Innovating in Government Contracts
Recently the Federal government has awakened to the notion that it has many opportunities available to it to more efficiently and effectively acquire the goods and services it needs to execute its mission. It has awakened like Smaug the Magnificent opened his eyes in the second Hobbit movie: slowly, languidly, and almost lazily. The eyes opened before the vast body moved, searching for an invisible thief who had come for the treasure trove. The eyes opened reluctantly, but open they did. The dragon awoke.
The Federal government has awakened to the notion that acquisition practices can be “strengthened” to “improve efficiency, reduce red-tape, and provide greater benefit for taxpayer dollars.” Indeed, according to a recent memo from the Office of Management and Budget, steps to strengthen those practices have already been taken, and improvements have already been noticed. (We suspect the author of the memo, Ms. Anne Rung, Administrator, Office of Federal Procurement Policy, has confused correlation with causation, but whatever.) (As a side note, if you are interested in the official duties of the OFPP: Administrator, click here.)
Ms. Rung’s memo called for continued improvements in acquisition practices. According to the memo, a primary goal is to reduce complexity; to simplify to drive “greater innovation and creativity and improved performance.” The memo stated –
The overwhelming feedback from industry and other stakeholders is that the complexity of the Federal contracting space leads to higher costs, slower procurements, and less innovation. Stakeholders cited as problems, among other things, 100 page request[s] for proposals with overly prescriptive, Government-unique requirements, significant contract duplication across Government, and very little sharing of pricing and other contract information between agencies and industry
The OMB memo establishes several areas of emphasis that (it asserts) should lead to improvements. These areas include:
-
Centralizing purchases of common goods and services under the rubric of “category management.”
-
Train buyers of IT products and other digital systems to be more creative and agile, by employing such methods as cross-functional training, rotational development and assignments, and private sector training ideas.
-
Building stronger relationships between Government buyers and contractors. This effort includes “removing regulatory barriers to innovation,” especially in the areas of commercial item acquisitions. Also included will be opportunities for contractors to provide “frank, open assessment feedback” to agencies regarding the agencies’ acquisition practices.
We here at Apogee Consulting, Inc., are all about acquisition reform. In fact, we have in the past suggested certain opportunities for the Federal government and its agencies to reform acquisition practices. Not that anybody ever listened to this minor blog bleating its suggestions.
Another group offering suggestions about acquisition reform, particularly with respect to how the Department of Defense acquires goods and services, is the National Defense Industrial Association. The NDIA recently released “Pathway to Transformation,” which is approximately 70 pages of innovative suggestions for DoD acquisition improvement. Here’s a link.
As with the OFPP memo, the NDIA report groups its suggestions into three categories:
-
Authority and accountability
-
Matching requirements to resources
-
Evidence-based decision-making
Knowing its audience, the NDIA also provided a one-page executive summary of its lengthy report, which you can find here. We won’t repeat it in this article.
But we will discuss some of the suggested innovations that fell under the heading of “matching requirements to resources.” The summary of that section stated—
NDIA strongly supports limiting the requirements levied on the acquisition system to the resources provided to it, and likewise making sure that any remaining essential requirements are properly resourced. To that end, the report recommends a process for sunsetting new and existing acquisition requirements in statute, or alternatively convening an expert panel to review and reduce the requirements in the current body of acquisition law. The report recommends several approaches to improving the management of both the civilian and military acquisition workforces by making workforce management more strategic, fully funding the Defense Acquisition Workforce Development Fund on a stable basis, and making the acquisition profession more attractive to capable and talented military personnel. The report recommends more collaboration between Government auditors and the vendors they audit and close oversight of that process by Congress. And it recommends taking advantage of the low administrative costs of small businesses by raising their reserve under the Simplified Acquisition Threshold to $250,000 and raising the Threshold to $500,000 for all businesses
[Emphasis added.]
