When Are Indirect Rates Final Billing Rates?
One of our pet peeves is Government’s tendency to want to reopen “final” indirect cost rates—i.e., rates that have been audited and negotiated and agreed-to by both Government and contractor as suitable for closing-out flexibly priced contracts. It’s not that we are against such an occurrence in all situations. For example, the Courts have held that “finalization” of indirect cost rates is no bar to revision when a CAS 413 segment closing pension adjustment is being calculated. We’re okay with that (kind of) even though at least one attorney passionately argued that “final means final” in the original series of Teledyne decisions that framed much of how that complex adjustment is supposed to work.
But DCAA wants more. In their view—and to be fair it’s the view of the FAR Councils as well—any CAS noncompliance must address the cost impacts of all “affected contracts” regardless of whether those impacts take place in “closed” years where indirect rates have been finalized. For example, see our series of articles on how DCAA (and DCMA) wants to treat the “expressly unallowable” costs associated with ineligible healthcare plan dependents. In our view, the Government’s position is—shall we say?—extreme and untenable. We await a good legal decision that imposes rationality, equity, and plain old common sense on the patently irrational, unfair, and bizarre interpretation taken by the FAR Councils in the mid-2000’s during their poorly conceived rewrite of FAR 30.6.
Recently, the ASBCA addressed a similar problem in a decision that we want to share with our readers. The decision was entitled Kearfott Guidance and Navigation Corporation, ASBCA No. 55626, dated June 10, 2011, and it can be found here. (Readers please note that Kearfott was represented by Stephen Knight of the law firm, Smith Pachter McWhorter. We’ve mentioned Steve’s work before, with approval if not outright admiration.)
The case was summarized by Judge Freeman as follows—
Kearfott … appeals a final decision denying its claim for inclusion of mistakenly omitted allowable costs in the calculation of indirect cost rates and facilities capital cost of money (FCCOM) factors in a letter agreement. The government contends that the omission was deliberate, the costs not proven to be allowable, and the letter agreement final. We find the omission inadvertent, the costs allowable, the letter agreement reformable for mutual mistake, and sustain the appeal.
Basically, Kearfott and the DoD agreed to rates for the period 1989 through 1997 to address a previously litigated issue as to whether Kearfott could claim the costs of “writing-up” its assets. The parties executed an agreement but—quite importantly—the agreement never had the word “final” in it. It’s pretty obvious the parties understood the indirect rates in the agreement to represent the final rates for the years in question … but they never explicitly said so.
A couple of months after executing the agreement, Kearfott realized that the rates it has agreed-to omitted costs associated with its intangible assets, such as software development and a covenant not to compete. DCMA had Kearfott submit a “Final” indirect cost rate proposal for the period 1984 through 1994, which was to be audited by DCAA. (We have no idea what happened to indirect rates for 1995 – 1997.)
DCAA performed its audit and opined (via memorandum) that the costs of the intangible assets were “not allocable” to Government contracts because—
… the 12 April 2005 letter agreement was ‘negotiated in good faith and with both parties clearly aware that amortized intangible asset costs were not included’; and … ‘[Kearfott] did not mistakenly omit the amortization of intangible asset costs; they were aware of their existence and chose to exclude them from all proposals and incurred cost submissions for the subject years.’
First of all, we have a bit of a problem with DCAA’s “opinion” as quoted above. We don’t see much accounting or audit testing in that opinion; what we see is DCAA trying to do the Contracting Officer’s job. But let’s move on ….
A year later, the DCMA Administrative Contracting Officer (ACO) told Kearfott that he was not going to reopen the previously negotiated rates, “citing substantially the same reasons” as were contained in the DCAA memorandum opinion.
Our readers should focus on the DCAA logic: it was DCAA’s opinion that Kearfott did not make a mistake, and that it was the company’s established cost accounting practice to exclude such costs from its indirect rate calculations. We’ve seen that logic before and we’ve always responded that, “a mistake is not a cost accounting practice.” In his decision, Judge Freeman said the same thing. He wrote—
… we find that the bookkeeping entry assigning the identifiable intangible asset write-up amortization costs to an income deduction account and not to an operating cost account was a mistake and not an established accounting practice or otherwise a deliberate decision to omit these costs from the indirect cost rates and FCCOM factors applicable to government contracts.
The Judge also found that Kearfott’s intangible asset costs were reasonable and allowable, as well as being allocable to the company’s government contracts. Moreover, the Judge found that the indirect rate agreement was “reformable” because of a mutual mistake. To do otherwise would be to give the Government a windfall to which it was not entitled.
The Judge sustained Kearfott’s appeal. Kearfott's indirect cost rates would be revised.
