Wednesday, February 28, 2018

Seven Years to Insert a Single Word Into a Regulation

Back in October 2011, the Cost Accounting Standards Board (CASB) issued a proposed rule to clarify one of the CAS (Cost Accounting Standards) exemptions provided by FAR 9903.201. Since 2000, this provision has provided an exemption from CAS for Firm-Fixed-Price contracts and subcontracts awarded on the basis of adequate price competition without submission of cost or pricing data. The CASB proposed to add the word "certified" before "cost or pricing data".

At the time the CAS rule was promulgated in 2000, the term cost or pricing data was understood to mean certified cost or pricing data. However, as a result of changes mad to FAR (Federal Acquisition Regulations) in 2010, the term could also be read to mean cost or pricing data without the certification. Since 2000, there have been two categories of cost or pricing data; "certified cost or pricing data" and "data other than certified cost or pricing data".

To avoid confusion and provide clarity to the Government contractor community on its original intent, the CASB proposed to add the word "certified".  to wit, when certified cost or pricing data were not obtained for FFP contracts and subcontracts, the safeguards provided by CAS were likewise not necessary.

When this one-word modification was first proposed, the Space Shuttle was still flying, Osama Bin Laden was still alive, and the US had 15 million fewer people. In the meantime, we've had two Presidential election cycles. Good work guys.

Tuesday, February 27, 2018

Report on External Peer Review of DCAA Published

Last November, the Department of Defense, Office of Inspector General (OIG) issued a report on its latest peer review of the Defense Contract Audit Agency (DCAA). With respect to peer review ratings, audit organizations can receive a rating of 'pass', 'pass with deficiencies' or 'fail'. DCAA received a rating of 'pass with deficiencies'. DCAA's previous peer review rating was also 'pass with deficiencies'.

DCAA agreed with the 'pass with deficiencies' opinion and overall conclusions on the documentation and evidence deficiencies. However, DCAA disagreed that the reporting, supervision, and professional judgment deficiencies rose to the level of a system-reportable deficiency. DCAA noted that the OIG overstated the conclusions by citing the same finding under several deficiencies. For example, the OIG cited one assignment for a lack of evidence to an audit position but took the same deficiency and cited DCAA for supervision, reporting, and professional judgment deficiencies.

DCAA agreed to take corrective action that focused on specific findings but since the Agency did not consider the deficiencies to be systemic, that is, widespread throughout the Agency, did not generally agree with OIG recommendations that called for massive Agency-wide re-training efforts.

The OIG disagreed with the scope of DCAA's corrective action plan is some cases and left those findings 'open' in an unresolved state. You can download and read the full Peer Review report from either the OIG's website or the DCAA website.

Now comes Senator McCaskill in her position as Ranking Member of the Senate Committee on Homeland Security and Governmental Affairs asking DCAA to explain their inadequate responses to the OIG's peer review recommendations. In a February 5th letter to DCAA, McCaskill requested DCAA to explain why it did not agree with the OIG's recommendations and specifically, why it did not agree to "implement broader reforms in order to avoid a recurrence of these or similar problems". McCaskill wants DCAA to address the following questions:

  1. Why does DCAA believe that these flawed audits indicated the need to improve the performance of audit staff, but not the performance of the supervisors reviewing the work of those staff members?
  2. Why does DCAA believe that the deficiencies which led to flawed audits in four offices do not point to the need for additional training agency-wide?

You can read Senator McCaskill's letter here. We'll report on DCAA's response to the letter if we ever get a copy.

Monday, February 26, 2018

Update on One-Person Company Awarded $156 Million Contract

A couple of weeks ago, we reported on a one-person company that had been awarded a $156 million contract by FEMA (Federal Emergency Management Agency) to deliver 30 million emergency meals to victims of the recent Puerto Rico hurricane. From the beginning, the company was unable to deliver so FEMA terminated the contract for default. This contract award has come under scrutiny by the House Committee on Oversight and Government Reform who has asked FEMA why, given the poor track record of this company, it awarded this contract where time was of the essence.

Now the Senate Committee on Homeland Security and Government Affairs is weighing in on the debacle, after reviewing the actual contract. The Senate Committee writes,
Unfortunately, this contract appears to be further evidence of systemic weaknesses in FEMA's contracting practices. In particular, we are concerned that FEMA is not taking appropriate steps to evaluate vendors' qualifications before awarding contracts to provide critical disaster relief supplies. In November 2017, FEMA cancelled $30 million in contracts for emergency tarps and sheeting after Bronze Star, LLC (Bronze Star) - a two-person company with no past experience - failed to deliver. FEMA's awards to Bronze Star raised concerns about how FEMA is ensuring that contractors with limited performance records have sufficient capacity to meet a contract's requirements. FEMA's decision to award a $1456 million contract to Tribute underscores this concern, and raises additional questions about FEMA's contract award process.
The Committee goes on to note that Tribute had no experience delivering on a contract of such scale but its past performance on previous Government contracts should have raised red flags when FEMA was evaluating prospective contractors (see One Person Company is Awarded $156 Million Contract). Not only did the Senate note the same pattern of poor performance that the House did, but also questioned it integrity and business ethics based on an inspector general report finding that Tribute altered and submitted a false shipping document and failed to follow subcontracting rules.

