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Apogee Consulting Inc

Think Pieces

Nick Sanders
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And now, for something completely different ….

We are working on a rather longish article at the moment. It may not be ready for a while. But in the meantime, we wanted to share the thoughtful blog posts of others. These pieces are not necessarily about government contracting matters. Some contain bad words. Some may espouse political positions with which you are in strong disagreement.

Still, we think each is worthy of your time. Each is a thoughtful piece, well-written and full of challenging concepts. Check them out and see if you agree.

Jim Wright, Master of Stonekettle Station. Jim is a retired U.S. Navy Chief Warrant Officer who lives in Alaska, roughly 8 miles from Sarah Palin’s house.

In this article, which went viral across Facebook, Jim explores the phenomenon of people who say they love America but show by word and deed how much of America they really hate.

In this follow-up article, Jim answers critics who challenged him to discuss what he loved about America.

John Scalzi, Proprietor of Whatever. John is an author, blogger, and currently serves as President of the Science Fiction Writers of America. Whatever is one of the oldest and most popular blogs on the Internet.

In this popular article, John discusses differences between the haves and have-nots of America, and the impact of tax increases (both perceived and real) on the well-to-do set.

In this short but poignant article, John explores difficulties faced by so many of us, each day—difficulties that we need to consider when we interact with others.

Okay, for those of you who want something—anything—related to government contracts, here’s Vern Edwards, blogging on WIFCON. WIFCON, of course, is a must-read site for anybody into government contracting matters. Vern, of course, is the master of government contracting advice—alternately stern, acerbic, frustrated, and fatherly, often he is quite literally the last word in WIFCON’s discussion forum.

In this absolutely must-read article, Vern provides 14 tips to would-be government contractors.

Here’s a very helpful article on the real nature of the United States Code.

Finally, here’s a text of a speech that Vern gave to Air Force Space Command, Space and Missile Systems Center.

Okay, we’re getting back to work on our pièce de résistance, to be published as soon as we can polish it off. Until then, consider the words of these other authors ….

 

Contractor Ineligible Dependent Health Care Costs—The Gift That Keeps on Giving

Nick Sanders
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Attention interested defense acquisition policymakers and DOD leadership.  This article is for you.  We want to show you what’s wrong with your system.  Here’s an object lesson on how your oversight agencies take a molehill and create a mountain—a mountain that takes hundreds if not thousands of person hours, millions of dollars, and years to undo.
 
We’re talking—once again—about the costs of ineligible dependents who participate in employee healthcare plans in violation of contractor policy.
 
By way of background, we first reported this issue here, way back in August, 2009.  We told you about new “troubling” DCAA audit guidance that “targeted” the unallowable costs associated with ineligible dependents—i.e., employee family members who were covered by contractor healthcare plans even though they were ineligible under plan rules and contractor policy.  
 
We also reported—
 

DCAA auditors ‘should verify that contractors have adequate procedures to ensure payment of insurance premiums or claims are only being made related to employees and their eligible dependents.’  A contractor's failure to have adequate procedures in this area will treated as ‘an internal control deficiency in the contractor's accounting system and a CAS 405 noncompliance, if applicable.’  Further, inclusion of costs related to ineligible dependents/spouses in cost estimates may be treated as inadequacies in the contractor's estimating system.  Previous DCAA audit guidance (MRD 08-PAS-403(R), dated 12/19/2008) directs that a single control objective failure should lead to a recommendation o system inadequacy.  An inadequate estimating system is a nuisance, but an inadequate accounting system can prevent a contractor from receiving any cost-reimbursement contract.  (Ref. FAR 16.301-3(a)(1).)  Accordingly, a threat to the adequacy of a contractor's accounting system internal controls must be taken very seriously.

 
We followed up with this article, in which we noted that DCMA Headquarters, in another example of a continuing ceding of business judgment and authority to DCAA, issued guidance to its contracting officers that healthcare costs associated with ineligible dependents were to be treated as “expressly unallowable” costs.  We opined that the 2002 Armed Services Board of Contract Appeals (ASBCA) decision in General Dynamics (ASBCA No. 49372, reversed on other grounds) established a clear—and difficult to meet—test for determining whether a cost was “expressly unallowable.”  The DCMA direction to its contracting officers not only ignored the ASBCA’s test, it also contradicted other aspects of its own guidance regarding how final indirect cost rates were to be established.
 
Now comes additional DCAA audit guidance, in the form of MRD 11-PAC-002(R), dated February 4, 2011.
 
Here’s what you need to know about DCAA’s more recent audit guidance:
 
  1. A contractor’s inclusion of healthcare costs associated with ineligible dependents in its indirect costs will not only be treated as inclusion of “expressly unallowable” costs, it will also be treated as a noncompliance with Cost Accounting Standard 405.
  2. As part of resolving the CAS noncompliance, contractors must submit a “cost impact proposal” calculating the impact to affected to their CAS-covered contracts.
  3. The cost impact proposal must calculate the impact(s) to all affected contracts for all years in which the contractor included the “expressly unallowable” costs.
  4. By “all years” the DCAA means “all affected years, including years that have had the indirect rates settled (closed years).”
  5. If the contractor’s cost impact proposal “does not include both open and closed years,” then the DCAA auditors should report it as “inadequate for audit.”
  6. If the contractor “refuses to submit an adequate cost impact,” then the auditors will “develop a reasonable estimate of the cost impact (a ROM) and recommend that the Contracting Officer pursue remedies as outlined in FAR 30.605(i) and 30.604(i).”
There are so many problems with the guidance that it’s difficult to muster the patience to even organize the issues in a logical fashion.  To keep us from tearing our hair out or howling at the moon, we’re going to pose our concerns in the form of questions—in a quasi-Socratic dialog kind of thing.
 
