Learning about FAR Cost Principles Too Late
Apogee Consulting, Inc. is a small business focused on providing assistance to contractors that are having trouble complying with the myriad administrative requirements of a typical government contract, especially those challenges that come with defense contracts. We help contractors deal with their first DCAA audit; or, perhaps their second DCAA audit if the first audit did not go as planned. We help contractors deal with developing (or enhancing) accounting and other business systems to better match their company’s strategic direction. We help with proposals; we help with negotiations. We help with accounts receivable, and we help with terminations.
We’re not as cheap as some, and we are certainly not as expensive as many. We think we create a fair value for our price.
But some contractors don’t call us, and they don’t call anybody else, either. They try to go it alone, relying on in-house expertise that may or may not exist, to provide assurance that they are managing their contracts adequately and executing them in a compliant manner. Some contractors get their first defense contract and think they are going to apply their time-honored management practices to it, never realizing how much more stringent the defense requirements are going to be on them.
Other contractors receive their first cost-plus contract and fail to realize that their world has just changed. We see this in the SBIR program, where successful contractors move from (fixed-price) Phase 1 contracts to (cost-type) Phase 2 contracts … never realizing that the management approach that worked out so well on Phase 1 is going to be woefully inadequate when applied to Phase 2.
Vern Edwards calls these companies “clueless would-be contractors” and has dedicated a blog article of his own about the phenomenon. He wrote—
Many small to medium sized companies go into government contracting without any idea of what they are getting themselves into. That might be okay with very small sales, but, otherwise, contracting with the U.S. government is the most complex business in the world. It’s right up there with trading derivatives. There are countless rules and contract clauses, many of which are exceedingly hard to understand.
In that blog article (link above), Vern offered “14 tips for the Truly Clueless Would-Be Government Contractors who think that winning a government contract is the yellow brick road to riches.” You really ought to read those fourteen tips, because following them could save you a lot of money downstream.
We touched on this notion, in this blog article about the recent ASBCA decision on the Inframat appeal. Inframat appealed a Contracting Officer’s decision disallowing costs questioned by DCAA as being unallowable, and which imposed some $21,000 in “level one penalties” associated with submitting those “expressly unallowable” costs in its certified proposal to establish final billing rates.
(Note: If you are unclear what an “expressly unallowable” cost might be, or what a “level one penalty” might be, or what a “certified proposal to establish final billing rates” might be, then you might just be one of those contractors Vern was talking about. Which is fine. Ignorance is not a crime! But your failure to comply with your contractual requirements just might be a crime. Something to think about, perhaps?)
What we said at the time about Inframat and similar contractors bears repeating, we think. We wrote—
… here’s the bottom-line for small businesses entering the defense marketplace: If you focus on contract execution and don’t pay attention to the back-office administrative requirements, your story will not end happily. You could easily end up paying the U.S. Government far more than it paid you …
Yet another potential landmine that you could trigger would be failing to deal with this ‘unallowable cost’ thingee that’s addressed in FAR Part 31. … If you are a small business, you may only have a vague idea as to what the FAR is—let alone have sufficient expertise in navigating the identification and segregation of unallowable costs (and the calculation of acceptable indirect cost rates). We suggest you had better learn more about this area—and quickly. The ability to properly account for unallowable cost implicates not only the adequacy of your accounting system, but also the adequacy (and accuracy) of your annual proposal for final billing rates. If you blow the proper accounting for unallowable costs, you are going to make DCAA very happy—because they will get to issue an audit report with lots and lots of questioned costs in it.
It may sound self-serving, but we honestly believe that if you are clueless regarding government contract cost accounting, then it would be a very good idea to hire a subject matter expert to assist you in that area. … Quimba’s problems with DOD need not typify that of every small business, but if you don’t at least come close to getting the contract accounting and billing correct, you are going to have similar problems.
It is not going to be pretty.
With those Cassandra-like warnings setting the stage, let us now turn our attention to the recent ASBCA decision in the appeal of Thomas Associates, Inc. The ASBCA’s decision in Thomas Associates, Inc. (TAI) was quite reminiscent of its decision on the Inframat appeal. Indeed, the ASBCA Judge cited to Inframat in the decision.
Like Inframat, TAI was not represented by outside counsel. Like Inframat, TAI was a small business (TAI was an 8(a) contractor). Like Inframat, TAI had a cost-type contract. Like Inframat, TAI was audited by DCAA, who questioned $33,890 in “expressly unallowable overhead costs” and $4,498 in “expressly unallowable G&A costs.” Like Inframat, DCAA recommended level one penalties—roughly $13,000 in TAI’s case.
