On July 15 the Defense Department issued a proposed rule that would revise the DFARS Business Systems rule to require contractors to self-assess and report on compliance with the accounting, estimating and material management and accounting (MMAS) business systems. The proposed rule will impose a significant obligation on contractors to (1) adequately and accurately self- assess and report on business system compliance and (2) obtain an independent (CPA) review of system compliance. A contractor’s failure to comply with the applicable reporting and audit requirements would result in system disapproval where the consequences can include payment withholds, negative past performance evaluations, cost disallowances, inability to receive new work and even potential False Claims Act actions.

Contractors would need to report on compliance with relevant system criteria for the three systems. The report is to include (1) a statement the contractor has evaluated each system’s compliance with relevant criteria (2) the contractor’s self-assessment of each system’s compliance including a statement as to whether the system complies in all material aspects as well as disclosure of any significant deficiencies as defined in the rule (3) status of any disclosed deficiencies including a corrective action plan with milestones for any deficiencies not yet corrected at the time of the report and (4) a signature from an employee at a level no lower than a vice president or CFO.

For accounting and estimating systems, this report will be made annually while for MMAS reporting it would be required when the government requests an MMAS review, which is usually required every three years. A contractor’s accounting and estimating system would be subject to an audit every three years by an independent CPA where contractors will be required to ensure the CPA is objective and qualified to conduct the audit. The MMAS CPA audit will be required when the government requests it. Contractors are required to make available to the government documentation to provide reasonable support for the contractor’s assessment as well as information related to the selection of the CPA and workpapers supporting the audit. Contractors with over $100 million in qualifying sales during a fiscal year or that receive a government request will also be required to disclose their CPA’s audit strategy, risk assessment and audit plan to the government. This requirement would require CPA firms to provide internal documentation they usually are reluctant to do so large firms may shun this audit work leaving it to smaller CPAs and CPA firms to perform.

The purpose of the proposed rule is to relieve DDAA of business system audit responsibilities because (1) they are unable to gather the resources to timely meet DOD needs and (2) they tend to find deficiencies in all systems they audit which negatively impacts the procurement process. At this time, there are no such reporting requirements for the other three business systems covered by DFARS – purchasing, earned value management and property management business systems (Fed. Reg. July 15, 2014).

The Office of Management and Budget and the Office of Defense Procurement and Acquisition have extended for two and a half years a temporary program to provide accelerated payments to small business subcontractors. The government-wide initiative directs civilian and defense agencies to the full extent permitted by law to temporarily accelerate payments to all prime contractors– ideally within 15 days of receipt of proper invoices. It is hoped this will allow more prime contractors to pay their small business subcontractors faster. The original one year policy was implemented July 2011 and extended for a second year in July 2013. The FAR councils in Nov 2013 finalized a new contract clause requiring prime contractors that receive accelerated payments from the government to make similarly accelerated payments to their small business subcontractors where receipt of proper invoices triggers the clause requirements for fast-paced payments. The clause has been inserted in all solicitations issued after the rule’s Dec 26, 2013 effective date, including solicitations and contracts for commercial items. No new rights are provided in the Prompt Payment Act and does not affect that law’s late payment provisions.

A final rule was published July 25 that prohibits contractors and subcontractors from recouping cost of legal services in connection with a whistle- blower proceeding begun by an employee submitting a compliant for reprisal or retaliation. The interim rule was published Sep. 30, 2013 and following public comments the final rule was modified to expressly include whistle blower complaints in the provisions of FAR 31.205-47(c). Paragraph (c) provides for recovery of costs when matters are resolved through consent or compromise whereas the interim rule prohibited settlement of whistle blower claims by making related legal costs entirely unallowable if the proceeding “could have led” to a monetary penalty or to an agency order for corrective action. The FAR councils argued now that whistle-blower proceeding have been added to paragraph (b) it is only reasonable they be covered in paragraph (c).

Commentators have stated that allowing firms to recover their costs in frivolous cases is a “wise decision” where there have been an explosion of whistle-blower cases as Congress has made it easier to bring such cases and many claimants and their attorneys view them as a way to make money. Even if the cases have no merit a contractor can still end up incurring hundreds of thousands of dollars in legal fees so providing a way to get that money back makes sense and hopefully will discourage people to file cases without merit. Another commentator states the exception does not go far enough where under the current provision settlements will in effect make legal costs unallowable where the standard for allowing the costs should be lower if there is no proof of the employee’s allegations, the action is not related to a fraud proceeding or the employer is taking disciplinary action against the employee (Fed. Reg. July 25, 2014).

