Prison Time for Accepting Kickbacks from Subcontractor

Have you ever discounted the importance of good, sound internal controls over your purchasing system? You shouldn't and here's why.

A former employee of a U.S. Government contractor in Afghanistan will spend the next 21 months in prison because he accepted more than $250,000 in kickbacks from one of the contractor's Afghan subcontractors. These kickbacks were given in exchange for assistance in obtaining subcontracts.

The employee (or, now the former employee) admitted that while he was employed as a project manager, he an Afghan executive agreed that in exchange for illicit kickbacks, the employee would ensure that the Prime Contractor awarded "lucrative" subcontracts to the Afghan company.

How did the employee do it? He admitted that he repeatedly told his supervisors that the Afghan subcontractors should be awarded "sole source" subcontracts, which allowed them to supply services to the Prime contractor without having to competitively bid on them.

That must have really been some convincing sole source justifications, or the superiors weren't all that concerned, or they had a big cost-type contract so no skin off their back. Or perhaps, this employee was highly trusted. But, as we've repeated here in this blog over and over, "trust" is not an internal control.

The value of the subcontracts totaled $1.6 million and the contractor employee got 15 percent of that. That should be a good indication right there that the prices were overstated. He stored the cash payments into his personal effects and when he got back to the states, he deposited the funds into several bank accounts.

No word in the DoJ Press Release as to how the kickback scheme was uncovered. Perhaps someone started looking into why so many sole-source subcontract awards were being made.

You can read the entire DOJ Press Release here.

Federal Fumbles - Vol. 3

Oklahoma Senator James Lankford just released "Federal Fumbles Vol  3, One Hundred Ways the Government Dropped the Ball". This represents his third annual edition of this football themed publication. You can read our coverage of Volumes 1 and 2 by clicking here for the 2015 version and here for the 2016 edition. To download all three editions, visit Senator Lankford's dedicated webpage..

The latest publication documents 100 new examples of wasteful, duplicative, and inefficient use of tax dollars. Many, perhaps most of the examples are rooted in wasteful contracts and grants because those are the mechanisms for spending Government funds. But as in past years, Lankford is not necessarily calling out Government contractors and grantees for wasteful spending, the root problem lies in the layers of Congress and bureaucracy making the decisions that certain things would be a wise use of taxpayer funds. Many of the 100 fumbles boarder on the humorous and would be if it weren't for the realization that these are monies that could be spent on real needs of the country.

Here are just a few examples of what you can find in this report.

1. A NSF (National Science Foundation) project to determine the public services provided by the Icelandic government to the 600 Syrian refugees arriving in their country.
2. In 2007, the Air Force began a project to upgrade its Air Operations Center. After delays and cost overruns, the Air Force terminated the uncompleted project after spending $745 million. The Inspector General blamed the problem on the contractor.
3. The National Archives decided to digitize 250 hours of video taken at a New York theater in the 1970s. The cost came to more than $400 per hour of film digitized.
4. The Department of Energy paid an employee $138,000 to pursue a law degree (unrelated to his job) whereupon he immediately left for a job in the private sector.
5. The NIH spent $1.6 million on research to discover that people paid to lose weight tend to lose more weight than those not paid to lose weight.
6. The IRS spent $12 million to upgrade its email system. The upgrade never worked and was subsequently trashed.
7. The Navajo Nation has received $803 million in block grants over the past 10 years to build homes for their members. They've built 1,110 homes which works out to $720,000 per house.
8. The Federal Government spent $91 million in 2015 to administer the federal grazing program but collected only $14.5 million in grazing fees. They charge a fraction of what states charge.

Senator Lankford say's that he is hopeful that Agencies be forced to make more responsible decisions. We don't know if that will ever happen but the report does make some fun reading. Print out a copy and put it where you keep your copy of "Chicken Soup for the Soul".

2018 NDAA - TINA Threshold to Increase to $2 Million

The threshold for requiring certified cost or pricing data is currently set at $750,000. This applies to the award of negotiated contracts, subcontracts and modifications (see FAR 15.403-4). This threshold is set by statute, a couple of statutes actually. 10 USC 2306A - Cost or pricing data: truth in negotiations sets the threshold at $500,000 while 41 USC 3502 - Required cost or pricing data and certification allows for that threshold to be adjusted for inflation every five years. There have been a number of adjustments since the 1994 baseline to bring the original threshold up to the current $750,000.

That threshold is about to increase significantly. Sec 811 of the 2018 NDAA (National Defense Authorization Act) which includes the enhanced reporting requirements for DCAA (Defense Contract  Audit Agency) discussed yesterday (see 2018 NDAA - New DCAA Reporting Requirements) also includes a provision that increases the TINA (Truth in Negotiations Act) threshold from $750,000 to $2,000,000. The adjustment provisions every five years still apply.

This is good news for a lot of contractors and prospective contractors and should facilitate proposal preparation and contract award. It is not a license for contractors to prepare shoddy proposals however. Contracting officers must still ensure that negotiated prices are fair and reasonable and will still, in many cases, require cost or pricing data - just not certified cost or pricing data. This also means that the Government will have a much smaller universe of contracts on which it can conduct Defective Pricing audits.

