(Editor’s Note. We addressed this issue about nine years ago in the GCA DIGEST where we thought it would be timely to revisit it now. The government is requiring auditors to review contractors’ accounting systems more often, sometimes once a year in many cases. New requirements to focus on “business systems” of contractors and a new push by source selection officials to ensure awardee shave adequate accounting practices have resulted in accounting system assessments being one of the biggest areas of audit scrutiny these days.)
One of our most frequent consulting engagements involvesconducting a “mock audit” of clients’ accounting practices wherewe put on our “audit hat” and conduct a review of theiraccounting practices to identify weakness that can result inadverse findings during an actual audit. Our audit usually entails most of the steps identified below where the result ends in our presenting a report on strengths and weakness of the system along with recommendations for improvements, provision of work papers that detail the basis of our findings, are commendation addressing possible changes of accounting for and charging indirect costs and normally either improving orpreparing written policies and procedures government auditorsdeem essential. We thought it would be a good idea to presentsome of the essential steps of conducting such a review socompanies can conduct their own “mock audit.” The advantages of contractors conducting their own audits or askingother independents are substantial: (1) identifies weaknessesbeforehand so there is ample time to take corrective action and
(2) supports the perception that you maintain strong internalcontrols since a key element of such controls includes independentmonitoring of the system. (In the past, if the system was deemedacceptable we would allow the auditor to examine our reportand workpapers which often resulted in reduced transactiontesting since we are CPAs and former DCAA auditors/supervisors. This approach also worked somewhat whencompanies would do their own internal assessments but withincreased emphasis on strict adherence to government auditstandards these days, auditors have significantly lessened thatopportunity but it is still considered an essential internal control.)
Adequate Accounting system
When auditors discuss an adequate accounting systemthey usually do not mean the accounting software youchoose but rather your ability to identify, segregateand report on costs of distinct final cost objectives.“Final cost objective” (FCO) may mean a contractor subcontract but it may also mean contract line itemsor individual task or delivery orders within contracts depending on what are the specific requirements ofthe contract. Basically, you need to demonstrate youraccounting system (no matter what type it is –packaged software, customized software, spreadsheetsor manual) is an adequate project accounting systemcapable of identifying and reporting full costs on aproject basis, particularly for government contracts.
Auditors used to issue one of three opinions –“adequate”, “inadequate in part” or “inadequate” butlately the “inadequate in part” opinion has beeneliminated. This development is unfortunate becausethe majority of opinions used to be “inadequate inpart” where relatively minor fixes could beimplemented and a return visit by auditors normallyresulted in a happy ending. Now, only two opinionsare possible – adequate and inadequate – where thereis little guidance for auditors on how to distinguishbetween the two so not only have “inadequate”opinions proliferated but one auditor’s opinion maydiffer widely from another’s. The critical objective isstill to avoid an “inadequate” opinion since a varietyof undesirable consequences can occur such as failureto be awarded a contract based on cost and pricingdata, suspension of payments on existing contracts,generation of additional audits (e.g. invoice),withdrawal of direct billing privileges, the need todemonstrate adequacy at a later date, etc.
Elements of Adequate AccountingPractices
At a minimum, contractors need to demonstrate theycould pass a pre-award accounting survey that iscommonly conducted by the Defense Contract AuditAgency. The criteria identified in this survey appliesnot only to new contractors who are likely to undergosuch a survey before being awarded a contract butthe same criteria is used to evaluate veteran contractors during subsequent accounting systemreviews. More detailed reviews are required for manylarger contractors but this survey is required of allwhen the government wants to be assured a contractorcan account for specific project costs. The criteria which is identified in Standard Form 1408 includes:
Direct costs are properly segregated from indirect costs.
Direct costs are identified and accumulated by finalcost objective (e.g. grant, contract, subcontract,contract line item and task or delivery order).
Logical and consistent method of allocatingindirect costs to contracts. Allocation of costs need not necessarily be part of the financial accountingsystem but, for example, is accomplished onspreadsheets for those contracts needing adequatecosts (e.g. cost type contracts, fixed price contractswhere there are progress billings or will be used toprice follow-on work, etc.).
Identification of contract costs in general ledger.That is, the costs that are separately identified in a costledger are reconcilable (i.e. visible) in accountsincluded in the general ledger.
Timekeeping system is capable of identifyingemployees’ labor by FCO.
Interim (monthly) determination of contract coststhrough posting to books of account.
Exclusion of unallowable costs.
Must demonstrate cost-type contracts can meetlimitation of cost and payment clauses e.g. visibilityof year-to-date and inception-to-date costs so the 85%notification can be provided. Also, whether fixed price contracts can meet progress billing requirements.Even if fixed price government work is the norm,contractors expecting to use cost data for pricingfollow-on work or if requests for equitableadjustments or terminations occur, you will also needto demonstrate adequate accounting practices forpricing those items.
Conducting the Mock Audit
(e.g. distinguishing direct versus indirect costs,charging final cost objectives, accumulating andallocating indirect costs and monitoring those coststhroughout the year), screening unallowable costs,timekeeping, expense reporting and billing (thataddress requirements for adjusting billing rates andensuring subcontractors’ practices are adequate). In addition to these five essential policies, be aware thatsome auditors may have their own personal favoritesthat they consider essential where the most commonones include estimating, purchasing and treatingstandard costs.
