“Lowest Available Airfare”—What Does That Even Mean?
Cool dude ERMan writes with a question. He asks—
… the new airfares the airlines are coming up with called Economy Basic. Travelers purchase tickets that are cheaper than regular economy but the tickets don’t come with overhead bin use privileges and are only allowed one small carry-on that fits under the seat in front of you. How does this impact the lowest airfare available requirement of FAR 31.205-46? Is this new airfare class the new low benchmark?
 In December, 2009, the FAR Councils—in their boundless wisdom—saw fit to issue a final rule revising the 31.205-46 cost principle “to ensure a consistent application of the limitation on allowable contractor airfare costs.” Like many similar cost principle revisions, the language was distorted and stretched and taken out of context by government auditors. (We’re looking at you, DCAA. See MRD 10-PAC-10 for an example of creating requirements where none exist in the regulation.) As a result, contractors and compliance practitioners collectively have scratched their heads regarding what the revisions actually meant and how they were to be implemented in practice.
For a rule that was intended solely “to ensure a consistent application,” the actual application has been anything but consistent.
Let’s quote from the promulgating comments of the final rule (link above)—
The travel cost principle at FAR 31.205-46(b) currently limits allowable contractor airfare costs to ‘the lowest customary standard, coach, or equivalent airfare offered during normal business hours.’ The Councils are aware that this limitation is being interpreted inconsistently, either as lowest coach fare available to the contractor or lowest coach fare available to the general public, and these inconsistent interpretations can lead to confusion regarding what costs are allowable.
The Councils believe that the reasonable standard to apply in determining the allowability of airfares is the lowest priced airfare available to the contractor. It is not prudent to allow the costs of the lowest priced airfares available to the general public when contractors have obtained lower priced airfares as a result of direct negotiation.
Furthermore, the Councils believe that the cost principle should be clarified to omit the term ‘standard’ from the description of the classes of allowable airfares since that term does not describe actual classes of airline service. The Councils further believe that the terms ‘coach, or equivalent,’ given the great variety of airfares often available, may result in cases where a ‘coach, or equivalent’ fare is not the lowest airfare available to contractors, and should thus be omitted.
(Emphasis added.)
Looking at the public comments and FAR Councils’ responses to those comments we see:
4. Comment: How will the Government determine the lowest priced coach class airfare available to the contractor versus the lowest priced coach class airfare available to the general public if the contractor does not have a negotiated airfare agreement with air travel providers and, therefore, only has available to it the same airfare that is available to the general public?
Response: In the situations described by this commenter, the lowest priced coach class airfare available to the contractor and the lowest priced coach class airfare available to the general public are the same. In this regard, the revision promulgated in this FAR case has no effect on the contractor. 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.
(Emphasis added.)
In response to another comment, the FAR Councils stated—
The amendment is not intended to guide contractors through the decision-making process of selecting the most economical airfare with the lowest net cost when multiple corporate airfare agreements are in place, as this is properly addressed in the contractor's policies and procedures that should be applied appropriately and reasonably in the circumstances of each travel mission and its associated scheduling requirements. In relying on the contractor's procedures to select the most economical airfare appropriate in the circumstances, this amendment only seeks to clarify for the contractor that it should use the lowest airfare available to the contractor that meets the schedule requirements of the trip rather than considering only airfare available to the general public for the same flight. This amendment makes explicit that the lowest of the two should be selected as the appropriate baseline.
(Emphasis added.)
Let’s summarize all that stuff above.
The contractor is not required to choose the lowest airfare available to it. The contractor is required to choose the “most economical airfare with the lowest net cost,” considering “the circumstances of each travel mission and its associated schedule requirements.” That is the requirement. That is the entirety of the requirement.
The purpose of the revision to the cost principle was to clarify that when calculating the amount of unallowable airfare associated with premium fares (business or first class) the baseline for the allowable fare was not the standard coach fare available to the general public but, instead, the actual fare available to the contractor when the contractor had negotiated fare discounts with certain airlines. Big contractors negotiate fare discounts based on their volume of travel and then they tell their employees to travel with the airline(s) that have the agreements in place. Small contractors have no opportunity to negotiate those volume-based fare discounts and thus were not affected by the rule revision. (Notwithstanding DCAA’s creation of allowability requirements where none in fact exist.)
