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Compliance with Labor Law Stuff

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I’m always surprised when government contractor personnel don’t want to cooperate with auditors’ requests for information. What did they expect was going to happen when they accepted that government contract?

To be clear, though, there are boundaries that should be enforced. Government auditors aren’t entitled to everything. They are, however, entitled to request and review most things. Knowing those boundaries is a key part of what every compliance practitioner needs to know. The other aspect of knowing those boundaries is explaining them to employees—often executives—who don’t know and probably don’t care, and most certainly do not want to provide to the auditors what they have requested.

They signed the contract but they didn’t read the fine print, the part in Section I where those pesky “clauses incorporated by reference” are listed. Too bad because, if they’d known what they were signing up for, they might not have signed. Or—more likely—they would have signed anyway, because revenue. But at least they would have had a clue.

Now, either during performance or perhaps after performance is complete, a government audit is happening. Auditors are requesting information, and they (quite reasonably) expect the company to provide the information requested. But somebody doesn’t want to provide the information. Why? Maybe they’re too busy right now, overwhelmed with all the other stuff they need to be doing. Or maybe they see the audit request as being unreasonable, over-the-line, beyond the pale. Government overreach. They’re just objecting based on principle.

Or maybe they have something to hide.

There’s very often no way to tell what’s really going on. Nobody can read minds. (Or, if you can read minds, then you are definitely in the wrong line of work.) But what’s often forgotten in the internal debate over what can and should be provided to the auditors is the point that the auditors can’t read minds either. They don’t know why the company won’t provide what they’ve requested—and they often default to the worst position: the company won’t provide the information because there is something to hide.

We were reminded of the rules about what can and should be provided versus what should not be provided by this news brief issued by the Department of Labor. As you can see (if you follow the link), the Department of Labor Administrative Law Judges have ordered a government contractor to provide information and documents related to a review of the contractor’s affirmative action program.

As we reviewed the case, it seems that this issue has been in play since 2013. Yes, that’s right. For eight years, a government contractor has disputed the Department of Labor’s right to review its affirmative action plans.

Anyway, after eight years of dispute (and eight years of paying attorney fees), the government contractor was told in no uncertain terms to comply “upon penalty of debarment and contract termination.” That would be quite a hit to the company’s revenue, we believe. Not a great hill to die on, in our view.

The DoL Judge found that the contractor “violated 41 C.F.R. § 60-1.12(c)(2) by failing to provide its written affirmative action programs and supporting data upon request, and that Defendant did not have good cause to excuse the violation.” This was after the contractor had argued that the audit requests were “unconstitutional under the Fourth Amendment because OFCCP has failed to articulate a basis for having selected any of [the contractor’s] facilities for compliance review according to a neutral administrative plan. [The contractor] further argues that the number of document requests is unreasonably burdensome….”

Yeah, no.

Defendant [the contractor], through its officers, directors, partners, representatives and agents, jointly and individually, shall provide all information Plaintiff [the Department of Labor] requested in the scheduling letters that were identified in the administrative complaints filed in these consolidated cases. Defendant shall provide the information to Plaintiff’s representatives no later than 4:00 PM on the business day next following the thirtieth calendar day after this Order becomes final under the law.

Should Defendant fail to comply with the Order set forth above, Plaintiff is directed to take all administrative steps necessary to terminate all existing Government contracts held by Defendant, jointly and individually, and to debar Defendant from receiving and participating in any future Government contracts for a period of at least three years or until Defendant complies with the provisions of EO 11246, the VEVRAA, the Rehabilitation Act, and 41 C.F.R. Chapter 60, whichever period is longer.

The next time some executive in your company wants to dispute the government’s right to request, receive, and review documents for which it clearly has the authority to request, receive, and review, we suggest you mention this little lesson.


Global Fraud Resolution

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With not much happening in terms of regulatory changes or DCAA audit guidance updates—and with nothing happening at the CAS Board—we have scaled back the frequency of blog articles. When we do post, it is likely to be about a Department of Justice settlement. Even then, we try to restrict those articles to something that may be informative, something that may impart a lesson learned to our readers.

