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here_2_help

DACO "abused discretion" in Failing to Consider Materiality

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FYI, a recently published (redacted) ASBCA decision sustains a contractor's appeal of a COFD related to changes in cost accounting practice. The DACO "abused her discretion" by failing to strictly follow FAR 30.602, specifically the mandatory consideration as to whether the cost impact from the contractor's changes to cost accounting practices was material in amount. A very important decision for those dealing with CAS compliance.

http://www.asbca.mil/Decisions/2016/58068 Raytheon Company, Space & Airborne Systems 8.9.16 (REDACTED VERSION).pdf

 

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4 hours ago, here_2_help said:

very important decision for those dealing with CAS compliance

here_2_help: Is the important holding that (when determining materiality per FAR 30.602) the contracting officer must follow not just (a), but also (b) through (f), reproduced below?

It seems like the contracting officer had a knee-jerk stance of "costs increased, therefore it is material," falling back on glittering generalities about taxpayers and protecting the government's interest. (The contracting officer conceded, however, that it would be unreasonable to determine a $10 cost increase to be material.)

In your experience, are many contracting officers or CFAOs or DACOs only looking at (a), the absolute dollar amount, and not considering, say, (b) and (f)?

 

48 CFR 9903.305 - Materiality:

9903.305 Materiality.

In determining whether amounts of cost are material or immaterial, the following criteria shall be considered where appropriate; no one criterion is necessarily determinative:

(a) The absolute dollar amount involved. The larger the dollar amount, the more likely that it will be material.

(b) The amount of contract cost compared with the amount under consideration. The larger the proportion of the amount under consideration to contract cost, the more likely it is to be material.

(c) The relationship between a cost item and a cost objective. Direct cost items, especially if the amounts are themselves part of a base for allocation of indirect costs, will normally have more impact than the same amount of indirect costs.

(d) The impact on Government funding. Changes in accounting treatment will have more impact if they influence the distribution of costs between Government and non-Government cost objectives than if all cost objectives have Government financial support.

(e) The cumulative impact of individually immaterial items. It is appropriate to consider whether such impacts:

(1) Tend to offset one another, or

(2) Tend to be in the same direction and hence to accumulate into a material amount.

(f) The cost of administrative processing of the price adjustment modification shall be considered. If the cost to process exceeds the amount to be recovered, it is less likely the amount will be material. 

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PepetheFrog,

My experience includes interaction with an ACO who had a remarkably similar attitude to the DACO in the ruling. In the ACO's words, if the impact to the government was equal to a GS-13's annual salary, it was material. Period. More generally, I have never, ever, seen a government employee -- DCAA auditor or DCMA CO -- review the materiality criteria you quoted above and determine a cost impact was/was not material in light of those criteria. Maybe it's happened; but it hasn't happened to me.

I wonder what is taught about materiality to COs in their CAS classes?

Hopefully the curriculum will be changing in light of this decision (unless it's appealed).

H2H

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I would not get too excited about this decision.  Note that the Board indicated there was an apparent inconsistency between the FAR and the CAS statute and CAS rules.  However, since neither party brought up the inconsistency, the Board did not rule on the validity of the FAR provision.  To me, this is an open invitation for contracting officers to look at the statute, follow it and challenge the FAR provision if a contractor disagrees with the finding of materiality.

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Retreadfed,

Your point is valid to some extent, though I thought the Judge made it clear that COs have to follow mandatory FAR prescriptions, including assessing the materiality criteria. I didn't think he gave them permission to ignore the criteria because he found a potential (unlitigated) disconnect between statute and FAR. To that extent, his point was "dicta" and not precedential.

Regardless of the validity of your point, I would very very much hope that COs take the decision to heart instead of taking the course you pointed out. In this case, as the Judge noted, the individual dollar impact to Raytheon's contracts would have been less than $36.00. It cost the government and Raytheon FAR more than the amount in question to litigate the matter. In addition, how much time was lost through the DACO having to be deposed and to testify? What else could the government attorneys have been doing with the time they spent on this case? What else could Raytheon have done with the unallowable costs it incurred to appeal the COFD? Is that really how the contracting parties want the system to work?

