Government Contracts Blog : Government Contracts Lawyer & Attorney : Sheppard Mullin Law Firm : Bids, Licenses, Awards, Conflict of Interest.

On May 19, 2009, the Federal Circuit in Secretary of the Army v. Tecom upheld the contracting officer’s disallowance of a contractor’s legal costs and settlement expenses in a sexual harassment and retaliation action brought under Title VII. The opinion is sweeping, and appears to extend the holding in Boeing North American, Inc. v. Roche, 298 F.3d 1272 (Fed. Cir. 2002) to almost every instance in which the contractor elects to settle in lieu of litigating cases to a conclusion.
 

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Last month, in what one of my colleagues has described as a “lucid rant,” I discussed the recent DCAA Memorandum for Regional Directors calling for increased referrals to agency Inspectors General of contracting officers engaged in such dastardly conduct as awarding contractors “unreasonable or excessive costs and/or profit” under their Government contracts, with “unreasonable” and “excess” defined to mean whatever DCAA on any given day deems them to mean.
 

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A recent DoD Inspector General Report issued on April 8, 2009 continues the intra-governmental assault on the independence of contracting officers in the disposition and compromise of contracting disputes. Billed as the “first in a series of reports we plan to issue on the actions that contracting officers took in response to audit reports of DoD contractors involved in Iraq reconstruction efforts,” the IG Report (D-2009-6-004), takes issue, inter alia, with contracting officer decisions relating to the compromise of a dispute with respect to a credit for self-insurance costs and to the recognition of a cost accounting change as “desirable,” thereby rendering allowable the increased costs associated with the change. Both contracting officer decisions had at least one characteristic in common, i.e., they disregarded the recommendations of the DCAA.
 

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On March 31, 2009, the FAR Councils issued several new interim rules (effective March 31, 2009) implementing the American Recovery and Reinvestment Act of 2009 (P.L. 111-5) (also known as ARRA, The Recovery Act, or the Stimulus Act). See Federal Acquisition Circular (FAC) 2005-32, published at 74 Federal Register 14621-14652. The FAC issued new interim rules on a number of areas required under the Stimulus Act, including:

• Reporting Requirements for Recipients of Recovery Funds (see 74 Federal Register 14639) 
   
• Publicizing Contract Actions (see 74 Federal Register 14636) 
   
• GAO and IG Access to Company Employees (see 74 Federal Register 14646) 
   
• Whistleblower Protections (see 74 Federal Register 14633) 
   
• Buy American Requirements for Construction Materials (see 74 Federal Register 14623)
   

This blog focuses on the final three sets of rules – those relating to Auditor access; Whistleblower protections; and Buy American requirements. The first set of rules is discussed separately here.
 

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A March 13, 2009 Memorandum for Regional Directors introduces a new level of formality in DCAA’s unceasing quest to intimidate and control contracting officers in the exercise of their discretion.

Contracting Officers have long been reluctant to disregard recommendations made by DCAA with respect to the treatment of costs, notwithstanding the fact that many of DCAA’s recommendations are based on legal conclusions that, by education and experience, auditors are not qualified to make. Indeed, some of these recommendations seem so clearly out of phase with the text and purpose of the applicable regulations that they remind one that, in the 2000 movie “O Brother Where Art Thou?” George Clooney’s character had been imprisoned for the unauthorized practice of law. Nonetheless, DCAA recommendations have a significant chilling effect on the willingness of Contracting Officers to “do the right thing.” Even when the correct decisions are ultimately made, they are often made only after a protracted period of unnecessary angst and aggravation.

But nothing is so bad that it cannot be made worse. Apparently dissatisfied with existing DCAA procedures for elevating “unsatisfactory conditions relating to actions of Government officials” – now, there is a mouthful – which entail the successive elevation of issues and complaints through ascending levels of Government management, DCAA has decided it is time to turn informer and refer these officials to the DODIG for investigation. Now, we are sure that there are a number of instances in which this kind of direct referral makes sense – like bribery and other forms of self-dealing – but, please is it really an IG-worthy event if an auditor believes that a Contracting Officer “awards a contractor unreasonable or excessive costs and/or profit”? That, friends, is the one specific example given by the DCAA MFR of “an action that is grossly inconsistent with procurement law and regulation.”

