The 2017 NDAA—What You Need to Know
From the public law that is the annual National Defense Authorization Act, signed by President Obama on 23 December 2016, springs future FAR and DFARS rule-making. Thus, a review of the NDAA gives some forewarning about future rules and rule revisions to come. As always, we rely heavily on Bob Antonio’s WIFCON analysis of Title VIII.
And as always, it’s a challenge to reconcile the House and Senate versions. Bob’s analysis provides them both. Any mistakes in interpretation are ours.
What is our opinion of the new public law? Well, let’s be diplomatic about it.
This year’s NDAA is a mixed bag. It contains much really bad law drafting, which is sure to lead to really bad future rule-making. It also has some nuggets of goodness mixed in with the bad. Overall, though, it’s not a good thing at all.
Remember that we are not reporting on the whole thing; the entire piece of legislation is massive. These are just the provisions that leap out at us, mostly from Title VIII and one bit at the end from Title IX. There are many more issues in the final document that is the formal public law, but it would take us a long time to wade through it all.
With that out of the way, let’s hold our collective noses and get started, shall we?
Section 820 establishes a new Defense Cost Accounting Standards Board. We agree that the current CASB, housed in the OFPP (which is housed in the OMB, which is under the White House), has been pathetic over the past four or more years. We’ve posted our opinion on the CASB’s inaction more than once. Still, WTF? Do we really need two of these things?
The duties of the Defense CASB include:
(1) ensure that the cost accounting standards used by Federal contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems;
(2) within one year after the date of enactment of this subsection, and on an ongoing basis thereafter, review any cost accounting standards established under section 1502 of this title and conform such standards, where practicable, to Generally Accepted Accounting Principles; and
(3) annually review disputes involving such standards brought to the boards established in section 7105 of this title or Federal courts, and consider whether greater clarity in such standards could avoid such disputes.
Yeah, there’s no conflict of interest there. We are sure that the new DCASB and the old CASB will align and collaborate well together. (Note: That was sarcasm.)
The House version included the following amendment, which we believe would be carried forward into the final public law:
The House … would … improve the government-wide Cost Accounting Standards Board (CASB) and require that Federal Cost Accounting Standards (CAS) be reconciled, to the extent possible, with U.S. Generally Accepted Accounting Principles. The amendment also would require the CASB to hire an executive director and meet at least quarterly to reduce inconsistencies between CAS and GAAP, as well as address problems identified by cases presented to the Armed Services Board of Contract Appeals and Civilian Board of Contract Appeals. … the head of a Federal agency [may] waive the application of the CAS for contracts valued at less than $100.0 million. The amendment also would retain the Senate proposal to create a Defense Cost Accounting Standards Board, but would authorize the new board to advise the CASB, oversee implementation of CAS within the Department of Defense, and ensure that managerial cost accounting is appropriately implemented for commercial functions performed by employees of the Department. The conferees also encourage the Director, Defense Contract Audit Agency (DCAA) to examine the potential for electronic quality management systems to improve the ability of DCAA to conduct thorough and timely audits.
[Emphasis added.]
See that part in italics, the part we emphasized? What does that even mean? What does “oversee the implementation of CAS within the Department of Defense” mean and how is that any different from the now long-defunct DoD CAS Working Group?
None of the above is any good for contractors, except perhaps for the creation of a new CAS exemption for any/all contracts valued at less than $100 million. We’ll have to see whether it will be the new Defense CASB or the old OFPP CASB that takes the lead in revising the FAR Part 99 CAS regulations as Congress directed. As the old OFPP CASB (henceforth: “OCASB”) has done nothing in the past several years, we expect the new DCASB to take the lead, because somebody has to.
Section 822 does something to competition requirements. Based on the Section title, one assumes the intent was to enhance competition. Let us know if you see how the following language will enhance competition.
FAR 15.403-1(b)(1) currently establishes that a contracting officer is prohibited from obtaining certified cost or pricing data when certain listed circumstances are present. Among those listed circumstances is the following: “The contracting officer shall not require certified cost or pricing data to support any action (contracts, subcontracts, or modifications) … to support a determination of a fair and reasonable price or cost realism) … When the contracting officer determines that prices agreed upon are based on adequate price competition ….”