Question:  The contractor’s costs associated with ineligible dependents are unallowable because such costs violate its policies and the plan coverage rules.  Why are such costs thought to be expressly unallowable?
 
Question:  If the costs are unallowable because they violate policy and plan rules, can the contractor make such costs allowable by (a) changing its policy and (b) renegotiating plan rules?
 
Question:  Under CAS 416, insurance costs are measured on the basis of (a) premium paid or (b) projected average loss.  Use of actual claims experience or actual claims paid is not an acceptable measurement method, unless the actual experience approximates one of the accepted methods.  Given this—
 
  1. Premium costs are shared between company and employee.  For many companies, the family rate is the highest rate and the number of dependents is irrelevant.  So, what is the company’s share of premium costs associated with ineligible dependents when there are sufficient eligible dependents to qualify for family coverage in any case?
  2. By and large, ineligible dependents are adult children who have reached age 21 without attending college the requisite amount.  What is the incremental premium cost associated with young adults?  Is it higher, or lower, than the premium cost associated with mature adults in their 40’s, 50’s, and/or 60’s?
Question:  Given the forgoing, are the costs associated with ineligible dependents likely to be material in amount, or immaterial, when compared to a company’s costs of providing healthcare coverage to its employees?
 
Question:  If the company can show that the costs of providing healthcare coverage to ineligible dependents is immaterial in amount, when compared to the entirely cost company healthcare costs, can the company then be found to be in noncompliance with CAS 405?  Can any contractor ever be found to be in noncompliance with any Cost Accounting Standard when the amount of cost at question is immaterial in amount?
 
Question:  What is the purpose of negotiating a final indirect cost rate, and “closing” a year to further adjustment, or “closing” a contract to further adjustment, when DCAA and the FAR Councils think that contracts in closed years should be part of a cost impact analysis?
 
Question:  Given that FAR 4.703 states that records must only be retained by a contractor for three years after receipt of final payment associated with its government contracts, why would anybody expect that a contractor would be able to prepare an adequate cost impact proposal for its closed years?
 
Question:  Given that the enabling CAS Board statute reserves the right to interpret CAS regulations exclusively to the CAS Board, what was the statutory basis for the FAR Councils’ 2005 interpretation of the cost impact regulations that required contracts in closed fiscal years to be included in the cost impact proposal?
 
Question:  Where in FAR or CAS is the DCAA given authority to review a contractor’s cost impact analysis for “adequacy”?  Where in the CAS regulations are the criteria for an “adequate” cost impact analysis spelled out?
 
Question:  If the contractor cannot or will not provide sufficient information to calculate a cost impact, how will DCAA calculate its ROM impact?  What level of accuracy do you think DCAA will be able to achieve on its own?
 
Question:  If you are a contractor caught in this swamp bog of bureaucratic bungling, this morass of regulatory misadventure, this mountain from a molehill, this tempest in a teapot, then how to you resolve it—other than by litigation?  If you litigate, how much time and effort will that take?  Who is going to pay for all that?
 
Answer:  This insanity can be stopped, but only if adults step in to supervise the children.  DCMA and DCAA are clearly caught up in “much ado about nothing” and DOD leadership needs to realize the price that is being paid by its contractors, who will have to resolve these issues through the courts—since they see no other avenue available to them.

Contractor Ineligible Dependent Health Care Costs—The Gift That Keeps on Giving

 

 

Attention interested defense acquisition policymakers and DOD leadership. This article is for you. We want to show you what’s wrong with your system. Here’s an object lesson on how your oversight agencies take a molehill and create a mountain—a mountain that takes hundreds if not thousands of person hours, millions of dollars, and years to undo.

 

We’re talking—once again—about the costs of ineligible dependents who participate in employee healthcare plans in violation of contractor policy.

 

By way of background, we first reported this issue here, way back in August, 2009. We told you about new “troubling” DCAA audit guidance that “targeted” the unallowable costs associated with ineligible dependents—i.e., employee family members who were covered by contractor healthcare plans even though they were ineligible under plan rules and contractor policy.

 

We also reported—

 

DCAA auditors ‘should verify that contractors have adequate procedures to ensure payment of insurance premiums or claims are only being made related to employees and their eligible dependents.’  A contractor's failure to have adequate procedures in this area will treated as ‘an internal control deficiency in the contractor's accounting system and a CAS 405 noncompliance, if applicable.’  Further, inclusion of costs related to ineligible dependents/spouses in cost estimates may be treated as inadequacies in the contractor's estimating system.  Previous DCAA audit guidance (MRD 08-PAS-403(R), dated 12/19/2008) directs that a single control objective failure should lead to a recommendation o system inadequacy.  An inadequate estimating system is a nuisance, but an inadequate accounting system can prevent a contractor from receiving any cost-reimbursement contract.  (Ref. FAR 16.301-3(a)(1).)  Accordingly, a threat to the adequacy of a contractor's accounting system internal controls must be taken very seriously.

 

We followed up with this article, in which we noted that DCMA Headquarters, in another example of a continuing ceding of business judgment and authority to DCAA, issued guidance to its contracting officers that healthcare costs associated with ineligible dependents were to be treated as “expressly unallowable” costs. We opined that the 2002 Armed Services Board of Contract Appeals (ASBCA) decision in General Dynamics (ASBCA No. 49372, reversed on other grounds) established a clear—and difficult to meet—test for determining whether a cost was “expressly unallowable.” The DCMA direction to its contracting officers not only ignored the ASBCA’s test, it also contradicted other aspects of its own guidance regarding how final indirect cost rates were to be established.