As noted in the FAR Councils’ comments, quoted above, a savvy contractor will create travel policies and procedures (aka, “command media”) that establish the decision-tree to be used that will result in the “most economical airfare with the lowest net cost” considering “the circumstances of each travel mission and its associated schedule requirements.”
In the situation raised by ERMan, the question to be answered (for each contractor) is whether or not it is reasonable to have travelers book a fare that does not permit use of an overhead bin. For some trips—e.g., a day trip with no associated lodging—it may well be prudent and reasonable to book the lower fare. However, for most other travel it would not be prudent and reasonable to book that fare because the traveler would be carrying luggage that would need to be stowed in an overhead bin. The alternative—checking the luggage—might result in an additional fee or might result in a schedule delay as the traveler is forced to wait for the luggage to be retrieved. (There is also the risk of lost luggage.) All of these issues need to be addressed in the contractor’s decision-tree embedded in its travel-related command media.
To summarize, the imposition of the new airfare type creates a need for contractors to revisit their travel policies and procedures. There are some circumstances where it would be prudent to use the new, lower-cost fares; and there are many circumstances where it wouldn’t be prudent to use them. The trick is to delineate those different circumstances so that the travelers (and DCAA auditors) understand the contractor’s practices in this area.
Thanks ERMan for asking this question!
If you have questions of your own that might have wider applicability, feel free to email them in.
Seminars Versus Selling
In our attempts to make sense of the FAR Part 31 Cost Principles, from time to time we discuss some aspect of cost allowability that seems to be a challenge for many folks.
Today we want to talk about the allowability issues associated with attendance at a technical seminar, symposium, or conference. These are not trade shows, though you could be forgiven for thinking so because, quite often, contractors set up booths in the foyer. And it’s a fact that almost every seminar or technical conference has sponsors: some sponsorships are differentiated by levels (e.g., gold, silver, bronze, etc.), which means that the highest level sponsors paid the most money and get the most favorable attention called to them. Other seminars are “hosted” which means that one contractor provides the facilities and the snacks & beverages.
Some employees attend these seminars or conferences in order to disseminate technical information; others attend to man the tradeshow booth. Others attend to mingle and network at the breaks. Some individuals do all of the above.
There is labor to deal with, and expenses, and seminar registration fees and seminar sponsorship fees. Where is the bright line for cost allowability determinations?
A couple of cost principle points will help us figure this out.
31.205-1 states (in part)—“Advertising media include but are not limited to conventions, exhibits, free goods, samples, magazines, newspapers, trade papers, direct mail, dealer cards, window displays, outdoor advertising, radio, and television. Public relations and advertising costs include the costs of media time and space, purchased services performed by outside organizations, as well as the applicable portion of salaries, travel, and fringe benefits of employees engaged in [these] functions and activities… The only allowable advertising costs are those that are—
(1) Specifically required by contract, or that arise from requirements of Government contracts, and that are exclusively for—(i) Acquiring scarce items for contract performance; or (ii) Disposing of scrap or surplus materials acquired for contract performance;
(2) Costs of activities to promote sales of products normally sold to the U.S. Government, including trade shows, which contain a significant effort to promote exports from the United States.”
(Emphasis added.)
Except as specifically noted as being allowable, all advertising costs are unallowable.
