SECAF: Government Contracts Opportunities & Obstacles

Grant H. WillisFebruary 11, 2014

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Government Contracts--Opportunities

• U.S. -- World’s largest consumer of goods and services

• In FY 13, $460 billion spent on contracts, $526 billion on grants

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Government Contracts--Opportunities

• In FY 12, about $89.9 billion went to small and small disadvantaged businesses

• SBA goal: 23% of prime contracting to small businesses

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Government Contracts--Opportunities

• Estimated Top 20 Contracts in 2014 74% increase over 2013 ($92 B$160 B)

• 73% Defense (mostly Army); 45% IT

• Cybersecurity, health care needs

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The Government is a Different Type of Buyer

• Special government policy concerns drive the buying and contracting processes

• Unique requirements and contract provisions vary depending upon the source of funds, the procuring agency, the method of procurement, the nature of the goods and services, and the nature of the contractor

• Risks different than commercial environment. Quite fluid.

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Unique Requirements and Risks•Certifications concerning eligibility and compliance with laws designed to protect the integrity of the procurement process

•Implied certification of strict compliance with all technical specifications and testing requirements

•Special accounting, pricing and record-keeping requirements

•Unique disclosure obligations

•Increased government focus on audits, compliance and prosecution

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Key Areas of Risk• Socio-economic program requirements• Domestic Preference Provisions

• Buy American/Buy America/ARRA• Specialty Metals/Berry Amendment

• Procurement Integrity Act/Anti-Kickback Act• Organizational Conflicts of Interest• Pricing

• Truth In Negotiations Act• GSA/MFC

• Cost Principles & CAS• Labor Charging• Product Substitution• Unique contracting rules (authority/funding/terminations)

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Consequence of Violations• Audits & Investigations • Negative Performance Record

• Disallowance of Costs • Civil False Claims

• Rejection of Invoices • Criminal False Statements and Fraud

• Reductions in Contract Price • Substantial Fines, Penalties and Damages

• Forfeiture of Claims and Contracts • Exclusion from Future Contracts

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TRUTH IN NEGOTIATIONS ACT (TINA)(FAR Part 15)

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TINA Requirements

• Statute Imposes a Unilateral, Affirmative Duty to Root Out and Disclose All “Cost Or Pricing Data”

• Certification that “Cost or Pricing Data” Disclosed Are Current, Accurate and Complete, as of the Date of Price Agreement (“Sweeps”)

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Applicability of TINA• Negotiated Prime Contract > $700,000

• Prime Contract Modification > $700,000

• Negotiated Subcontract > $700,000 at Any Tier, if Prime Contract and Upper Tier Subcontract(s) Provided Cost or Pricing Data

• Subcontract Modification > $700,000 at Any Tier, if the Prime Contractor and Upper Tier Subcontractor(s) Provided Cost or Pricing Data

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Exemptions from TINA• Adequate Price Competition

• Prices Set by Law or Regulation

• “Commercial Item” Acquisition at Fixed Price

• Pricing Actions Less Than $700,000

• Exceptional Cases - Waiver by Head of Contracting Activity

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FALSE CLAIMS ACT(31 USC §3729 et. seq.)

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FCA Generally

• Enacted in 1863; amended in 1986, 2009 and 2010

• FCA collections in past 3 years: $8.8 billion (Holder)

• Applies broadly to cover:– Submitting or causing a false claim to be submitted– Making false statements or using false records to

get or keep government money• Government’s primary civil anti-fraud mechanism.

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FALSE CLAIMS ACTDamages and Penalties

• Penalty of $5,500 to $11,000 per false claim (invoice)

• Treble actual damages

• Private plaintiffs may sue in the name of the Government. (Qui Tam “relator”)

• Liability for “relator” attorneys fees and costs

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FALSE CLAIMS ACT• Case filed under seal while DOJ investigates. DOJ can intervene

and prosecute, allow relator to prosecute, or dismiss

• Relator may be awarded a percentage of the recovery– 15%-25% if DOJ intervenes– 25%-30% if DOJ declines intervention

Usually Results In Debarment Proceedings

If Contractor Loses or Settles

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FALSE CLAIMS ACT

• Fraud Enforcement and Recovery Act (May 10, 2009)

• Patient Protection and Affordable Care Act (Mar. 23, 2010)

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PRESENT RESPONSIBILITY AND SUSPENSION AND DEBARMENT

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Present Responsibility

• Contractors Must Qualify as “Presently Responsible” To Do Business With the Government

• The Test of Responsibility Includes Not Only Adequate Financial Resources and Technical Skills, But Also:– A satisfactory performance record– A satisfactory record of integrity & business ethics– Adequate accounting and operational controls

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Present Responsibility

• Responsibility determination made by Contracting Officer prior to each contract award.

