Lockheed Martin Pays $4.7 Million to Settle Unallowable Lobbying Cost Case

Here's a reminder that lobbying is lobbying and the cost of lobbying activities is unallowable. It does not matter that the lobbying serves other purposes than just lobbying - if it involves attempts to influence the outcome of elections, referendums, legislation, and other governmental actions, it's lobbying effort and unallowable. Just ask Lockheed Martin. To read a comprehensive series on FAR 31.205-22, Lobbying and Political Activity Costs, start here.

Since 1993, Lockheed Martin has operated the Sandia Corporation, a Government-owned, contractor-operated laboratory that is part of DOE's (Department of Energy's) nuclear weapons complex. The initial contract was awarded in 1993 and has been extended non-competitively several times. The contract was set to expire on March 30, 2014 however two weeks before that date, DOE announced that it was "moving forward with a noncompetitive extension for a period of 2 years whith an option for a third year" while it prepared for a full and open competition.

In 2014, DOE's Inspector General published a report that called into question $223 thousand in fees paid by Sandia to Heather Wilson LLC (the principle of which is a former member of the U.S. House of Representatives. That report concluded that Sandia, through this consultant, attempted to influence an extension to the contract and paid for these activities with taxpayer funds.

The IG found that Sandia used Federal contract funds to engage in activities that were intended to influence the extension of the Sandia contract valued at $2.4 billion per year. In particular, Sandia developed and executed a plan that involved meeting with and attempting to influence Federal and congressional officials to provide assistance in obtaining a noncompetitive extension of its contract. The IG found that these expenditures were unallowable under Title 31 U.S.C. 1352, FAR 31.205-22 and the terms of the contract.

Ultimately, the Justice Department opened an investigation into the matter. Last week, the Justice Department announced that Sandia had agreed to pay $4.7 million to resolve allegations that it used pubic funds for lobbying activity.  Sandia, in its defense, maintained that the activities were typical of those for any contract intent on continuing a relationship with its sponsor, especially a long-term relationship, and that it was preparing to demonstrate that it deserved a full 5-year extension as permitted by the FAR. Justice didn't buy that argument and ultimately, Sandia decided to settle. Although $4.7 million is a lot of money, it is no doubt a small fraction of the profits that Lockheed earned from the contract.

No word on how the costs were uncovered. It could have been through routine oversight by contract auditors or from a whistleblower. We do know that DCAA (Defense Contract Audit Agency) has emphasized reviews of lobbying expense in recent years.

Political Campaign Activities at Contractor Facilities

You've seen it on TV. Perhaps you've experienced it first hand. Some politician is touring a plant, looking at a production line, shaking hands, answering questions, getting photographed and filmed, making a speech. It could be a campaign stop or a visit to support and endorse new technology. These visits cost money, right? They also take away from the productive work that employees are engaged in. Who pays for those costs? Who absorbs the downtime?

Well, if the company happens to be a Defense contractor, the Department of Defense wants to make sure that none of the costs are being passed off, charged to, or allocated to its contracts. DoD has taken the position that political candidate appearances at contractor facilities are tantamount to lobbying costs and therefore unallowable under FAR 31.205-22(a)(1). That particular FAR section states that costs associated with attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in kind or cash contributions, endorsements, publicity, or similar activities are unallowable. That might seem like a stretch to you but not to DoD.

DoD's auditors, if they find out about contractors hosting political events, will be asking you a lot of questions. They will be trying to build a case to demonstrate that the activities are "clearly an attempt by the contractor to influence the outcome of an election by soliciting votes."

The auditors have been told to determine how the candidate is portrayed by the contractor and the subject matter of the candidate's speech. They can learn a lot from news articles and broadcasts. Most likely, they will conduct interviews of organizers and attendees.

Not only will auditors question the costs associated with the event, but they will also pad the amount by finding directly associated costs. Additionally, we are aware of a case where auditors questioned the salaries and wages of contractor employees attending the event.

