Friday, September 30, 2016

Prohibition on Contracting with Delinquent Taxpayers and Felons

Last December, the FAR Councils published an interim rule that prohibits the Federal Government from entering into a contract with any corporation having a delinquent Federal tax liability or a felony conviction under any Federal law, unless the agency has considered suspension or debarment of the corporation and has made a determination that this further action is not necessary to protect the interests of the Government. This prohibition was required to implement sections of the Consolidated and Further Continuing Appropriations Act of 2015.

Yesterday, the FAR Councils made the interim rule permanent, without change, even though there were a few public comments that opposed, objected, or raised concerns with aspects of the interim and now, final, rule. For example, someone noted that the FAR already includes Federal tax delinquency and criminal malfeasance as causes for debarment so a new (similar) rule is unnecessary. Be that as it may, the Councils' response was a reference back to the underlying statute that made the regulation necessary.

Corporations are now required to self-certify in the SAM (System for Award Management) "Representations and Certifications" section that it has no delinquent taxes or has been convicted for a felony criminal violation with the preceding 24 months. The precise wording follows:

The new regulation contains no provisions for false certifications. Presumably that would result in a terminated contract and debarment or suspension thereafter.

This new rule should not have much of an impact as DoD and many other agencies have already implemented similar provisions in their FAR supplements.

Thursday, September 29, 2016

Another "Rent-a-Vet" Scam Uncovered

In August 2014, a contractor plead guilty for using fronting companies to secure 45 contracts totaling $23 million that were set aside for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). In June 2015, a Grand Jury indicted three people from Puerto Rico for the same kind of scheme - calling it a multi-million dollar fraud. Just last month, the Justice Department announced another similar scheme where a company owner used stolen names and social security numbers to obtain $3 million in contracts that had been set aside for SDVOSBs.

Yesterday, the Justice Department announced another like-minded fraudster. The owner of a "sham Veteran Owned Company" has been sentenced to 30 months in prison and a fine of $1 million for falsely claiming SDVOSB status in securing more than $100 million in Government construction contracts.

In this case (you can read DOJ's full press release here), a fellow set up a construction company after recruiting a disable Korean War veteran to act as the company's "straw owner" for the sole purpose of obtaining federal construction contracts that had been set aside under the SDVOSB program. When the Korean War veteran's health deteriorated so he could no longer function, the true owner went out and hired another disabled veteran to serve as the figurehead owner. Since 2006, the company was able to obtain contracts worth more than $113 million under this ruse.

In 2010, one of the company's competitors challenged a bid on the basis that "it appeared that the true owner, not one of the veterans, was the person running the company. The true owner went out and hired a "large Boston law firm" to assist him, helping him to backdate documents that contained false and misleading information. That fooled the SBA (Small Business Administration) who subsequently denied the bid protest (we wonder what the law firm's culpability is in this matter).

After that scare, the owner started siphoning off money in such a way that it would not look like compensation. He did not want the books to show that he made more than the rented disabled veteran. There was a $900,000 "gift" made to the owner. There were also deposits to private bank accounts totaling $2.5 million.

Somebody, somewhere was working behind the scenes however because it wasn't too long before a grand jury issued subpoenas against the company, its owners, and other witnesses and the scheme began to unravel. The owner was found guilty by a jury last June and sentenced earlier this week to two and a half year in prison.

Wednesday, September 28, 2016

Changes Coming to DoD's Mentor-Protege Program

The Department of Defense (DoD) published a proposed rule regarding its Mentor-Protege program last week. The Mentor-Protege program has been around since 1991 and was intended to provide incentives to major DoD contractors to furnish eligible small business - primarily disadvantaged small business -concerns with assistance designed to enhance the capabilities of eligible small business concerns to perform as subcontractors and suppliers under DoD contracts (and subcontracts) and to increase the participation of such business concerns as subcontractors and suppliers under DoD contracts as well as non-DoD contracts and commercial contracts.

The revised rule is intended to implement section 861 of the 2016 National Defense Authorization Act (NDAA) which added new reporting requirements to Mentor firms participating in the program. Specifically, mentors are required to report all technical or management assistance provided, any new awards of subcontracts to the protege firm, extensions, increases in scope of work, or additional, unreported payments to the protege firm, among other reports.

One of the purposes for including a provision into the NDAA is to ensure that the mentor-protege program is achieving its primary purpose. According to the conference report that preceded enactment, there was concern that the program may not always be executed to most effectively achieve mandated goals. Their analysis indicated that in some cases, protege firms participating in the program had received millions of dollars in federal prime contract awards prior to the establishment of their mentor-protege agreements, indicating they may have possessed sufficient ability to market their goods and services without the need for additional developmental assistance.

