Unsatisfactory Conditions - Part 2

Yesterday we introduced this topic by discussing voluntary refunds which can be requested by the Government or offered by the contractor. Voluntary refunds typically originate where there has been a windfall profit based on events that were unforeseen. If you missed that post, you can read it here. Today we will look at other forms of "unsatisfactory conditions".

The term "unsatisfactory condition" has no definition in the Federal Acquisition Regulations and could refer to almost anything that the contracting officer or contract auditor disapproves of. It is commonly used in connection with poor internal control systems or failure to consistently follow good accounting or internal control practices.

The DCAA (Defense Contract Audit Agency) audit manual provides a few examples of unsatisfactory practices (see CAM 4-803.1(b)) including (but not limited to):

• An estimating system and related practices so deficient that price proposals are consistently unreliable, resulting in widespread defective pricing.
• Significant and chronic violations of Cost Accounting Standards.
• Internal control weaknesses of a magnitude that could cause significant monetary loss to the contractor and excessive cost to the Government.
• Excessive or premature contractor reimbursement because of inappropriate applications or review of economic price adjustment provisions.
• Failure to pay the minimum wages required by the Davis-Bacon Act, Walsh Healey, Public Contract Act, or the Service Contract Act.

The Government's primary objective when unsatisfactory conditions are encountered is to resolve them quickly and at the lowest level possible. Where local resolution is not possible, there are procedures in place to elevate them - even as high as Headquarters level. Of course, no contractor should allow things to progress that far - where both sides dig in their heels and refuse to compromise. There are very few situations where unsatisfactory conditions identified by a branch of the Government doesn't have some merit. And contractors should be willing to take whatever remedial action is necessary to satisfy or allay the Government's concerns. Government officials are generally reasonable people and even if their recommendations seem onerous at first, they are usually amenable to a resolution that is commensurate with the perceived risk to the Government.

Unsatisfactory Conditions - Part 1

We've talked often about contracting officer and contract auditors' responsibilities for detecting and reporting suspected contractor irregularities, whether it be fraud, unlawful activity, awareness of fraud indicators, procedures for referring suspicions up the chain, and providing assistance to those charged with investigating suspicions and allegations.

Sometimes however there are situations that don't rise to the level of "fraud, waste, and abuse" but still might not pass the smell test as far as the Government is concerned. The existence of windfall profits falls into this category. serious internal control weaknesses, mismanagement, and negligence are other examples of concerns that may not be fraud indicators but could and probably would be reviewed in some fashion. The Government lumps these items into a category called "Unsatisfactory Conditions".

Today we'll take up the subject of voluntary refunds. Tomorrow we'll address a few other "unsatisfactory conditions".

Voluntary refunds are payments (or credits) to the Government from a contractor (or subcontractor) that is not required by any contractual or other legal obligation. Voluntary refunds may be initiated by the contractor or requested by the Government. Voluntary refunds are rare and are most likely to occur when the Government notices that a contractor is reaping a windfall profit on a contract. We suppose there have been cases where a contractor's conscious has gotten the best of it and it wants to voluntarily refund money to the Government but we do not know of any specific cases.

Now there is nothing wrong with making a profit. The Government attempts to negotiate fair and reasonable profits on its contracts. However, if the Government notices that a contractor is reaping a windfall profit on a contract, it will undoubtedly look into the circumstances giving rise to that profit. Probably the first thing it will do is to initiate a defective pricing audit (i.e. compliance with the Truth in Negotiation Act or TINA) to see if the contractor failed to disclose current, complete, and accurate cost or pricing data.

Windfall profits however could arise from circumstances not related to defective pricing. For example:

• The Government was inadequately compensated for the use of Government-owned property or equipment.
• The Government was inadequately compensated for the disposition of contractor inventory.

Before the Government agrees to accept a voluntary refund or solicits a voluntary refund, it must ensure that there are no readily available contractual remedies available to obtain the refund. The Government would not like to be beholden to anyone, you know.