This is one of those situations where contractors really need to weigh the costs against the benefits. If you think a candidate's appearance is disruptive, just wait until the auditors come in and ask their questions. You'll really experience disruption.

Was it Selling Expense or Lobbying Expense - We Still Don't Know

Back in 2011, a former employee of Fluor Corporation filed a whistleblower suit alleging that the company had used Government funds to lobby Congress. In 2012, the Government intervened in the case, presumably because it found some merit to the allegation. This week, Fluor and the Government settled the lawsuit for $1.1 million. The former employee whistleblower gets $200 thousand of the settlement - not a bad payday.

Fluor had a contract to operate a DOE training facility in Washington State. According to the whistleblower lawsuit, initial attempts by Fluor to "market" the training facility to regional first responders were not very successful. So, in 2005, Fluor hired a couple of consulting firms, using $675 thousand in DOE money, to market its training capabilities including overtures to Congress and federal agencies to include additional money to operate this training facility.

Fluor denied that the expenditures were lobbying costs (lobbying costs are unallowable under FAR 31.205-22). Fluor stated that it was required under the terms of the contract to increase utilization of the facility to promote "economies of scale" and "cost-effective operation and maintenance". Fluor also stated that it was prepared to prove that the use of consultants to cntact other government agencies to market the training facility was fully know to and overseen by high-level DOE officials who were also involved in meetings and communications with the consultants.

So the argument was settled out of court with neither side conceding anything. Fluor stated that it settled to avoid the expense and distraction of litigation. The Federal Government said that the settlement is not a concession that its claims were not well-founded.

So, we still don't know if the activities performed by the consultants were in fact, unallowable lobbying costs or were allowable under the Selling cost principle (FAR 31.205-38).

Lobbying Costs - Government Joins a Whistleblower Suit

Last month, the Government intervened in a lawsuit against Fluor Hanford Inc. and its parent company, Fluor Corporation (collectively Fluor).  The False Claims Act lawsuit was originally filed by a whistleblower  who was also a former employee of Fluor.  

Between 1999 and 2008, Fluor had a prime contract with the Department of Energy (DOE) to provide a wide variety of security, maintenance and operational services at the DOE’s Hanford Nuclear Site in southeastern Washington State.   As part of its contract, Fluor was responsible for managing and operating a federally-funded facility to train Hanford site workers as well as first responders and law enforcement personnel.  

           

The whistleblower complaint alleges that, as a condition of receiving its DOE contract, Fluor was required to certify that it would not use federal funds for lobbying activities.   The complaint further alleges that between 2005 and 2008, Fluor ignored these restrictions and used DOE funding to lobby Congress and executive branch officials for more funding for the training facility.   The complaint alleges that Fluor, and two lobbying firms hired by Fluor and paid using DOE funds, Secure Horizons LLC and Congressional Strategies LLC, lobbied members of Congress and executive branch agencies to include additional funds for the training facility in agency appropriations.  The United States intervened in the lawsuit.

 This is a significant development. Usually, these types of costs, if not excluded by contractors as part of their normal scrubbing of costs for unallowables, are flagged during the audit process and questioned. This new lawsuit by the Department of Justice takes the inclusion of unallowable lobbying costs  to an entirely new level, a False-Claims Act (FCA) action. FCA  carries significantly more liabilities than the penalties for unallowable costs provisions in FAR, including treble damages and civil penalties

Lobbying Costs and Legislative Earmarks - Part 4

Today we're going to finish up this series on lobbying costs. As we indicated in our first post in this series, DCAA is increasing its oversight on this subject and has revamped its guidance for auditors when reviewing lobbying costs.

Any company with a "Washington Office" is almost automatically a target for a lobbying review. In the auditor's view, why would a contractor have a Washington office if not for lobbying activities? There was a big push to perform comprehensive reviews of contractors' Washington offices several years ago. Look for that to happen again.

