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Welcome to Apogee Consulting, Inc.

Re: CASB 2020–02

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Apogee Consulting, Inc.

P.O. Box 759

Poway, CA 92074

(949) 705-9773


January 2, 2021

Mr. Mathew Blum

Office of Federal Procurement Policy

725 17th Street NW,

Washington, DC


Re: CASB 2020–02

Advanced Notice of Proposed Rulemaking

Conformance of the Cost Accounting Standards

to Generally Accepted Accounting Principles for

Operating Revenue and Lease Accounting

Dear Mr. Blum,

This letter provides comments in response to the subject Advanced Notice of Proposed Rulemaking (ANPRM) published in the Federal Register November 5, 2020. The proposed rule discusses potential changes to the definition of “operating revenue” and the treatment of certain leases. I understand that, in promulgating the ANPRM, the CAS Board is implementing the direction of Congress as provided by Section 820 of Public Law 114-328, which directed the CAS Board to conform CAS to GAAP to the maximum extent practicable.

Apogee Consulting, Inc., is a boutique consultancy focused on the administrative needs of government contractors. Our clientele includes both large and small contractors, selling to diverse Federal agencies including the Department of Defense, the Department of Energy, and the Federal Transportation Administration.

That being said, I provide these comments as an individual. My opinions are my own and do not reflect those of any client or other entity.

  1. Operating Revenue

The Board proposes “to rely on a definition of operating revenue that is more closely aligned to GAAP.” In doing so, the Board further proposes to modify the GAAP definition to be inserted at 9904.403-50(c)(1)(2) so as to restrict the calculation of operating revenue to only fee earned “for management contracts under which the contractor essentially acts as an agent of the Government in the erection or operation of Government-owned facilities.” The rationale provided for this limitation is that “government-owned, contractor operated (GOCO) facilities ‘receive little or no benefits from home office activities’; and, without the limitation to fee, some contractors would be ‘forced to make greater allocations to GOCO’s than would be reimbursed to them under the terms of some GOCO contracts.’”

I appreciate the Board’s concerns in this area, and I agree that contractors should not be “forced” to allocate home office costs for which they will not receive reimbursement. That being said, the modification of the GAAP definition of “operating revenue” with respect to CAS 403-50(c) is unnecessary. The existing Cost Accounting Standards and regulations have sufficient flexibility to accommodate the GAAP definition—without modification—while protecting the contracting parties from having to make excess home office allocations to certain segments.

  1. Residual expenses are those home office expenses that are not otherwise allocable to segments. If a beneficial or causal relationship between home office expenses and segments could be established, then such expenses already would have been allocated to segments either directly to the segment, pursuant to 403-40(a)(1), or via an allocation base specified by 403-40(b)(1) – (b)(5). These home office allocations correspond to a contractor’s Disclosure Statement (CASB DS-1) at Part VIII, 8.3.1 (“Directly Allocated”) and 8.3.2 (“Homogeneous Expense Pools”). Thus, by definition, residual expenses are those home office expenses that are not susceptible to being allocated on a beneficial or causal basis; if they could be so allocated, then CAS 403-4(a)(1) requires that they must be. Consequently, the notion that some GOCO segments would receive excess allocations, based on a beneficial analysis of those allocations, seems to be contradicted by the very definition of residual home office expenses.

  1. Standard 403 already protects the Government from home office allocations where a segment receives little or no benefit from a particular home office function or activity.

  1. 403-50(a)(2) states that “Where the expense of a given function is to be allocated by means of a particular allocation base, all segments shall be included in the base unless … [a]ny excluded segment did not receive significant benefits from, or contribute significantly to the cause of the expense to be allocated …”

  2. 403-40(c)(3) states that “Where a particular segment receives significantly more or less benefit from residual expenses than would be reflected by the allocation of such expenses pursuant to paragraph (c) (1) or (2) of this subsection … the Government and the contractor may agree to a special allocation of residual expenses to such segment commensurate with the benefits received.”

  3. 403-50(d) establishes rules for determining when a segment has received significantly less benefit in relation to other segments. In particular, 403-50(d)(2) identifies segments that may require special allocation as being “foreign subsidiaries, GOCO's, domestic subsidiaries with less than a majority ownership, and joint ventures.” (Emphasis added.)

Therefore, the notion that contractors would be “forced to make greater allocations to GOCO’s than would be reimbursed to them under the terms of some GOCO contracts” seems to be unfounded. To the extent that a GOCO (or other segment) received less benefit from a home office activity or function than would be commensurate with the normal allocation of residual home office expenses, the contractor and the government should agree on a special allocation, as provided by 403-40(c)(3).

In addition to the foregoing, I note that the issue of excess residual home office allocations has been exacerbated by the Board’s failure to modify the thresholds at which the three-factor allocation formula found at 403-50(c) must be used. If the thresholds had been raised—for example, to take into account the impact of cumulative inflation experienced since original promulgation in 1972, which has been estimated to be more than 600 percent—then fewer contractors would be forced to use the three-factor allocation formula found at 403-50(c)(1), which includes the current definition of “operating revenue.” Thus, one simple fix to address the Board’s concern with potentially excessive residual home office allocations is to raise the 403-40(c)(2) thresholds to levels more appropriate for the twenty-first century.

2. Should changes to cost accounting practices to conform Operating Revenue to ASC 606 be considered to be a required change, a unilateral change, or desirable change?

In the ANPRM, the Board stated “The Board believes that the definition in GAAP is essentially equivalent to the CAS definition….” If the two definitions are essentially equivalent, it is difficult to envision what changes to contractor cost accounting practice might flow from the revision of the definition of Operating Revenue in Standard 403.

