Redstone Government Consulting Blog (67)

Government contractors who are required to submit certified cost and pricing data as part of a bid proposal face increasingly greater risks of government rejection or award disqualification during pre-award review or even worse, defective pricing allegations after award causing government mandated downward negotiated price adjustments. In today’s government procurement environment where procurement commands and their auditors hold contractors to solicitation and cost analysis provisions with such rigidity, equating to a zero error tolerance during proposal evaluations, contractors must not fail to meet the “certified cost or pricing data” submission or disclosure expectations in the pre-award proposal preparation process as intended within the Truth-in-Negotiations Act (TINA).

All one has to do is read a recent article written by David Cox, President of the American Federation of Government Employees (AFGE), to derive the answer to this question, and the answer is that contractor employee compensation should be brought in line with the salaries that public sector employees (e.g., federal civilian personnel) are paid.

The Department of Defense (DOD) June 28, 2013 “Performance of the Defense Acquisition System” annual report states that little difference exists between fixed price and cost-plus contracts when it comes to predicting or controlling costs. 

DCAA employees have now received their long-awaited letters proposing an 11 day furlough - one day a week from July through September of 2013.   Since this furlough is cumulatively over 80 hours, employees will also lose an accrual of sick and vacation pay.  In addition, according to Jessica Wright, acting undersecretary of Defense for Personnel and Readiness, furloughs may not end in September.  She stated that looking at the FY 2014 budget numbers suggested by the White House and both sides in Congress, DoD may very well have to plan for another round of sequestration and furloughs.  Under the federal process, once an employee receives a proposal for furlough, an individual can present a case to the deciding official on why they feel like they should be excepted from the furlough. Then the deciding official will make a final decision.  Since this is a DoD initiative and exceptions apply to very few DCAA employees, the furloughs are expected to be upheld.

President Obama will purportedly send to Congress proposed legislation this week which will cap reimbursement of all government contractor employee annual salaries at $400,000, the President’s annual (base) salary.  The proposed legislation is an expansion of the FY 2013 National Defense Authorization Act (NDAA) approved in early CY 2013, applicable only to Department of Defense Contracts, which would ostensibly apply to all government contracts awarded by civilian government agencies, and elevate the cap from the previously debated ceiling of $230,700 (Vice-President’s salary) to the $400,000 amount. 

DCAA issued its long awaited audit programs for accounting system internal controls.  In March of this year it issued audit programs for its billing system, and the two facets of its accounting system; the control environment and the accounting system or accounting controls.  A significant portion of the control environment audit program is devoted to assessing a company’s “Management’s philosophy and operating style, commitment to competence, and human resource policies and procedures.”  DCAA informs its auditors that this is a very subjective area and in conjunction with their risk assessment procedures and attendance at audit entrance conferences and system demonstrations they should be aware of positive and negative signs.  Leaving the disclosure and development of these positive and negative signs up to the judgment and discretion of the auditor DCAA, HQs decides not to give any illustrations or examples of either, save one.  It very subjectively asserts that excessive turnover may be a possible negative indicator regarding management’s philosophy and operating style.  However, it doesn’t provide any type of a benchmark or barometer as to what is excessive.  It then instructs the auditors to request a listing of management or supervisory personnel in key functions such as operations and program management, accounting, or internal audit that have either retired, quit, or been terminated.  The auditor is then told that if the turnover appears to be excessive, obtain explanations of the reason for management or supervisory personnel leaving the organization. 

In a recent DCAA audit policy, DCAA makes note of the 2013 NDAA (National Defense Authorization Act) which requires DCAA to track requests and contractor responses for internal audits and to ensure that DCAA does not use contractor internal audit reports for any purpose other than evaluating and testing the efficacy of contractor internal controls and the reliability of associated contractor business systems.  The reason the NDAA mentions this “limited use” is to diffuse contractor concerns and allegations that DCAA will misuse access to internal audits for so called fishing expeditions.

Loss of Memory or In-Denial?

As most contractors (subject to DCAA incurred cost audits) are aware, DCAA and DCMA were soundly “defeated” in terms of ASBCA rejections of DCAA FAR 31.205-6(b) compensation reasonableness challenges (Reference to J.F. Taylor, ASBCA Cases 56105, 56322 and Metron, ASBCA Cases 56624, 56751, 56752).

Has the Government Learned Its Lesson?  Your Feedback is requested.

Perhaps the most subjective cost allowability determination process utilized by the Defense Contract Audit Agency (DCAA) is that associated with determining reasonableness of Government contractor employee compensation, more specifically the wages and benefits of senior managers and executives. Government contractors more likely to endure examination and challenging of such compensation are those with cost reimbursable contracts which invoke the audit of annual incurred cost proposals (ICP) via contract payment clauses. The audit review is a highly subjective process with the purpose of determining if annual compensation exceeds a hypothetical “reasonableness” benchmark, using ambiguous criteria contained in FAR 31.205-6(b)(2), i.e., measured to wage surveys reflecting compensation for same job position within companies of same size, same industry, same geographic area, and engaged in same type of non-government work as performed under government contracts. 

Recently the House of Representative unanimously passed a bill prohibiting new federal contracts with companies with seriously delinquent federal tax debts. However, the House failed to pass a similar measure, Federal Employee Tax Accountability Act (FETAA), which could have resulted in terminating government employees with seriously delinquent tax debts. It seems to us that retaining government employees with serious tax debt is equivalent to retaining employees who steal from their employer, but apparently in the view of Democratic Congress-persons (critics of the FETAA), it would be unfair to single out federal workers whose tax compliance is better than the general public. The last we checked, the general public does not work for the federal government and in any case, the specific federal employees who are seriously tax delinquent are not tax compliant so who cares if federal employees collectively are more tax compliant than the general public.