Contracting Officers Rely on DCAA Instead of Doing Their Jobs
It’s not the first time we’ve asserted that Contracting Officers rely on DCAA to tell them what to do. We’ve asserted that one FTA Contracting Officer relied on an audit report “like a crutch.” (See “The Sad, Yet, Illustrative Case of the PMO Partnership Joint Venture,” which can be found on this site in the members-only section.) Indeed, we are not the only ones asserting that point. In 2011, the GAO issued a report that stated DCMA was overly reliant on DCAA—at least with respect to contractor business system oversight. (See our article on the GAO report, here.)
In a recent decision, the ASBCA essentially said the same thing.
In the matter of Fluor Federal Solutions, Inc. (ASBCA No. 61353), the ASBCA was presented with a government argument that it lacked jurisdiction over Fluor’s appeal, asserting that the appeal “was premature because the Navy desired a DCAA audit before issuing a final decision.” In other words, the Contracting Officer felt unable to issue a final decision until DCAA issued an audit report.
Fluor disagreed, pointing out that a DCAA report might discuss quantum, but should not address entitlement. (Way back in 2009 we took umbrage at a DCAA audit report that discussed a contractor’s entitlement to omitted employee health and welfare costs.)
Importantly, Judge Clarke, writing for the Board, agreed with Fluor. He wrote—
We agree with Fluor's argument that an audit goes to quantum and is not needed to assess entitlement. We have held that a contracting officer's desire to conduct an audit does not change the status of a contractor's claim. Eaton Contract Services, Inc., ASBCA Nos. 54054, 54055. We deny the Navy's contention that the appeal is premature.
[Internal citations omitted.]
In other words, a Contracting Officer cannot use the fact that they may be awaiting a DCAA audit report as a valid reason for failing to issue a Final Decision within the timeframe specified by the Contract Disputes Act.
Reminder That Human Trafficking Is a (Very Bad) Thing
As we told readers more than three years ago, the chances are that your government contract has a clause in it that prohibits human trafficking. Which is a great goal and we’re sure you would never, ever, violate that contractual prohibition.
Do you have that contract clause?
It’s FAR 52.222-50 (“Combating Trafficking in Persons,” March 2015). Why don’t you go look and see if you have it? We’ll wait.
You probably have it, because the clause is required to be inserted in every single solicitation and contract issued by the government. So let’s assume you’re going to find it—at least, it will be listed in Section I of your contract, which is for clauses incorporated by reference.
Good. Now: have you read it?
Yeah, you’re probably going to want to read it. It’s long and perhaps you don’t think it really applies to you—because you’re not that kind of company—but we suggest you read it anyway. It says more than you probably think it does.
We mean to say that the clause contains more compliance requirements than simply “don’t traffic in human beings.” Because if that’s all it said, most of us would be good and we wouldn’t need to even write a blog article about the clause.
But oh no, dear readers, it says more than you think it does.
Among many other things, the contract clause 52.222-50 prohibits “procuring commercial sex acts during the period of performance of the contract.” Anywhere. Even where procuring such may be legal.
It used to be that what happened on R&R stayed on R&R, but no longer. Now what happens on R&R can really cause some corporate problems.
Read our article (link in the first sentence) about what the clause requires, in terms of compliance. Read the clause itself. Understand what you need to do, and understand what your employees, agents, and suppliers cannot do.
After reading all that, you might be prepared to appreciate this DoJ press release, in which it was announced that a “contractor for the Department of Defense” was sentenced to six years in prison for “engaging in commercial sex with a minor in the Philippines.” The press release provided the sordid details, to wit—
On April 19, James Marvin Reed, 62, pleaded guilty to engaging in illicit sexual conduct in a foreign place. According to court documents, from in or about September 2007 until in or about December 2007, Reed, then 52 years old, engaged in commercial sexual intercourse on multiple occasions with the then 14-year-old victim, and impregnated her, while he was working in the Philippines as a contractor for the U.S. Department of Defense. In 2016, he was arrested by Philippine authorities and returned to the United States for prosecution.
