Friday, December 29, 2017

Negotiating Advance Agreements on Specific Items of Cost

Would you like to forestall the Government from taking exception to certain items of costs?  If so, consider an advance agreement.

The extent of allowability of costs covered by the cost principles in FAR Part 31 applies broadly to many accounting systems in varying contract situations. Thus, the reasonableness, the allocability and the allowability under specific cost principles of certain costs may be difficult to determine. To avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability, FAR 31.109 encourages contractors and contracting officers to seek advance agreement on the treatment of special or unusual costs.

There are several cost principles that specifically call out the advisability of advance agreements. For example:

  • FAR 31.105, Construction Contracts
  • FAR 31.201-6(c)(4), Use of Statistical Sampling
  • FAR 31.205-6(j), Pension Costs
  • FAR 31.205-6(o), Post Retirement Benefits
  • FAR 31.205-37, Royalties
  • FAR 31.205-46(a)(5), Per Diem in Excess of Government Ceilings
  • FAR 31.205-46(c)(3), Use of Contractor Owned Aircraft
Other examples listed in FAR 31.109 where advance agreements may be particularly important are
  • Allowances for off-site pay, incentive pay, location allowances, hardship pay, cost of living differentials, and termination of defined benefit pension plans,
  • Use charges for full depreciated assets
  • Deferred maintenance costs
  • Precontract costs
  • Selling and distribution costs
  • Idle facilities/idle capacity
  • Severance pay
  • Plant reconversion
  • Professional services
  • Corporate allocations
Advance agreements are not limited to these items. One Government contract has more than a hundred advance agreements with the Government and that contractor may not be unique.

Advance agreements should be negotiated before incurrence of the costs involved. Agreements must be in writing and include a statement of its applicability and duration. Usually the Government will insist on wording that gives either party the right to terminate it at any time.

Contracting officers are not authorized to agree to a treatment of costs inconsistent with FAR cost principles. For example, an advance agreement may not provide that, notwithstanding 31.205-51, the cost of alcoholic beverages are allowable.

Advance agreements may be negotiated with a particular contractor for a single contract, a group of contracts, or all the contracts of a contracting office, an agency, or several agencies.

See also Advance Agreement on Costs

Thursday, December 28, 2017

Weather Related Closures - Repost

With inclement weather conditions in many parts of the country, here's a link to a previous posting on how the Government will view costs related to facility closures.

Weather Related Closures

What is the Energy Department's "Cooperative Audit Strategy"

DOE (Department of Energy) contractors are subject to more audit oversight than the typical Government contractor and that includes DoD (Defense). And there is good reason for that - DOE awards massive cost-type contracts to operate its facilities and clean up its nuclear messes. To ensure that the taxpayers interests are protected, DOE has developed a "Cooperative Audit Strategy" with these guiding principles:

  • The creation and maintenance of rigorous business, financial, and accounting systems by the contractor is crucial to ensuring the integrity and reliability of the cost data used by officials of the Office of the Chief Financial Officer, the Office of the Inspector General, and the office of the Director, Office of Acquisition Management
  • To ensure the reliability of these systems the Department requires each contractor to maintain an internal audit activity to support the Office of the Inspector General as part of the Cooperative Audit Strategy. The internal audit activity is responsible for performing operational and financial audits (including allowable cost reviews) and assessing the adequacy of management control systems.

This strategy allows DOE augment its own staffing by relying on the work of contractor internal audit activities. Its not free to the Government however. The cost of these internal audit departments are fully reimbursed by DOE under the cost-type contracts.

Contracting officers, the DOE Inspector General and DOE's Chief Financial Officer provide oversight and review of contractor's internal audit plans including the design of the organization, the annual audit plan, the annual audit report, and the results of its review of incurred costs.

The "design" of the internal audit organization gets plenty of attention. Contractor's must submit a report that describes (i) the placement of the Internal Audit activity within the contractor's organization, (ii) its size and the experience and educational standards of the audit staff, (iii) its relationship to the corporate parent, (iv) the audit standards to be used (v) an overall audit strategy, (vi) the intended use of external audit resources, (vii) the plan for pre-award and post-award audit of subcontracts, and (viii) the schedule of peer review of the Internal Audit Activity.

After DOE approves the design of the internal audit department (and we don't want to understate the rigors of that process), the Internal Audit Departments are required to submit annual reports comparing what they stated would be accomplished with what was actually accomplished. This is more than a statistical summary of progress since it is required to include summaries of specific contractor practices that resulted in unallowable costs.

Most non-public Government contractors do not have internal audit departments. Those that do are often reluctant to share information with the Government because they are afraid that the information will be misused in some fashion. DOE contractors however are required by the terms of their contracts to provide unfettered access to their internal audit departments.

Wednesday, December 27, 2017

Contract Financing on Commercial Contracts

In many circumstances, the Government will award "commercial contracts". Usually, under commercial contracts, it is contractors' responsibility to provide all resources necessary for contract performance including financing. However, Government regulations also recognize that in some markets, the provisions for financing by the buyer is a commercial practice.

Under FAR (Federal Acquisition Regulations) 32.2 (and corresponding statutes), the Government will allow for interim payments and advance payments for commercial purchases under certain circumstances. The overarching requirement that needs to be satisfied is a determination that offering financing will be in the best interests of the Government. Beyond that, the following circumstances must be satisfied.

  1. The contract item financed is a commercial supply or service
  2. The contract price exceeds the simplified acquisition threshold (currently set at $150,000)
  3. The contracting officer determines that it is appropriate or customary in the commercial marketplace to make financing payments for the item
  4. Adequate security is obtained (more on this below)
  5. Prior to any performance of work, the aggregate of commercial advance payments shall not exceed 15 percent of the contract price
  6. The contract is awarded on the basis of competitive procedures
  7. The contracting officer obtains concurrence from the payment office concerning liquidation provisions when required.
Security for Government Financing. Statutes require that the Government obtain adequate security for Government financing. Typically the solicitation will specify the type of security the Government will accept. In some cases, the offeror's financial condition could be considered adequate security provided the offeror agree to provide additional security should the financial condition become inadequate as security.

If the security is in the form of a lien on work-in-process, inventory, property, etc, it is considered paramount to all other liens and is effective immediately upon the first payment without filing, notice, or other action by the Government.

Other forms of security would include a surety, irrevocable letter of credit, bond, a third-part guarantee, and title to identified assets.

The ability to obtain contract financing on commercial contracts should reduce the need for many companies to go out and borrow working capital in order to pursue Government contracts.

Tuesday, December 26, 2017

Navy Makes Unauthorized Purchases - Contractors Go To Prision

If you were in the military back in the day and needed something but couldn't get it because the item was not in stock or you weren't authorized to have it, you could sometimes call on a crusty master sergeant to conjure it up. Indeed, one would marvel at that ability to secure something when all other avenues failed. Movies and novels have included such abilities and these master sergeants were praised for finding a way improve comforts, logistics, or save lives. Where did they develop such unique skills and abilities? Perhaps things weren't so much on the "up and up".

The Justice Department just announced prison sentences for two owners of several defense contractors as well as restitution, fines, and back taxes for making false representations to DoD for payment on items they knew had not been sold to the Navy, but which had been substituted with other, unauthorized products. So for example, these contractors and Navy personnel conspired together to order 10,000 "Post-It" notepads while delivering electronic transceivers (i.e. walkie-talkies). You see, the Navy personnel wanted transceivers but were not allowed to purchase them so they found a willing contractor to sell them transceivers but call them Post-It notes on all documentation.

This wasn't a "one-off" deal. It went on for years. In fact, the Justice Department estimated that over 50 percent of 12,000 transactions between 2008 and 2013 totaling $45 million were fraudulent. This scheme was used to purchase televisions, computers, gaming systems, cameras, iPhones and other electronics. A purchase for canvas organizer bags became sky diving gear while an order for motorized plumber snakes became televisions, pink Nintendo gaming systems and PlayStations.

Not only was substitution an issue but there was significant markup on the prices which netted the contractors significant windfalls.

The Justice Department announcement focused only on the contractor side of the conspiracy. There will certainly be some Navy personnel indicted in the scheme.

Read the full Justice Department press release here.

Friday, December 22, 2017

Justice Department Recovered $3.7 Billion in 2017 In Fraud Cases Against the Government

The Department of Justice just released its report on recoveries under the False Claims Act (FCA) for fiscal year 2017. The Department reported that it had obtained more than $3.7 billion in settlements and judgments from civil cases involving fraud and false claims against the Government.

As in prior years, the bulk of these recoveries were related to health care fraud ($2.5 billion) of which $900 million came from the drug and medical device industry. Recoveries related to DoD contracts totaled a far distant $219 million. Recoveries in the "all other" category (i.e. all Agencies other than HHS and DoD) totaled $1 billion. A lot of the recoveries under the "all other" category related to housing and mortgage fraud.

