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OMB Reminds Agencies to be Flexible in the COVID-19 Crisis

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On March, 20, 2020, the Office of Management and Budget (OMB) reminding Executive Agencies to be flexible with respect to contractor performance challenges during the COVID-19 crisis. Here’s a link to the official Memo, entitled “Managing Federal Contract Performance Issues Associated with the Novel Coronavirus (COVID-19).”

Having given you the link, we are now going to quote extensively from the Memo, because so many of you will not click the link.

Federal contractors play a vital role in helping agencies meet the needs of our citizens, including the critical response efforts to COVID-19. … This memorandum identifies steps to help ensure this safety while maintaining continued contract performance in support of agency missions, wherever possible and consistent with the precautions issued by the Centers for Disease Control and Prevention (CDC). Achieving these important goals - and maintaining the resilience of our Federal contracting base - requires continued communication by agencies with their contractors, both small and large, and effective leveraging of flexibilities and authorities to help minimize work disruption.

(Emphasis added.)

But there’s more!

Agencies are urged to work with their contractors … to evaluate and maximize telework for contractor employees, wherever possible. … Equally important, agencies should be flexible in providing extensions to performance dates if telework or other flexible work solutions, such as virtual work environments, are not possible, or if a contractor is unable to perform in a timely manner due to quarantining, social distancing, or other COVID-19 related interruptions. Agencies should take into consideration whether it is beneficial to keep skilled professionals or key personnel in a mobile ready state for activities the agency deems critical to national security or other high priorities. Additionally, agencies should also consider whether contracts that possess capabilities for addressing impending requirements such as security, logistics, or other function, may be retooled for pandemic response consistent with the scope of the contract.

(Emphasis added. Again.)

But we’re not done yet!

… agencies are encouraged to leverage the special emergency procurement authorities authorized in connection with the President's emergency declaration under section 501(b) of the … the "Stafford Act". These flexibilities include increases to the micro-purchase threshold, the simplified acquisition threshold, and the threshold for using simplified procedures for certain commercial items, all of which are designed to reduce friction for contractors, especially small businesses, and the government and enable more rapid response to the many pressing demands agencies face. The availability of these flexibilities does not mean they will always be suitable, and agencies should exercise sound fiscal prudence to maximize value for each taxpayer dollar spent. At the same time, the acquisition workforce should feel fully empowered to use the acquisition flexibilities, as needed, consistent with good business judgment in response to this national emergency.

(Emphasis added. Yet again.)

The OMB Memo ends with a set of “Frequently Asked Questions.” The FAQ addresses schedule delays and requests for equitable adjustments. We won’t quote the answers here; we’ve already quoted enough from the Memo. However, we strongly recommend you read them yourself. We provided a link to the Memo in the first paragraph. If you didn’t click the link then, we suggest you do so now.

 

DOD Increases Progress Payment Rates in Response to COVID-19 Crisis

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There was a time, not so long ago, when the DOD was contemplating lowering customary progress payment rates to 50 percent for large businesses, with an opportunity to earn higher rates based on meeting certain performance criteria. To be sure, that proposed rule was formally withdrawn, but DOD never withdrew from its initiative to reform contract financing payments and link those payments to “performance incentives” that would be established by DOD bureaucrats.

Public meetings on the topic were scheduled for early 2019. We never heard any feedback from those meetings; and since that time we’ve not seen any formal Federal Register publications on the topic. But we suspect the initiative has not gone away.

In any case, DOD recently issued a Class Deviation to increase customary progress payment rates. Class Deviation 2020-O0010, entitled “Class Deviation—Progress Payment Rates” provides contracting officers with alternate contract clauses that increase customary progress payment rates “to 90 percent for large business concerns and 95 percent for small business concerns,” effective immediately.

Which is a good thing!

Only … we wonder how effective it will be.

Our point is: the Class Deviation does not seem to apply to current, active, contracts. Instead, it seems to apply to new contract awards. Thus, if you are a defense contractor trying to address production concerns with your existing contracts, this Class Deviation does not seem to help you.

We can envision an scenario where a contractor in need approaches a contracting officer to modify an existing contract to incorporate the alternate clauses. According to contract theory, that would only happen if the contractor offered some form of consideration. For example, reduced profit. Then the parties negotiate and maybe—just maybe—the contract gets modified. But by then the crisis may be over, so what’s the point?

No, the alternate clauses with the increased progress payment rate seems focused on new contract awards, which are likely to be related to COVID-19 responses. Companies that would seem to be the beneficiaries will be those that produce masks, or ventilators, or other medical equipment. They are going to see the benefits of the increased progress payment rates, not the traditional defense contractors that produce more mundane products such as fighter jets and tanks.

And perhaps that’s appropriate, given the nation’s priorities at the moment.

