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Complying with Executive Orders

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Apologies for the dearth of blog posts in recent weeks. I’ve been … distracted … by other events/issues/concerns associated with national events. It’s been a bit of a struggle to muster the energy to write about the mundane topics associated with government contracts.

Finally, I think I found a topic that sort of combines both things—the national drama and government contracts. And I hope I can pull it off without offending anybody!

I want to discuss Executive Orders and compliance therewith.

President Trump has issued a number of Executive Orders (EOs) in recent days. Since September, 2020, 12 EOs have been issued, ranging from “Establishing the One Trillion Trees Executive Council” (EO #13955, published 10/16/2020) to “Addressing the Threat to the Domestic Supply Chain From Reliance on Critical Minerals From Foreign Adversaries and Supporting the Domestic Mining and Processing Industries” (EO #13953, published 10/05/20). All told, as of today President Trump has issued 195 Executive Orders. Some of the EOs get more publicity than others, and some impact government contracting more than others.

To be clear: I’m not picking on President Trump. All Presidents issue Executive Orders, to a greater or lesser extent. The first EO was issued by President George Washington in 1789. Here’s a link to the Federal Register site that compiles EOs. If you follow the link, you’ll see that, while President Trump’s quantity is higher that other recent Presidents, it’s not super incredibly higher either. For example, Bill Clinton issued 254 EOs during the eight years of his Presidency. Similarly, George W. Bush issued 291 EOs during his eight years. Thus, Trump’s 195 issued over a bit less than four years is higher than Presidents of the recent past—but it’s not 200% higher. I would say it’s within historical norms.

The issue to be discussed is whether a government contractor must comply with an Executive Order. If so, when and how? What are the remedies associated with non-compliance, if any?

First, what is an Executive Order? Here’s a link to a solid 2014 article on that topic, published by the Congressional Research Service. According to the authors, an EO is the result of the inherent powers of the Presidency, granted to the Executive Branch by the U.S. Constitution. The authors wrote—

While the President’s ability to use executive orders as a means of implementing presidential power has been established as a matter of law and practice, it is equally well established that the substance of an executive order, including any requirements or prohibitions, may have the force and effect of law only if the presidential action is based on power vested in the President by the U.S. Constitution or delegated to the President by Congress. The President’s authority to issue executive orders does not include a grant of power to implement policy decisions that are not otherwise authorized by law. Indeed, an executive order that implements a policy in direct contradiction to the law will be without legal effect unless the order can be justified as an exercise of the President’s exclusive and independent constitutional authority. … [I]f issued under a legitimate claim of authority and made public, a presidential directive could have the force and effect of law, ‘of which all courts are bound to take notice, and to which all courts are bound to give effect.’

The U.S. Supreme Court opined on the limits of Presidential power as exercised via EO in its 1952 decision in Youngstown Sheet & Tube Co. v. Sawyer (343 U.S. 579). According to the authors of the CRS study quoted above, that decision is more notable for the five concurring opinions than for the majority opinion. Among those concurring opinions, “Justice Jackson’s has proven to be the most influential.” In his concurring opinion, Justice Jackson identified three groupings of EO, based on each one’s relationship to Congressional authority. In the first category, the President is executing an express or implied authority granted by Congress. In the second category, Congress has neither granted nor denied authority to the President. In the third category, the President’s actions are “incompatible with the express or implied will of Congress.”

Regardless of which category an EO falls under, by their very nature Executive Orders are not permanent directives. As the CRS authors noted, “The President is free to revoke, modify, or supersede his own orders or those issued by a predecessor.” As Presidential Administrations change, often the very first actions taken are to revoke or modify the prior President’s EOs—especially those EOs that have impacted an agency’s rulemaking process. Moreover, Congress may overturn an EO by passing a bill to do so, though that is a relatively rare occurrence. Finally, the CRS authors noted that—

Congress may also inhibit the implementation of an executive order by preventing funds from being used to implement the order. For example, Congress has used its appropriations authority to limit the effect of executive orders by denying salaries and expenses for an office established in an executive order, or by directly denying funds to implement a particular section of an order.

