Allowability of Legal and Accounting Costs - Grants

The Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) authorizes FEMA (Federal Emergency Management Agency) to provide grant assistance to State or local governments for the repair, restoration, reconstruction, or replacement of a public facility damaged or destroyed by a major disaster and for associated expenses incurred by the government. FEMA's regulations concerning cost allowability are based on OMB Circular A-87.

St. Tammany Parish Government, Louisiana claimed reimbursement of costs for hiring lawyers and accountants to analyze, defend, and ultimately settle claims against the Parish by debris removal contractors. The Parish maintained that such costs were allowable, FEMA maintained that such costs were categorically unallowable. So, the dispute wound up at the CBCA (Civilian Board of Contract Appeals). The CBCA agreed with the Parish. The CPCA stated that FEMA can reimburse legal and accounting fees in appropriate circumstances (the costs are "allowable" in principle) but the costs must still be allocable and reasonable.

FEMA's argument hinged on 44 CFR 13.36 which states that grantees "alone will be responsible, in accordance wiht good administrative practice and sound business judgment, for the settlement of all contractual and administrative issues arising out of procurements." The Board rules that this particular regulation was not a cost-reimbursement regulation, and "responsible" here does not mean "financially responsible".

This is not the first time that we've seen or heard of agencies pulling regulations out of context to make their point. Unfortunately, it often works, especially at small contractors with limited resources or experience to research and counter a a Government position.

You can read the entire CBCA decision here.

Contractors May be Required to Have Third Party Audits Performed on their Business Systems

Yesterday we discussed DOE's decision to withdraw its proposed rules for ensuring contractor business systems are capable of providing timely, reliable information for the management of contracts and programs by contractors and the Department (see Department of Energy Withdraws its Proposed "Business System" Rules). The Department of Defense (DoD) has had similar rules in place through its FAR Supplement (DFARS) for a number of years and although the expectation by now was that DCMA (Defense Contract Management Agency) or DCAA (Defense Contract Audit Agency) would have reviewed or audited those systems for compliance with the standards laid out in the rules, not much has happened. A previous proposal that would require contractors to hire outside auditors to conduct those compliance reviews under the eyes and direction of DCAA were previously withdrawn as unworkable.

The Senate version of the 2017 National Defense Authorization Act (NDAA) contains a provision that would require DoD to develop a program to ensure contractor business systems are reviewed and comply with the standards established in DFARS. Key to this provision is that whatever program DoD comes up with, must result in reduced burden and price to the Government and the contractor. The program must meet five criteria:

1. It must include system requirements for each type of contractor business system covered by the program. The system requirements already established in the DFARS should satisfy this goal.
2. It must establish a process for reviewing contractor business systems and identifying significant deficiencies in such systems;
3. It must identify officials of the DoD who are responsible for the approval or disapproval of contractor business systems.
4. It must provide for the approval or conditional approval of any contractor business system that does not have a significant deficiency and
5. It must provide for the disapproval of any contractor business system that has a significant deficiency and reduced reliance on, and enhanced and effective analysis of data, provided by a contractor business system that has been disapproved.

The draft NDAA provision contains an element that is bound to be problematic and controversial. In the event that a contractor business system is conditionally approved or disapproved, DoD will be available to work with the contractor to develop a corrective action plan defining specific actions to be taken to address the significant deficiencies identified in the system and a schedule for implementation of such actions ("Hi, we're from the Government and we're here to help). We can't imagine DCAA wanting to do this as it would undoubtedly impair auditor independence if it were to become involved in helping contractors implement corrective action plans. DCMA could "work with the contractor" perhaps but currently, the Agency does not have the CPA type skills that would give corrective action plans credibility, especially concerning deficiencies in contractor accounting systems where deficiencies are most likely to occur.

This new program will apply to contractors where its Government contracts (not just DoD contracts) are 30 percent or more of its commercial sales and having a cost-type contract accounting for one percent or more of its commercial sales. That seems like a very low bar for implementation.



Provide for the approval or conditional approval
.  that would require contractors to

Department of Energy Withdraws its Proposed "Business System" Rules

Department of Energy Withdraws its Proposed "Business System" Rules

Back in 2014, not to be outdone by the Defense Department, the Department of Energy proposed its own Contractor Business System rules (see 79 FR 18415). These proposed rules were similar in scope to those being considered and ultimately adopted by DoD. They covered five of DoD's six business systems: accounting, estimating, purchasing, EVMS and property management. DOE's contractor business systems did not cover MMAS (Material Management & Accounting Systems), perhaps because DOE's contractors are not typically in the manufacturing business. The proposed rules included compliance enforcement mechanisms that would, like the DoD rules, allow contracting officers to withhold a percentage of payments when one or more of the business systems contained significant deficiencies.

Yesterday's Federal Register included the announcement that the Energy Department has withdrawn its proposed rules (see 81 FR 43971) . It gave no explanation for withdrawing the proposed rules other than a terse statement that read "... the Department has determined that it will not proceed with the rulemaking and, as such, is withdrawing the proposed rule.".

Perhaps DOE learned something from DoD's implementation problems. Although the rules exists, there are scarcely any audits being performed to determine the state of contractor compliance with those rules. DCAA (Defense Contract Audit Agency) is not making such audits a priority and some proposed rules a year or so ago that would require contractors to hire outside audit firms to perform the reviews (under DCAA supervision) was withdrawn as unworkable.

