Friday, March 31, 2017

Elevating Concerns That Are Not Satisfactorily Resolved by Your Local ACO

Did you know that DCMA (Defense Contract Management Agency) has a mechanism whereby contractors can elevate concerns that cannot be resolved at the CMO (Contract Management Office) level? One has to dig deep on DCMA's website to find it but here's a direct link.

According to that site, DCMA's primary responsibility is to administer the contractual requirements of the contracts awarded by its military customers. DCMA works directly with its military customers and with contractors to assure quality products and services are delivered within cost and on schedule. DCMA works closely with contractors in the performance of their contracts. Depending on the contractual requirements, this could mean constant collaborations and interfaces between the DCMA functionals (contracting, quality, engineering, property, safety, transportation, earned value, etc.) and contractor representatives. The DCMA working relationship with contractors is paramount for the successful performance of the contract.

While DCMA would like for collaborations and interfaces to always be perfect, it fully acknowledges the realities and challenges associated with the performance of contractual requirements.

DCMA does not guarantee working relationships with contractors will always be perfect. However, when issues cannot be resolved at the local level, DCMA Headquarters wants to hear about them. On those occasions when a concern cannot be resolved at the local level, the website provides a link for elevating the problem to HQ. HQ will, in turn acknowledge receipt of the complaint, route it to the appropriate official, and respond to, or ensure a response is provided to, the requester.

DCMA needs certain information to adequately respond to elevated issues including a contract number, contractor contact information (of course), the local DCMA official, a detailed description of the concern, and a statement as to whether the concern was elevated through the local chain of command.

We do not have any experience with this established mechanism for raising concerns or issues that cannot be satisfactorily resolved at the local level nor do we have any knowledge on how effective this mechanism is in resolving issues. But at least there is a mechanism. If you have any experiences with elevating issues to DCMA HQ, please let us know.

Thursday, March 30, 2017

New DCMA Guidebook on Purchasing Systems

UPDATE 2: The May 9, 2017  CPSR Guidebook discussed below has been replaced with a March 1, 2018 version.

UPDATE: The January 18 2017 CPSR Guidebook referenced below has been replaced with a May 9, 2017 version.

Government prime contractors have the responsibility of managing their purchasing program. DCMA (Defense Contract Management Agency) and specifically DCMAs' CPSR (Contractor Purchasing System Review) teams is responsible for evaluating the contractor's overall purchasing system to ensure that it is efficient and effective in the expenditure of Government funds and in compliance with contract requirements.

CPSRs are conducted at contractors where annual sales to the Government (including subcontracts) are expected to exceed $50 million in a 12 month period. The ACO determines the need for a CPSR based on various factors such as past performance, volume, complexity and dollar value of subcontracts. The ACO must perform a risk assessment at least once every three years to determine whether a CPSR is needed.

The requirements for an adequate purchasing system are found in FAR 44.3, 44.202-2, and DFARS (DoD FAR Supplement) 244.3. DFARS 252.244-7001(c) contains a listing of 24 criteria that a system must meet in order for it to be considered adequate.

DCMA performs various levels of review. First there is the Initial/Comprehensive review which is exactly what the title states. Both reviews cover the 24 criteria. The next level down is a "Special Review" which investigates specific weaknesses identified during contract performance. Finally, there is the "Followup  Review" which examines the sufficiency of contractor corrective action to previously disclosed purchasing system deficiencies.

DCMA recently published an update to its CPSR Guidebook (January 18, 2017). The first fifteen or so pages deal with internal policies for performing and reporting on CPSRs. The good stuff is in the 25 Appendices which takes up the bulk of the 100 page Guide. These appendices roughly correspond to the 24 DFARs criteria for an adequate purchasing system but go much deeper into the fundamental requirements. For example, the appendix on "Limitation on Pass-Through Charges" includes an introduction, a section citing regulatory references, the applicability, exemptions, contractor practices, policies and procedures, and best practices.

The DCMA CPSR Guidebook can be a very valuable resource for contractors (and subcontractors) for establishing their own purchasing systems and for evaluating existing systems against DCMA criteria for adequacy. Download it here.

Wednesday, March 29, 2017

Allegations that Senior DOE Official Received Kickbacks from Contractor

A contractor employee assigned to work at the FBI Headquarters as a database administrator pleaded guilty of making false statements to FBI agents in connection with an official investigation. This individual worked at FBI Headquarters for about three and a half years between 2011 to 2014. Prior to that, way back in 2004, he was somehow involved with the Department of Energy where he facilitated transactions between a senior DOE official and a private company doing business with DOE.

According to the Department of Justice, this individual lied to FBI investigators about a financial transaction that he facilitated between a senior DOE official and a private company. Specifically, at the request of the senior official, this individual served as a conduit for purported consulting payments from the private company to the senior official. The individual prepared and submitted false invoices to the private company for $140 thousand in services that he neither rendered or performed. Upon receiving payment from the private company and withholding a portion thereof to cover tax liabilities and other personal expenses, this individual made several cash disbursements to the senior official.

During an interview with the FBI, he denied making any such payments to the senior official. He also failed to disclose these transactions in his application for Top Secret clearance even though he was required to do so.

Look for more announcements relating to this case and investigation. There are at least two other parties to this fraud, the senior DOE official and the private company or representatives of the private company, neither of which will have a much of a defense now that the bag man has pleaded guilty.

It is probably not wise to lie to investigators when they come around asking pointed questions about events that occurred a decade earlier. Actually, its not wise to lie, period. Chances are very likely that they already know the answers to the questions they're asking and are merely solidifying or building their evidence.

