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.

What Happens When the Contracting Officer Disagrees with the Contract Auditor?

Contract auditors perform audits and issue reports, sometimes with recommendations or questioned costs, to the contracting officer. The contracting officer, in turn, resolves the audit findings with the contractor. Sometimes, the contracting officer does not agree with the audit findings; more so if the audit relates to pricing proposals than with historical costs. Why? When it comes to pricing proposals, everyone's dealing with estimates of future costs and judgement becomes a big part of estimating. Incurred cost on the other hand deal with historical evidence supporting the incurrence of costs. Contractors either have support or they don't. Judgement is not a major factor on the allowability of costs.

The Defense Department has made it very clear that when it comes to its contracting officers and its contract auditors (namely the Defense Contract Audit Agency), the contracting officer will rule the day. In a 2009 memorandum, the Defense Department states as official policy:

It is neither expected nor necessary that the contracting officer and the contract auditor agree on every issue. They have different, yet complementary, roles in the process. It is expected that the auditor and contracting officer will work together recognizing that it is the contracting officer's ultimate responsibility to determine fair and reasonable contract values.

That particular guidance anticipates that when the contract auditor and contracting officer disagree on particular issues, the matter be elevated  to successively higher levels until there is an agreement. That means one side or the other will need to give in.

Sometimes, auditors become so entrenched in their positions that they seemingly refuse to listen to the contractors' side of an issue or acknowledge that there might be merit to the position. In those cases, it is often better to take the matter up with the contracting officer, knowing that in the end, the final decision rests with them.

Don't Rely on Just Any Old Government Employee for Direction

Contracting officers have the authority to enter into, administer, or terminate contracts and make related determinations and findings. Contracting officers may bind the Government only to the extent of the authority delegated to them. Contracting officers shall receive from the appointing authority clear instructions in writing regarding the limits of their authority. Information on the limits of the contracting officers' authority shall be readily available to the public and agency personnel (FAR 1.602-1).

Contracting officers are responsible for ensuring performance on all necessary actions for effective contracting, ensuring compliance with the terms of the contract, and safeguarding the interests of the United States in its contractual relationship. In order to perform these responsibilities, contracting officers are allowed wide latitude to exercise business judgment. Among those responsibilities are

• Ensure sufficient funds are available for obligation
• Ensure that contractors receive impartial, fair, and equitable treatment
• Request and consider the advice of specialist in audit, law, engineering, information security, transportation, etc.

Contracting officers may also delegate some of their contract administration functions and responsibilities to an Administrative Contracting Officer (AC). In DoD, ACO's are part of the Defense Contract Management Agency (DCMA).

The top level responsibility rests with the Contracting Officer. Anything delegated must be delegated in writing.

Here's where problems arise. Sometimes there are Government employees running around acting like they have a lot of authority. These could be Contracting Officer Representatives, Contracting Officer Technical Representatives, inspectors, quality control people, and sometimes even auditors. Be very careful when you follow their advice or take some kind of contractual action based on their requests, demands, directions, or assurances. 

Beware when you comply with such direction. The person making the request/demand may not have the authority to do what he/she just did. It could be a construction project where an inspector tells you to place the door here instead of there. If he didn't have the authority to make that change, you will not prevail in an equitable adjustment for increased costs. This happens a lot in depot level maintenance contracts where someone on the Government's side has to decide whether particular work is included in the basic contract or represents "over and above" work that should be compensated. If a contractor relies upon direction from an individual that does not have the authority to bind the Government, the chances of prevailing in a dispute are diminished.

In the old days, courts (including the Board of Contract Appeals) were inconsistent in deciding whether the contractor acted in good faith in relying on a Government representative's actions. However, in a 2007 Federal Circuit Court decision (Winter v. Cath-dr/Balti Joint Venture), that former "flexibility" was sharply limited.

For more information on this, follow this link.

Contracting Officers

The Federal Acquisition Regulations (FAR) and the various agency FAR Supplements make frequent references to "contracting officer". For example, in several places, FAR states "The contracting officer may ... ". For companies just entering the Government contracting arena, it is sometimes confusing as to just who that person is. Actually, a contracting officer could be one of several persons/positions, depending on the situation. In general, a PCO (Procurement Contracting Officer) is the one negotiating and awarding contracts. After award, many of the duties associated with administering the contract are delegated to an ACO (Administrative Contracting Officer). In DoD, the ACO function is usually delegated to DCMA (Defense Contract Management Agency) although sometimes, the PCO will retain the "administrative" function. The PCO can also make limited delegations. The contract document will state whether "administratvie" duties have been delegated or assigned and whether there are any limitations on those assignments.

