New GAO Report on DCAA Incurred Cost Audits

The Government Accountability Office (GAO) was asked (by Congress) to review the extent of the contract closeout backlog at large federal agencies. It published its findings this month (see Additional Management Attention and Action Needed to Close Contracts and Reduce Audit Backlog). As the report title implies, the GAO was not satisfied that agencies have been effectively managing the contract closeout process. GAO attributed most of the problem to everyone's favorite whipping boy, the Defense Contract Audit Agency (DCAA).

The biggest contributing factor cited by agency officials in closing out flexibly-priced contracts is the delay in receiving audits of contractors' incurred cost proposals that are conducted by the Defense Contract Audit Agency. Digging a bit deeper, the GAO concluded that although DCAA has made some progress in reducing its backlog of incurred cost audits, it still took the Agency an average of two and a half years to push one out the door.

Since 2011, the Defense Contract Audit Agency (DCAA) has reduced its inventory of contractors' incurred cost proposals awaiting audit by about half to 14,208, and DCAA has significantly reduced its backlog of older proposals - those for 2013 and prior - as of September 2016. To do so, DCAA used a risk-based approach to reduce the number of audits and began conducting multi-year audits, in which two or more incurred cost proposals are closed under a single audit. Nevertheless, DCAA did not meet its initial goal of eliminating its backlog by fiscal year 2016. DCAA averaged 885 days from when a contractor submitted an adequate incurred cost proposal to when the audit was completed. The lag was due to limited availability of DCAA staff to begin audit work, as it took DCAA an average of 138 days to complete the actual work.

The GAO identified two areas in which DCAA may be missing opportunities or currently lacks information to help identify additional ways to reduce its inventory of incurred cost audits. These include (i) assessing actions for reducing the amount of time it takes DCAA to begin an incurred cost audit (nearly two years in fiscal year 2016) and establishing related performance measures to assess its progress and (ii) evaluating the use of multi-year auditing and establishing related performance measures.

DCAA attributed the delay in initiating audits to staffing shortages and the fact that the majority of incurred cost proposals are submitted all at once. DCAA uses a 6-24-6 framework for conducting incurred cost audits; 6 months for the contractor to submit its proposal, 24 months to complete the audit, and 6 months for the contracting officer to close the affected contracts. GAO noted however that the 6-24-6 framework is not being met in practice and needs to be revised to take into account the realities of the time-frames for contractors to submit adequate proposals and DCAA's own staffing issues.

At the end of FY 2016, there were 452 incurred cost proposals that were determined to be inadequate and thus not auditable. DCAA however does not have insight into the reasons why DCAA determined that a contractor's proposal was inadequate, the number of times that a contractor submits revised proposals until it is deemed adequate, or the length of time it takes to receive an adequate proposal. We know from personal experience that there is a lot of variability among DCAA's 80 or so field offices as to what constitutes an adequate incurred cost proposal. Sometimes proposals are rejected for the most inconsequential reasons.

GAO made a couple of recommendations to DCAA for improving its processes. Essentially the recommendations related to establishing performance measures to track its progress. DCAA concurred.

Click here if you want to plow through all 52 pages of the GAO report.

Jury Finds Raytheon Not Guilty of Retaliation in Labor Charging Case

A former Raytheon engineer filed a $3.56 million lawsuit claiming that he had been fired from his job in retaliation for raising concerns about timecard fraud to company ethics officials. The former employee complained that the company refused to compensate employees for time worked in excess of 40 hours per week.

At trial, it was revealed that the former employee filed his complaint with a company ethics official only after learning that he himself was being investigated for his own timecard irregularities. Raytheon introduced records to show that the employee had only been on site at Raytheon facilities for four hours when he charged 10 hours on his timesheet and other records to show that the former employee had not logged in to Raytheon systems either which could have suggested that he was working remotely.

It only took an eight person jury a couple of hours to find that Raytheon did not fire the employee in retaliation for whistleblowing.

We wonder whether Raytheon has refunded or intends to refund the Government for this employee's labor charged to contracts for time not worked.

Defense Contract Management Agency Gets its Own Hotline

Not to be outdone by its sibling DCAA (Defense Contract Audit Agency), DCMA (Defense  Contract Management Agency) has rolled out its own internal Hotline. Doesn't there seem to be a lot of redundancy here. The Inspector Generals (IGs) have their own hotlines. Contractors should be well aware of these since there are contractual requirements to post hotline posters in prominent locations (or on an employee website). DCAA established its own hotline a couple of years ago, encouraging auditors and outsiders to report matters relating to contract and procurement irregularities, cost/labor mischarging, defective pricing, defective parts, bid rigging, and bribery and acceptance of gratuities. Why are so many hotlines necessary?

DCMA states that their hotline is to enhance accountability practices and improve incident response times. They say that their hotline aligns with calls to improve government transparency. Really? Is DCMA going to make all of the hotline calls public? Don't think so since one of the tenants of a hotline is to ensure confidentiality. How then can DCMA's hotline improve government transparency, except perhaps in some esoteric way.

In introducing the Hotline to DCMA employees, the Agency stated:

Throughout our climate and government surveys and new channels of communication, there is a lot of talk about holding the government employees and contractors accountable for their actions. With the implementation of our DCMA  Hotline, we are providing an independent means for individuals to report allegations of fraud, waste, and abuse, or general administration issues and concerns, as well as other wrongdoings pertaining to programs, personnel and operations.

Hotlines are useful for identifying instances of fraud, waste, and abuse. According to the Association of Certified Fraud Examiners (ACFE), tips were the most common detection method by a wide margin, accounting for 39 percent of cases. Internal audits were the second-most common at 16.5 percent. For organizations that maintain internal hotlines, schemes were detected through a tip in 47 percent of the cases. Without the hotline, only 28 percent of schemes were detected through tips.