Now the interesting part. The Committee found that Tribute's proposal contained numerous contradictory or unintelligible assertions. The overwhelming majority of Tribute's 9-page proposal was plagiarized from several sources readily available on the internet (amazing that a 9-page proposal would yield a $156 million contract). For example, language in Tribute's "Delivery Plan" section is nearly identical to sections found on the websites of a global logistics company and a Florida medical transportation company. The Senate letter details several of these plagiarisms. Not only was the content of Tribute's proposal plagiarized, but it was misleading. For example, Tribute using terms and phrases such as "our logistics professionals", "each ... employee", "management team" is very misleading given that it is a one-person company.

The Senate Committee is asking FEMA for an explanation of how this occurred. You can read the very interesting Senate report in its entirety here.

Friday, February 23, 2018

Materiality is Critical to a False Claims Allegation

A United States District Court (Middle District of Florida, Tampa Division) vacated a $350 million jury verdict against Salus Rehabilitation, an operator of specialized nursing facilities, under the Federal False Claims Act (FCA). The Judge ruled that the relator (a Qui Tam relator - the Government did not enjoin this particular suit) failed to establish that Salus' failure to (i) maintain comprehensive care plans and (ii) sign and date documents were material to payment decisions by Medicaid.

The Whistleblower alleged that Salus failed to maintain comprehensive care plans for each patient and failed to properly sign and date documents as required by the Medicaid program. A Jury agreed and the $350 million judgment was levied against Salus.

But wait a minute. Were these significant infractions? The Federal Judge ruled that the Whistleblower failed to offer evidence of materiality. Under a previous case, the Court ruled that an FCA claim on an implied false certification theory fails if the non-compliance is disclosed to, or discovered by, the United States; and if the United States pays notwithstanding the disclosed or discovered non-compliance. Thus, for a relator to prevail on an FCA claim, the defendant must know, or reasonable should know, that its non-compliance was material when it sought payment, and the defendant's misrepresentation must be material to the Government's decision to pay.

In the Salus case, the Court found no evidence on how the Government might have addressed the disputed practices and the lack of evidence left the jurors to guess. According to the Court, the Government was and is aware of the disputed practices, aware of this action, aware of the allegations, aware of the evidence, and aware of the judgments for the relator. But the Government never ceased to pay or even threatened to stop paying Salus for the services provided to patients.

The controlling question in this case is whether the Government would refuse to pay a provider on a large scale because of a dispute about the method or accuracy of payment after the Government  permitted the practice to remain in place for years without complaint or inquiry. Every day that the Government continues to pay for a good or service, the greater the practical impediment to proof of materiality.

You can read the full decision here.

Thursday, February 22, 2018

Failure to Comply with Solicitation Results in Lost Opportunity

In 2016, GSA issued an RFP (Request for Proposal) for up to 70 IDIQ (Indefinite-delivery, indefinite-quantity) contracts to provide information technology (IT) services.

The RFP required offerors to assign themselves points in several categories. One of those categories concerned the offerors cost accounting system. In order to establish that an offeror was entitled to the points, the RFP stated that an offeror's supporting documents must include verification from the Defense Contract Audit Agency (DCAA), Defense Contract Management Agency (DCMA) or any Cognizant Federal Agency (CFA) of an acceptable accounting system that had been audited and determined adequate for determining costs applicable to the contract. Offerors were also required to provide contact information for the DCAA or DCMA and if available, a copy of the audit report. If not available, offerors were required to submit a letter from the auditing agency, on auditing agency letterhead, indicating unequivocally that the offerors' accounting system was audited and determined to be adequate for cost-reimbursement contracting. With respect to joint ventures, the RFP required documentation of a cost accounting system audit in the name of the joint venture itself or documentation in the name of each member of the joint venture.

SysVets, LLC, a service-disabled veteran-owned business (SDVOSB) joint venture comprised of Acquisition, Research and Logistics (ALR), Inc (the majority member), Information Management Resources (IMR), and Conception Solutions (CS) submitted a proposal in response to the solicitation and assigned itself the maximum number of points for having an audited accounting system. SysVets submitted a copy of the DCAA report that found the accounting system for its majority partner, ALR, to be adequate but did not provide any such documentation for the joint venture itself or the other two joint venture partners. So GSA deducted the points from SysVets score which lowered its overall score and consequently removed it from award consideration.

SysVets challenged GSA's evaluation to the Comptroller General (i.e. GAO). SysVets argued that GSA's deduction under the cost accounting system element was unreasonable. SysVets alleged that GSA should have concluded that ARL's audit documentation was sufficient because ARL is the majority member of the joint venture and is solely responsible for making all management and executive decisions. SysVets further argued that while it did not provide documentation for each of the joint venture partners, each partner did indeed have audited cost accounting systems.

