The audit guidance alludes to earlier guidance that

discussed the fact that auditors should question costs on

time and material contracts related to labor hours for

employees who do not meet the labor qualifications set

forth in the contract. The guidance alludes to FAR

52.232.-7(a)(3) that states labor hours incurred to perform

tasks for which labor qualifications were specified in the

contract will not be paid to the extent the employees

performing the work did not meet the qualifications

specified in the contract unless specifically authorized

by the Contracting Officer. The new guidance clarifies

that contracting officers have the authority to approve

use of non-qualifying labor both before and after the labor

is provided and directs auditors to coordinate with COs

before issuing audit findings in this area. Even in

circumstances where the CO’s approval has not and will

not be granted the guidance states the CO is not going to

withhold payment of all labor costs when an employee

does not meet the labor qualifications if the work delivered

adequately completed the contract scope of work. In

these cases, the guidance states the CO needs to modify

the contract for a new rate or a contract line item to

reimburse the costs. Auditors will assist the CO in arriving

at a rate that “is more appropriate than the rate charged

by the contractor (e.g. a rate based on the fully burdened

rate of pay for the unqualified employee or the labor

category where that employee truly fits).” Some

comments we have seen state DCAA is not technically

qualified to make an employee qualification

determination.

The guidance goes further and directs the auditor to

consider whether contractors’ failure to meet contract

requirements constitutes weak internal controls and hence

represents an inadequate accounting system where

adequacy would include assurances that the contractor

received CO authorization. Comments on this

vulnerability to an assertion of significant deficiencies in

its accounting systems have been very critical calling such

prescriptions “simplistic” without considering whether

the failure is material or systemic where contractors are

urged to resist such auditor assertions as inconsistent with

the definition of “significant deficiency” in the Business

System rules (MRD 14 PPD-008(R).

This guidance alerts auditors to changes to compensation

limitations we discuss above and states they will affect

all audits but focuses on how they will affect forward pricing audits. The guidance alludes to (1) NDAA 2012 extension of compensation caps to all employees and (2) the Bipartisan Budget Act (BBA) cap of $487,000

for all employees on awards made after June 24, 2014.

The guidance states exemptions to the caps may apply

to narrowly targeted employees such as engineers and

scientists. It also states that auditors are to coordinate

with ACOs to decrement proposed forward pricing rate

proposals or forward pricing rate agreements if the

compensation caps are not incorporated. Interestingly,

the guidance does not address how contractors should

implement the new ceiling leading commentators to

express worry that auditors may attempt to apply the

$487,000 cap to awards made before June 24 (MRD

No. 14-PPD-004(R).

The new guidance withdraws the DCAA handbook on

fraud indicators because of the handbook’s age and the

fact that scenarios set forth in the handbook are

“outdated.” In place of the handbook the guidance

directs auditors to “use examples of Indicators of Fraud

Risk in the GAGAS Appendix Section A.10,” relevant

risk factors identified in earlier DCAA guidance (dated

July 31, 2013) and the DODIG Contract Audit Fraud

Scenarios and Resources website (MRD. No 14-PAS003(

R).

New guidance to auditors on the Jan 2012 change to

the DFARS requirement that contractors whose

segments are allocated more than $11 million of IR&D

costs must report anticipated Independent Research and

Development projects to the Defense Technical

Information Center (DTIC) to demonstrate that projects

are of interest to the DOD and hence allowable under

DFARS 231.205-18. The guidance (1) confirms the

reporting is for anticipated IR&D projects and are not

required to reconcile with actual IR&D effort (2) IR&D

costs are to be treated as expressly unallowable (subject

to penalties) if they have not been reported in the DTIC

and (3) auditors should consider whether the failure to

report to DTIC constitutes weak internal controls that

may result in an accounting system deficiency.

Comments on this guidance worry that DCAA

involvement in DTIC reporting may lead to opinions

that reporting of IR&D projects may be considered to

be insufficient and hence unallowable (MRD No. 14PAC-

005(R).

As of July 14, 2014 the Small Business Administration

is adjusting all of its size standards that are based on

revenue to account for five years of inflation since the

last adjustment. There are 476 industries affected by

the change. The SBA is using the Gross Domestic Product

price index to obtain the best measure of inflation where

it determined the amount of inflation from the first

quarter of 2008 to the last quarter of 2013 was 8.73%.

