PCI Financial Forum Subcontractor, Travel and Legal Cost Reasonableness

Transcription

1 PCI Financial Forum Subcontractor, Travel and Legal Cost Reasonableness February 9, 2016 Phillip R. Seckman Gale R. Monahan

2 Agenda Cost Reasonableness Overview Travel Cost Reasonableness Travel Costs Generally Trends and Issues Subcontractor Cost Reasonableness Compensation Costs Generally Trends and Issues Legal Cost Reasonableness Legal Costs Generally Trends and Issues Best Practices 2

3 Cost Reasonableness Overview Why is cost reasonableness important? Reasonableness is a component of cost allowability Under cost reimbursement contracts, government only pays allowable costs If a fixed price solicitation requires certified cost or pricing data, only allowable costs may be used to develop/support price Including unallowable costs in vouchers or certain proposals may: Result in cost disallowances Result in system disapproval Subject contractors to penalties for expressly unallowable costs Serve as a basis for fraud allegations 3

4 Cost Reasonableness Overview (cont.) What makes a cost reasonable? FAR A cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person in the conduct of competitive business Reasonableness considerations Is the cost ordinary and necessary for the conduct of the contractor s business or contract performance? Is the transaction consistent with: Generally accepted sound business practices Arm s-length bargaining Federal and state laws and regulations What are the contractor s responsibilities to the government, other customers, the owners of the business, employees, and the public? Has the contractor significantly deviated from established practices? 4

5 Cost Reasonableness Overview (cont.) What makes a cost reasonable (cont.)? No presumption of reasonableness for costs incurred Historically, the government has focused on contractor processes/ procedures Old Rule (e.g., Boeing Aerospace Operations, Inc., ASBCA Nos , 46275, 94-2 BCA 26,802) Costs may not be disallowed on the basis of unreasonableness if the contractor has acted within the scope of its discretion in a nonarbitrary manner. Trend KBR cases (discussed later) Courts are permitted to evaluate not only the process, but also employee decisions made implementing the process DCAA and contracting officers may attempt to substitute their post hoc judgment for that of the contractor Increases need to fully explain both reasonableness determinations and the context in which the determinations were made 5

6 Travel Cost Reasonableness 6

7 Travel Cost Reasonableness Travel Costs subject to the FAR Cost Principles, Part 31 Directly addressed by: FAR , Travel Costs FAR 47.4, Fly America Act Implicate: General rules on allowability FAR , Entertainment Costs FAR , Recruitment Costs FAR , Relocation Costs FAR , Trade, Business, Technical and Professional Activity Costs FAR , Alcohol Costs FAR Travel Costs: Costs incurred for official company business are allowable Methods for calculating must result in a reasonable charge Costs are only allowable if documented: date/place of expenses; purpose of trip; name of person on trip/title or relationship to contractor 7

8 Airfare Costs Airfare costs Costs in excess of lowest priced airfare available to contractor during normal business hours are unallowable DCAA Guidance: this is not the lowest price available to the general public Should reflect special fares or negotiated rates available to the contractor Should be determined consistent with contractor s policies and procedures Generally requires documentation of quotations from competing providers Exception: a contractor need not choose the lowest price airfare available during normal business hours if it would: Require circuitous routing Require travel during unreasonable hours Excessively prolong travel Result in increased cost that would offset transportation savings Not be reasonably adequate for the physical or medical needs of the traveler Not be reasonably available to meet mission requirements Any such exceptions must be documented and justified 8

9 Airfare FAQs Business Class Travel No general threshold for when business class travel is allowable Contractor must show economy rates are unreasonable, using a relevant exception (i.e. physical or medical needs of traveler) 14 hour business class rule in FTR not applicable to contractors Frequent Flier Miles Contractor to establish own policy Not required to collect promotional benefits from employees If contactor obtains frequent flier credits for company use, the government should receive its applicable share of credits 9

