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DCAA guidance clarifies cost or price analysis requirements for subcontractor proposals

The Defense Contract Audit Agency (DCAA) published a Memorandum for Regional Directors (MRD) last week that provides answers to frequently asked auditor questions regarding cost and price analyses to establish the reasonableness of proposed subcontract prices. Of particular note is the direction that DCAA auditors proceed with subcontract proposal audits even if contractor cost or price analyses are not yet available. Dentons’ Government Contracts team explains what the new guidance means for contractors and subcontractors.

Read the complete article here.

DCAA guidance clarifies cost or price analysis requirements for subcontractor proposals

Speaking up about DOD’s proposed Independent Research and Development costs rule

A February 8, 2016, Department of Defense (DOD) advance notice of proposed rulemaking sought input to help address agency concerns regarding substantial future Independent Research and Development (IR&D) when such effort is undertaken as a means of reducing evaluated bid prices in competitive source selections. The proposed rule, if made final, would require the government to add costs (for proposal evaluation purposes) to any contractor offers that rely on IR&D efforts. In a recent client alert, Dentons encouraged contractors to participate in the comment process on the proposed rulemaking.

Dentons partners Thomas A. Lemmer and Steven M. Masiello submitted comments on the proposed rule. Specifically, they describe the relevant decisional authority establishing the appropriate methodology for distinguishing between direct costs of contract effort versus indirect costs of IR&D effort. Based upon this relevant authority, DOD’s concerns underlying the proposed rulemaking initiative to attribute IR&D project costs to the proposed price for evaluation purposes are misplaced.

Indeed, contrary to DOD’s concerns, relevant decisional authority confirms that IR&D efforts properly permit contractors willing to undertake, at their own risk, IR&D projects, to gain a relative price and technical advantage. Moreover, DOD should not discourage innovation by penalizing contractors for conducting IR&D projects resulting in innovation relevant to a competitive government procurement. Finally, IR&D costs are not contract costs, and treating them as such for evaluation purposes during the competitive procurement process misconstrues their nature and may skew award decisions.

You can read Dentons’ comments in full here.

Additionally, Dentons lawyers advised the American Bar Association Section of Public Contract Law on its comments on the proposed rule, which can be found here.

Speaking up about DOD’s proposed Independent Research and Development costs rule

Recently Effective FAR Modification Creates Confusion Regarding Uncompensated Overtime for Service Contractors

In light of a recent modification to the Federal Acquisition Regulation (“FAR”) regarding the identification of uncompensated overtime in service contracts, now, more than ever, contractors must make sure that:  (1) they have in place clear policies and processes regarding time recording and estimating, and accumulating and reporting labor hours, labor rates, and indirect costs; and (2) they are complying with said policies and processes.

Effective March 2, 2015, the FAR was amended to add the definitions of “adjusted hourly rate” and “uncompensated overtime” to FAR 37.101 and also to clarify that “[w]henever there is uncompensated overtime, the adjusted hourly rate . . . shall be applied to all proposed hours, whether regular or overtime hours.”  FAR 37.115-2(d), FAR 52.237-10.  This means that when a proposal for a service contract is based upon uncompensated overtime hours, the proposal’s proposed hourly rates must be consistent with the total time proposed, including the uncompensated overtime hours.

The comments to the FAR’s Modification state that the amended rule clarifies existing FAR policy which is that there is no requirement to record uncompensated overtime and base labor and indirect costs on both compensated and uncompensated labor hours.  In other words, the Modification does not expressly require that proposals be prepared based upon uncompensated overtime hours or that labor rates be based on uncompensated labor hours in all circumstances.

Despite that the Modification is merely a “clarification,” the amended rule is somewhat unclear and thus creates risks for contractors.

Recently Effective FAR Modification Creates Confusion Regarding Uncompensated Overtime for Service Contractors

Proposed Update to DFARS Business Systems Rule Would Impose Significant Burden on Contractors to Self-Assess and Self-Report on System Compliance

On Tuesday, July 15th, DOD issued a proposed rule that would update the DFARS Business Systems Rule to require contractors to self-assess and report on business system compliance.  Contractors with estimating systems, accounting systems, and material management and accounting systems subject to the Business Systems Rule requirements would be required to provide a report on compliance with the relevant system criteria.  These same systems also would be subject to a triennial audit by an independent contractor-selected Certified Public Accountant (“CPA”) to assess the contractor’s compliance with the applicable system criteria.

If adopted, the proposed DOD rule would impose a significant obligation on contractors both to adequately and accurately self-assess and report on business system compliance and to obtain an independent review of system compliance.  Inadequate contractor system reviews or inaccurate reporting of system compliance could have significant consequences for contractors, including payment withholding, negative past performance evaluations, cost disallowances, inability to receive contracts and potential False Claims Act liability.

In anticipation of this DOD update to the business system rule, Dentons has been preparing an updated edition of its Business Systems Compliance Guide.  The updated guide will provide up-to-date information and assistance to contractors seeking to understand and assess the acceptability of their business systems under the DOD Business Systems Rule.

Proposed Update to DFARS Business Systems Rule Would Impose Significant Burden on Contractors to Self-Assess and Self-Report on System Compliance

Is DOD Business Systems Self-Reporting Imminent?

The Department of Defense (DOD) may be on the verge of imposing on contractors mandatory self-certification requirements for business systems.  While the actual requirements of DOD’s upcoming business systems update are currently unknown, the rule that the Department of Energy (DOE) recently proposed on April 1, 2014 may well foreshadow future DOD requirements.

DOD is preparing a proposed update to the DFARS business systems rule, DFARS Case 2012-D042.  According to the most recent version of the DFARS case report, this update will revise the existing DFARS business systems clauses “to include contractor reporting and documentation requirements regarding contractor compliance with DFARS business systems criteria.”

Although little is definitively known about the DOD business systems update, the proposed DOE business systems rule issued on April 1, 2014 would require DOE contractors to provide the government with written documentation that each business system meets the relevant system criteria within sixty days of award.  Given the substantial overlap between the DOD and DOE rules, it would be reasonable to assume that DOE likewise obtained its self-reporting requirement from the DFARS update under development.  The updated DOD business system rule therefore may include a requirement similar to the DOE rule that contractors self-assess business systems compliance and report system adequacy determinations to the government.

For contractors, this reporting requirement would impose an enormous obligation on companies to adequately and accurately self-assess business system compliance, and to do so before making any system adequacy representations to DOD.  A draft of the proposed DFARS business systems rule update was sent to the Office of Information and Regulatory Affairs (OIRA) on April 21, 2014, generally the last step before publication unless OIRA disapproves and sends the rule back for rework.

Is DOD Business Systems Self-Reporting Imminent?

DCAA Clarifies Position on Documentation Requirements for Consultant Costs

The Defense Contract Audit Agency recently issued guidance clarifying the agency’s view on the types of evidence necessary to substantiate consultant costs.  The guidance explains DCAA’s position that Federal Acquisition Regulation 31.205-33, which addresses the allowability of consultant costs, does not require the existence of specific types of documents in order for consultant costs to be allowable.  Instead, the guidance explains that the FAR only requires evidence of the nature and scope of the consultant effort and that such evidence can be supplied in a variety of ways, including through non-contemporaneous documentation.  This guidance will assist contractors in resisting the common auditor position that FAR 31.205-33 requires contractors to provide specific types of documents, such as invoices, contracts, and work product, as a precondition of consultant cost allowability.

DCAA Clarifies Position on Documentation Requirements for Consultant Costs