The GAO did not sustain the protest. The RFP required offerors to submit specific documentation with their proposals. With respect to the cost accounting system audit, the solicitation required that the documentation be provided in the name of the joint venture or each joint venture member. SysVets failed to provide that documentation so GSA reasonably deducted the points from its evaluation. Documentation for just the majority joint venture member was not sufficient to comply with the clear and unambiguous terms of the solicitation.

You can read the full decision here.

Wednesday, February 21, 2018

Another "Rent-a-Vet" Scheme Uncovered and Prosecuted

The Justice Department announced last week that a business owner who falsely represented his company as owned and controlled by a service-disabled veteran was convicted of that crime. In this case, the "rent-a-vet" was the owner's own father-in-law who was disabled alright, but was in no condition to exert even a nominal amount of management responsibilities, much less 51 percent.

Stanley Raass of Utah, a former BYU football player, owned a construction company that provided general construction for the Federal Government. In 2009, he formed another company called RWT, named after his father-in-law's initials. Raass' father-in-law is a veteran with a 100 percent disability rating and was listed as the president and majority owner of RWT. Investigators however found that the father-in-law was physically incapable of manging RWT.

To meet SDVOSB requirements and be eligible for contracts set-aside for SDVOSBs, companies must be a small business and more than 50 percent owned by a service-disabled veteran, and daily operations of the business must be managed and controlled by the service-disabled veteran.

Raass represented that RWT was owned 51 percent by his father-in-law and 49 percent by himself. In reality, it was Raass himself that controlled the managerial and daily business operations of RWT. Ultimately, he was able to secure more than $16 million in construction contracts that should have gone to legitimate SDVOSBs.

Raass is expected to serve 24 months in prison and pay $640,000.

Tuesday, February 20, 2018

Bridge Contract Transparency and Accountability Act

Senator McCaskill (Missouri) recently introduced the Bridge Contract Transparency and Accountability Act of 2018. If passed and signed into law, the Bill will require Agencies to limit the use of Bridge contracts and the FAR Councils to report on how prevalent such contracts are used.

Bridge contracts are non-competitive contract extensions with existing contractors to bridge the time between the original end of that contractor's contract and the competitive award of a follow-on contract. Senator McCaskill and others in Congress believe they are used far too often and that's a problem because they are usually cost-reimbursable and the bridge contractors have little incentive to stay efficient and minimize the duration of the bridge performance period.

This new bill will require agencies to develop policies and procedures that seek to minimize the use of bridge contracts while providing for continuation of services and ensure appropriate planning by contracting officials. Such planning must include:

  1. Sufficient time and planning to review contract requirements, compete contracts as appropriate, enter into contracts, and consider the possibility of bid protests.
  2. For contracts that do not meet timeliness standards or which require entering into bridge contracts, the contracting officer must notify his/her boss's boss's boss.
  3. That top boss must approve any bridge contract that exceeds a year.

The bill also seeks to gather information on the use of bridge contracts. Within six months of passage, the bill requires OFPP (Office of Federal Procurement Policy) to report on government-wide policies, practices and uses of bridge contracts. Then every year, OFPP must submit reports showing, among other things,

  1. The number of bridge contracts entered into during the previous five fiscal years
  2. The estimated value of each contract that required the use of a bridge contract and the cost of the bridge contract or contracts
  3. The reasons for and cost of each bridge contract
  4. The types of services or goods being acquired under each bridge contract
  5. The length of the initial contract that required the use of a bridge contract, including the base and any exercised option years, and the cumulative length of any bridge contract related to the initial contract.
  6. A description of how many of the contracts that required bridge contracts were subsequently re-competed and how many of those re-competed contracts were the subject of a bid protest.
Of course, the elephant in the room is bid protests. If it weren't for bid protests, the number and duration of bridge contracts would significantly decrease.

Monday, February 19, 2018

Pilot Program for Streamlining Awards for Innovative Technology Projects

The Defense Department, last month, issued a Class Deviation that should effectively reduce some of the paperwork associated with Government Contracting for small businesses and non-traditional contractors. It exempts from certified cost or pricing data requirements (see FAR 15.403-1(b)) contracts and subcontracts awarded pursuant to (i) the Small Business Innovation Research Program (SBIR), (ii) the Small Business Technology Transfer Program (STTR) and (iii) a technical, merit-based selection procedure, such as a broad agency announcement.

Further, for SBIR awards and technical merit-based selections (but not STTR awards), this Class Deviation also eliminates the audit and records examination clause (see FAR 52.215-2, Audit and Records - Negotiations).

In this context, nontraditional defense contractors are those that are not currently performing and have not performed any contracts or subcontracts for DoD that are subject to full coverage under the cost accounting standards (CAS) and the implementing regulations for at least one-year preceding the solicitation.

This is a pilot program required by the fiscal years 2016 and 2017 NDAAs (National Defense Authorization Act) and is currently set to expire on October 1, 2020 (call it a three-year trial).

While this pilot program may appear to benefit small businesses, the practical impact doesn't seem so great. In our experience, most SBIRs are already, for the most part, awarded without certified cost or pricing data being required and we haven't seen too many of these technical merit-based procurements. The exemption to the audit clause may seem like a tangible benefit but the auditors have all but written off those contracts anyway due to immateriality. One of the clauses that require a lot of effort on the part of contractors and subcontractors is the allowable cost and payment clause at FAR 52.216-7 which requires the submission of an annual incurred cost proposal. This contract clause is not eliminated by the Class Deviation.

