It’s Official! Shay Assad Makes Cost of Ineligible Dependents Expressly Unallowable
Of all the things to worry about right now—from the impacts of budget sequestration to DCAA’s backlog of (at last count) 26,000 unaudited contractor final billing rate proposals, and from systemic corruption of government employees in multiple service branches to systemic contractor fraud in preferred socioeconomic contracting categories, and from GAO reports that DCMA has been mismanaged to GAO reports that DOD doesn’t even know the training status of its acquisition workforce—the Director, Defense Pricing, has chosen to focus on an issue that he has admitted has already been “largely corrected” by the defense industry.
We are talking about the additional healthcare premium costs associated with ineligible dependents.
We’ve discussed this particular issue before. Nothing gets us as upset as the building of a political mountain from what has been proven to be a cost accounting molehill. You can search this site using the keyword “dependent” and get links to seven (7) blog articles focusing on this particular issue, plus links to three others in which the issue is at least mentioned. It’s safe to say this is one of those buttons that, when pushed, sets us off.
Boom!
Today we report that the Honorable Mr. Shay Assad, Director, Defense Pricing, has gotten his wish, and that the DFARS Cost Principle at 231.205-6(m)(1) has been revised to make it super-duper clear that—
Fringe benefit costs that are contrary to law, employer-employee agreement, or an established policy of the contractor are unallowable.
Publication of the final rule marks the end of an eighteen-month effort by Mr. Assad and his associates to penalize contractors for inadvertent inclusion of such costs into their indirect cost rates. We told you it was coming.
In fact, we also told you that the DFARS rule change was going to be implemented, regardless of any public comment to the contrary. Indeed, that’s pretty much what happened. A look at the promulgating comments, including responses to public input, indicated that public comments were disposed of with the usual cavalier disdain.
Comment: One respondent asserted that industry-wide ineligible dependent costs are immaterial, and thus have no impact on contract billing or pricing. The respondent suggested that DoD should review the DCAA findings in its policy memo 09-PSP-016(R), dated August 4, 2009, before proceeding with further rulemaking.
Response: Research indicates the rate of ineligible dependent claims can represent as much as 3 percent or more of total healthcare costs. The overall cost for ineligible dependent claims, which are often fraudulent, can be significant for large contractors that spend millions of dollars for dependent healthcare. …
We ask: where is that research? Why has it not been published? Also, if such ineligible dependent claims are indeed fraudulent, then the victims of the fraud are the contractors themselves, and not the Department of Defense—since most large defense contractors are self-insured to a very large extent.
Comment: One respondent asserted that the treatment of ineligible fringe benefit costs as expressly unallowable does not comport with Cost Accounting Standard (CAS) 405 and its preambles. In the preamble of the original publication of CAS 405, the CAS Board explained its use of the term “expressly” in the definition of “expressly unallowable cost” as“. . . that which is in direct and unmistakable terms.” The respondent believed that “fringe benefit costs . . . contrary to law, employer-employee agreement, or an established policy of the contractor” are not direct and unmistakable costs.
Response: The rule makes fringe benefit costs expressly unallowable when such costs are contrary to law, employer-employee agreement, or an established policy of the contractor. The Director of Defense Pricing Policy determined these conditions are direct and unmistakable.
We ask where the DAR Council and Mr. Assad in particular were granted the authority to interpret the Cost Accounting Standards? We were under the impression that such interpretations were reserved by statute to the CAS Board.
Comment: One respondent asserted that the rule is unnecessary since the FAR cost principles already protect the Government. Contractors are currently required to exclude fringe benefit costs that do not meet the requirements for reasonableness per FAR 31.201-3.
Response: The results of the DCAA audits have made it clear that coverage is not sufficiently clear. …
As we have pointed out on this website, the problem with the DCAA audits is that they misinterpreted the regulations. The regulations were clear; DCAA couldn’t read them. Neither could DCMA Leadership at Fort Lee. Neither could Mr. Assad. So obviously the correct fix is to revise the regulations to comport with DCAA’s flawed interpretation.
The individuals involved in this rule-making are clearly among those who believe that when reality differs from one’s personal point of view, then reality should change. Unfortunately for many of us, those individuals have the power to warp reality, at least in this particular area.