In the category of "procurement fraud" which transcends HHS, DoD, and all other, the report listed major recoveries including (i) food services in Kuwait and Iraq, (ii) failure to follow safety standards at a Department of Energy facility, and (iii) overcharging on a GSA contract by not offering the Government most favored customer treatment.

Here's an interesting aspect of the report. Nearly 93 percent ($3.4 of the $3.7 billion) of the recoveries were a result of whistleblower reporting and those whistleblowers share of the recoveries totaled $393 million. That works out to about 11.5 percent of recoveries going to the whistleblowers (well, whistleblowers and their attorneys, we suppose). It seems like that without the beefed up Qui Tam provisions incorporated into the FCA back in 1986, the Government wouldn't have too much success in combating fraud. But it also indicates that while companies can easily hide fraud from the Government, its much harder to hide fraud from employees. Employees seem to know what's going on and the hope of a big payday provides the incentive to report instances of alleged fraud.

You can read a press release of the DOJ report here. The article includes links to more detailed information and data as well.

Thursday, December 21, 2017

Consent to Subcontract - Important Reminder

This is an update to previously published postings on the importance of obtaining consent to subcontract when required by regulations and a reminder to contractors of the consequences of ignoring or shorting the requirements.

Advance notification and consent are required before the award of subcontracts if the prime contractor does not have an approved purchasing system, where the Government is assuming a large portion of the contract risk and  therefore, has a vested interest in knowing and controlling costs with the contract. There are relatively few contractors with approved purchasing systems and therefor, the advance notification and consent requirements have broad application. Keep in mind however that even if a contractor has an approved purchasing system, the contracting officer retains the discretion to require advance notification and approval.

When advance notification is required, a contractor must notify the ACO reasonably in advance of placing certain subcontracts. The contractor must incorporate an appropriate lead time into its purchasing process to ensure the information required by FAR 52.244-2 is obtained and provided to the ACO for review prior to placing an award.

The ACO is required to review the information in a timely manner to ensure that it complies with the requirements of the clause (i.e. 52.244-2) and to notify the contractor immediately if the notification package is incomplete or insufficient.

The ACO's consent approval is required to be in writing and will include a statement that it is not a determination of allowability or acceptability of costs.

Failure to obtain advance consent could result in disallowance of all subcontract costs, as it did in the case of Technology Systems, Inc. (see Failure to Obtain Consent to Subcontract - All Subcontract Costs Disallowed).

Wednesday, December 20, 2017

The Cost of Employee Stock Options Determined to be Unallowable

Yesterday we discussed a recent decision handed down by the ASBCA (Armed Services Board of Contract Appeals) where the Board ruled that Luna Innovations employee stock option plan didn't meet the precise requirements of FAR 31.205-6(i) and therefore the costs were determined to be unallowable under Government contracts but those costs were not expressly unallowable so the Board did not sustain the Government's position regarding penalties for unallowable costs (see Government Looses Another "Expressly Unallowable" Case).

Today we will explain the Government's (and the Board's) logic concerning the unallowability of Luna's stock options as an element of employee compensation.

Although the cost of stock options are generally allowable compensation, there are significant restrictions in how the costs are calculated. Failing any of those restrictions will render the costs unallowable.

FAR 31.205-6(i) has three restrictions:

  1. Any compensation which is calculated, or valued, based on changes in the price of corporate securities is unallowable.
  2. Any compensation represented by dividend payments or which is calculated based on dividend payments is unallowable.
  3. If a contractor pays an employee in lieu of the employee receiving or exercising a right, option, or benefit which would have been unallowable, such payments are also unallowable.

The Luna case focuses on the first of these three restrictions; changes in the price of corporate securities.

Luna calculated the value of the awarded stock options pursuant to the "Black-Scholes" method. The Black-Scholes model is a method of estimating the value of a stock option and relies upon five inputs; (i) the current stock price (ii) the exercise (strike) price, (iii) the risk-free rate of return, (iv) the term of the option, and (v) the stock price variance. Although this model gets a bit technical, the option price is a function of historical stock price volatility. Accordingly, the Government took a position that valuing stock options using the Black-Scholes model constituted compensation that is determined by changes in stock prices and therefore unallowable by the terms of FAR.

Under the Black-Scholes model, a change in Luna's share price after the valuation date of the options has no effect on the value of the employee stock options, however, the actual financial benefit to the recipient will depend on future appreciation in Luna's stock price. Because the options were issued with strike prices set equal to the current share price, if the stock does not appreciate in value, or declines in value, the benefit to the recipient is zero.

The Black-Scholes model is widely recognized model in financial economics and is explicitly referenced in FAS (Financial Accounting Standard) 123. Any contractor relying on this model to calculate the cost of employee stock options should consider whether such costs are at risk for becoming unallowable.

Tuesday, December 19, 2017

Government Looses Another "Expressly Unallowable" Case.

Luna Innovations, a Defense contractor, appealed to the ASBCA (Armed Services Board of Contract Appeals) a final decision from the DCMA (Defense Contract Management Agency) contracting officer determining that (i) Luna had included unallowable employee stock option costs in its final indirect rate proposal and (ii) the inclusion of those stock options represented expressly unallowable costs and therefore subject to penalties.

The Board ruled that the stock options were unallowable because they did not meet the precise requirements of FAR 31.205-6(i). We'll discuss that aspect tomorrow. The Board also ruled that these were expressly unallowable costs and therefore not subject to penalties. The Board also stated that even if they were expressly unallowable, the contracting officer should have waived the penalties. We'll explain.

An expressly unallowable cost is a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable (FAR 31.001). If a contracting officer determines that a contractor has submitted an expressly unallowable cost for reimbursement then the contractor shall be assessed a penalty (FAR 52.242-3(d). As the assessment of a penalty is a Government claim, the Government bears the burden of proof.

Congress adopted the expressly unallowable standard to make it clear that a penalty should not be assessed where there were reasonable differences of opinion about the allowability of costs, so the Government must show that it was unreasonable under all the circumstances for a person in the contractor's position to conclude that the costs were allowable. Moreover, the determination as to whether a cost is expressly unallowable will depend on the clarity and complexity of the particular cost principle and the circumstances involved.

In the Luna case, the Government asserts that the employee stock option costs were expressly unallowable because FAR 31.205-6(i)(1) specifically names and states that compensation calculated or valued based on changes in the price of corporate securities is unallowable. But the method Luna used (the so-called "Black-Scholes model) is a question of first impression. The fact that there could be a reasonable difference of opinion regarding the costs, the Board held that it was not unreasonable under all the circumstances for Luna to have claimed the employee stock options costs and therefore, the costs were not expressly unallowable.

You can read the full ASBCA decision here.

Monday, December 18, 2017

Now You Can Earn Your Legal Degree at Government Expense

An educational service agreement is not a contract, but is an ordering agreement under which the Government may order educational services. Educational service agreements provide for ordering educational services when the Government pays normal tuition and fees for educational services provided to a student by the institution under its normal schedule of tuition and fees applicable to all students generally, and enrollment is at the institution under the institution's normal rules and in courses and curricula which the institution offers to all students meeting admission requirements.

Until recently, DFARS (DoD FAR Supplement) contained a prohibition under which educational service agreements could not be used for tuition or other expenses for training in any legal profession with the exception of detailing commissioned officers to law schools. That prohibition was lifted last week (see: Class Deviation - Educational Service Agreements for Training in the Legal Profession). A second prohibition against using educational service agreements for special courses or special fees for Government students still exists.

Although technically not a contract, an educational service agreement certainly has the look and feel of a contract with Schedule Provisions and General Provisions, replete with many of the same FAR and DFARS clauses one would find in a DoD contract.

DFARS requires that the Government must establish procedures to review each educational service agreement at least once each year in order to incorporate changes to reflect requirements of any statute. If the educational institution does not agree to any required changes, the Government must termination the agreement.

We don't know why DoD lifted the prohibition against legal education unless it is expecting to need a new crop of attorneys soon.

Friday, December 15, 2017

Price Realism Analysis Does Not Require Detailed Review of Cost Categories

NASA (National Aeronautics and Space Administration) issued a solicitation for a variety of services including software development, data center operations, voice, imaging, and data communications, multimedia services support and other related services. Ultimately, the award was made to ASRC Federal Data Solutions (ASRC) whereupon one of the other bidders, AbacusSecure, appealed, challenging various aspects of NASA's evaluation and source selection process including its price realism analysis.

In evaluating price, NASA considered whether the proosed prices were unrealistically low. Both ASRC and AbacusSecure submitted prices that were lower than the Government estimate however there was only an 8.6 percent price difference between the two bidders. Accordingly, based on NASA's comparison of prices and the presence of adequate price competition, NASA concluded that neither price was unreasonably low.

AbacusSecure protested that NASA failed to perform an appropriate price realism analysis as part of its source selection process. Among other things, AbacusSecure asserted that NASA was required to assess the realism of ASRC's labor rates, arguing that they were too low to recruit the incumbent workforce.