The Board may be asking a broader question—i.e., will any contractor changes to cost accounting practice made as a result of conforming CAS and GAAP be required changes, unilateral changes, or desirable changes? If that is the question, I suggest it should be the subject of a separate Staff Discussion Paper. It is not clear why the Board would be asking such far-reaching questions in an ANPRM, rather than in an SDP. Nonetheless, I will attempt to respond to the question.

As a threshold matter, the Board should be aware that the CAS contract clauses found in 9903.201-4 (dated JUL 2011) appear to be obsolete when compared to the FAR contract clauses 52.230-2 through 52.230-5 (dated JUN 2020). This is based on a comparison of the clauses found at www.acquisition.gov, which is the official regulatory repository for the U.S. Government. This is an issue that the Board may wish to address in a future rule-making action.

To address the Board’s question, when a contractor changes a cost accounting practice solely because of changes to GAAP requirements (absent any changes to a Standard), that would seem to be a unilateral change (i.e., “a change in cost accounting practice from one compliant practice to another compliant practice that a contractor with a CAS-covered contract(s) elects to make that has not been deemed desirable by the cognizant Federal agency official and for which the Government will pay no aggregate increased costs.”) I believe this is the case because a required change is defined as “a change in cost accounting practice that a contractor is required to make in order to comply with applicable Standards, modifications, or interpretations thereto,” or “a prospective change to a disclosed or established cost accounting practice when the cognizant Federal agency official determines that the former practice was in compliance with applicable CAS and the change is necessary for the contractor to remain in compliance [with CAS].” Since CAS is not changing—i.e., there is no change to an applicable Standard or interpretation thereto—then it seems clear that any change in cost accounting practice solely driven by changes in GAAP requirements do not meet the definition of a required change. They must therefore be unilateral changes.

Some unilateral changes may be found to be desirable changes (i.e., “a compliant change to a contractor's established or disclosed cost accounting practices that the cognizant Federal agency official finds is desirable and not detrimental to the Government and is therefore not subject to the no increased cost prohibition provisions of CAS-covered contracts affected by the change.”) But the determination and finding that a unilateral change is a desirable change is solely within the discretion of the cognizant Federal agency official and is to be decided based on the individual facts and circumstances of the change. The Board need not provide any further direction.

There are two use cases where the Board’s question poses a challenge. First, when conformance with GAAP results in a change or modification to an existing Standard that compels a contractor to then make a change in cost accounting practice. Second, when conformance with GAAP results in an elimination of a Standard, such that a contractor must now comply solely with GAAP—and that situation compels a contractor to then make a change in cost accounting practice. The second case seems probable if CASB Case 20-001 (the SDP regarding potential elimination of Standard 404 and/or 411) results in the elimination of one Standard or both.

    1. In the first case, the requirements of an existing Standard have been modified. Therefore, any contractor change in cost accounting practice that becomes necessary in order to comply with the modified Standard would seem to meet the definition of a required change. Consequently, the parties would need to negotiate an equitable adjustment as required by 9903.201-4(a)(4) and the contract’s Changes clause.

b. In the second case, there is no modification to an existing Standard; indeed, a Standard will be eliminated in its entirety. If the contractor must now change a cost accounting practice in order to comply with GAAP, then it follows that it was the requirements of the original Standard that compelled the contractor’s original cost accounting practice. In other words, the original cost accounting practice was required to comply with CAS. With the elimination of the Standard, the contractor must now comply with GAAP. (See 48 CFR 31.201-2(a): “A cost is allowable only when the cost complies with all of the following requirements … (3) Standards promulgated by the CAS Board, if applicable, otherwise, generally accepted accounting principles and practices appropriate to the circumstances.”) (Emphasis added.)

The elimination of a Standard that compels a contractor to make a change to cost accounting practice in order to comply with GAAP would seem to be a required change. Although the change in this use case does not meet the exact regulatory definition of “required change,” it was the contractor’s original cost accounting practice that was required to comply with the Standard. The requirements of the Standard distorted what the contractor’s cost accounting practice would otherwise have been. Therefore, if the elimination of that distortion requires a change in cost accounting practice in order to comply with GAAP, then that change should be treated as a required change, just as in the first use case.

3. Lease Accounting

I have no comment on the Board’s proposed clarification that right-of-use leases are neither tangible nor intangible capital assets for purposes of complying with CAS requirements. In its ANPRM, the Board wrote “Before right-of-use assets are considered for inclusion on balance sheets, the Board would need to further analyze the impact of these changes.” I would encourage the Board to proceed with its analysis. Conformance of CAS and GAAP may require some flexibility on the Board’s part with respect to traditional US-GAAP accounting treatment, and it is important to understand consequences associated with any changes that may come from conformance.

I am pleased to see the Board address these (and other) issues. However, in this comment letter I have also tried to point out other related areas that seem overripe for the Board’s attention. Among those issues are: (1) increase of the thresholds at 9904.403-40(c)(2) to address (if nothing else) actual inflation experienced since they were first promulgated, and (2) analysis and comparison of the 2020 FAR CAS-related clauses with the 2011 clauses found in the CAS regulations. Both of these areas would seem to be “low-hanging fruit” that would be worthy of the Board’s attention.

Thank you for considering these comments to the Advance Notice of Proposed Rulemaking.


Nicholas Sanders

President and Principal Consultant

Apogee Consulting, Inc.


