Deficiencies Identified in Audits of Subcontractors

Last March, the GAO (Government Accountability Office) issued a report soundly critical of DOE (Department of Energy) contractors' oversight of their subcontracts. GAO found that DOE did not always ensure that contractors audited their subcontractors incurred costs as required by contract terms. GAO's review of 43 incurred cost assessments and audit reports identified more that $3.4 billion in subcontract costs had not been audited and some subcontractors remained un-audited or un-assessed for more than six years (important due to the six-year statute of limitations. You can read our recap of that report which includes a link to the full GAO report here. GAO made a number of recommendations including one that would have DOE develop procedures to require its offices to step up its monitoring activities of prime contractors responsibilities to audit their subcontracts.

Last week, DOE's Office of Inspector General (OIG) issued its own report on this matter - focusing on its largest contractor, Bechtel National. Bechtel National is the prime contractor for DOE's $16.8 billion waste treatment plant that began in 2000 and is still under construction. Since inception, Bechtel has paid nearly $2 Billion in reimbursements under 400 flexibly-priced subcontracts. Bechtel's contract requires it to either conduct audits of subcontractors' costs or arrange for such an audit to be performed by the cognizant Government audit agency through the contracting officer.

You can probably guess what's coming. The OIG "determined" that Bechtel has not been fulfilling the requirement withing its contract to audit flexibly-priced subcontracts. Specifically, thee OIG found that since contract inception (2000), a significant number of flexibly-priced subcontracts have not been audited. The OIG also found that the few audits that have been performed have not always been effective or reliable. In fact, Bechtel did not even have an accurate inventory of subcontracts subject to audit. The OIG concluded that these deficiencies increased the risk of passing on unallowable costs from its subcontractors to DOE and ultimately the taxpayer.

The OIG's finding of ineffective and unreliable audits were based on findings from Bechtel's corporate internal audit staff and reviews by DOE that the audits did not comply with GAGAS (Generally Accepted Government Auditing Standards) and that there were deficiencies in performing the audits. GAGAS deficiencies included independence, auditor qualifications and continuing education, quality control and assurance, audit planning, supervisory review, and documentation of audit planning and results.

The OIG made a number of recommendations to which Bechtel concurred.

The full DOE-OIG audit report can be accessed here.

GAO Criticizes DOE for Subcontractor Oversight Practices

Prime contractors are responsible for oversight of their subcontracts. That is a well grounded and established principle of Government contracting. The Defense Contract Management Agency (DCMA) and Defense Contract Audit Agency (DCAA) dedicate a significant number of resources to ensuring the propriety of subcontract costs passed along to the Government through prime contractor billings. These include pre-award policies and procedures involving purchasing systems and consent to subcontract requests all the way to incurred cost audit procedures.

The GAO was asked to review contracting at DOE, the largest civilian contracting agency where 90 percent of their appropriations are spent on contracts. The review focused on (i) the parties that participated in DOE's largest prime contracts and the extent to which they subcontracted their work, (ii) the extent to which DOE ensured that those contractors audited subcontractors' costs, as required, and (iii) the extent to which DOE ensured the contractors met other subcontract oversight requirements.

GAO reviewed the 24 largest prime contracts which totaled $23.6 billion in fiscal year 2016 obligations. Of that $23.6 billion, prime contractors subcontracted about $6.9 billion (30 percent) to thousands of subcontractors.

GAO found that DOE did not always ensure that contractors audited subcontractors' incurred costs as required in their contracts. GAO's review of 43 incurred cost assessment and audit reports identified more than $3.4 billion in subcontract costs that had not been audited and some subcontractors remained unaudited or unassessed form more than six years (important due to the six year statute of limitations).

GAO blamed this lax oversight on DOE headquarters lack of procedures or guidance that requires local offices to monitor contractors to ensure that required subcontract audits are completed in a timely manner, consistent with federal standards for internal control. Without such procedures or guidance, unallowable costs may go unidentified beyond the six year statute of imitation period preventing DOE from recovering those costs.

GAO made several recommendations that DOE develop procedures that require local offices to monitor contractors to ensure timely completion of required subcontract audits. DOE concurred with most of the recommendations.

You can read the full GAO report here.

New Self-Reporting Requirement for Late Payments Made to Subcontractors

The FAR Councils issued a final rule amending the FAR (Federal Acquisition Regulation) that will require contractors to notify the contracting officer, in writing, if the contractor pays a reduced price to a small business subcontractor or if the contractor's payment to a small business subcontractor is more than 90 days past due. The rule also requires contracting officers to record the identity of contractors with a history of late or reduce payments to small business subcontractors in FAPIIS.

