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Welcome to Apogee Consulting, Inc.

Thoughts on the Navy Gold Coast Small Business Conference

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appogee_consulting_trade_showAs many of you know Apogee Consulting, Inc. attended its first trade show this past week. We exhibited at the Navy/NDIA Gold Coast Small Business conference, a 2-day affair. This article explores our impressions of the conference.

First, thanks to all those who sponsored the conference, who volunteered, who handled logistics, who coordinated the speakers and who made everything work for the participants and exhibitors. We very much appreciate your efforts.

Second, let’s talk about the presentations and the speeches.

Oh, wait. We can’t do that, because we didn’t hear any of them. We were over in the exhibitors’ space for the entire two days. To be fair, we could have – and were encouraged to – go have lunch with the participants and listen to the luncheon speakers. We chose not to accept that offer and, instead, to hang out in case anybody wanted to discuss Apogee Consulting, Inc. with us. (We were not the only exhibitors to make that decision.)

When we say above that we were “encouraged” to have lunch and listen to the luncheon speakers, that’s a bit of understatement. In fact, the exhibitors’ space was closed and the doors were locked and security actively kept people – including the exhibitors – from entering. The only flaw in that cunning plan was the bathrooms. Each bathroom had multiple entrances. For example, the men’s room had two doors facing the main hallway. In addition, the men’s room had a door that faced the exhibitors’ space. So while security had locked the entrance doors and was guarding them with two or sometimes three people, we just went in and out through the bathroom. It was no problem whatsoever. (Don’t tell them about the security hole.)

We were excited to be among the exhibitors, which included large primes (such as Lockheed Martin, Northrop Grumman, Raytheon, and AMEC Foster Wheeler) and other small businesses. Most of those small businesses seemed to be in search of primes that would buy their services/products. Some of the small businesses were looking to hook up with Navy folks and maybe grab a small business set-aside award. Some of the exhibitors (like us) were looking to hook up with the other exhibitors and make B2B deals.

Unlike most (if not all) of the other exhibitors, Apogee Consulting, Inc. wasn’t there solely to generate sales. We were there to expand brand awareness and to perhaps engage in some discussions about government contract compliance and related matters. And indeed, we had several good interactions. Those interactions may turn into projects or they may not, but they were fun!

We had several discussions with primes and several discussions with others (e.g., DCMA) and they encouraged us to submit Statements of Qualifications and to register in the appropriate databases so that we could get work. After some internal discussion, we don’t think that’s the right approach for us. We are a very small consultancy and we simply don’t have the bandwidth to support a large number of engagements. While it would be nice to be recommended by DCMA, contracting officers and/or primes to their various small business constituencies, we don’t have the appetite to support that work. Thus, we’ll continue to rely on this blog, word of mouth, and other channels to generate a small number of advisory projects with select clients—projects that we will enjoy performing.

Interestingly (as least to us) we overestimated the interest in government contract compliance by the attendees. We had anticipated about 150 – 200 interactions and we had about 10 – 15 over the course of two days. And in no case did anybody actually ask us any questions about compliance. The closest we got was a question about QuickBooks. In another instance we offered several sites for research purposes and we recommended one or two seminar providers. But that was it. The people who stopped to chat acknowledged the importance of compliance, and they acknowledged their general lack of knowledge in the area, but they couldn’t (or wouldn’t) engage in any in-depth discussions. There were no questions about cost allowability or direct versus indirect or compliance with Cost Accounting Standards. That surprised us. On the other hand, perhaps people were reluctant to air their dirty laundry in public, preferring rather to research us before engaging us. Which is fine … but nonetheless it took us by surprise.

All the other exhibitors had trinkets to give away in order to attract people to their booths. There were many with pens, some with candies, others with mousepads. There was one with branded mini-calculators. Everybody had something. Apogee Consulting, Inc. had knowledge. We were giving away advice and knowledge. That was all we had.

We were giving away knowledge but almost nobody at the conference seemed to want to receive it. Several participants acknowledged the importance of knowledge in this difficult area, and they acknowledged they lacked knowledge in this important area, but nobody – none of the people at the conference – tried to rectify their lack of knowledge by actually asking questions of the people who were the (relative) experts in the area.

