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Procurement Fraud at Sandia National Labs

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Pop quiz, hotshot.

You’re a member of the procurement staff at Sandia National Laboratories. You’re not a government employee; instead, you are employed by the contractor that manages the Lab. You are assigned to award a subcontract for moving services. Essentially a commercial service, except because it’s the Federal government there are some FAR and DEARS clauses to worry about, and some pesky Representations and Certifications. If it were a normal contractor, the moving services would be charged to overhead; but because it’s Sandia (or “SNL”) the costs are reimbursed by the Department of Energy. Accordingly, there is likely to be some scrutiny on the award process.

What do you do?

Do you:

(A) Award a sole-source subcontract because there is only one moving company in New Mexico?

(B) Set up a competition , evaluate proposals, and then award a subcontract to the moving company with the best value?

(C) Find the GSA Schedule with the moving companies on it, ask for three quotes from Schedule holders, and then make an award to the low bidder?

(D) Set up a sham moving company, author and submit a proposal from that sham company, evaluate the proposal and select the sham company as the best value bidder, award the company a subcontract, and then pocket a large amount of the subcontract award?

We don’t know about you, but we’re pretty sure the answer to the quiz shouldn’t be (D).

In unrelated news, the Department of Justice recently announced that a Federal Grand Jury returned an 11-count indictment against a former “procurement officer” employed by SNL. According to the news release, “Carla Sena, 55, of Albuquerque, New Mexico was charged with three counts of wire fraud, one count of major fraud against the United States and seven counts of money laundering.”

The press release explained that the indictment alleged that—

In late 2010, Sena was assigned by Sandia to manage the bidding process for the award of a contract for moving services at SNL. In anticipation thereof, Sena created New Mexico Express Movers LLC (‘Movers LLC’), prepared a bid on Movers LLC’s behalf, and submitted the bid to Sandia under someone else’s name to conceal her involvement. Sena made several material and fraudulent misrepresentations in Movers LLC’s bid that would have resulted in disqualification, but she used her position at SNL to ensure that these misrepresentations went undetected. Sena also used her position to access other bidders’ documents and information that she in turn leveraged to ensure award of the contract to Movers LLC. As a direct result of Sena’s scheme to defraud, Movers LLC received approximately $2.3 million in DOE funds. The indictment further alleges that, between December 2011 and April 2015, Sena transferred via negotiated checks at least $643,000 of these fraudulently obtained proceeds to legitimate businesses owned by her father with the intent to conceal her subsequent use of the proceeds for personal gain.

The Albuquerque Journal added a couple of more details, courtesy of an article written by Maggie Shepard. The article reported—

Federal prosecutors say Sena worked from 2006 to 2017 as a procurement employee responsible for managing and awarding contracts to companies supplying services and materials to the federal lab. From this position, she used inside information to develop the lowest – and therefore the winning – bid for a contract for moving services in late 2010, prosecutors say. That bid was awarded to a company she created eight days before the bid due date using a mailbox rented in her daughter’s name and a bank account shared with her then-husband, according to the indictment.

Authorities say she used her position to disqualify another bidding company because it had not included sufficient customer references, a bid requirement her manufactured company met – although her company never existed. … She retired from Sandia in 2017, spokeswoman Sue Holmes said Wednesday. Holmes said that the issue ‘was discovered internally’ and that the labs cooperated fully with authorities. Holmes said the labs employ 115 procurement staffers, and the indictment says that Sena was one of only three employees authorized to process bids through high levels of the approval process.

The thing is that we’re talking about moving services, for heaven’s sake. How prosaic! Why would a supervisor or manager worry about fraud in a subcontract award for moving services—especially from a trusted buyer who was one of the most seniors buyers in the organization?

Which is the point of this little article.

It’s the little things that slide under the radar that can lead to corrupt behavior. While everybody is focused on the big subcontract awards, the technically challenging ones, the ones valued in the hundreds of millions of dollars, the little awards for mundane items or services tend to fall through the cracks. So you need to watch those little ones just as closely as you watch the big awards.

