FAC 2005-65: We Told You So!
Federal Acquisition Circular 2005-65, published January 29, 2013, included a couple of final rules that affected government contract compliance. But you weren’t taken by surprise. As a long-time, loyal readers of this blog, you already knew about them. You knew about them because we told you they were coming, long ago.
First up: FAR Case 2012-013. This is a final rule that prohibits contracting with “inverted domestic corporations.” We originally brought this issue to your attention when it was first issued as an interim rule, back in July 2009. Six public comments were submitted; but those comments did not affect the language in the final rule.
When the FAR applies, you cannot contract with an inverted domestic corporation. An inverted domestic corporation is one that used to be incorporated in the United States, or used to be a partnership in the United States, but now is incorporated in a foreign country, or is a subsidiary whose parent corporation is incorporated in a foreign country. (See the definition of inverted domestic corporation at FAR 9.108-1.)
You’ll know if the FAR applies because you’ll have the solicitation provision 52.209-2 or the contract clause 52-209-10 staring you in the face when you read the RFP or contract. You are reading those things, right?
Second: FAR Case 2011-011. This is a final rule that first imposes the two percent excise tax on “certain Federal procurement payments to foreign persons,” and then makes payments of that tax unallowable. We first told you about this issue in March 2012, when it was issued as a proposed rule. As we told you at the time—
… in order to determine whether or not an excise tax should be imposed, and whether or not estimated project margins should be reduced by the value of that 2 percent excise tax, you first need to know (a) the country involved, and (b) whether that country has signed a Trade Agreement with the U.S.A. These decision points will need to be addressed at the time the proposal is being prepared—or, even better, at the time of the bid/no bid decision.
Candidly, we didn’t think very much of the proposed rule. We expected that it would create difficulties for companies subject to foreign “offset” requirements in the export of defense articles. However, we also noted that, “since the rule-making is mandated by Public Law, we don’t believe that the Councils have much latitude in the changes they can make.” Accordingly, we didn’t expect public comments regarding the proposed rule to affect the language to any great extent.
And guess what? We were right about that. As the promulgating comments stated, “Based on a review of the public comments … the Councils have concluded that no change to the proposed rule is necessary.”
The final rule revised FAR 31.205-41 to state that the costs of the two percent excise tax are not allowable. FAR 52.229-3, 52.229-4, 52.229-6, and 52.229-7 were amended to provide that the costs for the two percent excise tax cannot be included in either foreign fixed-price contracts with a foreign concern or foreign fixed-price contracts with foreign governments.
So when applicable, you must pay the excise taxes. However, you cannot include them in the proposed contract price, and you cannot submit them as an allowable cost for reimbursement. Essentially, the tax will erode the project margins of your export sales.
As we told you they would.
ASBCA Squarely Addresses CDA Statute of Limitations and DCAA Audits
Recently, we told readers about the apparent split in the forums that hear Contract Disputes appeals, with respect to applying the Contract Disputes Act (CDA) Statute of Limitations (SOL).
Over at the Court of Federal Claims, so far Judges appear to be strictly enforcing the six-year SOL invoked by the CDA, and are rejecting appeals (for lack of jurisdiction) that have been found to be untimely. For example, Judge Lettow wrote (in a July 2012 decision regarding CAS 418 litigation between Sikorsky Aircraft and the U.S. Government), that “an agency’s self-imposed, internal regulations are invisible for claim accrual purposes”—meaning that the Government can’t hide behind its own uncompleted bureaucratic processes in order to toll the CDA SOL. If the Government can’t complete its processes timely, then Judge Lettow won’t hear the case. (We focus on Judge Lettow because there are many COFC Judges, and the decision of one Judge is not binding precedent for another Judge.)
Judge Lettow was speaking about the CAS noncompliance process, and didn’t squarely address the question on everybody’s mind. That question—which we’ve covered fairly extensively on this site—is when does the SOL clock start running with respect to a contractor’s submission of its proposal to establish final billing rates? Does the Government have six years from the time the contractor submits its proposal to assert a claim for costs that are allegedly unallowable? Does it have six years from the time the DCAA auditor determines that the proposal was adequate for audit? Does the CDA SOL clock start running from the time that DCAA issues its audit report to the Cognizant Federal Agency Official, no matter how many years that might take? It wasn’t squarely addressed.