Under the proposed reporting requirements, mentor firms must submit semi-annual performance reports that cover the following:

  • Dollars obligated
  • Expenditures
  • Dollars credited toward applicable subcontracting goals as a result of developmental assistance provided to the protege
  • Any new awards of subcontracts on a competitive or noncompetitive basis to the protege firm
  • All technical or management assistance provided by mentor firm personnel
  • Any extensions, increases in the scope of work, or additional pyaments not previously reported for prior awards of subcontracts
  • The amount of any progress payments or advance payments made to the protege firm
  • Any loans made by the mentor firm
  • All federal contracts awarded to the mentor firm and the protege firm as a joint venture
  • Any assistance obtained by the mentor firm for the protege firm
  • Whether there have been any changes to the terms of the mentor-protege agreement
  • A narrative describing the success assistance provided including the developmental needs of the protege firm, the impact on DoD contracts, any problems encountered, any milestones achieved, and impact of the agreement in terms of capabilities enhanced, certifications received, and technology transferred.
Section 861 of the 2016 NDAA also requires DoD to submit a report detailing whether the program is effective - thus the need for all of the aforementioned data- and for the GAO to review the program to see if it is achieving its intended resulte.

Tuesday, September 27, 2016

Protester Must Establish that a Flawed Government Evaluation was Prejudicial

Competitive solicitations are evaluated based on stated criteria and each criteria is ranked in order of importance. Each of those criteria may contain sub-factors which themselves are ranked in order of importance. Besides rankings in importance, the criteria are also ranked in significance to other evaluation criteria. Thus a solicitation might provide something along the lines of the technical evaluation criteria are to be considered significantly more important than cost.

For contractors filing bid protests, they must not only show the Government somehow erred in its evaluation, but that the error prejudiced their ability to win the award.It is well established that a protester must show not simply a significant error in the procurement process, but also that the error was prejudicial, if it is to prevail in a bid protest. In that regard, a party has been prejudiced  when it can show that but for the error, it would have had a substantial chance of securing the contract.

If a bidder is ranked lower than other bidders in a "significantly more important" evaluation factor, it would have a difficult time proving that a Government flaw in the evaluation of a relatively insignificant evaluation factor prejudiced its ability to win the contract. If a protestor cannot demonstrate that it was prejudiced, the Courts or the Comptroller General will not even consider whether the Government's evaluation was flawed. That determination becomes moot.

If there is a tie among bidders on all evaluation criteria except the most insignificant, that is, bidders received identical adjectival ratings within each evaluation criteria, a protestor can then assert that it has been prejudiced by a flawed evaluation of the most insignificant criteria.

Monday, September 26, 2016

Energy Department Updates Guidance on Legal Cost Allowability

The Department of Energy (DOE) just released an update to a chapter in its "Acquisition Guide" that significantly expands on the criteria for determining the allowability of legal costs claimed as reimbursable by DOE contractors. The updated chapter covers the following three broad subjects:

  1. Contractor Legal Management Requirements
  2. Approving Settlements
  3. Determining the Allowability of Settlement Costs

Because many of DOE's contracts are cost-reimbursable, the Department has, since at least the mid-1990s, had procedures in place that imposed substantive requirements of DOE field counsel, contractor counsel, and outside counsel to ensure that public funds were not spent imprudently. Contractors who failed to comply with those procedures faced the very real possibility that legal costs and settlement costs would be disallowed under the contract. For example, contractors must obtain DOE permission to settle certain matters involving contractor payment of $25 thousand and over.

Under existing regulations (10 CFR 719), contractors are required to submit a legal management plan describing its practices for managing legal costs and legal matters for which it procures the services of retained legal counsel. Contractors are required to submit an annual legal budget that includes cost projections for significant matters at a level of detail reflective of the types of billable activities and the stage of each such matter. Contractors are required to submit staffing and resource plans that describes the method for managing a significant matter in litigation. Contractors are required to furnish DOE copies of any engagement letters and whenever it initiates litigation, it must provide prior written notice to Department counsel.

The guiding principles under the revised Acquisition Guide are two-fold:

  • Close collaboration between Department counsel and Contracting Officers is required to ensure effective management of contractors' legal costs.
  • Decisions regarding contractors' requests to settle legal claims and the allowability of associated costs may be made simultaneously only in limited circumstances.