Perhaps even more closely.

We are reminded of a time, a decade or so ago, when we were part of an investigation of a crooked Contracting Officer’s Representative (sometimes called a “COTR”). That guy was crooked, no doubt about it. But it was the little things that caused him to be charged, eighteen months before his scheduled retirement. Little things like directing the base contractor to order vehicle fleet replacement tires from the shop owned by his brother-in-law, or directing that the contractor obtain insurance for the (contractor-acquired) trucks that he and his wife drove—insurance that listed them as beneficiaries, instead of the government. The bigger things he could explain away; but it was the little things that tripped him up.

So pay attention to the little things because, if you don’t, you might find that your trusted senior-level employee has taken advantage of the situation you created when you focused your attention elsewhere.


Quick Close-out Gets Quicker for DoD

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Recently we wrote about DoD’s issuance of FAR and DFARS Class Deviations, which give DoD contracting officers permission to deviate from strict regulatory requirements. We noted that DoD probably wouldn’t have to issue so many Class Deviations if the DAR Council would show some urgency when performing its rule-making duties.

One of the examples we chose to illustrate the DAR Council’s lack of urgency was DFARS Case No. 2017-D042, which would, when issued, “permit closeout of contracts without reconciliation of low dollar residual amounts.” As we opined, that would seem to be a very good thing, given the enormous mountain of contract closeouts facing the DoD. Despite the seeming importance of issuing that rule, DAR Council granted the Contract Administration Committee another 90 days (over the original commitment date) to issue a “report” (whatever that is) to the Council. We suppose they just needed more time to do whatever it is they do when considering regulatory streamlining.

FAR 42.708 (“Quick-closeout Procedure”) establishes conditions when a contracting officer may negotiate settlement of direct costs and indirect rates for an individual contract, task order, or delivery order prior to determination of final costs and final billing rates for the contractor as a whole. In fact, when the specified conditions are present, the cognizant contracting officer “shall” utilize those procedures.

The problem is that the conditions are very stringent, and so the procedures aren’t used very much. For example, one of the specified conditions is that “The amount of unsettled direct costs and indirect costs to be allocated to the contract, task order, or delivery order [must be] relatively insignificant. Cost amounts will be considered relatively insignificant when the total unsettled direct costs and indirect costs to be allocated to any one contract, task order, or delivery order does not exceed the lesser of (i) $1,000,000; or (ii) 10 percent of the total contract, task order, or delivery order amount.” In this context, “unsettled” means not audited and negotiated and finalized in accordance with FAR 42.705. Accordingly, it is apparent that the permissiveness of the “quick-closeout” procedures is illusory, and that they would apply only to the smallest of government contractors.

The Defense Contract Management Agency (DCMA) has issued a series of its own Class Deviations, modifying DCMA Instruction 135 (“Contract Closeout”), to help its contracting officers navigate the complexities of contract closeout. From our reading the Class Deviations (also called Immediate Policy Changes or ICPs) don’t do much to streamline the process; instead, they seem to add steps.

However, Vice Admiral Lewis, DCMA Director, very recently issued a Class Deviation (dated August 15, 2017) that is intended to “streamline[] the prior quick-closeout process for DCMA’s Administrative Contracting Officers (ACOs) by removing requirements to obtain an audit report or Low-Risk AdequacyMemorandum from the Defense Contract Audit Agency (DCAA) prior to settling quick-closeout rates.” The Class Deviation “authorizes ACOs to settle final overhead rates and close any and all physically complete contracts regardless of dollar value or the percent of unsettled direct and indirect costs allocable to the contracts. It applies to Cost-Reimbursement. Fixed-Price Incentive. Fixed-Price Redeterminable and Time-and-Materials Contracts.” (Emphasis added.)

Well done DMCA!

(The DCMA Class Deviation has been added to the Knowledge Resources section of the website.)

