government contracting update series · goal: to clarify the application of the federal information...
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Government Contracting Update SeriesStay Current on Federal Contracting Changes &
Developments
Paul E. Pompeo, Arnold & Porter LLP
Sajeev Malaveetil, EY Government Contract Services
October 6, 2016
1
Agenda
Federal Acquisition Regulation (FAR)
Defense Federal Acquisition Regulation Supplement
(DFARS)
Cost Accounting Standards (CAS)
Defense Contract Audit Agency (DCAA) and the
Defense Contract Management Agency (DCMA)
guidance/policy
Notable Legal Decisions
2
Federal Acquisition Regulation
3
Information on Corporate Contractor Performance and Integrity
(FAR Case 2013-020)
Final Rule – Effective April 16, 2016
Offerors will be required to report and certify information regarding
immediate owners, subsidiaries or predecessors that held a
Federal contact or grant within the last three years
New provision 52.204-20 Predecessor of Offeror and annual
certification requirement
Contracting officers will begin to look at integrity of subsidiaries
and predecessors when assessing performance integrity and past
performance
Source: FAR Case 2013-020 – Federal Register 81 FR 11988, April 6, 20164
Basic Safeguarding of Contractor Information Systems
(FAR Case 2011-020)
Final Rule –Effective June 15, 2016
Adds a contract clause for the basic safeguarding of contractor
information systems that process, store, or transmit Federal
contract information
o DoD, GSA, and NASA will be developing FAR changes to
implement the OMB guidance when it is finalized
o Systems that contain classified information, or CUI such as
personally identifiable information, require more than the basic level
of protection
Goal: To clarify the application of the Federal Information
Security Management Act (FISMA) and the National Institute of
Standards and Technology (NIST) information systems
requirements to contractors and help create a greater
consistency in safeguarding practices across agencies
No exemptions for small entities 5
Source: FAR Case 2011-020 – Federal Register 81 FR 30439 May 16, 2016
6
Small Business Subcontracting Improvements
(FAR Case 2014-003)
Final Rule –Effective November 1, 2016
The changes being implemented in this final rule include the
following:
Requiring prime contractors to make good faith efforts to utilize their proposed
small business subcontractors during performance of a contract to the same
degree the prime contractor relied on the small business in preparing its bid or
proposal
Authorizing contracting officers to calculate subcontracting goals in terms of
total contract dollars in addition to the required goals in terms of total
subcontracted dollars
Providing contracting officers with the discretion to require a subcontracting
plan in instances where a small business represents its size as other than
small business
Requiring subcontracting plans even for modifications under the
subcontracting plan threshold if said modifications would cause the contract to
exceed the plan threshold
Restricting prime contractors from prohibiting a subcontractor from discussing
payment of utilization matter with the contracting officer
Source: FAR CASE 2014-003 – Federal Register 81 FR 45833 July 14, 2016
Small Business Subcontracting Improvements (cont’d)
Requiring prime contractors to resubmit a corrected subcontracting
report within 30 days of receiving the contracting officer’s notice of
report rejection
Requiring prime contractors to provide the socioeconomic status of the
subcontractor in the notification to unsuccessful offerors for
subcontracts
Requiring prime contracts with subcontracting plans on task and
delivery order contracts to report order level subcontracting information
after November 2017
Funding agencies receiving small business subcontracting credit
On indefinite-delivery, indefinite-quantity contracts, the contracting
officer may establish subcontracting goals at the order level (but not a
new subcontracting plan)7
Audit of Settlement Proposals
(FAR Case 2015–039)
Proposed Rule – September 14, 2016
Proposal to amend the FAR to raise the dollar threshold
requirement for the audit of prime contract settlement proposals
and subcontract settlements from $100,000 to $750,000
Help alleviate contract close-out backlogs and enable
contracting officers to more quickly de-obligate excess funds
from terminated contracts
Small business impact: fewer small businesses will be subject
to audits of their termination settlement proposals