2020 Hindsight

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The last article in 2020 will be a bit introspective.

Let’s start with the numbers: in 2020 Apogee Consulting, Inc. published 73 articles (74 if you count this one). That’s a serious increase from 2019’s count of 51 articles published. Seventy-three didn’t seem like a lot to me; there were long periods where nothing much was published. Most of those fallow periods were the result of client work: I co-instructed a week-long class in Northern England last January, and (as always) the editing of two LexisNexis reference books takes hundreds of hours. But client work wasn’t the sole reason: after the November election it became harder to write about government stuff. That is not a political observation; it is a personal one. It became harder for me to write blog articles. Nothing I saw or learned seemed to spark the need to write about it. Still, I managed some production. Not as much as I intended, but as much as I could.

So: 2020 sucked for a lot of people on any number of levels. But let’s look at Apogee Consulting Inc.’s numbers:

  • 73 articles published on this website (74 if you count this one). This article will be number 1,348 in the News Archive. If you assume the average article is 800 words (which is a reasonable assumption over the 10-year period even though the later articles tend to average 1,000 words or more), the math says that’s more than one million words devoted to this stuff.

  • 2 textbooks edited for Thompson Reuters/LexisNexis (one on FAR and the other on CAS)

  • 1 class co-instructed with Don Acquisition in Northern England (“Introduction to FAR and DFARS”)

  • 1 six-week class for San Diego State University’s World Campus migrated to a Canvas/Zoom environment and taught (“Financial Management of Government Contracts”)

  • Participated in a panel discussion on “Commercial Item Myths” with Brent Calhoon (of Baker Tilly) and Ryan O’Connell (of DoD’s Commercial Item Group)

  • Co-Led a workshop on “CPSR Preparation” with Luis Avila (of KMPG)

  • 1 article published in the Government Contracts Costs, Pricing and Accounting Report (“Explaining the DFARS Ground and Flight Risk Clause”)

  • 1 comment letter to the CASB written (it will be submitted this week and I’ll post it on the website)

  • 2 new clients brought on, in addition to supporting other long-term clients at various levels

I cannot say that 2020 sucked for Apogee Consulting, Inc., at least from a business perspective.

Looking at the government contracting environment, obviously the big news was COVID-19 and the response to the pandemic. Certain small business contractors availed themselves of the CARES Act Section 1102 Paycheck Protection Program, while other contractors used the CARES Act Section 3610 contractor paid leave provisions. In 2021, I expect that contractors will begin submitting Section 3610 reimbursement requests (if they haven’t done so already) and we’ll be hearing stories about audits of those requests.

For those who want a quick primer on all the COVID-19 related legislation and the provisions that impact government contractors, DCAA has developed a handy chart to aid its auditors. The chart lists legislation, regulations, and other government guidance. It also has an FAQ section that anybody who has COVID-19 related costs should read.

With respect to other DCAA audit guidance, 2020 once again saw very few actual MRDs being published on the website. We very much suspect that the majority of DCAA guidance is being published internally, on the audit agency’s intranet. That makes it harder to understand where DCAA is coming from and to prepare for upcoming audits, but that’s how we see it.

In 2020, DCAA also flirted with reorganizing its audit staff to focus on defective pricing audits and business system audits. We say “flirted” because, according to what we’ve been told, the reorganized Regional Business System expert teams have been (or soon will be) disestablished, so that the Branches can resume their traditional roles of auditing contractor business systems. Was it the Coronavirus impact—or some other agency politics—that led to the quick course correction? We couldn’t say. But having experienced business system audits under both the “center of excellence” and traditional Branch-led audit approaches, we prefer the latter. There is less “ramping up” learning required.

2020 was a busy year for the CAS Board, if only by comparison to the prior decade’s inactivity. A Staff Discussion Paper was issued, as well as an Advance Notice of Proposed Rulemaking. However—and as we’ve noted several times on this blog—not much seems to happen without an active industry member contributing to the process. The Board has been without an industry member for nearly a year now, and has been moving forward based on inertia, in my view. I don’t expect much from the Board in 2021. You can decide whether the forecasted lack of activity stems from a lack of industry membership or the fact that a new administration is (as I write this) coming into town with its own set of priorities.

2021 may be the year that commercial items become what they were intended to be, 25 years ago when the last significant acquisition reforms took place. There are a couple of proposed rules that could, if implemented as drafted, significantly change the landscape. I’ll be watching for those.

We are all placing a lot of hope in 2021. And it’s not just about acquisition reform or precedent-setting judicial decisions. Each one of us has suffered personal or business setbacks in 2020, and we are all hoping that 2021 puts us back on course.

So here’s to putting 2020 behind us, and moving forward into a better year.

Last Updated on Wednesday, 30 December 2020 10:06

Statute of Limitations, Again

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Acquaintances who are attorneys assure me that the current state of judicial interpretation of the Contract Disputes Act (CDA) Statute of Limitations (SoL) rules make sense and can be consistently enforced. Okay. We’re not attorneys so we’ll have to take their word for it, even though we can’t figure the logic out for ourselves.

Some things we think we know:

  1. Unallowable direct costs: The CDA SoL starts running when the customer pays the invoice. (See: Sparton de Leon Springs)

  2. CAS noncompliances: The CDA SoL starts running when the customer pays an invoice that included the noncompliant costs. (See: Fluor) Or when the customer knows it has been harmed through overbillings resulting from noncompliant costs. (See: Lockheed Martin)

But with respect to unallowable indirect costs, the judicial record seems a bit more muddied to us. (Again, perhaps that’s just us!)

