Wednesday, May 31, 2017

Pre-award Requirement or Contract Administration Matter

In 2016, the U.S. Marshals Service (USMS) issued a solicitation for towing, storage, maintenance, and disposal services for seized and forfeited vehicles. Contract award was contingent on a responsible offeror submitting an offer that conformed in all aspects to the solicitation requirements and also determined to be most advantageous to the Government, price and other factors considered. The solicitation also included a statement of work that required the winning bidder to provide evidence that it has complied with all laws and ordinances associated with vehicle storage.

Ultimately, the USMS received four proposals including ones from Flynn Jensen and Vintage Autoworks. After evaluating the proposals, the USMS awarded the contract to Vintage. Flynn filed a bid protest with the United States Court of Federal Claims stating stating that Vintage was in noncompliance with the solicitation's requirements because the subcontractor where Vintage proposed to store the vehicles was not zoned for storage nor was it licensed to hold public auctions.

The USMS argued that its decision to award the contract to Flynn was supported by the administrative record because the solicitation did not require offerors to submit permit or license information as part of their proposals. Agencies are required to evaluate proposals using only stated evaluation criteria so it would have been a violation of the law for the contracting officer to deem Flynn as not responsible based on unstated evaluation criteria regarding licenses and permits.

Although the statement of work requires the contractor to provide evidence that it has complied with all laws and ordinances associated with vehicle storage, nothing therein supports the argument that this was a pre-award requirement.

Therefore, whether Flynn obtained the required permits is a matter of contract administration that exceeds the bid protest jurisdiction. Once a contract has been awarded, the administration of the existing contract is within the discretion of the agency and disputes are resolved under the contract disputes clause and the Contract Disputes Act.

The Federal Court of Claims ruled that Vintage has not met its burden to identify record evidence showing error in the contracting officer's responsibility determination and therefore was not entitled to injunctive relief.

Although this bid protest was filed with the Federal Court of Claims, the GAO (Government Accountability Office) has rendered similar decisions - if something is not specifically listed as one of the evaluation criteria, it cannot be used to evaluate offers.

Tuesday, May 30, 2017

Travel Cost Principle Too Difficult to Implement - Here's Your Chance to Propose Changes

Back in February, the President signed an Executive Order (EO) entitled "Enforcing Regulatory Reform Agenda" which established a policy to alleviate unnecessary regulatory burdens on the American people. Included in that EO was a requirement for Federal agencies to establish Regulatory Reform Tax Forces to, among other things, evaluate existing regulations and make recommendations to the agency head regarding their repeal, replacement, or modification.

In this regard, agencies are to identify regulations that

  • eliminate jobs, or inhibit job creation
  • are outdated, unnecessary, or ineffective
  • impose costs that exceed benefits
  • create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies
  • rely on data, information, or methods that are not publicly available
  • derive from or implement EOs or other presidential directives that have been subsequently rescinded or substantially modified.
GSA (General Services Administration) is the first (that we're aware of) to take a swipe at complying with this EO and they are taking on a big project - the Federal Travel Regulations (FTRs). Now the FTRs apply primarily to Federal civilian and military employees. However sections of the FTRs have been incorporated into the Federal Acquisition Regulations (FAR). Those sections include:
  1. maximum per diem rates
  2. the definitions of lodging, meals, and incidental expenses, and
  3. the regulatory coverage dealing with special or unusual situations.
Throughout our experiences, we have noted that many Government contractors have found it burdensome to implement these regulations, particularly the maximum per diem rates. Its not that the concept is problematic but it adds extra steps to the travel reimbursement process. Often, small companies (and sole proprietors in particular) do not collect their travel costs on a voucher or expense form. Air fare gets charged to one account, car rental to another, hotel fees to a third, meals to even another. When it comes time to assemble, say, an annual incurred cost proposal, those contractors find it burdensome to collect and ensure that the sum does not exceed the maximum per diem rates listed in the FTRs. Often times, those business people spend a lot more than the maximum per diem rates, unaware that there are ceilings. Of course, there's the special or unusual situation exemption that allows for higher than maximum per diem but those exceptions must be approved in advance of the travel (usually).

The GSA is giving Government contractors a chance to weigh in on these regulations. Perhaps the implementation costs exceed the benefits. Perhaps some contractors will have data to show just that.

If you want to provide input to this project, follow the instructions published today in the Federal Register.

Friday, May 26, 2017

Proposal Submitted 23 Seconds Late is Rejected

The Navy issued an RFP to small business holders of the SeaPort-e multiple award indefinite-delivery/indefinite-quantity (ID/IQ contract. The RFP required the electronic submission of proposals via the SeaPort-e portal by 2:009 p.m. (Eastern Time). Under the SeaPort-e contract, an offeror's representative is required to confirm his or her intention to engage in a legally binding electronic action. In this regard,when a user intends to take an action that is legally binding, the portal displays a notice and requires the user to confirm the request before the system will complete the request. Once a legally binding proposal is submitted, the system stores a locked copy of the information which cannot be altered or modified in any way.

By the 2:00 p.m. closing time, three final proposals were submitted through the portal but Tele-Consultants, Inc's (TCI's) proposal was not among the three. Instead, TCI's proposal remained in the draft proposal section of the portal. TCI did not engage the "Submit Signed Proposal" button before the closing time. TCI panicked and hit the Submit Signed Proposal" button twice, once at 23 seconds after 2:00 p.m. and the other at 34 seconds after 2:00 p.m. When that didn't work, TCI phoned and emailed the Navy claiming that the portal was malfunctioning. The contracting officer sent an inquiry to the system administrator who reported no malfunctions. The contracting officer then notified TCI that its draft proposal will not be considered.