SAIC in Deep Curry with New York City’s “CityTime” Payroll Project
New York City’s “CityTime” payroll project is reportedly over-budget and behind schedule. And really, should we be surprised? When’s the last time you read about a city or county or state IT project that actually came in under budget or on time or even with the originally planned functionality? Answer: it’s been awhile.
But what sets NYC’s project apart is the series of alleged ethical “lapses” that have plagued its prime contractor, Science Applications International Corporation (SAIC). SAIC, as many readers will recognize, is a major Federal contractor performing billions of dollars worth of projects each year. (SAIC’s total FY2011 revenue was $11 billion.) So we were taken aback to read about the alleged problems SAIC had with managing the CityTime project, a project on which it had reportedly received $650 in billings (against an original budget of $68 million).
According to a report by the Wall Street Journal, “Last year, following a probe by the city's Department of Investigation, federal prosecutors charged six people with stealing $80 million from CityTime. Prosecutors have since added one more defendant; one defendant has died, and one has pleaded guilty and agreed to help prosecutors with the case.”
One allegation concerns SAIC’s principal subcontractor, TechnoDyne, who reportedly received $450 million from SAIC—allegedly because it agreed to pay kick-backs to SAIC employees. According to this article, on June 20, US Attorney Preet Bharara announced that TechnoDyne’s and its two co-founders (Padma and Randy Allen) had been indicted on fraud charges. One blog site stated—
Carl Bell, a former SAIC employee and CityTime systems engineer, has pled guilty to multiple charges and claims he received at least $5 million in kickbacks from TechnoDyne and the Allens ‘to ensure the continued success of the fraudulent scheme.’ Gerard Denault, another former SAIC employee, who was recently arrested in connection with the alleged scheme, allegedly took more than $9 million in kickbacks.
The Allens have reportedly fled to India and the company has closed its doors, leaving about 200 employees jobless. The article reported—
One defendant, Mark Mazer, a principal agent and representative of the New York City Office of Payroll Administration, oversaw the project. He allegedly approved time sheets for consultants who were on leave, who had been fired, and who were working less time than was reported. The payroll office awarded more than $600 million to SAIC, which paid about $450 million to TechnoDyne.
According to the 43-page indictment, TechnoDyne gave $75 million to companies D.A. Solutions and Prime View and their executives, Dimitry Aronshtein and Victor Natanzon, and allegedly channeled $25 million to Mazer. Natanzon pleaded guilty to his role in the CityTime fraud in February 2010.
The article continued—
Prosecutors have seized over $38 million in 120 bank accounts involving shell companies in three continents used to hide transactions in the CityTime probe.
Employees at TechnoDyne learned by e-mail May 31 that their company had closed its doors effective that day. When they tried to retrieve paychecks the next day, they were shocked to find out the Allens had removed them from the payroll in mid-May. In other words, they had worked two weeks not knowing they had no jobs.
This was a sad end for a company that had, in 2010, been honored by Ernst & Young LLP as New Jersey’s Entrepreneur of the Year. But there’s more to the SAIC story than the sad end of TechnoDyne.
Reports have surfaced of alleged timekeeping irregularities by SAIC’s staff, namely one Gerard Denault, SAIC’s CityTime Project Manager. (He was also one of those who allegedly received kick-backs from TechnoDyne.) We saw one Wall Street Journal article from May 25, 2011 that asserted that SAIC had fired Mr. Denault “for allegedly violating company policy when reporting his own timekeeping.” The article continued—
According to a ‘confidential’ letter that SAIC sent to the city this week, Mr. Denault ‘routinely recorded set hours each day rather than the actual hours that he worked as we require.’
‘Mr. Denault performed extensive work on CityTime, but because he did not precisely record the hours he worked as SAIC policy requires, SAIC cannot accurately calculate the amount that should have been billed to the city,’ the letter said.
SAIC has agreed to reimburse the city for all of Mr. Denault's billed services. The reimbursement will be $2,470,522.
Quite obviously, we don’t know all the facts and the real story of this problematic project. But we wonder whether the real problem here might be that SAIC didn’t view its state and local projects as being as risky as its Federal projects. We wonder if SAIC didn’t focus its compliance efforts on its Federal contracts which, after all, would be subject to Federal False Claims Act suits if it misbilled the Federal government. We also wonder whether the notoriously decentralized and entrepreneurial company might have taken a “hands-off” approach to local project management.
Regardless of the facts, we would urge readers to review their portfolio of projects, and ask themselves whether all projects are being treated equally. Are all projects subject to the same internal control systems and compliance reviews? Or, as we suspect is the case, have some projects slipped below your compliance radar screen because they are incorrectly perceived as being “low risk”?
We bet SAIC is asking themselves those questions right now.
