Learn from Learning Tree: Give Back Funds Owed to Uncle Sam
administrator
The Department of Justice reported on April 7, 2010 that
Learning Tree International, Inc. had agreed to pay $4.5 million to
settle allegations of violations of the False Claims Act. Now as FCA
settlements go, $4.5 million isn’t particularly large. In September
2009, Pfizer paid the U.S. Government $1 billion as part of an FCA
settlement. In April 2009, Network Appliance (NetApp) paid $128 million
as part of its FCA settlement. (For those interested, the Top 100 FCA
settlements are listed here.)
The point is, a settlement of $4.5 million indicates either a weak or a
complex case.
But what interested us was the
nature of Learning Tree’s alleged FCA violation. According to the DOJ
announcement, Learning Tree had a contract with the General Services
Administration (GSA) to provide information technology training to
Federal government employees. Learning Tree sold its courses in
multiple-course packages known as “vouchers” or “passports,” according
to the DOJ. Normally, one purchases a passport that entitles one to
attend several courses over a period of time. Obviously Learning Tree
receives the passport price up-front and if one doesn’t use all the
courses one has purchased before the expiration date, then too bad.
But
according to the DOJ, the GSA negotiated different payment terms in
order to “prevent the
United States from paying for training services that are not actually
rendered.” The contract reportedly required that Learning Tree invoice
the Government only for courses that were actually taken—or, as the DOJ
phrased it, “as services are provided.” Learning Tree was accused of
“knowingly invoic[ing] federal agencies in advance for multi-course
training packages before employees of the purchasing agencies had
attended the full number of courses available under each.” In addition,
the company allegedly retained the fees it had billed in advance after
the passport period had expired and it had become clear that the federal
employees would not be able to take the courses for which the Federal
government had been billed. It never offered its Federal customers a
refund or credit for funds it had billed in advance, for services never
provided—i.e., for money to which it was not contractually entitled.
We take away two lessons from this story. The first
lesson is that commercial business practices don’t often work well in
the world of Federal government contracting. What determines acceptable
business practices is determined by the contract terms and conditions,
not what makes “common sense.” In particular, contractors must clearly
identify their Federal contracts and make sure their accounting and
billing departments treat them differently than their other commercial
contracts. Billing terms and conditions must be communicated to the
accounting and billing departments to avoid problems. When all else
fails, read the contract and do what it says.
The second lesson concerns failure to promptly disclose
to one’s Federal customers that they are due a refund or credit. This
most commonly happens when final indirect cost rates are less than
contractual billing rates on cost-plus and/or T&M contract types.
Many companies see no reason to let their customers know they’ve been
overbilled, even though contract clause 52.216-7 (“Allowable Cost and
Payment”) clearly states that they must do so. This situation is also
found when a company receives a year-end volume rebate or retroactive
discount from a commercial vendor—and they do not record that
transaction as a credit to the original debit (expense) they included as
either a direct or indirect cost billed to the Federal government (in
violation of the cost principle at FAR 31.201-5 (“Credits”). In either
situation, companies are holding on to funds that don’t belong to
them—also known as receipt of “overpayments”.
The Federal government takes a dim view of contractors
that don’t promptly notify customers of overpayments that they’ve
received. Learn the lesson from Learning Tree and don’t bill Federal
customers in violation of contract terms, and promptly notify customers
when overpayments are received. Don’t be accused of violations of the
False Claims Act.
Next Generation UAVs
administrator
It would be hard to
argue that the Unmanned Aerial Vehicle (UAV) is the defense acquisition program
success story of the past decade. Ever since General Atomics’ MQ-1
Predator moved from a CIA-based reconnaissance role to an Air Force-led
offensive role during the Bosnian conflict in the late 1990’s, the
market for the “type” has grown exponentially, with multiple vehicles
filling niches at all levels. Every contractor seems to have its own
UAV that it touts as the best thing since the rifled muzzle. Defense
Industry Daily recently estimated that the market for UAV systems could
top $13.6 billion within five years. This article will take a brief
look at some of the “next generation” UAVs coming onto the scene.
