Standard Automobile Mileage Rates for 2012

The IRS standard mileage rate for 2012 remains at 55.5 cents per mile - the same as the last six months of 2011. The standard GSA (General Services Administration) mileage rate for 2012 remains at 51 cents per mile, the same as 2011. Concerning the difference in the rates, GSA stated:

The IRS recently announced its standard automobile mileage rate of 55.5 cents will not change effective January 1, 2012. Although the results of our internal evaluation indicate no change in the Federal privately owned automobile, airplane and motorcycle mileage rates beginning January 1, 2012, we will continue to monitor the fuel costs and will adjust these rates if warranted. Any adjustments will be posted in the Federal Register and on this web site. Note: IRS and GSA do NOT necessarily have the same rate.

This distinction is important for contractors who have tied their reimbursement policies into one or the other's rates. See our posting from last July for more information as to why this distinction is important.

Conditions That May Indicate Significant Estimating System Deficiencies

The Government loves to devise lists of things that might be indicative of other things. The Inspector Generals of the Executive Agencies (Defense, Energy, Interior, Commerce, Homeland Security, etc), for example, have "fraud" indicators meaning that if one or more of the indicators are present, there could be a chance of fraud occurring somewhere in the contractor's organization. The Government has financial capability risk indicators meaning that if one or more of these indicators are present, the contractor may be in dire financial straights and at risk of going bankrupt.

We found another list the other day. This one pertains to contractors' estimating system. As you know from previous postings, the estimating system is one of the six business systems that if found deficient, will result in payment withholds.

Here's the list. The following have been identified by the DoD as conditions that may indicate potentially significant estimating deficiencies and excessive costs to the Government.

• Failure to ensure that historical data on the same or similar work are available to and utilized by cost estimators where appropriate.
• Continuing failure to analyze material costs or failure to perform subcontractor cost reviews as required.
• Consistent absence of analytical support for significant proposed costs.
• Excessive reliance on individual personal judgment where historical experience or commonly used standards are available.
• Recurring significant defective pricing findings within the same cost element(s).
• Failure to integrate relevant parts of other management systems (e.g., production or cost accounting) with the estimating system so that the ability to generate reliable cost estimates is impaired.
• Failure to provide established policies, procedures, and practices to persons responsible for preparing and supporting estimates.
• Management information that does not match the data in proposals.
• Standards for labor and material costs that are not current.
• Changes in make-or-buy decisions not disclosed.
• Inappropriate or misleading sampling techniques.

Contractors might want to use this listing to perform their own self-assessments.

Government Approach to Profit/Fee Analysis

We've discussed profit and fee several times in this blog but it is worth repeating because we continue to hear of situations where the Government attempts to coerce prospective contractors into accepting paltry profit and fee amounts during negotiations. This aggressiveness may well be contrary to Government policy.

The underlying assumption behind Government approaches to profit/fee analysis is the belief that contractors are motivated by profit/fee (see FAR 15.404-4(a)). The Government is required to use a structured approach (usually the weighted-guidelines method) which provides a disciplined approach for ensuring that all relevant factors are considered in developing Government profit/fee negotiation objectives.

It is in the Government's best interest to offer contractor's opportunities for financial rewards sufficient to

• Stimulate efficient contract performance;
• Attract the best capabilities of qualified large and small business concerns to Government contracts; and
• Maintain a viable industrial base to meet public needs.  

If the Government is to use profit/fee to motivate contractor performance and achieve the above goals, practices primarily intended to reduce profit/fee or diminish the impact of profit/fee analysis are not in the Government's best interest (see FAR 15.404-4(a)(3)).

• Negotiations aimed at reducing prices by reducing profit/fee without proper consideration of the profit function.
• Negotiation of extremely low profits/fees
• Use of historical average profit/fee rates without regard to the unique circumstances of the immediate negotiation
• Automatically applying predetermined profit/fee percentages without regard to the unique circumstances of the immediate negotiation.

While profit/fee calculations must consider the unique circumstances  of the immediate negotiation, contract fee cannot exceed statutory limits that apply to cost-plus-fixded-fee contracts;

• 15% for experimental, development, or research work
• 10% for all other cost-plus-fixed-fee contracts.

Alaska Native Corporations (ANCs)

If you've been around Government contracting for any length of time, you've no double heard the term ANCs or Alaska Native Corporations. They're in the news a lot and its usually not positive coverage. For example, Eyaktek, an ANC, made the news recently when one of its employees was involved in an allegedly conspiracy to defraud taxpayers by $20 million under a U.S. Army Corps of Engineers contract. Senator McCaskill and other less vocal senators have railed for several years against the contracting preferences granted to ANCs. DoD is performing a comprehensive analysis to determine just how much money is going to ANCs through its contracts.

