Subcontractor Cost/Price Analyses Not Completed When Prime Proposal Submitted

DFARS (DoD FAR Supplement) 252.215-7009 is the Proposal Adequacy Checklist that companies should complete whenever a proposal to DoD requires the submission of cost or pricing data. The requirement is not mandatory, its only suggested as a means of facilitating submission of a thorough, accurate, and complete proposal (see DFARS 215.408(5). Although DFARS only suggests that it be prepared, often times procurement offices will make it a requirement for proposal submission thus making it effectively a mandatory document. Its a nice tool and we usually recommend contractors complete the checklist for any proposal. Whether prospective contractors choose to submit one or not, someone in the Government probably will prepare one so its best that contractors be prepared to respond to any queries that might result from a "no" answer.

One of the more problematic questions has been No. 17 which asks whether the prime contractor or higher-tier subcontractor has included the required cost or price analyses that establishes the reasonableness of each of its proposed subcontracts included with the Proposal. If not, the question further asks whether the offeror has included a matrix identifying (i) dates for receipt of subcontractor proposal, (ii) completion of fact finding for purposes of price/cost analysis, and (iii) submission of the price/cost analysis.

DCAA (Defense Contract Audit Agency) is playing hard-ball with this question. In recent guidance to its audit staff, it makes the following observation.

Question: If the prime contractor or higher-tier subcontractor has not completed the required cost or price analyses but has included a matrix identifying dates for receipt of subcontractor proposals, should Question No. 17 be marked as adequate or inadequate? Additionally, should the audit team consider the overall proposal adequate or inadequate for audit and proceed with the audit if this inadequacy exists?

Answer: FAR 15.404-3(b) requires the prime contractor or higher-tier subcontractor to conduct appropriate cost or price analyses to establish the reasonableness of the proposed subcontract prices and include the results of these analyses in the prime contractor’s proposal.

 As such, the inclusion of a matrix does not overcome the inadequacy of the prime contractor not submitting the cost or price analyses with the proposal. If the prime contractor or higher-tier subcontractor has not completed the cost or price analyses, as required by FAR 15.404-3(b), Question No. 17 ... should be marked as inadequate (i.e., answer “no” under “Adequate?”

We're not sure how the DCAA position serves any useful purpose. The DoD in its checklist has already allowed for a time-phased matrix when an offeror's cost/price analysis of subcontractor proposals cannot be completed by the proposal due date. If the offeror did not complete the cost/price analysis and did not supply a schedule for completing them, then the proposal might not be adequate for negotiating a price.

Contracting Officer's Alleged Misconduct Cost a Contractor $21 Million

L3 Technologies' Communication Systems-West Division (CSW) filed a suit against the Defense Contract Management Agency (DCMA) last month for $21 million alleging that DCMA's Divisional Administrative Contracting Officer (DACO) inappropriately directed the contractor to discontinue proposing its Material Adjustment Factor (MAF) on all proposals to the Government.

This case is about a DCMA DACO's unreasonable and improper administration of CSW's Government contracts and the "far-reaching harm" caused by that "maladministration". For more than two years, the DACO prohibited CSW from including otherwise allowable costs in its proposals for Government contracts. CSW, the complain alleges, had no viable choice but to accede to the DACO's directive because the DACO is the Government official with exclusive responsibility for determining CSW's compliance with Cost Accounting Standards (CAS), establishing final indirect cost rates and billing rates, and determining the adequacy of its accounting system and other contractor business systems (including estimating systems).

The MAF (Material Adjustment Factor) is a composite factor to propose material-related costs not included in any other bid element. It consists of four components: scrap, vendor rework, consumables, and residual material. From 1998 through 2006, CSW included the MAF factor in its negotiated Forward Pricing Rate Agreements (FPRAs). During those years, DCAA (Defense Contract Audit Agency) audited the factor numerous times and took no exception. During negotiations for a 2007-2011 FPRA, the Government and CSW could not come to agreement on one of the components of the MAF, residual materials. And so, the DACO excluded the MAF from the FPRA with the understanding that it would be included as an addendum to the FPRA when the parties resolved the residual material component.

In 2011, notwithstanding that the amount in dispute represented only a small part of the MAF and affected only certain contracts, the DACO directed CSW to discontinue proposing the MAF on all proposals until further notification. At no point prior to that did the DACO provide CSW written notice of any pontential noncompliances stemming from the use of the MAF nor did the DACO make any effort to reach a satisfactory settlement through discussions with CSW before peremptorily directing CSW to discontinue proposing the MAF. This action violated both FAR 30.605 and FAR 42.801.

