CAS Board Back in Action!
We’ve bemoaned the lack of CAS Board activity several times on this site. The most recent bemoanery may be found here. That article was written in July, 2017—about eight months ago. At that time, we noted that there was no CAS Board website, there was no OFPP website, there was no OFPP Administrator, and therefore there was no CAS Board Chair. There was nothing. We observed—
… it has become clear over the past 10 or so years that the CAS regime is also unworkable. It’s overly complex. It’s ambiguous. It’s burdensome. It’s grounded in a viewpoint that’s more than 40 years old, where DOD acquired more goods than services. But in the past 40 years many things have changed and the CAS regulations and Standards have not kept up with the changes. As we’ve noted from time to time, the CAS Board almost never met even when there was an OFPP Administrator to chair it. The published minutes reflected a situation where literally years would pass between meetings. The published list of CAS Board members included people who had left government service literally years before.
Meanwhile, in the intervening eight months, not very much has changed. We still cannot find a current OFPP website. We still cannot find a current CAS Board website. There is no confirmed OFPP Administrator and, therefore, there is no CAS Board Chair.
However, some things have changed. First, rumors are beginning to swirl that there may, in fact, be a nominee for the OFPP Administrator sometime in the near future. In the interim, it appears that Ms. Lesley Field has been acting as both OFPP Administrator and as CAS Board Chair. Thus, the CAS Board was able to actually hold a meeting and make a decision!
That relative flurry of CAS Board activity led to a Federal Register notice and a final rule, “clarifying” one of the existing exemptions from CAS coverage by adding a single word. As the Federal Register notice states—
… final rule revis[es] the exemption from CAS for firm-fixed-price (FFP) contracts and subcontracts awarded on the basis of adequate price competition without submission of cost or pricing data. This final rule clarifies that the exemption applies to FFP contracts and subcontracts awarded on the basis of adequate price competition without submission of certified cost or pricing data.
(Emphasis added.)
That single word we italicized in the quote above – certified – is the clarification.
This codifies the clarification as a final rule. The proposed rule, which was published for comment and input in 2011, received two comments. Both comments, according to the CAS Board, supported “the proposed change.” (Wait—we thought it was a clarification? Which is it?)
The reason for the change and/or clarification, as explained by the CAS Board, was documented in the proposed rule. “… the Board explained [in 2011] that at the time the CAS rule was promulgated in 2000, the term cost or pricing data was understood to mean certified cost or pricing data. However, as a result of changes made to the Federal Acquisition Regulation in 2010 … the term could also be read to mean cost or pricing data without the certification.”
In other words, it was the FAR Councils mucking about with FAR Part 15 cost or pricing data requirements that necessitated the present seven-year-long rule-making activity by the CAS Board.
We discussed the “mucking about” in this article. We said at the time—
We notice that the prohibition on obtaining cost or pricing data when certain conditions (e.g., adequate competition) are found has been de-emphasized in favor of a more detailed discussion of the types of data the contracting officer should obtain. This appears to represent a return to a pre-Federal Acquisition Streamlining Act (FASA) pricing environment, which may add to contractors’ proposal costs— meaning that, ultimately, the Government may end up paying more for the goods and services it acquires.
With nearly eight years of hindsight to guide us, it seems that the 2010 changes to cost and pricing date requirements were part of a multi-pronged approach by certain interest groups to ensure that the government paid as low as price as possible, by pushing contractors to provide more and more detailed information. That push ignored the cost that contractors were going to incur in order to provide that information. That push ignored the additional barriers to market entry that were being created—barriers that, today, the government is working hard to remove. Further, that push ignored the impact on subcontractors, many of whom are small businesses, who were going to have to deal with these new requirements.
In the past eight years, prime contractors have seen their purchasing systems put in jeopardy because they failed to adequately comply with the 2010 FAR Part 15 rule changes. As a result, they have pressured their subcontractors to comply, so that cost and price analyses can be performed on subcontractor proposals. That’s been great news for Apogee Consulting, Inc., who has make nice bank by helping those small business subcontractors navigate the cost or pricing data requirements. But it’s been bad news for taxpayers, who have had to pay the bill for the resulting increased costs.
In hindsight, the 2010 FAR Part 15 revisions were ill-advised. They added little except cost. Moreover, those changes led to a seven-year-long rule-making effort by a CAS Board that—trust us—had far better things to do with its limited time and staff.
But the CAS Board is now back, led by Acting Chair Field. We expect to be reporting on more activity in the near future.