 

Now comes additional DCAA audit guidance, in the form of MRD 11-PAC-002(R), dated February 4, 2011.

 

Here’s what you need to know about DCAA’s more recent audit guidance:

 

  1. A contractor’s inclusion of healthcare costs associated with ineligible dependents in its indirect costs will not only be treated as inclusion of “expressly unallowable” costs, it will also be treated as a noncompliance with Cost Accounting Standard 405.

  2. As part of resolving the CAS noncompliance, contractors must submit a “cost impact proposal” calculating the impact to affected to their CAS-covered contracts.

  3. The cost impact proposal must calculate the impact(s) to all affected contracts for all years in which the contractor included the “expressly unallowable” costs.

  4. By “all years” the DCAA means “all affected years, including years that have had the indirect rates settled (closed years).”

  5. If the contractor’s cost impact proposal “does not include both open and closed years,” then the DCAA auditors should report it as “inadequate for audit.”

  6. If the contractor “refuses to submit an adequate cost impact,” then the auditors will “develop a reasonable estimate of the cost impact (a ROM) and recommend that the Contracting Officer pursue remedies as outlined in FAR 30.605(i) and 30.604(i).”

 

There are so many problems with the guidance that it’s difficult to muster the patience to even organize the issues in a logical fashion. To keep us from tearing our hair out or howling at the moon, we’re going to pose our concerns in the form of questions—in a quasi-Socratic dialog kind of thing.

 

Question: The contractor’s costs associated with ineligible dependents are unallowable because such costs violate its policies and the plan coverage rules. Why are such costs thought to be expressly unallowable?

 

Question: If the costs are unallowable because they violate policy and plan rules, can the contractor make such costs allowable by (a) changing its policy and (b) renegotiating plan rules?

 

Question: Under CAS 416, insurance costs are measured on the basis of (a) premium paid or (b) projected average loss. Use of actual claims experience or actual claims paid is not an acceptable measurement method, unless the actual experience approximates one of the accepted methods. Given this—

 

  1. Premium costs are shared between company and employee. For many companies, the family rate is the highest rate and the number of dependents is irrelevant. So, what is the company’s share of premium costs associated with ineligible dependents when there are sufficient eligible dependents to qualify for family coverage in any case?

  2. By and large, ineligible dependents are adult children who have reached age 21 without attending college the requisite amount. What is the incremental premium cost associated with young adults? Is it higher, or lower, than the premium cost associated with mature adults in their 40’s, 50’s, and/or 60’s?

 

Question: Given the forgoing, are the costs associated with ineligible dependents likely to be material in amount, or immaterial, when compared to a company’s costs of providing healthcare coverage to its employees?

 

Question: If the company can show that the costs of providing healthcare coverage to ineligible dependents is immaterial in amount, when compared to the entirely cost company healthcare costs, can the company then be found to be in noncompliance with CAS 405? Can any contractor ever be found to be in noncompliance with any Cost Accounting Standard when the amount of cost at question is immaterial in amount?

 

Question: What is the purpose of negotiating a final indirect cost rate, and “closing” a year to further adjustment, or “closing” a contract to further adjustment, when DCAA and the FAR Councils think that contracts in closed years should be part of a cost impact analysis?

 

Question: Given that FAR 4.703 states that records must only be retained by a contractor for three years after receipt of final payment associated with its government contracts, why would anybody expect that a contractor would be able to prepare an adequate cost impact proposal for its closed years?

 

Question: Given that the enabling CAS Board statute reserves the right to interpret CAS regulations exclusively to the CAS Board, what was the statutory basis for the FAR Councils’ 2005 interpretation of the cost impact regulations that required contracts in closed fiscal years to be included in the cost impact proposal?

 

Question: Where in FAR or CAS is the DCAA given authority to review a contractor’s cost impact analysis for “adequacy”? Where in the CAS regulations are the criteria for an “adequate” cost impact analysis spelled out?

 

Question: If the contractor cannot or will not provide sufficient information to calculate a cost impact, how will DCAA calculate its ROM impact? What level of accuracy do you think DCAA will be able to achieve on its own?

 

Question: If you are a contractor caught in this swamp bog of bureaucratic bungling, this morass of regulatory misadventure, this mountain from a molehill, this tempest in a teapot, then how to you resolve it—other than by litigation? If you litigate, how much time and effort will that take? Who is going to pay for all that?

 

Answer: This insanity can be stopped, but only if adults step in to supervise the children. DCMA and DCAA are clearly caught up in “much ado about nothing” and DOD leadership needs to realize the price that is being paid by its contractors, who will have to resolve these issues through the courts—since they see no other avenue available to them.

 

 

 

MARK:

 

On “here” link to: http://www.apogeeconsulting.biz/index.php?option=com_content&view=article&id=108:new-dcaa-audit-guidance-targets-contractors-unallowable-health-benefit-costs&catid=1:latest-news&Itemid=55

 

On “this article” link to: http://www.apogeeconsulting.biz/index.php?option=com_content&view=article&id=444:update-dcma-agrees-with-dcaa-that-some-contractor-health-care-costs-are-expressly-unallowable&catid=1:latest-news&Itemid=55

 

On “MRD 11-PAC-002(R)” link to: DCAA MRD – Contractor Ineligible Healthcare Costs.pdf file attached

 

 

Contractor Ineligible Dependent Health Care Costs—The Gift That Keeps on Giving
 
 
Attention interested defense acquisition policymakers and DOD leadership.  This article is for you.  We want to show you what’s wrong with your system.  Here’s an object lesson on how your oversight agencies take a molehill and create a mountain—a mountain that takes hundreds if not thousands of person hours, millions of dollars, and years to undo.
 