TCI challenged the rejection. TCI asserted that its proposal was timely submitted and even if late, should have been viewed as subject to the "government control" exception of FAR 15.208. The Navy responded that because TCI never engaged the "Submit Signed Proposal" button, TCI did not submit a signed final proposal, either prior to the deadline or thereafter. The Navy explained that it is only when an offeror engages the "Submit Signed Proposal" button that a proposal is uploaded to the Government side of the portal and becomes a signed legally binding submission. As a result, TCI's proposal was not "received" at the time of closing.

TCI challenged the significance of engaging the "Submit Signed Proposal" button, arguing that its failure to engage the button was irrelevant because, at the time of closing, its proposal was uploaded to the correct Government location and thereby in the Government's control.

The GAO (Comptroller General) disagreed and denied the protest. The GAO noted that TCI "never actually submitted its proposal. There were no technical issues preventing TCI from submitting its proposal prior to the closing time. TCI filed to "hit the submit button" prior to closing - an action necessary to legally bind the offeror and to submit the proposal.

Thursday, May 25, 2017

Why Can't Contractors Perform Their Own Incurred Cost Audits?

There has been a lot of discussion lately about the state of incurred cost audits and more specifically, DCAA's (Defense Contract Audit Agency) ability to complete them in a timely manner. DCAA for its part, is subject to the unpredictability of Federal budgets, hiring freezes, and attracting qualified workers. In recent Congressional testimony, the DCAA Director worried that recent gains in reducing the backlog of incurred cost audits could evaporate because of hiring freeze imposed on them by the current administration. Recently we've been discussing proposed legislation that would require the Department of Defense to outsource at least 25 percent of incurred cost audits.

But is there another way of getting these audits completed in a timely manner? Perhaps there is. What if contractors were contractually required to perform their own incurred cost audits? Now that sounds like an idea fraught with problems, like letting the fox guard the hen house, right? But wait. The Department of Energy is requiring just that on a cost-type contract worth $900 million per year.

Since 1965, Battelle Memorial Institute (Battelle) has operated the Pacific Northwest National Laboratory under contract with the Department of Energy. This lab performs research and innovations in the areas of environmental protection and clean up, energy resources, and national security.

Battelle is required by it contract to "audit" costs expended under the contract to ensure that only allowable costs are claimed - costs that are reasonable, allocable, and allowable in accordance with the terms of the contract, applicable cost principles, laws, and regulations. To accomplish this, Battelle is required to have an internal audit function. The contract requires the following.
The contractor agrees to design and maintain an internal audit plan and an internal audit organization. The contractor must submit to the contracting officer for approval an internal audit implementation design to include the overall strategy for internal audits. The audit implementation design must describe ... the overall internal audit strategy of this contract, considering particularly the method of auditing costs incurred in the performance of the contract.
Is it working? It seems to be working just fine. The Department of Energy's Office of Inspector General (OIG) recently completed an audit to determine whether Battelle's internal auditors were doing an adequate job of assessing the propriety of incurred costs claimed under the contract. The OIG concluded the following:
Based on our assessment, nothing came to our attention to indicate that the allowable cost related audit work performed by Battelle's Internal Audit ... could not be relied upon. We did not identify any material internal control weaknesses with cost allowability audits, which generally met the Institute of Internal Auditors International Standards for the Professional Practice of Internal Auditing (IIA Standards). During its FYs 2013 and 2014 audits of cost allowability, Internal Audit identified $375,983 in questioned costs, all of which had been resolved.
The IIA Standards referred to above are very similar to GAGAS standards.

So there you have it. Battelle's internal auditors reviewed incurred costs. DOE's IG reviewed what the internal auditors had done and found that the Department could rely on their work as a basis for accepting incurred costs. Its too bad that DCAA and DoD's OIG cannot engage in the same level of cooperative audit strategy.

We do not know how the cost of Battelle's internal audit of incurred cost compares to outsourcing or or reimbursing another Agency's contract auditors (e.g. DCAA) to audit incurred costs. Battelle's internal audit department is certainly not free to the Government - its costs are included in the $900 million per year that is reimbursed by the DOE.

Wednesday, May 24, 2017

Defense Acquisition Streamlining and Transparency Act - Part 3

Last Friday and Monday, we discussed certain aspects of the proposed Defense Acquisition Streamlining and Transparency Act that seek to speed up the acquisition process by streamlining auditing processes that are "time consuming and low value" so that Government contract audit organizations such as DCAA (Defense Contract Audit Agency) will begin competing head to head with commercial organizations to perform incurred cost audits. If you missed those postings, you can go back and read Part 1 and Part 2.

Today we want to focus on another key provision of the proposed legislation - streamlining the way the Government buys goods. The Government is statutorily required to conduct market research, competition, and price comparisons prior to purchasing products. The resultant processes however are onerous and time consuming. Even for simple products, market research often entails issuing requests for information, while contracting and price comparisons can involve detailed requirements development and evaluation of in-depth proposals.

The proposed legislation would require the Department of Defense to buy commercial-off-the-shelf-items through the same marketplaces that businesses use to acquire goods; places such as or office depot or uLine. Marketplaces would be limited to those that are commonly used in the private sector; provide a dynamic selection of products and prices from numerous suppliers; and provide procurement oversight controls such as two-person approval for purchases.

The House Armed Services Committee (HASC) and its chairman, Mac Thornberry believe that this commercial proposal would allow off-the-shelf items to "radically" reduce costs and lower time to acquire commercial products.