PREDATOR C AVENGER
General
Atomics successfully produces many versions of the Predator, ranging
from the MQ-9 Predator B to the Extended Range/Multi-Purpose (ER/MP) Sky
Warrior. Here’s a nice overview article
on the various versions of the UAV. Here’s a quick video of the
Predator B in action—
But
the latest version of the Predator—the
Avenger—is the latest and greatest version.
What
makes the Predator C different and exciting?
General
Atomics’ next generation Predator is powered by a jet engine, unlike
the previous versions. And also unlike the previous versions, the
Avenger is clearly designed for stealth. The Avenger flies higher and
faster than the Reaper, and may be designed for carrier operations
(perhaps to compete with the Northrop Grumman N-UCAS, which is discussed
below).
NORTHROP
GRUMMAN FIRE SCOUT MQ-8
According to this article, this unmanned
helicopter was originally developed for the Navy, but subsequently was
taken over by the Army as part of its Future Combat Systems (FCS)
program. The Fire Scout was identified as one of the first “spin outs”
from that troubled program. The Navy now has its own version (known as
the Sea Scout), which has been deployed on the USS McInerney.
Additionally, Northrop Grumman expects (or hopes) to deploy the UAV on
the Navy’s new Littoral Combat Ships. Here’s a brief overview of the program.
Here’s a nice video of
the Fire Scout undergoing testing, with musical accompaniment.
NORTHROP GRUMMAN
N-UCAS X-47B
Another UAV under development is
Northrop Grumman’s Navy Unmanned Combat Air System (N-UCAS) X-47B.
Originally this was one of the two contenders for the “Joint” Unmanned
Combat Air System, but in a deft political move the joint program was
killed and the Navy emerged—along with Northrop Grumman—as the sole
winner. The X-47B is designed for stealthy flight, and also fully
autonomous carrier launches and recoveries. The first aircraft is in
testing now. Here’s a pretty cool video combined real film with CGI to
show how the X-47B might operate when deployed.
LOCKHEED MARTIN
RQ-170 SENTINEL
One of the more interesting “secrets” of the war in
Southwest Asia is the recent confirmation of a new stealthy UAV,
Lockheed Martin’s RQ-170 “Sentinel”. The Air Force acknowledged
existence of the aircraft reluctantly, and only when faced with grainy
photographs taken of the vehicle at Kandahar International Airport in
Afghanistan. Not much is known about this UAV, except that it is
believed to be the first stealthy UAV that has been publicly
acknowledged. We can see from the picture below that the RQ-170 is a
jet-powered, tailless, “flying wing” design, reminiscent of the B-2
bomber. The RQ designation indicates that it is unarmed, and it appears
to have pods for reconnaissance and/or communications on the upper side
of its wings. Here is a link to a Wikipedia
article—but be warned that the article is lacking details.
BOEING X-37B Orbital Test Vehicle
Not
strictly a UAV in the same sense as the other aircraft in this article,
the X-37B appears to be a “robotic spacecraft” and resembles the Space
Shuttle more than a traditional aircraft or helicopter. As with the
Sentinel, not much is known about this vehicle. Apparently, it is the
result of more than a decade of design and development. It is scheduled
to be launched aboard an Atlas V rocket from Cape Canaveral in
mid-April 2010. According to this article,
“The Air Force says the program objectives are ‘space experimentation,
risk reduction and … development [of] reusable space vehicle
technologies.’” The article notes that the spacecraft may be in orbit
for up to 270 days. This article from CNET
notes that the spacecraft will deploy solar panels to generate
electricity in orbit. (The article also has some pics of the
spacecraft, such as the one shown below.)
EADS TALARION
But
all is not rosy in the UAV marketplace. EADS, which famously has waffled on bidding for the US Aerial
Tanker replacement, and has had development problems on both its Airbus A380 commercial jet and its Airbus A400M military transport
planes, has also had problems developing its Euro-centric UAV. The
Talarion is a Medium Altitude Long Endurance (MALE) focused on the UAV
needs of France, Germany, and Spain. It is no coincidence that those
countries are EADS shareholders. Other countries, including the United
Kingdom of Great Britain, have also been mentioned as possible buyers.
