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Government’s Delay Leads to Contractor Victory in Defective Pricing Dispute

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In a recent article on the DOD Inspector General’s semiannual report to Congress, we noticed that the DOD IG reported on the status of “significant post-award contract audits”.  (See Appendix E of the DOD IG report, linked at the end of this article.)  According to the IG’s report, as of September 30, 2009 there were 1,617 open audits that covered $5.06 billion dollars worth of DCAA-questioned costs.  Of that total, 153 were in litigation and 1,085 were considered “overage”—i.e., not dispositioned by the cognizant Contracting Officer within 6 months of receipt.   The amount of questioned costs associated with the overage contract post-award audit reports was $2.66 billion.

 

This matters because Contracting Officer delays in dispositioning audit findings can lead to a forfeiture of amounts to which the government would have otherwise been entitled in a court of law, as a very recent case at the Armed Services Board of Contract Appeals (ASBCA) demonstrates.

 

McDonnell Douglas Services, Inc. (MDS) vs. United States (ASBCA No. 56568, 12/02/2009) involved a “post-award” (aka “defective pricing”) DCAA audit finding related to MDS’ subcontractor’s proposed costs under its contract with the Royal Saudi Air Force for Foreign Military Sales (FMS) Technical Support Program (TSP) services in support of the Saudi F-15 fleet.  (Note we have written about the FMS program, in general, here.) MDS was awarded a letter contract effective May 1, 1997 and that contract was definitized in early October, 1997. Pursuant to the Truth-in-Negotiations Act and its contract clauses (52.215-22 and 52.215-24), MDS certified that its cost or pricing data was current, accurate, and complete as of October 2, 1997.

 

MDS’s subcontractor, Alsalam Aircraft Company (Alsalam) submitted its proposal to MDS on or about October 8, 1996.  As the court noted, “Prior to award, Alsalam had submitted numerous documents to the Defense Contract Audit Agency (DCAA) containing or transmitting cost and pricing data.  DCAA reviewed the documents and data and issued pre-award audit reports on 16 December 1996 and 16 April 1997.” Alsalam certified that its cost or pricing data were current, accurate, and complete as of April 25, 1997, and it began performance on May 1, 1997.  (These dates are important to the case, trust us.)

 

Less than a year after starting contract performance (February 10, 1998), DCAA’s European Branch Office (DCAA EBO) initiated a “post-award” audit to evaluate whether Alsalam had complied with the disclosure requirements related to its subcontract pricing.  On July 31, 1998 (five months later), the DCAA EBO issued a “preliminary Audit Report” in which it alleged that Alsalam had overstated both its site overhead and TSP program overhead costs because (1) Alsalam failed to include forecasts for future contract direct labor dollars in its proposed site overhead allocation base, and (2) Alsalam had failed to exclude unallocable amortization costs from its TSP overhead pool.  (With respect to the latter finding, it seems that Alsalam had included an amount for amortization of “pre-operating costs” in its TSP overhead pool.)  The DCAA recommended a downward price adjustment of $3.12 million.

 

Subsequently (May 3, 2000), DCAA revised its report and recommended a downward adjustment of $2.9 million.  The revised audit report did not change any of the findings; it simply changed the resulting impact of the findings. Alsalam disputed the preliminary findings in a September 2, 2000 response.  DCAA EBO issued its final audit report to DCAA’s Boeing St. Louis Resident Office on March 22, 2001.  In the final report, DCAA EBO recommended a downward price adjustment of $1.67 million—but, again, the underlying findings did not change significantly. The final report noted “coordination” between DCAA and the cognizant Air Force Contracting Officer at Warner Robins Air Logistics Center.

 

Just to recap the timing, DCAA initiated its audit of Alsalam in February, 1998 and issued its final audit report on March 22, 2001—more than three years after starting its audit work.  But that delay wasn’t really a problem; the problem was how long it took the St. Louis DCAA auditorso do anything with the DCAA EBO audit report.