For the most part, ANCs try to take advantage of the opportunities afforded to them through legislation passed by Congress and signed into law by the President. And, why not? Its the smart thing to do and it makes good business sense. Many non-ANCs however would prefer a more level playing field. That's a reasonable position as well. However, as long as the laws stay on the books, ANCs will continue to avail themselves of the contracting preferences.

In our discussions with clients who are not ANCs, we find that there is a significant lack of knowledge as to what the ANC preferences are. There is also a lot of misinformation out there as well. So, to help elucidate the matter, we offer this brief explanation of ANC preferences.

In 1971, Congress passed the Alaska Native Claims Settlement Act which created thirteen regional Alaska Native Corporations (ANCs) and approximately 200 local village ANCs to stimulate Alaska's economy and settle land disputes between the United States Government and Alaskan natives.

Fifteen years after the passage of the Settlement Act, Congress, in 1986, authorized regional and village ANCs to be included in the SBA 8(a) program. The SBA is authorized by law to develop a program and promulgate regulations to assist socially and economically disadvantaged small businesses. The SBA's Section 8(a) program, the "Business Development Program" provids business development assistance to socially and economically disadvantaged small businesses, including help in obtaining federal contracts.

When Congress authorized ANCs to be included in the SBA 8(a) program, they also granted unique procurement advantages beyond those available to other Section 8(a) participants, including the following exemptions:

• ANCs were eligible to receive sole source 8(a) contracts regardless of dollar size, with no upper limit, while all other 8(a) firms could not receive sole source contracts in excess of $3 million for services and $5 million for manufacturing.
• The Alaska Native Claims Settlement Act automatically conferred "economically disadvantaged" status upon ANCs, while other 8(a) firms had to be managed by economically and minority disadvantaged owners.

Because of these preferences, ANCs are often awarded very large sole-source contracts. The contract between Eyatek and the Corps of Engineers discussed above for example, had the potential of reaching $780 million over a five year period.

Purchase, Existence, and Consumption

Material costs are usually significant for any production type contract. Contract auditors have a special review they perform annually whenever material costs are significant on cost-type contracts. This is a mandatory review as well, meaning that the auditor must perform the review before approving final costs on a contract. It is also required to be performed annually. The purpose of the special evaluation is to verify that purchased direct materials were in fact received and ascertain that they were

• needed for the contract
• purchased in reasonable quantities
• purchased at prudent prices
• used on the contract, and
• properly accounted for as to initial charge, transfer in or out, and residual value.

These reviews are a bit different from traditional audits in that the auditor will draw a sample of materials charged to Government contracts and then physically locate all items in the sample. The auditors will also obtain purchase orders for the sampled items and trace those purchase orders to receiving reports. Contractors that cannot physically locate sampled material items are at risk for internal control deficiencies and perhaps having some billings temporarily suspended.

To determine whether the item was needed for the contract, the auditor will compare purchase requisitions or purchase orders to contract requirements and/or bills of materials. Good internal controls would have all three of these documents (purchase requisitions, purchase orders, and receiving reports) prepared by different personnel.

Purchases should be made at optimum quantity levels. Contractors should not buy too few at a time and lose out on quantity discounts. On the other hand, sometimes, buying too many of a quantity will result in lower prices based on available quantity discounts.

When materials used on a contract come from inventory (as differentiated from purchasing directly for the contract) the auditor will be very interested in inventory valuation methodologies.

Prompt Payment Interest Rate Drops to 2%

The prompt payment interest rate dropped again for the sixth consecutive semi-annual period. The new rate for the period January 1, 2012 through June 30, 2012 is a flat two percent. This is down from 2.5 percent from the previous six month period.

Any Governmental agency that has acquired property or services from a business concern and has failed to pay for the complete delivery of property or service b the required payment date must pay the business an interest penalty. This applies to public vouchers under cost-type contracts, progress payments under fixed price, as well as many other payment methods.

Under the prompt payment act, if an interest penalty is owed to a business concern, the penalty shall be paid regardless of whether the business concern requested payment of interest. Agencies calculate interest penalty with the interest rate in effect at the time the agency accrues the obligation to pay a late payment interest penalty.The interest penalty shall be paid for the period beginning on the day after the required payment date and ending on the date on which payment is made.