10 Fly America Act Basics FAR part 47.4 implements the Fly America Act Requires that U.S. Government-financed international air travel be provided by U.S.-flag carrier, if available Contractors required to use U.S.-flag carrier if available, even though a foreign carrier may offer lower fares or more convenient travel If an origin or interchange point is not served by a U.S.-flag air carrier, foreign-flag air carrier service shall be used only to the nearest interchange point Exceptions Air Transportation Agreements - may use foreign-flag carrier that provides transportation under an air transport agreement with the U.S. Code-sharing - foreign carriers operating under a code share arrangement with a U.S. flag carrier are treated as U.S. carriers Disallowance of expenditures - must attach memorandum adequately explaining why U.S.- flag carrier service was not available or why it was necessary to use a foreign-flag carrier 10

11 Contractor Aircraft Contractor Owned, Leased, or Chartered Aircraft (FAR (c)) As a general rule, travel costs via private aircraft in excess of standard commercial airfare costs are unallowable Higher costs for travel by private aircraft allowable if: Travel by such aircraft is specifically required by the contract Higher costs are approved by the contracting officer: When an advanced agreement has been reached When commercial travel would require circuitous routing, travel during unreasonable hours, or excessively prolonged travel 11

12 Transportation Costs Costs for transportation may be based on: Mileage rates Actual costs incurred, or A combination of mileage rates and actual costs Method used must result in a reasonable charge Regular transportation to/from workplace not allowable 12

13 Lodging, Meals and Incidental Expenses FAR (a): Lodging, meals and incidentals may be based on: Per diem Actual expenses, or A combination of per diem and actual expenses Method used must result in a reasonable charge Except in special or unusual situations, allowable actual costs are limited on a daily basis to the maximum per diem rates set forth in government travel regulations 13

14 Per Diem Rates Sources for per diem rates Federal Travel Regulations (FTR) Contiguous U.S. ( GSA Rates ) Joint Travel Regulations (JTR) Alaska, Hawaii, outlying areas of U.S. Department of State Standardized Regulations (SR)--Other Contractors: single total daily cap for both components DCAA clarified that contractor maximum per diem rates are a combination of lodging plus meal, incidentals (March 22, 2013 Audit Alert; DCAM c(2)) Even if government regulations specify a separate cap for lodging vs. meals, incidentals Contractors must calculate downward adjustment for partial travel days Government travel regulations incorporated in FAR only to the extent of: Maximum per diem rates; definitions of lodging, meals, incidentals Special or unusual situations where higher reimbursement authorized Auditors often use government travel regulations to assess whether travel costs are reasonable 14

15 Actual Costs Contractor Cost Measurement Options: Actual Costs Documentation requirements Track contractor policies Receipt required for expenses over $75 Retain required approvals All unallowable costs must be separately identified and excluded from billings, claims, and proposals Actual costs may exceed per diem rates but cannot exceed the higher amounts authorized for federal civilian employees Written justification Approved by an officer of the contractor JTR/FTR specifies circumstances for approval of actual expense 15

16 Risk Areas Documentation in accordance with FAR requirements Subcontractor/consultant compliance Do costs comply with -46 and the FAR? Documentation? Justifications of other than lowest price airfare DCAA MRD 14-PAC-021(R) (Dec. 18, 2014) considers following expressly unallowable costs Lodging, meals, incidentals exceeding maximum per diem rate in government travel regulations Unjustified airfare costs in excess of the lowest priced airfare available to the contractor during normal business hours The portion of company-furnished cars that relates to personal use by employees (including transportation to and from work) 16

17 Subcontract Cost Reasonableness 17

18 Subcontract Costs No FAR cost principle specifically addressing subcontractor costs DCAA emphasis on subcontractor cost allowability Purchasing systems/contract cost audits Incurred cost submission Forwarding pricing rates/interim billings Significant questions/disallowed costs as unreasonable based upon Second guessing of teaming arrangements/procurement decisions Reevaluating contract price reasonableness determinations Any deviation from established purchasing system practice/lack of contract documentation Kellogg Brown & Root Servs., Inc. v. United States, 728 F.3d 1348 (Fed. Cir. 2013); Kellogg Brown & Root Servs., Inc. v. United States, 742 F.3d 967, (Fed. Cir. 2013), cert. denied, 135 S. Ct. 167 (Oct. 6, 2014)) DoD s proposed rule regarding price reasonableness for commercial items

