Companies Get Paid Multiple Times for the Same Work

Three corporations - Laserlith Corporation, Black Hills Nanosystems Corporation, and Blue Sky Engineering, Incorporated - were owned and controlled by one individual, Wallace Tang. Mr. Tang just pleaded guilty to defrauding NASA (National Aeronautics and Space Administration), NSF (National Science Foundation), and the Energy Department through their SBIR (Small Business Innovative Research) programs and has paid about $1.1 million in restitution back to the Government.

The SBIR program are designed to promote the progress of science by increasing opportunities for small businesses to undertake cutting-edge scientific research. Mr. Tank and his corporations unlawfully and knowingly conspired and agreed together to devise a scheme to defraud and obtain money and property from NASA, NSF, and DoE through false and fraudulent representations. The purpose of this conspiracy was to obtain federally-funded projects by and through material misrepresentations, statements, and omissions, thereby depriving the Agencies the ability to fund other legitimate research.

According to the affidavit, the corporations applied for and received federal awards for essentially equivalent work, or portions thereof, concealing the existence of the awards and the relationships between related companies from the awarding agencies. During the application process, the corporate-defendants misrepresented the existence and use of distinct company facilities, equipment, and operations in South Dakota and North Dakota, and elsewhere outside of California. These representations and statements were false in that of of the companies were co-located in a common facility in Richmond, California, sharing the same resources and performing essentially equivalent work, or portions thereof.

The fraudulent conduct included the preparation and submission of proposals for awards under NSF, NASA, and DoE SBIR programs, specifically involving costs, employees, the eligibility of principal investigators, suitability of facilities, location of facilities, subcontractors, consultants, letters of support, and certifications submitted to those Agencies.

Sentencing is scheduled for later this year. You can read more about this case in the Justice Department press release.

Unpaid Royalties Included in Government Contracts

Generally, royalties on a patent or amortization of the cost of purchasing a patent or patent rights necessary for the proper performance of a contract and applicable to contract products or processes are allowable.  There are some exceptions however when royalty costs are unallowable. For example, if the Government has a license or the right to a free use of the patent, the costs are unallowable. Sometimes there are situations where the patent has been adjudicated to be invalid, or  has been administratively determined to be invalid. The Government is not going to pay for royalties on invalid patents of course. Same goes for patents considered to be unenforceable or expired patents.

But what happens when royalty costs have been included in a proposal for a fixed price contract, the Government accepts such costs, but it turns out that the contractor didn't pay or didn't need to pay royalties after all? Well, we can assure you that the Government will want its money back. But a deal's a deal, right? Not so fast. In the case of unpaid royalties, most fixed price contracts include a provision that requires pay back.

Some contracts contain recapture provisions to become effective in the event actual royalty payments are less than those estimated and included in the negotiated prices. Specifically, FAR 52.227-9, Refund of Royalties, establishes procedures for the Government to recover royalties not paid by the contract when the royalties were included in the contractor's fixed price. You might want to check your contract(s) for that clause.

There's another FAR clause that may come into play. FAR 27.202-3 prescribes actions for the contracting officer to take to protect the Government's interests if royalties paid or to be paid to the contractor are excessive, improper, or not consistent with Government rights. This provision states that if, at any time, the contracting officer believes that any royalties paid, or to be paid, under a contract or subcontract are inconsistent with Government rights, excessive, or otherwise improper, the contracting officer shall promptly report the facts to the office having cognizance of patent matters for the contracting activity concerned, and then, if appropriate, demand a refund.

Who's going to find out whether a contractor has negotiated royalties but ultimately didn't have to pay? Contract auditors, for one, when performing defective pricing reviews (i.e. audits of compliance with the Truth in Negotiations Act). These unpaid royalties must be an issue from time to time because contract auditors have been specifically instructed to "... be alert to identify these circumstances and promptly notify the contracting officer."

Energy Department Improperly Rejected Bid That Did Not Include All Required Information

The Energy Department issued a solicitation back in April for the construction and completion of a capacitor bank at a substation in Arizona. Ten bids were received including one from Addison Construction Company. Addison was the low bidder.

Addison's bid requested an exception to the Buy American Act, on the basis that domestic products were unreasonably priced. It included the cost of foreign manufactured products in its bid. The DOE contracting officer however determined Addison's bid was non-responsive because it didn't include all of the information required by FAR 52.225-9 and 10.

Addison appealed the decision at the GAO (Government Accountability Office).

FAR 52.225-9 requires a contractor requesting an exception to the Buy American Act on the basis of unreasonable costs to include a rather extensive package of supporting information with its bid. Required information includes:

• price
• quantity
• unit of measure
• description of the foreign and domestic materials at issue
• detailed justification for the use of foreign construction materials
• a reasonable survey of the market
• completed price comparison table
• time of availability of the materials
• location of the construction project
• specific supplier information (including the name, address, and telephone number for the supplier)
• supplier's response
• other applicable supporting information

Addison's bid included all of these items except for the name, address, telephone number and contact information for the suppliers that had been surveyed.

DOE argued that Addison's bid was missing information required by FAR and that without that information, DOE could not determine whether a Buy American Act exception applied. Therefore, DOE rejected Addison's bid.

