The Treasury Secretary has set a rate of 4.50% for the period July 1 through December 31, 2004. The new rate is an increase from the 4.00% rate applicable in the first six months of 2004. The Secretary of the Treasury semiannually establishes an interest rate that is then applied for several government contract-related purposes. Among other things, the rates apply to (1) what a contractor must pay the government under the “Interest” clause at FAR 52.232-17 and (2) what the government must pay a contractor on either a claim decided in its favor under the Contract Disputes Act or payment delays under the Prompt Payment Act. The rate also applies to cost of money calculations under Cost Accounting Standards 414 and 417 as well as FAR 31.205-10 and when a discount factor is used to calculate the present value of future payments (e.g. deferred compensation) (Fed. Reg. 38,952).
A new government-wide rule issued June 18 amends certain sections of the Federal Acquisition Regulation. Of interest to our readers:
1. An interim rule seeking to implement the National Defense Authorization Act for FY 2004 provides that performance-based contracts or task orders for services will be treated as commercial items if certain conditions are met and the rule requires agencies to report on these awards. The definition of commercial item will be amended to add performance-based language. COs will now be able to use FAR Part 12, Acquisition of Commercial Items and Part 37.6, Performance-Based Contracting for non-commercial services and treat these services as commercial services when specific conditions are met. This provision was made into a final rule in the Defense Federal Acquisition Regulation Supplement on June 25 (Fed. Reg. 35,532).
2. Deletes the cost principle at FAR 31.205-24, Maintenance and repair cost, because either the Cost Accounting Standards or Generally Accepted Accounting Practices adequately address such costs. In addition, non-substantive revisions to remove unnecessary and duplicative language were made to FAR 31.205-7, Contingencies; FAR 31.205-26, Material costs and FAR 31.205-44, Training and education costs.
3. Intending to strengthen the procedures for establishing Blanket Purchase Agreements (BPAs) under the General Services Administration’s Federal Supply Schedules (FSS), the rules (1) clarifies the difference between an Authorized FSS pricelist and an FSS publication (2) makes clear that the CO placing an order on another agency’s behalf is responsible for applying that agency’s regulatory requirements (3) contains new coverage on use of statements of work when acquiring services from the schedules (4) requires that when an agency awards a task order requiring a statement of work that if the award is based on other than price (e.g. best value) the CO shall provide a brief explanation of the basis for the award to any unsuccessful contractor requesting such information (5) requires the ordering activity to document the results of its BPA review and (6) reminds (encourages) agencies they may seek a price reduction at any time, not just when an order exceeds the maximum order threshold (Fed. Reg. 34233).
Much to the relief of industry groups, the Small Business Administration July 1 withdrew its proposal to restructure the size standards that govern eligibility for federal small business procurements. The proposed rule, issued for comment March 19, intended to simplify size standards by establishing number of employees as a common standard for all industries and reducing the number of individual size standard levels from 37 to 10 that are based either on monetary receipts or on number of employees. Several industry groups raised concerns that the changes would have detrimental affects on small businesses making thousands of firms ineligible for small business set asides and asserted the current system is neither complex nor difficult to use and hence should not be changed. SBA said it will continue to study opportunities to simplify size standards (Fed. Reg. 39,874).
The Defense Contract Audit agency issued guidance on recent general revisions made to FAR Part 31 to make them consistent with the cost accounting standards. Though the changes do not materially change the substance of FAR, some changes are “noteworthy.” The guidance portrays the changes to the cost principles in a line-in line-out format and those changes we consider noteworthy are:
1. FAR 2.101, Definitions, Direct cost means “any cost that is identified specifically with a particular final cost objective” while indirect cost means “any cost not directly identified with a single final cost objective but identified with two or more cost objectives or with at least one intermediate cost objective.”
2. In FAR 31.201-1, Composition of total cost, references to FAR 31.201-2 are removed. Total costs represents the sum of direct and indirect costs allocable to the contract including standard costs properly adjusted for variances and cost of money less any allocable credits.
3. In FAR 31.201-2, Determining allowability, the introductory sentence that used to mention five factors that should be “considered” are now “required” for allowability. The five factors are (1) reasonableness (2) allocability (3) compliant with CAS, GAAP or is appropriate to circumstances (4) contract terms and (5) limitations set forth in the cost principles.