The SBA calculated the new size standards by multiplying

the current size standards by 1.0873 and then rounded

the total to the nearest $500,000 resulting in new

standards between $5.5 million and $38.5 million. The

SBA is now required to review its size standards every

five years following passage of the Small Business Jobs

Act of 2010 (Fed. Reg. 33647).

The White House and Labor Department June 12 released

a proposed rule that would raise the minimum wage for

workers on federal service and construction contracts to

$10.10 per hour. The proposed rule, which will be

adjusted annually for inflation, is expected to affect

200,000 workers and will become final on Oct 1. The

proposed rule implements Executive Order No. 13658

which the President signed on Feb. 12 and is to apply to

all contracts starting Jan. 1, 2015. The proposed rule

would apply to all construction contracts covered by the

Davis Bacon Act, service contracts covered by the

Service Contract Act, concession contracts such as

providing food and service contracts such as child care.

The $10.10 will also apply to workers with disabilities

where current law allows for lower wages than other

workers. Tipped workers will also receive an increase,

doubling their current hourly rate of $2.13 to $4.90 where

starting in 2016 their minimum wage will climb 95 cents

per year until they receive 70 percent of the prevailing

minimum wage. There has been mimimal comments by

industry groups to the increase.

The Defense Department has proposed a rule to require

service contractors to report labor hours and cost data,

intended to implement a provision of the 2008 National

Defense Authorization Act. The proposed rule would

require contractors and subcontractors to report the data

to DOD using the Enterprise-wide Contractor

Manpower Reporting Application (ECMRA) database.

Contractors will submit the data either at the end of

contract performance or Oct 1 of that year, whichever

comes first. The proposed rule will apply to all

solicitations, contracts and task and delivery orders and

include commercial items exceeding the simplified

acquisition threshold. Exceptions to the reporting will

be for construction, lease or rental of equipment or

facilities, utilities, freight and shipping and classified

services. DOD says the rule is intended to “help it

manage its labor force and make strategic workforce

decisions.”

Industry representatives are expected to come out

against the rule. The Professional Services Council

states in an interview the information will not be useful

to DOD where, for example, reporting labor hours is

“meaningless” in fixed price contracts since extra hours

do not cost the government anything where such

information does not help in workforce planning.

The Government Services Administration May 15

announced the award of 74 contracts for complete

professional services under its One Acquisition

Solution for Integrated Services (OASIS) program which

follows the GSA’s award in February of 124 contracts

under the small business set aside component of OASIS.

Under OASIS SB all professional services contracts will

be set aside for small business (the Air Force announced

it will use only OASIS SB contracts) while the regular

OASIS will include contracting 50 percent to small

business. OASIS is intended to provide its government

clients a “more flexible full service offering” that

complements the GSA’s multiple award schedules

(MAS) where it will offer agencies new ways to meet

requirements for both non-commercial and commercial

professional services which will be provided through

different types of contracts and pricing at the task order

level. It covers a broad range of service disciplines

under seven core areas: program management,

management consulting, engineering, science, logistics,

financial management and ancillary support. Vendors

may compete in one or more of these core areas where

initial terms will be for five years with a five year option.

The value of the OASIS program is estimated at $60

Billion, $6 Billion per year. There are currently 10

protests of ASSIS SB and 5 protests lodged against the

unrestricted programs so there will be no task orders

finalized until these protests are resolved, estimated to

be in August.

In action intended to detect and remove discriminatory

compensation practices, President Obama signed

Executive Order No. 13665 requiring government

contractors to allow discussions of compensation levels

without retaliation and directed the Labor Department

to require reporting of summary compensation data by

sex and race. The EO is intended to protect employees

“from retaliation if they broach the topic of unequal

compensation” by barring contractors to retaliate

against employees or applicants who may discuss,

inquire or disclose compensation levels. The EO does

not compel employees to discuss pay levels, publish or

otherwise disseminate pay data but rather provides a

“tool” to increase “transparency.” The EO’s concurrent

memo to DOL requires the agency to propose within

120 days a rule that would require federal contractors

and subcontractors to submit DOL summary data on

compensation paid to their employees including data

by sex and race. In considering the proposed rule DOL

is told to consider (1) directing enforcement toward

entities where reported data suggest potential

discrimination in compensation not where there is no

evidence of pay violations (2) minimizing the burden

on contractors and subcontractors, especially small

businesses and non-profits (3) encouraging voluntary

compliance with all federal pay laws and (4) avoiding

record-keeping requirements and relying on existing

reporting frameworks to the maximum extent possible.