The Defense Department adopted as final an interim rule requiring timely notification to any contractor that performs a function that the DOD plans to convert to performance by its civilian employees. The interim rule implements a 2012 National Defense Authorization Act provision that requires DOD to establish procedures for the timely notification. Suggestions to the interim rule that timely notification take place within a reasonable amount of time before insourcing takes place and that specific details of the rationale for insourcing be made were rejected because such disclosures would impede the ability to take insourcing actions once notification was made and for the rationale, the current rule does require a summary of why the service is being outsourced (Fed. Reg. June 24).

The FAR Council issued a proposed rule in June to have virtually all contractors report counterfeit and non- conforming items and materials they find in the supply chain when they lead to certain types of harm. Though initial efforts focused on electronic parts it was decided to expand it to “all parts that can impact the mission of all government agencies.” The proposal implements the 2012 National Defense Authorization Act to provide guidance to prevent entry of counterfeit parts into the defense procurement supply chain. Whereas an earlier final rule change to the DFARS affected only defense contractors and applied to only CAS covered contractors (full and modified) the FAR Council decided to expand it to all agencies and all contractors whether CAS covered or not.

Definition of counterfeit item refers to “unlawful or unauthorized reproduction, substitution or alteration that has been knowingly mismarked, misidentified or otherwise misrepresented to be authentic.” The scope of the proposed rule would add a number of requirements to any contracts for supplies that are delivered to the government, acquired by the contractor for performing services or furnished by the contractor for use by the government. The proposed rule seeks to ensure vendors have acceptable quality control systems in place though the rule does not explain exactly what contractors need to do to monitor or verify their QC systems. For reporting requirements, contractors need to monitor GIDEP (Government Industry Data Exchange Program) for any counterfeits that other manufacturers have reported and in addition must make certain reports such as reports to COs 30 days after it becomes aware of any items that are counterfeit or suspect counterfeit and reports to GIDEP within 60 days after becoming aware. Limited safe harbor will apply by not making contractors subject to civil liability when they provide written reports or notifications. The proposal’s new contract clause will be flowed down to all subcontracts for supplies or services that include supplies at any tier. Finally, the proposed rule will apply to commercial item acquisitions.

In response to the highly publicized trend of some companies reincorporating overseas to save on taxes – known as “inversion” – there have been several calls by legislators to prohibit award of federal contracts to those firms that are moving. For example, Senate Majority leader Reid says “there is no reason the US government should reward tax runaways with lucrative government contracts” while Sen. Charles Grassley (R-Iowa) calls the companies’ moves as “immoral” and is calling for an end to “fat government contracts.” More recently, several Democratic senators joined Democratic congressional representatives to introduce the No Contracts for Corporate Deserters Act that calls for an ownership threshold of 50 percent and would apply retroactively to contracts awarded since May 2014. Many Republicans have stated they are “interested in looking at the ban” though they have expressed reservations about a retroactive ban.

A recent Bloomberg News report stated that over the past dozen years Congress has passed many laws prohibiting American companies that reincorporate overseas from doing business with the federal government where those laws have not worked because of loopholes. Reasons for many companies avoiding the bans include though subject to them federal databases say they are exempt, or they may not meet the law’s narrow definition of inversion. The report focuses on Ingersoll-Rand who shifted its tax addresses overseas yet is collecting more than $1 billion a year from the government because it was awarded contracts when prohibition had temporarily lapsed or that were grandfathered because of earlier contracts.

President Obama July 31 signed an executive order (EO) requiring prospective contractors to disclose to agencies violations of 14 federal wage and hour, discrimination, health and safety, family and medical leave, labor and other workplace laws. The Fair Pay and Safe Workplace EO will apply to new federal contracts of more than $500,000 starting in 2016 and will require companies to reveal all such workplace violations – including any administrative merits determination, arbitral award or decision or civil judgment in the past three years before becoming eligible for a contract. Each agency will appoint a labor compliance advisor who under Labor Dept. guidance will review disclosures and consult with COs to “weed out the worst actors from contract consideration.” The EO also requires contractors to provide their employees with accurate pay documents showing hours worked, overtime hours, pay and any additions or deductions made from pay. If the contractor is treating an individual performing work under a contract or subcontract as an independent contractor and not an employee the contractor must provide a document informing the individual of this status. Once awarded a contract, employers must update their violations history once every six months.

