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Statute versus Regulation

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Recently we have noted a spate of Class Deviations issued by the Defense Procurement and Acquisition Policy (DPAP) Directorate. Generally speaking, the various Class Deviations relax certain requirements.

For example, DARS 2017-O0006 (July 13, 2017) increased the Micro-Purchase Threshold (MPT) to $5,000. (The MPT was increased to $10,000 for “acquisitions … for (i) basic research programs; and (ii) activities of the DoD Science and Technology Reinvention Laboratories (STRLs)” as listed in the Memo.) (The Class Deviation notes that the MPTs for other acquisitions remain unchanged.)

For another example, we discussed here Class Deviation DARS 2018-O0001 (November 8, 2017) that delegated to the Heads of Contracting Activity (HCAs) the ability to waive certain requirements for certain acquisitions. (It’s complicated; see the article for more details.)

DCMA has issued its own Class Deviations relaxing certain requirements. For an example, see this article where we reviewed the August 15, 2017 DCMA Class Deviation that modified Instruction 135 by—

… streamline[] the prior quick-closeout process for DCMA’s Administrative Contracting Officers (ACOs) by removing requirements to obtain an audit report or Low-Risk AdequacyMemorandum from the Defense Contract Audit Agency (DCAA) prior to settling quick-closeout rates.” The Class Deviation “authorizes ACOs to settle final overhead rates and close any and all physically complete contracts regardless of dollar value or the percent of unsettled direct and indirect costs allocable to the contracts. It applies to Cost-Reimbursement, Fixed-Price Incentive, Fixed-Price Redeterminable and Time-and-Materials Contracts.

(Emphasis added.)

We’ve asserted that the spate of Class Deviations stems from the lack of action by the DAR Council, the regulatory rule-making body charging with overseeing revisions to the DFARS (and for cooperating with the Civilian Agency Acquisition Council in making revisions to the FAR). (See FAR Part 1.201.) The lack of regulatory action is noticeable. That’s not to say that there is no action; however, the quantity of DFARS revisions has fallen markedly in the past year. Let’s just say that DAR Council members may be working hard; but the output of those efforts is disappointing.

Meanwhile, Congress keeps on passing laws that should—in theory—compel the FAR Councils to act with a sense of urgency. Looking at the recently enacted 2018 NDAA, we counted three (3) separate changes to acquisition thresholds, as follows:

  1. Micro-Purchase Threshold raised to $10,000 (for all DoD acquisitions)

  2. Simplified Acquisition Threshold raised to $250,000

  3. TINA Threshold raised to $2 million

Those are significant changes. But unless otherwise directed they impact only DoD and NASA acquisitions; they don’t impact acquisitions by civilian agencies. Obviously, if you were on the CAA Council you would want to adopt requirement relaxations for your own agencies; but nothing compels you to do so.

In the meantime, how do DoD Contracting Officers implement requirement relaxations? Do they implement the new statutory thresholds, or do they wait for the DAR Council to implement the new public law via revisions to the acquisition regulations? Or does DPAP and/or DCMA issue appropriate Class Deviations while everybody waits for the DAR Council to work its bureaucratic processes?

Those questions matter, because the threshold changes impact solicitation requirements and contractor proposals submitted in response to those solicitations. If the requirements have been relaxed, then it behooves all parties to implement those changes quickly, because if contractors are subject to fewer burdensome requirements, then they can respond more quickly (and more cheaply).

The problem is more challenging for contractors subject to the requirements of the FAR contract clause 52.244-2 (“Subcontracts”) or the DFARS contract clause 252.244-7001 (“Contractor Purchasing System Administration”). Those contractors have purchasing systems that are subject to government review—primarily by DCMA—using this CPSR Guidebook. Those contractors are expected to comply with applicable rules and regulations and statutes. The CPSR Guidebook states that the government review should encompass 30 individual areas, and too many deficiencies in any of those areas can lead to a disapproved contractor purchasing system.

Those contractors have a problem right now. Do they use the statutorily revised thresholds, or do they wait for the Council(s) to update the regulations? For example, when considering compliance with “Truthful Cost or Pricing Data. Truth in Negotiations Act (TINA)” (Item in the October 2017 Guidebook), do Contractors stick with the old (regulatory) threshold of $750,000, or to they immediately implement the new (statutory) threshold of $2 million? If they implement the $2 million threshold before the regulations catch up to the statute—which, based on recent history, could take a couple of years—will CPSR reviewers find them deficient and recommend system disapproval?

It’s a challenge.

Different companies respond differently to that challenge.

Some companies take a more conservative line and tell their buyers “nothing changes until the FAR is updated” to reflect that change. They don’t seem to trust that CPSR reviewers will accept statutory changes, and thus they are unwilling to risk the adequacy of their purchasing system until they have a regulation at which to point as the basis for their internal purchasing policy.