The Professional Services Council expressed “deep

reservations” about requiring only government

contractors to disclose salary practices to the DOL

where they are now already heavily regulated where

the president’s action represents “another potentially

disruptive, costly and unique requirement imposed on

our industry.”

The General Accounting Office issued a report stating

numerous federal agencies have “reinvigorated” their

suspensions and debarment programs. In a Bloomberg

interview with Todd Canni of Mckenna and Long, he

states suspensions have more than doubled from 2009

to 2013 while debarments have increased at an even

faster rate. Reasons cited for the increase include (1)

heightened attention by Congress has resulted in

increased suspension and debarment programs at many

agencies (2) programs are more aggressive where now

“fact based” cases are brought forward rather than in

the past relying on civil and criminal judgments and (3) the government is casting a wider net where now agencies are pursuing action against more parties such as affiliated firms and individuals, increasing cases from one wrong doer to up to 20. Mr. Canni states the suspension and debarment officials (SDOs) “hold all

the cards” where there is a relatively low burden of proof to impose suspension and debarment actions. In addition, FAR Part 9.4 vests the SDO with discretion

to determine whether there is a cause for action, whether or not there is adequate evidence and where there are no independent checks on the SDO short of

expensive litigation. These expanded programs do not necessarily mean there is an increase in wrongdoing but rather an increase in investigations. Nonetheless, with less government business and more competition Mr. Canni predicts there will be an increase in wrongdoing such as improperly obtaining and using information from source selection officials, bid and proposals or proprietary data. Similarly, bribes to government officials and primes receiving kickbacks from

The Defense Department issued a final rule on

detection and avoidance of counterfeit electronic parts.

Both the proposed and final rule provide that

contractors who supply electronic parts or items that

include electronic parts under contracts covered by the

Cost Accounting Standards are responsible for

“detecting and avoiding use or inclusion of counterfeit

electronic parts or suspect counterfeit electronic parts.”

The final rule clarifies the applicability of these

requirements by adding the term “electronic” to the

term “counterfeit electronic part” to remove any

ambiguity that the rule might be applied more broadly.

The final rule also adds an intent element in defining a

counterfeit electronic part as a part that “has been

knowingly mismarked” to avoid fears that ordinary

noncompliant parts might be considered counterfeit.

The definition of “suspect counterfeit electronic part”

was also revised to provide that a part is not suspect

counterfeit unless “credible evidence…provides

reasonable doubt that the electronic part is authentic.”

By adding the term “credible evidence” contractors may

now conduct an investigation to determine whether a

suspect part is counterfeit and once it is determined to

be so, the rule disallows all subsequent costs associated

with rework and corrective action. Several other notable

changes to the proposed rule were also added (Fed. Reg.

May 7, 2014).

The Director, Defense Procurement and Acquisition

issued a class deviation allowing contracting officers to

use their own determination of whether individual

orders, blanket purchase agreements and other

agreements have fair and reasonable pricing using

proposal analysis techniques found in FAR Part 15. The

class deviation was made to go around the FAR 8.404(d)

provision that states since the General Services

Administration has already determined that prices and

rates for supplies and services offered under multiple

schedule awards are fair and reasonable ordering

activities are not required to make separate

determinations about whether pricing is fair and

reasonable. Most commentaries state the change will

make it more difficult for DOD to use GSA supply

schedule contracts to acquire its supplies and services.

