Product Substitution is Bad Business
Last year we reported about fraudulent quality testing that led to substandard steel castings being supplied to naval construction. That was an expensive lesson for the company that employed the Director of Metallurgy who falsified the test results.
More recently, an environmental laboratory analyst was sentenced to two years of probation and ordered to pay a $2,500 fine for falsifying laboratory test results, according to this Dept. of Justice press release. According to the DOJ, the analyst “failed to properly calibrate and tune the quality control instruments, which was the foundation of the quality control process. This failure resulted in unreliable measurements of pollutants and hazardous substances, and therefore invalidated the testing process.”
That’s not good, and we suspect the laboratory that employed the analyst may have paid some expensive attorneys to make sure it was the analyst who was sentenced, and not the laboratory executives.
These are examples of product substitution fraud, which occurs when a contractor supplies nonconforming materials to the government. Most government contracts contain specifications that define what constitutes acceptable materials (and the quality assurance steps to ensure the materials meet spec). When a contractor falsifies lab results or other quality assurance report and, as a result, the government receives nonconforming materials (or materials that cannot be objectively determined to be conforming because of falsified tests), then that is product substitution. The “fraud” part speaks to intent.
Those two stories about are not good, but those aren’t today’s stories.
Today we want to talk about Djibouti.
Djibouti is in Africa, which makes it the purview of the Africa Strike Force, an initiative out of the Dept. of Justice’s Southern District of California. The Africa Strike Force was “developed to combat fraud and corruption as the United States expends resources across Africa,” according to the Dept. of Justice. The Strike Force’s first indictment was issued in October, 2020; it contained 98 counts of conspiracy, wire fraud, and aggravated identity theft. The CEO of the contractor was arrested for and charged with (among other things): “submitted fraudulent quality control plans with résumés of fictitious employees; fabricated quality control checklists, certifying quality control work that was never performed; fraudulent concrete strength test results; and fraudulent claims for construction that was never performed or that did not adhere to specification.” That’s not good.
But that massive October, 2020, indictment is not today’s story.
Today’s story concerns another African contractor, another target of the Africa Strike Force, that settled its fraud allegations by agreeing that it “faked testing results and submitted a series of false documents and false claims to the United States as part of a scheme to defraud the United States in the sale of substandard concrete used to construct U.S. Navy airfields in Djibouti.” Link to the press release: here. The contractor in question was a subsidiary of a French civil engineering company.
According to the press release, the contractor (Colas Djibouti) “created fictitious testing results, made fraudulent representations regarding the concrete’s composition and characteristics, and knowingly provided concrete to the United States that did not comply with the specifications.” Yeah, that’s not good. You’ll notice that the “knowingly” part in that sentence introduces the fraud aspects.
The press released opined “As a result of this criminal conduct, Colas Djibouti ultimately supplied substandard concrete to the Department of Navy in Djibouti that could promote early cracking, surface defects, and corrosion of embedded steel, and thus significantly impair the concrete’s long-term durability.”
Part of the criminal conduct included falsifying water testing: “in response to a request for an analysis of the water used in the concrete mix, Colas Djibouti provided an analysis for a store-bought bottle of drinking water.”
To settle the criminal charges, Colas Djibouti agreed to “forfeit $8 million, pay another $2,042,002 to the Department of Navy in restitution, and pay a monetary penalty of $2.5 million.” That’s $12.54 million.
But in order to settle the civil charges, the company also agreed to pay another $1.858 million, bringing the total to $14.4 million.
As the headline says, product substitution is bad business.
EPA Mismanages IT Contracts
Recently, the Environmental Protection Agency’s Inspector General issued an audit report that documented and sustained allegations received via a Hotline call. The Hotline call had alleged “contract and bidding irregularities with three major information technology contracts.”
We like how the EPA OIG put the salacious findings right on the report cover:
Then, right up front in the report, the EPA OIG provided the elevator-speech summary:
In violation of Federal Acquisition Regulation requirements and contract clauses, the EPA purchased 23 pieces of hardware and software equipment under an expiring information technology contract awarded to CGI Federal. This purchase was outside the scope of the contract and was ultimately never used for that contract. The EPA then improperly solicited bids for one of two subsequent contracts and transferred the equipment to use on the new contract. By approving the purchase, the EPA improperly spent $641,680 in federal funds.