4. FAR 31.203, Indirect costs, adds a new paragraph that states all CAS provisions apply to fully CAS covered contracts while the applicable CAS provisions identified in the paragraphs of FAR 31.203 apply to all other contracts.
5. In FAR 31.203 contractors must use its fiscal year for its accounting period if not CAS covered while it must use CAS 406, Accounting periods if contracts are fully or modified CAS covered (04-PAS-03(R).
The FAR Council issued a proposed rule change to FAR 31.205-16, Gains and losses on disposition or impairment of depreciable property or other capital assets, that addresses treatment of sales and leasebacks. The proposed changes include (1) date of disposition for a sales and leaseback arrangement will be the date of the arrangement rather than the end of lease period (2) gains or losses will be the difference between the fair market value on the disposition date and undepreciated balance on the disposition date and (3) the amount of the gain recognized for contract costing purposes will be the difference between the acquisition cost of the asset and its undepreciated balance; for assets acquitted under a capital lease, the gain will be limited to the capitalized value of the leased property and its undepreciated balance (Fed. Reg. 29380).
The General Services Administration May 18 issued a final rule implementing the statutory provision that authorizes state and local governments to acquire information technology equipment and services under GSA’s Federal Supply Schedule 70, known as the cooperative purchasing program. The GSA explained the boundaries of the program are established by Section 211 of the E-Government Act of 2002 which authorizes cooperative purchasing. It provides (1) services and goods may be purchased by state and local government under cooperative purchasing program only if they are through Schedule 70 (2) while Congress authorized GSA to make available to state and locat government the simplified acquisition procedures and discounts offered by GSA it did not authorize GSA to exercise oversight over state and local purchases and (3) GSA does not offer dispute resolution.
The final rule makes “minor changes” to the May 2003 interim rule:
Makes clear an FSS contractor’s sales to state and local government does not trigger the price reduction clause that applies to federal agencies under which a vendor that lowers its schedule price for one federal agency must reduce its price to other agencies
Defines domestic and overseas delivery and provides the contractor the option of providing supplies and services internationally
Clarifies the contractor’s option to accept or not accept orders from outside the executive branch of the federal government
States that both contracts and blanket purchase agreements established under cooperative purchasing are separate contracts
Asserts the state and local agencies may add supplemental terms and conditions (Fed. Reg. 26,063).
House Prohibits Awards to American Firms Incorporated in Tax Havens
The Hours of Representatives rejected amendments that would have prohibited the Department of Homeland Security from allowing work on a recently awarded $10 billion contract to Accenture Inc. because the American company was incorporated in Bermuda. The House June 18th let stand the contract provided that such awards would not be possible in the future.
In a June memo to Defense Department agency leaders, Director of DOD Procurment and Acquisition Diedre Lee reminded its leaders that existing laws and regulations provide “considerable flexibility” for acquisitions supporting “urgent situations” and national security requirements. Examples of regulatory flexibilities mentioned in the memo include:
A combined synopses and solicitation can be used to cut time to solicit and award contracts for commercial items.
COs can treat any acquisition as a commercial item if the supplies or services are used to defend against or recover from nuclear, biochemical or radiological attack.
Acquisitions issued using the “unusual and compelling urgency” exception under the Competition in Contracting Act “generally” exempts synopsis requirements.
Supporting justification for an exception can be made and approved after contract award when such preparation and approval would “unreasonably” delay acquisition.
Newly enacted provisions increase the micro-purchase and the simplified acquisition procedure thresholds for acquisitions in support of “contingency operations” or help against one of the above attacks.
A recent competitive sourcing study by the Office of Management and Budget stated that for FY 2003 and the first quarter of 2004, competitive sourcing decisions are expected to save the government $1.1 Billion over the next 3-5 years, translating into a $12,000 savings for each of the 17,595 full time equivalent (FTE) positions competed out. Representing not such good news for the private sector, the 17,595 FTEs competed out is a drop in the bucket of the 425,000 commercial type positions OMB previously identified as being candidates for contracting out. Further, 89% of the FTEs competed out were awarded to in-house, that is federal, employees (http://results.gov.index.html ).