NASA responded that its price evaluation was consistent with the terms of the solicitation. Specifically, NASA pointed out that the solicitation expressly put offerors on notice that price would be evaluated without evaluating separate cost elements and further, the solicitation did not require submission of labor rates for 90 percent of the line items. NASA further pointed out that it had noted the 8.6 percent difference in prices and had concluded on the basis of that comparison that ASRC's price was not unreasonably low.

The GAO (Government Accountability Office) did not sustain the appeal. GAO noted that there is no requirement that a price realism analysis be performed when award of a fixed-price contract because a fixed-price contract places the risk and responsibility for contract costs and ensuing profit or loss on the contractor. Nonetheless, a solicitation for a fixed-price contract may, as it did in this case, provide for a price realism analysis to assess the offerors' understanding of the solicitation requirements and potential risks (see Price Reasonableness vs Price Realism). In short, GAO found that NASA had done nothing inconsistent with the terms of the solicitation.

You can read the full text of the GAO decision here.

Thursday, December 14, 2017

Losses Incurred in Operating Company Cafeterias

Many Government contractors have on-site cafeterias for their employees where it makes economic sense to do so. Obviously, there needs to be quite a few (potential) users of such services, the cost to employees must be reasonable, quality must be descent, and there needs to be a variety of daily offerings. A nice atmosphere helps as well. If its too expensive, the quality is diminished or there is not enough variety, employees will migrate to off-site establishments or perhaps, bring their own lunches.

Most contractors providing cafeteria services do not try and operate the facilities themselves. There are many food service providers (e.g. Aramark, Guckenheimer, and a host of regional companies) that provide such services more efficiently and cost-effective than can be performed in-house. Some contractors will subsidize food services and this is where things get a little contentious when contract auditors start asking questions.

The FAR cost principles at 31.205-13 has something to say about cafeteria losses. Essentially, losses from operating cafeterias will be allowed only if the contractor's objective is to operate such services on a break-even basis (there are a couple of exceptions that we'll get to in a moment). That should be fairly easy to figure out, right? Contract with a food service provider, to come in and operate your cafeteria at no cost to the company; easy.

But its not that easy at all. You see, contract auditors are going to want to add in "occupancy costs" (and they're correct). That would include the facilities, utilities, depreciation, repair and maintenance, taxes, janitorial, and any other kind of directly associated costs they can conjure up. Adding in the cost of facilities, which are often significant, make is more difficult to prove intent to operate at break-even.

FAR does allow cafeteria losses in limited situations. A loss may be allowable, provided the contractor can demonstrate that unusual circumstances exist such that even with efficient management, operating the service on a break-even basis would require charging inordinately high prices or prices higher than those charged by commercial establishments. Examples of unusual circumstances include (i) adequate commercial facilities are not available and (ii) reasonable prices are a necessary incentive to keep employees on-site to avoid the more significant costs of lost productive time due to longer lunch periods.

When cafeteria losses are claimed, it is always the contractor's responsibility to demonstrate that unusual circumstances exist and to provide sufficient supporting documentation. This could be difficult but would probably include price comparisons with similar commercial establishments or the distance to off-site restaurants. Contractors having cafeteria facilities can always expect contract auditors to inquire concerning the break-even analysis. Failure to sufficiently justify cafeteria losses will always result in questioned costs.

Wednesday, December 13, 2017

The 2018 National Defense Authorization Act is Now Law

Yesterday, the President signed into law the 2018 National Defense Authorization Act (NDAA) as had been predicted. The NDAA establishes spending levels of about $626 billion for the base defense budget and an additional $66 billion for contingency operations (e.g. Afghanistan). It calls for a 20,000 member increase in the number of armed forces and a 2.4 percent salary increase for existing armed services members. And, of course, it includes all of the various provisions we've been discussing here on this blog over the past few weeks.

A couple of provisions we have not addressed are those related to improving the hiring and training of the acquisition workforce. These are included in Sections 841 and 843. Although improved hiring practices and better education might improve the acquisition process, one of the most glaring weaknesses among the acquisition workforce is the excessively high employee turnover rates resulting in little continuity and slim experience levels among those most responsible for ensuring wise and effective expenditures of taxpayer dollars.

Section 841, Enhancements to the Civilian Program Management Workforce, establishes a Program Manager Development Program for civilian Defense Department and military department personnel. The Secretary of Defense is required to implement a new career development program for highly qualified, competitively selected civilian employees to increase the pool of experienced civilian employees qualified to serve as program manager for major defense acquisition programs (MDAPs). It also requires an independent study of personnel policies and incentives needed to attract, retain, and hold accountable civilian and military program managers for the largest and most complex acquisition programs. Attracting highly qualified program managers does not seem to be the problem. Figuring out how to keep them (retention) is a problem.

Section 843, Improvements to the Hiring and Training of the Acquisition Workforce, among other provisions, will require the Comptroller General (GAO) to submit a report on the effectiveness of existing hiring flexibility for the acquisition workforce, as well as the need for acquisition training for personnel who work in acquisition programs but are not formally considered part of the acquisition workforce. The GAO study must also include a description of the flexibilities available to the Department to remove under-performing members of the acquisition workforce and the extent to which any such  flexibilities are used. It also includes a provision that requires DoD to evaluate gaps in knowledge of industry operations, industry motivation, and business acumen in the acquisition workforce.

Initially, this provision included a requirement for DCAA to report on strategies to enhance the professionalization of its workforce to meet "increasing demands" but this provision was omitted in conference committee.

Tuesday, December 12, 2017

What's the Big Deal With Two Extra Pages Beyond a Stated Page Limitation?

The Defense Threat Reduction Agency (DTRA) issued a solicitation for help in preparing various survivability assessments. Award was to be made on a best-value basis considering mission capability, past performance, and cost. The mission capability factor included two sub-factors; management approach and technical approach. Six firms submitted bids. DTRA awarded the contract to Centra. Two of the losing bidders, PAE and Ensco appealed challenging DTRA's evaluations of their own and Centra's proposals. The focus of this article is on DTRA's assessment of Centra's (the winning bidder) proposal.

The protesters argued that DTRA improperly relaxes the solicitation requirements by accepting two resumes submitted by Centra that exceeded the two page limit specified in the RFP (Request for Proposal).

The RFP required offerors to provide a maximum two-page resume for each of the 39 personnel, or in lieu of resumes, to submit the information in the form of a table, with the same page limits being applied. The RFP further instructed offerors that page limitations shall be treated as maximums. If exceeded, the excess pages will not be read or considered in the evaluation of the proposal.

Two of the resumes submitted by Centra exceeded the RFP's two-page limit. Both were four pages in length. Thus, on their face, the excess information of the resumes (everything beyond two pages) should not have been considered.

DTRA took the position that the two resumes were withing the page limits because if the information is extracted, and the minimum allowable formatting set forth in the RFP is applied, the text would fit within the page requirements. GAO noted however that DTRA did not cite any authority to support its argument, no could it find any, that would permit evaluators to extract and manipulate the text of an offeror's proposal in order to satisfy the pagination requirements set forth in the solicitation.

As such, GAO concluded that DTRA erred in considering those portions of Centra's proposal that exceeded the RFP's stated page limitations and recommended that DTRA re-evaluate the proposals accordingly. GAO also recommended that DTRA reimburse the protesters for their costs of filing and pursuing their protests.

You can read the entire GAO decision here.

Monday, December 11, 2017

2018 NDAA - New Prohibitions on Use of LPTA as a Basis for Contract Award

The Government's use of LPTA (lowest price technically acceptable) as a source selection technique has been very popular. It certainly drives prices down as bidders compete only on price and contracting officers like it because its less work for them. They don't have to consider the relative merits of benefits in excess of the basic requirements offered by competing proposals.

However, the Government is now realizing that the use of LPTA might be short-sited. In 2016, DoD tried limiting the use of LPTA techniques with the following guidance: LPTAs may be used in situations where the Government would not place any value on a product or service exceeding the Government's threshold technical or performance requirements and these requirements can be objectively defined in measurable terms."

In the 2017 NDAA (National Defense Authorization Act), Congress moved to further limit the use of LPTA techniques. That NDAA restricted DoD from using LPTA when purchasing (i) information technology services, (ii) cyber-security services, (iii) systems engineering and technical assistance services, (iv) advanced electronic testing, (v) audit or audit readiness services, (vi) other knowledge-based professional services, (vii) personal protective equipment, and (viii) knowledge-based training or logistics services in contingency operations.

The 2018 NDAA (expected to be signed into law shortly) places more limitations on the use of LPTA techniques. Under the new NDAA, LPTA can be used only where DoD would realize minimal innovation if LPTA was not used and when goods are purchased. Goods are defined as those that are predominantly expendable in nature, nontechnical, or have a short life expectancy or short shelf life (see Sec 822).

Additionally, the new NDAA will prohibit the use of LPTA techniques for the engineering and manufacturing development contract of a major defense acquisition program (see Sec 832).

It is apparent that the heyday of LPTA is over. That should be a good thing because it will allow prospective contractors to offer products as other than lowest prices.

