ASBCA Rescues Small Business from Navy Contracting Officer
Last Updated on Monday, 10 October 2016 17:57
In September, 2015, the US Navy awarded a $41,000 firm, fixed-price contract to HCS, Inc. (a small business) for pipeline repair work at NAS Corpus Christi. During contract performance, issues arose. HCS properly sought direction from the Navy contracting officer and executed the direction it received. The changed work led to a deductive change proposal in the amount of $1,435. In addition, the Contracting Officer’s Representative (COR) directed HSC to perform additional work not originally bid. HCS estimated the cost of the additional work to be $1,500, which just about offset the deductive change it had just calculated.
The contracting officer and the COR didn’t like those numbers. The COR, who was an ensign, a graduate from the Naval Academy with a degree in mechanical engineering but no experience in construction, attempted to make their own calculations. Their approach resulted in the original FFP value being reduced from $41,000 to $21,082. HCS filed a claim with the contracting officer, and the contracting officer kicked it to the NAVFACENGCOM Chief of Contracting, who found “partial entitlement” and directed the contracting officer to “negotiate a final price adjustment.”
The contracting officer offered HCS an additional $5,164 but HCS refused it and filed an appeal with the ASBCA. Interestingly, the Navy contracting officer offered the following piece of “advice” to HCS—
I am prepared to offer $5,164.00 to cover the portion of the claim that we have determined to have merit. That amount probably will not satisfy you though, as I understand that you feel you are due the full $22k. I have also heard that it can cost more than $100K to go through the ASBCA appeal process. If that is true, the economics of it don't make much sense to me, but of course you have the right to do so.
Fortunately HCS disregarded that advice and proceeded to an accelerated appeal pursuant to ASBCA Rule 12.3. And fortunately the Board found the appeal had merit. In the decision, Judge Hartman noted that the Navy had based its legal position on the lack of documentation (“receipts, costs, accounting records, or other documentation”) from HCS substantiating why it was entitled to the full firm, fixed-price it and negotiated and agreed-to. HCS argued that the Navy was attempting to convert the FFP contract into a cost-reimbursement contract after completion of all contract work. Judge Hartman found for HCS, writing—
The government has the burden of proving the amount of cost savings due to deletion of work. … A contractor, therefore, is entitled to receive its contract price, unless the government demonstrates the government is entitled to a price reduction for deleted work. … We are aware of no authority allowing the Navy to delete work from a contract after work performance and then refuse to pay for the work initially specified and performed, and the Navy cites us no legal authority for such action. … A contractor is entitled to receive its contract price where the government fails to demonstrate entitlement to a contract price reduction for deleted work. (Internal citations omitted.)
HCS was awarded its full contract price (plus a small bump for the additional work) plus interest.
So what does this mean?
Many of our clients are small businesses. They are sometimes left with a difficult choice regarding accepting contractual outcomes that are wrong, or lawyering-up and litigating. As you can see, in this case the Navy contracting officer was explicitly using that difficult choice as leverage, trying to force HCS to accept an unjust decision because the amount in question was cheaper than paying for a lawyer. Indeed, many larger businesses—including the very largest defense contractors—often make a decision to forego litigation because it will cost more to litigate than the case is worth.
It is morally wrong to put another party in a contract to that choice. It is morally wrong to force a small business to choose between taking a loss on a contract it had successfully performed and hiring an attorney. And it is reprehensible for a government contracting officer to put a small business into the position of having to choose, and to do so intentionally.
This, right here, is why so many companies are wary of doing business with the U.S. Government.
For those small businesses that may be reading this article, you do not have to let yourself be bullied by a prime contractor or by a government contracting officer. You can, and you should, choose to litigate when you believe you are correct. You can win and you may be able to get your attorney’s fees paid for by the opposition. (See: Equal Access to Justice Act.)
And to any government contracting officers who may be reading this article, you do not have to balance the Federal deficit via unethical means. You do not have to claw money back from small businesses who did their jobs and who rightfully should be paid. When you issue a COFD, make sure it’s a good one.
DCAA All Caught Up … but Too Late?
We recently spent a lot of words discussing how DCAA is now able to perform, once again, the full panoply of audit services for non-DoD agencies. This article is kind of a postscript to that one. In this shorter essay we want to explore whether the DoD Comptroller Certification to Congress was a bit too little, too late.
We’ve been tracking this for a while. We’ve reported that both NASA and the Department of Energy (DOE) have been concerned about the lack of DCAA audits – as well as the timeliness and quality of what audits have been performed by DCAA – for some time. We’ve been on this topic for some time. For years, as a matter of fact. Don’t believe us? You can search this site and see the articles. We’re not going to link to them here.
So while DCAA was busy not performing audits at non-DoD agencies, what were the auditors doing? First, they were lobbying Congress to get the statutory ban lifted. When that didn’t work, they focused on eliminating as many unaudited proposals as possible from the backlog. And while that was going on, they were working hard to persuade those non-DoD agencies to be patient and await GFY 2017, when DCAA would return to be their auditors once again.
But that approach didn’t really work either. As we have noted before, DOE OIG and NASA OIG already had concerns with DCAA’s audit support well before the GFY 2016 NDAA came into play. In February, 2015, the DOE OIG found that “DCAA has been unable to meet the non-M&O contract audit needs of the Department” and noted the DOE management had already taken action to address the audit support shortfall. The DOE OIG reported that DOE —
… has put a contract in place for audit services to ensure Contracting Officers have an alternative to DCAA to obtain quality audits; is coordinating closely with DCAA on its audits; and is following up with contracting activities to ensure they understand what is expected and have the appropriate support. Department management also noted that they believe it is important to recognize that whatever good intentions DCAA has, its track record makes it prudent to avoid assuming a marked change in DCAA's support.