(e.g. vendor invoice, employee timesheet) through theaccounting system to job cost reports and billings tothe government. Examples of relevant reports (e.g.labor distribution, other direct costs by project, etc.)should be requested and examined. The results of this should be written up, either as a narrative or as aflowchart. In addition other topics where properwritten policies do not exist should be covered in theinterview and notes written up covering such topicsas (a) how direct versus indirect costs are distinguished
(b) how indirect costs are computed and allocated tocost objectives (c) how actual indirect costs aremonitored during the year and the process forchanging provisional rates (d) timekeeping practices
(e) expense reporting (d) practices and training onscreening unallowable costs and (f) how limitation offunding requirements (e.g. notification when 85% ofauthorized contract value is expended) are met.Additional topics should be determined beforehandcorresponding to the type of industry the contractoris in and requirements of key contracts either awardedor being bid on.
Many companies undergo an accounting system auditwhen they receive or are about to receive their firstcost type or even a time-and-material contract eventhough they may have a long history of fixed price orcommercial item government contracts. Be aware that auditors will not express a favorable opinion onpotential adequacy – they want to see actual contractcost data when they come. When they do come, theywill ask to see the types of records discussed aboveon an actual contract so be prepared to show at leastthree months of actual data. We usually recommend“pretending” one of you government contracts is acost reimbursable contract and generate at least aquarter’s worth of direct cost data for that contractensuring the reports discussed above are available.If not easily accomplished with your normalaccounting system, generating off-line spreadsheetsis normally accepted as long as the data is reconcilablewith your accounting system data.
Prepare workpapers. Compile workpapers where, atleast, an evaluation of each major element of anaccounting survey is identified. Ensure each significant observation is identified and eachconclusion is logically tied to adequate documentation.If the contractor’s system is likely to be consideredadequate, either as it is now or after certain specificitems are fixed, then be sure the workpapers are inlogical and proper order so that an auditor mayreview them.
Write a report. Prepare a report that includes anexecutive summary and details of each major section.We prefer to use an observation-evaluationrecommendation format but other formats are fine. Both positive and negative evaluations should beclearly spelled out and corrective action needed toreceive an “adequate” opinion highlighted.
Both the workpapers and report can be provided toa government auditor if the accounting practices areadequate or will be adequate by the time accountingpractices are audited. If not adequate, you need notalert the auditor to the report. The process ofpreparing a “mock audit” plan, drafting a request fordata, conducting the review, preparation ofworkpapers and a report usually takes about 10 days(probably more your first time). We find that contractors unanimously consider the benefits of the“mock audit” to be worth the effort.
APPEALS BOARD AGAIN REJECTS DCAA’S EXECUTIVE COMPENSATION APPROACH IN METRON CASE
(Editor’s Note. For the second time this year, the Board hasissued a stunning opinion challenging DCAA’s approach toconducting executive compensation reviews of less than major government contractors. In the Q112 issue of the GCA DIGEST we described the J.F Taylor case that foundDCAA’s normal approach to evaluating executivecompensation “fatally statistically flawed.” Several challengesincluded faulting DCAA’s approach to automatically applyinga 10% range of reasonableness factor to their survey findingswhen the dispersion of data called for a much larger factor,treating widely different surveys equally, using a “default” 50percentile, failing to consider non-financial factors when selecting a percentile to use and benchmarking incorrect executivepositions. The following case, briefly described in the last GCAREPORT, finds additional faults with DCAA’s approach.Despite these exceptional findings, we see no new guidance norchange at this time in DCAA’s approach to conducting theirexec comp audits where most auditors are even unaware ofthese highly publicized findings.)
Background
Metron is a professional services firm that developssolutions to command and control problems applyingmathematics, physics, statistical analysis and computerscience approaches where the Department of Defenseuses its technology to track a variety of items such assubmarines and surface ships, missile defense andterrorist activities. Metron was a flat organization withfew or no levels of intervening management whereits executives have technical, business developmentand administrative responsibilities. The CEO, CFOand COO comprise the top level, where the next leveldown is the group level led by a Group managerconsisting of two or more divisions and the third levelis the divisional level where each division is led by aDivision Manager who has P&L responsibility whois supported by one or more “Senior Engineers”(now called Senior Managers) who are, in turn,responsible for running “business units” withindivisions that are made up of a customer or“problems” in technical areas. The Senior Engineersmanage multiple projects, recruit and developbusiness in their areas.
The two senior executives hold PhDs in Physics. The company seeks to hire analysts with advanced degreesin math, science or computer where around 60% ofits staff hold advanced degrees. In addition, its executives and technical staff are required to holdsecurity clearance where over 60% held Top Secretor higher security clearances and most of the rest heldSecret clearance.
