Advance Agreements
“Certainly the game is rigged. Don't let that stop you; if you don't bet you can't win.” – Robert A. Heinlein
This past week was Fed Pubs’ La Jolla Government Contracting Week, in which one of the most popular seminar-providers scheduled multiple courses in multiple areas of government contracting—all held in one hotel. Lots of people attended; it’s kind a big deal and there’s even a sponsored reception for students from the various classes to meet, mingle, and network. We know most of the instructors and they are, for the most part, top-notch. We have had no problem recommending these courses. That said, we were eager to get some feedback from course attendees.
One thing we heard was that some instructors were recommending use of Advance Agreements in order to proactively establish defenses against adverse DCAA audit findings. Obviously we weren’t there, but the logic seemed to be that DCAA auditors were going to have findings—often findings that were obviously meritless—but the cognizant Contracting Officer was going to be hesitant about flatly overruling those findings because of the DCMA bureaucratic rules that govern the process.
Gone are the days when a warranted Contracting Officer had the authority to use independent business judgement to adjudicate and negotiate and resolve disputes without litigation. In today’s Federal contracting environment, it’s a rare CO who wants to risk their career in order to support a contractor’s rebuttal of an adverse audit finding.
The theory, then, is that it is better to negotiate and work out a deal before things get adversarial. The contractor and CO should come to an understanding, memorialize it, and sign it. Then when DCAA shows up with problematic findings, it’s not about an auditor being wrong; instead, it’s about a pre-existing agreement that needs to be upheld by the US Government.
It’s a good theory and we have no problem seconding the recommendation. Advance Agreements are great things when you’ve got them (and have retained them to support future audits). Our only problem is that they are damn hard to get these days.
Let’s talk about Advance Agreements.
FAR Rules
Advance Agreement are discussed in FAR 31.109. FAR 31.109(a) states that “To avoid possible subsequent disallowance or dispute based on unreasonableness, unallocability or unallowability under the specific cost principles at Subparts 31.2, 31.3, 31.6, and 31.7, contracting officers and contractors should seek advance agreement on the treatment of special or unusual costs and on statistical sampling methodologies at 31.205-6(c).” So there’s the rationale for having them: they are intended to avoid cost disallowances or disputes in areas where it is “difficult to determine” cost allowability. Importantly, the FAR is clear that Advance Agreements should be negotiated “before incurrence of the costs involved” – i.e., in advance. (Duh.) According to FAR 31.109(b): “The agreements must be in writing, executed by both contracting parties, and incorporated into applicable current and future contracts. An advance agreement shall contain a statement of its applicability and duration.” In addition, “Advance agreements may be negotiated with a particular contractor for a single contract, a group of contracts, or all the contracts of a contracting office, an agency, or several agencies.” Other than that, the parties are relatively free to draft their Advance Agreement in any manner they may choose.
FAR 31.109 lists areas in which Advance Agreements may be of particular value in avoiding disputes. These areas include:
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Compensation for personal services, including but not limited to allowances for off-site pay, incentive pay, location allowances, hardship pay, cost of living differential, and termination of defined benefit pension plans
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Use charges for fully depreciated assets
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Deferred maintenance costs
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Precontract costs
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Independent research and development and bid and proposal costs
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Royalties and other costs for use of patents
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Selling and distribution costs
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Travel and relocation costs, as related to special or mass personnel movements, as related to travel via contractor-owned, -leased, or -chartered aircraft; or as related to maximum per diem rates
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Costs of idle facilities and idle capacity
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Severance pay to employees on support service contracts
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Plant reconversion
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Professional services (e.g., legal, accounting, and engineering)
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General and administrative costs (e.g., corporate, division, or branch allocations) attributable to the general management, supervision, and conduct of the contractor’s business as a whole. These costs are particularly significant in construction, job-site, architect-engineer, facilities, and Government-owned contractor operated (GOCO) plant contracts
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Costs of construction plant and equipment
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Costs of public relations and advertising
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Statistical sampling methods
In addition to the foregoing, the FAR emphasizes that construction and architect-engineer contracts are especially good candidates for use of Advance Agreements. The FAR states (at 31.105) “Because of widely varying factors such as the nature, size, duration, and location of the construction project, advance agreements … for such items as home office overhead, partners’ compensation, employment of consultants, and equipment usage costs, are particularly important in construction and architect-engineer contracts.”