(Footnotes omitted.)

To sum this up, an Executive Order may have the force of law in certain circumstances; however, since EOs tend to be rather ephemeral, that force may not be long-lasting.

But must contractors comply with Executive Orders?

While I am not a scholar of constitutional law (nor even any kind of legal scholar), I am fairly confident that an Executive Order means very little until it is codified in an agency regulation. We’ll talk more about that in Part 2, coming soon.


Deep Fake Operative Sentenced to Seven Years in Prison

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Garrison Kenneth Courtney, 44, of Tampa, Florida, falsely claimed to be a covert officer of the CIA involved in a highly-classified program or “task force” involving various components of the U.S. Intelligence Community (including the CIA) and the Department of Defense. In reality, Courtney had never been employed by the CIA, and the task force that he described did not exist. In reality, Courtney was a former Drug Enforcement Administration (DEA) public affairs officer.

According to the U.S. Attorney, “Courtney invented the elaborate lie to cheat his victims out of over $4.4 million.” And he was on the way to cheating the U.S. Government out of perhaps another $3.7 billion (with a “B”) when he was stopped.

Let’s quote the DoJ press release:

To accomplish the fraud, Courtney approached numerous private companies with some variation of this false story, and claimed that the companies needed to hire and pay him to create what Courtney described as ‘commercial cover,’ i.e., to mask his supposed affiliation with the CIA. Courtney also fraudulently claimed that the companies would be reimbursed in the future for these salary payments, sometimes by the award of lucrative contracts from the United States government in connection with the supposedly classified program.

Courtney went to extraordinary lengths to perpetuate the illusion that he was a deep-cover operative. Among other things, he falsely claimed that his identity and large portions of his conduct were classified; directed victims and witnesses to sign fake nondisclosure agreements that purported to be from the U.S. government and that forbade anyone involved from speaking openly about the supposedly classified program; told victims and witnesses that they were under surveillance by hostile foreign intelligence services; made a show of searching people for electronic devices as part of his supposed counterintelligence methods; demanded that his victims meet in sensitive compartmented information facilities to create the illusion that they were participating in a classified intelligence operation; and repeatedly threatened anyone who questioned his legitimacy with revocation of their security clearance and criminal prosecution if they ‘leaked’ or continued to look into the supposedly classified information. Courtney further created fake letters, purporting to have been issued by the Attorney General of the United States, which claimed to grant blanket immunity to those who participated in the supposedly classified program.

Oh, but there is more:

Courtney also convinced several real governmental officials that he was participating in this ‘task force,’ explained that they had been selected to participate in the program, and then used those officials as unwitting props falsely to burnish his legitimacy. For example, he directed his victims to speak with these public officials to verify his claims, and separately instructed the government officials as to exactly what to say. Courtney thereby created the false appearance to the victims that the government officials had independently validated his story, when in fact the officials merely were echoing the false information fed to them by Courtney. At times, Courtney also convinced those officials to meet with victims inside secure government facilities, thereby furthering the false appearance of authenticity.

Oh, but there is still more to the story:

Through the scheme, Courtney also fraudulently gained a position working as a private contractor for the National Institutes of Health (NIH) Information Technology Acquisition and Assessment Center (NITAAC), a branch of the NIH that provides acquisition support services to federal agencies. Once he had installed himself at NITAAC, Courtney gained access to sensitive, nonpublic information about the procurements of other federal agencies being supported by NITAAC. Courtney thereafter used that information to attempt to corrupt the procurement process by steering the award of contracts to companies where he was then also on the payroll, and used the false pretext of national security concerns to warp the process by preventing full and open competition. When law enforcement disrupted his scheme, Courtney actively was seeking to corrupt over $3.7 billion in federal procurements.

