Monday, December 31, 2018

Material Misrepresentation in Offeror's Proposal

The Coast Guard issued a solicitation for a fixed-price task order for project management, technical support, and logistics services for its Aviation Logistics Center. The solicitation required offerors to submit resumes for all positions, which the Government would evaluate to determine whether the qualifications and experience met or exceeded the position requirements. The Coast Guard received six proposals and after reviewing them, established a competitive range consisting of Sev1Tech and STI-TEC. Ultimately, the award went to STI-TEC whereupon Sev1Tech appealed contending that STI-TEC's proposal contained a material misrepresentation in that it proposed personnel for which it did not have a reasonable expectation would be available for performance under the task order.

Sev1Tech proposed a team comprised of 95 percent incumbent personnel, stating that it had met the current employees on two occasions and negotiated exclusive letters of commitment with incumbent personnel. STI-TEC provided the names and resumes for 10 of the same incumbent staff that Sev1Tech had proposed stating that it had "reached out to and negotiated contingent offers of employment with candidates for each position.

Sev1Tech called STI-TEC a liar. Sev1Tech stated that STI-TEC did not obtain permission to use the resumes of incumbent personnel in its proposal and did not contract the individuals concerning working on the task order until after the task order was awarded.

Sev1Tech's appeal did not go well for STI-TEC. The GAO (Government Accountability Office) noted that offerors may not represent the commitment of incumbent employees based only on a hope or belief that the offeror will ultimately be able to make good on its representation. A misrepresentation is material where an agency (the Coast Guard, in this case) has relied upon the misrepresentation and that misrepresentation likely had a significant impact on the evaluation. The GAO concluded that the STI-TEC materially misrepresented the availability of incumbent staff without receiving prior assurances that the incumbent staff was interested in continuing to work on the new task order and the Coast Guard relied on the resumes of the incumbent staff in its evaluation of proposals. Accordingly, GAO sustained the protest.

GAO recommended that the Coast Guard reevaluate STI-TEC's proposal, taking into consideration the awardee's misrepresentations and make a new selection decision. GAO also recommended that Sev1Tech be reimbursed reasonable costs of filing and pursuing the protest, including attorney's fees.

Friday, December 28, 2018

What Are Defective Pricing "Offsets"?

Since 1987, there has been statutory recognition for contractor offsets for defective cost or pricing data that resulted in understated costs. Whenever the Government challenges a contractor for failing to submit current, complete, and accurate cost or pricing data, the contractor is entitled to offset the cost impact of that defective pricing with other facts that went in the Government's favor.

Offsets must meet the same factual requirements that TINA (Truth in Negotiations Act) requires; must be factual data that existed at the time of agreement on price that was reasonably available to the contractor. Contractors cannot claim intentional understatements as offsets nor can contractors claim such things as unsupported "bottom-line" management adjustments.

To be considered, offsets against defective certified cost or pricing data

  • must be certified to the contracting officer that, to the best of the contractor's knowledge and belief, the contractor is entitled to the offset in the amount requested,
  • proves that the cost or pricing data were available before the date of agreement on the price of the contract (or modification), and
  • proves that the data was not submitted before such date.

Offsets will not be allowed if

  • the understated data was known by the contractor to be understated before the date of the Certificate of Current Cost or Pricing Data, or
  • the Government proves that the facts demonstrate that the contract price would not have increased in the amount to be offset even if the available data had been submitted before the date of agreement on price.

So, for example, offsets are prohibited if the contractor intentionally withheld from the Government information showing a higher cost for an item or service.

Offsets are permitted among and withing various line items of certified cost or pricing data but never for more than the maximum defective overstated costs. Offsets can never result in an increased contract price.

One final note, generally, the Government will not entertain offsets unless and until the contractor certifies to its allowability. There have been a few exceptions for whatever reason but exceptions to certification are not the norm.

Thursday, December 27, 2018

Whistleblower Protection for Contractor Employees - Legal Costs

As we discussed yesterday, contractors and subcontractors are prohibited from discharging, demoting, or otherwise discriminating against an employee as a reprisal for disclosing evidence of gross mismanagement of a federal contract, a gross waste of federal funds, an abuse of authority relating to a federal contract, a substantial and specific danger to public health or safety, or a violation of law, rule, or regulation related to a federal contract.

Most of the time, we suspect, when employees are discharged or demoted, its for reasons other than whistleblower activities. Sometimes however, when discharged or demoted, contractor employees will claim whistleblower status. When that happens, contractors must assume a defensive posture which will undoubtedly involve legal fees. Are those legal fees incurred to defend against claims of reprisal by an employee claiming whistleblower status allowable?  It depends. It depends on the outcome of the case and whether the contractor or subcontractor engaged in reprisal against a whistleblower.