There are many institutions that, over the years, have used intimidation, threats, and strong arm tactics to arrogate unto themselves a level of de facto power that, de jure, was not theirs to exercise. Many of these have, thankfully, long since passed from the scene. DCAA would be well to remember that it functions as an advisor, not a dictator, and that Contracting Officers are individuals vested with discretionary decision-making powers, not puppets of the audit agency.

Authored by:

John W. Chierichella

(202) 218-6878

jchierichella@sheppardmullin.com

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Since the FAR Council’s November 2008 publication of new regulations mandating the disclosure by federal contractors of certain categories of wrongdoing and Government overpayments, there has been much ink spilled by lawyers, consultants, and the Government itself regarding what it all means.  The lack of clear definitions in the rule – notwithstanding the accompanying pages and pages of purported helpfully commentary – has provided ample opportunity for discussion, analysis, and conjecture regarding what the rule requires and what contractors should do to stay compliant.
 

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On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Tax Act of 2009 ("the Act" or "the Stimulus Bill") (P.L. 111-5) (H.R. 1). As widely reported in the media, the Stimulus Bill includes approximately $787 Billion in government spending and tax cuts. With regard to the government spending provisions (Division A of the Act, which appropriates approximately $520 Billion), the U.S. Government (as well as the State and local governments receiving this money) will disburse the funds through a number of different vehicles – namely government contracts, grants, cooperative agreements, and other transactions. The legislation is intended to deal with, on an expedited basis, economic conditions that many Americans have not experienced in their lifetimes and for which they want an accelerated cure. Those familiar with the federal acquisition and grant processes, however, know that immediacy is not built into those processes. Moreover, to the extent that the “need for speed” overtakes process, recipients of the funds will almost assuredly find themselves downrange from one of the most rigorous oversight regimes ever enacted. Companies, and even States and localities – should familiarize themselves with the full terms of the Faustian bargain they will be striking.  

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On December 19, 2008 DCAA issued new guidance for audit of and reporting on internal controls that-- in two short pages of sometimes cryptic text — (a) redefines the agency's approach to the critical concepts of "significant deficiency" and "material weakness" in internal controls and (b) establishes new criteria for auditor reports of deficiencies in large contractor internal control systems, and recommendations as to the adequacy of the contractor systems, including recommendations that the Contracting Officer pursue suspension of progress payments on reimbursement of costs. 

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In its 2008 report on the Government’s financial consolidated statements released on December 15, the Government Accountability Office criticized “serious financial management problems at the Department of Defense, the federal government’s inability to adequately account for and reconcile intragovernmental activity and balances between federal agencies, and the federal government’s ineffective process for preparing the consolidated financial statements.”  GAO further reported that the Government did not comply “with significant laws and regulations.”  Ironically, this report issued just days after the Government forced all federal contractors to implement their own internal control systems under penalty of suspension or debarment.

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1. Every audit has the potential for multiple layers of liability - contractual, civil and criminal.

2. Coordinate all audit activity - start to finish - with your Law Department.

3. Speak with one voice, literally - use a single point of contact for all audit communications with the Government.

4. Try to negotiate reasonable limits on the documentation to be made available.

5. Be fully responsive to the audit request - but do not produce what has not been requested.

6. Bring the records to the auditor, not the auditors to the records.

7. Keep records of everything produced.

8. Educate your employees about the audit process and how to interact with the auditors - see Rule No. 3 above.

9. Do not allow audits to devolve into depositions - see Rule No. 3 above.

10. Do not allow an erroneous draft audit report to go unchallenged - it will take on a life of its own.

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