Redstone Government Consulting Blog | Contracts & Subcontracts Administration (20)

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 If portions of Section 893 are repealed, DCAA would have the renewed ability to perform audits for non-Defense Agencies without any reduction in DOD funding.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 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.

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.

Although there is a “time to every purpose under heaven” (lyrics to the song Turn, Turn, Turn, by the Byrds) including a time and purpose for Cost-Type Contracts (FAR 16.3 Cost-Reimbursement Contracts), do not try to sing this song to Senator John McCain (Chairman of the Senate Armed Services Committee or SASC). In application to cost-reimbursement contracts, Senator McCain recently referred to cost-plus contracting as “an evil that has grown and grown and grown over the years, and I will not stand for it on any weapons system”.   In support of his statement, there is a long history of significant cost overruns on major weapons systems which all started with cost-reimbursable developmental contracts. Unfortunately, comparing original cost estimates with final program costs, i.e., computing the percentage of cost growth, is a very simplistic and incomplete statistic noting that developmental contracts are just that, conceptual and lacking anything approaching a well-defined statement-of-work. As such, these agreements are not exactly candidates for a firm-fixed price contract (FAR 16.2), unless the prime contractor is naïve and/or reasonably sure that its risk will be mitigated by an endless series of change orders and requests for equitable adjustment for each and every change to the statement of work.   As a point of reference explaining why a contractor should not be overly optimistic in terms of accepting a fixed-price contract with an ill-defined statement of work, one only needs to read the decision in US CoFC Nos. 13-55C, 13-97C, filed August 18, 2015.  In particular, the judge rejected the contractor claim for increased costs noting that the contractor voluntarily assumed the risk of a firm-fixed price contract, albeit with an “unusually high risk” attributed to the ill-defined statement of work.

As a small (or potential) government contractor or subcontractor, one question you will frequently encounter is if you have a “Job Cost Accounting System.” This may sound like a specific type of software, but it is not. Many different accounting software systems can provide job cost accounting if properly configured. The questions on the SF 1408, Pre-award Survey of Prospective Contractor Accounting System, are designed to discover if you have a job cost accounting system. This still doesn’t tell the non-accounting person what a job cost accounting system is or why it is important (other than to get the right answers on the SF 1408 to qualify for a government cost-reimbursable contract).

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)?