And thus, even though it was fairly easy to draw an inference that the pendency of a DCAA audit—like other “internal regulations”—cannot overcome the “should have known” aspect of the FAR definition of “claim accrual,” nobody was absolutely certain that was the case. With respect to DCAA’s enormous backlog of uncompleted, pending, “incurred cost” audits, nobody was absolutely certain that DCAA’s opinion regarding a decent-sized portion of that pile was now completely irrelevant.
While many asserted audits of a chunk of the 25,000 proposals awaiting audit were now mooted (since the Courts would not hear any cases regarding them), nobody at DOD—least of all DCAA leadership—was willing to admit to it. Admitting that was the case would be a more-than-tacit admission that DCAA (and the hierarchy of DOD leadership that oversees DCAA) had mismanaged itself and botched one of its most essential missions: that of auditing contractors’ claimed costs to make sure that those costs complied with applicable rules and regulations.
So even though “Easy Ed” thought DCAA should just “write off” all its backlog of audits that were time-barred by the CDA SOL, and even though we agreed with that suggestion, we weren’t optimistic that DCAA would consider doing so until the audit agency was absolutely convinced that the Courts had mooted those ancient, uncompleted audits.
We also told readers that, over at the ASBCA, enforcement of a strict SOL timeclock has been—shall we say?—inconsistent. In fact, the ASBCA Judges have gotten it wrong. (In our layperson’s opinion, of course.) Although we have no qualifications (in a legal sense) to have an opinion on the matter, we still think Judge Delman authored a decision that added unnecessary confusion to what had been emerging as a relatively bright line with respect to the CDA SOL.
We thought that Judge Delman’s Lockheed Martin decision seemed to have ignored the “should have known” prong of the claim accrual definition, finding that the Contracting Officer’s Final Decision (COFD) was not time-barred because DCAA hadn’t informed the CO that there were “overbillings to, or overpayments made by the government on government contracts.” Apparently, DCAA must speak some magic words in the ear of the Contracting Officer in order for the CDA SOL clock to start running—a position which (in our view) ignores the issue of whether the CO should have known the government had been injured, even without the magic audit words.
Regardless of our views, LockMart’s Motion was denied and it settled its case (for a very favorable amount, we’re told). Consequently, we told our readers that “if you have a CDA SOL issue you want to litigate, we expect your attorneys are directing you to the Court of Federal Claims, and not to the ASBCA, because they don’t want to have to deal with this particular decision.”
But in the meantime, other appeals were pending before the ASBCA. Two of those appeals involved The Raytheon Company.
On December 17, 2012, Judge Delman ruled on Raytheon’s Motions for Declaratory Judgment, in ASBCA Nos. 57576 and 57679.
But before we get into that ASBCA ruling, let’s set the baseline. Here’s how FAR Part 33.201 defines “claim accrual” for purposes of establishing the SOL—
‘Accrual of a claim’ means the date when all events, that fix the alleged liability of either the Government or the contractor and permit assertion of the claim, were known or should have been known. For liability to be fixed, some injury must have occurred. However, monetary damages need not have been incurred.
We are all now on the same page.
Before Judge Delman was Raytheon’s Motion that was predicated on an assertion that the Government’s claims “were asserted beyond the six-year presentment period and are untimely.” Let’s look at the two Appeals separately.
In ASBCA No. 57576, Raytheon included allegedly expressly unallowable costs in several years’ worth of its proposals to establish final billing rates. Here are some of the key facts recited by Judge Delman—
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With respect to Raytheon’s CY 2000 indirect costs, DCAA “took no exception” to Raytheon’s incentive comp plans. In September 2003, DCAA “took no exception” to Raytheon’s incentive comp plans included in its CY 2002 indirect costs. DCAA expressly found that the costs were allowable pursuant to the Cost Principle at 31.205-6(f). Similar findings were issued for Raytheon’s CY 2003 indirect costs.
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Regardless of the foregoing, in November 2006 DCAA told Raytheon that its incentive comp costs were “compensation/fringe type costs” and that, to the extent such costs were allocated to unallowable labor, they were also unallowable. Raytheon did not agree.
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On 24 September 2007, DCAA issued an audit report relating to CYs 2002-2005 that stated that Raytheon's failure to withdraw from its “incurred cost submissions” a proportionate share of its costs of bonuses, restricted stock and other incentive compensation costs paid to employees engaged in expressly unallowable activities was a violation of FAR 31.201-6(a) and CAS 405-40(a). Raytheon contested the government's position.