Of course, nothing like that would ever happen to any of your employees, who are all upstanding citizens of the highest levels of integrity.
But are you sure of that?
How do you know?
How do you know for sure?
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Proposed FAR Rule Would Impact Definition of “Adequate Price Competition”
The NDAA giveth; the NDAA taketh away.
Recently, we have published a series of articles discussing how the FY2018 National Defense Authorization Act (NDAA) increased several important acquisition thresholds--notably, the threshold at which certified cost or pricing data must be obtained. The threshold applies both to government acquisitions and to contractor acquisitions. The “TINA threshold” was raised from $750,000 to $2 million, which we thought was a good thing.
But a recent proposed FAR rule, FAR Case 2017-006, reminded us that not all Congressional acquisition reforms work to the benefit of contractors. The proposed rule would (partially) implement Section 822 of the FY2017 NDAA by redefining “adequate price competition” for the General Services Administration (GSA), Department of Defense (DoD), and the National Aeronautics and Space Administration (NASA). Importantly, the change would not affect other agencies (e.g., Department of Energy or Environmental Protection Agency) because the NDAA was not directed at them. (We’ll note, however, that we have seen the other agencies adopt NDAA-based acquisition reforms, and they could do so here, as well.)
The proposed rule, if finalized as drafted, would limit the circumstances in which “adequate price competition” would exist. This matters because, if there is adequate price competition, then certified cost or pricing data need not be obtained. Indeed, if there is adequate price competition, then the contracting officer (or prime contractor buyer) is prohibited from obtaining certified cost or pricing data. Thus, some of the workload reductions given by raising the threshold to $2 million would be taken away by the proposed rule.
Currently, there are three circumstances in which adequate price competition can be found to exist. Without quoting FAR 15.403-1(c) in its entirety, they are:
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At least two offers are received for evaluation
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There was a reasonable expectation that at least two offers would be received, even though only one offer was actually received
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“Price analysis clearly demonstrates that the proposed price is reasonable in comparison with current or recent prices for the same or similar items, adjusted to reflect changes in market conditions, economic conditions, quantities, or terms and conditions under contracts that resulted from adequate price competition.”
Most people know the first set of circumstances, but fewer people know the other two sets of circumstances. Regardless, the proposed rule would (for affected agencies) establish that adequate price competition exists “only if two or more responsible offerors, competing independently, submit responsive and viable offers.” Period.
If you were one of the many who only followed the first definition of adequate price competition, then you probably won’t be impacted very much by the proposed rule. But if you were one of the few who used all three definitions—because they offered ways to reduce workload and shorten proposal lead times—then you will definitely be impacted. We suspect you won’t be very happy with the proposed rule.
We do not care for the proposed rule. If you are one of the contractors that don’t like either then you may, if you wish, follow the link in the first sentence and find out how to submit a comment. However, we don’t expect it will matter very much, because the proposed rule is basically just implementing the language in the NDAA.
We were interested to note that the FAR Councils have chosen to implement only a part of Section 822 of the FY2017 NDAA. The part that is not included in the proposed rule concerns prime contractor determinations of adequate price competition.
The NDAA language that was omitted from the proposed rule is—
DETERMINATION BY PRIME CONTRACTOR.—A prime contractor required to submit certified cost or pricing data under subsection (a) with respect to a prime contract shall be responsible for determining whether a subcontract under such contract qualifies for an exception under paragraph (1)(A) from such requirement.
We are not certain, but we believe the language above would clarify that the prime contractor’s determination that its subcontractor(s) do not need to submit certified cost or pricing data to it (because adequate price competition was achieved) could not be overruled by a contracting officer’s finding to the contrary. However, that is conjecture and should not be relied upon. Further, note that the prime contractor would be “responsible” for determining whether or not adequate price competition existed. If an audit or review subsequently found that the prime contractor had made a mistake, then that prime contractor might well be the subject of defective pricing allegations. Further—as we’ve seen before—if DCAA asserts that the subcontractor’s price was unreasonable, then the auditors may question up to 100 percent of subcontractor costs as being unallowable. So the language is definitely not a “get out of jail free” card.