Violations of the 14 laws that must be tracked are (1) Fair Labor Standards Act (2) Occupational Safety and Health Act (3) Migrant and Seasonal Agricultural Worker Protection Act (4) National Labor Relations Act (5) David-Bacon Act (6) Service Contract Act (7) EO 11,246 on equal employment opportunity (8) section 503 of Rehabilitation Act (9) Vietnam Era Veterans’ Readjustment Act (10) Family and Medical Leave Act (11) title VII of the 1964 Civil rights Act (12) Americans with Disabilities Act (13) Age Discrimination in Employment Act and (14) EO 13,658 of the Feb EO on minimum wage for contractor employees. In addition, equivalent state laws as defined by the DOL must be reported. It has not been specified how many violations would trigger disqualification. Under the new process, agencies will provide early guidance to companies identified as having a history of labor law violations where they would then have the opportunity to remedy the illegal practice which COs would then take into account before awarding a contract.

As expected a broad range of progressive groups have lauded the EO while industry groups have expressed skepticism that the EO would be implemented in such a way as to avoid excluding deserving companies from contracts stating some will be “blacklisted” from contracts for even minor infractions of complex labor laws. Other are saying the three year look back will require contractors to establish databases or similar mechanisms to pool information related to violations. Since it is not legislative, many people have said they can expect legal challenges to the EO. (Text of the EO can be found at “op.bna.com/dircases.nsf”)

The Labor Dept. Aug 6 announced a proposed rule that would for the first time require federal contractors and subcontractors to submit annual equal pay reports providing summary data on their employee compensation to DOL’s Office of Federal Contract Compliance Programs. Under the proposal, companies that file EEO-1 reports with the federal government, have more than 100 employees and hold federal contracts or subcontracts worth more than $50,000 or more will have to submit summary pay data on their workforce broken out by race, sex and ethnicity.

Comments we have seen state the burden should not be great because contractors are already reporting by EEO-1 category but question the utility of the reporting. Presumably, the OFCCP data will aggregate by industry and review according to EEO-1 categories to look at average pay, compute an average gap and then compare contractors within a given industry and target those companies with pay gaps for audit (Fed. Reg. Aug. 8, 2014).

(Editor’s Note. The following case should alert contractors that despite showing that costs were incurred it is not sufficient to be reimbursed where the incurrence of the costs must also pass reasonableness tests.)

BAE submitted a claim of $285,101 for an equitable adjustment. The claim was based on accounting records showing incurred costs for labor, hours, material, G&A and profit where DCAA conducted an audit, traced each element of claimed costs to the accounting system and source documents such as timesheets and vendor invoices and concluded all costs were verified as incurred and hence questioned none. The CO rejected DCAA’s conclusions reasoning though the costs may have been incurred and successfully traced to accounting records, they were nonetheless unallowable in accordance with FAR 31.201-2, determining allowability and reasonableness provisions of 31.201-3. It cited examples of some costs being unreasonable such as some of the direct costs charged to the modification were incurred after performance was complete, or some of the supervisory costs that were direct charged were also needed for other performed work or there was no authorization for the overtime hours. The Court disagreed that recorded costs, even confirmed by DCAA, should be the measure of an equitable adjustment ”absent proof from the contractor of reasonableness of the costs claimed” (BAE Systems, ASBCA 58809).

The VA issued a request for proposals to provide sterile surgical packs and procedure trays where offerors were required to provide samples of components included in four procedure packs. Marathon filed a protest after the contract was awarded to Manus alleging the VA gave Manus a chance to make its proposal acceptable after the closing date by letting it provide components for inspection but denied the same opportunity to Marathon to improve its proposal. In siding with Marathon, the GAO said discussions occurred under FAR 15.306 when the VA asked Manus to bring its components for inspection because this gave it the opportunity to establish the acceptability of its proposal noting discussions occur when communications between the parties allow for material enhancement of proposals.