Tuesday, March 28, 2017

RIP - Fair Pay and Safe Workplaces Regulations

Yesterday the President signed into law H.J.Res 37 which repeals the Fair Pay and Safe Workplaces regulations, which was based on an Executive Order from the prior President.

According to the Presidential spokesman, manufacturers had identified the "blacklisting" rule as one of the most significant threats to growing American business and hiring more American workers. "The rule simply made it too easy for trial lawyers to go after American companies and American workers who contracted with the federal Government.

Nice, we just got rid of 90 pages of Federal Register regulations.

Monday, March 27, 2017

Bidder Disqualified for Failing to Provide Evidence of an Adequate Accounting System

In March 2016, the National Institute of Health (NIH) issued a solicitation for "IT solutions and services. Leader Communications was one of the bidders but was excluded from further consideration for failing to submit verification of an adequate cost accounting system from DCAA (Defense Contract Audit Agency).

The Request for Proposal (RFP) contained detailed instructions regarding the submission of proposals including the following: offerors "must have verification from [DCAA]... of an accounting system that has been audited and determined adequate for determining costs applicable to this contract in accordance with FAR 16.301-3(a)(1)." The solicitation also required that an offeror provide in its proposal a contact name and contact information (i.e. phone number, address, email address) of its representative at its cognizant DCAA and submit, if available, a copy of the Pre-Award Survey of Prospective Contracting Accounting System (SF 1408), provisional billing rates, and /or forward pricing agreements.

Proposals were to be evaluated in two phases. In phase 1, the government would evaluate the proposals based on four go/no-go requirements, one of which was the verification of an adequate accounting system.

NIH received 552 proposals including one from Leader Communications. Leaders proposal contained a document stating that its accounting system was approved by DCAA in 2008 and provided the audit report number and contact information  for the cognizant DCAA office and representative.

NIH determined that Leader's proposal failed to comply with the requirements of the solicitation because Leader's own representations about its accounting system did not meet the requirements to provide verification of an adequate accounting system. As a result, Leaders proposal was found to be unacceptable and ineligible for further consideration.

Leader appealed to the Comptroller General, essentially arguing that the solicitation required only that offerors had received verification from DCAA that their accounting systems had been audited and determined adequate, bud did not require the submission of any documentation from DCAA itself. Elimination from competition was unreasonable because Leader met the solicitation's requirement by providing its own unambiguous statement that its accounting system had been audited and approved by DCAA, along with the DCAA audit report number and additional information. In Leader's view, this information was sufficient for NIH to independently confirm with DCAA the verification and audit of its accounting system.

NIH defended itself by stating that a DCAA audit report would have been an acceptable source of verification. The solicitation expressly required offerors to furnish verification from DCAA with its proposal - the solicitation did not permit offerors to essentially self-verify the adequacy of their accounting systems. By requiring offerors to provide verification from DCAA, NIH would obtain independent verification that offerors' accounting systems had been audited and determined adequate.

The GAO sided with NIH on this appeal. The GAO found that NIH's interpretation of the solicitation, when read as a whole, is reasonable, whereas Leader's interpretation is not reasonable. In this case, the solicitation stated that an offeror must have verification from DCAA of an accounting system that has been audited and determined adequate in order to be eligible for award. The solicitation also advised that NIH would evaluate evidence that the offeror has an adequate accounting system. Finally, the solicitation cautioned that failure to furnish verification of an adequate system would result in a rating of unacceptable.

DCAA is probably feeling very empowered by this decision. You can read the entire decision here.

Incidentally, the solicitation also provided an alternative to DCAA verification. NIH would also accept verification from third-party certified public accountants (CPA) as long as it was on the CPA's letterhead. Bidders that did not have DCAA audit coverage could qualify by hiring outside CPAs to perform pre-award accounting system surveys. PNWC performs pre-award surveys for companies that find themselves without independent verification of the adequacy of their accounting system. If you find yourself in that position, give us a call.

Friday, March 24, 2017

Guy Just Can't Get a Decent Job - Even With Wife's Assistance

A former contracting official with GSA (General Services Administration) and her husband pleaded guilty yesterday to engaging in a nepotism scheme in which they conspired to fraudulently obtain employment from the U.S. Government and private federal contractors with which the (former) GSA official had some form of official oversight. The Government calls this a $200 thousand fraud.

Kind of a curious situation - makes one thing the spouse was basically unemployable for why else would the spouse need to make 139 false employment applications to federal agencies and Government contractors.

According to the DOJ press release, the two engaged in a scheme to enrich themselves by obtaining employment with federal contractors and the U.S. Government through false and misleading statements concerning the spouse's relationship to the GSA official, his education, and his qualifications. The GSA official induced a Government contractor to hire her husband and she also tried to hire her husband at GSA where he would be under her supervision.

According the guilty plea, the couple caused over 139 false employment applications to be submitted to federal agencies. These applications misrepresented many things about the spouse including his supposed graduate degree and his level of contracting certification. He couldn't seem to land a job at a Federal agency so he submitted his false applications to at least six different Government contractors.

The couple now face a maximum penalty of five years in prison plus restitution though, it is unlikely the maximum penalties will be handed down when sentencing occurs next July.

The DOJ press release did not disclose how the fraud was uncovered. It would be useful to know that information so that contractors can enhance their own internal controls to reduce the likelihood of employing individuals with misleading resumes.