19 Purchasing Systems and Subcontractor Cost Allowability Purchasing systems and subcontractor cost allowability are intertwined Major aspect of subcontractor cost allowability is reasonableness Purchasing systems determine and document reasonableness of price, contract type, procurement type (commercial item) and competition Having a compliant purchasing system leads to allowable subcontract costs What is a purchasing system? Contractor system(s) for purchasing and subcontracting including make-or-buy decisions, vendor selection and subcontract administration What is a contractor purchasing system review (CPSR)? Evaluates the efficiency and effectiveness of contractor spending of government funds and compliance with government subcontracting policies Typically conducted by DCMA 19

20 Purchasing System Requirements FAR : provides minimum considerations for COs when determining whether to grant consent to subcontract FAR : identifies areas for special consideration when conducting a CPSR, including: Results of market research Competition obtained Pricing policies and techniques Evaluation of subcontractor responsibility Types of contracts used The Business Systems Purchasing System Rule (DFARS ) creates: New purchasing system requirements New structure for CPSR New implications for noncompliance 20

21 CPSR Best Practices Today Review FAR requirements and the Business Systems Rule Assess how your purchasing system stands up Strengthen as needed Document everything Recent government approach has been that if it is not documented, it didn t happen While contractors are not required to maintain perfect documentation, doing so (or at least trying to) will save headaches Before a CPSR Conduct an internal audit and remediate any issues discovered Update policies and procedures as necessary Provide training on problem areas Choose a liaison to manage process Make sure relevant policies and procedures and subcontract documentation are available for review Work with government to establish scope, timeline and points of contact 21

22 CPSR Best Practices (cont.) During the CPSR Gather questions; document answers Receive an exit briefing Immediately enhance system areas highlighted in exit briefing Communicate with the CO early before any initial determination Promptly respond to an initial determination with a corrective action plan Seek a letter from the CO indicating proactive corrective steps and low risk to government despite significant deficiencies noted in the audit (if possible) Post CPSR Respond to any final determination with immediate and frequent follow-up Continue to implement any corrective action plan Train purchasing personnel on issues discovered during CPSR Request prompt (re-)approval of system Consider appealing any unduly delayed CO (re-)approval of the system Prepare for subsequent disallowance(s) of previously incurred subcontract costs 22

23 Legal Cost Reasonableness 23

24 Legal Costs FAR addresses costs of legal and other proceedings Identifies specific unallowable legal proceedings Costs of legal matters or proceedings generally allowable if not specifically made unallowable Must be reasonable Must comply with FAR Why are legal costs so frequently contested? Potentially large amounts Can involve unfavorable circumstances Case law goes far beyond cost principles; relies on FAR COs sometimes do not view legal expenses as cost of doing business

25 Legal and Other Proceeding Costs Costs of actions for fraud and/or violation of law/regulation against contractor unallowable per FAR Costs unallowable if result in: Criminal conviction, finding of liability involving fraud, civil/administrative penalty, suspension or debarment, or termination of a contract for violation of law or regulation Settled and could have resulted in one of the above outcomes Proceeding must be brought by Federal, state, local, or foreign government; or A third-party in the name of the United States under the False Claims Act, 31 U.S.C (qui tam) Proceeding includes an investigation

26 Legal and Other Proceeding Costs (cont.) In settled qui tam cases where the government does not intervene, costs are allowable if contractor shows that relator had very little likelihood of success Even if successfully defended, only 80% of reasonable, allocable costs are allowable If contractor is only partially successful in its defense of a fraud proceeding Rumsfeld v. Gen. Dynamics, 365 F.3d 1380 (Fed. Cir. 2004): no recovery; the Court held that the Major Fraud Act of 1988 required that all claims be considered part of one proceeding DOE GOCO contracts may require different result Government has relied on FAR to bring cases not expressly covered within the disallowance provisions of FAR Actions brought by private parties held to be similar or related to fraud

