ASBCA Muddies Statute of Limitations Issue
Paul Pompeo, of Arnold Porter & Porter, did a great presentation late last year on the status of the Contract Disputes Act (CDA) Statute of Limitations (SoL) issue. Unfortunately, we don’t have it to share with you. So we have to muddle through without benefit of legal counsel.
And make no mistake: we here at Apogee Consulting, Inc. are not attorneys and you should not rely on any of our layperson legal analyses to guide you. Instead, you should seek counsel from knowledgeable and experienced government contract attorneys, such as Mr. Pompeo.
So with that caveat out of the way, let’s look at a recent decision by Judge Freeman at the Armed Services Board of Contract Appeals (ASBCA) in the matter of Fluor Corporation v. United States Government.
We don’t get it.
We’ve written extensively on the CDA SoL topic. As we’ve noted more than once, this is an area of the law that’s “evolving” (as they say), and each decision adds a bit to what we think we know about it. That evolution is not necessarily a linear progression: there are setbacks and victories, and great leaps forward and small steps backward. The two contract disputes fora (the ASBCA and the U.S. Court of Federal Claims, or CFC), don’t always agree with each other. Importantly, Judges are not required to treat each other’s decision as precedent-setting; they can ignore decisions with which they disagree. Accordingly, it’s very tough to determine any “bright line” with respect to when the CDA SoL jurisdictional timeclock begins to run—though everybody’s crystal clear that the timeclock runs out exactly six years after it starts.
Let’s recap a bit to illustrate what we mean.
-
In January, 2012, we wrote that the ASBCA had thrown-out a 2010 government claim against Boeing alleging increased costs related to changes in cost accounting practice because the government knew, or should have known, by 2003 (at the latest) that it had been harmed. It was in 2003 that the cognizant Administrative Contracting Officer (ACO) issued a letter to Boeing finding that Boeing owed the government money and offered to negotiate a settlement. Unfortunately, Judge Melnick did not determine exactly when the CDA SoL timeclock actually started (i.e., did it start when Boeing submitted a revised CASB Disclosure Statement, or when it submitted its cost impact showing increased costs to CAS-covered government contracts, or when DCAA issued its audit report identifying $7.4 million of increased costs? Each of those events happened prior to 2003.). He simply concluded that the government claim was time-barred.
-
In April, 2012, we wrote that the CFC had thrown-out a 2008 government claim against Raytheon related to a 1999 Advance Agreement in which Raytheon had already paid the government $4.75 million, in 2003. Judge Hodges concluded that the government had all the information it needed to file a claim nine years before it actually filed it. Thus, the government claim was time-barred. Importantly, Judge Hodges rejected the government’s argument that the “continuing claims doctrine” meant that each new year’s claimed cost represented a new start to the CDA SoL, finding that each year’s claimed cost was based on the original 1999 Advance Agreement.
-
In June, 2012, we wrote that the ASBCA had accepted a government claim against Lockheed Martin related to alleged noncompliances with Cost Accounting Standards (CAS), even though the DCAA had issued an audit report determining the CAS noncompliance in 2002, the DACO had issued a Final Determination that Lockheed Martin was in noncompliance in 2008, and the DACO had issued a Final Decision/Demand for Payment in 2010 (i.e., eight years after DCAA had reported the CAS noncompliance). Judge Delman wrote that, although DCAA had identified “inappropriate charges” in 2002, “DCAA did not identify any overbillings or increased costs paid by the government resulting from the alleged inappropriate charges.” Because DCAA had never identified overbillings or increased costs paid, the CDA SoL did not start to run. We didn’t think very highly of that decision.
-
In July, 2012, we wrote about two decisions at the CFC (Sikorsky and a motion for reconsideration on the Raytheon decision), in which it was made clear that the CDA SoL timeclock does not pause or stop simply because the government is going through its administrative procedures. The timeclock continues to run.