 

It took an additional 14 months (until May 14, 2002), for the local DCAA St. Louis auditors to send a letter to the Boeing Company (who had acquired MDS during the time period) seeking “comments before we issue our final audit report” which recommended a prime contract price adjustment of $2.025 million (an amount that included MDS overhead and profit applied to Alsalam’s questioned costs).  In that letter, DCAA St. Louis reiterated the basis for the recommended price adjustment, which again had not changed from the original DCAA EBO findings.  The final Audit Report was issued to the cognizant Warner Robins Contracting Officer by DCAA St. Louis on June 17, 2002—nearly 52 months after DCAA EBO initiated its audit work.  But that delay wasn’t the problem; the problem was how long it took the cognizant Contracting Officer to do anything with the DCAA St. Louis audit report.

 

It took nearly another six years for the cognizant Contracting Officer to issue a final decision on the matter.  (In the meantime, there had been a change in Contracting Officer assignment to the contract.) As the judge noted—

 

The CO cited DCAA’s Audit Report No. 3421-2002H42097001, the incorporated subcontractor Audit Report No. 2191-1998S42000315, and the same three bases for price adjustment asserted therein. He decided that MDS and Alsalam had failed to submit accurate, complete and current cost and pricing data as required by TINA and implementing contract provisions, thereby increasing the contract price by $2,024,877. He reduced the contract price by that amount and asserted that the Air Force was entitled to a refund in that amount, plus interest.

 

The Contracting Officer’s final decision was issued on June 3, 2008 (and was confirmed on June 17, 2008).  MDS appealed the decision to the ASBCA roughly three months later.  Before the court was the question as to whether the Government’s claim for a price reduction was time-barred by the six-year statute of limitations found in the Contract Disputes Act (CDA), 41 U.S.C. § 605(a). A similar provision is also found in the FAR, at 33.206 (Initiation of a claim).

 

The CDA language is as follows—

 

Each claim by a contractor against the government relating to a contract and each claim by the government against a contractor relating to a contract shall be submitted within 6 years after the accrual of the claim. The preceding sentence does not apply to a claim by the government against a contractor that is based on a claim by the contractor involving fraud.

 

As the court noted, the CDA does not define the phrase “accrual of a claim”—and that was the critical issue.  If the claim accrued when the DCAA St. Louis office issued its final audit report (June 17, 2002) then the government’s claim was just inside the six-year limit and would be valid. The government argued that was the date on which it knew of its damages in a “sum certain”. On the other hand, if the claim accrued on March 21, 2001 (when the DCAA EBO issued its report and “coordinated” the findings and issues with the cognizant contracting officer), then the government’s claim would be outside the six-year limit and would be rejected.

 

To answer the question, the court looked at the definitions section of FAR Part 33, at 33.201.  The court found the definition it had been looking for, which read—

 

Accrual of a claim occurs on the date when all events, which fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred. However, monetary damages need not have been incurred.

 

The court recited that the government had the burden of proving a claim for defective pricing damages—“In a defective pricing claim the government is required to prove that: (1) the information in dispute is 'cost or pricing data' under TINA; (2) the cost or pricing data was not meaningfully disclosed; and (3) the government relied to its detriment upon the inaccurate, noncurrent or incomplete data presented by the contractor.”

 

The court adjudged that—

 

Here, we do not need to determine a precise date on which the government was on notice of, was aware of, or should have been aware of, its potential defective pricing claim against the prime contractor, because the undisputed and uncontrovertible facts demonstrate that the government had established the basis for its defective pricing claim against the prime contractor well before, and definitely no later than, 14 May 2002, more than six years before the COs’ June 2008 decisions issued. Furthermore, in connection with its motion, appellant has not disputed the government’s contention that the alleged defective pricing increased the contract price. This occurred as of contract definitization, with the logical consequence that the government incurred increased costs when contract performance began and, again, definitely no later than 14 May 2002.

 

The government’s claim was determined to be time-barred and thus “it is not viable and cannot be considered.”  With a bit of finality, the court concluded as follows—

 

Because the government’s defective pricing claim upon which the COs’ decisions were based is time-barred and not cognizable under the CDA, the COs’ decisions asserting the claim were not valid. If there is no valid CDA claim, any purported CO’s decision on the matter is a nullity and we do not have jurisdiction to entertain an appeal from the purported decision.

 

The case is provided here.