Other companies lean forward to take advantage of any relaxation of requirements, even if the requirement relaxation hasn’t yet made it through the regulatory rule-making process. They see opportunities for accelerated schedules and less effort, and less procurement file documentation. They see opportunities for cost reduction and schedule reduction, and they are willing to trade a little risk for those opportunities.

Who’s right?

It’s not for us to say, since each company establishes its own policies, procedures, and practices.

We will offer this:

Essentially, the CPSR is an evaluation of the company’s purchasing system documentation and compliance with those policies, procedures, and practices. If buyers comply with their internal requirements then perhaps the risk isn’t as great as some would think. We’ve also heard of contractors getting gigged for not updating their procedures and instructions as the requirements change (in the regulations), so it might even be a good thing to be seen as leaning forward as requirements change (in the statutes).

Finally, Mark Hijar, an attorney focused on contractor purchasing system adequacy, offered this advice a few months ago on LinkedIn. He wrote “… assuming the contractor manages the [CPSR review] team effectively, raising the micro purchase threshold might upset the team and result in an easily-negotiated deficiency during the report phase. Best case, DCMA accepts the increase without question. … [Also] you really don’t need to wait for the regs to be edited if you don’t want to. The regs specify compliance with the law they articulate - order of precedence places the law above the reg, so differences between the two defer to the law itself.”

As a contractor, you need to be aware of upcoming regulatory changes, be they changes to statute or to implementing regulation or made via Class Deviation. You can watch the Open FAR Case report or the Open DFARS Case report to see how the rule-makers are progressing. You can wait for them to complete the revision process, if you’d like. Or you can lean forward and adopt statutory changes as they are enacted into law.

It’s your call.


Last Updated on Monday, 15 January 2018 19:41

Risk Aversion

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Sometimes the best advice we can give our clients is “get a lawyer.” We can offer suggestions and assistance in many areas of government contract cost accounting, compliance, and administration; but we cannot offer legal advice. In fact, we are prohibited from doing so!

Thus, sometimes we have to tell clients that they need legal advice from a real, honest-to-God attorney. If the matter is a complex government contracting issue, we suggest they find an attorney with strong credentials in that area. If the matter may lead to litigation if not resolved, we suggest they think about a firm with litigation experience in the government contracting area.

Obviously, one engages an attorney only with some reluctance, because we all know that attorneys are expensive—but when there is sufficient money at stake, that is definitely the way to go. Sometimes, however, the matter isn’t about money: it’s about risk. Risk associated with submitting a cost in an invoice, or risk associated with making a certain statement in a proposal. Oftentimes those are legal risks where an attorney’s input can be valuable; but other times the risks are simply business risks. It might be a matter of cash flow or a matter of profit, or a matter of a customer relationship.

And the point of this little article is that attorneys don’t always offer the best advice on business risk matters.

Why? Because in our experience too many attorneys bias towards risk aversion. They want to eliminate risk instead of managing it.

We have thought about this for some time. We have pondered why that might be the case. (And of course we are not talking about all attorneys; there are obviously exceptions to any generalization.) Our speculation is that this general bias against risk is a product of law school. Attorneys are trained to think about risks and possible consequences and what-ifs and what-abouts—and that kind of thinking leads to good attorneys and good advice. We speculate, though, that drafting contract language to militate against risk and thinking about how to avoid consequences naturally leads to an inherent risk aversion. It’s all just guesswork, but that’s where our thoughts have led us.

Not to make too much of a joke of this topic, but you might be a risk-averse attorney if

  • You require all internal documents to be marked “Attorney-Client Privileged” even though the documents don’t touch on legal matters and no attorney was involved in their creation

  • You require the Program Manager to refer all customer questions to you for consideration of their legal ramifications

  • You insist on personally resolving all customer disputes, even those of a routine administrative nature

Et cetera.

As business people, we learn to manage risk, not to avoid it. We understand that risk cannot be eliminated. We learn to identify risks, to monitor risks, and to implement mitigation plans when risks start to transform into events.

Every government contract is, in essence, a series of risks to be managed. (In fact, I co-instructed a NCMA National Education Seminar on Risk Management of Complex U.S. Government Contracts and Projects a few years ago. The seminar tag line, which you can still find on Google today, was “Risk management, the ability to efficiently and cost effectively mitigate potential problems, is fundamental to good business in both the public and private sectors.”) Obviously, each contract carries with it the risk associated with performance. As we’ve often opined, that risk includes the risk associated with subcontractor performance. But there are far more risks associated with a government contract and, as we’ve noted before, contractors are not very good at assessing their risks. Each clause referenced in Section I of your contract carries with it a specific non-compliance risk; some of those risks are relatively small but others are quite large. Section H clauses have their own risks. There are cost accounting risks (e.g., non-compliance with the FAR Part 31 cost principles or with applicable Cost Accounting Standards) and there are Business System risks (e.g., failure to properly manage government property, including contractor-acquired government property, or failure to have an adequate purchasing system). The point is: when you accept a government contract you accept a whole package of risks that all need to be managed.