EDITOR'S NOTE: It appears that Senior DOD Leadership has committed the agency to modify existing contracts, without consideration and potentially via "block change," even though nothing of that sort was mentioned in the Class Deviation. You had to read the DOD press release and then confirm via other sources. Still, all's well that ends well.

But remember, customary progress payments are based on costs incurred. Companies that don’t have any employees (because they are all at home) won’t have a lot of payroll costs to cover. Further, supply chain costs may be minimal, because the suppliers don’t have workers either. Companies that produce necessary medical supplies and equipment may be exempt from state or local “lock-downs”—we don’t know if that’s the case, but it would certainly make sense. If so, then strike this paragraph and skip to the next one.

Further, use of progress payments requires the contractors to have an adequate accounting system. Therefore, this Class Deviation is aimed at existing defense contractors, not at any non-traditional defense contractors that may start producing medical products in response to the invocation of the Defense Production Act. Would those non-traditional defense contractors even make use of progress payments based on costs? Remember, such contractors (and products) likely qualify for treatment as commercial items, based on FAR and DFARS definitions, already. If so, they probably don’t need progress payments based on costs and, instead, would like payment in full, in accordance with commercial terms.

Okay, so there’s a lot we don’t know; and this article contains a lot of speculation and “what-ifs” that may be completely unwarranted. What do you expect from me, sitting here in my home office? Obviously, somebody in the Pentagon thinks this is a good idea—and it may very well be a good idea! Certainly, it doesn’t hurt anything.

As they say: Primum non nocere.

Last Updated on Monday, 23 March 2020 16:59
 

COVID-19 and Government Contractors

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Well, it’s getting real now, isn’t it?

As employers we are having to face a number of issues related to the COVID-19 outbreak, including reductions/eliminations of travel, cancellation of training seminars, moving meetings from in-person to virtual, and deciding how to deal with production line issues.

Certainly, we are now seeing the “downside” of modern office life, with cubicle warrens, shared offices, and “bullpens.” Putting all those bodies in a concentrated space reduced office space costs, but at a price. If one infectious person comes to work then an entire activity or function can be taken out in a matter of days. Not good.

Meanwhile, your employees’ school districts are likely to have announced that children are now receiving an unplanned vacation, ranging in duration from two to four weeks, and now they have serious childcare issues that may require flexible work schedules and a lot of working from home.

OMB just issued guidance that encourages Federal agencies to—

… maximize telework flexibilities to eligible workers within those populations that the Centers for Disease Control and Prevention (CDC) has identified as being at higher risk for serious complications from COVID-19 … and to CDC-identified special populations including pregnant women …. These CDC-identified populations include older adults and individuals who have chronic health conditions, such as high blood pressure, heart disease, diabetes, lung disease or compromised immune systems. Agencies do not need to require certification by a medical professional, and may accept self-identification by employees that they are in one of these populations. Additionally, agencies are encouraged to consult with local public health officials and the CDC about whether to extend telework flexibilities more broadly to all eligible teleworkers in areas in which either such local officials or the CDC have determined there is community spread. Agencies are also encouraged to extend telework flexibilities more broadly to accommodate state and local responses to the outbreak, including, but not limited to, school closures.

Thus, feel free to emulate the Federal government and “maximize telework flexibilities” as much as possible.

Not to be outdone, the Department of Defense also announced that service members and civilian employees have had their travel plans halted.

This restriction will halt all domestic travel, including Permanent Change of Station, and Temporary Duty. This restriction will also pause civilian hiring at DoD installations and components for persons who do not reside within the hiring entity's local commuting area. Additionally, service members will be authorized local leave only, following Service guidelines. This new guidance is effective March 16 and continues through May 11.

Obviously, exceptions will be made, but right now we interpret that announcement to mean that there is going to be a significant reduction to travel. It may impact source selection decisions, or business system reviews, or contracting officer review boards, or even DCAA floorchecks. Some flexibility in how audits/reviews will be conducted and/or supported is obviously warranted.

There are any number of law firms and attorneys who have advice to offer in situations such as these. One firm we’ve been following is Covington. Covington has published several informative articles that we bring to your attention.

  • Checklist for U.S. Employers: Here

  • Mission-Essential Services: Article

That last article is interesting, because it discusses the “excusable delay” clauses and what contractual rights they confer. Here’s an excerpt:

Key here is that these provisions do not entitle the contractor to compensation. Non-compensable delays are delays for which the contractor is entitled to a time extension, but there is no entitlement to any additional monetary compensation. The theory is that neither the contractor nor the federal government has control over the non-compensable delay. Therefore, both parties assume their own additional costs. The contractor absorbs its delay costs for being out on the project longer and the federal government absorbs its costs by granting a time extension to the contractor and extending the contract.