The Pilot Program includes a provision that the contracting officer may still require certified cost or pricing data and may still require the audit clause based on some knowledge or suspicion that the clauses are necessary to protect the Government's interests.

You can read the full DoD Memorandum here.

Friday, February 16, 2018

Management Practices at DoD Do Not Align Well With Best Practices at Commercial Organizations

The Government Accountability Office (GAO) was requested by Congress to review the career paths, development, and incentives for program managers responsible for delivering DoD's most expensive new weapon systems. Congress noted that DoD major acquisition programs continue to experience cost and schedule overruns and previous studies have concluded that selecting skilled program managers is a key factor to achieving successful program outcomes.

To perform this study, GAO identified leading practices documented in prior work and by the Project Management Institute, and interviewed commercial companies identified by the Institute as leaders in this field. Those companies included AstraZeneca (biopharmaceuticals), Boeing (aerospace), DXC Technology (information technology) and Rio Tinto (mining).

GAO found that leading organizations use 10 key practices to train, mentor, retain, and ultimately select skilled program managers. GAO then compared these practices with practices in place at the Air Force, Army and Navy and found that a lot of the Service's practices did not align very well with those in place at leading commercial organization.

Four leading practices where the military services aligned very well with industry include:

  • Training classes that allow program managers to share experiences
  • On-the-job learning and information repositories
  • Recognition
  • Assignment based on skills, experiences, and program needs

Five leading practices where the services did not align extensively include:

  • Rotational assignments
  • Mentoring programs with senior leader involvement
  • Career paths that describe skills needed to advance
  • Education subsidies
  • Identification of high-potential talent by senior leaders

Finally, the 10th leading practice where the military services did not align at all include:

  • Financial rewards for good performance

GAO made eight recommendations, all fitting under the emphasis of "do more with the resources already available". DoD concurred.

You can read the entire GAO report here.

Thursday, February 15, 2018

Enhanced Debriefings

One feature of the 2018 NDAA (National Defense Authorization Act) is a requirement that DOD provide additional information to contractors competing for contracts. For contracts greater than $100 million, the Government must provide a redacted version of the Agency's written source selection award decision. For contracts between $10 and $100 million, small businesses and nontraditional contractors are allowed to request redacted versions of the source selection decision.

Perhaps the most significant change to the debriefing rules is the question and answer period. The new rules will provide an opportunity for unsuccessful offerors to submit additional follow-up questions within two days of the post-award debriefing. The agency then, must answer these questions, in writing, within five business days.

So why is this important? Because it extends the time available for an unsuccessful offeror to appeal the award. After a debriefing, an unsuccessful offeror has five days to file a bid protest with the GAO (Government Accountability Office). Now that there's a question and answer period (two days to submit questions and five days to provide answers), that period could potentially double to ten days or longer. This is because a debriefing is not considered finished until the day the agency delivers its written responses. Seven extra days is significant for contractors considering whether to appeal an award.

Refer to FAR 15.505 and 15.506 for more information on debriefing requirements.

Wednesday, February 14, 2018

One Person Company is Awarded $156 Million Contract

Documents obtained by the House Committee on Oversight and Government Reform indicate that FEMA (Federal Emergency Management Agency) failed to deliver tens of millions of emergency meals to the victims of the hurricanes in Puerto Rico. According to the documents, one of the primary reasons FEMA failed to deliver these meals is because it inexplicably awarded a contract worth approximately $156 million to deliver 30 million emergency meals to Tribute Contracting, LLC, a tiny, one-person company with a history of struggling with much smaller contracts.

The contract was awarded on October 3, 2017. Twenty days later, FEMA terminated the contract "for cause" after having accepted only 50,000 meals - 29 million meals short of their goal. Tribute explained that the company didn't have the capacity to produce 30 million meals and the subcontractors hired to produce the meals, stopped work after they didn't receive payment.

The House Committee found it "unfathomable" that FEMA could have believed that this tiny company had the capacity to perform this $156 million contract. The Committee wrote that while Tribute might have been the lowest price, there was no analysis of the company's ability to deliver on the contract. It was clear that Tribute did not have sufficient financial resources of its own to support this expansive contract. Based on Tribute's lack of experience in large-scale disaster relief and its limited financial capacity, FEMA should have raised serious questions about whether the company could meet the contract terms - especially since they concerned such a critical need.

The Committee then provided a litany of problems that the Government experiences with Tribute over the years.

  • Cancelled a $27 thousand contract for food because Tribute did not deliver
  • Cancelled a $57 thousand contract for bakery and cereal products due to Tribute's inability to deliver
  • Terminated for default a $10 thousand contract for meat products
  • Terminated for default a $30 thousand contract for bakery and cereal products
  • Terminated for default a contract for 3,000 tote bags with the Marine Corps logo because they didn't meet specifications.