This new rule "furthers the Administration's goal of supporting small business and advance the interests of small business subcontractors by discouraging reduced or untimely payments to small business subcontractors". It applies to all contracts including COTS (Commercial Items) and becomes effective on January 19, 2017.

The new rule provides several examples of payment and nonpayment situations not considered to be unjustified. These include

• contract dispute on performance
• partial payment is made for amounts not in dispute
• a payment is reduced due to past overpayments
• administrative mistake
• late performance by the subcontractor leads to later payment by the prime contractor.

The new rule also contains new definitions of reduced and untimely payments:

Reduced Payment means a payment that is for less than the amount agreed upon in a subcontract in accordance with its terms and conditions, for supplies and services for which the Government has paid the prime contractor.

Untimely Payment means a payment to a subcontractor that is more than 90 days past due under the terms and conditions of a subcontract for supplies and services for which the Government has paid the prime contractor.

Elsewhere, the new rule discusses what constitutes a history of reduced or untimely payments. A history of unjustified reduced or untimely payments has occurred when a contractor has reported three or more occasions of unjustified reduced or untimely payments under a single contract within a 12-month period.

It seems unlikely, for a variety of reasons,that any reporting will ever be made under this new regulation. If you want to read more, click here.

Subcontract Administration - Part 5 - Common Deficiencies

Today we will finish up this series on subcontract administration. This series has been a high level overview of Government expectations for contractors with subcontractors - especially cost-reimbursable subcontractors. Anyone that has gone through a purchasing system review (commonly referred to as CPSR or Contractor Purchasing System Review) know full well the excruciating level of detail that DCMA (Defense Contract Management Agency) request and expects. Its no fun. Fortunately, unless you're in that top 100 Government contractors (or so) its unlikely that you will ever have to go through it. However, that doesn't mean the expectations are diminished. Contract administration and audit can still assess the adequacy of contractor policies and procedures over subcontract administration when reviewing price proposals or auditing incurred costs.

The easiest way to ensure adequate subcontract oversight is to assume that whatever the Government does to you, you need to do the same to your subcontractors (assuming the subcontract is the same type as the prime contract). If the Government is assessing your accounting system, you probably need to assess whether your subcontractors have accounting systems that are adequate for the type of subcontract contemplated. If the Government demands an annual incurred cost proposal, you should probably figure that your subcontractors need to submit one as well.

Following is a listing of some common subcontractor oversight deficiencies published by DCAA (Defense Contract Audit Agency). We can't tell you anything about the frequency of occurrences - only that DCAA calls them "common".

1. Failure to verify the subcontractor has an adequate accounting system. See our previous post on what it takes to have an adequate accounting system.
2. Failure to appropriately monitor subcontract effort. There are plenty of activities throughout the life of the subcontract.
3. Failure to request a denial of access and notify the ACO when the subcontractor refuses access. There are situations where the subcontractor refuses to provide access to prime contractors. Often times its because the prime and sub are sometimes competitors and the historical data is proprietary. The Government understands this and will call in its own auditors to provide the necessary  oversight. Sometimes, the threat of Government auditors is enough incentive for subcontractor to have a change of heart.
4. Failure to notify the ACO and obtain approval, to subcontract
5. Failure to include the appropriate contract clauses in the agreement with the subcontractor. One of the toughest jobs for contractors is to ensure that the proper Prime Contract clauses are also included in subcontracts. Many times, the Government doesn't even include the right ones or omits some. 
6. Failure to ensure subcontract billings are accurate and compliant with subcontract terms. Its not sufficient to merely pay subcontractor invoices. There needs to be some level of review (e.g. ensure the subcontractor is using the correct billing rates).
7. Failure to obtain an adequate incurred cost submission from subcontractor.

Subcontract Administration - Part 4 - Ensuring the Propriety of Incurred/Claimed Costs

Happy New Year everyone. We're back and we're continuing our series on subcontract administration. So far, we've looked at the contractual requirements for prime contractors to monitor their subs (Part 1), the consent to contract requirement for contractors that do not have approved purchasing systems (Part 2) and what it means to "monitor" subcontracts (Part 3). Today we're going to examine a particular reporting requirement that pertains to prime contractors with cost-reimbursable subcontracts.