See that sentence in the above paragraph, the one we italicized? That one about auditors and auditees? That sentence caught our attention and we researched it in the formal report. Here’s what we learned. First, although the sentence in the foregoing paragraph was diplomatically worded, it’s worded a bit differently on page 53 of the report, where it carries the following header: “Reducing Inefficient Audit Practices.” That phrasing works for us!
The report states the “root cause” of the problem thusly –
… current audit requirements exceed Defense Contract Audit Agency (DCAA) capabilities and resources. Recent statements by DCAA leaders indicate that 40 percent of DCAA personnel have five or fewer years or less experience in government auditing, which, when combined with vigorous assertions of audit independence, can lead to wastefully expensive audit practices. Decentralized DCAA management allows variation in practice and culture among its auditors which can also be unhelpful.
The NDIA report doesn’t offer any panaceas for solving that problem, but it does offer a couple of suggestions for improvement. The report recommends –
-
Establishing a “risk-based approach to auditing that focuses on materiality”
-
Creating an “advisory approach to auditing that focuses on helping vendors come into full compliance” instead of “an adversarial approach that seeks to identify every possible error in vendor reporting and documentation and penalize them for it.”
To its credit, the NDIA report recognized that changing DCAA’s culture will be a difficult challenge. To that end, it recommended a first step of amending the annual DCAA reporting requirement (10 U.S.C. §2313a) to include reporting on “DCAA’s efforts to align its audit policies and practices across its various regions.” The NDIA report also stated—
Because most audit issues are unique to the company in question, the congressional defense committees should encourage DCAA to create outreach opportunities through meetings with companies, industry trade associations, and other contractor groups, to identify vendor complaints, review the facts, and resolve them effectively for both the vendor and auditors involved. Just as companies should not be treated as adversaries by auditors, neither should auditors be treated as adversaries by companies, and both should approach the audit process with a desire to learn and improve outcomes.
We’re okay with that.
To sum this all up, we need to talk about acquisition reform as a cyclic thing. Every decade or so, somebody decides the Federal acquisition system is rife with waste, fraud, and abuse—and then they make some speeches and issue some memos and make some improvement recommendations. More often than not, all that effort goes to waste because the people on whom the system depends are already overworked and undertrained. Just as importantly, their supervisors and managers are also overworked and undertrained. The only people not overworked and undertrained seem to be the ones giving the speeches and issuing the memos and making the improvement recommendations. The people at the top do their thing while the people at the bottom do their thing, and they don’t seem to talk to each other very much. And then the people at the top depart for jobs in law firms and think tanks and institutions of higher education, leaving the people at the bottom with the same workload they had before all the improvement recommendations were issued. And so it goes.
We wrote an article in 2011 about the Obama Administration’s acquisition reform efforts, comparing those efforts to those of the Clinton era. It was not accepted for publication. One of the less insightful comments we received as feedback was “the Obama Administration is not engaged in Acquisition Reform,” and therefore the fundamental premise of the article was flawed. That was the last time we ever submitted an article to anybody at NCMA. In point of fact, it doesn’t matter whether it was called “Acquisition Reform” with capital letters or “acquisition improvements” or “better buying power” or “acquisition tradecraft improvements” or “transforming the marketplace.” It’s all the same thing. A rose is a rose is a rose.
The Federal government has awakened, once again and after its usual slumber, and has realized once again that its acquisition practices might be improved. Memos will be issued. Speeches will be made. And the people at the bottom of the pyramid will receive more top-down driven help, as they always do. This cycle would seem to be endemic to the overall process.
New SECDEF Faces Tough Challenges
A recent analysis piece at Law360 carried the headline, “New Defense Chief Faces Tough To-Do List.” The piece starts out: “With speculation rising over who will succeed Chuck Hagel as the next defense secretary, experts say the ultimate nominee must know the Pentagon inside and out, as well as be a skillful political operator, to tackle the threats posed by both sequestration and the terrorist group the Islamic State.” And that’s all we can see because the rest of the analysis is hidden behind an expensive paywall.