More troubling, according to the Committee was the fact that the GPO (Government Printing Office) issued a stern warning to other Government agencies that Tribute would be ineligible for any contracts over $30,000 through January 2019.

The Committee is obviously looking for someone within FEMA to take responsibility for the fiasco and is requesting information from FEMA's files. We expect that hearings will ensue. We'll keep you appraised.

Tuesday, February 13, 2018

Firm Gets Contract, Doesn't Produce, Gets Another Contract, Doesn't Produce, Gets ....

A jury has just found the owner of a Government contractor guilty of fraud. He faces a maximum penalty of 20 years in federal prison when he will be sentenced next May.

Akbar Fard is the President and Owner of Advanced Materials Technology, Inc. (AMTI). Beginning in 2004 and continuing for eight years, Fard got pretty skilled at securing SBIR (Small Business Innovative Research) and STTR (Small Business Transfer Technology Research) contracts through NASA and various DoD organizations. In fact, he was awarded 11 such contracts over the years totaling $2.4 million.

To obtain those contracts, Fard dutifully prepared proposals in the formats one would expect. They included hours and hourly rates for program managers and research associates, lab supplies, small tools, test equipment, travel and of course, G&A (General and Administrative) costs.

These being cost-type contracts, Fard would then prepare billings based on costs incurred and submit them to the Government for payment. The Government would then pay the invoices.

Somewhere along the line, the Government became a little suspicious of Fard. Perhaps someone noticed that there was very little to show for the money being spent on Fard's SBIR/STTR contracts. We don't really know. But we do know that an investigation was opened.

The investigations found that Fard had not spent any of the money in the manner in which he proposed. No labor, no materials, no ODCs (other direct costs). Just deposits to his personal bank account. In fact, the company, AMTI, was based out of his personal residence and all of the funds were diverted to pay Fard's own personal expenses.

The thing that surprised us in this case is not that someone defrauded the Government. That happens all too frequently. But that manner in which it festered for eight years before someone noticed does not speak well for Government oversight and the established internal controls that should have significantly limited the period of time over which the fraud continued. Does anyone in the Government procurement cycle care about such things?

Monday, February 12, 2018

Department of Labor Announces Plans to Audit 1,000 Government Contractors

The Department of Labor, Office of Federal Contract Compliance Programs (OFCCP) sent out notices last week to 1,000 lucky Government contractors that they will be audited for compliance with all kinds of labor related rules and regulations such as EEO, affirmative action, veterans, disabilities, and many others.

These Corporate Scheduling Announcement Letters (CSALs) are notification to contractors that they have been selected to undergo a compliance evaluation during the scheduling cycle. The purpose of the CSALs is to give contractors a head start in ensuring compliance; to provide the contractor's internal EEO staff at least 45-days advance notice to obtain management support for EEO and self-audit efforts, to encourage contractors to take advantage of OFCCP compliance assistance offerings, to encourage contractors to focus on self-audit efforts that, if problems are adequately analyzed and corrected, saves OFCCP time and resources needed for its own audit, and to assist contractors in managing and budgeting the amount of time required for evaluation activities.

Compliance reviews are comprehensive analyses of the hiring and employment practices of Federal contractors, the written affirmative action program and the results of the affirmative action efforts undertaken by the contractor. Compliance reviews are typically performed in one or more of these stages; a desk review, an onsite review and an offsite analysis.

The OFCCP will be looking for statistical and anecdotal evidence of discrimination, indicators of potential discrimination such as patterns of individual discrimination, patters of systemic discrimination patterns of major technical violations such as record-keeping deficiencies or failure to maintain an affirmative action plan (AAP), and noncompliance with other labor and employment laws that may related to violations of the laws enforced by OFCCP.

Two areas of recent focus has been (i) pay equity to eliminate pay differences between women and men and (ii) compliance with VEVRAA (Vietnam Era Veterans' Readjustment Assistance Act). For both areas, there are extensive record-keeping requirements.

 Sometimes these CSALs do not get to the right departments within contractors in a timely manner. If you want to find out for sure whether you are one of the 1,000 contractors selected (that is, find out before they show up at your door), you can call the OFCCP at 800-397-6251.

Friday, February 9, 2018

Congressman Introduces Bill to Pay Some Contractor Employees During Shutdown

Congresswoman Norton (representing Washington DC) introduced a bill before Congress that would provide for compensation of Federal contractor employees that may be placed on unpaid leave as a result of any Federal Government shutdown. She calls it the "Low-Wage Federal Contractor Employee Back Pay Act of 2018".

Under this proposed legislation, if a Federal contractor that provides retail, food, custodial, or security services for the Federal Government places employees on unpaid leave as a result of any lapse in appropriations which begins in Fiscal Year 2018, the Government shall provide compensation to those employees at their standard rate of compensation for the period of such lapse.

The proposed legislation is not any more specific with respect to which contracts and/or which contractor employees are covered. The language presented is very generic and implementation will be open to interpretation (or through regulation).

Its like getting additional paid vacation.

