Forget health care costs for a minute. Let’s first lay a bit of foundation before we get into the meat of what needs to be discussed….

In Government contract cost accounting, not all costs are created equal. Beyond the distinctions between “allowable” and “unallowable” there are also “expressly unallowable” costs as well as “directly associated unallowable costs.” We want to focus on the distinctions between costs that are merely unallowable and those costs that are “expressly unallowable.”

When submitting the final indirect cost rate proposal (also known as the annual incurred cost submission), FAR 42.703-2 discusses that a certification must accompany the proposal. The certification is formally required by the contract clause 52.242-4 (“Certification of Final Indirect Costs”). By executing the certification, the contractor represents that all costs being claimed are allowable pursuant to the applicable cost principles, and that “This proposal does not include any costs which are expressly unallowable …”

The contract clause 52.242-3 describes what happens if a contractor includes unallowable costs in its final indirect cost rate proposal, despite its certification to the contrary. Such costs are subject to penalties. The clause prescribes—

If the Contracting Officer determines that a cost submitted by the Contractor in its proposal is expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs, the Contractor shall be assessed a penalty equal to—

(1) The amount of the disallowed cost allocated to this contract; plus

(2) Simple interest, to be computed—

(i) On the amount the Contractor was paid (whether as a progress or billing payment) in excess of the amount to which the Contractor was entitled; and

(ii) Using the applicable rate effective for each six-month interval prescribed by the Secretary of the Treasury pursuant to Pub. L. 92-41 (85 Stat. 97).

If the Contracting Officer determines that a cost submitted by the Contractor in its proposal includes a cost previously determined to be unallowable for that Contractor, then the Contractor will be assessed a penalty in an amount equal to two times the amount of the disallowed cost allocated to this contract.

(Readers wanting to dig deeper into the imposition of penalties should also look at the DCMA’s Guidance to Contracting Officers for negotiating final overhead rates. Here is a link to get you started.)

What is meant by “expressly unallowable” has been a source of disagreement between contractors and government representatives. The definitions section of FAR Part 31 states—

‘Expressly unallowable cost’ means a particular item or type of cost which, under the express provisions of an applicable law, regulation, or contract, is specifically named and stated to be unallowable.

The foregoing definition is not particularly conducive to resolving disagreements between government and contractor. In practice, DCAA tends to assert that any unallowable cost is expressly unallowable; whereas contractors tend to believe that very few costs are expressly unallowable. Alcohol, charitable contributions, and amortization of goodwill are among the few areas of agreement. The other cost principles are fertile ground for dispute.

In June 2002, the Armed Services Board of Contract Appeals (ASBCA) discussed the concept of “expressly” unallowable costs in the appeal of General Dynamics (ASBCA No. 49372). Although the decision subsequently was reversed (on other grounds) on appeal, the Court’s opinion stands as the most lucid discussion of the topic. The Court opined—

We do not believe the determination of ‘express unallowability’ can turn solely on whether the contractor made a ‘good faith effort’ to comply with the particular cost principle involved, although subjective good faith is important. We think Congress intended the standard to be an objective one. The FAR and CAS definitions of ‘expressly unallowable’ point to the need to examine the particular principle involved in light of the surrounding circumstances. Moreover, since Congress adopted the ‘expressly unallowable’ standard to make it clear that a penalty should not be assessed where there were reasonable differences of opinion about the allowability of costs, we think the Government must show that it was unreasonable under all the circumstances for a person in the contractor’s position to conclude that the costs were allowable. The scope of the inquiry will vary with the clarity and complexity of the particular cost principle and the circumstances involved. Under 10 U.S.C. § 2324(e)(1)(F), for example, the ‘costs of alcoholic beverages’ are unallowable and may leave little room for debate, short of a discussion of alcohol levels. On the other hand, the analysis required under 10 U.S.C. § 2324(k) is far more complicated and the answer not necessarily obvious, particularly when a settlement agreement must be consulted. See also 10 U.S.C. § 2324(e)(1)(N), now (e)(1)(O). [Emphasis added.]

Accordingly, our position is that the “expressly unallowable” standard is a high bar and difficult for the government to impose.

The foregoing is necessary prelude for the subject of this article.