EADS is currently
paying for Talarion system development and risk-reduction studies, even
though it still lacks firm orders. According to this Der Spiegel article, if EADS doesn’t
receive firm orders, the program will be “frozen”. The article reports—
EADS defense chief Stefan Zoller
said the Talarion project would have to be frozen by this summer if
Germany, France and Spain do not place concrete orders for the drone.
Developing the drone will cost the three countries an estimated total of
€1.5 billion, plus a further €1.4 billion to procure 45 models. So far
the countries have invested €60 million into the project.
The
article concludes: “The company has said it would continue to invest
its own money in the project, but only until mid-2010.”
There
are many more UAV programs and aircraft that we could have discussed,
but these six seem to represent a good cross section. Of course, there
are many smaller drones and UAVs that are in use today, and the
marketplace keeps expanding. However, it is obvious from the Talarion
program that just having a UAV isn’t enough; one must also have
customers with money and need.
DOD SARs Paint Bleak Picture of Problematic Program Management
administrator
On April 2, 2010 the Department of
Defense released its annual Selected
Acquisition Reports (SARs). As the DOD release
noted—
SARs summarize the latest
estimates of cost, schedule, and performance status. These reports are prepared annually in conjunction with
submission of the President's Budget. Subsequent
quarterly exception reports are required only for those programs
experiencing unit cost increases of at least 15 percent or schedule
delays of at least six months. Quarterly SARs are
also submitted for initial reports, final reports, and for programs that
are rebaselined at major
milestone decisions.
In summary, the December 2009 SARs
reported an aggregate increase in program estimates at completion (EACs)
of $107,241 million, which is an increase of 7.2 percent over the prior
quarter’s SARs. DOD reported that—
The cost increase is due
primarily to a net increase in planned quantities (+$44,851.5 million),
higher program cost estimates (+$51,338.8 million), an increase in
support requirements (+$25,434.6 million), and a net stretchout of development and procurement
schedules (+$8,973.4 million). These
increases are partially offset by the application of lower escalation
rates (-$23,980.3 million).
The DOD announcement also included a
listing of those programs that have breached
their Nunn-McCurdy limits. (We previously reported on two of those
programs here.)
There are two types of Nunn-McCurdy breaches. “Critical” breaches are
those programs that have experienced unit cost increases of at least 25
percent when compared to the current Acquisition Program Baseline (APB)
or at least 50 percent when compared to the program’s original APB.
“Significant” breaches are those programs that have experienced unit
cost increases of between 15 and 25 percent of the current APB, or that
have experienced unit cost increases of between 30 and 50 percent of the
original APB.
DOD notes that—
Pursuant to 10 U.S.C. § 2433, for those programs with
significant breaches, Congressional notifications are required, as well
as detailed unit cost breach information in the SAR. For those programs with critical breaches, notifications and
unit cost breach information are also required. In
addition a certification determination by the Under Secretary of
Defense for Acquisition, Technology & Logistics must be made no
later than June 1, 2010.
For this reporting period there are
six programs with “critical” breaches and one program with a
“significant” breach. In our previous article (link above) we discussed
breaches associated with the ATIRCM/CMWS program and WGS satellite
program. In addition, DOD announced breaches associated with the
following programs:
Apache Helicopter, Block III (AB3) – Breach does not stem from
poor program management. It stems from the addition of 56 new aircraft
to the APB, whereas the original APB only envisioned remanufacture of
existing aircraft.
Zumwalt-class
Destroyer (DDG 1000) – Breach does not stem from poor program
management. It stems from reduction in planned number of ships from 10
to 7.