TAI included the following in its certified proposal to establish final billing rates:
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$9,908 “for a Pintail Point corporate deluxe membership,” which included such activities as “sporting clay instruction, shooting, tournaments, a full-day fishing trip, a night at "Manor House Bed & Breakfast," a one-time use of a banquet room and five rounds of golf.” DCAA questioned those costs as being unallowable entertainment costs, but TAI thought they should be allowable as a “wellness/fitness center to improve employee morale, fitness, and teamwork under FAR 31.205-13.”
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$9,848 for an employee party at the Chesapeake Bay Beach Club, plus $700 for a limousine to carry employees to the party. TAI thought these costs should be allowable employee morale expenses under FAR 31.205-13, because it was an employee recognition event.
Do we need to tell you that TAI failed to persuade the ASBCA Judges on any aspect of its arguments? To put it bluntly, TAI’s arguments were absurd and it should have been embarrassed to make them. (Perhaps that’s why it had to represent itself? Perhaps TAI couldn’t find an outside attorney who could maintain a straight face while arguing those positions in court?)
With respect to the requested waiver of FAR-imposed penalties, TAI (like Inframat) did not prevail on that point either. TAI sought waiver of the penalties based on “financial hardship” as well as the fact that the DCAA audit findings was “a learning experience for us”—and that TAI subsequently improved its policies and procedures “to preclude these types of costs from being included in our incurred cost submissions.”
The ASBCA Judges wrote that TAI’s argument ignored the FAR and that the basis of its argument was “unpersuasive.” The Judges wrote—
There is no evidence that TAI submitted the five expressly unallowable costs in 2004 ‘inadvertently’ or due to ‘unintentional error, notwithstanding the exercise of due care,’ as prescribed by FAR 42.709-5(c)(2). Thus, the ACO properly denied TAI's 29 April 2010 waiver request.
TAI’s appeal was denied in all particulars. As well it should have been.
Look, here’s the deal. When you sign a contract with the U.S. Government, you are responsible for complying with all aspects of your contract—even those pesky “clauses incorporated by reference” found in Schedule I. This is especially true when you’re contracting with the Department of Defense. If you do not understand those clauses, don’t be embarrassed. It takes years of experience (and trial and error) to gain any appreciation of the requirements that those clauses mandate. If you are new to government contracting, there’s no reason you should be expected to understand them or to know how to comply with them. There’s no shame in ignorance when you’re at the bottom of the learning curve.
But government contracting is not very forgiving. There’s really no time to learn on the job or to make mistakes. Your company’s bottom-line—and perhaps its future—is at stake. Maybe you’re an excellent contracts manager but not so deep in accounting or property control or EVMS. Maybe you’re a great accountant, but purchasing and contract administration are skillsets that are out of your league. That’s the way it is, and you need to accept it. You need to get over the notion that your authority and/or subject matter expertise is somehow undermined because you don’t know everything about everything having to do with government contracting. The fact that your subject matter expertise has limits does not impact at all on the areas in which you do have that expertise. It just means you have some learning ahead of you.
So if you are facing new or challenging requirements, pick up the phone and call in a trusted business advisor who can help you out. And this is not about Apogee Consulting, Inc. There are many other advisors out there, and you should contact one of them as soon as you identify your needs.
It’s going to be a very wise investment, we assure you.
Government Employee “Sorry” for Spending $114,000 in Eighteen Months on Government Purchase Card
Yes, you would be sorry, too—if you had just been caught spending $114,494 in unauthorized personal expenses on your government purchase card. Who wouldn’t be?
Perhaps she was too young to know any better? After all, Ms. Jihan Cover, of Arden, North Carolina is only 34 years old.
Perhaps she didn’t understand that her government purchase card was only to be used for bona fide procurements related to her agency’s mission? After all, she was a Purchasing Agent with the National Institutes of Health’s National Cancer Institute, an entity within the Department of Health and Human Services. Sure, as a Purchasing Agent, her “sole job function involved procuring authorized items and services for NIH/NCI using assigned government credit cards.” Although as part of her job, she had “received regular training in the proper use of government credit cards,” perhaps it was insufficient for her to grasp the notion that her government purchasing card was not, in fact, her personal credit card.
For whatever reason, Ms. Cover made more than 250 unauthorized personal transactions via her purchasing card, worth $114,494, between June 2009 and December 2010—about eighteen months. That’s about $6,400 per month, for those keeping score.
Here are some of the details—
During this period of time … Cover used and caused to be used her NIH/NCI purchase cards to make over 170 personal purchases totaling approximately $16,000 from Amazon.com for items that included toys, exercise equipment, books, clothes and other personal times. Almost all of these items were shipped to Cover’s residence in Arden. In addition, Cover admitted using her NIH/NCI purchase cards to pay off over $29,000 in balances she accrued with various cash advance and payday loan vendors.
