Redstone Government Consulting Blog | Compliant Accounting Infrastructure (20)

In a recent Federal Circuit ruling, KBR found out that “simple negligence” in its calculations of a reasonable price range for subcontractor’s price proposal resulted in a “Gross Negligence ruling” by the courts. Kellogg Brown & Root Services, Inc. (KBR) v. U.S., No. 203-5030, slip op. (Fed. Cir. Feb, 3, 2014).

Two recent decisions by the General Accountability Office (GAO) and the ASBCA make it clear that the contractor will be held responsible for incorrect assumptions when they fail to follow up on known inconsistencies or missing information with the government, even when the government is responsible for providing the information.

The Department of Defense issued a final rule revising the DFARS “Proposal Adequacy Checklist” on January 29, 2014 to eliminate question 19 of that checklist which addresses whether the contractor cost proposal, to which the checklist applies, demonstrates that price analysis of costs for all proposed commercial items was performed.  The DOD determined that questions 14 and 17 address price analysis for all proposed materials and subcontracts, commercial or otherwise, therefore making question 19 duplicative and unnecessary. 

Non-U.S. contractors have many misconceptions as to what rules and regulations they must comply with under U.S. Government contracts. The two most common misunderstandings non-U.S. entities have are (1) their country laws trump U.S. laws and regulations, and (2) Federal Acquisition Regulations (FAR) rules on cost collection and allocations are less strenuous for non-U.S. contractors. These two misconceptions could not be further from the truth.

The National Defense Industrial Association’s (NDIA) September Procurement Division Committee meeting provided insights and information that we believe is of  interest to our readers.  These comments are our own interpretations and opinions based upon our presence at the meeting.

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. 

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. 

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).