Comments due by November 14, 2016
8Source: FAR Case 2015-039 – Federal Register 81 FR 63158 September 14, 2016
Fair Pay and Safe Workplaces
(FAR Case 2014-025)
Final Rule – Effective October 25, 2016*
Implements 2014 E.O. 3673, Fair Pay and Safe Workplaces
Intended to increase efficiency and cost savings through contractor compliance
with labor laws
Creates Agency Labor Compliance Advisor (ALCA) to advise CO’s as it relates
to consideration of labor matters reported by prospective and existing
contractors
Simultaneously DOL final guidance issued
The rule creates a new FAR Subpart 22.20 - establishes new reporting
requirement, obligations and limitations to contractors as it relates to compliance
with labor and safety statutes and executive orders
1. Requirement to proactive report labor violations
2. Obligations for pay transparency to select covered employees
3. Restricts the use of mandatory arbitration as it relates to claims of violations
related to select labor matters
* Note: requirements are phased in over three years
9
Source: Federal Register 81 FR 58653 (FAR) and 81 FR 58653 (DOL), August 25, 2016
Fair Pay and Safe Workplaces (continued)
Requirements
Requirement to report labor violations
Contractors are require to report “administrative merit determinations, “arbitral award
decisions” and “civil judgments” for violations of 14 E.O. and Statutes related to labor
and safety
Pre-award: Reporting will be considered in making determinations of contractor
responsibility
Post award: Reporting will be evaluated related to labor compliance agreement,
exercising of options, contract termination, potential referral to SDO
COs with advice from ALCA should give consideration to mitigating factors
Obligations for pay transparency to select covered employees
Applies to covered employees and contractors subject to FLSA, DBA and SCA
Contractors will be required to provide employees with information related to pay, hours
worked, overtime hours paid, additions to wages and deductions from wages
Also requires written notification to independent contractors of their status as
independent contractors
Restricts the use of mandatory arbitration for as it relates to claims of violations relates to
select labor matters
Applies to contracts over $1M
Must obtain voluntary consent from the employee to arbitrate claims related to Title VII
of Civil Rights Act of 1964, sexual assault and sexual harassment
10
Fair Pay and Safe Workplaces (continued)
Phase-in of the rule
Phased Implementation Plan:
10/25/2016: Applicable to prime contracts over
$50M (report just one year)
01/01/2017: Pay transparency requirements kick-in
04/25/2017: Applicable to prime contracts over
$500K
10/25/2017: Applicable to subcontracts over $500K
10/25/2018: Reporting requirement expanded to 3
years
11
Non-Retaliation for Disclosure of Compensation Information
(FAR Case 2016-007)
Interim Rule – Effective September 30, 2016
Implements E.O. 13666, “Non-Retaliation for Disclosure of Compensation
Information”, April 8, 2014 and OFCPP DoL final rule from September 11, 2015
Amends Equal opportunity clause to prohibit contractors from discharging, or in
any manner discriminating against, any employee or applicant for employment
because the employee or applicant inquired about, discussed, or disclosed the
compensation of the employee or applicant or another employee or applicant
Defines “compensation” as - any payments made to, or on behalf of, an
employee or offered to an applicant as remuneration for employment, including
but not limited to salary, wages, overtime pay, shift differentials, bonuses,
commissions, vacation and holiday pay, allowances, insurance and other
benefits, stock options and awards, profit sharing, and retirement
Requires dissemination of the non-retaliation provisions to employees and
applicants by
1. Incorporation into existing employee manuals or handbooks; and
2. Electronic posting or by posting a copy of the provision in conspicuous
places available to employees and applicants for employment
Comments to the interim rule are due on November 29, 2016 12
Source: Federal Register 81 FR 67732 September 30, 2016
Limitation on Allowable Government Contractor Employee
Compensation
(FAR Case 2014-012)
Final Rule –Effective September 30, 2016
Adopts as final, with changes, a prior interim rule implementing
compensation cap to all contractor employees pursuant the Bipartisan
Budget Act of 2013
Re-organizes FAR 31.205-6 to:
streamline references to applicability of compensation caps over
