The Coalition for Government Procurement

View from RJO

By Robert S. Metzger and Mark J. Linderman[i]

Reproduced with permission from Federal Contracts Report 102 FCR 376 (Sept. 23, 2014). Copyright 2014 by The Bureau of National Affairs, Inc. (800-372-1033) <http://www.bna.com>

Enterprise IT implementation projects fail too often in public implementation with costly results to public sponsors as well as to systems integrators and software providers.  Enormous amounts can be expended without achieving intended purposes and costly litigation can follow.  Recent examples include:

  • On July 22, 2014, a Senate investigations report accused the Air Force of wasting $1.1 billion in a failed effort, between 2004 and 2012, to implement the Expeditionary Combat Support System (ECCS), intended to replace unconnected logistics systems with a fully integrated system.[1]
  • On August 22, 2014, the State of Oregon brought suit against Oracle over its failure to provide a Health Information Exchange (HIX) and alleged breach of contract, fraud, racketeering and false claims.[2]  Oregon claims that it spent $240 million “for a health insurance exchange that never worked as promised” and for modernization of the state’s social services technology that “never got off the ground.”[3]
  • On November 3, 2013, the State of California terminated its contract with SAP for a new, integrated state payroll system, intended for 240,000 employees, and subsequently brought suit against SAP seeking more than $50 million in damages.[4]
  • On October 15, 2009, the State of Indiana terminated its $1.3 billion welfare modernization contract with IBM for cause and sued IBM seeking damages of more than $170 million.  In 2012, a trial court ruled for IBM, finding that default was not justified where there was “substantial performance.”[5]  An appellate court reversed this finding on February 13, 2014, concluding that IBM failed to fulfill the essential purposes of the contract.  The Supreme Court of Indiana has agreed to decide the matter.[6]

Failed IT systems mean that important government purposes go unmet and large amounts of public funds are wasted.  Contractors may incur losses amounting to tens or even hundreds of millions of dollars.  When large claims are filed or a customer terminates an IT project for default, litigation may result that costs further millions.[7]  Such controversies are never satisfactory either for provider or customer.

There are no “uniform best practices” to avert controversy and guarantee project success.  However, certain measures of risk identification and risk management can help both customers and contractors.  We offer 10 recommendations that reflect our experience with federal and state public sector IT projects.  In this article, we focus on the acquisition phase which precedes contract award.

1)      Legacy systems must be understood

IT implementation projects often involve the deployment of enterprise resource planning (“ERP”) systems.[8]  These involve systems integration built upon core software.  The software typically is originated for commercial customers and evolves through successive iteration as experience is gained with each installation.  But the “out of the box” solution rarely fits the particular needs of a government customer.  There will be differences between the customer’s present (“as is”) system and the prospective (“to be”) system that the customer desires.  Customization of the ERP solution is needed to address this gap.  This requires careful attention to understand the legacy environment and to define objectives of the new system satisfactory for every stakeholder.

2)      The customer must have a clear vision of the re-engineered business process

Governments pursue modern ERP systems to eliminate separate, “stovepipe” legacy systems and to replace them with integrated systems that leverage common data sets and automate many discrete governmental functions.  In theory, an ERP system will reduce the government’s operating costs, make the work of the public workforce more fulfilling and productive, and improve the ability of government to deliver services and otherwise respond to the public.  At the same time, not all stakeholders in existing systems will readily agree to new systems that require changes to old ways.  Projects can fail if owners attempt to bend back new systems to mimic legacy practices.

3)      Realistic expectations are essential to project success

When a public sector customer defines its ERP objectives, these become the “requirements” for the “to be” system.  The public sector customer must have a clear vision of what it wants in the re-engineered business process.  It can be very difficult to objectively document requirements because the customer, at the beginning of a project, may not know whether they want to employ out-of-the-box functionality or whether customization is required.[9]  If the customer has unreasonable expectations, this will increase project failure risk because there may be no achievable “target” for the contractor to hit.  Absence of clear and achievable objectives is a recipe for extended periods of contract performance and for delay or changes claims – if not frustration of fundamental purpose.

4)      The customer must have support of its stakeholders

IT projects that seek “transformation” from legacy systems involve a high degree of interdependency.  The public customer knows best its legacy capabilities as well as business needs.  It controls existing data that must be converted and transformed to test and then operate the future system.  RFPs should recognize customer-side responsibilities and contracts must clearly state that the contractor’s obligations depend upon the customer’s timely performance of its obligations.  Often, one agency will act as lead or sponsor for a system to benefit many other agencies or departments.  The sponsor must have the ability to assure that stakeholders timely perform their assigned functions as well as authority to accept a system even if risk-averse shareholders are reluctant to commit.

5)      Confirm sufficient resources are present for customer-responsible actions

Complex IT projects truly are joint undertakings.  Functions such as data conversion and integration testing depend upon the time, commitment and expertise of customer-side personnel for whom this work, though critical, may be outside their regular duties.  Project personnel also are responsible for review and approval of incremental performance – and this work typically is on the “critical path” for project success.  If the customer does not commit sufficient trained personnel to hold up its end of the project, the result is costly program extension and disruption to the planned work.