The phrase “adequate price competition” is a term of art that is defined at FAR 15.401-1(c)(1). That FAR subparagraph identifies various circumstances that would create “adequate price competition”. Thus, to know if you have adequate price competition you have to read that subparagraph to see if your circumstances qualify. If they do qualify, then not only are you exempt from the requirement to provide certified cost or pricing data, but the contracting officer is actually prohibited from requiring it.
The 2017 NDAA directs the FAR Councils to revise the current language of FAR 15.402-1(b)(1) as follows:
“Submission of certified cost or pricing data shall not be required … in the case of a contract, a subcontract, or modification of a contract or subcontract for which the price agreed upon is based on … competition that results in at least two or more responsive and viable competing bids …. “
In other words, the term of art “adequate price competition,” which previously had been defined by the FAR, has been replaced with a single set of circumstances. The other circumstances previously defined by FAR 15.401-1(c)(1) no longer seem to lead to a determination that there is adequate price competition. If we’ve interpreted the change correctly, this is really bad news for contractors. On the other hand, the other listed circumstances may continue to apply, and the changes may only apply to the first set if circumstances. That would be better. We’ll have to see which way it goes.
In addition, Section 822 also clarifies that the prime contractor is responsible for applying the FAR criteria to its subcontract awards, and thus determining whether or not it needs to obtain certified cost or pricing data for its own cost/price analyses. The language also clarifies that the government has the right to review those determinations. Frankly, we don’t see this as much of a change. From our point of view, the prime was always responsible for those determinations and the government always had the right of review (through CPSR, if nothing else).
Section 823 appears to clarify when the executive compensation ceiling amounts are to be applied. If we are interpreting it correctly, it eliminates the retroactive implementation. That’s some good news.
Section 824 requires both contractors and DCAA to separately report IR&D and B&P expenses—i.e., separately from other claimed allowable costs. In addition, it requires the DoD to establish a goal that limits reimbursement of contractor B&P expenses on cost-type contracts to not more than 1 percent of that contractor’s revenue; however, the DoD cannot accomplish this by making excess B&P reimbursements unallowable. Instead, if the DoD finds itself reimbursing excessive contractor B&P costs, it must figure out why. This language is going to require contractors to do separate reporting on their expenditures—in addition to the current burdens placed on them in 2016 (which we have written about fairly extensively).
Section 831 reinforces the FASA concept that the DoD should be using performance-based payments instead of cost-based progress payments as the preferred form of contract financing. That’s a bit of a joke, isn’t it? The DoD has worked very hard to move away from PBPs over the past few years and we don’t see any reason that’s going to change in 2017, no matter what Congress may direct.
Section 851 establishes that the DoD may count first and second tier subcontract awards in reporting progress in meeting its socioeconomic reporting goals. To us, this means that contractors will have some additional reporting burdens.
Section 861 directs the DoD to establish “program management” as a separate discipline from “acquisition management” – which is a very very good thing indeed.
Section 893 makes significant changes to the contractor business system rules. As we interpret the language, it establishes the following:
-
Publicly traded contractors that must comply with Sarbanes-Oxley, for which they hire external CPAs to test compliance with SOX Section 404, may also use their external CPAs to test their compliance with contractor business system requirements. If the external CPAs express an opinion that the contractor meets the requirements, then those business systems need not be further audited by the DoD.
-
Contractors not subject to full CAS coverage have long been exempted from compliance with the contractor business system requirements. In addition, contractors that generate less than one percent of sales from the U.S. Government are now also exempted.
If we interpret the foregoing correctly, it means that certain contractors may benefit but other contractors will still be in the same business system boat.
Finally, as we reported would be the case, it seems that the 2017 NDAA has directed the disbandment of the Office of the Under Secretary of Defense (Acquisition, Technology & Logistics). Section 901 replaces the existing OSD organization with two new Under Secretariats: the Under Secretary of Defense for Research and Engineering (USD R&E) and the Under Secretary of Defense for Acquisition and Sustainment (USD A&S). There is also a new Chief Management Officer (CMO).