31.205-38 states (in part)—“’Selling’ is a generic term encompassing all efforts to market the contractor’s products or services … Selling activity includes the following broad categories:
(1) Advertising. … (2) Corporate image enhancement. … (3) Bid and proposal costs. … (4) Market planning. … Long-range market planning costs are subject to the allowability provisions of 31.205-12. Other market planning costs are allowable. .. (5) Direct selling. Direct selling efforts are those acts or actions to induce particular customers to purchase particular products or services of the contractor. Direct selling is characterized by person-to-person contact and includes such efforts as familiarizing a potential customer with the contractor’s products or services, conditions of sale, service capabilities, etc. It also includes negotiation, liaison between customer and contractor personnel, technical and consulting efforts, individual demonstrations, and any other efforts having as their purpose the application or adaptation of the contractor’s products or services for a particular customer’s use. The cost of direct selling efforts is allowable. [The costs of any selling efforts other than those addressed in this cost principle are unallowable.]”
(Emphasis added.)
Except for activities noted as being allowable, selling costs are unallowable. Generally, only “direct selling” expenses are allowable. More specifically, general schmoozing, networking, and corporate image enhancement efforts are not allowable.
31.205-43 states (in part)—“The following types of costs are allowable … When the principal purpose of a meeting, convention, conference, symposium, or seminar is the dissemination of trade, business, technical or professional information or the stimulation of production or improved productivity—
(1) Costs of organizing, setting up, and sponsoring the meetings, conventions, symposia, etc., including rental of meeting facilities, transportation, subsistence, and incidental costs;
(2) Costs of attendance by contractor employees, including travel costs … and
(3) Costs of attendance by individuals who are not employees of the contractor, provided—
(i) Such costs are not also reimbursed to the individual by the employing company or organization, and
(ii) The individuals attendance is essential to achieve the purpose of the conference, meeting, convention, symposium, etc.”
Okay. Now we’ve got the basic rules and we can apply them.
If you read the rules (and you did read them, right?) then it becomes apparent that we need to understand the purpose of the expenditure in order to make the proper cost allowability determination.
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When the purpose is the dissemination of information, costs are allowable.
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When the purpose is corporate image enhancement, costs are unallowable.
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When the purpose is advertising, general marketing, networking, etc., the costs are unallowable. (Unless the efforts are to promote export of defense products.)
Those employees manning the trade show booth in the foyer? Unallowable time and expense. The employees there to network at the breaks? Unallowable time and expense. However, those employees attending the seminar or conference in order to learn something—that is 100% allowable.
What that means is that the employees who are attending for dual purposes will need to properly break-out their time and expenses between allowable and unallowable activities. Making the presentation? Likely allowable. Manning the booth afterwards? Almost certainly unallowable.
What about sponsorships?
As noted in the 205-43 cost principle, sponsorship is allowable where the purpose is a bona fide dissemination of technical information. However, where there is no dissemination of bona fide technical information—for example, where no employee is presenting and no employee is attending to learn—then the purpose of the sponsorship would be general image enhancement (general selling), and the costs would be unallowable.
Thus, the rule: bona fide training and technical information exchange are allowable, while general image enhancement and general selling are unallowable.
Remember, where costs are unallowable then all directly associated costs are also unallowable. These unallowable directly associated costs include travel-related expenses, as well as labor and allocated fringe benefits.
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T&M Subcontracts: What Can Go Wrong and How to Make it Right
A recent ASBCA decision (No. 58081, 2 December 2016) in the appeal of Kellogg Brown & Root Services, Inc. (KBR) of a contracting officer’s final decision (COFD) disallowing $14.7 million in KBR’s claimed subcontractor costs shows the pitfalls of issuing time and materials (T&M) subcontracts. It also shows how to defeat certain government arguments attacking claimed costs related to those T&M subcontracts.
KBR was issued a cost-plus-award-fee (CPAF) ID/IQ contract that “required KBR to provide the supervision, equipment, materials, labor, travel, and all means necessary to provide an immediate response for civilian construction contract capability in response to natural disasters or similar events.” Under its contract, KBR responded to several huge natural disasters in the Southern United States, including Hurricane Katrina, Hurricane Ivan, Hurricane Rita, and other related efforts. As part of its efforts, KBR issued several T&M subcontracts.