 

Pre and Post Contract Costs

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DCAA incurred cost audit procedures often require auditors to examine claimed costs that are outside a contract’s period of performance. Many contracts specify a period of performance – i.e., a start date and a completion date. For example a firm, fixed-price (FFP) contract might specify that a contractor must provide a specific Level of Effort (LOE) for a certain duration. (See, for example, FAR 16.306(d)(2).) DCAA audit guidance (at 6-202.2, Feb. 2016) directs auditors to disallow claimed costs outside the specified contractual period of performance, stating: “The auditor shall not approve for reimbursement any costs incurred by the contractor subsequent to the expiration date stated in the contract, or in excess of contract limitations.”

Thus, according to DCAA, costs incurred after the expiration of the contract’s period of performance will be disallowed. But note the language carefully. It says “costs incurred by the contractor” not all costs. For example, costs incurred by a subcontractor before the expiration of the prime contract’s period of performance, but not recorded by the prime contractor until after the expiration date are clearly allowable costs.

Disagreements with DCAA auditors often center on contract close-out activities, such as efforts to obtain plant clearance for property, security and intellectual property certifications, and costs associated with preparing final invoices. If those efforts are charged as direct costs, and fall outside the contractual period of performance, they run the risk of disallowance. As we have posted before, our recommendation is to consistently treat the costs of contract close-out activities as being indirect costs, thus avoiding that risk.

Some contracts are called “completion-type” because they obligate the contractor to deliver the specified product. While costs incurred in excess of estimated costs may not be reimbursed, the contract’s period of performance may be waived. In other words, the contractor may deliver late, and any costs incurred in performance (even after the period of performance has expired) may be claimed as allowable costs, up to the contractually specified cost limit. (See DCAA CAM at 6-202.3.) With respect to completion type contracts, the DCAA CAM states: “… questioning costs based only on the fact that they were incurred after the performance period would be inappropriate.”

But what about costs incurred before the official contract start date?

Such costs are called precontract costs. They are discussed at the cost principle found at FAR 31.205-32. That cost principle states—

Precontract costs means costs incurred before the effective date of the contract directly pursuant to the negotiation and in anticipation of the contract award when such incurrence is necessary to comply with the proposed contract delivery schedule. These costs are allowable to the extent that they would have been allowable if incurred after the date of the contract (see 31.109).

Based on the cost principle, if a contractor starts work early, it may claim those costs only if certain conditions are met. To be allowable, the precontract costs must:

  1. Be incurred “directly pursuant to” contract negotiations. We interpret that to mean that the contractor must disclose its early start to government negotiators, and they must not prohibit the early start.

  2. In anticipation of the contract award. We interpret that to mean that both parties must believe that the contractor will receive an award. A contractor cannot simply start work based on submitting a proposal; there must be a clear indication that the contractor will be the winning offeror and the government anticipates giving that contractor a contract.

  3. Must be necessary to comply with the proposed delivery schedule. The costs must be shown to be related to the proposed delivery schedule, such that, without being incurred, the proposed delivery schedule cannot be met.

  4. The must be allowable. In other words, a contractor cannot make an unallowable cost allowable by calling it a precontract costs.

Finally, there is a reference to FAR 31.109, meaning that the FAR drafters recommend an Advance Agreement be executed to clearly show the parties’ intent to incur and reimburse precontract costs. Note that such an Advance Agreement is not required; it is simply recommended. Legitimate precontracts costs that meet the four tests noted above should not be disallowed by DCAA auditors because an Advance Agreement is lacking. (See DCAA CAM at 6-202.1.)

Given the scrutiny DCAA auditors often apply to contracts’ periods of performance, contractors should take care to ensure that all claimed costs fall within specified contract dates. Where costs fall outside the contractual periods of performance, see if one of the exceptions we’ve listed here may apply. Another good practice is to modify the contract (or subcontract) as necessary to adjust the official period of performance to match the parties’ expectations. In our experience, it’s easier to process an administrative (no-cost) mod than it is to try to convince the auditors that a claimed cost that falls outside the official contract period of performance should not be disallowed.

 

DoD Revisits Procurement of Commercial Items After Criticism of Past Efforts

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On August 13, 2016, a proposed DFARS rule (DFARS Case No. 2016-D006) was published in the Federal Register. This is not DoD’s first attempt at such rule-making. For instance, readers may wish to review our comments on the prior attempt, which took place almost literally one year ago. We said at the time that the proposed rule was “… simply the return of the pre-FASA application of rigid mathematical formulae to determine commerciality.”