We have no fondness for the current USD (AT&L). We have tracked Mr. Kendall’s initiatives for some time, for at least six years. In particular, we noted his attempts to take credit for the “S2T2” initiative, which turned out to be nothing at all. See our opinions of that effort here. More recently, his role in killing efforts to save as much as $125 billion in Pentagon overhead costs was well documented by the Washington Post, and we commented on it as well. Still, we wish him well in his new endeavors.
Similarly, whatever respect we may have once had for the Directorates reporting to the USD (AT&L) has withered away over the past 15 years or so. Pretty much since the time when DPAP refocused its mission on “procurement and acquisition policy” instead of acquisition reform. We look to DPAP and other Directorates for leadership; but what we find instead is bureaucrats defending the existing status quo. See our article on the many recent acquisition reform disappointments for more on this topic.
The USD (AT&L) organization has made token efforts over the years to improve acquisition outcomes. “Should-cost” and “Better Buying Power” are two initiatives that come to mind. Yet, in our view those efforts have been much about trying and not very much about doing. In other words, the taxpayers haven’t received much in the way of promised benefits. So we say: let’s try this again with a new organization. Perhaps we’ll get a different, and better, outcome.
There is much more to say about the 2017 NDAA but this is enough words for now. As always, we encourage readers to go see the legislation for themselves.
About our Clients
The first rule of consulting is client confidentiality. We don’t identify our clients by name and, on the rare occasion we have cause to write an article about them, we change the names to protect their confidentiality. That being said, we thought readers might be interested in what we’ve been doing this past year. Without further introduction, here is a list of Apogee Consulting, Inc.’s 2016 clients and their projects.
-
Client 1 is a small, woman-owned business that provides engineering services. It’s experienced a phenomenal growth rate over the past few years. Its customers are largely prime defense contractors providing services to the US Navy. We have supported this client, off and on, for many years. Sometimes this client takes our advice. Other times: not so much. When the latter occurs we tend to write about it. The client wanted to become a prime, and receive cost-type contracts, but failed its first DCAA accounting system review, primarily because the company accountant didn’t know anything about government accounting or what DCAA would look for, and the client didn’t call us until afterwards. We helped the client develop a corrective action plan, which included hiring somebody who knew something about government contracting and government accounting. We helped the client advertise the position and evaluate candidates. The company eventually found somebody they liked. Since the company made the successful hire, we haven’t heard from it. (Which is fine, because our aim is to work ourselves out of a job. But it would be nice to know whether or not the client completed the accounting system corrective action plan we developed.)
-
Client 2 is a very successful small business providing engineering services, primarily to non-defense prime contractors. This client reappeared in late 2015, after several years of silence, with significant audit problems (most of which were rebuttable). After several attempts to rebut the audit findings with mixed success, we advised contacting an attorney, and the client accepted our recommendation. We continue to actively support this client and help prepare for litigation. More to the point, we continue to assist efforts to avoid litigation.
-
Client 3 is a former small business that became a large business by virtue of being acquired by a large business. It designs and produces complex connectors for aerospace and defense applications, both as a prime and as a subcontractor. Ed worked with this client to develop its first small business plan, which was now a contractual requirement. This was a rocky project because the client could not identify which internal organization and/or individual would be responsible for implementing the small business plan, to include such activities as small business outreach and reporting. Still, we delivered what the client asked for; we have no idea whether or not the client actually implemented the plan we designed.
-
Client 4 is a medium-sized classic defense contractor, recently acquired by a larger international organization. In 2015 Tom helped this client with critical subcontractor cost/price analyses that were delaying a large contract award. In 2016 he was asked to return to help with certain other issues, which included overseeing a project to develop a specialized safety manual for an affiliated entity.
-
Client 5 is a small subsidiary of a large defense contractor. It has both commercial and government contracts, but the government contracts have all been FFP. The large defense contractor recently was acquired by an even larger defense contractor. The problem was that this subsidiary had been providing products to the acquiring entity under a FFP purchase order. Now the transaction would be an inter-organizational transfer subject to FAR 31.205-26(e); i.e., it would be a cost-type agreement. We assisted the company with preparing a proposal that would meet FAR Table 15-2 requirements, including calculating compliant indirect cost rates. (We will continue to assist this client with similar issues in 2017.)