… Cover also used and caused to be used her NIH/NCI purchase cards to make more than $47,000 in payments to personal accounts she caused to be created on PayPal, an online payment website. Cover directed over $46,000 from these PayPal accounts to be deposited into bank accounts that she controlled. Plea documents also revealed that in an effort to conceal her misuse of assigned purchase cards, Cover created additional PayPal accounts associated with email accounts that she controlled and which she selected to resemble the name of a legitimate NIH/NCI vendor. In this manner, Cover made over $11,000 in additional hidden payments to these PayPal accounts.
Ms. Cover may have seemed dumb, but she was smart enough to attempt to conceal her misdeeds. As reported—
In addition, Cover admitted that she further sought to conceal her actions by submitting various dispute forms to the bank servicing her purchase cards, claiming that she did not recognize certain charges or did not authorize them, when, in fact, she knowingly made or caused to be made the personal charges. … Cover admitted that … she lied to investigators, claiming that she had satisfied personal transactions made with her NIH/NCI purchase cards using her personal bank account, which in fact she knew she had not. Previously, when confronted by her supervisor at NIH/NCI regarding suspicious transactions, Cover claimed falsely that she had been the victim of identity theft, when in fact she knew that she had caused the transactions.
Ms. Culver was sentenced to six months in prison for her crime of stealing government funds.
We … don’t know what to say about this. Alleged identify theft. Misuse of government-issued credit card. Disputed charges. Deliveries to one’s home address. This one is too bizarre for us.
We only know it will be very difficult for Ms. Cover to find another way to misuse a government-issued purchase card in the future.
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Mitsubishi Electric Proves Timecard Fraud is International
In January, 2012, Mitsubishi Electric Company—Japan’s second largest defense contractor—was indefinitely suspended from contracting with the Japanese Defense Ministry, the Japan Aerospace Exploration Agency, and the Japanese Cabinet Satellite Intelligence Center for allegedly “artificially increasing the number of workers and hours billed” on invoices submitted to those government entities. A detailed investigation was launched to quantify the amount of the (alleged) overbillings, according to this story at Defense Procurement News.
It’s not clear that Mitsubishi ever denied the allegations. According to this report from a Japanese news source—
A Mitsubishi Electric spokesman said, ‘It's a fact that the costs of other projects were added to the contracts in question to pad the bills, but we can't comment further as we are still investigating the case.’
More recently, the Defense Industrial Daily reported that the Board of Audit of Japan had release the results of its months-long investigation. According to the Board of Audit, Mitsubishi’s practice of “padding the bills” has been in place since 1970. It was reported that—
For most of [Mitsubishi’s] orders, comparable market prices were not available, so Mitsubishi Electric calculated material costs and working hours necessary for fulfilling the orders, and the contracts prices were set using this calculation as a reference.
Under the agreement, Mitsubishi Electric was to repay the ministries if its staff worked fewer hours than planned. But the Board of Audit of Japan has found that Mitsubishi Electric senior officials have overstated its employees' working hours for decades, using special terminals for manipulation.
So it seems that the workers were entering the correct number of work hours into the labor reporting system, but then their supervisors and/or managers used “special terminals” to increase those reported labor hours, so as to mask any underruns that would have prompted contract price adjustments. Unfortunately, the Board of Audit was unable to calculate the value of the fraud, because the company “has already destroyed the data on working hours and material costs for the contracts in question.”
How fortuitous.
You may be wondering how has the de facto debarment affected Mitsubishi Electric? Surely, its top-line revenue significantly suffered from the loss of such a large customer?
Nope.
As the article reported—
… since there are no other companies that can repair and manufacture such products, [Mitsubishi] received more than 111.8 billion yen worth of orders from the Defense Ministry on the basis of free [sole-source] contracts in the first half of this year, representing more than 90 percent of the orders it received from the ministry last year.
In other words, like some U.S.-based defense contractors, Mitsubishi Electric was too big to be debarred. But unlike some U.S.-based defense contractors, Mitsubishi felt remorse for its wrongful actions, saying “We apologize that we have caused trouble by breaching contracts.”
So there you go. All better now?
Former KBR Employee Reaches Suboptimal Plea Bargain that Uses “B” Word
Recently we told readers about four “gentlemen” from Texas who successfully obtained beneficial plea bargain agreements. Their plea bargains, and the description of their crimes by the Assistant U.S. Attorney who handled their cases, avoided problematic terms such as “gratuity,” “bribery,” and “violation of the Procurement Integrity Act.” We congratulated the Texans on their deals, which reduced by two-thirds their potential prison sentences.