If you were risk averse you would never be in government contracting in the first place.

That doesn’t mean you should ignore the advice of your attorney. After all, you’re paying for that advice and we don’t want you to waste your money. No, what we are saying is that your attorney’s advice is but one piece of information in your risk management regime. On legal matters, that advice ought to weigh very heavily but, on business matters, perhaps that advice shouldn’t carry the same weight.

In fact, our (limited) understanding of the situation is that jurisprudence makes a distinction between an attorney giving legal advice and an attorney giving business advice. In the former case, that communication is protected by privilege; but in the latter case, privilege may not apply.

For example, see this article we found at the San Diego County Bar Association website. We like it because not only does is discuss distinctions between legal advice and business advice, it does so in the context of risk.

It states—

Anytime you give advice, you are naturally exposing yourself to some level of risk. There is always the chance that things could go sour, the client blames you, and you find yourself defending your decision. However, that’s a risk in every business and every law firm, and one that you will need to assess based on your own comfort level.

The other (less obvious) risk is that giving business advice could potentially blur the lines between advice that is subject to the attorney-client privilege and advice that isn’t. For the most part, if you are acting as external (as opposed to in-house) counsel, your communications with your client will be privileged. However, as a general rule, the attorney-client privilege only applies where the relevant communications between a lawyer and a client are for the purpose of giving or receiving legal advice and are expressed in confidence. Application of this rule can become a bit slippery when an in-house counsel is acting in a commercial capacity (for instance, as Company Secretary) and providing business or strategic advice. While the lawyer will still be subject to professional rules of conduct that prohibit him or her from disclosing these discussions to a third party, the communications themselves may not be privileged.

(Emphasis in original.)

This is a complex, nuanced, area and we have probably pushed the envelope about as far as we should on this topic. Government contractors can—and have—fought protracted battles about which documents are privileged and which are not. Courts and Congress have admonished contractors’ counsels for going too far in making documents confidential. There are a number of attorneys who are perhaps over-zealous in trying to shield their clients from risk; and those efforts have created additional risks of their own.

As business people, we have to learn to make decisions given the information we have at hand. Some of that information is from our attorney(s) and other bits of information can come from other areas, such as program management, accounting, or finance. All the input must be considered and weighed, and used to inform our decision-making.

We cannot be risk-averse because avoiding risk is not an option, not if we want to have a thriving business. We also need to understand when our attorney is giving us legal advice, which should weigh heavily, and to understand when our attorney is giving us business advice. We think that’s the approach that will help optimize decisions.

Importantly, we also have to learn to find attorneys whose appetite for risk is more in line with our own. Risk aversion is great in some contexts, but we don’t think it works very well in a business context.



Last Updated on Monday, 15 January 2018 19:32

Read the Contract

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Honestly, we cannot give better advice than “read your contract.”

Read it before you ask questions. Read it before you get into an argument with your customer.

Read the contract.

You want to know when title passes to your customer so that you can claim revenue?

You want to know whether you can justifiably invoice for pre-contract or post-Period of Performance costs?

You want to know whether a cost can be justifiably claimed in an invoice?

The answer to all those questions—and more—starts with reading the contract.

What does it say?

You would be amazed at the number of people who don’t read their contracts. You might be similarly surprised at the number of people who think a consultant can give good advice without first knowing what the contract says.

Everything starts with the contract—and many things end with the contract as well.

As a good example of what we’re talking about, let’s look at a recent decision at the U.S. Court of Federal Claims, written by Judge Horn. Normally we wouldn’t discuss the decision, because it involves a dispute between the State of California and the Department of Interior (DOI). The DOI awarded the California State Controller’s Office (SCO) a cooperative agreement but then refused to reimburse the SCO for $296.5K in invoiced costs allegedly incurred pursuant to that agreement, because the costs were not allowable under the terms of the agreement.