Metron initiated an executive compensation plan in1995 where it used the median Radford Executive Survey to set base salary and then used incentivebonuses to reward superior performance that werebased on Radford statistics and company profits.Metron used the Radford results of the “under $50 million revenue range” for its 2004 and 2005compensation where its revenue was $16.5 and $18.3million, respectively. It selected the Radford surveyafter comparing the companies its employees hadworked for or received offers from with those in the Radford survey concluding 42% of those companies were included in the Radford survey. It also found the industry and geographic companies to be“proportionally indistinguishable” from those in theRadford survey.
DCAA Audit
In its audit of Metron’s 2004 and 2005 ICE proposalsDCAA questioned $585,777 and $725,233,respectively, of compensation as unreasonable. The analysis conducted by its Philadelphia compensationteam was fairly typical. It selected four surveys – theRadford Survey, Watson Wyatt, ERI and WTPF.DCAA selected the positions from the four surveys,it used the median survey position as a starting pointand then adjusted that point for financial performancein each year to arrive at a “market price total cashcompensation” (TCC) amount (salary plus bonus) foreach survey then computed an average to arrive at aTCC for the position. It considered other elements of compensation by using other surveys to arrive atreasonable amounts (e.g. pension cost) and addedthose amounts to the TCC. Finally, 10 percent of theTCC plus pension cost was added to compute a rangeof reasonableness (ROR) in accordance with DCAApolicy. The difference between the results for each position and amount paid was questioned asunreasonable compensation.
In its use of the Radford survey, DCAA used the 66percentile for the CEO, COO and CFO positions tocompensate for the lower revenue of the companycompared to a $50 million level and it used a 41percentile for the senior division positions it analyzedto match the even lower revenue figures generated atthe division levels. DCAA did not use the Radford survey for the Senior Engineers stating the Radfordsurvey did not identify executive positions that wereappropriate for these job titles, reasoning they werenot at the VP level or higher but were rather mid-management program or project managers.
Issues Raised and Board Decisions
Several approaches made by DCAA were rejected.
Board Ruling. The Board ruled the Radford surveywas “the best information for comparison with salariespaid by Metron” where the additional surveys “werenot sufficiently comprehensive, reliable, relevant toMetron industry” or the job matches were notsufficiently similar to warrant “reduction of the resultsobtained from use of the Radford Survey data alone.”The Board considered DCAA’s normal approach ofusing multiple surveys to obtain an “average” andnonetheless ruled that contractors are not necessarilyrequired to use more than one survey. Here, based on the facts, the Radford Survey data alone issufficient. (Editor’s Note. We find this decision harkens back to the approach DCAA used to take – it would evaluatethe basis on which a contractor determined compensation levelsand then asked for a separate compensation review only if itdecided the basis was inadequate (which was relatively rare).Now, DCAA automatically asks for a compensation reviewif it suspects compensation levels may be high regardless of theapproach a contractor takes.)
Lowering bonus averages to account for a low number ofbonuses reported. DCAA noted in the Radford Surveythat only a fraction of the participants reportedreceiving bonuses. For example, only 25% of CFOsreported bonuses in the survey stating that the amountof bonuses reported for the 25% (average of $48K)should be reduced by 75% (to $12K) to account forthe low level of bonuses paid. Both experts disagreedwith such an approach, asserting a survey readercannot know the reason a company does not reportbonus data stating there could be lots of possibilitiesfor reporting only one element of compensation (e.g.turnover, compensation structure like granting stock,performance).
Board Ruling. The Board rejected DCAA’s approach,agreeing with the experts.
Lowering compensation within the “below $50 million bin.”DCAA, which was confirmed by their expert, used“regression analysis” and “best fit trend lines” toreduce the findings of the Radford Survey results thatbenchmarked employees in a “bin of below $50million companies” to account for the lower revenuesof $14.5 million and $18.3 million generated in 2004and 2005. The CEO persuasively demonstratedthough there may be some dependence ofcompensation across revenue bins there is little to nosuch dependence within a revenue bin. Mr. McGee argued the Radford Survey creates revenue binsbecause they believe there is statistical significancebetween different bins but not within a bin so no regression analysis is appropriate.
Board Ruling. The Board ruled that the government’sadjustments to Radford Survey results were“deficient.” It stated using “best fit trend lines” or“regression analysis” within a revenue bin wasinappropriate where there is no evidence to supportthe contention that within each revenue bin (in thiscase under $50 million bin) there is a directrelationship between increasing revenue and increasedcompensation.
Senior engineers are executives. DCAA opined thatsenior engineers should be benchmarked to mid-levelmanagers pointing to the fact there was no VP in theirtitle, they were not “in charge of units” or responsiblefor “distinct product lines” or services and “probablyhad no sales responsibilities” where no interviewswere held. After reviewing the Radford descriptionsof strategic business unit executives both expertsstated the senior engineers met those descriptionsdespite the fact they did not have the VP designationin their title. Similarly, DCAA insisted onbenchmarking Dr. Corwin’s part time consultingeffort to an senior analyst position rather than a ChiefTechnical Officer since Dr. Corwin had an official title of Senior Analyst. After reviewing his functions andresponsibilities, both experts agreed his compensation should be pegged to the CTOposition.