Though the new proposed rule is not yet finalized an

abstract has been put out that provides that the DFARS

will be amended to require contractors to provide reports

on their accounting systems, estimating systems and

material management accounting systems regarding their

compliance with DFARS system requirements. The rule

is apparently being driven by DCAA who does not have

the resources to adequately audit all large contractors

who are covered by the business system requirements

of DFARS. The change would require the contractor

to hire an outside CPA firm to complete full audits of

all business systems similar to those conducted by

DCAA where the result will be more timely audits but

increased costs for contractors. Commentators are

saying contractors will have a hard time recovering the

costs for these audits in the current environment of

pressure to reduce indirect costs and will also have a

hard time finding qualified CPA firms with the

government contracting experience to conduct these

audits. Though the rule is not yet published there is

already increasing pressure for contractors to ensure they

are in compliance with business system requirements

where recently, the Department of Energy is making a

move toward self-assessment of contractors’ business

systems.

The government sought to disallow $3.8 million in

Laguna’s subcontracts in Iraq asserting these subcontracts

were awarded without proper competition and Laguna

had failed to document the reasonableness of the

subcontract prices. On Dec 6, 2005 the Iraq office of

DCAA issued an audit report to the Salt Lake City Branch

Office concluding Laguna’s subcontract management

system and related internal control policies were

inadequate and could not be relied upon. On Feb 9,

2006 the Salt Lake City Branch Office forwarded these

findings to the ACO in a separate audit report where the

government inexplicitly failed to issue a final report on

the $3.8 million claim until Dec 2012. The Board sided

with Laguna’s assertion the claim was barred by the CDA

because more than six years had passed from the date the

claim accrued. Because the government was “fully aware

of ” Laguna’s alleged failure to document the

reasonableness of the subcontract prices in both the Dec

2005 and Feb 2006 audit reports it held the government

claim accrued no later than Feb 9, 2006 making the Dec.

2012 final decision more than six years (Laguna Constr.

Co., ASBCA No. 58569).

Ensign’s contract was terminated and its termination

settlement proposal was not settled after numerous

exchanges so it filed a notice of appeal. The government

claimed the appeal board had no jurisdiction since it

was not a Contract Disputes Act claim following an

ACO’s final decision but the board ruled it had

jurisdiction because the parties had reached an impasse

in negotiations. It stated an impasse occurs when an

objective observer would find that continued negotiating

is unwarranted or has been abandoned by the parties

and the contractor has sought a final decision which

was met here where the termination contractor office

sent Ensign an email saying “it was apparent that

negotiations will not close the gap” (Ensign-Bickford

Aerospace & Def. Co., ASBCA No. 58671)

The Federal Election Commission rejected a legal

challenge (James vs FEC, D.D.C. No. 12-1451) that

attempted to impose a limit on total contributions to

federal candidates citing the recent McCutcheon case

settled by the Supreme Court 5-4 ruling that said a long

standing limit on the amount a contributor can give

candidates, political parties or traditional political action

committees (PACs) violates the First Amendment. But

in a separate case (Wagner v. FEC, D.C. Cir. No. 135126)

involving the decades old ban on federal

campaign money from government contractors the FEC

said it would continue to defend the ban despite the

McCutcheon ruling. Its lawyers said the McCutcheon

case “did not address the reasons that the contractor

contribution ban is justified” such as “pay-to-play”

arrangements. The FEC stated the McCutcheon ruling

was limited to the question of whether aggregate

contribution limits are justified under the First

Amendment and indicated that other restrictions on

campaign contributions remain in place. The FEC

attorneys said the federal ban on contractor campaign

money is constitutional under the analysis used in the

McCutcheon case because its objective is to prevent

“corruption and its appearance” in the process of

obtaining contracts which was a goal approved by

McCutcheon.

In its contract to provide laundry services in Iraq, Am.

Gen. submitted a claim that the government negligently

estimated its requirements. The government argued it

was not subject to a negligent estimate claim which

applies only to requirements type contracts. The board

sided with Am. Gen stating negligent estimate claims

may be pursued if volume estimates are material on a

contract where if the estimates underlying the contract’s

price were negligently estimated and Am. Gen. relied

on them then a claim based on that negligence is valid

(Am. Gen. Trading & Contracting WLL, ASBCA No.

56758).

NASA issued an 8(a) set aside solicitation for facilities

services and a joint venture BGI-Fiore submitted a

proposal. NASA concluded BGI-Fiore was ineligible

to compete because it had not been certified by the

Small Business Administration for participation in the 8(a) program and BGI-Fiore protested. The GAO sustained the protest saying they should not have been excluded because 13 C.F.R. 124.513(e) allows a joint venture to compete for an award as long as the SBA approves the agreement before award is made (BGI-Fiore JV LLC., GAO B-409520).

