Colt vs Remington Showdown

Remington Arms Company filed a bid protest in the U.S. Court of Federal Claims (COFC) protesting the Army's decision to award a contract to produce M4 and M4A1 carbines to Colt Defense LLC. Remington's bid protest is focused on whether the contracting officer's decision to award a contract to Colt while Colt was still in bankruptcy and was labeled "High Risk" by the Defense Contract Management Agency (DCMA) was arbitrary, capricious, and an abuse of discretion.

As you probably know, DCMA is the agency responsible for performing financial capability reviews of prospective contractors - a function it grabbed away from DCAA (Defense Contract Audit Agency) a number of years ago. DCMA had performed a financial capability review of Colt and noted that Colt had recently filed for Chapter 11 bankruptcy protection and that its liabilities far exceeded it assets. DCMA expressed doubt that Colt would have enough working capital to fulfill the contract. An additional DCMA concern was that at the time of the award, Colt did not have a long-term lease for the facility where it intended to manufacture the M4s.

The contracting officer had the DCMA financial jeopardy report and other information from ongoing bankruptcy proceedings but found Colt "responsible" nevertheless. Remington argued that the contracting officer failed to properly evaluate DCMA's report or evidence she reviewed from the bankruptcy proceeding which showed that Colt faced possible liquidation and that its manufacturing facility lease was about to expire.

Upon receipt of the negative DCMA financial capability report, the contracting officer had a conversation with Colt and determined that Colt "does indeed possess the financial resources to perform under the current contract or will have the ability to obtain those resources. In testimony, the contracting officer explained that the "DCMA report was based on information submitted before Colt had submitted its bankruptcy petition" and so the DCMA report was out of date. The contracting officer also discounted the problematic lease extension based on a conversation where Colt representatives told her they had no intention of moving.

Remington appealed, arguing that the contracting officer's responsibility determination under FAR 9.104 was unsupported and therefore arbitrary and capricious. The COFC agreed with Remington. Although the Court did not call her responsibility determination arbitrary and capricious, the Court did conclude that it was not supported by the record. The contracting officer's stated reasons for disregarding DCMA's report were insufficient in light of the bankruptcy court records she reviewed. The fact that a bankruptcy court was monitoring Colt's finances does not mean that the bankruptcy court would or could ensure Colt's continued viability was highly in doubt at the time of the responsibility determination.

In addition, the Court noted, and equally important, the contracting officer's conclusions regarding Colt's ability to manufacture M4s at its facility are also unsupported. Although Colt informed the contracting officer that it intended to stay in the facility, the bankruptcy record shows that the decision did not appear to be in Colt's control. The contracting officer relied on Colt's stated expectations which were largely contradicted by Colt's filings in the bankruptcy case. This decision, the Court found was arbitrary and capricious.

You can read the entire decision here.

Defense Department Implements a Hiring Freeze for Civilian Workforce

The Department of Defense (DOD) has instituted a civilian hiring freeze for the Office of the Secretary of Defense, Defense Agencies and Field Activities. This freeze applies to both DCMA (Defense Contract Management Agency), DCAA (Defense Contract Audit Agency) among many other agencies in the Department.  The freeze affects all vacant full-time, part-time, temporary and permanent civilian positions.

What does this mean for contractors? It can't be good. DCMA contracting officers already have more work than they can reasonably handle. Freezing hiring will only exacerbate the situation. If you don't believe us, put in a call to your administrative contracting officer. Chances are it will go to voice-mail and any message you leave may never get returned.

DCAA is already struggling to meet its workload demands and starting this fiscal year, has had to jettison all of its work for other Federal Agencies until such time as it can become current in its audits of incurred cost. Freezing DCAA hiring will certainly not help reduce the backlog.

DoD is looking for each agency to present it a delayering plan. A lot of people, Senator John McCain being a notable example have made civilian reductions at the pentagon a high priority. Some have suggested that the reductions be commensurate with the draw down of military personnel. The military has seen a seven percent reduction while the civilian side less than half of that at 3.3 percent.

The hiring freeze provides for exemptions for mission critical requirements. DCMA has asked for an exemption but so far, even though still hopeful, has not been granted one.

DCAA Set to Undergo Significant Reorganization

You may have heard rumblings about an impending reorganization of the Defense Contract Audit Agency (DCAA). There is plenty of chatter but DCAA has not publicly announced anything yet (that we know of). Here's what we've been able to gleen.

DCAA is currently comprised of five regional offices; Northeastern, Eastern, Mid-Atlantic, Central, and Western - and a Field Detachment specializing in audits related to sensitive compartmented information and special access programs.

Under the reorganization, the number of regional offices will be reduced from five to three - Eastern, Central, and Western. But these three remaining Regions will not have cognizance over the Government's largest defense contractors. Those will form their own "special" regions and report to the Director, just like the Regional Directors do now. There will be five new special regions including:

• General Dynamics/Raytheon/BAE
• Lockheed Martin
• Boeing/Honeywell
• Northrup Grumman
• L-3

Any audit activity at any of the segments of these contractors will report to the Director of the respective Contractor regions.

What will this mean for contractors? Well, if you're one of the major contractors listed above, you should see improved consistency in audit positions. One major contractor frustration is auditors at a plant in Seattle taking different positions than auditors at the same contractor's plant in St. Louis. Since all of the segments will be reporting to the same director, consistency should be improved.

