• Increase font size
  • Default font size
  • Decrease font size
Welcome to Apogee Consulting, Inc.

Putting the “I” Back in IR&D

E-mail Print PDF

Readers may recall our vehement concern with recent decisions made by the Department of Defense that, taken together, seemed to signal an intent to control contractors’ “independent” research and development (“IR&D” or “IRAD”) efforts. We most recently voiced our concerns last January, in this article. We made some fairly strong characterizations of the policies of then-USD (AT&L) Frank Kendall. We stand by those characterizations.

That article, of course, was but one of many in which we pointed out how the DoD was engaging in a “guerilla war” against its contractors. (The words in quotes weren’t originally ours; we swiped ‘em with full attribution.) We posited in early 2016 that the real objective behind the attacks on IR&D was to obtain contractors’ intellectual property rights without paying for the privilege.

In any case, the most recent article pointed out that Mr. Kendall’s policy was failing, as evidenced by a DFARS Class Deviation that delayed its implementation. And now here we are, nine months later, to tell you that DoD just issued another DFARS Class Deviation that has effectively killed one of Mr. Kendall’s pet initiatives—the requirement that contractors must enter into “technical interchanges” with a DoD official in order to have their IRAD costs reimbursed by the Defense Department.

Yep. It’s dead. And good riddance, too.

The Class Deviation states:

Effective immediately, contracting officers shall not require a major contractor … to engage in or document a technical interchange … as part of the criteria for determining a contractor’s annual IR&D costs to be allowable. … As the result of this deviation, the [DFARS allowability requirements pertaining to such technical interchanges] are no longer a part of the criteria a contracting officer must consider in determining a major contractor’s annual IR&D costs to be allowable.

Well, there you go.

 

Last Updated on Thursday, 21 September 2017 16:27
 

Not Much to Say

E-mail Print PDF

We’ve been absent from these parts for a while now, and some may be wondering “what’s up with that?”

The title says it all: Things have been quiet lately.

DCAA hasn’t published any MRD’s since May. The FAR Councils, and DAR Council in particular, seem to have paused in the rule-making process—perhaps wrestling with how to implement the “issue one-eliminate two” Trump Executive Order. It’s been several weeks since we found any new legal decisions that piqued our interest. The Section 809 panel has gone silent. We are waiting to see what the final language of the 2018 NDAA will look like. And we are tired of reporting the run-of-the-mill fraud and corruption stories that seem endemic to public procurement.

So: not much to say.

Even though blog posts have ceased, we’ve stayed busy. We’ve been polishing up our new training offering, focused on subcontract cost and pricing issues. We’ll be delivering the first session mid-October. Not to be egregiously self-serving, but if you want your subcontract administrators trained in the FAR requirements—and not just trained in the requirements, but trained in the flexibility found within the requirements—then you could do a lot worse than reach out to us and see if we can come to you and deliver the training. The session is timed at between four and six hours, depending on how many exercises and discussions clients want. In other words, we will tailor the training to emphasize what you want emphasized.

We’ve also got a couple of long-term projects still ongoing. We hope very much to write about one of them in the future, once things resolve and we get permission from the client and counsel. If we get permission, we think it will be a doozy of a story, involving a prime contractor’s management of one of its subcontractors. (We have been supporting the subcontractor.) Until then, however, nothing can be said.

Be patient, readers. We will publish articles again when there is something of value to add to the conversation. In the meantime, if you want to email us with topic suggestions or links to stories that you suspect would make an interesting article, please do so! And if you ever feel the need to submit a “guest blog” entry, we’d be interested in that as well.

Talk to you later.

 

 

Litigation Victory

E-mail Print PDF

We haven’t followed the case of Circle C and government allegations of violations of the False Claims Act, but we did hear the news that the company emerged victorious after a long battle. In the words of the company’s attorneys at Crowell & Moring: “FCA Defendant Wins Attorneys’ Fees and the Government Gets Stuck with the Bill.”

