Thursday, November 30, 2017

Prison Time for Accepting Kickbacks from Subcontractor

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

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

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

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

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

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

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

You can read the entire DOJ Press Release here.

Wednesday, November 29, 2017

Federal Fumbles - Vol. 3

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

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

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

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

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

Tuesday, November 28, 2017

2018 NDAA - TINA Threshold to Increase to $2 Million

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

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

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

Monday, November 27, 2017

2018 NDAA - New DCAA Reporting Requirements

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

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

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

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

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

This information, if nothing else, will prove interesting.

Friday, November 24, 2017

Whitefish Contract to Restore Puerto Rico Electricity - Update

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

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

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

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

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

Wednesday, November 22, 2017

GAO Publishes Fiscal Year 2017 Bid Protest Statistics

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

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

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

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

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

You can read the full GAO report here.

Tuesday, November 21, 2017

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

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

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

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

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

Read more about the new interim rule here.

Monday, November 20, 2017

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

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

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

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

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

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

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

Friday, November 17, 2017

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

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

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

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

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

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

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

Thursday, November 16, 2017

Law Allowing Contractors to Procure Their Own Incurred Cost Audits Rescinded

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

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

Wednesday, November 15, 2017

DCAA to Share Audit Function With Commercial Firms - Part 3

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

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

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

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

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

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

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

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

Tuesday, November 14, 2017

DCAA to Share Audit Function With Commercial Firms - Part 2

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

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

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

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

Monday, November 13, 2017

DCAA To Share Audit Function With Commercial Firms - Part 1

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

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

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

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

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

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

Friday, November 10, 2017

Calendar Days vs Work Days

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

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

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

The full decision can be found here.

Thursday, November 9, 2017

Whitefish Energy Contract to Restore Puerto Rico Electricity

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

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

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

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

Wednesday, November 8, 2017

GAO To Begin Charging a Filing Fee for Bid Protests

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

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

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

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

Tuesday, November 7, 2017

Fair Pay and Safe Workplaces Rules - Dead

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

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

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

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

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

Monday, November 6, 2017

Failure to Submit "Responsive" Offer Leads to Lost Opportunity

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

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

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

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

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

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

Read the entire decision here.

Friday, November 3, 2017

Fraud Friday - Government Employee Solicited and Accepted Bribes from Contractor

Now they're both in a heap of trouble.

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

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

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

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

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

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

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

You can read the entire Justice Department press release here.

Thursday, November 2, 2017

2018 NDAA - Public Comment Submitted to Congress

The Professional Services Council (PSC) has weighed in on some of the provisions of the 2018 National Defense Authorization Act (NDAA) now that the House and Senate bills have moved on to conference committee for reconciliation. Among their concerns is the provision in the Senate version requiring losing bid protesters to pay the processing costs incurred by DoD (see Large Contractors May Need to Reimburse DoD for Bid Protest Costs). The PSC "strongly objects" to this provision. But PSC's letter also covers major concerns over provisions related to DCAA's (Defense Contract Audit Agency's) incurred cost backlog. PSC writes:
The backlog of incurred cost audits under the Defense Contract Audit Agency (DCAA) has wide-ranging, consequential, and negative impacts for the government and the contractor community— both of whom have an interest in moving rapidly to close out contracts. For the contractor, the government commonly withholds significant funds that should be reconciled and paid in a more timely manner. The government should be able to collect any money that might be determined to be due from the contractor, while there is still time and funds available to be collected. Unfortunately, DCAA’s backlog—and improper accounting of the backlog—prevents either from meeting these goals. GAO’s September 2017 major report confirms the current unacceptable backlog still remains. 
PSC goes on to recommend that Congress take further actions to reduce the backlog of incurred cost audits by including targeted reforms that allow for the use of independent, third-party auditors. The House version repeals provisions of the 2017 NDAA that allowed for commercial auditor findings for certain DoD contractors to be submitted and accepted by DCAA if the audit adheres to Generally Accepted Government Auditing Standards (GAGAS). But, as PSC noted, that provision contradicts Section 802, the goal of which is to expand the use of supplemental audits performed by public accounting firms.

Whatever happens, it is obvious that no one has confidence that DCAA can reduce its backlog of incurred cost audits while diligently watching over the taxpayer dollar. Civilian agencies are not encumbered with contract audit arms and are free to go out and procure their own contract audit services from private/commercial firms. It seems like some parties would like the Defense Department to go the same way.

You can read the entire PSC letter here.

Wednesday, November 1, 2017

At Last, Some Relief for DOE Contractors

For the past few years, the Department of Energy (DOE) has taken an extremely literal approach to contractors claiming overtime for employee training purposes. FAR 31.205-44(a) , Training and Education Costs, states that overtime compensation for training and education is unallowable. DOE has taken the position that there can be no exceptions to this rule. It didn't matter whether a contractor could show that it was more cost effective to pay overtime for training than to hire additional staff to cover contract-required services. It didn't matter that certain training was specifically mandated by contract and not discretionary. It didn't matter that the training contributed significantly to contractor employee health and safety. Contractors had to find a way to do all of this without incurring overtime.

More than a few DOE contractors have conducted specific analyses showing that there are circumstances where incurring overtime cost the Government less in the long run. When presented to DOE contracting officers however, they have stood firm in their interpretation that overtime for any kind of training was unallowable. Actually, some contracting officers were sympathetic and wished that they had the discretion to authorize overtime for training thus saving taxpayer dollars but found that there was no way to satisfy their overseers if they broached the subject.

Someone in DOE headquarters finally took some initiative and authorized a Class Deviation to FAR 31.205-44(a). You can read all of the details here but essentially, it authorizes overtime for training purposes so long as the contractor has written approval from an agency approving official (typically a contracting officer). Additionally, approval is required before the costs are incurred. Contractors are expected to submit requests with sufficient justification to gain contracting officer approvals.

The Class Deviation applies to existing contracts as well as future contracts so that contractors in the midst of a multi-year contract will be able to benefit.

No word yet on whether other agencies will follow suit. Possibly not because we are not aware of any other agency that has taken similar positions to that of DOE rank and file.