Board Ruling. Metron’s senior engineers/managerswere properly considered to be executives where theirpositions should be matched to comparable RadfordSurvey executive positions. The evidence showed theyhad greater responsibilities than the governmentasserted, pointing in particular to their roles inbusiness development. The Board also agreed withthe experts about Dr. Corwin being benchmarked tothe CTO position. The Board stressed that the function rather than title should be considered.
High education and security clearances deserve premiumsof pay. Mr. McGee argued that few executive positionsin the survey require a PhD degree in math andphysics like Metron does which entitles it to apremium in pay. Likewise, the high security clearancesof its executives should also deserve premium pay.The government and their expert witness disagreed,asserting a premium for these two requirements wasnot deserved.
Board Ruling. The Board sided with Metron stating itis “speculative to make an assumption that fails torecognize” the potential significance of other nonrevenue factors that may influence compensation such as level of education and security clearances. TheBoard also challenged the singular importanceattached to revenue levels when determiningpercentile’s to use stating DCAA’s assumption thatthe overriding importance of revenues is “factuallyunjustified.” In the extreme case, promising hightechnology firms may have little to no revenue in theearly growth stages where they must nonetheless payhigh levels of compensation.
Financial comparisons with “peer group” is improper. Both DCAA and its expert based their percentile ratings inpart on financial comparisons of Metron with whatthey considered “peer group” companies, concludingMetron should be placed in the 66th and 41st percentilesin 2004 and 2005 respectively. Metron showed that these alleged comparable companies were very large,publicly traded companies with different organizational and financial structures.
Board Ruling. The Board said such comparisons are“misleading, unreliable and unreasonable.” The Board agreed with Metron, finding that the “peergroup” analysis conducted by DCAA and their expertwitness was based on “misleading comparisons withmuch larger companies with markedly differingorganizational and financial structures.”
Adjusting division managers percentile ranking for lowerrevenue is improper. To account for the lower revenue figures division managers were in charge of, DCAAdecided to lower the percentile used to benchmarkthese managers to the 25th percentile. However, both experts agreed no data provided by Radford showedthat revenue size can be ascertained at any percentilelevel.
Board Ruling. The Board found the government’sattempt to divide total Metron revenue in an attemptto lower the scope of accountability of executives“unpersuasive.” It stated such an approach againmakes the “questionable assumption” that there is arelationship between revenue and compensationwithin a revenue bin
DCAA did not conduct its financial analysis properly. In evaluating Metron’s financial performance todetermine the percentile that should be used, DCAAfailed to add a $950,000 profit contribution to itsprofit for the year, resulting in an assignment of a 41st percentile for the year in question. Though the profitcontribution was not claimed as an allowable cost, both experts stated it should have been consideredprofit made in 2005 which would have demonstratedgreater financial performance.
Board Ruling. The Board stated the government“misanalysed” the $950,000 voluntary contributionstating it was made for tax purposes and among otherthings shows Metron’s financial strength rather than abelow average financial performance its lowerpercentile would indicate.
In addition, the Board sided with both experts’opinion that it was appropriate to add pension coststo the Radford Survey’s TCC. The Board noted that Metron pays short term bonuses as opposed to longterm compensation (e.g. pension) offered by largercompanies and therefore it was proper to increasethe TCC by the pension amounts to make up for theabsence of long term payments
RULES ON LATE PROPOSALS
(Editor’s Note. We all know about the craziness of makingsure a proposal is delivered on time in spite of plans to avoidbeing late. If you reviewed cases like we do (I wouldn’trecommend it for fun) you see a significant amount of casesrevolve around decisions related to what constitutes late deliveryof proposals and when are they acceptable. We have been hoping to find an article that summarizes some of these casesto have a clearer idea on what the case-based rules are and we finally found one written by Ray Fioravanti of GeneralDynamics and Ken Weckstein of Epstein, Becker & Greenwritten in the Jan 17th issue of Federal Government Report.)
The authors start their article with a typical case study.You have a multimillion proposal requiring deliveryof three hardcopies at the CO’s office in minutes whenthe messenger phones to tell you he is lost. He made it to the facility after much traffic and finds himself ina maze of buildings. What to do? You need to have it “under government control” before the deadlinewhere you direct the messenger to find the nearestgovernment employee, maybe a security guard andleave it at the employee’s desk until the CO isdispatched to pick it up. You should also immediate send an electronic copy to the agency. If the deadlinehas passed, is it still worth making the delivery anyhow,anyway that same day even if its hours late – if theoffice is locked find one that’s open, if the electronicportal is down send it by email, just get it delivered.
The following addresses late bid rules and exceptionsto them as well as a few recent cases. The general ruleis pretty straightforward – offerors are responsiblefor ensuring proposals reach the designated office bythe “exact time” stated in the solicitation (or 4:30 if no time is specified) where a late proposal will “notbe considered” unless it falls under a recognizedexception per FAR 15.208. There are six recognized exceptions to the late bid rule:
The proposal was at the installation and undergovernment control prior to the deadline.
Government misdirection or improper action wasthe paramount cause of the delay.
An emergency or unanticipated event interruptethe normal government process so that proposalcould not be received.