The rest of the analysis may address other challenges faced by the new Secretary of Defense, or maybe it goes into more detail regarding the initial list of challenges. We don’t know because the rest of the analysis is hidden. But we think the incoming SECDEF has other challenges that lie between the two edges of extremism defined by the article (Congress and ISIS). We would like to assert that, at a minimum, the spectrum of challenges needs to be defined by a triangle instead of a line. The triangle would be defined by Congress, parastatial terrorism … and the defense industrial base. We believe the incoming SECDEF needs to be worrying about how to repair the damage caused by nearly a decade of the adversarial relationship between the Pentagon and its contractors.
We were reminded of this third dimension of challenge when we read Sanda Erwin’s recent article in the National Defense Magazine – the official publication of the National Defense Industrial Association (NDIA). Her article, entitled, “Despite Contracting Reforms, Pentagon Seen as Unfriendly to Business.” We would have called it, “BECAUSE OF Contracting Reforms, Pentagon Seen as Unfriendly to Business,” but maybe that’s just us. Regardless of the best choice for title, we agree with Ms. Erwin that the Pentagon is perceived as being unfriendly to business. We think that’s one of the incoming SECDEF’s biggest challenges, right up there with Congressional extremism and the threat of parastatial terrorism.
We’ve written about the adversarial nature of the relationship between the Pentagon and its industrial base before. Recently we explored a RAND study that listed reasons why non-traditional defense contractors are reluctant to do business with the DOD. In another article, we discussed another Erwin article, and explored why the Pentagon desperately needed those non-traditional defense contractors to do business with it. In yet another article we wrote: “The marriage between DOD and its contractors is, seemingly, headed for a divorce. And like every divorce we’ve ever heard about, at the end of the day, the only winners are going to be the lawyers.”
So this concern about the Pentagon and its contractors is nothing new. What is new is the growing recognition that it’s a problem that needs to be solved. And apparently, only the SECDEF can solve it.
Ms. Erwin wrote—
Pentagon officials have been emphatic about ‘lowering the barriers’ to potential vendors -- especially those on the cutting edge of technology -- in order to spur competition in a market dominated by big conglomerates. But the private sector is skeptical. Industry executives say they appreciate the Pentagon's initiatives but so far see them as empty rhetoric. … executives contend that Kendall's initiative is not enough to counter a deeply entrenched bureaucratic resistance to doing business differently. They argue that Pentagon buyers are rewarded for squeezing profits out of contractors and make unreasonable demands for companies' intellectual property. Unless conditions change, executives say, the Pentagon will continue to have trouble wooing high-tech vendors that could far more easily sell their products in mainstream commercial markets.
Ms. Erwin related a “lively” exchange between the Hon. Frank Kendall (USD, AT&L) and Dov Zakhiem (former Pentagon Controller), wherein Mr. Zakheim “accused the Defense Department of being antagonistic toward industry profits.” Mr. Kendall disagreed with the accusation, as expected. Mr. Kendall is, of course, the current cheerleader for the series of reforms and initiatives called “Better Buying Power,” which has noble aims and (we think) mixed results. As we have asserted before, the set of initiatives is based on the fundamental precept that the only way for the Pentagon to live within its diminishing budget is to squeeze more costs out of the industrial base. While doing more with less is obviously one goal that needs to be accomplished, other goals should not be forgotten. Among the other goals should be to reduce the DOD’s bloated overhead and its military service personnel costs.
Putting the primary focus on reducing contractors’ costs could lead to the other necessary goals receiving less attention than they deserve. In a similar manner, nominating a new SECDEF who is an expert on Congressional relations and understands how to deal with terrorist threats tends to miss the importance of solving the relationship issues with the DOD industrial base.
Ms. Erwin’s article cited a recent study by The Lexington Institute entitled, “Rethinking Competition in Defense Acquisition.” That study explored the Obama Administration’s belief that competition in defense acquisition is a good thing, and that competition leads to better goods and services at lower prices. As The Lexington Study asserted—
The defense department correctly asserts that competition is a powerful tool for achieving cost effective acquisition. It knows also that competition can encourage research and innovation; new services, products and uses; and increase quality, reliability and performance from suppliers. But these benefits depend on a market sufficiently appealing to attract more than one bidder.
