Government Loses Another 6-Year Statute of Limitations Case

In 2001 and 2004, Sparton Electronics (now Sparton DeLeon Springs LLC) was awarded Navy contracts for sonobuoy research and development and engineering and technical services related to submarine acoustics. Some of the work required under these contracts was farmed out to Jackson Engineering, an affiliated company of Sparton. By January 2007, the Government had reimbursed Sparton for about $577 thousand representing the cost of work performed by Jackson Engineering.

In 2007 and 2008, Sparton submitted timely final indirect cost rate proposals for its fiscal years 2006 and 2007. Both of these proposals included the required "Schedule I"s, Cumulative Allowable Cost Worksheet (CACWS) but neither Schedule I included the cost of the intra-divisional work performed by Jackson.

In September 2013, DCAA (Defense Contract Audit Agency) issued audit reports covering those years, noting that the Schedule I's did not include the Jackson costs. Eventually, the parties executed final indirect cost rate agreements after which Sparton updated its Schedule I's to reflect the the negotiated rates. The "final" Schedule I's still did not reflect the Jackson intra-divisional costs.

In August 2014, the contracting officer requested Sparton to submit final vouchers for the completed contracts/delivery orders. Sparton submitted the final vouchers that included the previously invoiced and paid Jackson costs.

In October 2015, the contracting officer issued a final decision demanding that Sparton repay $577 thousand that the Government had reimbursed it for work performed by Jackson. Evidently, Sparton was unable to satisfy the contracting officer's request for support for the costs. The contracting officer wrote: "There is no proof whatever that (Sparton) was billed for work or more importantly, that (Sparton) paid these costs in connection with any Government contract".

In January 2016, Sparton appealed the contracting officer final decision to the ASBCA (Armed Services Board of Contract Appeals) and the Government filed a complain alleging that Sparton had been overpaid because the Jackson costs were insufficiently supported.

Sparton eventually requested summary judgment that the Government's claim was time-barred under the Contract Disputes Act (CDA). Summary judgment can be granted if the movant (i.e. Sparton, in this case) shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. Under the CDA, the Government must bring a contract claim against a contractor within six years after the accrual of the claim. A claim accrues on the date when all events that fix the alleged liability of either the Government or the contractor and permit assertion of the claim were known or should have been known.

There was no dispute that the contracting officer first claimed there was an overpayment on October 26, 2015; consequently, to be timely, that claim must not have accrued earlier than October 26, 2009. The Board found that the Government knew, or should have know of the Jackson costs in January 2007 when it paid those costs pursuant to the interim vouchers that were reimbursed and by the Government's own admission, included information related to the Jackson costs. Moreover, the Government knew or should have known by January 2008 that Sparton had not included the Jackson costs in its indirect cost proposals. Thus, there is no genuine dispute that the Government's claim accrued no later than either January 2007 or January 2008. Both dates precede the October 2009 cut-off for statue of limitations purposes.

The ASBCA granted Sparton's motion for summary judgment and Sparton's appeal was sustained.

The decision doesn't mention why Sparton was unable to satisfactorily support the intra-divisional costs. It mentioned that Jackson had gone out of business in 2006 so perhaps the records supporting the intra-divisional transfers were no longer available.

You can read the entire ASBCA decision here.

Want a New Regulation? Fine, But First, Eliminate Two Existing Regulations

Last week, we reported on the President's moratorium on new regulations; no new regulations can be sent to the Federal Register until approved by someone appointed by the new administration and a 60 day freeze on those already published but have not taken effect.

Today, the President signed another Executive Order (EO) that should dramatically reduce the number of regulations. It requires agencies to cut two existing regulations for every new rule introduced. It will also set a cap on the cost of new regulations. For fiscal year 2017, the cap is set at $0.

The two for one plan is aimed at reducing regulator burdens on the private sector, especially small businesses. Agencies must self-identify the regulations to cut although the White House will have final say on the matter.

You can read the full text of the EO here.

Allowability of Consultant Costs Does Not Necessarily Depend Upon the Existence of "Work Product"

Earlier this month, the ASBCA (Armed Services Board of Contract Appeals) published its decision on a wide range of cost issues that were disallowed by a DCMA (Defense Contract Management Agency) administrative contracting officer (ACO). The contractor, Technology Systems, Inc. (TSI) challenged the ACO's decision, winning on some of the issues and losing on others. The decision is very informative in helping Government contractors understand and apply FAR cost principles and we will spend a few days discussing various aspects of the decision.

Today we start with the ASBCA position on what constitutes "adequate support" for professional and consultant service costs.

SMI was a consultant hired by TSI to provide it with both marketing and lobbying services. It had separate agreements with TSI for each and invoiced TSI separately for each. The contracting officer disallowed about $51,000 for the marketing services on the grounds that TSI did not provide enough documentation to permit an understanding of the work performed nor did it provide the "work products" and other itesm that the ACO believed were required in accordance with the provisions of FAR 31.205-33(f)(2) and (3).

FAR 31.205-33, Professional and consultant services costs provides that fees for services rendered are allowable only when supported by evidence of the nature and scope of the service provided and that evidence necessary to determine that work performed is proper and does not violate law or regulation shall include agreements, invoices, and work products.

That seems pretty clear, right? Not so fast. Here's what the Board ruled:

The government labors under the false impression that the FAR requires a consultant to create "work product" merely for the purposes of proving its costs. Though the FAR language in question is not as clear as we might like, it can be read - as we read it here - to impose no such requirement. Moreover, we have factually found the invoices submitted by TSI to be adequate to support a finding that TSI incurred the charged costs for SMI's marketing activities.