It Got Even More Complicated, But Northrop Still Won (This Round)
A long-time reader, who wishes to remain anonymous, recently emailed to urge us to write about this ASBCA decision in which the Board addressed a Government Motion for Reconsideration. By filing the motion, the Government was asking the Board to vacate its prior decision. According to the American Bar Association’s “Practicing Before the Federal Boards of Contract Appeals” legal manual—
BCAs generally grant motions for reconsideration in two circumstances: (1) to allow a party to present significant, newly discovered evidence; or (2) to address the board’s own mistake of fact or law. Do not re-argue positions already presented to and rejected by the board, and do not present arguments that could have been made earlier. When presenting significant, newly-discovered evidence in a motion for reconsideration, attach the newly-discovered evidence to the motion, explain where it came from, why it was not available earlier, and why it is relevant and should alter the board’s decision. If the motion is based on a mistake of fact or law by the board, the party must explain the mistake and why the decision would be different if the mistake was corrected.
We already discussed the original decision, in this article. You need to read that article before this one, because we’re not going to repeat ourselves.
In fact, and as noted in our article, that “original” decision wasn’t really the original decision. It was the second decision. The first decision dealt with “entitlement” and the second decision dealt with “quantum”. The Government won on the first decision—that it was entitled to damages. But the Government lost on the second decision, because the Board found that there were, in fact, no damages. The Government was entitled to nothing.
As part of that second decision (which we quoted at some length in our article), the Board noted that the Government’s position was based on a flawed theory created by DCAA and endorsed by a Contracting Officer, over the objections of DCMA’s own pension experts. Judge Peacock, writing for the Board, stated “The government has failed to sustain its burden of proving that any of the disallowed amount was or will be amortized as part of the transition obligation and claimed during the post-transition years. Its argument is founded on theoretical constructs that have no factual basis or evidentiary support here.”
The Government filed a Motion for Reconsideration of that second decision. It did not fare well.
Judge Peacock, again writing for the Board, stated—
Upon reconsideration, we affirm the quantum decision. There are no inconsistencies among the quantum decision and the Board's earlier entitlement decisions. The government's assertions that the Board contradicted the ‘law of the case,’ i.e., the entitlement decisions, are based on the government's untimely raised and unreasonable ‘interpretation’ of the entitlement decisions. Moreover, the government has ignored the quantum remedy for noncompliance established in FAR 31.201-2(c). In addition, it has misapplied fundamental concepts of cost ‘incurrence’ and ‘disallowance.’
Later in the decision, Judge Peacock wrote—
The gravamen of this dispute has always been whether the government was damaged, i.e., in the words, of FAR 31.201-2(c) whether the contractor claimed (or the government paid) any disallowable ‘excess’ PRB costs as a consequence of appellant's noncompliance. The ultimate overriding fact is that the government did not pay any ‘excess.’ It cannot overcome that basic fact that there was no ‘excess’ by parsing through the entitlement decisions trying to find ‘inconsistencies,’ actual or implied in the supposed ‘philosophy and intent’ of those decisions. …
The concept of cost incurrence ‘by operation of law’ in a government contract accounting ‘allowability’ context is indeed novel, extraordinary, unique and unprecedented. The government has failed to adduce even one analogous case supporting its position. The government contemporaneously exercised common sense during the pre-transition years and knowingly, willingly, declined to challenge appellant's accounting for its claimed PRB costs that resulted in lower costs to the government during the pre-transition years. The ‘common sense’ government position in this regard in the pre-transition years comported with FAR 31.201-2(c). The government now ignores its own regulatory remedy. In doing so it has created an extraordinary new category of costs, incurred not by the contractor's own accounting measurement, accrual or assignment methodology, but allegedly ‘required’ to be incurred by ‘operation of law,’ without regard to NGC's accounting procedures. To the contrary, the operative ‘law’ in this case is the common remedy prescribed for noncompliance in FAR 31.201-2(c). The government's duty is to evaluate costs actually incurred and claimed by the contractor under the pertinent cost principle for compliance. If non-compliant, any ‘excess’ is unallowable, not costs that were never incurred or claimed by the contractor.
(Emphasis in original.)
But wait. There’s more stuff to quote. Read this part about what a cost disallowance is (or should be):
The term ‘disallowance’ presupposes that the contractor has sought an ‘allowance’ for the cost in question, i.e., it has included those costs in contemporaneous cost-related filings and claimed, charged or been reimbursed for said costs. Here, the government has ‘disallowed’ costs for which the contractor has never sought an ‘allowance.’ The contractor has not and will never claim the costs in dispute here for the reasons detailed in the underlying opinion. The ‘excess,’ if any, is to be derived from cost/pricing, payment, and reimbursement submissions, including incurred cost data transmitted to the government from the contractor. There is no mention in any of these foundational, core documents that appellant ever incurred the costs in dispute, much less claimed their reimbursement. There was no ‘excess’ to disallow …
(Emphasis added.)
Do we need to inform you that the Motion for Reconsideration was denied?