Thursday, March 23, 2017

Inter-divisional Transfers at Price

Materials, supplies, and services that are sold or transferred between any divisions, subdivisions, subsidiaries, or affiliates under common control must be made on the basis of cost incurred with one exception; transfers may be made at price when it is the established practice when it is the established practice of the transferring organization to price inter-organizational transfers at other than cost for commercial work and the price of the item being transferred is based on adequate price competition, is set by law or regulation, is a commercial item, or a waiver has been granted. Additionally, the contracting officer cannot have already determined the price to be unreasonable (see FAR 31.205-26(e)).

 ATS is a Government contractor that provides counter-terrorism training services and solutions, including training related to how to identify, defuse, and evaluate IEDs (Improvised Explosive Devices). The company has two divisions involved in delivering training; one involved in training and the other involved in manufacturing training aids and devices used in the training. The training materials and equipment produced by ATS and are sold commercially including commercial sales under the GSA Schedule.

In 2009, the Army awarded a $200 million five-year CPFF (Cost Plus Fixed Fee) contract to ATS to provide training for armed forces to proactively defeat IED threats. ATS proposed that training materials and equipment produced by its sister-division would be charged to the contract at "price" based on provisions in FAR 31.215-26. In its pre-negotiation objective memorandum (POM) the Government noted that those particular costs were "realistic, fair and reasonable". Work began and ATS began billing the Government for inter-divisional materials at catalog prices.

In 2011, DCAA (Defense Contract Audit Agency) issued an audit report declaring that ATS' accounting system was inadequate, containing a "significant deficiency that is considered to be a material weakness..." DCAA found that ATS was billing materials acquired from its sister-division at "price" instead of at "cost". Turns out, DCAA was relying on an accounting technicality because ATS was not first transferring the material from one division to another before billing the Government. DCAA noted that ATS had established commerciality of its products and demonstrated a physical transfer of material goods between its two divisions, there was never an accounting entry made to reflect that transfer. Thus, DCAA (and later DCMA - Defense Contract Management Agency) did not believe that ATS satisfied the requirements of FAR 31.205-26(e)(1)(2).

Eventually, the contracting officer issued a final decision disallowing the transfer at "price". ATS appealed to the Armed Services Board of Contract Appeals (ASBCA). The ASBCA ruled in favor of ATS, calling out the Government for its failure to carry its burden of proof to justify the allowance under FAR 31.205-26(e) and secondarily ruling that ATS is entitled to recover its commercial catalog prices for training materials. Essentially, the ASBCA called nonsense, the Government claim that there must first be an accounting entry showing the transfer from one division to another before the item(s) can be billed to the Government at price.

You can read the entire ASBCA decision here.

Wednesday, March 22, 2017

Is a Lease Really an Intangible Asset?

Cost Accounting Standard (CAS) 404 establishes criteria for determining the acquisition costs of tangible assets which are to be capitalized. It requires contractors to capitalize the acquisition costs of tangible assets in accordance with a written policy that is reasonable and consistently applied. We have detailed the essential requirements of CAS 404 in a previous post that can be read here.

Recently, there was a decision handed down by the ASBCA (Armed Services Board of Contract Appeals) involving CAS 404 and whether the standard applied to Capital Leases. The case involved Exelis, Inc.'s failure to properly classify a building lease. Exelis recorded the lease as an "operating lease" rather than a "capital lease". Under an operating lease, a contractor simply records the rental payments as an expense (FAR 31.205-36) Under a capital lease, the present value of the lease expenses capitalized and depreciated over the life of the lease (FAR 31.205-11).

The Government took exception to Exelis' accounting for lease payments and cited the contractor for non-compliance with CAS 404. The Government calculated the impact at just over $3 million. Exelis appealed to the ASBCA who ruled that CAS 404 did not apply to capital leases as capital leases are not tangible assets but rather intangible assets. The Government appealed the ASBCA decision but lost the appeal as well. We will not go into the details of those decisions because we have covered those details in previous posts. See here and here for our coverage of the initial decision and the appeal, respectively.

Normally capitalization and depreciation issues are non-controversial. Depreciation is an allowable expense so disagreements usual hinge on useful lives. Contractors want shorter lives, the Government wants longer useful lives. The imipact is just the time value of money. However, since most contractors also claim Facilites Capital Cost of Money (FCCM) on the net book value of assets, the impact on the time value of money is a wash. The higher the book value (acquisition cost less depreciation), the more FCCM a contractor recoups.

So what is the big deal with the Exelis depreciation case? The big deal lies in Exelis' contract mix. Of the $3 million cost impact calculated by the Governement, $2.6 million applies to fixed priced contracts and the remaining $400 thousand applies to flexibly priced contracts. The Government is going to recover the $400 thousand through the settlement of indirect costs process (FAR 52.216-7). However, there is no simple contractual mechanism to recover the $2.6 million by which fixed priced contracts were overstated because Exelis applied the wrong accounting methodology to lease payments. To recover those increase costs, the Government would need to resort to TINA (Truth in Negotiation Act) and there is serious concern as to whether the Government could prevail in a TINA case.

The ASBCA decision continues to baffle us. According to the ASBCA, "...CAS 404 applies to 'Tangible Assets". The CAS defines "tangible capital asset(s)" as "asset(s) that  (have) physical substance. Thus, the plain language of the CAS provides that CAS 404 applies to tangible assets which are assets with physical substance. A lease is an intangible rather than an intangible asset because the lease itself is a legal right to use and occupy the building and does not have 'physical substance'".