-
Client 6 is a small, entrepreneurial company that designs and produces innovative products, primarily for defense prime contractors—although it has at least one DoD prime contract of its own. Our first project was to assist the company with designing a new indirect rate structure that would permit commercial item transactions (i.e., commercial item subcontracts between affiliated entities, which are different from non-commercial inter-organizational transfers). Our second project, which is still ongoing, involves Tom assisting with cost/price analysis regarding several subcontractors, some of whom seem to qualify for a commercial item determination. The challenge here is to sell the commercial item determination to the DCMA contracting officer.
-
Client 7 is a lovely client who ignored our advice, actually lied to us about the project status, and then didn’t pay our bills. We wrote a two-part article about this “gem” of a client. 2017 will start with us taking this asshole to court in order to collect what we are rightfully owed. Rocko, we are coming for you.
-
Client 8 is a long-term client, for whom we’ve been providing “on-call consulting services” for many years. A large telecommunications provider, this mega entity also has a smaller division that provides products and services to the DoD. We have provided advice and assistance to this client in areas including cost allowability, cost accounting practices, SAP implementation, commercial item determinations, and indirect rate calculations.
-
Client 9 is a new client, for whom we also provide “on-call consulting services.” That means that, basically, we answer their questions. Because this client already has a full-time experienced compliance team, we tend to only get difficult questions that require thought and research.
-
Client 10 is a small business provider of technology services to the DoD. We took on a quick-turn project to help the company develop a brand new indirect rate structure. This involved detailed labor cost modeling. The final indirect cost model aggregated data from three sources across two companies, and involved modeling a split of one fringe benefit pool into two fringe benefit pools, an on-site and an off-site overhead rate, and comparing a TCI G&A allocation base to a VAB G&A allocation base. For the VAB base scenario we developed a material handling pool. Honestly, it was one of the most complex models we’ve ever seen. But we got it done!
As you can see, Apogee Consulting, Inc., works on a variety of projects for both small and larger companies. It’s good to be busy.
2016 was a great year and we trust 2017 will be just as good!
|
Project Management, Subcontractor Management, and False Claims
 We recently wrapped-up 2016 with an article summarizing the many procurement-related fraud stories that December brought us. As we noted in that article, none of them really merited a stand-alone blog post; but taken together, they presented a pretty damning picture of the current state of procurement fraud. That article was written just before Christmas and posted on 28 December, and we figured that was it for the year.
But we were wrong.
There was at least one more fraud story to come out before year-end. But it’s okay, because this one would have merited its own blog article in any case. It ties together many of the themes we frequently repeat on this site, including:
-
The prime contractor is responsible to its customers, not only for delivering on time and on budget, but also for the actions of its subcontractors. The prime must manage all the risks associated with its responsibilities. The notion that the prime’s risks can be transferred to the subcontractor is wrong. (The reason it’s wrong is called “privity of contract;” you can look that phrase up if you are not familiar with it.) The most a subcontractor can do is indemnify the prime contractor; and that only works for some risks and only up to the point that the subcontractor has sufficient resources (financial and otherwise) to provide indemnification.
-
Because the prime contractor is responsible for program execution, and because risk cannot be effectively transferred to subcontractors, the prime contractor must take reasonable measures to ensure that its subcontractors are complying with the terms of their subcontracts. It is not DCAA’s job to audit your subcontractors; it is your job. At the very least, you have to try.
-
Effective subcontractor management is the key to effective project/program management. This is especially true in today’s aerospace/defense environment, where up to 70 percent (and more) of a typical Major Defense Acquisition Program (MDAP) is subcontracted out into the supply chain.
-
Contract types matter; and your choice of subcontract type impacts your risks and therefore impacts your risk management efforts. Choosing the wrong subcontract type will lead to many downstream challenges, not the least of which will be closing-out the subcontract.
With all that being said (yet again), let’s look at this end-of-year fraud story, brought to us by the U.S. Attorney’s Office of the District of Maryland.
In that press release (link above) we see that Advanced C4 Solutions, Inc., agreed to pay the U.S. Government $5.4 million to settle allegations that it violated the False Claims Act (FCA) by submitting “inflated invoices” to its government customer, SPAWAR.
