Raising the Bar: New Report Shows an Increase in Suspension and Debarment Actions

This post was written by Lorraine M. Campos and Carlos A. Valdivia.

On March 31, 2015, the Interagency Suspension and Debarment Committee (“ISDC”) released its report to Congress detailing federal suspensions and debarment actions for fiscal year 2014. From 2013 to 2014, federal agencies in aggregate increased their use of exclusion actions. The number of persons and entities proposed for debarments jumped from 2,229 to 2,241, and suspensions increased from 887 to 1,009. Even after considering the ISDC’s counting conventions, the numbers show an upward trend in agency enforcement.

Although the ISDC notes that the overall number of suspensions and debarments is not a measure of success, the increase in enforcement correlates with the improvement of agency suspension and debarment programs. The ISDC report cites the Government Accountability Office’s findings, which indicate newly active suspension and debarment programs within six agencies. Intra-agency referrals to suspending and debarring officials are more effectively supported now than they have been in the past.

The ISDC also articulated the steps it plans to undertake to strengthen agency suspension and debarment programs, including:

  • Adding a third vice chair to the ISDC to increase agency involvement
  • Liaising with the Council of Inspectors General for Integrity and Efficiency
  • Emphasizing training on suspension and debarment practices, with a view toward promoting greater procedural consistency
  • Helping agencies consider the use of administrative agreements, as an alternative to suspension and debarment
  • Making outreach efforts with congressional staffers, industry, academia, and public interest groups
  • Improving ISDC’s new public website

Given these trends, federal contractors should ensure that their compliance efforts meet the pace of enforcement. The full report is available here.

Reed Smith's Government Contracts Weekly Rundown

This post was written by Nkechi A. Kanu.

Here is a rundown of last week’s top developments related to government contracts to get you back on track and ready for this week.


On April 1, the Securities and Exchange Commission (“SEC”) settled its first enforcement action against a company for violating whistleblower protections by including restrictive language in confidentiality agreements used in its internal investigations.


The U.S. Department of Labor is extending the comment period for its proposed rule governing the obligations of federal contractors and subcontractors not to discriminate on the basis of sex in their employment practices.


The Chief Acquisition Officers Council, HHS, and GSA are conducting a national dialogue to discuss ideas on how to reduce the costs associated with reporting compliance under federal awards (contracts, subcontracts, grants, cooperative agreements).


The Federal Election Commission seeks comments on a public Petition for Rulemaking to amend the Commission’s regulations regarding political contributions, to include certain factors for determining whether entities of the same corporate family are distinct business entities for purposes of the prohibition on contributions by federal contractors.

Reed Smith's Government Contracts Weekly Rundown

This post was written by Nkechi A. Kanu.

Here is a rundown of last week’s top developments related to government contracts to get you back on track and ready for Monday.


U.S. Customs and Border Protection issued a final determination, finding that downloading an operating system into a laptop that was manufactured and assembled in a non-TAA-designated country was not enough to change the computer's country of origin for purposes of U.S. government procurement.


The Armed Services Board of Contract Appeals ruled that the United States must repay an Afghan contractor for cash payments that were stolen after the Army gave them to an unauthorized apparent agent of the company. Appeal of Seven Seas Shipchandlers, LLC. 


The Office of Federal Procurement Policy issued guidance last week for Acquisition 360, a feedback tool to help OFPP and agencies evaluate and improve their acquisition procedures from pre-award activities to contract award and debriefings.


President Obama signed an executive order Thursday that requires federal agencies to cut their greenhouse gas emissions by 40 percent by 2025, and introduces expanded and updated federal environmental performance goals to help cut greenhouse gas emissions across the government and the federal supply chain.


The Office of Acquisition Policy is requesting feedback on a proposed class deviation to the Federal Acquisition Regulation (FAR) and the General Services Acquisition Regulation (GSAR) to address common Commercial Supplier Agreement terms that are inconsistent with or create ambiguity with federal law.

Reed Smith's Government Contracts Weekly Rundown

This post was written by Nkechi A. Kanu.


On Tuesday, March 10, 2015, the Court of Appeals for the Federal Circuit reversed and remanded a decision by the Court of Federal Claims, which permitted the Centers for Medicare and Medicaid Services (“CMS”) to include contract clauses that deviated from federal government commercial contracting rules.


According to a report released by law firm Bass Berry & Sims PLC, the federal government netted nearly $2.3 billion from recoveries under the False Claims Act related to federal healthcare programs.  


The Court of Federal Claims affirmed the dismissal of protests over two government contracts for federal offender rehabilitation services, finding that the protester did not have standing because it never submitted an acceptable bid and didn't formally protest the terms of the solicitations.


The U.S. Small Business Administration (SBA) is reopening the comment period for a proposed rule that implements provisions of the National Defense Authorization Act (NDAA) of 2013, which pertains to performance requirements applicable to small business and socioeconomic program set aside contracts, small business subcontracting, the non-manufacturer rule and affiliation rules.


NASA has adopted, without change, an interim rule amending the NASA FAR Supplement (NFS) to implement Contractor Whistleblower Protections.

The Big Bad Price Reduction Clause Might Be On Its Way Out: GSA Proposes New Rule Replacing Customer Tracking Requirements With Price Paid Reporting Requirements

This post was written by Lorraine M. Campos, Leslie Monahan, and Paula Salamoun.

Government contracting is not for the faint of heart when it comes to compliance woes. Private companies looking to do business with the government face a regulatory maze so great that it may inspire references to Greek mythology, labyrinth and all. Few contract clauses reflect this sentiment of compliance pitfalls better than the General Services Administration’s (GSA) Price Reduction Clause (PRC) – a provision found in all Federal Supply Schedule (FSS) contracts that essentially restrains a contractor from providing its customers with a discount that it did not also provide to the government. Penalties for PRC violations have reached in the millions of dollars and have resulted in lengthy False Claims Act litigation.

As big a stick as the PRC might be for federal agencies, at least some in the government believe that the time for change is now. On March 4th, the GSA announced a proposed rule that would replace the PRC with a new reporting requirement that the GSA believes will provide a more effective model for ensuring fair and reasonable prices. Vendors involved in federal procurement should stay abreast of this development as it may bring new and critical reporting requirements for federal contracts.

PRC’s Basis of Award Structure

The PRC mandates certain disclosure requirements and creates a complex pricing relationship between the contractor, the government agency, and the contractor’s private customers. This underlying relationship is known as the basis of award. GSA awards a contract to a company based on the price discount it will receive relative to the price discount given to the company’s Most Favored Customer (MFC). In other words, when GSA awards a contact, the award is based on the the price given to the vendor’s MFC who makes purchases under similar conditions (e.g., same items, similar quantities) as GSA.

Under the PRC, vendors must monitor their pricing over the life of the contract. If the vendor increases the price discount it gives to its MFC, the company must generally do the same for the agency. In addition to the basis of award tracking requirement, the PRC also allows vendors to voluntarily offer—and for agencies to request—a price reduction any time when lower prices are being offered to the MFC.

Out With the Old, in With the New

GSA now proposes a new contract clause that would require vendors to report transactional data from orders and prices paid by ordering activities. GSA’s potentially game-changing move appears to stem, at least in part, from the Office of Federal Procurement Policy (OFPP) initiative to streamline and simplify the federal contracting marketplace through “category management.” We previously blogged about the OFFP’s effort here.

Category management describes a process whereby purchases are grouped by categories governmentwide and expert category managers will oversee the categories and share information across agencies. In similar fashion, GSA’s new rule requires contractors to report prices paid for products and services delivered during the performance of the contract, including under FSS orders and blanket purchase agreements (BPAs) through a new online reporting system. This mandatory report would include transactional data elements such as unit measure, quantity of items sold, universal product code (if applicable) prices paid per unit, and total price.

According to GSA, the prices paid for information will help cure inefficiencies in the current procurement system, particularly where prices paid have significantly varied across agencies for duplicate purchases. GSA believes this clause will be especially impactful when combined with the market expertise provided to agencies through the category managers.

Proposed Rule Will be Phased in for FSS Contract and Immediately Applicable to GWACs and IDIQ Contracts

If passed, the proposed rule will apply as GSA’s Governmentwide Acquisition Contracts (GWACs) and Governmentwide Indefinite Delivery Indefinite Quality (IDIQ) contracts immediately. FSS contracts, on the other hand, would phase in the new clause beginning with select products and services. Through the FSS pilot phase, vendors will not have to report on the PRC basis of award tracking requirement. The proposed changes will not apply to the Department of Veterans Affairs FSS contract holders.

GSA will use the FSS pilot phase to study whether its proposed transactional-based method provides a more effective pricing model than the basis of award. Not wanting to completely shut the door on the PRC, GSA does state that should the pilot program reveal that the proposed method is not as effective, GSA will reinstitute basis of award tracking requirements. More information on the scope of the pilot program can be found here.

