Why Do They Let the Fox Guard the Hen-house?

The Office of Inspector General (OIG) located withing each major agency, is responsible for protecting programs administered by their respective agencies. Their primary mission is to prevent waste, fraud, abuse, and mismanagement by employees and contractors. OIG offices conduct audits and investigations to identify internal and external problems, recover funds and tax dollars and to prevent fraud.

Eddie Saffarinia was an Assistant Inspector General for HUD (the U.S. Department of Housing and Urban Development) from February 2012 to September 2017 where for a time he was the Assistant OIG for Information Technology and later served as the Assistant OIG for Management and Technology. But he also served as HUD-OIG's Head of Contracting Activity which meant that he was responsible for awarding contracts. That would be an obvious internal control weakness and one that is surprising an OIG organization would allow - Mr. Saffarinia was responsible for overseeing himself, his own work - overseeing the contracts that he participated in awarding - ensuring that there was no fraud, waste or abuse going on in the OIG's contracting activities he was involved in.

In his position as head of contracting and as a senior manager supervising HUD-OIG procurements, Mr. Saffarinia oversaw procurement review and approval processes, had access to contractor proposal information and source selection information, and participated personally and substantially in procurements. Therefore, Mr. Saffarinia had a legal duty under government regulations to disclose actual and potential conflicts of interest and to not solicit and accept anything of monetary value from (i) anyone who is seeking to obtain government business, (ii) conducts activities that are regulated by the OIG and (iii) has interest that may be substantially affected by the performance or nonperformance of his official duties.

You can probably guess where this is going. In a 19 page indictment filed int he U.S. District Court for the District of Columbia yesterday, Mr. Saffarinia has been charged with all kinds of financial shenanigans - exchanging proprietary contractor and source selection information for money and directing prime contractors to utilize specific subcontractors and hire specific individuals in exchange for money. The various schemes involved Mr. Saffarinia and two other individuals who emigrated from the same country, went to college together and socialized with each other on a regular basis.

Well, as the Justice Department likes to point out, these indictments are merely allegations at this point. Defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law. Based on the evidence presented in the indictment (bank records, emails and other documents), the Government has a seemingly strong case.

NDAA 2020 - Government's Use of Firm Fixed Price Contracts

The Senate version of the 2020 NDAA (National Defense Authorization Act) is calling for two studies of the Defense Department's use of fixed-price contracts, one by DoD and the other by GAO (General Accountability Office).

The DoD's review will focus on how the Department informs decisions to use fixed-price contracts to support broader acquisition objectives, to ensure that such decisions are made strategically and consistently. It is to include decisions on the use of the various types of fixed price contracts, including fixed-price incentive contracts.

The GAO review is similar in scope. It will focus on (i) a description of the extent to which fixed-price contracts have been used over time and the conditions in which they are used, (ii) an assessment of the effects of the decisions to use of fixed-price contract types, such as any additional costs or savings or efficiencies in contract administration, and (iii) an assessment of how decisions to use various types of fixed-price contracts affects the contract closeout process.

To understand why the Senate is calling for these studies, one needs to go back to Section 830 of the FY 2017 NDAA. That provision, which has been enacted into law, requires the Defense Department to use firm fixed-price contracts for foreign military sales (FMS). There are several reasons why the Government likes fixed price contracts:

1. Fixed price contracts provide greater incentive than cost-reimbursement contracts for the contractor to control costs and perform efficiently 
2. Fixed price contracts shifts risk from the Government to the contractor
3. Fixed price contracts reduce administrative costs

The Government's push (and preference) for fixed price contracting may have resulted in situations where contractors are losing too much money. Some acquisitions are not well suited for fixed price contracting (such as developmental programs) and the Government's propensity for fixed price contracts has had undesired consequences.

Federal Government Surpasses it Small Business Contracting Goals for Fiscal Year 2018

The SBA (Small Business Administration) announced yesterday that the Federal Government achieved its small business contracting goals for the sixth consecutive year. The Federal Government overall, awarded more than 25 percent of Federal contract dollars to small businesses. This percentage equates to about $121 billion or about $15 billion more than fiscal year 2017.

Comparing fiscal year 2018 performance with that of 2017, awards to small businesses were up in all categories. The only category where the Federal Government fell short of its goal was awards to Women Owned Small Businesses. So there's an opportunity there for women-owned small businesses.

Here is a summary of achievements by category:

SBA tracked performance on 23 different Agencies including themselves. 19 of those Agencies received a score of 'A' or 'A+'. Three Agencies received a 'B' grade (AID, HHS, and OPM) and one received a 'C' grade (NFS).

