DOD Issues More Guidance on COVID-19 Expenses
On July 6, 2020, the Dept. of Defense issued more guidance on treatment of COVID-19 related expenses incurred by its contractors. We have noted several prior pieces of DOD guidance on the subject; however, more recently we have been critical of the lack of clear guidance to DOD contracting officers. This latest piece of guidance does nothing to change our mind about the failings of DOD guidance.
Our fundamental problem with the current guidance memo (link above) is that it really doesn’t say much of anything that a contracting officer might find useful.
Sure, it addresses non-labor COVID-19 expenses, which is new and certainly of potential interest to many DOD contractors. Recalling that the CARES Act (especially Section 3610) and related guidance focused on contractor’s “stand-bye” labor costs, one might reasonably argue that guidance on non-labor costs was needed. Our problem is the memo doesn’t really add anything to the conversation that wasn’t already in the FAR.
Here’s a quick recap of the memo, quoting selectively:
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DoD Contractors may have already incurred, and will likely continue to incur, delays and costs associated with their response to the COVID-19 pandemic. However, to date, no funds have been appropriated specifically for reimbursement of these costs.
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DFARS Class Deviation 2020-O0013 – CARES Act Section 3610 Implementation, effective April 8, 2020, provides a means for affected contractors to request reimbursement of costs incurred for paid leave granted to their employees during the COVID-19 pandemic. Subject to the availability of funds, a contracting officer may modify contracts or other agreements to reimburse up to 40 hours per week of paid leave costs.
So far, that’s just a recap of history. There’s absolutely nothing new there. Let’s continue:
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Contractors may face further unplanned costs due to COVID-19, such as those related to providing PPE to employees, additional cleaning of work areas, changes to work spaces to accommodate social distancing, and delays in delivering and/or receiving purchased materials. Where allowable and allocable, these costs may be recovered on cost-reimbursement and incentive contracts.
Yes. The FAR does permit contractors to be reimbursed for costs that are allowable and allocable to their flexibly priced contracts. Those costs don’t need to be COVID-19 related costs either; they can be any costs that are allowable and allocable. Why DOD felt the need to restate what was already true as if it were new policy guidance escapes us.
But let’s move on.
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DoD contracts contain clauses to excuse performance delays not due to the contractor’s fault or negligence … In the event of delays caused by COVID-19, the contractor may be entitled to relief from contract delivery requirements. However, there is no statutory, regulatory, or contractual entitlement to an adjustment to contract price for schedule delays that are attributable to excusable delays. Unlike contractors performing under cost-type contracts, contractors under fixed-price contracts generally must bear the risk of cost increases, including those due to COVID-19 (e.g., costs associated with PPE, social distancing, and supplier delays and inefficiencies).
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Contracting Officers are granted discretion, subject to the availability of funds, to modify contracts … to reflect changes to the Government’s needs as a result of COVID-19. Any resulting changes in contract price must be substantiated by the contractor and determined by the contracting officer to be required to perform the contract as modified, and must be driven exclusively by the change(s) directed by the Government.
Hold on. Let’s stop right there. What did the memo just say? Did it say contracting officers can modify FFP contracts for the cost impact of COVID-19 related expenses?
No. No, it didn’t. Read again.
The memo says that contracting officers are granted discretion to modify contracts to reflect changes to the government’s needs. It has nothing to do with the contractor’s needs. In fact the memo reinforces that notion with the statement that the changes “must be driven exclusively by the change(s) directed by the Government.” Exclusively.
So what does that mean? It means the memo is granting authority to contracting officers to make changes to FFP contracts under the changes clause, should the government’s needs have changed. You know what? That’s authority that was already given to contracting officers when they received their certificates of appointment. There is absolutely nothing new there.
The memo seems to hint that contracting officers are being given authority to make changes to FFP contract prices as the result of COVID-19. (Nudge, nudge. Wink, wink.) For example, it states “the costs that would be associated with such COVID-19 related, Government-directed change modifications may be above and beyond current available funding.” However, that weak hint is contradicted throughout the memo, including the following:
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In making such modifications, Contracting Officers must be mindful that they are stewards of the public funds. They must only execute contract actions that result in fair and reasonable prices for the supplies or services provided and are determined to be in the best interests of the Government.
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The costs that would be associated with such COVID-19 related, Government-directed change modifications may be above and beyond current available funding. In such cases, Contracting Officers may not direct a change or execute a modification that results in an increase to the contract price until and unless the Department receives additional appropriations.
