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I have probably asked this question before, and if memory serves me right, there was a montage of conclusions.

Does DCAA limit the Fee on a given contract? If so, I would think it varies whether the contract is cost-plus, T&M or fixed price.

I have been accused of having sleazy customers doing such things as "padding" costs.  This one proposed a fixed-price of $300,000, contractor cost of labor and travel $90,000, and a large subcontract for $140,000.  Indirects are another $40,000 or thereabouts.  Total cost $270,000.  Profit of 10%, Fee based on cost is 11.11%.

After the contract was negotiated, turns out the large subcontract is being whittled down to $50,000, and indirects attached to the effort are now $25,000.  Expected total cost is now only $165,000.  Profit is 45%, and Fee based on cost is 81.8%.

Unofficial sources tell me DCAA mandates that if Fee exceeds 30% on a fixed-price contract, the excessive money has to be given back.  Was not told whether the 30% was a profit margin or a Fee based on cost (These are two different numbers).

What say ye?

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9 hours ago, Corduroy Frog said:

I have been accused of having sleazy customers doing such things as "padding" costs.  This one proposed...

CF, could you please clarify your scenario?

What do you mean by the term “customers”? Are you referring to prime contractors that you were a subcontractor to?

 

9 hours ago, Corduroy Frog said:

After the contract was negotiated, turns out the large subcontract is being whittled down...

Who is “whittling”? Is it the prime contractor?

What is meant by “whittling down” the subcontract? Do you mean that the prime is re-negotiating  the subcontract price for performing the same work?

It looks like you are describing a scenario where the government and a prime negotiated a sole source contract or modification.  And after the negotiation, the subcontract amount was drastically reduced.

Am I correct?

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And DCAA would likely not be involved in a contract action for the amount described.

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Mr. Frog is likely referring to the Transdigm kerfuffle of a couple of years ago. 

GAO auditors asserted that any profits in excess of 15% of costs were excessive. DCMA and DDP (DCP? DPC? Whatever they're called now) and Congress agreed. Transdigm "voluntarily" repaid its excessive profits.

In this particular case, I would be concerned about allegations of defective pricing.

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13 hours ago, Corduroy Frog said:

I have been accused of having sleazy customers doing such things as "padding" costs.

Dude. You were the one who posted in the "padding costs" thread -- the thread you named -- that there was "intent to deceive."

That comment and others prompted me to post:

Quote

I must say, you seem to run into the shadiest of contractors. Must be stressful trying to keep them on the straight & narrow. I hope it pays well.

So: nobody accused you of anything.

Also: If this is a follow-on from the "padding costs" thread and you are now reporting that your contractor successfully padded subcontractor costs in order to boost its profits (with "intent to deceive" the government negotiators), then you have an ethical dilemma on your hands. Do you want to be complicit or do you want to do the right thing?

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Transdigm was about purchases of spare parts under 112 contracts. The auditors were the DODIG and GAO. And the contractor was shamed into voluntarily giving back $16 million after Congress held hearings at which Jim Jordan and AOC were on the same side, believe it or not.

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No one seems to know my role in the above - so I'll clarify.

I am an independent accountant - much more familiar with GAAP issues and IRS issues than contractural problems.  My "customer" is a small govt contractor who has no contracts expert to turn to - so I end up with the issues.  Hope this helps.

Yes the same line of posts earlier about "padding" bids on fixed price contracts.  In spite of all the padding, my customer is still turning in only a 4-5% profit margin on sales.  More last year due to PPP loans.  Risks have involved subcontractor overruns, facility shutdowns, unexercised opetions, declared holidays (where govt employees are paid but contractor employees are not), etc.  I hope this brings the moral issue into focus.

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I understand that you are the sole voice your client is turning to, regardless of whether or not you have the requisite expertise. That's a tough spot to be in.

As for me, I make no assertions regarding "moral" issues. I do wonder, however, whether your actions are consistent with the AICPA's Code of Professional Conduct? Of course, that is for you to decide.

Quote

1.000.020 Ethical Conflicts

.01 An ethical conflict arises when a member encounters one or both of the following:

a. Obstacles to following an appropriate course of action due to internal or external pressures

b. Conflicts in applying relevant professional standards or legal standards For example, a member suspects a fraud may have occurred, but reporting the suspected fraud would violate the member’s responsibility to maintain client confidentiality.

.02 Once an ethical conflict is encountered, a member may be required to take steps to best achieve compliance with the rules and law. In weighing alternative courses of action, the member should consider factors such as the following:

a. Relevant facts and circumstances, including applicable rules, laws, or regulations

b. Ethical issues involved

c. Established internal procedures

.03 The member should also be prepared to justify any departures that the member believes were appropriate in applying the relevant rules and law. If the member was unable to resolve the conflict in a way that permitted compliance with the applicable rules and law, the member may have to address the consequences of any violations.