Notice of a Public Meeting and Request for Comment

GSA contractors should take advantage of the opportunity to comment on the potential administrative impact of this proposed rule. A public meeting will be held on Friday, April 17, 2015, at 9:00 a.m (EST) in Washington, D.C. and written comments can be submitted on or before Monday, May 4, 2015 to be considered in the formulation of a final rule.

FAR Part 12 Applies to CMS Orders on Federal Supply Schedule Contract

This post was written by Lorraine M. Campos, Leslie Monahan and Nkechi A. Kanu.

On Tuesday, March 10, 2015, the Court of Appeals for the Federal Circuit reversed and remanded a decision by the Court of Federal Claims, which permitted the Centers for Medicare and Medicare Services (CMS) to include contract clauses that deviated from federal government commercial contracting rules. By doing so, the Court of Appeals held that Federal Acquisition Regulation (FAR) Part 12 – Acquisition of Commercial Items – applies to Federal Supply Schedule (FSS) contracts.

Through a pre-award bid protest appeal, CGI Federal Inc. (CGI) challenged the payment terms of requests for quotes (RFQs) issued by CMS that were pursuant to an underlying FSS contract. Specifically, CGI alleged that CMS violated FAR Part 12 by including payment terms in an RFQ for commercial items in a manner that is inconsistent with customary commercial practice for the item being acquired. While the government did not dispute that FAR Part 12’s proscription against terms inconsistent with customary commercial practice applies to solicitations for the underlying FSS contracts, it argued that the proscription did not apply to orders made pursuant to existing FSS contracts.

Judge Williams of the Court of Federal Claims agreed with the Government and found that CMS’s inclusion of the new payment clause was permissible. The Court of Federal Claims reasoned that FAR Subpart 8.4, which governs the FSS program, does not expressly state that FAR Part 12 applies to orders made pursuant to an existing FSS contract or orders placed against it.

On appeal, the Federal Circuit disagreed. The Federal Circuit found that FAR Part 12’s proscription against terms inconsistent with customary commercial practices applied to the RFQ. While not explicitly stated in FAR Subpart 8.4, FAR Part 12, in fact, applies to orders made pursuant to existing FSS contracts by its terms. The Federal Circuit also stated that, to the extent there is any perceived inconsistency between FAR Subpart 8.4 and FAR Part 12, FAR Part 12 controls.


Reed Smith's Government Contracts Weekly Rundown

This post was written by Lorraine M. Campos, Leslie A. Monahan, and Nkechi A. Kanu.

Spring forward with a rundown of last week’s top developments related to government contracts.

1. Proposed Rule to Change Price-Reduction Clause

The General Service Administration (GSA) proposed a new rule to change the basis of award monitoring requirement of the existing price-reductions clause, resulting in a burden reduction for participating FSS contractors.

2. OFPP Takes Actual Steps to Improve Relationship with Vendors

The Administrator of the Office of Federal Procurement Policy recently released a progress report detailing the steps OFPP has taken to achieve a more innovative, effective and efficient acquisition system.

3. Contractor Overcharges D.C. Homeless Program

An audit report on Washington, D.C.’s homeless programs revealed that its main contractor used accounting practices that violate both city and federal law to overbill the city by more than $5.3 million.

4. VA Officials Illegally Shift Funds for Improper Purpose

The VA inspector general’s office found that two former heads of the VA’s Chief Business Office shifted $92.5 million in medical support money toward the development of a new claims-processing system.

5. DOD Rule Proposes Ban of Foreign Made Flags

A new rule proposed by the Department of Defense would bar the military from using department funds for “the purchase or manufacture of a flag of the United States, unless such flag is manufactured in the United States.”

6. Great News for Amtrak, House Passes $8B Funding Bill

The House passed legislation Wednesday authorizing nearly $8 billion in funding for Amtrak, and overhauling its procurement and accounting process.



Reed Smith's Government Contracts Weekly Rundown

This post was written by Lorraine M. CamposLeslie A. Monahan, and Nkechi A. Kanu.

In case you spent last week (this morning) dealing with winter weather instead of reading the latest and greatest in the realm on federal contracting, here is a rundown of last week’s top developments related to government contracts, to get you back on track and ready for Monday.

1. Senate Passes “Clean” Spending Bill To Avoid DHS Shutdown

On February 27, the U.S. Senate passed a $39.7 billion bill funding the U.S. Department of Homeland Security through 2015 after resolving an immigration-related impasse. The House voted Friday to approve a one-week stopgap spending bill for the agency. If a DHS shutdown occurs, contractors could face stop-work orders and late payments. 

2. Shipping Containers Did Not Comply with Trade Agreements Act

The Government Accountability Office denied a protest over a Defense Logistics Agency contract for shipping containers, finding that the protester did not offer a U.S.-made end-product in compliance with the Trade Agreements Act of 1979.

3. New Executive Order To Encourage Cybersecurity Information Sharing

On February 13, President Barack Obama signed an executive order encouraging more sharing of cybersecurity threat information between the private and public sectors. The order would promote the development of central clearinghouses for companies and the government to share data, and creation of centers where data can be shared across specific geographic regions.

4. Small Business Loses 8(a) Qualification Based on Company Ties

The Small Business Administration's Office of Hearings and Appeals affirmed SBA's disqualification of contractor from the agency's 8(a) business development program, finding that the agency had reasonable evidence that the company was too closely connected to another business to qualify.

5. DOD Should Streamline Its Decision-Making Process for Weapon Systems

The Government Accountability Office published a new report on Department of Defense acquisition reform, finding that DOD's information and documentation requirements often add significant time to the acquisition process, sometimes for little additional value.

6. SAIC Wins $62M Task Order for Navy Engineering Services

The U.S. Navy awarded a $62 million task order for architecture and systems engineering support to McLean, Virginia-based Science Applications International Corp. SAIC will provide mission engineering analysis, software and network engineering, reliability and systems safety assurances, and other tasks for the Navy’s Space and Naval Warfare Systems Command.

Federal Circuit: VA May Refuse to Set Aside Contracts for Veteran-Owned Contractors

This post was written by Lorraine M. Campos and Carlos A. Valdivia.

Back in 2013, we reported that the Department of Veterans Affairs (“VA”) is not required to give veteran-owned small businesses (“VOSBs”) or service-disabled veteran-owned small businesses (“SDVOSBs”) preference for all contracts.  In Kingdomware Technologies, Inc. v. United States (“Kingdomware”), the United States Court of Federal Claims accepted the VA practice of purchasing off the Federal Supply Schedule (“FSS”) without first considering set-aside contracts for VOSBs or SDVOBs.  Last month, the U.S. Court of Appeals for the Federal Circuit upheld the precedent-setting Kingdomware decision. The 2-1 decision explains why the VA can refuse to set aside contracts for veteran-owned contractors despite small business goals required by law.

The dispute revolves around section 8127(d) of the Veterans Act of 2006, which provides that a contracting officer of the VA shall award contracts to VOSBs if the contracting officer reasonably expects offers from two or more VOSBs. This “Rule of Two” is a form of restricted competition meant to give VOSBs an opportunity to compete for set-aside contracts,  but veteran-owned status does not guarantee an award. Section 8127(d) expressly prefaces that contracting officers “shall” award contracts using the Rule of Two “for the purposes of meeting the goals under subsection (a) [i.e., the VA’s goals for participation in VA contracts by VOSBs and SDVOSBs].” The Federal Circuit held that this statutory language clearly expresses Congress’ intent to require restricted competition only when necessary to meet set-aside goals, and that the VA’s decision was entitled to Skidmore deference. The Rule-of-Two mandate cannot be divorced from the VA’s goal-setting authority.

As Judge Reyna points out in his dissent, however, the court may be giving too much weight to the prefatory language in section 8127(d), and the use of the word “shall” could require use of restricted competition under the Rule of Two. Ignoring the mandate in section 8127(d) expands the VA’s discretion when it comes to applying Rule-of-Two analyses, potentially undermining congressional intent. Moreover, the VA’s regulations do not use the prefatory language tying mandatory set-asides to goal-setting, other than in the non-controlling preamble to the regulations. In effect, the majority’s decision gives the VA the discretion to ignore mandatory set-aside requirements once it meets its small business contracting goals.

What does this mean for veteran-owned contractors? That veteran-owned status is no guarantee of a set-aside award, at least not where the VA is concerned.

The opinions can be read here (PDF). The case is Kingdomware Technologies, Inc. v. United States, No. 2013-5042, before the U.S. Court of Appeals for the Federal Circuit.

And the Government Strikes Again: New Proposed FAR Rule To Expand Reporting of Nonconforming Items

This post was written by Lorraine M. Campos & Leslie A. Monahan.