In other words, the study asserted that increasing competition is difficult when there is only one, or perhaps two, bidders. For example, competitions to build new nuclear submarines and nuclear aircraft carriers are not going to see a lot of bidders. In fact, there is a de facto sharing agreement between the two contractors that can build new submarines, because the Pentagon needs to perpetuate the façade that the two shipyards compete with each other for new work. Thus, the notion that competition will lead to better acquisition outcomes fails with respect to many of the largest and most complex acquisitions.
But The Lexington Institute Study goes beyond that initial assertion to lay out the reasons why the Pentagon can’t achieve robust competition in many of its acquisitions. The study stated—
Kendall attributes the decline primarily to decreasing defense budgets and fewer competitive opportunities, but it is more clearly DoD’s own acquisition policies that too often fail to attract bidders. The Defense Business Board (DBB) observed that ‘DoD lacks sufficient understanding of business operating models and drivers of innovation.” DoD consistently fails to appreciate the connection between policy, DoD buyer behavior, and results. Predictably, competition rates continue to fall.
DoD’s approach continues to be self-centered – focusing on internal metrics, and establishing and enforcing policy. DoD’s mantra for competition fails to consider RAND’s conclusion that ‘In some cases (especially in the procurement of major systems where the nonrecurring cost is large), it may be less costly for the government to forgo competition and to rely on a single supplier.’ Competition takes time, and since in the defense acquisition monopsony, government is the only important buyer, and usually must fund the development of all potential entries in a competition, it is not at all clear that competition saves money when nonrecurring costs are high or production runs are low. Even so, competition can serve other objectives such as keeping critical design teams and research in place to ensure a healthy industrial base, and a viable pool for future critical acquisition needs.
[Emphasis added.]
We agree with The Lexington Institute’s assertion that there is a link between DOD acquisition policy and the willingness of non-traditional defense contractors to compete for new opportunities. Until the Pentagon rethinks its adversarial approach to managing its contractors, it is not going to see a lot of new bidders. And as a result, it is not going to see the kind of disruptive technology it says it needs to maintain the technological edge our warfighters currently enjoy.
We need a new Secretary of Defense who gets that the relationship needs to be that of a partnership, and not that of a married couple sticking together for the sake of their children, even though they’d rather be somewhere else, away from each other.
|
More on False Claims Suits
A couple of updates on contractors facing FCA suits.
First update concerns CH2M Hill and its work at Hanford. We’ve written before about CH2M’s challenges at that contentious DOE environmental remediation site. In this article, we report that the Department of Justice has declined to intervene in a FCA suit filed against the CH2M Hill Plateau Remediation Co., in which the company was accused by Savage Logistics (a women-owned business) of “knowingly awarding subcontracts set aside for small and HUBZone businesses to companies that did not qualify for the work”—according to this article at The Tri-City Herald.
Apparently, the allegations involve some complex nuances of the small business reporting requirements. The Tri-City Herald reported it thusly—
The Small Business Administration determined that Phoenix Enterprises did not qualify as a small business when it was awarded a Washington Closure subcontract because it was too closely linked with Federal Engineers and Constructors, according to the most recent lawsuit.
Salina Savage of Savage Logistics informed CH2M Hill that the Small Business Administration determined that Phoenix Enterprises was not an independent business, but CH2M Hill awarded Phoenix Enterprises a contract worth $795,500, according to the lawsuit.
Federal Engineers and Constructors strongly denied that it was too closely aligned with Phoenix Enterprises or other subcontractors. It said that teaming arrangements among businesses for Hanford work is common and even encouraged.
CH2M Hill also awarded almost $1.5 million to the joint venture of Phoenix Enterprises and Acquisition Business Consultants under HUBZone subcontracts, according to the lawsuit. HUBZone subcontracts are reserved for small businesses in areas designated at Historically Underutilized Business Zones.