Here are some specific procedures that auditor will perform.

• Plan appropriate audit procedures to determine whether the contractor properly identified and excluded unallowable lobbying and related costs from submissions to the Government. Recall from a previous post that these costs must be separately identified in the General Ledger and cannot be commingled with other accounts.
• Determine whether the contract is a registrant under the Lobbying Disclosure Act and if so, obtain copies of the quarterly reports filed by the contractor.
• Reconcile the quarterly report with the contractor's incurred cost submission.
• Ensure the list of employees and specific lobbying issued disclosed in quarterly reports are consistent with the incurred cost submission.
• Perform procedures to ensure the contractor has included directly associated costs.
• Consult the OMB website for appropriations earmarks.
• Consult the Taxpayers for Common Sense (TCS) website for appropriations earmarks (this should leave no doubt that auditors will check non-governmental sources for audit leads).
• For significant earmarks, contractors should be queried to determine the procedures used to identify and remove the costs associated with supporting earmarks from forward-pricing and incurred cost proposals.
• Look for "supporting costs" which may include program management, contracting, public relations, consultants and technical personnel.

Any unallowable lobbying costs found in a contractor's incurred cost submission are probably going to be subject to penalty. Additionally, if a contractor does not have documented policies and procedures for accumulating and identifying lobbying costs in its accounting system, the auditor will issue a deficiency report to the appropriate contracting authorities.

Lobbying Costs and Legislative Earmarks - Part 3

For the past two days, we have been laying out the general allowability criteria for lobbying costs by studying the FAR cost principle (FAR 31.205-22). On Wednesday, we looked at the activities that are unallowable and yesterday, we discussed some exceptions to the general prohibition against claiming lobbying costs on Government contracts. There are a few.

Besides the FAR cost principle, there are two other statutes governing lobbying activities that Government contractors need to be aware of.

31 U.S.C. 1352, Limitation on Use of Appropriated Funds to Influence Certain Federal Contracting and Financial Transactions. This statute prohibits a recipient of a Federal contract (including grants, loans and cooperative agreements) from using appropriated funds to pa any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with any covered Federal Actions. This prohibition is very similar to the FAR cost principle but would also apply to situations where the FAR cost principle does not apply.

2 U.S.C. 26, The Lobbying Disclosure Act of 1995. This statute significantly expands the registration and reporting requirement for those who engage in lobbying activities. Contractors must register with the Secretary of the Senate and the Clerk of the House if the organization has at least one employee who meets the statutory definition of lobbyist and lobbying expenses exceed $10 thousand per year. This is an extremely low threshold and most contractors who engage in lobbying activities, easily exceed it.

Earmarks. Government auditors have taken the position that efforts expended to pursue legislative earmarks are a form of lobbying costs. That position may be eventually challenged on the basis that such activities are constituent services and do not meet the precise definition of lobbying activities. In any event, we would advise contractors to identify and exclude such costs from any submissions made to the Government. Usually such costs would not be significant enough to affect an indirect rate.

The OMB (Office of Management and Budget) describes earmarks as funds provided by Congress for projects, programs, or grants where the purported Congressional direction circumvents otherwise applicable merit-based or competitive allocation processes, or specifies the location or recipient..

Lobbying Costs and Legislative Earmarks - Part 2

Yesterday we began this series on lobbying costs by discussing the types of lobbying costs that are unallowable. Today we continue with a discussion of the types of lobbying activities that are (or could be, depending upon circumstances) exempt from the general prohibition against lobbying. There are a few.

Congressional Testimony: Costs related to providing a technical and factual presentation of information on a topic directly related to the performance of a contract through hearing testimony, statements or letters to the Congress or a state legislature, or subdivision, member, or cognizant staff member thereof, in response to a documented request provided

• such information is readily obtainable and can be readily put in deliverable form; and 
• costs for related transportation, lodging or meals are incurred for the purpose of offering testimony at a regularly scheduled Congressional hearing.