There are a number of cautions introduced by the new legislation. For example, the marketplace cannot feature or prioritize a product of a supplier based on any compensation or fee paid to the online marketplace by the supplier that is exclusively for such featuring or prioritization on the on-line marketplace. Also, suppliers will need to be screened to ensure that they have not been suspended or debarred.

You can read the entire bill here. As we stated earlier, the intent of the HASC is to roll these provisions into the fiscal year 2018 NDAA (National Defense Authorization Act) so its got a long way to go before it becomes law, if it even survives. So far however, we have not heard any significant objections to this bill.

Tuesday, May 23, 2017

Proposal Gets Snagged in Email System - Received Late - Tossed

The Army issued a solicitation for emergency medical services at Tobyhanna Army Depot in Pennsylvania. The RFP (Request For Proposal) specified that proposals were due by 4:00 p.m.
One of the bidders made four tries at submitting its proposal electronically; 2:43 p.m., 2:57 p.m., 3:01 p.m, and 3:06 p.m. The Government servers however logged receipt of those three tries at 6:00 p.m., 6:05 p.m., 6:06 p.m., and 6:09 p.m. Since they were received by the Government after 4:00 p.m., the bidder, Western Star, was eliminated from the bidding.

Western Star filed a challenge to its exclusion with the Comptroller General. Western Start asserted that it submitted a timely bid package but that the Army's email system was not reasonably configured to accept it until several hours after the deadline. Further, Western Star asserted that the Army should have known of potential flaws in its email receiving system and should have used cautionary language in the solicitation for bidders to confirm receipt.

The Army looked into the matter and found that it was Western Star's email providers that delayed the email prior to receipt at the initial point of entry into the Army's infrastructure. The Army argued that it was not at fault as it has no control over commercial providers.

The Comptroller General was not at all sympathetic to Western Star's argument. The Comptroller General stated that it is an offeror's responsibility to deliver its proposal to the proper place at the proper time. Proposals that are not received in the designated government office after the exact time specified are late and generally may not be considered. "While the rule may seem harsh, it alleviates confusion, ensures equal treatment of all offerors, and prevents one offeror from obtaining a competitive advantage that may accrue where an offeror is permitted to submit a proposal later than the deadline set for all competitors".

FAR 52.212 cautions offerors, when transmitting proposals electronically, to do so well in advance of the cutoff date to avoid the situation that Western Star faced. That same FAR provision recognizes that Government email systems are not always flawless so it provides that proposals "received at the initial point of entry to the Government infrastructure" no later than 5:00 p.m. one working day before proposals were due, even if received by the designated Government office after the deadline, would be considered timely. That wasn't the case with Western Star.

There are obvious lessons to be learned in this case. The first one is don't wait until the last minute to submit your proposal. If the solicitation is important for your company's success, hand carry the proposal, if necessary. Second, no matter when you submit you proposal, follow up with the designated Government office to confirm they received your proposal. All it takes is a phone call. Thirdly, if you're late, don't waste your time on an appeal. The Government's actions must be extremely egregious for "late submission" appeals to be successful.

You can read the entire decision here.

Monday, May 22, 2017

Defense Acquisition Streamlining and Transparency Act - Part 2

Last Friday, we brought you a provision of the Defense Acquisition Streamlining and Transparency Act that will require the Department of Defense to outsource at least 25 percent of the incurred costs audits to QPA (Qualified Private Auditors). This is going to put DCAA in a head-to-head competition with commercial auditors and it will be interesting to see how it all shakes out.

There are a couple of other provisions in the proposed legislation that impacts DCAA that we want to summarize.

Transparency in Audit Savings. The methodologies used by DCAA to calculate cost savings resulting from their audits and ROI (Return on Investment) are often suspect; primarily because they are self-serving, DCAA does not share the information, and there is no transparency or accountability. Last year the Agency claimed to have saved $3.6 billion for the taxpayers or $5.70 for every dollar the Agency spent. Yet those savings are based on a fair amount of judgment on the Agency's part but often accepted as fact.

The proposed Defense Acquisition Streamlining and Transparency Act would attempt to provide more transparency behind DCAA's numbers. The proposed legislation would revise reporting requirements of the Defense Contract Audit Agency (DCAA) to provide more clarity on the cost effectiveness of different types of audits. It would require DCAA to report separately for incurred cost, forward pricing, and other audits with regard to the number and dollar value of audits completed and pending, sustained questioned costs, and the costs of performing audits.

It strikes us as odd that an audit organization needs to justify its existence based on cost savings achieved or how many dollars were returned to the Treasury for each dollar expended. We know of no commercial audit firm that emulates such a practice. Can you imagine KPMG or any other national CPA firm advertising "Hire Us Because We Give the Highest ROI".

Peer Reviews by Commercial Auditor. One provisions of this proposed acquisition and streamlining act is a requirement that DCAA be peer reviewed by a commercial audit firm. Specifically, the Act provides that DCAA may issue unqualified audit findings for an incurred cost audit only if it is peer reviewed by a commercial auditor and passes such peer review. This might actually be good news for DCAA whose peer reviews are now conducted by the DoD Office of Inspector General (OIG) a program, we suspect, that is beset by political considerations rather than by objective criteria and objective reviewers. There is absolutely no question that DCAA audits are extremely detailed but does the Government require that level of detail? If you were going from home to work for the very first time, you might want to enter the destination into your GPS. But would you need to do so on the second day, the 10th day, the 30th day? At some point, someone's going to think you're dumber than a brick if you need to consult your GPS every time you go to work. Yet auditors are expected to drag out the same old audit program when they've done it a hundred times before. And, if they don't, the Agency gets written up for failing to comply with Generally Accepted Government Auditing Standards (GAGAS).