California sued the DOI, claiming breach of contract. As Judge Horn wrote—

Part 6.4 of the Agreement governed ‘Payment of Reimbursable Costs.’ Under Part 6.4(B), the DOI was responsible for reimbursing the SCO ‘for approved costs incurred under this Agreement in accordance with 43 CFR 12(A) Administrative and Audit Requirements and Cost Principles for Assistance Programs.’ At the time the parties entered into the Agreement in September 2010, 43 C.F.R. Subpart 12(A) prescribed the administrative requirements and cost principles for grants and cooperative agreements entered into by the DOI. … The regulation at 43 C.F.R. § 12.2 (2010) indicated that a cooperative agreement with a state is subject to several Office of Management and Budget (OMB) Circulars, including OMB Circular A-87, which established principles and standards for determining costs incurred under grants, cost-reimbursement contracts, and other agreements with state, local, and Indian tribal governments. … Additionally, Part 8 of the Agreement, titled ‘Standard Award Terms and Conditions,’ stated that ‘[a]wards are based on the application submitted to, and as approved by DOI, and are subject to the terms and conditions incorporated either directly or by reference in the following: . . . 43 C.F.R. 12(A) . . . 43 C.F.R. 12(C). . . ‘

In addition—

The Agreement at Part 6.5(C) stated, “[f]ringe benefits shall be allowed in accordance with the State’s established accounting system.” Pursuant to Part 6.5(D) of the Agreement, “[o]verhead rates shall be allowed in accordance with the State’s established audited accounting system.” Part 7.1(D), however, required that the SCO “maintain complete cost records for the Agreement period in accordance with the Generally Accepted Accounting Principles (GAAP). Such records shall be in sufficient detail to clearly demonstrate the total actual costs associated with the project . . . .”

Using methodology that had been documented in the California State Administrative Manual (SAM) for more than 30 years, California calculated a single hourly rate for each of its employees working on the cooperative agreement. That single hourly rate “merged an employee’s salary, fringe benefits, and indirect costs” together.

Some unnamed DOI entity issued an “Attestation Report” that asserted that California’s methodology led to an overstatement of incurred costs. The State of California disagreed, stating that DOI “has no contractual authority to dictate California’s polices and accounting practices and control. The Department of Interior cannot require the State to develop a costly separate accounting of its federal royalty program.”

In other words, the State of California was simply using its accounting system—the same accounting system that it had in place for 30 years. The DOI contract that imposed cost allowability principles and standards could not require California to change its accounting system.

(Sound familiar? This is exactly what is required of any business that wants to accept a cost-reimbursement government contract.)

From what we can tell, the problem was, fundamentally, the way the CA SCO calculated the quantity of direct labor hours. If the parties could have agreed on that issue, they may well have been able to resolve the application of indirect rates to the resulting direct labor dollars. However, the DOI asserted that “that every hour billed after reaching the ‘actual working hours’ of 144 causes an overstatement of costs.” The problem seemed to be that some of the “excess” hours were how California recovered some of its employee fringe benefit costs. (It’s complicated because California also applied a separate fringe benefits percentage.)

Before the Court of Federal Claims, both parties filed Motions for Summary Judgment, asserting that there was no genuine dispute as to any material fact and the prevailing party would be entitled to judgment as a matter of law. In this case, the parties differed with respect to their interpretations of the contract language. In essence, they were asking the Court to interpret the contract for them.

As Judge Horn wrote—

In its motion for summary judgment, defendant [DOI] argues that OMB Circular A-87 applies to the Agreement because Part 6.4 and Part 8 of the Agreement expressly incorporated by reference 43 C.F.R. Subpart 12(A), which incorporated by reference OMB Circular A-87. … plaintiff [CA SCO], in its cross-motion for summary judgment, simply asserts … that it was entitled to calculate fringe benefits and indirect costs in accordance with California’s State Administrative Manual, and that the DOI incorrectly ‘required California to use OMB’s method of accounting for costs.’ In its filings, the plaintiff concludes that it is ‘entitled to summary judgment under the specific language of § 6.5.C of the Agreement,’ which plaintiff believes is ‘clear, unambiguous and dispositive.’

Thus, Judge Horn needed to decide which of the parties’ interpretation was correct. In issuing the Court’s decision, Judge Horn quoted from many precedents. We’re going to quote some of those, as follows:

  • “Contract interpretation starts with the language of the contract.”

  • “The starting point for any contract interpretation is the plain language of the agreement.”

  • “In contract interpretation, the plain and unambiguous meaning of a written agreement controls.”

  • “Terms must be given their plain meaning if the language of the contract is clear and unambiguous.”

  • “In addition, we must interpret the contract in a manner that gives meaning to all of its provisions and makes sense. Further, business contracts must be construed with business sense, as they naturally would be understood by intelligent men of affairs.”

  • “A reasonable interpretation must assure that no contract provision is made inconsistent, superfluous, or redundant.”