A month after the U.S. Department of Defense issued a final rule (“DoD rule”) that impacted the defense supply chain by requiring certain contractors to detect and report counterfeit electronic parts (discussed here), the Federal Acquisition Regulation (“FAR”) Council published a new proposed rule to greatly expand counterfeit reporting obligations.  The proposed rule sets forth sweeping requirements for contractors and subcontractors to report nonconforming items.

Unlike the DoD rule, which is specific to electronic parts and CAS-covered contractors, the proposed rule extends beyond electronic parts and specific contractors.  Because the problem of counterfeit and nonconforming parts is far-reaching and can impact the mission of all government agencies, the proposed rule is designed to effect all contracts for acquisition of supplies or services that include supplies. 
Under the proposed rule, contractors and subcontractors at all tiers must screen the Government-Industry Exchange Program (“GIDEP”) as part of their quality control processes.  Further, the proposed rule requires reporting in GIDEP of any items purchased that (1) are “counterfeit,” “suspect counterfeit,” or contain “major nonconformance” or “critical nonconformance”; (2) are “common items”; and (3) constitute a “quality escape” that has impacted more than one customer.  In addition, contractors must notify Contracting Officers, in writing, when they become aware that “any end item, component, subassembly, part or material contracted in supplies purchased by the government” is counterfeit or suspect counterfeit.

While it may be challenging for contractors to argue against the reason for the rule, they should request clarity on and some easement of the burden of this regulation. For example, while the proposed rule provides definitions, whether an item meets the criteria for reporting is in the eye of the beholder.  One contractor may view a nonconformance as “major” for its purposes, while another may view a nonconformance as not triggering reporting as it applies to the specific project at hand. 

Another example of how the proposed rule could become more manageable concerns reporting counterfeit or suspect counterfeit items.  Under the proposed rule, contractors with multiple contracts would need to report to every Contracting Officer.  Contractors who would find this exercise to be a large administrative burden may want to request that the government utilize a more centralized procedure to address this issue.

Written comments on the proposed rule are due by August 11, 2014.  We expect and encourage government contractors across industries to request a less broad and burdensome application of the proposed rule.

Down We Go: Final Rule on Counterfeit Electronic Parts Extends Down the Supply Chain

This post was written by Leslie A. Monahan and Lorraine M. Campos.

The U.S. Department of Defense (“DOD”) recently issued a final rule that will significantly impact the defense supply chain.  The new rule, effective May 6, 2014, implements the provision in Section 818 of the fiscal year (FY) 2012 National Defense Authorization Act (“NDAA”) related to the use of counterfeit electronic parts in DOD products.  Specifically, the final rule imposes new obligations that place the responsibility of detecting counterfeit electronic parts on contractors and compliance to those further down the supply chain.

Contractors that are subject to full or modified coverage under the Cost Accounting Standards (“CAS”) (“covered contractors”) must comply with the final rule.  In addition, all subcontractors to covered contractors, regardless of their own CAS coverage or size status, are subject to the new regulations.  Further, since the final rule applies to commercial items and commercial-off-the-shelf (“COTS”) items subcontracted to covered contractors, suppliers of COTS items in the supply chain must also comply with the new regulations.

Under the final rule, covered contractors must establish a counterfeit part detection and avoidance system when the government acquires goods and services that involve electronic parts.  While last year’s proposed rule made contractors aware of these new responsibilities, the final rule incorporates many substantial alterations requested by industry.  Specifically, significant changes made in the final rule include:

  • Limiting the Scope to “Electronic” Parts:  DOD clarified that the final rule only applies to counterfeit electronic parts, suspect electronic parts, and obsolete electronic parts, and does not expand to other items in the DOD supply chain. 
  • Including an Intent Element:  A counterfeit electronic part is now defined as one that has been “knowingly mismarked, misidentified, or otherwise misrepresented,” which mitigates strict liability for instances where errors could have occurred that were not intended to mislead buyers.
  • Using Risk-Based Approach: Covered contractors have some flexibility in designing their counterfeit electronic part detection and avoidance systems, and are not required to follow a “one size fits all” approach.  The DOD expressly acknowledged that contractors may adopt “risk-based policies and procedures” for their systems, as long as 12 specific areas of criteria are addressed, including but not limited to: training, inspection, traceability and reporting.
  • Adopting a Reasonable Standard for Identifying Counterfeit Electronic Parts: DOD instituted a “credible evidence” standard to determine suspected counterfeit electric parts.  While contractors now have the ability to determine whether there is “reasonable doubt that the electronic part is authentic,” this opportunity may provide more obstacles for contractors, given the uncertainty that may result from an undefined standard.

Despite these requested changes, many burdensome aspects of the proposed rule remain unchanged.  Most importantly, the new counterfeit part detection and avoidance obligations will be flowed down the supply chain.  Also, compliance with the new regulations will become part of the existing requirements for a covered contractor’s purchasing system.  Failure to comply may result in disapproval of the system by the contracting officer and/or a withholding of payments.

Because the new rule is effective immediately, its provisions will be included in newly awarded contracts to covered contractors.  Further, the government will likely try to incorporate the new clauses into existing contracts through modifications.  For these reasons, covered contractors, subcontractors and suppliers of electronic parts involved in the DOD supply chain should start reviewing their current policies and procedures to determine if they are in compliance with the requirements of the final rule. 

Equal Opportunity Flowdown Changes - Coming Soon to a Contract Near You!

This post was written by Lorraine M. Campos and Erin Felix.

On March 24, 2014, the Department of Labor’s revised Vietnam Era Veterans' Readjustment Assistance Act of 1974 (“VEVRAA”) regulations take effect. Among various changes to the existing rules found at 41 C.F.R. Part 60-300, including establishing veteran hiring benchmarks, posting open jobs, and collecting quantitative recruiting data, federal government contractors with covered prime contracts will now be required to implement specific, mandated flowdown language when incorporating VEVRAA’s equal opportunity clause; merely referencing the equal opportunity statues and regulations alone will no longer be sufficient.

The Final Rule modifies 41 C.F.R. § 60-300.5(d) to require that the following language be included, in bold text, in all covered contracts and subcontracts following the citation to 41 C.F.R. § 60.300.5(a):

This contractor and subcontractor shall abide by the requirements of 41 CFR 60-300.5(a). This regulation prohibits discrimination against qualified protected veterans, and requires affirmative action by covered prime contractors and subcontractors to employ and advance in employment qualified protected veterans.

Since the Department of Labor recognizes that federal contracts are required to contain multiple equal opportunity clauses pursuant to various provisions of 41 C.F.R., the Agency allows contractors to combine all of their required equal opportunity flowdowns into a single provision. The Agency’s VEVRAA Frequently Asked Questions website provides an example of such a combined clause:

This contractor and subcontractor shall abide by the requirements of 41 CFR §§ 60-1.4(a), 60-300.5(a) and 60-741.5(a). These regulations prohibit discrimination against qualified individuals based on their status as protected veterans or individuals with disabilities, and prohibit discrimination against all individuals based on their race, color, religion, sex, or national origin. Moreover, these regulations require that covered prime contractors and subcontractors take affirmative action to employ and advance in employment individuals without regard to race, color, religion, sex, national origin, protected veteran status or disability.

The Final Rule states that this new flowdown requirement applies to all covered contracts and subcontracts valued at or above $100,000 that are entered into after March 24, 2014, the effective date of the rule. However, the regulation does not automatically apply to existing contracts. It is not until a new contract has been issued or an existing contract has been modified – for any reason – that the contract then becomes a covered contract. For example, if a $100,000 contract exists on March 24, the requirement does not immediately take effect. But if that contract is modified on March 25 for any reason (e.g., solely to add funding), the contract is now a covered contract subject to the new VEVRAA regulations. Thus, contractors are not required to proactively implement the new subcontract clause prior to March 24, 2014. Instead, the clause must be incorporated into any new covered subcontract or subcontract modification issued after March 24, 2014.

While the regulations do not outline specific sanctions or penalties for contractors who fail to comply, the Department of Labor website notes that violations of VEVRAA may result in cancellation, suspension, or termination of contracts, withholding of progress payments, and debarment. The sanctions for violating a mere administrative provision of the statute are likely to be less severe than a substantive compliance violation, but could still potentially result in a contract breach allegation.

Finally, it is important to note that the VEVRAA statute and regulation expressly provide that the equal opportunity clause shall be considered to be a part of every applicable contract and subcontract, whether or not it is physically incorporated in such contract and whether or not there is a written contract between the agency and the contractor. Thus, to the extent that a contractor enters into Federal contracts, subcontracts, or associated modifications after March 24, 2014, the new flowdown requirements will apply regardless of whether they are properly incorporated.

Lessons Learned: 3 Important Takeaways from the Recent Boeing Termination Settlement Appeal Decision

This post was written by Erin Felix.