NDAA 2020 - Cost or Pricing Data Required to Support Commercial Pricing

Well its that time of the year when we begin to follow the NDAA (National Defense Authorization Act) process. Both the Senate and House have their own versions of the bill. After they pass them in their respective bodies, it goes to a compromise committee comprised of both Senate and House members, voted on by both and eventually to the President's desk for signature. Not all provisions will survive. Some will be eliminated. Others will be watered down. Nevertheless, it is interesting to see what legislators are thinking about when it comes to contracting matters. We will be covering various NDAA 2020 provisions periodically from now until it becomes law.

Today we begin with Section 803 appearing in the House version.

Is the Government getting hosed on commercial item purchases? Many people think so and can point to anecdotal evidence of that happening. In theory, buying commercial products makes sense and can save a lot of time and money. But the FAR definition of "commercial item" is quite broad (see FAR 2.101) and the product or service doesn't even need to be actually sold to the general public - it only needs to have been offered for sale to the general public.

Last year, GAO issued a report concluding that DoD's process for determining whether an item can be purchased commercially - and at a fair and reasonable price - is often long and challenging. One of its findings is that DoD was unable to obtain contractor data when adequate market information was not available. Ultimately, contracting officers need to determine that a price is fair and reasonable to the Government, irrespective of how the product or service was priced.

Section 803 attempts to deal with that problem by requiring contractors proposing commercial items to also provide cost or pricing data to the contracting officer when, based on market research, that item will be solely procured by DoD. (This begs the question that if an item is only procured by DoD, how can it be a commercial item?)

If an offeror fails to comply with the requirement, the Secretary of Defense may suspend or debar such offeror or include a notation on such offeror in the system used by the Federal Government to monitor or record contractor past performance.

So commercial item contractors may be requested to furnish cost or pricing data or face being written up in the past performance rating system.

Another element to Section 803 is the threat of a should-cost review before DoD enters into a contract to procure such a commercial product.

The Director of DCMA shall identify which commercial products should be analyzed under the should-cost review process before the Secretary of Defense enters into a contract to procure such a commercial product. Read about 'should-cost' reviews here.

What are Undefinitized Contract Actions?

This is an update to previously posted articles on Undefinitized Contract Actions. To read previous posts, see Undefinitized Contract Actions (UCAs) and Undefinitized Contract Actions? Government May Lower Profit Percentages.

A Government contract is considered 'definitized' where there is agreement on (i) contract terms, (ii) specification, and (iii) price. An undefinitized contract then means any contract action for which the contract terms, specifications, or price are not agreed upon before performance is begun under the contract.

Undefinitized contract actions allow the contractor to begin work before there is a finalized contract in place. However, since undefinitized contract actions represent a risk to the Government, they are to be used only in rare and select circumstances.

Generally, undefinitized contract actions are to be used only when (i) the negotiation of a definitive contract action is not possible in sufficient time to meet the Government's requirements; and (ii) the Government's interest demands that the contract be given a binding commitment so that contract performance can begin immediately.

Contracting officers normally cannot enter into Undefinitized Contract Actions (UCAs) without higher level approval. UCA agreements must include a not-to-exceed price. This is necessary to ensure there is a limitation to the Government's financial exposure. UCAs must be definitized by the earlier of (i) 180 days (six months) or (ii) the date on which the amount of funds paid to the contractor under the contract action is equal to more than 50 percent of the not-to-exceed price.

UCAs should be rare occurrences but are more common than one would suppose (see GAO report: Observations of Air Force's Use of Undefinitized Contract Actions). Examples where UCAs are utilized include major acquisition programs with long-lead material purchases and where the Government needs to quickly respond to tragedies such as fires, hurricanes, and floods.

The one possible downside to contractors under the UCA process is the potential profit to be made. Sometimes performance is practically completed before the contract can be definitized making a firm-fixed price contract almost a cost-reimbursable contract. The farther down the performance period a contract goes before definitization, the less risk there is to the contractor (in the Government's view) which reduces risk to the contractor and a reduction in the profit percentage.

Contractor Pays $300 Thousand to Settle False Claims Allegations

A Philadelphia-based company, 'Support of Microcomputers Associates' or SOMA, has agreed to a $300 thousand judgment for selling foreign-sourced computer supplies (i.e. printers and other equipment) to Federal agencies.

For an eight year period, SOMA sold computer supplies and accessories under GSA's (General Services Administration's 'Advantage' program which provides a web-based ordering system for federal agencies. Companies selling under the GSA Advantage program certify that the materials they sell are permitted for sale under the Trade Agreement Act. This Act provide for the United States and its agencies to purchase American-made materials or materials manufactured in specified allied countries. In violation of this Act and contrary to its certification, SOMA offered for sale to Government agencies, printers and other materials manufactured in China, Vietnam, and other non-compliant countries.