Most every Government contractor is familiar with the requirement to submit annual incurred cost proposals whenever flexibly-priced contracts (CPFF, CPIF, CPAF, FPI, T&M, etc.) exist. Those requirements and the structure required are spelled out in FAR 52.216-7. One of the required schedules, Schedule J, requires the following:

(J) Subcontract information. Listing of subcontracts awarded to companies for which the contractor is the prime or upper-tier contractor (include prime and subcontract numbers, subcontract value and award type, amount claimed during the fiscal year, and the subcontractor name, address, and point of contact information).

Sometimes there is a bit of controversy over whether this requirements includes all subcontracts or just flexibly-priced subcontracts. Logically, it pertains only to cost-reimbursable subcontracts because those will need to be "settled" before the prime contract can be closed out. Also, the auditor will need to determine whether the prime contractor can and will audit the subcontractor or will need to request an assist audit. We've seen auditors go both ways on this requirement.

The DCAA Information for Contractors Pamphlet however make is clear that the schedule pertains only to cost reimbursable subcontracts. See Enclosure 6, Page 87 of the Information for Contractors. This example also requires data that is not listed in the FAR, specifically the subcontract period of performance. We always recommend contractors include the period of performance information even though not required by FAR. It is easily obtainable and will facilitate the eventual audit.

Once the auditor establishes that a contractor has flexibly-priced subcontracts, he/she will inquire  as to the status of the prime contractors' audit of incurred costs. The requirement to submit annual incurred cost submissions is a flow-down provision meaning that subcontractors must also submit annual incurred cost claims. If the subcontractor is also a prime contractor, it is likely that the Government, through its own contract auditors or an outside organization, will audit incurred costs. If the subcontractor has no prime contracts, the prime contractor will have to determine how it will go about ensuring that claimed costs are allocable, allowable, and reasonable and otherwise proper.

Subcontract Administration - Part 3 - Monitoring Subcontracts

Continuing on in our discussion of subcontract administration, we look today at the contractor's responsibilities for administering subcontracts. The fundamental requirement is found in FAR 42.202(e)(2) as follows:

The Prime contractor is responsible for managing its subcontracts. The CAO's (contract administration official) review of subcontracts is normally limited to evaluating the prime contractor's management of the subcontracts. Therefore, supporting contract administration shall not be used for subcontracts unless

• The Government otherwise would incur undue cost,
• Successful completion of the prime contract is threatened, or
• It is authorized by some other regulation.

The term "managing subcontracts" encompasses not only what contractors might consider necessary but also activities that the Government considers necessary. For example,

1. Subcontract award
2. Technical performance
3. Financial performance
4. Monitoring (including QA and QC)
5. Payment

A contractor's internal control system over subcontracts (and intercompany orders as well) should provide for appropriate flow-down clauses into the subcontract. There are a lot of prime contract clauses that must flow-down to subcontracts. Depending upon the type of subcontract, clauses (i) giving the prime contract access to a subcontractor's books and records, (ii) limiting billings to only allowable costs, and (iii) requiring subcontractors to submit annual incurred cost proposals must be flowed down to the subcontracts.

Essentially, anything that the contracting officer does when awarding contracts (establishing requirements, selecting the contracting vehicle, selecting source, and negotiating prices), is expected of contractors when awarding subcontracts. After award, anything that DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) does in administering and providing oversight of contracts is expected of prime contractors with respect to their subcontracts.

DCMA conducts periodic purchasing system reviews of the most significant Government contractors to ensure that their subcontracting policies, procedures, and practices are adequate for protecting the Government's interests. It is to the contractor's benefit to have their system considered adequate to avoid the need to secure the contracting officer's consent to subcontract and also to avoid billing withholds.

Subcontract Administration - Part 2 - Consent to Subcontract

The level of Government oversight on contractors' subcontracting practices is highly dependent upon the adequacy of contractors' purchasing systems. Most Government contracts include FAR Clause 52.244-2, Subcontracts. The requirements under this clause depends upon (i) whether the contractor has an approved purchasing system and (ii) the type of contract involved. An approved purchasing system is one that has been reviewed and approved in accordance with FAR Part 44 (FAR Part 44 is a subject for another day but to see what is required to have an approved purchasing system, go here). Consent to subcontract means the Contracting Officer's written consent for the Contractor to enter into a particular subcontract.

