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

By David Gallacher 

Last month we wrote about a provision in the proposed 2013 National Defense Authorization Act (“NDAA”) that would have given the Defense Contract Audit Agency (“DCAA”) statutory authority to demand a company’s internal audit reports in order to audit the efficacy of a company’s internal business systems. Surprisingly, the authorization, as originally proposed, was modified in the final legislation. While Congress directed DCAA to issue new guidance regarding auditor access to internal audit reports, Congress stopped short of giving DCAA actual authority to demand such reports. As such, contractors will remain at loggerheads with DCAA auditors who try to exceed their statutory authority.

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By David Gallacher 

The Defense Contract Audit Agency (“DCAA”) has long sought access to contractors’ internal audit reports in connection with the routine audit of contractors’ business systems. Contractors have, in most cases, successfully resisted requests for such access on the grounds that DCAA has no statutory authority to request such documents. But that may soon change. Section 843 of the Senate version of the 2013 National Defense Authorization Act (S. 3254) would grant DCAA broad access to contractor internal audit information.

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By David S. Gallacher and Kerry O'Neill

Last April, we wrote about proposed changes to Department of Defense ("DoD") reporting requirements for independent research and development ("IR&D"), raising concerns about how the proposed change would tie recoverability of IR&D costs to new reporting and disclosure requirements. Recently, Defense Federal Acquisition Regulation Supplement ("DFARS") 231.205-18(c) was finalized, with changes. See 77 Fed. Reg. 4632 (Jan. 30, 2012). This final rule is a mixed bag that got some things right, but also leaves some of the most serious issues unresolved.

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By David Gallacher and John Bonn

On January 2, 2011, the President signed the James Zadroga 9/11 Health and Compensation Act of 2010, Pub. L. No. 111-347, which set up a relief fund for victims, first responders, and construction workers who were injured in the September 11 terrorist attacks in New York City. To pay the estimated $4.3 billion price tag for the Act, Section 301 of the Act imposed on any foreign person a tax equal to 2% of federal procurement payment received by that foreign person. See 26 U.S.C. § 5000C. In addition, any person who makes or otherwise is a withholding agent with respect to such a payment is required to withhold the 2% tax from the federal procurement payment and remit the tax withheld to the Internal Revenue Service (“IRS”) under tax laws and regulations applicable to withholding of United States taxes from payments made to foreign persons. Although the tax has been in place for more than 14 months and the IRS has issued a revised Form 1042 with revised instructions to implement withholding and reporting obligations, the Government is only now turning to the details of how this tax will be accounted for in connection with the procurement process. And – as is often the case – there is quite a lot of devil in those details.

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By John W. Chierichella and Alexander W. Major

Under FAR 42.709-1, penalties for expressly unallowable costs are to be waived when the expressly “unallowable costs under this proposal” are less than $10,000. Although there are other bases for the waiver of the penalties, those other bases are discretionary. The $10,000 exclusion is mandatory.

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By David S. Gallacher

Those familiar with Government contracting know at least a little bit about the elusive and fickle regulatory requirements for Independent Research and Development (“IR&D” or “IRAD”) costs. IR&D is a means by which the U.S. Government supports a Contractor’s independent R&D efforts. By reimbursing a Contractor’s independent R&D costs, the Government long has hoped to advance the state of the art without stifling a contractor’s innovation under the weight of a federal bureaucracy, while simultaneously banking on the fact that the U.S. Government also will benefit from the technology advancements. But two recent developments may change the essential nature of IR&D, making it less “independent” and more “dependent” on Government rights and oversight. To quote Bob Dylan – “the times they are a changin’.” 
 

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By Louis D. Victorino

A great deal of discussion has transpired regarding recent legislation that reportedly could alter significantly the established “follow-the-funds” test used for the allocation of intellectual property rights in data developed under a government contract. The legislation involved is a provision of the National Defense Authorization Act for Fiscal Year 2011 (the “Act”), signed into law on January 7, 2011. In particular, Section 824 of the Act provides “Guidance Relating to Rights in Technical Data” and, more importantly, amends Section 2320(a) of Title 10 of the United States Code, the provision that defines the allocation of rights in intellectual property under Government contracts.
 

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In Teknowledge Corp. v. U.S., Fed. Cir., No. 2009-5053, 11/03/09, the U.S. Court of Appeals for the Federal Circuit affirmed a decision by the Court of Federal Claims (COFC) that software development costs were not allocable to the Government because the Government did not receive a benefit from the costs.  Earlier this year we wrote about the potential implications of the COFC's decision.
 

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Not so long ago, we called your attention to a troubling trend in the natural order of Government contracting. First, we recounted how DCAA has initiated itself into the dark art of intimidation. Then we described how a contracting officer’s mere disagreement with the DCAA could result in an IG referral for a poor CO who comes out on the other side of a DCAA recommendation. And when last we resumed our chronicle, we recalled that a call for an end to these frontal assaults on CO independence was issued – not only by us in the last several months – but by an ABA Ad Hoc Committee some 22 years ago.
 

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Based on their view that contractors who subcontract the majority of the work to subcontractors add little or no value, the Civilian Agency Acquisition Council and the Defense Acquisition Regulations Council (FAR Councils) issued an interim rule on October 14, 2009 that limits excessive pass-through charges by contractors and subcontractors.  See 74 Fed. Reg. 52,853 (October 14, 2009). The rule not only makes excessive pass-through costs unallowable, but also provides for recoupment of pass-through charges later determined to be excessive. 
 