-
In January, 2013, we wrote about two more Raytheon decisions at the ASBCA, in which Judge Delman found (with respect to allegations of unallowable costs) that the CDA SoL timeclock starts running when the contractor submits its annual proposal to establish final billing rates (aka, “the incurred cost submission”). The government has six years from that date to assert any claims that the contractor included allegedly unallowable costs in its rate calculations. Importantly, Judge Delman treated each separate contractor proposal as a separate start to the CDA SoL timeclock, such that even though claims against a stream of costs (such as depreciation) might be time-barred with respect to incurred cost submissions aged more than six years, claims against that same cost stream would not be time-barred with respect to incurred cost submissions aged less than six years. We thought Judge Delman was focused on factual knowledge of events rather than the events themselves, and offered some criticism on those grounds.
-
In March, 2013, we wrote about yet another Raytheon decision at the ASBCA, in which 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.” As you might guess, the government’s claim against Raytheon (related to a noncompliance with CAS) was thrown-out as being time-barred. This is an important decision because Judge Melnick took pains to distinguish the facts before him from those presented in Judge Delman’s Lockheed Martin decision. Here’s a link to our article in case you want to check-out the quotes we pasted from the decision.
-
In April, 2013, we wrote about Judge Lettow’s decision at the CFC in the matter of the Sikorsky CAS noncompliance, in which Sikorsky won on the merits but lost its motion to have the entire claim thrown out as being time-barred. We criticized that aspect of the decision, but obviously Sikorsky was thrilled.
-
In June, 2013, we wrote about several new Raytheon appeals at the ASBCA, in which it won several motions for summary judgment and lost another motion—all related to the CDA SoL. Judge Grant tied the start of the CDA SoL timeclock to submission of the contractor’s cost impact analysis. Absent that analysis, Judge Grant found the government lacked sufficient information to know it had been harmed. But once that analysis had been submitted, the CDA SoL timeclock started to run.
Today we want to discuss the Fluor case at the ASBCA and Judge Freeman’s opinion regarding Fluor’s motion to dismiss the government’s claim for increased costs related to an alleged CAS noncompliance because it was time-barred by the CDA SoL. Judge Freeman didn’t agree and found an interesting approach to the issue.
Looking at the recaps above, you might think to yourself that the issue should have been relatively straightforward. When did the government know of the alleged non-compliance and when did it know it had been damaged through identification of increased costs or overbillings? Those events should have (we believe) started the CDA SoL timeclock running, so that if the government’s claim (made by Contracting Officer Final Decision) was issued more than six years after those events, then the government would be SOL (pun intended) and its claim would be determined to be a nullity.
Not so fast, according to Judge Freeman.
Fluor’s cost accounting practices related to allocation of its “Burden and Benefits” (“B&B”) pool to its salary costs had been in place and disclosed to government oversight officials as early as January, 2001. Fluor’s salary costs included project assignment allowances, foreign service incentives and foreign hardship allowances (among other salary costs). In August, 2004, DCAA provided Fluor with a preliminary audit finding that its hazard pay and foreign assignment salary uplifts were too high and therefore unreasonable in amount. In February, 2006, another DCAA audit found that Fluor’s cost allocation methodology was compliant with FAR and CAS 418. In December, 2005, another DCAA audit report focused on B&B allocation methodology concluded that Fluor was in compliance with the requirements of CAS 403 (after a preliminary report prepared in September, 2005, found it was not in compliance).
Regardless of the foregoing, in September, 2007, DCAA issued yet another audit report stating that Fluor’s B&B cost allocation methodology was noncompliant with the requirements of CAS 403. In November, 2010 (more than three years later), the cognizant ACO issued a final determination that Fluor was noncompliant with CAS 403 because “the B&B allocation base was not representative of the factors on which total B&B pool payments were based.” In November, 2011, the ACO issued a Final Decision and asserted a claim against Fluor for $63.4 Million related to alleged increased costs on Fluor’s CAS-covered contracts for the period 2004 through 2010.
Simply looking at the facts, it seems quite clear that in 2007 the government objected to a practice that it had already stated was compliant in 2006, a practice that had been in place, unchanged, since at least 2001, a practice that had been the subject of multiple government audits. It seems quite clear that the government knew, or should have known, as early as 2004 that Fluor’s allocation methodology included “uplifts” which may have distorted the pool allocations. Thus, it seems quite clear that the government’s claim should have been dismissed as being time-barred.