Even though contractors may diligently adhere to the regulations, the reasons for incurring legal costs (e.g. liability, fault or avoidability) is a separate issue. The reason for the contractor incurring costs may affect the allowability of the contractor's legal costs. For example, whistleblower claims, employment discrimination claims, and sometimes contractor managerial actions, are all suspect when it comes to cost allowability.

You can read the complete text of the updates here.

Friday, September 23, 2016

DoD Prohibition on Use of Cost-Type Contracts for Construction

The Department of Defense amended its FAR Supplement (DFARS) with a final rule that implements a section from the 2012 National Defense Authorization Act that prohibits any form of cost-plus contracting for military construction projects or military family housing projects. Cost-plus contracts include (i) cost-plus-incentive-fee, (ii) cost-plus-fixed-fee, and (iii) cost-plus-award fee contracts.

The reason for the NDAA prohibition is fairly obvious; cost-plus construction contracts frequently encounter cost overruns and these overruns are often significant. Last year, for example, the Department of Energy had to acknowledge that the cost of its Vitrification Plant being constructed under a cost-type contract is projected to go over budget by $430 million. There is no financial risk to the contractor though as the Government simply increases the funding level and the contractor draws down on the funding to cover its expenses. We're not sure about the Vitrification Plant contract but many times, fee (or profit) is added to these overruns.

This new rule is unlikely to have a significant impact as cost-type construction contracts have generally fallen out of favor anyway. In fiscal year 2015, only 19 cost-reimbursement type construction contracts were awarded - two of them to small businesses.

The new rule includes two exceptions to the blanket prohibition; a declaration of war or the declaration of a national emergency by the President where the use of the Armed Forces is authorized.

Thursday, September 22, 2016

Unlikely the 2017 NDAA Will Pass Before Fiscal Year End

With Congress getting ready to recess later this week, many are wondering about the status of the Fiscal Year 2017 National Defense Authorization Act (NDAA). Right now, the versions of the Act that passed the Senate and House are being worked by a compromise committee to iron out the differences. If one trusts internet reporting, the only remaining obstacle to a bill for the President's signature is whether to block the sage grouse from being listed as an endangered species. What that has to do with national defense is anyone's guess. Other reporting however speculates that even if Congress passes something, the President is likely to veto it for a variety of reasons - many of which were delineated in the Administration's June 7, 2016 Statement of Administration Policy.

Right now however, Congress seems to be focused on little else than a continuing resolution to keep the Government (and states) running until Congress re-convenes on December 9th. Such a resolution would likely fund the Government at fiscal year 2016 levels. As a result, no one believes that the 2017 NDAA will be passed before Congress recesses or even by September 30th.

Here we go again.

Wednesday, September 21, 2016

Mandatory Pay Raises for Many Contractor Minimum-Wage Employees

Yesterday, the Wage and Hour Division of the Department of Labor (DOL) issued a notice announcing the applicable minimum wage rate to be paid to contractor employees performing work on or in connection with Government contracts.

That rate which becomes effective on January 1, 2017 will increase by $0.10 per hour from $10.10 to $10.20 per hour.

This minimum wage for Government contractor employees was based on a Presidential executive order from 2014 and became effective on January 1, 2015. The executive order and related regulations call for automatic annual increases based on the change in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) rounded to the nearest nickle.

Contractors affected by this minimum wage increase need to factor it into their forward pricing proposals and, to the extent impacted, their forward pricing indirect expense rates and provisional billing rates.

The full text of the new rules can be found here.

Tuesday, September 20, 2016

Contractor's Defense was an Astonishing Display of Chutzpay

Computer Sciences Corporation (CSC) had a DOE (Department of Energy) contract to provide occupational medical services at DOE's Hanford site. A couple of employees at the clinic were removed from the workplace after reporting numerous failures with a new electronic medical records system to their supervisor and the Department of Energy. These two workers alleged that the new system could put worker health and safety at risk. Their concerns were "brushed aside" by management and the new system was ultimately deployed over their objections.

Ultimately, CSC suspended the two employees without pay. When no one from CSC or DOE were supportive of the two whistleblowers, they filed a complaint with the U.S. Department of Labor. The Administrative Law Judge for the Department of Labor was not at all sympathetic to the employer (i.e. CSC) and ordered them to pay $216 thousand in back pay and compensatory damages, along with interest and attorney fees.

The Judge concluded that the two employees had engaged in protected activity when they met with DOE officials, that CSC knew of the protected activity and that the two employees suffered adverse employment actions. The Judge took CSC to task for their sloppy defense. He wrote:
And, in an astonishing display of chutzpah, Respondent argues "both (employees) were spending a significant amount of time colluding with (a successor contractor) who was attempting to have CSC removed from the contract. ... Whatever this evidentiary hash may be, it is not clear, and it is not convincing."