The lawsuit contends that both of the businesses in the joint venture would need to qualify as HUBZone businesses for the subcontracts to be valid, and Phoenix Enterprises was not considered a HUBZone business by the Small Business Administration, the lawsuit said. Acquisition Business Consultants had headquarters at the time in Wasilla, Alaska, and did not meet a requirement to have employees in Washington, the lawsuit said.
In related news, The Tri-City Herald also reported that “a month before, the federal government filed a civil lawsuit against another Hanford contractor, Washington Closure Hanford, which accused it of falsely claiming credit for awarding small-business subcontracts in certain categories. The claims of improper subcontracting in that lawsuit also were originally made by Savage Logistics.”
The interesting aspect of the Savage Logistics allegations, in our view, is that the gravamen of the suit would seem to be whether CH2M reasonably interpreted the small business rules in its subcontracting, or perhaps whether CH2M recklessly ignored a reasonable interpretation of those rules in making its subcontract awards. Good luck explaining those complex rules to a jury.
Meanwhile, The Tri-City Herald also reported that CH2M Hill Plateau Remediation Co. was recently awarded $4.9 million in award fees, equal to a 95 percent award. The article reported, “DOE gave CH2M Hill a rating of “excellent” and said the company had met specific goals for contracting out work to subcontractors and had exceeded all small business subcontracting requirements.”
Moving on, the second story doesn’t concern a specific False Claim Act lawsuit, exactly; it concerns the practice of KBR of having its employees sign non-disclosure agreements (NDAs) during interviews in internal corporate investigations. According to a Washington Times article, the NDAs “required [the employees] to get prior approval from a corporate lawyer before reporting wrongdoing.” That requirement “could violate defense acquisition rules and the Federal False Claims Act,” according to several Democratic Congresspersons, who wrote a letter to the President of KBR expressing their concerns.
Readers of this blog will recognize that KBR is no stranger to litigation, FCA-related and otherwise. It is no surprise that the company would have built-up internal defenses, processes, and protocols to aid in its legal defense efforts. That being said, this is the first we have heard of having employees execute NDAs as a part of participating in internal investigations.
The Washington Times article reported that KBR told the Congressfolk that “the company had never invoked the non-disclosure agreement to prevent whistleblower disclosures.” The article reported that the lawmakers were not swayed by KBR’s response. It said—
Still, lawmakers said they were concerned. ‘The personalized nature of this non-disclosure agreement — signed and witnessed by two individuals during an in-person interview — combined with the coercive, explicit threat for failing to comply could chill potential whistleblowers who might report fraud, waste, or abuse involving U.S. taxpayer dollars,’ the[y] wrote.
More on this issue as it develops.
To sum this article up, we are frequently reminded of the exposure faced by Government contractors to allegations of FCA violations. In our experience, far too many contractors fail to recognize their exposure, and they fail to properly factor that exposure into their risk analyses when evaluating their internal controls. Here, we report on one contractor facing allegations that its subcontract awards led to FCA violations; and even though the DOJ declined to intervene (always a good sign), the company still has to defend against the relator’s allegations. Another contractor has faced so much litigation it has (apparently) developed internal defenses to minimize future exposure—internal defenses that may have gone too far.
Government contractors must realize that their actions will be strictly scrutinized for compliance with contract terms and conditions. The scrutiny will come from current and former employees, or perhaps from competitors, or perhaps from disappointed bidders. If the company’s actions seem questionable, then it is very likely those actions will be questioned—and that questioning could very well take the form of a qui tam lawsuit under the False Claims Act. Defending against those lawsuits is going to be expensive, and the defense costs may be unallowable in many circumstances --meaning the costs will come out of profit dollars.
Something to think about.
The CDA Statute of Limitations: Looking for a Bright Line
As we see it, there are two types of people who help contractors comply with various FAR and CAS compliance challenges.