The Government's investigation began when a former executive of SOMA filed a qui tam (or whistleblower) action under the False Claims Act. Qui tam provisions permit private parties to sue for false claims on behalf of the Government and to receive a share of any recovery. The former executive will receive a share of the $300 thousand settlement but the Justice Department's press release announcing this settlement did not specify the amount. We guess the amount would be less than $100 thousand from which the executive's attorneys will want their cut.

The $300 thousand settlement was based on (i) SOMA's ability to pay and (ii) the company's cooperation in the investigation. That means there is a good chance that the company sold non-compliant goods for much more than that.

Who is Transdigm?

Transdigm is DoD's current bad boy. Yesterday we reported that DoD will not allow its contracting officers to use commercial item or sole source purchase mechanisms to buy from Transdigm or its 150 subsidiaries. All future purchases must be supported with cost or pricing data (either certified or non-certified, depending on whether a threshold is met). See DoD Scales Back on Sole Source Purchase Justifications from One Particular Supplier. This all came about after Congress asked DoD's Office of Inspector General (OIG) to audit contracts awarded to Transdigm. The OIG found that Transdigm made significant profits on sales to the Government, essentially by refusing to provide any support for their pricing, employing a 'take it or leave it' pricing strategy.

Who is Transdigm? Transdigm is a company that most people - even within the Government procurement community - have not heard of. However, some of the company's 150 plus subsidiaries might be more familiar. Esterline, who Transdigm acquired recently, is certainly a familiar name up here in the Pacific Northwest. The company was formed in 1993 and 10 years later, was acquired by a private equity fund in a leveraged buyout (a leveraged buyout usually means there is a significant amount of borrowed money). The company went public with an IPO (initial public offering) in 2006 and its stock is now traded on the NYSE.

Transdigm sales have grown from $435 million in 2006, the year the company went public to $3.8 billion in 2018. This rapid growth has been primarily through acquisitions. Transdigm has acquired more than 60 companies since its inception. Along the way it has also acquired a lot of debt. Its long term debt sits at $12.5 billion and more than half of the company's cash provided by operating activities goes toward payments on that debt. At the end of 2018, the company employed about 10,000 people.

The company is and has been profitable. The companies that Transdigm acquires are those where competition is slight and high profit margins can be maintained. Consider the following quotes form Transdigm's on-line presence.

• Private equity-like capital structure and culture - our longstanding goal is to give our shareholders over time, private equity like returns with the liquidity of a public market. We are focused on both the details of value creation as well as careful management of our balance sheet.
• Aligned with shareholders - we view our capital structure and allocation as a key part of our efforts to create shareholder value and allocate capital and structure our balance sheet to have the best chance to maximize returns to the shareholders. Everyone at Transdigm thinks and acts like an owner.
• Proven strategy. Proven performance A unique and consistent business model in the aerospace industry that has consistently created intrinsic shareholder value through all phases of the cycle.
• A proven value base operating strategy - a simple, well proven value-based operating strategy, based around our three value-driver concepts - profitable new business, productivity and cost improvements and value-based pricing
• Focused and disciplined acquisition strategy - we acquire proprietary aerospace businesses with significant aftermarket where we see a clear path to private equity like returns. Since our formation in 1993,  we have acquired over 60 businesses
• Propriety aerospace products with significant aftermarket - TransDigm Group Inc. is a leading global producer, designer and supplier of highly engineered aerospace components, systems and subsystems for use on nearly all commercial and military aircraft in service today.

Congress has already seen to it that Transdigm paid back $16 million to the Defense Department as a result of its business practices and if Congress gets its way, an additional $350 million.

DoD Scales Back on Sole Source Purchase Justifications from One Particular Supplier

Last week, we posted a three-part series discussing the TransDigm case. If you recall, the DoD Office of Inspector General (OIG) conducted an audit of purchases from the company (and its subsidiaries) and found that in a sample of  47 contracts, 46 of them were overpriced. The OIG calculated the Government was overcharged by about $16 million, even after allowing for a 15 percent profit. TransDigm paid that money back (with significant pressure from Congress). Now, Congress wants the OIG to look at the entire universe of contracts awarded to TransDigm to determine the full extent of overcharging. If you missed any of the previous postings, you can access them here.

