SBA Publishes 2015 Small Business Procurement Scorecard

The Small Business Administration released it annual Small Business Procurement Scorecards for fiscal year 2015 yesterday. These scorecards provide an assessment of each federal agency's annual small business contracting achievement against its goal using a grade of A+ down to F. Overall, the federal government received an A on the government-wide scorecard.

The federal government reached its small business federal contracting goal for the third consecutive year, awarding nearly 26 percent of all federal contract awards to small businesses. The goal was and still is 23 percent. The 26 percent equates to $91 billion in contracts. Also noteworthy from the Government's perspective is for the first time in history, the Government met its Congressionally-mandated goal of 5 percent of "eligible" awards to women-owned small businesses. The Government also achieved all-time highs in meeting its goals for service disabled veteran-owned and small disadvantaged businesses.

On an Agency level, no Agency received less than a B although three Agencies received lower scores than the previous year. Three Agency's were specifically called out for their "noteworthy" performance; GSA, Transportation, and SBA.

We can't help but think the Government is playing around with definitions - particularly with the term "eligible contracts". We couldn't find SBA's definition of eligible contracts but it is evidently a sub-set of total contracts. For example, DOD's fiscal year 2015 procurement budget was somewhere in the neighborhood of $500 billion. DOD reported that it had achieved nearly 25 percent of dollars awarded to small businesses. That should be about $125 billion ($500 billion times 25%). Yet the reported award dollars associated with that 25% was only d$52 billion.

Another example that suggests the SBA's scorecards are based on, perhaps, subjective elements, is their admission that the underlying data is subject to interpretation.

While each federal agency is responsible for ensuring the quality of its own contracting data, SBA conducts additional analyses to help agencies identify potential data anomalies. As part of its ongoing data quality efforts, the SBA is working with federal agency procurement staff to provide tools to facilitate review of data, implement improvements to procurement systems and conduct training to improve accuracy.

Nevertheless, even allowing for these anomalies, the overall trend in federal procurement awards to small businesses is upwards.

Limitations on Subcontracting - Protester Bears the Burden

Express Medical Transporters (EMT) protested the award of a Veterans Affairs (VA) contract to Wheelchair Transport Services (WTS) for non-emergency special mode transportation services. EMT contended that a clear reading of WTS's proposal should have led the VA to conclude that WTS's proposal had specifically taken exception to the applicable subcontracting limitation found in FAR 52.219-14.

GAO (Government Accountability Office) denied the protest.

The decision noted that as a general matter, an Agency's judgment as to whether a small business offeror will comply with the subcontracting limitation clause is a matter of responsibility and the contractor's actual compliance is a matter of contract administration. If a proposal, on its face, leads an Agency to conclude that an offeror has not agreed to comply with the subcontracting limitation , the matter is one of proposal acceptability. This is because the limitation on subcontracting is a material term of the solicitation, and a proposal that fails to conform to a material term or condition of a solicitation is unacceptable and may not form the basis for an award.

An offeror need not affirmatively demonstrate compliance with the subcontracting limitations in its proposal. Rather, such compliance is presumed unless specifically negated by other language in the proposal. Accordingly, where an offeror submits a proposal, the offeror agrees to comply with the limitation, and in the absence of any contradictory language, the agency may presume that the offeror agrees to comply with the subcontracting limitations.

The presumption may be rebutted by other language in the proposal but the protestor bears the burden to affirmatively demonstrate that the awardee's proposal takes exception to a material term of the solicitation.

The GAO looked over WTS's proposal and found nothing on the face of WTS's proposal or associated attachments that should have led the VA to determine that WTS had taken exception to a material term of the solicitation, specifically the limitation on subcontracting. Neither could EMT point to any portion of WTS's proposal in which WTS states an intent to take exception to a material term of the solicitation.

You can read the entire decision here.