There is a Raytheon decision that states the CDA SoL clock starts running when the contractor submits its final billing rate proposal, because (essentially) the government had the ability to start the audit at that time. However, there are other decisions that state that the CDA SoL clock starts running (with respect to indirect costs) when the audit starts (or perhaps concludes), because only then has the government looked at individual indirect cost transactions and had the ability to know whether claimed costs were allowable or unallowable.

Because of those latter decisions, we have recommended that contractors submit their general ledgers showing all indirect cost transactions along with their final billing rate proposals, when feasible to do so. (We get that it rarely is feasible to do so.)

In addition, we strongly suspect that the CDA SoL issue(s) are going to go away soon—at least with respect to unallowable costs—because DCAA is now operating under a public law that requires the auditors to complete their audit within one year of contractor submission. This means that contractor final billing rate proposals won’t lie fallow for years, as was the case up until the statute was amended by an Act of Congress.

Still, contractors who submitted their proposals (and/or who were audited) prior to the change are still dealing with CDA SoL issues, as we will now discuss.

In a recent decision on competing motions for summary judgment, Judge Hartman of the ASBCA gives some hope that the CDA SoL rules on unallowable indirect costs may be clarified in the near future. To be clear, Judge Hartman, writing for the Board, denied both motions. It was the reasoning used that we found to be of interest.

Advanced Technologies Group, Inc. (ATGI) appealed two Contracting Officer Final Decisions (COFDs) in which certain indirect costs questioned by DCAA during audit were found to be expressly unallowable and penalties were assessed. The years in question were ATGI’s FY 2007 and FY 2009. Apparently ATGI is one of those contractors where only some final billing rate proposals are audited in full. (The decision noted that “DCAA advised [ATGI that] full, detailed reviews would occur only every three to five years, with less-detailed reviews occurring the other years.”) This may have been because ATGI was a small business with only few cost-type contracts—primarily those issued under the Small Business Innovation Research (SBIR) program.

(Interestingly, DCAA had classified ATGI as “low risk” until it filed its appeals at the ASBCA, whereupon ATGI suddenly became a “high risk” contractor whose annual final billing rate proposals would receive very thorough audits. We note the only thing that seemed to have changed was ATGI’s willingness to challenge DCAA audit findings in court.)

Many small businesses stumble when they receive their cost-type SBIR contracts. We’ve written before about the challenges associated with making the transition from receiving grants or fixed-price contracts to receiving cost-type contracts. However, in this case, ATGI made efforts to do the right thing. The decision notes that “ATGI consulted with DCAA regarding its accounting practices, direct and indirect rates and the methods to establish those rates from the first cost-plus contract it performed. ATGI used the incurred costs electronically (ICE) Excel spreadsheet model furnished by DCAA to submit its incurred cost proposals.” (Citations omitted.) It took ATGI four tries to get an adequate final billing proposal with respect to its FY 2006 claimed costs; presumably, by FY 2007 and FY 2009 it had learned what DCAA needed to see and was able to submit adequate proposals the first time.

During its audits of FY 2007 and FY 2009, DCAA questioned two types of claimed indirect costs: marketing expenses and legal expenses associated with patents. (Travel costs were also questioned, but did not seem to be a part of the dispute.) The Judge stated that, with respect to FY 2006 costs, a final rate agreement was negotiated and executed; in that agreement “Legal and patent costs for FY 2006 were deemed acceptable as part of the G&A indirect rate.” That fact became part of ATGI’s motion for summary judgment.

The chronology of the audits is interesting and may shed some light on the eventual decision on the merits. Apparently, DCAA started and stopped and restarted its FY 2007 audit (as was common at the time). Further, DCAA apparently withdrew from the FY 2009 audit because it was “unable to complete the audit due to time constraints.” The FY 2009 audit thus was completed by the DCMA Contracting Officer, who subsequently claimed that he was unaware of the potentially unallowable nature of ATGI’s indirect costs before ATGI provided support for its claimed costs directly to him.

As noted above, Judge Hartman had competing motions for summary judgment.

ATGI argued that the government’s claims were time-barred by the CDA SoL. Its position was based on the theory that the SoL clock started to run when it submitted its final billing rate proposals to the government for audit.

The government argued that the SoL clock started to run when it learned of the nature of the transactions at issue. Judge Hartman wrote—

In submitting its FY 2007 and 2009 ICPs, ATGI did not provide DCAA any financial, accounting or other records or documents with specific information regarding the marketing, legal fees or travel expenses included in the G&A Schedules. For example, DCAA did not obtain data showing or from which it could have known of the unallowability of the patent costs identified as expressly unallowable in the FY 2007 COFD until after May 10, 2011.

(Citations omitted.)

Thus, according to the government, the COFDs (issued April 13, 2015 and January, 2018, respectively) were timely based on when it received information from ATGI showing the nature of the claimed indirect costs.

ATGI disputed the government’s position, arguing that “DCAA knew at the time it accepted the ICPs what types of costs were incurred ‘based on all previous incurred cost proposals submitted, accepted and audited by DCAA for the full history of ATGI’.” The following paragraph from Judge Hartman concisely summarizes ATGI’s and the government’s arguments—

ATGI essentially asserts here that, at time of receipt of its ICPs, the government had access to its accounting system and could verify it was billing the government for the costs billed. ATGI therefore concludes the government ‘should have known’ the material facts of the claims it asserts against ATGI. The government denies that it knew or should have known at time of its receipt of the ICPs information necessary for assertion of its ACO’s claims. The government presents affidavits of its officials testifying the ICPs did not identify the specific cost transactions forming the basis for its claims. According to the government, while it knew ATGI was billing costs to the government, it did not know facts sufficient to conclude that some of those costs were expressly unallowable and created a cause of action.