FAR (Federal Acquisition Regulations) 31.205-47 is the 'go to' cost principle for determining allowability of legal fees in connection with employees submitting whistleblower complaints of reprisal.
Costs incurred in connection with any proceeding brought by a Federal, State, local or foreign government for a violation of or failure to comply with law or regulation by the contractor (including its agents or employees), a contractor or subcontractor employee submitting a whistleblower complaint of reprisal, or a third party in the name of the United States under the False Claims Act, are unallowable if the result is
  • in a criminal proceeding, a conviction
  • In a civil or administrative proceeding, either a finding of contractor liability where the proceeding involves an allegation of fraud or similar misconduct, or imposition of a monetary penalty, or an order issued by the agency head to the contractor or subcontractor to take corrective action where the proceeding does not involve an allegation of fraud or similar misconduct.
  • A final decision by an appropriate official of an executive agency to debar or suspend the contractor, rescind or void a contract or terminate a contract for default.
  • Disposition of the matter by consent or compromise if the proceeding could have led to any of the previously described results.
  • Not covered by the previous results but where the underlying alleged contractor misconduct was the same as that which led to a different proceeding whose costs are unallowable by reason of the forgoing.
So, it depends upon the outcome of the case and also illustrates why innocent contractors will fight rather than settle out of court. An out of court settlement will probably render the settlement costs and legal fees unallowable.

Wednesday, December 26, 2018

Whistleblower Protection for Employees of Government Contractors

The FAR (Federal Acquisition Regulations) Councils are proposing to amend the FAR to implement a provision in prior NDAAs (National Defense Authorization Acts) to strengthen and make permanent protections for disclosures of certain information. It also clarifies the prohibition on reimbursement for certain legal costs incurred by contractors and subcontractors in defense of employee whistleblower complaints.

A four-year pilot program created by the 2013 NDAA will become permanent under this new regulation. The new regulation however contains some enhancements to pilot program regulations. It provides more details about the nature of what constitutes whistle lower information and to whom it may be disclosed, as well as more detailed procedures for filing and investigation complaints and enforcing orders.

The prohibition against retaliating against contractor whistleblowers is found in FAR 3.9, Whistleblower Protections for Contractor Employees. It is quite expansive so we won't try to cover its essence in this short blog post. One new definition has been proposed - Abuse of Authority. Abuse of authority means an arbitrary and capricious exercise of authority that is inconsistent with the mission of the executive agency concerned or the successful performance of a contract of such agency.

The basic policy remains essentially the same as that in the pilot program: Contractors and subcontractors are prohibited from discharging, demoting, or otherwise discriminating against an employee as a reprisal for disclosing, to (i) congress or a representative of a congressional committee (ii) inspector general (iii) GAO (Government Accountability Office), (iv) a federal employee responsible for contract oversight or management at the relevant agency, (v) an outhorized official of the Justice Department, (vi) a court or grand jury, or (vii) a management official or other employee of the contractor or subcontractor who has the responsibility to investigate, discover, or address misconduct the following:

  1. Evidence of gross mismanagement of a Federal contract
  2. A gross waste of Federal funds
  3. An abuse of authority relating to a Federal contract
  4. A substantial and specific danger to public health or safety, or
  5. A violation of law, rule, or regulation related to a Federal contract.
Tomorrow we will examine the cost allowability of defending against whistleblower allegations.

Monday, December 24, 2018

Trafficking in Persons - Recruitment Fees - Methods of Payment

We finished up last week with a couple of posts on trafficking in persons. Thursday we discussed the general prohibition found in statutes and regulations (see Trafficking in Persons) and followed that up on Friday with definition of recruitment fees (see Trafficking in Persons - Recruit Fees). One of the prohibitions found in FAR 22.17 makes it unlawful for Government contractors and subcontractors to charge employees fees for the privilege of working.for the company.

Now we mentioned last week that a lot of firms might try to find some wiggle room in the regulations to, in effect, find a way to charge recruitment fees - finding ways to adhere to the letter of the law if not the spirit or intent of the law. There's a good reason because many of the laborers used to support the military in areas such as Afghanistan and Iraq (to name two) come from impoverished areas where people are unencumbered by any stigma attached to unethical conduct. If people want jobs, they're going to have to pay somebody.