Cost Reduction: Any lobbying activities that would normally be unallowable but are necessary in order to directly reduce contract costs, or to avoid material impairment of the contractor's authority to perform the contract.

Statutory Authorization: Any activity specifically authorized by statute to be undertaken with funds from the contract.

Government contractors are sometimes subpoenaed or invited to testify at Congressional hearings. If the testimony relates directly to a specific contract, the costs might be allowable. But contractors must be prepared to carefully document the allowability criteria for any form of lobbying activity that they wish to claim on their Government contracts.

There was an ASBCA (Armed Services Board of Contract Appeals) case, later affirmed by a federal district court, involving lobbying costs that were incurred at the direction of an Army Program Manager. The courts ruled that the Army did not have the authority under the cost principle, to waive the prohibition against lobbying activities. Those costs were unallowable.

Lobbying Costs and Legislative Earmarks

Today we begin a short series on costs associated with lobbying and legislative earmarks. This is an area that is now receiving increased attention by the Government. DCAA (Defense Contract Audit Agency) recently revamped its audit guidance on the subject. It is also an area that we've discussed frequently in this blog but never in a comprehensive manner.

In general, lobbying costs represent amounts incurred to influence the outcome of elections, referendums, legislation, and other governmental actions at all levels of Government. Most of the time, these costs are unallowable on Government contracts however there are a few exceptions which we will be describing later (see FAR 31.205-22, Lobbying and Political Activity Costs). It is useful to note that this cost principle contains a provision that is unique among the many cost principles; it requires that contractors separately identify lobbying costs in their indirect rate submissions and maintain adequate records to affirm their certification of these costs as either allowable or unallowable. So, contractors should not be commingling lobbying costs with other expenses, such as legal and professional fees - they need to be specifically identified.

First, we'll take a look at what kinds of activities or costs are not allowable under Government contract.

Among the types of lobbying activities considered unallowable, are:

1. Attempts to influence the outcomes of any Federal, State, or local election, referendum, initiative, or similar procedure, through in-kind or cash contributions, endorsements, publicity, or similar activities (Note the term "in-kind". Some contractors have run afoul of this prohibition by "donating" employee time to such activities);
2. Establishing, administering, contributing to, or paying the expenses of a political party, campaign, political action committee, or other organization established for the purpose of influencing the outcomes of elections;
3. Any attempt to influence
• The introduction of Federal, state, or local legislation, or
• The enactment or modification of any pending Federal, state, or local legislation through communication with any member or employee of the Congress or state legislature or with any government official or employee in connection with a decision to sign or veto enrolled legislation
4. Any attempt to influence
• The introduction of Federal, state, or local legislation, or
• The enactment or modification of any pending Federal, state, or local legislation by preparing, distributing or using publicity or propaganda, or by urging members of the general public, or any segment thereof to contribute to or participate in any mass demonstration, march, rally fund raising drive, lobbying campaign or letter writing or telephone campaign
5. Legislation liaison activities
6. Costs incurred in attempting to improperly influence an employee or officer of the Executive branch of the Federal Government to give consideration to or act regarding a regulatory or contract matter.

For contractors with DoD contracts, the DoD FAR Supplements adds an additional prohibition: costs incurred by DoD contractors for preparing any material, report, list, or analysis concerning the actual or projected economic or employment impact in a particular state or congressional district of an acquisition program for which all research, development, testing and evaluation has not been completed.

This is a very comprehensive listing and does not leave much "wiggle room". However, there are a few exceptions to these prohibitions that we will discuss tomorrow.

Legislative Lobbying Costs

Last year, the DoD-IG (Office of the Inspector General) conducted an audit to determine whether DoD contractors that lobbied for and were the recipients of earmarks complied with the requirements of the United States Code and the Federal Acquisition Regulations (FAR) and properly classified lobbying costs as unallowable expenses.