We were surprised to see in our recent Grant Thorton

survey summary that 83% of the respondents state the

government asks them to perform work that is out of

scope with the original contract and that 77% of these

contractors to not request an equitable adjustment or

pursue a claim for the additional costs that are expended.

This is particularly startling in this budget cutting

environment where every precious dollar contractors are

entitled to should be pursued. Yes, there may be reasons

not to pursue contract price adjustment such as fear of

loosing new work if you are perceived as nitpicking but

we find such fears often misplaced. Contracting

personnel are used to dealing with contractors who go

after funds they are entitled to (they often suggest it in

the first place) where fears of them being angry are highly

exaggerated. We believe contractors need to be more

aware of when there is out of scope work ordered by

their customer and more aggressive in requesting more

funds for that work, especially in this environment of

less contracts and subcontracts and pressure to lessen

profit on work that is awarded. We have asked an attorney

colleague of ours who specializes in claims for out of

scope work, Tim Power of the Law Offices of Timothy

Power, to revisit this issue to provide some simple

guidelines on when equitable adjustments are valid and

here is his response.

Though there are usually a long list of regulations and

rules affecting a government contract it is not necessary

to know them to spot a potential claim. A few questions

can help clarify when you are eligible for a claim against

the government.

1. Is the performance of the contract different than I planned

when I bid the job? If yes, and the difference in performance

is increasing the time or cost of performance, then you

have valid grounds for a claim against the government

for the additional time or cost to perform the contract.

2. What factors are causing the difference in performance? The

key to identifying entitlement and presenting your claim

is to identify the specific causes for any changes in the

performance. You should thoroughly investigate the

causes for a delay, additional costs or why performance

is different than you intended when you bid.

3. Was I missing crucial information that would have changed

the way I bid the contract? During the bid phase, the

government has an obligation to tell you about

information it has that impacts the costs or methods of

performance. This is especially true if the government

knows you do not have the information or that it is

unlikely you will learn about the information while you

are preparing your bid. The information could be about

the site (e.g. history of flooding) or about the process of

performance (e.g. problems encountered by previous

contractors providing the service or product).

4. Did anything change from the time I bid, when I started

performance or since? This might include changes on a site

for service or construction type contracts or changes to

government budgets or policies.

5. Do I interpret a contract requirement differently than the

government? Differences in interpreting contracts are

endless – time of performance, product or service to be

provided, method of production or construction, etc.

There are numerous rules about interpreting contract

terms all starting with a common sense approach to

interpretation. If the government’s interpretation seems

unreasonable or far-fetched, you should investigate

further.

6. Are the government’s inspections of my work reasonable and

according to the standards required by the contract? The contract

contains specifications and drawings for how the work

will be performed. Other sections of the contract contain

inspection standards that define how the government will

inspect the work to determine acceptability. This latter

section does not define the work required. Sometimes,

however, inspectors will measure or consider work that

is not required by the contract merely because there is

an inspection standard listed.

7. Has the government caused the difference in performance?

The strength of your claim and how much you recover

may depend upon the cause for the different performance.

Generally, the government must be the cause of the

difference. Therefore, a critical step in determining the

existence of a claim is to establish the government has,

in some way, caused the difference in performance.

Q. We are reluctant to provide a breakdown of costs on

our subcontract invoices since it will divulge our rate

structure and amounts to our prime who we may compete

against in the future. What can we do?

A. If you are likely to compete with your prime, that’s a

good argument not to divulge a breakdown of costs on

your invoices. However, if the government is requiring

it of all cost type subcontracts its hard to fight that.

Perhaps you can submit an invoice to the prime

identifying the total of burdened costs and a separate

one to the government identifying a cost breakdown. It

is dependent on what you can negotiate.

Q. We agreed to the “take it or leave it” offer from the

government for our FY 2007 rate settlement. The changes

we agreed to will have a ripple effect – we will need to

apply the same criteria to all our subsequent ICE’s that

are on file. This means that we will have to re-submit

and “re-certify” each ICE as of the date of re-submission

(DCAA will not audit an ICE that is not certified as of

the date of submission). I believe DCAA will take this

to mean that their 6-year audit performance window

under the Statute of Limitations provisions now begins

from the re-certification date, not the original date.

