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Welcome to Apogee Consulting, Inc.

I Did it My Way

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We were going to write a long, involved post about December’s KBR decision at the ASBCA, but their website is down indefinitely. So that plan didn’t happen. This is Plan B. Plan B is a discussion about small businesses, entrepreneurship, and contract compliance.

We do a lot of work with small businesses, those government contractors who start from nothing and build themselves up to a position where they can perform effectively on subcontracts, and perhaps start thinking about going after a prime contract of their own. We do not focus exclusively on small businesses, but the largest contractors already have their full-time compliance teams—so it tends to be the smaller contractors that seek consulting advice.

Each of these businesses starts with a single person, or perhaps a small team. They have a vision of what the market needs and the value they can add. They spend time developing infrastructure. They spend time recruiting. They spend time marketing. And eventually they win a couple of contracts—almost always firm, fixed-price contracts awarded under competitive conditions. (Which are some of the lowest-risk contracts from a compliance perspective.) With respect to service providers, they land T&M subcontracts with fixed hourly billing rates. Since they are small companies, risks associated with T&M contracts are fairly low as well.

The point is, they start small, with low-risk contracts, and that gives them a solid foundation for developing experience and past performance credentials. The experience and past performance credentials enable them to bid on larger, more lucrative, contracts.

But what works for low-risk contracts doesn’t always work for higher-risk contracts, such as the cost-type contracts that typically come with SBIR Phase II awards. For that matter, any prime contract awards that are not awarded on a competitive basis are probably going to be subject to cost analysis—which means submission of cost or pricing data (whether or not certified) in a prescribed format. Thus, as small contractors progress into more lucrative contracts—which have higher compliance risks both on the front end and the back end—they need to evolve their back office policies, procedures, and practices.

Many small business government contractors don’t evolve their infrastructure, their back offices, to keep pace with the compliance risks of their newer contract awards. They end up with a mismatch between the needs of their newer contract requirements and the capabilities of their administrative staff. That’s when consultants can add some value.

But the real issue is not the knowledge or expertise of the team; the real issue is that the actual practices may need to change to match the compliance requirements of the newer contracts. The company may need to make fundamental changes to the way in which it does business.

For example, many small businesses operate on a “cash basis” accounting. That is fine for low-risk contracts, but it really doesn’t work for cost-type contracts. Contractors anticipating going after cost-type contracts (either as a prime or as a subcontractor) need to move toward “accrual” accounting. That is a fundamental change with far-reaching ramifications to many aspects of the business.

For another example, many small businesses use Quickbooks. Many small businesses have a bookkeeper to enter transactions into Quickbooks and run reports. That’s fine for smaller, low-risk contracts but, at a certain point, companies need to move away from Quickbooks and find another piece of accounting software more suited to the compliance needs of the higher-risk contracts.1 Some companies will need to move on from their bookkeeper—who may have been in place for years and is now treated like a member of the family—because they need to tap into the expertise of a CPA with government contracting experience.

Sometimes the first inkling of an issue surfaces when DCAA comes in to perform a pre-award accounting system review. The company fails the pre-award review and misses out on an opportunity for which it had been preparing, perhaps for several years. Sometimes a company will pass the pre-award review, but then fail the post-award review, which leads to problems such as demands for repayment of allegedly overbilled costs. In extreme cases, claims of bad accounting or misbilling can lead to allegations of violations of the False Claims Act—which can (and have) killed otherwise successful entities.

Many small business move forward with their new business capture strategy, completely unaware that they also need a back office strategy to go with it.

One problem is that the business may have become accustomed to how it has operated over time. It may not understand the need for change—or it may not want to change. “If the wheel ain’t broke, why fix it?” may be the reply to the consultant who recommends changes to business practices in order to better assure compliance with new contract terms.

This is especially true with respect to labor accounting.

We have experience with one small business—a very successful small business—that has incentivized its staff by paying higher labor costs on direct-billed work than it does on IRAD or other indirect billed work. The owner very much believes in his “innovative” way of doing business. The owner has resisted all recommendations (made by multiple consultants) to change the company’s payroll and labor accounting practices to pay a single rate for all staff hours. When the company failed its DCAA pre-award accounting system survey, it came as a complete surprise. When the company lost out on a large prime contract award because of the failed accounting system survey, that came as a surprise as well. However, regardless of the facts, the small business refused to change and thus it is stuck receiving FFP task orders, mostly as a subcontractor.

And that’s not the only labor accounting issue we’ve had to address in the past few years.

The point of this article is that companies grow and the compliance requirements grow as well. Companies that want cost-type government contracts need to be prepared to account for costs, including labor costs, in a manner that supports billings and audits of billings. This may require change to long-standing (and long-cherished) practices that no longer work in the new risk environment. Companies that refuse to change risk adverse audit findings—or worse.

1Yes, Quickbooks can be made to work for higher-risk contract types as well. With enough work it can meet all contracting requirements. Yet in our experience too many contractors don’t know how—or simply cannot—make Quickbooks do what it needs to do. For that matter, we are not recommending any particular accounting software in this article.

Last Updated on Sunday, 19 February 2017 07:54
 

Subcontractor Risk Management (Again)

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We have always looked to Lockheed Martin for leading practices in subcontractor management. Unlike far too many other A&D contractors, LockMart has created a position of Subcontract Project Manager—acknowledging and reinforcing the position that subcontractor management is a critical aspect of program management.

We are not going to recap our many posted pleas to get your subcontract management act together. We are not going to repeat our assertion—posted here many times—that effective subcontractor management is the key to effective program management. Instead we are going to focus today on subcontractor risk management, which is a subset of overall program risk management.

The state of the art with respect to program risk management is unfortunately immature. Sure, almost every program has a “risk register” (which is almost always offset by an “opportunity register” as if risks and opportunities were mathematically required to equally balance each other). In some companies the risks are dollarized (probability of occurrence times estimated impact) and then used in Estimate-at-Completion (EAC) calculations. That’s all fine, but it’s not enough. Following are some observations with respect to the state of A&D industry risk management, based on the last time we took a deep dive into the subject. Granted, that was about five years ago, but we don’t believe things have changed dramatically since then.

  • Risk identification is lacking. At best, risk identification is based on similar risks and/or issues dealt with on prior programs of similar complexity. In most instances, risks are identified by PM or engineering staff. Almost nobody is creating cross-functional teams to focus exclusively on risk identification. Almost nobody is continually adding new risks to the risk register as the program matures. (This is in part because for every risk identified there is pressure to add another opportunity.)

  • Risk management assumes a static environment. In contrast, the risk environment is dynamic. Risk probabilities change over time, sometimes increasing and sometimes decreasing. Almost nobody is reviewing risk probabilities and seeking to identify critical inflection points. Almost nobody is actually “burning down” risk probabilities in a manner commensurate with implementation of risk mitigation plans.

  • Risk mitigation tends to be formalistic. In other words, the risk mitigation plans tend to be for show. Typically, risk mitigation plans aren’t implemented in response to new risks or changing risk probabilities; instead, they are designed and approved—and then never used. One way to assess the efficacy of a risk mitigation plan is to ask who has approval to implement it. If the answer is that an approved risk mitigation plan requires additional approvals in order to implement it, then you know it’s simply for show; it’s not really intended to mitigate a risk that’s evolving towards actualization.

In a true risk-based culture (which we have not yet observed in the A&D industry), risks are identified, assigned a probability and a consequence, and a risk mitigation plan consistent with the probability and consequence. The risk mitigation plan is executed immediately when the cost of risk mitigation is less than the dollarized risk (probability x consequence). Both risk and risk mitigation plans are constantly monitored by a cross-functional team (or IPT), and that team acts like an advisory committee with respect to the PM and the PM team.

So what happens when risk management fails in a major defense program? Here’s one very recent story.

The story from Bloomberg (link above) quoted MG Teague (USAF Chief of Space Programs) as saying of the latest program setback: “This was an avoidable situation and raised significant concerns with Lockheed Martin subcontractor management/oversight and Harris program management.”

What’s the problem?

According to the Bloomberg story—

Last year, the Air Force and contractors discovered that Harris hadn’t conducted tests on the components, including how long they would operate without failing, that should have been completed in 2010. Now, the Air Force says it found that Harris spent June to October of last year doing follow-up testing on the wrong parts instead of samples of the suspect capacitors installed on the first three satellites.

Let’s be clear here: building satellites to meet specialized technical requirements is about the toughest thing there is. A next generation military satellite program is about the toughest PM challenge one can imagine. So let’s not pile on Lockheed Martin and its GPS III satellite program; and let’s not pile on Harris Corp. Instead, let’s look at this situation from a subcontractor risk management perspective.

  • What were the risks involved in the Harris subcontract?

  • Was there a risk that Harris (or any subcontractor, really) would not perform required testing?

  • Was there a risk that Harris, once it learned of improper or non-performed tests, would make another testing mistake?

  • What was the probability of occurrence? (Certainly it was greater than zero.)

  • What was the consequence? (Putting entire multi-billion dollar program at risk.)

Based on the answers above, what were appropriate risk mitigation strategies that Lockheed Martin could have employed? (Hint: One potential strategy could involve deploying test oversight personnel at the Harris facility to ensure required testing was properly performed.)

Typically, risk mitigation is not implemented because of budget concerns. In this example, we would speculate that nobody budgeted the labor and expenses associated with deploying test oversight personnel at the subcontractor facility. It was judged to be too expensive. But that is a myopic view, isn’t it? Now the program has had yet another schedule slip and the customer is upset. Thus, a failure to implement effective risk mitigation strategies (perhaps stemming from budgetary concerns) has jeopardized the entire program. From the government customer’s viewpoint, it needs to implement its own risk mitigation strategy, which may involve asking other contractors to act as prime (instead of Lockheed Martin) on future GPS III satellite builds.

Perhaps those other contractors will employ a more effective subcontractor risk mitigation strategy.

Last Updated on Monday, 13 February 2017 18:37
 

The Tale of Three Job Seekers: A Social Media Story

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This is a weird environment, isn’t it? The way things used to work don’t seem to work that way anymore.

Back in the day, if you wanted a job you read the help wanted ads in the paper. (In fact, if you were a smart high-schooler or college student, you looked at the help wanted ads and measured which jobs had more openings than others, so as to help you figure out what jobs were in demand.) You found a couple of jobs you thought you might be suited for, and you submitted a resume along with a cover letter. Typed on an electric typewriter and signed by hand using a pen. The recruiter sorted through the resumes and cover letters, weeding out unqualified candidates and those who had too many typos. A short list of interviewees was compiled, and the subsequent interviews (plus perhaps a background check) determined who got the job. If you were lucky, you knew somebody already at the company and that person could put in a good word for you. (In fact, at Hughes Aircraft Company that was about the only way to get hired: You had to know somebody or be related to somebody. But we digress.)

It doesn’t work like that anymore, does it?

Now we have job sites and LinkedIn and social media. Everything seems to be electronic. You submit your background info electronically. You upload your resume electronically. At many companies, it doesn’t really matter who you know, because all resumes have to follow the same electronic path. If you know somebody, it’s likely to be via social media rather than from a personal relationship. (Some people have thousands of “networking connections” on their accounts, filled with people they’ve never met in person, and perhaps never even interacted with at all.) Interviews still work in the same basic way, but background checks are handled by specialists—and they may include a review of your social media accounts.

Some folks seem to have adapted well to the changing job-seeking environment. Others? Not so much.

Today’s story is about three job seekers who approached social media and networking in different ways. It’s being presented to you as a developmental opportunity, so that you may learn from the mistakes of others. This story is absolutely true.

Candidate A is somebody I’ve known for a while. We’ve met in real life. Candidate A was a consultant for a bit, until he found a permanent job as a senior Finance lead at a smallish government contractor. Those of us who knew him were concerned that he was a bit out of his depth, but we wished him well. Unfortunately, after a couple of years the company let him go with very little warning. What did he do? First, he sent an email to many of his LinkedIn contacts, asking if anybody knew of any job openings. Then he followed that with a second email, resume attached. He asked his social network to review his resume and to provide comments and constructive feedback. He reiterated his request to let him know of any job openings. In addition, he updated his LinkedIn profile to show he was looking for a new position, and added his resume as an attachment.

Candidate B is somebody I’ve never met. He sent me a LinkedIn connection invite and, as I do, I looked carefully to see why we would have a connection. Candidate B has some complementary skills and is a member of some of the same groups, so I accepted the invitation. Within 24 hours of acceptance, the first email arrived, with a resume as an attachment. I didn’t respond. A week later, another email arrived, this time with a PowerPoint presentation attached. The presentation had something to do with Earned Value. I didn’t respond. A week after that came two more emails, each one talking about how Candidate B could show my company the benefits of an Earned Value Management approach to project management. I deleted those emails, attachments unopened. At that point, Candidate B seems to have deleted his connection to me. At least, I haven’t heard from him in a while and his name no longer comes up on my LinkedIn connection list.

Candidate C was a senior Finance leader who was recently laid-off from his company. He did some research and found that he was two or three degrees away from me on LinkedIn, so he asked a mutual connection to “introduce” him. I looked at his profile and saw some complementary skills and membership in the same groups, so I accepted the invitation. Within 48 hours I received a LinkedIn message thanking me and letting me know he was looking for a new position. He asked specifically about the company I work for (when I’m not a consultant). I told him there were no current openings at his level, which he accepted gracefully. A couple of weeks later I received another message letting me know he would be in the area soon and asking if we could meet for lunch. Why not? So we met for lunch and had a nice conversation. He asked me about certain local companies and he took notes when I replied. We shook hands and I wished him well in his job search.

Let’s discuss the Candidates and the perception(s) they created by their use of social media.

Candidate A panicked. He was laid-off unexpectedly and flailed about, letting everybody know he was panicking. Asking relative strangers—even real life acquaintances—to review one’s resume and provide feedback is an amateur move. Professionals have a polished, up-to-date resume ready to go at all times. They may not need it, but by God it is ready. More importantly, Candidate A didn’t use LinkedIn in a targeted fashion. He (apparently) didn’t use the Jobs Tab to do any searches. Had he done a good job searching, he wouldn’t have had to ask us if we knew of any job openings. Had he done a good job searching, he would have compiled a list of companies with suitable openings, and he could have then searched those companies to see those employees on LinkedIn with whom he had a connection. Then he could have approached those individuals to see what they might know. As far as I can tell, he did none of those things. To my knowledge, Candidate A is still looking for a new position. (I’m not 100% sure, as he’s not contacted me since I declined to review his resume.)

Candidate B acted like a jerk. You don’t connect with people on LinkedIn in order to spam them with your resume and multiple requests to let you tell them about your self-proclaimed expertise. Had Candidate B done any homework, he would have learned that my company already had a government-approved Earned Value Management system. At a minimum, he could have introduced himself via LinkedIn messaging and then inquired about my company’s experience and/or need in the Earned Value space. Instead, he just sent email after email, creating a—shall we say?—negative impression. Don’t be a Candidate B.

Both Candidate A and Candidate B violated what I believe to be the cardinal rule of social networking. They both sought to take without giving anything in return. They wanted something and they wanted me (and others) to give it to them. Where was the mutual value creation in that approach? It didn’t exist. Neither Candidate was likely to get what they wanted, because both were more focused on their needs then they were on creating mutual value. The focus on creating mutual value is what makes social networking work, to my way of thinking. Better yet: try giving advice and assistance without expecting anything in return. Try doing favors. Try connecting people with job openings (as I have done many times). That creates a positive force; it creates synergy. And should you need assistance in the future, I believe you’ll find many people eager to help you, to repay the favor.

“Be a giver, not a taker” sounds so trite, but it works on social networks.

Now let’s talk about Candidate C. Candidate C used LinkedIn to his advantage. He identified companies that might need his expertise. He identified individuals in his network (and outside of it) who might be able to provide insight into those companies. He was measured in his actions, and he came across as a seasoned professional. Inviting me to lunch was a class move. We could have had the same conversation over the phone but lunch was better. Now we have a personal relationship to go with the LinkedIn connection. He can be assured that, if any suitable openings come to my attention, I’m going to let him know.

This story provided to our readers as a public service. We hope you will learn from it. If you have any tips of your own, feel free to email them to us.

Last Updated on Tuesday, 31 January 2017 18:37
 

“I think he just got sucked into a bad place by the wrong people and wasn’t even aware of it until he was in way over his head.”

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Disgruntled employees and allegations of violations of the False Claims Act. We’ve written about it before. More than once.

This one involved Monaco Enterprises, a Spokane-based government contractor who was accused by four former employees of—

… overcharging for airfare and preparing false invoices to give to auditors. The [suit] also said [the company claimed that it] manufactured video monitors when in reality it bought video monitors off the shelf, put a Monaco sticker on them and increased the price by at least 35 percent …

The COO of the company was the CEO’s son-in-law. One of the attorneys for the whistleblowers pointed to the COO, rather than to the CEO. You know that stereotype about the son-in-law? We’re just saying …. In any case, the title quote comes from that attorney, in discussing the role of the CEO in the alleged wrongdoing.

One of the whistleblowers was fired from his job, allegedly in response to concerns raised about overbilling. That would be called “retaliation” and that’s never a good thing.

The company denied any wrongdoing. It settled the two qui tam suits (filed by the four whistleblowers) for $5 million, and it continues to perform work for the Federal government.

News story here.

 

 

This ASBCA Decision is Interesting

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Technology Systems, Inc. (TSI) was a small business. (We say “was” because the company is no longer operating.) It had been a government contractor since 1987. It received and performed cost-type contracts. Accordingly, it was required to invoice only allowable direct and indirect costs. Further, TSI was required to calculate its invoices using provisional billing rates that were intended to approximate the billing rates it would calculate at year end, when the books closed. Additionally, TSI was required to submit a proposal to establish final billing rates; that proposal would be audited by DCAA and eventually DCMA would negotiate the final billing rates based on the audited proposal.

(This is all rather humdrum. It’s how these things work. But we note them because some small businesses simply do not have a clue about it. For them, the foregoing may well be a revelation.)

The DCAA audit history of TSI’s annual proposal to establish final billing rates is interesting. DCAA conducted a “full audit” of Fiscal Years 1998, 1999, 2000, 2001, 2002, and 2003. With respect to FY 2001, DCAA questioned some claimed consultants’ costs because TSI failed to provide the auditors with “actual work product.” However, no costs were questioned—none at all—with respect to TSI’s FY 2002 and 2003 proposals. Based on the lack of questioned costs (which meant that TSI was considered to be a low-risk contractor), DCAA performed a “desk review” of TSI’s FY 2004 and 2005 proposals instead of a full audit. (We have voiced our opinion regarding this innovative DCAA audit approach several times on this blog.) With respect to FY 2006, DCAA performed another “full” audit and, again, found no questioned costs.

Which brings us to FY 2007.

TSI submitted its proposal to establish final billing rates on time, in June, 2008. The DCAA audit began a couple of months later. (This was back in the time when DCAA performed timely audits of such proposals; within a year from TSI's submission date, DCAA would make a management decision to stop performing “incurred cost” audits for several years, resulting in an embarrassingly large audit backlog. Again: something we’ve discussed many times on this blog.) Apparently one of the two auditors assigned to TSI was difficult to work with and TSI requested that she be replaced with somebody more “objective.” The request was declined. (This was back in the time when a contractor complaint about an auditor was considered to be somewhat of a merit badge. See our discussion of that situation—and how it has evolved—here.) Which is neither here nor there, because the audit was completed and a draft report was submitted in April, 2009, for a “peer review.” It had been less than one year since TSI had submitted its proposal. That’s how quickly DCAA worked back then.

The draft report, as submitted, questioned more than $360,000 in direct and indirect costs. TSI’s claimed overhead rate had been reduced by more than one-third. TSI’s claimed G&A rate had been reduced by more than one-third. And TSI’s claimed Material Overhead rate had been reduced to zero. Yes, that’s correct. 100 percent of the claimed Material Overhead indirect costs had been questioned by DCAA. That seems unusual. It would be interesting to see how the draft audit report fared in its “peer review.”

But by that time, DCAA had stopped performing such audits and the “peer review” was never completed. The draft audit report languished in limbo for a full four years, until April, 2013. Another auditor was assigned at that time, and spent another four months reviewing the work papers, before concluding that more information was required.

Then another DCAA auditor was assigned. (For those keeping count, this would now make four individual auditors assigned to this single ICP audit of a small business.) Another eight months passed.

Finally, in March 2014—five years and nine months after TSI had submitted its original proposal—DCAA formally notified DCMA that it was withdrawing from the audit, primarily because it was unable to complete additional transaction testing of TSI’s direct labor rates by the agreed-upon audit due date. The expanded testing was a result of TSI’s complaint to its Congressional Representative and/or Senator about DCAA’s conduct. This would seem to be a rather punitive response. Regardless, the testing was expanded but that meant that the audit would not be completed in time, so DCCA admitted failure and handed the resolution over to DCMA.

As part of its hand-off, DCAA provided the DCMA contracting officer with a “Decrement Memo” that expressly was not based on anything that complied with Generally Accepted Government Auditing Standards (GAGAS). Apparently that was an okay thing to do: once DCAA had withdrawn from its audit assignment it was (apparently) no longer required to comply with GAGAS.

The Decrement Memo that was not compliant with GAGAS requirements recommended indirect rates that DCMA should use to negotiate TSI’s FY 2007 final billing rates. The recommended rates were higher than those in the draft audit report. Among other things, no costs were questioned with respect to TSI’s claimed Material Overhead rate. Yes, that’s correct. Instead of questioning 100 percent of the claimed indirect costs, DCAA was now questioning zero percent. Almost as if the draft audit report had been wrong. Indeed, the fourth auditor explained to DCMA that he was not taking the same “hard line” that the original auditor had taken. Almost as if the original auditor had been less than objective, as TSI had feared she might be.

DCMA opened negotiations by offering not to assess any penalties on TSI if it would accept DCAA’s decremented rates. TSI declined and attempted to rebut DCAA’s position by claiming, among other things, that DCAA was questioning costs that had never been questioned in the past. DCMA’s position was established as follows:

We understand your argument that DCAA has historically not questioned these costs; however, that does not mean DCAA deems those costs to be allowable. We here at DCMA cannot speak for the DCAA auditor(s) that performed the reviews, nor can we speak for the sampling methodology used by DCAA. Our job will be to address the audit as written. If you are able to substantiate the costs with the required documentation, we will reinstate the costs. If not, we have to sustain the costs.

(Emphasis added.)

See that part in italics above? See how DCAA’s “Decrement Memo” that was expressly not an audit nor an attestation opinion, and expressly did not comply with GAGAS, became an audit in the mind of the DCMA contracting officer? That right there is one of the big problems in this business. Contracting officers aren’t trained to know the difference between an audit and a non-audit, and so they treat all opinions by DCAA as being of equal weight. To be sure, it was incumbent on TSI to point that out to the CO, but it was also the CO’s responsibility to understand that the recommended rates in that Decrement Memo had about as much substance behind them as a Potemkin village. (Go look up that reference.)

Negotiations ensued but the parties could not reach agreement. Finally, in late June, 2014—literally five days before the CDA Statute of Limitations would come into play—the contracting officer issued a COFD and asserted a government claim for $159,303. TSI appealed to the ASBCA.

What makes this story so interesting is that there was a dissenting opinion at the Board. Judge Clarke—the individual who actually heard the appeal—dissented from the majority decision. We’ll discuss the different viewpoints in the remainder of this article.

There were many elements of cost questioned by DCAA and, ultimately, sustained by the DCMA contracting officer. We are not going to recite all of them; instead, we are going to focus on the ones that may present lessons to our readership.

Consultants

Expenses for two marketing consultants were disallowed because of a lack of work product. (See FAR 31.205-33(f). This is a common finding that requires some good audit support tactics to overcome.) To be clear, there was an agreement in place and there were detailed invoices. However, the third prong of the requirements was allegedly missing. The majority decision found that the work was performed via telephone and no work product should have been required. (In fairness, had the executive receiving the marketing support kept notes from the conversations, this never would have been an issue in the first place.) The majority also found that “the details contained in the … invoices are adequate to support a finding that [the consultant] worked the hours charged.” The questioned costs were found to be allowable by the majority because the FAR requirements were complied with.

In his dissent, Judge Clarke stated that he would have sustained TSI’s appeal, based on a “course of conduct” between DCAA and TSI that had been established in the previous audits. Suddenly, DCAA changed its mind with respect to the required transaction support, without giving TSI adequate notice. This sudden change, he found, was equivalent to a prohibited retroactive disallowance. On the other hand, the majority rejected that finding, and stated that the retroactive disallowance prohibition was based on an estoppel argument that required evidence of bad faith on the government’s part. (Apparently the documented animus exhibited by the first DCAA auditor was insufficient to show bad faith.)

We think that contractors who engage consultants need to be aware of the FAR requirements in that area, and be prepared to show a government auditor how they are complying with those requirements. Indeed, we’ve written about those requirements.

Executive Bonuses

Three TSI executives were paid bonuses in FY 2007, pursuant to a one-page incentive compensation plan. However, the company failed to track the metrics discussed in the plan, and thus the awards lacked support. The majority decision found that the executive bonuses were unallowable. The majority wrote—“We agree with the government that TSI's executive bonus plan was too amorphous in its criteria for bonus award and subject to too unfettered discretion in its application to permit the inclusion of its costs in the ICP. … when an executive bonus plan lacks measurable metrics and is essentially subject to the unfettered discretion of those who would benefit from it … its costs are not compensable.”

The dissent by Judge Clarke would have allowed the bonuses. He found that there was a bona fide bonus plan—albeit of one page—and that it was reasonably followed. He found that TSI’s course of conduct with respect to its executive bonuses was reasonable for a company of less than 20 employees.

Unfortunately, the lesson to be learned here is that the requirements of the compensation cost principle at 31.205-6(f) will be strictly enforced, even as applied to small businesses. Companies that have incentive compensation should have a written plan that is consistently followed. Incentive compensation awards should be documented and supported. There should be no question as to why Employee A received the award she did and why Employee B received a different amount. This is a hard thing to understand and to do, because it’s such a closely-guarded process at most companies. How much IC is given to any individual is something that is simply not shared, except within the smallest possible group. That fact being acknowledged, somebody within that group needs to document and support the actual award amounts.

Subcontract Costs

TSI awarded several T&M subcontracts without first obtaining consent from the contracting officer, as required by the FAR contract clause 52.244-2. Because advance consent was never obtained, and because the information supporting TSI’s determination that the prices it was paying to its subcontractors was fair and reasonable was not available, the costs were disallowed by the majority.

As was the case with the consultant costs, Judge Clarke would have allowed the subcontractor costs because of the parties’ prior course of dealing, in which such costs had never been disallowed even though TSI had similarly failed to obtain advance consent for them.

The majority decision is a bit murky in this area, but apparently a failure to obtain consent was equated by DCAA, DCMA, and the Board as being equal to a CO challenge that the awarded price was not fair and reasonable. We don’t really understand that equivalence; to us it seems to be conflating two separate concepts. Can the costs be questioned solely on the basis that the contractor failed to comply with the advance consent requirements? We don’t see why not (though there may be a quantum meruit defense available). In other words, a contractor can have airtight documentation regarding price reasonableness, but if it fails to obtain advance consent when required to do so, it may be putting those costs at risk. We do not understand how the majority got from consent to price reasonableness—though that could just be our lack of understanding, since we lack legal training. Regardless, we have warned our readers that DCAA will challenge subcontractor costs when the price reasonableness is not supported—and here is another example of that principle in action.

Statute of Limitations

There was some discussion about the CDA Statute of Limitations. As noted above, the COFD was within the six-year clock—assuming the clock started when the FY 2007 final billing rate proposal was submitted. In fact, many recent ASBCA decisions tend to elide that date in favor of the date when the government had notification that disputed indirect costs were actually incurred and claimed as allowable indirect costs—i.e., when transaction detail is provided. That does not need to be the date of the audit commencement. For instance, if the contractor submits general ledger transaction detail along with the proposal, that would seem to be sufficient to start the SoL clock. That being said, both the majority and the dissent found that the COFD was issued within the CDA Statute of Limitations.

What was not discussed was whether the disallowance of the subcontractor costs was time-barred. This is a curious omission, because recent ASBCA decisions have distinguished direct from indirect costs with respect to the start of the Statute of Limitations. See, e.g., Sparton deLeon Springs. That appeal involved a disallowance of intra-organizational transfer costs (i.e., direct costs) that were insufficiently supported. Judge McIlmail, writing for the Board with no dissent, found that the SoL clock started running when the government paid the interim vouchers that included the disputed direct costs. He wrote: “… the government's overpayment claim is based upon the contention that Jackson costs were ‘insufficiently supported’, and that, according to the contracting officer, there is no proof that [the contractor] paid those costs in connection with any government contract. However, if that is true, it was no less so … when the government paid those costs pursuant to the interim vouchers. It is puzzling, if not disturbing, to see that line of reasoning not being addressed by either the majority or the dissenting opinion.

To wrap this article up, there is much to criticize about the story of the DCAA, DCMA, and TSI. The approach taken by DCAA was, to our eyes, unprofessional at best. DCMA’s reliance on a non-GAGAS non-opinion as a Bible-solid position that could not be ignored without irrefutable evidence from the contractor was, in our view, misplaced. The DCMA contracting officer had much more discretion available; though of course many contracting officers are afraid to use their discretion these days, since DCAA has a tendency to whine to the DoD Inspector General when their positions are not sustained. Finally, this decision may really undercut the previously solid doctrine that the government cannot engage in retroactive disallowance.

This is another important ASBCA decision that merits close scrutiny by those engaged in the practice of government contract compliance.

Last Updated on Tuesday, 31 January 2017 18:26
 

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