Friday, December 8, 2017

Government Leases Are Subject to Socioeconomic Programs

The AbilityOne program is among the nation's largest sources of employment for people who are blind or have significant disabilities. The program is administered by the U.S. AbilityOne Commission, which is the operating name for the Committee for Purchase From People Who Are Blind or Severely Disabled.

The Javits-Wagner-O'Day Act (JWOD) and its implementing regulations are intended to increase employment and training opportunities for persons who are blind or have other severe disabilities through authorization of the noncompetitive acquisition of specified products and services from qualified nonprofit agencies (NPAs) that employ persons with such disabilities. The Act established the AbilityOne Commission and granted exclusive authority to the Commission to establish and maintain a procurement list of products and services that must be purchased from qualified NPAs.

In 2004, custodial services at the Charlottesville Courthouse were added to the AbilityOne procurement list. Since that time, Goodwill Industries of Roanoke Virginia has performed the custodial services at the courthouse.

The current lease expires at the end of this year and GSA (General Services Administration) is negotiating a lease renewal with the building's owner, VVP, LLC. This new lease was intended to be a full-service lease that would include custodial services. GSA informed Goodwill that it would no longer contract directly with them and had no authority to direct VVP to use any particular contractor.

Goodwill protested on the basis that GSA's actions violated the requirements of the JWOD Act. Specifically, Goodwill maintained that GSA is required to either contract directly with Goodwill for custodial services or direct VVP to subcontract for those services.

GSA asserted that the award of a lease for real property is not subject to the requirements of the JWOD Act.

GAO (Government Accountability Office) disagreed with GSA and sustained Goodwill's protest. GAO stated that a real property lease is a contract, leases are subject to socioeconomic programs, GSA offered no statutory provision that would exclude leases from JWOD.

Thursday, December 7, 2017

Contractor Couldn't Deliver under $30 Million Contract

Bronze Star LLC was founded in 2015 by two brothers. Its business line includes apparel and textile products. After Hurricane Maria damaged tens of thousands of homes in Puerto Rico, Bronze Star, a very young company with an unproven track record won more than $30 million in contracts from FEMA(Federal Emergency Management Agency) to provide emergency tarps and plastic sheeting for repairs.
However, Bronze Start never delivered those supplies. After contract award, FEMA spent the next month trying to get Bronze Star to deliver, without avail. Finally, it terminated the contract for default and has now begun the process of re-soliciting bids for the still, urgently needed tarps.
It is not clear how FEMA determined that the company was capable of fulfilling the contract. Bronze Star had never won a Government contract previously or had otherwise delivered tarps or plastic sheeting. In fact, the company's principle place of business is a single-family home in a Florida subdivision. A FEMA spokesperson said the Agency's review process was somewhat expedited in order to respond as quickly as possible to the emergency. Nine bids were received and Bronze Star's was determined to be the best value. However, a responsibility determination had not been made. No past performance data, no review of infrastructure, inventory, production, or financial capability.
Bronze Star, in its defense, stated that the manufacturer who initially promised to supply the materials, bailed on them and the company could not find another supplier. Blue Star claims that FEMA denied its request to import tarps and plastic from China.
Fortunately, FEMA had not paid any money to Bronze Star under the contract at the time of termination and has now awarded the contract to another company with 20 years of federal contracting experience and has produced such supplies multiple times.
Now, seven Senators are urging FEMA's Inspector General's Office to investigate how a "tiny Florida company won ore than $30 million in contracts.
If the Government needs tarps, they should come to the Pacific Northwest, we've got plenty of them.

Wednesday, December 6, 2017

Example of a "Major Fraud"

The "Major Fraud Act of 1988" (MFA) was passed during the Reagan administration to strengthen previous fraud legislation. Among the changes, the MFA increased the maximum penalties for fraud and added protection for employees who assist in prosecuting fraud. The Act made it illegal to defraud the U.S. Government or to obtain money or property by means of a false pretense or representation. The Law authorizes fines up to $10 million in cases involving multiple violations and a maximum of $5 million for individual counts.

The Justice Department just announced the conviction of a Government contractor charged with fraud under the Major Fraud Act of 1988. According to the press release, Mr Collins executed a scheme to defraud the United states on a $1.5 million contract to replace the roof and air conditioning system at the Federal Courthouse in Jackson, TN.

As part of the scheme, Mr. Collins caused the roofing subcontractor, a small Memphis-area business, to perform work for which he was never fully paid. Mr. Collins however filed false and fraudulent certifications with the U.S. Government indicating that he, in fact, had the paid the subcontractor. The value of the funds obtained from this scheme was more than $580 thousand, a third of the contract price.

Although the Justice Department didn't indicate how the major fraud was uncovered, it seems very likely that the unpaid subcontractor complained to someone that he hadn't gotten paid for his services. There are several avenues available for subcontractors to make such complaints. And, its a very easy crime for Federal investigators to prove. Its fact specific - either the prime paid or it didn't.

One interesting aspect to this case is that it went to trial but after two days, Mr. Collins entered a guilty plea. The evidence presented must have been overwhelming.

Tuesday, December 5, 2017

Requirement to Engage in Technical Exchanges of IR&D Projects Lifted

DFARS (DoD FAR Supplement) 231.205-18 was amended back in November 2016 to require contractors to engage in or document a technical interchange as part of the criteria for determining allowable IR&D (Independent Research and Development) costs. In order for IR&D costs to be determined allowable for IR&D projects initiated in fiscal years 2017 and later, major contractors are required to engage in a technical interchange with a technical or operational DoD Government employee before IR&D costs were incurred. Additionally, the regulations required that contractors document the interchange in the Defense Technical Information Center (DTIC).

This requirement was essentially unworkable since no one within DoD knew what technical exchanges were supposed to look like. Additionally, there wasn't enough technical people withing the procurement community to engage in deep technical discussions with contractors and thirdly, no one within DoD was volunteering to step up and have such discussions. In short, the requirement was unworkable.

Realizing the ridiculousness of the requirement, DPAP (Defense Procurement Acquisition Policy) issued a Class Deviation  last September directing contracting officers to not require contractors to engage in the technical interchange. As a result of the Class Deviation, the requirements of DFARS 231.205-18/(c)(iii)(C)(4) are no longer part of the criteria a contracting officer must consider in determining a contractor's allowable IR&D costs.

DCAA (Defense Contract Audit Agency) has now issued conforming guidance to its auditors - not only for current IR&D expenditures but retroactive from when the requirement first became effective (i.e. Fiscal Year 2017). Specifically, the guidance instructs contract auditors "For all current and future audits of any type, no audit procedures should be performed to verify that the contractor engaged in technical interchanges prior to incurring independent research and development (IR&D) costs."

Good news for contractors.

Monday, December 4, 2017

Government Contractor Sentenced to 5 Years in Prison

Last June, we reported a case involving a North Carolina based contractor who's owner had pleaded guilty of over-billing the Government by $15 million over a ten-year period. (See $15 Million Fraudulent Billing Scheme).

The company owner has now been sentenced to 5 years in prison for his role in the conspiracy. There will no doubt sentences for the co-conspirators coming soon. In addition to the prison sentence, there will be a separate hearing to determine forfeiture and restitution.

The conspiracy involved a couple of shell-companies set up to submit invoices to the prime contractor for work never performed. The prime contractor, in turn, passed those false invoices on to the Government and received reimbursement.

As we stated before, the fact that this conspiracy was able to go on undetected for ten years surprises us and causes us to wonder about the adequacy and sufficiency of Government oversight. There should have been contract auditors reviewing the incurred costs. There should have been oversight by contract administration. Evidently, no one looked beyond the paper trail consisting of invoices and cancelled checks to determine whether services were even rendered.

Anyone tasked with the responsibility for contract oversight (which includes contractor oversight of subcontractors) should consider this a lesson learned and apply detection procedures against claimed costs.

Friday, December 1, 2017

Suspension Lifted - Abuse Resumes - New Two-Year Suspension

Back in August of 2016, the GAO (Government Accountability Office) suspended Latvian Connection LLC from filing bid protests for one year. The reasons for the suspension were many but essentially, GAO found that Latvian Connection's protest filings were collections of excerpts cut and pasted from a wide range of documents having varying degrees of relevance to the procurements at issue, interspersed with remarks that were derogatory and abusive. After 450 or so of these filings, the GAO had had enough "abuse" and suspended the firm from filing bid protests for a year (See GAO Suspends Firm from Filing Bid Protests for a Year for a more in-depth analysis).