The FAR makes it clear that the method of payment doesn't matter. Specifically, FAR states that a recruitment fee, as described last Friday, is a recruitment fee (i) regardless of whether the payment is paid in property or money, (ii) deducted from wages, (iii) paid back in wage or benefit concessions, (iv) paid back as a kickback, (v) bribe, (vi) in-kind payment, (vii) free labor, (viii) tip or tribute, or (ix) collected by an employer or a third party, whether licenses or unlicensed, including:

  1. Agents
  2. Labor brokers
  3. Recruiters
  4. Staffing firms (including private employment and placement firms)
  5. Subsidiaries/affiliates of the employer
  6. Any agent or employee of such entities, and
  7. Subcontractors of all tiers.
There is one final point that we should discuss - the job has to be accurately described. The regulations prohibit the use of misleading or fraudulent practices during the recruitment of employees or offering of employment, such as failing to disclose, in a format and language understood by the employee, basic information or making material misrepresentations during the recruitment process regarding key terms and conditions of employment, including wages and fringe benefits, the location of work, the living conditions, housing and associated costs, any significant costs to be charged (excluding recruitment fees), and, if applicable, the hazardous nature of the work.

Friday, December 21, 2018

Trafficking in Persons - Recruitment Fees

Yesterday we discussed the FAR prohibitions against "trafficking in persons" and the underlying statutory basis for those regulations (see Trafficking in Persons). One of the prohibitions, as you recall, was one prohibiting contractors and subcontractors from charging employees recruitment fees. One of the problems with this prohibition has been that no one could agree on what constituted "recruitment fees". In fact, in 2015, GAO (Government Accountability Office) came out with a report recommending that agencies develop a more precise definition of recruitment fees. According to GAO, without a clear definition, agencies would face challenges enforcing the prohibition. So, through the regulatory process, the Government has done just that; defined in FAR 22.1702 the term recruitment fees. Here it is:

Recruitment fees means fees of any type, including charges, costs, assessments, or other financial obligations, that are associated with the recruitment process, regardless of the time, manner, or location of imposition or collection of the fee.

Recruitment fees include, but are not limited to, the following fees when they are associated with the recruiting process for:

  • Soliciting, identifying, considering, interviewing, referring, retaining, transferring, selecting, training, providing orientation to, shills testing, recommending, or placing employees or potential employees
  • Advertising
  • Obtaining permanent or temporary labor certification, including any associated fees
  • Processing applications and petitions
  • Acquiring visa, including any associated fees;
  • Acquiring photographs and identity or immigration documents, such as passports, including any associated fees
  • Accessing the job opportunity, including required medical examinations and immunizations; background reference, and security clearance checks and examinations; and additional certifications;
  • An employer's recruiters, agents or attorneys, or other notary or legal fees;
  • Language interpretation or translation, arranging for or accompanying on travel, or providing other advice to employees or potential employees;
  • Government-mandated fees, such as b order crossing fees, levies, or worker welfare funds;
  • Transportation and subsistence costs for everything until disembarking at work site.
  • Equipment charges
  • Security deposits, bonds, and insurance 

This seems like a very comprehensive listing. Although some contractors and subcontractors might look for wiggle room to find ways to make employees pay some sort of fee for securing the job, the intent here is to not saddle employees with these otherwise allowable fees. Such fees, recruitment fees as they are called, must be charged direct to a contract or allocated though an indirect rate.

Thursday, December 20, 2018

Trafficking in Persons

The degrading institution of slavery continues through the world. Trafficking in persons is a modern form of slavery, and it is the largest manifestation of slavery today. At least 700 thousand people annually, primarily women and children, are trafficked within or across international borders. Approximately 50 thousand women and children are trafficked into the United States each year. Many of these people are trafficked into the international sex trade, often by force, fraud, or coercion. But trafficking in persons is not limited to the sex industry. This growing transnational crime also includes force labor and involves significant violations of labor, public health, and human rights standards worldwide. (22 CFR 78).

This "trafficking" statute also applies to Government contractors and is implemented by FAR (Federal Acquisition Regulations) 22.17.  Now one would not think that trafficking would be an issue with Government contractors but there have been documented cases where contractors over in Kuwait, Iraq, and Afghanistan who provide various services to military, have used subcontractors to fill their staffing needs. These subcontractors have induced workers from different (often impoverished) countries to work for them in sometimes inhuman conditions. In one recently settled case, the subcontractor even took their passports away so they couldn't leave.

The FAR coverage prohibits contractors, contractor employees, subcontractors, subcontractor employees, and their agents from:

  1. Engaging in severe forms of trafficking in persons during the period of contract performance
  2. Procuring commercial sex acts during the period of performance
  3. Using forced labor in the performance of the contract
  4. Destroying, concealing, confiscating, or otherwise denying access by an employee to the employee's identity or immigration documents, such as passports or drivers' licenses, regardless of issuing authority
  5. Using misleading or fraudulent practices during the recruitment of employees or offering of employments, such as failing to disclose, in a format and language accessible to the worker, basic information or making material misrepresentations during the recruitment of employees regarding the key terms and conditions of employment, including wages and fringe benefits, the location of work the living conditions, housing and associated costs, any significant costs to be charged to the employee, and if applicable, the hazardous nature of the work.requires certification and compliance plans
  6. Using recruiters that do not comply with local labor laws of the country in which the recruiting takes place
  7. Charging employees recruitment fees                     
  8. Failing to properly return workers to their countries after the end of employment.
  9. Providing or arranging housing that fails to meet the host country housing and safety standards
Contractors are required to periodically certify compliance and ensure that their subcontractors do the same. Enforcement of this is handled by the Labor Department.