If allowed by the solicitation, an electronicsubmission was received by the governmentinfrastructure by 5:00 PM the prior working day.
The submission in question is a more favorablerevision to an otherwise successful proposal
Only one proposal is received.
A review of the following recent cases shows howthese exceptions apply to various circumstances andwhat late bidders should do to maximize their chances of qualifying for one of the exceptions.
Under Government Control
In the first case, the messenger arrived at the facilitysecurity office before the deadline but due to a longtime to be processed and wrong directions, did notleave the guardhouse (surveillance cameras showedhim leaving) or deliver the until after the deadline.The Army determined it was late where in its protestB&S argued the commercial courier was “undergovernment control” because he was at the facilityand under surveillance before the deadline. The GAO rejected this argument stating the proposal had to bein the government’s custody where because the couriernever gave up control it was properly rejected as late(B&S Transport, B-404648).
USAI’s messenger called at 1:50 to say he was lostand could not meet the 2:00 deadline. The reason was he followed outdated maps and stated the airbaseprovided wrong directions that did not reflect newstreet configurations where USAI argued the“government mishandling or misdirection” exceptionapplied. The GAO disagreed saying out of date mapswere typical and the government’s misdirection wasnot the “paramount cause of delay” but rather themessenger’s failure to arrive earlier was the cause (US Aerospace, Inc., B-403464).
The authors state that if in these two cases the messenger had convinced the security officials or otheremployee to take possession or allowed it to stay inplain sight while the CO was dispatched to come itmight have worked. They cite the Haskell Companycase (B-2927560) that ruled the fact the proposal wasplaced on the attendant’s desk minutes before thedeadline made it timely where the implication is thatin the B&S and USAI cases they might have beensuccessful had the messenger relinquished controlbefore the deadline or at least the government wouldhave had a basis to consider the proposal rather thanreject it.
Emergency or Unanticipated Event
Hunter mailed its proposal “next day noon delivery”on Feb 10 to meet a Feb 12 deadline. A severe snow storm caused the post office to close on the 10th and 11th where the federal government was open underits “late arrival/unused leave” policy where the agencystaffed its office to receive proposals. The proposaldid not arrive until the 16th, the next day delivery,where the government rejected it as late and the GAOagreed stating though it was undoubtedly delayed bythe snowstorm, it did not make it impossible for bidto be delivered on the 12th (Hunter Contracting Co., B402575).
Prior Electronic Submission
Under this exception it must be established that (1)electronic submission was permitted by thesolicitation and (2) the submission hit thegovernment’s “infrastructure” by 5:00 PM on thepreceding work day. If that occurs the proposal willbe considered timely even if not received in theintended recipient’s email in-box by the actual deadline(thus eliminating arguments about whether thegovernment’s even caused the delay).
Sea Box allowed hand-delivery and electronic meansof delivery to meet its July15, 1:00 PM deadline. All seven of its emails were received by the Army before
1:00 PM on July 15th but did not reach the CO’semails until 1:33 where the Army rejected thproposal. In its protest Sea Box argued its bid was“under government control” because the emails hadhit the government’s server prior to the deadline andit could not have made any changes or gained anyadvantage. Nonetheless, the GAO denied the proteststating to allow it would be rewriting the rule thatrequired electronic submissions be made by 5:00 theprior day if it ruled that an e-submission receivedbefore the deadline but sent after 5:00 was considered to be “under government control.” (Sea Box, Inc., B-291056).
The following case significantly expands the ability tojustify late deliveries. The solicitation requiredproposals be received by 12 noon, allowing eitherhand or email delivery. Watteron sent its email proposal at 11:02 AM where the Army’s serverreceived it at 11:29 AM but it did not reach the CO’s in-box until 12:04 – four minutes late and therefore rejected. In its protest Watterson argued that severalhours prior to deadline a “mail storm” caused emaildelivery to “come to a crawl.” It did not deny it couldhave delivered it by hand on time. Contrary to earliercases that ruled an “event” in question must actuallyprevent timely delivery not just making it difficult, thejudge ruled here the mail storm constituted an“emergency or unanticipated event” notwithstandingthe fact other proposals were received on time. She also ruled that because the email contacted the government’s servicer a half hour prior to the deadlineit was “under government control” so that exceptionalso applied.
The authors state that at least in the US Court of Federal Claims the Watterson case has widened the reach of the “government control” and “emergencyor anticipated event” exceptions to the late bid rule.It now appears as if offerors who manage to transmitan email proposal prior to the deadline can successfullyargue their proposals were “under governmentcontrol.” regardless of when they were actuallyreceived in the designated in-box. Further, if a “mail storm” now constitutes an “unanticipated event” or“emergency” then it may now apply to any numberof problems that make it difficult if not impossibleto deliver a proposal like a snow storm, power outageor other IT problems that made it more difficult, butnot impossible, to deliver on time (Watterson v. United States, US Court of Federal Claims).