We weren’t the only ones to express concerns with the 2015 proposed rule-making. In a follow-up article, we noted critical comments from the Council of Defense and Space Industry Associations (CODSIA), as well as a critical letter written by Senator John McCain (R-AZ) and sent to SECDEF Ash Carter. In response, Frank Kendal (USD, AT&L) publicly walked back from the rule-making, and seemed to indicate that changes would be made in response to comments received.

So here we are, one year later, and we have an opportunity to gauge those promised changes. To that end, let’s review the comments received by the DAR Council and how they were dispositioned.

Comment: A number of respondents expressed concern that proposed rule 2013-D034 would exclude readily available data to determine commerciality.

Response: In accordance with section 831 of the NDAA for FY 2013, this rule will ensure that in cases in which uncertified cost information is required, the information shall be provided in the form in which it is regularly maintained by the offeror in its business operations. Further, in accordance with section 855 of the NDAA for FY 2016, this rule directs that market research shall be used, where appropriate, to inform price reasonableness determinations. Additionally, DoD is establishing a cadre of experts to provide expert advice to the acquisition workforce in assisting with commercial item and price reasonableness determinations.

We were interested to see that DoD has a “cadre of experts” who will provide “expert advice” to contracting officers faced with making a commercial item determination and in determining whether the price offered is fair and reasonable. We can’t help wondering how those experts were selected and what their qualifications may be. Does each individual have at least 10 years in making commercial item determinations under the current FAR 2.101 definition of “commercial item”? If not, what combination of experience and training confers their subject matter expertise? We think the rule-makers should have addressed that point.

Comment: A number of respondents took exception to the definition of “market-based pricing” in proposed rule 2013-D034.

Response: The definition of market-based pricing in proposed DFARS rule 2013-D034 has not been retained in this proposed rule.

Comment: A number of respondents took exception to the treatment of modified commercial items and catalog items in proposed rule 2013-D034.

Response: This rule focuses on obtaining appropriate data for determinations of price reasonableness, and provides for the consideration of the same or similar items under comparable and differing terms and conditions, and catalog prices, when regularly maintained and supported by relevant sales data, to serve as the basis for price reasonableness determinations.

Those are good things. Maybe the DAR Council listened to the comments received.

Comment: A number of respondents did not agree with the requirement for sales data to support a commerciality determination in proposed rule 2013-D034.

Response: This proposed rule does not address additional requirements for offerors to provide sales data to support a commerciality determination. This rule expands the use of FAR part 12 procedures. In accordance with section 853 of the NDAA for FY 2016, contracting officers may presume that a prior commercial item determination made by a military department, a Defense agency, or another component of the Department of Defense shall serve as a determination for subsequent procurements. Further, in accordance with section 857 of the NDAA for FY 2016, supplies and services provided by nontraditional defense contractors may be treated as commercial items.

More good things.

For those interested, the proposed rule seeks to add a definition of “nontraditional defense contractor” to DFARS 212.001 (Definitions). If implemented as drafted, a nontraditional defense contractor would be –

an entity that is not currently performing and has not performed any contract or subcontract for DoD that is subject to full coverage under the cost accounting standards … for at least the 1-year period preceding the solicitation of sources by DoD for the procurement or transaction

That’s a very interesting definition.

We noted that the proposed definition is different from the one used in implementing the pilot program for acquisition of “military-purpose nondevelopmental items” as described at DFARS 212.71. In that language, a nontraditional defense contractor is defined as a contractor that has not had –

--Any contract or subcontract that is subject to full coverage under the cost accounting standards prescribed pursuant to section 26 of the Office of Federal Procurement Policy Act (41 U.S.C. 1502) and the regulations implementing such section; or

--Any other contract in excess of the certified cost or pricing data threshold under which the contractor is required to submit certified cost or pricing data.

See the difference? Obviously, the definition being proposed in the new rule is more expansive than the definition found in the old (2011) rule that implemented the pilot program for acquisition of military-purpose nondevelopmental items. We discussed that pilot program in this article. The DFARS language as currently drafted does not explicitly say that the definition found in 212.71 describes a “nontraditional defense contractor,” but if you review the interim DFARS rule that became the final DFARS rule (without changes to the interim rule) that became DFARS 212.71, it is quite clear what is being defined.

Will that be a source of confusion? Who knows? It depends on whether the cadre of DoD subject matter experts will connect the dots the way we have.