6)      Be prepared to walk away if risks are transferred and not equitably shared

Careful review of an RFP or “model contract” will reveal when a government customer seeks to transfer excess performance, cost or schedule risk to the contractor.  Because project success depends upon mutual commitment and collaborative accomplishment, RFPs that shift too much risk to the contractor present high risk of failure both operationally and financially.  Such risks can become too great to justify a bid even if competitive circumstances permit pricing that takes some risk into account.

7)      Risk recognition must temper business capture objectives

Business capture organizations within contractors naturally see large IT projects as tempting opportunities.  This can produce pressure to take excess risks to secure the “win.” This is a mistake, especially for demanding “transformational” projects.  After the contract is signed, most of the leverage resides with the public purchaser.  Rarely can or will a government contractor abandon performance.  Recent history is filled with examples of IT projects gone bad where contractors spend tens of millions of dollars in delayed performance with little likelihood of full recovery.  A common problem is that of “concurrent delay,” because government customers are not likely to pay on claims unless the contractor can show that its claim is limited to delays and costs caused by customer-responsible actions.

8)      Evaluate the reasonableness of terms and conditions and their negotiability

It can be naïve and even reckless to assume that during performance the customer will act in good faith to resolve performance problems or by agreeing to contract changes.  Those responsible for the conduct of an acquisition are rarely the same people who preside over contract performance.  This places paramount importance upon the drafting details and on inclusion of commercially reasonable terms and conditions in the contractual documentation.  In state procurements, the public buyer may not be able or willing to negotiate any changes in material terms.  Over the years, failed IT projects sometimes produce claims against contractors seeking hundreds of millions of dollars.  Limitation of liability provisions and limitations on recoverable damages are essential to contain the potential exposure.

9)      It must be clear what constitutes “the Contract”

An IT implementation contract can run to thousands of pages, e.g., where the RFP and contractor’s proposal are among the contract documents.  Contractors must assure that critical obligations are stated clearly and should strive to avoid material inconsistencies at different levels of contractual documentation.  Special attention must be paid to priorities among objectives and (of course) the Order of Precedence clause.  Another key issue is how the contract treats assumptions that often accompany a contractor’s IT proposal.  These may address, for example, responsibilities of the customer, where requirements will be met “out of the box,” where customization is proposed, and how the contractor interprets key requirements.  Disputes often arise when the public customer refuses to agree that the contractor’s performance is governed by such assumptions.  Every effort should be made to be sure that those assumptions are recognized as part of the operative contract documents.

10)  The contract must establish how the adequacy of performance is determined

In the Indiana vs. IBM litigation, the trial court found that IBM was not in breach of the contract because of “substantial performance” and because the State realized many project benefits.  On appeal, however, IBM was found in “material breach” because the appellate court concluded that the fundamental purposes of the project had not been achieved to the State’s satisfaction.  The Supreme Court of Indiana will decide this issue.  It has potentially profound significance.  IT implementation contracts typically include time-sequenced iterative obligations, involving dozens or even hundreds of deliverables.  The customer’s receipt and review of in-process deliverables represent objective anddocumented events. Similarly, achievement of “Milestones” over the course of contract performance signifies progress in meeting contract objectives.  But disputes such as Indiana vs. IBM reveal that the public customer may insist that its subjective satisfaction at some overarching policy level is the legal measure of adequate performance.  At the very least, contractors must be warned to take all feasible measures to assure that any dispute over performance will recognize not just high level requirements but the documented satisfaction of contractual waypoints.

[1] “The Air Force’s Expeditionary Combat Support Systems (ECCS): A Cautionary Tale on the Need for Business Process Reengineering and Complying with Acquisition Best Practices,” Staff Report, Permanent Subcommittee on Investigations, U.S. Senate (July 7, 2014).

[2] Ellen Rosenblum vs. Oracle America, Inc., Case No. 14C 20043, Circ. Ct. of Oregon, County of Marion. Complaint available athttp://www.doj.state.or.us/releases/pdf/FINAL_Complaint_8_22_14.pdf

[3] Id., at 6.

[4] State Controller’s Office vs. SAP Public Services, Case No. 00154918, Super. Ct. of California, County of Sacramento.

[5] State of Indiana vs. International Business Machines, Case No. 49D10-1005-PL-021451, Super. Ct. of Marion County.  Findings of Fact, Conclusions of Law and Judgment for IBM, available athttp://www.in.gov/legislative/senate_democrats/files/blog/FinalOrdersignedJuly182012.pdf.

[6] State of Indiana vs. International Business Machines, No. 49A02-1211-PL-875, Ct. of Appeals of Indiana.  Opinion, available athttp://www.in.gov/judiciary/opinions/pdf/02131403nhv.pdf .

[7] The trial in Indiana vs. IBM lasted six weeks and the court heard 92 witnesses.  Before trial, the court considered 12 motions for summary judgment. Approximately 27,800 exhibits were submitted, totaling about 1 million pages of documents.

[8] ERP is defined by Gartner’s IT Glossary, at http://www.gartner.com/it-glossary/enterprise-resource-planning-erp/, as “the ability to deliver an integrated suite of business applications. ERP tools share a common process and data model, covering broad and deep operational end-to-end processes, such as those found in finance, HR, distribution, manufacturing, service and the supply chain.”