Government Mishandling or Misdirection
Stauback was diligent where the deadline of Feb 21at 4:30 was met by it arranging for DHL same daydelivery on Feb 20, a day earlier. Late that same afternoon Stauback telephoned the CO to ask whetherthe proposal was received and the CO said it had alarge package from Stauback that had been deliveredto her. On Feb 24 Stauback was notified its proposalwas rejected because only one of the three requiredvolumes had been received where Stauback later discovered the other two volumes were at the airport’s lost and found. Stauback protested to the GAOarguing that the government’s “misdirection” causedthe lateness citing the fact the CO incorrectlyconfirmed receipt of the proposal rather thanaccurately stating she received an incompletesubmission. The GAO refused to apply the“government misdirection” exception statingcontractors may not rely on statements of agencyofficials in that manner and are ultimately responsiblefor submitting their proposal on time (The Stauback Company, B-276486).
The lesson of Stauback and a similar Aquaterra case leaves clear the lesson that an offeror bears responsibility for a late proposal unless it is submittedin plenty of time prior the deadline and all fault forlater delivery rests with government officials.
In a rare example of a finding of “governmentmishandling”, CT Construction sent its proposal byUSPS Express Mail overnight delivery to thedesignated post office box. Delivery to the post officebox was attempted hours earlier than the deadline butafter the agency had already picked up mail from thebox where the proposal was not delivered to thedesignated official until the following day and hencewas ruled late. The agency asserted it was addressedto the wrong official even though the post office boxwas correct but the GAO rejected the agency’sargument stating if only it had simply checked thebox later that day the proposal would have beendelivered on time, regardless of whether it wasproperly addressed. It found the proposal wasdelivered on time where the fault for later deliveryrested entirely with agency officials who failed tosimply check the mailbox in the hours prior to thedeadline (CT Construction, B405575)
More Favorable Revision to an Otherwise Successful Proposal
This exception applies to Best and Final Offers whereit is not really strictly an exception but rather a“revision” to something other than the proposal wherethere is some cooperation with the agency. In appealing a late delivery decision Omega argued itsoriginal proposal submitted weeks earlier was moreadvantageous than the awardee’s and therefore its lateBAFO was merely a revision. The GAO ruled againstOmega stating there had been no determination thatits earlier submission was “otherwise successful” (Omega Systems, B-298767).
Only One Proposal Received
This exception is there more for the agency than the late bidder where though the agency does not haveto make an award it frees them up to do so rather han have to go through the process of a re-solicitation. No cases are alluded to.
Taken as a whole, recent cases described here can be used to provide possible arguments that late biddersmay be able to use. The authors offer a few “best practices:”
Be familiar with the solicitation’s stated deliverymethods, page requirements, number of copies and file size limitations. Electronic submissions may haveto be broken up into smaller ones.
Obtain advance clearance and approval for deliverypersonnel admittance to the facility.
Send e-submissions with confirmation requests by 5:00 PM the prior business day. Don’t depend on more lenient decisions
If time is running out, try to get the proposal intothe hands of an agency employee, even if it meansleaving it with an attendant until the designated officialmeets you there.If necessary, make delivery by any means to meetthe deadline, regardless of copies required or whatthe solicitation’s prescribed method is.
Even if it’s late make delivery anyhow to preservethe ability to make “emergency or unanticipatedevent” delay arguments later that would provide foran extended next day delivery deadline.
The authors recommend learning the late bid rulesnow for when the time comes you will actually needthem there may not be time then.
ADDITIONAL WAYS TO CHARGE COSTS DIRECT
(Editor’s Note. Since direct costing allows for not only a dollarfor dollar recovery of costs but additional markups for indirectcosts and fees contractors are understandably looking for waysto charge more costs directly rather than including those costs inindirect cost pools. Though the ability to charge specific costsdirectly may be limited to what a contract spells out, more oftenthe contractor has flexibility in establishing its own practiceson what costs it will charge directly. We have helped our clients establish ways to charge more costs directly so here are a fewgood ideas that we have found in multiple texts and our ownpractices.)
Actual direct costs are usually associated with “touch”labor and material costs but several other categoriesof costs, even small dollar amounts that are not worth tracking on an individual basis may be charged direct.Some examples include:
Blanket Costs
Labor and material costs may be incurred for multipleproducts and services but are too small or toonumerous to justify the record keeping needed tocharge them directly to one final cost objective (FCO).These costs are generally “touch” labor or materialwhich does not make them indirect costs yet it isusually too impractical or expensive to treat them asdirect. Examples of these “blanket costs” areinspection or quality controls costs or in amanufacturing setting might include painting, toolroom personnel, small tools and supplies or packing.Typical accounting treatment of these costs are topool them as direct costs in an intermediate cost pooland them allocate them as direct costs to FCOs on a reasonable basis. They become an average or standardmarkup to existing direct costs. For example, smalltools or supplies would be a markup to direct materialsor small tool labor would be a percentage markup todirect fabrication labor. As long as the contractorspecifies their practice in a written policy it willnormally be accepted. Advantages of such blanketcosts is they allow more costs to be charged directlyto maximize cost recovery without having to trackeach cost and also, since they are not included inindirect cost pools, tend to lower those indirect costrates which may help in a tough competition wherethe buyer is looking for lower overhead rates.