A. You raise a question that I do not think has been

clearly resolved in the courts – whether the new

submission is simply a minor revision of the original

submission (and the original date applies) or represents

an entirely new submission where the new date applies.

If DCAA is insisting on the later date, there is probably

not much of a basis to challenge them other than to assert

in your cover letter (and hence put yourself on the record)

that you believe it is a minor revision to the original

submission so if subsequent cases rule in your favor you

have a basis to claim the earlier date.

Q. We have a government SBIR CPFF contract for which

we subcontracted a vendor for foundry services under a

CPFF arrangement. I know that we are required to

monitor our subcontracts, but I do not know to what

extend and how to go about it.

A. The regulations are general and do not provide a great

deal of practical guidance. They say, for example, it is

the prime’s responsibility to audit their subcontractors,

make sure they have an adequate accounting system, their

invoices are accurate, etc. Sometimes, DCAA provides

the audit function, but less and less these days, at least

on a timely basis. You can request they audit your

subcontractor. Alternatively, you will contract with CPAs like us (make sure they have DCAA audit-like experience)

to do the audit where the parties, if the subcontractor is

reluctant, agree not to divulge subcontractor information

to the prime but rather will put forth a position on the

amount claimed (e.g. question $X dollars of overhead,

$Y of direct labor).

Q. We have a multi-year lease with increasing rent each

year. GAAP requires that the rent expense be straightlined

over the life of the lease, therefore, there is more

expense recorded than cash paid in the first half vs. the

second half of the lease (e.g. 3 yr lease at $12 – $14 – $16

over three years would be straight-lined at $14 each year).

The auditor argued that we were overcharging the

government in the first years. We were able to

demonstrate to another auditor the straight line charges

was a GAAP requirement and DCAA accepted our costs.

What do you think?

A. Its not always clear cut. You’re lucky it was resolved

around GAAP. Some auditors cling to the position of

the original auditor that allows costs only up to the cash

payments. They will claim there are several examples of

GAAP costing that is not accepted by government

contract accounting requirements.

Q. You helped us on some compliance issues a few years

ago. We are submitting a proposal where we would be

supplying some standard parts for an aerospace customer

that is under contract with the government. Our profit

after cost for the parts is 4.5%. This is a simple passthrough

of material but it does require receiving it, source

inspection, securing documentation and processing the

documentation through our customer system which is a

standard procedure. I guess I’m curious that if the profit

is 4.5% and this is a pass-through transaction, would

applying G&A be overkill? How can this be handled

without undue time and cost? This is not a sole source

bid. There are 4-5 companies quoting on this.

A. As I remember, you have a total cost input base for

your G&A rate that includes all material, including the

material you want to pass through. Hence you would be

entitled to apply a G&A rate to the material plus any

negotiated profit. However, it appears as if you don’t

want to do this for competitive reasons. If so, you can

voluntarily lower the G&A rate to a rate you believe

would be acceptable to your client by, for example,

lowering the G&A pool of costs by offering a

“management concession.” Though it might impede your

desire for a speedy result, you could try to obtain a

forward agreement where you agree not to charge G&A

to certain “pass through” items and in exchange, ensure

such material costs can be excluded from your G&A base.

Q. We subscribe to your newsletter and I have a question

I am hoping you can help me with. We have primarily

CPFF type contracts. I understand that the fee dollars

are supposed to be fixed, regardless of what your cost

ends up being, and that billing throughout the period of

the contract is based on percentage of cost. What I am

confused about is what prevents a contractor from

deciding to run all of their contracts at below their original

estimated cost in an attempt to essentially gain a higher

percentage fee?

A. Unless a contract stipulates that the fixed fee is based

on a range of costs to be adjusted if you fall below or

above that range, then you are right. You could estimate

costs on the high end to negotiate a higher fixed fee and

then get a higher percentage fee when actual costs are

below those estimated. Of course, such a practice may

be visible in your ICE submittals so the pattern of

overestimating costs could result in a decrement of

estimated costs on future contracts when it comes to

calculating your fee percentage not to mention making

you vulnerable to estimating deficiency assertions.