Prompt Payment Act Interest Rate Rises

The Department of Treasury, Bureau of Fiscal Service just announced the Prompt Payment Act interest rate for the second half of calendar year 2015. It will increase from 2.125 percent to 2.375 percent. This is the highest the rate has been since 2011 but no where near where it peaked in 1982 at 15.5 percent.

 This is the Treasury Rate that is used to compute FCCM (Facilities Capital Cost of Money). It's also used to calculate the Government's liability when they are late in paying contractors. An agency that has acquired property or service from a business concern and has failed to pay for the complete delivery of property or service by the required payment date (generally within 30 days) shall pay the business concern an interest penalty. Also, the Contract Disputes Act of 1978 and the Prompt Payment Act provide for the calculation of interest due on claims at the rate established by the Secretary of the Treasury.

The Secretary of the Treasury has the authority to specify the rate by which the interest shall be computed for interest payments under section 12 of the Contract Disputes Act of 1978 and under the Prompt Payment Act. 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 such penalty. Agencies must pay the interest penalty calculated with the interest rate, which is 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.

Contractors who submit public vouchers or progress payments requests are entitled to interest if the Government doesn't pay them in a timely manner. Late payments don't happen often but when they do, the "paying office" usually adds the interest penalty automatically.

(Fraud), Waste, and Abuse

We often rattle off the phrase "fraud, waste, and abuse" when were really describing fraud. Sure, fraud can lead to waste and abuse but the Department of Defense has a separate definition of "waste and abuse". It comes from the 2011 report to Congress by the Commission on Wartime Contracting (COWC), and is really a bullet listing of examples of waste and abuse:

• Requirements that were excessive when established and/or not adjusted in a timely fashion
• Poor performance by contractors that required costly rework
• Ill-conceived projects that did not fit the cultural, political, and economic mores of the society they were meant to serve
• Security and other costs that were not anticipated due to lack of proper planning
• Questionable and unsupported payments to contractors that take years to reconcile
• Ineffective Government oversight
• Losses through lack of competition

The Government (and the taxpayers) lose billions of dollars every year due to waste. According to the aforementioned COWC report, the Government lost somewhere between $31 billion to $60 billion because of contract waste during recent contingency operations in Iraq and Afghanistan. Waste and abuse can be subjective and often more difficult to prosecute than fraud but contractors should make every effort to prevent and ultimately avoid waste and abuse of their own resources as well as the Government's.

In 2009, the DoD-IG (Inspector General) reported that a contracting officer approved invoices for underutilized contractor personnel responsible for tactical-vehicle field maintenance at a joint base. For more than a year, the actual utilization rate was only 10 to 15 percent of the requirement. The contractor did the right thing by alerting Government officials that the actual utilization was far below that of the contractor personnel being paid. The Government did not act on the information and as a result, the IG estimated that $400 million was lost due to under utilization. This is a good example of waste occurring on a Government contract. (By the way, the IG was unable to uncover any rationale for continuing to pay for under utilization.

Limitation of Cost and Limitation of Funds - You Need the Right Tools

Prospective Government contractors are generally aware that they must satisfy the Government that their accounting systems are adequate for accumulating and reporting costs incurred under their contracts. The requirements vary somewhat depending upon the type of contract contemplated - cost type contracts have a few requirements that other types of contracts do not have.

Most of the time, prospective contractors have their systems in shape before the Government comes in to review. For DoD procurements, these accounting system reviews can be conducted by either DCAA (Defense Contract Audit Agency) or DCMA (Defense Contract Management Agency). For civilian contracts, they are generally conducted by an agency within the respective departments. Generally, those agencies will follow the DCAA practices for auditing contractor accounting systems.