time
include references and links to OMB websites related to
compensation
incorporates the following table into the Compensation Cost
Principle
13
Source: Federal Register 81 FR 67778, September 30, 2016
Prohibition on Contracting with Corporations with Delinquent Taxes or a
Felony Conviction
(FAR Case 2015-011)
Final Rule –Effective September 30, 2016
Adopts as final, without any changes, a December 2015 interim
rule prohibiting the Federal Government from entering into a
contract with any corporation having a delinquent Federal tax
liability (in excess of $3,500) or a felony conviction under any
Federal law, unless the agency has considered suspension or
debarment of the corporation and has made a determination
that this further action is not necessary to protect the interests of
the Government
Requires reporting of tax liabilities greater than $3,500 and
felony convictions within 24 months
14Source: Federal Register 81 FR 67728, September 30, 2016
Defense Federal Acquisition
Regulation & Other Supplements
15
Agencies must assess all costs and benefits of available regulatory
alternatives and, if regulation is necessary, select regulatory
approaches that maximize benefits (including potential economic,
environmental, public health and safety effects, distributive
impacts, and equity)
Emphasis on the importance of quantifying both costs and benefits,
or reducing costs, or harmonizing rules, and of promoting flexibility
This rule does not apply to contracts at or below the SAT
Multiyear Contract Requirements
(DFARS Case 2015-D009)
Final Rule – Effective May 10, 2016
Source: DFARS Case 2015-D009 – Federal Register 81 FR 28730, May 10, 201616
Rights in Technical Data and Validation of Proprietary Data Restrictions.
(DFARS Case 2012-D022)
Proposed Rule – June 16, 2016
Public comments ends September 14, 2016
Add special provisions for handling technical data that are necessary
for segregation and reintegration activities
Codify and revise the policies and procedures regarding deferred
ordering of technical data;
Expand the period in which DoD can challenge an asserted restriction
on technical data from three years to six years
Rescind changes to 10 U.S.C. 2320 from the NDAA for FY 2011 and
Codify Government purpose rights as the default rights for technical
data related to technology developed with mixed funding
17Source: DFARS Case 2012-D022 – Federal Register 81 FR 39482 June 16, 2016
Detection and Avoidance of Counterfeit Electronic Parts – Further
Implementation
(DFARS Case 2014-D005)
Final Rule –Effective August 2, 2016
Requires DoD contractors and subcontractors, except in limited
circumstances, to acquire electronic parts from trusted suppliers
in order to further address the avoidance of counterfeit
electronic parts
Contractors and subcontractors that are not the original
component manufacturer are required by this rule to notify the
contracting officer if it is not possible to obtain an electronic part
from a trusted supplier
For those instances where the contractor obtains electronic
parts from sources other than a trusted supplier, the contractor
is responsible for inspection, test, and authentication in
accordance with existing applicable industry standard
18
Source: DFARS Case 2015-004 – Federal Register 81 FR 50635 August 2, 2016
Costs Related to Counterfeit Electronic Parts
(DFARS Case 2016-D010)
Final Rule – Effective Aug. 30, 2016
Revises DFARS cost principles – 231.205-71 Costs
related to counterfeit electronic parts and suspect
counterfeit electronic parts
Counterfeit parts, reworked or corrective action is
unallowable unless
Operational system to detect and avoid counterfeit parts
Parts are GFP or obtained though Sources of Electronic Parts
clause
Contractor discovers counterfeit through inspection, testing &
authentication or by other means AND provides timely (60-day)
notice to COs and Government Industry Exchange Program(GIDEP)
19
Procurement of Commercial Items
(DFARS Case 2016-D006)
Proposed Rule - August 11, 2016
This rule provides guidance to contracting officers to promote
consistency and uniformity in the acquisition process
DoD intends to determine that it is in the best interest of the
Federal Government to apply the rule to contracts for the
acquisition of commercial items, including COTS items
An exception for contracts for the acquisition of commercial
items, including COTS items, would exclude the contracts
intended to be covered by the law, thereby undermining the
overarching public policy purpose of the law
