By Stephen D. Knight

Smith Pachter McWhorter constantly tracks current events, issues, and trends in Government Contracts to keep clients on the cutting edge of legal and policy developments. This e-letter highlights the most important issues, and the attached index provides weblinks to the source documents of these and many more developments.

I. Legislation

Members of both houses of Congress have introduced bills that would target contractors for “profiteering” and fraud, and would impose further restrictions on contractors for “unethical” conduct. The bills would also require disclosure of government audit reports on contractor costs, contract award information, and tighten “conflict of interest” provisions. Contractors are well advised to carefully read H.R. 3838, H.R. 4682, H.R. 5112, S. 2361, and S. 2356. The latest of these bills to be introduced are S. 2361 (March 2, 2006), S. 2356 (March 2, 2006) and H.R. 5112 (April 4, 2006). Even if Congress does not pass these bills as statutes, many of their provisions could be candidates for passage as amendments to various authorization and appropriations bills now under review by Congress.

The most recently proposed legislation, S. 2361 and S. 2356, would impose stiff criminal penalties for offenses “in any matter involving a contract or the provision of goods or services, directly or indirectly, in connection with a war or military action” or “relief or reconstruction activities.” Contractors in such matters would be liable for, among other offenses, “materially overvalue[ing] any good or service with the specific intent to excessively profit from the war or military action.” The bills are broadly drafted and, read literally, could extend to any contract or subcontract relating to support for the warfighter or reconstruction. Both bills would provide for extraterritorial jurisdiction for offenses.

S. 2361 would also require amendments to the FAR “to provide that no prospective contractor shall be considered to have a satisfactory record of integrity and business ethics if it (1) has exhibited a pattern of overcharging the Government under Federal contracts; or (2) has exhibited a pattern of failing to comply with the law, including tax, labor and employment, environmental, antitrust, and consumer protection laws.” The bill contains no discussion of what might constitute a “pattern.” Would some number of DCAA Form 1 cost disallowances indicate a “pattern”? Would a particular number of DCAA audit reports indicate a “pattern”? This provision is also reminiscent of a highly controversial regulation promulgated in the last days of the Clinton Administration which the Bush Administration reversed.

S. 2361 also contains provisions that would require increased competition for task or delivery order contracts, and orders under such contracts. The bill would prohibit contract awards for performance of inherently governmental functions and acquisition functions closely associated with inherently governmental functions. Other provisions would stiffen requirements of the Procurement Integrity Act by applying that Act to “lobbyists” and “lawyers,” as well as to “consultants,” and extending certain prohibitions from one to two years. Finally, the bill would extend protections for certain disclosures of information by federal employees which the employee reasonably believes evidences “any violation of any law, rule, or regulation; or gross mismanagement, a gross waste of funds, an abuse of authority, or a substantial and specific danger to public health or safety.”

II. Regulations

The change from “the contractor will not be obligated to continue work” to “the contractor is not authorized to continue work” may present a trap for contractors. Previously, if a contractor incurred costs beyond the allotted amount, a contracting officer might retroactively fund the contractor even though the contractor was not obligated to perform and the government was not obligated to pay. The change in language from “not obligated to perform” to “not authorized to perform” may persuade some contracting officers that they have no authority to fund a contractor’s effort beyond the allotted amount retroactively. Contracting officers often focus on the concept of “authority,” or more to the point – lack of authority, as a way to deny contractor claims. For example, a contracting officer might deny a contractor constructive change claim based on the fact that the contractor made a change as the result of discussions with an engineer rather than obtaining the contracting officer’s approval. In the context of the DFARS clause, contracting officers may believe that they have no authority to fund contractor performance beyond the allotted amounts on a retroactive basis. Contractors must be vigilant in monitoring incurred costs against funded allotments under the new DFARS.

Contractors with flexibly-priced contracts or contracts negotiated on the basis of cost analysis should be aware that the Office of Federal Procurement Policy (“OFPP”) has increased the executive compensation benchmark amount to $546,689. This benchmark is relevant to FAR 31.205-6(p).