• Part 1 - TransDigm pays back $16 million in overcharges
• Part 2 - How overcharging was allowed to occur
• Part 3 - OIG recommendations to prevent future overcharges

Last Friday, the Defense Department told its contracting officers that it can no longer buy products from TransDigm (or its 150 or so subsidiaries) unless it receives uncertified cost or pricing data to support prices proposed by TransDigm. DoD now understands the problem and its significance to fair and reasonable pricing:

FAR ... provides that adequate price competition exists if two or more responsible offerors, competing independently, submit priced offers that satisfy the Government's expressed requirement. Even where there is only one manufacturer of an item, an acquisition complies with this definition as long as offerors each establish their proposed price independently. However, the definition of adequate price competition does not address the fact that a sole manufacturer (such as TransDigm) participating in a competition can effectively control the competition by its ability to establish the material pricing for all other offerors. In these situations, the Department does not consider such rigged competitions to be adequate price competition, based on independently submitted offers.

Therefore ... contracting officers are directed to require the submission of uncertified cost or pricing data to support prices proposed by TransDigm and its subsidiaries.

Contracting officers have requested cost or pricing data in that past but TransDigm has refused. Given the critical nature of the parts being bought, TransDigm just might have the upper hand.

The DoD directive with its listing of 150 TransDigm subsidiaries can be found here.

RELATED: Article appearing in Forbes Magazine: Congress is Accepting Price Gouging by Defense Contractors. Alleges that the Transdigm case is only the tip of the iceberg.

Contractor Agrees to Pay $50 Thousand in Back Wages to Resolve Discrimination Allegations

The Department of Labor has a number of divisions tasked with contractor compliance with various labor laws. In the past few months, we have reported on actions by the Labor Department's Wage and Hour Division (WHD) to ensure compliance with primarily the Davis-Bacon Act and the Service Contracting Act. Where violations (or noncompliances) are found, contractors usually agree to make up for shortages in wages and fringe benefits. Occasionally, especially in the case of repeat offenders, the WHD can take more drastic action such as 'debarment' where, for a period of time, recalcitrant contractors can no more Government contracts.

A second Labor Department division tasked with compliance is the Office of Federal Contract Compliance Programs (OFCCP). This division, as the name implies, is only interested in Government contractors and grantees. Its primary focus is not a law at all but an Executive Order (EO No. 11246) which prohibits federal contractors and federally-assisted construction contractors and subcontractors, who do over $10 thousand in Government business in one year from discriminating in employment decisions on the basis of race, color, religion, sex, sexual orientation, gender identity, or national origin. The EO also requires Government contractors to take affirmative action to ensure that equal opportunity is provided in all aspects of their employment.

Most of the compliance evaluations performed by OFCCP are routine, probably randomly selected, however there is nothing to prevent the Office from following up on leads and/or hotline complaints.
Recently, after a routine compliance evaluation of a federal contractors subsidiary of Cummins Diesel, the contractor, Consolidated Diesel Inc. agreed to pay $50 thousand in back wages for 'alleged' pay discrimination against African-American managers at its manufacturing facility. OFCCP alleged that since at least 2013, Consolidated Diesel paid 11 African-American managers less than white managers in similar roles.

Fifty thousand dollars for eleven employees over a six year period is not a lot of money. That amount works out to an average of $63 per month. Consolidated Diesel did not admit liability however agreed to pay it to resolve OFCCP's alleged discrimination findings. Consolidated Diesel also agreed to take steps to ensure that its pay practices meet the legal requirements.

Where Have All the CPAs Gone?

Every year since 2011, DCAA (Defense Contract Audit Agency) has reported on its activities in a Report to Congress. The latest report dated March 31, 2019 (but only recently made available online) is available here. These reports primarily contain statistics and trends on how the Agency is performing; metrics such as net savings (down from the last two years), return on investments (down from the last two years), incurred cost audit backlog (improving), meeting due dates (improving), length of time to complete audits (generally improving), and many others.

One thing that caught our eye was a table that showed the professional makeup of DCAA's workforce. About 90 percent of DCAA's staff consists of auditors, which is understandable, and the preponderance of those have bachelor or advanced degrees. But here's something we didn't expect to see. DCAA lost a net of 52 CPAs (Certified Public Accountants) from the prior year. Since 2012, it has lost a net of nearly 200 CPAs. This obviously means that more CPAs are leaving the Agency than are being replaced either through hiring or developed internally.

Should this be a concern? We think it should be. A CPA certification is the pinnacle step of the accounting profession and DCAA has always prided itself on percentages of CPAs and other professional certifications comprising its workforce. It actively encourages staff to attain those certifications and provides training and educational funds to further that goal.

So why the drop-off in the number of CPAs? Obviously we don't have the data or insights to answer that question. The success and survivability of any organization is its staff. Not just any staff, mind you but one that is vibrant and interested in personal professional development with a desire to learn and advance and bring new ideas to the forefront. The fact that DCAA is losing, in absolute numbers, the CPAs in its organization might be a sign that the Agency is not hiring the staff necessary to preserve the organization. And that would be too bad. Bad for Government procurement and bad for taxpayers.

