Redstone Government Consulting Blog | Redstone Team (15)

Service Contract Labor Standards and Davis-Bacon Act

Government contractors are subject to many rules and regulations, and many contractors don’t always pay attention to the labor standards requirements incorporated into their contracts. Employers often worry about ensuring employees are properly being paid overtime and classified as exempt or non-exempt, but is your company really paying the appropriate pay rate and benefits that may be part of your contracts? Odds are if your company is performing services under a federally funded government contract, the Service Contract Labor Standards (SCLS), Davis Bacon Act (DBA), and/or Collective Bargaining Agreements (CBA) are likely part of your contracts.

One of the most important parts of a proper response to a Government Solicitation is the Basis of Estimate(s) (BOE). The BOE is a tool that is carefully developed by members of a project team through intricate analysis of the Performance Work Statement (PWS) in order to calculate the total price for the required effort. The BOE must be developed before the pricing can take place so that the pricing team knows the cost elements, which will require pricing. To put it differently, the BOE is an estimate developed to outline a Company’s expected staffing and solutions for the selected Government solicitation. This proposed estimate is combined with detailed explanations and supporting rationale which bolsters the overall conclusion. The BOE needs to be able to show the level of services (proposed labor), the skill mix required, materials, travel, etc., that will be required to deliver what is requested through the solicitation. In order to provide a realistic estimate, technical experts should be utilized in order to appropriately determine the work effort needed. The details in the BOE need to be sufficient for the technical evaluator (government or prime contractor) to understand the rationale used, the source of the underlying data, the detailed calculations involved, and the basis for any complexity factors.

Quite often our clients ask for guidance or research on a particular compliance or cost accounting topic. These types of requests generally result in a run through the usual suspects for guidance, like FAR and CAS; and the customer agency's acquisition supplement like DFARS or DEARS. What many people don't realize is that there is a wealth of other publicly available information that can shed light on some of the more subjective aspects of these regulations.

Sometimes, a company is so anxious to receive a government contract that it ignores warning signs in the solicitation and accepts a firm-fixed-price contract when the contract type is not appropriate for the circumstances. Often the warning signs are subtle and consist of vague specifications, but in other cases, the warning signs are written, literally in capital letters. One such contract resulted in the ASBCA issuing a decision on March 30, 2016, on case number 58243. This case upheld a termination for default issued April 23, 2012, against Highland Al Hujaz Co., Ltd. This case illustrates both the warning signs the contractor should have heeded and the consequences.

Whenever there is a scope change on fixed price contract, there are several steps that take place. First, is preparing a proposal for the amount of the scope change and negotiating that change with the contracting officer. If the contracting officer issues a final decision (unilateral contract modification) that does not result in a satisfactory amount of recovery, the next step is to submit a request for equitable adjustment (REA). If again, the final decision does not provide adequate recompense, the next step is often appealing the decision to the Armed Services Board of Contract Appeals (ASBCA). This is not an option to be taken lightly, as a recent decision proved.

On April 12, 2016, the Department of Justice (DOJ) and the Federal Trade Commission (FTC) issued a joint statement explaining their standard of review under the antitrust statutes of proposed transactions (mergers, teaming agreements, and other joint business arrangements) acquisitions, within the defense industry. The DOJ and FTC are responsible for reviewing mergers in the defense industry under Section 7 of the Clayton Act, which prohibits mergers whose effect “may be substantially to lessen competition, or to tend to create a monopoly.”

Over the past few years, the Department of Energy (DoE) has, to the unpleasant surprise of some prime contractors, quietly been inserting contract clauses in all of their management and operating contracts and some non-management and operating contracts making prime contractors responsible for not only managing their subcontracts but also for auditing their subcontracts.  More recently, the Inspector General has been conducting reviews of prime contractors for compliance with this requirement and contracting officers have been placing greater emphasis on enforcing the requirement.

DCMA and DCAA have issued guidance on how to deal with the impact of the $487,000 rate cap that applies to contracts subject to FAR 31.2 and awarded on or after June 24, 2014. If you have not read this document, see DCAA’s MRD 16-PSP-005(R), dated February 19, 2016. It includes the DCMA guidance also. You have flexibly priced contracts that require an annual incurred cost submission. Now what, exactly, are you supposed to do with this guidance?

As a small (or potential) government contractor or subcontractor, one question you will frequently encounter is if you have a “Job Cost Accounting System.” This may sound like a specific type of software, but it is not. Many different accounting software systems can provide job cost accounting if properly configured. The questions on the SF 1408, Pre-award Survey of Prospective Contractor Accounting System, are designed to discover if you have a job cost accounting system. This still doesn’t tell the non-accounting person what a job cost accounting system is or why it is important (other than to get the right answers on the SF 1408 to qualify for a government cost-reimbursable contract).

For years, DCAA has promised Congress it would get current on its incurred cost backlog. For years, it has failed to deliver on that promise. Logically, you would have expected DCAA to address the quality of their audits (or lack thereof) and eliminate the inefficiencies caused by, among other issues, (i) failure to adequately assess risk, (ii) performance of unnecessary procedures due to fears of failing the internal quality control reviews, regardless of risk, (iii) inadequate understanding and misinterpretation of regulatory requirements, and (iv) failure to have sufficient communication with the contractor to understand the issues. Unfortunately, that has not been DCAA’s approach. Instead, DCAA chose to increase the thresholds for the incurred cost submissions selected for audit, write off millions in lieu of audit, and claim victory. That strategy failed once they ran out of low hanging fruit to write off and still needed to do actual audits.