As soon as the suspension was lifted, Latvian resumed its practice of submitting numerous bid protests, once again comprised of excerpts cust and pasted from a wide range of documents that are largely irrelevant or fail to address the substantive and threshold issues raised by its protests even though GAO warned Latvian back in August that protest submissions must be concise and logically arranged. For example:
Latvian Connection filed a 28-page statement containing dozens of excerpts, tables, computer screenshots, and pictures, interspersed with commentary (often derogatory) from the protestor. The statement is presented in a confusing array of text sizes, fonts, highlighting, and varying margins, rendering it unintelligible.
Latvian Connection's filings continue to levy derogatory and abusive accusations towards agency and GAO officials, including baseless accusations of criminal activity (read the full text of the decision for specific examples).
GAO noted that Latvian has continued to routinely and repeatedly file protests that are not legally sound and both GAO and the agencies must divert its collective time and resources to responding. Recent protests continue to place a burden on GAO, the agencies whose procurements were challenged, and the taxpayers, who ultimately bear the costs of the Government's protest-related activities. GAO therefore concluded that Latvian's practices undermine the effectiveness and integrity of the bid protest process and constitute an abuse of process.

Because of this, GAO has once again suspended Latvian from filing bid protests, this time for a period of two years along with a stern warning:
We also give notice that if Latvian Connection continues its abusive litigation practices after the end of this new suspension period, our Office may impose additional sanctions, including permanently barring the firm and its principal from filing protests at GAO.
The full text of GAO latest Latvian decision can be downloaded/read here.

Thursday, November 30, 2017

Prison Time for Accepting Kickbacks from Subcontractor

Have you ever discounted the importance of good, sound internal controls over your purchasing system? You shouldn't and here's why.

A former employee of a U.S. Government contractor in Afghanistan will spend the next 21 months in prison because he accepted more than $250,000 in kickbacks from one of the contractor's Afghan subcontractors. These kickbacks were given in exchange for assistance in obtaining subcontracts.

The employee (or, now the former employee) admitted that while he was employed as a project manager, he an Afghan executive agreed that in exchange for illicit kickbacks, the employee would ensure that the Prime Contractor awarded "lucrative" subcontracts to the Afghan company.

How did the employee do it? He admitted that he repeatedly told his supervisors that the Afghan subcontractors should be awarded "sole source" subcontracts, which allowed them to supply services to the Prime contractor without having to competitively bid on them.

That must have really been some convincing sole source justifications, or the superiors weren't all that concerned, or they had a big cost-type contract so no skin off their back. Or perhaps, this employee was highly trusted. But, as we've repeated here in this blog over and over, "trust" is not an internal control.

The value of the subcontracts totaled $1.6 million and the contractor employee got 15 percent of that. That should be a good indication right there that the prices were overstated. He stored the cash payments into his personal effects and when he got back to the states, he deposited the funds into several bank accounts.

No word in the DoJ Press Release as to how the kickback scheme was uncovered. Perhaps someone started looking into why so many sole-source subcontract awards were being made.

You can read the entire DOJ Press Release here.

Wednesday, November 29, 2017

Federal Fumbles - Vol. 3

Oklahoma Senator James Lankford just released "Federal Fumbles Vol  3, One Hundred Ways the Government Dropped the Ball". This represents his third annual edition of this football themed publication. You can read our coverage of Volumes 1 and 2 by clicking here for the 2015 version and here for the 2016 edition. To download all three editions, visit Senator Lankford's dedicated webpage..

The latest publication documents 100 new examples of wasteful, duplicative, and inefficient use of tax dollars. Many, perhaps most of the examples are rooted in wasteful contracts and grants because those are the mechanisms for spending Government funds. But as in past years, Lankford is not necessarily calling out Government contractors and grantees for wasteful spending, the root problem lies in the layers of Congress and bureaucracy making the decisions that certain things would be a wise use of taxpayer funds. Many of the 100 fumbles boarder on the humorous and would be if it weren't for the realization that these are monies that could be spent on real needs of the country.

Here are just a few examples of what you can find in this report.

  1. A NSF (National Science Foundation) project to determine the public services provided by the Icelandic government to the 600 Syrian refugees arriving in their country.
  2. In 2007, the Air Force began a project to upgrade its Air Operations Center. After delays and cost overruns, the Air Force terminated the uncompleted project after spending $745 million. The Inspector General blamed the problem on the contractor.
  3. The National Archives decided to digitize 250 hours of video taken at a New York theater in the 1970s. The cost came to more than $400 per hour of film digitized.
  4. The Department of Energy paid an employee $138,000 to pursue a law degree (unrelated to his job) whereupon he immediately left for a job in the private sector.
  5. The NIH spent $1.6 million on research to discover that people paid to lose weight tend to lose more weight than those not paid to lose weight.
  6. The IRS spent $12 million to upgrade its email system. The upgrade never worked and was subsequently trashed.
  7. The Navajo Nation has received $803 million in block grants over the past 10 years to build homes for their members. They've built 1,110 homes which works out to $720,000 per house.
  8. The Federal Government spent $91 million in 2015 to administer the federal grazing program but collected only $14.5 million in grazing fees. They charge a fraction of what states charge.

Senator Lankford say's that he is hopeful that Agencies be forced to make more responsible decisions. We don't know if that will ever happen but the report does make some fun reading. Print out a copy and put it where you keep your copy of "Chicken Soup for the Soul".

Tuesday, November 28, 2017

2018 NDAA - TINA Threshold to Increase to $2 Million

The threshold for requiring certified cost or pricing data is currently set at $750,000. This applies to the award of negotiated contracts, subcontracts and modifications (see FAR 15.403-4). This threshold is set by statute, a couple of statutes actually. 10 USC 2306A - Cost or pricing data: truth in negotiations sets the threshold at $500,000 while 41 USC 3502 - Required cost or pricing data and certification allows for that threshold to be adjusted for inflation every five years. There have been a number of adjustments since the 1994 baseline to bring the original threshold up to the current $750,000.

That threshold is about to increase significantly. Sec 811 of the 2018 NDAA (National Defense Authorization Act) which includes the enhanced reporting requirements for DCAA (Defense Contract  Audit Agency) discussed yesterday (see 2018 NDAA - New DCAA Reporting Requirements) also includes a provision that increases the TINA (Truth in Negotiations Act) threshold from $750,000 to $2,000,000. The adjustment provisions every five years still apply.

This is good news for a lot of contractors and prospective contractors and should facilitate proposal preparation and contract award. It is not a license for contractors to prepare shoddy proposals however. Contracting officers must still ensure that negotiated prices are fair and reasonable and will still, in many cases, require cost or pricing data - just not certified cost or pricing data. This also means that the Government will have a much smaller universe of contracts on which it can conduct Defective Pricing audits.

Monday, November 27, 2017

2018 NDAA - New DCAA Reporting Requirements

Section 811 of the 2018 National Defense Authorization Act (NDAA) covers several topics. One concerns the increase in the dollar threshold for the submission of certified cost or pricing data which we will cover in more detail tomorrow. The other appears to be a slap on the wrist of DCAA (Defense Contract Audit Agency) for obfuscating some of their performance data.

Is DCAA "current" in performing incurred cost audits? The Agency says it is and that's why they are once again performing incurred cost audits for non-DoD agencies. But was does "current" mean? And how did DCAA achieve currency? In DCAA's parlance, current means 18 months as in the Agency needs to complete incurred cost audits withing 18 months of receiving an adequate contractor submission. But the 18 month time-frame is also an average which means some will take longer that 18 months to complete and some will take less. Which answers the second question of how did the Agency achieve the 18 month average in such a short time when just a few years ago its backlog was four to six years (depending on who you talk to). Easy, the Agency simply "wrote off" what it determined were low risk contractors by accepting the final indirect rates as proposed - and that included the preponderance of contractors. Eureka! No more backlog.

But Congress didn't quite buy that and it was deeply concerned with writing off the preponderance of contractors without performing any type of audit. In Sec 803 of the 2018 NDAA which we discussed here, Congress instituted a plan for private audit firms to begin sharing the incurred cost audit workload with DCAA and mandated that these audits would be completed with a year of receiving an adequate submission.

Now here in Sec 811 of the 2018 NDAA, Congress wants to get to the bottom of DCAA's performance. It is requiring DCAA to revise its Annual Report to Congress to provide clarity on the cost effectiveness of different types of audits. Under the 2018 NDAA, DCAA must now break down its statistical tables by type of audit. Though "type of audit" is not defined, it presumably includes (i) incurred cost (ii) forward pricing, (iii) defective pricing, (iv) and internal control/business systems. But here are the added reporting requirements:

  1. The total number and dollar value of incurred cost audits completed, and the method by which such incurred cost audits were completed (i.e. was an audit performed or was it written off as low risk).
  2. The aggregate cost of performing audits, set forth separately by type of audit
  3. The ratio of sustained questioned costs to the aggregate costs of performing audits, set forth separately by type of audit, and
  4. The total number and dollar value of audits that are pending for a period longer than one year as of the end of the fiscal year covered by the report, and the fiscal year in which the qualified submission was received, set forth separately by type of audit

This information, if nothing else, will prove interesting.