DoD Removes "Reasonable Expectation" Rule from Adequate Price Competition

The FAR (Federal Acquisition Regulation) has been amended to eliminate the so-called "Reasonable Expectation" rule when it comes to awarding contracts based on adequate price competition for DoD, NASA, and the Coast Guard procurements.

The Reasonable Expectation rule provided that a price is based on adequate price competition when there was a reasonable expectation, based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation's expressed requirement, even though only one offer is received from a responsible offeror. There's more to the rule but that covers the essence of it. Agencies other than DoD, NASA, and the Coast Guard can still use the "reasonable expectation" rule in awarding contracts based on price competition.

This tightening of the adequate price competition rules was brought about by the FY 2017 National Defense Authorization Act. Evidently, Congress had some concerns over the potential abuse of the reasonable expectation rule and took action to eliminate it - at least for DoD, NASA, and the Coast Guard. Our limited research did not uncover any anecdotal evidence of abuse of the reasonable expectation rule. In fact, one commentator writing in response to the rule after it was first proposed stated that it was unclear what problem this rule was trying to resolve. The respondent urged reconsideration of the regulation until the actual problem can be identified and targeted with an expected outcome that proves an acceptable solution.

The Defense Department is working on a rule to implement this at the subcontractor level.

DoD Proposes to Double the CPSR Threshold

The Defense Department has issued a proposed rule to increase the CPSR (Contractor Purchasing System Review) threshold from $25 million to $50 million in sales to the Government.

Currently, there are about 670 defense contractors that are subject to DCMA's (Defense Contract Management Agency) CPSR reviews (at least) once every three years. Increasing the threshold from $25 million to $50 million will reduce that number by 20 percent or 133 contractors.

The Defense Department maintains that the $25 million threshold has not been increased since 1996 and by doubling it now, roughly equates to inflation over that same time period. Under the proposed rule, contracting officers will retain the flexibility to lower that threshold if determined to be in the best interest of the Government.

The proposed rule will certainly reduce the burden on small contractors and, according to DCMA, will allow a more efficient and effective use of CPSR resources at larger contractors where more taxpayer dollars are at risk. Larger contractors, we're certain, are thrilled at the prospect of additional oversight. We guess that its too much to expect that if DCMA's work goes down by 20 percent that there would be a commensurate reduction in DCMA staffing.

There is one downside for small contractors. There could be additional requirements for those firms to request consent to contract from ACOs (see FAR 52.244-2, Subcontracts). With approved purchasing systems, the consent to subcontract requirement does not apply.

Recommendations to Prevent Overcharging by Sole-Source Contractors

For the past two days, we have been discussing the TransDigm case where the DoD contractor significantly overcharged the Government for spare parts. Parts 1 and 2 can be accessed here and here, respectively.

To recap, the House Committee on Oversight and Reform requested the Defense Department OIG (Office of Inspector General) to look into concerns brought to their attention concerning potential overcharging by TransDigm. The OIG pulled a sample of contracts and determined that 46 of 47 contracts were overpriced by $16 million. Ultimately, TransDigm paid back the $16 million but now, the House Committee has requested the OIG to perform a comprehensive review of all TransDigm contracts with the DoD.

The OIG pointed out a number of regulations that contributed to the overcharging including the fact that contracting officers had no recourse when contractors refuse to provide requested cost or pricing data needed to determine price reasonableness. The OIG also made a number of recommendations to avoid future occurrences including the following:

1. Examine the US Code, FAR, DFARS, and other guidance to determine changes needed in the acquisition process of parts produced or provided from a sole-source to ensure that contracting officers obtain uncertified cost data when requested and that the DoD receives full and fair value for its expenditures.
2. Immediately revise the policy on access to records to expand reporting requirements to all contractor denial of cost data for acquisitions of parts produced by one manufacturer, as well as for other sole-source acquisitions, regardless of whether the requirement is urgent. Disseminate the new guidance and update the DFARS as appropriate.
3. Establish a team of functional experts to analyze data reported. The team should assess parts and contractors deemed to be at high risk for unreasonable pricing and identify trends and perform price analysis and cost analysis of high-risk parts to identify lower cost alternatives or fair and reasonable pricing for future procurements.

DoD's response was fairly non-committal. DoD essentially stated that it would look into the matter but didn't address specifics of when and how the recommendations would be implemented. Therefore, from the OIG's perspective, the recommendations remain unresolved.