 

DOD Instruction 7640.02 (“Policy for Follow-up on Contract Audit Reports”) requires that “Findings and recommendations contained in contract audit reports shall be resolved and dispositioned in a timely manner which is consistent with legal statutes, regulations, and DoD policy.”  The DoDI requires, as a matter of policy, that the Director, DCAA must “Issue timely audit reports and provide timely and complete responses to contracting officers or review officials who request clarification or information supporting the audit findings and recommendations.”  Moreover, the DOD contracting officers are required to “resolve reportable audit reports within 6 months of report issuance.”  The Instruction provides for a Contract Audit Follow-Up (CAFU) database and periodic status reports. Obviously, one of the purposes of such a system is to prevent such a delay in resolution that a claim asserted by the government is time-barred, as happened in the MDS case before the ASBCA.

 

So as one ponders why it would take DCAA more than four years to notify the prime contractor of its recommended price adjustment related to a subcontractor’s defective pricing, and why it would take the DOD contracting officer(s) another six years to officially issue a final decision demanding the price adjustment (plus interest), one might also wonder if the audit reports had been entered into the CAFU database, as DOD policy required.  And if the DOD Instruction had been followed, would that have accelerated the process and lead to a successful government claim?

 

Perhaps that is merely idle speculation.  But when we read from the DOD IG report that there are more than 1,000 “overage”:post-award audit reports awaiting disposition, we can’t help but asking how many of those are in a situation that is similar to the MDS case discussed here.  And perhaps more worrisome is the question regarding how many audit reports aren’t even in the CAFU database, leaving them invisible and uncounted in the DOD IG report?

 

 

GAO Sustains BAE Systems/Navistar Protest of FMTV Award to Oshkosh

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We have posted several articles on the recompete of the KC-X aerial tanker contract, calling it a “poster child” for the dysfunctional Defense acquisition system.  Now comes word of a successful bid protest at the Government Accountability Office (GAO), in which two protestors had their allegations of a flawed bid evaluation upheld.  Has the Department of Defense completely lost its ability to evaluate complex, multi-billion dollar weapon system acquisitions?

 

According to the GAO official press release, there were two fundamental flaws in the Army’s evaluation of the competing offers.  First, the Army mis-evaluated Oshkosh’s capability.  The press release did not provide any more details, but one might speculate that, under the capability evaluation factor, Oshkosh received an unreasonably high rating that was not supported by the technical evaluation.  It is likely that Oshkosh unreasonably was rated higher than BAE Systems’ subsidiary (formerly known as Stewart & Stevenson—the incumbent contractor).  Second, the Army mis-evaluated Navistar’s past performance.  Again, the press release lacks details, but it is likely that Navistar’s past performance unreasonably was rated lower than Oshkosh’s.

 

As the press release notes, the GAO decision sustaining both protests does not constitute a judgment as to which proposal reflected the best value to the Government.  The GAO’s decision is limited to whether the Army’s evaluation was made in accordance with applicable statutory and regulatory requirements—and whether it was fundamentally fair.  In particular, GAO focuses on whether the evaluation of the offers was made in strict accordance with the evaluation methods and criteria stated in the Army’s solicitation, also called a Request for Proposals (RFP).

 

As part of the bid protest decision, GAO recommended that the Army reevaluate the three proposals under the capability factor “in a manner consistent with the terms of the solicitation.”  In addition, the GAO recommended that the Army “conduct a new evaluation of Navistar’s past performance that adequately documents the agency’s judgments.”  Based on those actions, the Army should make a new source selection decision. Finally, GAO recommended that both protesters be reimbursed “the costs of filing and pursuing the successful grounds of their protests related to their challenge of … evaluation issues, including reasonable attorney fees.”

 

See the GAO’s press release here.

 

According to this article, the news of the successful protest led to an 11% drop in the price of Oshkosh stock, while Navistar was up five percent and BAE Systems was up just over one percent.  In a similar piece, the Wall Street Journal reported that—

Wisconsin-based Oshkosh's success with the FMTV contract stunned many defense industry observers because the company managed to displace BAE as the incumbent contractor for the trucks. BAE and Stewart & Stevenson Services, a company acquired by BAE earlier in this decade, had built more than 56,000 of the FMTV trucks since 1991. The contract requires Oshkosh to build essentially the same trucks as BAE. The FMTV series features up to 17 different truck models for a variety of uses with payloads from 2.5 tons to five tons.

The contract has been reported to be worth at least $3 billion.