The DFARS adds (at 231.205-70(d)(viii)) that the Contracting Officer should negotiate an Advance Agreement when a contractor is engaging in external restructuring (think Lockheed and Martin Marietta merging). That external restructuring Advance Agreement must set forth “at a minimum, a cumulative cost ceiling for restructuring projects and, when necessary, a cost amortization schedule.”
Finally, you need to know that Contracting Officers cannot sign an Advance Agreement that makes an unallowable cost allowable. (See 31.109(c).) Some costs are made unallowable by statute, and no CO has the authority to contravene a public law.
Sounds pretty straightforward, right? So what’s the problem?
DCMA Boards of Review
The first problem—as we alluded to earlier—is that DCMA doesn’t give its Contracting Officers much independent discretion these days. For example, depending on the scope and/or estimated value of the contracts covered by a proposed Advance Agreement, that agreement may have to be reviewed by two separate Boards of Review (one at the Division level and one at the DCMA HQ level). If annual costs on contracts covered by the agreement are estimated to be less than $25 million, then the CO can execute it. But if annual costs on covered contracts are greater than $25 million then a Division-level Board of Review must be convened. And if annual costs on covered contracts are greater than $50 million, or if more than one contractor segment is affected, or if the Advance Agreement covers pension and/or insurance costs, then an HQ-level Board of Review must be convened.
DCMA has a Policy Instruction (“134—Boards of Review”) but it’s not available to the public. Consequently we can’t tell you with certainty how they work. But we do know this: Each time a DCMA Board of Review is convened, the CO must prepare a review package. The package takes a lot of work and its quality (or lack thereof) is a direct reflection back on the CO who prepared it. Obviously, many Contracting Officers will be reluctant to invest the necessary time and effort to prepare a package that they won’t mind being reviewed by their peers, superiors and/or the brass at Ft. Lee. You are going to have a lot of convincing to do.
Even if the CO decides to submit a review package in order to obtain approval to enter into an Advance Agreement, there is no guarantee that the Board (or Boards) of Review will go along with the plan. It’s not unheard of for a CO to hear a resounding NO back from the Board (or Boards) of Review. What happens then? Well, the CO can resubmit the package and hope for a different answer—knowing that may upset some people, who may be under the impression that the CO is dense because they didn’t get the message the first time. Or the CO can simply tell the contractor “sorry” and then get back to business.
Even if the Board (or Boards) of Review reach a favorable consensus and endorse the proposed Advance Agreement, that process is not going to happen overnight. It’s going to take weeks or months. It’s going to take time to prepare the review package and it’s going to take time to convene the Board (or Boards) of review, and it’s going to take time for the Board (or Boards) to deliberate and get back to the CO. Meanwhile, the contractor is not supposed to incur any costs covered by the proposed Advance Agreement until it’s been executed.
Good luck with that.
DCAA’s Role
At noted above, the objective of having an Advance Agreement is to proactively agree on the treatment of certain costs so that they do not become subsequently disallowed or become the subject of a dispute between contractor and customer. DCAA believes it has a role in the process of negotiating and executing an Advance Agreement, at least in certain areas. One of those areas is compliance with the unique requirements of contractor executive compensation. Without going into too much detail, DCMA and the contractor may enter into an Advance Agreement regarding use of “blended rates” to comply with the myriad statutory limits on executive compensation. DCMA and DCAA seem to have agreed that “prior to signing an advance agreement or accepting a methodology” (with respect to blended rates) “the ACO … must invite DCAA to review the computation of the compensation cap, and participate in prenegotiation discussions and/or subsequent negotiations.” (See MRD 16-PSP-005, dated 2/19/2016.) Thus, if a contractor is proposing an Advance Agreement to address use of blended rates to comply with the executive compensation ceilings, not only will all of the DCMA process steps discussed above need to be followed, but your friendly local DCAA auditor will be part of the process as well.