On December 3, 2013, the Armed Services Board of Contract Appeals (“ASBCA”) issued its decision in Case No. 57409, a termination for convenience settlement appeal by the Boeing Company. The ASBCA held that Boeing’s financial recovery from the U.S. Air Force was capped by the presence of FAR 52.232-22, the Limitation of Funds (“LOF”) clause, in Boeing’s contract. At a macro level, this holding is not surprising since the language of the LOF clause expressly limits the government’s liability to the funded value of the contract. However, the facts of the case suggest that multiple, compounding factors – which are often present in dynamic program environments – ultimately led to Boeing exceeding the funding limit. In reviewing this dispute, contractors should take away the following three key lessons as they navigate the day-to-day performance of their programs.

Lesson #1: You are Only Entitled to What the Actual Contract Provides. The government issued its termination for convenience approximately four years into Boeing’s period of performance. At the time of termination, Boeing had almost two years of performance remaining under its partially funded contract. Boeing and the government had previously “agreed in principle” that a new program estimate to complete (“EAC”) was required, and the parties were actively working to develop a new, increased budget. Despite this informal agreement, the ASBCA held that the government was only obligated to reimburse Boeing up to the funded limit stated in the contract. This dispute should serve as a warning to not rely on understandings or “agreements in principle” that contractors believe they have with the government, when the clear language of the contract states otherwise.

Lesson #2: Manage Your Prime/ Subcontractor Relationships Carefully. Multiple subcontractors, including Honeywell, performed large portions of Boeing’s contract. As part of the termination proceedings, Honeywell provided Boeing with a combined termination settlement and request for equitable adjustment (“REA”) proposal. The value of Honeywell’s proposal alone exceeded the value of remaining funds on Boeing’s contract. Since many critical details surrounding Honeywell’s subcontract and proposal were not discussed in the case, Boeing and Honeywell will likely be stuck negotiating a settlement in which one or both parties will not be made financially whole as a result of this decision. Contractors wishing to avoid similar situations should be hyper-aware of their subcontractors’ funding forecasts, and take proactive measures to manage their subcontractor agreements.

Lesson #3: Include Sufficient Termination Liability Funding Requirements in Your Program Funding Profile. Contractors are generally required to submit and maintain financial profiles that forecast funding needs over the life of incrementally funded contracts. These funding profiles should include a time-phased forecast of potential expenses in the event of contract termination. Such termination liability expenses include cancellation costs for supplier purchase orders, settlement expenses, and employee severance pay resulting from the termination. Accounting for termination liability costs does not increase the total value of the program. Rather, it shifts more funding to the front end of the contract, which decreases over time as the impact of a potential termination wanes. In Boeing’s case, the inclusion of sufficient termination liability funding may not have fully prevented Boeing’s funding shortfall because of the added EAC and REA circumstances. However, actively managing your funding profile to account for changing contractual and programmatic realities is a legitimate and critical way for contractors to protect themselves from adverse LOF impacts.

Contractors should view the Boeing decision as an opportunity to examine their current contracts for potential termination funding issues. In addition, contractors should consider the takeaways from this dispute when entering into contracts with the government and subcontractors in the future.

Prepare for Impact - The Executive Order Increasing the Minimum Wage for Federal Government Contractors is Imminent

This post was written by Lorraine M. Campos and Erin Felix.

During his 2014 State of the Union address, President Obama announced that he intends to use his executive power to increase the minimum wage for federal government contractors to $10.10 per hour.  The forthcoming Executive Order is expected to impose this wage increase on all new and renewed federal service and construction contracts after the Order’s effective date.  However, specific details regarding the Order’s contents are still under development by the White House.

An increase from the current federal minimum wage of $7.25 per hour will have varying effects on government contractors.  Twenty-one states, as well as the District of Columbia, currently have established minimum wage requirements greater than $7.25.  As a result, contractors in these areas will feel less of an impact than those in states with minimum wages at or below the current federal level.  Similarly, some contractors may already have self-imposed minimum pay rates that meet or exceed $10.10 per hour, and will not be affected by the mandate.  Contractors who will be affected, however, should be sure to consider the following direct and indirect effects to their existing workforce and contracts:

  • Personnel wages for all labor categories at and around the new minimum wage requirement.  The most direct and immediate impact to government contractors will be the requirement to increase the wages of any affected employees making less than $10.10 per hour.  An indirect consequence of this, however, is that contractors will likely need to also reassess and consider wage increases for employees who were previously paid at or slightly above $10.10 per hour.  If more senior or highly skilled employees are suddenly paid the same amount as their less qualified colleagues, employers will likely see an increase in employee turnover and a negative impact on morale.  Contractors who have unionized employees may also be required to renegotiate their collective bargaining agreements.
  • Impacts to negotiated government rate agreements and proposals in processContractors who have negotiated forward pricing or other rate agreements with the federal government will need to assess, propose, and negotiate the impact of their increased direct wages on such agreements.  Contractors may also be required to re-price proposals for new or renewed government contract bids in process, depending on how much lead time the Executive Order provides before the wage increase takes effect.
  • Effects on existing contracts containing future option years.  While the minimum wage increase will only directly apply to future new and renewed contracts, it may have a collateral impact to existing contracts with options that overlap with the new wage effectivity.  A contractor may have pre-existing contract options for future work based on today’s rates.  If this same contractor also intends to obtain new government contracts for the same or similar work after the new minimum wage becomes effective, the contractor will have to wrestle with how to handle having similarly qualified personnel being paid at differing rates.  If the contractor maintains disparate rates, employee morale and retention could suffer.  Conversely, the contractor could suffer significant financial impacts if it chooses to increase wages for personnel on the existing contract without the benefit of re-pricing its contractual compensation.
  • Subcontractor concerns.  Finally, contractors should be prepared for similar concerns to be voiced to them by their subcontractors.  Subcontractors who are paid on a fixed-price or time-and-materials basis will likely be more vocal regarding these issues because they will bear the impact of increased costs to perform.  However, contractors who compensate their subcontractors on a cost-reimbursement basis may also suffer, since such costs are passed through to the prime (and likely to the government) and create a greater risk of budget overrun.

Regardless of whether government contractors support or dislike the idea of increasing the minimum wage, the President’s Executive Order is imminent.  While many details remain unknown at this time, contractors should be proactive in assessing the potential impacts of the wage increase on their respective business operations, pricing practices, and current government contracts.  If it appears that current contracts will be impacted, contractors should begin a dialogue as soon as possible with their government contracting officers and internal suppliers to discuss how the impacts of the minimum wage change can be amicably resolved.

Small Businesses: You Left $3.8 Billion on the Table

This post was written by Carlos Aksel Valdivia.

Give small businesses a piece of the pie. That is the thrust of the U.S. federal statutory goal of awarding 23 percent of prime contract dollars to small businesses. Unfortunately, the Small Business Administration (SBA) reported earlier this month that the federal government missed its goal again in FY 2012, earning a “B” for its efforts.

By achieving 22.25 percent, the 0.75 percent shortfall appears inconsequential at first. However, when one considers the massive scale of federal contracting in America, coming up a little short means small companies losing big. In FY 2012, the U.S. federal government spent $517 billion on contracts. That is a $3.8 billion piece of pie that was left sitting on the counter.

Here is a simplified version of the SBA’s report card:

Strong Small Business
2012 Goal: 23.00%
Achieved: 22.25%

Women-Owned Small Business
2012 Goal: 5.00%
Achieved: 4.00%

Small Disadvantaged Business
2012 Goal: 5.00%
Achieved: 8.00%

Service Disabled-Veteran-Owned Small Business
2012 Goal: 3.00%
Achieved: 3.03%

2012 Goal: 3.00%
Achieved: 2.01%

As you can see, the federal government met some goals but not others. The numbers on the report card alone do not reveal whether this is a failure of government or something symptomatic of government contractors. It is probably some combination of the two.

Some agencies underperform and have greater difficulty meeting these goals. The same agencies complain there is a dearth of women-owned or small business contractors operating in their field. However, this May, the SBA announced in an interim final rule (PDF) that it would implement section 1697 of the National Defense Authorization Act for FY 2013, which removes the statutory limitation on the contract award size for which women-owned and economically disadvantaged women-owned small businesses could compete. With removal of the caps limiting the size of the contracts available to WOSB and EDWOSB companies, there should be more agency spending on that front. Nevertheless, federal contractors would do well to educate themselves on these set-aside programs and ensure that they are not leaving money on the table.

Going Once, Going Twice...Sold to the Lowest Bidder

This post was written by Lorraine M. Campos and Leslie A. Monahan.

Earlier this month, the General Services Administration (GSA) launched its new reverse auction tool for commonly purchased products on certain Federal Supply Schedules (FSS). GSA’s Reverse Auction Platform — reverseauctions.gsa.gov — is designed to drive down procurement prices and increase taxpayer savings. Specifically, reverse auctions are intended to make the buying of non-complex commodities and simple IT services more efficient and effective by having sellers undercut each other and drive down the total costs of acquisitions.

