Political Contributions

It is important to know that political contributions by federal contractors to any political party or candidate for Federal office would not only be unallowable under relevant FAR cost principles but are unlawful to make in the first place. Specifically 11 CFR 115 states:

It shall be unlawful for a Federal contractor ... to make, either directly or indirectly, any contribution or expenditure of money or other thing of value, or to promise expressly or impliedly to make any such contribution or expenditure to any political party, committee, or candidate for Federal office or to any person for any political purpose or use. This prohibition does not apply to contributions or expenditures in connection with State or local elections.

This prohibition works both ways. It is also unlawful for any such person to solicit contributions from a Federal contractor.

In the context of this law, Federal contractor is a person (including legal person) who enters into any contract with the United States or any department or agency thereof either for the rendition of personal services or furnishing any material, supplies, or equipment or selling any land or buildings.The funds for these purchases must have been appropriated by Congress.

The prohibition lasts as long as the contract.The prohibition also applies to active bids.

Contracts include sole-source, negotiated or advertised procurements and contract modifications.

Individuals or sole proprietors who are Federal contractors are prohibited from making contributions or expenditures from their business, personal, or other funds under their dominion or control. The spouse of an individual or sole proprietor who is a Federal contractor is not prohibited from making a personal contribution or expenditure in his or her name.

Here's the big loophole. Stockholders, officers, or employees of a corporation can make contributions from their personal assets. There have been many allegations over the years that Federal contractors give bonuses to their executives with the implicit understanding that those funds would go to targeted candidates.

Expanded Access to Records Clause for Some Contracts

The United States Central Command's (CENTCOM) area of responsibility (AOR) includes countries in the Middle East, North Africa, and Central Asia. This AOR, of course, includes Iraq and Afghanistan. The military operations that are occurring in Iraq and Afghanistan are often referred to as contingency operations. The United States is spending a significant amount of money on these contingency operations. Since 2001, the US has spent $1.6 trillion in Iraq, Afghanistan, and fighting ISIS. A good part of that money goes to contractors and subcontractors supporting the contingency operations.

Over the years, there have been many many allegations of fraud, waste, and abuse among contractors and subcontractors operating in CENTCOM's AOR. Funds paid to contractors (and subcontractors) are subject to extortion or corruption and in some cases, provided directly or indirectly to persons or entities that are actively supporting an insurgency or otherwise actively opposing US forces.

Most contracts give the Government certain access to records rights. However, the access is generally narrowly defined and, except for cost-reimbursable contracts, does not automatically give the Government access to incurred cost data. Even in the case of defective pricing (or TINA, Truth in Negotiations Act), the Government is only granted authority to access cost or pricing data that was known to the contractor as of the date of agreement on price, not to cost incurred during contract performance. So essentially, the Government has been somewhat hamstrung in its investigations that contract funds are being used for illicit purposes because it has no contractual authority to demand cost records.

That's about to change.

Earlier this week, the Department of Defense issued a new DFARS (DoD FAR Supplement) clause that will give the Government additional authority to examine records under certain circumstances. The new DFARS clause applies to all contracts and subcontracts over $100 thousand in CENTCOM's AOR. It states, in part, that "In addition to any other existing examination-of-records authority, the Department of Defense is authorized to examine any records of the Contractor to the extent necessary to ensure that funds available under a contract are not subject to extortion or corruption or provided, directly or indirectly, to persons or entities that are actively supporting an insurgency or otherwise actively opposing United States or coalition forces in a contingency operation."

To activate the clause, a contracting officer must issue a written determination based upon a finding by the CENTCOM commander that there is reason to believe that funds available under the contract may have been subject to extortion, corruption, or siphoned off to the opposition. Then, once the written determination is made, the investigators or auditors (or both) will have the legal authority to look at whatever records it determines necessary to follow up on the "reasonable belief".

It will be interesting to see what, if anything, will come of this expanded access to records authority.

Performance Bonds - Know Your Surety

Yesterday we published a primer on performance bonds as they relate to construction contracts awarded by the Federal Government. Click here to read it. One point we made is that a performance bond (or surety bond) on any construction contract over $100 thousand is absolutely required and must be approved by the contacting officer. The Treasury Department maintains a listing of certified sureties. If you stick with one of these, you probably won't get burned. However, the fraudsters are out there trying to peddle instruments that are not from approved sureties.

Here's a case in point. Earlier this week, the Justice Department posted a news release announcing that an individual had been sentenced to more than four years in prison for operating a multi-million dollar surety bond fraud scheme. This scheme resulted in financial losses, created delays in construction projects, and compromised bids allowing some contracts to be awarded to unqualified construction companies. You can read the press release here.

The defendant lied to contractors and Government agencies about his qualifications to issue surety bonds. For about a year up until July 2013, the defendant used several corporations to sell fraudulent surety bonds on construction projects. He held himself out to contractors and government agencies as having the authority to execute or issue surety bonds on behalf of the Federal Insurance Company and Pacific Indemnity Company (both Treasury approved sureties). He created fraudulent surety bonds, embossed the bonds using a counterfeit seal and forged the signatures of individuals from legitimate companies. Ultimately, he issued bonds with a face value of more than $100 million and received premium payments of more than $2.2 million.

In one instance, the defendant sent a letter on forged Pacific INdemnity letterhead and had a telephone conversation confirming validity of the Pacific Indemnity bonds with a Navy contracting officer. The Navy approved the bonds based on the forged letters and conversation with Campbell. That one bond netted him a $374 thousand premium. Not a bad payday for fake letter and a 10 minute phone call.