Is a lease really an intangible asset as the ASBCA states? For financial reporting purposes, leases are considered liabilities. We have yet to see a case where leases are reported on financial statements as intangible assets. Would the ASBCA also say that a mortgage represents an intangible asset because there is no physical substance to the piece of paper?

Tuesday, March 21, 2017

When Can Bid and Proposal (B&P) Spending Begin?

There have been inconsistencies among contractors and Government oversight agencies in applying the requirements of the FAR cost principle on Bid and Proposal Costs (see FAR 31.205-18).
Some contractors and contract auditors and contracting officers maintain that B&P funds cannot be incurred until a formal solicitation has been published. Others take a  broader view and maintain that B&P funds can be incurred before a formal solicitation has been published to, for example,

  • answer sources sought
  • answer requests for information
  • preparation after a draft statement of work has been issued
  • preparation after a draft request for proposal has been issuedin applying

Bid and proposal (B&P) costs are costs incurred in preparing, submitting, and supporting bids and proposals (whether or not solicited) on potential Government or non-Government contracts. B&P does not include the costs of effort sponsored by a grant or cooperative agreement, or required in the performance of a contract (see FAR 31.205-18).

The DoD response the question on when B&P spending can begin is as follows:
The use of funds in response to sources sought, requests for information, and draft statements of work and draft requests for proposals could reasonably be interpreted as "incurred in preparing, submitting, and supporting bids and proposals.
Charging such activities as B&P is probably the cleanest way to account for the costs. The alternative is to charge the costs to Selling (see FAR 31.205-38) which would be subject to "second-guessing" by contract auditors and contracting officers as to whether such costs are allowable. Follow the DoD lead in this matter.

Monday, March 20, 2017

Going to Court? Give it Your Best the First Time Around

Last November we highlighted an ASBCA (Armed Services Board of Contract Appeals) ruling from August 29, 2016 that CAS 404, Capitalization of Tangible Assets) does not apply to capital leases. This ruling caught us by surprise as almost everyone in Government contracting circles believed otherwise and acted on that premise in determining allowable costs (depreciation) on Government contracts. Read it here.

The Defense Contract Management Agency (DCMA) who defended the case before the Board also thought the Board was wrong and moved for a reconsideration of the Board's opinion alleging that the Board had made a "legal error". The Board denied DCMA's motion and wrote some strong wording concerning DCMA's approach to handling the original case and the motion for reconsideration. The Board wrote:
A motion for reconsideration is not the place to present arguments previously made and rejected. Where litigants have once battled for the court's decision, they should neither be required, nor without good reason permitted, to battle for it again. Motions for reconsideration do not afford litigants the opportunity to take a second bite at the apple' or to advance arguments that properly should have been presented in an earlier proceeding.
Moreover, we note that DCMA's argument regarding the interpretation of CAS 404 comprised just five and-a-half pages of its twelve-page brief in opposition to Exelis' motion to dismiss. Now DCMA has submitted a 34 page brief devoted solely to this issue. Put simply, the rulings of a board are not mere first drafts, subject to revision and reconsideration at a litigant's pleasure. The proper time for DCMA to have made these arguments was in response to Exelis' motion to dismiss, and not in a motion for reconsideration.
Notwithstanding the denial for reconsideration, the Board considered DCMA's additional arguments and found none of them to be persuasive. Those arguments were:

  1. the Board misinterpreted the text of CAS 404
  2. the Board incorrectly held that GAAP (Generally Accepted Accounting Principles) play no role in the interpretation of CAS 404 and
  3. that the Board improperly applied the standard of review by assuming the Exelis' lease of an office building was not a capital lease.
As we stated in our previous posting, the Government can still pursue the case based on FAR and probably will. It is not unlikely however that DCMA will appeal the Board's rulings to a higher court.

Friday, March 17, 2017

Contractor Team Arrangements

Contractor team arrangements as used in Government contracting, are where (i) two or more companies form a partnership or joint venture to act as a potential prime contractor or (ii) a potential prime contractor agrees with one or more other companies to have them act as its subcontractors under a specified Government contract or acquisition program.

Teaming agreements can be desirable from both a Government and industry standpoint in order to enable the companies involved to complement each other's unique capabilities and offer the Government the best combination of performance, cost, and delivery for the system or product being acquired.

The companies involved normally form a contractor team arrangement before submitting an offer. However, they may also enter into an arrangement later in the acquisition process, including after contract award.

The Government is not obligated to accept or recognize the integrity and validity of contractor arrangements. Typically there is some form of Government review of the arrangements. There must be a written agreement between the participating contractors. This agreement will normally contain

  • the name of the venture
  • the customer and solicitation number
  • the names of the participants
  • any limitations on the powers and rights of the participants
  • the contributions that each participant is required to make with regard to the venture's capital, personnel, proposal preparation, etc
  • anticipated subcontract
  • funding requirements
  • responsibilities for record keeping and for the preparation of reports and invoices
  • the designated management
  • limitation of liabilities
  • term of venture and dissolution agreements
  • responsibilities for and restrictions on royalities, patents, copyrights, and property rights arising from venture operations
  • the resolution of disputes among the ventures
  • covenants on how litigation costs will be borne by the participants
  • which state's laws will govern the venture
  • the filings or disclosures required by the state, FAR, etc
  • any technology transfer agreements, and
  • any cost/profit sharing agreements.
If you are contemplating teaming up with another company to pursue a Government contractor, you must ensure that the forgoing points are covered in your formal agreement. We believe that the most important sections is the fifth bullet: the contributions that each participant is required to make with regard to the venture's capital personnel, proposal preparation. Implicit in this feature is the method of accounting that will be used and how indirect rates will be developed and applied. The Government will spend most of its review efforts on this one factor.