Friday, May 19, 2017

Defense Acquisition Streamlining and Transparency Act - Commercializing Contract Audits

On May 18th, 2017, Chairman Thornberry of the House Armed Services Committee (HASC) introduced The Defense Acquisition Streamlining and Transparency Act, a bill to (i) empower the Defense Department to use "e-commerce" to purchase commercial off-the-shelf items, (ii) reform the defense contract audit process and (iii) a number of other provisions. For purposes of this article, we want to focus on how the bill intends to reform the contract audit process. According to Thornberry,
Right now, the Defense Contract Audit Agency's audits of incurred costs are slow, time-consuming, and often generate little value to the taxpayer. In 2016, it took an average of 855 days to close out an incurred cost audit and these audits account for only a small amount of DCAA's reported savings to the government. In this proposal, materiality standards for incurred cost audits would be raised to avoid spending time and resources on low-value auditing. Acquisition officials would be able to choose either the Defense Contract Audit Agency or a qualified private auditor to conduct incurred cost audits, which would be required to be completed within one year.
You can read the entire 80 page bill, which will eventually be folded into the 2018 NDAA (National Defense Authorization Act) by clicking here.

The crux of the proposed legislation is that by the year 2020, twenty-five percent of all incurred cost audits now performed by DCAA (Defense Contract Audit Agency) must be performed by commercial auditors. To accomplish this, DCMA (Defense Contract Management Agency) will enter into an ID/IQ (Indefinite Delivery/Indefinite Quantity) contract with two or more private CPA firms (called "Qualified Private Auditors" or QPA in the legislation). Then, DCMA can choose either DCAA or a QPA to audit incurred costs of a particular contractor. The legislation would also prohibit DCAA from further auditing or reviewing audits performed by QPAs.

One oft-heard criticisms of DCAA is that auditors frequently get bogged down by minutiae - spending a lot of hours on costs that are immaterial and have no significant impact on Government spending. The proposed legislation specifies a materiality standard for incurred cost audits based on private sector norms for both DCAA and QPAs. It is not clear to us how the minimum materiality standards specified in the proposed legislation is supposed to work; whether they represent reporting standards or risk assessment thresholds. We'll have to wait for additional clarification on this.

Finally, the proposed legislation requires that incurred cost audits be completed within one year of receipt of an adequate incurred cost submission. If not, the submission will be accepted in their entirety without any form of audit. That's not much different than what DCAA does right now - administratively closing out low-risk contractors without audit.

Lest you think that commercializing the contract audit process represents undue risk to the taxpayer, consider that other non-Defense agencies - notably the Department of Energy - have been successfully using private CPA firms to perform contract audits for several years and have had no problems relying on the results of their audits. The HASC (House Armed Services Committee) noted that commercial auditors used by other Federal agencies cost less and are completed sooner. Well, there is no doubt that commercial auditors complete their incurred cost audits sooner but its not a given that it cost less.

Thursday, May 18, 2017

Who's Gonna Fill Their Shoes *

The Federal Government has established statutory goals for ensuring that small businesses get their fair share of Government contracts. For example, 23 percent of prime contracts must go to small businesses. Three percent of prime and subcontracts must go to service-disable veteran-owned small businesses. Given the size of Government procurement, that represents a lot of money.

The U.S. Small Business Administration, Office of Advocacy issued a report last month based on data from the U.S. Census Bureau's Survey of Business Owners. The SBA reported that there are 2.5 million businesses were majority owned by veterans but only 442 thousand of them had employees. The other 2.1 million were non-employers. 99.9 percent of the businesses were "small businesses. 7.3 percent of veteran owners had service-connected disabilities.

Veteran business owners are much older than business owners in general. In 2012, 74 percent of veteran business owners were age 55 and over. This is much higher than the national average of 41 percent. But here's the problem as we see it. There are not enough veterans or service-disabled veterans in the pipeline to take over when the current generation  retires.

More than half of all veterans are age 65 and older. 70 percent are 55 and older. Compare that with non-veterans where only 27 percent of the populations is 55 and older. Only 15 percent of veterans are in the age group of 25 - 45 when they are most likely to be starting businesses. This disparity is largely due to the "Viet Nam" bubble but its this View Nam bubble that is running businesses right now.

Many prime contractors are having difficulty meeting their small-business subcontracting goals including the three percent that goes to service-disabled veteran-owned small businesses. This problem will become even more chronic as the numbers of such businesses decline. Perhaps Congress will need to reduce the targets.

In the meantime, there are and will be great business opportunities out there for veteran-owned small business enterprises, especially those owned by service-disabled veterans (SDVOSBs).

* With apologies to George Jones

Wednesday, May 17, 2017

Improper Payment Acts - DoD's Implementation

Last week we discussed GSA's (General Services Administration) progress toward compliance with the Improper Payments Acts citing a report by the Agency's Office of Inspector General that identified deficiencies in reporting and evaluating improper payments (see Improper Payment Acts - Government Efforts to Reduce Improper Payments). The Acts require federal agencies to review their programs and identify those that are susceptible to significant improper payments.

The Department of Defense Office of Inspector General (DoD-IG) recently issued their report on DoD's compliance with the Improper Payment Acts (see The DoD Did Not Comply With the Improper Payment Elimination and Recovery Act in FY 2016). As the report title implies, the DoD-IG found significant room for improvement in DoD's compliance with the statutory requirements of the Acts.