20Source: DFARS CASE 2016-D006 – Federal Register 81 FR 53101 August 11, 2016
Rights in Technical Data
(DFARS Case 2016-D008)
Final Rule - Effective Date September 23, 2016
Implements section 813(a) of NDAA of 2016
Addresses rights in technical data relating to major weapon systems and expands application of the presumption that a commercial item has been developed entirely at private expense
Prior to rule, with the exception of COTS items, a contracting officer’s challenge to asserted restrictions on technical data relating to a major system was sustained unless the contractor or subcontractor submitted information demonstrating that the item was developed exclusively at private expense
Narrowed to apply to only major weapons systems (excludes major non-weapons systems)
Expanded beyond COTS to include (i) COTS items with modifications of a type customarily available in the commercial marketplace or minor modifications made to meet Federal Government requirements; (ii) commercial subsystems or components of a major weapon system, if the major weapon system was acquired as a commercial item in accordance; and (iii) components of a subsystem, if the subsystem was acquired as a commercial item 21
Source: DFARS CASE 2016-D008 – Federal Register 81 FR 65565 September 23, , 2016
Transactional Data Rule
(GSAR Case 2013-G504)
Final Rule – Effective June 23, 2016
Rule will be phased in by GSA Schedule and SIN over the course of a
three-year pilot
Participants are no longer subject to CSP and PRC requirements
Rule aligns with GSA’s long-term objective to adopt a market-driven
pricing model rather than a vendor’s most favored pricing
Monthly reporting of transactional data will be required for all orders
against certain FSS contracts, GWACs and Government-wide IDIQ
contracts
The new reporting clause and corresponding pricing disclosure will be
required for all new offerors and renewals
Existing contractors may voluntarily opt in through acceptance of a
bilateral contract modification
22
FAR Final Rule
Transactional Data Reporting – Covered schedules
Source: GSAR clause (552.216-75)Note: Graphical data prepared by EY’s Government Contract Services
The initial pilot will cover eight Schedules and related
SINs, as listed below:
Schedule 58 I, Professional Audio/Video,
Telemetry/Tracking, Recording/Reproducing and
Signal Data Solutions
Schedule 72, Furnishing and Floor Coverings
Schedule 03FAC, Facilities Maintenance and
Management
Schedule 51 V, Hardware Superstore
Schedule 75, Office Products
Schedule 73, Food Service, Hospitality, Cleaning
Equipment and Supplies, Chemicals and Services
Schedule 00CORP, The Professional Services (PSS)
Schedule:
SINs 871-1, 2, 3 ,4, 5, 6, and 7 (PES)
Schedule 70, General Purpose Information
Technology Equipment, Software, and Services:
SINs 132-8 (Hardware), 132-32, 33, and 34
(Software), and 132-54 and 55 (Commercial Satellite
Communications, or COMSATCOM)
Contractors with schedules containing only select
SINs — PSS and Sch70 — will be required to report
transactional data for all SINs (i.e., TDR is required
for all SINs even these not subject to the rule).
1 Number reflects all Schedule 70 and OOCORP contracts; some schedule holders
may not have SINs subject to TDR.
Schedule 2015 Sales # of GSA contracts1
70 6,025,923,944 5,060
72 34,560,405 140
73 166,972,222 446
75 518,403,586 392
871 914,909,479 246
03FAC 513,720,277 733
51 V 659,481,363 410
58 I 101,336,613 166
00CORP 862,637,198 3,891
Total 9,797,945,087 11,484
Source: GSA Schedule Sales Query, FY15 reported sales
Covered by TDR
Not covered by TDR70
%
30
%
23
Federal Supply Schedule, Order-Level Materials
(GSAR Case 2016–G506)
Proposed Rule - September 9, 2016
Clarifies the authority to acquire order-level materials when
placing a task order or establishing a Blanket Purchase
Agreement (BPA) against a Federal Supply Schedule (FSS)
contract
Proposed a paragraph (d) be added to FAR 8.401, General,
which would permit the addition of ‘‘open market (noncontract)’’
items to a FSS blanket purchase agreement or task or delivery
order only if
All applicable acquisition regulations have been followed (e.g., publicizing
([FAR] Part 5), competition requirements ([FAR] Part 6), acquisition of
commercial items ([FAR] Part 12), and contracting methods ([FAR] Parts 13,
14, and 15))
The ordering office contracting officer has determined the price for the open
market items is reasonable; and
The items are clearly labeled as open market (noncontract) items on the
order.