The only thing that changed between the proposed and the final rule was the elimination of the language that would have made estimating such costs expressly unallowable and subject to penalty. Even the DAR Council realized that language was impossible to enforce, since penalties only apply to costs claimed in contractors’ proposals to establish final billing rates, which are based on actual, incurred, costs and not estimated costs. Nothing else changed.
So here’s the thing. What do you do if you are a defense contractor, subject to the DFARS Cost Principles in addition to the already-onerous FAR Cost Principles? Do you implement expensive testing to make sure your employees don’t include, intentionally or inadvertently, their ineligible dependents in their healthcare coverage?
Well, yes. You should do that. You should make sure that only eligible employee dependents are being covered by your healthcare plans. There are a number of ways to do that, and you should figure out which method results in the best return for your investment.
One other thing you can and should do is change your policies. You should clarify coverage of employee dependents in your policies. For example, you might expressly grant your employees a one-year grace period in which to identify and remove otherwise ineligible dependents from their requested coverage. You might tie coverage to the Affordable Care Act’s requirements (i.e., cover dependents until age 26). In other words, since the allowability of dependent costs is tied to your policies, you should look at those policies and make dependent coverage as broad as possible. In that way, you will be reducing the risk that an auditor will allege you have expressly unallowable dependent costs in your healthcare premium costs.
You need to take this seriously, because those inside-The-Beltway Senior Executives with the power to make your life difficult have decided to take it seriously. DCAA auditors will be looking, and DCMA Contracting Officers will be eager to uphold audit findings, so as to show those Senior Executives how eager they are to do their bidding.
Opinions re: the State of the DCAA Audit Environment
Our colleague and friend, Mr. Darrell Oyer, publishes a monthly newsletter to his clientele. We are lucky to be on the mailing list and thus receive the benefit of Mr. Oyer’s wisdom. Recently, Darrell went off on DCAA and we want to share some of his rant with you.
Understand, please, that Mr. Oyer is offering an informed opinion about the current state of DCAA. Darrell spent roughly 20 years with DCAA in various positions, including Assistant RAM and Assistant Director, Policy and Plans. After leaving the audit agency, he joined the “Big 8” professional accounting firms and became a Partner at Deloitte & Touche. So Mr. Oyer knows whereof he speaks.
When he says, “it is most important [in the current audit environment] to be sure to have an extensive audit with elaborate workpapers in such a manner that no one could criticize the audit” he is not merely ranting for the sake of ranting (as we have been accused of doing in the past). Instead, he is using his first-hand experience and background to draw conclusions—conclusions that seem, quite honestly, damning.
What set Darrell off was the receipt of a note from DCAA by one of his clients. The note informed the client that the audit report would not be issued, even though it was nearly complete and the client had been supporting it for some time. Instead of issuing a formal, GAGAS-compliant audit report, DCAA chose to issue a 13-page “Results of Audit for work conducted within time constraints” memo to the ACO—and the contractor was told not to bother to issue any response to it. The reason given for the premature audit wrap-up was “due to the time constraints with the Statue [sic] of Limitations.”
Readers may remember we wrote this approach was becoming the new norm for how DCAA operates, and seems designed to generate as many questioned cost dollars as possible while simultaneously avoiding issuing anything that would subject the agency to criticism that it was not complying with GAGAS. How’s that working out for DCAA?
Mr. Oyer didn’t think too much of DCAA’s output. He wrote, “The 13 page draft report is replete with misspellings, repetitions, inconsistencies and inaccuracies and is laughable to anyone but the contractor!”
He went on to look for the root cause of the situation. He asserted it stemmed from “changing the DCAA mission from ‘providing financial advice to Contracting Officers’ to ‘protecting the taxpayer interest.’” As a result, “we have an audit for the sake of having an audit rather than for assisting either the CO or protecting the taxpayer.”
Mr. Oyer is not the only individual criticizing DCAA’s new approach to auditing.
Over on LinkedIn, one former DCAA auditor posted—
[I] have actually been busy working [in a new job], unlike my experience at DCAA where I sat around with nothing to do for days or weeks.
The office I worked in was a ‘mobile’ office as opposed to a resident office, so we saw a lot of the smaller submissions and I had to do those ridiculous ‘risk assessments’. It was a complete joke. Basically anything under $100M was never audited, regardless of whether their submission appeared to have issues. As long as it met the adequacy checklist (which just basically means that they included everything and the math is right), then it was assessed for risk. Low risk was done and closed out. High risk was looked at again and considered, but usually got a decrement memo issued just before the statute expiration unless it was over the $250M.
