The Contractor's Perspective

Raytheon v. United States—the Federal Circuit’s tutorial on the difference between the Cost Accounting Standards and the FAR Cost Principles

Posted in Claims and Disputes, Cost Issues

The Federal Circuit’s decision in Raytheon Co. v. United States, No. 2013-5004 & 2013-5006 (Fed. Cir. April 4, 2014) [pdf] affirms a $59-million judgment arising from a government challenge to Raytheon’s calculation and payment of pension fund adjustments. It is certainly an important case because of the money at stake for Raytheon and its analysis of CAS 412 and CAS 413.

It may have much broader relevance. One of the most striking elements in the decision is the court’s discussion of the relationship between the Cost Accounting Standards and the cost principles in FAR Part 31. In a few direct and succinct paragraphs, the court summarizes the differences between allowability under the FAR and allocability under the CAS. Here are the highlights drawn from the opinion:

  1. The FAR Cost Principles govern matters of cost allowability. A determination that a particular cost is allowable reflects a policy judgment that the cost is of a type that should be paid by the Government.
  2. The CAS does not address allowability. Rather, the CAS addresses the measurement, assignment, and allocability of costs.
  3. If there is a conflict between the CAS and the FAR as to an issue of allocability, the CAS governs.
  4. According to the CAS, measurement includes defining the components of costs, determining the basis for cost measurement, and establishing the criteria for using alternative cost measurement techniques. Allocability addresses the relationship between a cost and a cost objective (e.g., a contract), such that the cost objective bears the appropriate portion of a cost.
  5. An agency may include a provision in its contracts or regulations that disallow certain types of costs because they are unreasonable in amount or contrary to public policy. Unallowable costs may nevertheless be allocable to a contract.

The decision also concludes that the Government bears the burden of proving that a contractor’s accounting practices do not comply with the CAS.

Is mail dead?

Posted in Postal Service Contracting

Lonely mailboxIs mail dead?  Let’s ask Google, the ubiquitous source of all things online. This should be a lay-up on the home court of those who would say yes. And guess what. The top ten results for a Google search of “Is mail dead?” produces seven articles on why e-mail is dead, two unrelated articles, and one article on why direct mail is not dead. Dig down for another ten results and you get about the same result – more articles on why email is dead and a few on why direct mail or “snail mail” isn’t dead.

At the National Postal Forum last month, a postal official responsible for large customer accounts noted that a while back, Circuit City was his 26th largest customer. Circuit City is now defunct. But if we asked people 15 years ago to predict whether USPS or Circuit City would still be around today, I don’t think many people would have picked the Postal Service.

Don’t get me wrong – mail has definitely changed. There’s much less First-Class Mail than before, and less total volume than before. But here’s what I learned about why mail is not dead and not going away any time soon.  No company is forced to use the mailbox as an advertising medium and there are strong competitors for most package services. But Standard Mail volume for the first quarter of Fiscal Year 2014 is the same as last year, and Shipping Services & Packages volume increased by 14 percent.

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Pass-through claims without a contract—Severin doctrine part two

Posted in Claims and Disputes, Contract Administration, Subcontracting

The Severin doctrine restricts the ability of prime contractors to hold the government responsible for costs incurred by subcontractors. It is often of limited practical effect because it can usually be avoided by contract. Liquidation agreements, sponsorship agreements, pass-through agreements, and other similar agreements often include a conditional release that limits the subcontractor’s recovery to the amount that the prime contractor recovers from the government. With this protection, prime contractors are often willing to pursue subcontractor claims on a pass-through basis.

As we discussed in part one of this post, the Severin doctrine is nevertheless a recurring issue in federal contracts. Here we address two recent cases that explore the application of the Severin doctrine when the rights of the prime contractor and subcontractor are not expressed in a written agreement.

