Out of the Frying Pan and Into …
 The Office of Federal Procurement Policy (OFPP) in the Office of Management and Budget plays a central role in shaping the policies and practices federal agencies use to acquire the goods and services they need to carry out their responsibilities. The OFPP oversees the development of acquisition regulations—the OFPP Administrator is the Chair of the FAR Council. The OFPP Administrator is also the leader of the Chief Acquisition Officer’s Council. The OFPP formulates and coordinates new acquisition legislation; it manages the government-wide procurement data system (FPDS). And it directs the activities of the Federal Acquisition Institute, whose objective is to improve the caliber and professionalism of the acquisition workforce. Oh, and the OFPP Administrator also chairs the Cost Accounting Standards (CAS) Board, as well.
You might say that the OFPP and its Administrator play a fundamental, a critical, role in determining how well (or how poorly) the Federal government acquires goods and services on behalf of the taxpayers.
Given the scope and importance of the position’s responsibilities, you’ve got to believe that it’s a tough job. It starts with a tough confirmation process and then we bet it gets even tougher from there. Joe Jordan went through that process and took on the responsibilities. He was confirmed in May, 2012 and, during his tenure, he successfully carried on the tradition of his OFPP predecessors. When he announced his departure some 18 months after he was confirmed, Federal Computer Week reported—
Since coming to OMB in 2011 from the Small Business Administration, Joe Jordan has been a tremendous asset to this institution and a key adviser to both me and former acting Director [Jeff] Zients. … He has been a driving force behind administration procurement initiatives, including eliminating inefficiencies and buying smarter through strategic sourcing and shared services; improving contractor accountability and fighting waste, fraud, and abuse through the increased use of suspensions and debarments; stopping the excessive reimbursement for contractor executives; and making it easier for small businesses to contract with the federal government. I can't thank Joe enough for his outstanding public service, for his tireless efforts, and for the many contributions he has made over the years.
FCW was quoting, of course, from the press release issued by FedBid and written by its founder, Mr. Ali Saadat. Mr. Jordan left his position at OFPP in January, 2014 to head that company’s public sector group. FedBid, which is divided into public sector and private sector support (with the private sector continuing to be led by Mr. Saadat), offers to create a digital marketplace where buyers can quickly and cheaply find qualified sellers, and where competitions can be held to efficiently select the low bidders. As we understand it, the fundamental means by which this is accomplished is the reverse auction. (We might be wrong about that, but that’s our understanding.
Reverse auctions are not necessarily good things. We’ve addressed them before. Even though the OFPP has been encouraging their use since 2004 (long before Mr. Jordan took the helm), we have heard rumblings that all is not pine-scented air fresheners in the State of Denmark (so to speak). In our article on reverse auctions (link above) we wrote—
The problem with reverse auctions is that they lack full transparency. The sellers know that somebody is underbidding their proposed price, but not necessarily who is doing so. This situation creates the opportunity for ‘phantom bids’ – i.e., bids submitted by Federal buyers whose sole intent it to generate “savings” for their agency by forcing the prices lower and lower.
How likely is the possibility of Government-submitted phantom bids? It’s difficult to determine because the goal of such behavior is not to be the winning bidder but, instead, to be the next higher bidder. That way their name won’t be disclosed and nobody will know that the price was driven down by fraudulent bids. (The bids are fraudulent, of course, because the Government bidder has no intention of fulfilling the order. Indeed, the Government bidder cannot fulfill the order.)
In any case, Mr. Jordan departed OFPP for FedBid and almost immediately landed in hot water with the Veteran’s Administration Office of Inspector General. Washington Technology reported in October, 2014, that the VA OIG issued audit reports that found –
- FedBid's claims of sizable savings generated by the reverse auctions the firm provides for federal contractors are overblown and misleading.
- Susan Taylor, deputy chief procurement officer at the Veterans Health Administration, was castigated for allegedly engaging ‘in conduct prejudicial to the government when she pressured contracting staff under her authority to give preference to and award a task order for reverse auction services to FedBid Inc.
- Reverse auctions can inadvertently derail federal efforts to properly record contract documentation. They can unduly complicate the contracting process and limit competition by squeezing out potential vendors.