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On 14 May 2010, the government issued a final determination of noncompliance (FDN) on this matter for CYs 2002-2008, and demanded a general dollar magnitude impact report from Raytheon, who prepared and submitted impact reports under protest, and also updated these reports to include CY 2009 impact.
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On 10 January 2011, the Contracting Officer issued a Final Decision, demanding payment of $14.1 million. The CO also issued a penalty against Raytheon due to its inclusion of alleged expressly unallowable costs in its final indirect cost rate proposals for CYs 2002-2009, in the amount of $5,946,762, including interest, pursuant to the contract clause FAR 52.242-3, Penalties for Unallowable Costs (May 2001). In total, the Government demanded that Raytheon pay $20 million. Raytheon appealed the COFD.
Judge Delman ruled as follows (internal citations omitted)—
With respect to CY 2002, the record shows that on 29 September 2003, DCAA issued a memorandum regarding its audit of appellant's bonus and incentive compensation costs for CY 2002, concluding that these costs were fully allowable. However roughly four years later, by audit report dated 24 September 2007, DCAA determined that portions of these same costs were not allowable for reasons stated herein. It was this audit report that ultimately led to the government's present claims under this appeal. Based upon the date of the DCAA memorandum, we believe the government should have known - by 29 September 2003 - that the incentive compensation costs in question for CY 2002 were unallowable and should also have known that the government had paid increased costs under government contracts in CY 2002. We also believe that, for purposes of the government's penalty claim for CY 2002, the government should have known by 29 September 2003 that Raytheon had included these expressly unallowable costs in its CY 2002 final indirect cost rate proposal, which had been submitted to the government in or around June 2003.
The government's claim letter is dated 10 January 2011, and the government's claims must have accrued no earlier than 10 January 2005 to be timely. We have concluded that the government's claim to recover increased costs paid under government contracts in CY 2002 and the related penalty claim for CY 2002 accrued no later than 29 September 2003. Accordingly, we must conclude that the government's claims for CY 2002 are untimely.
With respect to the government's claim to recover increased costs paid under government contracts for CY 2003, Raytheon's overhead cost submission for CY 2003 was submitted to the government in or around June 2004. As for CY 2004, Raytheon's Corporate Home Office Allocations proposal for forward pricing rates was submitted to the government in September 2004. We believe the government should have known - prior to 10 January 2005 - of the subject CAS noncompliance and that the government paid increased costs under government contracts as a result in CY 2003 and CY 2004. We are persuaded that the government's claims of 10 January 2011 for these increased costs in CY 2003 and CY 2004 are untimely.
As for CYs 2005-2009, the government could not have been aware, actually or constructively, of any increased costs paid by the government under government contracts in these years until the advent of these years and until payments were made under government contracts in those years. We conclude that the government's claims of 10 January 2011 to recover these increased costs for CYs 2005-2009 are timely.
As for the government's claim for penalties for CY 2003, Raytheon's final indirect cost rate proposal for CY 2003 was submitted to the government in or around June 2004, and we believe that the government should have known - prior to 10 January 2005 – that said final indirect cost rate proposal included these alleged expressly unallowable costs. Hence, the government's claim for penalty for CY 2003 is untimely. As for the government's claim for penalties for CY 2004, Raytheon's final indirect cost rate proposal for CY 2004 was submitted to the government on 2 June 2005, within 6 years of the date of the government's claim letter of 10 January 2011. We are persuaded that the government's claim for penalty for CY 2004 is timely. It follows that the government's claims for penalty for future years, CYs 2005-2009, are also timely.
[Emphasis added.]
In ASBCA No. 57679, Raytheon included allegedly expressly unallowable costs in incentive comp plans, including its “Long-Term Performance Plan” (LTTP). The LTTP payout was based on several factors, including a “Total Shareholder Return” (TSR) metric. Here is a chronology as discussed in Judge Delman’s decision—
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Raytheon briefed the government on its LTTP plan, including the TSR metric, as early as January 2004. In July 2004, DCAA issued an audit report in which it concluded that "the Long-Term Incentive Plan compensation system and related internal control policies and procedures of the contractor are adequate".