But no. Judge Freeman found that “the government did not and could not know at that time, much less submit a CDA claim for, the increased costs … until that work was performed, billed and paid.” (Emphasis added.)
Judge Freeman found that—
The government’s 17 November 2011 claim was a continuing claim inherently susceptible to being broken down into a series of independent distinct events each having its own associated damages—namely, each payment by the government to Fluor for a CAS non-compliant billing on a government contract.
But all was not lost for Fluor. The part of the government’s claim relating to payments made on or before September, 2005 (the date on which DCAA concluded, on a preliminary basis, that Fluor was in non-compliance with the requirements of CAS 403) accrued on that date for purposes of the CDA SoL, so any claims asserted against Fluor for those pre-September 2005 payments after September 2011 were time-barred. (Remember, the ACO issued the CoFD in November, 2011.) As for the rest of the government’s claim, the CDA SoL timeclock started to run “on the date [Fluor’s invoices] were paid.” Thus, any payments made to Fluor before 17 November 2005 were thrown-out.
Now we don’t know what to make of this muddle. It occurs to us that there were a couple of approaches Judge Freeman might have used. First, he could have looked to the contractor’s cost impact analysis as the date the government knew it had been harmed. Unfortunately, Fluor refused to provide a cost impact analysis, perhaps under the theory that it doesn’t make much sense for to give the government any ammunition it is going to use to shoot at you.
Another approach would be to say that the government knew of Fluor’s practices as early as 2001, so what the heck? Or perhaps that the government knew in 2004 that Fluor included in its cost allocation base the very components that formed the basis for the eventual CAS noncompliance. In either scenario the entire government claim would be time-barred.
Another approach would be to say that any costs estimated, accumulated, or billed in a manner noncompliant with applicable CAS requirements were unallowable costs (see FAR 31.201-2) and therefore, like all unallowable costs, the CDA SoL timeclock started running when Fluor included them in a proposal to establish final billing rates. In that scenario, incurred cost submissions dated earlier than November, 2005 would be thrown-out, but submissions after than date would be susceptible to a trial on the merits.
But we really don’t like Judge Freeman’s approach, which focused on individual contract billings. We get that such an approach might actually help Fluor, since generally invoices are paid before submission of a final billing rate proposal (i.e., invoices related to 2012 costs have been paid before the contractor submits its 2012 final billing rate proposal in June, 2013). But we think such an approach flies in the face of the CAS noncompliance regime, codified in the FAR CAS Administration clause (52.230-6). As we read that clause, it seems that the impact of any CAS noncompliance must be estimated, and that estimate is used as the basis for negotiating contract price adjustments. Judge Freeman’s approach seems to ignore that statutorily-required approach in favor of an invoice by invoice analysis that is going to be hugely time-consuming for both parties.
Judge Freeman appeared to have embraced the “continuing claims” doctrine, while other Judges seem to have found it to be not very helpful. It’s unclear to us how this will impact disputes involving “stream-of-cost” issues such as depreciation.
All in all, we’re confused. And we bet others are, as well. We continue to look for the various contract disputes fora—and their Judges—to give the parties a bright line test that can be used to resolve issues and avoid litigation.
As far as we can tell, this ain’t it.
Lockheed Martin Regains EVMS Adequacy
We are happy to report that LockMart’s Fort Worth, Texas, operation has regained the official designation that its Earned Value Management System is adequate and approved. It was reported that the company will be allowed to collect the millions of dollars of payments that have been withheld by the Dept. of Defense.
We were interested to read that a key process improvement was the “automation” of accounting data, “so that actual costs could be entered into the EVMS system within one to two days, instead of the seven to eight days it had taken earlier.” Another improvement “involved automating data from the factory floor and the manufacturing process so it could be entered into the F-35 integrated master schedule.”
It was not reported as to exactly how the company will collect those withheld payments. Will the company submit an adjustment voucher covering only payment withholds? Will the withholds be a line item on the next SF 1034 or DD 250? We don’t know.