- The main purpose of reverse auctions -- to save money -- can be negated by multiple factors, including FedBid's fees and the Industrial Funding Fee customers paid to cover the General Services Administration's operation of the Federal Supply Schedules program.
- The formula that reverse auction providers use to calculate savings -- subtracting the final award price from the ‘independent government cost estimate’ -- was not reliable, in part because of frequent mismatches between that independent estimate (which is required by VA policy) and the target price set by agency contracting officers. In addition, contract prices represent funds obligated at the time a contract was awarded, but many purchases were not fully funded at that time, resulting in inflation of the reported savings.
- It took a while, but this week the US Air Force (not the Veteran’s Administration) suspended FedBid and began debarment proceedings, based on “lack of business honesty or integrity” at the company, according to this FCW story. Mr. Jordon issued a statement expressing his “disappointment” with the proceedings and stressing the company’s continued cooperation with investigators and suspension/debarring officials. (As if the company had a choice ….) Mr. Jordan also noted that the respected law firm of Arnold & Porter had been hired to perform an independent investigation, and stated that no legal wrongdoing was found. Mr. Jordan also stated that “The company has also created an ethics and compliance steering committee that includes the chief compliance officer and the CEO, to oversee and implement changes in the company's ethics and compliance program, policies and training.”
The Washington Post offered more details, noting that the company is considered to have “deep ties to the Washington establishment.” The WaPo story discussed how FedBiz “mounted an aggressive campaign” to have a VA contracting moratorium, imposed by a “senior VA official,” overturned. WaPo reported—
‘Need to assassinate his character and discredit him,’ read an e-mail from a top executive in 2012, according to the IG. The firm also vowed to ‘unleash the hounds’ and ‘take off the gloves’ in its ‘storm the castle’ campaign to win back the business.
In another story, Federal Times outed the unnamed executive as being Glenn Richardson, the former FedBid President whom Mr. Jordan succeeded.
Importantly, that top (unnamed) executive issued those emails well before Mr. Jordan accepted his leadership position at FedBiz. Unfortunately for Mr. Jordan, he had to deal with the fall-out from the intemperate and ill-advised missives.
Mr. Jordan would seem to have his hands full trying to save his company and regain any semblance of a reputation for integrity and honest dealings. As we noted in our article on reverse auctions, there would seem to be opportunities for chicanery within the process itself, and only companies with sterling reputations for transparency and integrity should be involved. If FedBiz wants to continue to be a player in the reverse auction marketplace, Mr. Jordan will have to work some magic.
There’s no question that the role of OFPP Administrator is a tough—yet critically important—role in the Federal acquisition environment. Mr. Jordan survived eighteen months at the helm of OFPP, with no ill effects to his reputation (as far as we can tell from a Google search). Now Mr. Jordan would seem to have an even tougher job in front of him, one that might make or break his career. Will he be known as the savior of the reverse auction, or the man who went from the frying pan into the fire of suspension and debarment?
Expressly Unallowable Costs
The Cost Principle at FAR 31.201-6, Accounting for Unallowable Costs, requires that “Costs that are expressly unallowable or mutually agreed to be unallowable, including mutually agreed to be unallowable directly associated costs, shall be identified and excluded from any billing, claim, or proposal applicable to a Government contract.” The FAR contract clause 52.242-3 (“Penalties for Unallowable Costs,” May 2014) states that—
If the Contracting Officer determines that a cost submitted by the Contractor in its proposal [to establish final billing rates] is expressly unallowable under a cost principle in the FAR, or an executive agency supplement to the FAR, that defines the allowability of specific selected costs, the Contractor shall be assessed a penalty equal to—
(1) The amount of the disallowed cost allocated to this contract; plus
(2) Simple interest, to be computed—
(i) On the amount the Contractor was paid (whether as a progress or billing payment) in excess of the amount to which the Contractor was entitled; and
(ii) Using the applicable rate effective for each six-month interval prescribed by the Secretary of the Treasury pursuant to Pub.L.92-41 (85 Stat. 97).