If a contractor does not have an approved purchasing system, the contractor must obtain a consent to subcontract from the contracting officer prior to awarding a subcontract under a contract that is cost-reimbursable, time-and-materials, or labor-hour. Additionally, consent to subcontract is required for fixed-price contracts that are greater than the simplified acquisition threshold (currently $150 thousand) or five percent of the estimated contract cost.

If a contractor has an approved purchasing system, the Government reserves the right to require a "consent to subcontract". These are usually and specifically spelled out in the contract, and, in our experience, a somewhat rare occurrence.

Contractors must provide a minimum level of information when applying for a consent to subcontract. Among the data required are the following:

• A description of the supplies or services to be subcontracted
• Identification of the type of subcontract to be used
• Identification of the proposed subcontractor
• The proposed subcontract price
• The subcontractor's current, complete, and accurate cost or pricing data and certificate of current cost or pricing data (when required).
• The subcontractor's Disclosure Statement or Certificate relating to Cost Accounting Standards (when required)
• A negotiation memorandum reflecting
• The principal elements of the subcontract price negotiations
• The most significant considerations controlling establishment of initial or revised prices
• The reason cost or pricing data were or were not required
• The extent, if any, to which the contractor did not rely on the subcontractor's cost or pricing data in determining the price objective and in negotiating the final price
• The extent to which it was recognized in the negotiation that the subcontractor's cost or pricing data were not accurate, complete, or current, the action taken by the contractor
• The reasons for any significant difference between the contractor's price objective and the price negotiated; and
• A complete explanation of the incentive fee or profit plan when incentives are used.

It is important to note that consent does not mean constitute a determination that subcontract costs are allowable, that all the subcontract terms and conditions are acceptable nor that the contractor is relieved from any responsibilities under the contract.

Finally, contractors should build into their processes, sufficient time for the Government to review the "consent" file. The time required by the Government varies considerably and is somewhat dependent upon the complexity and value of the subcontract. At a minimum, allow 30 days but to be safe, allow 60 days.

Subcontract Administration - Part 1

Its been a long time since we discussed a contractor's responsibility for monitoring subcontracts (see this post from 2009 which focused on surveillance responsibilities). Over the next few days, we are going to dig a little deeper into exactly what FAR requires when it comes to the prime contractor/subcontractor relationship.

To be "responsible", a contractor (or subcontractor) must have adequate financial resources to perform the contract, or the ability to obtain them, (ii) be able to comply with the required or proposed delivery or performance schedule, taking into consideration all existing commercial and governmental business commitments, (iii) have a satisfactory performance record, (iv) have a satisfactory record of integrity and business ethics, (v) have the necessary organization, experience, accounting and operational controls and technical skills (or the ability to obtain them), (vi) have the necessary production, construction, and technical equipment and facilities or the ability to obtain them, and (vii) be otherwise qualified and eligible to receive an award under applicable laws and regulations (see FAR 9.104-1).

In the case of a prime contract, the Government must determine "responsibility" before awarding a contract (see our recent seven-part series on preaward surveys). When it comes to subcontracting however, it is the prime contractors' responsibility, not the Government's, to determine subcontractor "responsibility". In essence, everything the Government does to ensure prime contractor responsibility, the prime contractor should replicate to determine subcontractor responsibility. This is a tall order but is absolutely required by FAR 9.104-4 (unless, in rare circumstances, the Government decides to take on that responsibility itself).

The approval to subcontract out part of a Government contract is not automatic. On Monday, we will look at the "Consent to Subcontract" clause.

Deficient Subcontractor Oversight

The Department of Energy's Inspector General Office issued a report late last week that was highly critical of the Departments financial oversight and management of its contractors and grantees. The Department had reimbursed contractors/grantees for unallowable costs and found that some of its contractors were not performing adequate oversight of their subcontractors.

Specifically, the report noted the following three issues:

1. DOE had reimbursed $5.3 million in unsupported and/or unallowable costs at nine recipients for unsupported subcontractor or partner costs, potentially unallowable and/or unsupported travel and meal costs and other expenses that were not supported by detailed invoices. In other words, the prime contractors were simply passing along subcontractor invoices without having determined the costs were allowable, allocable and reasonable to the Government.

2. DOE was unaware that one recipient included unallowable costs of approximately $700,000 in its indirect cost rate calculation, a practice that resulted in higher than allowable reimbursements estimated at over $64,000. Contractors need to ensure that unallowable costs are identified and excluded from any billings to the Government.

