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Project on Government Oversight

POGO warns of risky federal buying method

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March 6, 2006

Dr. Rein Abel
Cost Accounting Standards Board
Office of Federal Procurement Policy
Office of Management and Budget
725 17th Street, N.W.
Washington, D.C. 20503

Via Facsimile:  (202) 395-5105

Re:  Cost Accounting Standards Board; T&M Contracts for Commercial Items -- Proposed Rule With Request for Comment

Dear Dr. Abel:

Thank you for the opportunity to comment on the Cost Accounting Standards (CAS) Board’s Proposed Rule With Request for Comment, titled “Cost Accounting Standards Board; T&M Contracts for Commercial Items” (71 FR 313, January 4, 2006).  Founded in 1981, the Project On Government Oversight (POGO) is an independent nonprofit that investigates and exposes corruption and other misconduct in order to achieve a more accountable federal government.  POGO has a keen interest in government contracting matters, especially those relating to the ongoing activities of the CAS Board.

The CAS Board Has Not Made a Good Faith Effort to Comply With Federal Register Publication Requirements

Continuing what now appears to be a concerted effort to effectively undermine and abolish all CAS requirements; POGO believes that this proposed rule does not comply with Federal Register publication requirements.  We note that the information contact for this proposed rule as listed in the Federal Register is Rein Abel, Director of Research.  However, a call to the CAS Board’s offices revealed that Dr. Abel retired from federal service on December 31, 2005.  This proposed rule was filed with the Office of the Federal Register on January 3, 2006.  Federal Register publication requirements specify that an agency must list a contact person who can answer questions concerning a proposed or final rule.  As Dr. Abel retired before this rule was even filed with the Office of the Federal Register, and the proposed rule specifies a 60-day comment period ending on March 6, 2006 (more than two months after Dr. Abel retired), we requested to speak with an alternative contact person.  We were told that there was no other person available to discuss the rule at the CAS Board’s offices.  Accordingly, at a minimum, POGO requests that this proposed rule be withdrawn and republished in accordance with Office of the Federal Register requirements that specify that an individual be listed in the “contacts section” of the rule who is qualified to answer questions.  Failing this, the CAS Board appears to no longer even be making a good faith effort to comply with the notice and comment provisions of the Office of Federal Procurement Policy Act, 41 U.S.C. § 401 et seq., or Office of the Federal Register publication requirements.

In addition to the above-cited procedural defect, the preamble to this proposed rule explicitly indicates that it is based on comments received in response to a Federal Acquisition Regulation proposed rule governing use of time and material and labor hour contracts (“T&M/LH contracts”), and that the FAR Council specifically requested comments on applying CAS to this contract type.  POGO is unaware of any legal authority that would permit the FAR Council to request comments on the application of CAS to any contract type.  To the extent that this proposed rule is based on comments solicited under a FAR proposed rulemaking, it must be withdrawn.

The Preamble to the Proposed Rule Contains Factual Misstatements

The preamble to the proposed rule contains factual misstatements which undercut the rationale, including the legal basis, for much of the proposed rule.  For example, the preamble states:  “Under the provisions of SARA [the Services Acquisition Reform Act], and the requirements of the draft proposed FAR rule, T&M and LH contracts for commercial items must be awarded on a competitive basis.” Although the referenced draft FAR rule does require that T&M/LH contracts for commercial items be awarded on a competitive basis, the language used in the draft rule is subject to much interpretation.  The draft FAR rule states, at 12.207(b)(1)(i), that T&M/LH contracts may be used when “the service is acquired under a contract awarded using competitive procedures” (emphasis supplied).  This language is problematic at best, and misleading at worst, for it specifically excludes task and delivery orders placed against “contracts awarded using competitive procedures,” which includes a broad array of various indefinite delivery/indefinite quantity type contracts, including often abused multi-agency contracts, and GSA schedule contracts.  In short, this language would permit very large dollar value T&M/LH task and delivery orders to be awarded on what is effectively a sole source basis without the protections afforded by CAS.

Continuing in this vein, the preamble to the proposed rule asserts that because contracting officers are prohibited by proposed FAR 15.403-1(c)(3) from obtaining cost or pricing data for the award of T&M/LH contracts for the acquisition of commercial services, that by implication, the CAS exemption at 48 CFR 9903.201-1(b)(6) must be automatically extended to these contracts, as well.  Actually, to the extent that the issue of adequate price competition is addressed in CAS rules whatsoever, it is addressed, with respect to firm-fixed price contracts, at 48 CFR 9903.201-(b)(15).  Instead, 48 CFR 9903.201-1(b)(6) is directed to the award of firm fixed price (and certain firm-fixed price with economic price adjustment contracts) awarded regardless of whether adequate price competition exists.  Thus, the analogy used to extend the “(b)(6)” exemption in this proposed rule is inapplicable.