Despite the contractual language discussed in the Covington article, it is likely that most contractors will see increased indirect costs stemming from the COVID-19 outbreak. There will likely be some inefficiencies created as companies respond to the situation. Employees may use more sick leave that usual. Compassionate leave may be granted. On its face, those increased costs would seem to be fully allowable.

However, to the extent that contractors have Forward Pricing Rate Agreements (FPRAs) or Provisional Billing Rate Agreements (PBRAs) based on 2020 budgets, it is possible that the additional costs (coupled with a potential reduction in direct costs) are going to blow those budgets out of the water. Thus, two points: (1) try to document the increased costs associated with the COVID-19 situation, and (2) as those costs are recorded, work to understand the impact on 2020 budgets. And a third point: communicate with your cognizant contracting officers and/or ACOs to let them know what you’re seeing.

The situation is fluid and will likely evolve over the next few weeks. But this is our assessment of what’s happening at this time.

Also: wash your hands.

 

CAS Board Continues to Meet with Little to Show for Board’s Efforts

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The good news is that the CAS Board has continued to meet and is working on stuff. The bad news is that the stuff the Board is working on isn’t being published.

What is being published on the Federal Register is a meeting notice regarding past meetings held in February and March, 2020. Remember, the Board’s meetings are closed to the public, so all we have to go on is what they tell us in the meeting notice(s). The meeting notice linked to above identifies the tasks that the CAS Board is addressing, to include:

  1. Conformance of CAS to GAAP. The Board is discussing comments received in response to the Staff Discussion Paper (SDP) that it published literally a year ago. That’s right. A year later, the Board is still discussing the public’s input. In addition, the Board discussing a possible Advance Notice of Proposed Rulemaking (ANPRM) regarding CAS 408 and 409. Finally, “more generally,” the Board is discussing whether conformance of CAS to GAAP would be considered to be a cost accounting practice change under the Board’s regulations and the CAS contract clauses.

  1. Application of CAS to ID/IQ and hybrid contract vehicles. The Board will “revisit” recommendations from the Section 809 Panel regarding application of CAS coverage to such contract types. This has been a known issue for about 25 years; we’re very happy to hear that the Board has put it on the agenda for discussion.

  1. Amending the waiver threshold. Section 820 of the 2017 NDAA increased the CAS waiver threshold (the threshold under which CAS application may be waived “if the business unit of the contractor or subcontractor that will perform the work is primarily engaged in the sale of commercial items and would not otherwise be subject to CAS.” The threshold was raised in the statute from $15 million to $100 million, but the CAS Board has not yet seen fit to revise its regulations to conform to the statute. It’s only been four years—what’s the hurry?

  1. Producing the required Annual Report to Congress. The Board was required, by public law, to submit a report to Congress regarding its activities for Government Fiscal Year 2019 (ending September 30, 2019). It’s only been six months so we shouldn’t be impatient, right? On the other hand, exactly how much content is there to talk about, anyway? Seems like a two- or three-page report, with pictures to fill in the blank spaces, ought to do just fine.

What’s not listed in the above is the OMB request to Congress to increase the CAS applicability threshold from $2 million to $15 million. Had it not been for the recent GAO report on CAS Board activities, we wouldn’t have known about that, because the CAS Board isn’t acknowledging that it happened. Which is kind of funny, right? Because the CAS Board is an organizational element of the Office of Federal Procurement Policy (OFPP). And the OFPP is an organizational element of the OMB. So basically, the left hand is not talking about what the right hand is doing. Strange. You’d think the CAS Board would be a key stakeholder in any efforts to revise the CAS applicability threshold. Apparently, not so much.

Lots of talking; little output to show for it. We’ve spoken with people who are close to the CAS Board and they tell us the problem isn’t the Board; the problem is the Office of Information and Regulatory Affairs (OIRA). For those who may not know, OIRA is a mandatory reviewer of proposed and final regulations. Nothing goes out without an OIRA review/approval. Apparently, that review/approval step is taking a really long time. Or so we are told. The weird thing is that OIRA is yet another organizational element of the OMB. Thus, this is yet another example of left hand/right hand dysfunctional communications.

Or so it seems to us.

Could somebody please light a fire under the chairs at the CAS Board? And maybe get them talking to other organizational elements of the OMB?

‘Cause that would seem to be the thing to do here.

Last Updated on Monday, 23 March 2020 18:32
 

DCAA Audit Guidance on Sampling

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Those of us deep into DCAA audits of final billing rate proposals (also known as “incurred cost audits”) have learned that the audit agency recently updated its required transaction sample sizes, based on input from statisticians. Unsurprisingly, the sample sizes didn’t go down; they almost doubled in size. That means more work for both auditors and auditees.

Note: DCAA still has 12 months to complete its audit, regardless of sample size used. In other words, the auditors must now cram in nearly twice the transaction review effort into the same audit duration. One might almost feel sorry for them.