.04 Before pursuing a course of action, the member should consider consulting with appropriate persons within the firm or the organization that employs the member.

.05 If a member decides not to consult with appropriate persons within the firm or the organization that employs the member and the conflict remains unresolved after pursuing the selected course of action, the member should consider either consulting with other individuals for help in reaching a resolution or obtaining advice from an appropriate professional body or legal counsel. The member also should consider documenting the substance of the issue, the parties with whom the issue was discussed, details of any discussions held, and any decisions made concerning the issue.

.06 If the ethical conflict remains unresolved, the member will in all likelihood be in violation of one or more rules if he or she remains associated with the matter creating the conflict. Accordingly, the member should consider his or her continuing relationship with the engagement team, specific assignment, client, firm, or employer. 

Bottom-line: there are individuals and firms that can assist your client in the area of government contract compliance so that you do not have to take on these burdens. If you message me using the WIFCON app, I'll give you a couple of names with whom you can follow-up.

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Is there really a moral problem?  If your client negotiated shrewdly but honestly for a price that was necessary to stay afloat, and the Government willingly agreed with the price, what is the moral problem?  A bargain was struck.  You haven't said that your client lied about or misrepresented facts -- when forced to make an estimate for a fixed-price contract, it seems both prudent and honorable to err on the high side.

Based on what you have shared, I am not seeing a moral problem -- I am seeing an agency that needs better negotiators, or needs the fresh air of competition.

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ji20874, this thread is a follow-up to another thread entitled "Padding Costs for a Fixed Price Contract." Suggest you review it again before reaching any conclusions.

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21 hours ago, here_2_help said:

Mr. Frog is likely referring to the Transdigm kerfuffle of a couple of years ago. 

GAO auditors asserted that any profits in excess of 15% of costs were excessive. DCMA and DDP (DCP? DPC? Whatever they're called now) and Congress agreed. Transdigm "voluntarily" repaid its excessive profits.

In this particular case, I would be concerned about allegations of defective pricing.

Here’s a link to an article about Transdigms pricing practices- using the beloved commercial item acquisition methods, where it may be surmised here that commercial customer prices are also high. Supply and demand...when you are the only supplier and there is (required) demand.

https://www.cleveland.com/open/2019/06/cleveland-aerospace-company-accused-of-pentagon-profiteering.html

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However, it can be argued that competition is an essential characteristic of capitalism and a free market economy.

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22 hours ago, here_2_help said:

In this particular case, I would be concerned about allegations of defective pricing. [Apparent reference to the original post]

Would “defective pricing”, as defined by TINA, apply to a. $300,000 contract action described in the original post? I don’t think so. It is below the threshold for certified cost or pricing data.

 

 

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55 minutes ago, joel hoffman said:

Would “defective pricing”, as defined by TINA, apply to a. $300,000 contract action described in the original post? I don’t think so. It is below the threshold for certified cost or pricing data.

Fair point, Joel. Let me restate my concern, then. I would be concerned about "fraud in the inducement."

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Ok, thanks for clarifying H2H. So, to prove fraud, you’d need to involve the US Attorney’s Office. And- well you’d have to prove an intent to defraud.

When a prime “whittles” away at a subcontract after award (often referred to as bid shopping) , that has been a frequent practice. Bid shopping isn’t illegal per se.

It’s not bid shopping if the sub agreed with the prime to initially inflate its proposal with the intent to later reduce it.  It would have to be proven and pursued by the US Attorney Office, which seldom pursued actions for relatively small amounts involved, as in the example here.  I was told that they say that it costs more to pursue than can be recovered for that magnitude.

 

 

Edited by joel hoffman
Restated and scrubbed.
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4 hours ago, joel hoffman said:

When a prime “whittles” away at a subcontract after award (often referred to as bid shopping) , that has been a common practice, which is seldom pursued by the US Attorney Office.

@joel hoffmanWhy would a U.S. attorney pursue bid shopping? Is bid shopping a violation of Federal law? I don't think so. Am I wrong?

https://www.keglerbrown.com/publications/ethical-challenges-of-bid-shopping/#:~:text=Although bid depositories are intended,on the freedom of competition.&text=Bid shopping also may violate unfair trade practices laws.

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Perhaps nothing is more widely condemned in the construction industry than bid shopping. But, regardless of the stated consensus against bid shopping and bid peddling, the practices remain common.

And legal.