The DoD identified 10 programs that are at high risk for improper payments. Among the 10 are four at-risk areas affecting payments to contractors. These are,

  1. Defense Finance and Accounting Service (DFAS) Commercial Pay - This is where most DoD contractors send their public vouchers and progress payments.
  2. U.S. Army Corps of Engineers Commercial Pay
  3. Navy Enterprise Resource Planning Commercial Pay
  4. Navy Commercial Bill Pay - Naples

DoD organizations are required to implement comprehensive systems of internal controls that provides reasonable assurance that programs are operating as intended and to evaluate the effectiveness of the controls. DoD did not perform risk assessments in some cases nor did it publish estimates that were statistically valid, nor did ity publish corrective actions with planned or actual completion dates.

The DFAS Commercial Pay is one of the programs that report improper payments and the testing that was performed for this system excluded billions of dollars worth of transactions. About $3 billion was excluded because DoD inappropriately believed that since the costs were being audited by DCAA, it was of low risk.

The DoD-IG made a number of recommendations which were essentially concurred to by DoD. As a result, some defense contractors may see increased oversight by the Government in its increased efforts to reduce (or eliminate, if possible) improper payments.

Tuesday, May 16, 2017

Contractors Getting Shortchanged on Past Performance Ratings

The purpose of Performance Assessment Reports (PARs) is to provide source selection officials with information on contractor past performance. Government officials prepare PARs in CPARS (Contractor Performance Assessment Reporting System). Most Government contractors are familiar with PARs/CPARS, having had the opportunity to review and respond to performance information loaded up on Government databases.

The DoD, Office of Inspector General (IG) recently published its capstone report on DoD compliance with PAR regulations. Over a number of years, it reviewed 238 PARs prepared by Army, Navy, Air Force and Defense organizations. While the IG found that officials generally registered (or had valid reasons for not registering) contracts and prepared corresponding PARs, they did not consistently comply with preparation requirements. Besides the fact that a third of them were prepared an average of 73 days late, 200 of the 238 PARS were deficient in terms of complying with FAR regulations and the CPARS Guide. Specifically, DoD officials did not:

  • prepare written narratives sufficient to justify the ratings given
  • rate required evaluation factors, and
  • prepare sufficient contract effort descriptions.

The IG found reasons for these deficiencies. They included

  • assessors were not adequately trained and organizations lacked effective procedures for timeliness and reviews of the PARs (there it is, the "more training" recommendation - you see this in every IG report)
  • there was a lack of internal controls within CPARS - no system requirement to write a narrative and insufficient explanations for the different ratings,
  • the CPARS guide did not contain sufficient information related to the utilization of small business.

Now the big "so what". Why should contractor's care about these deficiencies? Well, without access to timely, accurate, and complete past performance assessment information, contracting officers will not have past performance information needed to make informed decisions related to contract awards. This could work against contractors whose good work on prior contracts are not considered in the selection process. We would also suggest that it could work against the Government as well if past poor performance was not documented.

As recommendations, the IG recommended more guidance, more training, and enhancements to CPARS that will require written narrative along with other information.

You can read the entire IG report here.

Monday, May 15, 2017

Paid Administrative Leave - Allowable, or Not?

The Government pays employees for administrative leave for a lot of reasons; specific Government-wide examples include emergency dismissals, civilians returning from active military duty, voting, or the death of a president. Beyond that, agencies can use administrative leave when such leave is directly related to the agency's mission to enhance the development or skills of the employee, or be as brief as possible and in the interest of the agency. Some past examples have included the Employee Assistance Program, blood donations or agency-approved volunteering (though one wonders if the employee is being paid, is that truly volunteering). Some employees have been placed on administrative leave pending the outcome of an investigation or pending a physical examination. According to OPM (Office of Personnel Management), the Government's HR (Human Resources) Department, administrative leave should never be used for an extended or indefinite period of time or used on a recurring basis.

So what about Government contractors and their use of paid administrative leave? What does FAR (Federal Acquisition Regulations) say about paid administrative leave?

The second of these two questions is easy. FAR is silent on the matter. There is nothing in FAR 31.205-6 (Compensation) or any other cost principle that addresses the subject of paid administrative leave. Paid administrative leave would probably fall under the general category of fringe benefits so that would make such costs allowable as long as they are reasonable.

Contractors should expect to provide some rationale and circumstance for uses of paid administrative leave. If there is a valid reason and it is what a "prudent person in the conduct of competitive business" would normally expect to occur, there there should be no reason for the Government to come along and try to disallow the costs.

If however, the use of paid administrative leave was for some disciplinary action associated with improper conduct by an employee, the allowability would probably be contingent upon the outcome. The costs might initially be charged to the Government pending an investigation, adjudication and final decision. The costs might then become unallowable if the contractor were "at fault" once the situation is fully resolved.

We recommend that contractors develop written policies for the use of paid administrative leave with descriptions for how such payments will be accounted for under different scenarios. Also, if the costs become significant, consider an advance agreement with your administrative contracting office to avoid future conflicts.

Friday, May 12, 2017

Defendant Pleads Guilty in Army Contracting Bribery Case

The National Procurement Fraud Task Force (NPFTF) is comprised of representatives from the U.S. Attorney's Offices, the FBI, the Offices of Inspector Generals and various other federal law enforcement agencies. It was formed eleven years ago to help the early detection, identification, prevention, and prosecution of procurement fraud in Government programs.

Yesterday, the Task Force announced a guilty plea to bribery charges related to contracting at the Army's Communication-Electronics Command. The guilty plea was entered by Matthew Barrow, the President and owner of MJ-6, LLC.

In 2006, the U.S. Army Contracting Command at Aberdeen Proving Grounds awarded a 10 year $20 Billion contract to seven contractors to provide technology services to support the integrated engineering, business operations, and logistics needs for the Army. Two Army civilian officials, John and Danielle Kays (husband and wife) held leadership positions related to the contract.