It is unlikely that any of the defrauded contractors will be able to collect damages. Most surety con artists simply pick up and move to other locations and other markets or change their names or company names and stay in business.

For contractors trying to cut costs, it might be tempting to respond to internet offers of cheap premiums. But beware of the risks. You might be better off by soliciting quotes from several of the "approved" sureties that are certified by the Treasury Department..

Performance Bonds

The Miller Act, enacted in 1935, provides that all federal construction contracts performed in the US must require contractors to furnish performance bonds in an amount satisfactory to the contracting officer. In 1994, the Federal Acquisition Streamlining Act (FASA) set a threshold for performance bonds at $100 thousand. Prior to that, all construction contracts required performance guarantees. The statutory requirements of the Miller Act, and FASA are implemented by FAR Part 28, Bonds and Insurance.

Surety bonds are guarantees in which the surety guarantees that the contractor will perform the obligation stated in the bond. Usually the obligation requires the contractor to complete the project on time and within cost. If the contractor fails to perform the obligation stated in the bond, both the contractor and the surety are liable on the bond. The amount in which a bond is issued is referred to as the penal amount. In the case of construction for the Federal Government, the penal amount is generally one hundred percent of the contract amount. The penal amount is usually increased whenever there are change orders.

The most common means of satisfying federal bonding requirements is purchase a bond issued by a corporate surety. Not just any surety will satisfy the requirement. The Department of Treasury maintains a listing of "approved" corporate sureties. That listing can be found here and it is updated whenever a new surety is added to the list.

The Treasury Department audits the financial strength of corporate sureties and establishes bonding limits. On Federal construction projects, the contracting officer is required to make certain that the surety has not exceeded its bonding limit. On very large construction projects, performance bonds are usually issued by several approved surety companies as co-sureties.

There are other ways of satisfying bonding requirements, in theory. Contractors could pledge enough of their own assets to support the penal amount. As a practical matter however, contracting officers prefer to deal with approved corporate sureties. For contractors that might not otherwise qualify for bonds issued by corporate sureties, this might be the only way to compete for a contract.

Performance bonds, of course, cost money. Bonding costs however are allowable contract costs when required by the contract or in accordance with sound business practices. The rates and premiums must be reasonable under the circumstances (see FAR 31.205-4).

The cost of bonding will vary based on many "underwriting" factors including past experience. Companies with less than stellar records will pay comparatively higher rates than good companies. That might put them at a competitive bidding disadvantage.

OFPP's Plan to Reform Federal Contracting

We picked up this story last week from the Federal Times.

It's a fairly long article so you should probably read it fully if you want to understand the grist of OFPP's (Office of Federal Procurement Policy) vision. Briefly stated, OFPP wants to "stovepipe" procurement, that is, centralize procurement across all agencies by categories of spending - information technology, professional services, construction, medical, etc. These categories of spending will be managed by dedicated executives whose job it will be to:

• smooth out pricing variability
• analyze spending data to optimize procurement strategies (whatever that means)
• culling duplicative contracts
• negotiating better deals based on overall government-wide demand

OFPP claims this concept - category management - is widely used in industry and in the UK. It helps ensure that agencies get the same competitive price and quality of performance, it frees up agency acquisition personnel to focus on complex agency specific procurements, and it give vendors one place to go and one person accountable for shaping the strategic direction of that one common category.

Each category will be headed up by a senior official (either from industry or the government) who is known to be an expert in that category. That manager would be able to understand buying trends, what drives cost, new innovations coming, and emerging companies.

To begin, the administration is focusing on 10 categories. By the end of fiscal year 2016, the government will have collected critical contract data for the $275 billion spent in those 10 categories and "tens of thousands of acquisition workers" will be able to access that data to make better decisions.

Sounds good. Will it reduce costs? Stay tuned.

GAO's High-Risk List - DoD Support Infrastructure Management

We are concluding our series on GAO's list of high-risk agencies and program areas that were selected for their vulnerabilities to fraud, waste, abuse and mismanagement, or are most in need of transformation. Although there are many more programs on the listing, we selected the ones that most affect or apply to traditional Government contractors. You can read the entire GAO report by clicking here. If you missed any of the earlier discussions, go to Part 1, Part 2, and/or Part 3.

DoD Support Infrastructure refers to the real property that the Department manages consisting of 562 thousand facilities including commissaries, data centers, office buildings, laboratories, and maintenance depots. These facilities are spread out to more than 5,000 sites worldwide and cover more than 28 million acres. Quite obviously, these facilities all need ongoing repair and maintenance as well as grounds maintenance and that is where contractors come in. DoD does not do the work themselves - they hire it out.

The GAO focus here is that DoD should do more to eliminate potentially excess facilities but it is hampered in doing so because it does not maintain complete and accurate data concerning the utilization of its facilities. Until is has reliable utilization data, it cannot assess the level of excess facilities and therefore is hampered in its ability to reduce excess infrastructure.

The other aspect of this is that where facilities have consolidated (e.g. Joint Bases), there is little if any data showing whether cost savings resulted from combining facilities. If fact, there is anecdotal evidence showing that in some cases, costs have increased as a result of base consolidations. Moreover, DoD has not established any action plans to make certain savings are achieved. The GAO identified snow removal standards at two installations that combined. The Air Force and Army had different standards, yet when the two combined, the combined facility applied the higher standard, thus actually increasing costs.

Contractors should expect to see increased effort by DoD activities to reduce historical levels of support thereby achieving savings in contracted services.