We very much hope that readers will take maximum advantage of this DCMA policy change, and will work to close-out contracts, delivery orders, and task orders upon physical completion, without waiting for a DCAA audit report.

Why did DCMA feel the need to issue this Class Deviation?

Well, perhaps because they were tired of waiting for the DAR Council to fulfill its role in the rule-making process.


Last Updated on Monday, 20 November 2017 20:54

Another Class Deviation

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On November 8, 2017, the Office of the Under Secretary of Defense (Acquisition, Technology and Logistics) published a DFARS Class Deviation (designed 2018-O0001). This one provided that special authorities granted to the head of the agency by another Class Deviation (DFARS Class Deviation 2017-O0007, dated September 1, 2017) were delegated, for DoD-funded appropriations only, to heads of contracting activities.

What does that all mean? It means that for certain missions, the heads of contracting activities may exempt contracting officers and contractors from complying with certain requirements that would otherwise apply.

What are those “certain” missions?

  • Contingency operations

  • Defense against or recovery from cyber, nuclear, biological, chemical, or radiological attack

  • International disaster assistance

  • Support response to an emergency or major disaster

What are those “certain" requirements?

  • Exempts DoD unique item identification

  • Permits treating items as commercial items that don’t normally meet that definition

  • Exempts recompetes/additional efforts when only one offer is received

  • Eliminates justification of T&M contract types

Basically, the DFARS Class Deviation rolls-back requirements that have been imposed relatively recently—but only for certain missions. For everything else, the burdensome requirements still apply.

Why did the DAR Council issue the original Class Deviation? Because Congress implemented a Public Law (the 2017 National Defense Authorization Act) that rolled-back those requirements for those missions. Even though nearly a year has passed, the DAR Council still haven’t issued implementing regulations. Apparently some folks thought giving the flexibility was a good idea, so the Class Deviation was issued in the interim.

Then some other folks thought that if the flexibility was really a good idea, then the authority should be delegated to a lower level.

What is going on over there? Why aren’t these people implementing Congressional direction?

A peek over at the list of open DFARS cases (as of 11/03/2017) reveals a whole lot of intent without much action. Or to use a description we applied in a different context: There’s a whole lot of splashing without much swimming.

According to the 03 November 2017 list, there are more than 50 open DFARS cases. (Our count was 53, but we were just eyeballing.) Of those 50+ open cases, only four look close to hitting the Federal Register as a proposed rule seeking public comment. The rest seem to be in regulatory limbo.

For example, DFARS Case No. 2017-D042 would “permit closeout of contracts without reconciliation of low dollar residual amounts,” which would seem to be a very good thing, given the enormous mountain of contract closeouts facing the DoD. Despite the seeming importance of issuing that rule, the current case status reads “07/12/2017 DARC Director tasked Contract Administration Cmte. to draft proposed DFARS rule. Report due 08/09/2017. Report due date extended to 11/15/2017.” While it was probably ambitious to expect a “report” (whatever that is) is less than 30 days, we have a hard time understanding why the Contract Administration Committee was granted another 90 days for this task.

DFARS Case No. 2017-D038 would increase the dollar threshold associated with Contractor Purchasing System Reviews (CPSRs). You would think that would be an easy job, right? Pick a number. Somebody doesn’t like it. Negotiate. Agree. Submit. How hard can that be? Yet the current status shows that “Case manager and DARS Regulatory Control Officer resolving issues.” And it’s been that way for 60 days.

DFARS Case No. 2017D033 would simply move the definition of “information technology” from one part of the DFARS to another part of the DFARS. It should take about 30 minutes to figure that one out, right? Wrong. The proposed rule has been sitting at the DARS Regulatory Control Officer’s desk since March—more than eight months.

Those are just a few examples of how slow the DAR Council moves, and why Class Deviations have been necessary in the face of that lack of action.

So when you see a FAR or DFARS rule published as “interim” and the rationale for publishing an interim rule without waiting for public comment is some comment about “urgency,” well. You know that’s not true. There isn’t any urgency anywhere in the DAR Council, which is one of the more significant problems with our defense acquisition environment.