Today, as we wind up 2021, we have another DoJ settlement and (hopefully) another lesson for our readers.

On December 22, 2012, the Department of Justice announced that it had reached a “global resolution” of both civil and criminal matters with the contractor, Balfour Beatty Communities, LLC (BBC), an entity that was described as “one of the largest providers of privatized military housing to the U.S. Armed Forces.” (BBC operated 55 military housing communities for three different services, according to the DoJ press release.) The resolution involved BBC pleading guilty to one count of major fraud against the United States (18 U.S.C. § 1031)(a)(1)). In addition, BBC agreed to pay “over $33.6 million in criminal fines and over $31.8 million in restitution to the U.S. military, serve three years of probation, and engage an independent compliance monitor for a period of three years.”

But wait. There’s more. “Separately, BBC also entered into a False Claims Act settlement with the United States to resolve its civil liability for $35.2 million. The amounts paid under the civil settlement will be credited against the amounts owed under BBC’s criminal plea.”

So basically, almost $66 million. Not a small settlement, not at all.

What had BBC done to warrant such a significant payment?

According to the press release, BBC employees falsely claimed that the company had met contractual performance objectives in order to obtain quarterly (or semi-annual) performance incentive fees. The relevant contractual objectives related to timely performance of maintenance services and resident satisfaction with BBC’s management. “BBC employees altered or manipulated data in property management software and destroyed and falsified resident comment cards to falsely inflate these metrics and, ultimately, to fraudulently induce the service branches to pay performance incentive fees which BBC had not earned.”

In addition, “the military service branches were provided an inaccurate assessment of the state of BBC’s military housing communities and were unable to assess, and potentially correct, BBC’s performance.”

The size of the fine was affected by a number of factors, “including the nature and seriousness of the offense, the pervasiveness of the misconduct among BBC’s employees and at multiple military installations, and the state of BBC’s compliance program and the progress of its remediation, including the fact that BBC’s compliance program and internal controls [had] not been fully implemented or tested to demonstrate that they would prevent and detect similar misconduct in the future.”

Finally, the announcement stated that two BBC employees had been individually charged with offenses related to the scheme, and both had pleaded guilty earlier this year.

What lessons can be learned from this?

First, many contractors have award-fee contracts or incentive-fee contracts that require a contractor’s self-assessment. Other contracts make the self-assessment optional. In either case, contractors must be clear that their self-assessments are legal documents, subject (at a minimum) to the False Statements Act. And, as this case clearly shows, false statements (or documents) may lead to allegations of violations of the False Claims Act (or the Major Fraud Act). Therefore, contractors must take care to ensure that their self-assessments are factually correct to the best of their ability. There is a natural, human, tendency to puffery in such things—but that tendency must be tempered with the knowledge that an intent to deceive could have catastrophic consequences for the company that far exceed the award or incentive fees earned. Those consequences could (and, in this case, did) extend to individual employees.

Second, note that, once again, a contractor was heavily fined for an inadequate compliance program and associated internal controls. Contractors who have accepted contracts that contain FAR clause 52.213-13 (“Contractor Code of Business Ethics and Conduct”) are urged to read it closely and to take its requirements seriously. The money you save by implementing a robust compliance program and associated internal controls may be sufficient to repay your investment, several times over.

Link to DoJ’s charges is here.

Link to BBC’s plea agreement is right here.

This is likely the last 2021 blog article. We wish for you peace and prosperity in 2022!


Overcharged Overhead

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Federal contractor Charles Stark Draper Laboratory, Inc. is a not-for-profit entity based in Cambridge, Massachusetts. Recently, Draper entered into a settlement agreement with the U.S. Government to resolve allegations that it “improperly overcharged the government under federal acquisition regulations (sic) for certain overhead costs.” The costs were recorded in 2016, and were identified during government audit.

The government alleged that Draper “improperly billed the government for costs associated with internal projects that Draper called ‘Opportunity Investments.’” It’s not clear exactly what Draper’s Opportunity Investments were. Were they akin to contractor Independent Research and Development (IR&D) efforts? Or perhaps they were internal projects intended to result in process efficiencies and/or cost reduction. We don’t know.