Judge Horn concluded that the contract language was not ambiguous. She wrote—

The plaintiff [CA SCO] should have calculated its fringe benefits and indirect costs in accordance with 43 C.F.R. Subpart 12(A), including the OMB Circular A-87, and, permissibly, California’s State Administrative Manual. Part 6.4(B) of the Agreement provided that the DOI would reimburse the SCO in accordance with 43 C.F.R. Subpart 12(A) … and Part 8 … also indicated that the Agreement was subject to the provisions of 43 C.F.R. Subpart 12(A). Thus, the Agreement unambiguously incorporated 43 C.F.R. Subpart 12(A) into the Agreement by making several explicit references to ‘43 CFR 12(A).’ … With the exception of the regulations specifically pertaining to fringe benefits and overhead rates, the administrative regulations and cost principles prescribed in OMB Circular A-87, however, still applied to the SCO’s requests for reimbursement, even if the SCO chose to bill utilizing California’s State Administrative Manual. … When the SCO opted to use the accounting system contained in California’s State Administrative Manual, the DOI was required to reimburse the SCO for its costs, only if those costs met the requirements for reimbursement contained in both California’s State Administrative Manual and OMB Circular A-87.

In other words, the State of California should have read its contract.


Last Updated on Monday, 08 January 2018 17:17

Well, It’s a Start…

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We opine, from time to time, on the Department of Defense’s fascination with the “innovation” being pursued by technology companies in the private sector. We’ve asserted it’s a love/hate relationship. Where the DoD loves the technology but hates having to woo the companies that have it. DoD loves the fact that the private sector is spending heavily on R&D on its own—without asking the taxpayers to fund those efforts. DoD hates that the “high tech” companies in the private sector largely disdain the government sales channel and will not accept the “standard” government acquisition model—instead making money hand-over-fist by selling to the public rather than to the DoD.

SECDEF Dr. Ash Carter said it in March, 2015—

With budgets tightening and technology and globalization revolutionizing how the world works, the Pentagon has an opportunity to open itself to new ways of operating, recruiting, buying, innovating and much more. America is home to the world’s most dynamic businesses and universities. We have to think outside this five-sided box and be open to their best practices, ideas and technologies.

But not much has happened over the past 30+ months since then.

Apple, Google, and others continue to spend heavily on their R&D programs while traditional defense contractors such as Lockheed Martin spend but a small fraction of those amounts. Example: in 2014, Google spent just about 15% of sales on R&D; in that same period Lockheed Martin spent less than two percent of its sales on R&D. Meanwhile, despite POTUS direction to roll-back regulatory roadblocks and a Section 809 Panel that is supposed to recommend “bold” acquisition reforms and a DFARS team that’s supposed to do the same thing, despite all the bureaucrats and outside experts and blog authors pointing out how broken it all is, the Department of Defense seemingly cannot actually streamline much of anything.

In fairness, different people have different ideas about how to fix the defense acquisition system. A recent editorial from the Executive Director of the National Contract Management Association (NCMA) seemingly blamed the top DoD leaders for the endemic acquisition problems. He wrote—

… as all involved can attest, it’s the creation, coordination and validation process of the what and how (meaning the review and approval of acquisition decisions) that ensures delivery of systems that are almost technologically obsolete on Day One. The more leaders (both executive and legislative branch), executives, managers, reviewers (both civilian and military) involved, the longer everything takes. The more decision responsibility is diffused, the longer it takes. The more complicated the process is designed to be, the longer it takes. The more unstable or unknown the budget is, the longer it takes. The more users involved in deciding what it is they want, the longer it takes. Acquisition is a leadership, bureaucratic and people issue; not a contracting, statutory or regulatory one. …

Thus, a greatly reduced leader-to-doer percentage will increase progress. None of this is in the Federal Acquisition Regulation, but just as the FAR has grown, all the peripheral guidance and requirements has evolved over decades.

That can’t be right, can it? The author asserts that it’s not the statutes, or the complex regulations, that create the problems. It’s not the lack of training or workforce demographics or the bizarre organizational structures or the inept policy implementations. No, the problem is that DoD has too many leaders. You get rid of the leaders and let the average Contracting Officer do what they need to do, and it will all work out just fine. Superfast and super cheap.


As Dalton said in the classic movie, Roadhouse, “opinions vary.”

In April 2015, we presented to a group of folks just outside The Beltway, and we told them DoD cannot achieve its goals of technological innovation unless it also disrupts its acquisition management and oversight regime. Unfortunately, the fact of the matter is that too many entrenched bureaucrats are unwilling to disrupt the status quo.

For example, consider the November, 2015, report entitled “Eliminating Requirements Imposed on Industry Where Costs Exceed Benefits.” The report, a culmination of a five-year effort by DoD, was—shall we say?—disappointing. See our article on the topic here.

Looking on the bright side, DoD just issued a Class Deviation intended to “streamline awards for innovative technology projects.” The Class Deviation was issued to implement Section 873 of the National Defense Authorization Act … of 2016. That is literally three NDAAs ago. The DAR Council couldn’t get the regulatory revision out the door in twenty-six months, even though Congress told them what to write, so finally DPAP got tired of waiting (or perhaps got tired of the embarrassing lack of action) and issued a Class Deviation.

