Redstone Government Consulting Blog (59)

Provisional billing rates are established by either the ACO (Administrative Contracting Officer) or DCAA (Defense Contract Audit Agency).   As described in a 2014 DCAA Audit Policy (MRD 14-PPS-012, dated July 22, 2014), per FAR 42.704, provisional billing rates should be established early within a contractor fiscal year for purposes of invoicing indirect costs (on cost-type contracts or any contract which ultimately requires final indirect cost rates per FAR 42.705).   For anyone familiar with FAR, it is self-evident that provisional billing rates are based upon FAR Part 42, which details contract administration versus proposal contract pricing, (typically FAR Part 15, if cost or pricing data is required).   Although there may be similarities, the proposal process involves solicitation clauses, whereas a contract award contains contractual clauses.

The Bipartisan Budget Act of 2013 (BBA) has changed the game for executive compensation limitations yet again. Before 2012, US Government contracts subject to the FAR Part 31 Cost Principles were subject to the applicable fiscal year (FY) Compensation Cap established by the OMB (Office of Management and Budget) on the five most highly compensated employees in management positions. This changed again for contracts awarded from January 1, 2012 through June 23, 2014 to apply to all contractor employees performing DoD, NASA, and Coast Guard contracts, but apply only to the top five executives for remaining agencies. Every year the Office of Management and Budget publishes a memorandum to the Heads of Executive Departments and Agencies announcing the “benchmark compensation amount” for certain executives and contractor employees. During contractor’s fiscal years 2013 and 2014 the executive compensation dollar limitation was $980,796 and $1,144,888, respectively. Now, the BBA limits how much a contractor could charge the federal government for an employee’s compensation to $487,000 to all contractor employees for new contracts subject to FAR 31.2 awarded on or after June 24, 2014. This provision limitation change within a fiscal year has caused a contractor to be subject to multiple employee compensation caps (FAR 31.205-6(p)) within the same fiscal year.

Over the course of 2015, one of our accounting services consultants, Katie Donnell, made four week long trips to Unanet Headquarters in Dulles, VA for training classes to implement and operate Unanet software.

On July 6, 2016, the DOE (Department of Energy) quietly withdrew its April 1, 2014 proposed rule, “Contractor Business Systems—Definition and Administration. The April 2014 proposed rule which defined five business systems was modeled after similar business systems requirements imposed upon DOD Contractors (DFARS 252.242-7005 along with six interrelated regulations pertaining to each of the six business systems noting that the five DOE systems excluded MMAS). Also in common with DOD, the statement or mantra, that “Contractor business systems and internal controls are the first line in defense against fraud, waste and abuse. That statement was excessively used by the Commission on Wartime Contracting, a Bi-Partisan Commission whose August 2011 248-page report concluded that at least $31 billion and possibly as much as $60 billion was wasted in Iraq & Afghanistan from 2002-2008 ($4.4B to $8.6B annually; by comparison, Government agencies estimate annual improper payments exceeding $100 billion in each year 2009-2015).   If one bothers to read the 248-page report, one would also surmise that most of the waste resulted from government failures which notably includes one singular failure, the lack of any accountability for $6.6B of a $9.1B cash shipment.

Cost-type contracts invoke FAR 52.216-7, Allowable Cost and Payment Clause, and that FAR clause requires the contractor to prepare, certify, and annually submit a final indirect cost rate proposal (ICPs).   Although the majority of these ICPs are dispositioned without any DCAA audit (DCAA’s Low Risk Sampling Policy), for those unlucky enough to be audited by DCAA, there is the thrill of receiving a draft audit report with new and novel audit assertions. Translated, cost questioned for unexpected and sometimes incomplete and/or inaccurate interpretations of the underlying FAR cost principles (FAR Part 31).

Practically speaking, DCAA’s performance/productivity has been abysmal for several years. Irrespective of what DCAA’s Management reports on the state of its operations, it cannot justify an average of one audit report issued per auditor per year, or approximately 4,000 total audit reports. Compare those statistics to a time in the not-too-distant past, when the Agency as a whole annually issued over 44,000 audit reports with slightly fewer auditors. There are many reasons for this reduction, not the least of which is DCAA’s own overreaction to GAO reports issued in 2008 and 2009, as well as recommendations around the same time frame by the Wartime Commission.

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.

Updated October 26, 2016

In our blog “Blended Compensation Rate Guidance: Steps to Success”, posted on March 4, 2016, we provided the steps a contractor should take to determine if and how the compensation cap applies.  The reference is FAR 31.205-6(p) which establishes a statutory cap on allowable compensation, notably the methodology for determining the cap was changed as was the cap (reduced to $487,000) effective on contracts executed on or after June 24, 2014.  The reference to blended rates pertains to a contractor incurring costs in 2014 on contracts executed before June 24, 2014, as well as on contracts executed on or after June 24, 2014.   The “old” contracts subject to the previous (more contractor-friendly) regulation with a 2014 cap of $1,144,888 and the “new” contracts subject to the artificially low (and highly political) cap of $487,000.

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.