Thursday, February 8, 2018

Unallowable Litigation Costs

When contract auditors questions a particular cost in a contractor proposal or claim they are just doing their jobs. It happens day in and day out, all across the country. Auditors report their findings to contracting officers, contracting officers agree (usually) and the Government doesn't pay the expense. The Government conservatively estimates that it recovers $5.70 for every dollar it spends on contract auditing.

By contrast, when contractor employees report potentially unallowable costs, they have a pretty good chance of hitting the jackpot. Consider the case of Integral Consulting Services, Inc (ICS). ICS is a Government contractor based in Maryland that provides IT services. In 2012, the company was awarded a contract by the Army to provide "identity intelligence analysis support" (whatever that means).

From 2012 to 2014, the company loaded up its General and Administrative (G&A) pool with litigation expenses related to a dispute involving another Government contract. We don't know the totality of these litigation expenses but by charging them to the G&A pool, ICA overcharged the Army contract by more than $500 thousand.

An ICS employee blew the whistle on the charging scheme by filing a Qui Tam action whcih permits private parties to file suit on behalf of the United States for false claims and obtain a portion of the recovery. In this case, the ICS employee (or by now, former employee, we suspect), received $92 thousand (or whatever portion of the $92 thousand his lawyer didn't keep).

Funny thing though, had a contract auditor found the expense, the Government would have kept the full $500 thousand. Now a lot of Qui Tam actions involve matters that contract auditors are not likely to catch during a routine audit - parts that do not meet MILSPEC, for example. But a contract auditor would most likely have found unallowable litigation costs. Legal and professional fees is a category that an auditor will always review because the category is considered a high risk for including unallowable costs.

If you want to read more about the ICS case, click here.

Wednesday, February 7, 2018

Outsourcing Contract Audits

DCAA (Defense Contract Audit Agency) is not the only organization capable of performing audits of incurred costs and other types of audits designed to support Government procurement. DCAA's activities are not an inherently governmental function - a function so intimately related to the public interest as to require performance by Federal Government employees. Consider the Energy Department and to a lesser extent NASA who routinely outsource their contract audit requirements.

Recommendation #9 from the Section 809 Panel's recently released report wants DCAA to use IPAs (Independent Public Accountants, i.e. CPA Firms) to manage resources to meet time limits - to augment their current staffing with non-Governmental firms.

Here's why.

DCAA cannot eliminate its current backlog of unaudited final indirect cost rate proposals (i.e. incurred cost audits) while providing timely financial oversight and advisory services to contracting officers. DCAA needs additional resources to get and stay current with its oversight responsibilities.

Although DCAA has reduced the backlog of incurred cost audits from more than 20,000 to around 4,500, the Agency still has a sizable number of current incurred cost audits in its inventory. According to a recent GAO report, DCAA possesses nearly 10,000 unaudited final indirect cost rate proposals that are not currently included in its backlog, many of which will be subject to an audit in accordance with DCAA's risk assessment approach.

It currently takes DCAA an average of 747 days to begin its work on a final indirect cost rate proposal once it is received. GAO concluded in its report that “the primary reason for the delay is due to the availability of DCAA staff to begin the audit work.” Because DCAA lacks sufficient capacity to perform the current needs of DoD contracting officers and eliminate its backlog of unaudited final indirect cost rate proposals, the time it is taking for DCAA to start its nonbacklogged incurred cost audits is growing. Due to the backlog and previous legislation that prohibited DCAA’s provision of audit services to nondefense agencies, NASA now allows its contracting officers to use IPAs to conduct incurred cost audits as well as other financial services.

The Section 809 Panel concluded that DCAA should use IPAs to provide timely audit and advisory services in accordance with statutory time limits (discussed yesterday). This approach will assist DCAA in eliminating its final indirect cost rate proposal backlog and provide better coverage and more responsiveness in other audits and advisory services. The contracting community will benefit from increased use of IPAs by DCAA to perform oversight functions. Timely performance of necessary risk management activities allows oversight professionals and contracting officers to gain insights into current contractor operations. This insight facilitates faster corrective actions (if necessary), which, in turn, reduces risks of noncompliance and DoD’s oversight burden.

The Panel foresees a time when IPAs will no longer be necessary to augment DCAA resources. For that to happen, DCAA must first:

  • embrace a more robust risk assessment process,
  • adopt commercial engagement management and materiality approaches, and
  • focus on the contracting officer as its customer.

Tuesday, February 6, 2018

Statutory Due Dates for DCAA Audits - A Recommendation

We've been discussing some of the recommendations coming out of the Section 809 Panel for the past few days and we want to continue in that vein by highlighting another recommendation for re-making DCAA (Defense Contract Audit Agency) into a vital component of the Defense acquisition process. This one deals with the timeliness of audits, or the timeliness any any advisory services provided by DCAA.

The Panel's 8th recommendation is to establish statutory time limits for defense oversight activities. Note that the recommendation regards statutory time limits, not a lesser regulatory provision or a policy or another form of guidance. That's an important distinction

According to the Panel, financial and business system oversight of DoD's contractors often starts too late and takes too long (no one can argue with that observation). These delays cause problems for both contracting officers and defense contractors and reduce the utility of oversight findings. To be effective and efficient, DoD's system of internal controls must operate in a timely manner.