[9] An IT project typically includes a “blueprint” phase to further or fully define the requirements that are to be achieved during design and development.  The problem is even more acute in “agile” development projects where requirements tend to be stated at a very high level with planned, short-term “sprints” during performance to achieve narrowed understandings of desired functionality at completion.

[i] Robert S. Metzger is the head of the Washington, D.C. office of Rogers Joseph O’Donnell, P.C., and Mark J. Linderman is a Shareholder in the firm’s office in San Francisco, CA.  Rogers Joseph has focused upon public contracts matters for more than 30 years.

Healthcare Spotlight

By: Donna Lee Yesner, Partner, Morgan Lewis & Bockius LLP and Stephen E. Ruscus, Partner, Morgan Lewis & Bockius LLP

In the wake of the scandal over veteran wait time for health care at certain Department of Veterans Affairs (“VA”) medical facilities, Congress acted quickly to improve the care available to veterans, including access to providers outside the VA system.  On August 7, 2014, President Obama signed into law the Veterans Access, Choice, and Accountability Act of 2014 (“Veterans Choice Act”), which authorized veterans to obtain hospital care and medical services from non-VA providers and $10 billion to pay for such care.  Prior to the enactment of the Veterans Choice Act, the VA had voluntarily adopted a policy of paying for veterans’ medical care outside the VA system under certain circumstances; however, VA approval was required for these referrals.   By contrast, the new law gives veterans greater access to the hospital care and medical services to which they are entitled under section 17 of title 38 of the United States Code.

The Veterans Access, Choice and Accountability Act – Key Provisions

The new law applies to veterans who are:

  1.  enrolled in a patient enrollment system at the VA established under 38 U.S.C. 1705 and have contacted the VA seeking an initial appointment for the receipt of hospital care or medical services; and
  2. eligible for hospital care or medical services under 38 U.S.C. 1710(e)(1)(D) and have either
    1. unsuccessfully attempted to schedule an appointment at a VA medical facility within the Veterans Health Administration wait-time goals (posted on the internet),
    2. live more than 40 miles from the closest VA medical facility,
    3. reside in a state lacking a VA hospital, emergency care and surgical care or live more than 20 miles from such a medical facility, or
    4.  live 40 miles or less from a medical facility but must travel by boat, air or ferry to reach it or travel is otherwise burdensome due to geographic challenges.

A veteran who meets any of these conditions is referred to as an “eligible veteran.”

Section 101(a) of the Veterans Choice Act requires the VA to either place an eligible veteran on an electronic waiting list for hospital care or medical services at a VA facility or, at the veteran’s election, authorize care outside the VA through agreements authorized by the statute, or any other laws, from one of four categories of care providers.  Further, the VA must inform eligible veterans of the available care and ensure the electronic waiting list is accessible in order for veterans to determine the wait time and make an informed choice.  If an eligible veteran elects to receive medical care outside the VA, he or she may obtain care from any of the following entities that have entered into agreements with the VA as described in the statute:  1) any health care provider in the private sector, including any physician, that is participating in the Medicare program; 2) any federally-qualified health center as defined in 42 U.S.C. 1396d(1)(2)(B); 3) the Department of Defense, and 4) the Indian Health Service.   To avoid affirmative action program compliance issues, the law expressly prohibits the Department of Labor, Office of Federal Contract Compliance Programs from treating an entity that signs an agreement to furnish health care to veterans as a federal contractor or subcontractor.

When entering into participation agreements under section 101(d) of the Veterans Choice Act, the VA must negotiate rates for furnishing hospital care and medical services and reimburse the entities at the negotiated rates.  In general, negotiated rates may not exceed the rates paid by the Medicare program to providers of services and suppliers as defined in sections 1861(u) and  (d) of the Social Security Act for the same care or services.    However, the VA may negotiate higher rates for care or services furnished to veterans in highly rural areas.  The law prohibits providers from collecting more than the negotiated rate and from collecting a co-payment in excess of any amount that could be collected under chapter 17 of title 38 if the veteran received care from a VA provider.

Veterans must disclose whether they are covered under a health care plan other than Medicare, Medicaid, or Tricare.  If they are covered by another plan, that plan will be primarily responsible. , for hospital care and medical services for a non-service related disability, to the extent the plan covers the care furnished. The VA will be secondarily responsible.  The provider will be responsible for seeking reimbursement first from the primary payer.  Authority to pay for hospital care and medical services through non-VA providers – as either the primary or secondary payer – has been transferred from the Veterans Integrated Service Networks and VA medical centers to the Chief Business Office of the Veterans Health Administration.   Within 90 days after the August 7, 2014 enactment date, the VA must prescribe regulations for the implementation of a system for processing claims and paying bills for authorized care and services.

