Smith Pachter McWhorter PLC 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

When Congress returns from its current recess, it will once again take up the proposed National Defense Authorization Act for Fiscal Year 2006. Contractors should pay close attention to a number of the provisions of that pending legislation because Congress is poised to impose new burdens on those doing business with the federal government.

More disturbingly, the proposed legislation would require DOD to establish a pilot program to examine the use OMB Circular A-76 to convert functions currently performed by contractors that could be performed by DOD federal employees. The proposed legislation would require the pilot program to include not less than four competitions.

Ethics Requirements. As a result of recent ethics violations, the proposed legislation also includes significant reporting requirements, whereby contractors would file annual disclosures of any former DOD employee or retired military person who “was provided compensation by the contractor” less than two years after such person left DOD service. The quoted phrase would also include persons acting as consultants to the contractor.

The proposed legislation would also require DOD, with the Office of Government Ethics, to conduct a review of “ethics considerations raised by” contractor performance of functions “closely associated with inherently governmental functions” and “functions historically performed by Government employees in the Federal workplace.”

Most troubling for contractors is the proposed section that would require DOD to establish a “risk assessment team,” chaired by the DOD Inspector General, “to assess the vulnerability of [DOD] contracts to fraud, waste, and abuse.” The risk assessment team would review contracting systems and internal controls of DOD and prime contractors, and prepare a report which would then be reviewed by GAO. DOD would be required to develop an action plan to address the identified areas of vulnerability.

Proposed Amendments. Contractors should also pay attention to the proposed amendments to the DOD authorization bill. For example, Senator Robert Byrd’s proposed amendment would require a 100% withhold of any contractor cost questioned by “an investigative or audit component” of DOD in a contract or subcontract related to security and reconstruction activities in Iraq and Afghanistan. The contractor would receive payment only “upon a subsequent determination by the appropriate Federal procurement personnel, or investigative or audit component” of DOD that the cost is allowable.

Another proposed amendment would establish a Special Committee on War and Reconstruction Contracting consisting of seven Senators. The committee would examine all aspects of procurement, including but not limited to “wasteful and fraudulent practices,” related to Iraq, Afghanistan, and the war on terrorism. The committee would have power to subpoena both documents and testimony.

Yet another proposed amendment would prohibit a prime contractor from applying indirect cost burdens and profit on subcontractor effort under a time and materials contract.

Additional proposed legislation of concern to contractors is listed in the attached index with weblinks to the source documents.

II. Regulations and Policies

Government contractors with ESOPs should examine the CAS Board’s Notice of Proposed Rulemaking, “Accounting for the Costs of Employee Stock Ownership Plans (ESOPs) Sponsored by Government Contractors.” That proposed rule would clarify that CAS 415, not CAS 412, governs accounting for ESOPs, and that the contractor’s cost is measured by its contribution “including interest and dividends” to the ESOP. DCAA has long taken issue with the allowability of interest in ESOP contributions. Contractors should be alert to any proposed changes to FAR Part 31 to disallow such costs.

Contractors should also be alert to DCAA’s increased scrutiny of compensation costs. On June 30, 2005, DCAA issued “Audit Guidance on Evaluating Compensation Costs” to all DCAA regions. That audit guidance emphasizes the importance of scrutinizing compensation reasonableness, and encourages field audit offices to use the “Mid-Atlantic Region Compensation Team” to assist as consultants and expert witnesses.

Additional final and proposed regulations, and DCAA audit guidance, may be found in the attached index with weblinks to the source documents.

III. Litigation

One bright spot in the past several months is the Court of Federal Claims decision in General Motors Corporation v. United States, No. 00-40C (COFC June 28, 2005). There, GM sued to recover monies for a segment-closing pension cost adjustment under the original CAS 413. The government argued that GM’s recovery should be limited to exclude closed contracts. The government also argued that GM could not recover where GM had failed to fund pension costs in a given year (citing FAR 52.216-7(b), Allowable Cost and Payment), or where the amount GM claimed under CAS 413 exceeded the amount estimated for purposed of the Limitation of Cost/Limitation of Funds clauses (FAR 52.232-20, -22). The court rejected all three of these arguments and found that closed contracts, and the cited FAR provisions did not affect the CAS 413 segment-closing adjustment. The court’s decision is a rejection of the July 23, 2004, DCMA/DCAA Joint Guidance on segment-closing adjustments. Contractors should be alert to DCAA efforts to limit cost recovery by asserting FAR provisions to overcome CAS.