The government has opened up several websites. The Small Business Administration has launched a Website to help businesses connect with federal agencies. www.Business.gov will provide one-stop, online Federal government information and services that businesses need such as links to business development, financial assistance, taxes, laws and regulations, international trade, workplace rules, buying and selling and federal forms.
The Department of Homeland Security and the Defense Logistics Agency announced their partnership to provide DHS a tailored version of Department of Defense’s EMALL. The DOD Electronic Mall is an internet based marketplace allowing purchasers access to DOD’s vendors and 383 catalogs containing more than 12 million goods and services items. DHS will now be able to purchase goods and services under DOD contracts as well as their own exclusive contracts.
The General Services Administration’s new eOffer Web site enables companies that want to become GSA-approved businesses, listed on GSA’s Schedule 70, to respond electronically to the Schedule 70 solicitation for information technology services and products. The new web site is at www.eoffer.gsa.gov.
The Department of Homeland Security June 19 announced issuance of liability protection under the SAFETY Act for antiterrorism technologies developed by four companies. The announcement comes eight months after DHS issued an interim rule implementing the Support Anti-Terrorism by Fostering Effective Technologies (SAFETY) Act which is intended to encourage the private sector to put forth innovative but unproven technologies while providing sellers of “qualified antiterrorism technologies” (QATT) protection from lawsuits. The Act provides two levels of protection depending on whether the product is a designated or certified QATT. The four technologies receiving designation and certification are:
Lockheed Martin Corp. Risk Assessment Platform, an integrated real time computer system providing real time terrorism threat analysis.
Michael Stapleton Associates. A two way high speed video/audio system designed to X-ray items for explosives and hazardous materials.
Northrop Grumman. A detection tool to rapidly analyze samples from US Postal Services facilities.
Teledyne Brown Engineering Inc. Remotely operated high pressure water jet system to gain access to potential explosive devices.
The General Accounting Office, founded in 1921 to be Congress’s accounting and financial advisor, has changed its name to the Government Accountability Office. Since its role has expanded from accounting and financial matters to audits of federal programs the name change will more accurately “reflect its mission.” (Pub. L. No. 108-271).
(Editor’s Note. Though only three parts of the Federal Travel Regulation formally apply to contractors – combined per diem rates, definitions of meals and incidentals and conditions justifying payment of up to 300% of per diem rates – many contractors choose to follow the FTR either because some contracts call for incorporation of it or they choose to follow it. Therefore, we continue to present significant new changes or decisions likely to affect contractors’ travel and relocation expenses.)
While on temporary duty (TDY), Victoria took taxis and subways to restaurants claiming the only food near her work station was fast food or ethnic which were not part of her normal diet. The Board sustained rejection of her taxi and bus expenses ruling that Section 301-10.190(b) of the Federal Travel Regulation provides that employees may only be reimbursed the costs of using local transit (bus, subway or streetcar) for travel to places where meals can be obtained if “the nature and location of the work are such that meals cannot be obtained there.” In addition, FTR 301-10.420 provides that employees may use taxes only to obtain meals at the “nearest available place.” The Board ruled her statement that food near the TDY location was not part of her normal diet meant simply she preferred to eat elsewhere and that such personal taste does not justify the public or private transportation expenditures (Victoria Davis, GSBCA 16331-TRAV).
Congress is considering a bill that if passed would grant employees compensatory time off for traveling on official government business. The proposed bill would require agencies to provide employees one hour of compensatory time off for each hour they spend in travel status during non-business hours. Though the Office of Personnel Management opposes the proposal, stating that federal employees already are compensated for travel time, the full Senate has already approved the measure which is now before the House (go to http://thomas.loc.gov. for a copy of the bill)
While on his two week TDY in Huntsville Frank stayed with relatives rather than in a hotel but on a weekend side trip he stayed at a hotel. In rejecting his request for reimbursement for the hotel, the Air Force argued that section C4563-E of the JTR limited reimbursement to the amount payable had Frank stayed at the TDY site which in this case was zero, reasoning had Frank stayed in Huntsville he would have stayed with relatives. The Board agreed the cited regulation applied but disagreed that Frank was not entitled to lodging. It concluded an employee is free to stay any number of nights with relatives and the remaining time in commercial lodging, reasoning that each night is a separate transaction and the agency cannot presume a choice for an employee (Frank Condino, GSBCA 16365)
The government issued a purchase order in September even though Serena’s quote in response to a request for quotation stipulated the quotation of a discounted price was valid through June. CA protested the discounted price award to Serena, asserting Serena’s quote did not represent the best value because the reduced price was “unavailable” at the time the agency made a determination and hence Serena’s undiscounted price was $6 million more than CA’s. The GAO ruled the government’s evaluation was “in accord with the fundamental nature of a quotation.” It stated in contrast to submission of a bid or proposal, which creates a binding legal obligation on both parties and hence requires a reasonable period of acceptance, a quotation “is not a submission for acceptance by the government to form a binding contract” but is rather “purely informational” (Computer Associates GAO, B-292077).