Notwithstanding the starts and stops, DoD has not given up on auditing contractor business systems. Tomorrow, we will discuss a provision in the FY 2017 NDAA (National Defense Authorization Act) that attempts to restore audit coverage of the six DoD contractors' business systems.

In a Certified Claim, a "Sum Certain" can be Based on Estimates

In 2013, DLA (Defense Logistics Agency) awarded a contract to Government Services Corp (GSC) for fuel deliveries. Evidently, GSC did something to displease DLA because in 2015, GSC received a negative rating in CPARS (Contractor Performance Assessment Report System. Every Government contractor is or should be familiar with the CPARS.

Later that year (2015), GSC submitted a certified claim to the contracting officer in the amount of $100,000 alleging that the negative rating constituted bad faith and a breach of the duty of good faith and fair dealing owed to it by the Government. GSC requested a final decision with respect to its claim.

DLA asked the contractor to provide detailed substantiating records to support the $100,000. GSC responded that the $100,000 was an estimate of the future administrative and legal expenses expected to be incurred to counter the negative CPARS rating.

DLA didn't respond so GSC filed a notice of appeal from the "deemed denial" of the claim. DLA argued that GSC did not file a proper claim because its submission to the contracting officer did not include a sum certain. According to DLA, GSC's failure to include a mathematical basis for any portion of its $100,000 claim or assign a specific dollar value to any component thereof meant that the claim did not meet the sum certain requirement.

The ASBCA (Armed Services Board of Contract Appeals) ruled that DLA's assertion was incorrect. The ASBCA stated that is is well-settled that neither the CDA (Contract Disputes Act) nor its implementing regulations require "submission of a detailed cost breakdown or other specific cost-related documentation with the claim. Instead, the contract need only submit in writing to the contracting officer a clear and unequivocal statement that gives the contracting officer adequate notice of the basis and amount of the claim.

The ASBCA has repeatedly held that use of estimated or approximate costs in determining the value of a claim is permissible so long as the total overall demand is for a sum certain.

The Government's motion to throw the case out because it lacked a sum certain was not sustained by the Board.

You can read the entire ASBCA decision here.

Justice Department Nearly Doubles Penalties under False Claims Act

Last week, the Department of Justice issued an interim rule (with request for comments) which, among other provisions, will nearly double penalties under the False Claims Act from a range of $5,500 to $11,000 per false claim to a range of $10,781 to $21,562 per false claim. Justice is calling this increase an inflation caused adjustment - the last increase came 20 years ago. Now, according to the Bipartisan Budget Act of 2015, the inflation adjustment will occur annually.

The new penalty amount apply to civil penalties assessed after August 1, 2016 whose associated violations occurred after November 2, 2015 (the date that the Bipartisan Budget Act was enacted). Violations occurring before November 2, 2015 and assessments made prior to August 1, 2016 whose associated violations occurred after November 2, 2015 will continue to be subject to the old penalty amounts.

This is a significant increase in penalties and some commentators have expressed concern that it will adversely affect contractors' willingness to settle disputes. While penalties under the False Claims Act are mandatory courts have discretion within the stated range. Additionally, courts have discretion in deciding what constitutes a false claim. In one very old case involving timecard improprieties, the Government argued that each questionable timecard entry was a false claim. The court sided with the contractor who argued that there could be no false claim until a voucher (i.e. an invoice) for the labor costs represented by those timecards were submitted to the Government. Thus, hundreds of potential false claims became one.

You can read the full text of the interim rule here. Although termed an interim rule, its unlikely that anything substantive will change between it and the final rule as it is essentially based on a statute (the Bipartisan Budget Act of 2015) with proscribed formula for determining and measuring increases in penalty ranges.

DCAA to Undergo Another Peer Review

The Department of Defense Office of Inspector General recently announced that it is initiating a new peer review on the quality and adequacy of DCAA (Defense Contract Audit Agency's) audit work. The last quality control report was issued back in August 2014 and covered DCAA's system of quality controls in effect as of June 30, 2013. Federal audit organizations can receive a rating of pass, pass with deficiencies, or fail. DCAA received a rating of "pass with deficiencies". The deficiencies related to lack of sufficient documentation where the peer review team could not discern the judgment and conclusions drawn by DCAA auditors. Additionally there were instances where the documentation did not support information in the audit report.

The objective of the peer review, according to the OIG's engagement letter includes the following:

Our objective is to determine whether the DCAA’s system of quality control was suitably designed and whether the audit organization is complying with its quality control system to provide it with reasonable assurance of conformity with the applicable professional standards. Government Auditing Standards require that an audit organization performing audits in accordance with Government Auditing Standards have an appropriate internal quality control system and undergo an external quality control review every three years by an organization that is independent of the organization being reviewed. We will review individual audits from DCAA headquarters and field offices, as well as internal quality assessment activities necessary to meet the review objectives. We will use the CIGIE Guide for Conducting Peer Reviews of Audit Organizations of Federal offices of Inspector General. 

DCAA is, of course, hoping the next peer review will result in an improvement from its last peer review. The Agency has certainly worked hard to improve its quality control systems and compliance with applicable policies and procedures. Perhaps now that a lot of the adverse publicity that has tailed DCAA for the past few years has diminished, the OIG can be more objective in its peer review.