The first type is comprised of those folks who started in Contracts or perhaps even Law. They understand the legal ramifications of a contract: offer, acceptance, consideration, etc. They have read several Cibinic & Nash books, and they might even subscribe to the newsletter. The have read Restatement (2nd) of Contracts and have a good familiarity with the Uniform Commercial Code. They understand the legal ramifications of new judicial decisions, including when a decision is precedential and when it is not. But they tend to struggle with the accounting aspects of compliance. They don’t really like cost accounting. They don’t understand the nuances of revenue recognition. The interplay between balance sheet and income/expense statement is lost on them. They understand the legal decisions interpreting the Cost Accounting Standards – and they can probably quote from them – but how the Standards work in real life, in an accounting system or ERP system, is a mystery.
They know the theory cold, but the practical application is largely an unknown realm.
The second type of compliance people are the accountants. They are numbers people, at home inside complex spreadsheets populated with data pulled from detailed queries. Maybe they started out as auditors, at DCAA or in a public accounting firm. Maybe they started out as junior analysts in a contractor’s accounting department and graduated into audit liaison positions. At some point, they either prepared a final billing rate proposal or audited one. They understand the FAR Cost Principles cold. They’ve read the DCAA Contract Audit Manual cover-to-cover; they have a good familiarity with the audit programs as well as the latest MRD’s. They may not understand the legal decisions interpreting CAS, but they understand how the accounting system works and can demonstrate compliance. They understand the contractor’s financial statements and how cost accounting works. They have a firm grasp of details within the realm of audit and accounting, but legal decisions are far outside their purview. They take direction from above, trusting that the direction is the result of consultation with legal counsel.
They know the practical application of GAAP and FAR and CAS as those rules are actually applied in day-to-day accounting transactions, but the legal theories and judicial interpretations are largely an unknown realm.
There are a few people who straddle both worlds (Tom Lemmer of Mckenna Long & Aldridge, and Lou Rosen, formerly of Ernst & Young, come to mind). But they are few and far between.
This is a problem.
In order to be a good government contract compliance manager, you have to actually straddle both worlds. You have to have a solid grasp of the accounting transactions and the rules of GAAP, FAR and CAS. You have to understand the CAM and read the latest MRDs. In addition, you have to keep up on legal decisions that affect government contract compliance. You have to read ASBCA decisions and Court of Federal Claims decisions, and you have to keep an ear to the ground to listen for rumblings of how the Federal Circuit may have affirmed or overturned those decisions on appeal. You don’t have to be a lawyer but you have to be able to read through legal decisions – or at least subscribe to newsletters and bulletins and client alerts wherein lawyers translate those decisions into laypersons’ terms. You have to have one foot in several different camps: you have to be a little bit lawyer and a little bit accountant and a little bit auditor.
Successful compliance folks figure out how to pull-off that balancing trick. The unsuccessful ones focus on, and specialize in, one domain while remaining ignorant of the others. They may be the world’s greatest accountants or the world’s greatest internal auditors, but if they don’t at least dabble in the legal world, they don’t have all the pieces they need to put together a solid compliance system and defend that system to external auditors. Whether you are a DCAA auditor or a DCMA Contracting Officer or a contractor audit liaison, financial analyst or accountant, if all you do is worry about the accounting, you are missing a big piece of the puzzle.
Chances are, if you are ignoring the legal decisions, you are missing the most important aspect of government contract cost accounting and compliance.
It’s an unalterable fact of life that the FAR and CAS are just words, subject to multiple interpretations and disputes – until a judge or group of judges agree on a specific interpretation and meaning of those words, and that interpretation is affirmed on appeal. That interpretation, as “blessed” by an Appellate Court, creates a “bright line” that the rest of us use to establish our compliance baselines. Until we get a precedential legal decision or an affirmed decision, all we have is speculation about what the words mean. And your speculation is pretty much just as good as anybody else’s speculation.
