on how to reduce the costs associated with obtaining and managing tax dollars awarded through Federal contracts, grants, subcontracts, and sub-awards. The dialogue will be open for two years and if you register, you can comment on or share thoughts on emerging ideas and identify those you believe to be most impactful.

Last year's campaign ended May 2014. Click here to read the results of that dialogue. 118 ideas were posted, 190 comments were received. 548 people/organizations registered. The sharing of EVMS certification reviews that we discussed a couple of weeks ago (see Plans for Reducing the Number of EVMS Certification Reviews) came out of last year's open dialogue.

The popular suggestions in this year's campaign so far, include the following. You can read more detail for each of these by visiting the National Dialogue website:

• Raising the micro-purchase threshold from $3,000 to $10,000. The lower threshold creates a cost of compliance that far exceeds any potential reduction in waste, fraud and abuse that might occur from establishing a higher threshold.
• Require agencies to adopt common research terms and conditions. While NSF, NIH, DOE, NASA, and other agencies have adopted common research terms and conditions, some agencies have opted out. the Council on Government Relations has recommended that the opt-out option be eliminated.
• Eliminate prime recipient monitoring of subs-recipients subject to audit. Where a subrecipient has a current Single Audit report, prime recipients should be able to rely on the subrecipient's auditors and cognizant agency oversight for routine audit follow-up and management decisions.
• Common Federal proposal and award management system. Consolidate federal proposal and award management systems, including payment systems, optimally with significant input from stakeholders.

Contractors are encouraged to participate in this dialogue, if nothing more than casting votes for what will make their jobs easier and reduce the cost of compliance.

Contractor Purchasing Systems - Source Selection Considerations

FAR (Federal Acquisition Regulations) 52.244-2 requires prime contractors to provide contracting officers notification before the award of many subcontract and to obtain contracting officer consent to subcontract. See Government's Consent to Subcontract for more information on this subject. The objective of requiring consent to subcontract is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when subcontracting.

With this in mind, Government agencies have devised a variety of checklists they use when reviewing contractor notification and consent packages. One of the most important aspects in determining contractor compliance with Government policy is in the source selection process. Following is a compendium of items taken from several of those checklists. Contractors would do well to ensure that their own purchasing systems address these areas.

• Adequately address make-or-buy considerations.
• If procurement is from a contractor-controlled source, provide adequate justification.
• Consider soliciting labor surplus areas and small business sources, including small business owned and controlled by disadvantaged individuals.
• Compliance with contract requirements regarding small business subcontracting, including, if applicable, plans for subcontracting with small, veteran-owned, service-disabled veteran-owned, HUBZone, small disadvantaged and women-owned small business concerns.
• Agreement to provide progress payments on fixed-price subcontracts with small business concerns in conformity with FAR 32.502-3 and not consider such payments as an adverse factor in selection.
• Ensure adequate price competition or properly justify the absence of adequate price competition.
• Ensure a sound basis for determining the responsibility of a particular subcvontractor.
• Ensure that the proposed subcontract type is appropriate for the risks involved and consistent with current policy.
• Ensure that the proposed subcontract does not appear on the Excluded Parties List System (see FAR 9.404).
• Ensure that OCI (Organization Conflicts of Interest) analysis has been performed.

Proposed VA Veteran-Owned Small Business (VOSB) Verification Guidelines

The Department of Veterans Affairs (VA) is seeking to find an appropriate balance between preventing fraud in it's contracting programs and providing a process that would make it easier for more VOSBs (Veteran-Owned Small Businesses) to become verified.

The VA verification program has been the subject of audits by the GAO (Government Accountability Office) and the VA's Office of Inspector General. Both have found that fraud exists and continues to exist in the verification program.

To help prevent fraud, the VA has issued proposed amendments to its regulations governing the verification program. The proposed regulations are quite voluminous but if you are a VOSB needing verification, it is important reading. The proposed rules;

• Clarify the eligibility requirements for businesses to obtain "verified" status
• Adds and revises some definitions,
• Reorders requirements
• Redefines the definition of "control", and
• Explains the examination procedure and review process.