We have written before that a prime contractor should think twice before issuing T&M subcontracts, because of all the administrative requirements that go into proper subcontractor management of that contract type. We recently wrote: “At this point, if a prime is going to be issuing a T&M subcontract, there had better be a compelling business reason. Because if there is no compelling business reason then it would seem to be a really bad idea.” In this case, though, KBR seemed to have a compelling business reason for use of that subcontract type. The scope of work was simply too fluid to use a firm, fixed-price, type and the size (and maturity) of the subcontractors tended to preclude use of a pure cost-reimbursement type.
We don’t like T&M subcontracts because DCAA likes to poke holes in them, particularly with respect to initial reasonableness of subcontract pricing and also with respect to whether the personnel performing the work properly fit into the labor categories in which they are being billed. In KBR’s case, DCAA initiated Form 1 disallowances and made other audit findings (many of which were sustained by the contracting officer) that proved our point. The disallowances were so large and pervasive that, in June 2009, the Navy customer simply stopped paying all KBR invoices and making the required award fee determinations to which KBR was entitled under the contract.
DCAA questioned (and disallowed) KBR’s subcontractor costs using the following rationales, many of which applied to the same subcontractor:
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Subcontractor markup applied to hourly labor rates and equipment, because that created a prohibited cost-plus-percentage-of-cost subcontract type.
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Subcontractor pricing was unreasonable.
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Unreasonable and/or unallowable costs built-into subcontractors’ fixed hourly billing rates.
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Subcontractors billing lower-tier subcontractor costs as material (with markup) instead of labor, which would have been via fixed hourly rates (without markup).
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Unsupported third-tier subcontractor costs (certified payrolls were required to be submitted).
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Subcontractor billed labor hours that did not match the subcontractors’ certified payroll records.
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Subcontractor invoice math errors related to labor adjustments (the contract work moved from Davis-Bacon Act applicable to nothing to Davis-Bacon Act applicable to Service Contract Act applicable).
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Subcontractor Other Direct Costs (ODCs) and associated markup, because reasons.
The ASBCA decision discusses those points and, in the main, refutes them. The vast majority of questioned (and disallowed) costs was found to have been properly billed by KBR. The decision did not discuss the fairness of simply not paying invoices for nearly eight years but, given the fact that the COFD was rejected in nearly all respects, we have to ask whether that reflected well on the Navy and its administrative team. The lesson here, for government folks, may be that ringing the alarm bell over a DCAA audit report is not always warranted. In fact, COs are required to be independent adjudicators of disputes between DCAA and contractors. (But we digress.)
The decision is worth going into because many of the points raised by DCAA (and sustained by the CO) in KBR’s contract are points that are frequently raised. Thus, the decision gives us all some ammunition we can use to refute those points the next time they are raised. We are not going to cover all issues raised and decided in the decision; instead, we are going to focus on the ones that seem to us to be the most important.
1. A T&M subcontract with additional markups (on either side of the T&M equation) is an illegal cost-plus-percentage-of-cost (CPPC) subcontract. No, it’s not. Citing to Urban Data Systems (699 F.2d 1147, Fed Circuit, 1983), Judge D'Alessandris, writing for the Board, found that “A contract is a cost-plus-a-percentage-of-cost contract when (1) payment is on a predetermined percentage rate; (2) the predetermined rate is applied to actual performance costs; (3) the contractor's entitlement is uncertain at the time of contracting; and ( 4) the contractor's entitlement increases directly with an increase in performance costs.” He found that the additional markup applied by KBR’s subcontractors to their T&M billings did not equate to a CPPC subcontract because the markups were not applied to actual costs; instead, they were applied to the fixed hourly billing rates. Thus, the second factor or prong of the four-part test was not satisfied. Even where a markup was applied to the reimbursable “M” side of the T&M contract, the contract was still not a CPPC type because it still had fixed hourly billing rates on the “T” side. This is a critical finding and readers need to remember it. Essentially, so long as any aspect of a subcontract is not billed at actual costs, it is very difficult to find that the subcontract is a CPPC type.