Last Updated on Tuesday, 14 November 2017 17:39

Indirect Rates are Math

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Just_MathPool over base equals rate.

It’s really that simple.

It’s just math.

Elementary school division, to be precise.

You take your indirect cost pool and you divide it by the amount of dollars in the allocation base, and you get an indirect rate. Then you multiply the amount of allocation base charged to your contract by the indirect rate, and you get the amount of indirect costs allocated to your contract.

Nothing could be easier.

But some people over at the Department of Energy have a problem with that math.

We’re talking about the appeal of CH2M-WG Idaho, LLC (CWI), before the Civilian Board of Contract Appeals (CBCA), as documented in a decision published by the CBCA in September, 2017. By way of background, CWI was awarded a $2.5 billion contract by DOE (known as the Idaho Cleanup Project). The parties disagreed on how much incentive fee CWI had earned and CWI appealed the contracting officer’s final decision. CWI was seeking $27.4 million in lost incentive fees plus $6.0 million in lost “safe units”—which were essentially incentive compensation paid to CWI employees. (There was another matter but that’s the topic for another article.) In sum, CWI was looking for the CBCA to award it roughly $33.4 million plus interest.

And the CBCA obliged.

The case was postured as a matter of contract interpretation—and it was—but what it really was was an argument over math. DOE officials didn’t like how the math allowed CWI to earn “extra” incentive fee and so they tried to reform the contract by unilaterally changing how the incentive fee was to be calculated. The changed the incentive fee formula after the fact; i.e., after CWI had already performed the work and the contract was essentially complete.

It was clear that DOE’s attempt to reform the contract after the fact bothered the CBCA. As it should have.

But let’s talk about the math.

When DOE issued the RFP for the Idaho Cleanup Project, it told bidders what to bid on—and, critically, what not to bid on. As Judge Sheridan, writing for the Board, noted, “The work set forth in the SOW was referred to as the ‘target work.’ The selected contractor would be paid its costs to perform the target work, including indirect costs such as G&A costs, as well as an incentive fee, provided certain cost measures were met.” The scoped work became known as “B.4 work.” In addition, the RFP also discussed “potential non-target work” that might be awarded to the winning contractor. That additional work became known as “B.5 work.” The contract’s target cost and associated incentive fee was based solely—by DOE direction—on the B.4 work. Any B.5 work would be awarded separately, and would be performed on a CPFF basis.

Thus, the contract was bifurcated. There was contractually scoped, estimated, work to be performed on a CPIF basis and there was non-scoped, non-estimated, work that would be performed on a CPFF basis, to the extent it was awarded at all.

All that being said, almost immediately after contract award, DOE began discussing with CWI the award and administration of B.5 work. An early project baseline reflected that the B.5 work might be valued at $51 million in direct costs, plus an additional $39.3 in G&A expenses that would be allocated to that non-target work. According to the CBCA decision, at that time “CWI informed DOE that because it maintained only a single G&A pool it was reallocating $39,288,999 of G&A out of the target work into the non-target work to cover the B.5 non-target work G&A costs.”

Because that’s how the math worked.

If you have a single G&A pool that covers two types of work (in this case B.4 and B.5 work), you have to calculate the G&A expense rate based on the total amount of work actually incurred, not just the work the parties initially estimated. Further, as both types of work incur costs, the G&A expense pool must be allocated to the costs in both categories.

It’s not a manual thing. It’s not (necessarily) an adjusting journal entry or some type of accounting jiggery-pokery done by bean-counters wearing green eyeshades.

It’s just math.

It’s the difference between estimated billing rates and actual billing rates. Estimated billing rates are what you expect; actual billing rates are what you end up with. (See the contract clause 52.216-7, Allowable Cost and Payment, for more details.)