We followed the link in the Crowell summary over to the Sixth Circuit, where we learned about the case. Circle C was a prime contractor that built 42 warehouses for the U.S. Army. One of its subcontractors, Phase Tech, failed to pay two electricians the wages required by the Davis-Bacon Act, which was a clause in the prime contract that was “flowed-down” to Phase Tech. (The value of the underpayments was $9,900.) The government alleged that the failure of a subcontractor to comply with a contract clause made Circle C’s statements that it had complied with contract requirements a falsity, meaning that every single invoice that Circle C had submitted to the Army was a false claim.

In the words of Judge Kethledge—

As a result, the government thereafter pursued Circle C for nearly a decade of litigation, demanding not merely $9,900—Phase Tech itself had paid $15,000 up front to settle that underpayment—but rather $1.66 million, of which $554,000 was purportedly ‘actual damages’ for the $9,900 underpayment. The government’s theory in support of that demand was that all of Phase Tech’s electrical work, in all of the warehouses, was ‘tainted’ by the $9,900 underpayment—and therefore worthless. ‘The problem with that theory,’ we wrote in the last appeal, was that, ‘in all of these warehouses, the government turns on the lights every day.’ We therefore reversed a $763,000 judgment in favor of the government and remanded for entry of an award of $14,748—less than 1% of the government’s demand.

(Internal citation omitted.)

Because the final judgment was so much less than the damages sought by the government, Circle C asked the court to have the government reimburse it for the nearly $500,000 in legal fees it paid during the decade of litigation concerning the $9,900 underpayment of the subcontractor’s two electricians. The district court declined to make that award and Circle C appealed. Its appeal was upheld and the district court’s ruling was overturned by the Sixth Circuit.

Judge Kethledge discussed at length whether the government’s demand for $1.66 million was reasonable and concluded that it was not. Therefore Circle C was entitled to its attorneys’ fees unless it had acted in bad faith. We are going to quote the decision’s discussion of that aspect because we suspect it can be applied to other FCA litigation matters.

The government has not shown that the conduct giving rise to Circle C’s $14,748 of liability in this case was driven by a sinister motive rather than the result of an honest mistake. Unlike many cases under the False Claims Act, this case did not involve a large-scale, systematic effort to defraud the government. Compare, e.g., United States v. Rogan 517 F.3d 449, 451 (7th Cir. 2008). Instead, Circle C submitted compliance statements that were inaccurate as to $9,900 of particulars in a project costing more than $20 million. Moreover, one of Circle C’s co-owners, John Cates, testified that Phase Tech gave Circle C a ‘set price’ for each building, which obscured the amount that Phase Tech paid each electrician. And both of Circle C’s owners, Frances and John Cates, testified that they submitted the certifications on the honest belief that they were true. The government cites no evidence that shows otherwise. …

Under the False Claims Act, however, ‘knowingly’ is itself a term of art, which refers to three mental states: ‘actual knowledge,’ ‘deliberate ignorance,’ or ‘reckless disregard.’ The district court found that Circle C was reckless—the least culpable of these states—as to whether its compliance reports were accurate regarding the wages paid to Phase Tech’s electricians (actually, on this record, just two of them). But ‘recklessness is a less stringent standard than bad faith[.]’ And on this record we see no reason to depart from that rule. …

In this case the government made a demand for damages a hundredfold greater than what it was entitled to, and then pressed that demand over nearly a decade of litigation, all based on a theory that as applied here was nearly frivolous. The consequences for Circle C included nearly a half-million dollars in attorneys’ fees. Section 2412(d)(1)(D) makes clear that the government must bear its share of those consequences as well.

(Internal citations omitted.)

We noted that there was a dissent, from Judge Rogers. He would have found that the government’s position was reasonable because it was upheld by two district courts before being overturned on appeal.

So congratulations to Circle C and to its law firm of Crowell & Moring on their litigation victory.

