Defense Department Planning to Liberalize Contract Financing Policies

Under current procurement regulations, there are several different ways that the Government is able to help contractors with financing. These include (i) advance payments (rare), (ii) progress payments based on costs incurred as the work progresses, (iii) loan guarantees, among others.

Prudent contract financing can be a useful working tool by expediting the performance of essential contracts. Contracting officers determine whether to include contract financing in solicitations and contracts. Government financing is generally limited to situations where financing is actually needed. While financing is certainly beneficial to contractors, it simultaneously increases the contract administration workload as financing methods must be monitored as well as contractors' financial viability.

Where contractors will not be able to bill for the first delivery of products for a substantial time after work begins (generally six months or four months for small businesses), and the contractor must make expenditures for contract performance during the pre-delivery period that will have a significant impact on its working capital requirements, contract financing is often automatic. If the contract doesn't meet that criteria, the contractor must demonstrate actual financial need or the unavailability of private financing.

Being able to demonstrate actual financial need or unavailability of private financing became a very high bar to cross over and contractors and prospective contractors spent inordinate time in preparing justification only to be denied in the end. In fact, DoD found that the lack of contract financing discouraged many businesses from participating in the Government procurement arena.

With that background, DoD is now proposing to amend the FAR (Federal Acquisition Regulations) through its Supplemental Regulations (DFARS or DoD FAR Supplement) to remove the requirement to demonstrate actual financial need or unavailability of private financing. That's one less drag on contractor and contracting officer resources. The proposed rule reads as follows:

For fixed-price contracts with a period of performance in excess of a year that meet the dollar thresholds established in FAR 32.104(d) - generally $2.5 million or more - and for solicitations expected to result in such contracts, in lieu of the requirement at FAR 32.104(d)(1)(ii) for the contractor to demonstrate actual financial need or the unavailability of private financing, DoD has determined that (i) the use of customary contract financing (see FAR 32.113) is in DoD's best interest and (ii) no further justification is required from either the contracting officer or the contractor.

DoD has determined that the use of such customary contract financing provides improved cash flow as an incentive for commercial companies to do business with DoD, is in DoD's best interest, and requires no further justification of its use.

Brand Name or Equal

In a "brand name or equal" procurement, a product offered as an equal need not meet unstated features of the brand name product, and where the Government does not include a list of salient characteristics in the solicitation, it may not reject an "equal" quotation for noncompliance with a specific performance or design feature unless the offered item is significantly different from the brand name product.

In a recent bid protest decision, the GAO (Government Accountability Office) denied Pitney Bowes protest of an award to a competitor for the FBI's new mail tracking system. The GAO found that the FBI's determination that products offered by Neopost through its FSS (Federal Supply Schedule) contract satisfied the solicitation's requirement that the items be brand name or equal. The FBI wanted a mail and tracking system that had the capability to capture a signature - thereby showing proof of delivery - and retain a record of that signature. The FBI evaluated the functionalities of the items quoted by each vendor and reasonably found that both vendors had quoted items that met the FBI's requirements.

Pitney Bowes pointed out that Neopost's offering - in this case a portable scanner - lacked certain features that were available on its product. For example the Pitney Bowes scanner could take pictures. But, the GAO pointed out that the ability to take pictures was not necessary or required by the solicitation because the FBI was not planning to use such features. As a result, the GAO saw nothing unreasonable with the FBI's determination that Neopost's scanner was equvalent to the one listed in the solicitation.

Because an agency - the FBI in this case - has broad discretion in evaluating quotations and there was nothing in the solicitation that defined salient characteristics for each item being procured, the GAO found no basis for sustaining the protest.

You can read the entire case here.

Government Contractor Suspensions and Debarments on the Decline

The Inter-agency Suspension and Debarment Committee (ISDC) recently issued its annual report summarizing agencys' suspension and debarment activities from fiscal year 2015. The purpose of the ISDC is to help agencies build and maintain the expertise necessary to consider suspension and debarment as necessary to protect contract and program integrity. The annual report is mandated by the 2009 National Defense Authorization Act (NDAA).

From 2009, when the ISDC began collecting suspension and debarment data until 2014, the number of suspensions and debarments increased. In fiscal year 2015, however, the data shows slight reductions in suspensions and debarments.

Is this a positive trend or are agencies becoming lax in maintaining systems to flag incidents of improper business conduct? The report doesn't provide such analysis. However, the committee reported that the use of administrative agreements increased by 25 percent from 2014 to 2015. This, the report suggests, results from an emphasis on the use of proactive engagement tools, such as pre-notice engagement letters, which give contractors an opportunity to discuss the steps they are taking to address issues, that, if left unremediated, would likely result in suspension and/or debarment.

The agency with the most suspensions and debarments, unsurprisingly since they issue the most contracts, is the Defense Department. Housing and Urban Development (HUD) and Homeland Security (DHS) come in second and third, respectively. Four agencies didn't issue any suspensions or debarments in fiscal year 2015; Labor, National Geospatial Intelligence Agency, Nuclear Regulatory Commission, and Social Security.

You can read the entire committee report here.