Treatment of reverse auctions for FSS contracts has been varied in the past. For example, in March 2012, the Department of Veterans Affairs (VA) issued a memorandum ordering its contracting officials to suspend the use of reverse auctions as a procurement method. However, a month later, the VA lifted its ban on reverse auctions with an internal memorandum that set forth new guidelines for this method of procurement. A little over a year later, 12 GSA Schedules and 6 VA Schedules have been approved to be operated through the new reverse auction platform.

GSA reverse auctions are offered to federal agencies free of charge through GSA’s National Information Technology Commodity Program (NITCP). These auctions can be used to facilitate the request for and submission of quotes, offers or proposals for products, services, and solutions through GSA Multiple Award Schedules (MAS) and Blanket Purchase Agreements (BPAs). In addition, certain auctions may be set aside for small businesses.

According to GSA, federal agencies have saved as much as 17% through the use of reverse auctions. GSA also stresses the fact that these types of procurement vehicles provide greater transparency into government negotiations and pricing. With statistics like this, we advise that contractors get acquainted with reverse auctions because this type of procurement is here to stay.

Trying to Put a Cap on It - Yet Again: Another Attempt to Limit Government Reimbursement of Contractor Executive Compensation

This post was written by Lorraine M. Campos, Christopher L. Rissetto and Leslie A. Monahan.  

Back in February 2012, the Obama Administration asked Congress to reform the current reimbursement formula for federal government contractor executives. Specifically, President Obama sought to cap the executive reimbursement at the same level as what the government pays its own executives – $200,000 per executive. Although last year’s request may have fallen on deaf ears, more than a year later, debate over reimbursement for executive compensation remains a hot topic.

The White House is once again pushing for lower contractor compensation caps. According to the Office of Management and Budget's newest blog post, the Obama Administration will ask Congress to tie the federal government contractor executive reimbursement limit to the president's annual salary, which is currently $400,000. OMB stated that this proposal “provides a reasonable level compensation for high value Federal contractors while ensuring taxpayers are not saddled with paying excessive compensation costs."

The Obama Administration understands that while the proposed limit saves taxpayers’ money, all contractor skills are not created equal and there may be appropriate reasons for exceeding the limit. Accordingly, the proposed new plan provides an exemption for allowing additional reimbursement when specialized skills must be utilized to support missions. Further, there would be no cap on what federal contractors could pay their own executives. Rather, the only restriction would be on what the government could reimburse federal government contractor executives.

Although the prior proposal failed to be made into law, there is still support for this issue in Congress – especially given the government’s current financial constraints. However, critics of the proposal remain on both sides. On one hand, organizations like the American Federation of Government Employees argue that this proposed cap does not do enough. Others, like the Professional Services Council, argue that if implemented, federal contractors will lose their ability to attract top talent and the government will ultimately suffer as a result. Only time will tell if the White House can claim success on this issue or if it will need to try yet again to put a cap on this reimbursement issue.

Defense Contractors Are Now Subject to Notice Requirements for Hacked Systems

This post was written by Gunjan Talati and Timothy Nagle.

The 2013 National Defense Authorization Act (“NDAA”) became the law of the land in early January. This NDAA contains a notice requirement that follows the government trend of the past few years of being required to tattle on yourself. Specifically, the NDAA directs the Department of Defense (“DoD”) to create notice requirements that mandate notification by “cleared” defense contractors to the government if covered networks are successfully penetrated.

A lot of uncertainty surrounds how the DoD will implement these notice requirements and exactly what they will cover. The NDAA explains that the Under Secretary of Defense for Intelligence (in conjunction with other enumerated officials) “shall establish the criteria for designating the cleared defense contractors’ networks or information systems that contain or process information created by or for the [DoD] to be subject to the reporting [requirements].” Thus, the NDAA gives the DoD significant discretion in determining what networks and systems will be covered, and whether unclassified networks and systems will be included.

The NDAA also gives the DoD broad discretion with the procedure for reporting, requiring only that the reporting be “rapid.” The NDAA does, however, outline certain elements a report must have, such as how the system was penetrated, and a sample of the malicious code if available.

The law also requires the DoD to establish a process that gives DoD personnel the authority to access “equipment or information of a contractor necessary to conduct a forensic analysis” to determine if any DoD information was “exfiltrated” by the hack. While the language of the statute appears to limit the access of the DoD to simply determining if information was “exfiltrated,” the actual procedures proposed by the DoD may be a different story. If the DoD drafts procedures that go beyond just determining what was “exfiltrated,” companies will have to grapple with a number of issues, such as the inadvertent release of trade secrets, DoD access to privileged records, and attorney/client communications. As is almost always the case, the true devil will be in the details.

Growing Trend Among States Threatens Debarment for Contractors with Iran Ties

This post was written by Gunjan Talati, Joelle E.K. Laszlo and Michael A. Grant.

Guilt by association seems to be a growing trend in government contracts. Under this trend, states are starting to use their contracting authority to promote U.S. foreign policy and impose mandatory debarment for policy violators. In the latest example, companies doing business with Michigan must now be sure to stay away from business dealings with Iran, or they could find themselves debarred from state contracts for three years.

Please click here to read the issued Client Alert.

Sequestration: From Remote Possibility to Inevitable

This post was written by Gunjan Talati, Christopher L. Rissetto and Robert Helland.

While the world did not end Friday, December 21, 2012, as some had feared, last Friday still struck terror in the hearts of many government contractors. That’s because last Friday, lawmakers and the president embarked on their recesses, leaving the budget talks unresolved, and sequestration—which mandates substantial reductions in government spending—intact. As we previously reported and given sequestration’s effective date of January 3, 2013, what was once thought of as a remote possibility now seems inevitable.

Government contractors that have previously ignored the hype about sequestration can no longer put off preparation in lieu of wishful thinking. A few key areas contractors should consider addressing now include:

  • Terminations for Convenience. Contractors, particularly defense contractors, should know and become familiar with the termination clauses in all government contracts. If a contract is terminated, contractors will have to follow the procedures of the relevant clauses, and prepare and submit detailed termination cost claims.
  • Subcontracts and Other Agreements. Cuts that impact prime contracts are inevitably going to impact subcontracts, joint ventures, etc. Contractors should review their agreements to see what their rights and duties are, as well as if modifications are necessary. For example, contractors with subcontracts that do not have termination for convenience rights should consider negotiating such a modification to the subcontract.
  • Bid Protests. As federal dollars dry up, contractors are likely going to fight more for the remaining amounts. Thus, contractors should be prepared to bring challenges on contracts lost, as another opportunity may not be around the corner. Additionally, given the strain budget cuts will have on agencies, winning contractors should consider intervening to assist an agency in defending its award.
  • Labor Issues. Drastic revenue drops as a result of sequestration may force contractors to lay off employees or shut down facilities all together. Contractors must ensure that they follow all relevant state and federal requirements, such as the Worker Adjustment and Retraining Notification (WARN) Act, which requires advance notice to workers.

With a little preparation, contractors can reduce some of the fear associated with sequestration.


Whistle While You Work: The Non-Federal Employee Whistleblower Protection Act of 2012

This post was written by Christopher L. Rissetto and Leslie A. Monahan

On September 13, 2012, Rep. Jackie Speier (D-CA), along with Rep. Todd Platts (R-PA), introduced the Non-Federal Employee Whistleblower Protection Act of 2012 (H.R. 6406). This legislation is designed to reduce fraud within the government and save taxpayer dollars by expanding the whistleblower-protections covering to federal contractors, subcontractors and grantees.

In its final report issued to Congress, the Commission on Wartime Contracting in Iraq and Afghanistan estimated that by 2011, as much as $60 billion had been lost to contractor fraud and waste in America’s operations in Iraq and Afghanistan. The sponsors of the bill believe that in order to prevent such gross waste from continuing, federal contractors and grantees need to report such wrongdoing with federal funds.

According to Rep. Platts, the proposed legislation would provide "meaningful protections for contract workers who have the courage to blow the whistle, at the risk of their own careers, on waste, fraud, and abuse within the government."

The bill is designed to help facilitate these types of disclosures by providing non-federal employees protection against forms of retaliation, including demotion, discrimination and discharge. Specifically, the legislation sets up a procedure for investigating claims of persons who reported wrongdoing and were subjected to reprisal. Under the proposed procedure, such individuals may submit a complaint regarding the reprisal to the appropriate agency inspector general ("IG"). The IG generally has 180 days to investigate and make a determination on the complaint, and must provide the person alleging the reprisal access to the investigation file. If the IG determines that evidence supports a prohibited reprisal, the claimant’s employer must abate the reprisal, reinstate the employee, or pay the employee the costs incurred in bringing the complaint. In cases where the reprisal was found to be willful or malicious, the employee may receive 10 times the amount of his or her lost wages and other compensatory damages.