In the meantime, while the False Claims Act continues to be a “big stick” in the government’s compliance arsenal, it does seem to have limits. In particular, where a court sees government overreach in terms of damages sought, that overreach could cost the government its case – as well as the defendant’s legal fees.

Of course we are not attorneys, so if you have a serious situation with respect to litigation, please see one and do not rely on some layperson’s thoughts in a blog.

 

Last Updated on Tuesday, 29 August 2017 17:05
 

Q Integrated

E-mail Print PDF

Normally we don’t focus on bid protests. They are not all that relevant to government contract cost accounting and related matters; they are more relevant to government contracting officers who need to understand what bid protests have been upheld (and why) so that they can avoid similar mistakes. To that end, Bob Antonio’s WIFCON offers an excellent repository of bid protest decisions, updated frequently—so we don’t need to do so.

(However, when we do see a bid protest decision worth thinking about, that decision tends to become of the focus of a long article rather than a blog post. See, for example, this one.)

But a recent bid protest decision over at the U.S. Court of Federal Claims caught our eye. Actually, it wasn’t a bid protest decision: it was a decision regarding a successful protester’s request to have its proposal preparation costs and attorney fees reimbursed by the Federal government.

Q Integrated Companies LLC (“Q Integrated”) asked the Court to approve reimbursement of $63.4K in proposal preparation costs and $82.6K in attorney fees. The government was willing to pay Q Integrated $9.05K in proposal prep costs and objected to paying anything for attorney fees or, in the alternate, argued that the company would be entitled to no more than $24.7K in attorney fees.

Remember that, although the proposal prep costs would be reimbursed via Q Integrated’s G&A expense rate, its attorney fees would be unallowable under the cost principle at 31.205-47(f)—thus any dollar not reimbursed would reduce the company’s profit. So perhaps the stakes were higher than the numbers might otherwise indicate.

The government’s primary objection to Q Integrated’s proposal costs was that the company submitted ten “nearly identical” proposals to the U.S. Department for Housing and Urban Development (HUD) and the successful bid protest only concerned three of the ten proposals. Further, the government noted that Q Integrated actually won one of the ten proposals it submitted, so Q Integrated actually benefited from its proposal preparation costs.

Judge Lettow was not persuaded by the government’s arguments, writing “Q Integrated … unnecessarily incurred bid costs with respect to the three contract areas at issue in this case. The fact that a similar proposal was used in a winning bid for one area is of no relevance to this protest; Q Integrated devoted at least some of the bid costs it incurred to proposals rendered futile by HUD’s errors in the procurement process.”

However, the court accepted the argument that not all proposal prep costs should be reimbursed. Consequently, Judge Lettow then “allocated” the B&P costs between the ten submitted proposals to calculate the amount associated with the three proposals at issue in the bid protest. He used the FAR Part 31 definition of “allocable” to support his position, writing –

A claimed cost is allocable if it ‘[i]s incurred specifically for the contract,’ or if it ‘[b]enefits both the contract and other work, and can be distributed to them in reasonable proportion to the benefits received.’ FAR § 31.201-4(a), (b). More specifically, a cost is allocable if ‘a sufficient ‘nexus’ exists between the cost and a government contract.’ Boeing N. Am., Inc. v. Roche, 298 F.3d 1274, 1281 (Fed. Cir. 2002) (quoting Lockheed Aircraft Corp. v. United States, 375 F.2d 786, 794 (Ct. Cl. 1967)). In its original application for bid costs, Q Integrated sought to recover all of the costs it incurred in connection with the HUD procurement. … The government has argued, however, that Q Integrated is only entitled to bid costs for the three contract areas at issue in this case, not for all ten areas for which Q Integrated submitted bids, which would result in an award of 30% of Q Integrated’s total bid costs incurred. … Q Integrated countered in its reply that it is entitled to bid costs for all of the areas for which it did not receive an award, i.e., nine out of the ten submitted proposals, which would result in an award of 90% of total bid costs.