2018 NDAA - New DCAA Reporting Requirements

Section 811 of the 2018 National Defense Authorization Act (NDAA) covers several topics. One concerns the increase in the dollar threshold for the submission of certified cost or pricing data which we will cover in more detail tomorrow. The other appears to be a slap on the wrist of DCAA (Defense Contract Audit Agency) for obfuscating some of their performance data.

Is DCAA "current" in performing incurred cost audits? The Agency says it is and that's why they are once again performing incurred cost audits for non-DoD agencies. But was does "current" mean? And how did DCAA achieve currency? In DCAA's parlance, current means 18 months as in the Agency needs to complete incurred cost audits withing 18 months of receiving an adequate contractor submission. But the 18 month time-frame is also an average which means some will take longer that 18 months to complete and some will take less. Which answers the second question of how did the Agency achieve the 18 month average in such a short time when just a few years ago its backlog was four to six years (depending on who you talk to). Easy, the Agency simply "wrote off" what it determined were low risk contractors by accepting the final indirect rates as proposed - and that included the preponderance of contractors. Eureka! No more backlog.

But Congress didn't quite buy that and it was deeply concerned with writing off the preponderance of contractors without performing any type of audit. In Sec 803 of the 2018 NDAA which we discussed here, Congress instituted a plan for private audit firms to begin sharing the incurred cost audit workload with DCAA and mandated that these audits would be completed with a year of receiving an adequate submission.

Now here in Sec 811 of the 2018 NDAA, Congress wants to get to the bottom of DCAA's performance. It is requiring DCAA to revise its Annual Report to Congress to provide clarity on the cost effectiveness of different types of audits. Under the 2018 NDAA, DCAA must now break down its statistical tables by type of audit. Though "type of audit" is not defined, it presumably includes (i) incurred cost (ii) forward pricing, (iii) defective pricing, (iv) and internal control/business systems. But here are the added reporting requirements:

1. The total number and dollar value of incurred cost audits completed, and the method by which such incurred cost audits were completed (i.e. was an audit performed or was it written off as low risk).
2. The aggregate cost of performing audits, set forth separately by type of audit
3. The ratio of sustained questioned costs to the aggregate costs of performing audits, set forth separately by type of audit, and
4. The total number and dollar value of audits that are pending for a period longer than one year as of the end of the fiscal year covered by the report, and the fiscal year in which the qualified submission was received, set forth separately by type of audit

This information, if nothing else, will prove interesting.

Whitefish Contract to Restore Puerto Rico Electricity - Update

This is an update to our posting of November 9 discussing the contract awarded to Whitefish Energy by PREPA (Puerto Rico Electric Power Authority) to help restore electricity on the island (see Whitefish Energy Contract to Restore Puerto Rico Electricity). PREPA awarded a $300 million sole-source contract to Whitefish Energy which, when it was exposed, became immediately controversial for several reasons. At the time of award, Whitefish had only two employees. The contract prices for linemen seemed exorbitant. The contract was was awarded without competition and contained unusual clauses such as the one preventing PREPA (or the Government) access to cost data.

The U.S. Government is interested in this contract because ultimately, it will probably end up paying for the restoration work. Congress is, of course, interested (one Senator called it price gouging) and the FBI has opened an investigation into the matter. Last week, the head of PREPA resigned his position (under pressure, no doubt).

PREPA terminated the Whitefish contract but according to the terms of the contract, there was a 30 day notice requirement which allowed Whitefish to continue working (and billing). However, last week, Whitefish walked off the job claiming that PREPA owed it 83 million and could no longer afford to pay its workers and subcontractors. Earlier this week, PREPA made a payment to Whitefish and the company resumed work.

The New York times reported that Whitefish was paying its senior power linemen $63 per hour and then billing PREPA $319 per hour for the worker. Whitefish claimed that the rate differential does not take into account Whitefish's overhead costs - but no one believes that such a differential is reasonable (more than 400%!).

Whitefish's contract ends on November 30th and PREPA does not appear to have a replacement ready to take over. Meanwhile, more than half of Puerto Rico's electrical customers are still without power.

GAO Publishes Fiscal Year 2017 Bid Protest Statistics

The Competition in Contracting Act of 1984 requires that the Comptroller General (i.e. the GAO or Government Accountability Office) report to Congress each instance in which a federal agency did not fully implement one of its recommendations in connection with a bid protest decided in the prior fiscal year and each instances in which a final decision in a protest was not rendered within 100 days after the protest was filed.

The GAO just published its Fiscal Year 2017 Bid Protest Annual Report to Congress and reported that there were no such instances in Fiscal Year 2017. The report also provided summary level data concerning the overall protest filings for the year and shows comparative data from previous years.

The number of bid protest cases filed dropped by almost 200 cases from Fiscal Year 2016. Perhaps one reason for this drop was the suspension of a prolific filer (see GAO Suspends Firm From Filing Bid Protests for One Year).

GAO issued 581 decisions (sustained and denied) of which 99 were sustained. That represents a sustention rate of only 17 percent - down from 23 percent the previous fiscal year. The effectiveness rate which measures a protestor obtaining some form of relief from the agency, either as a result of voluntary agency corrective action or the GAO sustaining the protest was 47 percent, up slightly from 46 percent the previous year.

The number of ADR (Alternative Disputes Resolution) cases totaled 81. The success rate for ADR cases was 90 percent. Seems like ADR might be the way to go with bid protests as the chances for success is almost double that of a formal GAO hearing.

You can read the full GAO report here.