You can read the full 40 page text of the Judge's decision here.

A copy of a related press release can be found here.

Monday, September 19, 2016

PSC's Agenda for the Next President

The Professional Services Council (PSC) calls itself " ... the voice of the government technology and professional services industry, representing the full range and diversity of the government services sector." It has more than 400 member companies representing small, medium, and large businesses who employ hundreds of thousands of workers in all 50 states.

The PSC just released a report entitled "An Agenda for the Next President of the United States". The agenda identifies a number of specif issues and actions, grouped around four main areas; harnessing technology and new business models to modernize Government service delivery, improve Government operations to better compete globally, build a better engagement model to bring the best ideas and solutions from industry into Government, and develop the Government and industry work forces of the future. It is the last of these agenda items that we want to highlight today.

PSC writes:
Attracting and retaining the workforce of the future is a crucial imperative for both federal agencies and the contractors that support those agencies. There is a war for talent, competition is fierce and new approaches must be considered to create an environment that encourages our best and brightest to take on careers of public service. ... there are continuing challenges that are preventing new employees from remaining in the government and having the tools and experiences to optimize their performance and contributions.
The organization writes about a capacity gap, a capability gap, and a confidence gap. The capacity gap refers to the current workforce not having the time and resources to keep up with demand. We could not agree more. The capability gap comes from hiring, training and retaining workers. We think the primary contributor to this gap is employee retention. The Government has no problem hiring and its training programs (including on-the-job training) is top-notch. However, when private industry, including PSC members themselves dangle a boat-load of dollars in their faces to jump ship, they leave. Pay equality would solve some (perhaps a lot) of the retention gap. The confidence gap refers to current workers unprepared or unwilling to take well-reasoned risks to achieve potential innovations or cost savings, instead of defaulting to familiar, often sub-optimal, strategies.

One of PSC's solutions is to dump the Government employees and hire more (PSC member) contractors. PSC writes: "...government leaders must also be thinking about and addressing the appropriate mixture of government and contractor personnel to achieve agency mission needs." There have been many many studies over the years comparing the cost of government service versus privatization. These studies have varied and conflicting results and there is certainly no consensus on which is most cost-effective.

You can read the full report by clicking here.

Friday, September 16, 2016

New Procedures for Submitting Payment Requests on NASA Contracts

NASA has published an interim rule affecting its contractors who submit payment requests under cost-reimbursable contracts. Until the 2016 NDAA (National Defense Authorization Act), oversight of billings by NASA contractors was administered by DCAA (Defense Contract Audit Agency). However, the 2016 NDAA now prevents DCAA from performing any work for non_DoD agencies. As a result, all non-DoD agencies that have been relying upon DCAA to provide contract audit oversight are scrambling to find alternatives to DCAA.

NASA notes that since DCAA discontinued its "voucher support" to NASA, timely payments to contractors for work performed has been jeopardized and that a new mechanism is needed to implement procedural changes to minimize delays to contractors and suppliers and avoid the potential accrual of Government interest payments to contractors.

The new rule designates a centralized payment office where NASA contractors can send their vouchers, instructions for preparing the payment request, and the requirement for backup documentation. The requirement for backup documentation is the aspect that is going to seem most onerous to NASA contractors, who generally, have not had to submit such documentation previously but have only been required to maintain it for when an auditor came looking. This documentation requirements includes:
  • Breakdown of billed labor costs and associated contractor generated supporting documentation for billed direct labor costs to include rates used and number of hours incurred.
  • Breakdown of billed other direct costs (ODCs) and associated contractor generated supporting documentation for billed ODCs
  • Indirect rates used to calculate the amount of billed indirect expenses., 
The rule also covers additional administrative matters such as the rejection of improper vouchers and re-billing for costs that were previously suspended or disapproved.

Presumably someone in NASA's billing office will be reviewing vouchers for accuracy and compliance. There is no provision for audit oversight of contractor billing systems - guess NASA contractors will now be on the honor system.

Thursday, September 15, 2016

Threshold for Audit of Termination Settlement Proposals to Increase

The FAR (Federal Acquisition Regulation) Councils have proposed to increase the dollar threshold for requiring audit of termination settlement proposals from $100,000 to $750,000. The proposed new threshold will be tied to the threshold for obtaining cost or pricing data (FAR 15.403-4(a)(1), thus whenever that threshold increases (once every five years based on inflation), the audit threshold for termination settlement proposals will increase as well.

