Redstone Government Consulting Blog (65)

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.

Although the 2017 NDAA (National Defense Authorization Act) is a work in progress, as it stands, it includes Section 820 which would repeal subsections (a) and (d) of Section 893 of the 2016 NDAA (section 893 was discussed in a previous blog dated January 13, 2016). If portions of Section 893 are repealed, DCAA would have the renewed ability to perform audits for non-Defense Agencies without any reduction in DOD funding.

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.”

On March 4, 2016, we posted a blog, “The Inherently Evil Cost-Type Contracts” which discussed the Government view of cost type contracts. More specifically, the risks to the Government when using a cost-type contract (typically cost-plus fixed-fee, but also including cost-plus incentive fee or CPIF).   From a contractor risk perspective, the evil-twin of the CPIF contract is a Fixed-Price Incentive Firm Target (FPIF) contract because of the major difference in contractor obligations to perform as a function of costs incurred.   Typically cost type contracts only require contractor performance up to the contract limitation of funds (LOF); as noted in FAR 16.307(d)(1), the completion form of a cost-type contract requires the contractor to complete and deliver the specified end product within the estimated cost (LOF). However, if the specified end product can’t be performed/delivered within the estimated cost, the government can require more effort provided the Government increases the estimated cost.  A contractor is no longer required to perform once costs incurred equal the LOF; hence, the Government assumes the risk of cost overruns if the Government wants to compel delivery of the end-product.

DCAA’s Inevitable Link with an Inadequate Accounting System

There is no specific regulatory authority that can be cited which requires work authorizations as a part of a contractor’s Labor/Timekeeping System. This argument, although accurate, is not the rationale which will be used by a DCAA auditor when “disclosing” deficiencies in a contractor’s labor system during a routine labor floor check. The auditor will ultimately render an opinion of inadequacy with respect to the accounting system citing DFARS 252.242-7006(c)(1), which states “The contractor’s system will provide for a sound internal control environment, accounting framework, and organizational structure”. You may and, probably will, ask where is there a mention of work authorizations anywhere in DFARS 252.242-7006 Accounting System Administration? The short answer; there isn’t. The DCAA answer, and the only one it thinks matters, is that the regulation it cites does not have to specifically address work authorizations but a link can be inferred within the highly general requirement for a “sound internal control environment”.

As some may have seen, on March 10, 2016, the Department of Defense (DOD) issued its 2017 regulatory proposals. However, through marginally reliable resources, we’ve located one significant regulatory deviation being sought by DOD.  We understand that DOD will make this public on April Fool’s Day, 2016.  The following is what we know about this rumored (but could be factual) DOD action.

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.