Also:
We also found that the EPA issued task orders under all three contracts without approval from the chief information officer, which is required under the Federal Information Technology Acquisition Reform Act. This resulted in the EPA spending $52.5 million in taxpayer funds without proper approvals
Also (but not headline-worthy):
The Agency also mismanaged these contracts with respect to monitoring property and licenses. For example, the EPA underreported and incorrectly identified purchased equipment in the Agency’s property reporting system and did not record $1.18 million in software licenses in the Agency’s asset management system.
Well, there it is. Not a great look for the EPA contracting officer(s), is it?
Looking at the first finding in a bit more detail, we see that “An EPA CO authorized purchasing $641,680 worth of equipment under contract EP-W-07-024, awarded to CGI Federal, two days before the contract closed.” (Emphasis added.) We’re guessing that somebody noticed that not all obligated funds had been spent, and decided to get them spent rather than deobligating the funds as they properly should have done. So they had the contractor spend the money on equipment that wasn’t needed, and then “EPA transferred the equipment to a new contract, EP-W-18-008.” Importantly, that second contract had also been awarded to the very same contractor, CGI Federal. Unfortunately for both the EPA contracting officer and CGI Federal, the Inspector General reported that the second contract “originally did not allow for government-furnished property.” (The contract was modified after award to permit GFP.)
In order to make the shady equipment purchase happen—
The OCFO [Office of the Chief Financial Officer] requested an emergency action in the EPA’s contract system to purchase and transfer the equipment. We found that the OCFO fully intended to use the equipment purchased under EP-W-07-024 on the new contract. The CO and OCFO management stated that they used an emergency action because the EPA’s contract system was unavailable to make modifications to the new contract, so they modified the expiring contract.
The Inspector General succinctly summarized the situation thusly: “The Agency cannot use emergency actions to circumvent contract clauses and the FAR.” Yep.
But the IG wasn’t done with this shady situation. Another aspect to be considered was the type of appropriation used to purchase the equipment. (This is commonly called “color of money” and, normally, contractors don’t care too much about it; but government acquisition and finance folks certainly do.) The IG found that “When purchasing the $641,680 in equipment for EP-W-07-024, the CO used a different appropriation than the one used for the remainder of the contract.” This is called “split-funding” and, while it is an acceptable practice, when split-funding occurs the contracting officer must document a rationale for allocating contract costs to the different colors of money and the contracting officer “must send the split-funding documentation rationale to OCFO management for approval and maintain the documentation in the overall contract file.” This is to happen before contract or task order award.
Would you be surprised to learn that it didn’t happen in this case? Would you be surprised to learn that neither the contracting officer nor OCFO would locate the split-funding rationale when challenged by the IG auditors? Yeah, we weren’t surprised either.
Now let’s take a closer look at the second finding, where task orders were issued without required approvals by the EPA’s Chief Information Officer.
The Inspector General pointed out that “Federal Information Technology Acquisition Reform Act, gives the chief information officer approval authority over IT purchases.” The contracting officer did not notify the CIO, as required by FITARA. “In this case, the EPA’s CIO was unaware of the CO’s purchase of the equipment, so the CIO did not have the opportunity to review inventory for spares, duplicates, and compatible equipment.”
Looking at the award of that second contract to CGI Federal, the IG concluded that it was improper, finding that “the EPA provided government-furnished equipment for EP-W-18-008, even though the EPA did not disclose that it would provide equipment in the contract solicitation.” Because the EPA provided GFP to the winner (who was, perhaps, also the incumbent), “the EPA’s choice to provide equipment for EP-W-18-008 may have led to an unfair competition practice” and may have violated the Federal law that requires agencies to use full and open competition, as well as FAR 45.201(a), which “requires agencies to include anticipated government-furnished property in the solicitation.”