But we’re not done yet:

Courtney also sought to use the actual and apparent power of the government to execute and protect his scheme, and to attempt to defeat law enforcement’s investigation. Among other things, Courtney caused a public official to attempt to prevent a private company from responding to a grand jury subpoena; caused a civilian attorney with the Air Force to contact one of the prosecutors on the case in an attempt to read that prosecutor in to the bogus program, thereby freezing the investigation; caused a public official to threaten FBI agents investigating this case with themselves being prosecuted if they did not drop the investigation; falsely told victims who had questioned his legitimacy that they were about to be arrested by the FBI for supposedly leaking classified information; used unwitting public officials to feed the names of innocent witnesses to the FBI, in the hopes that the FBI would seek to prosecute those innocent persons for supposedly leaking classified information, thereby diverting attention from himself; and sought to have real public officials issue and sign a ‘classification guide’ for the bogus program, a document that would have set forth the rules and standards by which information acquired as a part of a governmental program is classified.

You gotta admire the man’s brazenness, right?

Still, he was caught and now, in the words of the U.S. Attorney, “Courtney – along with his five aliases – will now spend the next seven years in federal prison for his deceitful and felonious criminal conduct.”

I was going to do a “what can we learn from this?” conclusion, but I gave up. Courtney preyed on the innocence and patriotism of gullible strangers—both in private industry and with the U.S. Government. He fooled lawyers and FBI agents. He fooled government procurement folks. He fooled just about everybody he came into contact with.

But he was caught and now must pay the price.

Last Updated on Thursday, 05 November 2020 20:40

The Contractor Submission Portal

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You can’t find the MRD on the DCAA website, but it’s making the rounds via industry associations, so we thought we’d talk about it. Give it a week or two, and then MRD 20-OTS-005 will be available to the general public.

What is MRD 20-OTS-005?

It’s called “Introduction of The Contractor Submission Portal,” and—as the name foretells—it discusses a new means for contractors to submit the annual proposals to establish final billing rates. (Which are popularly but incorrectly called “incurred cost submissions,” but that’s not the point of this article.)

The Contractor Submission Portal (“CSP”) is “a formal electronic method for contractors to submit their certified incurred cost submissions.” According to the MRD, “The goal of this portal is to provide a single place for contractors to submit their incurred cost proposal.”

Wait, what?

Historically, contractors already have had a single place to submit the final billing rate proposals. It was called email. You emailed the proposal to the cognizant Federal agency official (ACO, DACO, CACO, whatever) and you sent a copy to DCAA. We always sent it to the FAO Manager, but your mileage may vary. Anyway, it’s worked just fine for dozens of years; but now apparently we have a CSP to replace it.

Back to the MRD.

When a contractor submits its proposal into the CSP, an email will be generated from the CSP “to the cognizant FAO mailbox.”

So, basically, the CSP is simply a middleman. Instead of emailing your proposal to the FAO Manager, you submit to CSP and then CSP generates an email to the FAO Manager. That’s some brilliant process improvement and streamlining, right there.

Back to the MRD.

What the CSP is, according to the MRD, is a Sharepoint site that “is designed to allow access to all employees within the FAO.” What’s the value-added by the CSP Sharepoint site? “This allows any employee within the FAO to download a copy of the proposal submission from the SharePoint site to the contractor perm file and perform the adequacy review and subsequent audit of the submission.”

As opposed to forwarding it via email, we guess.

Another benefit (to DCAA) is that the CSP can generate status reports by contractor, showing which proposals are pending an adequacy determination and/or which proposals have been determined to be adequate and need to be audited. This is a cool feature, because (as you probably know) DCAA has two months after receipt to determine proposal adequacy and 10 more months after than to start and complete the proposal audit. We get that it would be important to be statusing contractor proposals, by contractor and by FAO, to make sure the statutory deadlines are being met.

Therefore, as near as we can tell, there is zero benefit to the contractor from the new CSP and next to zero benefit to the FAO auditors, but perhaps some moderate benefit to DCAA Headquarters from improved reporting.