A couple of months before that, in December, 2014, we reported that the NASA OIG said “NASA is at increased risk of paying unallowable, unreasonable, and unallocable incurred costs and of losing the opportunity to recoup improper costs because Agency contracting officers rely too heavily on DCAA’s incurred cost audit process.” The NASA OIG recommended that NASA “Revise the NASA FAR Supplement 1815.404-2(a)(1)(F)(1) to allow independent public accounting firms to provide supplemental audit coverage for NASA contracts where DCAA currently conducts any contract audit services but cannot be responsive to NASA’s need for an audit.”
So this is not a new thing and the NDAA prohibition on DCAA performing audits for non-DoD agencies really didn’t affect the management strategies for contract audit support at those non-DoD agencies. But it certainly did get the attention of DCAA’s management team, who have come to rely on funding from those non-DoD agencies to pay for their staff and to pay for an approach to audits that sacrifices audit quality and timeliness in favor of risk assessments and working paper documentation.
While DCAA was working hard to convince Congress it had the resources to provide audit support to non-DoD agencies (and that the audit agency was perfectly ready to pocket all that lovely audit reimbursement funding), both DOE and NASA were busy replacing DCAA with independent contractor auditors.
Earlier this year we reported that DOE was going to make its M&O contractors audit their subcontractors. And in August, 2016, we told readers that DOE had made it official: they had put procedures in place to permit DOE contracting officers to obtain audit support services from the private sector. The new DOE policy stated—
As an alternative to DCAA audit support, DOE/NNSA Contracting Officers may obtain audit services from a private sector provider of audit services. One available option is a Blanket Purchase Agreement (BPA) for audit services that is currently in place with CohnReznick, LLP. Orders for audit support can be placed by any DOE/NNSA Contracting Officer through individual awards issued against BPA DE-MA0011836. Each order placed against the BPA is awarded and administered by the field site Contracting Officer placing the order.
And now, October, 2016, the news media is reporting that NASA has awarded contracts to six independent audit firms, including: Castro & Company, Kearny and Company PC, CohnReznick LLP, KPMG LLP, Moss Adams LLP and Regis and Associates PC. The contracts are reported to be FFP, multiple-award ID/IQ, types, worth up to $100 million (combined). (Hat tip: Stephen Avery.)
So DCAA now has competition for audit support services provided to at least two non-DoD agencies. Those agencies will be able to compete required audit services between DCAA and outside auditors, perhaps evaluating price, quality, and timeliness – and making best value trade-offs. That’s new.
And if you are a DCAA auditor looking to leave government service and continue your profession elsewhere, you now know you have options … and where to submit your resume.
The Time We Sold Out
Remember that time we walked away?
We decided a potential client was too big, too bureaucratic, and that life was just too short to put up with it.
Remember that? We wrote a blog article about it. We wrote that article knowing that the client we walked away from was going to read it.
That article generated some interesting reader feedback. One reader from a place “where it’s always sunny, unless it’s raining,” emailed to say—
Your article on the almost-client, really hit home. Regardless the fee, better to be battling with the client than against their people or policy. Nice to have that option. Keep it up, I've made sure my folks read it, as many haven't been on the other side.
We also received some feedback from the almost-client. The client still wanted to hire Apogee Consulting, Inc.! The client could not overrule the determination by its Procurement Department that only the most current Form W-9 would be accepted; Apogee was going to have to live with that and there was nothing to be done. However, the client offered a compromise: they would fill out the new W-9 for us and all we would have to do was sign it and send it back.
Also the client offered payment terms that were within industry standards. (As readers may recall, we were afraid that a client that big would also require onerous payment terms.) To be clear, the payment terms were not our normal 15-day-after-receipt-of-invoice requirement, but they were okay.
(Why insist on 15 days as our standard payment terms? Because we’re a small business and most of our clients are defense contractors. They are supposed to pay their small business suppliers that quickly, according to DoD policy; many of their prime contracts require it. We’ve written about this before on the site; look it up.)
So a compromise was offered. For us, it was a choice of revenue versus principles. Guess which one won? (Hint: see this article’s title).
Also our newest client wanted us to say nice things about them. Sure. Did you know the client is one of the largest EPC (Engineering, Procure, Construct) firms in the world? That they are publicly traded and, unlike other such companies, they actually pay shareholders a dividend? That they have a long history of successful project execution and are very well respected in the industry? Well, all that is true and we would have said those things even if they weren’t (now) paying us to say them.
Sanders Presenting at Joint NCMA/AGA Educational Seminar
Nick Sanders, Principal Consultant of Apogee Consulting, Inc., is pleased and honored to once again present at an upcoming educational seminar jointly sponsored by the San Diego Chapters of the National Contract Management Association (NCMA) and the Association of Government Accountants (AGA).
On Wednesday, October 19, 2015, Nick will be leading a discussion entitled “Properly Categorizing Your Suppliers—It Matters! Subcontractors, Temps, Consultants, and Other Suppliers”. This is a seemingly trivial topic but one that is surprisingly difficult to get right; and one that has unpleasant consequences if you get it wrong. We’ll spend three hours on the topic, and we probably won’t have time to discuss all of its ramifications.
Location: Four Points by Sheraton Hotel, San Diego, CA
Cost: $60 for NCMA/AGA members, $80 for non-members
Register online at www.ncmasd.org
(Registration deadline is October 14th.)