Time limits are commonplace in both private industry and the Federal Government concerning performance of audits and other forms of advisory engagements. Independent Public Accountants (IPAs) must complete audits by financial reporting deadlines established by the SEC. Auditors for federal agencies must complete agency financial statement audits under deadlines established by the Chief Financial Officers Act of 1990. GAO must also complete congressional-requested audits and reviews in accordance with statutory due dates. These professional service providers both in and out of Government complete their work in accordance with professional standards within time-frames established before work begins.

Not so with DCAA. DCAA's work is untimely, which causes delays in contract awards, as well as other negative effects on the contract life cycle, through and including contract closeout. For example, in fiscal year 2016, DCAA did not begin work on final indirect cost rate proposals until more than two years after contractors' submissions. Contracting officers need DCAA's work to close out flexibly priced contracts.

DoD's system of acquisition internal controls operates most effectively when controls are applied in a timely way. Statutory time limits for various oversight activities will improve their effectiveness.

The Panel's recommendations goes on to suggest due dates for the various types of audits performed by DCAA. Although the recommendations would be an improvement overs DCAA's performance, they are still very generous and not likely to satisfy many procurement professionals.

Monday, February 5, 2018

What Gets Measured, Gets Done

In's an old cliche, to be sure: "What gets measured gets done" but the message is clear: measuring something gives you the information needed to make sure you actually achieve what you set out to do.

Last Friday, we briefly discussed the Section 809 Panel's recommendations concerning the Defense Contract Audit Agency (DCAA). See "Section 809 Panel Issues First Report". Today we want to go into more detail on the Panel's second recommendation (Recommendation #6 Overall) concerning DCAA: Revise the elements of DCAA's annual report to Congress to incorporate multiple key metrics. Most of the following is taken verbatim from the Panel's report.

Congress’s reporting requirement for DCAA lacks critical metrics to adequately measure DCAA’s performance. To alter the conduct of the DoD’s financial and business system oversight functions, success must be defined to be consistent with improving mission focus, valuing time, and simplifying compliance. 

Congress currently emphasizes the number of audit reports completed, and recovering or sustaining questioned costs, over measurements on the other advisory services DCAA provides—which are not mentioned in the report requirements today. DCAA’s annual report to Congress requires some measurements of delayed audits; however, the current report emphasizes the number of audits and questioned costs.  

If DCAA is operating effectively, its success cannot be measured only in questioned and sustained costs. As DoD and contractor internal controls improve, there may be fewer costs to question and sustain. In contrast, worsening DoD and contractor internal controls may increase costs questioned and sustained. Similarly, DCAA’s success as an organization cannot be measured by the quantity of audits at the expense of quality. Congress’s current emphasis on questioned costs and DCAA’s emphasis on return on investment alone do not adequately demonstrate performance. DCAA is not, and should not, be considered a profit center. Most importantly, the current DCAA report has no measure of DCAA’s primary customers’ (contracting officer or acquisition team) satisfaction with the quality and timeliness of DCAA’s work.

Congress must measure DCAA’s success in a manner that helps DoD meet contract objectives. Although detecting contractor noncompliance is important, preventing noncompliance through education and training of contractors and contracting officers is DCAA’s original mission and the best use of its resources.   Questioned costs and sustained costs should remain part of DCAA’s report to Congress; however, these metrics alone are misleading and should not be viewed in isolation of the other key parts of DCAA’s mission regarding service to the contracting offer and the acquisition team. The current report makes no mention of contracting officer or acquisition team satisfaction with the quality and timeliness of DCAA’s work, yet they are DCAA’s primary customer. Congress should measure DCAA using a balanced scorecard consisting of multiple key metrics to include the following:

  • A description of the regulatory requirements that create compliance difficulties for contractors, including an analysis of how those regulatory requirements affect contractors of different sizes and industries.
  • The total number of new audit or advisory engagements, by type (preaward, incurred cost, other postaward, and business system), with time limits expiring during the fiscal year that were completed or were awaiting completion, as compared to total audit and advisory engagements completed or awaiting completion during the year.
  • On‐time performance relative to time limits for each type of audit or advisory engagement (shown separately for the DCAA and qualified private auditors retained by the agency).
  • The time limit (expressed in days) for each type of audit or advisory engagement, along with the shortest period, longest period, and average period of actual performance (shown separately for the DCAA and qualified private auditors retained by the agency). 
  • For preaward audits and advisory engagements of contractor costs, sustained costs as a total number and as a percentage of total questioned costs, where questioned costs are expressed as the impact on negotiable contract costs (shown separately for the DCAA and qualified private auditors retained by the agency).
  • For postaward audits and advisory engagements of contractor costs, the questioned costs accepted by the contracting officers and contractors as a total number and as a percentage of total questioned costs, where questioned costs are expressed as the impact on reimbursable contract (shown separately for the DCAA and qualified private auditors retained by the agency).
  • The aggregate cost of performing audits, set forth separately by type of audit.
  • The ratio of sustained questioned costs to the aggregate costs of performing audits, set forth separately by type of audit.
  • The total number and dollar value of postaward audits that are pending for a period longer than 1 year as of the end of the fiscal year covered by the report, and the fiscal year in which the qualified proposal was received, set forth separately by type of audit.
  • A summary of the reasons for the difference between questioned and sustained costs shown in the statistical tables.
  • A description of outreach actions towards industry to promote contract compliance and professional development of the DCAA workforce (shown separately for collaborative outreach actions and other outreach actions).
  • A statistically representative survey of contracting officers from DoD buying commands and the DCMA and representatives of small and large businesses to measure the timeliness and effectiveness of audit and advisory services provided by the DCAA (shown separately for the DCAA and qualified private auditors retained by the agency).
You will no doubt have noted that the focus of this recommendation is designed to move DCAA back to supporting its primary customers; contracting officers and the acquisition community.