TransDigm - How Overcharging Was Allowed to Occur

Yesterday we discussed the House Committee on Oversight and Reform's role in securing a $16 million return of excess profits by TransDigm on its DoD contracts. Today we want to take a closer look at the DoD Office of Inspector General's (OIG's) audit report that disclosed the overcharging to see how existing regulations allowed the overcharges to occur. If  you missed yesterday's installment, you can access it here.

The OIG determined that TransDigm earned excess profit on 46 of 47 parts purchased by the Defense Department even though contracting officers followed the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement) when they determined that prices were fair and reasonable. How does that happen? Under what circumstances does FAR allow profit margins up to 4,451 percent (that percentage is not a typo - TransDigm really earned profit of 4,451 percent on one of the purchases. On average, profit on the 46 parts was more than 100 percent.

Contracting officers used FAR and DFARS-allowed pricing methods, including historical price analysis, competition, and cost analysis to determine whether prices were fair and reasonable. The OIG however concluded that historical price analysis and competition were unreliable in identifying when TransDigm was charging excess profit because,

• prices for parts had become inflated over time, and some parts appeared to be inflated at the time the Government first purchased the part, further compounding the excess profits and

• TransDigm was the only manufacturer at the time for the majority of the parts competitively awarded, giving TransDigm the opportunity to set the market price for those parts because the other competitors planned to buy the parts from TransDigm before selling them to the Government.

 According to the OIG, performing cost analysis using certified or uncertified cost data is the most reliable way to determine whether a price is fair and reasonable. Contracting officers are required to obtain certified cost data before awarding contracts above the TINA threshold and can request uncertified cost data for those below the threshold. However, contracting officers are often prevented from obtaining uncertified cost data because of the following reasons:

• FAR enables sole-source providers and manufacturers of spare parts to avoid providing uncertified cost data, even when requested, because of the less stringent requirements for awarding small dollar value contracts and commercial item contracts.
• There is no specific requirement in FAR that requires or compels contractors to provide certified or uncertified cost data to the contracting officer when requested before the contract is awarded
• Statutory and regulatory requirements discourage contracting officers from asking for uncertified cost data when determining whether a price is fair and reasonable.

In many of the contracts awarded to TransDigm, contracting officers justified the price as 'the best obtainable price' because TransDigm refused to submit cost or pricing data and the contracting officers had exhausted other methods of determining price reasonableness and the need was urgent.

Tomorrow we will look at the OIG's recommendations for preventing future occurrences of price gouging.

Congress Calls for Comprehensive Audit of Contractor's Sales to Defense Department

Background. Last February, the Defense Department's Office of Inspector General (OIG) issued a report on its audit of purchases from TransDigm Group. The audit was conducted in response to several letters from Congress to determine whether purchases were made at fair and reasonable prices.

The OIG reviewed a small sample of 47 parts totaling $29.7 million purchased by DoD from TransDigm between January 2015 and January 2017. Specifically, the OIG set out to determine how contracting officers established fair and reasonable prices for the required parts.

As a result of the audit, the OIG concluded that TransDigm had overcharged the Government by $16.1 million beyond a reasonable profit. That works out to a figure greater than 100 percent profit.
How does a contracting officer determine that prices were fair and reasonable when at those exorbitant rates? There were a number of factors that left contracting officers hamstrung in the process, the most prevalent being denial of access to cost or pricing data. The Defense Department needed critical parts and TransDigm pretty much gave the Defense Department a 'take it or leave it' offer. In fact, of the 47 contracts audited by the OIG, 46 were overpriced and TransDigm denied the Government access to cost or pricing data. The only one of the 47 contracts not overpriced was one in which TransDigm was required to furnish cost or pricing data because the value exceeded the threshold for cost or pricing data requirement. The OIG report has many more details concerning problems that contracting officers faced.

New Development. Late last month (May 24th), the House Committee on Oversight and Reform announced that TransDigm had agreed to refund the $16 million in overcharges.

Today's decision by TransDigm to refund millions of dollars in blatant overcharges would not have happened without the hearing in the Oversight Committee last week. This is solid, bread-and-butter oversight that helps our troops and the American taxpayers. We saved more money today for th American people than our Committee's entire budget for the year. ... While this is a good first step, we must do even more in the future to prevent unscrupulous contractors from holding us hostage through abusive monopoly contracts.

TransDigm's problems did not end with the $16 million repayment. The House Committee on Oversight and Reform has now requested the OIG to perform a comprehensive audit of all TransDigm's contracts from January 2015. These contracts totaled $782 million and if overstated by the same percentage that the OIG's found in its initial sample, would return an additional $350 million to the Treasury.