Based on the express language of the memo, we strongly recommend that contractors not expect any changes to their FFP contract prices as the result of non-labor COVID-19 related costs. Their stand-bye labor costs, of course, may reimbursed (even under T&M or FFP contracts) pursuant to the CARES Act Section 3610; but even that price impact is subject to contracting officer discretion and the availability of funds.
And as we’ve already noted, contracting officers have received little if any guidance regarding the exercise of their discretion.
This memo continues that trend.
DCMA and COVID-19
This is going to be one of those blog posts that gets me into trouble. I could feel it before I sat down and began typing. And yet, I can’t seem to find another way to discuss what may turn out to be the scandal of the COVID-19 pandemic: DCMA’s lack of leadership.
The Defense Contract Management Agency is responsible for administering contracts for the Department of Defense and other authorized federal agencies. In the agency’s own words:
The Defense Contract Management Agency is, first and foremost, a product delivery organization. Our nation’s warfighters expect our defense industry to produce and deliver the equipment they need to fight, survive and win. DCMA’s integrated team of acquisition and support professionals makes this happen.
The Agency provides contract administration services for the Department of Defense, other federal organizations and international partners, and is an essential part of the acquisition process from pre-award to sustainment. Around 12,000 employees, mostly civilians, work at offices and contractor facilities around the world, divided among three continental U.S. commands, one international command and other specialized offices.
Together, the Agency manages 300,000 contracts, valued at more than $7 trillion, at 15,000 contractor locations worldwide. DCMA makes sure DoD, other federal agencies, and partner nation customers get the equipment they need, delivered on time, at projected cost, and meeting all performance requirements.
Every business day, DCMA receives nearly 1,000 new contracts and authorizes more than $700 million in payments to contractors. Most importantly, every day our team delivers more than a million and a half items – from fighter jets to fasteners – to our warfighters.
Right now, our nation’s warfighters need DCMA to help the defense industrial base overcome the myriad challenges posed by the COVID-19 pandemic. The nation’s warfighters need DCMA contracting officers to make critical decisions, decisions whose consequences will impact the thousands of suppliers who deliver to the warfighters more than a million and a half items every day.
And the contracting officers are failing to make those decisions.
They are not making decisions because DCMA leadership hasn’t told them what to do.
Readers may recall that we’ve posted several articles about the Department of Defense’s response to COVID-19. We’ve written about the CARES Act, especially Section 3610, and how that impacts defense contractors. We’ve posted links to DOD guidance about Section 3610. The DOD guidance is very nice but it’s not yet complete. Defense contractors keep waiting for the rest of the guidance to be issued. It’s been promised several times, and each time the promised deadline has been missed.
The final DOD guidance may be available by the time this article is published. But right now, it’s missing in action. What we have is some top-level guidance that—critically—gives discretion to individual contracting officers without giving them any direction. Contracting officers are expected to make decisions in a policy vacuum, knowing that they will be second-guessed and criticized for any “mistakes” they make. As a result, most of them are doing nothing, leaving contractors in limbo—not knowing whether their COVID-19 costs made allowable by CARES Act Section 3610 will be reimbursed.
The situation doesn’t help anybody. It doesn’t help the defense supply chain and it doesn’t help the warfighters. All it does is perpetuate a relatively unfortunate status quo.
We’d like to encourage those DCMA contracting officers to take the initiative, to make bold decisions to implement the rather clear Congressional intent in advance of receiving guidance from Fort Lee. We’d like to do that, but we cannot.
We cannot advise DCMA contracting officers to take bold and decisive action because their recent leadership has an unfortunate history of throwing those same contracting officers under the bus at every opportunity.
This blog has documented several “audit reports” issued by the DOD Inspector General that were critical of DCMA contracting officers.
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Or this February, 2019, audit report criticizing DCMA contracting officers for paying a contractor too much profit, even though they followed the FAR and DFARS requirements to the letter
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Or this November, 2018, audit report, criticizing DCMA contracting officers for daring to negotiate contracts when DCAA said the contractors’ proposals were inadequate
We could go on and on. That wasn’t even two years’ worth of blog posts, and the blog stretches back to 2010. But we believe we’ve made the point. The DOD Office of Inspector General seemingly takes every opportunity to criticize DCMA contracting officers for any decisions whose result the OIG auditors do not like. And what happens then?
Does the Director, DCMA, support their team?
Does the Director, DCMA, defend their contracting officers?