Finally, let’s point out that the new definition of nontraditional defense contractor, the one that says that any entity that is not fully CAS-covered, nor has been for at least one year, is extremely expansive. Since any small business is, by CAS regulation, exempt from CAS coverage, that means that every single small business in America is now suddenly a nontraditional defense contractor and is capable of supplying commercial items to the DoD. Is that what the rule-makers intended?

And it’s not just small businesses. Any contractor that is other than fully CAS-covered can be a nontraditional defense contractor under the proposed definition. That seems … counter-intuitive. We suspect the rule drafters simply forgot the second half of the 212.71 definition. But in case we are wrong about that, if implemented as drafted then many upon many contractors just become nontraditional defense contractors, even if their only customer has been the Department of Defense.

Have fun with that.

 

Last Updated on Monday, 22 August 2016 17:47
 

SBA Opens Mentor-Protégé Program to All Small Businesses

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Did you see this final rule, published in the Federal Register on July 25, 2016? It’s kind of awesome. It expands the Mentor-Protégé Program to all small businesses.

Before now, the Program was limited to 8(a) Program participants. If you were an 8(a) participant, then you could be a Protégé to a large business Mentor. There were several advantages to both parties from program participation. With respect to DoD participants under the “pilot” Mentor-Protégé Program (which was initially established in 1991), Protégé firms can receive significant assistance from their Mentor firms in terms of management systems, help with proposal preparation, and other important areas. With respect to the Mentor firms, they can receive direct reimbursement from DoD for the costs of assisting the Protégé firms, or if not direct reimbursement, they can apply their costs towards small business plan credit for categories in which they are lagging their goals. And (perhaps most importantly) a Mentor firm can award a subcontract to a Protégé firm without competition.

We did our time in the Mentor-Protégé Program trenches in the 1990’s. Indeed, our team was awarded one of the earliest Nunn-Perry Awards for achievement in that area. But that was a very long time ago, and the new SBA rules signal a new chapter in the Program.

The new rule opens the Program to all small businesses. If your firm qualifies as a small business under a NAICS code, then it can qualify as a Protégé firm – assuming you can find a Mentor firm willing to help you out. If you are a large business, then any small business supplier you have—or are considering using—can become a Protégé firm. The benefits from the arrangement are noted above.

And SBA expanded the benefits as well as opening the program to all small businesses. It loosened the affiliation standards, such that a Mentor and Protégé could create a Joint Venture and pursue work as a small business. The new rule provides –

A firm that has an SBA-approved mentor-protégé agreement authorized … is not affiliated with its mentor firm solely because the protégé firm receives assistance from the mentor under the agreement. Similarly, a protégé firm is not affiliated with its mentor solely because the protégé firm receives assistance from the mentor under a federal mentor-protégé program where an exception to affiliation is specifically authorized by statute or by SBA under the procedures set forth in § 121.903. …

Two firms approved by SBA to be a mentor and protégé under § 125.9 of this chapter may joint venture as a small business for any Federal government prime contract or subcontract, provided the protégé qualifies as small for the size standard corresponding to the NAICS code assigned to the procurement, and the joint venture meets the requirements of § 125.18(b)(2) and (3), § 126.616(c) and (d), or § 127.506(c) and (d) of this chapter, as appropriate.

For purposes of this provision and in order to facilitate tracking of the number of contract awards made to a joint venture, a joint venture: must be in writing and must do business under its own name; must be identified as a joint venture in the System for Award Management (SAM); may be in the form of a formal or informal partnership or exist as a separate limited liability company or other separate legal entity; and, if it exists as a formal separate legal entity, may not be populated with individuals intended to perform contracts awarded to the joint venture (i.e., the joint venture may have its own separate employees to perform administrative functions, but may not have its own separate employees to perform contracts awarded to the joint venture). SBA may also determine that the relationship between a prime contractor and its subcontractor is a joint venture, and that affiliation between the two exists, pursuant to paragraph (h)(5) of this section.

So the ability to joint venture is not without limits, and we strongly recommend that any Mentor and/or Protégé firms seeking to take advantage of this change read the SBA rules in Title 13 of the Code of Federal Regulations very carefully.

Another change is that the SBA will permit a Mentor to invest in and own as much as 40 percent of its Protégé firms without changing the Protégé firms’ status as a small business. This would seem to be of a significant advantage to those large firms seeking access to small business set-asides.

In summary, it looks like the SBA has opened the floodgates and we expect quite a number of government contractors to be thinking hard about how to take advantage of the new environment.