 

As we’ve reported, the KC-X tanker competition has gone through a nasty, seven-year history of proposal, evaluation, protest, and recompetes.  As this post is being written, it is unclear whether the EADS/Northrop Grumman team will even submit a bit in the latest round of evaluations.  Despite a “rigorous” and “extra cautious” evaluation strategy, the Air Force mis-evaluated the proposals through a series of errors that should have embarrassed the acquisition professionals involved in the process.

 

Now it’s the Army’s turn to feel the heat.  It’s one thing to mis-evaluate the technical capability of a company that proposes to produce a complex series of trucks.  It’s quite another thing to mis-evaluate an offeror’s past performance and fail to “adequately document” the evaluation.  That’s just bad management.

 

The GAO sustains between 20 and 27 percent of roughly 300 protests submitted to it for judgment each year, according to this article. (Additional bid protests are submitted to the U.S. Court of Federal Claims.)  That’s too high, in our view—as it means that roughly a quarter of all evaluations are done poorly enough to warrant a re-do.  If a surgeon had a 25% failure rate, his/her license to practice medicine might well be revoked.  Certainly, medical malpractice insurance premiums would shoot through the roof!

 

Has the U.S. Government—particularly the Defense Department—lost its ability to evaluate proposals fairly and in accordance with the written evaluation criteria?  Have we cut back on senior acquisition professionals to the point where we can no longer execute the admittedly complex and burdensome acquisition system?  Signs point to yes.

 

A More Detailed Forecast of A&D Industry’s Near-Term Future

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We have previously posted articles discussing the near-term future of the aerospace/defense industry.  We have reported on immediate US Department of Defense (DOD) funding shortfalls.  We have discussed a reported downturn in the global A&D marketplace.  And we have noted that A&D corporate leadership may not handle workforce reductions in the same manner as it did in the previous market downturn. To summarize, times are going to be tough, but there is some reason to think that many leadership teams remember mistakes made from the last major workforce restructuring, and will do better this time around. But the A&D marketplace is dynamic and we are constantly searching tea leaves for new insight and information regarding how businesses will be affected by changes to the overall environment.

 

On December 9, 2009 Aerospace & Defense News (ASDNews) published a story entitled, “A New Era for the US Defense Market” that forecasts a near-term spending plateau, followed by a “steady decline” in the forecasted future.  Further, while the Pentagon has asked for a 2 percent increase real growth to its “regular” budget, the Obama Administration has indicated that its initial plans call for spending to remain “essentially flat.” The ASDNews story is based on a new report from Forecast International that gives a more detailed projection of the industry’s near-term future.

 

And while current plans call for the current Iraq force drawdown to result in a complete withdrawal of US forces by December 31, 2011, President Obama announced on December 1, 2009 that he is sending an additional 30,000 troops to Afghanistan.  With troops (and presumably support contractors) withdrawing from Iraq but ramping up in Afghanistan, one might think the two efforts would wash, but that assumption in not correct, according to the Forecast International report, as well as this article by the Spokane Examiner, which compares and contrasts the two “surge” strategies.

 

According to the Forecast International report, “"Redeploying U.S. assets in Iraq will be a complex and costly process, and the need to repair or replace equipment damaged or lost in theater will only add to the near-term investment. … as combat operations wind down and troops leave Iraq by the thousands, the overall financial burden on the U.S. will slowly begin to ease.” Given the current U.S. economic situation, however, as well as the continued economic pressure of Medicare and other entitlement programs on the budget, the easing is not expected to result in more funds available for non-combat defense activities.

 

Meanwhile, the DOD’s 2010 Quadrennial Defense Review (QDR) is almost complete and will be given to Congress in early 2010.  The QDR is a legislatively mandated review of DOD’s overall strategy and threat prioritization.  As such, its results will drive DOD’s needs assessments, budget requests, and program funding.  According to the DOD’s QDR fact sheet, “Key security challenges include violent extremist movements, the spread of weapons of mass destruction, rising powers with sophisticated weapons, failed or failing states, and increasing encroachment across the global commons (air, sea, space, cyberspace).” Thus, even with a flat or declining budget, programs may be deferred, restructured, or even terminated based on the results of the QDR.

