Prohibition on Contracting with Delinquent Taxpayers and Felons

Last December, the FAR Councils published an interim rule that prohibits the Federal Government from entering into a contract with any corporation having a delinquent Federal tax liability or a felony conviction under any Federal law, unless the agency has considered suspension or debarment of the corporation and has made a determination that this further action is not necessary to protect the interests of the Government. This prohibition was required to implement sections of the Consolidated and Further Continuing Appropriations Act of 2015.

Yesterday, the FAR Councils made the interim rule permanent, without change, even though there were a few public comments that opposed, objected, or raised concerns with aspects of the interim and now, final, rule. For example, someone noted that the FAR already includes Federal tax delinquency and criminal malfeasance as causes for debarment so a new (similar) rule is unnecessary. Be that as it may, the Councils' response was a reference back to the underlying statute that made the regulation necessary.

Corporations are now required to self-certify in the SAM (System for Award Management) "Representations and Certifications" section that it has no delinquent taxes or has been convicted for a felony criminal violation with the preceding 24 months. The precise wording follows:

The new regulation contains no provisions for false certifications. Presumably that would result in a terminated contract and debarment or suspension thereafter.

This new rule should not have much of an impact as DoD and many other agencies have already implemented similar provisions in their FAR supplements.

Another "Rent-a-Vet" Scam Uncovered

In August 2014, a contractor plead guilty for using fronting companies to secure 45 contracts totaling $23 million that were set aside for Service-Disabled Veteran-Owned Small Businesses (SDVOSBs). In June 2015, a Grand Jury indicted three people from Puerto Rico for the same kind of scheme - calling it a multi-million dollar fraud. Just last month, the Justice Department announced another similar scheme where a company owner used stolen names and social security numbers to obtain $3 million in contracts that had been set aside for SDVOSBs.

Yesterday, the Justice Department announced another like-minded fraudster. The owner of a "sham Veteran Owned Company" has been sentenced to 30 months in prison and a fine of $1 million for falsely claiming SDVOSB status in securing more than $100 million in Government construction contracts.

In this case (you can read DOJ's full press release here), a fellow set up a construction company after recruiting a disable Korean War veteran to act as the company's "straw owner" for the sole purpose of obtaining federal construction contracts that had been set aside under the SDVOSB program. When the Korean War veteran's health deteriorated so he could no longer function, the true owner went out and hired another disabled veteran to serve as the figurehead owner. Since 2006, the company was able to obtain contracts worth more than $113 million under this ruse.

In 2010, one of the company's competitors challenged a bid on the basis that "it appeared that the true owner, not one of the veterans, was the person running the company. The true owner went out and hired a "large Boston law firm" to assist him, helping him to backdate documents that contained false and misleading information. That fooled the SBA (Small Business Administration) who subsequently denied the bid protest (we wonder what the law firm's culpability is in this matter).

After that scare, the owner started siphoning off money in such a way that it would not look like compensation. He did not want the books to show that he made more than the rented disabled veteran. There was a $900,000 "gift" made to the owner. There were also deposits to private bank accounts totaling $2.5 million.

Somebody, somewhere was working behind the scenes however because it wasn't too long before a grand jury issued subpoenas against the company, its owners, and other witnesses and the scheme began to unravel. The owner was found guilty by a jury last June and sentenced earlier this week to two and a half year in prison.

Changes Coming to DoD's Mentor-Protege Program

The Department of Defense (DoD) published a proposed rule regarding its Mentor-Protege program last week. The Mentor-Protege program has been around since 1991 and was intended to provide incentives to major DoD contractors to furnish eligible small business - primarily disadvantaged small business -concerns with assistance designed to enhance the capabilities of eligible small business concerns to perform as subcontractors and suppliers under DoD contracts (and subcontracts) and to increase the participation of such business concerns as subcontractors and suppliers under DoD contracts as well as non-DoD contracts and commercial contracts.

The revised rule is intended to implement section 861 of the 2016 National Defense Authorization Act (NDAA) which added new reporting requirements to Mentor firms participating in the program. Specifically, mentors are required to report all technical or management assistance provided, any new awards of subcontracts to the protege firm, extensions, increases in scope of work, or additional, unreported payments to the protege firm, among other reports.

One of the purposes for including a provision into the NDAA is to ensure that the mentor-protege program is achieving its primary purpose. According to the conference report that preceded enactment, there was concern that the program may not always be executed to most effectively achieve mandated goals. Their analysis indicated that in some cases, protege firms participating in the program had received millions of dollars in federal prime contract awards prior to the establishment of their mentor-protege agreements, indicating they may have possessed sufficient ability to market their goods and services without the need for additional developmental assistance.

Under the proposed reporting requirements, mentor firms must submit semi-annual performance reports that cover the following:

• Dollars obligated
• Expenditures
• Dollars credited toward applicable subcontracting goals as a result of developmental assistance provided to the protege
• Any new awards of subcontracts on a competitive or noncompetitive basis to the protege firm
• All technical or management assistance provided by mentor firm personnel
• Any extensions, increases in the scope of work, or additional pyaments not previously reported for prior awards of subcontracts
• The amount of any progress payments or advance payments made to the protege firm
• Any loans made by the mentor firm
• All federal contracts awarded to the mentor firm and the protege firm as a joint venture
• Any assistance obtained by the mentor firm for the protege firm
• Whether there have been any changes to the terms of the mentor-protege agreement
• A narrative describing the success assistance provided including the developmental needs of the protege firm, the impact on DoD contracts, any problems encountered, any milestones achieved, and impact of the agreement in terms of capabilities enhanced, certifications received, and technology transferred.