The rapidity at which DoD operates is mind-boggling.

Anyway, the Class Deviation is nice. It does two things to address well-known barriers to entry into the DoD marketplace.

  1. It reduces the cost & pricing data requirements of FAR 15.401-1(b) by creating a new exemption for “contacts, subcontracts or modifications of contracts or subcontracts valued at less than $7.5 million” where those contract actions are to be awarded to a small business or to a “non-traditional defense contractor” pursuant to a “technical, merit-based selection procedure,” or pursuant to a Small Business Innovative Research (SBIR) program, or pursuant to a Small Business Technology Transfer (SBTT) program. When those circumstances are encountered then no certified cost or pricing data will need to be submitted.

  1. It eliminates the government’s right to audit (pursuant to the contract clause 52.215-2) in the circumstances described above—but not for contracts, subcontracts, and modifications thereto awarded under the SBTT program.

Which is nice, we suppose. If you are a small business participating in the SBIR or SBTT program or a “non-traditional” defense contractor—a term that is defined in the Class Deviation as an entity that is not currently performing any fully CAS-covered contracts or subcontracts for the DoD, nor has it performed any such contracts/subcontracts for the preceding year.

Of course, this is a relatively small step. The first thing we noticed is that, even if the requirements for “certified” cost or pricing data are relaxed, a contractor might still be required to submit “uncertified” cost or pricing data to the Contracting Officer and/or to the auditors. While it’s nice to see the risk of “defective pricing” eliminated, the Class Deviation doesn’t address the rather onerous burden of preparing cost or pricing data and supporting it through fact-finding/audit and negotiation.

Second, the Class Deviation expressly permits the Head of Contracting Activity (HCA) to impose the requirements waived by the language of the Deviation, when “past performance” or “other information” indicates that the requirements should be imposed. In another nice touch, when the requirements are imposed at HCA direction, then any “performance audits” (whatever those are) must be initiated within 18 months of contract completion. (No mandatory completion date for those audits was stated.)

And what if those audits are not initiated within 18 months of contract completion? Has the government waived those audit rights, or does the statutory and regulatory Statute of Limitations kick-in? We suspect it will be the latter and that the direction to start audits within 18 months of contract completion will be ignored.

What does this all mean?

It means that the DAR Council cannot follow Congressional direction, as we’ve asserted before in this blog. And thus a Class Deviation was required to substitute for formal rule-making.

With respect to the Class Deviation, it’s a nice policy statement without much in the way of substance. It will apply to a small group of contractors and it is unlikely to sway the bigger high-tech players to enter into the defense marketplace. It has built-in loopholes that permit its intent to be ignored. It has internal policy contradictions that might conflict with existing statutes and regulations.

In the larger context of defense regulatory streamlining and acquisition reform, it’s a very small step in the right direction.

But it is a start in the right direction….


Resolving Disputes

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I like the contract cost accounting and compliance side of government contracting more than I like the contracting and subcontracting side of government contracting.

There. I said it. Deal with it.

I’ve done most of what can be done in the field—at least, what can be done as a contractor. I’ve never been a government employee. I’ve managed prime contracts; I’ve managed subcontracts. I even ran a procurement shop for a relatively brief while. I’ve been a program manager for a multi-million CPAF task order and came close to getting 100% of the available award fee from the US Navy. I did Small Business reporting and I ran the company’s Mentor/Protégé Program, and I received some awards that said I did well. Once, in a fit of madness, I agreed to oversee the company’s Government Property Management System. I even led development of a new subcontracting/procurement tracking and reporting system for a multi-billion-dollar engineering services provider, which linked acquisition transactions to the property system to eliminate all the duplicative data entry that had been going on for more than a decade.

So I’ve held many acquisition-related roles in my long career.

I didn’t really enjoy those roles.

That’s not to say I didn’t learn or gain valuable experience from those assignments. I certainly did. But “experience is what you get when you didn’t get what you really wanted.” I performed my responsibilities with diligence, but over time I realized it wasn’t what I wanted to be doing.

I wanted to be dealing with the finance side, not the contracting side.

The reason I didn’t find the acquisition roles especially enjoyable is that dispute resolution was difficult.

If you have a prime contract matter in dispute, you have your contract’s Disputes clause and you have FAR Part 33. Things aren’t too bad. The main problem is that 95% of all contractors don’t want to exercise their contractual rights because they are afraid to upset the customer. Thus, you typically fall back on negotiation and persuasion—which is fine in most cases. But if you run into a difficult Contracting Officer then you are going to end-up caving more often than not—in the name of “customer relationships.” (Why you would want to continue a relationship with such a difficult customer remains a mystery to me.)