In this instance, a 30% allocation of bid costs is appropriate. Even though all of the bid costs incurred by Q Integrated are attributable to each area for which Q Integrated submitted a proposal (i.e., all of the costs were necessarily incurred for each proposal, regardless of how many proposals were submitted), such costs must be allocated among the proposals ‘in reasonable proportion to the benefits received.’ FAR § 31.201-4(b).

The quote above is interesting in the sense that it applies allocation rules to costs incurred for one or more B&P “projects”. When a B&P project is established in a contractor’s accounting system, it must be treated like a final cost objective in many respects. For example, it must receive the same direct labor charges that would have been received by a revenue-generating contract. Those labor charges must be burdened the same way that they would have been burdened if charged to a revenue-generating contract. (See 31.2015-18 and CAS 420.) However, it seems fairly clear that such B&P projects are not revenue-generating projects. Importantly, they do not receive an allocation of G&A expense. Accordingly, we would argue that such B&P projects are not final cost objectives in the contractor’s cost accounting system. They are not one of the “final accumulation points” because their costs are allocated to final cost objectives via use of the same base as is used for allocation of G&A expenses. (See CAS 410.)

Thus, we would assert that Judge Lettow’s rationale for cost allocation is inapposite. He applied rules designed to govern final cost objectives to cost objectives that were not final. Note: We are not saying that he didn’t reach a fair answer; we are saying that his rationale in support of his calculation was wrong.

Judge Lettow then turned to the question as to whether Q Integrated proposal prep costs were reasonable in amount. Here the Judge was on more solid ground (in our view), citing to the cost principle at 31.201-3(a)—which applies to all contractor costs, both direct and indirect. Unfortunately for Q Integrated, its two principals who generated the majority (if not all) of the labor costs associated with the proposal preparation did not maintain “contemporaneous time records” to support their labor hours and associated labor costs. Although the government wanted to make a big deal out of this issue, Judge Lettow found that the labor estimates and rationale provided by Q Integrated were sufficient for these purposes, noting “Such summaries that are based on records maintained by the business are sufficient to support a claim for reasonable bid costs, particularly with regard to small businesses that do not regularly maintain contemporaneous time records. See Geo-Seis, 79 Fed. Cl. at 80; Beta Analytics Int’l, Inc. v. United States, 75 Fed. Cl. 155, 163 (2007).”

The next challenge was to analyze the hourly labor rates associated with the two principles. As Judge Lettow wrote—

Following the government’s objections to Q Integrated’s use of market rates to calculate direct labor cost, Q Integrated revised its application to apply an hourly rate based on Michael Ognek’s and Christopher Ognek’s annual compensation for the years they worked on the HUD proposal, as reflected in the company’s tax filings for each year, and ‘calculated by dividing [each] employee’s total compensation by 2,080 (52 weeks at 40 hours).’ … This approach is reasonable, see Gentex Corp. v. United States, 61 Fed. Cl. 49, 54 (2004) (‘[B]id proposal costs ‘must be based upon actual rates of compensation . . . and not market rates.’’) (citations omitted), and the court accepts that Q Integrated incurred $43,702.75 in direct labor costs in preparing its proposal.

Judge Lettow also evaluated Q Integrated’s request for reimbursement of consultant expenses and other direct costs purported incurred in support of the HUD proposals. Certain expenses were withdrawn by Q Integrated, based on the timing of incurrence or because the claimed expenses “were not supported by credit card statements.” In sum, the Court found that Q Integrated had incurred $70.4K in reasonable and allowable proposal prep costs, of which 30% or $21.1K would be reimbursed by HUD.

With respect to the attorney fees, the Court awarded Q Integrated “338.35 hours of attorney time at a rate of $192.08 per hour,” for a total of $65.0K.

Thus, while Q Integrated sought $63.4K in proposal preparation costs and $82.6K in attorney fees, it was awarded $21.1K in proposal prep costs and $65.0K in attorney fees. The remainder of the unreimbursed proposal prep costs will presumably be recovered in Q Integrated’s G&A expense rate, while the remainder of the unreimbursed attorney fees will come out of Q Integrated’s bottom-line profit.