First thing: Advanced C4 Solutions (ACS) is a small business, In fact, it is a certified “8(a) business,” which means quite a bit in terms of competitive advantage—but which meant absolutely nothing in terms of liability for contract compliance. Being a small business or a small disadvantaged business or an 8(a) business buys you nothing if the government believes you are trying to rip it off. And in this case, the government alleged that the ACS project manager—who was named—knew that ACS’ subcontractor, Superior Communication Solutions, Inc. (SCSI) was submitting invoices to ACS that “charged for labor hours that were not actually worked … at job classification rates for personnel that did not have the requisite credentials to be billed at those rates.”
Thus, we learn that ACS awarded SCSI a T&M type subcontract that had designated hourly billing rates for certain defined labor categories. SCSI billed ACS for labor hours by people that did not qualify for the labor categories under which they were billed. In addition, SCSI billed ACS for labor hours that were not actually worked, which we should all agree is kind of a no-no.
Importantly, the press release clearly states that the ACS project manager “was responsible for verifying the accuracy of all invoices submitted by subcontractors to the Company and, in turn, all the invoices submitted by the Company to SPAWAR.” This is important because, in our experience, too many PMs think that subcontractor invoice approval is a waste of their time. They tend to think it’s an accounting function or a contracts function. But it’s not: it is clearly a PM’s (or knowledgeable delegate’s) responsibility to verify that subcontractor services were provided in a compliant fashion—to include verifying that labor hours were performed by qualifying subcontractor personnel. PM’s have to do whatever it takes to verify compliance; they need to ensure adequate time and resources are budgeted in the project/program for those actions.
Because the PM will be held accountable, even if it is the company that ultimately pays the legal bills.
In this particular case, the PM (Andrew Bennett) and two others were individually indicted on federal criminal charges related to this matter. The $5.4 million settlement just got ACS off the hook; the PM is being held individually liable. (We note for the record that $5.4 million was probably a big hit to ACS’ 2016 profits.) Holding individuals liable separately from the company liability is a recent Department of Justice trend and one readers should be sensitive to. (Look up “Yates Memo.”)
So far, two alleged conspirators have pleaded guilty. The press release reports that “Bennett and Shank pled guilty to conspiracy to commit wire fraud for their conduct related to the DO 27 contract. The third defendant is scheduled for trial beginning on January 30, 2017.” A single wire fraud count carries with it a maximum sentence of 20 years in federal prison.
How’s that for individual accountability?
In summary, this story neatly confirms several of our recurring themes on this blog. You might want to print this one out and save it for your next staff meeting.
End of Year Legal News
So here we are at the end of 2016.
We thought we would wrap-up the year with a list of some legal news. As long-time readers know, we stopped reporting most fraud stories a while ago, because they got boring. There was very little reason to sit down and type up a story about yet another fraud. Plus, there were just too many. It was too much for us.
And we don’t even follow reports of healthcare fraud.
To prove our point, here’s a recap from the past 30 days or so. Basically, this is just one month’s worth of procurement-related fraud news, none of which--in our view--merited a stand-alone article. (The list excludes, as always, reports of healthcare fraud. Believe us: the list would have been much longer if we included the Medicare/Medicaid fraud and similar matters.)
-
$125 million FCA settlement paid by “Bechtel National Inc., Bechtel Corp., URS Corp. (predecessor in interest to AECOM Global II LLC) and URS Energy and Construction Inc. (now known as AECOM Energy and Construction Inc.)” in connection with allegations that “they made false statements and claims to the Department of Energy (DOE) by charging DOE for deficient nuclear quality materials, services, and testing that was provided at the Waste Treatment Plant (WTP) at DOE’s Hanford Site near Richland, Washington. The settlement also resolves allegations that Bechtel National Inc. and Bechtel Corp. improperly used federal contract funds to pay for a comprehensive, multi-year lobbying campaign of Congress and other federal officials for continued funding at the WTP.”
-
Convicted fraudster ordered to forfeit $6.7 million in connection with his conviction for “recruiting veterans as figurehead owners of a construction company in order to receive specialized government contracts.”