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Should “Shell Companies” Receive Federal Contracts?
Most folks normally think it’s sufficient simply to review the Excluded Party List before making a contract award, in order to make sure their awardee isn’t suspended or debarred. In fact, that’s a mandatory step even if you’re a prime contractor, and one that’s checked in almost every Contractor Purchasing System Review (CPSR) performed by DCMA functional specialists. Woe to the Government Contracting Officer or to the prime contractor’s contract administrator who awards work to a suspended or debarred entity!
But is that review good enough?
Recently, we came across this article that discussed the State of Wyoming’s “liberal incorporation laws” that permit entities to incorporate using an “alias” in order to preserve “corporate anonymity”. Wyoming Corporate Services was named in the article as the provider of such services. According to the entity’s website, it offers the following benefits to companies interested in incorporating anonymously in Wyoming:
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No State Income Taxes
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No information collected to be shared with IRS
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Privacy allowed
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Shareholders are not listed with the state
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Best Asset Protection Laws
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Nominee officers are legal
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Citizenship not required
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State tax not being considered
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Wyoming draws little attention
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No Nevada "Stigma"
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Lower Startup Costs
There’s nothing illegal in incorporating in Wyoming, nor in using the services of Wyoming Corporate Services—at least, as far as we can tell. However, problems seem to arise when an unscrupulous corporation uses its corporate anonymity to misrepresent itself when bidding on a Federal contract. We’re talking, once again, about representation as a small or small socioeconomically disadvantaged business when the entity fails to meet the qualifications established by FAR Part 19.
According to the article—
In January, the Defense Logistics Agency (DLA) banned Eagle Logistic Solutions and Eagle Logistics Aerospace from selling components to the Pentagon for three years. The ban came after investigators found the firms, and their owners, had knowingly supplied air and fluid-filtering kits for military tractor-trailers between 2001 and 2005 that were reverse-engineered in Turkey to look like they were made by Parker Hannifin, the required manufacturer. … The parts were considered ‘critical application items,’ which the Pentagon defines as ‘essential to operating personnel.’
The article continued—
The companies were created by Atilla C. Kan, an employee of another Pentagon supplier called New York Machinery. DLA records, Wyoming incorporation data, and documents submitted by an attorney for New York Machinery in a settlement agreement in a separate federal criminal lawsuit show Kan formed the companies in Wyoming under the name John Ryan. He later used the alias, and a description of the companies as ‘minority-owned,’ ‘woman-owned’ and ‘Hispanic-owned,’ when applying to supply military parts, the documents show.
The article reported that, “Both firms listed their address as 2710 Thomes Avenue in Cheyenne, the DLA records show.” That address is—not coincidentally—the address of Wyoming Corporate Services. The article noted that—
A Reuters investigation has found that more than 2,000 companies are registered at 2710 Thomes Avenue in Cheyenne, the headquarters for Wyoming Corporate Services …
Among the firms incorporated there is a small subset that make their money from government contracts.
A Reuters review of federal contracting databases found nine firms registered at 2710 Thomes Avenue have been awarded 93 contracts worth more than $1.6 million by a half dozen government agencies, including the U.S. Department of Defense, the U.S. Treasury's Internal Revenue Service, the Centers for Disease Control, and the Department of Veterans Affairs.
More than 90 percent of the contracts were awarded by the Department of Defense.
We have previously reported on the real and present danger posed by counterfeit parts within defense program supply chains. Many contractors simply don’t know how to secure their supply chains so as to lock-out untrustworthy suppliers. Today, we are suggesting one test to check for the trustworthiness of a potential supplier.
We recommend checking the corporate address of the potential supplier. If the corporate address is 2710 Thomes Avenue, Cheyenne, Wyoming … then we recommend caution and further checking. Having that address is not evidence of a problem, but we consider it to be an indicator—a warning sign, if you will—of potential concern.
To our original question (should a contract be awarded to a shell company run by somebody using an alias?) we can only answer that we would hesitate, and run several more checks on that supplier, before doing so.
Stop the DATA Act!
Normally we don’t have a lot to say about pending legislation. Pending acquisition regulations: yes. Pending public laws: not as much. As far as we can remember, our last (and only) foray into pending legislation was this bit on “The Subcontractor Fairness Act” wherein we opined that, “This is bad legislation and, if signed into law as written, will do much more harm than good. “
The reason we so rarely get worked up about pending legislation is that such legislation so rarely survives as written. There are Committee hearings and votes, and amendments and CBO input and more amendments … it’s difficult to get too upset about something until it seems likely to become law; at which point it’s time to call your Congressman and/or Senator and remind them that, when in doubt, the best rule is, “primum non nocere.” (“First, do no harm.”)