Impact of Expanded Care on Drug and Device Suppliers

Furnishing medical care to veterans through non-VA providers is a positive development for suppliers of drugs and medical devices as it should increase the utilization of their products.  For example, the VA may pay for products that are manufactured in countries that are not designated countries under the Trade Agreements Act (“TAA”) without a non-availability determination, because the TAA only applies to products acquired under a federal procurement contract, not products purchased by private sector health care providers through commercial channels.  At the same time, the law authorizing access to care outside the VA system raises questions regarding reimbursement of supplies, particularly pharmaceutical and biological products, which need to be resolved, perhaps through the claim processing system regulation.   For example, the law specifies that veterans may elect to receive medical services including supplies furnished incident to a medical service from Medicare providers.  It also contemplates that VA provider agreements will cover drugs and devices covered by Medicare Part B, cap the negotiated rate paid for such supplies at the Medicare rate, and follow procedures applicable to participation agreements under the Medicare program.  What is unclear is whether the VA will pay for any drug administered by a non-VA physician and covered by Medicare, or impose its own restrictive formulary on contract providers.

Prior to the Veterans Choice Act, any drugs paid for by the VA were subject to VA formulary requirements.  Not only would it be burdensome for non-VA providers to adhere to the VA formulary as a condition of reimbursement, physicians participating in the Medicare program may be unwilling to sign agreements to treat veterans if they cannot use the same products covered by Medicare and receive the same payment.  Similarly, military treatment facilities and federally-qualified health centers will want to be reimbursed for whatever supplies they use in treating all their patients, not just veterans.  If the VA formulary restrictions do not apply to drugs administered by non-VA physicians, manufacturers of non-formulary drugs may increase utilization of their drugs in the VA market.

Another area requiring clarification concerns prescriptions written by non-VA physicians.  Although the Veterans Choice Act authorizes VA payment for supplies furnished as medical services under the Medicare program, it does not provide a pharmacy benefit outside the VA system, and does not cover drugs dispensed by private sector pharmacies.  If veterans want the VA to pay for their prescriptions, the prescriptions must be dispensed by a VA pharmacy or the agency’s mail order pharmacy.   Before enactment of the new law, prescriptions written by non-VA physicians often could not be dispensed by VA pharmacies without a VA physician first seeing the patient and approving the prescription.  In those situations, a veteran still had to wait to schedule an appointment at a VA facility to get the medication.   Hopefully, the VA will not continue that practice under the new law.

It is unclear, however, whether the VA will still require veterans to make appointments with VA doctors in order to obtain certain prescriptions.  Requiring a veteran to wait weeks for a VA appointment or drive many miles to see a VA doctor in order to receive medication, which could be prescribed outside the VA and dispensed by the VA’s mail order pharmacy, is clearly contrary to the spirit of the law.  If the VA is concerned with the expense of a drug prescribed by a non-VA doctor, a requirement for electronic or telephonic consultation between the prescribing doctor and a VA doctor should suffice.   In addition, veterans will be issued Veterans Choice cards in order to process payment claims.  Thus, it would be relatively easy for a Pharmacy Benefit Manager to manage prescriptions written by authorized non-VA doctors and dispensed by the VA’s mail order pharmacy to Veterans Choice beneficiaries, including any prior authorization requirements.

Finally, it is worth noting that if veterans elect to be treated by DoD physicians, any drugs or devices furnished to veterans at a military treatment facility will be procured by DoD at contract prices available to DoD, including prices under Blanket Purchase Agreements.  Similarly, if veterans elect to be treated at federally-qualified health centers, as defined in section 1905(1)(2)(B) of the Social Security Act, drugs used to treat the veterans will be acquired at deeply discounted prices under pricing agreements authorized by section 340B of the Public Health Service Act.  Thus, the acquisition cost for these providers is well below the Medicare rate, which, for drugs, is generally based on the weighted average sales price for the drug, exclusive of federal sales.  The Veterans Choice Act caps the negotiated reimbursement rate paid non-VA providers for medical supplies at the Medicare rate; however, the statute  does not,  prohibit the VA from negotiating prices below this amount with providers that are beneficiaries of other federal contracts or pricing agreements and have much lower acquisition costs.  Accordingly, the VA could negotiate payment terms with DoD facilities or federally-qualified health centers consisting of a service fee plus the acquisition cost of the drug.

We are now approximately two and a half weeks away from the Coalition’s 35th Anniversary Celebration, Excellence in Partnership Honors and the 2014 Fall Conference.  On November 5th and 6th the Coalition will be hosting a Myth-Busters dialogue with government and industry.  The central themes will be fostering partnership between government and industry, supporting common sense in government procurement and creating professional opportunities for returning Veterans!  These three themes are central to a procurement system that delivers best value for the American people! I am looking forward to seeing all of you there!

Today, I am pleased to announce our 2014 Lifetime Acquisition Excellence Honorees:

 

Kathy Jocoy, Management Services Center, Post Award Acquisition Division Director, General Services Administration

In her role supporting GSA’s portfolio of professional services schedules Kathy’s leadership and management skills have made a best value difference in MOBIS, LOGWORLD, Environmental Services, PES and the Consolidated Schedules.  Kathy’s 37 years of commitment to excellence reflect the best in public service!

 

Steve Viar, Director, FEDSIM, General Services Administration

Steve Viar started with GSA in 1978!  He began his career in the FSS Tools Center; ultimately moving to FEDSIM in 1988 where he has served ever since.   An outstanding acquisition professional, Steve served as a contracting officer managing complex information technology procurements that made FEDSIM a “best in class” procurement organization recognized across the federal government. Steve now heads up FEDSIM, managing a staff of 135 who deliver best value solutions to customer agencies like DHS, DOD and FDIC every day.