As the contract progressed, CWI would provide DOE with an annual estimate of B.5 non-target work and used that estimate to develop estimated billing rates. From Judge Sheridan—

CWI applied agreed upon forward pricing rates for purposes of estimating its G&A expenses. The rates used were compliant with the regulatory requirements of the CAS, incorporated into the contract, and consistent with CWI’s established and disclosed accounting practices. [The B.5] work was ordered and priced on a CPFF basis, based on full application of G&A costs to that work.

As the contract progressed, it became obvious that the B.5 non-target work was “was exceeding what DOE initially anticipated.” Which is interesting, right? That statement implies that DOE knew there would be some amount of non-target work awarded at the time of the RFP, but directed the offerors not to bid that work into their pricing. The result of that initial direction was to inflate the offeror’s proposed prices, since they were bidding on lower-than-expected costs.

The rationale for that initial direction was not ever provided to the Board, to our knowledge.

Finally, more than two years into contract performance, DOE woke up and realized that allocation of G&A from B.4 target work to B.5 non-target work meant that CWI’s costs for the B.4 work—which was subject to the incentive fee provision—was going to be lower than the parties had initially agreed upon. Consequently, CWI was going to receive an incentive fee that was larger than DOE considered to be fair.

Starting in November, 2007, DOE and CWI personnel engaged in discussions about DOE’s concerns. The parties’ positions were succinctly explained in an internal DOE letter, which stated—

Consistent with its disclosure statement, CWI applies G&A to all work including B.5 at the same provisional rate. As a result, the base upon which CWI’s G&A is applied is increased, the G&A rate [is] lowered and the ICP Target portion of the G&A cost is reduced. The reduced Target share of the G&A cost benefits CWI under the CPIF Contract terms improving its variance. CWI contends that this benefit is inherent in the contract structure and no adjustment is necessary. DOE believes CWI is being unfairly rewarded under the G&A structure and is proposing a reduction in the final ICP Target fee earnings to account for the fee attributable to the B.5 G&A application above that included in the LCB.

DOE’s position evolved to the point where it was not allowing CWI to propose G&A expense on the B.5 non-target work it wanted CWI to perform, unless CWI could show (to DOE’s satisfaction) that the additional non-target work was causing CWI to incur additional G&A expenses. (Which is crazy since, by definition, G&A expenses are not attributable to any specific final cost objective. But that’s where DOE’s denial of the math took it.) In addition, DOE refused to negotiate fixed fee associated with the estimated G&A expenses that would be allocated to that work. The decision quotes an internal 2011 DOE email as saying—

We tried to work this issue out a couple of years ago and ran into a stalemate. The decision at the time was this would be one of the final contract negotiation items that resulted in it being tabled. ... In my opinion, their draft proposal is miles away from what the government position should be on this . . . . I would recommend that CWI needs to demonstration [sic] why the increase in B.5 work caused a linear increase in indirect costs consistent with their indirect cost % of total cost.

The entire issue was “deferred”—which in our view is a shorthand way of saying the parties couldn’t resolve it and were hoping they would all retire before it became a show-stopper. In other words, they declined to do the jobs that the taxpayers were paying them to do, because the jobs involved math and were otherwise too hard for them. What makes things worse, from our point of view, is that the drivers of the controversy seemed to be the DOE Finance folks, who didn’t possess a certificate of appointment (warrant) as Contracting Officers, but who seemed to think their objections should be listened to by the people who did possess contractual authority. And the Contracting Officers, who were charged with resolving issues of controversy arising under their contract before they turned into messy—and expensive!—litigation, did nothing in the face of the concerns expressed by the DOE Finance folks.

For years.

Our rather forceful opinion above was echoed, albeit with more restraint, by the Board. Judge Sheridan wrote—

Throughout contract performance, various DOE offices responsible for analyzing the G&A allocation issue (DOE-ID, DOE budget, and DOE finance) seemed to be consistently revisiting the issue but unable to reach any DOE consensus about what to do about it. Instead of timely negotiating a solution to the G&A allocation issue, DOE-ID decided to defer the issue until the end of performance.