If the Contracting Officer determines that a cost submitted by the Contractor in its proposal includes a cost previously determined to be unallowable for that Contractor, then the Contractor will be assessed a penalty in an amount equal to two times the amount of the disallowed cost allocated to this contract.
Thus, it is important for contractors to “scrub” their proposals to establish final billing rates (also known as “incurred cost proposals”) to ensure that they are not claiming expressly unallowable costs. They are required to certify that they have excluded such costs and, if the Contracting Officer determines that the proposal contained expressly unallowable costs despite that certification, then penalties and interest may be imposed.
The problem is that what costs constitute “expressly unallowable costs” has not be clearly defined in the FAR. CAS 405 has a definition of what types of costs are "expressly unallowable" but does not otherwise list those costs. The Standard states that an expressly unallowable cost is a “particular item or type of cost which, under the express provision of an applicable law, regulation, or contract, is specifically named and stated to be unallowable.”
This is an important concept because the value of the penalty and interest assessed may well exceed the value of the disputed cost itself. As Karen Manos wrote in her September 2013 article, “not all unallowable costs are expressly unallowable, not all expressly unallowable costs are subject to penalties, and even when the disallowed cost is subject to penalties, a waiver may be required.”
Ms. Manos wrote, “Expressly unallowable costs are a relatively small subset of unallowable costs.” Though she listed conditions that would create an expressly unallowable cost, she did not provide a definitive list of such costs. Nor can any such list be found in FAR or CAS. So what is a Contracting Officer to do? In her article, Ms. Manos takes both DCAA and DCMA to task for an “overbroad interpretation of expressly unallowable costs,” and for imposing penalties and interest when not warranted, and for refusing to grant waivers from penalties and interest when required. Yet guidance in this area has been singularly lacking.
So if not all unallowable costs are expressly unallowable, how can the parties easily distinguish between the two types?
In mid-December, 2014, DCAA attempted to remedy the lack of clear guidance by issuing MRD 14-PAC-021, “Audit Alert Distributing a Listing of Cost Principles That Identify Expressly Unallowable Costs.” The audit guidance is admittedly not comprehensive, but it’s a good step in the right direction. It consists of 103 individual costs that, in DCAA’s view, are expressly unallowable. In addition, there are seven additional DFARS costs that should be similarly treated by auditors.
Importantly, nowhere on the list do we see that a cost questioned as being unreasonable in amount is expressly unallowable.
We express no opinion regarding whether we agree with DCAA’s list, but we do applaud the agency for tightening the audit guidance in this area of frequent dispute.
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Contractors Blowing Whistles on Feds
 Recently we had occasion to discuss a new channel for reporting DCAA misconduct—the DCAA Office of Inspector General. The new DCAA OIG exists to accept disclosures of “incidents of fraud, waste, abuse or gross mismanagement without fear of reprisal or retaliation.” Importantly, anybody—be they auditor or Contracting Officer or contractor—may file a complaint with the DCAA OIG.
We expressed some confusion regarding when one was supposed to report concerns to the DCAA OIG Hotline and when one was supposed to use the more traditional Hotline of the Department of Defense OIG. Either method would seem to be acceptable, though naturally DCAA would hope that its auditors would use their internal Hotline instead of calling the DoD OIG Hotline.
Just like contractors would hope their employees would use their internal Hotlines instead of calling the DoD OIG Hotline.
As we noted in our previous article, the DoD OIG thought having contractor employees use contractor internal Hotlines negatively impacted the effectiveness of the official DoD OIG Hotline. However, no such concerns appeared to exist with regard to the existence of a competing DCAA OIG Hotline. Indeed (according to DCAA), the DoD OIG actually encouraged creation of the competing Hotline. Hmm….
Regardless of the apparent inconsistency, there are now (at least) two avenues that can be used for reporting concerns with DCAA audits. And now there is another avenue that contractors can use to report wrongdoing by Federal employees. They can report wrongdoing directly to the United States Office of Special Counsel. Or at least they will be able to in the future, when this proposed rule becomes final.