As somewhat of a side note, we were piqued by the notion that DCAA would be participating in prenegotiation discussions and/or subsequent negotiations, as if DCAA somehow had co-equal authority as the warranted Contracting Officer. That seems … odd—and would seem to defeat at least a part of the objective for having an Advance Agreement in the first place. But what do we know?
More generally, the DCAA Contract Audit Manual (at 6-710) clearly states that “The auditor shall abide by properly executed advance agreements that are in effect for the fiscal year when determining final rates.” However, the CAM notes that “Should the auditor find that an advance agreement is not in the best interest of the Government, he/she will follow established procedures for recommending to the contracting officer, in writing, that the advance agreement be rescinded.” We have some experience with rescinded Advance Agreements and, let us tell you, the rescission leaves a very bad taste in the contractor’s mouth. Rescission of an Advance Agreement—after a cost has been incurred—is very much akin to breach of contract, in our view.
Where does this leave us with respect to the advice offered by the Fed Pubs instructors?
Well, we agree with it. It’s good advice.
In theory.
But in the real world of today’s somewhat adversarial defense acquisition environment, we believe that it’s going to be a difficult challenge to get an executed Advance Agreement prior to incurrence of the costs at issue. Is it impossible? No. Not at all. But it is a challenge and it will take a long time, and the odds are stacked against a favorable outcome.
But don’t let that stop you. If you don’t bet you can’t win.
The NEON Light Flashed Red: Doors Were Secured
Well calm down, temper, temper
You shouldn't get so annoyed
You're acting like a silly little boy
And they wanted to be men
And do some fighting in the street
(They said) no surrender
No chance of retreat …
Drunken plot's hatched to jump it
Ask around are you sure?
Went for it but the red light was showing
And the red light indicates doors are secured
“Red Light Indicates Doors are Secured,” The Arctic Monkeys
 According to its website—
The National Ecological Observatory Network (NEON) is an NSF-funded large facility project. NEON comprises terrestrial, aquatic, atmospheric, and remote sensing measurement infrastructure and cyberinfrastructure that deliver standardized, calibrated data to the scientific community through a single, openly accessible data portal. NEON infrastructure is geographically-distributed across the United States, including Alaska, Hawaii and Puerto Rico, and will generate data for ecological research over a 30 year period.
NEON is designed to enable the research community to ask and address their own questions on a regional to continental scale around the environmental challenges identified as relevant to understanding the effects of climate change, land-use change and invasive species patterns on the biosphere.
It’s a government project, a government IT project. We all know without looking that it’s going to be a troubled project, with cost overruns and schedules slips That’s the way most government IT projects go these days.
But we didn’t expect controversial audit findings, auditors being whistleblowers on their own management, and Congressional hearings.
We wrote about the NEON controversy before. That was in 2014. Much has happened since then, but if not for a couple of gently persistent folks who kept pointing us to the Wikipedia article on DCAA (in which the controversy is prominently featured), we would have missed it.
Our original article did not express much sympathy towards the DCAA whistleblower or towards the Senators who wrote nasty letters or towards the Congresspersons who held hearings on the topic in December, 2014. Additional hearings were held in February, 2015. Records are sketchy but it appears to us that NEON justified the use of “management fees” charged to the subsidiary performing the NSF grant.
The NEON, Inc. Chairman testified that-
It is our understanding that OMB has long held that fees in the case of a non-profit like NEON or profit in the case of a private business are not considered appropriated funds and are outside the scope of OMB Circular A-122 and the Byrd Anti-Lobbying Amendment. Moreover, NSF has consistently indicated to NEON that management fees constitute discretionary or unrestricted funds and can be used to pay for business costs that are considered unallowable. … NEON has used management fees to cover a variety of costs, including those associated with contract terminations, late fees, and other normal business expenses. NEON also has used management fees to cover costs associated with government outreach activities, providing amenities, including coffee, for its employees, and meals and social functions that included the purchase of alcohol.
We noted a letter from the law firm of Gibson Dunn (found on the website, link in the previous sentence) that stated—
OMB Circular No. A-122 provides principles for determining the costs of work performed by non-profit organizations under cooperative agreements. The Circular explicitly states that ‘[p]rovision for profit or other increment above cost is outside the scope of this Circular.’ While the Circular notes that the costs of alcoholic beverages and lobbying are unallowable, the Circular’s cost principles do not apply to any management fee or profit earned by an organization through a cooperative agreement. Accordingly, Circular No. A-122 does not prohibit a non-profit organization from using funds earned through management fees on a cooperative agreement for such costs. Nor does any other statute, rule or guidance of which we are aware.