Another interesting aspect of this situation, according to the Inspector General, was the lack of property accountability and tracking. We could not summarize this aspect any better than the IG did in its report—
The OTS staff neglected to follow the EPA Personal Property Manual to monitor, count, or report the purchased equipment, as required by federal requirements and EPA policies. The EPA property management staff—responsible for the care, use, accountability, and security of government-owned property in EPA areas—said that they were not informed of the purchase under EP-W-07-024 because the CO never reported the equipment in the contract file. The EPA did not report the equipment, 23 pieces of hardware and software, as inventory in its 2018 financial reports. The EPA did not report the equipment until a year-and-a-half after it was purchased and after we requested the property records as part of this audit. In addition, the EPA did not maintain a comprehensive list of software inventory and did not track software licenses, as required by regulation. The EPA underreported at least $1.18 million in software license costs in its financial statements and inventory records. As a result, the Agency temporarily lost t rack of the equipment paid for by taxpayer dollars.
Oh, but that’s not all. According to the Inspector General, the EPA wasn’t tracking software licenses either, which is required by Public Law. The IG reported that “Since awarding the contract [to CGI Federal] on December 31, 2017, the EPA issued five modifications that involved software license purchases, renewals, or software maintenance fees totaling $1,180,574.64. The EPA has no record of these software licenses as of the end of fiscal year 2019. The OTS did not include this $1.18 million in software licenses and maintenance fees in the EPA’s property system.” (Notes omitted; emphasis added.)
Essentially, the IG found that the equipment was improperly purchased, it was improperly transferred to a contract that was not intended to receive it. The equipment was not properly approved, nor was it reported or tracked. In addition, other software licenses worth more than one million dollars were not tracked or reported either.
If you are getting the picture of a very lax contracting environment, you are not alone.
For its part, the EPA agreed with the IG’s findings. However, it didn’t believe the second contract had been improperly awarded. That second contract will not be terminated, because doing so would not be in the best interest of the government as the services are still needed. Further, the $642K in equipment was transferred from the contractor’s possession and into the EPA’s possession.
As for the contracting officer that effectuated this shady set of circumstances? We did not see anything to indicate disciplinary action was taken.
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GSA Multiple Award Schedules and Compliance Risk
There’s a risk continuum for government contract compliance. Nearly two years ago I presented at the Society of Corporate Compliance and Ethics’ Annual Compliance Institute on the topic of “Taking a Dynamic Approach to Compliance Risk Assessments for U.S. Government Contractors”—and that was the takeaway from my show.
As I told the audience: “USG contractors work in a highly dynamic environment where compliance risks must be frequently evaluated, because they are frequently changing. Annual ‘snapshots’ will create gaps in compliance planning.” (Emphasis in original.) You can find the entire presentation on my LinkedIn profile, if you are so inclined.
A contractor’s compliance risks are based on factors that include (but are not limited to) contract type, contract value, competitive versus non-competitive awards, awarding agency, and the contract clauses found in the contracts. A small business has a different compliance risk profile than a large contractor. A contractor subject to Full CAS coverage has a different compliance risk profile than one that is Exempt or subject to only Modified coverage. A contractor that sells commercial items under FAR Part 12 procedures has a different risk profile that one that submits certified cost or pricing data under FAR Part 15 negotiated contract procedures. Et cetera. You get the idea.
Generally speaking, a contractor who is selling to the Federal government under a GSA Multiple Award Schedule (MAS) has a lower risk profile than one that sells directly to another Federal agency, especially the Department of Defense. In fact, GSA MAS are only supposed to offer items and services that qualify as commercial items, as that term is defined at FAR 2.101. When a contractor prepares its annual proposal to establish final billing rates as required by the contract clause 52.216-7, the GSA contracts are lumped along with any other commercial sales the contractor might have into “other-commercial.”