The proposed bill has companion legislation (S. 241) in the Senate cosponsored by Sens. Claire McCaskill (D-MO), Jim Webb (D-VA), and Jon Tester (D-MT). The House hopes that its version will receive bipartisan support and will be passed sooner rather than later.


Suspensions & Debarment at an All-Time High With No End in Sight

This post was written by Gunjan Talati.

Suspension and debarment has long been a remedy available to the government to ensure that it only does business with currently responsible contractors. When a company is suspended or debarred, it is subject to a number of restrictions, primarily not being able to do business with the government as a prime contractor or subcontractor. For a company that does nothing but government contracts, this can be a substantial blow to business.

A new report from the Interagency Suspension and Debarment Committee reveals that the government has been using this powerful weapon in the war against contractor fraud. The report reveals that the number of suspensions and debarments is up from more than 1,900 in fiscal year 2009 to more than 3,000 in 2011. The Office of Federal Procurement Policy Administrator, Joe Jordan, is touting this as “significant progress in cracking down on bad actors.”

All government contractors should take notice of these increased numbers. They reveal a willingness of the government to employ suspension and debarment more routinely than in the past. This means that non-compliance with government contract terms or conditions that would have once been minor, could now be problematic. In one recent case, we represented a client that faced debarment because the company defaulted on a $20,000 task order. The government was concerned that this was the beginning of a pattern, even though the company had been successfully performing government contracts for a number of years without any issues.

In addition to taking notice, contractors should take a proactive approach to compliance. Contractors should routinely evaluate their compliance programs and make sure they are tailored to the company’s risk profile. Contractors should also make all required disclosures, including mandatory disclosures under the government’s mandatory disclosure regime. Finally, contractors should always consider approaching suspension/debarment officials first if there is any doubt about their current responsibility as a contractor. This could help prevent any formal action, and demonstrates to the government that the company does not want to be considered a “bad actor.”

New Proposed Rules Require Government Contractors to Safeguard Information Systems, but What do They Really Change?

This post was written by Timothy J. Nagle and Gunjan Talati.

On Friday, August 24, the Federal Acquisition Regulation (“FAR”) Council issued a proposed rule that adds a subpart and contract clause to the FAR that would force government contractors to implement basic information-systems safeguards for any non-public information that is provided by or generated for the government. While the proposed rule is intended to plug a hole in the FAR that does not currently require such safeguards, the draft of the rule is so broad that it is not clear what holes it will actually plug. Rather, what we do know is that it adds yet another FAR clause in government contracts to an already long list that companies will have to monitor for compliance. Comments to the proposed rule are due no later than October 23, 2012.

At the outset, we note that the proposed rule does not appear to change security standards. Rather, it appears to expand (without being sufficiently precise) the applicability of the standards. Specifically, the Federal Information Security Management Act (FISMA) of 2002, 44 U.S.C. 3544, states:

(a) In General.— The head of each agency shall— 
(1) be responsible for— 
(A) providing information security protections commensurate with the risk and magnitude of  the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of—
(i) information collected or maintained by or on behalf of the agency; and
(ii) information systems used or operated by an agency or by a contractor of an agency or other organization on behalf of an agency;  [emphasis added].

Thus, agencies already have a duty to identify possible security holes and mitigate risks.

The proposed rule does not change the FISMA requirements. Rather, the proposed rule seeks to “apply the following basic safeguarding requirements to protect information provided by or generated for the Government (other than public information) which resides on or transits through its information systems from unauthorized access and disclosure.”

While there is a definition for “information system” in the proposed rule, it is broad and encompasses just about any information that is not already public. The definition also fails to identify what a “Contractor” information system really is under the rule. There is no clear delineation in the proposed rule between an information system operated by a contractor on behalf of an agency and one operated by just a contractor.

Also, the rule does not supersede any specific safeguards spelled out in a contract. A government contract or statement of work will usually describe the technical requirements and boundaries of an information system required to provide the specified services, and a contractor can price the equipment, technical support and policy development into its bid. And most government contracts will require the contractor to maintain the system to government (FISMA) security standards and be subject to certification and accreditation with subsequent audits. This does not change, and therefore the rule may be of little practical value to contractors that already have such safeguards spelled out in their contracts.

One concern is that the proposed rule might be interpreted to mean that the corporate network of the contractor, which does not directly support any government contract work, is now subject to government standards, inspection and audit if it processes or stores any government information. This could potentially include contract invoices, reports, pricing information or any other documents and data required for contract administration. Without more clarity, no program manager or CIO will know the extent of potential government supervision of their corporate network. Such an interpretation would unnecessarily extend the reach of FISMA. The risk of such interpretations makes it likely this proposed rule will be challenged on several fronts.

If the rule is not challenged and implemented as drafted, contractors will need to ensure that their systems comply. Exactly what constitutes the appropriate basic safeguards would surely vary from company to company with few bright lines. Additionally, the government could take the position that a contractor’s safeguards do not meet the requirements of the rule and use it as a basis for claims, termination for default, and possibly even suspension and debarment (for failing to have adequate internal controls).

NIST Releases Draft Policy of Mobile Security Guidelines, Recommends Centralized Mobile Device Management

This post was written by Amy S. Mushahwar 

On July 11, the National Institute of Standards and Technology (“NIST”) released Guidelines for Managing and Securing Mobile Devices in The Enterprise, its draft policy for securing mobile devices that will supplement its already-published general security recommendations for any IT technology. In these draft Guidelines, which are a revision of its 2008 publication Guidelines on Cell Phone and PDA Security, the NIST is updating its mobile security recommendations and focusing on new technologies, specifically smartphones and tablets. Once published, this could become the approved guidelines for all federal agencies and federal contractors, which could be particularly troublesome for those lacking mobile device security policies and other security measures.

Focused on providing cost-effective security guidelines, the NIST recommended centralized mobile device management technologies for both organization-owned and personally-owned (BYOD) devices, which manage the configuration and security of mobile devices while allowing other security features to be added as needed. Additionally, the NIST recommended: (1) developing system threat models for mobile devices and the resources that are accessed through the mobile devices; (2) instituting a mobile device security policy; (3) implementing and testing a prototype of the mobile device solution before putting it into production; (4) securing each organization-issued mobile device before allowing a user to access it; and (5) maintaining mobile device security regularly.

Please click here to read the entire set of Guidelines. The NIST is accepting comments concerning the draft Guidelines until August 14.


Research and drafting assistance for this post was provided by Reed Smith Legal Intern Rachael E. Pashkevich.

Pressing on the Brakes and Shifting into Reverse: The Department of Veterans Affairs Halts the Use of Reverse Auctions

This post was written by Leslie A. Monahan.

Back in 2000, Professor David C. Wyld published an initial report on the potential of reverse auctions as a government cost-saving tool. Reverse auctions enable sellers to “bid down” prices for their goods and services, and have become an increasing method for federal procurement. In his second report on the topic, Professor Wyld estimated that use of these procurement techniques would result in as much as $8.9 billion in savings across the federal government. Aware of these potential savings, multiple federal agencies expanded their use of online reverse auctions, and the Department of Veterans Affairs (VA) was no exception. 

On June 9, 2003, the VA issued an information letter on reverse auctions. This document provided guidance on the procedures contracting officers must follow in order to acquire goods and services using this auctioning technique.  

On March 7, 2012, news broke that the VA has issued a memorandum ordering its contracting officials to suspend the use of reverse auctions as a procurement method. The memorandum, dated March 3, 2012, appears to be in response to numerous complaints by long-time VA suppliers about the application and oversight of this procurement technique. In addition to the memorandum, the VA is currently conducting a detailed examination of reverse auctions, and is drafting a report on how these techniques have been managed by the agency.

While the recent memorandum only applies to the VA, its impact may be far reaching.  Experts agree that the existence of the memorandum has put other agencies on notice of the potential problems with this procurement technique. Only time will tell whether other agencies put the brakes on their approaches toward reverse auctions, or increase competition through these techniques.

In-House Relator? The 2nd Circuit Considers Whether To Put the False Claims Act Between Attorneys and Their Clients.

This post was written by Matthew R. Sheldon and Alexander Y. Thomas.

The Second Circuit Court of Appeals is reviewing a lower court decision disqualifying a former in-house attorney from acting as a False Claims Act qui tam relator against his former employer.

The relator was formerly general counsel to Unilab, a subsidiary of Quest Diagnostics Inc. The qui tam suit alleged that Unilab violated the Federal Health Care Anti-Kickback Act by engaging in a fraudulent scheme to increase medical testing referrals under the Medicare and Medicaid programs. Unilab sought to dismiss the suit, arguing that the relator's participation in the action was unethical under the New York Rules of Professional Conduct. The District Court agreed, stating that his duties included his obligation not to disclose client confidences that would otherwise be protected by the attorney-client privilege.