Average Costing
The regulations such as CAS 418 address averagelabor costing but most commentators say the samerules should apply to average material costing too.Direct labor costing can be based on average or preestablished direct labor rates set for a group ofemployees. The Cost Accounting Standards Boardhas established criteria for the group of employeesto be (1) interchangeable with respect to functions tobe performed (2) produce similar output or (3) forman integral team. So, for example, a group ofemployees may have diverse labor skills where anaverage rate for the group is computed and multipliedby the hours worked for each final cost objective. Or, for example, an average group rate is computed whereactual time spent by individuals within a group isidentified and the average rate is applied to thosehours. An ASBCA case (Litton Systems, ASBCA 37131) allowed computation of average rates acrossmultiple facilities in several locations where there wereoverlapping manufacturing capabilities, where therewere frequent changes on performance of specificoperations and average labor rates were determinedby a weekly averaging of actual rates within agrouping of job classifications.
Service Center Costs.
A service center is defined as an organizational unitthat performs technical and/or administrativeservices. Most companies have numerous candidatesfor service center costs such as MIS, reproduction,warehouse, vehicles, engineering, repair and maintenance, etc. CAS 418 provides numerousexamples of service centers and the basis in whichthe costs may be charged either directly to FCOs orto other indirect cost pools. (We have also discussedservice centers in other contexts – use our key worksearch feature.) For cost reimbursable contracts, some contractors provide provisional service centerrates where they then go through the often laboriousprocess of “truing up” actual costs. We advise use of “fixed price” rates so as to avoid such a processwhere both auditors and ACOs will accept those evenon cost reimbursable contracts if the rates can be justified.
Standard costs.
A variation of average costing is standard costing ofmaterials and labor. Though too detailed to explorehere, be aware that standard costing needs to conformto CAS 407 for labor and material costs which, in practice will apply to non-CAS covered contractorswhere standards updates and treatment of variancesmust be adhered to.
RECENT DECISIONS ON TRAVEL AND RELOCATION
(Editor’s Note. Though only three parts of the Federal TravelRegulation and Joint Travel Regulation provisions formallyapply to government contractors – combined per diem rates,definitions of meals and incidentals and conditions justifyingpayment of up to 300% of per diem rates – many contractorschoose to follow the FTR either because some contracts call for incorporation of it or auditors and contractors consider it to be the basis for determining “reasonableness.” This feature is a continuation of our effort to present new changes or decisionslikely to affect contractors’ travel and relocation expenses.)
Super Bowl Lodging Not ReimbursedOver 300 Percent of Max Lodging Rate
Donald was assigned temporary duty (TDY) to helpparticipate in security operations related to the 2012Super Bowl. Though he obtained lodgingreservations well before the travel was to occur, the room rates spiked where the normal room rate of$91 increased to $329, a 361% increase. The agencylimited reimbursement to $273 representing 300percent of the maximum per diem rate plus taxes. In his appeal to receive the entire $329 rate the appealboard rule an agency has no leeway to reimburseactual expenses above 300 percent of the maximumper diem rate citing FTR 301.11.303 “The maximumamount that you may be reimbursed under actualexpense is limited to 300 percent of the applicablemaximum per diem rate” (CBCA 2807-TRAV).
Could Notice of Lease Termination Been Given Earlier?
Linda was given a verbal job offer with the VA onMarch 23 that would include a transfer from Orlando, FL to Washington DC. The date the transfer took place was not known until she received a transfer orderon April 13 providing a reporting date of April 25.On April 7, she gave her leasing office notice shewould be leaving where a lease termination settlementof $350 was negotiated and she soughtreimbursement. The VA said had she given notice on March 23rd there would not have been any leasetermination costs and hence withheld reimbursement. The Board stated that lease termination fees made in connection with an authorized transfer is reimbursable except when there is a failure to give appropriatenotice promptly after receiving definite knowledge ofthe transfer. The Board ruled Linda had givenadequate notice because such notice is not required atthe time of an informal job offer which did not occuruntil the April 13 written order (CBCA 2703-RELO).
Safety Concerns Justify Hotel Stay
Arriving home at 1:00 AM following a nine hour workday and a nine hour flight with a two hour drive homeahead, Michael who was too tired to drive home, secured lodging at the airport hotel. The Defense Department denied reimbursement for the hotel citingJTR C4552-C.1.a that states per diem cannot be paidwithin the permanent duty station limits or within the vicinity of the residence the employee commutes from.In spite of the two-hour drive the Board did notdispute the agency’s assertion the hotel was in thevicinity of Michael’s residence but stated in previouscases employees were reimbursed for lodging withinthe vicinity of the residence when, for example,weather and safety concerns justified it where here, itruled, an 18 hour day plus a two hour drive satisfiedthe safety concern criterion (CBCA 2696 TRAV).