Legislation to Help Small Business Subcontractors Get Paid On Time

Subcontractors to Government contractors are often vulnerable to the whims and idiosyncrasies of those prime contractors. We know of cases and have heard many anecdotes where primes do not pay their subcontractors for work performed on a timely basis. Sometimes prime contractors, contrary to procurement regulations, do not pay their subcontractors until they themselves have been reimbursed by the Government. For small business subcontractors, delayed payments can put severe strains on their finances, cash flow, and profitability.

Help may be on the way.

Each Federal agency has an Office of Small and Disadvantaged Business Utilization (OSDBU) whose purpose is to provide "maximum practicable opportunities" to small business concerns when acquiring goods and services. Most agencies use the OSDBU name so they're easy to find when searching a particular agency. In the Defense Department, the organization is referred to as the "Office of Small Business Programs".

Earlier this year, legislation was introduced in the House (and has already passed the House vote) that would lend assistance to small business subcontractors who are not being paid by their Government prime contractors in a timely manner. This bill utilizes the services of OSDBUs to assist small businesses in receiving timely payments from their prime contractors.

Here is how it will work.

1. If a subcontractor has not received payment for performance within 30 days of the completion of such performance, it has 15 days to notify (i) the Office of Small and Disadvantaged Business Utilization (OSDBU) of the Federal agency and (ii) the prime contractor of such lack of payment.

2. After receiving the notification, the OSDBU must investigate. The OSDBU will verify the subcontractor's contention that payment has not occurred and importantly, determine whether non-payment is the result of a restriction placed on the prime contractor by the Federal agency.

3. During the investigatory period, the prime contractor may respond to both the subcontractor and the OSDBU with relevant verifying documentation to either (i) prove payment or (ii) allowable status of nonpayment (i.e. the Government imposed a restriction on the Prime contract/contractor).

4. If the OSDBU verifies the lack of payment and determines that it was not due to an action of the Federal agency, the OSDBU will notify the prime contract and give them 15 days to make payment.

5. If the prime contractor does not make full payment in 15 days, the OSDBU shall ensure that such failure to pay is reflected in the CPARS (Contractor Performance Assessment Reporting System).

Will this work? Perhaps. No Government contractor wants to have negative comments attributed to them in the CPAR system.

GAO's Listing of Fraud Risk Indicators

Trial lawyers have an old saying: "You never ask a question on cross examination to which you do not know the answer to." Unlike lawyers, contract auditors, during the fieldwork phase of an audit, ask a lot of questions to which they don't know the answer. Its what auditors do and its part of gathering sufficient information to support a conclusion. However, many auditors will also sprinkle a few questions into the mix that they do know the answer to. They do this to test the veracity and forthrightness of the individual being interviewed (or questioned).

During the planning stage of any audit, auditors are required by Generally Accepted Government Auditing Standards (GAGAS) to consider fraud risk factors and if any are noted, to add specific audit procedures to address the increased risk of noncompliances or inappropriate costs charged to the Government. For DCAA (Defense Contract Audit Agency), auditors are directed to two sources of fraud risk indicators. One is the listing published by the Defense Department's Office of Inspector General (OIG) and the other is the Government Auditing Standards published by the Government Accountability Office (GAO).

We've written concerning the OIG's fraud risk indicators several times on these pages. For example, see Fraud Indicators and What are Fraud Indicators. Today we want to list out the GAO's fraud indicators. In general, the GAO's fraud indicators are more conceptual in nature while the OIG's are much more granular. The GAO would ask: "Is there something going on in the U.S. economy that threatens the company's viability? The OIG on the other hand might list out fraud risk indicators for a specific cost element, such as Consultant and Professional Service costs.

Here then are the 14 fraud risk indicators published by the GAO.

1. Economic, programmatic, or entity operating conditions threaten the entity's financial stability, viability, or budget
2. The nature of the entity's operations provide opportunities to engage in fraud.
3. Management's monitoring of compliance with policies, laws, and regulations is inadequate
4. The organizational structure is unstable or unnecessarily complex
5. Communication and/or support for ethical standards by management is lacking.
6. Management is willing to accept unusually high levels of risk in making significant decisions.
7. The entity has a history of impropriety, such as previous issues with fraud, waste, abuse, or questionable practices, or past audits or investigations with findings of questionable or criminal activity.
8. Operating policies and procedures have not been developed or are outdated.
9. Key documentation is lacking or does not exist.
10. Asset accountability or safeguarding procedures is lacking.
11. Improper payments.
12. False or misleading information.
13. A pattern of large procurements in any budget line with remaining funds at year end, in order to "use up all of the funds available".
14. Unusual patterns and trends in contracting, procurement, acquisition, and other activities of the entity or program.

There is one thing for certain that will result in increased contractor oversight; a history of proprieties. That's why risk factor No. 7 is present. There is another thing that will significantly increase an auditor's awareness; evasive answers and missing documentation. That is why risk factor No. 9 is present.