On September 24, 2010, DCMA issued this guidance to the DOD “Contracts Community”. The guidance was short and simple. It said—

• DCAA found that some defense contractors are inappropriately charging the Government for health benefit costs for dependents that are no longer eligible for benefits under the contractors' plans.  Based on their findings, DCAA issued audit guidance on ineligible dependent health benefit costs in MRD 09-PSP-016(R). That guidance states that the costs are expressly unallowable, and therefore subject to penalties if included in a contractor's final indirect cost rate proposal.

• We have reviewed DCAA's audit guidance and agree that the costs are expressly unallowable and subject to penalties if included in a contractor's final indirect cost rate proposal. 

• If the ACO determines that the costs are unallowable, the ACO shall treat the costs as expressly unallowable costs.

• As a result, we are revising the Final Overhead Instruction to ensure ACOs properly assess penalties on these costs.

We told you about DCAA’s focus on “ineligible” dependent health care costs last year, in this article. We called the audit guidance “troubling” and made some suggestions regarding what contractors might do to prepare for DCAA’s audit approach. Subsequently, we’ve learned more about this topic (mostly from contractors who have been audited) and we think it’s a tempest in a teapot. Quite simply, the amount of costs at issue just isn’t that big.

But we think the government is going to have trouble meeting the standard established by the ASBCA regarding the test for “expressly unallowable” costs—particularly with respect to the “grace periods” offered to employees who need to report changes in the eligibility of dependents.

That said, we’re also concerned by DCMA’s guidance, which continues a troubling trend of reducing the discretion of Contracting Officers in favor of centralized direction. The current DCMA guidance (link above) requires that an Administrative Contracting Officer (ACO) must generate “an affirmative statement that the ACO agreed or disagreed with each finding and recommendation made by DCAA or DCMA specialists … and whether or not the assessment of any penalties and interest is appropriate.”  We have difficulty seeing why the ACO needs to follow that direction, when there is no discretion to disagree.

 

 

We’re back from the Apogee Consulting, Inc. annual fall maintenance shut-down, and ready to catch-up on some news. Here we go—

 

1. We previously reported the sordid little tale of two former Staff Sergeants in the U.S. Army, stationed at a Forward Operating Base in Afghanistan, who accepted bribes and falsified documents in order to facilitate theft of fuel by a government contractor. Our prior story reported that (former) Staff Sergeant Michael Dugger (age 27) had pleaded guilty to one count of receiving a bribe as a public official, but that his alleged co-conspirator, (former) Staff Sergeant Stevan Ringo (age 26), had turned-in a plea of not guilty. Well that’s changed.

On September 24, 2010, the Department of Justice announced that Ringo had decided to plead guilty to one count of bribery. Ringo, like Dugger, now faces up to 15 years in prison plus monetary fines. As the DOJ reported—

Ringo was stationed at Forward Operating Base (FOB) Shank, a U.S. Army installation in the Logar Province of Eastern Afghanistan. FOB Shank supports U.S. military operations in Afghanistan in various ways, including through fuel receipt and redistribution. More specifically, the Army stores large quantities of fuel at FOB Shank and redistributes that fuel to installations in the surrounding area through government contractors. Ringo’s responsibilities at FOB Shank included supervision of that fuel redistribution process.

In his guilty plea, Ringo admitted that between December 2009 and February 2010, he accepted more than $400,000 in cash payments from a government contractor in exchange for creating and submitting fraudulent paperwork permitting that contractor to steal fuel from FOB Shank. The total value of the fuel stolen in the course of the scheme was nearly $1.5 million.

2. We have reported (several times) on compliance implications associated with falsely certifying business socioeconomic status. For example, in this article we reported on a firm that settled allegations it improperly reported the extent to which minority and disadvantaged business enterprises were performing work on its public construction contract, and in another article we reported the story of an Alaska Native Corporation (ANC) that was alleged not to qualify for status as an SBA 8(a) business. Here’s a story about affiliated companies that falsely claimed to be HUBZone business entities.