Oh, hell no. The Director, DCMA, either (a) says nothing and lets somebody else agree with the OIG, or (b) agrees with OIG and promises better training, or more clear policies, or an investigation into what went wrong. Even if, technically, nothing did go wrong.
Thus, we cannot fault DCMA contracting officers for taking no action, pending receipt of prescriptive direction from Headquarters. It’s the only way to avoid the almost inevitable criticisms that will be coming from DOD OIG. Criticisms that their leadership will to nothing to mitigate.
So here we are. All of us in the defense industrial base. Waiting for clear DOD guidance, which will (hopefully) translate into clear DCMA guidance that can be implemented at the individual contract level.
Meanwhile, the intelligence agencies have already moved forward briskly with their contractors. The Navy’s SUPSHIPs have already moved forward with their shipbuilding contractors. It’s just the rest of the supply base—the thousands of contractors that deliver, daily, more than a million and a half products to our nation’s warfighters—that are stuck in limbo, waiting for direction and fearing the inevitable Monday-morning quarterbacking from those who have the luxury of not having to make critical decisions.
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Where does this lead? We strongly suspect it leads to court.
We believe that, a year or two from now, there is going to be a tsunami of appeals of Contracting Officer Final Decisions. Many contractors have incurred COVID-19 related costs in the belief that their DOD customers will reimburse them. If the contracting officers deny claims for reimbursement, we predict quick appeals. There’s just too much money at stake, and it’s already been going on too long, to change course now and abandon the thought of reimbursement.
Had DCMA been more agile, able to issue guidance more quickly, then perhaps some of the upcoming issues may have been avoided. Unfortunately, such was not the case. And so here we are … and we think we know where we are going.
See you in court.
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Working Under an Implied-in-Fact Contract
Most of the people reading this blog work in the field of government contracting, in one capacity or another. Some of you are finance/accounting folks, some are contracting folks, some are buyers. Some are program managers. Some of you work for the government and some of you work for contractors. But the single thread that unites the majority of readers is that you all work with contracts—government contracts.
Accordingly, you are used to having a contract to deal with. Most of the time, there is a Request for Proposals (RFP) and a proposal in response to that RFP, and then there is a negotiation and award of a contract. An actual written-and-signed-in-blue-or-black-ink contract. There’s even a Uniform Contract Format that is used by the Federal government, just to make sure the standard contract follows a standard structure that the parties both understand.
But what happens if there is no contract?
What happens if there are two parties working together without a written agreement?
Can that even be a thing in government contracting?
Yes. Yes, it can.
It’s certainly not a best practice. Or even a recommended practice. In fact, we strongly advise against working without a written agreement.
We teach the acronym RTFC: “Read the Foolish Contract,” because so few actually do. But if you don’t have a written agreement then there’s nothing to read, so it’s supremely difficult to determine the contracting parties’ mutual rights and responsibilities. For example, how do you bill for services rendered without any sort of billing instructions? How do the parties know when the agreed-upon scope of work has been completed? (How do the parties even confirm what the agreed-upon scope of work actually is?) Working without a written agreement is, to put it mildly, a very poor practice that is likely to end in one or more disputes, and possibly in litigation.
Still, it happens. And it happened to one contractor named Network Documentation & Implementation, Inc. (NDI), who alleged it performed more than $2 million worth of services for the Defense Information Systems Agency (DISA) without a written agreement. Unsurprisingly, the parties found themselves before the Armed Services Board of Contract Appeals (ASBCA), with a dispute under contract number “000000-00-0-0000.”
Before the ASBCA was the government’s motion to dismiss. One of the bases for DISA’s motion to dismiss was that NDI failed to allege the elements of an “implied-in-fact” contract. To be clear, the Board can hear appeals involving implied-in-fact contracts. Because they can exist and are a thing in government contracting.
What are the elements of an “implied-in-fact” contract?
According to Judge Witwer, writing for the Board—
An implied-in-fact contract is ‘founded upon a meeting of the minds, which, although not embodied in an express contract, is inferred, as a fact, from conduct of the parties showing, in the light of the surrounding circumstances, their tacit understanding.’ The elements of an implied-in-fact contract are: ‘(1) mutuality of intent; (2) consideration; (3) an unambiguous offer and acceptance; and (4) ‘actual authority’ on the part of the government’s representative to bind the government in contract.’
(Internal citations omitted.)