The DACO compounded "her blunderbuss approach to the MAF with her erratic and unpredictable actions regarding the status of CSW's estimating system". The DACO disapproved the estimating system, then changed "disapproved" to "inadequate" and threatened CSW that it it proposed the MAF, she would consider the system to have a significant deficiency.

Because of the DACO's improper actions, CSW was unable to propose allocable, allowable, and reasonable costs totaling $21 million, the amount of the lawsuit.

More Recommendations for the Section 809 Panel

From time to time, we provide updates to some of the activities of the Section 809 Panel, an advisory panel created by the 2016 NDAA (National Defense Authorization Act) to make recommendations on streamlining the Defense Department's acquisition regulations. The Section 809 Panel solicits recommendations and ideas from anyone that has an interest in Government procurement and wishes to offer up ideas for streamlining the acquisition process.

Last week, The Coalition for Government Procurement submitted a list of 30 specific recommendations for (i) reducing unnecessary regulations on industry, (ii) empowering successful acquisition management and (iii) strengthening inter-agency contracts to ensure that DoD contracting officers can make informed contracting choices. The Section 809 Panel is reviewing those recommendations now, The Coalition's report can be found here.

So what were some of their recommendations? Well, to be honest, we haven't read the full 94 page report ourselves. That seems a bit much to ask, no? But we did review the titles of the 30 recommendations, scanned through the document, and read the details of a few that sounded interesting. Here are some samples:

1. There were a few suggestions that appear outside the scope of the Panel's mission. For example, the Coalition recommended that a change required by the 2017 NDAA - competition at the task order level - be expanded to civilian agencies as well.
2. Permanent sun-setting - the Coalition recommend a procurement sun-setting on all procurement regulations not required by statute.
3. Eliminating the requirement to report executive compensation - this will save contractors 55,000 hours every year and the requirement has dubious benefits.
4. Increase the micro-purchase threshold to $10,000 (from $5,000). Affects only one percent of spending but would increase the speed of thousands of transactions.
5. Streamline the cumbersome SAM (System for Award Management) registration process. The current process is intimidating for new businesses seeking to sell to the Government.
6. More training for the acquisition workforce (a recommendation that comes up every year)
7. Modernize FedBizOpps - it lacks many of the features found on comparable commercial market platforms.
8. Change the auditing process - This recommendation is not a slam against DCAA.  Rather it is a recommendation that civilian agencies use organizations other than their own Inspector General offices to conduct contract audits.

You can read (or peruse) the full report here.

Another "Rent-a-Vet" Scheme Settlement

The New York Foundation for Fair Contracting (NYFFC) is a not-for-profit organization established to support, promote and encourage fair contracting by leveling the playing field in public works construction for the benefit of taxpayers, contractors and workers (online source). According to NYFFC, not all construction contractors play by the rules. Unfortunately a number of them skimp on safety, cheat workers out of wages and use shoddy materials. When this happens, the construction industry, the taxpayers and the local economy pay the price. The NYFFC works to ensure that only responsible contractors - contractors that pay the proper wages, perform quality  workmanship and complete projects on-time - are awarded the opportunity to perform wok on public works contracts.

The Foundation just became $450,000 richer. It blew the whistle on a couple of contractors who fraudulently obtained Federal Government contracts that were designated for service-disabled veteran-owned (SDVO) small businesses. The companies involved Zoladz Construction and Arsenal Contracting, and Alliance Contracting (along with the two owners, Zoladz and Lyons) service-disabled veterans and therefore were not eligible for the contracts.

Zoldaz recruited a service-disabled veteran to serve as a figurehead for Arsenal, which purported to be a legitimate SDVO small business but which was, in fact, managed and controlled by Zoladz and Lyons, neither of whom is a service-disabled veteran. The Government determined that Arsenal was a sham company that had scant employees of its own and instead relied on Alliance and Zoldaz employees to function. After receiving numerous SDVO small business contracts, Arsenal then subcontracted nearly all of the work to Alliance (owned by Zoladz and Lyons) and Zoladz (owned by Zoldaz). Neither Alliance nor Zoldaz were eligible to participate in SDVO small business contracting programs.

The principles agreed to pay $3 million to settle the allegations. NYFFC who blew the whistle in this case, will receive $450,000 of that amount. No word on the value of the contracts awarded to Zoladz or Alliance. Presumable, the $3 million was calculated to take away the profits that the companies made as a result of their false statements.