 

According to the Forecast International report, "Complicating the entire matter is an acquisition system that is often plagued by severe cost growth and schedule delays."  The ASDNews article concludes that, “while the acquisition system as a whole is not broken, the fact that many of the Pentagon's most important - and costly - programs continue to face the same challenges year after year only strengthens the impetus for change.” This, of course, may be our most recurring theme in our postings:  programs that fail to execute well will be put on the chopping block, while those that do meet cost, schedule and performance/quality objectives will be spared.

 

To summarize, a consensus is emerging that the U.S. A&D industry is entering another of its cyclical downturns.  The growth of the past eight years—fueled by the response to the 9/11 terrorist attacks and the resulting “global war on terror”—is abating.  Funding will be in short supply, and will be given to the programs that are the best fit with the QDR strategic needs assessment.  Moreover, programs that struggle with cost growth or schedule will become fodder for those that succeed in that area.


 

 

DOD Issues Semiannual IG Report

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In early December 2009 the Department of Defense Inspector General (DOD IG) issued its 9/30/2009 semiannual report to Congress.  As the name implies, the report is issued every six months in accordance with Public Law.  While the report is interesting reading, our primary interest lies in what it reports about DCAA activities during that time period.  But before we get into the DCAA discussion, let’s take a moment and note some highlights.

 

 

 

 

  • The DOD IG staff is reported to be 1,570 with a budget of $272 million.
  • In the six month reporting period, the DOD IG pursued many investigations, obtaining 197 indictments, 175 convictions, 55 suspensions, and 81 debarments.
  • 224 subpoenas were issued.
  • 1,153 hotline cases were opened, and 909 cases were closed.
  • 53 official audit reports were issued. In addition, 78 “other oversight” reports were issued—among which was the IG’s assessment of DCAA’s work environment (D-2009-6-009), as well as a review of DCMA’s follow-up actions in response to DCAA audit reports on CAS compliance and contractor internal control system adequacy with respect to contractors involved in Iraq reconstruction activities (DD-2009-6-004).
  • Roughly 1,000 vouchers representing more than $90 million in payments “were provided to [the Defense Criminal Investigation Service, DCIS] and its partners to support seven investigations.”

 

The report includes several anecdotes of fraud and corruption.  Among them are allegations of bribery, bid steering, false statements, false claims, wire fraud, money laundering, etc.  All of the items reported were related to Defense Department contracts, contractors, and/or Pentagon employees. Contracting activities were primarily (though not solely) in Southwest Asia, and covered such areas as construction, trucking/logistics, and even acquisition of bottled water.

 

For example:

 

On April 17, 2009, three DoD contractor employees were each sentenced to a total of 125 months imprisonment and three years supervised release, and ordered to pay more than $1.1 million in restitution for major fraud against the government, theft, mail fraud, and conspiracy.  The defendants defrauded the government and two other victims by submitting false time and material bills for reconstruction work during the post-9/11 reconstruction of the Pentagon. Some of the falsely billed labor and materials represented work on a newly constructed bar and restaurant owned by two of the defendants.  On May 1, 2009, a subcontractor involved in the scheme was sentenced to two years probation and fined $10,000 for conspiracy to defraud the government. The subcontractor received home remodeling materials and labor that he charged to the Pentagon reconstruction contract.

 

Another example:

 

Between May and July 2009, four U.S. Army civilian employees, a former Army major, and a DoD contractor were sentenced to serve a combined 121 months imprisonment and ordered to pay more than $116,000 in restitution to the government for conspiracy to defraud the United States. Acting as public officials on behalf of the Army, the coconspirators circumvented the government’s competitive bidding process to influence and steer the award of lucrative government computer contracts to an information technology company in return for cash and merchandise.  The co-conspirators provided the IT company with internal procurement information related to impending U.S. Army acquisitions, which allowed the company to submit the lowest bid and obtain contract awards in lieu of fair and open competition. In addition to influencing the bidding process, the co-conspirators engaged in a scheme where they shipped undamaged government property from the Tobyhanna Army Depot to the IT company for repairs, but the items were misbranded as new equipment and resold to the government.


With respect to contractor disclosures (about which we’ve written before), the reports notes that DOD IG is in the process of “closing out” disclosures made under the now-defunct Voluntary Disclosure program, and has received 81 disclosures under the new Mandatory Reporting program through the end of the reporting period.  According to the report, the majority of the disclosures have involved labor mischarging.  A chart from the report, illustrating the breakdown of contractor disclosures under the new program, is shown below.