But sometimes we are called to point out that a piece of pending legislation is so full of potential pitfalls that we recommend calling one’s Congressperson and/or Senator right now, so as to make sure the legislation doesn’t survive as drafted, and so as to ensure that any pending idiocies are amended into oblivion.
This is one of those times.
It’s called “The DATA Act” (H.R. 2146) and it’s chock-full of things that are going to be problematic for government contractors. Introduced by Representative Darrell Issa (R-CA 49), it has the ostensible purpose of promoting “accountability and transparency in federal spending.” Let’s summarize its requirements:
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Any recipient of more than $100,000 in federal funds—whether such funds be grants or loans, contracts or cooperative agreements, subcontracts, purchase orders, task orders, delivery orders or even blanket purchase agreements—would be required to report exactly how those federal funds were spent to a brand-new oversight board called, “Federal Accountability and Spending Transparency Board” (or “FAST Board” if you like catchy acronyms).
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The information to be reported to the FAST Board includes: “the amount of Federal funds that were expended or obligated to projects or activities; a detailed list of all projects or activities for which Federal funds were expended or obligated; and such additional information reasonably related to the receipt and use of Federal funds as the Board shall require.”
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The draft legislation mandates reporting by recipients not less often than once per quarter. However, the legislation also states that, “To the extent practicable, the Board shall require continuous or automatic reporting for compliance ….”
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The information provided by recipients (as well as the information reported by awarding agencies) will be published online by the FAST Board.
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The information provided by recipients will be combined with “other compilations of information, such as Government databases and other proprietary and nonproprietary databases” so that the eligibility of recipients to receive Federal funds can be verified, and so that “Executive agencies, Inspectors General, and law enforcement agencies” can “track Federal awards to find waste, fraud, and abuse.”
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Penalties may be imposed on those recipients that fail to accurately report required information.
In case we weren’t clear, we have grave concerns about this piece of legislation. First of all, the data and uses for that data seem somewhat duplicative. Doesn’t the Federal government already track how it awards its funds? (Note: that was a rhetorical question. The answer is yes. Yes it does. It’s called USAspending.gov.)
And doesn’t the Federal government already have a means to verify the eligibility of contractors to receive Federal funds? (Hint: that was another rhetorical question right there. It was called the Excluded Parties List System (EPLS) but is soon to be called the System for Award Management or SAM.) It’s right over here.
More importantly, do you as a recipient of Federal funds want yet another financial report to submit? Many of you already submit monthly Cost Performance Reports pursuant to your contracts’ EVMS clauses. Some of you submit periodic Contract Funds Status Reports (CFSRs) and/or Quarterly Limitation of Payments (QLOP) reports. Chances are, you already track expenditures in great detail and report that information in several different formats. These FAST Board reports will simply be another report of the same financial data, in a different format, that will need to be proofed and reconciled, and which will be audited and questioned and supported by your staff—whom you will need to hire more of in order to execute the foregoing tasks, in a time of declining budgets and competitive pressure to cut your indirect costs.
But that’s not even the part that really worries us. Go back and review the third bullet point in the list above, the part dealing with reporting frequency. Take a look at the directive to have the FAST Board require “continuous or automatic reporting.” See that part? To us, it means that the Federal government wants to link to your accounting system, so that it can pull financial expenditure information right from your books and records.
How does that sound to you?
You know, though, we’re not the only ones who have serious issues with The DATA Act. Over at OMBWatch, they call the pending legislation “troublesome” and “dangerous” and “fatally flawed”. But not for the same reasons we did. Their concerns include: it would repeal FFATA (“The Federal Funding Accountability and Transparency Act”), a law passed in 2006 that (among other things) created USASpending.gov. FFATA was signed into law with the same purpose as espoused by The DATA Act … and we’re not at all sure why The DATA Act needs to replace FFATA (nor apparently is OMBWatch). Moreover, OMBWatch notes that The DATA Act’s requirements “sunset” in seven years, which means that in seven years either the bill gets extended or transparency ends. In their words—
… by repealing FFATA, the bill would actually take spending transparency a few steps back, because FFATA contains a number of data elements that are required to be reported that the DATA Act does not. And unless Congress acts to reauthorize the bill in 2018, the spending information that appears on USAspending.gov and all the other spending transparency created by the DATA Act will disappear. We shouldn't have to be reconsidering whether spending transparency is necessary every seven years or worried that a polarized Congress finding itself in a legislative stalemate will fail to agree on approving time-sensitive legislation.
And to cap off this little tirade, we note with sadness and alarm that, on June 22, 2011, the House Committee on Oversight and Government Reform unanimously approved The DATA Act and sent it to the House floor for consideration.
It may already be too late. But don’t let that stop you from trying to stop this bill.
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