When I left, they were still trying to figure out how to issue a proper opinion on a report. They didn't know how to issue a Disclaimer... even though the agency is full of CPA's. …
I could go on and on.... but I have work to do now.... rather than sitting around and being told to charge time on an audit when I'm not actually doing anything (waiting for Supervisory review), and being bored out of my mind wishing that I could actually work on some of the audits that they were tossing out the door, I'm actually busy every day. I'm told that my former office manager keeps complaining about how they don't have enough auditors and need to hire more... all while auditors sit around with nothing to do and only have 1 audit assigned to them at a time, taking months to complete it because no one questions their hours.
A former DCAA auditor and a former DCAA leader both agree that the agency’s current approach to conducting audits—or, should we say, issuing Memoranda in lieu of audit reports—serves neither the needs of the Department of Defense nor the public interest.
When will the DOD IG, GAO, and/or Congress realize the same thing?
|
OFPP Issues FY 2012 Executive Compensation Benchmark/Ceiling
Section 39 of the Office of Federal Procurement Policy (OFPP) Act requires the OFPP to issue, annually, an executive compensation “benchmark” amount that establishes an allowability ceiling on compensation of contractor executives. The benchmark amount is set at the median (50th percentile) amount of compensation over a recent 12-month period for the five most highly compensated employees in management positions at each home office and each segment of all publicly-owned companies with annual sales over $50 million, and the determination is based on analysis of data made available by the Securities and Exchange Commission (SEC). As defined by the Cost Principles at FAR 31.205-6(p), executive compensation means the total amount of wages, salaries, bonuses, restricted stock, deferred and performance incentive compensation, and other compensation for the year, whether paid, earned, or otherwise accruing, as recorded in the contractor's cost accounting records for the year. For government contractors, executive compensation in excess of the annual OFPP benchmark/ceiling amount is unallowable. Period.
We have previously noted that Section 803 of the FY 2012 NDAA extended the executive compensation cap beyond the “top 5” most highly compensated executives in each segment, to apply to all contractor employees. Further, we have also reported a proposed rule change to the FAR Cost Principle on Compensation that would implement that statutory direction. It was problematic in several respects, as we noted.
The FY 2011 ceiling amount of executive compensation was $763,209.
The FY 2012 ceiling amount is $952,308.
The Federal Register notice provided ample evidence that the OFPP disagrees with the statutory formula it is required to follow. In a Memorandum published along with the new ceiling amount, OFPP Administrator Joseph Jordan opined—
When the cap was raised to $693,951 for Fiscal Year (FY) 2010, the President called on Congress to repeal the current statutory formula and replace it with a lower, more sensible limit that is on par with what the Government pays its own executives and employees. Over the last several years, the Administration has strongly reiterated the need for reforms to the current statutory framework and Congress has considered several proposals to reform the compensation cap. To date, however, Congress has not revised the cap amount or the formula for adjusting the cap. Instead, Congress made only a modest change that expanded application of the statutory cap on defense contracts from the contractor’s senior executives to all of its employees (section 803 of the National Defense Authorization Act for FY 2013, Pub. L. 112–81, December 31, 2011). This expansion of the applicability of the cap to all contractor employees did not cover contracts with the civilian agencies, so the cap for those contracts remains applicable only to certain contractor senior executives, which is defined as the five most highly compensated employees in management positions at each home office and each segment of the contractor.
OFPP Administrator Jordan then availed himself of the opportunity to ask Congress, again, via the Federal Register (as opposed to, you know, sending a letter) to lower the statutory formula to match the President’s annual salary (current $400,000).
We here at Apogee Consulting, Inc. believe that OFFPP Administrator Jordan has not gone far enough. Not only should Congress cap the allowability of contractor salaries at $400,000, it should also cap the tax deductibility of all compensation, received by any individual in America, at that same that limit. Brad Pitt and Angelina Jolie should have their actor compensation limits set at $400,000, with respect to tax deductible film production expenses. Larry Ellison should have his Oracle salary limited to $400,000, with respect to Oracle’s corporate tax deductions. Nobody on Wall Street should be allowed to treat compensation in excess of $400,000 as a tax deductible expense.