When the TINA (and other acquisition) thresholds were raised by the NDAA, we told contractors to update their procedures. Given the language in the proposed rule—which is almost certain to be finalized as drafted, or very close to it—we suggest that contractors should prepare to update their procedures once again.
Long Term Agreement Price Reasonableness
Contractors enter into Long Term Agreements (LTAs) in order to establish firm pricing for future requirements. LTAs are good things, because you can achieve volume discounts today based on the expected total volume of orders expected over the contract's duration. In contrast, if you are just issuing individual Purchase Orders then each one stands alone in terms of pricing; you get the price associated with the volume of the PO.
In addition, if you enter into a LTA you only have to establish price reasonableness once. You can compete one time and award the low bidder (or best value bidder) an LTA, and then you can use that price reasonableness determination to support your pricing for years to come. (Although we have seen DCAA take the position that price reasonableness must be evaluated annually; which kind of defeats the purpose. If your DCAA or DCMA has taken that position, call us because we know how to solve that one.)
All in all, LTAs are good things but, if the government waits until you propose LTA pricing in a proposal submitted in response to an RFP, then DCAA may want to review information that’s a year (or more) old at that point. That can delay the audit and the audit report and the negotiation—and that impacts PALT.
Thus, DCAA issued MRD 18-PSP-002(R) on 15 February 2018—though for some unknown reason it took the audit agency until June to actually publish the audit guidance on its website. The audit guidance clarifies that auditors can review the reasonableness of LTA pricing independently of a government solicitation. In other words, a contracting officer can request a DCAA review of LTA price reasonableness before the LTA pricing is incorporated into a contractor cost proposal.
According to the MRD, there are four preconditions that need to be in place before the auditors can perform an audit. They are:
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The subcontract proposal has been approved by the appropriate subcontractor management.
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The prime contractor has submitted the subcontract proposal to the Government with an assertion from the prime contractor’s management that it intends to award an LTA with the subcontractor and identifies the benefit of the LTA to the Government
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The subcontract proposal is adequate for examination based on the requirements set forth in FAR Subpart 15.4, Contract Pricing
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The Contracting Officer has determined that subcontract audit support is required based on DFARS PGI 215.404-3, Subcontract pricing considerations
Importantly, it seems that DCAA envisions that the contractor will engage with its contracting officer (and the auditors) prior to negotiating and finalizing the LTA pricing. Based on what we see (above), the prime contractor will request a proposal from the LTA supplier and then submit it to a contracting officer for … what? Not approval.
The CO should not be approving a commercial agreement between a prime contractor and its subcontractors. Given that there is no prime contract is place (and not even an RFP), there is no advance consent requirement in place. So we don’t know what the CO is supposed to think when they receive a notice of intent to award an LTA. Further, it’s not clear to us which CO has the authority to request DCAA audit support in the circumstances in which this is all suppose to take place. Certainly it's not the PCO. Perhaps it's the ACO? But if so, how was that authority assigned?
Nevertheless, there is now an official path to having governmental review of proposed LTA pricing, and presumably acceptance of price reasonableness, independently from any proposal submitted in response to an RFP.
We don’t know what would happen if DCAA determined that the proposed prices were not reasonable. We mean … it would definitely be a flag that there will be future problems with use of the LTA. But what remedy would the CO have, since the costs would not have been charged to any government contract at the point at which a DCAA auditor would be opining on price reasonableness?
Questions. We have so many questions....
Anyway, this is the plan. Don’t mind our questions; you should move briskly forward to solicit LTA pricing because, despite DCAA’s ostensible role in the process, having LTAs is definitely the smart move.
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