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However, when DCAA audited Raytheon’s CY 2006 “incurred cost proposal” (submitted in June 2007), it took issue with the LTTP. In July 2008, DCAA opined that the LTPP violated CAS 415-50(a)(3) and CAS 415-50(e)(l). With respect to the TSR metric, DCAA stated that the "TSR costs are not allowable per FAR 31.205(6)(i) [sic] because the number of shares awarded is dependent on the change in the price of Raytheon's stock". Raytheon contested the government's position.
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On 4 September 2009, the CO issued a FDN to Raytheon on this matter related to CYs 2004-2006. By letter to Raytheon dated 1 June 2011, the CO stated that the cost impact with respect to the CAS noncompliance was immaterial.
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By letter dated 2 June 2011, the CO issued a final decision, asserting that the costs of the TSR portion of Raytheon's LTPP were expressly unallowable under FAR 31.205-6(i)(l) because the TSR formula "shows that the stock award to a TSR participant is arrived at by determining the change in stock price". The CO asserted a claim under the Allowable Cost clause to recover the expressly unallowable TSR/LTTP costs for CYs 2004-2006 in the amount of $1,316,183. The CO added a claim for penalty under the Penalty clause due to Raytheon's inclusion of these expressly unallowable costs in its final indirect cost rate proposals, in the amount of $1,316,183 plus interest of $360,761, for a total of $2,993,127. Raytheon appealed the COFD.
Judge Delman ruled as follows (internal citations omitted)—
Under this appeal the government seeks recovery of unallowable costs and penalties for CYs 2004-2006. Based upon DCAA's review of the LTPP in 2004 and the information available to DCAA about the program at that time, we agree with Raytheon that the government should have known by 2004 that the TSR formula was based, in part, upon the price of appellant's stock, which in the government's present view makes the related costs unallowable. However, in order for the government's claim to accrue the government also must have known or should have known of some ‘injury’ to the government by that date. The record fails to show that the government knew or should have known in 2004 or 2005 of any injury to the government based upon Raytheon's application of this metric. Indeed, from the motion papers it appears that appellant did not include the subject TSR/LTPP costs in its CY 2004 overhead cost submission or its CY 2005 overhead cost submission because the subject costs were incurred only after a full three-year cycle. To the extent these costs were incurred in CY 2006 and were identified in appellant's CY 2006 overhead cost submission of June 2007, the government's 2 June 2011 claim for these costs is timely. It follows that the government's claim for penalties for including such expressly unallowable costs in its final indirect cost rate proposal for CY 2006 is also timely. We conclude that the government's claims under this appeal are timely.
[Emphasis added.]
The first thing we have to say is that Judge Delman squarely addressed the issue and found that the CDA SOL clock starts running from the time that the contractor submits its annual proposal to establish final billing rates.
The clock starts running when the proposal is submitted. Not when it’s reviewed for adequacy. Not when it’s audited. Not when the audit report is issued. Not when the audit report is received by a CFAO. The clock starts running when the proposal is submitted. The Government has six years—no more—from that date in order to assert a claim against the contractor. Many of those 25,000 whiskered contractor proposals to establish final billing rates are now mooted, because the Courts won’t hear any claims by the Government for allegedly unallowable costs that were included in those proposals. (Well, assuming the ruling is upheld on appeal, of course.)
On the flip side of the coin, the contractor has six years—no more—from that date to assert a claim against the Government. If the contractor’s submitted rates are higher than its provisional billing rates, then it has six years—no more—to file a claim for unbilled indirect costs. If there is fee retention outstanding, the contractor has six years—no more—to file a claim for that unpaid fee. Wait one day longer to demand payment, and you risk having your Government customer laugh in your face.
That’s the good news. (Well, it’s not good news for DCAA, but you get our drift.) That’s the news that everybody’s talking about.
We don’t see anybody talking about the bad news. We don’t see or hear anybody saying that the decision also got it wrong in some respects. While the decision is undeniably good news in one respect, it’s also bad news in another respect. It’s a half-a-loaf, not a full loaf.
What in the world are we talking about?
Well, in our non-attorney, layperson’s view, Judge Delman continues to conflate the concepts of “events” and “facts”. Looking above at the FAR 33.201 definition of “claim accrual,” one can see that it focuses on events and not on facts. It is when the events occur—all events that fix the alleged liability—that the CDA SOL clock starts running.
Looking at the Raytheon ruling in ASBCA No. 57576, we can see that the events that fixed Raytheon’s alleged liability occurred when Raytheon (a) established its incentive comp plans, and (b) DCAA examined those plans. The ruling focuses on when the Government became aware (or should have been aware) that those plans allocated allegedly unallowable costs to government contracts. According to the Statement of Findings, the Government knew it had been injured as early as September 2003—and very likely before that date. That is when the CDA SOL clock started running.