According to the FAR Councils, this increased threshold will significantly reduce the number of termination settlement proposals requiring audit, help alleviate contract close-out backlogs and enable contracting officers to more quickly de-obligate excess funds from terminated contracts. Additionally, (and unstated) it removes a significant source of audit work from DCAA (Defense Contract Audit Agency) who, in recent years, hasn't been quite as nimble as it once was in completing audits low risk/low dollar termination settlement proposals - much to the consternation of contracting officers.

The proposed revision does provide an option for referring termination settlement proposals under the $750,000 threshold to the auditor. Such referrals must indicate any specific information or data that the contracting officer considers relevant and include facts and circumstances that will assist the audit agency in performing its function. This referral is not an audit however. The audit agency merely "develops requested information and make further accounting reviews it considers appropriate". Then, the audit agency will submit written comments and recommendations (something less than a full-audit report).

The new threshold will apply to subcontractors as well as primes.

This is a proposed regulation and the comment period is open for 60 days. If anyone bothers to submit comments, they follow the familiar refrain of support from contractors and industry groups and dismay by government and watchdog groups.

Read more here.

Wednesday, September 14, 2016

Auditor Testing of Paid Vouchers

Back in 2012, the authority for determining a contractor's eligibility for direct billing - submitting vouchers without having them first approved by a contract auditor - was taken away from DCAA (Defense Contract Audit Agency) and correspondingly, all defense contractors were automatically eligible to bill their costs without DCAA pre-approval. This greatly streamlined the billing process, allowed contractors to be paid more quickly, thus ensuring improved cash flows.

While the pre-approval requirement or authority to grant direct billing status was eliminated, DCAA was and continues to be responsible for ensuring that contractors are billing allowable costs and that they comply with the terms and conditions of their contracts. To accomplish this responsibility, DCAA has developed a "paid-voucher" testing program - testing to see whether billings tie back to the books and records and comply with contract terms and conditions.

DCAA is in the process of phasing in its paid voucher review program. By next year at this time, the Agency will require testing on at least one voucher per year at ever contractor that submits vouchers, and more often than yearly at major contractors and those deemed to be high risk. Many contractors are already suffering through paid voucher reviews.

DCAA has developed an audit program for paid voucher testing. It can be downloaded here. Over the next few postings, we will highlight some of the factors that auditors will be considering when testing the propriety of billings. The audit program itself is nine pages but only pages 6 through 8 contain specific analytical steps relating to contractor books and records. Today we begin with a discussion of payments for materials.

FAR 52.216-7, the Allowable Cost and Payment Clause, authorizes the reimbursement of allowable costs for recorded (booked) costs that have been paid for at the time the voucher is submitted. It also authorizes reimbursement of accrued costs provided payment is made in the ordinary course of business - usually 30 days.

The auditor is going to test whether any amounts billed are compliant with these provisions - either actually paid for at the time the billing was submitted or accrued and paid within 30 days. One method of testing this is to review the accounts payable aging schedule and inquire about any significant payables that exceed 30 days. If there are delinquent payables, there could be reasonable explanations as to why payments become delinquent but delinquent payments could also be a risk factor that requires additional audit testing.

Contract auditors will also request a minimum of five material items that have been charged to the contract and test to see whether vendor payments were made prior to voucher submission to the Government or paid within 30 days of the date of the invoice.

If a contractor is delinquent in paying costs in the ordinary course of business, the costs are not (yet) reimbursable under Government contracts and auditors are advised to prepare and issue a DCAA Form 1 to suspend the costs and recoup the overpayment.

Tuesday, September 13, 2016

Failure to Comply with Solicitation Requirements Leads to Lost Opportunity

The VA (Department of Veterans Affairs) issued a solicitation to purchase healthcare furniture and associated services for medical centers, community-based outpatient clinics, vet centers, and other qualifying clinics and offices throughout the United States. Selection was to be made on a best-value basis considering technical capability, past performance, small business participation and price. Under the technical capability factor, vendors were instructed to submit, among other things, a certifying statement indicating that they can meet all service requirements as defined in the statement of work.

govSolutions was one of 30 bidders for the work. The VA assigned govSolutions' quotation an "unacceptable" rating because it did not include the self-certifying statement in the technical capability volume. govSolutions filed a protest with GAO (Government Accountability Office) maintaining that the VA erred in finding its quotation unacceptable for that reason. govSolutions maintained that its cover letter, in particular, provides a certifying statement that it can meet the service requirements identified in the statement of work. That cover letter statements that the company would provide complete coordination and took no exception to the solicitation and amendments should have been sufficient to meet the certification requirement.