You might well conclude that GSA MAS sales are lower-risk. And you’d be right to do so, except “lower risk” is not the same thing as “risk-free.” There are risks associated with GSA MAS sales, including (but not limited to):
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Accurate disclosure of “commercial sales practices”
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Accurate identification of “Basis of Award” customers (those customers whose prices will be compared to the prices offered to GSA)
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Compliance with the Price Reductions Clause (which requires that discounts offered to Basis of Award customers also be offered to the GSA)
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Accurate calculation and timely payment of the Industrial Funding Fee (IFF)
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Compliance with Trade Agreements Act
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Compliance with required labor qualifications
I was recently reminded of the GSA MAS risks when I came across this press release from the Dept. of Justice, announcing that “SAP Public Services, Inc. has agreed to pay the United States more than $2.2 Million to resolve allegations that it violated the False Claims Act by failing to pay required fees” on its GSA MAS contracts.
SAP Public Services sold software engineering and support to government customers through its MAS contracts, but it cancelled those contracts in 2014. But it was too late. An internal investigation discovered compliance errors, and the company was required to disclose those errors to the GSA under the contracts’ mandatory disclosure provisions. Before I get into the details of the errors, let’s note that SAP Public Services received praise (and, I’m sure, credit) for its cooperation with Federal agency officials. The Deputy U.S. Attorney was quoted as saying “From the time that this matter was brought to its attention, SAP has committed itself to setting things right, despite considerable time and expense. We appreciate its cooperative approach and its intensive investigative efforts to get to the bottom of what happened here.”
What happened?
According to the press release, it seems that SAP Public Services made errors when calculating the IFF due GSA. “The United States’ investigation – conducted in conjunction with a robust internal investigation by SAP Public Services – determined that SAP Public Services failed to account for the IFF it owed on several contracts…”
But that was not all. SAP Public Service also (apparently) failed to comply with the Price Reductions Clause. The press release stated “SAP Public Services … did not always provide the appropriate contractual discounts …”
But that was not all. SAP Public Service also (apparently) failed to comply with the labor qualifications in its GSA MAS contracts. The press release stated “SAP Public Services was required to … meet certain educational or experiential qualifications in its staffing assignments. … SAP Public Services … did not always provide the appropriate … staffing.”
Thus, a $2.2 million settlement to resolve False Claims Act allegations involving at least three of the six compliance risk issues identified earlier in this article.
Before your company sells to the Federal government via a GSA (or Veterans Administration) MAS contract, consider making a robust compliance risk assessment. It’s probably in your best interest to do so.
Training Contracting Officers
Recently the Department of Defense (DOD) announced significant changes to the way in which its contracting officers will be trained. For months, DOD evaluated how to obtain increased performance in its acquisition system, striving to move at the “speed of relevance” instead of the traditional plodding pace in which it literally took longer to acquire a replacement handgun for the US Army than it did to fight the entirety of World War II.1
Thus, in September, 2020, the USD (A&S), Ms. Ellen Lord, issued a memo announcing that DOD was going to get “back-to-basics” (BtB) when training its acquisition workforce—i.e., those “who develop, acquire, and sustain operational capability.” (Acronym: AWF.) Her memo announced (and we are not making this up) “the BtB 21st Century AWF talent management framework, beginning on October 1, 2020 with full deployment by October 1, 2021.”
So: BtB 21st Century AWF talent management framework. Because what had been passing for training up to that time just wasn’t getting it done.
At Apogee Consulting, Inc., there always seems to be a blog article. That’s what we get for writing about this stuff for more than a decade. Anyway, in 2011 we wrote about the lack of skills at DCMA. Both GAO and DCMA expressed concerns with loss of key skillsets between 2000 and 2010, as the DCMA workforce shrank precipitously. With our usual diplomatic nuanced language, we wrote that GAO was calling-out DCMA for “mismanagement,” which we also characterized as “sabotage” of the acquisition workforce (now called the “AWF”).
We wrote in that 2011 article (link above)—
What we’re saying is that you can look at this from (at least) two points of view. One point of view says DCMA mismanagement created a lack of necessary skill sets (including knowledge and experience) which led to ‘cost risks’ in the pricing of DOD contracts. The other point of view says DCMA mismanagement created a lack of necessary skill sets that made effective management and administration of those contracts nearly impossible.