Since we are all just guessing and speculating and making individual interpretations of what the rules require, we are likely to disagree with each other. For instance, DCAA is likely to base its audit findings and Form 1 disallowances on its agency’s interpretation of the words, which is probably not going to be super helpful to the average government contractor. DCMA Contracting Officers are going to follow their agency’s direction and their Guidebook, which are both just another interpretation. Contractors are going to interpret things as permissively as possible, focusing on creating ambiguity, so as to maximize allowability and cost recovery. Everybody’s got their interpretation of the words, and those interpretations vary. That’s just what happens when there is no “bright line” and we all have to make it up as we go along.
Multiple interpretations and differing agendas lead to disputes. And while the FAR clearly says those disputes should be resolved without resorting to litigation whenever possible, the sad truth is that it rarely happens these days—or, at least, it happens a lot less frequently than it used to. Consequently, we have a lot of disputes that require a lot of attorneys and a lot of unallowable legal fees. DCMA is jammed with Contracting Officer Final Decisions and the Courts are jammed with contractor appeals thereof.
All because we don’t have a “bright line” to guide us.
Which leads us, inexorably, to yet another discussion of the Contract Disputes Act’s Statute of Limitations.
The CDA Statute of Limitations (SoL) has been a frequent topic of discussion on this website. It’s been a frequent topic of discussion because the law is “evolving” and we still don’t have a “bright line” to guide the contracting (and litigating) parties. Writing as a non-lawyer, we are still looking for clear guidance so that we can properly advise our clients. It still doesn’t exist.
Some of the problem stems from differing opinions by the Judges of the Court of Federal Claims and the Judges of the ASBCA. Some of the problem stems from the fact that the Judges of the Court of Federal Claims don’t have to follow each others’ opinions as being precedential. Some of the problem stems from the fact that the Judges of the ASBCA don’t have to follow each others’ opinions as being precedential. Some of the problem stems from the fact that the ASBCA Judges don’t need to treat CoFC decisions as being precedential, and vice versa. Some of the problem stems from the fact that few CDA SoL cases have made it to the Court of Appeals.
There’s plenty of blame to spread around but, regardless of who’s at fault, the current situation is difficult to navigate.
A great example of the lack of “bright line” comes from comparing two ASBCA decisions.
The first case is one we’ve written about before: Raytheon Missile Systems, ASBCA No. 58011, issued in January, 2013. In that decision, Judge Menick dismissed the Government’s claim for the impact of a CAS noncompliance as being “untimely and … therefore invalid.” Judge Melnick found that “The events fixing liability should have been known when they occurred unless then can be reasonably found to have been either concealed or ‘inherently unknowable’ at that time.” Notice that the Judge focused on the events themselves rather than on knowledge of damages. As we’ve written, we believe that is the proper interpretation of the FAR’s definition of claim accrual. We agree with Judge Melnick’s decision that “claim accrual does not turn upon what a party subjectively understood; it objectively turns on what facts are reasonably knowable.”
Judge Melnick wrote –
Accrual of a contracting party's claim is not suspended until it performs an audit or other financial analysis to determine the amount of its damages. … Damages need not have actually been calculated for a claim to accrue. … The fact of an injury must simply be knowable. … The fact the government waited until 2006 to declare in an audit report that these earlier materials provided that notice is irrelevant. Delay by a contracting party assessing the information available to it does not suspend the accrual of its claim.
Based on that decision, as well as the decisions in two other Raytheon appeals (ASBCA Nos. 57576 and 57679, December, 2012), we thought the ASBCA was moving toward the kind of “bright line” guidance that the contracting parties could use in resolving disputes and potential disputes, without the need to resort to litigation. We were feeling pretty good about things.
Not so fast there, bucko.
ASBCA Judge McIlmail, ruling in the appeals of Combat Support Associates (ASBCA Nos. 58945 and 58946, October, 2014), kind of bent that nascent “bright line” back into an ebon opaqueness. Key findings of fact included the following –
-
CSA submitted its FY 2006 proposal to establish final billing rates (“incurred cost submission” or “ICS”) on August 30, 2007. Well, the ICS was actually submitted earlier than that, but on May 10, 2007, DCAA requested some additional information, including Schedule T. That revised Schedule T was submitted on May 20, 2007.