GAO disagreed for a number of reasons. GAO analyzed the wording of the cover letter and determined that it did not reasonably equate to the certifying language required by the solicitation. GAO also expressed skepticism that govSolutions intended the cover letter to serve as a certification:
To the extent that govSolutions argues that the cover letter in its entirety serves as its certifying statement, we note that the inclusion of a discussion of the protester's past performance and pricing in the cover letter suggest that - regardless of its placement after the cover sheet for the technical capability volume - the letter was in fact not meant to serve as the required certifying statement , or indeed to be specific to the technical capability volume.
GAO found VA's rejection of govSolutions quotation reasonable. govSolutions failure to include a simple certification was probably on oversight. Live and learn, they say, but hopefully you can learn from others' mistakes; be sure you meet solicitation requirements.

You can read the entire GAO bid protest decision here.

Monday, September 12, 2016

New Panel Convened to Streamline DoD Acquisition Regulations

The Department of Defense announced the establishment of the Advisory Panel on Streamlining and Codifying Acquisition Regulations, as directed by the Fiscal Year 2016 National Defense Authorization Act (NDAA). This panel is to conduct a "thorough and independent" assessment of acquisition regulations applicable to the Department of Defense.

DoD also announced that Deidre Lee, former Director of Defense Procurement and Acquisition Policy and former Office of Federal Procurement Policy (OFPP) Administrator, is leading an 18 person panel which will be assessing regulations and associated laws to determine which are essential and which slow down the process unnecessarily. In addition to exploring possible regulation changes, the panel will also look for approaches to defense acquisition that are working well and should be expanded.

The Panel will have two years to complete their work, develop recommendations to amend or repeal regulations they determine necessary in order 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 Department of Defense
  • Eliminate any regulations that are unnecessary for the purposes described.

For more information on this panel including biographies of all eighteen members, visit their website. The Panel includes a former director of the Defense Contract Management Agency (DCMA) but unfortunately, no current or former representative from the contract audit community.

Friday, September 9, 2016

Ready to Implement an Internal Company Hotline?

As some point during a company's growth, leadership will need to develop a hotline - a mechanism for employees to report violations of laws and regulations, harassment, fraud, waste, and abuse. For Government contractors, that point comes, at the latest, when they receive a $5.5 million dollar contract that exceeds 120 days (see FAR 3.1004 and FAR 52.203-13). The pertinent regulations requires contractors to implement an internal control system that includes ...
An internal reporting mechanism, such as a hotline, which allows for anonymity or confidentiality, by which employees may report suspected instances of improper conduct, and instructions that encourage employees to make such reports.
There are many ways to set up an internal reporting mechanism. Most larger contractors have dual mechanisms that include a traditional 1-800 telephone number and a web-based complaint form. Some even offer face-to-face reporting.

In setting up a hotline, there are some considerations that need to be adhered to and basic questions that need to be answered if a contractor is going to be able to effectively pursue the alleged impropriety. First, contractors need to be serious about pursuing hot line allegations. Employees will know real soon whether a hotline is real or for show. Second, contractors need to ensure anonymity for anyone using the hotline. Third, bedside manner is critically important. Don't put Hannibal Lecter in charge of taking information over your hotline. Find someone that can show a little empathy for the relator. Fourth, make certain that the 1-800 number is answered. Asking someone to leave a message is not going to ensure anonymity. Fifth, provide feedback to the relator where you can. If a caller chooses to remain anonymous, there is no feedback expectation. Otherwise, provide feedback to the caller at the conclusion of your investigation. Finally, assign the responsibility for the investigation to someone in your organization savvy enough to understand the issues and is not a party to the issue or in the relater's chain of command.

As far as questions are concerned, the more information you can obtain or glean from a caller, the better, quicker, more effective your investigation will proceed. One of the Government's Inspector General's hotline questionnaires contains the following questions:

  • When did the issue occur?
  • Where did the issue occur?
  • Who took the action(s) at issue?
  • What did the person (or people) do?
  • To whom did the action(s) happen?
  • What law, regulation or policy was violated?
  • What remedy is being sought?
  • Names and positions of witnesses.
Employees who report to internal hotlines have other avenues to report their concerns - most notably the Hotlines operated by the Inspector General's of the various executive agencies. If they're not satisfied with or afraid to use your internal hotline and choose to use an outside hotline, there's no telling where an investigation will lead or how much extra time and effort you will expend in coordinating with outside parties.

Thursday, September 8, 2016

16,000,000 Miles and What Do You Get?