Wednesday, December 19, 2018

SBA - Size Restrictions Now Based on 5-Year Averaging

On Monday, this week, the President signed into law several bills, one of which was H.R. 6330, the Small Business Runway Extension Act of 2018" (SBREA). The SBREA modifies the method for prescribing size standards for small businesses. Basically, this is a one-word change but it will, in most cases, benefit small businesses. The Law amends 15 USC 14A, Section 632(a)(2)(C)(ii)(iii) by changing the number '3' to '5'.

For purposes of 15 USC 14A, a small-business concern is one that is independently owned and operated and is not dominate in its field of operations. To be a small business, the firm must not exceed certain size standards consisting of employment numbers and average annual average gross receipts over a period of time. Previously, the average was calculated over a period of three years. Under the new law, the average is to be calculated over a five-year period.

The objective of the legislation is to allow small business to stay small businesses longer. Instead of calculating revenues based on the trailing three-year average, small businesses can calculate average revenues based on the last five years. This works for growing companies - those who the Government has chosen to benefit. However, the converse is also true. Companies that are losing revenues may well stay in the non-small business category longer.

Calculating annual revenues based on averages, whether three or five years, smooths out a lot of the volatility in revenue recognition inherent in small businesses and start-ups. Far more companies will benefit from a five-year averaging scenario than those that might be harmed by it.

Tuesday, December 18, 2018

Unsealing "Qui Tam" Cases

The publicizing of a "Qui Tam" suit happens at the time the Government decides whether to intervene. The underlying investigation took months, and sometimes years, to complete.U

Under the False Claims Act (FCA), private parties may bring suit in the name of the United States. The private parties, known as qui tam relators, must initially file the complaint under seal. Sealing protects the United States' investigation while the Government determines whether to intervene in the action. Once the United States decides whether to intervene, the qui tam complaint is unsealed. This is keeping with the general presumption that the public enjoys free and unfettered access to Court records.

To justify continued sealing of qui tam court records, the risk of disclosure must outweigh the public benefits in access to court records. What might those risks be? Such risks for continued sealing would be a showing that the particular pleading either includes confidential investigative techniques, jeopardizes an ongoing investigation or risks injury to non-parties. By contrast, if the pleading merely discloses routine investigative procedures which anyone with rudimentary knowledge of the investigative process (i.e. someone who watches crime shows on television) would assume would be utilized in the regular course of business and contains no information about specific investigatory techniques, then the pleading would be unsealed.

Sometimes the Government will try to maintain pleadings under seal. Perhaps the real reasons for trying to do do are not disclosed but the Government still tries and usually fails. In one recent case, the Government cited motions for extensions of time, routine investigative matters such as the numbers of subpoenas issued, witnesses interviewed, and pages of documents reviewed. as justification for continued sealing. The Court ruled that none of the pleadings implicate specific people or provide any substantive details about the investigative or decision-making efforts beyond memorializing routine investigative steps involved in any such process.

Monday, December 17, 2018

SBIR/STTR Contracts - Know Cost "Eligibility" Rules

We use these pages to keep readers up to date on FAR (Federal Acquisition Regulation) cost principles (i.e. FAR Part 31) and supplemental cost principle regulations from individual agencies (e.g. DFARS or DoD FAR Supplement). Contractors need to understand however that there are many other factors that affect the allowability and eligibility of costs. Contracts and grants often contain specific limitations while agencies themselves impose their own limitations. When it comes to SBIR/STTR programs, things can get very confusing and its necessary to fully understand allowability and eligibility criteria when negotiating contract prices. Here are some examples of competing or conflicting guidance pertaining to SBIR/STTR contracts.

  • Some agencies allow you to purchase equipment as a direct cost on a Phase 1 project while others do not.
  • Some agencies prohibit travel in Phase 1 while others strongly encourage it and even others require it. This leads to "consistency" issues in estimating, recording, and reporting costs.
  • NIH (National Institute of Health) limits Phase 1 indirect rate to 40 percent of all direct costs unless there is an approved rate on a recent Federal project. This 40 percent limitation can result in a significant hardship to small businesses.
  • NSF (National Science Foundation)  limits the combination of fringe benefits and indirect costs to not more than 150 percent of direct labor.
  • All agencies allow profit and commonly refer to 7 percent of total cost. However, some agencies take that to mean that profit cannot exceed 7 percent, others say that means "normally" profit should not exceed 7 percent, while still others say 7 percent is an agency average.