DCMA suggests that its new hotline be used for such matters as (i) waste of funds, (ii) theft and abuse of government property, (iii) abuse of authority, (iv) conflicts of interest, (v) mismanagement, and (vi) a variety of personnel-related issues.

DCMA also states that employees can still refer matters relating to suspicions of contractor fraud, waste, and abuse to its FraudNet,

Read more about the DCMA Hotline here.

You Cannot be a Principal Investigator for Two Companies at the Same Time under SBIR Rules

While performing a pro-active review of  SBIR/STTR awards (Small Business Innovation Research/Small Business Technology Transfer), NASA (National Aerospace and Space Administration) found that an individual was listed as a PI (Principal Investigator) for contracts awarded to two separate companies. Investigation revealed that a group of scientists and engineers who had worked together at ATK, a defense contractor in Huntsville, Alabama, came to an agreement in 2006 with another company, Amtec, also of Huntsville, to work for Amtec with the understanding that they would eventually become their own company. These Amtec employees incorporated their own business, Scientic, Inc in 2008 and beginning in 2009 worked as dual employees of both Amtec and Scientic.

One of the dual employees began proposing SBIR projects for both Scientic and Amtec. In due course, both companies were awarded a variety of SBIR contracts with this employee acting as Principal Investigator for both.

While this employee was serving as PI for SBIR contracts at both companies, the two companies, Scientic and Amtec made certifications and representations to the Government in their contract proposals that the employee would be primarily employed during the performance of the contracts by the company submitting the documents. FAR requires that a PI be primarily employed by the company and requires that the PI spend more than half of his or her employment time during the performance of the contract with the company proposing the research.

During an interview with the NASA Office of Inspector General, the employee confirmed that he was the PI of the Amtec SBIR as well as two Scientic SBIRs. Thus, Scientic's certification that the PI was primarily employed by Scientic was false at the time of Scientic's contract performance with NASA and DoD. The Government alleged that Scientic's knowingly making this certification constituted a false statement under U.S. Code.

Yesterday, the Justice Department ordered Scientic to refund the full amount of the SBIR contracts with NASA and DoD totaling $250,000 and to pay a fine of $30,000. The Judge also placed Scientic on three years' probation. (Read more about the sentencing here.)

$2 Million Settlement in Small Business Subcontracting Fraud

The Department of Justice (DOJ) announced last Friday a partial settlement in a case involving questionable subcontracting practices by an Energy Department contractor and one of its subcontractors. The investigation is ongoing but one of the parties agreed to pay $2 million to resolve its part of the case.

The DOJ press release can be found here while a newspaper article with more detail can be read here.

Government contracts and subcontracts contain small business subcontracting goals. Although in most cases, contractors make diligent attempts to meet those goals, there is no real penalty for not meeting them. Except in the case of some DOE contracts. DOE is known to base a portion of award fees on contractors' successes in meeting those goals.Therefore in those cases, failure to meet those goals has a direct impact on profits.

In this case, the prime contractor was Washington Closure Hanford (WCH). The Federal case against that company continues. One of its subcontractors was Federal Engineers & Constructors (FE&C). Although admitting no liability, FE&C settled with the Government for $2 million to resolve its part in the affair.

FE&C, in turn, awarded two subcontracts totaling $19.5 million to a third company called Sage Tec cleanup work at DOE's Hanford site. Sage Tec is a small, woman-owned business and awarding $20 million worth of subcontract to a small woman-owned business counted significantly toward both WCH and FE&C meeting their small-business goals.

Things began to unravel when another woman-owned small business, Savage Logistics, called foul. Its owner, Salina Savage, filed a whistleblower suit claiming that Sage Tech was a front company and had no relevant experience, no equipment, and no employees other than its owner.

Turns out that was true. When FE&C awarded the first subcontract to Sage Tec, Sage Tec had no experience, equipment, or employees. When it awarded the second subcontract three years later, Sage Tec still had no employees or equipment although by then it must have had a little bit of experience.

So how did Sage Tec pull off $20 million worth of subcontracting without any equipment or employees? Easy, it "rented" trucks from its prime contractor, FE&C, and used FE&C employees to drive those trucks. So, Sage Tec certainly looks like a front company. It probably doesn't seem helpful to know that the owner of Sage Tec was also the wife of an FE&C Vice President.

For her part in blowing the whistle, Salina Savage gets $470,000 of the $2 million settlement. Also, FE&C agreed to reimburse her for $100,000 in attorney fees.

Technical Interchanges of IR&D Projects No Longer Required as a Condition of Allowability

Good news for major defense contractors.

The Department of Defense issued a class deviation regarding the requirement for Independent Research and Development technical exchanges. (See Class Deviation 2017-O0010 dated September 14, 2017).

Under the existing DFARS (DoD FAR Supplement) Cost Principle (DFARS 231.205-18(c)(iii)(C)(4), major contractors are required to engage in or document a technical interchange as part of the criteria for determining a contractor's annual independent research and development costs to be allowable.

This requirement has been controversial since it was enacted back in 2016 primarily because DoD didn't develop the internal structure to host or coordinate these technical exchanges. DCMA (Defense Contract Management Agency) backed away from any involvement early on saying it didn't have anyone qualified to engage in such technical interchanges. (see Enhancing the Effectiveness of Independent Research and Development for more information on requirement).

As a result of this deviation the actions require by DFARS (engaging in technical interchanges with a technical or operational DoD Government employee prior to the generation of IR&D costs and documenting those interchanges) are no longer part of the criteria a contracting officer must consider in determining a major contractor's IR&D costs to be allowable.

This class deviation is effective until it is incorporated in DFARS or until it is rescinded. Look for it to be incorporated into DFARS. It was bad policy from the beginning.