Likewise, according to NSF regulations, as clarified by OMB guidance, management profit and fees earned under a cooperative agreement are excluded from the definition of ‘appropriated funds’ for purposes of the prohibition on use of such funds for lobbying. Accordingly, it appears there is no prohibition on the use of management fees or profit for the purposes of lobbying, so long as proper disclosure is made in accordance with 45 C.F.R. § 604.100(c).
According to NEON and its attorneys, NEON, Inc. charged a management fee to the subsidiary, which was akin to profit and could be used to pay for business-related costs, including costs that would otherwise be considered to be unallowable costs under applicable rules. Seems like a total victory.
But it may have perhaps been a Pyrrhic victory because, while the parent company was successfully surviving Congressional hearings into its use of the management fees, the performing subsidiary was looking at an $80 million project overrun and 2 year schedule slip, which did NOT make the NSF happy. As a result, the management contract was terminated and NSF picked Battelle Memorial to try to wrangle the troubled project.
Now, back to the DCAA Wikipedia article that discusses the audit allegations and results. According to that article, NEON, Inc. was “fired from the project” and that action “represents one of the largest Federal agreement terminations for cause in history.” We are not convinced that’s the proper way to view this. While it is indisputable that the NEON management contract was terminated, it is not at all clear that it was terminated for cause. There was no need for NSF to take such a drastic step—a step that could be litigated and converted to a T4C—when the easier step was to simply terminate the contract for convenience and let the parties walk away. We strongly suspect that is the proper way to view the termination and replacement of the management contractor.
Similarly, the Wikipedia claims that the whistleblower’s claims “directly led” to the termination of the NEON management contract is suspect. While we are quite sure that the controversy and hearings did the contractor no good whatsoever, we strongly suspect it was the large cost overrun and significant schedule slip that were more directly linked to the termination. If the contractor had been performing well, it might have survived its audit problems. This is, in our view, an important illustration of the importance of effective project management—a topic that’s gotten lots of attention on this website in the past 7 years.
Some people who send us email would like to make the NEON controversy into a back-room management conspiracy. In particular, they’d like to link it to the sudden departure of former Director Fitzgerald from DCAA. We don’t see it that way. Occam’s Razor suggests the simplest explanations are more likely to be true. In that sense, the auditor was overruled by DCAA management, and it seems there was good rationale for the position they took. We don’t know why Director Fitzgerald left DCAA, but it is more likely to be linked to the pile of unaudited Incurred Cost Submissions (which led to Draconian action by Congress in the 2016 NDAA) than it is to audit problems with a non-profit entity under a non-DOD grant/contract.
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F-35 Production to Ramp Up
Recent news stories breathlessly announce that F-35 production is set to ramp up. That’s nice.
We are not sure what that means.
For example, according to this story at Defense One, “F-35 production is slated to hit full steam in 2019, and Lockheed Martin is reshaping its final assembly line to get ready. … By 2020, one year after the Fort Worth plant hits its full 17-jet-per-month stride, there will be more than 600 F-35s, including nearly 180 sent to U.S. allies.” 2019. Last time we checked, that was three years away.
But maybe it’s time to celebrate. Maybe the well-publicized program problems are now behind Lockheed Martin and its many customers. That would be nice.
Yet it’s hard not to be cynical about claims the program’s problems are in the past and that the future looks bright. We’ve written about the F-35 Lightning II Joint Strike Fighter before, and it’s rarely been good news we’ve been writing about.
In this article we noted that the Government Accountability Office (GAO) found that the F-35 program “epitomized” the loss in acquisition buying power, despite the focused efforts of the top leaders at DOD and the “price fighters” of the DOD “should-cost” team.
Going way back to 2009, one of our earliest articles probed Lockheed Martin’s claims that it would ramp up production to 20 aircraft per month, or 230/240 per year (depending on the source).