We’re talking—once again—about the costs of ineligible dependents who participate in employee healthcare plans in violation of contractor policy.
 
By way of background, we first reported this issue here, way back in August, 2009.  We told you about new “troubling” DCAA audit guidance that “targeted” the unallowable costs associated with ineligible dependents—i.e., employee family members who were covered by contractor healthcare plans even though they were ineligible under plan rules and contractor policy.  
 
We also reported—
 

DCAA auditors ‘should verify that contractors have adequate procedures to ensure payment of insurance premiums or claims are only being made related to employees and their eligible dependents.’  A contractor's failure to have adequate procedures in this area will treated as ‘an internal control deficiency in the contractor's accounting system and a CAS 405 noncompliance, if applicable.’  Further, inclusion of costs related to ineligible dependents/spouses in cost estimates may be treated as inadequacies in the contractor's estimating system.  Previous DCAA audit guidance (MRD 08-PAS-403(R), dated 12/19/2008) directs that a single control objective failure should lead to a recommendation o system inadequacy.  An inadequate estimating system is a nuisance, but an inadequate accounting system can prevent a contractor from receiving any cost-reimbursement contract.  (Ref. FAR 16.301-3(a)(1).)  Accordingly, a threat to the adequacy of a contractor's accounting system internal controls must be taken very seriously.

 
We followed up with this article, in which we noted that DCMA Headquarters, in another example of a continuing ceding of business judgment and authority to DCAA, issued guidance to its contracting officers that healthcare costs associated with ineligible dependents were to be treated as “expressly unallowable” costs.  We opined that the 2002 Armed Services Board of Contract Appeals (ASBCA) decision in General Dynamics (ASBCA No. 49372, reversed on other grounds) established a clear—and difficult to meet—test for determining whether a cost was “expressly unallowable.”  The DCMA direction to its contracting officers not only ignored the ASBCA’s test, it also contradicted other aspects of its own guidance regarding how final indirect cost rates were to be established.
 
Now comes additional DCAA audit guidance, in the form of MRD 11-PAC-002(R), dated February 4, 2011.
 
Here’s what you need to know about DCAA’s more recent audit guidance:
 
  1. A contractor’s inclusion of healthcare costs associated with ineligible dependents in its indirect costs will not only be treated as inclusion of “expressly unallowable” costs, it will also be treated as a noncompliance with Cost Accounting Standard 405.
  2. As part of resolving the CAS noncompliance, contractors must submit a “cost impact proposal” calculating the impact to affected to their CAS-covered contracts.
  3. The cost impact proposal must calculate the impact(s) to all affected contracts for all years in which the contractor included the “expressly unallowable” costs.
  4. By “all years” the DCAA means “all affected years, including years that have had the indirect rates settled (closed years).”
  5. If the contractor’s cost impact proposal “does not include both open and closed years,” then the DCAA auditors should report it as “inadequate for audit.”
  6. If the contractor “refuses to submit an adequate cost impact,” then the auditors will “develop a reasonable estimate of the cost impact (a ROM) and recommend that the Contracting Officer pursue remedies as outlined in FAR 30.605(i) and 30.604(i).”

 
There are so many problems with the guidance that it’s difficult to muster the patience to even organize the issues in a logical fashion.  To keep us from tearing our hair out or howling at the moon, we’re going to pose our concerns in the form of questions—in a quasi-Socratic dialog kind of thing.
 
Question:  The contractor’s costs associated with ineligible dependents are unallowable because such costs violate its policies and the plan coverage rules.  Why are such costs thought to be expressly unallowable?
 
Question:  If the costs are unallowable because they violate policy and plan rules, can the contractor make such costs allowable by (a) changing its policy and (b) renegotiating plan rules?
 
Question:  Under CAS 416, insurance costs are measured on the basis of (a) premium paid or (b) projected average loss.  Use of actual claims experience or actual claims paid is not an acceptable measurement method, unless the actual experience approximates one of the accepted methods.  Given this—
 
  1. Premium costs are shared between company and employee.  For many companies, the family rate is the highest rate and the number of dependents is irrelevant.  So, what is the company’s share of premium costs associated with ineligible dependents when there are sufficient eligible dependents to qualify for family coverage in any case?
  2. By and large, ineligible dependents are adult children who have reached age 21 without attending college the requisite amount.  What is the incremental premium cost associated with young adults?  Is it higher, or lower, than the premium cost associated with mature adults in their 40’s, 50’s, and/or 60’s?

 
Question:  Given the forgoing, are the costs associated with ineligible dependents likely to be material in amount, or immaterial, when compared to a company’s costs of providing healthcare coverage to its employees?
 
Question:  If the company can show that the costs of providing healthcare coverage to ineligible dependents is immaterial in amount, when compared to the entirely cost company healthcare costs, can the company then be found to be in noncompliance with CAS 405?  Can any contractor ever be found to be in noncompliance with any Cost Accounting Standard when the amount of cost at question is immaterial in amount?
 
Question:  What is the purpose of negotiating a final indirect cost rate, and “closing” a year to further adjustment, or “closing” a contract to further adjustment, when DCAA and the FAR Councils think that contracts in closed years should be part of a cost impact analysis?
 
Question:  Given that FAR 4.703 states that records must only be retained by a contractor for three years after receipt of final payment associated with its government contracts, why would anybody expect that a contractor would be able to prepare an adequate cost impact proposal for its closed years?
 
