Redstone Government Consulting Blog | Contracts & Subcontracts Administration (19)

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.    

What is the Service Contract Labor Standards (SCLS)?

The McNamara-O’Hara Service Contract Act (41 U.S.C. §§ 351-358) (SCA) requires contractors and subcontractors performing services on prime contracts in excess of $2,500 to provide service employees certain minimum wage and fringe benefits when performing work on those awarded federal service contracts. The Department of Labor is responsible for enforcing SCLS.

Although FAR 42.202(e)(2) states that prime contractors are responsible for managing subcontracts, DCAA has launched or relaunched a strategy which presumes that prime contractors are responsible for “auditing” subcontractors.   Unfortunately, DCMA seems to have embraced this concept with respect to closing out cost-type subcontracts. Specifically DCMA Instruction 135, section 3.2.3.2 states that prime contractors are responsible for auditing subcontracts and closing subcontract using procedures similar to those used by the government.

Outsourcing certain administration functions within an organization has become a trending practice among government contractors. In fact, we have seen a noticeable uptick in outsourced accounting, human resources and contracts administration functions over the past year.

Whether a company chooses to outsource a certain administrative function to fill a temporary void or a permanent one, looking to subcontractors for help makes sense for a number of reasons.

For government contractors your indirect rate structure is critical to your competitiveness, perhaps more so than any other element of the proposal.  In today’s LPTA environment, most offerors are going to be very similar when it comes to technical capabilities and past performance, so almost always award decisions come down to cost.  For the select few companies that have a technical edge or a differentiator in the way of performance that outweighs the cost to your government customer you can stop reading now.  The vast majority of companies working with the federal government don’t have this luxury, so what are they doing to set themselves apart when it comes to developing their indirect rates and overall wrap rates (wrap rates are a function of total direct and indirect costs for a labor hour divided by the direct labor hourly rate); hence, a lower wrap rate is perceived to be a more competitive overall cost structure)?

In each of the past four years, the Justice Department has recovered more than $3.5 billion dollars from cases that involve the False Claims Act (FCA). Although the FY2015 recoveries are a substantial decline from FY2014’s $5.7 billion, these are still extraordinary amounts of money that are being recovered based upon fraud allegations. It should be noted that the DOJ FY2015 Summary Media Release mentions a number of settlements by name (i.e. specific identification of the individual or company which allegedly violated the FCA); however, this DOJ Media Release masks the fact that many of these involve mere allegations with no finding of liability (a statement included at the very end of each individual settlement media release). Of note, the government contracting world we live in represents the second largest piece of the recovery pie; according to the Department of Justice’s release, the government contracting slice was $1.1 billion over the last fiscal year. Something of a “wow moment” even though FCA recoveries from health related services continue to lead the pack.

Requirement for Improved Auditing of Contracts

In late November, President Obama signed the 2016 NDAA (National Defense Authorization Act, S.1356)) which includes a number of sections related to Acquisition Policy or Acquisition Management.  Of particular note for those subject to DCAA contract audits, a requirement for improved auditing which is focused on the so-called incurred cost audit backlog (contractor indirect cost rate proposals (ICPs), submitted annually as required by FAR 52.216-7(d)).   Section 893 prohibits DCAA from performing any audits for non-defense agencies (e.g. NASA) unless DOD certifies that DCAA is current on the ICP backlog.  “Current” is defined as 18 months of incurred cost inventory, further defined as “the level of contractor incurred cost proposals in inventory from prior years that are currently being audited by DCAA”.  As a point of clarification, the inventory should include ICPs currently being audited or those in the queue awaiting audit.  Based upon DCAA’s 2014 report to Congress, DCAA had approximately 18,185 ICPs valued at $822 billion (on hand as of 9/30/2014).  Based upon May 2015 public comments made by DCAA’s Deputy Director, the annual inventory is approximately 7,500 ICPs which would implicate an approximate annual value of $339 billion.

In today’s budgets constrained environment U.S. Government contracting officers are seeking every opportunity to obtain discounted or reduced prices for services and materials, and as a tax payer that should make us all happy. However, for those of us who work in the government contracting industry the sight of LPTA solicitations, and enhanced scrutiny of proposals does make work life more challenging. One of the areas that we see challenged by contracting officers either during the proposal process or after award is the application of G&A on direct travel associated with the contract. This might be a solicitation provision, a Government expectation for contractor concessions during negotiations or a Government interpretation after contract award.

On June 30, 2015, the U.S. Department of Labor (DOL) increased the McNamara-O’Hara Service Contract Act (SCA) Health & Welfare benefits from $4.02 to $4.27. A notice is not sent directly to contractors and unfortunately for them the importance of this change lies with timing. For those contractors that are currently working diligently on preparing cost proposals, this increase will directly affect you. According to the DOL memorandum that put this change into effect, “all invitation for bids opened, or other service contracts awarded on or after June 30, 2015, must include an updated SCA WD issued in accordance with the regulatory health and welfare (H&W) fringe benefit determination methodology.” So if you have recently submitted a proposal subject to the SCA, we suggest that you ensure that your H&W meets the SCA H&W requirement of $4.27.

In 2014 DCAA quietly rolled out its new audit report format which generated some obvious questions: