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Home News Archive DCAA Independence Hits New Low, with Auditors Opining on Legal Entitlement

DCAA Independence Hits New Low, with Auditors Opining on Legal Entitlement

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On November 11, 2009 the Court of Appeals for the Federal Circuit took the somewhat unusual step of affirming a prior decision by the Armed Services Board of Contract Appeals (ASBCA) in a nonprecedential decision without comment, pursuant to its Rule 36. Curious about the case that was so clearly correct that the Appellate Judges did not believe comment was warranted, we researched the original ASBCA case, and were taken aback by what we found.

 

But first, some background.  Readers of this site are well aware of concerns raised by the Government Accountability Office (GAO) regarding the Defense Contract Audit Agency’s (DCAA) alleged failure to maintain “independence” from those it audits.  In addition to the original July 2008 GAO audit report that first raised this issue, we have reported on this issue in August, in September, and several times in October.  It’s fair to say that auditor independence has played a large role in Senate and House hearings on the quality and effectiveness of DCAA’s audits, and likely led to former Director April Stephenson’s reassignment in November of 2009.

 

Auditor independence is a big deal—or so we thought, until we read the original ASBCA decision in the matter of Beyley Construction Group Corporation (found here).

 

 

BCG’s Contract Dispute and Appeal to the ASBCA

 

Beyley Construction Group (BCG) was awarded a grounds maintenance contract by the US Army, to be performed at Fort Buchanan, Puerto Rico.  BCG, an 8(a) business (which is a small business which is owned and controlled by one or more socially and economically disadvantaged individuals), received the contract, which included a base year and two option years.  The contract included the clauses 52.212-4 and 52.212-5 (which indicated that it was a contract for a commercial item acquired pursuant to FAR Part 12)—but it also included the clause 52.222-41, incorporating the Service Contract Act. The inclusion of the Service Contract Act clause is interesting, because acquisitions of commercial services should have been exempted from the Service Contract Act (SCA) pursuant to the requirements of the Federal Acquisition Streamlining Act Of 1994 (FASA), as this letter from the American Bar Association, Public Contract Law Section, makes clear.

 

In fact, research tells us that the SCA was on the list of public laws which were exempted from application to commercial item acquisitions, until it was removed from the list of exemptions in July 2000. Subsequently there was a somewhat confusing parade of DOD class deviations, interim rules and final rules, which ended with the SCA being applicable to some (but not all) prime contracts for commercial services, and to some (but not all) subcontracts for commercial services.  At the end of the day, it appears that BCG’s contract was, indeed subject to the SCA, even though it was a Part 12 “commercial item” acquisition. (But even this conclusion is subject to some doubt, as we will discuss later in this article.)

 

The gist of the SCA requirements was discussed by the judge in BCG’s case, and is as follows—

 

Each service employee employed in the performance of this contract … shall be paid not less than the minimum monetary wages and shall be furnished fringe benefits in accordance with the wages and fringe benefits … as specified in any wage determination attached to this contract. … In the absence of a minimum wage attachment for this contract, neither the Contractor nor any subcontractor under this contract shall pay any person performing work under this contract … less than the minimum wage specified by … the Fair Labor Standards Act of 1938. [Emphasis added.]

 

As the judge noted, “The contract did not attach any wage determination and, accordingly, the minimum wage—$5.15—was applicable. Had it been made a part of the contract, the proper wage determination (WD) would have established a wage of $6.13 plus $2.02 in health and welfare benefits.”

 

BCG was the low bidder and, after confirmation by the Government of its price, it was awarded a contract in September 2001. (Note the timing. It is possible that the SCA was not applicable to the acquisition during formulation of the government’s requirements and request for proposal, but became applicable by the time the contract was awarded.  Interestingly, there was no discussion of the acquisition time line and/or SCA applicability in the ASBCA decision.)

 

It became clear during the first six months of performance that BCG had “forgotten” to include an estimate for health and welfare benefits in its bid.  The judge found that “BCG included a wage rate of $6.13 plus 40% for [fringe benefits]. … Beyley testified that had BCG included health and welfare benefits, the fringe benefit portion of its service employees’ pay ‘would have been like around 72 percent instead of 40 percent’.” It became clear that not only had BCG not included the full amount of prevailing wages pursuant to the SCA, neither had the government’s Independent Government Estimate (IGE).  It began to look like there had been a mutual mistake in contract formation, as opposed to a unilateral mistake by the bidder, discovered after contract award. Nonetheless, failing to get a favorable decision from the Contracting Officer (using the FAR language at 14.407-4(a) as support for its position), BCG filed a certified claim pursuant to the Contracts Dispute Act. (We note for the record that it is unlikely BCG’s interpretation of that FAR Part 14 language would have been upheld by the Court.)

 

In its pleading before the ASBCA, the government said, “With respect to the claim for omitted DOL wage rates, the contracting officer will issue a modification that compensates Appellant for the difference between the amount Appellant received from the Army and the prevailing DOL wage rate for health and welfare benefits plus interest in accordance with the Prompt Payment Act.…” In other words, the government conceded during its arguments the merits of BCG’s claim and notified the Court that it would make BCG whole.

 

Then DCAA got involved.

 

 

DCAA’s Audit of BCG’s Claim

 

The judge found that “DCAA issued its audit report (No. 1271-2008F17200001) on 29 February 2008.  Even though it found that BCG actually incurred $343,020 in health and welfare payments, more than the $322,085 originally claimed, DCAA questioned the entire amount claimed.  It found that ‘[t]he contractor failed to include these costs,’ in its bid, and that it signed the contract, ‘either knowingly or unknowingly, omitting the costs.’” Based on the DCAA audit report, the government reversed its previous position and now asserted “that it has no obligation to pay said amount and intends to litigate this issue before the Board.”  The government’s change of position was warranted, in its view, “because its concession on the health and welfare costs was ‘based upon a then incomplete understanding of Appellant’s claim’ since clarified by the [DCAA] audit [opinion].”

 

Unsurprisingly BCG opposed the government’s change of position, arguing that since “the audit cannot express any opinion on the contractor’s [legal] entitlement,” the audit report could only be used to determine quantum but not legal entitlement. The judge was not persuaded by BCG’s argument, and permitted the government to change its position.  In other words, DCAA’s opinion of the legal issues involved was allowed to affect the litigation.

 

Generally, Government claims are divided into two basic parts: "entitlement" and “quantum”. Entitlement is the legal determination of whether the claim has merit, while quantum is the determination of how much money (or time) is involved. As a general rule, if entitlement is not established, there is no need to address quantum. Almost universally, accountants involved in litigation support roles are focused exclusively on the quantum and do not express any opinion on the legal entitlement or merits of the case, because doing so is essentially practicing law without a license. Not so DCAA, who apparently feel free to advise the government attorney on the legal merits of the contractor’s entitlement to the quantum involved.

 

A review of the June 2009 edition of the DCAA Contract Audit Manual (CAM) finds the following audit guidance—

 

Entitlement is a legal question; however, the auditor should provide the requestor with any meaningful observations regarding the question of the contractor's entitlement to recover delay damages …. These observations may be provided in the audit report explanatory notes or in an appendix on other matters to be reported. (CAM 12-802.1a. Emphasis added.)

 

The CAM also contains the following guidance –

 

Report any meaningful observations regarding the question of the contractor’s entitlement to recover unabsorbed overhead damages to assist Government officials in determining entitlement issues. Facts or circumstances that could assist the contracting officer in determining entitlement, may include:

· Evidence that the asserted Government delay/suspension did not cause any extension in the actual time of performance beyond the original or previously revised contract performance date.

· Evidence that the contractor was or was not able to begin work on the next new contract in the extension period because of continuing work on the delayed/suspended contract.

· Evidence that the contractor did or did not secure a replacement contract(s) or other substituted work between the start of the delay/suspension period and the end of the period of extension beyond the original or previously revised contract performance date.

· Evidence of contractor-caused delays that were concurrent with the alleged Government delay or suspension.

· Evidence that the contractor was aware of differing site conditions or other causes of the asserted Government-caused delay prior to the original bid submission.

· Evidence that the contractor was unable to obtain replacement work because its bonding capacity was limited due to circumstances unrelated to the Government-caused delay/suspension.

Provide observations on any evidence as discussed above in the audit report explanatory notes or in an appendix on other matters to be reported.

[Emphasis added.]

 

Importantly, the foregoing guidance (found at CAM 12-804c and d) permits the DCAA auditor to “report … observations” with respect to the contractor’s entitlement—but only to the contracting officer and only with respect to audits of claims for unabsorbed overhead in claims for government delays and/or disruptions.  Thus, it is doubtful that the DCAA audit report discussing BCG’s SCA costs could be said to have been prepared in full compliance with applicable audit guidance. In our view, the questioning of the contractor’s entire claim by the DCAA auditor, based on the auditor’s opinion of the contractor’s legal entitlement to its additional costs, is more than a lack of independence; it brings into question whether the auditor followed applicable professional standards.

 

 

The Court’s Decision

 

The ASBCA judge permitted the Government to change its position with respect to BCG’s claim for the additional health and welfare costs it failed to include in its bid.  Characterizing the situation as a “unilateral mistake in bid,” it found there was “insufficient proof” that the Government knew (or should have known) that BCG”s bid was too low.  Accordingly, the Court found that BCG was not entitled to a reformation of its contract to cover the omitted health and welfare costs.  There were other claim elements, each of which was addressed and denied seriatim.

 

As we noted at the beginning of this article, the ASBCA decision was appealed and adjudicated by the Court of Appeals (Federal Circuit) without comment, pursuant to Rule 36. The Federal Circuit’s Rule 36 permits an Entry of Judgment without Opinion when “an opinion would have no precedential value” and when one of several conditions are determined to exist.  Among those decisions are “findings that are not clearly erroneous,” and where there was no error of law in the original judgment.

 

Based on our reading of the ASBCA case, we beg to differ with the Appellate Court’s opinion.  We hope this article has raised a number of questions in the readers’ minds—among them whether this was a case of a unilateral or mutual mistake, and whether or not the SCA should have been incorporated into BCG’s commercial item contract.  Additionally, we trust we have raised awareness and concern regarding a DCAA report that (apparently) offered a legal opinion on the contractor’s entitlement, and which significantly influenced the outcome of the litigation.

 

 

DISCLAIMER: Nobody at Apogee Consulting, Inc. is an attorney and (unlike DCAA) we are not offering any opinions of law.  We are simply reporting the personal opinion of the author, which may not reflect the views of Raytheon Company or any client of Apogee Consulting, Inc.  In fact, as laypersons, we probably got the whole legal analysis wrong.  If we were you, we wouldn’t rely on it.  Except the part about DCAA issuing opinions on legal entitlement—that’s the issue we think you should be prepared for when you file a claim pursuant to the Contract Disputes Act.


 

 

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.