Nobody did anything for years, even though they all knew that the issue was out there. The can was kicked down the street in the vain hope that it might be resolved through magic, or through osmosis, or through any means other than rolling-up shirtsleeves and dealing with it. The situation went on for years and the people whose job it was to resolve it … didn’t.

Yet nobody was demoted for incompetence or dereliction of duty, to our knowledge.

Just like nobody was demoted or otherwise censured for trying to rewrite Cost Accounting Standard 410 because they didn’t like the result.

Meanwhile, in 2009 the American Reinvestment and Recovery Act (ARRA) added more than $400 million in additional funding to the Idaho Cleanup Project. Of that amount, $118 million was added to B.4 target work and $287 was added to B.5 non-target work. Obviously the additional ARRA work just made the bad situation worse, from DOE’s viewpoint, because now there wasa lot of CWI G&A being allocated to the B.5 non-target work.

Yet the G&A allocation issue was left unresolved and allowed to fester.

While all this was happening, DOE’s position continued to evolve. In 2012, DOE told CWI that they weren’t disputing the allocation of G&A expense (probably because there was no way for them to do so) but, instead, they were disputing the interpretation of the incentive fee contract clause that would allow CWI to share in the cost-savings associated with a reduced allocation of G&A to the B.4 target work. The DOE Contracting Officer told CWI that “DOE will not pay cost incentive fee for simple cost allocation actions when no cost savings occurred.”

Sure. And the earth is flat and the moon landings were faked and chemtrails are real things. In other words, DOE was denying reality. DOE was denying that the math, combined with the contract structure and contract terms that it had initially insisted on, resulted in CWI getting more profit than DOE felt it should be entitled to receive.

The contract was physically completed on September 30, 2012—and the G&A allocation issues had still not been resolved. Finally—

On July 2, 2013, CO Mitchell-Williams submitted a proposed bilateral modification to CWI, which included a downward adjustment to CWI’s target cost and target fee for target work based on the G&A costs allocated to B.5 non-target work. DOE proposed to reduce CWI’s target costs by $85,229,025 and target fee by $6,272,856 based on the G&A costs allocated to B.5 non-target work. Citing the contract’s Changes clause (FAR 52.243-2) and the Incentive Fee clause (FAR 52.216-10) as authority for its proposed adjustment, DOE warned that it ‘would issue a unilateral modification, followed by a final fee determination’ if CWI failed to agree to the bilateral adjustment. DOE also sought to reduce CWI’s target cost and target fee based on certain fringe costs allocated to B.5 non-target work. CWI responded to DOE’s letter on July 8, 2013, disagreeing with DOE’s position and refusing to execute the proposed modification.

DOE issued the unilateral mod and CWI submitted a claim in March, 2014. The DOE CO issued a final decision in May, 2014, and CWI appealed to the CBCA.

In deciding the issue for CWI, Judge Sheridan and the Board made some key statements. Among them—

First, that the contract’s Changes clause did not give DOE the right to unilaterally change the contract to reduce target cost and fee. The Changes clause does not give the government “an unfettered right to change any and every clause in the contract.” Specifically, the Board found that the Changes clause does not give the government the right to change the contract’s payment terms. Judge Sheridan wrote—

The Changes clause applicable to this contract does not provide DOE the right to unilaterally change the contract to adjust payments between the target and non-target work as a means of correcting the B.5 G&A allocation issue. DOE may issue unilateral changes only for the contract’s description of services to be performed, time of performance (i.e., hours of the day, days of the week, etc.), and place of performance of the services.

Second, that the contract’s Incentive fee clause did not give DOE the right to unilaterally adjust target costs and fee, absent a modification that added or deleted contract work. Judge Sheridan wrote—

A plain reading of the clause allows a contracting officer to adjust the target cost and target fee when work under the contract is increased or decreased by modification. The Incentive Fee clause we are interpreting here does not allow a contracting officer to unilaterally move costs from one category of work (non-target work) to another (target work) to affect what DOE views as an inequity resulting from CWI’s allocation of G&A from target work to non-target work. Furthermore, the contract’s Incentive Fee clause, upon which DOE relies, does not apply to the non-target work from which DOE seeks to shift costs.