No subcontract at all

The decision in Parsons-UXB Joint Venture, ASBCA No. 56481, 13-1 BCA ¶ 35,378 (Aug. 1, 2013) [pdf] addresses the application of the Severin doctrine when there is no written subcontract. Parsons and UXB formed a joint venture to complete a Navy project to restore the Hawaiian island of Kaho’olawe, which had been used as a weapons range. The JV was “unpopulated,” meaning that employees of Parsons and UXB did all the work even though the JV formally held the contract. There were no subcontracts in place between the JV and either Parsons or UXB. When a dispute developed over costs incurred on the project and the JV brought the case to the Armed Services Board, the Navy cited the Severin doctrine. Without a subcontract, the Navy asserted that the JV could not be liable for costs incurred by Parsons or UXB and therefore could not pursue claims on their behalf.

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Preserving attorney-client privilege in internal investigations after Barko v. Halliburton

Posted in Compliance, False Claims Act, Qui tam litigation, Suspension and Debarment

Read the press about Judge James Gwin’s decision in United States ex rel. Barko v. Halliburton Co., No. 1:05-cv-1276 (D.D.C. Mar. 6, 2014), and you might see it as the beginning of the end for the attorney-client privilege in internal investigations. While the ultimate implications of the decision remain to be seen, that’s not how we see it.

The attorney-client privilege and the work product doctrine are alive and well, as is their application to internal investigations. The FAR clause implementing the requirement for a Code of Business Ethics and Conduct preserves the contractor’s right to conduct an internal investigation subject to the protections of the attorney-client privilege and the work product doctrine. See FAR 52.203-13 (Dec. 2008). The Justice Department’s Principles of Federal Prosecution of Business Organizations explicitly states that a company is not required to waive privilege in order to get credit for cooperating with a government investigation. “[W]aiving the attorney-client and work product protections has never been a prerequisite under the Department’s prosecution guidelines for a corporation to be viewed as cooperative.”

For federal contractors, publicly-traded companies, and others in highly-regulated industries, the real question presented by Barko is more granular: How can my company avoid the same result?

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A five-part action plan for responding to a federal search warrant

Posted in Compliance, False Claims Act, Labor & Employment

The line between “white collar crime” and “street crime” is often blurred as prosecutors and investigators deploy all of the tools at their disposal against white collar and regulatory offenses. Principal among these tools is the search warrant. While the execution of a lawfully-obtained search warrant cannot be stopped, a company’s reaction to the search and to the agents conducting it can have a significant impact on the course of a government investigation. A well-executed response may yield intelligence about the nature and scope of the investigation and may limit the amount of information the government obtains.

In this post, we present an overview of the search warrant process and offer some basic guidelines that may be used in preparing for and responding to a search warrant.

Understanding the element of surprise

Government investigators correctly see search warrants as their one chance to use the element of surprise. They make every effort to use it effectively. Long before a warrant is served, agents spend weeks or months on pre-search surveillance. They serve warrants simultaneously at all of a company’s offices. They conduct interviews of key executives at their residences early in the morning before attorneys are available. They use whistleblowers present during the execution of the warrant wired to record employee conversations of the employees. They interview employees on site before company attorneys can inform them of their rights or contact the lead prosecutor. They engage in surveillance of key individuals after the search is executed. They even search nearby dumpsters for evidence. Several weeks later, they may issue a grand jury subpoena requiring the company to produce email and text messages sent during and after the search.

Investigators have the process down to a science, while the company at the center of the investigation likely will be going through it for the first time. Preparation and training on the process will help level the playing field. Here are the five basic elements that should be addressed in an action plan for responding to a search warrant.

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Three new grounds for bid protests in a cyber secure world

Posted in Bid Protests, Compliance

No one will argue against the need to improve cybersecurity. We should limit the vulnerability of critical infrastructure and preserve the confidentiality of military technology, private company trade secrets, and individual medical records.

But there is a significant cost to upgrade IT systems in order to achieve this goal. The federal government will pay more to contractors who can meet heightened cybersecurity standards. If cybersecurity standards are too restrictive, qualified contractors will be driven away from federal contracting. At a minimum, new cybersecurity standards will mean more grounds for bid protests, which are the focus of this post.