The eligibility of costs is usually mentioned in the agency's SBIR/STTR solicitations but usually requires some "digging" to find them. Before entering into an SBIR/STTR contract, be certain that you fully understand any unique cost eligibility requirements and restrictions that apply and query the contracting officer for others that might not be evident. Phase 1 projects are usually fixed price while Phase 2 are typically cost-reimbursable. Once Phase 1 costs are negotiated, contractors can pretty much spend the contract amount as it sees fit. Not so with Phase 2 projects. Phase 2 projects can cause the most problems to contractors because those contracts become subject to audit.

For some free training resources from the SBIR/STTR folks, see New Resources for Small Businesses Seeking R&D Funding.

Friday, December 14, 2018

Government Paid $13.6 Million to Hire Two Border Guards

Boarder patrol positions have been notoriously difficult to fill, in large part, because of the polygraph exam applicants are required to undergo. It must be a rigorous polygraph because two of three applicants fail the exam.

To assist in hiring border guards, the U.S. Customs and Border Protection (CPB) awarded Accenture Federal Services a five year contract for nearly $300 million to to recruit and hire 7.500 Boarder Patrol Agents. Now, 10 months into the contract, CPB has paid Accenture $13.6 million and what do they have to show for their efforts? Accenture has filled 2 positions (or $6.8 million per recruit).

The Department of Homeland Security (DHS), Office of Inspector General (OIG), initiated its audit of Accenture's performance after receiving "Hotline" complaints about the contractor's performance. The OIG's report, issued last week, found numerous problems and concluded that CBP management needed to address "serious performance issues on the Accenture hiring contract.".

Among the performance issues identified by the OIG are

  • Accenture has not provided the promised hiring process or results. Accenture has yet to demonstrate the efficient, innovative, and expertly run hiring process it promised.
  • Accenture relied on CBP resources to fulfill contract obligations. Accenture was supposed to provide a team of technical experts and tools to fulfill contract requirements. Instead, Accenture relied heavily on CBP resources to complete the hiring process.
  • Accenture has not provided the agreed-upon technological innovations.
  • Accenture used a retinal scanning tool to discern deception based on eye and face muscle movement to pre-screen candidates without regulatory approval.

The OIG made a series of recommendations which CPB concurred to.

The full report can be accessed here.

Thursday, December 13, 2018

Government Employee Guilty of Accepting Gratuities in Exchange for Official Acts

NASA's Wallops Flight Facility (WFF) is located on the Eastern shore of Virginia although to get there from Virginia proper, you would need to take a boat or drive through Deleware. WFF provides launch and range services for both the Government and commercial sectors.

Mr. Kremer was the Chief of the Range and Mission Management Office at NASA Wallops (a GS-15 position). In his position, Kremer was responsible for administering the Range Operations Contract (ROC) - a multi-year, $190 million, cost-plus Government contract to provide various services at Wallops' test facilities and launch control centers. The prime ROC contractor awarded numerous subcontracts. One of the subcontractors performed interior design and office furnishing services and equipment at WFF.  The subcontractor (identified as Firm #2 in court documents. One of Firm #2's employees, identified as 'SC" in court documents, was the primary point of contact between Firm #2 and Mr. Kremer. "SC" also owned a beach house in Cape Charles, VA that he made available for Kremer's use.

One week for eight consecutive summers, Kremer was allowed free use of SC's beach house. In exchange, Kremer steered the award of interior design and furnishing projects to SC and Firm #2. Ultimately, emails between Kremer and SC did them in. During one stay, Kremer emailed SC: "... after this week, I'm going to be searching for rooms even those that no one uses at Wallops and put new furniture in the. I owe u big time. This has been so super." After another week's free use, Kremer wrote: "Can I book a week like last year? I will give you some days this week if that is OK ... THANK YOU so much again. Your customer service is unmatched ... not to mention the summer fun you offer. LOL.."

The Justice Department estimated the value of these week long stays to be about $18 thousand. In addition, the Government's investigation also disclosed that Kramer asked SC to procure some personalized art and charge it to the contract. Together they conspired to call it a "whiteboard" with SC claiming that it was not her "first time at the rodeo". Investigators also found that Kremer instructed the ROC contractor to buy $7,000 in Amazon gift cards, ostensibly to use to purchase "electronic reference books" for WFF employees. Those gift cards however were used for Kremer's personal use.There were more irregularities uncovered in the investigation including $11 thousand in "promotional" items for Kremer's friends and family members.

Mr. Kremer plead guilty in Federal court to receiving gratuities in exchange for official acts performed in his capacity as a government official, and to stealing funds from a Government contract. Sentencing is scheduled for next March.