Between 2008 and 2014, the Kays agreed to take official actions favorable to Barrow and MJ-6 in return for Barrow paying them approximately $800,000. The Kays used their official position to add MJ-6 as a subcontractor acceptable to the Army, to steer potential employees for government contractors to work for MJ-6, to approve MJ-6 employees to work on various task orders, and to approve the pay rates, status reports and travel reimbursements for MJ-6 employees. In total, the Kays steered subcontracts worth $21 million to MJ-6.

The Kays set up a front company, Transportation Logistics Services, LLC, to conceal payments from Barrow. Barrow was careful to make transfers of less than $10 thousand to avoid bank reporting requirements.

Barrow faces a maximum sentence of 15 years in prison when he is sentenced later. The Kays have been indicted and are pending trial but with Barrow's plea, their defenses just got a lot harder. Their assets have been frozen.

The DOJ press release (which can be read here) did not disclose how the fraud was uncovered. It would be beneficial to know and understand those details in order for contractors to set up their own controls for detecting and preventing procurement fraud.

Thursday, May 11, 2017

Improper Payment Acts - Government Efforts to Reduce Improper Payments

The Improper Payments Information Act of 2002, the Improper Payments Elimination and Recovery Act of 2010, and the Improper Payments Elimination and Recovery Improvement Act of 2012 are collectively referred to as the Improper Payments Acts. The purpose of these Acts is to eliminate and recover payments improperly made by federal agencies. The Acts require federal agencies to review their programs and identify those that are susceptible to significant improper payments. Many Government contractors have felt the impact of these efforts, either through the respective finance (payment) offices, contract administration, and contract auditors. Improper payments can take many forms and do not necessarily mean that anything fraudulent, wasteful, or abusive has occurred. Sometimes timing issues result in temporary improper payments because, for example, contractors have not had time to update their billings to reflect final, rather than provisional, indirect expense rates.

In fiscal year 2015, the Federal Government estimated $136 billion in improper payments - payments that under statutory, contractual, administrative, or other legally applicable requirements should not have been made or were made in an incorrect amount. Such payments are generally believed to be widespread and a significant problem in the Federal Government.

The OMB (Office of Management and Budget) issued guidance on how Agencies should (or could) eliminate improper payments. First, agencies must conduct risk assessments to identify the programs most susceptible to significant improper payments. Then, agencies must come up with corrective action plans and estimate and report improper payments for those programs annually. Most importantly however, agencies must recover funds that were inappropriately expended.

So how are agencies doing in ferreting out and recovering improper payments?

A recent report by GSA's (General Service Administration) Office of Inspector General (OIG) gives us some insight on this issue. The report concluded that GSA's Office of Chief Financial Officer (the department tasked with ensuring compliance with the Improper Payment Acts) was deficient in its reporting and evaluation of improper payments. Specifically, the OIG found:

  • GSA did not have adequate internal controls over reporting improper payments. Its fiscal year 2016 report was published with numerous errors.
  • GSA was not successful in identifying ineffective controls through its continuous monitoring of vendor payments, and
  • GSA did not sufficiently implement corrective action related programs previously identified as high risk.

The GSA experience may or may not be indicative of the Government as a whole however GSA is one of the Government's biggest spenders of taxpayer funds. It is apparent that the emphasis on eliminating improper payments will continue. Contractors can continue to expect increased levels of oversight on public vouchers, progress payments, and other forms of payments from the Government.

Wednesday, May 10, 2017

Idle Facilities/Capacity - Audit Guidance

We last wrote about idle facilities and idle capacity back in 2010. As far as the cost principle is concerned (i.e. FAR 31.205-17), nothing has changed. There are limits to how long the Government is going to pay or reimburse a contractor for idle facilities and idle capacity. At some point, those costs will become unallowable.

When DCAA (Defense Contract Audit Agency) converted its CAM (Contract Audit Manual) Chapter 7 into a stand-alone "Selected Areas of Cost Guidebook" last year, it created a chapter dealing with idle facilities and idle capacity including guidance on how contract auditors should approach potentially idle facility costs encountered at a contractor's facility.

There are two aspects to this new audit guidance that contractors should be aware of.

Directly Associated Costs.  The cost of idle facilities or idle capacity comprises more than just the cost for the facility. It also includes associated costs such as maintenance, repair, property taxes, insurance, and any other related cost incurred in retaining the facility. Therefore the auditor should consider the entire amount associated with the costs of idle facilities in determining the significance of the questioned costs.

Subleasing. Sometimes, a contractor will sublet an idle facility for a lesser amount than the actual costs incurred. In those cases, DCAA's position is that that the difference between the two amounts are unallowable. DCAA cites FAR 31.205-23 as the basis: "An excess of costs over income under any other contract is unallowable." We're not so enamored with this logic. It confuses the issue. If the costs represent idle facilities, they are unallowable period. The sublease revenue simply reduces the amount of the unallowable costs.

One additional comment, This is one area that is prime for an advance agreement under FAR 31.109. If you anticipate idle facilities, get an advance agreement with your contracting officer to prevent future disputes with contract auditors.

Tuesday, May 9, 2017

Data Collection Efforts by DCAA on Unaudited Incurred Cost Proposals

By now, everyone knows that DCAA (Defense Contract Audit Agency) has "risked away" the preponderance of contractors' annual incurred cost submissions. By "risked away" we mean that the contractor submissions have been closed without audit and the proposed rates are accepted as final by the Government. By "preponderance" we are referring to quantity, not absolute dollar amounts. Major contractors will not be "risked-away" because there are too many dollars at stake.