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The FAR Councils issued an interim rule, effective October 14, 2009, revising the circumstances under which services not offered and sold commercially can still qualify as commercial services. This is important for a couple of reasons, but probably most importantly, because commerciality can eliminate the requirement for the submission of cost or pricing data and can limit the amount of Government contracting requirements to which a company is subjected. The new interim rule now permits a Contracting Officer determination of commerciality even where services are not offered and sold competitively in substantial quantities in the commercial marketplace. 
 

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On October 14, 2009, the Civilian Acquisition Council and the Defense Acquisition Regulation Council issued an interim rule that limits the use of award-fee contracts, modifies how a contractor earns an award fee, and prohibits the rollover of unearned award fees. The interim rule implements § 814 of the John Warner National Defense Authorization Act (NDAA) for Fiscal Year 2007, § 867 of the Duncan Hunter NDAA for Fiscal Year 2009, and the Office of Federal Procurement Policy Guidance Memorandum dated December 4, 2007 entitled "Appropriate Use of Incentive Contracts." The interim rule significantly revises Federal Acquisition Regulation (FAR) Part 16, adds FAR Part 16.401(e), and makes other general housekeeping changes.  
 

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In November 2002, the FAR Councils eliminated the so-called "paid cost" rule from the FAR, which had previously prevented federal prime contractors other than small businesses from recognizing incurred subcontractor costs for purposes of progress billing until "payment by cash, check, or other form of actual payment" had actually been made. See 67 Federal Register 70520 (Nov. 22, 2002). The Government form used to request progress payments, the Standard Form (SF) 1443, Request for Progress Payments, implemented the paid cost rule by requiring large contractors to identify "paid costs eligible under progress payments clause" (Line 9) and "incurred costs eligible under progress payments clause" (Line 10). See FAR 53.301-1443 (2008) (last updated in October 1982). Bizarrely, however, when the paid cost rule was eliminated in 2002, the SF 1443 was not updated to remove these two lines. Now -- a mere six years and eight months since the elimination of the paid cost rule -- the FAR Councils have finally issued a revised SF 1443, removing Lines 9 and 10 and thereby eliminating the last vestiges of the long-defunct rule. See 74 Federal Register 28430 (Jun. 15, 2009).
 

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As in -- “What gives the DCAA the right to take the contractor’s money?”  DCAA would tell you that Form 1s are a long established mechanism for Governmental “self-help” in reclaiming funds from Government contractors.  And based on some recent audit guidance, it looks like Form 1 withholdings are fast becoming the “weapon of choice” for auditors.  But what the DCAA fails to acknowledge in its memoranda is that Form 1 withholdings actually are an illegitimate circumvention of the FAR.

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Effective October 17, 2008, the Cost FAR Councils will implement revisions to the policies and procedures for contract debts under FAR Subpart 32.6.  The changes cover all contract debts to the Government resulting from contractor’s compliance or failure to comply with contract terms, and irrespective of how, or by whom, the debt is identified.  The revisions grew out of DoD’s recommendations published on May 26, 2005, and are being applied Government-wide “to improve contract debt controls and procedures, and to ensure consistency within/between existing regulations.”  73 Fed. Reg. 53997.

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The Case of the Missing CAS Disclosure Statement

NASA has terminated for convenience a $750 million cost plus award fee contract because the awardee failed to submit the required Cost Accounting Standards Disclosure Statement and because, as a result, NASA could not, and did not, evaluate the purportedly winning proposal against the missing Statement.  NASA’s announcement came in response to a GAO bid protest over the space agency’s handling of the procurement for “next-generation” space suits.  NASA’s corrective action, which is being challenged by the protester, would reopen discussions and permit “limited proposal revisions.”  The nature and scope of those “limited proposal revisions” remain undefined as of this date.  It remains to be seen whether NASA will attempt to limit the reopening of the competition to the retroactive submission of a disclosure statement by the previous awardee.  See Wall Street Journal, NASA Seeks to Reopen Spacesuit Contest, August 16, 2008; Page B5.

Sheppard Mullin represents the protester in the above-referenced proceedings.

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Executive Compensation

The Office of Federal Procurement Policy has established the FY 2008 compensation cap for the contractors’ five most highly compensated executives at $612,196.  Contractors are free to compensate executives above that amount, but pursuant to FAR 31.205-6(p) the cap sets the limit for how much of the compensation is reimbursable under government contracts.  The yearly amount is derived from commercial surveys and reflects “the median (50^th percentile) amount of compensation accrued over a recent 12 month period for the top five highest paid executives of publicly traded companies with sales over $50 million.”  73 FR 15,779.

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CAS Exemption for Overseas Contracts

On February 13, the CAS Board announced that it will retain without change the CAS exemption for contracts executed and performed outside the US, its territories or possessions, found at 48 CFR 9903.201-(1)(b)(14).  The Board had issued a staff discussion paper in 2005, inviting comments on whether the exemption needed to be revised in light of earlier changes in the statutory authority for the CAS.  Commentators were unanimously opposed to any revisions, citing, among other reasons, potential difficulties in administering the CAS overseas.  73 FR 8259.

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Interest Rate

For the period starting January 1, 2008, and ending June 30, 2008, the US Treasury has set the interest rate used to calculate interest due on claims under the Contract Disputes Act and the Prompt Payment Act at 4.75 percent per annum, a decrease of 1 percent from the previous six-month period.  72 FR 74408.

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