Question:  Given that the enabling CAS Board statute reserves the right to interpret CAS regulations exclusively to the CAS Board, what was the statutory basis for the FAR Councils’ 2005 interpretation of the cost impact regulations that required contracts in closed fiscal years to be included in the cost impact proposal?
 
Question:  Where in FAR or CAS is the DCAA given authority to review a contractor’s cost impact analysis for “adequacy”?  Where in the CAS regulations are the criteria for an “adequate” cost impact analysis spelled out?
 
Question:  If the contractor cannot or will not provide sufficient information to calculate a cost impact, how will DCAA calculate its ROM impact?  What level of accuracy do you think DCAA will be able to achieve on its own?
 
Question:  If you are a contractor caught in this swamp bog of bureaucratic bungling, this morass of regulatory misadventure, this mountain from a molehill, this tempest in a teapot, then how to you resolve it—other than by litigation?  If you litigate, how much time and effort will that take?  Who is going to pay for all that?
 
Answer:  This insanity can be stopped, but only if adults step in to supervise the children.  DCMA and DCAA are clearly caught up in “much ado about nothing” and DOD leadership needs to realize the price that is being paid by its contractors, who will have to resolve these issues through the courts—since they see no other avenue available to them.
 
 
 
MARK:
 
On “here” link to:  http://www.apogeeconsulting.biz/index.php?option=com_content&view=article&id=108:new-dcaa-audit-guidance-targets-contractors-unallowable-health-benefit-costs&catid=1:latest-news&Itemid=55
 
On “this article” link to:  http://www.apogeeconsulting.biz/index.php?option=com_content&view=article&id=444:update-dcma-agrees-with-dcaa-that-some-contractor-health-care-costs-are-expressly-unallowable&catid=1:latest-news&Itemid=55
 
On “MRD 11-PAC-002(R)” link to:  DCAA MRD – Contractor Ineligible Healthcare Costs.pdf file attached
 
 
 

Honeywell Pays $11.8 Million to Resolve Criminal Environmental Complaint

Nick Sanders
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Of course the game is rigged. Don't let that stop you--if you don't play, you can't win.

-- Robert A. Heinlein

 

We focus quite a bit on compliance with statutes and regulatory matters (not to mention contract terms) related to cost accounting, contract administration, and program management. However, that list does not exhaust the Pantheon of potential compliance issues facing government contractors, as Honeywell International recently learned to its chagrin.

The U.S. Department of Justice announced on March 11, 2011 that Honeywell International had agreed to plead guilty to one felony count (storing hazardous waste without a permit) and to pay a $11.8 million criminal fine, in order to resolve criminal charges stemming from its onsite storage of radioactive potassium hydroxide (KOH) “mud” at its facility in Metropolis, Illinois. (Yes, there really is a city called Metropolis.)

Honeywell’s facility in Southern Illinois has been in operation since 1958. In 1964, the facility was “mothballed” until reopening in 1968. Honeywell operates the facility under a license from the U.S. Nuclear Regulatory Commission (NRC). The facility is the only site that converts uranium in its natural state into uranium hexafluoride (UF6). The UF6 is then further enriched into nuclear fuel and reportedly used in nuclear power plants.

According to the Dept. of Justice—

At the Metropolis facility, air emissions from the UF6 conversion process are scrubbed with potassium hydroxide (KOH) prior to discharge. As a result of this process, KOH scrubbers and associated equipment accumulate uranium compounds that settle out of the liquid and are pumped as a slurry into 55-gallon drums.

(The slurry is called “KOH mud.”)

Up until 2002, Honeywell used a “wet reclamation” process to reclaim the uranium from the KOH mud; however, in 2002 Honeywell ceased using that process and, instead, decided to store the KOH mud on site. (We cannot find any discussion of why Honeywell chose to end its reclamation process.) As a result of its decision, Honeywell entered the KOH mud storage business, having to store drum upon drum of the contaminated sludge on its site—which happens to be located relatively near the Ohio River.

Unfortunately for Honeywell, the contaminated KOH mud was classified as a “corrosive hazardous waste” under the Resource Conservation and Recovery Act (RCRA), 42 U.S.C. § 6901. Accordingly, Honeywell was required to obtain a RCRA permit to store the KOH mud at its site for longer than 90 days. According to the DOJ, Honeywell knowingly violated RCRA’s requirements.

The thing is, we’re not so sure about the “knowingly” part. Obviously we’re not environmental scientists or RCRA specialists—far from it, in fact. However, though the waste treatment and storage rules under RCRA are complex (to say the least) we noticed some ambiguity. For example, what might a jury make of this statement found in the 2001 final rule?

Our rule will allow qualified generators of LLMW to claim a conditional exemption from the regulatory RCRA definition of hazardous waste for mixed wastes stored and treated by the generator under a single NRC or NRC Agreement State license. This conditional exemption acknowledges that NRC regulation for low-level waste (LLW) provides protective regulation of storage and treatment of mixed waste in tanks and containers. This regulatory flexibility applies only to generators of low-level mixed waste who are licensed by NRC or an NRC Agreement State.

Based on the foregoing, it might be argued that Honeywell honestly believed it was exempt from RCRA permit requirements because its operation was licensed by the NRC. But in any case Honeywell apparently realized it needed a RCRA permit, because in July 2007 the company requested a modified storage permit from the Illinois EPA, which was received in July 2008. According to the DOJ, the permit allowed “Honeywell to store drums containing KOH mud only in a KOH container storage area designed to contain any spills, leaks or precipitation that accumulates in the drum storage area.”