24
Revised Voucher Submission & Payment Process
(NFS Case 2016–N025)
Interim Rule – September 14, 2016
To implement revisions to the voucher submittal and payment
process
Revisions necessary due to section 893 of the National
Defense Authorization Act for Fiscal Year 2016 prohibiting the
DCAA from performing audit work for non-Defense Agencies
NASA had delegated to DCAA the task of reviewing contractor requests for
payment under NASA cost-type contracts.
An immediate need to implement procedural changes to
minimize cost voucher submission and payment delays to
NASA suppliers as well the potential accrual of Government
interest payments to contractors
Comments due by November 14, 201625
Establishing Paid Sick Leave for Federal Contractors
DOL Final Rule - Effective January 1, 2017
Implements E.O. 13706, September 7, 2015
Effective Date: contracts awarded on or after January 1, 2017
Covered Contracts: contracts covered by Davis-Bacon Act (DBA) or Service
Contract Act (SCA), concessions contracts (contract to use Federal property),
contract in connection with Federal property to provide services to Federal
employees
Covered Employees: not all employees of a company; if employee is working
on a covered contract and their wages are governed by DBA, SCA, or FLSA
Includes employees exempt from FLSA’s minimum wage and overtime provisions
Includes employees who spend 20% or more of their time in connection with covered
contract
Key Requirements:
Minimum annual accrual of 56 hours of sick leave provided to covered employees; 56
hours can be carried over
Use of sick leave: specific events identified such as caring for parent, time spent
related to domestic violence, sexual assault, or stalking
Various employee notification requirements (e.g. posters, notification of rights)
26
Source: Federal Register 81 FR 67598, September 30, 2016
Cost Accounting Standards (CAS)
27
Implementation of Defense Cost Accounting Standards
Board
•
The Senate Armed Services Committee has included a provision in
the 2017 NDAA (National Defense Authorization Act) that would
establish a new Cost Accounting Standards Board within the
Department of Defense
The Committee expressed concern that the current cost accounting
standards favor incumbent defense contractors and limit
competition by serving as a barrier to participation by non-
traditional, small business, and commercial contractors
Provision requires cost accounting standards developed - to the
maximum extent practicable - align with Generally Accepted Cost
Accounting Principles, thereby minimizing the requirement for
government-unique cost accounting systems28
Department of Defense
Defense Contract Audit Agency (DCAA) &
The Defense Contract Management Agency (DCMA) policies
29
Defense Procurement Acquisition Policy Memo
Guidance on CIDs and the Determination of Price
Reasonableness for Commercial Items - September 2,
2016
Outlines various DoD policy initiatives related to commercial items
DCMA has stood up six Commercial Item Centers of Excellence
(CoEs) – aligned to various market sectors – to support CO’s CIDs
DCMA is establishing a database of CIDs
COs should recognize prior CIDs and include a copy of the prior CID in
contract files
DPAC and DCMA’s Cost & Pricing Center are working with companies
to develop advance agreements outlining the type of information
needed to support CIDs and fair and reasonable determinations
Advance agreements would be uploaded into Contract Business
Analysis Repository (CBAR)
Reinforces FY 2016 NDAA requirements that IT products and services
in excess of the SAT should be commercial 30
DCAA – Reorganization
Update
• Implementation timeline - March
through September 2016
Major changes:
oAdding the following contractors
to their Contract Audit
Coordinator (CAC) pilot project:
1) General Dynamics
2) BAE
3) Boeing
4) Honeywell
5) Lockheed Martin
oGoing from five regions to three
– East, Central, and West
Note: Graphical data prepared by EY’s Government Contract Services
31
DCAA – Audit Guidance on the Impact of the National Defense
Authorization Act on DCAA’s Audit Support to Non-Defense Agencies