But we do know that Draper’s “Opportunity Projects” were audited, and the audit asserted that “Many Opportunity Investment projects were not of interest to the government, or Draper lacked sufficient documentation to justify the costs.” Readers are reminded of FAR 31.201-4, which discusses the concept of allocability. Costs may be allocated under one of three methods; the method that seems germane here is the notion that a cost is allocable to a government contract if the cost “benefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received …” In other words, when challenged, a contractor must be able to describe the beneficial relationship between the costs it has incurred and the amount(s) allocated to its government contracts.

We don’t know if Draper’s contracts contained additional DFARS cost principles, or if those cost principles were related to the “Opportunity Projects.” Assuming yes and also assuming that the Opportunity Projects were akin to IR&D projects, then DFARS 231.205-18 requires a “major contractor” (as defined in that cost principle) to analyze its IR&D costs for efforts “of potential interest to DoD.” IR&D expenses that are not of potential interest to DoD are not allowable costs with respect to contracts that contain the DFARS IR&D cost principle.

Again, there’s a lot we don’t know about the situation. However, the DoJ press release did offer the following additional information—

The audit also found that Draper lacked sufficient internal accounting controls concerning Opportunity Investments. When the Department of Defense requested additional information about the costs flagged by the audit, Draper, for months, did not reveal that it lacked documentation to support charging some of the Opportunity Investments to the government.

That additional bit points to some other issues that Draper allegedly had. First, most everybody should understand that DCAA probes for internal controls in most (if not all) of its Business System audits—including audits of a contractor’s accounting system. (We’ve written about that aspect of accounting system audits on this blog.) If a contractor does not have robust (and documented) internal controls, then it will likely not do particularly well in its audits.

Second, Draper (allegedly) didn’t tell the government auditors that it lacked documentation to support the allocation of its Opportunity Investment project costs to its government contracts. Readers are reminded that FAR 31.201-2 (“Determining Allowability”) states—

A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements. The contracting officer may disallow all or part of a claimed cost that is inadequately supported.

We don’t know the total dollars involved, but we do know that Draper settled the allegations for $3.5 million (not counting unallowable attorney fees). Gosh, we wonder how many internal controls could have been established and documented for that kind of money?

So there you go. Draper’s costs were subject to disallowance on a variety of potential bases. As always, our intent here is not to castigate Draper, but instead to provide an opportunity for our readers to learn from Draper’s mistakes, so as to avoid their own.

Last Updated on Monday, 06 December 2021 08:23

Criminal Conspiracy to Illegally Restrain Wages?

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On December 9, 2021, the Department of Justice reported that a criminal complaint against an individual executive of Raytheon Technologies’ subsidiary, Pratt & Whitney, had been unsealed. As most readers know, Pratt & Whitney is a huge manufacturer of various airplane engines (2017 revenues in excess of $16 billion), with a long history as a U.S. defense contractor.

According to the criminal complaint, a (now former) Pratt & Whitney Director of Global Engineering Sourcing, participated in “a long-running conspiracy with managers and executives of several outsource engineering suppliers (Suppliers) to restrict the hiring and recruiting of engineers and other skilled laborers among their respective companies.” The complaint alleged that Mahesh Patel “enforced this agreement while serving as an intermediary between conspiring Suppliers.”

The DOJ announcement provided some details of the allegations, as follows—

Patel upheld a conspiracy among aerospace companies [the Suppliers] not to hire or recruit one another’s employees. At times, Patel confronted and berated Suppliers who cheated on the agreement, often at the direct behest of another Supplier, and threatened to punish nonconforming Suppliers by taking away valuable access to projects. In addition, as the complaint alleges, Patel and co-conspirators recognized the mutual financial benefit of this agreement — namely, reducing the rise in labor costs that would occur when aerospace workers were free to find new employment in a competitive environment.

Reading between the lines a bit, it seems that Patel felt pressure to hold down the labor costs of providers of outsourced engineering services. Was that cost-control pressure (if it existed) exerted on him from above, or was it created in his mind in order to justify his value-add to the company? We (obviously) don’t know, but we assume it will come out in the trial.