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For a complete list of Recent Developments in Government Contracts, please see the attached index with weblinks to the source documents. If you wish to discuss these or any other government contract issues, please contact the following individuals or view our website at www.smithpachter.com to view additional attorney biographical information:

LINKS TO RECENT DEVELOPMENTS IN GOVERNMENT CONTRACTS  

I. LEGISLATION

• H.R. 1815, “National Defense Authorization Act for Fiscal Year 2006” (June 6, 2005)

• S. 1042, “National Defense Authorization Act for Fiscal Year 2006” ( May 17, 2005)

• Proposed Amendments to S. 1042

• Senate Report No. 109-69, “National Defense Authorization Act for Fiscal Year 2006” ( May 17, 2005)

• H.R. 2863, “Department of Defense Appropriations Act, 2006” ( June 21, 2005)

• H.R. 3058, Making appropriations for the Departments of Transportation, Treasury, and others ( July 26, 2005)

• S. 1185 and H.R. 3406, “ United States Workers Protection Act of 2005,” (June 7 and July 22, 2005)

• H.R. 2067, “Acquisition System Improvement Act” (May 4, 2005)

• H.R. 6, “Energy Policy Act of 2005” (presented to the President August 4, 2005)

II. REGULATIONS AND POLICIES

• FAC 2005-05, 70 Fed. Reg. 43576 ( July 27, 2005)

• Interim Rule with Request for Comments, “DFARS - Business Restructuring Costs – Delegation of Authority to Make Determinations Relating to Payment,” 70 Fed. Reg. 43074 ( July 26, 2005)

• Correction to Final Rule, CAS Board, “Capitalization of Tangible Assets,” 70 Fed. Reg. 37706 ( June 30, 2005)

• FAC 2005-04, 70 Fed. Reg. 33654 ( June 8, 2005)

• Response to Public Input, “DOD – Contract Financing: Performance-Based Payments,” 70 Fed. Reg. 32306 ( June 2, 2005)

• Interim Rule with Request for Comments, “DFARS – Incentive Program for Purchase of Capital Assets Manufactured in the United States,” 70 Fed. Reg. 29643 ( May 24, 2005)

• Interim Rule with Request for Comments, “CAS Board – Applicability of Cost Accounting Standards Coverage,” 70 Fed. Reg. 29457 ( May 23, 2005)

• Proposed Rule with Request for Comments, “DFARS – Notification Requirements for Critical Safety Items,” 70 Fed. Reg. 44077 ( August 1, 2005)

• Proposed Rule, “FAR: OMB Circular A-76,” 70 Fed. Reg. 43107 ( July 26, 2005)

• Notice of Proposed Rulemaking, “CAS Board – Accounting for the Costs of Employee Stock Ownership Plans (ESOPs) Sponsored by Government Contractors,” 70 Fed. Reg. 42293 ( July 22, 2005)

• Proposed Rule, “FAR – Fast Payment Procedures,” 70 Fed. Reg. 40279 ( July 13, 2005)

• Proposed Rule, “FAR – Past Performance Evaluation of Orders,” 70 Fed. Reg. 35601 ( June 21, 2005)

• Proposed Rule with Request for Comments, “DFARS – Contractor Insurance/Pension Reviews,” 70 Fed. Reg. 35606 ( June 21, 2005)

• Proposed Rule, “FAR – Buy-Back of Assets,” 70 Fed. Reg. 34080 ( June 13, 2005)

• CAS Board Meeting Minutes (July 19 and May 13, 2005) (OMB WEBSITE)
  
• July 19th Meeting
  
• May 13th Meeting

• DCAA Memorandum, “Audit Guidance on Evaluating Compensation Costs” (June 30, 2005)

• DCAA Memorandum, “Audit Alert on Emphasizing Certain Incurred Cost Audit Procedures as a Result of the PCIE-based Review Findings" (June 28, 2005)

• DCAA Memorandum, “Audit Guidance on Revised FAR Part 30, Cost Accounting Standards Administration and Related Contract Clause and Solicitation Provisions” (June 6, 2005)

• DCAA Memorandum, “Audit Guidance on the Executive Compensation Cap for Contractor Fiscal Years 2005 and Beyond” (May 20, 2005)

• DCAA Memorandum, “Audit Guidance on Low Risk Time and Material/Labor Hour Contract Closeout Initiative” (May 17, 2005)

• DCAA Memorandum, “Audit Guidance on Reasonableness and Allowability of Security Clearance Bonus/Premium as an Element of Compensation” (May 9, 2005)

• DCAA Memorandum, “Audit Guidance on Disclosure of Contractor Proprietary Data to Third Party Private Firms (Service Providers)” (May 3, 2005)

III. CASES

 IV.       REPORTS

• “Procurement Ethics: Investigators Band Together Against Contracting Fraud,” National Defense (August 2005)

• “Report to Congress,” Special Inspector General for Iraq Reconstruction  (July 30, 2005)

• GAO-05-681, “DOD Cannot Ensure Its Oversight of Contractors under Foreign Influence is Sufficient” (July 2005)

• Rep. Henry A. Waxman & Sen. Byron L. Dorgan, “Halliburton’s Questioned and Unsupported Costs in Iraq Exceed $1.4 Billion” (June 27, 2005)

• DOD Inspector General Report No. D-2005-077, “Accounting for Sperry Marine Pension Plan Assets Under an Advance Agreement with Litton Industries, Inc.” (June 17, 2005)

• GAO-05-637, “Thousands of Civilian Agency Contractors Abuse the Federal Tax System with Little Consequence” (June 2005)

The information in this newsletter is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.