Continuation of Essential Contractor Services

DoD has amended the DFARS (the DoD FAR Supplement) to require contractors, that provide essential contractor services (as determined by the requiring activity) be prepared to continue such services during periods of crisis. The requirement will be mandatory in contracts awarded after October 29, 2010 but can be added to existing contracts with "appropriate consideration".

This rule is necessary to ensure that essential contractor services are not interrupted. According to DoD, the current changing threat environment, particularly under the additional challenges caused by such potential crises as destructive weather, earthquakes, or pandemic disease, has increased the need for continuity of operations capabilities and plans that enable agencies to continue their essential functions during a broad range of emergencies and crises.

DoD established this requirement for contractors to submit their plans to ensure continuation of essential contractor services that support mission-essential functions during a crisis situation. As a general rule, the designation of services as essential contractor services will not apply to an entire contract but will apply only to those service function(s) that have been specifically identified as essential contractor services by the functional commander or civilian equivalent.

DFARS 252.237-7024, Notice of Continuation of Essential Contractor Services, to require the submission of the plan as part of the offeror's proposal. The associate provision prescription is added at 237.7603. The contractor's continuity of essential services plan shall be considered and evaluated as part of the technical evaluation of offers. The functional managers of the services will most likely be consulted to determine the sufficiency of these plans. The contractor's Mission-Essential Contractor Services Plan, in the resultant contract, will remain active in accordance with the clause at DFARS 252.237-7023, Continuation of Essential Contractor Services.

Equitable Adjustment. If costs increase due to the continuation of services during an event that would create an excusable delay, contractors should be entitled to an equitable adjustment to the terms of the contract.

Pending Legislation Affecting Alaska Native Corporations

Indian Country Today has a story on Sen. McCaskill's (Missouri) renewed effort to bring changes to the manner in which the Government contracts with ANCs (Alaska Native Corporations). Earlier this month, Sen McCaskil announced that she will be continuing her efforts to crack down on waste and abuse in contracting by introducing legislation to eliminate the unique government contracting preferences and loopholes for ANCs. This announcement followed a September article from the Washington Post that listed a number of alleged improprieties surrounding ANC contracts.  If you read the Washington Post chronology however, you will realize that the so-called improprieties are not because of actions by the ANCs themselves but more an issue with the contracting community using ANCs to ease their own administrative processes. To a lesser extent, there is some concern that the contracting preferences afforded to ANCs is not delivering sufficient social benefits back to Alaska natives.

McCaskill’s office said the Post’s reports were an impetus for her legislation, which has the following goals:

• Eliminate the ability of ANCs to receive sole-source contracts exceeding the caps applicable for other 8(a) participants of $3.5 million for services or $5.5 million for goods;
• Eliminate the automatic designation of ANCs as socially disadvantaged business enterprises, requiring ANCs to demonstrate their social disadvantage by providing evidence of “racial or ethnic prejudice or cultural bias within American society because of their identities as members of groups;”
• Eliminate the automatic designation of ANCs as economically disadvantaged, requiring any ANC seeking to participate in the 8(a) program to demonstrate that corporation’s economic disadvantage upon entering the program;
• Require ANCs to count all affiliates and subsidiaries in size determinations for 8(a) eligibility, which shall be limited to no longer than nine years, as is required for other 8(a) participants;
• Require ANCs who choose to participate in the 8(a) program to own a majority interest in only one 8(a) subsidiary at any one time;
• Require ANCs who choose to participate in the 8(a) program to be managed by individuals who qualify as socially and economically disadvantaged under the program, as other 8(a) participants must do; and
• Prohibit ANCs who chose to participate in the 8(a) program from operating as pass-throughs to non-Native companies that do not qualify under the 8(a) program.

Indirect Cost Allocation Bases

This will be of interest to publicly held Government contractors. DCAA recently revised its guidance concerning audit review of indirect cost allocation bases. Auditors are now required to review the applicable portions of SEC filings to determine if off-balance sheet arrangements or related party transactions exist.

If any off-balance sheet arrangements or related party transactions exist and receive benefits of the parent company, or a segment, the auditor must determine that those entities are included in the appropriate allocation bases for an equitable share of indirect costs.

Auditors, of course, have always tested to determine whether the indirect cost allocation bases are proper for the computation of indirect rates. Now however, they have another source or reference point to help make those determinations.

Travel Costs ....... Again.