First, the background

Executive Order No. 13636 (Feb. 12, 2013) [pdf] called for agencies to publish guidance on mitigating cybersecurity threats in federal procurement. In November 2013, DOD and GSA released a joint report recommending that compliance with an established cybersecurity protocol be a precondition to the award of information and communication technology (“ICT”) contracts. See Improving Cybersecurity and Resilience through Acquisition, Final Report of the Department of Defense and General Services Administration (Nov. 2013) [pdf].

L-R: Pat Gallagher (NIST), Brig Lambert (Venafi), John Conners (Vanguard Integrity Professionals), Governor Martin O’Malley (Md.), County Executive Isiah Leggett, Vernon Lee (Microsoft), U.S. Senator Barbara Mikulski (D-Md.)Tom Gann (McAfee), Gigi Schumm (Symantec), Dave Patterson (Intel Federal), Hemma Prafullchandra (HyTrust), Bill Cull (Splunk), Michael Brown (RSA Federal Business), Ned Miller (Hewlett-Packard), Gen. Keith Alexander (NSA), and Gregory Akers (Cisco Systems)

The National Institute for Standards and Technology (“NIST”) released its voluntary framework for improving cybersecurity for critical infrastructure in February 2014. See Framework for Improving Critical Infrastructure Cybersecurity, Version 1.0 (Feb. 12, 2014) [pdf]. The NIST Framework is a tool for organizations seeking to measure and improve their cybersecurity programs against an ideal. The Framework encourages organizations to improve their cybersecurity programs “when such a change would reduce cybersecurity risk and be cost effective.” Compliance is not yet mandatory, but legislation incentivizing or requiring compliance should be expected.

These are by no means the first cybersecurity standards for federal contractors, but they would broaden and increase existing requirements. As they are implemented, cybersecurity requirements will certainly lead to an increase in pre- and post-award bid protests for ICT contracts. We see them principally in three areas.

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FedEx tops list of U.S. Postal Service contractors in 2013

Posted in Postal Service Contracting

Top 150 USPS Suppliers in FY 2013Federal Express Corporation was the U.S. Postal Service’s largest contractor in fiscal year 2013. The next largest USPS supplier was EnergyUnited, which provides consolidated telecommunication and energy billing services. Military air mail transportation provider Kalitta Air was third. Six of the Postal Service’s top 10 suppliers served the agency’s transportation needs. The Top 150 USPS supplier list is compiled annually by David P. Hendel, a partner in Husch Blackwell LLP’s Government Contracts practice group who focuses on Postal Service contracting matters.

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Obama’s Executive Order on the new federal contractor minimum wage

Posted in Compliance, Labor & Employment, New FAR Rules

President Obama signed an Executive Order raising the minimum wage for employees of federal contractors on February 12, 2014. Our earlier entry on the issue discusses how a higher minimum wage will affect current contractors. It looks like more waiting will be required before the true impact will be known.

The Executive Order calls for the Secretary of Labor and the FAR Council to draft regulations and contract provisions implementing the new minimum wage and to publish them later this year. But the Executive Order also includes some useful guidance.

Here are the key takeaways—

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How the Federal Circuit’s decision in Metcalf Construction fixes good faith and fair dealing

Posted in Claims and Disputes, Construction Contracting

Now for some good news in government contracts law. On February 11, 2014, a three-judge panel of the Federal Circuit reversed the Court of Federal Claims decisions in Metcalf Constr. Co. v. United States, 102 Fed. Cl. 334 (2011) (Metcalf I) and Metcalf Constr. Co. v. United States, 107 Fed. Cl. 786 (2012) (Metcalf II). The case has been remanded for further proceedings and application of the correct legal standards. A copy of the Federal Circuit’s decision is available here.