Which would seem to have cured the problem, unless one were to realize that “by September 2008, Honeywell had accumulated over 7,000 drums of KOH mud.” And by April 2009, that number was up to 7,500 drums of waste—all of which the U.S. EPA alleged were not being stored in accordance with the terms of the RCRA permit. According to the DOJ, it was not until March 2010 that Honeywell was in compliance with its RCRA storage permit.

Thus, the criminal charge and the largish fine.

DOJ reported that, in addition to the $11.8 million fine—

In accordance with the terms of the criminal plea agreement, Honeywell will serve a five-year term of probation. As a condition of probation, Honeywell must comply with the terms of the interim consent order entered into with the Illinois Attorney General’s Office and the Illinois Environmental Protection Agency, filed on April 21, 2010, and any subsequent revisions, which imposes a schedule for the processing of KOH mud. As a further condition of probation, Honeywell must implement a community service project in the community surrounding the Metropolis facility, whereby Honeywell will develop, fund and implement a household hazardous waste collection program and arrange for proper treatment, transportation and disposal of this waste collected during at least eight collection events over a two-year period, at a cost of approximately $200,000.

The point to this story is that there’s more to compliance that FAR and CAS. A robust compliance program isn’t simply about back-office bean-counters making sure the beans are appropriately categorized. A robust compliance program integrates the back office with operations, and ensures that all statutory and regulatory (and contractual) requirements are considered. All facets of the operation must be examined for compliance requirements, lest one slip through the cracks.

 

FAR Revisions Add More Difficulties to Use of Other than Firm, Fixed-Price Contracts

Nick Sanders
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Public Law 110-417—better known as The Duncan Hunter National Defense Authorization Act (NDAA) of 2009—was enacted into law on October 14, 2008. That was more than two-and-a-half years before the date of this article.

October, 2008. Only 36 months ago, but it might as well be a different era.

Back then, Wall Street and various financial institutions were in the first stages of a months-long meltdown and Congress had just passed the first “bailout” package. General Petraeus had just been appointed to lead CENTCOM. And a couple of Presidential candidates were in the midst of slugging through the last days of a bruising battle.

To be clear then, P.L. 110-417 was the final NDAA of President Bush’s eight-year term as President. It reflects the lessons learned from nearly seven years of the Global War on Terror, including the sojourn in Iraq and the difficulties in Afghanistan. And it reflects the sensibilities of a partisan battle led by Representative Henry Waxman on the alleged waste, fraud, and abuse of the Bush Administration’s spending priorities—particularly DOD spending on its efforts in Southwest Asia.

So what does this bit of ancient history have to do with us today? Well, among other things, the FAR Council is just getting around to implementing some of the requirements established by that Public Law.

One of the interesting provisions of the 2008 NDAA was Section 864, entitled, “Regulations on the Use of Cost-Reimbursement Contracts.” Section 864 said (in part)—

(a) In General- Not later than 270 days after the date of the enactment of this Act, the Federal Acquisition Regulation shall be revised to address the use of cost-reimbursement contracts.

(b) Content- The regulations promulgated under subsection (a) shall include, at a minimum, guidance regarding--

(1) when and under what circumstances cost-reimbursement contracts are appropriate;

(2) the acquisition plan findings necessary to support a decision to use cost-reimbursement contracts; and

(3) the acquisition workforce resources necessary to award and manage cost-reimbursement contracts.

(c) Inspector General Review- Not later than one year after the regulations required by subsection (a) are promulgated, the Inspector General for each executive agency shall review the use of cost-reimbursement contracts by such agency for compliance with such regulations and shall include the results of the review in the Inspector General's next semiannual report.

The foregoing seems fairly straightforward. As Representative Waxman, commented, “Section 864 requires regulations to address the use of cost-reimbursement-type contracts.” How hard could that be to misinterpret?

Well, here’s the FAR Councils’ interim rule intended to implement Section 864—what do you think?

Let’s first note that the FAR Councils believed that the numerous revisions to the FAR connected with this rule needed to be implemented on an interim basis, without benefit of public comment on a proposed rule, because of “urgent and compelling reasons”—including the fact that they had dawdled so long over the rule that the Inspector General was in danger of not being able to conduct its required compliance review in time to get any findings into its next semi-annual report.

And when we say “numerous revisions,” we mean it. Despite the seemingly straightforward nature of the law, the FAR Councils felt the need to revise the following FAR provisions—

  • 1.602

  • 1.603

  • 1.604

  • 2.101

  • 7.102

  • 7.103

  • 7.104

  • 7.105

  • 16.103

  • 16.104

  • 16.301

  • 32.1007

  • 43.302

  • 50.205

Interestingly enough, the FAR Councils also saw fit to go beyond the requirements of the Public Law, in order to require that contracting officers justify the use of any contract type other than firm, fixed price type. For example, FAR 16.103 (Negotiating Contract Type) was revised to read as follows—

(1) Each contract file shall include documentation to show why the particular contract type was selected. This shall be documented in the acquisition plan, or if a written acquisition plan is not required, in the contract file.

(i) Explain why the contract type selected must be used to meet the agency need.

(ii) Discuss the Government's additional risks and the burden to manage the contract type selected (e.g., when a cost-reimbursement contract is selected, the Government incurs additional cost risks, and the Government has the additional burden of managing the contractor's costs). For such instances, acquisition personnel shall discuss--

(A) How the Government identified the additional risks (e.g., pre-award survey, or past performance information);

(B) The nature of the additional risks (e.g., inadequate contractor's accounting system, weaknesses in contractor's internal control, non-compliance with Cost Accounting Standards, or lack of or inadequate earned value management system); and

(C) How the Government will manage and mitigate the risks.

