Friday, December 29, 2017

Negotiating Advance Agreements on Specific Items of Cost

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

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

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

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

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

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

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

See also Advance Agreement on Costs

Thursday, December 28, 2017

Weather Related Closures - Repost

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

Weather Related Closures

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

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

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

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

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

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

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

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

Wednesday, December 27, 2017

Contract Financing on Commercial Contracts

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

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

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

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

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

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

Tuesday, December 26, 2017

Navy Makes Unauthorized Purchases - Contractors Go To Prision

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

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

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

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

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

Read the full Justice Department press release here.

Friday, December 22, 2017

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

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

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

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

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

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

Thursday, December 21, 2017

Consent to Subcontract - Important Reminder

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

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

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

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

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

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

Wednesday, December 20, 2017

The Cost of Employee Stock Options Determined to be Unallowable

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

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

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

FAR 31.205-6(i) has three restrictions:

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

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

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

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

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

Tuesday, December 19, 2017

Government Looses Another "Expressly Unallowable" Case.

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

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

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

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

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

You can read the full ASBCA decision here.

Monday, December 18, 2017

Now You Can Earn Your Legal Degree at Government Expense

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

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

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

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

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

Friday, December 15, 2017

Price Realism Analysis Does Not Require Detailed Review of Cost Categories

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

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

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

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

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

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

Thursday, December 14, 2017

Losses Incurred in Operating Company Cafeterias

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

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

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

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

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

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

Wednesday, December 13, 2017

The 2018 National Defense Authorization Act is Now Law

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

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

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

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

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

Tuesday, December 12, 2017

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

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

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

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

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

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

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

You can read the entire GAO decision here.

Monday, December 11, 2017

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

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

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

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

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

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

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

Friday, December 8, 2017

Government Leases Are Subject to Socioeconomic Programs

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

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

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

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

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

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

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

Thursday, December 7, 2017

Contractor Couldn't Deliver under $30 Million Contract

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

Wednesday, December 6, 2017

Example of a "Major Fraud"

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

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

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

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

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

Tuesday, December 5, 2017

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

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

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

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

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

Good news for contractors.

Monday, December 4, 2017

Government Contractor Sentenced to 5 Years in Prison

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

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

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

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

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

Friday, December 1, 2017

Suspension Lifted - Abuse Resumes - New Two-Year Suspension

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

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

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