Vern has posted several times recently bemoaning the nature of the system. I believe that individual practitioners can change the system, by using common sense instead of "protecting the taxpayers" by litigating $150,000 against a business that performed $5 billion of government work annually.

In other words, it's the principle of the decision that matters to people like me who have to deal with audit findings and negotiate with COs. The principle of the decision is "don't sweat the small stuff." I hope COs take that lesson to heart.

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1 hour ago, Retreadfed said:

To me, this is an open invitation for contracting officers to look at the statute, follow it and challenge the FAR provision if a contractor disagrees with the finding of materiality.

Wouldn't COs be deviating from the FAR if they ignored FAR 30.602(a)? Don't they need to obtain approval to deviate?

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Don, the object of only considering if there is increased costs to the government in determining whether the contractor is entitled to  implement the accounting practice change would be to challenge 30.602(a).  If the ACO is wrong in doing so, the result would be a reiteration of Raytheon whether a deviation was obtained or not.  If the ACO is correct that 30.602(a) is inconsistent with the statute, and the terms of the statute prevail, failure to get a deviation, if one was required, would likely be  harmless error.

But going to your point, it seems an overly broad statement to say that if a contracting officer ignores a FAR provision without obtaining a deviation, the contracting officer has acted improperly in all circumstances.  For example, it would be pointless for a contracting officer to obtain a deviation to FAR 33.208(a)(2) when that provision has been held invalid at least three times by the Court of Appeals for the Federal Circuit.  Similarly, it would have been pointless for a contracting officer to obtain a deviation from FAR 19.1104 after the Fed. Cir. issued its Rothe decision and before the FAR was revised to remove Subpart 19.11.  Finally, I believe you have pointed out that agencies usually cave to protests challenging a failure to set aside overseas contracts for small business concerns.  Maybe you know if they obtained a FAR deviation to do so but it seems that relying on the SBA regs would be sufficient without obtaining a deviation.

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To me, this decision and its two predecessors show the absurdity of putting a bunch of professional specialists (accountants, auditors, and lawyers) to work writing complex regulations that must be implemented by a bunch of generalists (COs and their bosses). I wonder if the CO could have explained the concept of materiality on the stand. The litigation in this case cost much more than the cost increase the CO rejected. Oh, what Adm. Hyman Rickover wrought.

I have written a piece that will be published next month in which I propose that the 809 Advisory Panel recommend applying CAS only to contracts worth more than $50 million at the time of award and under which the CO expects REAs and claims of more than $5 million each. I wish I had made the numbers $100 million and $10 million.

The road to bureaucratic hell is paved with complex legislation and regulation.

 

 

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34 minutes ago, Retreadfed said:

But going to your point, it seems an overly broad statement to say that if a contracting officer ignores a FAR provision without obtaining a deviation, the contracting officer has acted improperly in all circumstances.  For example, it would be pointless for a contracting officer to obtain a deviation to FAR 33.208(a)(2) when that provision has been held invalid at least three times by the Court of Appeals for the Federal Circuit.  Similarly, it would have been pointless for a contracting officer to obtain a deviation from FAR 19.1104 after the Fed. Cir. issued its Rothe decision and before the FAR was revised to remove Subpart 19.11.  Finally, I believe you have pointed out that agencies usually cave to protests challenging a failure to set aside overseas contracts for small business concerns.  Maybe you know if they obtained a FAR deviation to do so but it seems that relying on the SBA regs would be sufficient without obtaining a deviation.

I think the issue is one of authority. In the examples that you provided, I agree that it would be pointless for the CO to follow the FAR, but I don't agree that a CO has the authority to deviate without obtaining a higher-level approval. A deviation would be perfectly justified in your examples. However, I don't think COs get to determine which parts of the FAR they will follow or not follow on their own.