Instead, Judge Delman decided that there was a separate CDA SOL clock for each Raytheon submission of its annual proposal to establish final billing rates. His ruling focused on factual knowledge, not on events. He wrote—
… the government could not have been aware, actually or constructively, of any increased costs paid by the government under government contracts in these years until the advent of these years and until payments were made under government contracts in those years.
We think that’s an incorrect view. We believe that the events that cause the Government’s alleged injury occurred when Raytheon established its plans and incurred costs. The fact that there was a stream of costs over time associated with the plans should be irrelevant to the situation. Indeed, FAR 33.201 expressly states that it is the events that matter—and that “monetary damages need not have been incurred.” Judge Delman’s ruling focuses on the Government’s knowledge of monetary damages for each year in which Raytheon submitted its final billing rates, and elides the fact that those alleged damages continued to stream from an original event that took place more than six years before the Contracting Officer issued the COFD.
Looking at the ruling in ASBCA No. 57679, we see again Judge Delman’s focus on factual knowledge of a monetary injury instead of on the events that caused the alleged injury. Even though DCAA (by the Government’s own admission) knew of the LTTP and its TSR factor as early as January 2004, Judge Delman ruled that the CDA SOL clock didn’t start running until Raytheon included those costs in a proposal to establish final billing rates. According to him, the Government couldn’t have known it had been injured until Raytheon submitted a proposal that included them. That’s a focus on factual knowledge and not on the underlying events. That’s a focus on monetary damages, and not on events. We think Judge Delman missed the mark.
So if we’re right and the ASBCA is wrong, what does this mean for DCAA audits? Does it mean that DCAA is forever precluded from asserting costs are noncompliant with CAS or unallowable, once six years have passed from the time the contractor started to incur the questioned costs? Does this mean that DCAA can never change its mind?
Yes, that’s exactly the implication of our position. The logical outcome of our interpretation is that the Government has six years from the events that created the costs to assert a claim. Period.
Which is perhaps why the ASBCA Judges are shying away from it.
Now, again we are not attorneys and we are not Judges. You must read our opinions of legal matters with a grain of salt the size of the Rock of Gibraltar. If you litigate a position based on our Internet rants, then you’re a fool. Instead, obtain the advice and counsel of a licensed attorney with deep expertise in these matters. And then do what he or she advises.
But in the meantime, we expect that your attorney will be advising you to avoid CDA SOL litigation at the ASBCA, and head on over to the Court of Federal Claims. Perhaps—just perhaps—they will tell you that the ASBCA interpretation of the Contract Disputes Act’s Statute of Limitations is a problem to be avoided.
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GAO Discusses Contractor Pension Costs: Adds to DCAA Audit Burden
How to start this?
Let’s face it—most Americans don’t care about pension costs. That is to say, they care very much about their own pensions, but not so much about other peoples’ pensions. And almost nobody cares about cost accounting issues associated with pensions.
Even in our small world of government contracting, almost nobody wants to talk about pensions. In fact, let us go so far as to assert that the number of government contract cost accounting experts—the gray-haired CAS gurus—who feel comfortable discussing the nuances of CAS 412 and 413 can be numbered on two hands. Hell, our Principal Consultant has participated in CAS 413-related litigation before the Court of Federal Claims, and even he has to run back to the CAS and to review court cases before being able to confidently discuss some of the issues.
Yes, it’s that complex.
And it’s that boring, at least to most folks.
So our challenge today is to write about a recent GAO report, issued to Congress, which discusses pension matters within the Defense industrial base, without putting our readership into a coma. The GAO report is entitled, “PENSION COSTS ON DOD CONTRACTS: Additional Guidance Needed to Ensure Costs are Consistent and Reasonable.” Yeah, with a catchy title like that, we’re sure all the Senators and staffers are going to be all over it like white on rice. Dan Brown should be worried it’s going to displace his upcoming next installment of the adventures of Robert Langdon from the bestseller lists.
But before we delve into the GAO best-seller, let’s remind our readers that we’ve ventured onto the thin ice of this issue before. So if you’re a long-time reader, we expect you’re up to speed on issues associated with defined benefit pension plans and—more importantly—the variety of issues associated with recent “harmonization” revisions to Cost Accounting Standards 412 and 413 necessitated by the Pension Protection Act of 2006. If you need a refresher, trying searching for “pension” using the site search feature.