The Board was unable to grant either party’s motion for summary judgment. With respect to ATGI’s arguments, “ATGI … has not met its burden of establishing the requisite factual predicate for invoking the statute of limitations as a bar to the government’s claims.”

With respect to the government’s arguments, the Board found that the government had not met its burden of proving that ATGI’s claimed costs were, in fact, unallowable—let alone expressly unallowable. (We’ve written about the difference between the two types of unallowable costs on this blog.) In particular, Judge Hartman wrote—

The government also has not shown that the patent legal costs claimed are not required by the contracts at issue. SBIR contracts, such as the four here, generally contain a patent rights clause specifying the rights retained by the contractor and the rights granted the government in inventions developed under the SBIR contract. E.g., FAR 27.303(b), 52.227-11. …

The patent rights clause in ATGI’s SBIR contracts expressly requires it to protect the government’s interests. Specifically, the contractor is to have executed and delivered to the government all instruments necessary to establish or confirm the rights throughout the world that the government has in an SBIR funded invention for which ATGI possesses title, including notifying the CO of any decisions not to file a nonprovisional patent application, continue the prosecution of a patent application, pay maintenance fees, or defend in a reexamination or opposition proceeding upon the patent in any country before expiration of the response or filing period required by the relevant patent office. …

While we do not decide the issue today, it appears the requirements of FAR 52.227-11(c) place a contractual obligation upon a contactor to perform the effort described in FAR 31.205-30(a)(1), (a)(2), and (a)(3). If that is so, it appears that related patent legal costs would be allowable. See FAR 31.205-30(c).

Thus, the government had the burden of showing that ATGI’s legal expenses related to patents were not required by its SBIR contracts, a burden it could not meet in its motion for summary judgment. Judge Hartman concluded—

Because the record before us primarily contains terse legal bills specifying money due for patent legal work without a detailed description of the legal work actually performed and the government has not presented evidence regarding the disputed costs showing that they are expressly unallowable, we currently do not have a factual basis to grant summary judgment to the government that ATGI’s patent legal costs are ‘expressly unallowable.’ Because the government has not developed the facts sufficiently here, the issue of allowability of the disputed costs cannot now be resolved by summary judgment. Simply put, there are genuine issues of material fact that bar us from granting the government’s cross-motion.

(Citations omitted.)

While neither motion for summary judgment prevailed, this seems to be an interesting case with facts that may lead to a further clarification of the muddled rules on interpretation of the CDA SoL when the case goes to a trial on the merits. So stay tuned for more on this matter.

Last Updated on Wednesday, 09 December 2020 19:34

Government Furnished Property Problems

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FAR Table 15-2 establishes the standard format for providing certified cost or pricing data. It lists the types of cost or pricing information and how that information should be organized. As part of the Table, the first page of a contractor’s proposal is discussed. In that section, the instructions state that the contractor must identify “whether you will require the use of Government property in the performance of the contract, and, if so, what property.”

We don’t know whether FAR Table 15-2 was part of the BGT Holdings, LLC (BGT) proposal to the U.S. Navy to “construct and deliver a gas turbine generator.” We only know that BGT was awarded an $8.25 million fixed-price contract in 2014 to do so. The contract identified at least two Government Furnished Equipment (GFE) items: an exhaust collector and engine mounts. Those items were to be provided by the Navy so that BGT wouldn’t need to source them.

Presumably, when the Navy and BGT agreed on the contract price, both parties knew that certain items were going to be provided to BGT as GFE. Presumably, the agreed-upon price was lower than it otherwise would have been, because BGT didn’t include costs associated with GFE in its proposal. Those are big presumptions; however, they seem reasonable because that’s how GFE normally works.

Another big presumption (on BGT’s part) was the presumption that the GFE would show up on time, and in working condition. The contractor was going to base its price (and schedule) on that presumption. And if the GFE didn’t show up on time (or in working condition) then BGT was going to have a problem.

Another big presumption (on BGT’s part) was that the Navy was not going to hold the contractor hostage. Very few people would expect the Navy to withhold the GFE and refuse to provide it “unless BGT provided a ‘cost savings’ to the Navy, i.e., a decrease in the contract price commensurate with the amount BGT would save by not having to procure the exhaust collector and engine mounts on its own.” Yet, that was exactly the behavior that BGT alleged it experienced during contract performance.

Allegedly, when BGT refused to provide a cost savings, it was told that “that the exhaust collector and engine mounts had been reallocated as fleet assets and would no longer be made available to BGT.” BGT then purchased those items (at a cost of $610,775) and submitted a request for equitable adjustment to the contract price to the Navy contracting officer. The REA was denied and BGT filed an appeal at the Court of Federal Claims, citing five grounds for relief.

The Court of Federal Claims dismissed BGT’s first three counts and BGT appealed to the Federal Circuit, which vacated and remanded on two of the three counts. We want to discuss the appellate decision because it has important information for contractors that deal with Government Furnished Property (or Government Furnished Equipment). Sometimes, a prime contractor will offer to procure and provide certain items to a subcontractor, and this decision would be relevant to those transactions as well. So let’s discuss.