• Global decision that a contractor is not responsible may be made via Suspension and Debarment Process

• Prime contractors are responsible for ensuring present responsibility of subcontractors

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Suspension and Debarment

• An agency may propose to "debar" a contractor from participation in all future government procurements

• A contractor is "suspended" pending administrative proceedings.• Debarment grounds include:

• commission of a fraud relating to a public contract or subcontract

• violation of State or Federal antitrust laws• commission of specified crimes indicating a lack of integrity, e.g.,

embezzlement, theft, forgery, bribery, obstruction, false statements, tax evasion

• mislabeling origin of goods or products ("Made in America")• any other offense indicating a lack of honesty or business

integrity (FAR 9.406)

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Suspension and Debarment

• Contractors also may be debarred for violations of the Davis-Bacon Act, Contract Work Hours and Safety Standards Act, the Service Contract Act, the Fair Labor Standards Act, and related Labor Laws. (FAR 52.222-12)

• Corporations are responsible for the actions of officers, directors, managers, employees and agents, and frauds, crimes and serious misconduct may be imputed to joint venture partners (FAR 9.406-5)

• Congress has proposed legislation to debar any company convicted of an FCPA violation (HR 5366)

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Suspension and Debarment• Exclusions from all new procurements and “non-

procurements” Government-wide. (FAR 9.401)• Debarments are for periods of 1 to 3 years (including any

suspension period)• Contractor proposals must disclose and certify whether they

presently are debarred, or have been charged with specified offenses with the past three years. (FAR 52.209-5) (FAR 52.209-7)

• Primes will not use debarred subcontractors absent unique requirements and contracting officer approval

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Suspension and Debarment – Recent Changes• As of December 2008, contractors face suspension or

debarment for “knowing” failure by a “principle” to make “timely disclosure” when have “credible evidence” of:– A violation of federal criminal law involving fraud,

conflict of interest, bribery, or gratuity violations– A violation of the civil False Claims Act; or– A significant overpayment on a contract.

[In connection with one of its government contracts]

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COMPLIANCE PROGRAMS AND DISCLOSURE REQUIREMENTS

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Mandatory Code of Conduct and Disclosures for Contractors• In December 2008, the FAR Council issued a new

rule regarding compliance programs and mandatory disclosure

• All Covered Contractors “must” have a written Code of Conduct; large businesses must have ongoing compliance programs, training and effective internal control systems

• Covered Contractors must “fully cooperate” with investigations

• Covered Contractors must disclose wrongdoing relating to their contracts

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Mandatory Disclosure• A Covered Contractor must “timely disclose” in writing to the

agency’s Inspector General and the contracting officer in connection with the award, performance or closeout of the contract, or a subcontract thereunder, “credible evidence” of:– A violation of federal criminal law involving fraud, conflict of

interest, bribery, or gratuity violations; or – A violation of the civil False Claims Act

• Applies to all contracts and subcontracts expected to exceed $5 million with a performance period of at least 120 days (but see new debarment basis)

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CURRENT TRENDS & DEVELOPMENTS

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New Vet and Disability AA Rules

• New percentage goal-based requirement

• New reporting requirements

• New flow down requirements (specific text)

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Changes in Cost-Type Contracting?

• Risk shifting

• Reduced incentive to enter into cost-type contracts?

• Increased proposed fixed price contracts?

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Changes in Cost-Type Contracting?

• LOGCAP III Decisions (KBR)

• Fed Circuit rejected “best effort” test for allowability; no reliance on “business judgment rule”

• Costs incurred by gross negligence not allowable

• Other negligent mistakes? Unclear

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Bid Protest Activity--2013

• Slight dip from high in 2012—2,429 new cases• More than doubled since 2001• More corrective actions• Sustained 17% of protests on merits—most victories

because of failure to follow procedures• More task order protests

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Suspension/Debarment Activity on the Rise?

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Areas of Debarment Risk

• Small Business

• Performance

• Labor Issues

• Veterans Certifications

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Suspension/Debarment—Affiliates at Risk

• Agility / Public Warehouse subsidiaries• Suspended for over 4 years• 11th Circuit—can continue past 18 months during

criminal proceedings against parent• Agencies can suspend based on “adequate

evidence”—like “probably cause”• Concern that parent will shift business to affiliate

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Contracting Officer Turnover

• Contracting officer positions change

• Uneven training / competence

• Written notification of changes. Written agreements

• No apparent authority

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Cybersecurity

• Recommendations from final DOD/GSA report• Baseline cybersecurity requirements for certain

acquisitions (similar to proposed FAR rule)• Common definitions• Training• Overall Cyber Risk Management Strategy• OEM / “Trusted Reseller” Purchase Requirements

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PRACTICAL ADVICE

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Practical AdviceStrive for Commercial Item Status

• Fewer requirements

• Fewer flow-downs

• Exemption from TINA and CAS

• Dramatically reduce compliance risk

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Practical AdviceCommit to Market/Commit to Compliance

• Must invest in people, systems and procedures to learn and follow rules of road

• Contract administration; accounting, finance, record-keeping—key functions

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Practical AdviceCompliance Must Be a Core Value• Code of Business Ethics and Code of Conduct• Internal procedures and controls• Independent/anonymous hotline• Compliance Officer with access to Sr. Mgmt/audit

committee• Ongoing training• Ongoing internal audit and risk assessment• Senior management commitment• Part of annual evaluations

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Practical AdviceManage Records• Keep everything you need. Keep only what you need• Assume everything you type, text, scribble or send will become

public• Make it accessible

Mergers & Acquisitions• Conduct thorough “due diligence” for unique government

contract risks• Internal evaluations and corrective plans post acquisition

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Practical AdviceWhen Problems Happen

• Do triage; get counsel involved in potentially serious matters

• Do a thorough investigation and make required disclosures ASAP

• Always keep the debarment issue in mind/prepare both the defense and present responsibility case from the start– Make restitution– Discipline people– Implement reform and safeguards– Try to have it done before the agency asks for it