No requirement for proof of specific targeting

The main issue on appeal in Metcalf was the legal standard applicable to contractor claims that the government breached its duty of good faith and fair dealing. The Court of Federal Claims concluded that the decision in Precision Pine & Timber, Inc. v. United States, 596 F.3d 817, 829 (Fed. Cir. 2010) requires proof of specific targeting—that Government actions were “specifically designed to reappropriate the benefits” of a contract. Incompetence and failure to cooperate are not enough.

The Federal Circuit rejects this analysis. “The trial court misread Precision Pine, which does not impose a specific-targeting requirement applicable across the board or in this case.”

The Federal Circuit’s opinion in Metcalf also rejects the Government’s attempt to limit the scope of the duty of good faith and fair dealing. Citing Precision Pine, the Government argued that the duty of good faith and fair dealing “cannot expand a party’s contractual duties beyond those in the express contract or create duties inconsistent with the contract’s provisions.” In its appellate brief, the Government urged a broad application of that language that would almost always preclude a good faith and fair dealing claim. Citing its interpretation, the Government argued that Metcalf’s claim must fail because it could not “identify a contract provision that the Navy’s inspection process violated.”

That argument went nowhere with the Federal Circuit. According to the court’s decision, the Government’s interpretation “goes too far:  a breach of the implied duty of good faith and fair dealing does not require a violation of an express provision of the contract.”

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The Bipartisan Budget Act of 2013 and the Consolidated Appropriations Act, 2014: what they do and what they don’t do

Posted in Funding Shortfalls (Sequestration & Shutdown)

Submitted by Russell Orban

The Consolidated Appropriations Act, 2014, Public Law No. 113-76 (Jan. 17, 2014) funds the federal government until September 30, 2014. This legislation followed the groundbreaking Bipartisan Budget Act of 2013, Public Law No. 113-67 (Dec. 26, 2013). Together, these laws reflect a significant departure from the recent past. Normally, the budget agreement sets the boundaries for federal government spending in the upcoming fiscal year and the details are then supplied by the Appropriations Committees. The Bipartisan Budget Act set levels for both FY2014 and FY2015—the period from October 1, 2013 to September 30, 2015. This gives Congress a head start on its spending process for FY2015 and will postpone budget-deficit skirmishes until after the next election. Many important things remain undecided, but it is encouraging that Congress has found some common ground.

During the budget process, the House and Senate decide how much the federal government will spend in an upcoming year. Targets are based on Presidential requests and Congressional committees’ advice about agency needs. Allocations are made to each appropriation subcommittee, and Congress has four or five months to agree on how to spend the allotted money. The President’s role in the process comes from his power to veto appropriations bills.

Without a budget, no appropriations guidelines were set and gridlock ensued. Disagreements over spending cuts, raising revenues and allocating money resulted in stalemate, automatic sequestration cuts, and a government shutdown.

Since that time, both sides have worked out a compromise that spends less than the President requested but more than what originally passed. Here are some thoughts on what the two laws do and what they don’t do:

What the Budget Act and the Consolidated Appropriations Act do—

  • Prevent another government shutdown. By passing a bill that prescribes spending amounts for the rest of the fiscal year, Congress avoided another shutdown in January.
  • Meet budget targets. The Bipartisan Budget Act set a discretionary spending ceiling of $1. 012 trillion for 2014, and the Consolidated Appropriations Act met that goal. This is $191 billion less that the President requested, but it marks the fourth straight year of reduced government spending. That has not happened for over 60 years.
  • Set spending levels for two years. The Budget Agreement makes it possible for the Appropriations Committees to get an early start on 2015 spending priorities and (hopefully) work out differences ahead of time. Setting budget targets moves the endless budget deficit debate off center stage.
  • Reduce the impact of “sequestration.” Republicans and Democrats agree that sequestration is arbitrary and wasteful. The Budget Agreement reduces sequestration in 2014 and 2015 by $63 billion, postpones portions of those cuts, and finds ways to “pay for” any increased spending. The legislation reflects agencies’ latest priorities with flexibility to make intelligent reductions instead of blind, across-the-board cuts.

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