At the risk of beating this subject to death, we present, yet again, another discussion on travel costs. Travel costs, though not always significant in the scheme of things, is an area that Government auditors find low hanging fruit - a high probability of finding unallowable costs. Within the general cost category of travel, there are several cost limitations that contractors without a good set of travel policies, procedures, and practices, can easily exceed. Today we will cover the types of costs that are included in the maximum per diem rates.

Maximum per diem rates are based on one of three sources depending on destination. For the continental U.S., FAR prescribes the use of the FTRs (Federal Travel Regulations). For Alaska, Hawaii, and "outlying areas" FAR requires that JTR (Joint Travel Regulations) rates be used. And, for international travel, the State Department rates (Department of State Standardized Regulations) are to be used. However, the rates from these sources have different compositions. Under FTR, taxes on hotel rooms and laundry/dry cleaning can be charged separately whereas under the State Department, these costs are included in the rate and may not be billed separately. Under the JTR, hotel tax is separately billable but laundry and dry cleaning are included. Confusing? You can incorporate the following table in your policy and procedure manual to help you avoid unallowable costs.

All of these rates include the following "incidental expenses": fees and tips to waiters and porters; transportation between places of lodging or business and places where meals are taken, if suitable meals cannot be obtained at the TDY site; and mailing costs associated with filing travel vouchers and payment of Government-sponsored charge card billings.

As we stated earlier, this is a prime area for contract auditors to review, especially during their audits of incurred cost. Contractors without intricate knowledge of the travel regulations are at risk for noncompliance.

International Air Travel and the "Fly America Act"

The "Fly America Act" requires that Government contractors traveling internationally on contract related business, fly on U.S. flag carriers. FAR 47.4 implements the Fly America Act and requires the contract clause at FAR 47.403-1 be included in contracts where international travel is anticipated. In practicality, this clause is routinely included in contracts, whether international travel is contemplated, or not. You should check your contracts to determine whether it has been included.

FAR 47.403-1, Availability and unavailability of U.S.-flag air carrier service, provides detailed requirements for determining the availability of U.S.-flag carrier service, as well as guidelines that must be followed to ensure that U.S.-flag carriers are used to the greatest extent possible. Contractors are required to use U.S.-flag carriers when they are available, even though a foreign carrier may offer lower fares for the same flight or flight segment. Contractors that frequently travel abroad should have processes and procedures in place to ensure compliance with the Fly America Act.

Although FAR 47.403 provides detailed implementation requirements of the Fly America Act, the regulations do not address code share carrier agreements. Code share carrier agreements are commonplace in the air transportation industry and involve arrangements between carriers where one carrier will book and provide air travel transportation services aboard another carrier’s aircraft. The Comptroller General’s Decision, B-240956, dated September 25, 1991, views code share arrangements between a U.S.-flag carrier and a foreign carrier as simply a lease of the seats and its crew aboard the aircraft, and as such, the U.S. carrier is responsible for the transportation service for passengers in the leased seats. Based on the Comptroller General’s decision, contractors are required under the Fly America Act to use U.S.-flag carriers, or foreign carriers under a code share arrangement with the U.S.-flag carrier, whenever available, unless the contractor can provide adequate justification and supporting documentation, as required by FAR 47.403-1.

To the extent that a U.S.-flag carrier, including code share flights booked through the U.S.-flag carrier, is not used for international air travel funded by the U.S. Government, FAR 47.403-3(a) provides that Agencies shall disallow the costs associated with the air transportation on the foreign air carrier unless adequate justification is attached to the voucher, which notes that a U.S.-flag carrier was unavailable.

When the travel is by indirect route or the traveler otherwise fails to use available U.S.-flag air carrier service, the amount to be disallowed is based on the loss of revenues suffered by U.S.-flag air carriers, determined by the formula provided in FAR 47.403-1. However, based on the Comptroller General’s decision, 56 Comp. Gen. 209, dated January 3, 1977, the disallowed amount shall not exceed the fare of the segment improperly traveled.

Goodwill

If you go out and buy a company (or part of a company) but pay more for it than the fair value of assets (less liabilities), the excess is charged to an account called Goodwill. Goodwill is an intangible asset as differentiated from tangible assets. Tangible assets include property, plant, and equipment. Tangible assets have underlying substance to the costs paid and recorded in the accounting records. Intangible assets do not.

According to FAR 31.205-49, any costs associated with Goodwill on a Government contract is unallowable. This includes amortization, expensing, write-off, or write-down of goodwill (however represented). Some contractors forget to exclude Goodwill from the "facilities capital employed" base when calculating cost of money. FAR 31.205-10(b)(2) requires that Goodwill be excluded from FCCM (facilities capital cost of money) calculations as well.