…The target cost and target fee specified in the schedule were established entirely independently from and without consideration of the B.5 non-target work, at DOE direction and by DOE design. The FAR 52.216-10 clause permits adjustments to the target cost and target fee ‘specified in the Schedule’ and, accordingly, does not permit adjustments for either the addition or deletion of B.5 non-target work that was never included in the schedule’s target cost and target fee per the parties’ agreement. DOE’s decision to order, or not to order, non-target work did not change CWI’s existing obligations associated with the separate and distinct target work and cannot serve as a basis to unilaterally reprice the target work.

(Emphasis in original.)

Third, that DOE waited too long “at its own peril” to address the issue, “both because it was not an issue DOE was contractually allowed to address unilaterally, and because, by the time DOE decided to address the issue, CWI’s position on an equitable adjustment for the G&A allocation issue had changed.” Judge Sheridan added—

It appears from the record that DOE-ID hoped the issue would simply resolve itself, but other DOE entities persisted in revisiting the G&A allocation issue. The record is devoid of any consistent DOE analysis on the issue, and it seems that DOE-ID was content in deferring until the very end of the contract the decision of whether and how a contract adjustment might be calculated. When ultimately the final fee determination and modification 260 were issued, CWI disagreed on the adjustment and took a hard line, arguing that DOE was not entitled to the unilateral adjustment under the terms of the contract. DOE, while presenting equitable arguments, has provided no compelling legal basis to support its unilateral actions.

Judgment for CWI, at least on the first two issues. We’ll discuss the third issue in another article.

Finally, we are reminded of the CAS Board’s Restatement of Objectives, Policies and Concepts. (That’s a document from the prehistoric days before the internet that you basically cannot locate anymore—which is a pity.) In that document, the CAS Board reiterated its view that it considered a Cost Accounting Standard to be fair when it showed neither bias nor prejudice to either contracting party. The CAS Board went on to say that “in any given case, the results of contract pricing may ultimately be regarded as fair or unfair by either or both parties to the contract because, on a case-by-case basis, fairness is viewed from the personal vantage point of the particular party.”

Obviously, DOE felt the application of CAS 410 resulted in an unfair incentive fee calculation for CWI. But the application of CAS 410 to DOE’s contract with CWI was not something within the control of either party. Further, once CAS 410 defined the G&A expense pool and the chosen allocation base, then the rest was math.

Just math.

Last Updated on Sunday, 19 November 2017 20:22

Drafting a Subcontract

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ContractWe’re not lawyers but this week we attended a briefing where lawyers spoke. And one of the briefing topics was drafting a subcontract.

It caught our attention because—as you know if you’ve been reading this blog for a decent amount of time—we think subcontracting is a pretty important topic and one that has been given short shrift in the government acquisition environment. Reason being, of course, is that the Federal government doesn’t do subcontracting. Oh sure, contracting officers must review consent packages and CPSR reviewers must review contractor files; but generally the topic of subcontracting is a mystery to most of the Federal acquisition team. As a result, it’s kind of a mystery to the contractor side as well—even though that’s supposed to be a core competency of contractor acquisition.

As you know if you’ve been reading this blog for a decent amount of time, we think subcontractor management is the single most important factor that determines program outcomes. In today’s environment, where often more than half of a program’s content is sourced from the supply chain via subcontract, a failure to effectively manage those subcontractors almost inevitably leads to program problems.

Effective subcontractor management starts with subcontract formation.

You could go further back in time, if you’d like. You could say that effective subcontractor management starts with subcontractor source evaluation and selection. Or you could say that effective subcontractor management starts with choosing the right teaming partner and putting the right teaming agreement language into place. Those statements wouldn’t be wrong. But we’re going to start with subcontract formation because that’s what the attorneys focused on.