-
Two men had lengthy prison sentences affirmed on appeal for their roles in executing “the largest reported DBE fraud in the nation’s history.” Their scheme lasted for “over 15 years and involved over $136 million in government contracts in Pennsylvania alone.”
-
A woman was charged with making False Claims and False Statements for being paid for two DoD jobs at the same time. While getting paid for being a security guard for a SCIF facility, the woman was alleged to have also worked as an active duty Army intelligence officer at Fort Meade.
-
A subcontractor that managed military housing agreed to pay $1.6 million as part of a deferred prosecution agreement to resolve criminal fraud charges related to accepting “kickbacks” which may have included undisclosed insurance rebates. (We recently did a blog post on accounting for credits.) In connection with the government investigation, two individuals were convicted; both were fined and one went to jail.
-
Those readers who remember the “Fat Leonard” scandal (which we’ve written about on this blog) may be interested to know that “a former supervisory contracting officer was sentenced to 72 months in prison today for accepting bribe payments in exchange for steering U.S. Navy contracts” to Fat Leonard’s company.
-
ThunderCat Technology, LLC, “agreed to pay $1 million to settle civil False Claims Act, Anti-Kickback Act, and Procurement Integrity Act claims relating to bid rigging and kickback schemes in connection with six government procurements.”
-
A former Veterans Administration Chief of Podiatry and the CEO of a VA vendor were indicted by a grand jury for “health care fraud, conspiracy to pay and receive kickbacks on medical referrals, and conspiracy to commit wire fraud.” Some of the 11 counts were related to an alleged scheme to bill “the Veterans Health Administration for custom work and services that were prescribed but not supplied in shoes delivered to veterans.” (Note to readers: yes, this one was related to healthcare fraud, but if you follow the link and read the story, you’ll see it wasn’t really about healthcare fraud. It was really about common variety procurement fraud in a VA hospital.)
-
GE Aviation agreed to pay $2.55 million to settle allegations that its Italian subsidiary, Avio Aero, falsified testing reports on “gearboxes used in T700 and F110 engines in DOD helicopters and fighter jets, respectively.”
-
Two Northeast construction companies—along with four individuals—agreed to pay $1 million to settle allegations of FCA violations that stemmed from “claims for reimbursement for funding earmarked for minority, women-owned, or small business that they were not entitled to receive.” One company was the prime; the other was the subcontractor. Apparently both companies were aware that the subcontractor did not qualify as a disadvantaged business enterprise (DBE), yet the prime allegedly claimed awards to the subcontractor on its small business reporting to the US EPA.
-
A Chinese national and lawful permanent resident of the United States pleaded guilty to various charges centered on his admitted theft of sensitive military program documents from United Technologies Corporation and transporting them to China. Charges to which the man pleaded guilty included: “one count of conspiracy to engage in the theft of trade secrets knowing that the offense would benefit a foreign government [and being a] foreign instrumentality or foreign agent, [and] one count of unlawful export and attempted export of defense articles from the U.S. in violation of the Arms Export Control Act.”
-
Finally, Roy Friend, of Newport News, VA, was sentenced this month to serve 33 months in prison after pleading guilty to stealing government property. While employed by DoD as “Chief of Logistics and Program Management, Aviation and Missile Command” at Fort Eustis, Friend ordered roughly $905,000 in goods from the GSA Advantage website and under the auspices of the U.S. Falcon contract. During an investigation, it was determined that Friend took some of the items for personal use; other items had the GSA shipping labels removed prior to being resold; and still other items were sold on eBay. The scheme apparently went on for about five years before being detected.
One last word on the foregoing. We get emails from the Department of Justice every day (sometimes more often) so it’s a fairly quick task to skim the emails to see if there’s anything worthy of a blog article. If not, the emails are quickly deleted. When we set out to compile this list of wrongdoing for our readers, many of the original emails had already been deleted. But Bob Antonio keeps a rolling list of procurement fraud links over at his WIFCON site. Thus, his list became an invaluable resource for compiling this list. If you don’t visit WIFCON at least once a week, you are missing a very important resource for government contracting and compliance professionals.
And I think we’re done with 2016 now.
|