The GAO report is interesting reading for those few gray-haired CAS gurus who have to deal with the various issues. It’s an important topic for a number of reasons, not the least of which is that some of the largest defense contractors have been mired in litigation over their pension plans for a number of years. The GAO report notes that, for defense contractors that have defined benefit pension plans subject to CAS 412/413, measured pension costs will start to increase starting in 2014, driven by the “harmonization” revisions to the Standards. It also asserts that the CAS Board failed to carry forward aspects of harmonization into the segment closing provisions of CAS 413. The report asserts that DOD guidance regarding inclusion of defined benefit pension plan costs into forward pricing rate proposals needs more specificity.
The GAO report is actually a pretty good primer for those interested in getting more knowledge of the subject. That’s as much as we’re going to say about that.
But we do want to discuss what GAO has to say about oversight and audits of defense contractors’ pension costs.
According to GAO, DOD “relies on centralized expertise for management and oversight of defined benefit pensions.” GAO wrote—
The corporate-level contracting officer has two primary sources of technical expertise available to assist in determining that the contractor’s CAS pension costs meet CAS and FAR requirements that they be allowable, allocable, reasonable, and compliant: the DCMA CIPR Center and auditors from DCAA. … The CIPR Center represents a key element in DOD’s oversight process, giving recognition to the complexity and highly technical nature of defined benefit pension plans. As DOD’s centralized source of actuarial expertise, it advises DCMA contracting officers on pensions as well as insurance, including review of forward pricing proposals. The CIPR Center assesses the reasonableness of actuarial assumptions, including the discount rates used to calculate liabilities. It also provides an independent measurement for projected pension costs. …
DCAA auditors at the contractor’s corporate office are responsible for reviewing other aspects of proposed pension forward pricing, such as previous CAS pension cost estimates to assess how close they were to actual CAS pension costs for those periods. DCAA employs technical specialists who provide auditors with additional support on pension issues. DCAA audits may question costs that they identify as not allowable, allocable or reasonable, which the contracting officer may incorporate into negotiations with the contractor. For example, DCAA audits have questioned costs in forward pricing proposals because estimated CAS pension costs were higher than the contractor’s historical cost trends or the calculation methods were not compliant with CAS.
The problem with the current DOD oversight regime, according to GAO, is that they “do not address reasonableness of value of defined benefit pension plans.” This means that—
DOD’s oversight processes do not clearly assign responsibility for assessing the reasonableness of the value of pension benefits to plan participants, focusing instead on the reasonableness of actuarial assumptions or fringe benefits as a whole.
According to GAO, the fundamental flaw in this approach is that, under CAS, the amount of pension costs measured in any particular year may not equate to the real value to the employees. GAO wrote—
Auditors are instructed to review fringe benefit costs as a whole when determining their reasonableness, but CAS costs for defined benefit pensions are an imperfect measure of the value of pension benefits participants earned in a year as part of their total compensation. Multiple factors drive CAS pension costs. For example, the pension cost could be zero in a given year due to strong asset returns, and this pension cost would not capture any of the value of the benefits earned that year by employees. Conversely, the pension cost could be higher in a given year than the value of the benefits earned that year by employees as a result of actuarial losses. While they may be aware of the CAS costs of defined benefit pensions, auditors do not know the value of these benefits to an employee in a given year. They lack guidance on how to measure this value (containing, for example, acceptable methodologies, assumptions, or data sources), and therefore are unable to get a complete picture of the reasonableness of total compensation for contractor employees.
Neither the CIPR Center nor DCAA’s compensation team currently assess the reasonableness of benefits offered through defined benefit plans.
Consequently, GAO recommended that DCAA start evaluating the reasonableness of employees’ compensation stemming from defined benefit pension plans. Yeah, you read that correctly. The audit agency that currently has a backlog of some 25,000 unperformed audits of contractors’ proposals to establish final billing rates should begin evaluating the reasonableness of the value of defined benefit plans as an individual element of compensation.
Even GAO thought that was a bit of a challenge throw at DCAA. It wrote—
Accurately applying the cost of a defined benefit pension to an individual employee’s total compensation package is challenging due to the complexity and annual volatility of costs even if the value of the ultimate benefit does not change. DCAA compensation team officials noted that it is not clear how costs of a defined benefit plan should be evaluated. In addition, they lack current market survey data for defined benefit plans, and team officials noted that companies participating in these surveys do not consistently calculate and report their compensation costs.