Less than a year later (April 2010) we reported testimony in Senate hearings that claimed that the JSF Program had “turned the corner” and that both cost and schedule were locked into place. Our article included the following quote (original source DODBuzz.com) –
‘We’ve turned the corner on production line delays,’ said Air Force Lt. Gen. Mark Shackelford, the service’s top buyer, who expects to take delivery of the first test aircraft this year. The jump in the JSF’s price tag and the delays were due primarily to small design changes, which while minor, rippled through the production line causing excessive ‘churn and stress.’ That production line is now well on the way to ‘maturing,’ he said. He declared the F-35 airframe itself as solid; although the plane’s software package has proven a bit more problematic.
That testimony was proferred in 2010.
So now, in 2016, when we hear that production will ramp up to 17 aircraft per month (not 20) and Plant 4 will reach that capacity by 2019 (not 2016), please pardon us if we seem a little skeptical.
Unallowable Training
Many (most?) government contractors know that the Federal government has rules regarding the types of costs it will pay for. The “Part 31 Cost Principles” are a fundamental part of government contract compliance, and people who don’t know much about government contracting at least know that the rules exist, even if they don’t know where to find them in the FAR. People commonly think those rules only apply to cost-type contracts (aka “cost reimbursement” type), so they tend not to worry about them unless they are bidding or performing on such contracts. People who have Time-and-Materials (“T&M”) contracts probably know that the rules apply to costs billed under the “M” part of the T&M equation, but that’s rarely the predominant part of the invoice being billed, so compliance typically is not considered to be a big deal. But those rules can also apply to cost proposals submitted for firm fixed-priced contract types. (See FAR 31.102, which states “The applicable subparts of Part 31 shall be used in the pricing of fixed-price contracts, subcontracts, and modifications to contracts and subcontracts whenever (a) cost analysis is performed, or (b) a fixed-price contract clause requires the determination or negotiation of costs.”)
Thus, unless you are doing sealed bids or competitive FFP contracts 100% of the time, you will probably be dealing at some point with the FAR Part 31 Cost Principles and trying to figure out how to properly identify and segregate the various flavors of unallowable costs. It would be nice to be prepared to do that but, alas, too many companies simply gloss over that aspect of contract compliance. As we’ve noted before, the compliance risk assessment tends to be skewed because contractors tend to not appreciate or understand the true risks they are facing.
There are plenty of consultants—including some ex-DCAA auditors who have retired and set up consultancies—available to assist small contractors with the subject. There are Procurement Technical Assistance Centers—PTACs—who will do the same thing, for free (donations are always appreciated). Larger contractors hire the best experts they can find, either as employees or as consultants (or both), because the larger the contractor the larger the impact of a sustained questioned costs (aka “cost disallowances”). There are lawyers in law firms, big and small, expensive and really expensive, who can provide assistance. (We here at Apogee Consulting, Inc. think we know a thing or two about the topic, but this is not the place to tout our expertise.) You can even buy expensive books on the subject, some written by the top government contracts attorneys or top-notch practitioners, each author with impeccable pedigrees. There are lots of resources available, depending on the depth of one’s pocketbook and the appetite for compliance.
The point is that there is little, if any, excuse for not complying with at least the fundamental aspects of the FAR Part 31 Cost Principles when they are applicable to your company or to your contract.
That being said, some of the nuances are tricky and it is—quite frankly—difficult to know everything about everything in the Cost Principles. To learn the nuances requires a lot of effort, and many people don’t care to delve that deeply into government regulation trivia and case law. If you are a small business owner, you spend most of your time worrying about cash flow and proposals and executing the contracts you’ve already won; there is precious little time left to worry about things like allowable costs and unallowable costs and proper calculation of indirect cost rates.
Even government contracting officers often don’t have the time to get into the topic to the necessary depth. They take their DAWIA-mandated courses at DAU or wherever, and then they get back to the business of trying to make the nearly broken Federal acquisition system work. They are so busy trying to get stuff done that they don’t have the time to become experts on government contract cost accounting, even if they would otherwise be inclined to do so.
Yet those some government contracting officers are required by their warrants to referee disagreements between government auditors and contractors regarding the allowability of certain costs, costs subject to tricky and nuanced rules. Rules that are hard to understand, and to apply, and to get right.