Department of Energy (“DOE”) Management and Operating (“M&O”) contractors should pay attention to several DOE regulatory changes. First, DOE evaluated its make-or-buy policy and determined that the make-or-buy program is not “delivering value” to DOE. DOE has decided to eliminate the requirement that M&O contractors prepare and maintain formal make-or-buy plans.

Second, DOE has issued a notice of proposed rulemaking to require that contractors use the “cooperative audit strategy” in all M&O contracts. The cooperative audit strategy is a program that requires an M&O contractor to submit a detailed description of its internal audit plan and organization, and an Internal Audit Implementation Design to the contracting officer for approval. By January 31 of each year, the contractor must submit an annual audit report summarizing the audit activities undertaken during the previous year. By June 30 of each year, the contractor must submit its internal audit plan for the next fiscal year. The contracting officer may require revisions to these submissions. The proposed regulatory language also states: “If at any time during contract performance, the contracting officer determines that unallowable costs were claimed by the contractor to the extent of making the contractor’s management controls suspect, or the contractor’s management systems that validate the costs incurred and claimed suspect, the contracting officer may, in his or her sole discretion, require the contractor to cease using the special financial institution account …”

Finally, DOE has issued DOE N 351.1, “Contractor Employee Pension and Medical Benefits Policy.” This policy severely restricts contractor pension and medical benefits policies essentially by moving contractors away from defined benefit plans to defined contribution plans. The policy states that DOE will not reimburse “incremental pension costs” or “incremental medical benefit costs” due to the addition of new employees or augmented benefits under a defined benefit pension plan or medical benefits plan.

III. Litigation

Four cases should be of particular interest to contractors doing business with the government. In United States v. Stein, the court granted discovery to the defendants in a criminal action on the issue of whether the use of the “Thompson Memorandum” by the Department of Justice (“DOJ”) interfered with the defendants’ constitutional right to counsel. The Thompson Memorandum is a policy set forth in a January 2, 2003, memorandum by then Deputy Attorney General Larry D. Thompson, that redefined what a corporation must do to “cooperate” with DOJ to avoid prosecution or to plea to a lesser charge. The Thompson Memorandum states in part: “[A] corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct, or through providing information to the employees about the government’s investigation pursuant to a joint defense agreement, may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.” [Footnote omitted.] The issue in Stein relates to “whether the government, through the Thompson memorandum or otherwise, affected KPMG’s determination(s) with respect to the advancement of legal fees and other defense costs to present or former partners and employees with respect to the investigation and prosecution of this case …”

In Lockheed Martin Corporation v. United States, the U.S. Court of Federal Claims rejected the government’s position that the Cost Accounting Standards (“CAS”) regulations prohibit a contractor from offsetting cost increases and decreases among cost-type and fixed price contracts. The court stated: “Defendant, however, asseverates that 48 C.F.R. § 9903.306(e) does not allow a contractor to offset or eliminate cost increases associated with the change in cost accounting practices in cost-reimbursement contracts with cost decreases triggered in fixed-priced contracts by the same accounting change … [D]efendant’s interpretation of the regulations is – in a word – wrong.”

The ASBCA granted the contractor’s motion for reconsideration in Bath Iron Works, and determined that the contractor was entitled to interest under the Contract Disputes Act. That case involved the contractor’s recovery of costs to repair and replace damaged ship piping under fixed-price incentive contracts. In its first opinion, the ASBCA decided that the contractor was not entitled to interest but reversed this finding on reconsideration. Finally, in Environsolve, LLC v. U.S. Department of Justice Drug Enforcement Administration, the DOTCAB decided that the government may recover excess reprocurement costs as common law damages for breach of a time and materials contract, even though the contract contained FAR 52.249-6. That clause is the standard FAR termination clause for cost-type contracts which does not provide for excess reprocurement costs.

LINKS TO RECENT DEVELOPMENTS IN GOVERNMENT CONTRACTS

III. CASES

IV. REPORTS