The Department of Justice Office of Inspector General (OIG) recently released an audit of the FBI's (Federal Bureau of Investigation's) contracts for bulk fuel purchases. The FBI spends about $2 million per year on bulk fuel purchases. That, by the way, is enough gas to take 33 round trips to the moon or 2,800 round trips from Los Angeles to New York. Indeed, $2 million buys a lot of gas.

The purpose of the audit was to determine whether the FBI adhered to federal regulations during the contract award and administration process, had adequate contract oversight, and was properly invoiced by vendors. If the FBI cannot award contracts following the FAR, what business does it have investigating FAR deviations by other agencies. Did they pass the audit? No, they did not.

The OIG audit disclosed several deficiencies including (i) no assurances that the Bureau received the best fuel prices, (ii) received the proper amount of fuel at the agreed upon price, and (iii) used fuel in the most efficient manner. What did the OIG find? The OIG found that the FBI did not award one of the  two fuel contracts under audit to a FAR specified mandatory source. Also, they bought premium grade fuel when only regular grade was needed.

Additionally, FBI contracting officers did not comply with FAR requirements for reviewing invoices or ensuring that the Bureau made timely payments to vendors, did not maintain complete contract files and made numerous errors in inputting information into the Federal Procurement Data System.

Although not specifically a contract compliance issue, the audit also identified that the fuel tanks in Miami were located 12 miles from the FBI office requiring a 30 minute drive to fuel vehicles and a commensurate waste of time. Additionally, the fuel tank was not adequately secured.

In response to the findings, the FBI, of course, promised to fix things promptly. You can read the entire audit report here.

Wednesday, September 7, 2016

New Cost Principle Addresses Allowability of Costs Related to Counterfeit Parts

The Department of Defense just published a final rule in its FAR Supplement (DFARS) that affects the allowability of certain costs - costs related to counterfeit electronic parts. The new cost principle can be found in DFARS 231.205-71. The "dash 71 means there is no corresponding cost principle in the FAR (Federal Acquisition Regulations).

This new cost principle implements various sections from the National Defense Authorization Acts from fiscal years 2012, 2013, and 2016 because many in Congress became concerned over the rising cost of counterfeit electronic parts creeping into our weapon systems with no monetary consequences to contractors whose responsibility was to ensure the prevention of such parts.

Specifically, the new cost principle states the following:
The costs of counterfeit electronic parts and suspect conterfeit electronic parts and the costs of rework or corrective action that may be required to remedy the use or inclusion of such parts are unallowable, unless they satisfy at least one of the three following requirements.
  • The contractor has an operational system to detect and avoid counterfiet electronic parts and suspect counterfeit electronic parts that has been reviewed and approved by DoD
  • The counterfeit electronic parts or suspect counterfeit electronic parts are Government-furnished property.
  • The contractor becomes aware of the counterfeit electronic parts or suspect counterfeit electronic parts through inspection, testing, and authentication efforts of the contractor or its subcontractor; through a Government Industry Data Exchange Program (GIDEP) alert or by other means, and provides timely (i.e. 60 days) written notice to the contracting officer
No word on who in DoD is going to review and approve contractor systems to detect and avoid counterfeit parts but presumably it will fall to DCMA (Defense Contract Management Agency).

You can read more about the new cost principle here.

Tuesday, September 6, 2016

More Prodding by DoD to Increase Use of Commercial Pricing

The Department of Defense (DOD) updated its guidance late last week on commercial item determinations and the determination of price reasonableness for commercial items. Although there is a current DFARS (DoD FAR Supplement) case making its way through the rule-making process (see DFARS Case 2016-D0006), the DoD wants to jump-start the process to improve consistency and timeliness.

The guidance addresses those concerns about consistency and timeliness.
There have been instances where it has taken the Department too long to render commercial item determinations, particularly for items not sold in the competitive commercial marketplace. Further, there have been instances where one contracting officer within the Department has reached a determination about the commerciality of an item that is inconsistent with a determination made for the same or similar item elsewhere in the Department.
Inconsistent determinations are a problem and are a direct result on the contracting officer's exercise of judgment in making those determinations. Everyone's "judgment" is different. Contractors, especially contractors with multiple business units, experience such inconsistencies all the time. Contract auditors take different positions with respect to similar fact situations. Usually it all gets unraveled but after a lot of contractor time and expense.

The big news in this new guidance is the establishment of Commercial Item Centers of Excellence within the DCMA (Defense Contract Management Agency). These centers of excellence will be staffed with a cadre of engineers and price/cost analysts to advise procuring contracting officers (PCOs) in their determinations of commerciality. These "experts" will also be an excellent resource to support commercial item pricing. These centers will also be available to assist prime contractors in their commerciality determinations of subcontracts.