Centurion entered into a contract to provide repair and maintenance for computers where the contract stipulated it would receive $80,000 in materials and 3,620 service hours per year for the life of the contract where the contract’s total value for the base year and four option years was set at $1.3 million. Due to lower than expected demand the contract was modified downward twice and in the end the government ordered 667 service hours the first year and 590 hours for the second and did not exercise the three other option years. In response to its claim for $346,000 of “unused hours” the CO offered Centurion $80,000 to cover both years and Centurion appealed. Because Centurion promised to provide “all per call repairs” and failed to negotiate a guaranteed number of billable service hours, the Board ruled the agreement was a requirements contract. This meant that though the actual requirements were substantially less than estimates Centurion was not entitled to damages on a requirements contract because there was no guaranteed minimum and since there was neither negligent prepared estimates nor bad faith, there was no legal basis for any adjustment. The appeals court concurred (Drew v. Brownlee, 95 Fed. Appx. 978).
A joint venture formed under the Small Business Administration’s mentor-protégé program was composed of a large business mentor who would provide management support services for the contract and a small 8(a) business who would manage and supervise performance. The Joint Venture received a neutral past performance history rating because it had no prior experience and protested the award to a higher rated lower priced bidder under past performance, experience and performance risk subfactors, arguing the evaluation did not properly reflect the significant past performance and experience of the large business partner. In supporting its position the protesters alluded to FAR 15.305 that provides past performance evaluations “should” take into account past performance information regarding “predecessor companies, key personnel who have relevant experience and subcontractors” when relevant. The GAO sided with the government stating though the solicitation permitted offerors to include past contracts for management personnel in their performance risk proposals the evaluation provision only stated that such contracts would be considered; it did not state past performance of other than the offering entity would be considered in the past performance evaluation and since the Joint Venture as an entity had no past performance it was reasonable to give it a neutral rating. As for the FAR requirements, the GAO held that the provision permits, but does not require, agencies to consider separately the experience of the individual entities of the JV (MW-All Star Joint Venture, GAO, B-291170).
The cost type indefinite delivery/indefinite quantity contract identified no estimated cost value for environmental services and included the Limitation of Cost (LOC) clause that required the government be notified whenever the contractor had reason to expect that within the next 60 days, its costs would exceed “75% of the estimated costs in the Schedule.” The government rejected an invoice for $223,000 on one of its delivery orders because the contractor failed to provide notice under the LOC clause while the contractor claimed the clause applied to the ID/IQ contract as a whole not to individual delivery orders. The Appeals Board examined sections A through H of the contract where there was no dollar amount specified in “estimated cost” but in Schedule B-1 there was language limiting a fixed fee for “each task/delivery order.” The Board stated Schedule B-1 connected the phrase “estimated cost” with each DO and concluded the FAR ordering clause and documentation for each DO stated the terms of the contract applied to the DO, which “included the LOC clause.” The Board sided with the government, concluding the LOC clause applied to each delivery order rather than 75 percent of the “$0” estimated cost of the total contract (Analysas Corp. ASBCA No. 51483).
On March 30 the CO informed contractor by email that its bid to the Veteran Affairs had not been selected. The contractor immediately advised the CO by email it would protest the decision upon receipt of formal notification and explanatory documents. In a letter dated April 6, postmarked April 8th and received by contractor April 11th, the VA notified contractor of its decision and briefly explained the reasons where immediately after, it filed a protest. The CO asserted the protest was untimely because it was not filed within 10 days of the CO’s preliminary email but the GAO disagreed, saying the email did not contain sufficient information to put Contractor on notice of its basis for protest. The GAO found the contractor had acted reasonably and promptly by requesting further information from the agency after receiving its March 30th email and then filling a protest immediately after receiving the VA’s letter (Chicago Dryer Co., GAO B-293940).