Get Ready for the New Overtime Rules

Last week, the Labor Department published its final rules updating the overtime regulations which, Labor estimates, will automatically extend overtime pay protections to over 4 million workers within the first year of implementation. Or will it?  If you've been following the news on this topic, you've no doubt heard from many sources that the 4 million estimate is wildly overstated. Who knows? Perhaps we'll know in a year or so just how well the new rules are working.

According to the Labor Department, "this long-awaited update will result in a meaningful boost to many workers' wallets, and will go a long way toward realizing (the President's) commitment to ensuring every worker is compensated fairly for their hard work.

The Labor Department published proposed rules almost a year ago, July 2015, and received more than 270,000 comments in response to the notice of proposed rule-making (NPRM). That number of comments is very significant. Most NPRMs get a few comments, many less than ten. Labor didn't tell us how many of the 270,000 comments supported or disagreed with the proposed regulations. We suspect that there were a lot of comments on both sides - businesses generally against the new rule and labor groups in favor.

Here are the key provisions of the final rule. It focuses primarily on updating the salary and compensation levels needed for Executive, Administrative and Professional workers to be exempt from the FLSA (Fair Labor Standards Act)

• Sets the standard salary level at the 40th percentile of earnings of full-time salaried workers in the lowest-wager Census Region, currently the South ($913 per week; $47,476 annually for a full-year worker)
• Sets the total annual compensation requirement for highly compensated employees (HCE) subject to a minimal duties test to the annual equivalent of the 90th percentile of full-time salaried workers nationally ($134,004), and
• Establishes a mechanism for automatically updating the salary and compensation levels every three years to maintain the levels at the above percentiles and to ensure that they continue to provide useful and effective tests for exemption.

There are, of course, many details that businesses will need to know to effectively implement the new rule. It becomes effective on December 1, 2016. Click here to read more about the new rules.

Contractor Officer Fined $166 Thousand for Lying to Government Investigators

Last February, the Justice Department announced that MCC Construction Company had agreed to pay $1.8 million in criminal penalties and forfeiture for conspiring to commit fraud by illegally obtaining government contracts that were intended for small disadvantaged businesses (e.g. 8(a) set-asides). Unfortunately, these kinds of cases are not rare - MCC used a couple of firms in SBA's 8(a) program to obtain contracts and then proceeded to do the work themselves. The scheme involved

• Allowing the two 8(a) companies to retain a guaranteed percentage of each contract for simply obtaining the contracts for MCC
• Allowing the two 8(a) companies to perform no labor on the awarded construction projects
• Performing the accounting and government reporting for the two 8(a) companies
• Falsely representing to the government that MCC employees were in fact employees of the 8(a) companies prior to bidding, and
• Conspiring with the 8(a) companies to hire straw employees for the 8(a) companies whose labor and salaries were paid for by MCC.

Over a four year period, MCC, through its 8(a) co-conspirators, was awarded 27 Government contracts totaling more than $70 million.

That's not the end of the story however. Earlier this week, GSA's (General Services Administration's) Inspector General announced another settlement in the case. The former owner and officer of MCC pled guilty to an obstruction of justice charge. Essentially, when the U.S. Attorney, the FBI, the SBA's Inspector General and GSA's Inspector General, and the Defense Criminal Investigative Service (DCIS) and the Army CID (Criminal Investigative Command) began investigating the relationship between MCC and the two "front" companies, the owner/officer lied. The Government calls this "obstructing a Government proceeding". 

Now the former owner/officer has agreed to pay restitution of $166 thousand and could face jail time when sentenced later this year. 

You can read the full February 2016 Justice Department press release here.

You can read this week's GSA press release here.

Pilot Program for Increased Cost or Pricing Data Threshold

The Fiscal Year 2016 National Defense Authorization Act (NDAA) authorized a pilot program to test the "efficacy" of using a risk-based approach to increasing the threshold for submission of cost or pricing data. Currently, the threshold sits at $750,000. Under the pilot program, that threshold significantly increases to $5 million.

The purpose of increasing the TINA (Truth in Negotiations Act) threshold is to make things easier on contractors and contracting officers. Auditors are generally opposed to the increased thresholds however, there is a probability that by October 2018 when the pilot program ends, the test will be rendered a success and the $5 million threshold will be made permanent.

The Department of Defense is now seeking candidates to test this authority and has requested the Army, Navy, and Air Force to each nominate at least one candidate program. The nominations must address the following six elements/questions.

1. Whether the Government received, within the previous 12 months, adequate certified cost or pricing data and completed cost analysis, with similar configuration, and quantity and delivery schedules.
2. Whether the price analysis demonstrates historical pricing stability with no significant expectation of future deviation.
3. Report any deficiencies with DFARS 252.215-7002 (estimating system requirements) or DFARS 252.242-7006 (accounting system administration)
4. Have contractors/subcontractors demonstrated a history of providing quality products in accordance with delivery terms?
5. Have contractors/subcontractors demonstrated a history of providing data required by the contracting officer to determine the proposed prices are fair and reasonable?
6. Identify any significant previous audit findings or other required previous contract adjustments.

If you think that you or one of your programs is a candidate for this pilot program, it wouldn't hurt to nominate yourself. Let your contracting officer know of your interest. 

You can read the entire guidance memorandum here.