(iii) Discuss the Government resources necessary to properly plan for, award, and administer the contract type selected (e.g., resources needed and the additional risks to the Government if adequate resources are not provided).

(iv) For other than a firm-fixed price contract, at a minimum the documentation should include--

(A) An analysis of why the use of other than a firm-fixed-price contract (e.g., cost reimbursement, time and materials, labor hour) is appropriate;

(B) Rationale that detail the particular facts and circumstances

(e.g., complexity of the requirements, uncertain duration of the work, contractor's technical capability and financial responsibility, or adequacy of the contractor's accounting system), and associated reasoning essential to support the contract type selection;

(C) An assessment regarding the adequacy of Government resources that are necessary to properly plan for, award, and administer other than firm-fixed-price contracts; and

(D) A discussion of the actions planned to minimize the use of other than firm-fixed-price contracts on future acquisitions for the same requirement and to transition to firm-fixed-price contracts to the maximum extent practicable.

(v) A discussion of why a level-of-effort, price redetermination, or fee provision was included.

(2) Exceptions to the requirements at (d)(1) of this section are--

(i) Fixed-price acquisitions made under simplified acquisition procedures;

(ii) Contracts on a firm-fixed-price basis other than those for major systems or research and development; and

(iii) Awards on the set-aside portion of sealed bid partial set-asides for small business.

In the foregoing quotation, note that the government has helpfully listed risks associated with other than firm, fixed price contracts. Let’s bring them down here for clarity, in case you skimmed over the language of the interim rule. Risks to be considered include:

  • Inadequate contractor's accounting system,

  • Weaknesses in contractor's internal control,

  • Non-compliance with Cost Accounting Standards, or

  • Lack of or inadequate earned value management system

As you ponder the list above, ask yourself just which government oversight agency will be determining the exact level of contract-related risk for any particular contractor. If you answered, “The DCAA,” then give yourself a prize. Yes, indeed, that same audit agency criticized by the Government Accountability Office and the DOD Inspector General for widespread and systemic audit quality failures concerning assessments of contractor internal control systems will be positioned to deny contractors awards of new contracts, if said contracts are other than firm, fixed price.

We’re sure that will work out well.

The FAR Councils seem to have anticipated our concerns. They wrote—

The Councils recognize that assigning adequate and proper resources to support the solicitation, award, and administration of other than firm-fixed-price contracts (cost-reimbursement, time-and-material, and labor-hour) contract is challenging. There is also great concern that a lack of involvement in contract oversight by program offices is primarily present in other than firm-fixed-price contracts.

The FAR Councils proposed a solution to the problem of inadequate resources. The solution is—

The Councils consider that greater accountability for the management and oversight of all contracts, especially other than firm-fixed-price contracts, can be gained and improved by requiring that properly trained CORs or COTRs … be appointed before award.

So that’s the solution. According to the FAR Councils, having more Contracting Officer Representatives and Contracting Officer Technical Representatives will ensure that the enumerated risks associated with other than firm, fixed-price contractors are effectively mitigated. Yeah, sure they will.

But we’re not done yet. Before we move on, let’s note another aspect of the interim rule.

Formerly, FAR 16.301-3 established the requirements for use of a cost-reimbursement contract. Prior to this rule, there were two primary requirements: (1) The contractor’s accounting system had to be adequate for account for contract costs, and (2) The government had to have adequate surveillance during contractor performance in order to assure that the contractor was performing in a reasonable efficient and effective manner. Now, FAR 16.301-3 reads as follows—

(a) A cost-reimbursement contract may be used only when-

(1) The factors in 16.104 have been considered;

(2) A written acquisition plan has been approved and signed at least one level above the contracting officer;

(3) The contractor’s accounting system is adequate for determining costs applicable to the contract; and

(4) Adequate Government resources are available to award and manage a contract other than firm-fixed-priced (see 7.104(e)) including—

(i) Designation of at least one contracting officer’s representative (COR) qualified in accordance with 1.602-2 has been made prior to award of the contract or order; and

(ii) Appropriate Government surveillance during performance to provide reasonable assurance that efficient methods and effective cost controls are used.

(b) The use of cost-reimbursement contracts is prohibited for the acquisition of commercial items (see Parts 2 and 12).

That doesn’t sound too bad until you take a look at the factors in 16.104. Among the twelve (12) factors discussed (which must be “considered” by the contracting officer), note this little gem—

(i) Adequacy of the contractor's accounting system. Before agreeing on a contract type other than firm-fixed-price, the contracting officer shall ensure that the contractor’s accounting system will permit timely development of all necessary cost data in the form required by the proposed contract type. This factor may be critical-

(1) When the contract type requires price revision while performance is in progress; or

(2) When a cost-reimbursement contract is being considered and all current or past experience with the contractor has been on a fixed-price basis. See 42.302(a)(12).

Stay with us here. Note that the last sentence directs contracting officers over to the regulations at 42.302(a)(12). Here’s what that bit says—

(12) Determine the adequacy of the contractor’s accounting system. The contractor’s accounting system should be adequate during the entire period of contract performance. The adequacy of the contractor’s accounting system and its associated internal control system, as well as contractor compliance with the Cost Accounting Standards (CAS), affect the quality and validity of the contractor data upon which the Government must rely for its management oversight of the contractor and contract performance.

Note the part we italicized for emphasis: “The contractor’s accounting system should be adequate during the entire period of contract performance.” What might that sentence mean?