Early Travel to Cancelled TDY Assignment is Allowed
In a related case, Kathryn received orders to attendtraining in Florida April 11-15 where she and herhusband elected to spend a long weekend so shemoved up her flight to April 8 and took a vacationday. Shortly after her arrival on April 8 she wasnotified the training was cancelled and the agencysought to avoid reimbursement for all of her expensesasserting it would be a violation of the JTR C4564-Hthat allows for reimbursement for cancelled tripsduring travel to the assignment but not if notifiedbeforehand and concluded she should be responsiblefor her travel costs just as she would be for anypersonal vacation. The Board disagreed. It acknowledged that as a general rule when an employeetravels away from their official duty station while onannual leave they must return home at their own expense. However, a prior case approved anexception in cases where cancellation of the TDYassignment is beyond the employee’s control and itcan be determined that the employee would haveavoided the trip had it known about the cancellation.The Board concluded Kathryn would not have takenthe trip had she known about the cancellation (CBCA2463-TRAV).
Maximum Per Diem Limited to Assigned TDY Location
The TDY location was Newton, MA but the traveler decided to stay in Boston, 15 minutes away to see theholiday lights with his family. The agency refused topay the Boston lodging, limiting reimbursement tothat for Newton only. FTR 301-11.7 was cited which states the FDY location determines the maximum perdiem rate allowed and the FDY location and not the lodging location should determine amount entitled to. The Board concluded if a traveler obtains lodgingoutside of the FDY location for personal preferenceor convenience the allowable per diem is limited tothe FDY location (GSBCA 13684-TRAV).
Documentation From Online Hotel Reservation Services Are Acceptable
Two recent cases address the type of documentationrequired when lodging is booked online. Both Scott and Emily reserved lodging online and submitteditemized receipts from the online booking service.Both their requests for reimbursement were rejectedwhere the agency cited JTR C4555.5-B.5 “Lodgingreimbursement is not authorized for hotel lodgingunless an itemized receipt from the hotel is provided.”In both cases, the Board noted that the JTR was recently amended to state lodging reserved online isallowable when the traveler can provide an itemizedreceipt for room costs from the hotel or online agentshowing the following charges: (a) daily hotel roomcosts (b) daily hotel taxes and (c) daily miscellaneousfees, if applicable. concluded that Hence the costs were reimbursable (CBCA 2362-TRAV and CBCA 2511-TRAV).
Board Allows Real Estate Fees Even Though They Went to Spouse
Phillip made a permanent change of duty station andpaid out $24,850 in real estate fees associated withselling his old house. The government granted $9,720in fees but rejected $12,960 paid to the listing agentCarnival, because the agent working for Carnival whoreceived a percentage of the fee was his wife. The agency said this relationship constituted a conflict ofinterest stating when money exchanges between ahusband and wife “no real expense is suffered” andtherefore no expense should be granted. The Boardsided with Phillip. It looked first to the relevant regulation in JTR C5756-A.1. that stated broker’s feesare allowable as long as they are comparable rates paidin the locality. The Board found the payment met allthe pertinent requirements for reimbursement of realestate fees where if a different listing agent was usedthey would have been reimbursed. As for the asserted conflict of interest, the government did not cite anyrule asserting this position (CBCA 2356-RELO).
Entitled to Lodging ReimbursementWhen Residing in a Condo at TDYAssignment
In anticipation of frequent TDY assignments toHuntsville, Mark purchased a condominium for$63,900 taking out a mortgage of $60,700. Over a nine year period, Mark charged the government anamount it calculated for interest cost, utilities and taxes for the time he stayed in the condominium which represented a reduced rate of $33-35 per night overthe maximum rate. Following an audit, the DefenseAccounting and Finance Service (DFAS) assertedMark owed the government the entire amount paid,$24,944. The Board said the full amount could not be collected from Mark since he was entitled to some lodging costs. In determining whether the amountpaid was correct, the Board noted the regulations inplace for the time allowed for lodging reimbursementunder the “lodging plus” model – the actual amountpaid by the traveler for lodging plus an allowance formeals and incidentals not to exceed the maximum perdiem rate. The Board also examined case law when an employee purchases a condo in connection withTDY which establishes the traveler is entitled to a dailyamount based on prorate monthly interest, propertytax, utilities and maintenance costs. The Board concluded the agency should compute the totallodging entitled based on use of the lodging plussystem for each day and if it exceeded the $24,944 nomoneys were due but any amount less would be owed(CBCA 2169-TRAV).
How Much Freedom to Choose Hotels to Earn Travel Rewards
Though employees are not allowed to select airlinesto earn miles on that airline we have been asked whether they can bypass company travel agents andcompany agreements at certain hotels to arrange hotelaccommodations to earn points. FTR 301-53.4 states“you may not choose a travel provider to gain frequenttraveler benefits for personal use” and FTR 301-11.11states “when selecting commercial lodging facility, first consideration should be given to governmentlodging agreement programs.” Of course if no travel agents or hotel agreements exist, I don’t see why choiceof lodging cannot be more flexible.
Government Not Obligated toReimburse Stolen Advanced ATM Funds
The Employee withdrew ATM funds in advance ofits TDY assignment where it was stolen at the TDYlocation and the government refused to reimburseEmployee. The Board agreed with this decisionasserting the advance is considered to be a personalloan to the traveler where he is responsible for thefunds. Since he cannot show they were used for officialtravel the government is not obligated to repay thefunds (B-183489).
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