MRD 16-PPD-008(R) September 30, 2016
Effective October 1, 2016 – DCAA is again providing full audit
support to non-Defense Agencies
DCAA has met the requirement of less than 18 months of
incurred cost inventory outlined in 2016 NDAA
DoD Comptroller has certified the progress to Congress
Auditors will coordinate with non-Defense agencies on
prioritization of audits
Other agencies continue to ramp-up audit capabilities
32
DCAA –Audit Alert on Handling Incurred Cost Proposals Using a Blending
Approach of Compensation Caps
MRD 16-PPD-007(R) June 30, 2016
Addresses blending methodologies and requirements for final overhead,
interim billing, and forward pricing rates
DCAA to evaluate forward pricing and incurred cost proposals to ensure
proposed blended rates do not result in costs exceeding allowable
compensation amounts
o Does not require contractors to use blended compensation cap rates
o Address the new compensation caps for 2013 and 2014
DCAA Audit Alert on Handling Incurred Cost Proposals Using a Blending
Approach of Compensation Caps (MRD 16-PPD-007 (R)) – June 30,
2016
o If the contractor proposes to use a blended cap, the contractor and
Administrative Contracting Officers (ACO) are required to execute an
advance agreement
o A list of contractor fiscal years (CFYs) will be furnished to DCMA for all
CFYs
o DCAA will provide a non-audit service on proposed advance
agreement to ensure that it complies with the DDP guidance
33
DCAA – Audit Guidance on Revised Policy & Procedure for Low-Risk
Incurred Cost Proposal Less Than $250M in ADV
MRD 16-PPD-006(R) May 27, 2016
DCAA will reassess all open audits, of an adequate proposal, that are
classified as high risk with ADV less than $5 million where fieldwork has
not been started
o Must obtain Regional Audit Manager (RAM) approval to continue the
performance of the audit, justifying a warranted need based on
significant risk
Going forward, DCAA will assess risk for all adequate proposals with ADV
less than $250 million using revised policy and procedures and the
appropriate Low-Risk Determination tool
34
DCAA – Updated Guidance on the Treatment of Overdue Indirect Rate
Proposals
MRD 16-PPD-004(R) February 11, 2016
DCAA Actions
May 2016: Audit teams with send a letter to the designated Contracting Officer
(CO) in May 2016 notifying DCMA of their intent to close the overdue incurred
costs submissions once they reach 12 months overdue.
June 2016: Audit teams must close the assignments on the list on June 30, 2016, if
DMCA Contracting Officers do not notify DCAA of any extensions or ongoing
coordination that would warrant DCAA leaving the assignments open.
DCAA providing support to Unilaterally Establish Contract Costs
Applying unilateral costs decrements is up to the judgment of the CO. When
requested by the CO, DCAA will provide all relevant information related to the
contractor’s delinquent CFY, including billing deficiencies, and incurred cost audit
experience. DCAA may also provide a calculated unilateral contract cost decrement
based on historical questioned costs.
35
Notable Legal Decisions
36
Notable Legal Decisions
False Claims Act
UNIVERSAL HEALTH SERVICES, INC. v. UNITED STATES ET AL. EX REL.
ESCOBAR ET AL.
Argued April 19, 2016 – Settled June 16, 2016
The implied false certification theory can be a basis for FCA liability
when a defendant submitting a claim makes specific representations
about the goods or services provided, but fails to disclose
noncompliance with material statutory, regulatory, or contractual
requirements that make those representations misleading with respect
to those goods or services.
Contrary to Universal Health’s contentions, FCA liability for failing to
disclose violations of legal requirements does not turn upon whether
those requirements were expressly designated as conditions of
payment.
37
Source: Bloomberg BNA Federal Contracts Report – Universal Health Services Inc v. United States et el ex. rel. Escobar et al
Notable Legal Decisions (continued)
False Claims Act
KBR Whistleblower in Iraq False Claims Act (FCA) Case – U.S. ex rel. Conyers v.