Thursday, March 16, 2017

Some Claims Must Be Raised Before Contract Award

The U.S. Court of Federal Claims dismissed a company's OCI (Organizational Conflict of Interest) claim related to the award of a contract by the Army because it effectively waived its claim by not raising it before contract award.

A party who has the opportunity to object to the terms of a government solicitation containing a patent error and fails to do so prior to the close of the bidding process waives its ability to raise the same objection subsequently in a bid protest action (Blue & Gold Fleet L.P. v US, 492 F. 3d, 1308, 1313). The Federal Circuit adopted this rule to prevent contractors from taking advantage of the government and other bidders by sitting on their rights during the bidding process, which leads to expensive post-award litigation. The waiver rule applies broadly in bid protests to all situations where the protesting party had the opportunity to raise its claim before the award of the contract.

In the present case, The Concourse Group alleged that the Army and the incumbent's "unusually close" relationship gave rise to multiple OCI claims. Despite the incumbent status, Concourse claimed that it was unaware of the unusually close relationship until after contract award. The Court wasn't convinced by Concourse's alleged lack of knowledge. The Court found that Concourse knew or should have known of the incumbent's role well before contract award, noting:

  1. The Court found it unconvincing that Concourse was ignorant of or unable to access two public documents it references in its complaint before contract award
  2. The incumbent filed three separate pre-award protests at the GAO before contract award, thereby publicly displaying its interest in the procurement and putting Concourse on notice of its possible involvement
  3. Concourse admitted in its complaint that it was aware of the incumbent's direct participation with the prime contractor bidder prior to contract award and did not raise an OCI claim in its pre-award protest at the GAO.

In summary, both the public documents and the incumbent subcontractor's interest in the procurement were easily recognizable or obvious facts that make them subject to the Blue and Gold test. Based on that, the Court dumped the challenge. 

Besides the "Blue and Gold" test, the other salient point in all of this is "known or should have known". It is not necessarily a defense to have not known the facts if the facts are obvious and the protester should have known them.

Wednesday, March 15, 2017

Contractor Disclosure Program - Contractor Repays $1.8 Million in Billing Discrepancy

Early on in our blog publication (February 2010), we discussed DoD's implementation of the voluntary disclosure program - an opportunity for contractors to self-disclose instances of contract "wrong-doing". You can read our initial post on the subject here and although that information is still current, we were reminded of it again after the the Justice Department announced a $1.8 million recovery under the program.

The Contractor Disclosure Program is not voluntary. It was once voluntary and called the Contractor Voluntary Disclosure Program. But sometime around 2008 or 2009, FAR Clause 52.203-13 was published making disclosures of certain violations of criminal law and violations of the civil False Claims Act not so voluntary so they dropped the word "Voluntary" and it became the Contractor Disclosure Program. Now, as part of the Business Ethics Compliance Program, contractors have an affirmative duty to report "credible evidence" of wrong-doing.

The Program has several key features.
  • It affords contractors a means of reporting certain violations of criminal law and violations of the civil False Claims Act discovered during self-policing activities
  • Provides a framework for Government verification of the matters disclosed.
  • Provide an additional means for a coordinated evaluation of administrative, civil, and criminal actions appropriate to the situation

Contractors can also report suspected counterfeit parts or non-conforming parts through the submission of a contractor disclosure.

Each Agency gets to designate an organization for managing the Contractor Disclosure Program. For most agencies, the responsibility for administering the program was handed over to the departmental Office of Inspector General (OIG) which makes sense as the OIG will most likely lead the investigation into the contractor disclosures.

As we mentioned earlier, the Department of Justice just announced a settlement in a Contractor Disclosure Program case. In this case, a contractor discovered during its self-governance activities that it had (inadvertently?) billed the Government for wages and associated costs for work that was not performed. The contractor disclosed the matter, it was investigated by the OIG and the Department of Justice's Civil Division, the contractor repaid $1.8 million and the case closed.

It seems to us that this was a quick and speedy resolution to what could have been a contentious and protracted settlement process had the over-billing been discovered say, through an audit or by a whistleblower. You can read the Justice press release here.

Tuesday, March 14, 2017

Executive Order on Cutting Federal Waste - Will Offer Public Input

The President issued an Executive Order yesterday that requires every executive agency to conduct an internal review of how their funds are being wasted or abused and to recommend changes they can pursue to operate more efficiently. According to the President, "There is duplication and redundancy everywhere. Billions and billions of dollars are being wasted on activities that are not delivering results."

Sound familiar? It should. Back in 2011, President Obama issued an EO (No. 13589) to Promote Efficient Spending, citing the Administration's commitment to cutting waste in Federal Government Spending and identifying opportunities to promote efficient and effective spending. At the time, each Executive Agency was required to establish a plan for reducing the costs of travel, information technology, printing, motor vehicle fleets, and promotional items. No word on how that exercise went.

This latest audit or review is a little bit different from earlier reviews however. This will be spearheaded by the OMB (Office of Management and Budget) and will invite public input. We don't ever recall such a study that utilized public input but we're sure that there will be many. For starters, three Senators; Lankford from Oklahoma, McCain from Arizona, and Flake, also from Airizona, have published books on Government waste (see Federal Fumbles, America's Most Wasted (which doesn't refer to drug addictions), and PORKemon Go). It is unknown how and at what point in the process, public input will be solicited.