Friday, November 24, 2017

Whitefish Contract to Restore Puerto Rico Electricity - Update

This is an update to our posting of November 9 discussing the contract awarded to Whitefish Energy by PREPA (Puerto Rico Electric Power Authority) to help restore electricity on the island (see Whitefish Energy Contract to Restore Puerto Rico Electricity). PREPA awarded a $300 million sole-source contract to Whitefish Energy which, when it was exposed, became immediately controversial for several reasons. At the time of award, Whitefish had only two employees. The contract prices for linemen seemed exorbitant. The contract was was awarded without competition and contained unusual clauses such as the one preventing PREPA (or the Government) access to cost data.

The U.S. Government is interested in this contract because ultimately, it will probably end up paying for the restoration work. Congress is, of course, interested (one Senator called it price gouging) and the FBI has opened an investigation into the matter. Last week, the head of PREPA resigned his position (under pressure, no doubt).

PREPA terminated the Whitefish contract but according to the terms of the contract, there was a 30 day notice requirement which allowed Whitefish to continue working (and billing). However, last week, Whitefish walked off the job claiming that PREPA owed it 83 million and could no longer afford to pay its workers and subcontractors. Earlier this week, PREPA made a payment to Whitefish and the company resumed work.

The New York times reported that Whitefish was paying its senior power linemen $63 per hour and then billing PREPA $319 per hour for the worker. Whitefish claimed that the rate differential does not take into account Whitefish's overhead costs - but no one believes that such a differential is reasonable (more than 400%!).

Whitefish's contract ends on November 30th and PREPA does not appear to have a replacement ready to take over. Meanwhile, more than half of Puerto Rico's electrical customers are still without power.

Wednesday, November 22, 2017

GAO Publishes Fiscal Year 2017 Bid Protest Statistics

The Competition in Contracting Act of 1984 requires that the Comptroller General (i.e. the GAO or Government Accountability Office) report to Congress each instance in which a federal agency did not fully implement one of its recommendations in connection with a bid protest decided in the prior fiscal year and each instances in which a final decision in a protest was not rendered within 100 days after the protest was filed.

The GAO just published its Fiscal Year 2017 Bid Protest Annual Report to Congress and reported that there were no such instances in Fiscal Year 2017. The report also provided summary level data concerning the overall protest filings for the year and shows comparative data from previous years.

The number of bid protest cases filed dropped by almost 200 cases from Fiscal Year 2016. Perhaps one reason for this drop was the suspension of a prolific filer (see GAO Suspends Firm From Filing Bid Protests for One Year).

GAO issued 581 decisions (sustained and denied) of which 99 were sustained. That represents a sustention rate of only 17 percent - down from 23 percent the previous fiscal year. The effectiveness rate which measures a protestor obtaining some form of relief from the agency, either as a result of voluntary agency corrective action or the GAO sustaining the protest was 47 percent, up slightly from 46 percent the previous year.

The number of ADR (Alternative Disputes Resolution) cases totaled 81. The success rate for ADR cases was 90 percent. Seems like ADR might be the way to go with bid protests as the chances for success is almost double that of a formal GAO hearing.

You can read the full GAO report here.

Tuesday, November 21, 2017

Treasury Department To Pull Your Tax Returns Prior to Awarding a Contract

The Treasury Department has issued an interim rule to its Acquisition Regulations (DTARs) to permit contracting officials to obtain taxpayer tax return information as part of their responsibility determination - to determine whether prospective contractors are in compliance with tax laws or have unpaid liabilities. While this pertains only Treasury Department right now, these requirements could spread to other Executive Agencies. In fact, there are probably a bunch of regulators asking themselves right now, "why didn't we think of that?"

The Treasury Department determined that IRS information is needed for determining an offeror's eligibility to receive an award, including, but not limited to implementation of the statutory prohibition of making an award to corporations that have unpaid Federal tax liabilities.

This new regulation will be implemented through the Representations and Certifications section regarding responsibility matters identified by the term "Tax Check". Essentially, offerors will be authorizing the Treasury Department to pull income tax information.

Contractors (and prospective contractors) might find it beneficial to take steps to confirm that it does not have a delinquent Federal tax liability prior to submission of a proposal and/or obtain information to positively demonstrate to the contracting officer that it has no such liability. Its probably only a matter of time before faulty information is transferred from the IRS to a contracting officer somewhere and that information could jeopardize an offeror's chances for securing a contract.

Read more about the new interim rule here.

Monday, November 20, 2017

DCAA Must Report to Congress on the Education, Qualifications, and Certifications of its Staff

Of all the things that DCAA (Defense Contract Audit Agency) can be criticized for, the educational qualifications of its staff is not one. Virtually all auditors have Bachelor's Degrees and a 40 percent of them have advanced degrees. On top of that, a quarter of them (more than 25 percent) are CPAs (Certified Public Accountants). The Agency actively encourages its auditors to pursue advance degrees and CPA status. The Agency has a robust training program as well. In their first year, auditors can expect four or more weeks of intensive training and because the Agency is engaged in Yellow Book audits (i.e. GAGAS or Generally Accepted Government Auditing Standards), auditors are expected (and required) to meet minimum CPE (Continuing Professional Education) requirements at Government expense. Consider the following table that comes from DCAA's annual report to Congress.

With this in mind, one of the outcomes of 2018 NDAA Conference Committee seems somewhat odd. The conferees directed the DCAA Director, in consultation with the Under Secretary of Defense (Comptroller) to brief the Congressional defense committees in six months with the following agenda items:

  1. The current education, certifications, and qualifications of the Defense Contract Audit Agency workforce, by supervisory and non-supervisory levels and type of position.
  2. Shortfalls (if any) in education, qualification, or training in the DCAA workforce, by supervisory and non-supervisory levels and type of position and the reason for those shortfalls.
  3. The link (if any) between DCAA workforce skill and experience gaps and the Agency's backlog of audits.
  4. The link (if any) between the effectiveness of DCAA regional directors and their education, certifications, and qualifications
  5. The number of DCAA auditors who have relevant private sector experience, including from industry exchanges while at DCAA and from prior employment experiences, and the perspective of DCAA on the benefits of those experiences
  6. Ongoing efforts and future plans by DCAA to improve the professionalization of its audit workforce, including changes in hiring, training, required certifications or qualifications, compensation structure, and increase opportunities for industry exchanges or rotations.

DCAA does not need six months to write this report. It could do so right now. While auditor educational achievements and training programs are exemplary, turnover tends to be high - possibly because of better compensation opportunities - which creates an experience gap. Also, too much meddling by outside agencies such as the Inspector General and GAO has resulted in a degree of paralysis because of fear of criticism which in turn, has caused the Agency to jettison common sense risk assessments.

DCAA still predominately relies on homegrown staff - hiring them at entry level and progressing them through the organization. There are very few that come into the Agency with a significant level of auditing experience. Those that do often have other motives for joining. We know of two who joined because they had serious health issues and the Government's health insurance offered better benefits than that of their previous employers. Another sold his private CPA practice and needed a place to hang out for a couple of years until his covenant not to complete expired. A couple had bounced around numerous jobs and it became quickly apparent why they were not valued members of previous employers' staffs.

Its too bad there wasn't some kind of rewind button. We could go back to 2005 when DCAA was just fine and was considered a valued member of the procurement team.

Friday, November 17, 2017

A Few Contractors May Have to Reimburse DoD for Bid Protest Costs if Protest Denied

Here's an update to a post from last July where we wrote that the Senate version of the 2018 NDAA (National Defense Authorization Act) would require large defense contractors to reimburse the Defense Department for failed bid protests (see Large Contractors May Need to Reimburse the Defense Department for the Cost of Bid Protests). That provision has been greatly watered down in the newest version of the NDAA.

Sec 827 of the House and Senate NDAA compromise bill which has passed the House and is now waiting Senate passage replaced the Senate provision with one that calls for a three-year pilot program, a study and a report. Specifically, the provision requires the following:

  1. The Defense Department shall carry out a pilot program to determine the effectiveness of requiring contractors to reimburse the Department of Defense for costs incurred in processing covered protests (see below for definition of covered protests).
  2. The pilot program shall be three years beginning two years after the date of enactment of the NDAA and ending five years after the date of enactment.
  3. After the pilot program ends, the Defense Department must provide a report to Congress assessing the feasibility of making permanent such pilot program.

In the context of Sec 827, a covered protest means a bid protest that was denied in an opinion issued by GAO (Government Accountability Office) filed by a company with revenues in excess of $250 million during the previous year. The Senate version set the threshold at $100 million.

This current version is significantly different than the original Senate provision which provided detailed statutory mechanisms for the payment of costs for defined protests. This one does not provide details on what procedures that program should include. But, the Defense Department has a couple of years to work out those details - probably through DFARS (DoD FAR Supplement). Of course, two years to implement this provision also gives Congress two years to tinker with the requirement through future NDAAs.

Contractors with sales greater than $250 million (in its prior fiscal year) may find it more cost-effective to pursue bid protests though the U.S. Court of Federal Claims which carries no such requirement.