The audit report was issued last December and was not released to the public as it was considered "For Official Use Only". A brief of the report was made available on the IG's website and can be viewed here.

In the audit, the IG reviewed the accounts of 24 contractors that were the recipients of 50 earmarks, valued at $115 million and found that eighteen of the 24 contractors properly accounted for lobbying costs. The IG found a few minor issues at the remaining six contractors, consisting of $84 thousand where policies were not followed and $258 thousand where the support lacked sufficient detail to determine whether the costs were for lobbying or for some other purpose.

As a result of these minor deficiencies, the IG stated that DoD "may" have reimbursed contractors for unallowable lobbying costs but did not come right and state that it in fact happened. Even if all the "suspect" costs were ultimately unallowable, the impact on the Government would have to be factored for the Government's participation percentage in the indirect pools where the costs were booked.  Bottom line, contractors are doing a pretty good job in following contracting regulations.

The DoD-IG is not the only agency looking for lobbying costs related to earmarks. We've alerted you to DCAA's emphasis a couple of times, most recently here. DCAA has the list of contract awards based on earmarks and has alerted its auditors to specifically look for lobbying costs that are or have been allocated to Government contracts.

The procurement policies and procedures of 31.U.S.C. 1352, limitation on use of appropriated funds to influence certain Federal contracting and financial transactions, as implemented in FAR Subpart 3.8, restricts the use of appropriated funds to pay any person to influence or attempt to influence an officer or employee of any agency, a Member of Contress, an officer or employee of Congress, or an emplolyee of a Member of Congress. The FAR requires offerors to furnish a declaration consisting of both a certificatin and a disclosure (see FAR 3.8 and 52.203-11 and -12).

Lobbying Costs Related to Legislative Earmarks

The Defense Contract Audit Agency (DCAA) recently issued guidance to its auditors to be on the lookout for lobbying costs related to legislative earmarks. This guidance from September 2011 is actually a reiteration of guidance first published about three and a half years ago. The new guidance however, adds links to Governmental and non-governmental available sources of information on historical and current lobbying and earmark activities. We recommend that contractors peruse these databases in order to anticipate and prepare for possible auditor queries in this area.

A legislative earmark refers to a Congressional provision directing funds to be spent on specific projects. Typically, a legislator seeks to insert earmarks in spending bills that direct a specified amount of money to a particular contractor, organization, or project in his or her home state or district. Earmarks are still alive and well in D.C. The Office of Management and Budget reported that in the 2010 Defense Appropriations Act alone, there were 1,759 earmarks totaling $4.3 billion.

Some contractors, seeking earmarks, might expend a significant amount of effort including professional services for the purpose of influencing or attempting to influence Government officials in connection with earmarks. Auditors are being instructed to evaluate contractor's procedures for properly identifying and accounting for costs associated with lobbying activities and legislative earmarks. Auditors are being instructed to question these costs under FAR 31.205-22, Lobbying and Political Activity Costs. The new DCAA guidance states that FAR 31.205-22  applies to "... costs incurred associated with any attempt to influence legislation (e.g. earmark) ...". Actually FAR 31.205-22 makes no reference to "earmarks". This is a DCAA editorial insert and we've seen a legal opinion that makes a contrary case that FAR 31.205-22 does not apply to earmarks. A stronger case could be made citing FAR 52.203-12, Limitation on Payments to Influence Certain Federal Transactions, which prohibits the cost of activities to influence the award, the extension, continuation, renewal, amendment or modification of a contract.

Notwithstanding the merits of DCAA's position on this matter, the fact is that most companies already voluntarily remove any costs related to "earmark" activities from any claim for reimbursement from the Government. The costs are usually immaterial in that whether claimed or not, an indirect rate is not significantly affected. And, since immaterial, the risks of becoming embroiled in a dispute with the Government have limited potential payback.