If you are in a prime/subK relationship, things are more muddied and disputes are more difficult to resolve. In fact the hardest aspect of being a subcontractor is when you know you are right but the prime simply refuses to listen. If you have a difficult subcontractor manager there is almost nothing you can do about it, short of going to court. As a consultant, a decent percentage of my workload involves advising subcontractors on strategies to deal with disputes with their primes.

Client confidentiality prohibits me from giving too many details in support of my assertions. But I will say that I had one memorable situation where I was asked to advise on a multi-million-dollar prime/subK dispute where the prime contractor and subcontractor were sister divisions of the same company. That’s right—they were actually in an inter-organizational transfer (IOT) situation and not in a prime/subcontractor relationship—and yet the “prime” continued to treat the “subcontractor” as if it were managing a FFP subcontract. (It clearly wasn’t; see FAR 31.205-26.) Months passed, and we could not get the “prime” to understand the true relationship. That’s an example of how dispute resolution is so much more difficult than it needs to be when there is a problem between a prime and a subcontractor. (Also: see our articles on litigation between primes and subKs. There are several of them on the site.)

In contrast, on the financial side of things, there is a defined route for dispute resolution. If you have a disagreement with auditors, you can write a Contractor’s Response, which goes into the audit report. If necessary, you can write another rebuttal directly to the Contracting Officer. (Sometimes you are even required to do so.) If that doesn’t work you have defined appeal rights, either at a Board of Contracting Appeals or at the U.S. Court of Federal Claims. Sure, the latter course of action involves attorneys and is expensive (and frustratingly long), but if you care enough (and there is sufficient money at stake) you can avail yourself of the Judicial Branch of our government, in the hope that somebody will put a check on the rapacious grasp of some Executive Branch bureaucrats.

No matter if you're dealing with a difficult audit report or a difficult CO, you can actually force a Contracting Officer to make a decision, as Fluor Federal Solutions LLC (Fluor) recently demonstrated at the Armed Services Board of Contract Appeals. The dispute is interesting and I’ll discuss it here, but readers need to know that there is not yet a resolution. I’m writing about the decision because it illustrates how contractors have opportunities to force governmental action.

Fluor had a contract with the US Navy and, during performance, submitted a large Request for Equitable Adjustment (REA). According to the Board’s decision, the REA was a consolidation of many other, smaller, REAs that had already been submitted. Judge Woodrow, writing for the Board, found that—

The 96 page consolidated REA included a detailed narrative of the facts giving rise to the REA and was accompanied by 70 attachments and 2 appendices. The consolidated REA addressed matters that had all been raised in a series of separate REAs that Fluor submitted in 2013 and 2014, which the Navy either rejected with little or no comment, or failed to address at all. Seven months later, the Navy, on 3 February 2016, denied Fluor's consolidated REA, stating that additional information provided in the REA submission had not warranted the government to reverse its original denials of the earlier REAs. Fluor then submitted its consolidated claim on 30 September 2016.

(Internal citations omitted.)

Judge Woodrow used the terms “REA” and “claim” to describe different aspects of the Fluor/Navy dispute. Let's dig into those two terms. Fluor submitted a consolidated REA in late June, 2015, which was denied in February, 2016. Fluor then submitted a “claim” on the same facts and alleged entitlements on September 30, 2016. Essentially Fluor gave up more than a year’s worth of interest by treating an REA as being separate and distinct from a claim. That’s consistent with how many contractors approach dispute resolution with their government customers. Many contractors like to think that an REA is relatively benign, and that a certified claim is an escalation from an REA, which is triggered by an impasse between the parties.That viewpoint isn't necessarily correct, nor has it been since 1995 As Vern Edwards has pointed out in one of his WIFCON blog articles—

The determination of whether a contractor’s submission to a CO is or is not a claim does not depend on what the parties call it. The mere fact that a contractor calls its submission a claim will not make it a claim if it lacks any necessary element of a claim. And calling a submission an REA does not mean that it is not a claim if it possesses all of the necessary elements of a claim. Claims and REAs are not categorically different things. It is the content of a submission, not what the parties label it or call it, that determines whether it is a claim. …

An REA valued at more than the simplified acquisition threshold that includes the REA certification, but not the claim certification, is an REA that is not a claim, because it lacks one of the necessary elements of a claim. If the same REA is certified as a claim, and has the other necessary elements of a claim, then it is an REA that is a claim.

What if a contractor includes both the REA certification and the claim certification? Assuming that the REA has all of the other necessary elements of a claim, it is an REA that is a claim, notwithstanding the inclusion of the REA certification. However, the dual certification might indicate some confusion on the part of the contractor and make its intentions unclear.

Bottom line: An REA is a claim if it has the required elements of a claim as defined in FAR 2.101. An REA that lacks any required element of a claim is not a claim.