The term "contracting officer" is defined in FAR 2.101.

A "contracting officer" means a person with the authority to enter into, administer, and/or terminate contracts and make related determinations and findings. The term includes certain authorized representatives of the contracting officer acting within the limits of their authority as delegated by the contracting officer. "Administrative contracting officer (ACO)" refers to a contracting officer who is administering contracts. "Termination contracting officer (TCO)" refers to a contracting officer who is settling terminated contracts. A single contracting officer may be responsible for duties in any or all of these areas.

Resolving Disputes between the Auditor and Contracting Officer

Back on December 10th, we reported on guidance issued by DoD concerning the resolution of significant audit report recommendations when the contracting officer does not agree with the findings and recommendations of the auditor. To read that post, go here.
DCAA has now issued its own guidance on implementing the DoD policy. You can read that guidance in its entirety by going here. Essentially, this guidance deals with internal processes for elevating disagreements to higher and higher levels withing DoD, until it gets to an undersecretary of Defense. It also includes related correspondence from the Army, Navy, Air Force, DLA, and DCMA. These organizations, in turn, issued their own guidance to implement the DoD guidance.

A couple of notes:

1. The guidance applies only to pricing proposals over $10 million where the contracting officer does not sustain at least 75% of the audit findings in a pre-negotiation objective. A pre-negotiation objective is documentation of what the Government hopes to achieve during negotiation. There is usually a difference between the negotiation objective and the final negotiated price. A contracting officer can easily include the audit findings in his/her negotiation objective with little hope or intent of trying to sustain the finding during negotiations, just to appease the auditor and get around this requirement (we've seen this happen).
2. The policy does not apply to all of the other kinds of audits that DCAA performs; internal control reviews, incurred cost reviews, defective pricing, CAS compliance, progress payment reviews, paid voucher reviews, and a host of others. The policy is not clear with respect to terminations and claims since those are often referred to as "proposals".
3. Elevating matters does not necessarily mean that a disagreement will be adjudicated fairly. Ultimately there is a final authority/decision maker and his/her decisions might be influenced by matters not evident to those with vested interests in the outcome (like, "I don't care what it cost, just get that plane up in the air").
4. This could be a response to a problem that doesn't exist. Recalling our days in the Government, contracting officers were always looking for data that could help them achieve fair and reasonable contract pricing, be it from DCAA or technical reviews. We can't think of many cases where audit findings related to pricing proposal were not incorporated into the pre-negotiation objective. Significant disagreements between the auditor and contracting officer do arise in less quantitative audits like internal control reviews. Internal control reviews are very difficult to resolve because its not easy to show a nexus between the internal control deficiency and risk to the Government. For example, how does one show that failing to have a written policy to cover an event that has never occurred but could conceivably occur at some unspecified future point in time, constitute undue risk to the Government. Yet, that is the position that some auditors have taken. What's a contracting officer to do in that situation? Withhold funds? Disqualify the contractor from future contracts? Or, disposition the audit finding without taking action? 

Resolving Contract Audit Recommendations

DoD issued guidance concerning the resolution of significant audit report recommendations when the contract auditor and contracting officer disagree on those recommendations. In cases where the contracting officer does not include at least 75 percent of the audit recommendations in his/her negotiation objectives, the issues can be elevated to succesively higher levels until there is agreement. The policy, however, makes it very clear that it is the contracting officer, not the contract auditor, who is responsible for determining fair and reasonable prices:

It is neither expected nor necessary that the contracting officer and the contract auditor agree on every issue. They have different, yet complementary, roles in the process. It is expected that the auditor and contracting officer will work together recognizing that it is the contracting officer's ultimate responsibility to determine fair and reasonable contract values.

This policy only applies to proposals greater than $10 million and does not address many other types of audits where there are significant disagreements between contracting officers and contract auditors. For example, audits citing deficiencies in contractor internal control systems would not fall under these guidelines. Yet, the resolution of systemic deficiencies are often times difficult because of the subjective nature of the audit "findings". Other examples of contract audits not covered by this policy are audits for compliance with TINA (Truth in Negotiations) and audits of incurred costs.