F-25 Lightning II Joint Strike Fighter (JSF) – No surprises here. Breach stems from “larger-than-planned development costs driven by …
weight growth and a longer forecasted development schedule, increase in
labor and overhead rates, degradation of airframe commonality, lower
production quantities, increases in commodity prices (particularly
titanium), major subcontractor cost growth, and the impact of revised
inflation indices.” Additional causal factors included “substantially
higher change traffic (i.e., changes in design not resulting from
changes in requirements or capability), which led to increased
engineering and software staffing; extended manufacturing span times;
and delayed delivery of aircraft to flight test, led to a further slip
of the development and flight test program.”
Remote
Minehunting System (RMS) –
Breach stems from a combination of factors, including “a reduction in
production quantities [cut from 108 to 54 units], the use of an
incorrect average unit cost as a basis of estimate in the 2006 program
baseline calculation, and an increase in development costs needed to
address reliability issues.”
C-130 Avionics
Modernization Program (AMP) – Breach stems from a
variety of factors that might be characterized as a failure to plan.
According to the DOD, “the program amended its strategy to provide for
depot installs during the Future Years Defense Program (FYDP) and
amended its estimate for the level of spares. It
also added costs for training systems not previously included, adjusted
for current inflation indices, and incurred a one-year gap in
production.”
DOD also reported that 35 other programs (some of
which have been discussed here before) experienced “program cost
changes” that did not give rise to Nunn-McCurdy breaches, or that
actually had decreases in estimated program
costs. You can find the entire list by clicking on the link at the
beginning of this article. In addition, DOD published a summary
document that can be found here.
As can
be seen from the foregoing, some Nunn-McCurdy breaches are caused by
factors beyond the program team’s control—such as decreases in the
number of units to be acquired or the addition of work beyond the scope
of the original program baseline. Some breaches, however, appear to be
caused by factors that were within the control of the program team. We
might suggest that those programs consider
upgrading their management effectiveness, lest they repeat the fate of
the Armed Reconnaissance Helicopter and Future Combat Systems—to name
just two of several programs recently terminated or severely curtailed.
KBR Bills DOD for its Private Security Force, Faces False Claims and Other Charges
administrator
On April 1, 2010 the
Department of Justice (DOJ) announced that
it had filed suit against LOGCAP contractor KBR, alleging violations of
the False Claims Act. Unfortunately for
KBR, this was no April Fool’s
Day joke. According to the DOJ press release—
The
government’s lawsuit alleges that some 33 KBR subcontractors, as well
as the company itself, used private armed security at various times
during the 2003-2006 time period. KBR allegedly violated the LOGCAP III contract by failing to
obtain Army authorization for arming subcontractors and by allowing the
use of private security contractors who were not registered with the
Iraqi Ministry of the Interior. The subcontractors using private
security are alleged to have also violated subcontract terms requiring
travel only in military convoys. The government’s lawsuit further
alleges that at the time, KBR managers considered the use of private
security unacceptable and were concerned that the Army would disallow
any costs for such services. KBR nonetheless charged the United States
for the costs of the unauthorized services.
In
a statement, KBR said the Army was aware of the private security costs.
‘Nothing in KBR's contract
with the Army prohibits KBR or its subcontractors from using private
security to fulfill its mission to support America's troops,’ the company said. The company added that the Army breached its contract
responsibilities ‘by
repeatedly failing to provide the necessary force protection and, in
fact, frequently left KBR, its employees and its subcontractors
unprotected.’ KBR said it
had had taken that issue to the Armed Services Board of Contract Appeals
in 2008.
This Business Week article quotes KBR as saying that “it believes the costs incurred by
it and subcontractors ‘were reasonable, necessary and appropriate under
the contractual arrangement between KBR and the Army.’”
We reported
recently on the tension between using
Government personnel versus private security personnel to support military operations. In that article, we discussed the GAO’s report to Congress, in
which it concluded that, in some instances, use of private contractors was saving the State Department more than 10 times what it would have paid for equivalent Government personnel.
Unfortunately DOD was unable to provide GAO with sufficient information
to support a meaningful analysis. Nonetheless, we were struck by the
enormous cost savings the Government received via use of
non-governmental personnel to support military operations. Sure, that
point is not dispositive in the matter of whether KBR billed DOD for
costs expressly prohibited by its contract, or whether DOD breached its
duty to protect KBR employees in the Southwest Asia Area of Operations.
