Government Contracts Legal Forum : Government Contracts Lawyers & Attorneys for Litigation & Counseling

A recent settlement by a construction company highlights the need for government contractors to ensure compliance with small business subcontracting requirements. Federal contractors with contracts over a certain size have long been required to put in place and implement a plan to subcontract a certain percentage of work to small and disadvantaged businesses. While the procurement regulations provide for liquidated damages where a company fails to make a good-faith effort to comply with its approved plan at FAR 19.705-7, the government has, until now, not focused its enforcement efforts on small business subcontracting compliance. This recent settlement (see press release), which has not yet been filed with the court, suggests that may change (the U.S. Attorney’s Office for the Eastern District of New York has said a civil complaint that mirrors the non-prosecution agreement will be filed next week) .

According to public reports, between 2002 and 2007 former employees of Schiavone Construction Company falsely certified they were using minority subcontractors on major public works projects in New York City. Those federally-funded public works contracts required Schiavone to use good-faith efforts to retain a certain percentage of disadvantaged and women or minority-owned subcontractors. Some former employees reportedly filed false reports with the Metropolitan Transit Authority and New York City’s Department of Environmental Protection claiming a certain percentage of that work had been performed by qualified subcontractors.

The government launched both criminal and civil probes. The investigations were resolved by a nonprosecution agreement, which reportedly requires Schiavone to pay $20 million, hire an ethics and compliance officer, designate a dedicated minority contractor compliance employee, assist the government in its continuing investigation, and discharge employees involved in the false reporting. The contractor was also required to reimburse the MTA’s Inspector General and the New York City Department of Investigation for investigation costs of $2.4 million.

Combined with the federal Small Business Administration’s increased scrutiny of prime contractor compliance with limitations on subcontracting requirements and willingness to suspend or debar non-compliant contractors, matters previously discussed on this blog, the investigation into Schiavone’s small business subcontracting practices provides further confirmation that government entities, both state and federal, are paying increased attention to compliance with small business contracting requirements. We will continue to monitor and report on these developments in the coming weeks.
 

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Due to the scrutiny and criticism DCAA received from the Government Accountability Office in 2008 and 2009, DCAA took a number of steps to address the problems identified by GAO, many of which were intended to address the finding that DCAA auditors lacked independence. The emphasis in resulting DCAA audit guidance on auditor independence has created consternation both within the contracting community and among DCAA auditors as familiar avenues of communication among contractors, auditors, and contracting officers appeared to be shut down and fundamental questions were raised: Could an auditor have an entrance or exit conference with a contractor? Could a contractor have discussions with the auditors about an on-going audit?   Could a contracting officer invite an auditor to attend a pre-proposal conference with the contractor?

This fall, DCAA released its Audit Guidance on Auditor Communications (“The Rules of Engagement”) (.pdf) in an apparent effort to address concerns about the extent and nature of communications that are permissible and do not affect auditor independence. This guidance addresses auditor communications in all stages of an audit. Key guidance includes the following:

• Auditor communication with the contractor and contracting officer is consistent with GAGAS (Generally Accepted Government Auditing Standards), essential to conducting a proper audit, and does not necessarily result in impairment of auditor independence.
• Auditor participation in pre-proposal meetings does not, per se, impair independence, and while auditors cannot advise the contractor on how to develop its proposal, they can advise what the proposal should contain to be considered adequate.
• An entrance conference should be held with the contractor, in which an explanation of the purpose and overall plan for conducting the audit should be provided. 
• During the audit, the auditor should discuss matters with the contractor to gain a full understanding of the contractor’s basis for each area under audit, and should discuss preliminary audit findings to ensure conclusions are properly based on all pertinent facts.
• An exit conference should be held with the contractor to discuss the audit results and obtain the contractor’s reactions and responses to the audit findings. Except for certain types of audits involving costs subject to negotiation, auditors should provide the contractor with a copy of the draft report, or at least the “results of audit” section of the draft report.

Fundamentally, this guidance recognizes the importance of ensuring that auditors understand the contractor’s submission, the pertinent facts, and the contractor’s viewpoints. Further, auditors must understand the scope of the audit requested by the contracting officer and ensure the contracting officer understands the audit protocol to be followed and the resulting audit findings. To achieve all of this, there must be substantive and regular communication among DCAA auditors, contractors, and contracting officers. 

Whether this guidance will be followed by DCAA to its fullest extent remains to be seen, particularly given the agency’s current heavy audit load and overburdened resources. However, contractors should be aware of this guidance and press DCAA to engage in communication to the fullest extent possible.

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Jonathan Cone and Robert Rhoad contributed to this blog post.

Did you hear that?  It was a collective sigh of relief from companies contracting with the federal government thanks to the U.S. Court of Appeals for the Fifth Circuit’s decision in United States ex rel. Steury v. Cardinal Health, Inc. In Steury, the Fifth Circuit found that a company that contracts with the government cannot be punished under the False Claims Act – the government’s primary anti-fraud statute, and a potent one at that – by merely violating a contractual provision or federal statute or regulation. (N1)  To be liable under the FCA, the court wrote, a company must falsely certify compliance with a contractual provision, statute, or regulation that is a prerequisite to payment.  Unless the government’s payment was conditioned on adherence to a specific provision, statute or regulation, the “crucial distinction” between punitive FCA liability and ordinary breaches of contract would be lost.