3. DOE had not ensured that recipient procurement practices were adequate to fully protect the Government's interests and that these practices complied with applicable policies, procedures and best practices. For example, one recipient non-competitively awarded approximately $1 million for subcontract work to two companies that shared common ownership interests with the recipient. In addition, recipients had not always utilized competition to obtain the best possible prices for goods and services purchased with Federal funds. At two of the recipients, we found examples of purchases valued at about $210,000 for materials, equipment and services that were not supported by competitive bidding procedures. Accordingly, we questioned approximately $1.2 million of procurement costs that may not have provided the best value to the Government.

We guess that the IG had to blame somebody for these oversights but to us, the emphasis should have been on the contractors, not the Government. Contractors are required to have adequate accounting, purchasing, timekeeping, and billing systems as a condition for contracting. Lacking support for expenditures, claiming unallowable costs, and having poor purchasing policies and procedures are contractor issues, not DOE issues. While Government oversight is built into the system, the corrective action should focus on getting contractors to improve their systems, not blaming a Government agency for lack of oversight.

You can read the full report here.

Subcontract Administration - Quality

Today we will conclude this four part series on prime contractor responsibilities when it comes to subcontracting and administering those subcontracts. We have addressed only a few of those obligations but the ones we have discussed are the ones that have monetary consequences when contractors fail to take those responsibilities seriously.

Contractors are responsible for performing or having performed all inspections and tests necessary to substantiate that the supplies or services furnished under their contract conform to contract requirements, including any applicable technical requirements for specified manufacturers' parts. These pertinent clauses are found in 52-246-1 through 14 depending upon type of contract and what is being purchased.

These clauses also give the Government the right to inspect the goods and services being purchased prior to delivery or contract completion. The inspection clause protects the Government by allowing it time to spot and correct defects or flaws before completion. It also protects the contractor because sometimes the Government will try to alter standards to a higher level than that spelled out in the contract.

Quality testing can take on many different forms but the most common attributes tested are quality, quantity, and timeliness. When the Government performs inspections and tests, it must do so in a manner that will not unduly delay the work. However, whether the Government chooses to perform testing or not, the contractor is never absolved from meeting the quality standards specified in the contract.

Just as the Government conducts inspections and testing at the prime contract level, the prime contractor must conduct similar inspections and testing at the subcontract level. Failure to do for example could introduce non-conforming parts into the supply chain. The Government has pursued many cases where companies falsely represented parts as meeting contract specifications.

In some cases, the Government may also want to conduct quality assurance testing on subcontracted supplies and services when it is in their interest. For example, if the item produced by a subcontractor is to be shipped directly to the end user, it would be in the Government's interest to conduct testing at the subcontractor. Just because the Government steps in and conducts testing/inspections at the subcontractor, the prime contractor is not relieved of any of its responsibilities under the contract.

Subcontract Administration - Billings

Today we are continuing our series on prime contractor responsibilities toward their subcontractors. After learning that Lockheed Martin paid out $15.8 million to settle a civil suit brought by the Government because its oversight was found to be lacking, we thought it would be beneficial to discuss those responsibilities. Yesterday we focused on making certain that the proper clauses (the flowdown clauses) were included in the subcontract document. Today we will discuss prime contractor responsibility concerning the propriety of subcontractor billings.

A contractor's (or higher tier subcontractor's) primary responsibility with respect to billings from subcontractors is to ensure that those billings are prepared in accordance with subcontract terms and conditions. Depending on the type of subcontract, there could be cost-reimbursement vouchers, progress payments based on costs, performance based payments, or simply traditional invoices. The level of prime contractor oversight required is greatest for cost-reimbursable vouchers and less for simple invoices.

For cost-reimbursable subcontracts, prime contractors must ensure that subcontractors have accounting systems that can accommodate billings under those types of contracts. This would include the capability of accumulating costs by contract, calculating and monitoring indirect rates and adjusting them when necessary, applying those rates to the appropriate base costs, reporting no less than monthly, advising the prime contractor when certain thresholds are met (limitation of funds), and more.

For progress payments based on costs, the prime contractor must ensure the propriety of incurred costs and also calculate for potential subcontract "losses". For performance-based payments, the prime contractor must ensure that the subcontractor has the capability of determining when milestones are met or achieved.

The worst thing a prime contractor can do is make payments to subcontractors without ever performing any level of review. Such reviews need not be performed for each and every billing. The prime contractor might decide to review subcontractor billing systems to gain the confidence and assurance that the system can produce accurate billing statements. Once a system is determined adequate, prime contractors can reduce testing to periodic levels.