The government makes a superficially persuasive argument, that the FAR's statement that the evidence necessary to determine that the work is proper "shall include ... work products" and related documents, makes the provision of such documents mandatory. The problem with this interpretation of the FAR is that it does not account for the case in which such documents were never created by the consultant. Moreover, it does not account for the case where, as here, the invoices include the data that the FAR defines as work product, such as persons visited and subjects discussed. We further note, that DCAA's own audit manual reflecting the government's own interpretation of this FAR requirement, provides that "the auditor should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed.

Thus, we conclude that FAR 31.205-33(f) may require the provision of a consultant's work product, if it exists, but is not so rigid as to require its creation when it would not otherwise be necessary for the consultant to perform its duties. To be sure, any lack of work product makes it more difficult for a contractor to prove that it incurred the costs for which it seeks compensation, and the lack of work product in an instance where the consulting work was of such a scale or scope that work product would be expected may properly subject the costs to question. As with most things, the proper amount of documentation and work product to be expected will largely depend on the scope of work performed, and we do not conclude that the FAR intended to impose "make work" upon consultants that would only lead to higher costs to the contractor which would then be imposed upon the taxpayer.

The burden of supporting professional and consultant service costs (as with any costs charged to Government contracts) is squarely on the contractor. However, if, as in this case, there is no formal work product, FAR allows for alternative evidence to support the nature and scope of the actual work performed.

The full ASBCA decision may be downloaded here.

Contractor Fined for Placing Unqualified Individual in charge of Internal Audit Department

The Department of Justice (DOJ) announced a settlement with a DOE contractor who agreed to pay $5 million to resolve a couple of issues including a charge that it billed the Government for internal audit work by an individual that had no auditing experience and failed to provide any meaningful oversight of the Audit Department.

The government also alleged that WRPS charged the government for auditing work that was not performed. WRPS allegedly installed as the head of the contractually required Internal Audit Department for the first three years of the Tank Farms contract its own general counsel, who allegedly had no auditing experience and failed to provide any meaningful oversight of the Audit Department. The government alleged that this knowing violation of an important safeguard in the contract enabled the extensive timecard fraud.

When WRPS was awarded the DOE "Tank Farm" contract in 2008, it was advised by law enforcement of specific concerns about systemic timecard fraud being committed by the previous contractor, many of whose employees and procedures were retained by WRPS. However, WRPS made no actual changes to the timekeeping procedures at the Tank Farms for nearly five years and did not take steps until after July 2013, to curtail the prior fraudulent practices. As a result, the Government alleged that WRPS knowingly charged DOE for overtime for busy work or for work that was not actually performed and premium emergency call-in pay that was not authorized by the contract.

To settle these two issues, WRPS agreed to pay $5,275 million. The claims resolved by the settlement are, of course, allegations only. There has been no determination of liability.

You can read the full DOJ press release here.

Don't Expect Any New Regulations to be Published for A While

Yesterday, we reported the President's goal of reducing regulations by 75 percent. That, or course, is a very ambitious goal and whether he can roll back the number of pages of regulations to the early 1970s level is questionable but a very worthy goal.

But, the President has already begun - he has instituted a freeze on all new regulations.

Specifically, the freeze provides for the following:

1. Subject to any exceptions the Director or Acting Director of the OMB (Office of Management and Budget allows for emergency situations or other urgent circumstances relating to health, safety, financial, or national security matters, Executive Agencies may send no regulations to the Office of the Federal Register (OFR) until a department or agency head appointed or designated by the President after noon on January 20, 2017, reviews and approves the regulation.

2. With respect to regulations that have been sent to the OFR but not published in the Federal Register, immediately withdraw them from the OFR for review and approval.

3. With respect to regulations that have been published in the OFR but have not yet taken effect, as permitted by applicable law, temporarily postpone their effective date for 60 days for the purpose of reviewing questions of fact, law, and policy they raise. Where appropriate, consider proposing for notice and comment a rule to delay the effective date beyond the 60-day period.

You may read the entire directive, signed by the President's Chief of Staff here.

New Administration Wants to Significant Reduce the Number of Regulations

President Trump told business leaders yesterday that he wanted to cut regulations by 75% or more. That would be a good start and take us back to the early 1970s in terms of number of pages of regulations. Currently, the Code of Federal Regulations (CFRs) is about 180,000 pages (or about as high as the Washington Monument). 

(online source: GW Regulatory Studies Center) 

Within those 180,000 pages is the Federal Acquisition Regulations (FAR) which takes up about 1,500 pages. Within the FAR are cost principles that take up 50 or so pages. Many people make a career of being experts on cost principles which represents 0.028 percent of the CFRs.

Each year for the past three years (at least), the last Administration set new records for the number of pages in the Federal Register. The Federal Register is the official journal for Government regulations and in Fiscal Year 2015, totaled 82 thousand pages. Found on those pages are 3,378 "final" rules and regulations of which 545 are recognized as having effects on small businesses.

Regulations are promulgated to implement legislation passed by Congress and signed into law by the President. Another significant source of regulations are to implement Executive Orders (e.g. Fair Play and Safe Workplaces). "Final" regulations appear in the Code of Federal Regulations.

Regulations resulting from EOs should be easy for the President to eliminate - rescind the EO and the corresponding regulation(s) have no basis. For regulations based on statute (perhaps the majority) however, the new Administration will need help from Congress.

It will be interesting to see what can get done quickly. Certainly a lot of small businesses will appreciate fewer regulations.