Centex prevailed in its protest of an Air Force procurement for biochemical masks but the award was not cancelled because rapid provision of the masks was deemed to be a matter of national security. It sought recovery on its bid and proposal costs which included about $250,000 of B&P costs incurred by its teammates as well as profit on its B&P costs. The Court ruled against Centex arguing that the teaming agreement provided that “each party shall bear its own costs during the proposal stage” and hence there was neither an obligation for Centex to reimburse its teammates nor had Centex incurred their B&P costs. The agreement between the parties for Centex to reimburse the teammates if the Court ruled in its favor did not constitute an obligation to pay. In considering the teammates roles, the Court found the teammates were subcontractors not offerors and Gentex did not claim they had formed a joint venture. As for Centex’s claimed profit, the Court alluded to other cases that had routinely found a protester may not recover profit on its own employee’s time for either pursuing protests or preparing bids or proposals. As for the markup on the B&P costs, the Court ruled that the “profit” was not a cost (e.g. based upon rates of compensation, overhead, fringe benefits, etc) and hence Centex’s claim for a 15% markup on B&P costs was not allowable (Centex Crop. V US, 2004 WL 140).
A government contractor must, at some point, demonstrate its accounting system can identify and exclude–screen–unallowable costs from proposals, billings and incurred cost submittals. FAR 31.201-6 and CAS 405 are the guiding regulations for screening and accounting for unallowable costs. A determination of inadequacy in this area can range from a recommendation to make improvements to the conclusion the contractor’s accounting system is inadequate for government contracting purposes. This determination, in turn, can result in failure to award a contract until adequacy is demonstrated, suspension of progress payments and vouchers and/or inability to obtain government work in the future.
Unallowable costs include:
1) Costs Identified by Pertinent Laws and Regulations. These are the costs identified by FAR 31.205 cost principles and departmental supplements as well as OMB Circulars and are continuously being interpreted by court and board decisions, expert opinion and the Defense Contract Audit Agency.
2) Contract Specific Costs. Contracts often specify criteria that must be met for a cost to be allowable or that may express a ceiling limitation. Common examples include travel and subcontracting costs must be approved, overtime over a specific level is not reimbursed, and indirect cost rates are capped.
3) Advanced Agreement. These agreements are commonly negotiated with Administrative Contracting Officers to affect one or more costs categories.
4) Directly Associated Costs. These normally allowable costs are unallowable because they would not have occurred had not the unallowable cost been incurred. For example, travel costs associated with attending an unallowable golf event.
The following areas are commonly scrutinized by government auditors:
General policies and procedures. These should be in writing and should provide that direct and indirect costs are properly classified as allowable or unallowable (including associated costs). The policies and procedures should demonstrate that unallowable costs are identified and segregated from contract costing, billing and pricing when the contract amount is not completely based on catalog or market prices. These written procedures should address, at a minimum:
a. General ledger accounts for unallowable costs. One account is acceptable for a very small business but other separate accounts should be created where cost categories may contain significant unallowables (e.g. travel, legal, advertising etc.).
b. List of unallowable costs. All unallowable costs should be identified with relevant FAR references. A brief discussion of conditions that make an unallowable cost allowable (e.g. product or service advertising is unallowable while advertising for employees is allowable) should be included.
c. Internal controls. Normal internal controls for financial accounting should be included in efforts to screen unallowable cost. A list of duties by position, management review evidenced by signature requirements, separation of duties to ensure unallowables “don’t slip through” and flowchart or narrative of the screening process.
d. Communication and training. Describe how appropriate personnel are informed and what, if any, training is provided. For example, do traveling employees and their supervisors know about travel and entertainment rules and are key accounting and contracts personnel knowledgeable about all relevant cost principles?
e. Adequate documentation and record keeping. Do procedures exist on how to brief a contract, document reasons why a specific cost is allowable, and identify relevant forms (e.g. travel expenses with space for purpose of travel and excess travel costs)?