The three Judges that heard the case and concurred with the decision (which was written by Judge Bryson) summarized their reasoning thusly:

The most straightforward claim in BGT’s amended complaint is that the Navy breached the government property clause, 48 C.F.R. § 52.245-1, by failing to provide an equitable adjustment after it withheld the GFE items it had agreed to deliver under the contract. While the Navy was entitled to withdraw GFE under the government property clause, it was not free to do so without consequence.

Further, by refusing to provide an equitable adjustment when the Government Property clause in the contract provided for one, the Navy had breached the contract. The government disagreed but the Court was not persuaded.

The government argues that BGT’s claim under subsection (d)(2)(i) [of the Government Property clause] is untenable because the contracting officer was required only to ‘consider BGT’s request for an equitable adjustment—not to grant the adjustment to BGT.’ Under the government’s theory, the phrase ‘shall consider’ gave the contracting officer discretion to grant or deny an equitable adjustment and imposed no duty to grant an adjustment even if BGT could prove financial loss due to the government’s withdrawal of the exhaust collector and engine mounts. We reject the government’s interpretation of the term ‘shall consider’ because it would produce absurd results under the government property clause.

It is dubious, to say the least, that the drafters of the FAR’s government property clause, 48 C.F.R. § 52.245-1, envisioned that the government would essentially have an unfettered right to withdraw promised GFE from a contract without consequence. The correct interpretation of ‘shall consider’ in this contract setting does not give the government absolute discretion, but instead holds the government to a duty of good faith and reasonableness. … Moreover, the FAR demands that the contracting officer exercise impartiality, fairness, and equitable treatment when considering requests for equitable adjustments. The government’s interpretation of ‘shall consider’ would invite subversion of that responsibility.

(Internal citations omitted.)

BGT also argued that it was entitled to an equitable adjustment under the contract’s Changes clause, wholly apart from the language of the contract’s Government Property clause. The Appellate Court did not rule on the merits of that argument, but it did vacate the Court of Federal Claim’s decision and remand for another trial, in which the Court of Federal Claims will “determine whether BGT pleaded facts sufficient to support its ratification theory and, if so, whether BGT can prove that the contracting officer ratified the withdrawal of the exhaust collector and engine mounts.” The Appellate Court also remanded to the Court of Federal Claims to determine whether BGT’s third count was supported by facts.

In summary, this is a puzzling case. The Navy awarded an $8.25 million fixed-price contract and, in doing so, had to find that the contract price was fair and reasonable. That contract price was based on certain items being provided by the Government to the contractor. It is unclear why the Navy would ask for a second price decrease during performance for those same items. (Which is what BGT alleged to have happened.)

More generally, contractors and subcontractors who rely on GFP/GFE and customer-furnished property to perform their contracts are taking risks. They should be aware of those risks and have risk mitigation plans in place. They should be alert to possible contract changes related to the GFP/GFE and be prepared to submit requests for equitable adjustment when they believe their contract had been changed because of delayed or faulty GFP/GFE.

We will have to see how BGT fares back at the Court of Federal Claims. Hopefully, the parties have had enough litigation and will be able to settle this dispute outside of a decision on the merits. But if that’s not the case, then the Federal Circuit has provided the Court of Federal Claims with a roadmap to resolve the matter.

Last Updated on Tuesday, 29 December 2020 13:49

Accidental Diversity

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[Editor’s Note: This article was first published on LinkedIn.]

Those who know me and/or read my blog know that I tend to go off on rants from time to time. I don’t really want to upset anybody, but sometimes things upset me; the blog is a vehicle to communicate with others about the situation. With whom am I communicating? I don’t ever really know that for sure, but I do know that I have a small following who thinks that my blog articles are of some interest.

Like me, they are interested in the arcana of government contracting and the myriad of issues that a government contractor must deal with on a daily basis. Proposals and pricing of goods/services. Cost accounting and compliance with Federal Acquisition Regulations and Cost Accounting Standards. Accurate billing. Program management and supply chain management. Changes and Requests for Equitable Adjustment. Budget management. Calculation of indirect rates. Terminations. Claims. Fun and interesting stuff—if only to a few people, like me.

Who could get upset about any of that stuff?

Hold on, because what follows is a rather long rant.

Recently I came across a Department of Justice press release that announced a legal settlement with a government contractor. The amount of the settlement--$19 million—indicated that the contractor had a fairly serious situation to resolve. No, I’m not going to identify that contractor here. That’s not the point of this article.

The point of this article is about making good hiring decisions.

Interested in how the contractor got to where it had a $19 million legal settlement (after receiving credit for making the initial disclosure and cooperating with investigating authorities, and after incurring no doubt quite a bit of unallowable legal costs along the way), I spent some time looking at the company’s website. In particular, I looked at the open positions to see if the company’s $19 million “lesson” had sparked the recognition of the need to hire some top-notch government contracting compliance folks to prevent a future recurrence of the same issue(s) that led to the settlement.

I was disappointed at what I found. In particular, what I found indicated that—based solely on the position descriptions—the company was unlikely to ever fill an open position with the right candidate. To say the position descriptions were vague would be to pay them a compliment.

It occurred to me that if you can’t describe what you are looking for in a prospective hire, you are unlikely to find the right candidate. At a minimum, you will waste a lot of time reviewing resumes of candidates who don’t meet your needs.

If you wonder why you get so many resumes that seem unrelated to the position you are trying to fill—or why you can’t seem to fill the position despite months of effort—perhaps it’s because you didn’t properly describe your requirements. If you can’t clearly define your requirements you are going to have challenges along the way.