Almost.

Transaction samples primarily are used on audits of indirect costs. The auditors pull as sample that is statistically significant and then they use the findings from that sample to project to the sample universe. For example, assume a universe of $1,000,000 and a statistical sample of $10,000. In that sample, auditors find $1,000 (10%) in questioned costs. They then write the report to show total questioned costs of $100,000 (10% of the universe). That’s basically how it works. Therefore, it’s important that the sample be statistically valid, because the audit agency doesn’t want contractors arguing that the projected results were wrong on statistical grounds.

In December, 2019, DCAA issued revised audit guidance on when sampling may be used by auditors. The guidance (MRD 19-PIC-005), was published on DCAA’s website only recently. We have read it several times and, frankly, it’s not the clearest piece of writing that DCAA has ever issued. Fortunately, it references a Contract Audit Manual (CAM) section (6-104). The CAM has several revised sections, effective February, 2020—and this is one of those sections. We went to the revised section 6-104 in order to understand what the MRD was trying to say.

Here’s what we learned:

Effective with final billing rate proposals (which DCAA calls “incurred cost proposals” or “ICPs”) received after January 1, 2020, ICPs eligible to participate in the risk-based sampling process will be assessed for sampling eligibility. If the ICP is determined eligible for sampling it will be placed in the sampling universe subject to random selection for audit based on established sampling parameters. If the ICP is not randomly selected for audit, a risk-based sampling memorandum will be issued to the contracting officer indicating the ICP was eligible for sampling and not selected for audit.

(Remember, DCAA is using a “risk-based” stratification of contractor proposals, such that only the largest proposals (measured by Auditable Dollar Value or ADV) get audited every year. The smaller proposals get audited less often. Contractor proposals with an ADV of $5 million or less don’t get audited. Ever. We’ve written about the DCAA audit approach before—see (for example) this article. We have not been fans of DCAA’s “new approach” (we call it “new” even though its seven years old at this point) because it simply seems like another way of not fulfilling DCAA’s contract audit mission. Whatever.)

(Also, there are two type of ADV calculations. The first ADV addresses the overall contractor ICP risk, which is total flexibly priced contract dollars plus T&M billed dollars less subcontractor dollars. The second ADV (called “sampling ADV”) is defined as “total cost proposed on flexibly priced Government contracts, plus total cost billed on Government T&M contracts, less direct costs on non-DoD contracts in which the reimbursable agency does not participate.” The more you know ….)

Back to the CAM:

Well, it looks like we were wrong, because sometime between 2016 and 2020, DCAA changed its policy such that proposals with small ADVs can be audited. They can even be audited via statistical sampling methodology! The revised CAM now states that such ICPs may be audited via sampling when (1) there were no significant questioned costs in the last completed incurred cost audit, and (2) there are no Department (ACO, PCO, COR, DCAA, etc.) concerns with a significant impact on the ICP. So there.

For proposals with sampling ADVs between $5 million and $100 million, transaction sampling may be used when conditions (1) and (2) (as above) apply, plus a condition (3): “The contractor does not have a pre-award accounting system survey that resulted in an unacceptable opinion, or a disapproved accounting system based on a postaward accounting system audit.”

For contractor proposals with sampling ADVs between $100 million and $250 million, first thing is that they must be audited every 5th year. Beyond that, transaction sampling may be used when conditions (1), (2), and (3) apply, plus the following additional conditions: (4) the contractor does not have any business system deficiencies relevant to the incurred cost year subject to audit, (5) the contractor does not have any significant accounting practice changes in the year subject to audit; and (6) the contractor has not experienced any significant organizational changes in the year subject to audit.

For contractor proposals with sampling ADVs between $250 million and $500 million, first thing is that they must be audited every 4th year. Beyond that, conditions (1) through (6) (as above) apply.

For contractor proposals with sampling ADVs between $500 million and $1 billion, first thing is that they must be audited every other year. Beyond that, conditions (1) through (6) apply.

Contractor proposals with sampling ADVs greater than $1 billion must be audited every year.

What does it mean if a contractor’s proposal is subject to audit but, for whatever reason, sampling and projection cannot be used? As we understand it, a prohibition on using statistical sampling methodology simply means that the results cannot be projected to the universe. However, we may be wrong about that. Perhaps in those higher-risk situations, a super-high sample size is used because there is no ability to project. Neither the MRD nor the CAM is particularly clear on the issue.

Clearly, the auditors’ judgment must be used to develop appropriate audit techniques. Maybe some smart auditor who’s taken AUD 113 Risk-Based Sampling of Incurred Cost Submissions at DCAI can write us and let us know the official answer.

In the meantime, we trust we’ve decoded the latest MRD. At least, we did our best to do so.

 

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Newsflash

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.