Wednesday, December 12, 2018

Proposed Changes to Progress Payment Rate - Public Meetings Rescheduled

Last August, the Defense Department proposed significant changes in the way that progress payment rates are established. Currently, FAR 52.232-16 sets customary progress payment rates of 80 and 85 percent for large and small businesses while the Defense Department bumps the small business progress payment rate to 90 percent. The change proposed back in August leaves the small business progress payment rate alone but drops the rate for non-small businesses from 80 percent to 50 percent with provisions to increase the base amount to 90 percent by meeting certain incentives (see Proposed Changes to Progress Payment Rate).

The idea behind these changes were to increase the effectiveness and efficiency of certain areas including (i) on-time deliveries, (ii) contractor quality, (iii) contractor business systems, (iv) increasing subcontracting opportunities for small businesses, and (v) improved estimating systems. The objective, while addressing valid DoD concerns, met with a lot of opposition. Initially DoD scheduled a public meeting in the DC area to obtain views of interest parties (see Proposed Changes to Progress Payment Rate - Public Meeting). Later on (in October 2018), the entire proposal was withdrawn and the public meeting was cancelled (see Proposed Changes to Progress Payment Rate - Withdrawn).

Withdrawn perhaps, but not forgotten. DoD withdrew the proposal to give it time to conduct additional outreach with industry regarding contract financing methods. but since the proposed rule is predicated upon a provision in the 2017 NDAA (National Defense Authorization Act), there will need to ultimately be some kind of change to contract financing reform.

The Defense Department has now rescheduled its public meetings (two in January and one in February) to obtain views of experts and interested parties regarding revising policies and procedures for contract financing, performance incentives, and associated regulations for DoD contracts. The fact that the Department is scheduling three meetings instead of one previously, gives some indication of the level of interest in this matter.

Pre-registration is required so hurry over to these registration instructions if interested in attending.

Tuesday, December 11, 2018

Resolving Proposal Inadequacies - Contracting Officers Failure to Document

The Defense Department Inspector General (IG) recently evaluated whether contracting officers took actions that were appropriate and complied with FAR (Federal Acquisition Regulations) 15.4, Contract Pricing, when the auditors (specifically DCAA or Defense Contract Audit Agency) determined that a contractor's price proposal was inadequate because those proposals did not comply with the specific requirements of FAR 15.4.

The good news is that the IG found that contracting officers did indeed take appropriate action to address proposal deficiencies identified by DCAA. In 23 of 23 proposals identified by DCAA as unacceptable as a basis for negotiations, contracting officers took the necessary actions to resolve the inadequacies.

The bad news however is that the contracting officers did not document the inadequacies or the actions taken to address the inadequacies in the contract file. Such documentation is required by FAR 15.406-3, Documenting the Negotiation.

The (Acting) Undersecretary of Defense for Acquisition and Sustainment recently sent out a reminder to contracting officers to, in essence, get their act together and comply with the documentation requirements. The memorandum reminded contracting officers that they have an affirmative requirement to document all DCAA identified inadequacies and to document why the actions taken appropriately address the contract price proposal inadequacies. By doing so, the memorandum concluded, contracting officers will have properly accounted for any issues of noncompliance or other discrepancies identified int he DCAA audit.

While we were auditors, we encountered many contractor proposals that were inadequate in not including the detail and support required by FAR 15.4. Some deficiencies were certainly more egregious than others but when the magnitude rose to a level where we didn't think the Government could achieve fair and reasonable pricing based on the garbage submitted, we would advise the contracting officer accordingly and recommend he/she not negotiate. Whatever actions contracting officers might have taken to resolve those inadequacies were rarely satisfactory to the audit community. Evidently contracting officers answer to a higher power than the contract auditor who are often viewed as an impediment to a smooth negotiation process.

The full IG report can be read or downloaded here.

Monday, December 10, 2018

Estimating Labor Hours on Price Proposals

Whenever cost or pricing data is required in connection with a Government contract or subcontract, whether certified or other than certified,  contractors (or subcontractors) are called upon to provide a significant amount of detail to back up their estimates. Then it is up to the Government - could be the Defense Contract Management Agency, the Defense Contract Audit Agency, or cost/price analysts in the buying activity - or the prime contractor to decide the level of review necessary to validate the propriety of the estimates. Today we will discuss some of the considerations that auditors might use to evaluate labor costs, and more specifically, labor hours.

Labor costs are comprised of labor rates and labor hours. Estimates for labor rates are fairly straight-forward. Usually labor rates are based on existing pay rates with escalation thrown in. Estimates for labor hours however create a big challenge to estimate and represent a significant risk area for the Government. Contractors need to answer the questions of how many hours will it take to perform a particular task and how does it know? The Government will come along and asked them to "prove it".