The dispute involved additional services that NDI alleged were ordered by DISA’s Chief Information Officer for Operations. According to NDI, the CIO—who had negotiated prior contracts with which NDI has been involved and who thus had actual or apparent authority to bind the government—requested the NDI perform additional services under a “separate agreement” from the one in which it was currently operating as a subcontractor. According to the complaint, the CIO represented that DISA would compensate NDI for the additional work “at NDI’s standard hourly rates.”
Right there we have at least two problems.
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Was NDI’s prime contractor aware that its customer had requested its subcontractor to provide additional services not associated with the prime contract? Seems awful close to a conflict of interest to us, but obviously we don’t have the subcontract in front of us.
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What does the phrase “standard hourly rates” even mean? Was the CIO not aware that many contracts are competed and prices are set by contractors based on competitive pressures? Alternatively, what about negotiations? Has no contractor ever in the history of DISA ever offered lower hourly rates in order to secure the contract award? It seems to us that the DISA CIO would have understood those concepts, because (allegedly) he negotiated the prime contract under which NDI had been a subcontractor. So … what did he mean when he (allegedly) said to NDI that it would be compensated at its “standard hourly rates”?
Also, the use of the phrase “standard hourly rates” implies either a labor-hour or T&M contract. Okay. Not our favorite contract type, but okay. Now … what about travel expenses and other ODCs? Was DISA going to reimburse NDI for those non-labor expenses? If so, at what rates? Could NDI rent a limousine to transport its employees to and from the DISA site, and then bill DISA for the limo? If not, why not? What contract term would prevent it? Remember, there was no written agreement, just an alleged implied-in-fact contract.
No matter, because NDI “submitted a copy of its hourly rates” to DISA, which was allegedly reviewed and accepted.
However, one thing NDI did not do was submit any invoices to DISA as the work progressed. Because how could it? It had no contract to reference, no ACRNs to reference, no billing instructions to reference. There was nothing in DFAS’ payment systems that would let a billing clerk process payment, even if such a payment request somehow made its way to that clerk’s desk. Nope. NDI didn’t bill and the unbilled costs kept mounting up.
According to NDI, DISA promised to pay “in full” when the work had been completed. (As noted above, we wonder how the parties would know when the work had been completed, but let’s assume they would.)
After nearly two years, NDI allegedly completed its work and then submitted an invoice to DISA, an invoice that DISA did not pay.
Another five years passed. No, we don’t know why.
Nearly five years after submitting its invoice for services provided under its alleged implied-in-fact contract, NDI finally got around to filing a claim for $2.036 million. A DISA contracting officer quickly denied the claim and NDI appealed to the ASBCA. DISA moved to dismiss, arguing, among other things, that there was no agreement.
Judge Witwer denied the motion, writing –
To survive a motion to dismiss for failure to state a claim, the complaint must allege facts plausibly suggesting, not merely consistent with, a showing of entitlement to relief. Here, NDI alleges that a government official with implied actual authority represented that DISA would pay NDI’s costs in return for NDI’s provision of the additional artificial intelligence services. In particular, NDI alleges that Mr. Norwood, who had previously negotiated the terms of NDI’s subcontract on the TEIS II contract and who repeatedly authorized the issuance of Common Access Cards to NDI employees, stated that DISA would compensate NDI at its ‘standard hourly rates’ for the additional services. NDI relied on that promise and provided the requested services. The government accepted and benefited from NDI’s performance. These allegations describe the elements of an implied-in-fact contract. Thus, we reject DISA’s argument that the appeal must be dismissed because the complaint does not allege sufficient facts to suggest that an implied-in-fact contract was formed.
Because NDI has satisfied both the jurisdictional claim requirements of the CDA and the minimum pleading requirements for the pursuit of a claim before this Board, we deny the government’s motion to dismiss. Whether a contract was actually formed relates to the merits of the appeal and is not before us at this time
(Internal citations omitted.)
Let’s wrap this up with four last points.
If a contractor chooses to accept direction from a person who is not a government contracting officer, then there should be assurance that the individual providing direction has authority to bind the government.
If a contractor chooses to work without a written agreement, then there should be assurance that it will be paid for its services.
If a contractor chooses to work for years without being paid, then there should be assurances that it will be paid in full as soon as the work is completed.
If a contractor chooses to wait five years before asserting its right to payment via a claim, we think that contractor should not accept any more government contracts. If you aren’t getting paid and you think you are entitled to payment, you should file a claim quickly—certainly within a few months.