So, have you ever wondered what kind of information DCAA retains in its files pertaining to these incurred cost submissions that are never audited? Well, wonder no more. Here's the list:

• Contractor’s annual incurred cost proposal,
Adequacy checklist, The blank checklist is available on DCAA's public website.
• High/Low-risk determination,
• Coordination/communication with the contracting officer(s) - contracting officers sometimes advises the contract auditor of concerns that should be incorporated into audit steps,
• Communication with the contractor,
• Communication with prime contractor FAOs (Field Audit Offices), if applicable,
• Low-risk memo issued to the ACO,
• Final rate agreement letter,
• Cumulative costs worksheet, if applicable,
• ADV calculations, and
• All other related documents.

Contractors should request copies of the Adequacy Checklists and High/Low-Risk Determinations. If the local DCAA office declines to release them, they should be available under FOIA (Freedom of Information Act) procedures.

For contractors that have been places in the "High-Risk" pool, DCAA's characterization based on its High/Low-Risk Determinations worksheet is important and informative. Moreover, DCAA has been known to rely on outdated and/or inaccurate information when making the assessment. Such information should be corrected.

Monday, May 8, 2017

Proposed Legislation to Increase Small/Minority/Disadvantaged Subcontracting Goals

On May 4th, companion bills were introduced in the Senate and House that are designed to increase participation of small businesses in Government contracting. Both bills are titled the same - Assuring Contracting Equity (ACE) Act of 2017.

The Bills contain several provisions to raise the SBA (Small Business Administration) contracting goals and (supposedly) to increase transparency. These include:

  • Raising the SBA's government-wide small business contracting goal from 23 to 25 percent.
  • Increasing the contracting goal from 5 percent to 10 percent for businesses owned by veterans, women, and economically disadvantaged individuals.
  • Making the reporting requirements more transparent and prohibiting reporting practices that artificially inflate the appearance of contracting to minority-owned businesses (good luck on that effort).
  • Requiring the SBA to disclose the percentage of contracts that are awarded to small business from all federal contracting dollars.
  • Consider past subcontracting compliance in award decisions.

Raising small business, minority, and disadvantaged subcontracting goals are pretty straight-forward provisions. The reporting requirements designed to increase transparency however are bound to be controversial if for no other reason than it adds more, perhaps onerous, reporting requirements on prime contractors and upper-tier subcontractors. This runs counter to efforts of the current administration to reduce regulations that create barriers to sound business practices and cause many businesses to eschew Government work.  Also, the provisions that past subcontracting compliance can affect award decisions sounds very similar to the so-called "black-listing" provisions that were so controversial in the Fair Pay and Safe Workplaces rules that were overturned earlier this year by Congress and the President.

We have no idea how far these Democrat-sponsored bills will progress through the legislative process. If it were limited to increasing thresholds instead of laying on a lot of new reporting requirements as well, it might have a better shot.

Friday, May 5, 2017

Commercial Item Determinations - Minor or Major Modifications

The Army awarded a sole-source commercial item contract to AAR Mobility Systems for environmentally controlled shelters which can be mounted on the Army's family of medium tactical vehicle platforms. AAR had been manufacturing these shelters in various configurations for all services of the military for many years.

Gichner Systems Group, Inc. challenged the Army's determination that AAR's shelter is a commercial item. Although Gichner acknowledged that the basic shelter is a commercial item, it argued that the modifications required by the solicitation are not minor changes as provided in the FAR (Federal Acquisition Regulations) definition of a commercial item.

Gichner stated that unlike a standard, commercially available 20-foot ISO container, the Army required a shelter that is divided into three compartments and includes patented features such as integrated jacks, roller plates on the bottom of the shelter, and detent rails that lock into a military-specific material handling system.

The GAO found that the Army's judgment was reasonable.

The FAR defines a commercial item to be:
(1) Any item, other than real property, that is of a type customarily used by the general public or by non-governmental entities for purposes other than governmental purposes, and   (i) Has been sold, leased, or licensed to the general public; or   (ii) Has been offered for sale, lease, or license to the general public;* * * * *(3) Any item that would satisfy a criterion expressed in paragraphs (1) or (2) of this definition, but for--
   (i) Modifications of a type customarily available in the commercial marketplace; or   (ii) Minor modifications of a type not customarily available in the commercial marketplace made to meet Federal Government requirements. Minor modifications means modifications that do not significantly alter the nongovernmental function or essential physical characteristics of an item or component, or change the purpose of a process. . . .

According to GAO, Gichner focused on the wrong definition. Gichner focused on definition 3 above but the GAO found that AAR's shelter meets the commercial item definition based on the first paragraph. AAR's shelters are regularly used by a variety of commercial industries for transportation, storage, and housing options and therefore meets the criteria for commercial item. The record shows that the shelter was offered on its website to the general public - the only modification required would be tailoring the location of partition walls, doors, and entry panels to meet the Army's specific space requirements.

Therefore, GAO concluded that the Army reasonably determined that the shelter is a commercial item.

Thursday, May 4, 2017

Government Claim Denied When It Couldn't Prove that Money Had Been Paid

Alaska Aerospace Corporation (AAC) is a corporation fully owned by the State of Alaska. It operates a missile test facility on Kodiak Island (Alaska) that has been used by the Missile Defense Agency (MDA) and the Air Force.

Employees of Alaska Aerospace are, in all respects, employees of the State of Alaska, and as such, receive all of the fringe benefits accruing to State employees including a defined benefit pension plan.

In it's Fiscal Year 2008 incurred cost proposal, AAC included contributions to the State's defined contribution pension plan including $302,637 in pension plan contributions that were paid by the State of Alaska on AAC's behalf. DCAA questioned the amount which the contract office then demanded payment in his COFD (Contracting Officer Final Decision). The contracting officer also demanded penalty even though DCAA audit report that questioned the amount concluded that the amount was not subject to penalty.