Vern’s 2012 blog article at WIFCON is outstanding, chock full of important information relevant to the topic of dispute resolution, and I’ve quoted just a bit of it. I urge readers to follow the link and read the entire article. Consider printing it out and saving it. It’s that good.

Anyway, back to Fluor and its claim.

Even though the Navy denied Fluor’s original consolidated REA after seven months of considering it, the CO took the claim a bit more seriously. The Navy CO told Fluor that DCAA would audit the claim. The Contracting Officer promised to issue a decision on Fluor’s claim by April 28, 2017—seven months after Fluor had submitted it.

“Beginning in November 2016 through 15 May 2017, Fluor organized and participated in multiple in-person meetings and telephone conferences requested by DCAA regarding the claim, and provided written responses to DCAA's written requests.” However, DCAA didn’t complete its procedures in time (surprising nobody who reads this blog), and the CO told Fluor that the DCAA audit completion date had slipped to July 31, 2017—and that a Contracting Officer Final Decision (COFD) on the merits of Fluor’s claim would be issued by December 31, 2017—fourteen months after Fluor had submitted it and 29 months after Fluor had submitted its original REA (that apparently was not a claim).

Meanwhile, the DCAA audit had come to a halt and there was no interaction between auditors and auditee for four months. Finally, on September 21, 2017, “DCAA repeated requests to which Fluor had already responded in writing on 20 January and 15 March 2017. Fluor responded to DCAA's request on 25 September 2017, repeating its previous responses, which explained it did not maintain certain records in the manner DCAA requested and expressed Fluor's willingness to answer specific questions regarding the data used to price the claim and provide DCAA an additional walkthrough of the data.”

The situation described above is not that unusual. DCAA often requests data to be prepared in certain formats in order to facilitate the audit. The “art” of audit liaison often lies in preparing unique reports and/or giving the auditors what they want, but not necessarily in the manner in which it’s been requested. However, that didn’t seem to work in this case, because the next interaction between Fluor and DCAA was when Fluor received a “Formal Request for Access to Records,” in which DCAA asserted that Fluor had records to which auditors were not being given access. (Typically, receipt of that document sets of another chain of dispute resolution that can—but shouldn’t—end with receipt of a subpoena.)

According to the Board’s Statement of Facts: “Fluor repeated, in a letter to DCAA dated 31 October 2017, its earlier offers to respond to any DCAA concerns, as Fluor had provided all of the information available and was willing to meet with DCAA representatives. DCAA never responded [to that letter].” A month later, DCAA informed Fluor that it was canceling its audit.

Fluor took the Navy to court to force the Navy CO to issue a Final Decision.

Judge Woodrow wrote—

The Navy contends that Fluor is largely responsible for the CO's inability to issue a final decision and Fluor should not be rewarded for this behavior. … The Navy also argues that Fluor has refused to provide DCAA access to all relevant factual data.

Fluor … disagrees with the Navy's assertions that it has not cooperated with DCAA. … According to Fluor, DCAA has requested data and reports organized in a specific format that is inconsistent with how Fluor ordinarily maintains the data and according to the FAR, is under no obligation to create records for DCAA … Fluor emphasizes that the Navy has had more than two years since the submission of its consolidated REA …to develop its position on entitlement. During this time, Fluor asserts that it has made numerous attempts to meet with Navy representatives to discuss the claim but has been rebuffed and that it has made every reasonable accommodation in responding to DCAA inquires, but has no obligation to reorganize its records or to create records to suit DCAA.

After reciting the Statement of Facts and the parties’ contentions, Judge Woodrow wrote—

Here, the consolidated claim is clearly large and complex. However, the Navy has had the information regarding the consolidated REA and claim for over two years. Given the history and number of promised COFDs and the present situation where it is unclear when the CO will be issuing a final decision, it seems the parties have reached a stalemate which most likely will not be broken by agreement. Accordingly, the Board hereby directs the CO to issue a decision on the contractor's claim by 31 January 2018.

I didn’t set out to make this article about Fluor’s battle with the Navy. But it seems to be a good illustration of what works in dispute resolution, as well as some of the potential process pitfalls. Of course this is a story of a dispute between a prime contractor and its government customer. As we noted, that’s a relatively easy situation to resolve, compared to a dispute between a subcontractor and a prime contractor. Regardless of what situation you are in, if you have a dispute to resolve, start by reading your contract (or subcontract). Understand the dispute resolution process the contract/subcontract outlines. Understand your rights and your rights of appeal. Understand the differences between an REA and a claim. Then get good advice (hopefully you will get a good attorney to advise you), and follow the dispute resolution path toward conclusion.


Last Updated on Sunday, 07 January 2018 07:55

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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.


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