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

In a related development, on March 4, 2008, the DCAA issued guidance on the method for application of the executive compensation cap.  Under the guidance, the cap only applies after determining the amount of allowable executive compensation.  Portions of executive compensation may not be allowable for reasons unrelated to the cap – e.g., the executive may be compensated for performing unallowable activities, the compensation may be based on changes in the stock price, which is unallowable under FAR 31.205-6(i)(1), or the amount may be unreasonable.  Such unallowable elements are to be subtracted from the total compensation amount before determining whether the compensation cap has been exceeded.  The DCAA also reminded the auditors that under FAR 31.205-6(p)(2) not all forms of compensation are subject to the cap, but only “wages, salary, bonuses, deferred compensation, and employer contributions to defined contribution pension plans.”

CAS Administration Provisions

Effective March 31, 2008, FAR Part 30 contains updates regarding CAS administration rules.  The proposed changes were first published in October 2006 and are the result of comments received following earlier revisions to FAR Part 30 made in March 2005.  The new provisions specify that the cost impact of a noncompliance that affects cost estimating and cost accumulation must be measured by combining impacts on both.  In addition, the provisons now require the CFAO to consider the auditor’s advice in administering the CAS and to evaluate the detailed cost impact proposals.

3% Tax Withholding

The IRS is seeking public input on the implementation of the statutorily mandated 3% tax withholding on payments to contractors for any service or property.  The withholding was added by Sec. 511 of the Tax Increase Prevention and Reconciliation Act of 2005, and requires federal, state, and local governments to withhold 3% from payments for goods and services as an effort to stem tax delinquency.  Although industry groups are advocating its repeal, the withholding requirement currently is scheduled to go into effect on January 1, 2010.  The comments are sought with respect to how the withholding should be applied to purchases with credits cards, to government contractors and subcontractors, etc., and how the withholding should be transmitted to the IRS.  Comments are due by April 28, 2008.  For more information, see Internal Revenue Bulletin 2008-13.

Prompt Payment Act Interest

In Essex Electro Engineers Inc. v. US, the Court of Federal Claims held on February 20, 2008 that the USG did not owe PPA interest where the due date of payment was not specified.  The parties had entered into a settlement agreement and contract modification under which the USG was to make a payment “as soon as possible” and to use its best efforts to obtain funding.  This imprecise language did not provide the date payment is due under the contract and was “fundamentally inconsistent with the underlying assumption” of the PPA.  Rather, the PPA interest accrued  30 days after the receipt of a proper invoice.

Authored by:

Aleksander Lamvol

(202) 218-0006

alamvol@sheppardmullin.com

In a related development, on February 19, the chairman of the House Armed Services Committee called upon the OMB to reconsider the decision to retain the 48 CFR 9903.201-(1)(b)(14) exemption, saying that it does not “recognize the significance of the waste and fraud that has occurred with contingency contracting in Iraq.” Federal Contracts Report, 02/26/08.

Residual Home Office Expense Allocation

On February 13, the CAS Board issued a notice soliciting public comments on potential revisions to the dollar amounts in the three-factor formula allocation thresholds, found at CAS 403-40(c)(2).  The current provision continues to use the threshold amounts established in 1972.  In recent years, both the Aerospace Industries Association and the Department of Defense have proposed revisions to these amounts in order to reflect inflation, as well as economic, industry, and acquisition policy changes.  Comments are due April 14, 2008.  73 FR 8259.

Excessive Pass-Through Charges

The GAO has issued recommendations for finalizing and implementing the new DoD rule on excessive pass-through charges.  The interim DFARS provision at 215.408, and associated clauses at DFARS 252.215-7003 and 7004, require contractors who subcontract more than 70 percent of their total cost to describe their value added and permit the DoD to recoup any pass-through charges that it determines to be excessive.  Because the regulations do not provide specific criteria for evaluating value added, the GAO recommends that the evaluation be based on certain risk factors (e.g., whether contract is complete, whether the contract is fixed price, whether the contract was awarded using full and open competition) and that it involve the assistance of the DCMA and the DCAA.  Defense Contracting, Contract Risk a Key Factor in Assessing Excessive Pass-Through Charges, GAO-08-269.

Disclosure of Line-Item Pricing Information

On January 29, in the reverse-FOIA case of Canadian Commercial Corp., et. al. v. Dept. of the Air Force, the DC Circuit Court of Appeals affirmed the lower court’s decision that disclosure of line-item pricing would cause substantial competitive harm, thereby precluding the release of that information under FOIA Exemption 4.  In reaching the decision, the court reaffirmed its previous holding in McDonnell Douglas Corp. v. Air Force, 375 F.3d 1182 (2004), and found that the record did not support the Air Force’s contention that the line-item pricing had been historically disclosed prior to FOIA or that their release would be harmless in this case.  In addition, the court rejected the argument that disclosure of otherwise protected trade secret information was required under any FAR provision.

Environmental Remediation Costs

In Shell Oil Co. v. US, the Court of Federal Claims held on February 8 that the “Taxes” clause found in World War-II era contracts authorizes the recovery of environmental remediation required under CERCLA, which was passed in 1978.  The clause at issue provided that the Government would pay any “new or additional taxes, fees or charges” incurred by the contractor by reason of performing the aviation gasoline production contract in support of the war effort.

The passage of CERCLA obligated the contractor to clean up the site used to dump a byproduct of the gasoline production process.  The cost of the remediation, the court held, fell within the meaning of “charges” under the “Taxes” clause and its recovery was precluded by neither the passage of time nor the Anti-Deficiency Act.

Authored by:

Aleksander Lamvol

(202) 218-0006

alamvol@sheppardmullin.com

Performance-Based Payment (PBP)

PBP is a contract financing technique pursuant to which payments are based on specifically described events, or measurable criteria of performance, other than the signing of the contract or modification, the exercise of options, or the passage of time.  Effective January 25, 2008, COs may use PBPs when the parties agree to the PBP terms, the contract or line item is fixed price, and the contract does not provide for progress payments.  PBPs are prohibited for cost-type line items and contracts awarded through sealed bidding.  PBPs are not limited to actual incurred costs, but the Government must be able to verify that the payment criteria have been successfully met.  FAR Case 2005-016.

Allowable Airfare

The FAR Councils are proposing to amend the limitation on the allowable airfare costs set forth in FAR 31.205-46, which currently limits such costs to "the lowest customary standard, coach, or equivalent airfare offered during normal business hours."  The proposal would delete the word "standard" since it does not refer to an existing class of service.  The proposal would also “clarify” that the airfare at issue is the lowest airfare available to the contractor, as opposed to that available to the general public.  This proposal is hardly a clarification and, if adopted, would be extraordinarily difficult to implement and should be expected to spawn numerous disagreements with respect discount and rebate agreements negotiated between contractors and airlines.  Companies with multiple airline agreements would need to reconcile the fare against each of those agreements.  Companies with flight-by-flight discount agreements might find themselves disadvantaged cost-wise in comparison to contractors whose travel discounts are triggered by periodic volume traffic that results in one-time, lump sum rebates.  The proposed rule does not come to grips with such disparate circumstances or the potential inequities inherent in the application of the rule to those differing circumstances.  Comments on the proposed rule are due February 19, 2008.  FAR Case 2006-024.

Authored by:

John W. Chierichella

202.218.6878

jchierichella@sheppardmullin.com

and

Aleksander Lamvol

202.218.0006

alamvol@sheppardmullin.com