But it’s an interesting point, nonetheless—and one that we believe is
not getting sufficient play in the “mainstream media.”
Meanwhile,
this article by the Indianapolis Star reported that 47 National Guardsmen have refilled a lawsuit against KBR
in a Houston District Court. This lawsuit is one of many filed by
“hundreds” of members of the National Guard who provided security for
KBR personnel at the Qarmat
Ali water-pumping station near Basra, Iraq—according to the report. The
Star reported that—
The plant the KBR employees
were rebuilding was vital to restoring oil production in the area. The
site initially was covered in an orange, sand like dust, the remnant of an anti-corrosive chemical
that had been spread around, according to the suit. It contained heavy concentrations of a carcinogen called hexavalent chromium. … The possible exposure has inspired legislation in Congress
that would create a registry of affected service members and extend
their access to health care.
We have noted a spate of recent
KBR-related “issues” over the past few months. For instance, the Franken
Amendment reportedly originated with a KBR
employee’s rape at the hands of her fellow co-workers. In another
article, we discussed allegations that KBR
billed DOD for excessive levels of maintenance staff. And of course,
like all other LOCAP contractors, KBR spends its fair share of time
before the Commission on Wartime Contracting,
getting grilled on staff drawdown, DCAA audit issues, and alleged
deficiencies in its “business systems.”
One might argue that
“where there’s so much smoke, there must be fire.” But another point of
view might be that these are complex matters involving disputed facts
and circumstances, and that it will take a wise trier of fact to
determine where fault lies. We favor the latter interpretation.
Real Stories from the World of Government Oversight
administrator
he Federal government’s exercise
of contractor oversight has been in the news for months, and it’s been
the topic of several articles on this site as well. From the Commission
on Wartime Contracting to the proposed
DFARS rule on contractor “business systems,”
and from the “ad hoc Senate Committee on Contracting Oversight” to allegations of illegal favoritismtowards a certain LOGCAP III contingency contractor (who shall
remain nameless but whose initials are KBR) … the public has been
inundated with committee hearings and testimony and reports. But what about the “real world”? Can
anybody point to exercise of real oversight and the give-and-take of a
military leader being grilled by a Congressman over failure to properly
assess risk and plan for contingencies?
We
can.
Oh boy, do we have an example of
“real oversight” to share with you.
By way of
background, the Defense Department has been building new facilities and
preparing to transfer large numbers of personnel, ordnance, and weapon systems from bases in Japan
and elsewhere to the small island of Guam. The increase is so large—and
so impactful—on the island’s current population
that the island is now commonly referred to as
“Fortress Guam”. (The indigenous Guam population is largely comprised of U.S. citizens, by the way.)
Here’s a link to a 26 minute-long 2007 Australian
documentary on the military buildup on Guam, for
those who want more background.
Naturally,
Congress has been concerned about the build-up on Guam. There have been several hearings and much
testimony collected over the past few years. We came across this video
of one of those recent hearings,
where Representative Hank Johnson (D-Georgia) grilled Navy Admiral Robert
Willard (Commander, U.S. Pacific Command)
over potential problems associated with the military buildup.
Here is a two-and-a-half minute video of that encounter. Pay close
attention at the 1:20 mark.
We congratulate Admiral Willard on
maintaining his demeanor in the face of Congressman Johnson’s probing
questions. In particular, his
response to one hypothetical scenario advanced by the Congressman (“…
we don’t anticipate that.”) defused a potentially difficult encounter.
But we have to ask—doesn’t this Admiral
have, you know, important things to
accomplish? Doesn’t he have the lives of literally thousands of service
men and women at risk right now, and shouldn’t he be looking after those thousands of men and women, instead of
wasting his time in this sham of an “oversight” process?
If this is
real Congressional oversight, then we need to stop it, right now. We need to get our military leaders
back to leading their commands.
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.