But we do know that this issue, which has persisted for many years, finally has been put to rest. Good for LockMart!
|
New DCAA Audit Guidance on Consultant Costs Emphasizes Substance over Form
As long-time readers know, we tend to be quick to criticize DCAA audit guidance. In our experience DCAA auditors would like to “do the right thing” in terms of audit procedures and findings, but find themselves constrained by guidance in their Contract Audit Manual (CAM), guidance in recently issued Memoranda for Regional Directors (MRDs), and by undocumented decisions made by Regional leadership (as well as by Fort Belvoir leaders). Thus, we tend to criticize the guidance as opposed to the auditors.
As we’ve written in several blog articles over the years, our belief is that well-trained, experienced, auditors generally have the judgment and discretion to reach their own conclusions, without the multiple layers of management review heaped upon them. Yes, we can argue as to whether your individual DCAA auditor meets the generally-accepted professional standard of “well-trained [and] experienced” but that’s as much a matter of luck as anything. The acumen of an individual in any large group is going to be subject to the bell curve—and there are roughly 5,000 DCAA auditors. Of course your mileage may vary from the expected mean.
Which is why we focus on audit guidance. If the audit guidance is good, the average DCAA auditor ought to be able to execute against it and reach reasonable, supportable, conclusions. If the audit guidance is bad, then even the best auditor is going to be challenged in executing against it, and in reaching reasonable, supportable, conclusions.
Over the past four years, we haven’t had many nice things to say about DCAA audit guidance. (You may have noticed that.) We believe our criticisms have been reasonable. Not everybody agrees with us or thinks we have been reasonable in our negative assessments. In our defense, when we see good guidance, we also point that out to our readership—as we have a couple of times in the past few months.
Today we have another piece of good audit guidance to bring to your attention.
It concerns how DCAA auditors should determine the allowability of the cost of outside consultants used by contractors.
We’ve written about the use of consultants before and we summarized applicable regulatory requirements in that article, as well as discussing some other compliance challenges in that area.
The allowability of consultants’ costs has long been an area of contention between DCAA and contractors. In fact, consultant costs are often considered to be “low-hanging fruit” with respect to generating questioned costs—and we all know how giddy it makes Fort Belvoir to report “taxpayer savings” from such questioned costs to Congress every year. (Never mind the fact that the majority of those “questioned costs” are never sustained by a Contracting Officer, and often lead to protracted litigation that significantly costs those same taxpayers.)
(Rumor around the watercooler is that DCAA Director Fitzgerald has established an expected target of 6% CQ for each ICS audit. We have not verified that rumor. But we digress.)
In any case, DCAA recently updated applicable audit guidance via MRD 13-PAC-026(R), issued December 19, 2013. Generally speaking, we like what we read. The guidance tells auditors to focus on substance, not form, and to use professional judgment to determine the allowability of consulting costs. That sounds promising, doesn’t it?
The first thing we noticed about the guidance is that it is “effective immediately for all new and in-process assignments.” That means that it applies to any 10100 (ICS) audit of your annual proposal to establish final billing rates, even if that audit has been exited. So long as the audit has not been issued, it is subject to the guidance—which could give you an opportunity to get some of the questioned costs associated with outside consultants reversed! (Not likely, but still ….)
Second, the guidance stated—
… we want to ensure that when testing a transaction for allowability, we apply the appropriate audit criteria (i.e., FAR Cost Principle) based on the nature of the claimed cost and not the account in which the contractor recorded the cost. In some instances, costs recorded as consultants may represent purchased labor, and audit teams should evaluate these costs using appropriate audit criteria.
In our experience, it’s been tough to convince DCAA auditors that a vendor is not a consultant, especially when the associated cost has been misrecorded into the wrong General Ledger account. The foregoing should be helpful in that area, especially when you use the following—
Audit teams must first determine whether the underlying nature of the claimed cost represents professional and consultant services before applying the documentation requirement in FAR 31.205-33(f). … The audit team’s assessment of the underlying nature of the claimed costs determines whether FAR 31.205-33 is applicable and not the contractor’s accounting classification. For instance, contractors may record expenses for purchased labor (e.g., janitorial, clerical, security) in a “Consultant” or “Professional Services” account; this does not make these costs subject to the requirements of FAR 31.205-33. Likewise, costs recorded in other accounts may be professional and consultant service costs and the auditor should evaluate the costs using the criteria of FAR 31.205-33.