This blog article is about one of those rules: FAR 31.205-44 (“Training and Education Costs”). That Cost Principle seems easy to master at first glance, but a deeper dive reveals difficulties that one would be wise to avoid.
Pretty much everybody can read the first phrase: “Costs of training and education that are related to the field in which the employee is working or may reasonably be expected to work are allowable …” because it makes sense and seems logical and reasonable, and it is very similar to IRS rules on the tax deductibility of such expenses. However, many people stop there and miss the important next phrase: “except as follows:”—which sets forth circumstances in which training and education costs would not be allowable.
There are six circumstances in which the costs of employee training and/or education would not be allowable. The first circumstance is what we want to focus on today: “Overtime compensation for training and education is unallowable.” Does that sentence mean what it seems to mean? Does that sentence say that, even if the cost of tuition is allowable, the attending employee’s labor is unallowable if it is overtime labor?
Yes. Yes it does.
The next questions usually gets into what the definition of “training and education” might be. Does it apply to outside seminars? To college and graduate school classes? What about internal training? Does it apply to all kinds of training and education without limitation?
Yes. Yes it does.
What about salaried, exempt, employees? They don’t get premium overtime pay, but sometimes they get “extended work weeks” (or something similar) and they get paid straight-time rates for hours recorded in excess of their standard 40-hour workweek. Does the rule apply to those labor hours as well?
Yes. Yes it does.
What about training exercises? What if you are working at a Government-Owned, Contractor-Operated (GOCO) site and you run a terrorist attack simulation or an earthquake simulation or a forest fire simulation, the intent of which is to train employees on how to handle a crisis—and that training runs into the night (because terrorists don’t always attack during the daytime), which requires overtime to be paid? Is that overtime labor made unallowable by this Cost Principle?
Well, maybe. And that’s where it gets nuanced and that’s where a dispute between auditor and contractor may arise.
Which is why the Department of Energy issued Acquisition Letter AL 2016-005 on May 3, 2016.
We have written several blog article applauding the DOE’s attempt to provide written guidance to its contracting officers to help them with tricky issues. From our point of view, the guidance we have seen has been reasonable and equitable. The guidance helps ensure consistency and makes it easier for the DOE contracting officers to adjudicate disputes between auditor and contractor. Further, such guidance helps DOE contractors establish proactive compliance strategies. When the contractors know the DOE’s policy on a particular subject, they can focus their processes and resources on complying with it, which tends to decrease a lot of the disputes between auditor and contractor that would otherwise arise. AL 2016-005 is another example of smart, reasonable, equitable guidance that helps all parties avoid disputes and, potentially, litigation. We can only wish the DOD would emulate DOE’s approach.
AL 2016-005 is actually kind of remarkable in its format and content. It is filled with such gems of wisdom as “The selected costs in FAR 31.205 deal primarily with the issue of when costs are specifically unallowable. When the language in a discussion in FAR 31.205 states the ‘cost is unallowable’ it means the cost is always unallowable. The converse is not true.” What that last part means is that a cost if allowable only if it complies with the requirements of FAR 31.201-2. There are five requirements of cost allowability set forth in that FAR Cost Principle. So even if a cost is not called-out as being expressly unallowable, it can’t be said to be allowable unless it can be determined that the cost has satisfied all five requirements.
After a bit of helpful background, the AL gets into the meat of the topic: 31.205-44. It states—
FAR 31.205-44 is one of the FAR 31.205 selected costs. Its paragraph (a) states that an overtime cost incurred during training or education related to the field in which the employee is working or may reasonably be expected to work is specifically unallowable. (In addition to the FAR 31.205-44’s absolute ban on overtime costs for training or education, FAR 22.103 makes it clear that overtime costs in general merit special scrutiny. Contractors should normally not incur them, and contracting officers may normally not specify delivery or performance schedules that require them. In negotiating contracts, contracting officers should, consistent with the Government’s needs, attempt to negotiate prices without overtime premiums or obtain the requirements from other sources. If overtime is required, FAR 22.103 provides procedures to follow and approvals to obtain.)