To read more, please visit The Washington Legal Foundation blog.

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A recent GAO report highlights the fact that when a solicitation and procurement strategy prioritize (1) capabilities and the quality or level of service to be procured over (2) the dollars to be paid, government contracting, project, and source selection personnel are forced to earn their paychecks.  In these situations, two or more proposals, with potentially vast differences, must be comparatively analyzed for overall and incremental value, with solicitation requirements serving as a baseline, and government employees must decide which proposal provides the best value to the government.

On October 28, 2010, GAO followed through on the mandate in Section 845 of the National Defense Authorization Act for Fiscal Year 2010 and reported on the Defense Department's use of the best value tradeoff process in source selections during March through October 2010.  GAO focused on difficulties and challenges faced by government officials in making and supporting source selections when factors other than cost or price (e.g., technical approach, past performance, small business utilization) are designated as having more importance, when combined, than cost or price factors.  DOD relies heavily on this approach in situations involving high-dollar, competitive contract awards.  The GAO report notes that government used this approach 95% of the time during FY 2009 in situations involving competitively awarded contracts involving an obligation of $25 million or more.

In theory, the government's use of a best value tradeoff analysis should provide the critical element of flexibility to decision makers.  That is, the decision to pay Contractor A a higher price for good and services than that offered by Contractor B is an acceptable one, if doing so yields the best value to the government.

In practice, the use of a best value tradeoff process places government officials in the position of having to exercise business judgment.  And, perhaps most important, the process forces the government to articulate and document its reasons, with very specific references to information gained from offerors during source selections, for deciding that the government's best interest are served by paying either (1) more dollars for more capability or service, or (2) less dollars for less capability or service.  Interestingly, GAO found that DOD officials selected the lower priced option nearly as often as it selected the highest rated, but more costly, proposal.

GAO's report underscores the importance of growing a DOD Acquisition Workforce (including 6,400 anticipated new hires over the next few years) that has the guidance, skills, and business judgment to maneuver the best value tradeoff process properly and successfully.  And GAO would know, considering the continuing failures by the federal acquisition workforce to perform tradeoffs and determine best value.  Here are two recent examples.

This past summer, in Powersolv, Inc., B-402534, Jun. 1, 2010, 2010 U.S. Comp. Gen. LEXIS 234, GAO sustained a protest because the Federal Railroad Administration utterly failed to engage in a tradeoff process when it selected for award the proposal of a higher priced, higher rated proposal for database support services.  After the protestor pointed out that no tradeoff analysis was done to justify payment of a 10% price premium, the agency scrambled unsuccessfully to find documents that would have shown consideration, with specifics from features of contractor proposals, of whether the higher price was worth it.

Likewise, in Systems Eng'g Int'l, Jul. 20, 2010, 2010 CPD ¶ 167, GAO sustained a protest in a procurement for power system maintenance services because EPA took an unacceptable short-cut in the best value tradeoff process and only considered the top two qualitatively rated offers out of ten received.  In this instance, EPA failed to consider the lower priced offers.  GAO noted that, even though the protester's offer was marked low as "Marginal" in non-price factors under consideration, the offer nonetheless should have been considered in the best value tradeoff process, because it was the least expensive quote.

These decisions, and GAO's recent report, suggest that the federal acquisition workforce is going to continue to be held accountable for the best value decisions it makes and that it may well be money well spent for the government to devote more significant resources to hiring individuals with the sound business judgment and experience required to make effective best value tradeoff decisions for major acquisitions.

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Last week showed that U.S. Government contracting in Afghanistan is more problematic than ever. According to an October 27 audit report by the Special Inspector General for Afghanistan Reconstruction (SIGAR), U.S. government agencies, including DOD, State, and USAID, have paid nearly $18 billion to roughly 7,000 contractors for reconstruction work in Afghanistan; however, SIGAR is unable to determine who is being hired for what or the financial mechanisms used. Earlier this year, SIGAR was itself audited and got a failing grade on management and standards. Contractors, too, are reportedly failing according to another October 27 SIGAR audit showing that several Afghan National Police facilities recently built by U.S. Army Corps of Engineers contractors were so poorly constructed that they are unusable. All of this is likely to translate into more scrutiny for companies doing reconstruction work--assuming they are not forced out by President Karzai's imminent ban on security contractors first.

President Karzai has yet to bow to international concerns regarding his intention to oust all security contractors, but he has relaxed his original December 17 deadline for their expulsion. On October 27, he announced that a special committee--led by the Ministry of Interior and including representatives of NATO and international donors--would prepare a timetable by November 15 for disbanding companies that guard development projects. Once each company is told its dissolution date, it will have up to 90 days to move out. Details are still sketchy, however, and the plans are likely to evolve significantly over the coming weeks. 

Several development contractors are saying that, without security contractors, they will have no choice but to leave because there simply are not enough Afghan police or military officers to provided needed protection. Those that do leave may be faced with contract termination and a host of related legal consequences. Those that stay may have contract claims, tort claims, and Defense Base Act issues to contend with. Either way, the security, political, and legal environment for Afghan reconstruction contractors is fraught with practical and legal risk.

Watch this space for news about an upcoming Crowell & Moring event on these topics, featuring Ambassador Zalmay Khalilzad.

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