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Don, why do you think a deviation would be necessary in the examples I gave where the FAR provisions have already been ruled upon and found wanting?  That is particularly true in regard to the Rothe situation where the underlying statute was held to be unconstitutional.  What I hear you saying is that a contracting officer would need a deviation to give him/her permission not to do something that is unconstitutional.  Based upon the contracting officer's oath of office, (s)he already had a duty not to comply with the FAR in that circumstance.

In light of what I perceive to be an invitation from the Board, I would be willing to bite the bullet on 30.602(a) without a deviation and take my lumps if I am wrong.

Vern, toward you comments, have you seen DoD's proposed rule on "non-traditional contractors"?

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3 minutes ago, Retreadfed said:

Don, why do you think a deviation would be necessary in the examples I gave where the FAR provisions have already been ruled upon and found wanting?  That is particularly true in regard to the Rothe situation where the underlying statute was held to be unconstitutional.  What I hear you saying is that a contracting officer would need a deviation to give him/her permission not to do something that is unconstitutional.  Based upon the contracting officer's oath of office, (s)he already had a duty not to comply with the FAR in that circumstance.

That would be the justification for the deviation--compliance with the FAR is at odds with existing case law. The FAR permits deviations, but it imposes some controls over them. For one, they have to be justified, approved, and included in the contract file. No exceptions for "unless a court has ruled that the particular FAR provision is invalid." If a third party were to review the acquisition, the approved deviation would show why the acquisition was inconsistent with the FAR.

The issue is not whether the agency has the authority to do something inconsistent with the FAR. It's who in the agency can exercise that authority.

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Quote

Don, why do you think a deviation would be necessary in the examples I gave where the FAR provisions have already been ruled upon and found wanting? 

It may be that the FAR councils want to wait for a Federal Circuit decision before they change the FAR. The decisions of the ASBCA are not binding on the CBCA or the COFC. I don't think all agencies comply with the decisions of the Fed. Cir. with regard to FAR 33.208(a)(2).

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On 9/13/2016 at 1:14 AM, here_2_help said:

My experience

Thanks, here_2_help. That's what PepeTheFrog suspected-- especially the entirely inappropriate (in a business/economics/big picture sense) comparison to the civil servant's own salary. (What about the time and salaries of everyone else involved? The contractor's time and resources? All the other things these people could have been doing?) Forest and trees... Contracting (and acquisition) professionals really need to understand the concepts of opportunity cost and expected value. A slight degree-- just an inkling-- of numeracy would also help. That might be too much to ask, however, with no sarcasm intended.

On 9/13/2016 at 0:31 PM, Vern Edwards said:

applying CAS only to contracts worth more than $50 million at the time of award and under which the CO expects REAs and claims of more than $5 million each.

Hear, hear! This is thinking about the big picture.

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On ‎9‎/‎13‎/‎2016 at 6:41 AM, Retreadfed said:

I would not get too excited about this decision.  Note that the Board indicated there was an apparent inconsistency between the FAR and the CAS statute and CAS rules.  However, since neither party brought up the inconsistency, the Board did not rule on the validity of the FAR provision.  To me, this is an open invitation for contracting officers to look at the statute, follow it and challenge the FAR provision if a contractor disagrees with the finding of materiality.

Retreadfed,

This weekend I went through the decision in some detail, and it occurred to me that your position offers the greatest hope to overturn the FAR Council's ill-advised 2005 FAR Part 30 and CAS clause revisions. In other words, I hope you are right that somebody, somewhere, some time, will make a decision that will lead to an appeal that will overturn the 2005 revisions, based on an impermissible conflict between statute and regulation. That would be awesome!

Paul Pompeo (Arnold & Porter), who litigated the matter for Raytheon, wrote that the materiality criteria themselves offered an avenue to consider offsetting impacts from concurrent changes, even though the FAR Council prohibited such in the 2005 revisions. (See (e)(1) in PepetheFrog's post, above.) I'm okay with that, too. But I also like your scenario.

H2H

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