According to the information in the proposed rule, the OSC is proposing to allow contractors to file whistleblower disclosures of “a violation of any law, rule, or regulation; gross mismanagement; gross waste of funds; abuse of authority; or a substantial and specific danger to public health or safety” from “current and former Federal contractors, subcontractors, and grantees (collectively, “contractors”).”
As the rulemaking comments explain—
In the modern workforce, employees of contractors, subcontractors, and grantees … often work alongside Federal employees, having similar if not identical duties. Thus contractors are similarly situated to observe or experience the same type of wrongdoing as are Federal employees. According contractors a safe channel to report wrongdoing within the government advances Congress's purpose in enacting the CSRA and WPA. Moreover, Congress recently extended protection against retaliation to government contractors who make whistleblower disclosures, thereby signaling its encouragement of such disclosures. OSC deems such protection against retaliation a precondition to asking insiders to risk their careers to report wrongdoing.
Thus, since the modern Federal workforce consists of both employees and contractors, and it is difficult to figure out who is whom, it was deemed appropriate to extend the reporting avenue (and protections) of the OSC to the contractors embedded in the workforce.
We’re okay with that.
Indeed, we have in the past lamented the seeming decay of ethics in the Federal workplace (including the military branches). So we welcome another avenue for wrongdoing to be reported for investigation.
The remaining problem, as we’ve noted before (see link in paragraph immediately above), is that investigative resources are in short supply. DCAA investigative support to DoJ and DoD has been thin. There simply may not be enough trained and seasoned investigators to quickly and efficiently determine whether Hotline allegations received have merit.
But that’s a downstream problem.
At this point, contractors and Contracting Officers and Federal employees and auditors have many avenues available to them to report suspected wrongdoing. Whistleblower protections have been beefed up, to the point where anybody who retaliates against a whistleblower is a fool. If you think wrongdoing has occurred, you are running out of excuses to rationalize your silence.
At this point, If you remain silent, you are part of the problem.
Reporting a DCAA Auditor for Misconduct
 Kids, back in my day you did not report a DCAA auditor to his/her Supervisory Auditor, even when it was obvious the auditor lacked independence or objectivity. This one time a new auditor opened our first meeting by announcing, “I have ADD.” How do you respond to that line? Nothing. You do nothing. You do not respond.
Back in my day, you did not call up a Branch Manager and complain about a Supervisory Auditor, even though that SA was letting his or her auditors run roughshod over the audit program and your people. There was no point to complaining. It was just the way it was. So deal with it. Ditto the Regional Audit Manager.
DCAA audit support seminars teach that you can appeal all the way up the chain of command, right to the Director, DCAA, located at Fort Belvoir, Virginia. And you can, if you have the right connections. One time Bill Reed looked us in the eyes and said, “If you have a problem with any of my people, you call me directly. I’ll look into the situation and, if warranted, I’ll fix it.” But we knew nobody was going to call him. Not us, anyway.
First of all, the kind of service Mr. Reed was offering was reserved for the Top 5 or Top 10 defense contractors: Boeing, Lockheed Martin, Northrop Grumman, General Dynamics, Raytheon. The bigs. Not only could their Corporate people call Mr. Reed and get their calls returned that same day, but they also got quarterly meetings with the top DCAA echelon and annual joint councils and that’s the way that went. First among equals, you know. No piddily SBIR contractor was going to get that level of service.
Second, to some extent having a contractor complain about an auditor was seen as a badge of honor. If the contractor was complaining, the auditor must be doing something right. So a contractor complaint didn’t lead to a change in auditor; it led to the auditor doing the same thing the contractor was complaining about, only with more energy and encouragement.
Somehow that all changed in the past few years and we’re not sure how or why or when. Did it start to change when DCAA audit guidance encouraged frustrated auditors to call the DoD Inspector General and report DCMA personnel for not sustaining the audit findings? Did it start to change when a DCAA auditor, frustrated with direction to obtain more current evidence in order to issue an audit report, called DoD IG to complain about the lack of audit guidance in that area?
We don’t know, but change it did.