Speaking of the trial, the DOJ announcement stated that Patel was charged with “conspiracy in restraint of trade.” Our (non-legal) understanding of the allegation is that Patel has been charged with a violation of the Sherman (Anti-Trust) Act.

Patel was arrested. Yes, that’s what happens when somebody is charged with a criminal complaint. Patel was arrested and he appeared before a Judge. After his appearance, Patel “was released on conditions including travel restrictions and a $100,000 appearance bond.” The DOJ press release stated—

The maximum penalty for conspiracy to restrain trade under the Sherman Antitrust Act is 10 years of imprisonment and a fine of $1 million for individuals. The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime if either amount is greater than the statutory maximum fine.

So, yes, individuals can and will be charged when the Federal government believes that circumstances warrant doing so. It’s not always the companies that are on the hook, and issues are not always solvable by monetary settlement alone.

And speaking of companies … the DOJ announcement added the following sentences:

“The charges are the result of an ongoing federal antitrust investigation into market allocation in the aerospace engineering services industry … The charge against Patel is the first in this ongoing federal antitrust investigation.”

So, yeah, other aerospace companies doing business in the Northeast might want to perform a bit of diligence in this area, to make sure that they themselves are not exposed to allegations of Sherman Act violations. We’re just sayin’ ….

Reminder: A criminal complaint is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.

Last Updated on Monday, 13 December 2021 18:31

The Wages of Fraud: A Follow-Up

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More than a year ago, we first wrote about the issues at Bradken. As we discussed at the time, the corporate structure of Bradken was interesting, but the bottom-line was that its US subsidiary, based in Tacoma, Washington, had for some time been “the U.S. Navy’s leading supplier of high-yield steel for naval submarines.” As a subcontractor, Bradken provided castings to Navy prime contractors for use in fabricating submarine hulls.

For thirty years, Bradken produced castings that had failed lab tests and did not meet the Navy’s standards. The fraud started well before the company’s acquisition by foreign ownership and continued for a decade after the acquisition. Bradken settled its civil False Claim suit for $10.8 million, and the company entered into a deferred prosecution agreement with respect to the criminal charges it was facing.

As part of its Deferred Prosecution Agreement, Bradken agreed to make a public statement. We wrote about that public statement in a follow-up article. We believe that public statement is well worth reading, and we recommend you follow the link to it.

While the company was settling its legal liabilities, its former Director of Metallurgy, Ms. Elaine Thomas, was facing her own legal issues. She was charged with Major Fraud against the United States. On November 8, 2021, Ms. Thomas pleaded guilty to “defrauding the United States by falsifying test results that measure the strength and toughness of steel used in U.S. Navy submarines.” She will be sentenced in February, 2022. She faces “up to 10 years in prison and a $1 million fine,” according to the DoJ press release.

When we first wrote about this situation, we were careful to make sure it was clear that the Ms. Thomas had only been accused of fraud, because everybody is entitled to be considered to be innocent until proven guilty in a court of law. However, now that Ms. Thomas has pleaded guilty, we can dispense with the niceties and call her what she is: a fraudster.

This article at TheDrive.com, written by Thomas Newdick, adds some details to the story. Newdick’s article quotes Thomas’ attorney as saying, “she regrets that she failed to follow her moral compass — admitting to false statements is hardly how she envisioned living out her retirement years.” Well, then. That makes it all better, doesn’t it?

Newdick’s article adds—

Exactly what drove Thomas to falsify the results of the strength tests is still unclear, but according to the Justice Department, she thought it was ‘stupid’ that the Navy demanded the tests be carried out at -100° Fahrenheit. As a result, the department contends, Thomas changed the results to false positives in some cases.

Interestingly, the Newdick article adds commentary about other problems facing the Navy’s submarine program, and he notes that the problems lay unnoticed for several years before discovery—which ought to concern everybody. However, the article ends on an optimistic note, in which Newdick writes, “… after this fiasco, the Navy will surely be keeping an especially close eye on the production quality of structural components needed to ensure these powerful submarines perform according to their exacting specifications.”

We shall have to see whether or not the Navy has learned any lessons from this—and other—contractor fraud cases.

Last Updated on Wednesday, 17 November 2021 18:26

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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.