In an appeal of the District Court's ruling to the Second Circuit, the plaintiff has primarily argued that the relator had no duty to keep client confidences as Unilab was engaged in acts of fraud. In response to that argument, Unilab claimed that failure to disqualify counsel would have a chilling effect on a client's willingness to seek advice of counsel regarding issues that could implicate the False Claims Act.

The case raises significant questions regarding the limits of the attorney-client privilege when the client is potentially engaged in acts of fraud. Typically, communications with counsel that are in furtherance of a crime or fraud are not protected by the attorney-client privilege. But communications regarding a previous crime or act of fraud are protected by the privilege, unless the lawyer believes that disclosure is necessary to prevent a future crime. Whether the privilege applies in this particular case will depend, in part, on the Second Circuit's interpretation of the scope of the crime-fraud exception to the privilege. If the Second Circuit affirms the District Court's decision, companies can at least rest easier knowing that their communications with counsel about False Claims Act issues will, in most instances, remain private.

Are Government Contracts Executives Overpaid?

This post was written by Leslie A. Monahan.

Last week, the Office of Management and Budget (“OMB”) announced that President Obama is working to breathe life back into a proposal to end federal contractor executive overpayment. According to the OMB’s blog post, the Obama administration will be asking Congress to reform the current reimbursement formula for contractor executives. The proposal will not limit how much contractors can pay their top five executives. Rather, it aims to limit the amount the government can reimburse contractors for executive salaries. Specifically, the proposal seeks to cap the government’s reimbursement at the same level as what it pays its own executives – $200,000 per.

Back in the 1990s, Congress tied the levels of pay given to contractor executives to the salaries of the nation’s top private executives, as opposed to government executives. As private sector salaries soared, so did those of contractor executives, something that did not go unnoticed. Receiving support from senators on both sides of the political spectrum, an amendment to the 2012 Defense Authorization Bill capped the reimbursement of salaries for some contracts with the Department of Defense. The Obama administration now seeks to extend the provisions across all government agencies as part of its Campaign to Cut Waste.

While the Obama administration believes that ending executive overpayment will benefit all taxpayers, certain taxpayers disagree. On the same day OMB made its announcement, the Professional Services Council (“PSC”) publicly opposed the measure. PSC stated that the proposal would negatively impact small businesses and inhibit the ability of the government and industry to attract top talent to work on federal contracts.

Equality for Women: Amending the Women-Owned Small Business Program to Ensure Consistency with the Other Small Business Administration Program

This post was written by Leslie A. Monahan.

On January 12, 2012, the Small Business Administration (“SBA”) issued an interim final rule amending certain regulations governing the Women-Owned Small Business (“WOSB”) Program. These amendments to threshold amounts and protest procedures make the WOSB Program more consistent with other SBA government contracting programs. Given the public benefit of consistency in small business programs, SBA found good cause to publish the changes in an interim final rule, as opposed to a proposed rule, and made the rule effective from the date of publication.

The WOSB Program, which was established by a final rule issued on October 7, 2010, authorizes contracting officers to set aside contracts for WOSBs and economically disadvantage women-owned small businesses (“EDWOSBs”) in certain industries where such concerns are shown to be underrepresented. To qualify as a WOSB, a business concern must be at least 51 percent unconditionally and directly owned by at least one woman who is a U.S. citizen. WOSB qualifications also require one or more women to control the management and daily business operations of the business concern. To qualify as an EDWOSB, a business concern must meet the same requirements as a WOSB and demonstrate that the owner or owners’ ability to compete in business has been impaired due to diminished capital and credit opportunities. Further, an EDWOSB owner’s personal net worth, adjusted gross yearly income averaged over the three years, and asset fair market value cannot exceed $750,000, $350,000, and $6 million, respectively.

Originally, under the WOSB Program, contracting officers could restrict competition for federal contracts not exceeding $5 million for manufacturing contracts and $3 million for all other contracts. The interim final rule changed those amounts to $6.5 million and $4 million, respectively, to be consistent with other SBA regulations. In addition, the interim final rule acknowledges the Federal Acquisition Regulation Council’s authority to adjust competitive thresholds for inflationary adjustments. These changes allow WOSBs and EDWSOBs to obtain larger contracts to grow their businesses.

In addition, under the interim final rule, contracting officers may now proceed with a contract award during the course of a protest, if necessary to protect the public interest, without having to make such a determination in writing. It also allows contracting officers to move forward with contract awards if the SBA does not respond concerning the status determination of the WOSB or EDWSOB filing the protest within 15 days from receipt of the protest. These changes allow contracting officers to award contracts more easily in protest situations.

Comments on the interim final rule are due by February 13, 2012.

One Strike and You're Out? Debating the Need for Instituting Mandatory Suspension and Debarment Procedures

This post was written by Leslie A. Monahan.

To mandate or not to mandate the use of suspension and debarment - that is the current question up for debate among federal agencies and government officials. As criticism of agencies for failure to utilize or enforce suspension and debarment procedures continues, the idea of mandating the use of these procedures as punishment for indictments and convictions related to federal contracts is gaining momentum. Interest in this idea reached a high point in recent weeks with issuance of a memorandum from the Office of Management and Budget (“OMB”) and agency testimony before the Senate on the matter.

The OMB memorandum identifies the use of suspension and debarment a “powerful tool” for protecting taxpayer resources and the integrity of federal government processes from government contractors who “lack business integrity because they have engaged in dishonest or illegal conduct or are otherwise unable to satisfactorily perform their responsibilities.” The memorandum, which was issued in response to an August 2011 Government Accountability Office (“GAO”) report, found that more than half of the ten agencies it reviewed lacked characteristics common among active and effective suspension and debarment programs. In particular, the GAO discovered that the agencies investigated did not have: (i) sufficient dedicated staff resources, (ii) well developed internal guidance, and (iii) processes for referring cases to officials.

To remedy the issues addressed in the GAO report, the OMB set forth a new set of directives that apply to agencies and departments subject to the Chief Financial Officers Act. These directives include the following: (1) appointing senior accountable officials to assess agency suspension and debarment programs; (2) reviewing internal policies and procedures to ensure effective use of suspension and debarment tools; and (3) checking federal databases to guarantee that only responsible contractors receive federal awards. The OMB tasked the Interagency Suspension and Debarment Committee (“ISDC”) to serve as support structure by helping agencies develop trainings and share best practices related to suspension and debarment tools.

The OMB issued its memorandum one day before the Senate Committee on Homeland Security and Government Affairs (“Committee”) held a hearing on the matter. The Committee obtained testimonies from agency heads and officials, including Daniel Gordon, outgoing OMB procurement chief, and Steven Shaw, deputy general counsel of the U.S. Air Force. While committee members, including Senators Susan Collins and Joseph Lieberman, support implementing mandatory suspension and debarment, agency officials advocated against mandating such procedures. Mr. Gordon stated that the current regulations provide the necessary authority and discretion to combat dishonest or incompetent federal contractors. Mr. Shaw argued against taking away agency discretion and stated that automatic suspensions and debarments would remove contractor incentive to work in creative ways to benefit the government.

Although the question concerning mandatory suspensions and debarments is still up for debate, contractors should use this time to ensure that they and their businesses would not fall prey to the proposed automatic measures if they became law. Accordingly, contractors need to take an internal look at their compliance policies and procedures to make certain they meet all federal contract requirements. By taking advantage of the opportunity to “clean house” concerning contract provisions and ethical regulations, contractors can obtain a clear conscience about their compliance and prevent any violations that could potentially lead to suspensions and debarments.

Small Businesses to Have Larger Role in Big Contracts

This post was written by Gunjan Talati.

Earlier this month, the government issued an interim rule amending the Federal Acquisition Regulation (FAR) to implement set-aside requirements of the Small Business Jobs Act of 2010. The Small Business Jobs Act amended the Small Business Act to require the government to set aside parts of a multiple-award contract for small businesses; set aside orders placed against multiple-award contracts for small businesses; and reserve one or more contract awards for small businesses under full and open multiple-award procurements.

The interim rule attempts to implement these requirements through additions and revisions to a number of FAR parts and subparts:

• FAR Subpart 8.4—Federal Supply Schedules: The interim rule revises this subpart to clarify that even though the set-aside requirements of FAR Part 19—Small Business Programs—are not mandatory for procurements under Federal Supply Schedules, the ordering activity is allowed, at its discretion, to set aside orders and Blanket Purchase Agreements, or BPAs, for small businesses

• FAR Subpart 12.2—Special Requirements for the Acquisition of Commercial items: The interim rule also clarifies that agencies can set aside orders under multiple-award contracts for the acquisition of commercial items

• FAR Subpart 16.5—Indefinite-Delivery Contracts: The interim rule revision acknowledges that set-asides can be used for orders under multiple-award contracts

• FAR Part 19—Small Business Programs: The interim rule adds a new section that allows agencies to use set-asides under multiple-award contracts and reserve one or more contract awards under multiple-award contracts for small businesses

• FAR Subpart 38.1—Federal Supply Schedule Program: The interim rule includes a reference to the changes in FAR Subpart 8.4, clarifying that set-asides can be used for orders and BPAs under Federal Supply Schedules

Even though many of these changes grant the agencies discretionary authority to use set-asides, whereas many of the existing set-aside requirements in the FAR are mandatory, they present additional avenues through which agencies can increase the credit they receive toward their small business goals.