27 Legal and Other Proceeding Costs (cont.) FAR disallows costs associated with both prosecution and defense of non-fraud CDA claims Legal and consultant costs are unallowable even if case is won Considerations For what purpose was the consultant/attorney retained? Request for Equitable Adjustment or pursuit of CDA Claim? Nippo Corp./Int'l Bridge Corp. v. AMEC Earth & Envtl., Inc., CIV.A , 2013 WL (E.D. Pa. Apr. 1, 2013) (district court held that subcontractor s REA against prime was outside the scope of CDA) Moshe Safdie & Assocs., Inc. v. Gen. Servs. Admin., CBCA 1849, 14-1 BCA 35,564 (REA preparation costs are allowable) To assist in achieving contract administration resolution? Tip Top Constr., Inc. v. Donahoe, 695 F.3d 1276 (Fed. Cir. 2012) Fees associated with the realm of negotiation and genuine contract administration are allowable, even if negotiations fail and result in a claim

28 Legal and Other Proceeding Costs (cont.) Costs of other types of non-fraud related proceedings unallowable per FAR Connected with organization, reorganization, mergers and acquisitions Defense of anti-trust suits Patent infringement litigation unless provided for in contract Bid protest costs May recover if costs of defending protest are incurred pursuant to a written request from a CO Defense or prosecution of suits between contractors, concerning: Teaming agreement Joint venture Similar arrangements of shared interest Except if required by contract or approved by CO

29 Legal and Other Proceeding Costs Trends Legal costs specifically Government confusion over Tecom COs are demanding contractors show little likelihood of success prior to reimbursing any settlement costs Government resistance to payment of legal costs Reasonableness concerns Allegations that costs to correct noncompliances are unreasonable Documentation issues Treatment of law firms as subcontractors DCAA audits of internal controls relating to legal costs Per the DCAAM , adequate internal controls include Written policies/procedures regarding the reasonableness and allowability of legal costs An established policy regarding the types of information and provisions included in legal service agreements A designated reviewer of bills submitted by outside legal counsel A process if the reviewer believes the outside legal bills contain duplicate or excessive charges

30 Cost Reasonableness: Best Practices 30

31 Cost Reasonableness Best Practices Establish and Consistently Apply Processes A key element of demonstrating cost reasonableness is establishing, maintaining, and consistently applying policies/procedures Travel policies, subcontractor cost/price analysis and related determinations (e.g., commerciality) Internal approvals and audits integrated into processes to ensure that documentation of business decisions is complete Reinforce Processes with Training Regular training should occur on all policies/procedures Document and retain records of attendance Anticipate Challenges to Cost Reasonableness All policies and practices should be designed with the expectation that DCAA will question the reasonableness of any significant expenditures Challenges are becoming more common Document Everything 31

32 Questions? Phillip R. Seckman Partner Government Contracts Gale R. Monahan Managing Associate Government Contracts

33 Thank you Dentons US LLP 1400 Wewatta Street Suite 700 Denver, CO United States Dentons is a global law firm driven to provide a competitive edge in an increasingly complex and interconnected world. A top 20 firm on the Acritas 2014 Global Elite Brand Index, Dentons is committed to challenging the status quo in delivering consistent and uncompromising quality in new and inventive ways. Dentons' clients now benefit from 3,000 lawyers and professionals in more than 80 locations spanning 50-plus countries. With a legacy of legal experience that dates back to 1742 and builds on the strengths of our foundational firms Salans, Fraser Milner Casgrain (FMC), SNR Denton and McKenna Long & Aldridge the Firm serves the local, regional and global needs of private and public clients Dentons. Dentons is a global legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.