The attorneys segregated the subcontracts into different categories. They identified commercial item subcontracts and non-DoD subcontracts and DoD subcontracts. Each of those categories were subject to different prime contract flow-down requirements. The attorneys identified mandatory flow-down clauses for each type.

But that’s not all. As the attorneys pointed out, there are many non-mandatory clauses that a prime contractor would want to flow down to its subcontracts. Those are clauses that, if something happens at the prime level, the prime would want to have its subcontractors take parallel actions. Without those clauses there is nothing that compels the subcontractors to take such actions—potentially leaving the prime contractor in a world of hurt.

We are reminded of a situation years ago, where the prime contractor failed to include a Termination for Convenience clause in its firm, fixed-price subcontract. And then—whoops!—the prime contract was T4C’d and litigation inevitably followed. One of the (many) problems was that the prime needed to submit a termination settlement proposal within 12 months and the subcontractor was not cooperating about providing actual costs incurred because the parties were in litigation. Suffice to say that the subcontractor had sufficient leverage to obtain a very nice settlement.

The attorneys also discussed additional clauses that would be helpful to the prime. These clauses might not be found in the prime contract at all, but it would be in the prime’s best interests to include them in its subcontracts. Some clauses might be found in a prime’s “standard set” of terms and conditions, but others might not be obvious. The value added by a skilled and experienced subcontract administrator is that they have learned what clauses need to be added in order to protect the prime. If you are a prime contractor, you will want to make sure you have a cadre of skilled and experienced subcontract administrators. It will be worth your while.

On the other hand, subcontractors also have rights and interests that need to be protected. Their “sell side” administrator needs to be just as skilled and experienced as the prime’s “buy side” administrator. While the prime is busy flowing-down mandatory (and non-mandatory) clauses and adding in additional clauses intended to protect it, the subcontractor is similarly busy editing and/or deleting some of those clauses because they impose overly onerous duties that the prime hasn’t (yet) paid enough for. One attorney we spoke with called it “the battle of the forms” and he noted that if the parties authorized the subcontractor to begin work before the battle was over, then that created some interesting challenges with respect to post-award disputes. If the parties hadn’t agreed on the final subcontract language then it would be hard for a trier of fact to interpret the contract. Indeed, it might be possible to say that there was no subcontract, because there hadn’t been a meeting of the minds regarding rights and duties.

All in all, subcontract administration is its own discipline, one with its own body of knowledge. That’s not to say that an individual should specialize only in that body of knowledge and exclude knowledge of prime contract matters or basic procurement matters. As my old boss Bill used to say, he wanted a team of acquisition professionals who were well-rounded and skilled in every aspect of Government contracting, because then he had a versatile team who could solve whatever problem came up.

So you might want to consider whether Bill was right, and whether you should develop your people so that they are knowledgeable about the entire spectrum of government contracting—or whether you want experts in a single discipline. Either way, what you don’t want is people who don’t know what they’re doing or why they’re doing it. Unfortunately, that description fits too many people, both in and outside of government.

Last Updated on Saturday, 11 November 2017 14:14

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In March 2009, Nick Sanders’ article “Surviving Government Audits: Have the Rules of Engagement Changed?” was published in Government Contract Costs, Pricing & Accounting Reports (4 No. 2 GCCPAR P. 11). Apogee Consulting, Inc. is proud to announce that Mr. Sanders’ article was selected for reprint and publication in Thomson West’s The New Landscape of Government Contracting.  Mr. Sanders, Apogee Consulting’s Principal Consultant, joins such distinguished contributors as Professors Steven Schooner and Christopher Yukins, Luis Victorino and John Chierachella, Joseph West and Karen Manos, Joseph Barsalona and Philip Koos and Richard Meene, and several others.  The text covers a lot of ground, ranging from the American Recovery and Reinvestment Act (ARRA) to Business Ethics and Corporate Compliance, and includes several articles on the False Claim Act and the Foreign Corrupt Practices Act.  In addition, the text includes the full text of many statutory and regulatory matters affecting Government contract compliance.


The book may be found here.