On a related note, the President's budget proposal expected this week will seek significant reductions in the Federal workforce (source) with housing, foreign assistance, environmental programs, public broadcasting, and research expected to take the most significant hits. The Energy Department cuts could impact many contractors as the department that funds research on LED light bulbs, electric trucks, advanced batteries and bio-fuels, is looking at a 30% cut.

Hang on. This could be Mr. Toad's Wild Ride.

Monday, March 13, 2017

Oh My, Whistleblower Gets $10 Million from a $45 Million False Claims Settlement

A Government contractor has agreed to pay $45 million to resolve allegations under the False Claims Act (FCA) that it misled the government concerning discounts given to its commercial customers.

You can read the Justice Department press release here.

This case involves a GSA's Multiple Award Schedule (MAS) contract. As most readers know and at least intuitively understand, negotiated prices under MAS contracts must give the Government most favored customer status at the time of award and throughout the life of the contract. MAS contracts contain provisions that require contractors to adjust their prices whenever prices to commercial customers for comparable items or services are improved.

In this case, CA Inc. did not fully and accurately disclose its discounting practices to GSA contracting officers. Specifically, CA provided false information about the discounts it gave commercial customers for its software licenses and maintenance services at the time contracts were negotiated in 2002, 2007, and 2009. CA also violated the price reduction clause by not providing Government customers with additional discounts when commercial discounts improved.

The False Claims Act (FCA) provides liability for any person who knowingly presents, or causes to be presented, a false or fraudulent claim for payment or approval, knowingly makes or uses a false record or statement material to a false or fraudulent claim or knowingly makes a false record or statement material to an obligation to pay or transmit money to the Government, or knowingly conceals an obligation to pay.

This was a very complicated case involving false statements during contract renewal, false statements during contract performance and failure to comply with the price reduction monitoring clause. For example, CA requested modifications to the contract multiple times during the contract period and expressly represented to the Government that its commercial discounting and pricing policies were the same as had been described in CA's original proposal. However, it turned out that these representations were knowingly inaccurate and incomplete. While CA represented its CEU  (commercial end user) customers received average discounts of 50 percent, the whistleblower and ensuring investigation found that average CEU discounts were 64 percent.

The allegations against CA were first made in a whistleblower lawsuit filed under the False Claims Act by a former employee. Under the False Claims Act, private individuals can sue on behalf of the Government and share in any recovery. The False Claims Act also allows the Government to intervene and take over the action, as it did in this case. The whistleblower's share of the settlement is $10.1956 million (of which the whistleblowers attorneys will receive a portion).

Friday, March 10, 2017

DCMA Reforms to Improve Their Product Offerings

DCMA (Defense Contract Management Agency) has undertaken a new initiative to improve its business capabilities. The DCMA business capability framework is "...a set of high level contract management functions that underpin the Agency's strategic plan and captures the results of the daily, multi-functional activities of  ... personnel in order to provide actionable insight to the Defense Acquisition Enterprise."

DCMA has established thirteen working groups, tasked to separate policy from procedure, with an emphasis on producing agency manuals and streamlining policies in ther respective area to make sure everyone around the Agency follows the same guidelines.

The thirteen working groups are further broken down into primary capability, integration, and enabling. The five primary capability working groups focus on administering existing or future contracts and include:

  1. Product acceptance and proper payment
  2. Indirect cost control (formerly a DCAA (Defense Contract Audit Agency) primary function)
  3. Contractor Effectiveness
  4. Negotiation intelligence
  5. Contract maintenance.
The three integrating working groups will take the information gleaned from the primary groups, analyze and repackage the data to help the Agency's other stakeholders (customers) These working groups include:
  1. Program support
  2. corporate assessment
  3. Mission assurance and industrial base vialbility assessment
The enabling working groups provide support to DCMA's workforce so that employees can do their jobs better. These five groups include:
  1. Facilities management
  2. Talent management
  3. Skills development
  4. Stewardship
  5. Information technology management
  6. Planning and programming
What does this mean for contractors? Well, in theory, it should improve the contract administration process. Time will tell however whether this results in any tangible improvements or is merely more fanciful fluff like so many acquisition reform initiatives in the past.

Thursday, March 9, 2017

Are Company Christmas Parties Considered Employee Morale or Entertainment?

A recent DCAA (Defense Contract Audit Agency) incurred cost audit report questioned the cost of a company "Holiday/Christmas Party" on the basis that the cost was unallowable entertainment pursuant to FAR 31.205-14. The contractor countered that the costs were allowable under the employee morale cost principal at FAR 31.205-13.

The contracting officer receiving the audit report was confused so the issue was kicked upstairs for an expert DoD opinion. The so-called experts could not or would not address the issue, kicking in back to the contracting officer and the contracting officer's legal council. They wrote:
This is a gray area where resolutions are dependent upon interpretations of highly specific facts. I recommend you collect all of the available facts related to the event and then talk with your legal folks. Only then will you be able to make a determination is this has to do with FAR 31.205-13, Employee Morale, Health, Welfare, Food Service, and Dormitory Costs and Credits, or FAR 31.205-14, Entertainment Costs.
The cost of office parties is often contentious but we would not necessarily agree that it is a gray area. The regulations are not unclear. Contract auditors often question such costs without having all of the facts. Contractors however, don't help themselves when they fail to provide the salient facts to the auditors.

The questions that need to be asked and answered are (i) what is the primary purpose of the event and (ii) are the costs reasonable?