From the Associated General Contractors of America

https://www.agc.org/industry-priorities/procurement/bid-shopping

Quote

Oppose Unsound Bid Shopping Legislation

Background:

The Associated General Contractors of America is resolutely opposed to the practice of bid shopping. In 1995 AGC, the American Subcontractors Association, and the Associated Specialty Contractors issued this joint statement on the issue of bid shopping and bid peddling: "Bid shopping or bid peddling are abhorrent business practices that threaten the integrity of the competitive bidding system that serves the construction industry and the economy so well." AGC strongly believes that bid shopping and bid peddling cannot sustain long-term working relationships between prime and subcontractors. However, AGC has serious reservations about this particular legislative solution to the practice.

AGC Message:

No Evidence to Support Assertions that the Practice is Widespread. Legislation designed to constrain bid shopping on the federal level is unnecessary. The need for such legislation is not supported by any federal government study, nor has the legislation been requested by any federal entity. The construction industry does not consider bid shopping a common practice in federal government contracting.

Mandatory Bid Listing is Not the Solution. Mandatory bid listing would require a general contractor to list all subcontractors when a bid is submitted and would only allow substitution with permission of the government's contracting officer. Mandatory bid listing undermines the government's attempts to streamline procurement, removes the flexibility of the prime contractor to manage projects, and does not improve the quality or decrease the cost of construction projects. Not only would this be a huge administrative and paperwork burden on contractors, but even more so on the part of our chronically understaffed and overworked federal agency partners.

The Solution Proposed Has Empirically Failed Before. The legislation proposes the practice of bid listing as the solution, yet that practice has already been found to be net worse. Previous attempts to require bid listing created a morass in the administration of federal construction contracts, including delays in awards of contracts, rejected low bids, project delays, and higher procurement costs. The General Services Administration (GSA) previously required bid listing, but eliminated this requirement in 1983 on the belief that "bidding problems and protests related to the 'listing of subcontractors' requirement adversely affected the GSA construction program". By eliminating the bid listing requirement, the GSA stated the change would "simplify procurement procedures, reduce paperwork burdens associated with procurement... and eliminate potential delays and financial losses experienced as a result of the listing requirement."

Existing Framework of Federal Rules and Regulations Solves Better. The contracting community believes that the solution is a strong commitment to ethical conduct by the professionals who work within the construction industry. Federal construction contractors hold themselves, and are held, to the highest ethical standards. There are also several mechanisms already in place to ensure contractors do not engage in such practices such as the False Claims Act and the Federal contractor Ethics and Compliance Rules. Grafting a new mechanism onto the system (which has failed in the past) to prevent this practice, is not only unnecessary, but is also net worse for the system than the practice which the mechanism is designed to solve.

 

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1 hour ago, joel hoffman said:

Ok, thanks for clarifying H2H. So, to prove fraud, you’d need to involve the US Attorney’s Office. And- well you’d have to prove an intent to defraud.

Joel, I appreciate your input. However, I feel as if your response is not really connected with the prior posts in this thread or in the other one that was a precursor to this thread.

I'm not trying to prove anything here. I'm just responding to the posts of Mr. Frog. It was his characterization of the action(s) that led to my concern.

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10 hours ago, Vern Edwards said:

Vern, I agree with you.  I was referring to H2H’s comment concerning the prime “whittling down” a subcontract, which could have been as a result of bid shopping.

When there is “bid shopping” , it generally occurs after a negotiated settlement or successful bid or offer. The practice is unethical in my opinion but not necessarily illegal.  H2H said:

“Fair point, Joel. Let me restate my concern, then. I would be concerned about ‘fraud in the inducement.’ “

A U.S. Attorney generally won’t pursue “bid shopping” that occurs after award or settlement.

I have edited my post above to clarify that bid shopping isn’t necessarily illegal and deleted an example of actual “defective pricing”.  Thanks.

Edited by joel hoffman
Added a paragraph.
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10 hours ago, here_2_help said:

Joel, I appreciate your input. However, I feel as if your response is not really connected with the prior posts in this thread or in the other one that was a precursor to this thread.

I'm not trying to prove anything here. I'm just responding to the posts of Mr. Frog. It was his characterization of the action(s) that led to my concern.

“Here”, I don’t disagree with you that there appears to be a considerable amount of unethical conduct/business practice described. My perspective is from that of someone who couldn’t rely on the legal system (or non-Corps contract auditors) to help detect and right such wrongs.

But something that could be merely bid shopping after award is hard to prove as fraud in the inducement 

I agree with you that my response wasn’t clear and connected with the various threads. I have edited it. Thanks. 

 

Edited by joel hoffman
Added last paragraph.
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