Historical data is usually the preferred method of forecasting future hours. Without historical data, labor hour estimates are usually based on judgmental estimates, or engineering estimates. Estimates cannot be evaluated with empirical data. Negotiations usually come down to decisions about reasonableness or who can put up the most convincing arguments.

The Government however wants to know about a contractor's historical experience in building whatever the item being built or assembled. For this reason, the Government will always ascertain the suitability of historical data for making estimates. (i.e. accurate, reliable and representative). If a contractor has not identified relevant historical labor hours in its basis of estimate, the Government is going to ask for historical hours and make that comparison.

The Government will also take that history and adjust it for learning/improvements. The Government might apply improvement curve techniques or regression analysis, or other trend-line techniques to historical hours.

The Government will also look at a couple of other areas. They will make sure that proposed direct labor is classified consistent with FAR 31.202 and 31.203(a). In other words, they do not want contractors to propose as direct labor, activities that are and should be charged indirect. Second, the Government will want to ensure that the proposed labor mix is consistent with past performance and company demographics. For example, there should be consistency in the proposed mix of various skill levels with that supported by historical evidence.

Sometimes contractors get a little sloppy in estimating their direct labor hours and are left scrambling when the Government begins inquiries into the propriety of historical hours. Be prepared.

Friday, December 7, 2018

Does Your Contract Contain the Clause at FAR 52.204-23 - the Kaspersky Prohibition?

FAR 52.204-23 is a relatively new contract clause that is appearing in a lot of contracts. It prohibits the Government from contracting for hardware, software, and services developed or provided by Kaspersky Labs and other covered entities. Covered entities includes successor entities to Kaspersky Lab, entities that controls, is controlled by or is under common control with Kaspersky Lab or another entity of which Kaspersky Lab has a majority ownership.

But whether the clause has been included in your contract, or not, the prohibition applies as it is based on a statutory authority that became effective last October (October 1, 2018).

So what's wrong with Kaspersky anti-virus software? The Department of Homeland Security (DHS) is of the opinion that Kaspersky software presents an information security risk because of Kaspersky's Russian connections. A report out of the University of Illinois College of Law provides these thoughts:
  1. Russian law outlines a legal obligation by Kaspersky to assist Russian FSB (their Federal Security Service) in the execution of their duties including counterintelligence and intelligence activity.
  2. Russian law also permits FSB personnel to be embedded in private enterprises
  3. Because Kaspersky qualifies as an organizer of the dissemination of information on the Internet, it is required to provide the FSB with metadata and is also required to provide Russian officials with decryption keys for its data transmissions.
  4. Under Russian law, Kaspersky is required to install equipment for the FSB to monitor data transmissions.
Those facts raises concerns that the Kaspersky is too closely tied to the Russian Government and creates an unacceptable risk to the U.S. Government.

Back in September, we reported on these pages a couple articles stating that many contractors are unprepared for October 1st 2018 deadline. In some cases, contractors are not even aware that Kaspersky is running on their networks because it came pre-installed with unrelated software. In other cases, contractors have attempted to remove Kaspersky but missed  some instances because complete removal is more complicated that simply uninstalling the program. There is even a concern that some contractors don't believe the ban applies to them, when it most certainly does. It applies to subcontractors too.

In the event a contractor finds that it has violated this prohibition, it is required to notify the contracting officer within one day along with its mitigation actions and must submit a full report within 10 days. This is how serious the Government is taking the prohibition.

Thursday, December 6, 2018

Limitation on Subcontracting - Simplifying the Calculations

The FAR (Federal Acquisition Regulations) Councils are proposing to amend the FAR to bring it into conformity with certain SBA (Small Business Administration) regulations regarding limitations on subcontracting.

Under various rules, sometimes prime contractors are required to perform a certain percentage of work itself whereas under other programs, prime contractors could include subcontracts to "similarly situated entities" in the percentage of work it performed. The methods for calculating compliance also varies across small business programs.

A previous NDAA (National Defense Authorization Act) changed the focus on limitations on subcontracting rules. Instead of requiring a percentage of work to be performed by a prime contractor, the limitation on subcontracting rules now limit subcontracting to a percentage of the overall award amount to be spent by prime contractors on subcontractors. This is a much easier calculation.

Contractors no long will need to track the percentage of costs incurred that it spends performing work itself; it only has to track the percentage of the overall award amount (i.e. contract price) that it spends on subcontractors.

Additionally, the percentage of award amount that the prime contractor spends on subcontractors who are similarly situated entities is not considered subcontracted for purposes of complying with the limitation on subcontracting. "Similarly Situated Entities" are subcontractors that have the same small business program status as that which qualified the prime contractor for the award and is considered small for the NAICS code the prime contractor assigned to the subcontract for which the subcontractor will perform.