Attention to “Hot” Areas. You can usually expect DCAA to audit “risky” (i.e. probability of finding unallowable costs) accounts that are either significant in amount or were problematic in the past. Also, individual auditors and supervisors often have their own “hot” areas to scrutinize which is usually based upon their experiences at other contractors. In addition, DCAA has occasionally focused on certain areas to coincide with regulation changes, clarifications or guidance put out to its auditors. Though not exhaustive, the following represents quite common areas:
1. Entertainment (FAR 31.205-14). Distinctions contractors make between unallowable entertainment costs and allowable costs such as certain travel, public relations, employee morale and health, etc.
2. Independent Research and Development and Bid and Proposal (FAR 31.205-18 and CAS 420). Are these properly indirect or direct costs.
3. Legislative Lobbying (FAR 31.205-22). Association fees may often include such unallowable costs.
4. Professional and Consultant Services (FAR 31.205-33).
5. Executive Compensation (FAR 31.205-6). Is compensation within OMB annual caps? For smaller companies, is compensation excessive even though it is below annual OMB caps.
6. Fringe benefits (FAR 31.205-6). Are certain fringe benefits (e.g. bonuses) added to compensation to determine reasonable total compensation? Are other categories of fringe benefits (e.g. severance, insurance) excessive?
7. Relocation Costs (FAR 31.205-35).
8. Idle facilities and capacity (FAR 31.205-17).
9. Organization costs (FAR 31.205-27). Are external and internal restructuring costs distinguished and is the former costs identified across different accounts (e.g. legal, consulting, etc.)
10. Travel (FAR 31.205-46). Excess travel and associated costs of unallowable activity.
11. Trade, Business, Technical and Professional Activity. Procedures should be in place that adequately describe the business purpose of meetings or conferences.
Point of Entry Screening. The organization should screen for unallowable costs up front rather than after the fact when cumbersome and expensive screening is required for certification or incurred cost submittals. Individuals incurring the expense and reporting it on a document should identify the unallowable cost. Personnel reviewing expense reports and vendor invoices should clearly identify the unallowable cost on the document and enter the cost into the appropriate account in the general ledger. These point of entry practices not only save time and money but can reduce the perception of your organization being considered a high audit risk requiring extensive transaction testing.
Statistical Sampling. A recent change to DCAA’s Contract Audit Manual (Chapter 7-1002-4) recognizes the validity of using statistical sampling methods in lieu of direct identification of unallowable costs in certain accounts where unallowable portions of costs are likely to be “immaterial”. Though direct identification is considered preferable, the results of statistical sampling for both incurred cost and forward pricing proposals are considered acceptable. So, for example, statistical sampling of travel accounts are rejected as not meeting “the requirements of the CAS and FAR” while statistical sampling of travel accounts at the corporate home office would be acceptable when government work represents a small portion of total work and the costs of identifying and segregating unallowable per diem costs would exceed the unallowable portions.
Len recommends sending a copy of the case to the DCAA auditor pointing out the Court’s opinion addressed all the issued it has raised and explains why such costs are allowable. Make sure you inform the auditor the case is not being appealed. Since you have not gotten anywhere with the auditor and supervisor, you may want to request that the resolution of this matter be referred to the DCAA Regional Audit Manger, who oversees several branch offices. He suggests you resolve any other issues of allowability and retain as an open issue the state tax issue (not to exceed the state tax rate for C Corporations) where your interim billings can be adjusted but make sure your interim rates are high enough to cover the state taxes if they are material.
Q. To help many of our small subcontractors with their cash flow, we book and pay for their transportation, hotel and car rental expenses. We use a value added G&A base and use our administration staff to book the expenses just as we do for our employees. Can we charge the expenses to direct travel in which case we can apply G&A or to subcontractor costs where we cannot recoup G&A? Though the costs are currently not significant we may be receiving a large contract where the costs would be significant.
A. I believe a good case can be made for either treatment. Your point about administration staff arranging and paying for the accommodations provides a good basis to charge the costs to travel because the type of expense and indirect cost support (admin staff) is similar to employee direct travel costs. Direct charging to subcontract costs can also be justified. Since either method is reasonable, I would select the practice you want to follow, commit it to writing in your policies and procedure and follow the practice consistently so when you do receive the large contract you can demonstrate an existing practice.
© 2024 Government Contract Associates. All Rights Reserved.