But that didn’t stop GAO from making the recommendation.
And it didn’t stop the Honorable Richard Ginman, Director of Defense Procurement and Acquisition Policy, from agreeing to the recommendation. He wrote—
Concur. DCAA will be responsible for evaluating the reasonableness of pension plans offered by contractors. DCAA will review its current policy to ensure it assesses the value of benefits earned by participants. … If an initial review of the pension plan offered by the contractor indicates a potential for unreasonable compensation, the [DCAA] policy will require an evaluation of other parts of compensation to determine if total compensation is unreasonable as required by FAR 31.205-6(b)(2). … DCAA will reassess its guidance covering the evaluation of defined benefit pension plans as part of the assessment of reasonableness of executive compensation.
Based on our reading of the GAO report, it’s clear that DOD is starting to react (more than six years too late) to the specter of increased contractor pension costs. The fact that their interest in the increasing pension costs comes at a time of increased budget pressures on the Defense Department is purely coincidental, we’re sure.
So if you are one of the “lucky” contractors that has a defined benefit pension plan, you should expect DCAA to start nosing around, smelling for “unreasonable” benefit levels. Exactly how the auditors will evaluate reasonableness of unclaimed costs, or of costs other than those measured by CAS, remains to be seen.
And if you’re one of the “lucky” auditors who gets assigned to evaluate the reasonableness of a contractor’s defined pension plan, you should expect contractors to push back a little bit. For instance, we suspect contractors might ask you what right you have to audit a cost that they haven’t claimed, or a cost that’s different from that measured by CAS.
And we think some smart-ass contractor is going to suggest your time is better spent catching up on all those unperformed audits, rather than tackling new assignments that are likely not to result in large amounts of questioned costs.
P.S. We were interested to note that DPAP now has the authority to establish DCAA audit policy on behalf of the audit agency. The last time we checked, DCAA reported directly to the Defense Comptroller and not to the USD (A,T&L). Perhaps there was a reorg and nobody told DCAA Director Fitzgerald?
Who are the “Price Fighters”?
This is one of those articles where several recurring themes coalesce into something new—perhaps something unexpected. Let’s explore:
One of the recurring themes on this site has been to discuss the apparent love/hate relationship between the Pentagon and its defense industrial base—the contractors who enable the warfighters to, you know, fight. We’ve written about it too many times to easily count. (But you can do a keyword search for all those articles, if you’re so inclined.) It’s become clear that the relationship that existed in the mid-90’s—that of “trusted business partner”—is no longer the case. Instead, it’s become adversarial. We assert that this is no longer a matter of opinion; it’s now a matter of documented fact.
When former Secretary of Defense called for reductions in non-valued-added Pentagon bureaucracy, those self-same bureaucrats almost immediately redefined the mission into a drive for reductions in contractor prices. Several of them did pretty well for themselves, parlaying their pieces of the redefined mission into cushy, well-funded, promotions. We documented that phenomenon as well.
The thing of it is, we can’t flatly say it’s wrong to attack the contractors in a drive for efficiency and affordability—a Defense Department “that works better and costs less”. (How many of you get that reference?) The “jointness” of integrated operations now includes the contractors. They’re ineluctably intertwined and can’t be separated. So if you want to address Pentagon bloat and bureaucracy, you also need to address how that bloat and bureaucracy is outsourced to the support contractors.
But it’s plainly wrong to focus on reducing contractors’ costs in a vacuum, as DOD has largely done to date. The attack on contractors is one of the clearest symptoms of the disease that has infected the Pentagon over the last decade or so. We don’t pretend to have all the answers, but we think one aspect of the overarching disease is a myopic focus on the “sharp end”—the tactical warfighter—and a concomitant lack of focus on the rest of the spear—which includes logistics, maintenance and support, as well as the contractors who enable the vast military machine to move toward its objectives.
Whereas yesterday’s military travelled on its stomach, today’s military travels on the backs of its contractors. Pentagon leadership has failed to adapt to this new reality and, as a result, are attacking the very infrastructure that gets them where they need to go.