Using Blended Labor Rates to Implement New Compensation Caps - Part 4

Before we conclude this series on blending labor rates, here's a link to most of the published guidance on the matter. It includes the initial authorization from the Undersecretary of Defense for Acquisition, Technology, and Logistics dated October 24, 2014, the DCMA (Defense Contract Management Agency implementing guidance on the use of blended rates dated January 29, 2016 (this is the guidance we've been discussing in this series) and DCAA's (Defense Contract Audit Agency) own implementing guidance on blended compensation caps dated February 19, 2016. The latter simply authorizes auditors to support DCMA's efforts in negotiating advance agreements with contractors.

The decision to implement blended labor rates is solely that of the contractor. Contractors are not compelled by law or regulation to go forward with such a plan. The Government has offered up the blending option as a means of facilitating implementation of the significantly lowered compensation caps applicable to contracts awarded after June 24, 2014. Once a contractor chooses to use a blended compensation cap methodology however, the contracting officer must execute an advance agreement (FAR 31.109). The advance agreement is only the beginning of contractor responsibilities. The advance agreement will set forth the agreed to process and frequency for providing auditable data necessary to support the calculation and application of the blended compensation cap for forward pricing, interim billing, and final rates, as well as the expiration date for the ending of the blended compensation cap estimating method. Some contractors might find the requirements onerous.

The use of blended compensation caps can continue as long as contractors are incurring costs on pre-June 24, 2014 contracts. In extreme cases, this could be a decade. However, each year, the number of pre-June 24, 2014 contracts will diminish and eventually, so small that it makes continued operations under advance agreements not cost-effective. Advance agreements are written in such a way as to allow either party to exit whenever they want. Item 12 of the advance agreement template provided as part of the aforementioned DCMA guidance reads: "The parties retain the right to unilaterally and immediately cancel this agreement upon written notification to the other party. However, it is understood that each party will give the other party at least 30 calendar days' written notice, unless urgent and compelling reasons exist, prior to cancelling the agreement."

As we stated in the introduction to this series, the blended compensation cap methodology is not for everyone. For contractors having no employees that exceed the new compensation cap, there is clearly no applicability. Contractors that can implement the old and new caps within their existing system without significantly re-engineering their ERP systems should probably do so. This may not be too difficult if the highly paid employees (e.g. scientists and engineers) charge direct. Contractors where the impact is minimal may decide that the additional work required to develop, maintain, and support blended rates is not worth the added cost.

Using Blended Labor Rates to Implement New Compensation Caps - Part 3

We began this series on DoD's initiative to allow contractors to blend labor rates in order to facilitate the implementation of the new limitation on compensation by discussing the impetus behind the program (see Part 1)Yesterday, we demonstrated how the blending would be calculated for incurred cost (see Part 2). Today we tackle the slightly more difficult task of blending rates for forward pricing proposals.

At first blush, one would think that there would be no reason to blend labor rates for forward pricing purposes. After all, if the contract is going to be awarded after June 24, 2014 it must comply with the new compensation cap. The complication arises when factoring in modifications and change orders for contracts awarded prior to June 24, 2014. Those contracts and modifications thereto are still subject to the old compensation caps.

The greatest challenge in this exercise is to estimate the value of pricing for new solicitations and for modifications to existing contracts. This is not an easy task and will require the exercise of judgment. How easy is it to estimate the value of contracts it will be awarded during the year? To some extent, its always a guess. How can one estimate the value of modifications to existing contracts that will be awarded during the year? Often times contractors have no idea that the Government is contemplating contract modifications.

Once those two baselines are established, the mathematics to blending rates are the same as for incurred costs.

Like the blended rate calculations for incurred costs, the blended rate examples from DCMA rely on total contract costs. But as we warned yesterday, total contract costs might not be a good basis for blending rates. Contractors need to be aware of their indirect rate allocation methodologies to ensure that the blending method achieves an equitable result.

Tomorrow we will conclude this series by highlighting other aspects of the newly issued DCMA guidance on blending labor rates.

Using Blended Labor Rates to Implement New Compensation Caps - Part 2

The Department of Defense has formally authorized contractors to used blended labor rates to implement the new compensation cap applicable to contracts awarded after June 24, 2014. If you missed Part 1 of this series, click here. Briefly, the Bipartisan Budget Act of 2013 established a new compensation ceiling applicable to all employees (not just the top level management) of $487 thousand. The challenge for contractors and the Government is to find a method to implement that new compensation ceiling in fiscal years where there are contracts with different ceiling amounts.