Thursday, November 16, 2017

Law Allowing Contractors to Procure Their Own Incurred Cost Audits Rescinded

Sec 804 of the 2018 NDAA (National Defense Authorization Act) repeals a provision that became law under the 2017 NDAA. 10 USC 190 was a new section that requires the creation of a Defense Cost Accounting Standards Board (DCASB). But appended to DCASB coverage was a new requirement that concerned the use of commercial auditors to perform audits of Defense contractors. Specifically, section (f) reads (paraphrased):
Defense contractors may present, and DCAA shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs and such audit was performed using relevant commercial accounting standards and relevant commercial auditing standards established by the commercial auditing industry.
Further, DCAA may audit direct costs and shall rely on commercial audits of indirect costs without performing additional audits, except in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.
The intent of this provision is to allow contractors to go out and retain their own auditors for purposes of expediting audits of incurred costs and closing old contracts. The provision becomes unnecessary with Sec 803 commercialization initiative we discussed the past three days. Anyway, no one could ever articulate a practical implementation of the provision. Its not practical to separate audits of direct and indirect costs. Auditors need to assess both in order to make recommendations concerning final indirect expense rates.

The remaining portion of 10 USC 190 dealing with the Defense Cost Accounting Standards Board has been retained.

Wednesday, November 15, 2017

DCAA to Share Audit Function With Commercial Firms - Part 3

This is the third part in our series on Section 803 of the 2018 NDAA (National Defense Authorization Act) which will require the Defense Department to begin utilizing private audit firms to augment the ability of DCAA (Defense Contract Audit Agency) to complete incurred cost audits in a timely manner. Though some may see it differently, this provision is not a rebuke of DCAA's performance in completing incurred cost audits in a timely manner. It is more a recognition that DCAA is not sufficiently staffed to conduct the full range of audits that the are required by procurement regulations.

Incidentally, the 2018 NDAA has now passed the House and its on to the Senate where passage is also expected.

Today we will focus on the implementation schedule for this new provision.

In Fiscal Year 2018, the Defense Department has to come up with a plan. The plan needs to include a description of the incurred cost audits that are appropriate to be conducted by qualified private auditors including the approximate number and dollar value of such incurred cost audits. Although not specifically prohibited, the large Defense contractors such as Boeing, Lockheed, Raytheon, United Technologies, General Dynamics, and Northrup Grumman will not be part of this list. DCAA will retain those contractors for itself. The plan must also include the number and dollar value of incurred cost audits for each of the following six fiscal years (fiscal years 2019 through 2025). By April 1, 2019, private audit firms must be under contract.

In order to improve the quality of incurred cost audits (and reduce duplication), the Defense Department is authorized to provide qualified private auditors with information on past or ongoing audit results or other relevant information on the entities the qualified private auditor is auditing.

The working papers generated by qualified private auditors will become the property of DoD except the qualified private auditor will be allowed to retain complete copies.

DoD is also required by Section 803 to implement numeric materiality standards for incurred cost audits to be used by auditors that are consistent with commercially accepted standards of risk and materiality. In developing such standards, DoD must consult with commercial auditors that conduct incurred cost audits, the Section 809 Panel, and other governmental and nongovernmental entities with relevant expertise. Whatever the outcome of this study, it is almost certain that the materiality and risk factors used by DCAA now, will change. Maybe that's good, maybe not.

So, who would you rather have come in and conduct your audits? Are you comfortable with the status quo (i.e. DCAA) or would you rather take your chances with a QPA (Qualified Private Auditor).

Tuesday, November 14, 2017

DCAA to Share Audit Function With Commercial Firms - Part 2

Yesterday we introduced the Section 803 provision in the 2018 NDAA (National Defense Authorization Act) that will require the Defense Department to begin farming out some of its incurred cost audit functions to commercial firms. Though the probable soon-to-be law does not specify a particular percentage or dollar value of audits to be shaved off of DCAA's (Defense Contract Audit Agency's) current workload, the general tenor of the provision sounds like the sharing will be substantial and on-going.

For example, yesterday we reported that the new provisions require that audits be completed within one year from submission of an adequate incurred cost proposal (for information on what constitutes an adequate incurred cost proposal, see Annual Incurred Cost Submissions - Adequacy or DCAA's Checklist for Determining Incurred Cost Proposal Adequacy). But what happens if the audit is not completed within a year? Section 803 contains a provision that states if audit findings are not issued within one year after the date of receipt of a qualified incurred cost submission, the audit shall be considered to be complete and no additional audit work shall be conducted. That would result in significant risk to the Government and will probably necessitate the transfer of a substantial number of audits from DCAA to commercial auditors - particularly since DCAA has not had much success in completing incurred cost audits in a year.

Another Section 803 provision that makes the number of commercialized audits substantial and on-going is the requirement that DoD maintain an appropriate mix of Government and private sector capacity to meet the current and future needs and to ensure that qualified private auditors perform incurred cost audits on an ongoing basis. Sounds to us like the program is to be set up for the long haul.

There are certain qualifications that commercial firms must meet in order to participate in the program. There can be no conflicts of interest, the auditors must be independent, they must sign non-disclosure agreements to protect proprietary or nonpublic data, they cannot use proprietary data for other purposes, and must protect it. Also, and significantly, the firms performing the audits must have a peer review with an "acceptable" rating ("acceptable" is as good as you can get in a peer review).

Monday, November 13, 2017

DCAA To Share Audit Function With Commercial Firms - Part 1

The 2018 NDAA (National Defense Authorization Act) Conference Report has been published. The Conference Report refers to the final version of a bill that is negotiated between the House and the Senate via conference committee. It will still need to be submitted to each Chamber for its consideration for approval or disapproval but in the past, NDAA conference reports are routinely passed by both the House and Senate. So, assuming the President signs the bill, it will become law.

Our coverage of the NDAA focuses on contracting matters - provisions that will affect contractors or prospective contractors. And this year's NDAA is going to change the way many Government contractors are audited. The Department of Defense will be making a major shift toward using commercial audit firms to conduct incurred cost audits instead of exclusively relying upon DCAA (Defense Contract Audit Agency) to perform their incurred cost audits. We can't foresee whether this is good news or not such good news for contractors.

The good news is that audits will be completed much quicker than they presently are. Audits will need to be completed within a year after the Government receives an adequate incurred cost submission from the contractor. More good news includes the fact that the Government and contractors will be able to close out contracts much quicker. The big uncertainty for contractors however is the unknowns that come with a new audit organization. Will the audits be more detailed or less detailed in scope? Will commercial auditors have the same materiality threshold as Government auditors?

We will spend a few days unpacking the content of the new bill. There's a lot to it. But here's the essence: To support the need of the Defense Department for timely and effective incurred cost audits, and to ensure that DCAA (Defense Contract Audit Agency) is able to allocate resources to higher-risk and more complex audits, the Secretary of Defense shall use qualified private auditors to perform a sufficient number of incurred cost audits;

  1. To eliminate any backlog of incurred cost audits by October 1, 2020.
  2. Ensure that incurred cost audits are completed not later than one year after the date of receipt of a qualified incurred cost submission
  3. Maintain an appropriate mix of Government and prive sector capacity to meet the current and future needs of DoD to perform incurred cost audits
  4. Ensure that qualified private auditors perform incurred cost audits on an ongoing basis to improve the efficiency and effectiveness of incurred cost audits
  5. Limit multi-year auditing (obviously you cannot perform multi-year auditing and achieve one year turn-around)

Privatization of the incurred cost audit function under this bill is not a one-time shot to help DCAA eliminate its backlog. The bill intends privatization to be a permanent, on-going, and substantial part of contract audits.

Friday, November 10, 2017

Calendar Days vs Work Days

Family Entertainment Services (FEI) was awarded a grounds maintenance contract for nearly 4,000 acres at Fort Campbell, Kentucky. One of the contract line items required the contractor to mow grass on a 21 day schedule. From the beginning of the contract, FEI fell behind in the mowing schedule and despite several cure notices from the Army, was unable to catch up. Ultimately, the Army deducted $82 thousand from the contract price because FEI did not meet the terms of the contract.

FEI appealed to the ASBCA on the basis that the term "day" should be defined as a work day instead, as the Army contends, a calendar day. On this basis, a 21 day schedule would equate to approximately 27 to 29 calendar days (depending upon how weekends fell) which means the Army withheld too much money. FEI asked the ASBCA to clear up the contract ambiguity.

The ASBCA has published guidance regarding ambiguities in a contract.
In resolving disputes involving contract interpretation, we begin by examining the plain language of the contract. We construe a contract "to effectuate its spirit and purpose giving reasonable meaning to all parts of the contract. the threshold question here is whether the plain language of the contract "supports only one reading or supports more than one reading and is ambiguous, as held by the Board. Ambiguity exists when contract language can reasonably be interpreted in more than one way.
Parties having a differing opinion of contract terms in not enough to show ambiguity. Rather, both interpretations must fall within a 'zone of reasonableness.
In this case, the ASBCA found that there is only one reasonable way to interpret the contract. FEI's opinion that "day" should mean "work day" is not a reasonable interpretation of the contract. The contract incorporates FAR 2.101 which defines "day" as a calendar day (unless otherwise specified in the contract). The Board found no exceptions in the contract that would lend credence to a different interpretation so denied the appeal.