The GAO thought differently. The GAO found that based on the information provided in Addison's bid, the bid was responsive. While the bid did not include all of the information required under FAR, it nonetheless included sufficient information for DOE to understand the foreign material being provided, and the quantity and costs of such material. Thus while the bid was missing some documentation, the omission would not enable Addison to alter the price, or relative standing of its bid.

The GAO whet farther. The GAO stated that there was nothing in the relevant clauses that requires an agency to reject a requested exception simply because the bidder did not provide every piece of information listed. 

You can read the full GAO decision here.

Proposed Rule: Rental Cost Analysis in Equipment Acquisitions

When we first viewed the title of this proposed FAR (Federal Acquisition Regulation), our minds went immediately to the cost principle on Rental Costs (FAR 31.205-36) wondering whether the FAR Councils were planning to make some changes, particularly to Section (b)(3) dealing with leases between related parties, a section that frequently poses problems to contractors. But no, that's not the case. This change relates to equipment that the Government leases. If you are in the business of leasing equipment to the Government you need to be familiar with these proposed changes because they will become final. Most likely future Government's analyses will become much more rigorous than what you might be accustomed to.

The proposed change directs agencies to evaluate comparative costs and other factors when considering whether to lease or rent equipment versus purchase equipment. The rule also adds a link to a GSA site that provides additional guidance on renting and leasing equipment. Finally, it adds a link to a GSA office from which agencies may request information when making lease or purchase decisions. Finally it clarifies that the term "lease" applies to both the lease and rental of equipment to avoid confusion on whether there the differing terms are subject to different rules. They're not.

Based on Fiscal Year 2016 data, the Government issued approximately 34,925 contract actions for the rent, lease, or purchase of equipment. Of that amount, approximately 20,100 awards were made to 6,670 unique small business entities. The average award to small businesses was valued at approximately $700 thousand.

The new analysis requirements will apply to both the initial acquisition of equipment and the renewal or extension of existing equipment leases (and rentals). Rental agreements are typically for shorter periods of time than lease agreements. Additionally, maintenance requirements and financial terms differ between a lease and a rental agreement.

The GSA guidance that agencies will now need to follow and document can be found here.

Mandatory Antiterrorism Training for Government Contractors

The Defense Department just published a proposed rule that, if adopted and most certainly will be adopted, will require its contractors to conduct anti-terrorism training to personnel that require routine physical access to a Federally-controlled facility or military installation.

Routine physical access is considered more than intermittent access, such as when a contractor employee is required to obtain a CAC card (a common access card).

Once implemented, training will need to have been completed withing 30 days and annually thereafter. Training must be completed either through DoD-sponsored and certified computer or web-based distance learning instruction, or under the instruction of a qualified Level I anti-terrorism awareness instructor.

This requirement will apply to all types of contracts, cost-type, fixed price, commercial, simplified, etc. The criteria is not the type of contract but whether contractor employees will require routine physical access to military bases or other Federally-controlled facilities.

DoD does not believe the cost will be significant. The training materials will be developed and disseminated by DoD so contractors will not need to create their own training materials. Training duration at two hours per employee per year however are not specifically reimbursed by DoD. Under a cost-type contract, contractor employees will undoubtedly charge the contract. That doesn't work for other types of contracts. It would probably be prudent to include a provision for anti-terrorism training when putting together price proposals however.

You can get more information on Level 1 Antiterrorism Awareness Training at this website. Training topics include:

• surveillance detection fundamentals
• Government facility security fundamentals
• insider threat
• active shooter fundamentals
• residential security
• air travel 
• ground travel
• hotel security
• hostage survival

Government Contractor Employees Earning Minimum Wage Will Receive a 2.4% Increase in January

Last week, the President's decision to forgo a cost of living pay raise for Federal Government employees in 2019 made national news. Other than the Federal workforce and related organizations (e.g. AFGE), not too many gave the decision a passing thought. These decisions however have a way of reverberating back to the public who need an efficient Government bureaucracy, including Government contractors who rely on Government employees to solicit, award, and administer their contracts. The impact may not be felt immediately but it impacts the Government's ability to attract and retain (emphasis on retain) a capable workforce. Spend any time at all with Government employees and you'll soon hear them bemoaning the loss of employees who left for better pay, better working conditions, and better appreciation. They too are looking for an exit. Who's going to fill their shoes? Someone with inexperience, likely. We recently encountered a contracting officer making million dollar decisions, with six months of experience under her belt.

Contractors certainly have their share of anxieties over Government foibles but one thing they don't have to worry about is the Government restricting pay raises (as long as the raises are reasonable). In fact, in some cases, the Government mandates certain pay raises. A few years back, the President issued an executive order setting a minimum wage for contractor employees working under Government contracts. The minimum wage adjusts every year based on a prescribed formula. It started at $10.10 per hour and is currently $10.35 per hour. Beginning in January 2019, the minimum wage increases to $10.60 per hour (a 2.4 percent increase).

Now we don't know how many contractor employees are affected by this Executive Order. We suspect that in the aggregate, the number of contractor employees earning minimum wages is significant but as a percentage of the contractor workforce, not significant. Employees on contracts covered by Davis-Bacon or the Services Contracting Act are already earning more than minimum wage. It seems most likely that minimum wage personnel are those paid for with non-appropriated funds, such as concessionaires on military bases. In any event, if you are a contractor with minimum wage employees, you will need to factor this pay raise into future budgets.