Basically, if you are going to interfere in the free market, why not go all the way and just implement top-down, centralized, compensation limits (with respect to tax deductibility, of course). It should be obvious that nobody adds any more value to the American economy than the President of the United States of America. So let’s take that notion and enforce it across the board! After all, nobody is limiting the amount of compensation that may be paid; the only limits would be on the tax deductibility of that compensation.
And let’s see how all those corporate and Wall Street contributors to Congressional campaigns react to that initiative, shall we?
Getting back to contractor compensation allowability, we note (for the record) that once again the OFPP is late issuing its benchmark ceiling. Most contractors have already submitted their FY 2012 proposals and retroactively implementing the new amount would be expensive.
Perhaps OFPP Administrator Jordan would be better served ranting less about the law he and his staff are required to follow, and working harder to ensure that they follow the law within a reasonable timeframe?
Technology Evolving Too Fast for DOD?
In September, 2013, the Naval Surface Warfare Center in Port Hueneme, California, issued an RFQ for “180 PowerXpress PPC8A Power PC-based 6U VME embedded computing boards, made by GE Intelligent Platforms in Huntsville, Ala.” The boards were introduced nine years ago and were designed into several Naval surface warship weapon systems—systems whose design configuration has been frozen. In other words, NSWC cannot make design changes to those systems, even the minimal design changes to substitute more recent products that have the same form, fit, and function. As the folks at Military & Aerospace Electronics pointed out, the original manufacturer (GE) does not carry the boards in stock anymore, preferring to use more recently manufactured boards in current designs.
So when NSWC (and other repair depots) runs out of their stock of nearly decade-old PC boards, they have a problem. The problem is called “technological obsolescence” and it’s a byproduct of moving away from the good ol’ days of MILSPEC and, instead, focusing on using Commercial-Off-the-Shelf (COTS) parts in military designs.
John Keller, Editor-in-Chief of Military & Aerospace Electronics, wrote up a recent op-ed piece on the pervasive problem. He wrote—
What military program managers and the defense industry face today is a broadly installed base of COTS electronics with capabilities and supportability that is going obsolete rapidly, and with diminishing prospects for being brought back up to date because of crushing military budget cuts. … Military budget cuts are delaying or eliminating scheduled rounds of component upgrades for military systems. Those COTS components that were supposed to be switched out ever five years or so are staying in the field longer than ever. Sometimes only portions of fleets are being upgraded, leaving others to make-do with what they have for indefinite periods.
The results are predictable -- obsolete parts and a complicated logistics chain are exactly what we're seeing today as the military adjusts to a rapid downturn in spending. We have electronic components that are going obsolete quickly, with only spotty long-term support. Obsolete COTS technology can be far more problematic than obsolete mil-spec technology.
We visited the DOD DMEA (Defense Microelectronics Activity) website and learned a little bit about the official view of the problem. The DMEA folks wrote—
The primary cause of obsolescence is commercial profit motive: when an item is no longer economical to produce, manufacturers stop producing it.
The U.S. Department of Defense also contributes to the problem with its long design-to-acquisition lead times which bring about support requirements for military systems that generally extend from 25 to 30 years, as opposed to the 4-to-7-year support cycle expected for many commercial electronics systems.
Basically, by the time the DOD gets its major weapon systems into production, the original design is already replete with obsolete parts, built by sources who are preparing to end their production and long-term support. Historically the DOD has solved this problem by making large purchases—“life-time buys”—or guaranteeing the manufacturer a certain quantity of purchases, so that a sufficient flow of parts will be there for the weapon system’s life cycle. That ability has been impacted by sequestration and looming budget cuts.
Use of COTS parts has, generally, been viewed as a no-brainer. Why spend time and money designing some MILSPEC part that that is already being produced by private industry? This is especially true when that private industry-designed part is of a more current design, with better operating features. But we are now seeing the other shoe drop, where DOD’s inability to innovate and match the private industry product development cycle is leaving the logistics, repair and maintenance functions with a big headache, as they struggle to source technologically obsolete parts called for by their “frozen” designs.
Here’s a tip.
You want to get rich? Find out what COTS parts are designed into the F-35 and stockpile them. In a couple of years, DOD is going to be asking you for those parts, and you’ll be able to name your price.
Just sayin’….
|