Friday, February 2, 2018

Section 809 Panel Issues First Report

The Section 809 Panel released its first of three reports this week. This 642 page tome can be downloaded here. The Section 809 Panel, you will recall, was named for Section 809 of the 2016 NDAA (National Defense Authorization Act) from which it gained its status and authority. Its objective is to make recommendations that will enable DoD to more consistently buy what it needs in a timely and cost-effective manner.

The Panel stated that its research "unequivocally" proved that the cumbersome, and often one-size-fits-all acquisition process is an obstacle to DoD's ability to access a marketplace that has moved far beyond the captive industrial base of the Cold War era.

This report contains numerous recommendations to update the process by which DoD acquires IT business systems, streamline DoD's cumbersome auditing requirements, address challenges in how the small business community and DoD interact, update commercial buying, clarify definition of personal and non-personal  services, remove statutory requirements for 13 acquisition-related DoD offices, and repeal 20 acquisition-related statutory reporting requirements.

There's plenty of material in this report to keep us busy writing for a long time. But today, we want to focus on recommendations impacting the Defense Contract Audit Agency (DCAA), the Agency that has taken more than its fair share of criticisms lately - some justified, most not - for a lot of the inefficiencies in the current process.

The recommendations concerning DCAA fall into three categories; re-focus on assisting contracting officers, use commercial standards rather than home-grown ones, and find better ways to be more effective and efficient in oversight activities. Here they are.

Enhance DCAA's Focus on the Contracting Officer and Acquisition Team

  • Align DCAA's mission statement to focus on its primary customer, the contracting officer
  • Revise the elements of DCAA's annual report to Congress to incorporate multiple key metrics
  • Provide flexibility to contracting officers and auditors to use audit and advisory services when appropriate.
  • Establish statutory time limits for defense oversight activities.
  • Permit DCAA to use Independent Public Accountants (IPAs) to manage resources to meet time limits.

Use Accepted Commercial Standards and Practices with Objective and Standardized Compliance Criteria

  • Replace system criteria from DFARS 252.242-7006, Accounting System Administration, with an internal control audit to assess the adequacy of contractors' accounting systems.
  • Develop a Professional Practice Guide for DoD's oversight of contractor costs and business systems.
  • Require DCAA to obtain peer review from a qualified external organization

Provide More Effective and Efficient Contract Compliance Oversight

  • Increase coverage of the effectiveness of contractor internal control audits by leveraging IPAs
  • Incentivize contractor compliance and manage risk efficiently through robust risk assessment.
  • Clarify and streamline the definition of and requirements for an adequate incurred cost proposal to refocus the purpose of DoD's oversight.

Many of these are excellent recommendations. We'll unpack some of them in later posts.

Thursday, February 1, 2018

Contractor Gets Caught Misrepresenting its Veteran Ownership Status

There have been so many 'rent-a-vet' schemes uncovered and prosecuted lately that we're surprised that companies continue to think the risks are low enough that they won't get caught. In fact, uncovering 'rent-a-vet' schemes seems to be one of the easiest contract frauds to detect. Its like picking the "low-hanging fruit" as one former auditor would often quip.

Take Patriot Company, for example. The company obtained some contracts that were set aside for veteran-owned businesses. A quick unannounced trip to one of the company's job site by the Veterans Administration however, found that the guy who was supposed be be managing the day to day operations of the company, was 40 miles away working at his full-time Government job. Seems that Patriot was not so patriotic after all.

Patriot company is ostensibly owned by Wilson and Salavitch. Wilson is not a veteran but Salavitch is, and a service-disabled veteran at that. Wilson was responsible for the day-to-day operations and the long-term decision making of the company. Salavitch however certified to the VA that he was responsible for managing and long-term decision making. Based on that representation, Patriot was granted SDVOSB (Service Disabled Veteran Owned Small Business) status.

Ultimately, Patriot used its ill-gotten SDVOSB status to obtain 20 Government construction contracts valued at $13.8 million. These were contracts that legitimate SDVOSB contractors were not awarded.
Patriot has now been de-certified but that is not the end of the story. Wilson and Salavitch face a year or so of jail time without parole and have agreed to forfeit $2.1 million.

You can read more about this case in the Justice Department press release.