 

Joanne Woytek, Program Manager, NASA SEWP, National Aeronautics and Space Agency

Joanne is the driving force and leader of one of the most successful information technology contract vehicles in the federal government.  NASA SEWP is recognized as a leader in providing customer focused, best value information technology products and services.  Under Joanne’s leadership, NASA SEWP now processes over 25,000 orders annually accounting for over $2.5 billion in customer agency purchases.  NASA SEWP is known throughout government and industry for its efficiency and effectiveness in supporting agency missions.

 

Jan Frye, Deputy Assistant Secretary, Office of Acquisition and Logistics,

Department of Veterans Affairs

Jan has a long and outstanding career in public service as an acquisition professional.  A retired Army Colonel, Jan served in senior acquisition and logistics positions throughout his 30 year career.  Among other Army posts, he served as Principal Assistant Responsible for Contracting in Eighth U.S. Army/US Forces Korea and as Deputy Principal Assistant Responsible for Contracting, U.S. Army Corps of Engineers.  Among his many military honors and decorations is the Legion of Merit.

At the Department of Veterans Affairs (VA), Jan currently leads one of largest acquisition and logistics operations in the Federal government. Not only he is responsible for implementation of department wide acquisition policies and procedures; he is also a driving force behind the VA Acquisition Academy located in Fredrick, Maryland.  Jan also serves as a member of the Committee for Purchase from People who are Blind or Severely Disabled, appointed by President Obama in October 2011.

 

Congratulations to our Lifetime Acquisition Excellence recipients!  The 2014 Excellence in Partnership Award winners for the remaining categories will be announced in next week’s Friday Flash.  We look forward to honoring all of the outstanding public servants/acquisition professionals on November 5th!

See you all there!

Roger Waldron

President

FAR and Beyond Blog 

It is an exciting time for the Coalition for Common Sense in Government Procurement! As you know, on the evening of November 5th the Coalition will begin its 2014 Fall Training Conference with Excellence in Partnership (EIP)  honors  & a 35th Anniversary Gala  at the Ronald Reagan Building.  The conference will continue on November 6th at the JW Marriott in Washington, DC.   We look forward to seeing you!  Please don’t delay registration.  Register by October 22nd!

Excellence in Partnership

The evening’s festivities will include our 15th Annual Excellence in Partnership (EIP) honors. The EIP honors acquisition officials who have made significant strides in promoting and utilizing government-wide contracting vehicles.  Awards will be given to individuals, organizations, and contractors involved in federal government procurement.

35th Anniversary – Supporting our Veterans

In honor of our 35thAnniversary, the Coalition, in partnership with The George Washington University, established the Coalition for Government Procurement Endowed Government Procurement Scholarship/Fellowship Fund.  The  fund will support qualified veterans pursuing a law or master’s degree with a concentration on US Government procurement.  This fund combines the two pillars of the Coalition: (1) Common sense acquisition policy, procedures and programs; and (2) Support for our veterans as they transition to civil life.

Guest speaker, Marine Corps Veteran Cory Gritter

The evening’s events will include a networking reception with dinner, and a conversation with Cory Gritter, a medically retired veteran of the United States Marine Corps and President of Gritter-Francona, Inc., a Service Disabled Veteran Owned Small Business that focuses on Information Technology and Cyber Security services.

Cory started his company in January of 2013 and has successfully grown it to 35 employees over the last 18 months. Cory coined the tag line “The Veteran Edge” for his company on the belief that the training and leadership skills veterans learn in their service is second to none.  He is the exemplar for determination, good attitude and work ethic and actively seeks out veterans to hire for his firm and is convinced that they will help him build a solid set of values upon which the company can grow and thrive.

In 2005 Cory fulfilled his lifelong dream of serving his country as a U.S. Marine.  In 2008 he was selected to attend the Marine Scout Sniper Basic course, where upon completion, he also attended the Urban Sniper course, graduating at the top of the class. Cory was deployed to Afghanistan in 2009 where he led an elite Scout Sniper team in ground combat operations.  During one of his missions he was severely wounded by an IED and evacuated to Walter Reed National Military Medical Center where he spent the next 3 ½ years in recovery and endured over 20 surgeries.

For the last year and a half of his recovery Cory worked with his Marine Corps leadership and participants from the Wounded Warrior Mentoring Program to prepare for his transition to civilian life.  He interned at the Pentagon under Headquarters Marine Corps (HQMC) Command, Control, Communications & Computers Cyber (C4 CY) and with U.S. Marine Corps Forces Cyberspace (MARFORCYBER) Marine Corps Network Operations and Security Center (MCNOSC) in Quantico, VA.  During that period Cory also interned with Booz Allen Hamilton’s Cyber Security Operations Center (CSOC), learning the skills necessary to be a successful cyber security professional.

Silent Auction

A silent auction benefitting the Coalition for Government Procurement Endowed Government Procurement Scholarship/Fellowship Fund will take place on this evening.  All proceeds of the auction will go to the fund.

We are gratified at the support we have received from across the procurement community for the creation of the fund and excited to be off to a great start with community support.  You too can help a veteran at The George Washington University by participating in the auction.