Our anonymous reader concluded his email with the following thoughts—
After the LMIS case published last year the DCMA issued guidance to only question costs based on a cost principle or contract clause. The Northrop case started way before LMIS was decided. I wonder if DCMA will reissue their guidance again with some minor tweaks. Such as, don’t demand repayment for a ‘cost’ that was never billed.
Well, we don’t know the answer to that question. In fact, we were unaware of the DCMA “guidance” in question until our anonymous reader mentioned it. If you have a copy (or a link) to that document, please send it to us!
As a final point, let’s remember that, although there have been at least three decisions already issued in this dispute, the parties still have appeal rights. This brouhaha may not be over. We could see another decision on this dispute issued by the Federal Circuit.
|
Bad Information
Usually the DCAA website is a good place to go for information regarding government contract accounting matters. It’s chock-full of helpful information, from the Contract Audit Manual to the Selected Areas of Cost Guidebook. It has a list of DCAA audit programs and a list of recently promulgated audit guidance (called MRDs for “Memoranda for Regional Directors”).
DCAA’s website has many checklists to assist contractors in understanding what auditors expect to see. For example, it has a Pre-Award Accounting System Adequacy Checklist and a Contract Pricing Proposal Adequacy Checklist, and it has an “Incurred Cost Submission” Adequacy Checklist and a Cost Impact Adequacy Tool.
DCAA’s available guidance includes the Information for Contractors pamphlet and the FAR Cost Principles Guide. In addition, there are links to “targeted information” presentations intended to “assist with audit issues that relate to small businesses.”
In sum, the DCAA website is a valuable resource and, if you are seeking to learn more about government contract cost accounting and/or compliance requirements, it’s a good place to start.
But beware.
Not all the information found on DCAA’s website is accurate. Nor is the audit agency’s interpretation of regulation always aligned with court decisions on those regulations. Some of the information you might want to see isn’t there; and some of the information you would expect to find is curiously unavailable. So take what you find there with a grain of salt, so to speak, and make sure you check DCAA’s interpretations against other resources.
We can be more specific with respect to our warning, if you’d like.
First and foremost, be advised that DCAA’s guidance and checklists and interpretations lack regulatory effect. What that means is that DCAA’s point of view doesn’t carry the weight of the statutory and/or regulatory language itself. If it comes to litigation, most Judges are going to look to the language first, rather than to DCAA’s interpretation of that language.
Think of it this way: if the government was always right, we’d never need to prepare taxes every year. We’d just tell the IRS how much money we had made, and then they would tell us how much we owed in taxes. But it doesn’t work that way, does it? Instead, we have tax programs and tax preparers and accountants and bookkeepers, who help us navigate the complex tax rules so that we can (legitimately) minimize our taxes. Same thing here. We don't ask DCAA to calculate our indirect rates for the same reason we don't ask the IRS to calculate our taxes for us.
The next thing to discuss is the missing information. DCAA’s list of MRDs has curious gaps in it. MRDs are posted late (if at all) and then they disappear when incorporated into the Contract Audit Manual. There is no published record of MRD disposition; you can’t tell when an MRD was incorporated and you can’t tell where it was incorporated. For example, there was some audit guidance published in the second half of 2017 (or in the first half of government fiscal year 2018, if you will) that discussed DCAA’s view of how subcontractor cost and/or price analyses was to be provided in a prime contractor’s proposal. The MRD disappeared after about 30 days. Where did it go? Was it incorporated into the CAM? If so, where? We don’t know and DCAA won’t tell us.
Looking at the CAM itself, we noted that Chapter 5 “is currently being rewritten.” That’s not particularly helpful if you are researching how DCAA would audit “policies, procedures, and internal controls relative to accounting and management systems”—i.e., the six DFARS contractor business systems.
Similarly, the Selected Areas of Cost Guidebook is missing critical information. There are 75 Chapters, each devoted to a separate area of cost, but several Chapters are “under construction” and have no content. For example, Chapter 10 (Compensation for Personal Services) is missing. This is a critical topic that has formed the basis for several high-profile disputes (the majority of which were lost by the government, based on a flawed DCAA audit approach). If you wanted to understand DCAA’s current position on the allowability of compensation costs, you’d be out of luck. Ditto Chapter 22 (Economic Planning Costs) and Chapter 27 (Fines, Penalties and Mischarging Costs). Point made, we trust.
It’s apparent that things aren’t much better at the section of DCAA’s website entitled “Audit Process Overview—Information for Contractors.” If you are a contractor seeking information, then you are going to have some problems. First, DCAA Manual 7641.90 (“Information for Contractors”) is woefully out of date. The version available on the website is dated June 26, 2012. Now, you could argue that things haven’t changed much since then, in terms of the general acquisition and audit flow—and you’d be right. But some things have changed in the intervening five years. There have been changes to how DCAA is organized, such that the information in Enclosure 1 is just wrong. There have been changes to the application of the Truth in Negotiation Act (TINA), such that information in Enclosure 2 is out of date and potentially misleading. Since 2012, statutes and regulations have changed. Legal decisions and opinions have been issued. So while it’s true that the overall process has remained about the same, it’s equally true that the document needs to be updated. Contractors—especially small business contractors—that rely solely on the information found in DCAA Manual 7641.90 may be misled. That would be unfortunate. Indeed, it would be an interesting defense in a bid protest or other dispute: the contractor relied on DCAA’s written guidance, to its detriment.