These changes, if adopted (and they no doubt will be adopted) will give small businesses greater flexibility on how they choose to comply with the limitations on subcontracting.

Read more about the proposed change here.

Wednesday, December 5, 2018

Board Decision Becomes Treatise on FAR 31.201-3 - Reasonableness

In 2001, the Army awarded a contract to Brown & Root Services, Inc (KBR) for support services during military operations in Iraq (commonly referred to as the LOGCAP III contract). KBR. Two of KBR's subcontractors filed REA's (Requests for Equitable Adjustment) with KBR. KBR paid the subcontractors and then in turn, requested reimbursement from the Army. The Army denied the cost so KBR appealed to the ASBCA.

The ASBCA also denied the appeal because it found the KBR's actions and the resulting costs to be unreasonable.

First, KBR agreed to the validity of its subcontractor's REA after concluding that performance delays were the Government's fault. However, after examining the facts and the contract language, the Board found that it was not reasonable for KBR to conclude the the Government failed to perform the prime contract.

Second, KBR did nothing to analyze the propriety of its subcontractor's claimed costs. Although KBR recognized that its subcontractor could only seek its actual costs, it did not require evidence of actual cost before paying out a $25 million settlement. Instead of determining the actual number of delay days, KBR relied on its subcontractor's unrealistic model of estimating delay days.

This is a lengthy ASBCA decision but is highly instructive for someone trying to understand how the Board might apply the FAR 31.201-3 "reasonableness" standard.

Tuesday, December 4, 2018

What is a Profit Margin Test?

Every DCAA (Defense Contract Audit Agency) audit, whether requested or self-initiated, begins with a risk assessment. A risk assessment is a set of tools auditors - all auditors - use to help decide where and what to focus on in an audit. So, for example, if only $100 of material costs have been charged against a $1 million contract, the auditor would probably conclude that his/her limited resources can be better spent on other than material costs.

For T&M (Time and Material) contracts, there are two inherent risks to the Government. First, did the Government really receive the services that it paid for and second, were those services rendered by personnel with the right qualifications? There have been some well-publicized criminal cases were contractors reaped windfall profits by not providing the requisite skill level that the Government paid for. For example, the Government contracted for Senior Engineers but the contractor performed the work with Junior Technicians.

One test the auditor might perform to determine whether there might be a risk for that happening is what DCAA refers to as the "profit margin test". The profit margin test compares booked cost (i.e. actual costs) to billed cost. If variances are significant, it might mean that the contractor is not paying employees the amount that it proposed and negotiated with the Government. And one reason why that might happen is because the contractor is utilizing lesser skilled employees for work that the Government desires (and pays for) higher skilled individuals. That's not the only reason for variances however. Variances could be cause by differences between negotiated and actual overhead rates.

If there is a significant variance between actual costs and billed amounts, auditors will perform further analysis to determine the reason for those variances. If it is caused by labor rate variances, Auditors will then assess the risk that the contractor is substituting less qualified employees. If substitution is occurring, auditors will most likely identify those personnel for detailed employee interviews.

Sometimes it becomes necessary to utilize different skills than what is contemplated on a T&M contract. The proper way to handle this is to notify the contracting office of the necessity and negotiate a contract rate adjustment. Don't wait for an auditor to find or a whistleblower to call the hotline.

Monday, December 3, 2018

OFCCP's Help Desk

The Labor Department's Office of Federal Contract Compliance Programs (OFCCP) mission is to protect workers, promote diversity. It performs audits of companies with Federal Government contracts to ensure compliance with requirements to take affirmative action and to not discriminate. We have written about the Office several times in past year or so, usually in the context where the Office has taken punitive action against a contractor for failing to follow a law or regulation.

OFCCP issued a new directive last week (see Directive 2019-03) for the purpose of providing compliance assistance and guidance in a manner that employees and employers can easily access and reasonably rely upon as they seek to understand their rights and obligations.

Specifically the OFCCP is enhancing its existing "Help Desk" which will allow contractors to make inquiries by phone or email regarding a variety of topics. Think of it as a "knowledge base". The OFCCP wants to make certain Help Desk inquiries and responses dynamically available and searchable as a self-service option on OFCCP's website. This self-service option would allow contractors (or contractor employees) to benefit from prior inquiries and lead to greater efficiencies in OFCCP Help Desk operations.

OFCCP also plans to incorporate the use of opinion letters as part of guidance to employers, employees and the public. It hopes that by making fact-specific guidance in opinion letters about OFCCP's jurisdictional coverage or application of regulations or guidance will provide more certainty about how the Agency exercises its authority.

Any one having experience using "knowledge base" information to solve a problem knows full well that solutions can be difficult to find and even then, are not sufficient or specific enough to take "bullet proof" actions. Let us know your experiences.