Here is a current list of the items donated for the silent auction:

  • Suite at the Verizon Center (18 seats + 3 parking passes) for February 3rd at 7:00 p.m. when the Caps play the Kings (Stanley Cup Champions) – donated by Lockheed Martin
  • Box Seats at Nationals Park – donated by Baker Tilly
  • Golf Lessons and a Foursome – donated by Whiskey Creek Golf Club
  • Patriotic Quilt – made and donated by Robin Klonarides of Raytheon
  • Football signed by Ron “Jaws” Jaworski and  Dick “Coach” Vermeil – donated by The Judge Group
  • NFL Football Helmet signed by Alfred Morris, Ahmad Bradshaw, Maurice Jones-Drew, Jason Witten, and 12 others  – donated by Berkeley Research Group and the NFL Players Association
  • 4 tickets for the Wizards vs Denver Nuggets game on 12/5 – donated by Federal News Radio
  • Six Award Winning Personal Finance books signed by author Ric Edelman – donated by Ric Edelman
  • Complimentary Night Stay at the Mayflower Renaissance Hotel – donated by Marriott
  • Complimentary Weekend Stay at The Liaison Capitol Hill PLUS Dinner for two at Art & Soul – donated by Affinia Hotel Collection
  • Coffee Table Book from the Degas/Cassatt and Rockwell exhibitions plus a canvas tote bag – donated by Booz Allen Hamilton
  • Russell Stover Chocolate Basket – donated by Russell Stover
  • Catered Chicken Taco Bar for 10 from Qdoba – donated by Qdoba
  • Tour and Tasting for 4 at RdV Vineyards in VA – donated by RdV

Fall Conference

The Fall Conference is an unparalleled opportunity to find out about current and future initiatives affecting contractors selling commercial items into the federal market. We have a great line up of speakers.  Click here to see the complete agenda.

Please register as soon as possible!

We look forward to your support on the evening of November 5th!!  It will be a special event supporting our nation’s veterans and acquisition excellence.  For logistical purposes, we do need to have a fairly accurate headcount for this two day event by October 22nd, so please don’t delay registration.  Contact Matt Cahill at 202-315-1054 or mcahill@thecgp.org if you have any questions, or click here to register!

 

Roger Waldron

President


Legal Corner

By:  Jonathan Aronie, Partner, Sheppard Mullin Richter & Hampton

I acknowledge it runs counter to the traditional, universally-accepted, ultra-cool image of DC Government Contracts lawyers, but I must admit I like reading GSA OIG Audit Reports.  So it was with great anticipation that I poured myself a generous glass of milk the other night and curled up in front of a warm desk lamp to devour the pages of the OIG’s latest commentary, engagingly titled “Audit of Contractor Team Arrangement Use.”

As its title foreshadows, the Report, dated September 8, 2014, recounts the exhilarating tale of the OIG’s exploration of GSA Contractor Team Arrangements (“CTAs”).  The noble objectives of the audit team, established in the Report’s opening pages, were to “(1) determine the extent to which contracting officers follow existing guidance and regulation in the administration of contractor team arrangements and (2) assess contracting officer awareness of risk in improperly administering team arrangements.”  They had me at “objectives.”  Snuggling up closer to my desk lamp, I read on.

Because GSA’s CTA records were “incomplete, inaccurate, and unverifiable” (a finding, incidentally, that would spell disaster for a contractor), the OIG’s audit was performed on a limited sample of GSA task orders – 7 orders, to be exact.  The auditors, however, did interview numerous contracting officers and supervisors, and the conclusions they were able to draw from their review are nothing short of hair-raising.  According to the auditors – wait for it – GSA’s contracting officers “have been provided minimal instruction and have received no formal training relating to the award and administration of team arrangements.”  The auditors also concluded GSA has provided inadequate guidance regarding the use and administration of CTAs.  I was pulled deeper and deeper into the story with each new paragraph.  As I flipped the pages with zest, hungering for the surprise around the next corner, I . . . .

Okay, I give up.  The truth is, there is absolutely nothing surprising, engaging, hair-raising, or even particularly interesting about the OIG’s audit findings.  We all have known for years that GSA contracting officers don’t understand Contractor Team Arrangements – and, frankly, most contractors don’t either.

For the last 15 years or so, I’ve taught an Advanced Issues in MAS Contracting Course – previously with Carolyn Alston (currently with the Coalition) and currently with Larry Allen (previously with the Coalition) – and the issue of CTAs comes up in every class.  The pervasiveness of the confusion among Government COs and contractors never ceased to amaze me – at least until I attended a CTA course at GSA Expo a few years back taught by a now-retired CO.  With due respect (and apologies) to the many good COs and Government teachers out there, the course was awful.  The information was vague, not useful, and, in many ways, just plain wrong.  Thus, it came as no surprise to me, as it probably didn’t to you, that the GSA OIG auditors concluded COs are not being well educated on this topic.

I was more interested in the OIG’s view of the consequences of the lack of training and guidance.  The consequences identified by the auditors, however, were presented through the lens of a Government actor – not a contractor.  While I don’t quibble with the correctness of the auditors’ findings, I do regret they ignored most of the risks to the contractor of misunderstanding CTAs.  And there are several.  But before getting to that, let’s get some basics out of the way.