Contractors are not required to use the new CSP, as the MRD makes very clear. However, FAOs are required to engage with their contractors and “encourage” support of the new initiative. It would be weird if nobody used this fancy Sharepoint site, right? Kind of makes you wonder what Fort Belvoir would do when some of the data is coming out of the CSP Sharepoint site and the rest is being manually aggregated by each FAO.

And there it is. Once touted as a “TurboTax of Incurred Cost Submissions,” the CSP is revealed to be a ho-hum Sharepoint site with some basic reporting functions.

Use it if you wish.

But before you decide, there is one thing we will mention that you may want to consider—and it’s something we’ve mentioned here before. Courts have held that the Contract Disputes Act’s Statute of Limitations does not start to run until the government knew or should have known about the costs the contractor was claiming. Courts have held that the government should not be expected to know about potentially disputable indirect costs until they have access to details about those costs; commonly, that’s not until the audit actually starts. We think that one way to start the clock earlier is to submit the entire expense ledger along with the final billing rate proposal.

It’s not clear to us that the CSP will accept such a potentially massive document. If the CSP will not accept it and you want to get that clock started, then that would be a reason not to use it and stick with tried-and-true email. Of course, given the current deadlines, it’s fairly rare that DCAA will wait to get that audit started. But you never know….

Something to consider.

Last Updated on Friday, 30 October 2020 08:21

Pension Benefit Curtailment and The Aftermath

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CAS 412 and 413, both gifts that keep on giving job security to actuaries, accountants, attorneys, and administrative law judges.

Which is to say, they are both complex Standards with a myriad of potential non-compliance pitfalls—especially for those few contractors that continue to maintain defined benefit pension plans. In addition—as we are about to discuss—a decision by a contractor to terminate or curtail its defined benefit pension plan can carry its own risks.

Let’s start with the basics.

As many contractors do, Northrop Grumman maintained additional benefits for its senior executives. In this case, the company maintained an Officers’ Supplemental Executive Retirement Plan (OSERP), which was a Rabbi trust where funds were put away for these executives, invested on their behalf, and then was made available (upon retirement) for those executives to supplement their other retirement pay and other retirement investments.

We like the old joke about such things: When executives tell employees that people are their most important resource, that’s a lie. In reality, their supplemental retirement plan benefits are their most important resource.

Okay. We’ll work on that one.

Anyway, Northrop curtailed the OSERP in 2014, after about 11 years of activity. The verb “curtailed” (or alternatively “froze”) was explained as “ending further contributions to the plan and curtailing increased benefits based on such contributions. Persons entitled to the pension would still receive it upon retirement, but their payments would be based upon their years of service as of the date of the curtailment, rather than their years of services as of their retirement date.”

As CAS 413 requires, when Northrop decided to curtail its plan, it calculated the plan’s assets and liabilities. If the assets are greater than the present value of the obligations, it means the government “overpaid” the pension plan expenses in prior years and is entitled to a refund. But if the assets of the pension plan are calculated as less than the present value of its obligations, then the contractor is entitled to a proportionate payment from the government to remedy the situation, because the prior years’ expenses were too low.

Here, Northrop did the actuarial math and calculated that the government owed it $75.7 million. Unsurprisingly, the government objected to both Northrop’s math and the resulting value. According to the government, when it did its own math and adjusted for Northrop’s inappropriate adjustments, it still owed the contractor some money—about $28.1 million—but nowhere in the neighborhood of $76 million. And that difference of $47.6 million became the amount of a claim and then a dispute, to be decided by the ASBCA.

Say what you want about the Cost Accounting Standards, but they certainly can generate some large-dollar controversies.