Ethics in Steel Production
In 2008—which let us note is 12 years ago—a company called Bradken acquired a foundry in Tacoma, Washington. Bradken, described as a “foundry holding company” is a wholly owned subsidiary of Bradken Ltd., a company based in Newcastle, Australia. Bradken Ltd. is in turn a wholly owned subsidiary of Hitachi Construction Machinery.
This subsidiary of a subsidiary is reportedly “the U.S. Navy’s leading supplier of high-yield steel for naval submarines. Bradken’s Tacoma foundry produces castings that prime contractors use to fabricate submarine hulls.” Right. Made in America; owned by Japan. Not dramatically different than Honda, which makes its cars in Ohio; and not dramatically different than BMW, which makes its cars in South Carolina. In other words, the fact that the Navy’s leading supplier of submarine hull steel is owned by a foreign company is not considered to be an issue.
What is considered to be an issue is the fact that Bradken allegedly produced castings that had failed lab tests and did not meet the Navy’s standards for 30 years. In other words, the Tacoma foundry allegedly1 had been falsifying test records and shipping defective steel to Navy prime contractors for nearly two decades before the acquisition by Bradken and for more than a decade after the acquisition.
As one might guess, the U.S. Government wasn’t pleased when it found out about the situation, and initiated proceedings under the civil False Claims Act. Bradken was on the hook for a really big dollar value, as perhaps it should have been. In addition, the government initiated criminal proceedings against the company, charging Bradken with Major Fraud Against the United States.
That’s not good.
With respect to the civil False Claims Act allegations, the government alleged that—
… some of the castings Bradken produced did not conform to the Navy’s specifications. In addition to the allegations concerning the altered test results, the United States contended that Bradken invoiced shipbuilders for the parts as if they were made to the demanding military specification when they were not, causing the shipbuilders to invoice the Navy for parts that did not meet specifications.
Bradken was able to reach a settlement with the Department of Justice that addressed the civil False Claims Act allegations. The settlement was announced here. The settlement cost the company $10.8 million. As part of the settlement, the government agreed to give Bradken a deferred prosecution agreement with respect to the criminal charges. So that part of the case was resolved.
But how did this alleged fraud get perpetrated for 30 years?
According to the Department of Justice, “Elaine Thomas, as Director of Metallurgy, falsified test results to hide the fact that the steel had failed the tests. Thomas falsified results for over 200 productions of steel, which represent a substantial percentage of the castings Bradken produced for the Navy.” Allegedly, Ms. Thomas altered “test cards” and other records that would have shown the steel did not meet specifications. According to the Department of Justice, Bradken’s management was unaware of the actions of its Director of Metallurgy until 2017, when “a lab employee discovered that test cards had been altered and that other discrepancies existed in Bradken’s records.” At that point, Bradken notified the Navy—as it was required to do under contract clause 52.203-13 (“Contractor Code of Business Ethics and Conduct”). However, in its disclosure the company “made misleading statements suggesting that the discrepancies were not the result of fraud.” As part of its deferred prosecution agreement, Bradken admitted that “these misleading statements hindered the Navy’s investigation and its efforts to remediate the risks presented by Bradken’s fraud.”
The deferred prosecution agreement required Bradken to make significant changes to its operations. Bradken was required to:
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Make changes to the Tacoma foundry management team
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Create new positions focused on lab testing oversight and tracking
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Enter into a compliance agreement with the Navy
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Create an audit and risk committee to oversee the compliance issues
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Implement a new lab information system with anti-fraud controls
Bradken also agreed to publish a detailed account of its missteps in the Casteel Reporter, a trade publication, to educate other government contractors.
If Bradken successfully implements the above steps, then the government will dismiss the criminal charges against the company after three years.
In the words of the U.S. Attorney:
The Navy has taken extensive steps to ensure the safe operation of the affected submarines. Those measures will result in increased costs and maintenance. Our agreement with the company is aimed at ensuring they improve their procedures and inform their peer companies about how their systems failed to detect the fraud. We hope such steps will improve the military procurement system.
What about Ms. Thomas?
First, she is now described as a “former employee” of Bradken. But that’s not her real problem. She is still facing criminal charges. She has been charged with Major Fraud against the United States. Major Fraud against the United States is a criminal charge under Title 18 of the United States Code. Ms. Thomas will make her initial appearance in federal court in Tacoma on June 30, 2020. If convicted, she is facing up to 10 years in prison (per count) and a fine of up to $10 million.
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