Now, just a week later, comes word of a young woman, Diyana Montes, age 29, of Houston, Texas, who pleaded guilty to one count of bribery, in connection with her employment duties in Afghanistan. Here’s the usual DOJ press release.
From the press release, we learned that Ms. Montes worked for KBR at Bagram Airfield, Afghanistan, where she was assigned to the Army’s Movement Control Branch (MCB). We’ve written about Bagram Airfield before, when we reported about allegations of bribery and suchlike with respect to award of a trucking contract to AZ Corporation. So in that respect it is unsurprising to read about more bribery and associated perfidies at that location.
We’ve not been to Bagram, and it’s quite possible that there are many, many service men and women, and civilians, as well as contractors, who operate there with the highest degree of honor, integrity, and commitment to ethical behavior. We do not mean to impugn their honor in any way. In fact, we sincerely thank them for their service during a time of war.
But let’s be open about this. Based on the number of investigations, prosecutions, convictions, and plea agreements coming from that single location, we have to ask WTF? What is going on in that culture? Is it the wild west, or post-Soviet Russia, or what? What does it say about the military and civilian leadership, and the controls in place at the time, that we keep reading about so much wrongdoing at one military base?
Okay. Back to Ms. Montes’ story.
Ms. Montes worked for the MCB, which “coordinated requests from various U.S. military units for trucking services and assigned those requests to particular contractors.” Okay, full stop. How many readers think that any function that “assigned” work “to particular contractors” would be subject to some increased risk of improper influence peddling and, as a result, needed some enhanced controls over the assignment of work? Yep, that’s what we thought, too, even before the rest of the story was told.
Anyway, Ms. Montes reviewed Trucking Movement Requests (TMRs) and reconciled the TMR information with contractors’ invoices. “Once Montes reviewed the documents and determined they were accurate, she would pass them on to other contracting personnel, who would rely on her review in approving payments to the trucking company.”
One of the trucking contractors to whom work could be assigned was Afghanistan Trade Transportation (ATT). ATT submitted TMRs and associated invoices to Ms. Montes for review “on numerous occasions.” Ms. Montes knew ATT had not performed work for which it had submitted invoices, and she “knew the invoices from ATT contained service claims that were not accurate, and she passed them along for payment with the knowledge that the billings were fraudulent.”
This activity took place from May through December 2008—approximately seven months. During that time, Ms. Montes “received from ATT approximately $50,000, consisting of $35,000 wired to her personal bank account in the United States and another $15,000 in cash paid to her on several occasions in Afghanistan.”
Let’s compare and contrast Ms. Montes with the other four Texans we wrote about, whose plea deals did not involve pleading guilty to bribery.
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The wrongdoing at Sheppard Air Force Base lasted for decades, from the “mid to late 1990’s through 2009.” In contrast, Ms. Montes’s wrongdoing lasted about seven months.
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When one of the four “gentlemen” became aware of the criminal investigation, he attempted to get at least one of the others to “lie” about receiving cash payments. In contrast, nobody alleged that Ms. Montes lied about receiving payments or attempted to obstruct the investigation in any way.
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Ms. Montes received approximately $50,000 for her role in knowingly approving the fraudulent payments from ATT. In contrast, the total amount of corrupt payments that took place between the four other Texans was unknown (or unspecified), but involved at least one $10,000 cash payment, plus other gratuities such as travel and shows.
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Ms. Montes assisted in defrauding the United States through knowingly approving false claims for work performed. In contrast, government employees provided “sensitive source information” that undercut the integrity of the competitive bidding process, as well as “approving and accepting” work performed in return for cash payments.
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Ms. Montes is from Texas, so were the other four “gentlemen.”
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Ms. Montes is a woman; the other four Texans were male.
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Ms. Montes pleaded guilty to one count of bribery. In contrast, the other four Texans each pleaded guilty to one count of conspiracy of some trivial matter (see the exact wording in the blog article).
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Ms. Montes faces 15 years in prison. In contrast, the other four Texans each face a maximum of five years in prison.
Well, we don’t know why Ms. Montes fared so poorly in her plea agreement, compared to the four fraudsters at Sheppard AFB. We don’t know why she had to cop to a bribery count, when the others skated on that charge. We don’t know why at least one of the men wasn’t charged with obstruction of justice—or something worse.
Maybe Ms. Montes’ lawyer wasn’t the best negotiator. Maybe there are facts not reported in either of the DOJ’s press releases, which would serve to explain the seemingly disparate bargains. Maybe it’s because one defendant was a woman.
We don’t know. But we can’t help but wonder.
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