Among the various attributes required for an "adequate" system is that it be able to provide cost accounting information as required by contract clauses concerning limitation of cost (FAR 52.232-20), and limitation of funds (FAR 52.232-22). Essentially, these clauses require contractors to notify the Government whenever it is approaching estimated costs or funds allotted to the contract. In the -20 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days (may vary from 30 to 90 days), when added to all costs previously incurred, will exceed 75 percent (may vary between 75 and 85 percent) of the estimated cost specified in the schedule. In the -22 clause, contractors are required to notify the contracting officer whenever it has reason to believe that the cost it expects to incur under this contract in the next 60 days, when added to all costs previously incurred, will exceed 75 percent of the total amount so far allotted to the contract by the Government.

If an accounting system is to fail audit, its often because contractors do not have adequate systems in place to meet the limitation of costs/limitation of funds notification requirements. To meet these requirements, contractors will need a set of tools and be able to demonstrate that they are operational and well understood by management. These tools must provide an estimate of the costs that will be incurred in the next 60 days (often referred to as the "burn rate"). Audit assessments will consider such things as:

1. The nature and adequacy of controls which govern the establishment of budgets.
2. The procedures for accumulating incurred costs by budget element
3. The actual cost compared to budgeted costs
4. The means provided for comparing incurred costs to the percentage of contract completion
5. The development of estimates to complete (ETCs)

The one question that prospective contractors should ask themselves is whether their accounting system is capable, on a continuous and systematic basis, that it can meet the limitation of costs/limitation of funds reporting requirements - i.e. will the costs expected to be incurred in the next 60 days, when added to costs already incurred, exceed 75 percent of the estimated costs of the contract (or estimated funding on the contract).

Inverted Domestic Corporations - Status Change During Contract Performance

Inverted Domestic Corporations (IDCs) are companies that used to be incorporated in the US (or used to be partnerships in the US), but are now incorporated in a foreign country, or are subsidiaries whose parent corporations are incorporated in a foreign country. The technical definition of an inverted domestic corporation is codified in 6 U.S.C. 395(b):

(b) Inverted domestic corporation For purposes of this section, a foreign incorporated entity shall be treated as an inverted domestic corporation if, pursuant to a plan (or a series of related transactions)—      (1) the entity completes before, on, or after November 25, 2002, the direct or indirect acquisition of substantially all of the properties held directly or indirectly by a domestic corporation or substantially all of the properties constituting a trade or business of a domestic partnership; 

     (2) after the acquisition at least 80 percent of the stock (by vote or value) of the entity is held—

         (A) in the case of an acquisition with respect to a domestic corporation, by former shareholders of the domestic corporation by reason of holding stock in the domestic corporation; or 

          (B) in the case of an acquisition with respect to a domestic partnership, by former partners of the domestic partnership by reason of holding a capital or profits interest in the domestic partnership; and 

     (3) the expanded affiliated group which after the acquisition includes the entity does not have substantial business activities in the foreign country in which or under the law of which the entity is created or organized when compared to the total business activities of such expanded affiliated group. 

Since 2008, the Federal Acquisition Regulations (FAR) have prohibited the award of contracts using appropriated funds to any foreign incorporated entity that is treated as an inverted domestic corporation or to any subsidiary of such entity.

But, what happens when, after contract award, the contractor becomes an inverted domestic corporation or a subsidiary of an inverted domestic corporation? Well, nothing really, but the Government wants to know if that happens. Last week, the FAR Councils (DoD, GSA, and NASA) published a final rule that requires two things.

First, offerors (and contractors) will be required to represent their current status at the earlier of an offer submission or the annual anniversary of the registration in the System for Award Management (SAM). In SAM's representations and certifications section, there are now check boxes to represent whether an offeror or contractor is or is not an inverted domestic corporation and is or is not a subsidiary of an inverted domestic corporation.

Second, FAR 52.209-10, Prohibition on Contracting with Inverted Domestic Corporations, now requires affirmative notification by contractors if they become inverted domestic corporations. The provision reads:

In the event the Contractor becomes either an inverted domestic corporation, or a subsidiary of an inverted domestic corporation during contract performance, the Contractor shall give written notice to the Contracting Officer within five business days from the date of the inversion event.