The new guidance also strongly reaffirms the policy that contracting officers may presume that a prior commercial item determination made by a Defense organization shall serve as a determination for subsequent procurements of such items. It talks about an eventual database where such information will be stored. In the meantime, contractors should be aware of attempts to re-invent the wheel - perform another commercial item determination after one has already been granted for the same part. In this regard, a contractor's knowledge will be more complete than the Government's.

The guidance also contains a mechanism for elevating disagreements about whether an item or product is truly a commercial item. Disagreements must be escalated and that creates more work. As a result, we would not expect to see too many disagreements.

You can read the entire guidance memorandum by clicking here.

Friday, September 2, 2016

Proposal Compensation Plans - Consistency is Paramount

Adnet Systems protested the award of a NASA contract to another bidder for a number of reasons, all of which were denied by the GAO (General Accountability Office). One of those protests involved the proposed level of compensation to be paid to incumbent employees.

Many solicitations require that the successful bidder on a successor contract hire the employees of the incumbent contractor, sometimes at no reduced benefit, or at least give them the right of first refusal. Compensation is a tricky thing - come in and offer employees less than what they are currently earning and one would expect rapid turnover and lost productivity. Bidders sometimes get very creative by factoring efficiency into their bid - something along the lines of we can do the same amount of work with 25 percent fewer employees because the incumbent contractor is fat and lazy and working under a cost reimbursable contract with no incentive to be lean and mean. It would be very interesting to see a study on whether these efficiencies ever materialize, whether compensation is actually reduced, whether employee turnover ever impacts productivity.

In the Adnet case, NASA assigned a weakness to Adnet's proposed total compensation plan. While Adnet's proposal guaranteed to maintain current compensation for incumbent employees, its proposal never explained exactly how it would fulfill these guarantees given that the firm proposed a reduction in labor costs while continuing the same level of service (expressed in FTEs) as delivered by the incumbent and as required by the solicitation.

Adnet appealed NASA's determination but the Comptroller General (CG) was unconvinced. The CG stated that the solicitation cautioned that offerors should ensure that their cost proposals were consistent with their technical proposals in all respects.

Due to the disconnect between Adnet's compensation guarantee in its technical proposal and its proposed rates in its cost proposal, we find reasonable the agency's concerns that Adnet would not be able to meet its guarantee and thus would not be able to hire and retain incumbent employees. On this record, the agency's assignment of this weakness was reasonable and consistent with the terms of the solicitation.

You can read the full GAO bid protest decision here.

Thursday, September 1, 2016

Screening Contractors with Unpaid Federal Tax Liabilities

Back in 2010, the White House noted in a memorandum to Executive Agencies that Government contracts were being awarded to "thousands of companies" with serious tax delinquencies. The total amount of unpaid taxes owed by these companies was estimated to be more than $5 billion at the time.

Since then, through directives and various authorization/appropriations acts, Agencies have tried to crack down on awards of contracts to firms with unpaid tax liabilities. In most cases, contractors must self-certify that they have no unpaid delinquent tax liabilities. The Department of Defense, for example, implemented this requirement in its FAR Supplement, DFARS 252.209-7991.

Well, how's it been working? We can tell you how the prohibition has not been working at the IRS.

The Treasury Inspector General for Tax Administration (TIGTA) recently issued its findings from an audit to determine whether contracting officers are completing the required tax checks to ensure that contractors with serious delinquencies do nbot receive taxpayer funds through contracts with the IRS.

The TIGTA found that IRS contracting officers were not effective in identifying tax delinquent contractors. As a result, the IRS remains at risk of awarding contracts to entities that are not in compliance with the regulations.

TIGTA reviewed 73 contract awards from a population of 336 contracts greater than $250 thousand that were awarded during a two-year period ending in August 2014. The auditors found that 21 of the 73 contract awards (29 percent) did not have evidence that the contracting officer performed the required tax check on the winning bidders. Even worse, in all 73 awards, there was no evidence that the other qualified bidders for the work underwent a tax check, as required.

The audit found several systemic problems. For example, tax check results did not contain sufficient information to enable contracting officers to support their responsibility determinations. Additionally, policies did not give contracting officers the ability to communicate tax check results to the affected contractor using consent processes when tax check results indicated tax debt. Finally, tax checks were only performed for solicitations greater than $250 thousand, leaving thousands of contracts at risk for violating the regulations.

The IRS undoubtedly has it easier than other Executive Agencies in identifying tax deadbeats. Other agencies must rely on self-certifications of prospective contractors. But that could change.

You can read the entire audit report here.