 

Last Updated on Monday, 04 September 2017 18:42
 

Not Everybody is a Star

E-mail Print PDF

Netflix famously published a 120-slide PowerPoint manifesto on its innovative approach to managing Human Resources. We wrote about it here. Netflix approached personnel hiring and retention decisions like a professional sports team: it wanted stars at every position. (It’s HR metric was called “talent density.”)

In contrast, my old boss Bill – who was the best boss ever, because whatever I did wrong he was doing it wronger than I was – had a different HR philosophy. Bill stratified his employees into one of four categories: (1) stars, (2) cows, (3) losers, and (4) TBD. Bill’s HR management philosophy was that a team did not need—and did not want—stars at every position. He believed such a team was too contentious. There were too many chiefs and not enough Indians (to use the politically incorrect phrase that Bill would have used). You could say that Bill’s approach was more diverse, was more inclusive. And I’m thinking you would be right in that assessment.

In another article, we touched on workforce diversity, noting that the Big 4 environment wasn’t quite as diverse as it claimed it was. Sure, every characteristic protected by Federal or State law was included, but beyond that there was a sameness—an intentional sameness—to the individuals slotted for practice roles. We wrote—

Those firms say that they are inclusive and focused on diversity, but the kind of diversity they welcome is not unlimited. If you are in a practice role (as opposed to a support role), it is highly likely that you are well-educated, smart, ambitious, and driven. We’re talking ‘Type A’ personality all the way. … Doing whatever it takes because if you don’t there are many others who will! It’s a system intended to weed out people who don’t fit—those who don’t have the right ‘chemistry’—because every year another class of Associates joins the firm, and some of them may make Partner one day if you can’t (or won’t) do what it takes to make it. …

People are different and they have different skills and different motivators. The Briggs Myers folks claim there are 16 different personality types. I don’t know about 16, but I know there is more than one type. But in the world of the Big 4, there really is only one type that succeeds—and that is the type that is driven to succeed.

Thus, it seems that the Big 4 professional service firm environment is not unlike that of the Netflix environment: both are seeking “high performers”—stars—at every position. Yet, Bill wasn’t all that concerned about having enough stars. He thought a workforce comprised of 10 to 20 percent stars was good enough. Those would be the leaders and the “cows” would be the followers.

In Bill’s mind there was nothing wrong with being a cow. If Bill called somebody a cow he meant absolutely nothing derogatory by that comment. In Bill’s view, a cow was dependable. A cow showed up on time and left on time. A cow did what was asked of them, and a cow did it well. A cow wasn’t ambitious and wasn’t seeking glory; a cow just wanted to be told what the expectations were so that they could be met. Cows received “meets” performance reviews and cows received the median merit increases. There was nothing wrong with being a cow. In fact, they were necessary because Bill believed that too many leaders created conflict.

There were positive attributes about being a cow. First, you generally had a long-term employee. You didn’t have somebody who was going to jump ship because they had been passed-over for promotion or because somebody else had received a bigger raise. Generally, cows were content. And a content employee is a good thing if you have a lot of people to manage. So that was the second positive attribute associated with cows: they were easy to manage. They didn’t complain and they didn’t call HR about every little thing. (Which was good because there were already too many people calling HR about Bill.)

In a nutshell, “cows” were the ones who produced the milk, each and every day. Bill depended on that production.

In contrast, “losers” were problem employees destined, sooner or later, for the exit. Whereas Netflix sought to separate the stars from the rest, retaining only the stars, Bill was focused on separating the losers and finding ways to move them out from his organization. In Bill’s philosophy, “losers” didn’t meet performance expectations. Losers didn’t deliver a day’s worth of work for a day’s pay. Perhaps most importantly, losers lacked integrity and you couldn’t count on them to do what they said they would do. Losers were on the fast track to gainful employment elsewhere. Bill figured he had about five percent “losers” in his organization, if only he could identify them.

