Public-Private Competition. Once again, Congress appears ready to protect federal employees by forbidding the conversion of a DOD function performed by federal employees, unless based on a public-private competition under the May 29, 2003 version of OMB Circular A-76. If the difference between the contractor’s cost of performance, compared to the cost of the “most efficient organization” of federal employees, would be less than ten percent of the MEO’s personnel-related costs or $10,000,000, then the federal employees would win the competition. In other words, in order to win an A-76 competition, a contractor would have to beat the MEO costs by more than ten percent or $10,000,000. 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

• Graham County Soil & Water Conservation District v. United States ex rel. Wilson, No. 04-169 (Sup. Ct.June 20, 2005) (state statute of limitations governs employee retaliation claims under federal civil False Claims Act)
   Arthur Andersen LLP v. United States, No. 04-368 (Sup. Ct. May 31, 2005) (conviction reversed due to erroneous jury instruction, but recitation of facts is instructive regarding contractor record retention policies)
  Morse Diesel International, Inc. v. United States, No. 99-279C (COFC July 15, 2005) (first adjudicated case by COFC “under the comprehensive scope of the Anti-Kickback Act of 1986”)
  Gould, Inc. v. United States, No. 95-88C (COFC July 8, 2005 ) (no private right of action for contractor due to government violation of multiyear contracting statute and regulations)
  Fluor Hanford, Inc. v. United States, No. 02-759C (COFC July 1, 2005) (legal costs incurred in defense of qui tam action capped at eighty percent)
  General Motors Corp. v. United States, No. 00-40C (COFC June 28, 2005) (segment closing pension issues under original CAS 413; dismissed GM’s claims that did not comport with Contract Disputes Act; status of past contracts (open or closed, or contractor releases relating thereto) does not limit CAS 413 current period adjustment; CAS 412 and FAR provisions do not extend to segment-closing adjustment; CAS 413 segment-closing adjustment does not implicate LOC/LOF clauses; GM has no right to profit in connection with CAS 413 adjustment)
   Tecom, Inc. v. United States, No. 00-475C (COFC June 27, 2005) (detailed discussion of presumption of good faith on part of government employees)
  University Research Co. v. United States, No. 04-1177C (COFC June 3, 2005) (protest sustained where agency conducted flawed cost realism analysis due to improper normalization of reproduction costs; past performance evaluation need not be weighted based on degree of relevance of contracts)
  
• United States ex rel. DRC, Inc. v. Custer Battles, LLC, No. 1:04cv199 (E.D. Va. July 8, 2005) (FCA “claim” requires request for payment from U.S. Government funds; “claim” does not extend to cases where government acts solely as custodian of funds)