The funny thing—as noted by Judge Prouty—the Contracting Officer (or CFAO, as this function is called in the world of CAS) rejected Northrop’s claim in full, even though she agreed the government owed $28.1 million. Why? Because she said “she did not have the authority to pay this money.” That’s quite a puzzling statement and Judge Prouty noted “In our memory, we have never encountered a CO denying, in full, a claim that she determined to be partially owed to a contractor on the grounds of lack of authority. It is potentially problematic, to say the least ….” Of course, she had the authority and a failure to compensate Northrop for the amount she agreed was owed to the company teetered on being arbitrary, capricious, and/or an abuse of discretion. What does a Certificate of Appointment mean? Who’s training these government folks?

So there were pages and pages of discussion about mortality tables and the appropriate use of interest expense deductions when calculating the final settling-up amount. One issue was that CAS 412-50(a)(5) explicitly states that tax liability may not be used to recalculate rates of return even as it allows taxes as an expense. However, Judge Prouty noted that the pension settlement calculation was being made pursuant to the requirements of CAS 413—and CAS 413 did not contain an equivalent prohibition. Judge Prouty found that Northrop’s treatment of income tax payments on the OSERP assets was not compliant with CAS 412, but that it did not constitute a material noncompliance because “consideration of taxes as an expense was permissible and leads to the same result.”

Readers may recall that CAS does not deal with immaterial costs. You cannot be in non-compliance with CAS if the calculated value of the non-compliance is immaterial. As Judge Prouty correctly summed-up: “… we conclude that considering taxes in estimating the OSERP’s actuarial accrued liability was not CAS-compliant, but that the result here, of calculating them as a discount to the interest rate applied to the plan’s investments, was not material and generated an identical result, which we need not revisit.”

Having discussed and disposed of all government arguments against Northrop’s calculations, Judge Prouty declared—

The appeal is sustained in whole. We understand that the government has already begun compensating NG for some of the funds that the CO acknowledged were due and owing to it. This appeal is remanded to the parties to calculate the amount currently due and owing from the government to NG.

CAS 412 and 413, both complex Standards that have generated a more-than-fair-share number of disputes with respect to defined benefit pension plans. If you are not subject to Full CAS coverage or do not have a defined benefit pension plan, be thankful.

Last Updated on Tuesday, 03 November 2020 18:25

The CASB Preambles

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I’ve been doing CAS for many, many years. First, I was a student, trying to figure out what the Standards and the Regulations meant, then I was a consultant (working for somebody who was on the original CAS Board), and later I became an instructor. Now I’m the Editor of the LexisNexis reference book addressing CAS compliance.

The point is, I think I know something or two about the Federal Cost Accounting Standards.

When I teach CAS, I attempt to make clear that just reading the Standards is not sufficient. To get a good understanding of what a Standard means and how it is to be applied, you need to study three things:

  1. The Standard itself (there are 19 of them)

  2. The CAS Board Preambles associated with that Standard, which explain why the Standards and related Rules and Regulations were written, and provide a rationale for positions taken relative to issues raised in the public comments

  3. Any judicial opinions regarding disputes on how a contractor interpreted and/or applied the Standard

Until you’ve studied those three things, you don’t really know what any particular Standard means. Note I said “studied,” not skimmed, or scanned, or reviewed. If you are serious about gaining an understanding, you need to look carefully at each sentence. You may need to highlight and underline and draw arrows connecting concepts. You may need to diagram the sentence to ensure you really understand it.

You need to do the same thing with the Preambles and the judicial interpretations. You can’t just run through them in five minutes. You need to take your time and think about what you’re reading. If you’re not doing that, you’re not studying; you are simply reading. And that won’t get you where you need to go.

Now, many business people don’t have the time, or the inclination, to do all that. That’s where consultants come into play. (Hello!) Consultants have—at least in theory—spent the time studying so you don’t have to.

But assuming you want to put in the time and diligence, the FAR Councils just made it harder to do so.

On October 23, 2020, the FAR Councils published a final rule that ostensibly removed any references to a “FAR Appendix” (also known as “Appendix A to Part 30,” “Appendix B,” and “the Appendix). In addition, references to a FAR “loose-leaf” edition were also removed because “the FAR loose-leaf version is now published online at https://www.acquisition.gov. It is no longer published as a paper loose-leaf version.”