We know this to be true in other areas, such as software development. The first thing one needs to get started is a detailed set of requirements. Generally, you don’t have a project until you have a set of requirements. (As one software development company states, the first milestone in software development is gathering requirements, and the second milestone is to validate those requirements.) Moreover, one of the bigger gripes in software development (or any project management discipline, really) is changing requirements. If you change the requirements, you are bound to get cost and schedule impacts. Changing requirements are the bane of effective project management, though I would assert that the ability to handle changing requirements is the mark of an effective project management team.

Let’s apply that viewpoint to talent acquisition, using as an example an actual job opportunity posted on that same company’s website. Let me show you what I saw on the company’s “career” website and let me share my thoughts about what I saw.

Among the positions the company is looking to fill, one is called a Project Finance Analyst. This is a common position in government contractors; typically, it is a business management person who handles the financial aspects of the project, allowing the Project Manager to focus on technical and customer management. In this case, the successful candidate will “will work under close supervision to support the management of numerous tasks and provide overall management of project financials.” Clearly, then, the company is looking for an individual contributor.

I’ll ignore the key responsibilities of the position, because they are essentially the customary responsibilities that one would expect to see. I’m going to focus on the position’s qualifications, both “required” and “preferred.” Quoting verbatim, here is what the position description states:

Required Qualifications

  • Requires a Bachelor's Degree in area of specialty or equivalent and at least 8+ years of experience in the field or in a related area

  • 5 or more years of experience in a government contracting environment. Working knowledge of indirect rate structures, a plus

  • Demonstrated proficiency in Microsoft Office, especially Excel

  • Work independently and in collaborative teams, and to adjust schedule to address workload demands and meet deadlines

  • Attention to detail and the ability to manage multiple duties simultaneously while meeting deadlines

  • Excellent organizational, analytical, and problem-solving skills

  • Strong interpersonal, verbal and written communication skills

  • Must be proactive and eager to tackle new challenges

Candidates that do not meet the required qualifications will not be considered.

Preferred Qualifications

  • Understanding of various contract types, e.g., cost plus fixed fee, award fee, fixed price contracts, and Government Wide Agency Contracts

  • Knowledge of Microsoft Excel including advanced formulas and their use in financial tracking, analysis, and reporting environments

  • Knowledge of monitoring compliance with general contract terms and conditions for government contracts and supporting multiple clients in a fast-paced environment Experience with financial modeling, including revenue projections

  • Experience with project or program management, including Federal Acquisition Regulation (FAR) and Joint Travel Regulation (JTR) requirements

  • Experience with accounting standards, such as General Accepted Accounting Principles (GAAP) and Sarbanes-Oxley (SOX)

  • Experience with financial management support in a government contracting environment

Let’s start with the required qualifications.

  • Bachelor’s degree “in an area of specialty” or no Bachelor’s degree and “at least 8+ years of experience in the field or in a related area”

I’m not a Talent Acquisition expert, but I really have very little idea as to what that even means. What, exactly, is “an area of specialty”? Does a degree in art history count? What about basket-weaving? Each of those is an area of specialty. If the company meant a degree in a field related to the job responsibilities, then why didn’t it say so? Remember, candidates that don’t meet the required qualifications will not be considered. If, for example, a candidate was not considered based on having a degree in art history versus a degree in finance, then that would seem to be grounds for some type of complaint about the fairness of the hiring process.

Also you don’t really even need a degree, so long as you have “at least 8+ years” (sic) of experience “in the field” or in “a related area.” What field? “Field,” as in farming? Or perhaps you are a veteran who has been deployed oversees “in the field.” Do those count? And what “area” is related to the field? Agriculture in general? Animal husbandry? Viniculture?

Oh, you mean a field related to finance. Is that what you meant? Then why didn’t you say so? Remember, you are going to be discarding candidates that don’t meet the required qualifications, so you had better be clear regarding exactly what those requirements are. Because you didn’t specify “the field or a related area,” you should expect to see a lot of candidates with widely disparate backgrounds.

Diversity is good! But diversity without purpose doesn’t help anybody, especially if most of the candidates with “diverse” backgrounds will not make the list of finalists for the position. In this case, let’s call it “accidental diversity.” It’s probably not a good thing, since it wastes the time of both the applicants and those vetting applications.

Diversity without purpose wastes times and keep you from finding the right candidate you are looking for.

(And do I even have to mention that if you fail to consider a candidate who does not have a Bachelor’s degree but who does have more than eight years of experience in a related area, then you aren’t following your own rules?)

But let’s move on.

  • 5 or more years of experience in a government contracting environment. Working knowledge of indirect rate structures, a plus

Okay, this seems clear. “5 or more years of experience in a government contracting environment.” But what kind of experience is required? I know some members of the janitorial staff who have more than 5 years of experience working in a government contracting environment. Do they meet the required qualifications? If not, why not? Since the company failed to specify the type of experience that candidates are required to possess, it should expect a wide range of applicants, very few of whom the company is really looking for. (See: “accidental diversity.”)

Let’s also discuss that last bit. “Working knowledge of indirect rate structures, a plus.” Why is that even listed here? How can “a plus” be part of the required qualifications? Aren’t required qualifications a pass/fail thing? If a candidate does not have working knowledge of indirect rate structures, has that candidate still met all the required qualifications? If the candidate does possess that working knowledge, is that a preferred candidate?

In other words, why is that particular statement found here and not under “preferred qualifications?”

And I’ve got to tell you, that sentence fragment is the poster child for vagueness. I do have a working knowledge of indirect rate structures, and I don’t know what in the world the company is actually looking for. It’s not clear whether “working knowledge of indirect rate structures” means knowledge of how to design a structure, or understanding the FAR and CAS rules of cost pooling and cost allocation, or perhaps merely how to take rates that one is given and apply them to program budgets. (Again: “accidental diversity.”)