KBR Inc. et al.
April 1, 2015: KBR Inc. agreed to settle a first-of-its-kind SEC administrative enforcement
action that one of its confidentiality agreements infringed on federal whistle-blower protections
KBR employees who internally reported potential wrongdoing had to sign a confidentiality
agreement that prohibited them from “discussing any particulars” about the subsequent internal
investigation without permission of the company's legal department
• The SEC said the form violated Rule 21F-17 under the 1934 Securities Exchange Act, which prohibits companies
from impeding employee attempts to report wrongdoing to the agency
Under the LOGCAP III contract, awarded in 2001, KBR served more than 700 million meals,
delivered nearly 400 million pounds of mail, produced almost 14 billion gallons of potable water
and transported more than 1 billion gallons of fuel to support U.S. troops in Iraq. Transportation
reportedly included over 170 million miles.
• The federal government, and a former employee, accused KBR of reaching agreements with the two subcontractors
— La Nouvelle General Trading & Contracting Co. and First Kuwaiti — as part of their LOGCAP III contract in
exchange for kickbacks, then charged the government inflated sums for those agreements in violation of the FCA
38Source: KBR Inc., SEC, Admin. Proc. File No. 3-16466, 4/1/15
Appeals of Kellogg Browns & Root Services, Inc. ASBCA, Nos. 57530, 58161, 7/25/16, decision released 8/9/16
Notable Legal Decisions (continued)
CAS Materiality
Raytheon Co., Space & Airborne Sys., ASBCA No. 58068, 16-1 BCA ¶ ___ (Aug.
9, 2016)
CO abuse of discretion: failure to consider materiality factors in CAS
• Found abuse of discretion even in absence of bad faith
CO found cost impact material simply because there was an impact
CO failed to consider mandatory materiality criteria in CAS regs and was wrong that none
of the criteria were applicable
• Should have compared amount to $3B contract base, or divided amount by the
“hundreds if not thousands of contracts” – Board divided amount by 1,000 and then
again by 4, for each year
• Should have considered administrative expense (lawyers, auditors, etc.) to recover cost
impact – effectively a litigation risk analysis
• Offsets back on the table
• One of the criteria is whether amounts “tend to offset” one another to render them
immaterial
• Board only gave two “examples” – did not limit to the two above39
Notable Legal Decision (continued)
CAS 404
Exelis, Inc., ASBCA No. 60131, 16-1 BCA ¶ __ (Aug. 29, 2016)
Claim that contractor treated building lease as an operating lease
instead of capital lease was a noncompliance with CAS 404 (and
unallowable under FAR 31.205-11(h))
Plain language of CAS 404 applies to “tangible capital assets”: having
physical substance
• Lease is “intangible” asset – it is a legal right to use and occupy a
building and does not have physical substance
• Preamble supports plain language
Dismissed CAS 404 noncompliance on failure to state a claim upon
which relief could be granted
40
Notable Legal Decisions (continued)
Allowability: CERCLA recovery and the interface with indirect rates
Lockheed Martin Corp. v United States, __ F.3d __ (D.C. Cir. Aug. 19
2016)
Lockheed included remediation costs in indirect rates for Lockheed’s
environmental cleanup obligations
United States has proportionate responsibility as PRP remediation
costs
• Asserts Lockheed gets double recovery through its payment and
indirect rate
Government made a choice in a 2000 Billing Agreement that itemized
environmental remediation costs – among many other costs – would
be reimbursed and treated as allowable.
• Focuses on Billing Agreement as a settlement on recovery of the
costs
• Nothing required the government to “funnel the governmental share”
through the indirect pool
41
Contact Information
• Presenters:
• Paul E. Pompeo, Partner, Government Contracts and National
Security, Arnold & Porter LLP – 202.436.1602.
• Sajeev D. Malaveetil, Partner, EY Government Contract Services –
703.862.0543. [email protected]
42