A CTA is an agreement between two (or more) GSA Schedule contractors to provide a solution to an authorized Schedule purchaser that neither could provide on its own.  In GSA’s words, a CTA allows Schedule contractors “to meet the government agency needs by providing a total solution that combines the supplies and/or services from the team members’ separate GSA Schedule contracts.  It permits contractors to complement each other’s capabilities to compete for orders for which they may not independently qualify.”  Here are a few other important elements of CTAs:

  • All participants in a CTA must have their own Schedule contract, and must contribute something to the CTA.
  • The products or services offered through the CTA must be “on Schedule” just as they would have to be if offered by a sole Schedule holder.  (Open market items may be offered only as provided in FAR Part 8.)
  • Notwithstanding the penchant of Schedule contractors to characterize one member of the CTA as the prime and the other member as the sub, in fact, all CTA participants are primes.  The leader commonly is known as the “Team Lead,” while the others commonly are known as “Team Members.”  But, legally speaking, they all are primes.  As the OIG pointedly reminded GSA in its Audit Report, “each team member is a prime contractor and should be treated as such.”  The point is critical for reasons discussed further below.
  • As prime contractors, all CTA participants have “privity of contract” with the Government.  In other words, all participants assume the rights of, take on the obligations of, and subject themselves to the risks of being a prime contractor.
  • All CTA participants are responsible for complying with the terms and conditions of their respective Schedule contracts, including pricing terms, TAA requirements, Price Reductions Clause obligations, labor qualification requirements, etc.
  • Each CTA participant is responsible for reporting its own revenue and paying its own IFF.

And importantly, each CTA participant – whether it views itself as the lead or as a member – is at risk for any non-compliance, including breach risk for its or its teammates’ non-compliance, past performance risk for its or its teammates’ performance failures, False Claims Act risk at least for its own recklessness (and possibly for its teammates’ recklessness if it was known), and, as a practical matter, reputational risk for most anything that goes wrong regardless of fault.

With that as background, let’s now take a look at the aspects of a CTA that create some of these risks from the perspective of the contractor.

Billing Errors Risk

In the context of a Subcontract, the prime contractor must have all products/services on its Schedule and must bill the Government at or less than its Schedule price – even if the products/services are provided by a subcontractor.  This means that, unless a unique solicitation provision directs otherwise, the prime contractor can “mark up” the subcontractor’s price to the prime’s Schedule price.  In the context of a CTA, however, each participant is beholden to its own price list.  Thus, the team lead cannot “mark up” a team member’s products/services beyond that team member’s Schedule price.  Failure to appreciate the difference between a Subcontract and a CTA can create the risk of pricing errors and, at the very least, the risk of confusion among COs and auditors.

IFF Reporting Risk

Each team member is responsible for paying its own IFF on sales made through a CTA.  Where CTAs are structured so the Team Lead handles all interactions with the customer, however, the Team Lead sometimes pays the entire IFF obligation and, consequently, the Team Members may lack visibility into the timing or even the amount of Schedule revenue.  While GSA typically receives its due tribute in any case (since, as noted, the Team Lead sometimes pays the full IFF amount), the absence of a specific, traceable payment by the Team Member can create all sorts of problems when it comes time for IOA reviews and/or OIG audits.

Labor Qualification Risks

A prime contractor must ensure all personnel working on the project meet the labor qualification requirements set out in the prime contractor’s GSA Schedule contract – whether or not the individual performing the work is employed by the prime contractor or a subcontractor.  In contrast, each participant in a CTA must ensure its personnel meet the labor qualifications set forth in its own Schedule contract.  Here again, a clearly written CTA is essential.  Lack of clarity regarding the nature of the contracting relationship can increase the risk of an inadvertent contract breach in an area (i.e., labor qualification issues) that increasingly is a favorite among auditors.

Ability-to-Offer Risk

As GAO has made clear again and again over the years, except in very limited situations, Schedule procurements require the proposal of Schedule items.  The failure to offer products or services on the offer’s valid Schedule contract can result in rejection of the proposal, or, if it does not, will provide fodder for an easy bid protest.  While a contractor bidding under a CTA can pull from any/all of its teammates Schedule contracts to prepare a compliant 100%-Schedule solution, a prime contractor cannot pull from its subcontractor’s Schedule if the prime does not have the product/service on its own Schedule.  The prime contractor must have 100% of the items on its own Schedule.  One unlucky contractor found this out the hard way back in 2007 when it submitted a quotation in response to a management operations RFQ, but didn’t make clear it was proposing as a Contractor Team.  Consequently, GSA rejected the quotation, finding it not to be a CTA and finding the offeror did not independently hold all of the necessary Schedule items required by the RFQ.[1]

Price Reductions Clause Risk

This one is best described through the ancient and time-honored art of a war story.  I had a client years ago that entered into what it thought was a prime/sub relationship with another Schedule holder.  It was a service contract for the military and the “prime” didn’t have all the necessary labor categories on its Schedule so it “subbed” to my client.  As many companies do, the companies structured their relationship as a prime/sub arrangement, with the “sub” providing personnel at a discount to the “prime,” and then the “prime” marking up the personnel to its Schedule price; the markup serving as the “prime’s” fee.