Now we’re not looking a gift horse in the mouth here. It’s a GOOD THING that DCAA has resources available for contractors, and the audit agency should be commended for doing so. What we are saying is, since the audit agency has made the decision to provide resources and information, it’s incumbent on the agency to maintain the resources and keep the information current.
Finally, there is some bad information on the website that you need to be wary of. The one thing that caught our eye was found in the listing of “targeted information to assist with audit issues that relate to small business.” In that listing was a link to a DCAA presentation entitled “Monitoring Subcontracts.” Like almost everything on the website, it has good information. But it also has an egregious error that needs to be corrected, or else ignored. On Slide 17 (“Common Prime or Higher Tier Subcontract Deficiencies”) the third bullet is: “Failure to obtain an adequate incurred cost submission from subcontractor.” In other words, DCAA is stating in writing that a prime contractor or higher tier subcontract is required to obtain an adequate incurred cost proposal from its subcontractor(s). Yeah, no. Wrong, wrong, wrong. That particular agency position was laughed out of court and we wrote about it here.
Another, perhaps less egregious, example is found in the DCAA slide show entitled “Elements of An Adequate Proposal.” On Slide 3, bullet 2 states “The contractor bears the burden of proof in establishing reasonableness of proposed costs.” Well, not exactly. The contractor bears the burden of proof if challenged by a contracting officer. See FAR 31.201-3(a), which states in part: “No presumption of reasonableness shall be attached to the incurrence of costs by a contractor. If an initial review of the facts results in a challenge of a specific cost by the contracting officer or the contracting officer’s representative, the burden of proof shall be upon the contractor to establish that such cost is reasonable.” That’s a slightly different emphasis, isn’t it? DCAA’s interpretation implies that the reasonableness of every proposed cost must be provided, when in fact that is not the case.
Okay, enough of this stuff. We think we’ve supported our initial assertion that, when using information and/or resources found on the DCAA website, one should be wary. The less sophisticated the contractor, the more second opinions and other interpretive resources should be sought. Many of the resources and much of the information is helpful, but there are sufficient gaps, out of date information—and even bad information—that this warning is justified.
Statute versus Regulation, Part 2
In a recent article, we discussed the quandary faced by contractors (and perhaps by contracting officers) who might seek to implement the many acquisition threshold changes mandated by the 2018 NDAA. We tried to walk the tightrope between acknowledging the quandary and our views on how to deal with it. We clearly noted that some individuals (and entities) were going to be more conservative than others.
We wrote: “You can wait for [the FAR Councils] to complete the revision process, if you’d like. Or you can lean forward and adopt statutory changes as they are enacted into law.”
Now comes evidence that the right approach is to lean forward—to implement the statutory thresholds without waiting for the FAR Councils to open and close their FAR Cases. The evidence is a Class Deviation issued by the Civilian Agency Acquisition Council (CAAC), that authorizes civilian Agency level Class Deviations to implement threshold changes in advance of official rule-making.
Remember, the changes were focused only on agencies covered by the NDAA, so the fact that the CAAC has jumped on them is a very good sign that they are going to be adopted. Well, not all of the changes, but most of them. You need to review Attachment A and Attachment B of the CAAC Class Deviation to see what will be changing in the FAR versus what will be changing in selected agency supplements (e.g., DFARS and NFARS).
For example, it’s clear that the micro-purchase threshold will be moving to $10,000 across all agencies, both civilian and non-civilian. Further, it’s clear that the Simplified Acquisition Threshold (SAT) will be moving to $250,000 across all agencies (except where it’s higher for certain listed circumstances).
Also note that for some certifications, the requirement for inclusion remains $100,000, because they were set by different statutes. For example, check the Byrd Cert, the Anti-Lobbying Cert, and the Anti-Kickback Cert. We think those will stay at $100K even as the SAT moves to $250,000. If you have contract writing software that tied certs to the SAT rather than to the underlying statutory requirement(s), then you are going to have a problem.
Interestingly (to us), no mention was made of the changing TINA limits, which will now be $2.0 million going forward. Perhaps that was outside the scope of the CAAC Class Deviation, and it will be covered by a future communication.
To summarize: the thresholds are changing. If you are one of the conservative individuals (or entities), who is waiting for the regulations to be officially revised before implementing them, then you are missing an opportunity to reduce workload. The time to update policies, procedures, and practices is now.
|