-
However, on August 25, 2007, CSA submitted “revised Schedules A and B of its ICS.” We don’t know why and Judge McIlmail didn’t say.
-
Sometime after those dates, DCAA conducted its audit. We don’t know when the audit started. But we do know that on June 17, 2013, the DCAA issued its audit report. About two months later, on August 23, 2013, the ACO issued two final decisions (COFDs) – “one demanding that appellant pay the government $332,167 in disallowed direct costs … and the other disallowing indirect costs and unilaterally determining appellant's indirect cost rates for FY 2006.”
According to the Judge –
The ACO's payment demand consist[ed] of two categories of disallowed direct costs: (1) $308,889 in equipment costs, and (2) $23,278 in telephone and fax expenses. The ACO disallowed and demanded repayment of $164,008 of the equipment costs because [s/he] determined that appellant had failed to provide documentation that justified the purchase of Caterpillar equipment from Winner International Trading Company (Winner), as opposed to from whom the ACO identified as the sole authorized distributor of Caterpillar equipment in Kuwait in FY 2006, Mohamed Adulrahman Al-Bahar. The amount disallowed was the difference in price between the two suppliers. The ACO disallowed and demanded repayment of $144,881 of the equipment costs because it determined that appellant had failed to provide documentation that justified ‘the selection of Volvo Motor Road Grader rather than the lowest bidder supplier’.
[Internal citations omitted.]
CSA Moved for Summary Judgment, based on the fact that the COFD was issued more than six years after submission of its ICS. As Judge McIlmail wrote, “Given the CDA's six-year limitation, to be timely, the government's 23 August 2013 claims must have accrued on or after 23 August 2007.” The Judge ruled that the government’s claims were timely, because "the supporting data related to those costs identified in the two (2) Government contracting officer final decisions dated August 23, 2013 was not provided to the auditors until after August 23, 2007" (which was the testimony of the DCAA Supervisory Auditor).
Judge McIlmail based his decision on the fact that the information in CSA’s final billing rate proposal was insufficient to put the government on notice that CSA had incurred the costs that were eventually disallowed. He wrote –
Appellant replies that a contractor is not required to submit supporting data with an ICS. That misses the point. The issue raised by appellant's motion is when the government knew or should have known of its claims; not whether the ICS satisfied the requirements for an ICS. Upon the record currently before the Board, the government has established that it knew or had reason to know of its claims only after 23 August 2007, upon appellant's submission of the ‘supporting data’ from which the government learned, or had reason to learn, of its claims.
Well, now we seem to be back to square one.
Hey, we’re not attorneys! Our thoughts and feelings and beliefs are worthless. You should ignore them! On the other hand, we’re not practicing law here; we’re writing a blog article – one that is supposed to express a point of view.
And our point of view is that this decision is a step backwards.
According to the logic in this decision, the government cannot know of an injury until a DCAA auditor requests some magic, unidentified and nonregulatory, “supporting documentation” and reviews it. Then and only then, does the CDA SoL clock start to tick. Based on this logic, the government can delay the clock from starting, simply by delaying the start of its audit. If the auditors never request supporting data – or never get around to reviewing it – then then the clock never starts to tick.
That position, in our layperson’s mind, is ridiculous.
Regardless of our thoughts and feelings and beliefs about the decision, it does illustrate how different illustrious Judges of the same contract dispute forum reach different conclusions using different logic. And it does illustrate how frustrating it is to try to discern a “bright line” regarding when a claim accrues under the Contract Disputes Act. Because different Judges have different measuring sticks, the contracting parties are left in the dark, wondering when they can breathe easy because the CDA SoL has expired and the time for successful litigation has passed.
We need a bright line here and, so far, the contract disputes fora have failed to provide it—which is a shame, because the uncertainty leads to litigation, whereas knowledge certain would (presumably) lead to negotiated resolutions without the need to litigate.
Speaking as taxpayers first and as contract compliance practitioners second, let’s get this situation fixed, please.
|