At that time, DCMA announced that its plan to address those gaps in necessary skillsets was to centralize command and control. As GAO reported—
Ironically, this focus on providing CMOs the flexibility to meet their customers’ needs as well as the absence of specific guidance and procedures resulted, according to DCMA officials, in a level of confusion among their program office customers. … Relatedly, the decentralized nature of DCMA guidance led each product division to develop and execute its own policies and provided CMOs the leeway to develop additional policies and procedures to respond to their own customers’ needs. This led to inconsistent oversight and surveillance activities among CMOs. Another unintended consequence was inefficiencies in how CMOs operated. For example, CMOs in close proximity but under different product divisions sometimes did not share resources or expertise and thus did not leverage their workforces to help meet workload surge requirements.
We’re not going to rehash that decade-old blog article any more. You can follow the link above if you want to read it. However, those points are foundational for understanding that DCMA centralized its command and control in order to curb AWF flexibility, while at the same time training the AWF using sub-optimal methods. Flash-forward a decade to 2020, and the DOD announcement of “the BtB 21st Century AWF talent management framework” now has some context. Also, keep in mind the centralization theme, as it’s going to come in handy later on.
Let’s talk about that 2020 memo.
In late 2020, when USD (A&S) Lord made her announcement, the Defense Acquisition University (DAU), which had been responsible for implementing the suboptimal training, called the memo “perhaps the most significant update to the Defense Acquisition Workforce certification construct and governance we've seen in many years.” Which is a bit disingenuous because it was DAU’s failure to adequately train the AWF that led to the need to significantly restructure AWF training.
Let’s move on to today.
A year later, a new memo issued by the new Principal Director of the Defense Pricing and Contracting (DPC) Directorate, provided details of the new BtB training plan. His focus was on one of the six new AWF functional areas: contracting. His memo focused on the training of DOD contracting officers. After seven months of detailed planning, his memo announced the new training plan for those people who acquire billions of dollars of goods and services for the DOD and its warfighters.
As we understand the new plan, DOD is now adopting NCMA’s Contract Management Standard. There will be one certification, a certification that requires only “foundational training” and an examination. You pass—you’re certified. The exam will cover “the American National Standards Institute/National Contract Management Association (ANSI/NCMA ASD 1-2019) accredited Contract Management Standard.”
In addition—
The Contracting Competency Model represents a set of competencies that are foundational and common among the Contracting workforce, regardless of the organization or mission area, and will form the basis of the Contracting training program. In addition to achieving certification in Contracting, a workforce member may earn credentials and complete specialty training relevant to the needs of their current job assignment, and will engage in continuous learning throughout their career. All positions in the Contracting Functional Area will follow the DoD Acquisition Workforce requirement to achieve 80 Continuous Learning points within a two-year period.
But wait, there’s more (or less, if you will)—
Under the new structure, mandatory training for Contracting certification has been significantly reduced from approximately 650 hours to 200 hours. Beginning on 1 October 2021, the new training courses for certification will be: CON 1100 Contract Fundamentals; CON 1200 Contract Pre-Award; CON 1300 Contract Award; and CON 1400 Contract Post-Award. Additionally, there will no longer be a requirement for a baccalaureate degree as part of the DoD Contracting Professional Certification; however, 10 U.S. Code § 1724 requires a baccalaureate degree for 1102 series positions and similar military positions.
(Emphasis added.)
So basically, less training is now required. You don’t even need a college degree unless you want to be an 1102-level contracting officer. Take a test and you’re in. Already have a DAWIA Level I, II, or III certification and you’re in.
We’re sure this new approach will not have any deleterious impacts on the skillsets or competency of future contracting officers.
But maybe the next generation of contracting officers won’t need as much training or, at least, not as much training in things such as contracting. Maybe their training should focus on following written direction.
What do we mean? Well, remember that DCMA has spent the past decade centralizing its command and control. Back in the ancient days of yore, there was a “One Book,” which was a resource for all contracting officers. That’s long gone. Instead, now there are a myriad of Instructions that prescriptively tell DCMA contracting officers exactly what to do. If a contracting officer follows their Instructions, they won’t be criticized, even if nothing gets done. But if they try to take initiative and make things happen outside of those prescriptive Instructions, then they are at risk.