The new provision does not address the actions to be taken by a contracting officer in the event a contractor becomes an inverted domestic corporation during contract performance. It seems logical that contracts will be allowed to run their course. However, contract modifications and perhaps IDIQ contracts may be in jeopardy of continuance.

Threshold for Certified Cost or Pricing Data Will Increase to $750,000

The FAR Councils released a final rule today that will, among other acquisition related thresholds, will increase the threshold for submission of certified cost or pricing data from $700,000 to $750,000. The change will become effective on October 1, 2015.

The certified cost or pricing data threshold as well as other inflation related thresholds are required, by statute to be adjusted every five years for inflation using the Consumer Price Index for all urban consumers. The last adjustment was in 2010 when the threshold was raised from $650,000 to $700,000. By adjusting thresholds, the relative risks to the Government remain essentially the same and the Government does not end up doing more work simply because of inflation.

Other thresholds impacted by the final rule include:

• The micro-purchase base threshold of $3,000 (FAR 2.101) is increased to $3,500.
• The simplified acquisition threshold (FAR 2.101) of $150,000 is unchanged.
• The FedBizOpps preaward and post-award notices (FAR part 5) remain at $25,000 because of trade agreements.
• The threshold for use of simplified acquisition procedures for acquisition of commercial items (FAR 13.500) is raised from $6.5 million to $7 million.
• The statutorily equivalent Cost Accounting Standard threshold are raised from $700,000 to $750,000 (FAR 30.201-4(b)(1).
• The prime contractor subcontracting plan (FAR 19.702) floor is raised from $650,000 to $700,000, and the construction threshold of $1,500,000 stays the same.
• The threshold for reporting first-tier subcontract information including executive compensation will increase from $25,000 to $30,000 (FAR subpart 4.14 and section 52.204-10).

Contractors Repay $75 Million for Overcharging the Government

Here's something for contractors with GSA Multiple Award Contracts to consider. Every company that has ever received a GSA contract knows full-well that the prices offered the Government must be the best prices offered any commercial contractor. That requirement is well entrenched into the process. If you want to sell to the Government, fine, just don't try to gouge the Government because it has deep pockets, because you can get away with it, because the oversight is lax, or just because you can.

Under the Multiple Award Schedule (MAS) Program, prospective vendors agree to disclose commercial pricing policies and practices to the GSA in exchange for the opportunity to gain access to the broad federal marketplace and the ease of administration that comes from selling to any government purchaser under one central contract.  GSA regulations require that, during contract negotiations with GSA, prospective vendors seeking an MAS contract make “current, accurate and complete” disclosures of the standard and non-standard discounts they offer to commercial customers.  The GSA relies on the accuracy of these disclosures in order to negotiate fair pricing for government purchasers.  Additionally, after the MAS contract is awarded, regulations require that MAS Program vendors disclose to the GSA changes in their commercial pricing practices, including improved discounts that are offered to commercial customers, after the MAS contract is in place.

The Department of Justice recently announced a settlement with two MAS contractors who agreed to pay back a staggering $75 million to resolve allegations that they violated the (Civil) False Claims Act by misrepresenting their commercial pricing practices thereby overcharging the Government (it would be interesting to see how the companies footnote these events in their audited financial statements).

The settlement resolves allegations that the two companies made false statements to the government in connection with the sale of their products and services under MAS contracts.  These false statements allegedly concealed the companies’ commercial pricing practices and enabled the companies to overcharge the government from 2007 through 2013. 

The civil settlement resolves a lawsuit filed under the whistleblower provision of the False Claims Act, which permits private parties to file suit on behalf of the United States for false claims and obtain a portion of the government’s recovery.  Looks like a very good payday for the whistleblower (a former president of one of the companies). Although the Justice's press release did not disclose how much of the $75 million will go to the whistleblower, it will be sizable.

The claims resolved by the settlement are allegations only; there has been no determination of liability.

You can read the full press release here.