Quite frankly, we’re not entirely sure what that sentence means. But consider this. Assume that DCAA issues an accounting system audit report identifying deficiencies in the contractor’s system, or weaknesses in its internal controls. Assume further that the contractor will submit a corrective action plan to remediate those deficiencies. Assume further that the Administrative Contracting Officer will have to decide whether the contractor’s corrective action plan will mitigate the government’s risk and that the system can be deemed “adequate pending implementation of corrective actions,” or if it will be deemed “inadequate” and payment withholds will be initiated. This is, of course, a very likely scenario, and one faced by many contactors today, with more to follow when the DFARS “business system” rule is finally issued.

Well, given the foregoing, we think that little sentence might just mean that no contractor’s accounting system can be considered adequate for other than firm, fixed-price contracts until all corrective actions have been implemented and until DCAA has issued a follow-up audit report telling the contracting officer that the contractor no longer has any system deficiencies and/or internal control weaknesses. In other words, one adverse DCAA audit report can be a death sentence for new contract awards, if those awards were to be on other than a firm, fixed-price basis.

What do you think? Do you think the FAR Councils went beyond Congress’ intent and overreached? Did they establish requirements for which existing resources are inadequate? Did they give too much power to DCAA to the detriment of the contracting process?

Despite the fact that the revisions were promulgated as an interim rule, the FAR Councils are still seeking public input. (The rule, link above, explains how to submit comments.) If you share our concerns with the interim rule revisions, perhaps you will be motivated to submit comments to the FAR Councils.

 

Proposed DFARS Rule Would Make Display of DOD IG Hotline Posters Mandatory

Nick Sanders
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DOD_Hotline_PosterWay back in 2007 and 2008, the FAR was significantly revised to eliminate the twenty year-old contractor “voluntary” disclosure program in favor of a new mandatory disclosure program. (For background, see our article right here.) A few months after the new “contractor disclosure program” started, we posted an update over here.

The FAR revisions mandated disclosure to the cognizant agency Inspector General, without regard to materiality. That led to a huge increase in disclosures (as compared to the volume of disclosures in the old “voluntary” program), and caused the DOD Inspector General to add staff in order to handle the workload. Moreover, the majority of the disclosures was of the garden variety “labor mischarging” type versus the headline-grabbing product substitution or falsified quality inspection report type. So the end result was the same as under the old voluntary program—the contractor credited the appropriate cost objective and that was pretty much the end of the story. It’s just that there were more players and more process steps to go through (which cost everybody more money).

From what we’ve heard and observed since then, we see no reason to change our initial assessment. Without revealing privileged information, suffice to say that we have had first-hand experience with nearly 30 contractor disclosures over the past two years. All of them were mundane, stupid, labor-charging issues. Some of them were largish, but the many were valued at less than $25,000. And what’s even more upsetting is that many labor-charging issues were not to a single contract, but were instead to indirect cost pools or to multiple contracts—thus diluting the Government’s “damages” even more.

So if your metric is quantity of disclosures, then the new “mandatory” disclosure program is a great success. But if your metric is dollars of government cost recovery or dollars of quantum versus administrative dollars spent disclosing and/or supporting audits of disclosures, then maybe you’re less sanguine about the situation.

So along comes a new, proposed, DFARS rule that purports to solve a problem that in reality doesn’t exist, and will tend to exacerbate an already tough situation.

On March 11, 2011, the DAR Council issued a proposed DFARS rule that “would require contractors to display the DoD Hotline in common work areas.”

Currently, the applicable FAR rule requires contractors to display the DOD IG Hotline poster in common work areas, but provides an exception when the contractor “has implemented a business ethics and conduct awareness program, including a reporting mechanism….” The proposed DFARS rule would eliminate that exception for DOD contractors, creating a situation where they must both maintain an internal reporting mechanism and display the DOD IG Hotline poster. Which either gives employees a choice of reporting mechanism or sows seeds of confusion, depending on your point of view.

Why the need for such a rule? According to the DAR Council—

GAO Report GAO-09-591, Regarding the Display of DoD Inspector General Fraud Hotline Posters by DoD Contractors, recommended that the DoD IG determine the need for defense contractors' display of the DoD IG's fraud hotline poster, including directing a contractor to display the DoD IG hotline poster in common work areas for performance of DoD contracts.

The DoD IG determined that DoD contractors, including contractors who have an ethics and compliance program that includes a reporting mechanism such as a hotline poster, need to display DoD fraud hotline posters in a common work area within business segments performing work under the contract and at contract work sites. …

The DoD IG finds that this exemption has the potential to make the DoD hotline program less effective by ultimately reducing contractor exposure to DoD IG fraud hotline posters and diminishing the means by which fraud, waste, and abuse can be reported under the protection of Federal whistleblower protection laws. Some contractor's posters may not be as effective as the DoD poster in advertising the hotline number, which is integral to the fraud program. The DoD IG is also revising the DoD IG fraud hotline poster to inform contractor employees of their Federal whistleblower protections.

Well, there you have it. After an exhaustive analysis, the DOD IG determined that it would be more effective to mandate display of DOD IG Hotline posters. Never mind that the current contractor disclosure program was generating so many disclosures that the IG needed to add staff. Never mind that employees might be confused regarding which reporting mechanism to use. And never mind that, if the current volume of allegations coming to the IG increased, then even more staff would have to be added.

Oh, wait. To that last point, about adding staff. Does anybody other than we here at Apogee Consulting, Inc. think that may have been a factor in the IG’s determination? Is this just another excuse for bureaucratic empire-building?

Well, maybe it is just us, then.

 
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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.