 

Contractor Disclosures through 30 Sept 2009.bmp

Appendix D of the report is devoted to DCAA activities.  According to the report, DCAA completed 11,688 audit assignments in the six month period reporting period.  Of that amount, 76 reports were related to post-award (defective pricing) audits, and 708 audits were related to compliance with the Cost Accounting Standards (CAS). In the reporting period, DCAA examined $133.5 billion dollars.  Of that amount, auditors questioned $971.4 million (0.73%). With respect to forward priced proposals, DCAA recommended negotiation savings of $9.572 billion. There was no discussion regarding amounts of questioned costs sustained or successfully negotiated by the recipients of the audit reports.

 

With respect to audit reports issued to various commands and entities that are being tracked in the DOD’s Contract Audit Follow-up (CAFU) database, the report states that 2,020 audit reports are being tracked. Of this amount, 403 audit reports were closed in the reporting period.  The 403 closed audit reports included $468.1 million in questioned costs.  Of that amount, $176.6 million was sustained, representing 37.7% of total questioned costs.

 

In addition, DCAA reports that 153 of the CAFU reports are in litigation (47 of which are under criminal investigation).  DCAA estimates that the questioned costs in the litigated findings are valued at $1.826 billion.

 

Were one of an analytical mindset, one could find a series of DOG IG reports and plot some trendlines that would look at audit reports issued by DCAA, amount of dollars examined, costs questioned, and questioned costs sustained.  We’ll leave that exercise for the reader.

 

See the entire semiannual DOD IG report here.

 

 

FAC 2005-38 Brings Changes to Cost Allowability Rules

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Air Fare Secrets


 

 

Issued on December 10, 2009 Federal Acquisition Circular (FAC) 2005-038 implemented several revisions to the Federal Acquisition Regulation (FAR).  Included among the revisions were two changes to FAR Part 31 cost allowability rules—the Cost Principles.  One change impacted relatively few contractors, while the other change will impact all contractors subject to the Cost Principles.

 

 

Changes to PRB Rules

 

The first change (FAR Case 2006-021) impacts contractors that maintain postretirement benefit plans other than pensions (PRBs).  According to the FAC—

 

Currently FAR 31.205-6(o) allows contractors to choose among three different accounting methods for PRB costs; pay-as-you-go (cash basis), terminal funding, and accrual basis using generally accepted accounting principles by applying Statement 106 of Financial Accounting Standards (FAS 106). The FAR also requires that any accrued PRB costs be paid to an insurer or trustee. This final rule amends the FAR to permit the use of Internal Revenue Code sections 419 and 419A contribution rules as an alternative method of determining the amount of accrued PRB costs on Government cost-based contracts.

 

The full rule can be found here.  As the FAR Councils note, “the total measured PRB costs over the life of the PRB plan would be the same whether the contractor chose to apply the criteria in FAS 106 or IRC sections 419 and 419A [and] the Government will not pay higher PRB costs, since the resulting difference from contractors previously funding the lower IRC amount rather than the full FAS amount will continue to be an unallowable cost. This final rule does permit contractors to electively switch to the IRC 419 accrual basis and avoid any current or future disallowances.”

 

 

Changes to Air Fare Allowability Rules

 

The second change (FAR Case 2006-024) changes the cost allowability rules applied to air fare.  The current rule based the allowable cost of air fare on “the lowest customary standard, coach, or equivalent airfare offered during normal business hours” but the FAR Councils assert that this language was ambiguous and led to “inconsistent interpretations” and “confusion regarding what costs are allowable.”  Consequently, the language was amended to set the allowability standard as “the lowest priced airfare available to the contractor.” (The revised rule eliminates any reference to airfare class, such as economy or coach.)

 

This change is going to affect all contractors subject to the Cost Principles—and is going to be problematic. In fact, we’ll go so far as to say that the new rule introduces more ambiguity than the prior rule and raises a host of new questions.  It’s a cure that is worse than the disease.  Moreover, from personal experience it’s clear that there never was any disease in the first place; any ambiguity was in the minds of the rule-makers and there was no need for this revision in the first place.