2. When the government asserts that subcontractor pricing is unreasonable, the burden of proof is on the contractor to prove it is reasonable. Well, not exactly. Citing to another KBR decision at the Federal Circuit level, Judge D’Alessandris quoted “"the standard for assessing reasonableness is flexible, allowing [the Board] to consider many fact-intensive and context-specific factors.'" Thus, even though the burden of proof was on KBR, its arguments as to why the pricing was reasonable were persuasive. For example, with respect to one subcontractor (Environment Chemical Corporation), DCAA alleged that KBR awarded the subcontract to the highest of three bidders without justification and that KBR did not solicit bids from qualified competitors that had lower rates. In the COFD, the CO determined that ECC’s labor rates were reasonable compared to its competitors but still questioned some of the claimed labor costs. According to the decision, “KBR … presented direct evidence that ECC' s bid of $68 per hour was the best value because the other two offerors did not submit fully burdened labor rates as requested by KBR, and also because the rates, when adjusted for the additional overhead items disclosed in the bids by the other offerors, were higher than ECC's rate or close to the ECC rate with other overhead items still not accounted for.” Thus, the rates were found to be reasonable. Period.
3. The government can question unallowable and/or unreasonable costs within the fixed hourly billing rate. No, they can’t. Back to ECC. The COFD asserted (based on the DCAA audit findings) that ECC’s fixed hourly billing rates contained unallowable and/or unallocable and unreasonable costs, including such items as an allocation of unallowable/unallocable “management airfare” and lodging costs that were already reflected in the hourly billing rates. Judge D’Alessandris disposed of those assertions, finding that the FAR cost principles did not apply to the fixed-price hourly billing rates. He wrote “FAR 31.205 pertains to the allowability of selected costs for cost-type contracts. FAR 3l.204(b)(1) provides that costs in that FAR part are allowable for cost-reimbursement, fixed-price incentive, and price redeterminable contracts. As ECC had a fixed-price, time-and-materials contract, these cost allowability provisions are inapplicable and we find for KBR with regard to the $0.15 per hour management airfare issue. … ECC submitted a fixed-price fully burdened bid, and the final decision does not question the fixed hourly rate. How ECC internally apportions that hourly rate is irrelevant to the Navy, as the Navy is reimbursing at a fixed hourly rate of $68 per hour.” (Emphasis added.)
4. Math errors in the reconciliations supporting subcontractor invoices, without further support, indicate unallowable costs. Wrong again. One subcontractor had to repropose its hourly billing rates as its efforts flipped in and out of Davis-Bacon Act and Service Contract Act coverage. There were other contract changes going on as well. KBR kept a spreadsheet of all the changes and, according to DCAA, it was rife with math errors. The COFD cited to DCAA’s audit finding without any further support. The decision states “On cross-examination, the DCAA auditor … testified that he had not attempted to seek more information from KBR regarding the calculations in the spreadsheet. He also conceded that if the explanations [provided by KBR about the changes] were correct, then there were no math errors in the spreadsheet. [He] further testified that if the rates used the in the spreadsheet were appropriate, there would be no basis for questioning BE&K's costs.” (Internal citation omitted.)
5. Failure to submit certified payrolls to support invoices results in unallowable subcontractor costs. Nope. That’s not correct either. KBR paid 75% of a subcontractor’s invoice but withheld 25% percent because the subcontractor failed to submit certified payrolls to establish compliance with Davis-Bacon Act requirements. Naturally, the COFD asserted that the 75% paid was unallowable because it was unreasonable for KBR to have paid the subcontractor anything at all. For its part KBR asserted that “it was unreasonable for the Navy to disallow the FSS invoice amount in its entirety, especially because KBR had already reduced the invoiced amount by 25%.” Key to KBR’s argument was that the work had been actually performed. Judge D’Alessandris wrote “The DCAA audit and the final decision denied payment based solely upon the failure to provide the certified payroll information, and the disallowance was not based on any finding that the payroll information provided, although not in the correct format, was inaccurate. Under these circumstances, we hold that the Navy improperly denied any payment of the invoice; however, there is a quantum issue to determine the appropriate amount of withholding. Here the contracting officer denied 100% of the amount invoiced, which already reflected a 25% discount from FSS' invoice. Pursuant to the Board's holding in Acme, the withholding must be a ‘reasonable’ amount. The reasonable amount is a quantum issue to be remanded to the parties.”