In addition, the logic concerning the concept of adequate price competition as applied to T&M/LH contracts is also problematic.  T&M/LH contracts can never really be subject to adequate price competition concepts applicable to fixed-price contracts, because there is no “price” established at the time that the contract is awarded.  The “price” is not determined until the work is completed, or the funds available are exhausted.  That is why T&M/LH contracts fit into the broad genre of cost-reimbursement type contracts.  See CACI, Inc. – Federal v. Gen. Servs. Admin., 03-1 BCA ¶ 32106, GSBCA No. 15588, 2002 WL 31835736 ( Dec. 13, 2002 ), for an excellent discussion on this point.

Even if one accepts the faulty premise that the labor rates are “fixed” under a T&M/LH contract, this does not cure the underlying problem.  Because various indirect costs are “loaded” into the labor rate(s) under a T&M/LH contract, some methodology must exist to ensure consistency, avoid double-counting, ensure that unallowable costs are excluded from the rates, and ensure that a consistent cost accounting period is used.  These factors do not even consider that material costs are “reimbursed” under a T&M contract, so some conventions must be used to account for these costs, as well.

Moreover, as was pointed out by the CAS Board itself in its final rule addressing the commercial item exemption for firm-fixed price contracts, 62 FR 31294 (June 6, 1997), there is no statutory CAS exemption for commercial item contracts, including T&M/LH contracts for the acquisition of commercial services.  Rather, 41 U.S.C. 422(f)(2)(A) and (B) provides that CAS are not mandatory for so-called “commercial item” contracts.  It is an erroneous leap in logic to state that a CAS exemption exists, when the statute provides that CAS is not mandatory.  Further underscoring this point is the Conference Report language to Section 4205 of Pub. Law 104-106 (“the Clinger-Cohen Act”) which specifically directs the CAS Board to issue rules applying to the allocation of costs to commercial item contracts (other than firm fixed-price contracts).  As the CAS Board noted in the preamble to the original 1997 CAS exemption for fixed-price commercial item contracts, id., “ ... the Board will, of course, pursue the development of guidance to address the issue ... when other than firm fixed-price or fixed-price with economic price adjustment commercial item contracts are authorized[.]”   Now that such additional contract types have been “authorized,” the CAS Board must address the issue as contemplated in the Conference Report language to the Clinger-Cohen Act.

T&M/LH Contracts Exceeding CAS Applicability Thresholds Should be Subject to Some Existing Standards

Assuming that the CAS Board implements the Conference Report Language contained in the Clinger-Cohen Act that the Board previously committed to implementing, POGO suggests that the Board start with an analysis of what Standards should be applied to T&M/LH contracts for the acquisition of commercial items or services.  As an initial matter, a review of the case law will indicate that T&M/LH contracts are a form of cost-reimbursement or flexibly-priced contracts.  See CACI, Inc. – Federal, supra.

Another starting point for this analysis is Vernon J. Edwards excellent article entitled “The Time-and-Materials Contract:  The Time Has Come for a Long, Hard Look,” available on the “Where in Federal Contracting” forum at www.wifcon.com.  Mr. Edwards includes in his paper an insightful observation offered by John Ford, former Deputy General Counsel of the Defense Contract Audit Agency, in commenting on the subject of development of fully-burdened labor rates for T&M/LH contracts, “Many contractors compute overhead costs on a direct labor or dollar basis.  I would suspect that most of these contractors exclude subcontract labor from the base when computing overhead.  To charge subcontract labor as direct labor under a T&M contract and burden it with overhead that was computed with subcontract labor excluded from the base could be a violation of CAS 401 [“Consistency in estimating, accumulating and reporting costs”].   In other words, a great number of T&M contracts that contain subcontract labor rates (which is a particularly controversial point under the proposed FAR rule on T&M/LH contracts), are at risk of being noncompliant with the most basic of CAS rules.  Based on a relatively simple analysis of the development of contract labor rates that POGO was able to obtain from federal contracting officials, we strongly suspect that, in addition to numerous CAS 401 problems, that many, if not most large dollar T&M/LH contracts for the acquisition of commercial items or services should be subject to the provisions of  CAS 402 “Consistency in allocating costs incurred for the same purpose,” CAS 405 “Accounting for unallowable costs,” CAS 406 “Cost accounting period,”  CAS 407 “Use of standard costs for direct material and direct labor,” and CAS 411 “Accounting for acquisition costs of material.”

Conclusion

For all the aforementioned reasons, this proposed rule should be withdrawn.  These reasons include:

1. Failure to comply with Federal Register notice requirements respecting a contact person at the agency who can discuss the proposed rule;

2.  Apparent solicitation and consideration of comments relating to CAS under a proposed FAR rule for which there was no authority to solicit comments on CAS;

3. Inaccurate and potentially misleading statements in the preamble to this proposed rule regarding SARA and CAS requirements; and

4.  Failure of the CAS Board to discuss implementation of Pub. L. 104-106 Conference Report language directing the Board to issue guidance for the allocation of costs to commercial item contracts other than those that are firm fixed-price.

      Thank you for your consideration of these comments. If you have any questions, you may contact Scott Amey, General Counsel at (202) 347-1122.

      Sincerely,

      Danielle Brian
      Executive Director


      cc:  CAS Board Members

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