The full decision can be found here.

Thursday, November 9, 2017

Whitefish Energy Contract to Restore Puerto Rico Electricity

As promised, we are bringing you an update to our October 30th posting concerning the contract awarded to Whitefish Energy by the Puerto Rico Electric Power Authority (PREPA) to help restore electricity on the island (see Whitefish Energy). This $300 million contract at rates exceeding $240 per hour for electrical linemen awarded to a company with two full-time employees raised a lot of concern by both Democrats and Republicans in Congress as well as several oversight agencies including Offices of Inspector Generals. One Congressman termed it a "sweetheart deal to a fly-by-night company".

The offending contract has now been terminated although the full cost through termination will not be known for some time. So far, Whitefish has racked up $60 million in charges and that doesn't include the cost of demobilization and other allowable termination costs.

PREPA defended the Whitefish contract by noting that the unknown, tiny company was the only bidder that didn't require a down payment, and would handle its own logistics. PREPA is bankrupt and $9 billion in debt, and other better-established companies required significant down payments in order to offset the risk that PREPA might not be able to pay off contract work. Whitefish didn't enhance its own reputation by threatening to pull its linemen out of the Mayor's hometown when it was called on to be more transparent.

Meanwhile, the investigations expand. Another Whitefish type contract has emerged - this time, a $200 million contract award to a firm named Mammoth Energy Services' Cobra Acquisitions LLC with similar contractual language.

Wednesday, November 8, 2017

GAO To Begin Charging a Filing Fee for Bid Protests

Beginning sometime next year (2018), the GAO (Government Accountability Office) will begin charging $350 to anyone filing bid protests. Currently, there is no charge for filing. For some contractors, the cost may be even higher. There is a provision in the Senate version of the 2018 National Defense Authorization Act (NDAA) that would require unsuccessful bidders to pay the cost for unsuccessful protests filed against the Defense Department (this applies to companies with revenues in excess of $100 million).

The ostensible reason for levying this new fee is to help offset the cost of development, operations, and maintenance of a new electronic protest docket system (EPDS). $350 per filing will bring in about $1 million a year based on historical filing totals - not nearly enough to cover the costs but every little bit helps. Besides, Congress mandated that GAO begin charging fees.

Some cynics suggest that the real purpose behind the new filing fee is to discourage frivolous protests. You will recall that last August, the GAO took the unprecedented step of suspending a firm from filing protests for one year because it had filed 300 bid protests over a four-year period and 150 protests in fiscal year 2016 alone (see GAO Suspends Firm From Filing Bid Protests For a Year). None of these protests were sustained and most were dismissed without merit. Since that suspension was lifted, the formerly suspended firm has already filed five new bid protests. For a protestor filing hundreds of protests per year, a $350 filing fee may be a deterrent.

For most companies filing bid protests, a $350 filing fee will not be a deterrent to filing. When tallying up the costs of a bid protest, especially if outside counsel is engaged, $350 will be represent a very immaterial portion of the total costs.

Tuesday, November 7, 2017

Fair Pay and Safe Workplaces Rules - Dead

This week, the FAR (Federal Acquisition Regulation) Councils issued a final rule implementing a public law that disapproved a previous final rule. The rule, called Fair Pay and Safe Workplaces, was based on an Executive Order (EO) that was ultimately overturned by Congress. To read what the regulations would have required, see Fair Pay and Safe Workplaces).

In 2014, the President issued EO 13673, Fair Pay and Safe Workplaces. In August 2016, implementing rules were published. In October 2016, several industry organizations filed a lawsuit seeking to overturn the final rule. That same month, the Court issued a preliminary injunction against the Government preventing them from enforcing most of the rules.

In March 2017, under the Congressional Review Act, Congress passed House Joint Resolution 37 which disapproved the entire FAR rule that was published back in August 2016. The President signed the Resolution into law that same month. By statute, the rule was to be treated as if it had never taken effect.

Had the rules remained in effect, the cost to contractors and the Government would have been significant. The Regulatory Impact Analysis (RIA) that included a detailed discussion and explanation about he assumptions and methodology used to estimate the cost of the final rule, calculated the cost to be in excess of $470 million the first year, $458 of which was to be born by contractors and subcontractors. That figure doesn't include the defense of litigation, some of it frivolous, that most people figured would occur as a result of alleged noncompliances with the rules.

No contractor we know of is disappointed that these onerous rules have been abolished.

Monday, November 6, 2017

Failure to Submit "Responsive" Offer Leads to Lost Opportunity

Offerors must avail themselves of every reasonable opportunity to obtain solicitation documents. Otherwise, they risk being eliminated from consideration.

The Department of Homeland Security (DHS) issued an RFQ (Request for Quotation) to provide armed and unarmed detention officer services in California. Nu-Way security and Investigative Services (Nu-Way) was one of the bidders. DHS issued four solicitation amendments. Three of the four extended the deadline for proposal submissions. Amendment No. 2 made several changes including three modifications to the pricing spreadsheet including a transition period line item, a project manager for San Diego, and increased mileage reimbursement rates. All of these changes were summarized on page one of the amendment.

Nu-Way did not use the revised spreadsheet as its proposal submission. DHS noted that the proposal lacked a line item for the San Diego project manager and failed to update the mileage reimbursement quantities. The contracting officer then notified Nu-Way that its quotation had been found non-responsive and would not be evaluated for award.

Nu-Way protested to the GAO alleging that the revised pricing spreadsheet was not available for download. DHS responded that the modification description clearly stated changes were made to the pricing spreadsheet and other offerors were able to download and submit the revised pricing spreadsheet. Nu-Way argued that the front page of Amendment 2 did not explicitly state that there were changes made to the pricing spreadsheet such that a new pricing spreadsheet was required. Therefore, the requirement was ambiguous.

GAO did not sustain the appeal. GAO found that Amendment 2 specifically stated that changes were made to the pricing spreadsheet. Regardless of whether Nu-Way could download or received the revised pricing spreadsheet, the company was on notice that DHS had revised the spreadsheet. As a result, Nu-Way should have availed itself of every reasonable opportunity to obtain the spreadsheet.

DHS was correct (acted reasonably) in rejecting Nu-Way's proposal because it failed to acknowledge a material amendment.

Read the entire decision here.

Friday, November 3, 2017

Fraud Friday - Government Employee Solicited and Accepted Bribes from Contractor

Now they're both in a heap of trouble.

There is not that much different in the relationship between a Government contracting officer and his contractor and that of a purchasing agent and his suppliers. In both cases, management places a great deal of trust that the person will act with integrity in carrying out his duties - namely buying at the best possible prices and terms. Trust is crucial but is not a substitute for good internal controls.

One reason we discuss allegations of contract fraud on these pages is to examine what went wrong in a given situation, what internal controls were nonexistent or were not adequate to prevent. We know from research that within a five year period, most small businesses will be affected by occupational fraud. And we also know that where there is a financial need, an opportunity, and rationalization, fraud is more likely to occur. So one way to prevent (or reduce) the occurrence of fraud is to take away the opportunity and that means implementing a robust system of internal controls.

So consider the recent Justice Department press release announcing the arraignment of Elvis, a supervisor with the U.S. Food and Drug Administration (FDA) and a business owner named Ivan on charges of bribery and kickbacks. Although this occurred at the FDA, it could have occurred in any governmental or contractor organization.

Elvis was the senior facilities officer at FDA's Atlanta field office and in that role, influenced the selection of businesses that perform building maintenance work. Ivan was the owner of P&E Management, a firm that performed building maintenance work. Ivan need work to sustain his company and Elvis was there ready to give him work ... for a price.

According to the press release, Ivan gave Elvis a debit card tied to Ivan's bank. Elvis used this card for shopping sprees, vacations, and dining out. On one occasion, Elvis used the card to pay for official government business trip and later sought reimbursement from the Government for that trip. To top it off, Ivan bought Elvis a Cadillac Escalade worth somewhere in the neighborhood of $80 thousand.

This bribery/kickback scheme went on for six years before it was discovered. We don't know how it was discovered - whether someone blew the whistle or perhaps an internal audit review. For the same firm to win contracts time after time over an extended period of time is inherently a red flag. But we know that there was a massive breakdown in internal controls that allowed this to happen and to persist for such a long time. It seems that Elvis had the ability to spend the Government's money without any oversight at all. And, if we've come to understand Government procurement regulations at all, we know that is not the way procurement is supposed to be done. Government procurement is characterized by market research, solicitations, evaluations, selections, negotiations, review and approvals accompanied by mountains of paperwork. For one person to wield so much power and influence to circumvent all of these controls suggests an internal control breakdown.

So how did Elvis circumvent the controls? Elvis always kept his purchases of building maintenance services under the micro-purchase threshold (currently set at $5,000) where speed and efficiency can streamline the procurement process but can also be easily exploited by persons such as Elvis.

You can read the entire Justice Department press release here.