Don't expect a whole new cadre of auditors however. That will stay the same. Don't expect shifts in audit focus. There is only so many type of contract audits that can be performed. Do expect better access to top management. The special regional directors are only one level below the Director for all of DCAA.

If you're not one of the eight top defense contractors, you probably shouldn't expect to see any significant changes when interacting with contract auditors.

End of the Road Looming for Cost-Type Construction Projects

The Department of Defense is proposing a change to its Federal Acquisition Regulation Supplements (DFARS) that will prohibit any form of cost-plus contracting for military construction projects or military family housing projects. This prohibition will appear at DFARS 216.301-3. Currently, the prohibition applies to Cost-Plus-Fixed-Fee contracts. The new regulation broadens that to include all form of Cost-Plus contracting.

It seems to us that this is rather a DoD formality because cost-type contracts for military construction has been pretty much taboo for a long time. According to the Federal Procurement Data System, DOD awarded only 15 cost-reimbursement construction contracts in Fiscal Year 2015. 

The Hanford Waste Treatment Plant project illustrates the dangers of cost-plus contracting for construction projects. The Department of Energy (DOE). DOE has watched the cost of its Hanford Waste Treatment Plant balloon from $4.3 billion in 2000 to now over $12 billion and the project is still not finished. That latest estimate is going higher. Cost-type contracts for construction are not good for whoever is paying the bill and everyone knows it.

This new rule comes as a result of a provision in the Fiscal Year 2012 National Defense Authorization Act. Although it doesn't significantly change existing practices, the fact that it is not based on Statute (Public Law 112-81 and 10 USC 2306(c) makes it more difficult for DoD to seek a waiver or to otherwise find a way around the prohibition.

New Cost Principle Proposed for the DoD FAR Supplement

It has been a number of years since we've seen a new cost principle added to the Federal Acquisition Regulations. There have been many modifications to existing regulations but no new ones in at least 15 years. That is about to change. The Department of Defense (DoD) has just published a proposal to amend its FAR Supplement (the DFARS) to limit cost recovery when counterfeit electronic parts are incorporated into products the Government buys.

This provision/limitation was pretty much forced on DoD because it was included in the Fiscal Year 2016 National Defense Authorization Act. Counterfeit electronic parts have become a big deal in Government acquisition, primarily because of quality control issues. If a million dollar missile goes off course because of faulty electronic parts, you've wasted a million dollars and hit something you were not targeting.

Specifically, the new proposal provides that the costs of counterfeit electronic parts or suspect counterfeit parts and the cost of rework or corrective action that may be required to remedy the use or inclusion of such parts may be allowable if:

1. The counterfeit electronic parts or suspect counterfeit electronic parts were obtained by the contractor in accordance with applicable regulations.
2. The contractor discovers the counterfeit electronic parts or suspect counterfeit electronic parts, and
3. The contractor provides timely notice to the Government. Timely is defined as within 60 days after the contractor becomes aware of the counterfeit parts.

The applicable regulations mentioned in Item 1 above generally relate to buying from trusted suppliers. Contractors are required to obtain electronic parts that are in production or currently available in stock from the original manufacturers of the parts or their authorized dealers or from trusted suppliers who obtain such parts exclusively from the original manufacturers of the parts or their authorized dealers. If the pars are not in production, contractors must obtain the parts from trusted suppliers.

If all three conditions stated above are not met, the cost of rework and corrective action are not allowable.

This new cost principle will appear as DFARS 231.205-71.

Government Files False Claim Action Against DOE Contractor

The U.S. Government has filed a civil action against the contractor in charge of its Savannah River cleanup operations (Savannah River Nuclear Solutions, LLC or SRNS) and its parent company Fluor Federal Services, Inc. (FFS) for making false and fraudulent claims and statements to the Government and for knowingly including unallowable costs in inflated claims to the Department of Energy.

The contractor operates under a DOE (Department of Energy) M&O contract (Maintenance and Operations). These M&O contracts are designed to operated by stand-alone entities and therefore any cost allocations from a home office are not allowable under the contract. Any costs that may be allocable to the M&O contract from a home office are covered by the fee that the contractor earns.

The M&O contractor often "borrows" personnel from the parent company. These loaned employees are now commonly referred to as "corporate reachback" employees because employees are loaned from the M&O contractor's owners to conduct work directly for the M&O contractor. The M&O contract makes it clear that while the reachback program is fine, the costs allocated to the M&O contractor for reachback labor cannot include any home office allocations.

The problem from the Government's point of view was that the cost of reachback labor transferred from the SRNS's owner did include home office allocations. The Government's filing goes to great lengths in chronicling the contractor's duplicity in telling the Government one thing but doing quite another. In fact, the filing describes a "secret" modification to the cost transfer agreement between SRNS and FFS that deleted the phrase "For the term of this Agreement and any extensions thereof, allocations of home office expenses to FFS loaned employee costs are unallowable in accordance with the provisions of the SRNS Contract ..." to "For the term of this Agreement and extensions thereof, allocations of home office expenses to the SRNS segment costs are unallowable in accordance with the provisions of the SRNS Contract ..." That change is no small matter. Between 2008 and 2015, the amount of home office allocations on reachback labor ultimately billed to DOE totaled $5.2 million.

We are not Government contract attorneys but on the surface, it seems like the Government has made a very compelling case against the actions of SRNS. You can read the Government's complaint here.