Recently we reported the results of a DoD IG Hotline investigation, in which the quality of a DCAA audit was called into question. The IG sustained the allegations and found some pretty serious flaws in the auditor’s methodology and conclusions. (Note: this was basically a repeat from 2008, though in 2014 it was a targeted investigation and not a Region-wide quality review.) And we are not even counting KBR’s recent lawsuit against DCAA for professional malpractice, since that’s outside the purview of the DoD IG.
It seems fairly evident that auditors, if not also contractors, are making use of the DoD Inspector General Hotline to report issues and problems within DCAA. Those auditors are not using internal agency processes. They are not escalating and elevating to SAs and to FAO Managers, or to Tech Specialists or to RAMS. Instead, they are dropping dime and calling the DoD IG Hotline and thus initiating an IG investigation which will possibly result in the issuance of a report that makes public the audit agency’s dirty laundry. Not good for the SES leadership team.
What should be done about this situation? Well, to address concerns DCAA has taken some interesting, and perhaps innovative steps.
First, did you know there is now a DCAA Office of Inspector General? Yep. Apparently that’s a thing now, though we could not find that position listed on the CIGIE Inspector General Directory. The DCAA OIG was established on January 5, 2015 because allegedly the DoD Inspector General encouraged DCAA to do so. Formerly, internal complaints were handled by the DCAA Internal Review Directorate (IRD). Why change? According to the website’s FAQ: “Converting the IRD to an OIG will provide DCAA employees with processes, governed by law vs. internal regulatory requirements, to confidentially disclose incidents of fraud, waste, abuse or gross mismanagement without fear of reprisal or retaliation. The new organization is comprised of auditors and investigating officers, previously assigned to the IRD, who reside at locations throughout the continental United States and have worldwide responsibilities.”
So the new DCAA OIG is basically the old DCAA IRD, but it might now be subject to different standards? We’re not so sure but that’s what the executive summary seems to indicate.
The DCAA OIG has an
This e-mail address is being protected from spambots. You need JavaScript enabled to view it
and a complaint form (DCAA Form 7648, Dec. 2014). There is even a phone number to call, if filling out the complaint form is too much effort. (That phone number is (703) 767-2012.) There are a multitude of avenues to use for reporting “allegations of Fraud, Waste, and Abuse or Gross Mismanagement as well as other wrongdoings pertaining to programs, personnel, and operations that fall under the purview of the DCAA.”
Did we mention there is now a DCAA OIG website? Yep. That’s a thing now, too.
A visit to the website revealed that “anyone may file a complaint.” Anybody—even the poor contractor who is feeling pain during an audit. However, the website cautions that “Certain matters may be better resolved through other channels, instead of the DCAA Hotline.”
Indeed, there’s a link to a FAQ that you will probably want to check out. Among other things, the FAQ clarifies the scope of allegations that will be investigated by the new OIG function. Whining about employment-related grievances and your fellow auditor’s inaccurate timesheets are not among those issues that will be accepted for investigation by the OIG.
The funny thing is, we remember when the DoD OIG complained that establishment of contractor hotlines negatively impacted the effectiveness of its own Hotline program. As a result, the DFARS was revised to make posting the DoD OIG Hotline mandatory at most defense contractors’ sites. We didn’t think very much of that initiative at the time, and said so.
So now, nearly four years later, the DoD OIG has apparently given its blessings to have DCAA stand-up its own OIG function and create its own Hotline and other complaint avenues. And we’re guessing this new function will not negatively impact the DoD OIG effectiveness in a manner similar to how the defense contractors’ hotlines were alleged to have done. That’s … interesting.
To sum this all up, if you have a complaint to make regarding DCAA’s audits, you don’t have to reach out to the DoD Inspector General. Now you have a new avenue of recourse: You can reach out to the DCAA Inspector General. Which is essentially the old IRD function staffed by the same old IRD personnel, but perhaps (maybe?) subject to different or even higher standards.
Or you can call the DoD IG Hotline. Or if you are a contractor you can file suit alleging professional malpractice. You have a lot of options now, which is more than we had back in the day, when you simply did not complain about your DCAA auditor.
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James Glenn Warner, age 44, of Manassas, Virginia, was a “Contracting Official” supporting the United States Army. He worked in the Pentagon.