Part of the attack on defense contractors has been the creation of “should-cost” pricing. We’ve written about it before. It’s a theory, created by those self-same Pentagon bureaucrats, that is predicated on the notion that the bureaucrats should tell the contractor what its costs will be, as opposed to having the contractor tell them. Implementation of that theory on price negotiations for the next buy of F-35 aircraft led to some interesting results: (1) there was an inordinate delay in reaching an acceptable negotiated price, (2) the parties polarized and relationships soured, and (3) the contractor’s overhead costs went up, driven by the costs of providing the government negotiators with thousands of pages of information, so that the negotiators could establish their “should-cost” targets. It was an unmitigated disaster.
But that didn’t keep the Pentagon bureaucrats from trumpeting their victory over the contractor, in terms of negotiated savings achieved by their strong-arm tactics.
Recognizing that full implementation of the new aggressive negotiating postures required access to many types of information, DCMA and the DOD Director of Pricing (Mr. Shay Assad) issued a memo late last year calling for better integration of DOD Buying Commands and military service personnel with DCMA Contracting Officers and DCAA auditors in the evaluations of contractors’ proposals to establish “forward pricing rates” (FPRs). FPRs are used by contractors in their cost proposals when they tell DOD how much they think their programs are going to cost.
Yes, those are the same proposals that DOD is working hard to ignore as part of its “should-cost” initiative. So apparently, DOD not only wants to be in a position to ignore a contractor’s cost proposal, it also wants to be in a position to ignore its proposal to establish an agreement as to the indirect rates to be used in those proposals.
This approach must make sense to somebody. It doesn’t make any sense to us. In our view, it’s just another symptom of a bureaucracy looking elsewhere—anywhere—rather than to look in a mirror and tackle its own issues. And it’s crystal clear what those issues are, as the Government Accountability Office told the Pentagon Leadership more than a year ago.
Now, let us come to yet another symptom of the adversarial relationship between the Pentagon and its contractors. They are called “Price Fighters”. This is real. Apparently, the intent is to link these “Price Fighters” to the real warfighters who risk their lives every day to accomplish the nation’s national security objectives. We ain’t those guys, so we’re not particularly offended by the name. But let’s not fool ourselves: there ain’t nothing “risky” about looking at cost or pricing data, and negotiating contract prices.
Where did we hear this term? We heard it right from the same Pentagon bureaucrats who have been championing the “should-cost” initiative. We heard it right from the same Pentagon bureaucrats who have been pushing the integrated forward pricing rate review teams. We heard it right here.
The language of the memo is filled with noble phrases. Phrases such as “surge support,” “right place, right time,” and “on-time delivery of quality pricing products.” That’s all very nice, we’re sure. Just like the theory behind “should-cost” was also very nice.
But notice: “Price Fighters”.
Who are they fighting?
Who’s the adversary?
If the “warfighters” are fighting a war, what are the “Price Fighters” fighting?
Yeah, you know where we’re going with this.
This is yet one more symptom of the same disease with which the Pentagon is currently afflicted: the idea that the contractors are the enemy—the idea that there’s a war going on and it’s DOD against its own industrial base.
But who are these “Price Fighters”? We think it may also be contractors. Yes, we have reason to suspect that the Pentagon has hired contractors to assist in attacking other contractors.
Of course,
That’s the problem with attacking contractors. They’re so baked-into the mechanism of how things are done, you can’t distinguish them from the DOD civilian workforce. You can’t tell ‘em apart. And since nothing can get done without the contractors to do it, you need to hire contractors in order to attack the contractors, because you don’t have the internal resources to attack the problem any other way.
And thus some contractors are making a profit helping their Pentagon masters attack the profits of other contractors.
In prison, those folks are called “trusties”—they are the convicts who are regarded as being worthy of a certain amount of trust, and thus they receive special privileges in return for acting as agents of the prison guard force.
In World War Two, those folks were called “collaborators,” or “quislings”—and while they benefited from their support of the fascist occupiers, they later paid a price after liberation.
Now, we’re not saying that contractors who collaborate provide support to the Pentagon in its efforts to drive down contractor prices should have their heads shaven, or be blindfolded and shot at dawn. No. Don’t think for a moment that we’re advocating any type of retaliation.
But do think for a moment about the people in power at the Pentagon, who apparently are so taken with their war on their own contractors that they have named a group of cost analysts “Price Fighters”.
Really?
Are they really in a war?
Is that really how they see it?
Based on what we’ve seen over the past few years, the answer can only be “yes”.
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