In a BCA (Board of Contract Appeals) case that is now 30 years old, the Board disallowed costs incurred in connection with a company holiday party, concluding that the because clients were invited, the purpose of the event was primarily entertainment. The Board stated that "To be an allowable cost, it must be clearly documented that an event's purpose was to improve employee morale, that the event benefited employees and not outside participants (such as spouses or other non-government clients), and that the costs were reasonable."

Contractors planning to claim the cost of holiday parties (and other like events) must clearly document the primary purpose of the event, ensure the costs are reasonable, and also exclude the portion of costs that are unallowable under other cost principles (e.g. alcoholic beverages).

Facts and documentation will go a long way toward avoiding contract disputes.

Wednesday, March 8, 2017

Congressional Resolution to Rescind Fair Pay and Safe Workplaces Rules Passes Both Houses

Last Monday (March 6), the Senate passed a joint resolution disapproving the final rule implementing the Fair Pay and Safe Workplaces Executive Order. The House initiated the joint resolution and passed it in February. From what we've been able to discern from reading online sources, the President is expected to sign it into law.

The resolution reads:
Resolved by the Senate and House of Representatives of the United States of America in Congress assembled, That Congress disapproves the rule submitted by the Department of Defense, the General Services Administration, and the National Aeronautics and Space Administration relating to the Federal Acquisition Regulations (published at 81 Fed. Reg. 58562 (August 25, 2016)), and such rule shall have no force or effect.
The Fair Pay and Safe Workplaces Executive Order and its related regulations have been controversial from the start. It requires the Government to "consider" a contractor's (or prospective contractor's) history of actual and alleged labor violations when awarding contracts. It has become known as the blackballing regulation.

Just before it was to go into effect, a Texas judge enjoined the Government from implementing the portion of the new rules relating to the reporting and disclosure requirement s regarding labor law violations, but not other aspects of the regulations.

Presumably, this resolution applies to the entirety of EO and regulations including the provisions relating to the paycheck transparency (see FAR 52.222-60), based on the same EO and part of the same regulation addressed in the Congressional resolution.

Tuesday, March 7, 2017

Senate Doesn't Like 60 Day Suspension of New Regulations

Three United States Senators (Wyden, McCaskill, and Markey) published a letter they wrote to the Secretary of Energy (Rick Perry) concerning whistleblower protections for employees of DOE (Department of Energy) contractors.

On January 31, 2017, DOE published a notice that it was issuing a stay on implementation of final rules allowing DOE to hold contractors accountable for retaliation against whistleblowers who reported nuclear safety violations. The Senators requested DOE to immediately reinstate these rules which, according to them, have clear impacts on public safety and national security.

DOE published final regulations establishing that retaliation against whistleblowers for raising nuclear safety concerns was a nuclear safety violation on December 27, 2016. These new rules allowing DOE to assess civil penalties against certain contractors and subcontractors for violations of the prohibition against retaliating against an employee who reports violations of law, mismanagement, waste, abuse, or dangerous/unsafe workplace conditions, among other protected activities, concerning nuclear safety we to become effective on January 26, 2017.

These new rules however were halted (or temporarily suspended) by the new administration who established a new process for managing the Federal regulatory process. The temporary stay is 60 days.

The Senators didn't like the action. In their letter, they wrote:
Whistleblowers at DOE have exposed substantial waste, fraud and abuse, as well as prevented serious safety violations across the DOE complex. That DOE contractors have retaliated against these whistleblowers is well documented. What's missing is DOE's willingness to do something to reverse the culture of retaliation among its contractors and to demand accountability. After failing for years to close a regulatory chasm that prevented the DOE from fully using its nuclear safety authority to protect whistleblowers, including the use of civil penalties, DOE finally di so in December, only to then suspend them a month later. We request that you immediately lift this suspension and reinstate these rules.
Good grief, its only a 60 day suspension. Do the Senators really think that contractors will use this 60 day stay to retaliate against whistleblowers?

Monday, March 6, 2017

$6 Million Fraud Case Related to Humvee Production

The U.S. Army Tank-Automotive and Armaments Command (TACOM) is the organization responsible for buying Humvees (High Mobility Multipurpose Wheeled Vehicles). A company named "Ibis Tek" had a subcontract to produce Vehicle Emergency Escape Window (VEE Window) kits for the Humvees.

A couple of brothers who ran the subcontractor, Ibis Tek, are now in a lot of trouble with the Army (and the Justice Department). It has been alleged that the brothers set up another company, Alloy America to purchase window frames from China for $20 each and sell them to Ibis Tek for $70 each. That's a nice little markup for doing nothing more than pass-through. However, the nature of the subcontract made such markups inappropriate. Inter-company transfers were to have been made at cost.

In addition to inflating the cost of purchased parts, Ibis Tek sold scrap aluminum collected in the manufacturing process but failed to credit that money back to TACOM, according to the terms of the subcontract (see FAR 31.205-26 (b)(1) - the contractor shall adjust the costs of material for income and other credits, including available trade discounts, refunds, rebates, allowances, and cash discounts, and credits for scrap, salvage, and material returned to vendors and credit such income and other credits either directly to the cost of the material or allocate such income and other credits as a credit to indirect costs).

Between the inflated cost of the window frames from China and the sale of scrap aluminum, Ibis Tek overcharged TACOM by more than $6,000,000. That, according to the Justice Department, constitutes a "Major Fraud Against the United States" (see 18 USC 1031) and carries significantly higher penalties.

But that's not all. There was a Government civilian employee who accepted more than $1,000,000 of illegal gratuities from the brothers. This Deputy Project Manager is not only in trouble for accepting the gratuities (bribes) but also for failing to report the million dollars as taxable income on his tax returns.