The risk to prime contractors (and ultimately the Government) is the potential for subcontractors to bill costs prior to their incurrence or prior to when they should according to the terms of the subcontract. Excessive provisional billing rates is one method of obtaining reimbursement for costs not incurred. Milestone payments is another area that can be abused if payment percentages (or amounts) are disproportional to the level of work accomplished.

Subcontract Administration - Flowdown Provisions

Yesterday we discussed the civil penalties brought by the U.S. Government against Lockheed Martin for failing to adequately oversee a subcontractor's charging practices and by mishandling information revealing these practices. According to the settlement agreement, Lockheed failed to undertake appropriate measures to ensure the integrity and validity of subcontract costs that were passed along to the Government. Although we don't know much in the way of details beyond what was in the DoJ's press release, we can surmise two things;

• Lockheed Martin did not administer this particular subcontract according to its own subcontracting policies and procedures, and 
• When an indication of impropriety came to Lockheed's attention, it did not sufficiently follow up on the information.

Broadly speaking, prime contractors should administer their subcontracts similar to the manner in which the Government administers its prime contracts. The methods will not be the same but the basic concepts regarding subcontract administration should be similar to the way the Government works. These concepts vary depending on type of contract/subcontract (e.g. CPFF, FFP, T&M) and size. Generally, cost-reimbursable contracts requires more oversight than do firm-fixed price contracts.

Our focus in these next few blogs will be prime contractor responsibilities after subcontract award, particularly awards of cost-reimbursable subcontracts. Keep in mind that activities leading up to subcontract award are just as important as post-award actions. In fact, the Government has specialized teams that review contracting purchasing systems which include elements of subcontracting.


The word "flowdown" refers to the practice of obtaining a certification or representation from a prospective subcontractor that was first required of the prime contractor including the actual text of the "substance" of all or part of a Government prime contract clause in a subcontract and requiring something of a subcontractor that the Government requires of the prime.

First and foremost, prime contractors must ensure that all required flowdown requirements/clauses are included in the subcontract. There are two types of flowdown requirements; mandatory and essential. Mandatory flowdown requirements are those expressed in the texts of provisions and clauses. Numerous FAR provisions and clauses contain such mandatory flowdown requirements. By entering into a prime contract that includes mandatory flowdown clauses a prime contractor promises the Government that it will include the clauses in its subcontracts. Failure to do so would be a breach of contract.

Essential flowdown requirements are those that the Government does not require the prime contractor to flow down, but that the prime contractor must include in its subcontracts in order to be able to fulfill its obligations to the Government.

Ensuring that the proper clauses are included in subcontracts is not an easy task. It requires a careful reading of the clauses in the prime contract. There are (by one account) potentially 88 different clauses that could be flowed down to a subcontract, depending on circumstances. We've seen some contractors flow down all the clauses from their prime contract whether they are relevant or not. That may be safe but it often leaves subcontractors scratching their heads trying to figure out what clauses mean and how they apply. There are practice aids available to purchase that can help contractors sort out the flowdown requirements.

Prime Contractors, Monitor Your Subs

Tools and Metals Inc. (TMI) was a subcontractor to Lockheed Martin on several aircraft programs. TMI produced perishable tools and sold them to Lockheed for use on military aircraft including the F-22 and F-35 fighter jets. TMI inflated the costs of these tools for seven years before the Government caught on to the scheme. During this time, Lockheed passed the inflated costs on to the United States Government under various prime contracts. The president of TMI ultimately plead guilty and was sentenced to prison for seven years. But that is not the end of the story.

The Federal Government then brought civil claims against Lockheed under the False Claims Act alleging that Lockheed contributed to the inflated amounts paid by the United States in connection with TMI's pricing scheme. Specifically, the government alleged that Lockheed acted "recklessly" by failing to adequately oversee TMI's charging practices and by mishandling information revealing these practices.

Last week, Lockheed agreed to pay $15.8 million to settle these allegations. In announcing the settlement, the Department of Justice stated "It is troubling that a large defense contractor with long-established contractual ties with the United States failed to undertake appropriate measures to ensure the integrity and validity of the costs is submitted to the United States.."

What are those"appropriate measures" that DoJ talked about? We are going to take the next few days to explore exactly what is required by prime contractors in administering its subcontracts. This was a painful lesson for Lockheed. Don't make the same mistakes.