 

Let’s look at the rule.  Effective January 11, 2010, the travel Cost Principle at FAR 31.205-46(b) will read as follows:

 

(b) Airfare costs in excess of the lowest priced airfare available to the contractor during normal business hours are unallowable except when such accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, are not reasonably adequate for the physical or medical needs of the traveler, or are not reasonably available to meet mission requirements. However, in order for airfare costs in excess of the above airfare to be allowable, the applicable condition(s) set forth above must be documented and justified.

 

In addition to the foregoing, paragraph (c)(2) will be amended to replace the term “standard” with the word “allowable” wherever it appears.

 

The FAR Councils explain in the promulgating comments that “lowest-price airfare” includes the cost of non-refundable tickets.  Moreover, the Councils assert that “the requirement for supporting documentation and justification for airfare costs in excess of the ‘lowest coach airfare available’ should include documentation justifying purchase of a higher-cost refundable ticket in those instances when a non-refundable ticket is available.” The Councils also clarified that the costs of cancelling or changing restricted air fares is allowable.

 

The Councils explained the need for this rule as follows—

 

This amendment is intended to prohibit the contractor's practice where it has negotiated airfare agreements with travel providers and uses those agreements to purchase first class or business class seats but does not use the lowest priced airfare available under the agreements to determine the allowable cost baseline for the first class or business class seats, but instead determines the allowable cost based on the lowest airfare available to the general public instead of the lowest airfare available to the contractor under the agreements. This amendment will require the contractor to use the lowest airfare available to the contractor.

 

The revised air fare rule can be found in its entirety here.

 

Problems

 

The key problem with the new rule is that there are many more types of less expensive air fare available to contractors than the ones they have negotiated.  For instance, use of discount airlines such as Southwest or Air Trans or Jet Blue may result in cheaper fares, but also may require use of alternate airports.  Of course, where use of a discount airline results in “increased cost that would offset the transportation savings” the contractor need not use it—but that conclusion will need to be documented and justified for each trip.  Moreover, the rule doesn’t address use of Expedia, Travelocity or other internet-based discounter.  Are contractors now supposed to jettison their traditional travel agents in favor of such internet entities in the search for the “lowest priced airfare available to the contractor”?  One would tend to assume the FAR Councils did not mean to require that, yet the words say what they say.

 

In addition, the rule seems to create a new class of unallowable air fare, which is fares paid in excess of that elusive “lowest priced airfare” that was available at the time of booking.  If the FAR Councils did not mean to create this new unallowable air fare, then the rule was crafted poorly.  As written, each air fare incurred for each trip must be compared to the platonic ideal of a “lowest priced airfare”—as that ambiguous term is interpreted by the contractor and its auditors.

 

One could take the position—supported by the words of the promulgating comments quoted above—that any airfare incurred pursuant to a negotiated corporate agreement is fully allowable unless it is for a first class or business class seat.  If a premium seat is purchased, the unallowable amount is calculated by comparing the actual fare paid to what would have been paid had a non-premium seat been purchased pursuant to that same agreement.  That would be a reasonable interpretation that would certainly minimize confusion and implementation costs.

 

But that’s not what the words say.  And based on our experience with Government auditors, that is not how the rule will be interpreted in audits of such costs.  Accordingly, if the Government desires truly to implement the rule in accordance with the FAR Councils’ comments, as opposed to the actual words, then they will need to implement clear audit guidance to that effect.

 

We are not optimistic.

 

We believe this rule is unnecessary, ambiguous and poorly crafted.  It will not accomplish the stated intent of the FAR Councils and might very well lead to additional unallowable costs.  At a minimum, it imposes an additional documentation and justification requirement that add to contractors’ travel accounting efforts, which are already too high.

 

 

A Simple Solution?

 

A final thought.  If the rule is interpreted by auditor based on the words rather than the promulgating comments, one quick solution is to stop negotiating corporate agreements with airlines.  Simply pay the same price the public pays, which eliminates the issue raised by the FAR Councils as the impetus for the rule change.  Such a step will not fix the other ambiguities and problems we’ve noted, but should immediately reduce the auditors’ interest in this area.

 

Of course, if contractors take that simple step, the Government will pay more—perhaps far more—than it currently does for contractor air fares.  It would be a great example of the operation of the Law of Unintended Consequences.  But it would reduce unallowable air fare costs and thus increase the corporate bottom-line.  And it would serve the bureaucratic rule-makers right, in our view.

 

 

 

 

 

 

 

 

 
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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.