The defendants in this case are expected to enter guilty pleas.

The Justice Department press release does not explain how the fraud was uncovered. There are a number of possibilities but most likely, a whistleblower came forward to spark the Government's interest.

Friday, March 3, 2017

New Standards of Conduct Manual

The Department of Defense, Standards of Conduct Office recently issued an updated version of its Encyclopedia of Ethical Failure. This 176 page book - available free in PDF format - contains a huge selection of cases of ethical failures. The purpose of the book is to provide DoD personnel with real examples of Federal employees who have intentionally or unwittingly violated the standards of conduct. Since Government contractors are also required to implement standards for ethical conduct, which, in many cases mirror those applicable to Government employees, this book will be useful as a training tool for contractors.

These case studies include descriptions of multiple jail and probation sentences, fines, employment terminations and other sanctions that were taken as a result of ethical failures. Violations of some ethical standards involve criminal statutes.

The book is organized according to offense. Some of the offenses categories include:
  • Abuse of position
  • Bribery
  • Conflicts of interest
  • Credit card abuse
  • Endorsements
  • Financial disclosure violations
  • Fraud
  • gambling and other contest violations
  • Gift violations
  • Misuse of Government resources and personnel 
  • Political activity violations
  • Post-employment violations
  • Time and attendance violations
  • Travel violations
Did you know that running a fantasy football league in the workplace or on Government computers was an ethical violation for Government employees? What about your workplace? Do your standards of conduct cover gambling?

What kind of standards do you have for employees who have side businesses? What prohibitions are in place to prevent such employees from using subordinates to "help" out?

What procedures are in place to discourage employees from abusing time and attendance reporting? Abuses in time and attendance reporting often result in increased costs on Government contracts. One employee had to pay back $10 thousand for falsifying time worked.

Contractors are encouraged to use this handbook to augment required training on ethical conduct.

Thursday, March 2, 2017

Bills Introduced to Bolster U.S. Manufacturing and Employment

Congressman Ryan (Ohio) introduced two new bills last month aimed at bolstering U.S. manufacturing and employment.

He calls the first of these the "Retain Act" which modifies the U.S. Code for civilian and defense contracts by adding a preference for contractors that promise to retain jobs in the United States. To be eligible for the preference, an applicant for a federal contract must submit a certification that confirms the contractor and its subcontractors will not relocate jobs from the United States to foreign countries during the period of performance of the contract and will use products substantial manufactured in the United States and services provided in the United States under the contract.

It seems to us like this addresses a problem that doesn't exist. If every bidder promises to retain jobs in the U.S., everyone gets the preference and then there is no preference.

The second bill is called the "Investing in America's Small Manufactures Act". This Act increases access to credit for small manufacturers through the Small Business Administration's (SBA's) loan guarantee program. This legislation increases affordable loans to manufacturers, incentivizes manufacturers to grow operations, eliminates the startup penalty, expands education assistance to small manufactures, and consolidates loan guarantee programs.

There is a companion bill in the Senate for the Investing in America Act.

Wednesday, March 1, 2017

Navy Erred but Error Had No Impact on Solicitation

The U.S. Navy needed 270 gas stoves for base housing in Italy. Using FAR Part 12, Acquisition of Commercial Items, the Navy specified on a brand name or equal basis a model manufactured by Glem Gas and listed as salient characteristics a depth of 60 centimeters and internal volume of 95 liters. To be considered for award, offerors of equal products must include sufficient information to show that the offered items meet the salient characteristics listed in the solicitation. Award was to be made to the lowest-priced, technically acceptable basis.

The Navy received four quotations, all of which were technically acceptable. Gaeta, which submitted the lowest-priced quotation, offered an alternative stove that had a depth of 50 centimeters and an oven capacity of 92 liters. The Navy awarded the contract to Gaeta so Glen Gas who offered the lowest price for the Glen Gas stove, protested the award on the basis that Gaeta's proposed did not meet the solicitation's salient characteristics.Glen Gas argued that the Navy should have rejected Gaeta's quotation as technically unacceptable, because it failed to meet the dimensions and oven capacity specified in the solicitation for a non-brand name product.

The Navy acknowledged that Gaeta's product offered alternate depth and capacity but maintained that the deviations were minor and therefore inconsequential. The Navy stated that these "Insignificant differences would not impact the stove's performance capabilities - the two stoves would do the same job in a like manner with the same results." The Navy contended that since the stoves are functionally interchangeable and will perform identically, waiver of the two specifications was appropriate. The Comptroller General ruled the Navy was incorrect but its actions provided no basis to sustain Glem Gas' protest.

An agency can waive compliance with a material solicitation requirement in awarding a contract only if the award will meet the agency's actual needs without prejudice to other offerors. Competitive prejudice from such a waiver exists only where the requirement was not similarly waived for the protester, or where the protester would be able to alter its quotation to its competitive advantage if given the opportunity to respond to the relaxed term. The pertinent question here is whether Goem Gas would have submitted a different offer that would have had a reasonable possibility of being selected for award had it known that the requirement would be waived.

Although the Comptroller General agreed with Glem Gas that the Navy improperly waived the solicitation's salient characteristics, the CG also agreed with the Navy that the protester had not shown that it was prejudiced by the waiver. Glem Gas did not allege that it would nave quoted a lower price for its brand name model, or that it would have offered another similar product, if it had known that the Navy would waive the solicitations salient characteristics. Thus, the CG had no basis to sustain Glem Gas' protest.