This decision is complex, with more than 250 separate findings of fact. We have attempted to summarize the aspects of the decision that we found potentially impactful to our readers. There were other aspects that we could have discussed but then this article would have approached the 56 page length of the decision! For those seeking more insight, we suggest you read the entire decision, once the ASBCA website returns to functionality.
Hat Tip to ERMan for sending us the decision via email. Much appreciated!
Timekeeping Fraud
Timekeeping fraud continues to be the most prevalent form of employee misconduct—and one of the easiest to prove.
In the DoD OIG’s Semiannual Report to Congress, covering the six-month period ending 31 March 2016, the Defense Inspector General reported that labor mischarging comprised 60 percent of all contractor disclosures made during that period. The DoD OIG reported that, during the six-month period ending 30 September 2016 (which is the most current reporting period) labor mischarging made up 71 percent of all contractor disclosures.
And those two data points are consistent with history. Labor mischarging—timekeeping fraud—is by far the number one reason contractors made disclosures, as required by the contract clause 52.203-13. (For details about contractor disclosures, see my article, “Audits of Mandatory Contractor Disclosures under 52.203-13: Everything You’ve Been Told is Wrong,” available on this website under “knowledge resources.”) Despite employee training and contractor internal controls designed to prevent such misconduct, it is still the number one reason for employee disciplinary action.
It’s not just contractor employees, of course. It’s anybody, really, who thinks they can get away with breaking the rules. And that also includes government employees and those independent contractors who work directly for the Federal government.
Such as Dan Glauber.
Dan worked as a contract employee for the Office of Personnel Management (OPM), where he served as a system administrator. To be clear: Dan was not a government employee, but he was an independent contractor hired directly by OPM. It was a full-time gig. It didn’t last very long, though. He only made it a little over three months (April 2012 through August 2012) before being terminated. It’s not clear why he was terminated, but we can guess that the 323.75 hours he recorded on his timesheet during that period where he wasn’t present at the OPM worksite may have played a role.
After Dan was terminated, one of the causes for his absentee status was uncovered. It seemed that Dan also worked, full-time, for NSA as a subcontractor. NSA investigators determined there were 269.5 hours recorded on Dan’s timesheets, for which he was not present at the work site. These missing hours were recorded during the period May 2012 through August 2012.
So Dan did the dream. He pulled down pay for two full-time gigs at the same time. Unfortunately, that was timekeeping fraud. The interesting thing is that, while the OPM folks noticed his absences and investigated, the NSA folks seemingly did not notice until the OPM folks clued them in.
Oops!
According to the obligatory Department of Justice press release, Dan was convicted of making false statements, and was sentenced “to five years of probation. During that time, he will be placed on GPS monitoring for 90 days, must perform the community service, and must pay a total of $70,646 in restitution.”
Why do employees keep on falsifying their timesheets, despite all the training and all the internal controls deployed to prevent such wrongdoing, and despite all the downside of getting caught?
We don’t have the answers, but we strongly suspect one causal factor is that the supervisory review and approval of employee timesheets isn’t as strong an internal control as it’s cracked-up to be. Really, in this virtual world, how much insight can a supervisor have into an employee’s time when the employee is performing work in another building, or perhaps in another location far away? What good is that supervisory signature when the supervisor may have no idea how the employee spends their time?
HR tends to link supervisory timesheet reviews with the organizational structure. The supervisor who reviews and approves timesheets is same one who does the annual performance reviews. Perhaps it’s time to revisit that linkage and decouple it. Perhaps the supervisor who reviews and approves an employee timesheet should be the one who is there actually supervising the employee on a day-to-day basis. That way, there will be some real assurance that when a supervisory signature is found on an employee timesheet, it was based on real insight and knowledge. It was not just a rubber stamp.
We’re just sayin’….
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