With agencies under the spotlight for missing these goals, there will likely be a lot of activity under these changes. While the impact on small businesses is obvious—increased set-aside contracting opportunities, the impact on large businesses is not so clear. Certainly, there will be the loss of some opportunities, as large businesses cannot submit proposals on set-aside competitions. However, with careful planning, such as identifying potential subcontracting opportunities, large businesses may be able to soften any blow from the potential loss of work and perform a value service by supporting a small business.

The interim rule went into effect November 2, 2011, and companies or trade groups interested in submitting comments to be considered before a final rule is issued will have until January 3, 2012 to submit their comments.

Regulatory Round Up 11. 8.11

This post was written by Michael A. Grant.



No More Wavering on Waivers: Proposed FAR Amendments Seek to Standardize Sudan Waiver Process

This post was written by Joelle E.K. Laszlo.

“Efficiency” and “transparency” are on the lips of many government regulatory types these days. Along these lines, the FAR Council has proposed a process for determining whether the President may waive in a particular circumstance the standing prohibition in FAR section 25.702 on doing business with entities that conduct certain types of business in Sudan. That section prohibits Federal contracting with entities that engage in “restricted business operations” as defined in the Sudan Accountability and Divestment Act of 2007, including activities related to power production, mineral extraction, oil, and the production of military equipment. While the section permits the President to waive the prohibition on a case-by-case basis, the FAR contains no criteria to govern the section 25.702 waiver process. The FAR Council’s recently-proposed amendments aim to change this situation, by establishing greater consistency in the process.

To bring about this consistency, the amendments would make two specific changes: first, they would establish the particular information an agency must provide when requesting a section 25.702 waiver; second, they would institute a formal process for reviewing agency waiver requests. In addition to requiring pieces of data one would expect (i.e., the agency’s and contracting entity’s names, complete addresses, and points of contact), the proposed amendments would require an agency seeking a waiver to provide market research-supported justification for contracting with the proposed entity, assurances that is it “in the national interest” to grant the waiver, and details on “humanitarian efforts engaged in by the [entity], the human rights impact of doing business with the [entity] for which the waiver is requested, and the extent of the [entity’s] business operations in Sudan,” including its relationship to other entitles that conduct prohibited business operations in the country. Under the proposed amendments, after being reviewed and cleared by the head of the requesting agency, these details would be forwarded to the Administrator of the Office of Federal Procurement Policy, which would consult with the President’s National Security Council, Office of African Affairs, and the Department of State Sudan Office and Sanctions Office, in reviewing the waiver request.

The Sudan Accountability and Divestment Act of 2007 is one of a composite of regulations and statutes addressing the activities of U.S. persons and business in Sudan and/or with Sudanese nationals. Importantly, the “restricted business operations” designated in the Act, and the actions prohibited under the Sudanese Sanctions Regulations, at 31 C.F.R. Part 538, will remain just as restricted and prohibited as they currently are, even if the proposed FAR amendments are adopted as drafted. Parties interested in commenting on the proposed FAR amendments may do so until December 6.

Forget What You Know About Acquisition Thresholds (Unless You Know Some of Them Changed Recently)

This post was written by Joelle E. K. Laszlo.

Inflation is good for some things, including increasing the acquisition-related thresholds in the Federal Acquisition Regulation (“FAR”). Inflation-pegged adjustments to the FAR thresholds were initiated by the Ronald W. Reagan National Defense Authorization Act of 2005, and are required every five years thereafter. The most recent adjustments, which took effect on October 1st, increase a number of thresholds, including the following “heavily used” figures:

  • The simplified acquisition threshold, which sets the bar below which the simplified acquisition procedures in FAR Part 13 may be used, is now $150,000.
  • The ceiling for the commercial items test program (described in FAR Subpart 13.5), under which simplified acquisition procedures may be used if a contracting officer reasonably expects offers to include only commercial items, is now $6.5 million.
  • The cost or pricing data threshold is now $700,000, meaning that a contracting officer must obtain cost or pricing data before awarding any negotiated contract or subcontract, or modifying a contract, unless one of the exceptions in FAR § 15.403-1(b) applies.
  • The prime contractor subcontracting plan floor described in FAR § 19.702 is now $650,000, meaning that the bidder in a sealed-bid acquisition selected for award of a contract (or contract modification) expected to exceed this amount must submit a subcontracting plan to the contracting officer within a specified time, or risk being found ineligible for the award.
  • The threshold in FAR § 19.702 applicable to construction contracts is now $1.5 million.

The micro-purchase threshold, which sets the bar at and below which commercial purchase cards and other less restrictive procedures described in FAR Subpart 13.3 may be used, remains unchanged at $3,000. Also unchanged is the requirement under FAR Part 5 that notice of contract actions above $25,000 must be posted on FedBizOpps.gov.

Support Your Contracting Officer!

This post is written by James P. Gallatin, Jr. and Lorraine M. Campos

Being a Contracting Officer may be the most thankless job in government. Let’s just say it, it IS the most thankless job, period.

Unfortunately, the government acquisition personnel are often overworked and understaffed. Earlier this year, Peter Orzag, the former OMB Director, stated that while there is more than $500 billion in federal contracts, and while those contracts have doubled in size over the past eight to nine years, the acquisition workforce has generally remained constant. So there is an ever-increasing workload; responsibility for billions of dollars in purchases from sophisticated and highly aggressive commercial vendors across a staggering variety of industries; compensation far below private sector peers; constant scrutiny by their agency personnel, auditors, and Inspectors General; regular second-guessing or simple overruling by senior management; mocking by congressional representatives and senators as incompetent – what’s not to like?

But wait . . . there’s more. The thanklessness of being a Contracting Officer is further highlighted by the erosion of independence definitively described in "The Incredible Shrinking Contracting Officer" by John S. Pachter in the Public Contract Law Journal, Vo. 39, No. 4 Summer 2010. Every government acquisition professional should read this piece – and be prepared to be depressed. (It’s not pretty reading for the contractor community either.) And we haven’t even talked about the emerging and disturbing trend toward OIG investigations of Contracting Officers when an auditor cannot locate the acquisition file, even though the contract file may be a decade old and may have been transferred to other procurement personnel.

We are not addressing the “nonprofessionals” we have encountered who have never read the $400 million contract they administered for 10 years; nor are we talking to those who have made no attempt to understand what they are signing, leaving the rest of us to clean up the resulting messes years in the future. They are a lost cause. We are talking about the “professionals” – people intent on doing a professional job, with all the authority, few of the proper tools, and a whole lot of negative reinforcement. No wonder so many talented professionals forthrightly head to private industry at the first opportunity.

But the simple fact is that those of us in the private sector who work with Contracting Officers share the challenges they face. It does us no good to abuse the pressure or lack of resources to strike a tough deal or ram through a poorly crafted contract. Both sides will address the consequences at some point in the future, and the government has unlimited money, time, and lawyers. This challenge has only one professional and productive response, a response that furthers private industry and the taxpayers’ interests: Support Contracting Offices and their fellow acquisition professionals in their work.

It isn’t rocket science, people. It’s the basics. Make sure your Contracting Officer understands what you are selling and how you sell it. Don’t hide the ball. When in doubt disclose – disclose in writing. Document everything and keep the documents for at least the term of the audit-rights under the contract. Make sure the contract is clearly written, reflects the business deal, makes sense in your industry, and includes all the relevant documents. Read what you sign before you sign it. Read it again. Explain it to someone else. Then sign it. And save a copy of the awarded contract and all pertinent correspondence.

Where and when ethically permitted, get to know your key acquisition professionals. Understand their workloads and priorities. Understand the outside pressures they have to deal with, whether meddling management, hyper-aggressive auditors, or the wonderful benefits of congressional oversight. Make sure they understand not only your workload and priorities, but also your industry and issues. Go to their industry days and make sure they have other ethically appropriate but effective means to how your business sector works.

Contracting Officers’ roles will likely remain a frustrating mix of critical importance, limited support, and lots of intervention by third parties. Private industry has no choice but to do a better job on its end of supporting Contracting Officers in creating reasonable, defensible contracts. So yes, we end with this plea – Support your Contracting Officer.