According to this DOJ announcement—

CSI Engineering and CSI Design Build, located in Beltsville, Md., and their president, Debdas Ghosal, have agreed to pay the United States $200,000 to settle claims that they used false statements to obtain contracts from several government agencies. … The United States alleged that CSI Design Build falsely represented to the SBA and other government agencies that it maintained its principal office in a designated HUBZone location in Maryland. According to the government, CSI Design Build actually operated as part of CSI Engineering, which was not located in a HUBZone. Both companies are owned by Debdas Ghosal. Despite not qualifying for the HUBZone program, CSI Design Build was awarded contracts that had been set aside for qualified HUBZone companies based upon the false statements it made to the SBA and the contracting agencies. The company obtained HUBZone contracts from the Army, the Department of Labor, the Department of Homeland Security and the Smithsonian Institution.

As the DOJ release notes—

Under the HUBZone program, companies that maintain their principal office in a designated area and employ 35 percent of their workforce from that area, among other requirements, can apply to the Small Business Administration (SBA) for certification as a HUBZone small business company. HUBZone companies can then use this certification when bidding on government contracts. In certain cases, government agencies will restrict competition for a contract to HUBZone-certified companies.

It was not made clear how the $200,000 settlement was reached. So we are left to wonder whether it was based on the number of false statements made, the number of false claims submitted under contracts tainted by the false statements, or whether it had something to do with profits made under the fraudulently obtained contracts. It would be helpful to us—and we believe to our readers as well—if the DOJ would clarify whether the settlement made such improper business practices unprofitable, or not.

3. If you’ve seen our presentation on the “DOD Oversight Wars” you know that one of the great unanswered questions of 2009 was why then DCAA Director April Stephenson never fired any of the audit agency executives who were accused of such infractions as allowing audit scope to be influenced by buying commands (and/or contractors), changing audit findings, and whistle-blower retaliation. Clearly, taking action would have appeased the agency’s critics and might have helped her keep her job. We’ve seen speculation that her hands were tied by agency counsel, who forbade her from taking any action while investigations were open against the individuals (who after all were entitled to the protections of their civil service positions). But we’ve never seen anything definitive, and it has remained one of the mysteries of the situation.

So we were very interested in this recent report by Robert Brodsky at GovExec.com, in which he noted a one-line September 27, 2010 memo to DCAA employees, stating that, “in light of the investigations at DCAA,” Ms. Susan Barajas was “no longer an active DCAA employee.” According to the article, Ms. Barajas was the Deputy Director of the Western Region, and was implicated in some of the shenanigans cited by the GAO in the two audit quality reports it issued, which were subsequently confirmed by the DOD Inspector General. As the article noted—

It is not clear whether the investigations Fitzgerald referred to in his memo on Barajas' departure are related to the 2008 GAO report, but if they are, the deputy regional director would be the first DCAA career employee to face substantive disciplinary action as a result of the findings.

As is the case with almost all GovExec.com articles about the troubled Defense audit agency, the comments were brutal. That said, a couple of them caught our eye. Here they are, unedited and unverified:

“The agency wide memo from Director Fitzgerald sounds great but why is that many within DCAA are saying that Barajas was allowed to retire at age 55 with her full pension. DCAA allowed her to remain on the payroll for two years after all these findings came to light and then retire with her full pension and no penalty for leaving early. Why were these facts not reported? This woman went after little people and showed no mercy, yet she was allowed to hang around for over two years and then collect her six figure pension. Just goes to show you how there are different rules for different people within DCAA. But hey at least we got rid of one bad egg. Why not ask the Western Regional Director who was her boss to leave or do we have to wait ten years until he is 55? We have many more who need to call it a career.”

“In an old school, good-old-boy Agency, 2 women are made the scapegoats and forced out.”

“It seems to me her departure is being percieved as a sort of chemo-therapy. We're not sure which was worse, the cure or the disease. The director is limited in what he can do, not so much the political appointees; the Secretary of Defense could have taken an interest in correcting this agency a long time ago. He still has a chance to clear out the Executive Steering Committee and give the director a chance to make positive changes.

At some point the agency is going to have evolve into a federal agency, follow the law, provide a service to tax payers, and a good start could be adhering to a code of ethics - real philisophical ethics, not the auditor ethics that are being ignored anyway. It doesn't take much time to see the left hand has no concept of the right hand. Contridiction exists in practically everything we do - and we look like a joke.”

We have much more to write about—but we’ll save additional topics for another day.