Contractor Pleaded Guilty in Product Substitution Case

The Justice Department recently announced a guilty plea by a company involved in product substitution. DLA (Defense Logistics Agency) put out a solicitation to purchase oil absorbent mats - mats that because they are used to absorb flammable liquids, are required to dissipate electrical charges to the ground. The solicitation stated that there were only two approved manufacturers for these types of mats, both located in Pennsylvania and required mats to be purchased from one of the two manufacturers.

Enco, a company in New Hampshire was one of the bidders for the mats, proposing to buy mats from one of the designated suppliers. Ultimately Enco won the award and between 2012 and 2013, sold 21 thousand mats to the Government and collected nearly $700 thousand.

There was a problem however. These mats that Enco was selling to the Government were not manufactured by one of the approved manufacturers. Someone raised suspicions and DLA brought in an independent company to test the mats for compliance. The testing company concluded that the mats did not meet the contract requirements.

Once Enco's scheme was uncovered, Enco wrote to DLA admitting that it did not purchase the mats from one of the two approved suppliers because their prices were prohibitive. When interviewed by Government investigators, Enco's president stated that at the time of award, the company had fully intended to purchase mats from one of the two approved manufacturers but after award, decided to seek out other sources. Here's what's interesting however. The investigator already had documents showing that even before contract award, Enco had already decided and committed to purchasing mats from a non-approved source so Enco's president was caught in a lie. That 'lie', according to the Justice Department press release, proved intent which is a crime.

Sentencing is scheduled for later this year. The company is most certainly already debarred from Government contracting and could also face significant fines.

Similar Proposals - One Was Considered Weak - the Other Was Considered Strong

The Air Force issued a solicitation for someone to collect, analyze, synthesize and process scientific and technical information at its Homeland Defense and Security Information Analysis Center (essentially a publicly accessible website) . Information International Associates, Inc (IIA) was one of several unsuccessful bidders IIA challenged the award. IIA claimed that the Air Force unreasonably evaluated awardee's proposal as containing a strength where the added benefit identified by the Air Force was not consistent with the terms of the solicitation while evaluating IIA's proposal as containing a weakness when it was not materially different than the awardee's proposal. (Well, as they say, one company's strength is another company's weakness.)

The solicitation required a feedback mechanism where viewers provide feedback on the website's content. The winning bidder (Quanterion) proposed a system that automatically sends an email requesting feedback at each download and also tracks and consolidates the status of the responses. That was rated a strength by the Air Force. The problem was, as the GAO noted, IIA proposed essentially the same mechanism and that was rated a weakness.

The GAO found that the Air Force unequally applied its stated rationale for why Quanterion satisfied the RFP's feedback requirement while IIA's did not. Both proposals included systems to track view counts - one was rated a strength and the other a weakness.

The GAO concluded that the Air Force unreasonably assigned this weakness to IIA's proposal and recommended that the Air Force conduct and document a new evaluation. The GAO also recommended that the Air Force reimburse IIA for reasonable costs associated with filing and pursuing its protest, including attorney fees.

Proposed Legislation to Strengthen DoD Ethics Policies

The following was extracted from a press release announcing a new bill that was introduced in the Senate - The Department of Defense Ethics and Anti-Corruption Act.

In announcing her proposed legislation, Senator Warren wrote:

Defense contractors often recruit former DoD officials through the revolving door to become lobbyists, then use those former officials' relationships and access to peddle influence at the Pentagon and to secure lucrative defense contracts. According to the Project on Government Oversight's Center for Defense Information, in 2018, nearly 400 high-ranking DoD officials and military officers took a spin through the revolving door to become lobbyists, board members, executives, or consultants for defense contractors. Of these former DoD officials, including top brass in the U.S. military, one in four went to work for one of the DoD's top five contractors.

The proposed DoD Ethics and Anti-Corruption Act would:

• Limit the revolving door and restrict contractor influence by imposing a four-year ban on "giant" contractors hiring senior DoD officials and on contractors hiring former DoD employees who managed their contract.
• Extend to four years the existing prohibition on former military generals lobbying the DoD
• Require defense contractors to submit detailed annual reports to DoD regarding former senior DoD officials who are subsequently employed by contracts
• Raise the recusal standard for DoD employees by prohibiting them from participating in any matter that affects the financial interests of their former employer for four years
• Ban senior DoD officials from owning any stock in a major defense contractor and bans all DoD employees from owning any stock in contractors if the employee can use their official position to influence the stock's value.

Additionally, the 'Act' would require large defense contractors to submit a report of their lobbying activities including who they meet with and what they're lobbying about, and to make that information public.

A companion bill will also be introduced in the House.