The Government would love to have contractors implement the new compensation cap on all contracts regardless of when they were awarded. This makes is easy for everyone. However, for many contractors, this would create a significant adverse impact on the bottom line. There is an option for contractor to develop discrete rates for contracts under each of the caps. For example, two G&A rates; one for pre-June 24, 2014 contract and the other for post-June 24, 2014 contracts. While this may be feasible for some contractors, it is probably very difficult to implement in most of today's accounting software or ERP systems.

The calculation of blended rates are going to be different for incurred costs and for forward pricing purposes. The incurred cost calculation is the easiest to calculate so we'll start there. There are three steps to calculating a blended rate.

1. Identify the total costs incurred for contracts awarded before and after June 24, 2014 and calculate percentages to the total
2. Identify the compensation cap applicable to both groups
3. Multiply the percentages from Step 1 by the respective compensation caps and add the results.

For example, if in 2014 a contractor incurred cost under pre-June 24, 2015 contracts of $700,000 and incurred cost under contracts that were awarded after that date, the blended rate computation would look like this:

This method prescribed by DCMA (Defense Contract Management Agency) could result in some inequities so contractors need to be cognizant of their indirect rate structure. For example, if a contractor were on a value-added G&A allocation base and all of the the post-June 24, 2014 costs were subcontract costs, the above calculation would not result in an equitable blended rate because no labor costs would be charged to post-June 24, 2014 costs and the labor charged to pre-June 24, 2014 costs would be "watered-down" by costs charged to post-June 24, 2014 contracts.

Tomorrow we will look at blended rate calculations for forward pricing purposes.

Using Blended Labor Rates to Implement New Compensation Caps - Part 1

This is a follow-up to our posting of March 18, 2015, Subject: Compensation Caps Cross the $1 Million Threshold. In that posting, we promised to discuss DCMA's (Defense Contract Management Agency) newly released guidance on blending labor rates. We did not get around to doing so as soon as we had hoped. Other news seemed more urgent. Today we rectify that situation.

The Bipartisan Budget Act of 2013 implemented a compensation limitation of $487 thousand applied to all contractor employees contracts awarded after June 24, 2014. As a result, contractors may be subject to multiple compensation limits each year beginning in 2014 until such time as all contracts issued prior to June 24, 2014 have been completed.

This "blending" concept only applies to contractors paying employees in excess of $487 thousand per year. If you are not one of those contractors, you can move on. Keep in mind however, that these are only compensation caps. These are not "reasonableness" determinations. You will still need to establish reasonableness of compensation amounts. For example, $487 thousand is most likely not going to be reasonable for a entry-level engineer.

One note of caution. This policy allowing blended labor rates applies to DoD contracts only. It is not binding on other Governmental agencies. However, we suspect that other agencies will be quite willing to accept DoD's methodologies.

Back in October 2014, the Director of Defense Pricing authorized the use of blended labor rates to help contractors avoid undue complexity and related cost to implement multiple labor rates in the same accounting period. Last January, DCMA issued guidance for implementing the blended rate approach.

DCMA's basis policy reads as follows:

The cap amount for each year should be calculated as a weighted average by blending the separate cap amounts based on the contract actions entered into before June 24, 2014 and on or after June 24, 2014. The relative percentage that the new cap contributes to the blended rates will increase over time as the business mix shifts from modifications to older contracts to new contracts. DCMA's method does not require the contractor to develop multiple sets of rates and relies on the contractor's existing cost accounting practices and processes to apply the cap to all contracts subject to FAR 31.205-6(p). Contractors will be required to demonstrate the accuracy of their calculations based on their accounting records and to provide objective, auditable support for the basis selected for forward pricing rates, interim billing rates, and final incurred cost rates. The information used to calculate the blending should be consistent in quantum and detail with the information used to calculate the proposed rate.

Next week, we will provide an example of how the blending might be calculated.