Well, that sounds innocuous, doesn’t it? No need for a loose-leaf FAR version when you can get it online. And why reference a “FAR Appendix” when people can “access 48 CFR chapter 99 easily online at the electronic Code of Federal Regulation (eCFR) website (https://www.ecfr.gov).”

Who could complain?

I could.

See one thing people may not know is that the FAR Appendix used to contain the CAS Board Preambles. You could look them up and study them, if you had a mind to. At one point, you could even order a hardcopy of the Preambles from the Government, if you had the inclination to send a letter to the Publications Office, Office of Administration, Executive Office of the President. But not any longer.

This final rule puts the final nail in the coffin by deleting any references to the Preambles from FAR Part 30.

Before the regulatory revision, FAR 30.101 stated—

(c) The Appendix to the FAR loose-leaf edition contains-

  1. Cost Accounting Standards and Cost Accounting Standards Board Rules and Regulations Recodified by the Cost Accounting Standards Board at 48 CFR Chapter 99; and

  1. The following preambles:

(i) Part I-Preambles to the Cost Accounting Standards Published by the Cost Accounting Standards Board.

(ii) Part II-Preambles to the Related Rules and Regulations Published by the Cost Accounting Standards Board.

(iii) Part III-Preambles Published under the FAR System.

(d) The preambles are not regulatory but are intended to explain why the Standards and related Rules and Regulations were written, and to provide rationale for positions taken relative to issues raised in the public comments. The preambles are printed in chronological order to provide an administrative history.

Those paragraphs were stricken by the final rule, and you won’t find them in the FAR again. Unless you already know about the Preambles, you won’t know they exist.

Over the years, the Preambles have become harder and harder to locate. Certainly, they do not exist in either the 48 CFR Chapter 99 found on www.acquisition.gov. Nor do they exist in the 48 CFR Chapter 99 found on the Electronic Code of Federal Regulations. You can’t get where you want to go from those sites.

What you will get is the same statement found in the CAS Board’s Regulations (at 48 CFR 9903.307). To wit—

Preambles to the Cost Accounting Standards published by the original Cost Accounting Standards Board, as well as those preambles published by the signatories to the Federal Acquisition Regulation respecting changes made under their regulatory authorities, are available by writing to the: Publications Office, Office of Administration, Executive Office of the President, 725 17th Street NW., room 2200, Washington, DC 20500, or by calling (202) 395-7332.

Go ahead and write them. I did. When I did, I was told that no copies were available. Maybe you’ll have better luck than I did.

As noted in the soon-to-be-deleted FAR paragraphs quoted above, the Preambles have three parts. Finding Part III used to be relatively easy, but finding Parts I and II was damn near impossible. Now, the Preambles—all three parts—will be assumed to just not exist.

Which is tragic in many respects. As I stated in the beginning, I don’t think you can really understand the Board’s intentions with respect to the CAS Rules, Regulations, and Standards unless you study the Preambles. Consequently, locating them so that you can study becomes rather critical.

Where can you find them?

Well, we noted that the CPA firm Cohn Reznick has kept a copy of Preambles Parts I and II, and made that copy available on its website.

If you want just Part III, you can find it on www.acquisition.gov, even though you can’t find it under the FAR Chapter 99 heading. (Link: HERE.)

You can also buy Lou Rosen’s 2013 book, Cost Accounting Standards Board Regulations, Standards and Rules. That has the Preambles in it; however, be advised that the Preambles are organized chronologically, and not grouped by the Standard (or Regulation) to which they pertain.

The situation, then, is problematic. At least, it’s problematic for students (or want-to-be students) of the Federal Cost Accounting Standards. The FAR Councils’ decision to delete any FAR reference to the Preambles just makes it that much harder for the next generation of contracting officers, auditors, and contractor compliance folks who have to interpret and administer them, without access to the CAS Board's thoughts.

Last Updated on Wednesday, 28 October 2020 16:57

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Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.