As before, “working knowledge” is vague and the company probably means “experience with.” Similarly, the company’s requirement that a candidate must have “demonstrated proficiency in Microsoft Office, especially Excel,” is also poorly written, in my view. How, exactly, will candidates demonstrate their proficiency? Will there be a test? Should they bring a recently completed Excel workbook with them to the interview? What is the difference between “can use Excel” and “proficient in Excel”?

Honestly, to me “working knowledge” means somebody can use the basic functionality. It’s probably the next step up from entry level. In a Project Financial Analyst, you probably want a bit more than that, but whatever.

If the required qualifications are imposed to weed out unqualified candidates, the company should have a plan for executing the weeding. Putting in vague or poorly worded qualifications makes me think that the real weeding process will take place using qualifications other than those listed.

And it would be those unwritten qualifications that could lead to potential legal problems for that company, should somebody look at the pool of applicants versus those interviewed, and see that decisions were made based on unwritten qualifications.

Okay, done with the “required qualifications” and moving to the “preferred qualifications.” Presumably, the preferred qualifications are the means of deciding the list of final candidates, once they have been screened against the “required qualifications.”

  • Understanding of various contract types, e.g., cost plus fixed fee, award fee, fixed price contracts, and Government Wide Agency Contracts

This is another example of vagueness. What does “understanding” mean in this context? As in, “took a class” or “read a book” or “spent 15 minutes reading FAR Part 16 (‘Types of Contracts’)”? Does the company mean “experience working with various contract types,” and, if so, how many years of experience is preferred? Knowledge and experience are two different things. If you have both, that’s great. But don’t confuse one for the other.

  • Knowledge of Microsoft Excel including advanced formulas and their use in financial tracking, analysis, and reporting environments

Check. That would be an important skill to have for a Project Finance Analyst. But what, exactly, constitute knowledge of “advanced formulas” in Excel? Ability to set data filters? Ability to use Pivot tables or VLOOKUP? Ability to click the Autosum button? And who decides when a candidate possesses sufficient Excel skills? The hiring manager? How will the knowledge be tested? Will the results of the test be applied fairly to each candidate?

  • Knowledge of monitoring compliance with general contract terms and conditions for government contracts and supporting multiple clients in a fast-paced environment Experience with financial modeling, including revenue projections

This is the requirement that got me started on this rant. It sounds so good, and still lacks any meaning. How can you determine the right candidate based on this requirement?

Let’s unpack this a bit.

“Knowledge of monitoring compliance.” Note, no actual experience with monitoring compliance is required. Just knowledge. Theoretical knowledge of some unspecified amount. It’s a preferred job qualification. And remember, just “monitoring” compliance. No actual, you know, action is required. Just monitor compliance; and if you see anything noncompliant going on, continue to monitor until directed otherwise.

And what should you know how to monitor? “Compliance with general contract terms and conditions for government contracts.” You know what? Most government contracts (with perhaps the exception of construction contracts) don’t actually have any “general” terms and conditions. There are only terms and conditions of the contract. In an Indefinite Delivery/Indefinite Quantity (ID/IQ) type contract, there are overarching contract terms and conditions, and individual Task or Delivery Order terms and conditions, but there are no “general” terms and conditions. It’s a meaningless thing, written by a person who doesn’t understand what they are hiring for. Yet, it’s a preferred qualification, presumably intended to help identify finalists for the position.

Talk about “accidental diversity!”

I could continue this rant, poking at the preferred “experience with” qualifications that include such disparate subjects as the Federal Acquisition Regulations, the Joint Travel Regulations, Generally Accepted Accounting Principles/Procedures, the Sarbanes-Oxley Act, and “financial management support in a government contracting environment.”

(That latter may be the most important qualification of them all, even though it’s listed last. It’s probably what the company is actually looking for. I would have listed it under “required qualifications,” not “preferred qualifications.”)

I could continue to poke at “experience” because there is no amount of experience that is specified. One day of experience is, apparently, equal to five years of experience. And this is how you get “accidental diversity” with respect to experience, as well.

Certainly, some candidates—especially candidates with experience in CPA firms—are going to have a lot of what the company is looking for. But if the company wants somebody with everything it is looking for, then it should expect to pay top dollar. And the candidate with all that expertise is not going to want to be “closely” supervised; that person is going to expect to work independently and perhaps to supervise others.

Which brings me to: “Who wrote this?” Was it the HR function or Talent Acquisition function? Did they take a standard boilerplate set of qualifications and just post it to the website? That would make some sense to me, given what I saw.

But what if the Hiring Manager wrote all that gobbledygook? How scary would that be? Because it would tell us that the Hiring Manager doesn’t actually know enough about the job to write a meaningful set of required job qualifications. How is that person going to exert effective supervision over this position that (let’s remember) “will work under close supervision.”

At a bare minimum, I would expect that the Hiring Manager reviewed and approved the job opening. That’s really not any better, is it?

In my view this is as poorly worded a job opportunity as I have seen in a long time. The requirements are vague, poorly worded, and will tend to generate a lot of applicants who will not be what the company is really looking for (or what it really needs). I expect the company will generate quite a bit of “accidental diversity” that is going to waste a lot of time and impede the efficient hiring of the right candidate.

Let’s just say that, based on this one job description, I am not surprised the company just paid $19 million to the government in a legal settlement.


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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.