We all know those people, right? They are not fun to work with. Indeed, they are disruptive to the smooth functioning of the workforce. Bill’s management goal was to identify them as early as possible and show them the door as soon as HR would let him. Building on that, I would say that one important attribute of a company’s culture is how quickly HR will let a manager get rid of such people. Some companies require a ton of paperwork and a Performance Improvement Plan and they delay and delay the final decision, trying to avoid a lawsuit claiming wrongful termination. Other companies move more quickly. Which company do you want to be working for?

I remember this one person at a large defense contractor who was one of those people that Bill would have labelled as being a “loser.” On paper she was top-notch but in reality she was a pain to work with. Literally nobody wanted to work with her. She didn’t report to me but her boss took unexpected medical leave and I was asked to step in on an interim basis. Unfortunately there was no documentation in the employee file about the myriad problems and complaints associated with this individual, so my first order of business was to start documenting and to start discussing “performance concerns” with her. (Discussions that were later characterized as being “ambushes” because I made sure to have a witness present.) Long story short: she received a “Needs Improvement” rating and was denied a bonus, and then she complained to HR and suddenly I was the problem. It took me a long time to wash away the “bad supervisor” stigma. Fortunately, a year later her group transferred out of state, and she said she would only go if she received a promotion. The boss (not Bill) asked around and found out that literally nobody wanted to work for her, or even with her. They said they would quit if they had to report to her. When the boss told her that she wasn’t getting her promotion—and why—she quit that very same day in a huff. Problem solved, and my reputation was restored.

So how do you deal with “cows” and “losers” (or whatever you call them)? Do you seek only superstars or are you happy with a staff of productive, content, employees who produce the expected amount each day? And if you want to get rid of a problem employee, how easy is that to accomplish? These questions matter because they reach into the heart of Human Resource management, company culture, and personal management style.

Before you can be a leader, you have to figure out how you are going to lead.

Bill would have called Harvey Wong a cow. You probably don’t know Harvey because he didn’t have any LinkedIn connections. He didn’t write any articles and, to my knowledge, he never appeared on any panels. He was a member of the (E&C) Compliance Roundtable—perhaps a founding member—but he never sought a leadership role, preferring instead to handle the administrative tasks while others took the spotlight. After he left DCAA, Harvey worked for the same company for the rest of his life. When that company moved him out of state, he went. He didn’t look for another job because he was content with his current job, regardless of where the company located him geographically. He wasn’t a supervisor. He wasn’t a leader. He was in no way a star. He just showed up and did what he was told to do. And he did it well. For a very long time, right up until he passed away in December, 2015.

The world needs more people like Harvey Wong. Perhaps more importantly, people in charge of establishing teams and hiring people need to be okay with hiring people like Harvey Wong—people who are not superstars but who show up each day and do a full day’s work for a day’s worth of pay. If you only search for stars, you are going to miss a lot of cows. And I strongly suspect your workforce is going to suffer for it.

 

 

Who's Online

We have 104 guests online

Newsflash

In March 2009, Nick Sanders’ article “Surviving Government Audits: Have the Rules of Engagement Changed?” was published in Government Contract Costs, Pricing & Accounting Reports (4 No. 2 GCCPAR P. 11). Apogee Consulting, Inc. is proud to announce that Mr. Sanders’ article was selected for reprint and publication in Thomson West’s The New Landscape of Government Contracting.  Mr. Sanders, Apogee Consulting’s Principal Consultant, joins such distinguished contributors as Professors Steven Schooner and Christopher Yukins, Luis Victorino and John Chierachella, Joseph West and Karen Manos, Joseph Barsalona and Philip Koos and Richard Meene, and several others.  The text covers a lot of ground, ranging from the American Recovery and Reinvestment Act (ARRA) to Business Ethics and Corporate Compliance, and includes several articles on the False Claim Act and the Foreign Corrupt Practices Act.  In addition, the text includes the full text of many statutory and regulatory matters affecting Government contract compliance.

 

The book may be found here.