The definition of "ownership and control" is where most of the fraud occurs. A small business concern must be owned and controlled by one or more eligible veterans, service-disabled veterans or surviving spouses.  Control means the strategic policy, long-term decision-making authority, and the management of daily business operations for the VOSB. Control is not the same as ownership. Individuals managing the concern must have managerial experience of the extent and complexity needed to run the concern. A veteran need no have the technical expertise or possess a required license to be found to control an applicant or participant if he or she can demonstrate that he or she has ultimate managerial and supervisory control over those who possess the required licenses or technical expertise.

Regular readers of this blog will be aware that many fraud cases involving the VOSB program are the result of a non-veteran firm using the credentials of a VOSB in order to secure a contract. Whether these new rules will reduce fraud in the program remains to be seen.

Audits of Business Systems at DoD Contractors - Update

This is a follow-up to a posting last July concerning DoD's decision to kill the proposed rule that would allow Government contractors to go out and hire independent auditors to perform reviews of the three business systems that DCAA normally audits (i.e. accounting, estimating, and material management and accounting). Under Generally Accepted Government Auditing Standards, DCAA has not been able to keep pace with demands and needs some help to maintain currency. (See DFARS Proposal to have CPA Firms Audit Contractor Business Systems - Dead.)

The proposed rule received many comments. While some supported the idea, many were wary of the implementation. Supporters liked the idea that their systems could get audited in a timely manner but the implementation appeared onerous with too much involvement and oversight by DCAA. DCAA for its part, considered that the design of the oversight process would result in fewer audit resources expended then if it were to perform the audit themselves.

While the proposal has been withdrawn, DCAA is not giving up. The rule was withdrawn so that the Agency could consider the comments received and determine a path forward. Its possible that the proposed rule will be resubmitted with modification or some other alternative will be pursued.

In the meantime, DCAA is experimenting with an Agency-wide Business System Audit Team that will be performing business system audits at high risk contractors. High risk contractors are generally the largest contractors. The team is comprised of experienced auditors who are specifically trained to perform business system audits. As they travel from contractor to contractor, the teams will be augmented with local audit staff who are familiar with the particular contractor business systems. DCAA admits that this team approach is not the ultimate answer. It only covers the highest risk contractors and will not cover all the business system audits that need to be performed.

Company Pays $4 Million to Resolve False Claims Allegations

Coast Produce was awarded a contract to provide fresh fruits and vegetables to military dining facilities and Navy ships in the Southern California area. Under the terms of the contract, Coast Produce was to have charged the Government its cost (i.e. the prices it paid to its suppliers) plus an additional $1.50 per unit "distribution fee" that included Coast's overhead, packaging, transportation, profit, etc. The distribution fee did not vary with the price of the item. Thus, whether the price of vegetables or produced went up or down, the amount which Coast was paid for its role in sourcing and delivering them did not. Evidently, $1.50 per unit was not enough for Coast.

Coast began overcharging the Government for the cost of the produce in several ways. First, they instructed suppliers to provide inflated quotes for produce, which the company then submitted to the Government as pricing support while simultaneously instructing the two suppliers to actually bill at their regular lower prices. Second, Coast charged the Government more than it paid for bananas and pineapples under long-term fixed-price supply contracts. Finally, Coast submitted artificially high quotes to the Government from vendors it hand no intention of buying from - in order to set a payment rate, but then actually purchasing the produce it supplied at lower prices and pocketing the difference.

A whistleblower surfaced the allegations in 2008 when he filed a civil complaint in Federal court. The Government enjoined the suit and it took until last month to settle. Coast agreed to pay $4 million to resolve the civil allegations (admitting to no wrongdoing, of course) and the whistleblower received about $1 million of that amount. In should be noted that when the Government enjoins a whistleblower suit, most of the legal costs are subsumed by the Government resulting in the relator, not the attorneys, keeping most of the proceeds - in this case, most of the $1 million.

In a related matter, once the civil suit was settled, the Government slapped a criminal information against Coast alleging that the company altered or falsified records. The information alleged that Coast provided false invoices to the Government when it requested evidence concerning the prices Coast was paying for produce it provided the military. The criminal information was filed pursuant to a Deferred Prosecution Agreement in which the Government agreed to defer any criminal case against Coast for two years in return for the company's agreement to implement various compliance and remedial measures during that period.