The AL also addresses the nuances. It addresses the situation where training/education is a byproduct of a training simulation and/or exercise. And it gives the same advice to DOE contracting officers that we have often given to clients: The intended purpose helps inform the cost allowability determination. In other words, when you understand why a cost has been incurred, you will then be prepared to make a call as to that cost’s allowability. In fact, we devoted most of a blog article to that topic. We said “If you tell us what you are doing and (more importantly) why you are doing it, we can give you an allowability determination with a high degree of confidence. But it you mislead us, or withhold certain crucial facts, then our determination may well be wrong. And that error may end up costing the company millions of profit dollars.”
In the DOE AL, the contracting officer is given guidance as follows—
When overtime costs are incurred for purposes other than training or education, and some training or education occurs as a side effect, the overtime costs are not specifically unallowable per FAR 31.205-44. Any portion of the overtime costs incurred solely for the purpose of FAR 31.205-44 training or education, however, would be specifically unallowable per FAR 31.205-44. As an example, assume a contractor conducts a 48 hour continuity of operations exercise or force on force exercise that requires guard service personnel to participate after standard shift hours. During the exercise employees gain knowledge that is related to the field in which the employees are working or may reasonably be expected to work. Continuity of operations exercises and force on force exercises are not generally training as that term is used in the cost principle. The exercises are usually conducted to test operational procedures, not for the purposes of training or education, and therefore overtime costs are usually not specifically unallowable. (Any portion of the overtime costs incurred solely for the purpose of FAR
31.205-44 training or education, however, would be specifically unallowable per FAR 31.205-44.) This does not mean the overtime costs meet all of the five requirements listed in FAR 31.201-2, that is, it does not mean the overtime costs are necessarily allowable. The contracting officer should always analyze why the exercise could not be conducted during the employees’ normal working hours to determine if the overtime costs are reasonable.
That is some great policy guidance, right there. Have we mentioned that we wish DOD would take a similar approach?
In addition to the policy guidance quoted above, the DOE AL also provides the flexibility to permit DOE contractors to make a business case for the allowability of otherwise unallowable overtime labor associated with training and education. The AL states—
If before overtime costs for FAR 31.205-44 training or education are incurred a contractor believes that training on overtime would lower the overall costs to the Government or is necessary to meet urgent program needs, it should submit a detailed cost benefit analysis and appropriate rationale to make the business case for the contracting officer to seek deviation authority and await a deviation approval. The business case must include an analysis of alternative approaches that the contractor could take, including training on regular time, that might possibly meet contract objectives and avoid training on overtime. If the contractor demonstrates to the contracting officer’s satisfaction that overtime cost incurrence would significantly reduce the overall cost to the Government or is necessary to meet urgent program needs, the contracting officer may, at his or her discretion, consider a contractor’s request for a deviation.
Finally, the AL also includes the reminder (which we hope our readers will consider) that paying employees overtime is not the preferred approach to performing government contracts. The AL reminds DOE contracting officers that the FAR has something to say about the issue, stating—
FAR 22.103 states, ‘Contractors shall perform all contracts, so far as practicable, without using overtime, particularly as a regular employment practice, except when lower overall costs to the Government will result or when it is necessary to meet urgent program needs. Any approved overtime, extra-pay shifts, and multi-shifts should be scheduled to achieve these objectives.’
In these days of sequestration, budget constraints and lowest-price technically-acceptable contract awards, and Baby Boomer retirements and normal attrition, it’s become harder and harder for contractors to get the job done with the workforce they have in place. (This is fundamentally a leadership problem abetted by a failed HR function, but we’ve ranted on that subject before.) Overtime, especially for experienced direct-charging employees, has become the new normal. The quote from FAR 22.103, above, should remind us all that use of systemic overtime—as a regular employment practice—leaves a company vulnerable to allegations by disgruntled employees of violations of the False Claims Act (via the implied certification theory). Something to consider, perhaps?
All in all, an excellent piece of policy guidance by the Department of Energy. Clearly, DOE is moving forward and trying to manage contracts without the benefit of DCAA’s audit assistance. We think the Department is doing a great job of it so far, and we look forward to the next piece of policy guidance. In the meantime, we don’t have many nice things to say about DOD and DCAA.
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