Accordingly, it couldn’t be clearer that the first step in evaluating the allowability of consultant costs is to conclude that the costs are, in fact, consultant costs. And it is the underlying nature of the activity, and not the contractor’s cost account description, that drives that determination. Only after the auditor concludes (with appropriate evidence) that the cost is related to a “professional and consultant services” (as that term is defined in the FAR Cost Principle) should the auditor then go on to evaluate the allowability of that cost using the three-pronged test of 31.205-33. If the auditor concludes that the cost is not related to “professional and consultant services” then the three-pronged test cannot be used to determine cost allowability—though of course there are lots and lots of other Cost Principles in FAR 31.2 that might be used.
The audit guidance also contained helpful clarifications regarding that three-pronged test. It described the three prongs as follows—
… it is important for the audit team to understand that the evidence required from the contractor is essentially the following:
• An agreement that explains what the consultant will be doing for the contractor;
• A copy of the bill for the actual services rendered, including sufficient evidence as to the time expended and nature of the services provided to determine what was done in exchange for the payment requested, and that the terms of the agreement were met. This documentation does not need to be included on the actual invoice and can be supported by other evidence provided by the contractor;
• Explanation of what the consultant accomplished for the fees paid–this could be information on the invoice, a drawing, a power point presentation, or some other evidence of the service provided.
Helpfully, the audit guidance stated—
It is important to clarify that the audit team is looking for evidence to satisfy these three areas and not a specific set of documents. Therefore, auditor judgment will be the determining factor on the type and sufficiency of evidence required to satisfy these requirements. … The contractor may provide evidence created when the contractor incurred the cost as well as evidence from a later period. … As an example of evidence from a later period, the contractor may facilitate a meeting between the consultant and the audit team to obtain documentation (oral/written) from the consultant regarding what effort they performed (i.e., third party confirmation). The audit team should consider the evidence provided by the consultant, along with other evidence obtained, to determine if the total evidence gathered is sufficient to satisfy the documentation requirements
One of the most difficult areas (in terms of audit support) is to meet the third prong of the three-prong test—i.e., to provide a work product or other evidence of work performed. Given DCAA’s recent tendency to delay performing audits for years (or even a decade in some extreme cases), it’s usually a challenge to come up with the work product. Given that you may be looking for support for consulting expenses some four or five years after incurrence, it’s challenge enough to figure out who to talk to regarding what the consultant did, let alone to hope that same person retained evidence of work performed. Thus, it’s very important to review the MRD language regarding work product, since it is more flexible that previous audit guidance has been. The new guidance stated—
The purpose of the work product requirement is for the contractor to be able to demonstrate what work the consultant actually performed (in contrast to what work is planned to be performed). Although a work product usually satisfies this requirement, other evidence also may suffice. Therefore, if the audit team has sufficient evidence demonstrating the nature and scope of the consultant work actually performed, the contractor has met the FAR 31.205-33(f)(3) requirements even if the actual work product (e.g., an attorney’s advice to the contractor) is not provided. The audit team should not insist on a work product if other evidence provided is sufficient to determine the nature and scope of the actual work performed by the consultant.
While we are not in 100% agreement with every aspect of the audit guidance (e.g., we disagree that attorney-client privilege does not act to protect the contractor from disclosure of materials to auditors), we generally think this is a very positive piece of audit guidance. Now it’s up to our readers to educate their DCAA auditors on the newly relaxed—and reasonable—requirements it contains.
DCAA Looks to Speed Audits by Reducing Reviews
It’s generally accepted throughout the defense industrial base that DCAA takes too long to issue its audit reports. For example, we’ve reported that DCAA now takes (on average) nearly four years to issue a single “incurred cost” audit report covering a single contractor’s fiscal year. No contractor thinks that’s an acceptable cycle time standard. But that’s not the only metric: there are other examples to discuss, and we’ve devoted several articles to DCAA’s drop-off in productivity—including its challenges in issuing business system follow-up audit reports in a timely fashion.