The VA did not meet its responsibility to treat Marathon equally by allowing it a similar opportunity to establish acceptability of its proposal where in this case equal treatment would have meant that Marathon could provide past performance references that it originally omitted (Marathon Med. Corp., GAO, B-408052)

In a case we reported on in the March-April issue of the Report, the lower court ruled that certain documents generated during an in internal review of potential fraud following procedures under its code of business conduct could not be protected under attorney- client privilege since those documents were generated pursuant to regulations and corporate policy rather than for the purpose of obtaining legal advice. An appeals court reversed that decision ruling the attorney-client privilege applied to its internal investigation stating the documents were privileged because one significant purpose of the investigation was to obtain legal advice. In responding to government assertions that much of the review was conducted by non-attorneys, the Court cited Upjohn & Co v. US that ruled attorney-client privilege applied to KBR’s internal investigation and covered communication between company employees and attorneys where communications with non- attorneys do not dilute the privilege when they are agents of attorneys. The current decision also rejected the “but-for” privilege test underpinning the original decision where the court said the primary purpose of a communication is to obtain or provide legal advice only if the communication would not have been made but for the fact that legal advice was sought. Under this test, the privilege would not apply if there was any other purpose behind communication. The appeals court held this test was inappropriate where it would “eradicate” attorney- client privilege for internal investigations conducted by businesses that are required by law to maintain compliance programs. Finally, the court ruled it should not be presumed that a communication can have only a legal or business purpose where if obtaining legal advice is one of the significant purposes – as was the case here

– the privilege holds (Kellogg & Root, Inc. et al, CA-DC).

The government issued a solicitation contemplating the award of a blanket purchase agreement (BLA) against a successful offeror’s federal supply schedule (FSS) for lab testing and analysis services. The award was to be on a best value basis after evaluations of technical proposal, past performance and price. Am Holding protested the award to Quest asserting the government applied an unstated evaluation factor to the proposals. The court agreed with Am Holdings finding the government applied an unstated evaluation factor by evaluating offerors’ proposals based on the number of FSS test types listed where FSS test types became a “predominant discriminator” used to select Quest despite the fact the government did not say it would evaluate proposals in this way. The court said that use of this unstated evaluation criterion undermined the entire technical evaluation. In addition, the price evaluation also violated the solicitation terms because the solicitation was clear that pricing information for all tests would be evaluated but its decision to evaluate price for only the FSS items violated the stated terms (Lab Corp. of Am Holdings vs. US, 2014 BL 174179, Fed. Cl, No. 14-261C).

Q. Our scientists frequently go on experiments which require them to be outdoors (sometimes at sea) for several hours at a time. These employees receive meal reimbursements at GSA per diem rates. In addition to this reimbursement, we typically allow them to purchase water bottles and Gatorade to drink on the boat to prevent dehydration. Sometimes they purchase snacks as well which we do not deduct from the per diem. My question is – can we charge a cost-type contract for the cost of these drinks and snacks, since we are also charging the contract for full meal per diem amounts.

A. You should be able to consider these purchases as “supplies” or some comparable term in addition to the per diem. Of course, that should not prevent some auditor from taking an erroneous position.

Q. My company entered into an economic development agreement with our state’s (Ohio) Department of Development (ODOD). Per this agreement, “the Tax Credit Authority approved a grant in the form of a refundable fifty percent Ohio tax credit for six years” in exchange for our agreement to create new jobs in the state. This spring, ODOD processed the annual reports that we submitted each year for 2011-2013 (our first three years of eligibility in the program) and informed us that we were eligible for $448,414. As an Ohio business, we pay a Commercial Activity Tax (CAT) to Ohio. When we submitted our 2014 Q1 CAT, we showed our Q1 tax liability ($18,697) and then the $448,414 in refundable credits. Ohio sent us a check for $429,717 (the difference between our credits and Q1 CAT liability). Our accountant advised us to classify this as “other income”. However, my concern is that DCAA will be looking for us to apply these funds as a credit to our G&A expenses, not just as miscellaneous income.

A. You are supposed to credit the G&A pool for the cost of the expenses you are claiming not revenue you receive. For example, if you incur phone expense of $5,000 and charge it to G&A then receive revenue from a customer of $3,000 whose phone expenses represent $1,000 of the $5,000 then you are supposed to credit the G&A pool for $1,000 not the $3,000 you received. As a matter of convenience, contractors commonly just credit all the revenue of immaterial amounts because of the difficulty in determining the cost related to the revenue received. There is no need to credit the entire $448K from the G&A pool but only the amount of “costs” ($18,697) you charged to the pool.