Evidence in support of that assertion was recently provided by the DOD Office of Inspector General via Audit Report No. DODIG-2021-056, dated February 26, 2021. The audit focused on how DCMA contracting officers dispositioned DCAA audit findings at “two of the largest DoD contractors.” The IG auditors looked at 30 DCAA audit reports to see whether the contracting officers “complied with applicable Federal Acquisition Regulation (FAR), DoD Instruction 7640.02, and DCMA policy” when they dispositioned those reports. Spoiler alert: In about half of the 30 audit reports (14/30), the contracting officers did not—
… adequately document or explain why they disagreed with $97 million in questioned costs from eight DCAA incurred cost audit reports, as required by FAR subpart 42.7; or comply with FAR 30.605 when they addressed six DCAA CAS audit reports.
The DOD IG audit report lists a number of Instructions with which contracting officers must comply, including:
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DOD Instruction 7640.02 (“Policy for Follow Up on Contract Audit Reports”) establishes policy, assigns responsibilities, and includes reporting requirements and follow-up procedures for DCAA audit reports, including incurred cost audit reports, CAS audit reports, and business system deficiency audit reports. It also “requires the contracting officer to indicate whether the contracting officer agrees with each DCAA finding or recommendation and, if not, to document the rationale for the disagreement in the negotiation memorandum” and “establishes recordkeeping and reporting requirements for reportable contract audit reports.”
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DCMA Instruction 125 requires the contracting officer to evaluate all DCAA findings, appropriately settle final indirect rates, and document the results in a negotiation memorandum. The instruction also requires the contracting officer to retain documents associated with the settlement of the final indirect cost rate proposal.
According to the DOD Inspector General, in 14 out of the 30 audit reports reviewed, the cognizant contracting officer failed to comply with either the FAR or the appropriate Instruction. Specifically the contracting officer did not—
… adequately document or explain why they disagreed with $97 million in questioned costs from eight DCAA incurred cost audit reports as required by FAR 42.705-1(b)(5)(iii) and DoD Instruction 7640.02; or comply with FAR 30.605 and DCMA Instruction 108 when they took action to settle six DCAA CAS audit reports.
(We note that there was no opinion expressed on the quality of the DCAA audit reports and whether the findings within those reports had merit.)
Why such a high failure rate? The IG cited three causes:
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DCMA contracting officers did not obtain a required legal review.
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DCMA supervisors did not provide effective oversight of DCMA contracting officer actions to settle the DCAA audit reports.
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DCMA contracting officers did not maintain detailed contract file documentation, such as documents provided by the contractor during negotiation to support not upholding DCAA audit report findings and recommendations.
Importantly, the audit report stated—
DoD Instruction 7640.02, Enclosure 3, paragraph 3(b), and DCMA Instruction 126 require that DCMA contracting officers consult legal counsel and document the legal basis when their disagreement with DCAA findings or recommendations is based on an interpretation of law or regulation. In all four instances, the DCMA contracting officers’ disagreement was based on an interpretation of the FAR that differed from the DCAA’s interpretation and should have had a legal review.
There it is. Remember that centralization policy? This is the result. Essentially, DCMA contracting officers must not exercise independent thought or action without appropriate reviews. They must follow their Instructions or risk criticism.
And the Director of DCMA agreed with the findings and the recommendations, which included “Review the contracting officer’s decision to not uphold the $97 million in [DCAA] questioned costs and determine whether the costs are unallowable in accordance with the Federal Acquisition Regulation.”
Given all of the above, doesn’t it make sense to stop training contracting officers in critical thinking skills and judicial interpretations of the regulations? Why train them in something that they will never use or, worse, be criticized for using? Just train them in the fundamentals (e.g., “what is a contract?”) and focus on making sure they understand the Instructions that will guide their day-to-day decision making. Make sure they escalate any judgment calls to the appropriate centralized authority so that they can then be told what to do. Document, document, document.
Meanwhile, DOD Leadership wonders why the acquisition system can’t move any more quickly.
1 Hat tip to Vern Edwards for that piece of shocking information.
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