DOD Proposed Rules Seeking Contractor Business System Rule Self Assessments

The Department of Defense issued a proposed rule on July 15th that would revise the DFARS Business Systems Rule by requiring contractors with estimating, accounting, material management, and accounting systems that are currently subject to the existing Business Systems Rule to perform self-assessment reports on their business systems compliance.  The proposed rule would have contractors assuming responsibility for annual self-assessments of those systems and for overseeing a triennial audit of the contractor’s compliance by an independent contractor-selected Certified Public Accountant.  As drafted, the proposed rule would only apply to the contractor’s accounting, estimating, material management, and accounting systems used for DOD CAS-covered contracts. Government auditors would examine the results of the self-evaluations.  Contractors will be offered no favorable credit or “safe harbor” for disclosures made in the contractor’s report.

The proposed DOD rule seems to suggest that DCAA’s “eyes are bigger than its stomach,” and that it lacks the staffing to discharge the expanded, and expansive, audit rights for which the regulations now make provisions.  The response, perhaps predictably, is not to reduce the scope of the audits, but rather, to transfer the responsibility to someone else, in this case the contractor and its designated third party CPA.  Not only does this place a substantial administrative and monetary burden on contractors, but it has a number of collateral effects that, from the contractor’s perspective at least, are highly undesirable, e.g., (1) because the DCAA will not conduct any audit until the contractor and/or its CPA has completed their own audits, the statute of limitations on Government claims will begin to run at a much later point in time than would be the case if the audit process were initiated by the Government; (2) DCAA criticisms of contractor audits could easily prompt False Claims Act allegations based on alleged misstatements in the private audits or other alleged inadequacies in the audit process; (3) 18 U.S.C. 1001 allegations are likely to be lurking around every corner in connection with allegedly “soft” audit reports, and (4) the contractor’s CPA becomes a “witness for the prosecution” (apologies to Agatha Christie) in any ensuing proceeding, making it difficult, if not impossible, to adduce controverting expert testimony to defeat any Government claim that rests on the CPA’s analysis.

Admittedly, the opportunity to have the first crack at a systems audit has some initial facial appeal.  But no one should be deluded into believing that DCAA will accept those self-assessments or those prepared by the contractors’ CPAs.  And, one should not ignore the collateral consequences of this proposed rule, some of which are outlined above.

Compensation Allowability Cap Cut in Half Under New FAR Interim Rule

On June 24, 2014, an interim rule was published that revises the allowable cost limit relative to the compensation of contractor and subcontractor employees. In operation, the interim rule changes the application of the cap, the amount of the cap, and the formula for adjusting the cap. The new cap now rests at $487,000 for contracts awarded after June 24, 2014, while contracts and subcontracts awarded before that date will still be subject to the old cap that hovered around $952,000.  The cap is not static but will be adjusted annually to reflect changes in the Employment Cost Index for all workers, as calculated by the Bureau of Labor Statistics.  In terms of exceptions, the interim rule authorizes the head of executive agencies to establish “narrowly targeted exceptions” to the raise the cap as needed to account for scientists, engineers, or other specialists deemed necessary for the agency to retain “access to needed skills and capabilities.”  Application of this exception likely will fall upon the contractor to propose an exception, however it should be noted that the authority to grant the exception rests with the head of Executive agencies and not with the contracting officer.

Proposed Rule Increases Vigilance On Pass-Through Contracts

On July 10, 2014, premised on Section 802 of the 2013 National Defense Authorization Act, a new rule was proposed that imposes additional requirements on agencies related to the review and justification of pass-through contracts by requiring agencies to justify contract awards when more that 70% of the total cost of work will be passed-on to subcontractors.  Except in instances when contracts are awarded to small businesses, Contracting Officers receiving such a proposal will need to consider alternative contract vehicles and the possibility of contracting directly with the proposed subcontractor(s) in lieu of the proposing prime. Thereafter, the agency must document in writing that the selected approach is in the best interest of the Government. The proposed rule is a departure from the strict reading of Section 802, which only applied originally to contracts with the Department of Defense, the Department of State, and the United States Agency for International Development.  The proposed rule’s announcement explained that, “for the purpose of consistency,” the rule would be applicable to all agencies subject to the FAR. Any written comments on the proposed rule are due September 9, 2014.

Some Women-Owned Small Businesses Now Eligible For Any Dollar-Amount Set-Asides

On June 24, 2014, the Government adopted as final, without change, its June 2013 interim rule, removing the dollar limitations for set-asides to economically disadvantaged women-owned small business (“EDWOSB”) concerns and eligible women-owned small business (“WOSB”). The finalized rule confirms that contracting officers may now set aside acquisitions for competition restricted to EDWOSBs and eligible WOSBs at any dollar level above the micro-purchase threshold so long as they meet the other set-aside requirements.  This is a substantial change from before the interim rule when Contracting Officers could only set aside contracts for EDWOSBs and eligible WOSBs if the anticipated award price of the contract did not exceed $6.5 million for manufacturing contracts or $4 million for all other contracts.  Uncapping the limits of these set-aside contract values will likely facilitate Federal Government goals of awarding 5 percent of its prime and subcontract dollars to EDWOSBs and eligible WOSBs.