Section 861 of the 2016 NDAA also requires DoD to submit a report detailing whether the program is effective - thus the need for all of the aforementioned data- and for the GAO to review the program to see if it is achieving its intended resulte.

Protester Must Establish that a Flawed Government Evaluation was Prejudicial

Competitive solicitations are evaluated based on stated criteria and each criteria is ranked in order of importance. Each of those criteria may contain sub-factors which themselves are ranked in order of importance. Besides rankings in importance, the criteria are also ranked in significance to other evaluation criteria. Thus a solicitation might provide something along the lines of the technical evaluation criteria are to be considered significantly more important than cost.

For contractors filing bid protests, they must not only show the Government somehow erred in its evaluation, but that the error prejudiced their ability to win the award.It is well established that a protester must show not simply a significant error in the procurement process, but also that the error was prejudicial, if it is to prevail in a bid protest. In that regard, a party has been prejudiced  when it can show that but for the error, it would have had a substantial chance of securing the contract.

If a bidder is ranked lower than other bidders in a "significantly more important" evaluation factor, it would have a difficult time proving that a Government flaw in the evaluation of a relatively insignificant evaluation factor prejudiced its ability to win the contract. If a protestor cannot demonstrate that it was prejudiced, the Courts or the Comptroller General will not even consider whether the Government's evaluation was flawed. That determination becomes moot.

If there is a tie among bidders on all evaluation criteria except the most insignificant, that is, bidders received identical adjectival ratings within each evaluation criteria, a protestor can then assert that it has been prejudiced by a flawed evaluation of the most insignificant criteria.

Energy Department Updates Guidance on Legal Cost Allowability

The Department of Energy (DOE) just released an update to a chapter in its "Acquisition Guide" that significantly expands on the criteria for determining the allowability of legal costs claimed as reimbursable by DOE contractors. The updated chapter covers the following three broad subjects:

1. Contractor Legal Management Requirements
2. Approving Settlements
3. Determining the Allowability of Settlement Costs

Because many of DOE's contracts are cost-reimbursable, the Department has, since at least the mid-1990s, had procedures in place that imposed substantive requirements of DOE field counsel, contractor counsel, and outside counsel to ensure that public funds were not spent imprudently. Contractors who failed to comply with those procedures faced the very real possibility that legal costs and settlement costs would be disallowed under the contract. For example, contractors must obtain DOE permission to settle certain matters involving contractor payment of $25 thousand and over.

Under existing regulations (10 CFR 719), contractors are required to submit a legal management plan describing its practices for managing legal costs and legal matters for which it procures the services of retained legal counsel. Contractors are required to submit an annual legal budget that includes cost projections for significant matters at a level of detail reflective of the types of billable activities and the stage of each such matter. Contractors are required to submit staffing and resource plans that describes the method for managing a significant matter in litigation. Contractors are required to furnish DOE copies of any engagement letters and whenever it initiates litigation, it must provide prior written notice to Department counsel.

The guiding principles under the revised Acquisition Guide are two-fold:

• Close collaboration between Department counsel and Contracting Officers is required to ensure effective management of contractors' legal costs.
• Decisions regarding contractors' requests to settle legal claims and the allowability of associated costs may be made simultaneously only in limited circumstances.

Even though contractors may diligently adhere to the regulations, the reasons for incurring legal costs (e.g. liability, fault or avoidability) is a separate issue. The reason for the contractor incurring costs may affect the allowability of the contractor's legal costs. For example, whistleblower claims, employment discrimination claims, and sometimes contractor managerial actions, are all suspect when it comes to cost allowability.

You can read the complete text of the updates here.

DoD Prohibition on Use of Cost-Type Contracts for Construction

The Department of Defense amended its FAR Supplement (DFARS) with a final rule that implements a section from the 2012 National Defense Authorization Act that prohibits any form of cost-plus contracting for military construction projects or military family housing projects. Cost-plus contracts include (i) cost-plus-incentive-fee, (ii) cost-plus-fixed-fee, and (iii) cost-plus-award fee contracts.

The reason for the NDAA prohibition is fairly obvious; cost-plus construction contracts frequently encounter cost overruns and these overruns are often significant. Last year, for example, the Department of Energy had to acknowledge that the cost of its Vitrification Plant being constructed under a cost-type contract is projected to go over budget by $430 million. There is no financial risk to the contractor though as the Government simply increases the funding level and the contractor draws down on the funding to cover its expenses. We're not sure about the Vitrification Plant contract but many times, fee (or profit) is added to these overruns.

This new rule is unlikely to have a significant impact as cost-type construction contracts have generally fallen out of favor anyway. In fiscal year 2015, only 19 cost-reimbursement type construction contracts were awarded - two of them to small businesses.

The new rule includes two exceptions to the blanket prohibition; a declaration of war or the declaration of a national emergency by the President where the use of the Armed Forces is authorized.