Q. I have a question regarding a CPFF contract (SBIR Ph 2) which is being invoiced via WAWF. The contract includes a clause limiting invoicing of fees to 85%. Should we invoice 85% of the fee on each invoice or can the organization invoice the full fee then no longer apply fee when they reach the 85% limitation.

A. Unless the contract specifies it, either method should be acceptable.

Q. The entire cost of our 1099 employees is their negotiated rate times the number of hours they work. I read somewhere about charging the equivalent of an employee to direct labor and the balance to overhead. We do not do this. I have

a separate GL account titled Direct labor- Purchased 1099 Labor. Are we OK?

A. So you are charging the government at what the employee is billing you and what you pay them. Correct? That is one acceptable method. On T&M contracts you may be able to charge the government at the negotiated rate for that category of employee if they meet the conditions of that category. On cost type work, you can also book and charge the purchased labor at an “average” direct rate if they qualify for that labor category and then charge relevant indirect costs. You should make that clear in either the proposal or agreement.

(Editor’s Note. We have received inquiries from clients and subscribers on what questions their employees can expect to receive during a floorcheck. In order to put together a comprehensive list we put the question to several employees

of our clients who are going through these floorchecks. We were surprised to see how much more detailed the inquiries are these days compared to when we conducted floorchecks as either government auditors or conducting mock floorchecks on

our own for clients. We have not edited the responses from the three employees so repetition of certain questions are intentional. We hope you will find the list below helpful in preparing for your floorchecks.)

• Where are Jim and Linda located (after selecting timesheets to review)
• Are these all the people assigned here?
• Print current timecard.
• What department are you assigned to?
• Who is your supervisor?
• What is your job title?
• Do you know your employee number?
• What is your employee number?
• Do you have an employee badge?
• Please show us some picture identification of who you are.
• When do you fill out your time?
• When do you sign your timecard?
• Who approves your timecard?
• Does anyone else have access to your timecard to make changes?
• How do you make changes to your timecard?
• Is there an audit trail of people who have made changes to your timecard?
• What were you working on when we came in?
• Can you provide an artifact of that work?
• Who assigns the tasks you work on?
• Please explain what you charged to for the various tasks you charged on your timecard.
• Are you aware of anybody in the company inappropriately charging to wrong tasks?
• Are you a full-time exempt employee?
• Do you surf non-work-related web sites at work?
• Please print a history of websites you have visited.
• Do you have a Timekeeping process you follow?
• Where do you keep your copy of the process?
• Do you have access to the DCAA Fraud Abuse Hotline?
• Do you have a DCAA Fraud Abuse poster?

• What were you working on when we came in?
• What were you working on yesterday?
• What is your job?
• Do you have an employee ID badge?
• Can we see some identification?
• How often do you submit your time card?
• Who approves your time card?
• Do you have a physical copy of your time card?
• Do you make changes to your time card?
• If you make changes, how are they recorded?
• What is your charge code?
• Do you ever charge to projects?
• Does anyone else have access to your time card?
• Does anyone make changes to your time card or submit time cards on your behalf?
• If so, what are the circumstances under which those changes are made?
• What does your job entail?
• Have you seen any evidence of time charged to a project that should not have?
• If that were to happen, what do you do?

• When do I enter my time?
• Is there a process that tells me how to enter my time?
• What is my name?
• What is my employee number?
• What department do I work in?
• Who is my supervisor?
• Who approves my time?
• Is there any one that can enter my time for me?
• What was I working on when the auditors came in?
• How do I know what charge line to enter my time on?
• Who assigns my charge line
• How do you I know what charge code to enter for the invoice I was working on?
• Do I sign my time card?
• When do I submit my time card?
• Please print your time card?
• Please print your internet history?
• Do I work overtime?
• Do I get paid for overtime?
• Have I ever worked overtime?
• Am I an exempt employee?
• Do I know that there is a DCAA hot line to report fraud?
• Do I know if there has been any fraud in charging time to the company?
• What is my job title?
• Is there a job description for my job?.
• Print a copy of the invoice I was working on?