AAC appealed to the ASBCA (Armed Services Board of Contract Appeals).

The Government quickly retracted on its penalties argument and instead argued that it was entitled to recover that amount because the government paid that amount to AAC as reimbursement of employee pension plan contributions and AAC did not incur those charges since the State of Alaska made the contributions, not AAC.

AAC countered that it did incur those charges since AAC is a corporation run by the State of Alaska. Furthermore, AAC argued that the government is not entitled to recovery as it never paid any of the claimed amount to AAC. AAC states that the employee pension plan contributions were included at the end of FY08 in AAC's Incurred Cost Proposal and were not a part of any invoices that were paid by the government.

The Board sustained AAC's appeal on the basis that the Government could not show that it had reimbursed AAC for any of the costs. However, the Board expressed no opinion as to whether the pension plan contributions at issue in the appeal are allowable costs.

You can read the full ASBCA decision here.

Wednesday, May 3, 2017

NASA Calls Foul on DCAA Low-Risk Determinations

Yesterday, NASA announced that it would no longer accept low-risk determinations issued by DCAA (Defense Contract Audit Agency) on its contractors where the preponderance of the work relates to NASA contracts. Although unstated, NASA's rationale is apparent - not every agency is enamored with DCAA's low-risk determination procedures and the resultant mass write-off of incurred cost dollars without any audit or oversight.

DCAA has informed its auditors to cease issuing low-risk determinations on behalf of NASA. Additionally, DCAA advised its staff, for contractors where NASA doe not represent the preponderance of dollars, to coordinate with NASA to determine whether any issues or concerns exist on NASA contracts before issuing low risk determinations.

Contractors may not like the new policy because it now increases their chances of coming under audit. Its not clear whether the audits will be performed by DCAA or whether NASA, as many other Agencies do already, will go out and hire non-Governmental CPA firms to perform the work.

Tuesday, May 2, 2017

DOE is Lax on Fraud

The GAO (Government Accountability Office) issued a report yesterday claiming that DOE's (Department of Energy) lax management and oversight of its contractors puts its contract management at a High Risk. The audit was requested by Senator McCaskill who was herself, at one time, an auditor. For example, the GAO noted that in November 2016, DOE contractors constructing a nuclear waste treatment plant agreed to pay $125 million to settle a lawsuit alleging, among other things, that a contractor improperly used federal funds for lobbying purposes.

The GAO found that DOE does not use leading practices for managing fraud risks - such as data analytics - that can help agencies detect fraudulent spending or other improper payments. The GAO made several recommendations aimed at reducing DOE's risk of fraud and improper payments. These include, but are not limited to:

  • Creating a dedicated anti-fraud entity to lead fraud risk management activities
  • Conducting regular fraud risk assessments that are tailored to the program
  • Developing and documenting a strategy to mitigate assessed fraud risks
  • Designing and implementing specific control activities such as data analytic activities to prevent and detect fraud.

The recommendation concerning enhanced use of data analytics is problematical and the only GAO recommendation that DOE did not concur.
It is not possible to fully employ data analytics as a tool to identify potential indicators of fraud or other improper payments at DOE because of limitations in contractor-maintained cost data. Much of the cost data maintained by the two DOE contractors GAO selected for data analytic purposes could not be used because these data did not include a complete universe of transactions that was reconcilable with amounts billed to DOE or did not contain details necessary to determine the nature of costs charged to DOE. Because DOE does not require its contractors to maintain sufficiently detailed transaction-level cost data that are reconcilable with amounts charged to DOE, it is not well positioned to employ data analytics as a fraud detection tool.
Effective fraud risk managers collect and analyze data and identify fraud trends and use them to improve fraud risk management activities, according to leading practices that GAO has previously identified. Without the detailed data necessary to conduct such analysis, DOE is missing an opportunity to develop, refine, and improve its experience with data analytic tools and techniques.
 DOE does not concur with this recommendation because it would require its contractors to submit data not required by any other Government contractor. GAO is not convinced however because they see DOE as a special case where 90 percent of its entire budget is paid out to contractors. No other Agency relies as much on a contractor workforce.

You can read the entire GAO report by clicking here.

Monday, May 1, 2017

Proposed Legislation to Notify Small Businesses of Free Procurement Assistance

Senators Gary Peters (D-MI) and Susan Collins (R-ME) have introduced legislation to help protect small businesses from falling victim to fraud when they register to procure federal contracts. The "Procurement Fraud Prevention Act" would require small businesses to be notified that free assistance is available for help in procuring government contracts through federal programs. Free assistance is available through the various Procurement Technical Assistance Centers (PTACs) the Small Business Administration (SBA) and other organizations.

Many business owners are unaware that these resources exist and fall victim to scams that mislead them into paying high sums of money for contract procurement assistance. Procurement Technical Assistance Centers (PTACs) provide local, in-person counseling and training services for small business owners. They are designed to provide technical assistance to buisnesses that want to sell products and services to federal, state, or local governments. The Procurement Technical Assistance Program is administered by the Defense Logistics Agency.

PTACs can help determine whether a particular small business is ready for government contract, help register them in the proper places (e.g. SAM or System for Award Management). They can help determine eligibility for small business certifications such as woman owned, disadvantaged, veteran-owned and HUBZone. The PTACs also have the resources to search prior contracts to see what kind of contracts have been awarded to similar business.

You can find your local PTAC from SBA's Website. There are also specialized PTAC such as Native American PTACs who focus on businesses owned by native Americans.

Whether this bill passes or not, businesses interested in selling to the Government should make a point of visiting their local PTAC. Can't hurt, its free.