You can read more about this case in the Department of Justice's press release.

Former Contracting Officer Accused of Accepting $3 Million in Bribes

For the past 10 years, the U.S. Army has been upgrading Camp Humphreys to be its new flagship installation in South Korea. The bulk of U.S. forces and civilians stationed in South Korea, including those stationed at the current Eighth U.S. Army Headquarters in Yongson (Seoul) will be relocated to Camp Humphreys once the upgrades are completed. This will allow U.S. Forces to consolidate its footprint from more than 100 installations throughout South Korea to less than 50. Camp Humphreys has the added benefit of being located beyond the range of most of North Korea's 14,000 artillery pieces.

To call this project an upgrade significantly understates the scope of what is happening. The cost has been publicly acknowledged at  $13 billion but probably exceeds that by a significant amount. Its size exceeds that of Washington D.C. It will house 36,000 service members, dependents, civilian employees and contractors. It's an entire city with hospitals, schools, shopping, and recreation facilities including a golf course.

With a cost projected at $13 billion there are plenty of opportunities for fraud, waste, and abuse in and among contractors working on the project and the Army Corps of Engineers in charge of the project and related contracts. The Justice Department just announced charges in one case.

A former contracting officer for the Army Corps of Engineers and a former officer in the Korean Ministry of Defense were indicted for their roles in a scheme to direct over $400 million in DoD construction contracts to a South Korean construction company in exchange for $3 million in bribes. One has to believe that the expected profit on $400 million had to be significant in order to offset more than $3 million in bribes.

The former Corps of Engineers contracting officer, currently living the good life in Hawaii, has been charged in a nine-count indictment with mail and wire conspiracy, bribery, wire fraud, conspiracy to commit money laundering, and making false statements.

Between 2008 and 2012, the contracting officer solicited bribes from a large Korean engineering and construction company in exchange for directing contracts to the company related to the relocation and expansion of Camp Humphreys.

The former COE contracting officer hid the bribe money by purchasing real estate and putting it in bank accounts in the names of others, including two girlfriends. He quit his job with the Corps in 2012 and began lobbying the DoD for construction projects on behalf of the company that paid him the bribes.

You can read more in the Justice Department press release here.

The Bonus for Cost Cutters Act of 2017

A Bill that would authorize the head of a federal agency to pay a cash award to federal employees who identify unnecessary expenses (i.e. waste, fraud, and abuse) resulting in cost savings for the agency has been introduced in the House and referred to the Committee on Oversight and Government Reform. The maximum amount of the bonus would be $20,000 and certain Government employees would not be eligible including (i) an officer serving in a position at Level I of the Executive Schedule, (ii) the head of an agency, (iii) anyone employed by the Office of the Inspector General, and (iv) a commissioner, board member, or other voting member of an independent establishment.

The Congressional Budget Office (CBO) issued its report on this legislation, noting that there would be no significant additional cost to implement the bill since there are many tools at the Government's disposal under current law to report waste and mismanagement of funds. However, the CBO also said that it wouldn't do much to help reduce wasteful spending because there would be no significant reduction in federal spending because of increased identification of wasteful or fraudulent spending as a result of enacting the bill. The CBO is probably correct. The Government has a lot of priorities and if funds are not spent somewhere, they'll be spent somewhere else. The CBO failed to note however that money spent on wasteful projects means that something else will not get funding.

In the context of this bill, the term "unnecessary expense" means amounts identified by an employee as unnecessary that the CFO of the agency determines are not required for the purpose for which the amounts were made available and the rescission of which would not be detrimental to the full execution of the purposes for which the amounts were made available.

The "unnecessary expenses" would be deposited in the Federal Treasury to reduce the Federal deficit. The agency can retain up to 10 percent of the funds to pay for the cash awards or for other uses of the agency (consistent with other provisions of the law).

There is some concern that this bill, if enacted, could affect contract awards and contract funding - especially funds remaining at year end when the Government slips into its annual "spend it or lose it" ritual - where the Government will spend money on anything as long as it gets spent on something. Many of the "wasted" projects lambasted by Senator Flake in "Porkemon Go" or Senator McCain in "America's Most Wasted" or Senator Lankford in "Federal Fumbles - 2016 Edition" may not have received funding had a bonus incentive been in place at the time someone in the Government decided it was worthwhile to spend money to see if dinosaurs were able to sing.