 

Last Updated on Monday, 22 August 2016 17:49
 

DOD Pays Pension Cost Impacts

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Pay_UpTen years later, the piper is being paid. Liabilities created in 2006, which DOD refused to budget for at that time and, indeed, through most of the past ten years, are now coming due. We are talking about the cost impacts associated with contractors’ defined benefit pension plans.

It’s been quite a while since we had anything substantive to report on the issue. The most salient blog article is this one. There are others, some dating back to 2010. In other words, this is not a new issue. But the impacts are being felt in the current government fiscal year.

Legislative changes to pension plan accounting enacted in 2006 created ripple effects with respect to compliance with CAS 412 and 413. CAS-covered contractors with defined benefit pension plans claimed entitlement to the cost impacts associated with those ripple effects. DOD knew about the cost impacts, and at first did nothing but later issued some fairly bizarre guidance that contractors were sure to challenge. Meanwhile, the large defense contractors calculated their cost impacts, submitted them for audit and eventual negotiation, and prepared to file claims if the DOD failed to pay up.

And now the first payment (that we know of) has been made. Buried in the lower middle of the August 12, 2016 Defense Department’s list of daily contract awards is the following notice:

Boeing Co., Seattle, Washington, has been awarded a $22,598,000.00 contract action modification (P00100) to previously awarded contract FA8625-11-C-6600 to account for the impact of The Pension Protection Act of 2006, Pub. L.109-280; Moving Ahead for Progress in the 21st Century Act, Pub. L. 112-14; the Highway and Transportation Funding Act of 2014, Pub. L. 113-159; and the Bipartisan Budget Act of 2015, Pub. L. 114-74, as identified in accordance with the terms of the settlement agreement: The Boeing Company Request For Equitable Adjustment And Claim For Pension Protection Act Cost Impact, Amendment 01, dated July 5, 2016. This modification funds a portion of the equitable adjustment for costs incurred related to engineering and manufacturing development.  Fiscal 2015 research, development, test and evaluation funds in the amount of $22,598,000.00 are being obligated at time of award. The Air Force Life Cycle Management Center, Wright-Patterson Air Force Base, Ohio, is the contracting activity.

Obviously we don’t know the details of the agreement with Boeing. We don’t know if this is the entirety of the adjustment to be paid to the contractor, or perhaps simply one of many. For example, it is conceivable that DoD would make one payment per affected military service (i.e., one for USAF, one for Army, one for Navy, etc.). The FAR gives the Cognizant Federal Agency Official (CFAO) discretion and wide latitude regarding how to reflect equitable adjustments stemming from CAS-related cost impacts. Still, $22.6 million is a decent chunk of change. Even if this represents 100 percent of the equitable adjustment, it’s not bad. Not bad at all.

And remember, Boeing is just one of the affected contractors. Other large contractors have also submitted REAs and claims for their calculated cost impacts. Any CAS-covered contractor with a defined benefit pension plan is a candidate for an equitable adjustment. So we don’t know the total bill to be paid with current DoD appropriated funds. But based on this figure, it’s going to be a fairly large figure. (Well, unless you are used to dealing with billions of dollars. In which case, it will be a small blip on the financial radar screen.)

Left out in the cold while the large contractors negotiate their claims with DoD are the smaller contractors, the ones that have defined benefit pension plans and cost-type contracts, but which are not fully CAS-covered. As we told readers, those contractors (whomever they are) have to comply with CAS 412 and 413 because there is a FAR Part 31 cost principle that requires them to do so. However, since they are not subject to CAS outside of the cost principle, the rules on changes to cost accounting practice don’t apply to them.

We wrote at the time—

We have long argued that it makes little sense to exempt contractors from the burdensome requirements of CAS coverage, only to condition cost allowability on compliance with certain aspects of the Standards. And now, once again, we see the inequity of that situation.

Sorry guys, you’re out of luck on this one.

And we think that assessment still holds true today.

In any case, while the little guys are getting shafted, the big guys are doing their negotiation dance with DoD and making bank. This was all foreseen ten years ago, and the can was deliberately kicked down the decade-long road so that it could be made somebody else’s problem – and that “somebody else” is today’s CFAO at Boeing and the Air Force program team and all the other current DoD employees impacted by these long-simmering claims. Sorry guys, but you’re out of luck on this one, as well.

 

 

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Newsflash

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.