Interestingly, many in government service (notably those civilians employed by the Defense Contract Management Agency) agree with industry on this point—marking one of the few points of agreement between the Defense Department and its contractors in these adversarial days. Both parties agree that DCAA takes too long to issue its reports, and many (including GAO and the DOD Inspector General) assert that what reports DCAA does manage to squeeze out are of dubious quality and usefulness to contracting officers and buying commands.
Opinions vary as to the root causes of DCAA’s general inability to issue GAGAS-compliant audit reports in a reasonable timeframe. Certainly, many argued that it was DCAA’s focus on cycle time reduction that led to the well-known audit quality failures publicized by the GAO and legislators in the 2008/2009 timeframe. Thus, less focus on the time it takes to generate audit reports and more focus on the quality of those reports would seem to be a good thing. Unfortunately, recent government reports indicate that the quality of DCAA’s audit reports (at least in terms of ability to comply with GAGAS) has not noticeably improved. So DCAA’s management reforms have led to a situation where the only thing that’s changed is that the agency produces fewer and fewer reports.
For its part, DCAA senior management has a tendency to blame contractors for the delays in issuing audit reports. Contractors are not responsive and do not produce supporting documentation timely, so goes the refrain. Contractors do not provide real-time access to accounting systems. Contractors do not provide adequate proposals that comply with the requirements of FAR Table 15-2. Contractors do not provide adequate “incurred cost submissions” that comply with the requirements of FAR clause 52.216-7. Contractors do not provide access to personnel, or to attorney-client privileged information, or to internal audit reports. Liaison personnel don’t facilitate audits; instead, they impede them. The list of alleged contractor failures goes on and on. But in the meantime audit reports don’t get issued.
It’s become apparent that one of the causes for DCAA’s inability to issue timely reports is the multiple layers of management reviews associated with each audit. From Supervisory Auditor review to Technical Specialist review, and from FAO Manager review to Independent Reference Reviewer review, DCAA has redesigned its entire management focus to deploy multiple reviews, designed to ensure that its audits are GAGAS-compliant in all respects. And that new approach has delayed audit report issuance, often for months and sometimes for years.
It’s not like DCAA management hasn’t realized the problem. They obviously realize they’ve created a monster. And they’ve tried to reduce the number of reviews. For example, we reported back in April, 2013, that DCAA had implemented a new Instruction (DCAAI 7642.2) designed to give discretion to the auditor to determine what additional reviews might be necessary (based on risk) and to specify reviews associated with individual audits (activity codes). Unfortunately (as we told readers) DCAA chose not to publish that Instruction, so contractors have no idea what reviews they should expect and thus cannot make an informed estimate regarding the duration of those reviews.
More recently, DCAA issued new guidance (MRD 13-PPS-024(R)) designed to “reduce the number of required reviews” and give the FAO managers more discretion in determining if additional reviews are needed. According to the MRD, “required reviewers include the Supervisory Auditor, FAO Manager and, if applicable, the RAM and/or Independent Reference Reviewer (IRR).” Optional reviewers include FAO Technical Specialists and Regional Technical Programs. DCAAI 7642.2 was modified once again to document the reduced number of management reviews.
The impetus for the changes was said to be “recent town halls and other input venues” that aired “concerns from the field” that the multiple layers of review were not enhancing quality. Instead they were simply slowing down the audit completion process.
Or perhaps, DCAA management may have read our many blog articles complaining about the same thing? (Doubtful.)
Whether the FAO teams will avail themselves of their enhanced discretion to reduce audit report reviews remains to be seen. Accordingly, whether the changes to DCAAI 7642.2 will result in faster issuance of audit reports also remains to be seen.
In the meantime, we are hearing continued reports that DCAA has given up performance of Disclosure Statement adequacy reviews and turned that responsibility over to DCMA. We are hearing reports that DCMA is hiring DCAA auditors as “cost monitors” and “pricing analysts”—and gearing up to evaluate contractor proposals without the benefit of a DCAA audit report. We are hearing that DCMA is preparing to handle business system reviews, and we’ve already reported that DCAA has announced DCMA is going to be negotiating Forward Pricing Rate Agreements (FPRAs) without waiting for a DCAA audit. In other words, DCAA is working hard to take itself out of the defense acquisition system.
The recent attempts to streamline audit report reviews may be a case of “too little, too late.”
|