A year or so after the project came to an end, the “sub” was hit with an OIG audit.  The auditor saw the “discounts” to the “prime” and accused it (the “sub”) of violating its Price Reductions Clause.  (The company’s Basis of Award included prime contractors.)  The auditor did not particularly care that the Government was the ultimate customer.  He saw only a discount to a BOA customer and, to him, that spelled PRC violation.

Nor was the auditor taken by the company’s argument that the relationship actually was a CTA and, therefore, the sales to the “prime” actually were sales to the Government because (as you know if you’ve read this far) each CTA member is a prime contractor.  The company’s argument was not made any easier when the auditor reviewed the order (which only referenced the “prime”), reviewed the agreement between the “prime” and the “sub” (which was titled a “Subcontract” and referenced only a “prime” and a “sub”), and recognized that the “prime” had paid the totality of the IFF (an action consistent with a prime/sub relationship, not a CTA).  Had the parties clearly identified the agreement as a CTA, employed the correct terminology, and acted consistent with GSA’s CTA guidelines, there would have been no PRC violation allegation.

The moral of this little tale is this:  Words matters.  Contractors should use prime/sub when dealing with a subcontract, and use lead/member when dealing with a CTA.[2]

Risk Mitigation Techniques

Add to the foregoing risks the additional, mostly-Government-facing risks identified in the OIG’s Audit Report and you have yourself one very confusing, very misunderstood, and very risky contract vehicle.  This is not to say, of course, you should avoid entering into CTAs.  But you should look before you leap, understand the rules and the risks, and take compliance seriously.  And, oh yes, don’t read the OIG Audit Report as though it sets forth all the risks!

In its Audit Report, the OIG identified a number of measures GSA can/should take to help reduce some of the confusion around CTAs.  These involved better training for COs, better internal record keeping systems within GSA, and better policies.  While industry awaits these enhancements, there are things contractors can do to protect themselves.  Here are a few:

  • Understand the difference between a Subcontract and a CTA, and clearly identify which vehicle you are employing.  Be clear internally, be clear to your teammates/ subcontractors, and be clear to the Government.
  • Do not rely on oral CTAs (or oral subcontracts for that matter).  Prepare properly crafted CTAs in writing.  While, as confirmed by the OIG, GSA historically has paid little attention to the content of CTAs, the agency’s website does offer a pretty good list of what contractors should include in their CTAs.  See www.gsa.gov/portal/content/202253.  While GSA identifies these elements as requirements of a CTA (i.e., “The CTA document must address” X or Y), they are not.  They are, however, quite good recommendations.
  • Share the CTA with the contracting officer.  GSA “strongly encourages” contractors to do so, and so do I.
  • Use correct terminology.  If you are establishing a CTA, call it a CTA and identify one company as the Lead and the other as the Member.  If you are establishing a subcontract, call it a subcontract and identify one company as the prime and one as the sub.  Do not use the terms interchangeably.[3]
  • Try to have the award issued in the name of the CTA rather than in the name of one member of the CTA.  If this is not possible (e.g., because the agency, for whatever reason, resists), then try to have the CTA identified on the face of the award document.  As the OIG recognized in its Audit Report, contracting officers often do not remember to do this on their own.
  • Identify clearly in the CTA (and in the proposal and/or contract) which team member will submit invoices and how payment is expected to be made.  Remember, while the Government should pay each team member independently, agencies rarely want to take that approach, and GSA does not force them to.  Failure to deal with invoicing and billing issues early can create great confusion down the road as auditors struggle with reconciling reported revenue to internal records.  The OIG correctly recognized this issue in its Audit Report as well.

*          *          *

In hindsight, perhaps I was too hard on the OIG in my introduction.  While GSA’s CTA files may be incomplete, inaccurate, and unverifiable, the Audit Report nonetheless got it right.  CTAs are misunderstood by the contracting community – industry-wise, CO-wise, and otherwise.  So maybe the Audit Report was not as exciting as I had hoped, but it did provide a good opportunity to reflect upon a risky area of GSA Schedule contracting.  Perhaps the sequel will be more riveting.  GSA estimates it will publish updated CTA regulations by April 2016.  I plan to be the first in line to get a copy so I once again can curl up in front of my warm desk lamp with a nice glass of milk and get lost in the world of GSA Schedule contracting.  Oh, what a life!

Jonathan is the co-managing partner of Sheppard Mullin’s Washington, DC office, and has been practicing government contracts law since 1994.  He is the co-author of the GSA Schedule Handbook (West Publishing), teaches on a variety of Government Contracts topics across the country, and is a frequent speaker at Coalition events.  When not reading or writing about Government Contracting, he can be found trying to get control over his two young girls, one of whom became a teenager this month.

[1]               The Computer Cite protest (B-299858) is an interesting one and a good read for contractors participating in CTAs.  In the bid protest that followed GSA’s rejection of the offer, the offeror contended its teaming agreement satisfied “the essential requirements for a CTA. . . .”  GAO disagreed.

[2]               For those interested, the audit actually came to a very interesting and successful conclusion.  Since the “prime” did not have the necessary labor categories on its Schedule and the “sub” did, we explained to the auditor that either (1) the prime and the Government agency violated the procurement rules by providing/procuring non-Schedule services under a Schedule procurement or (2) the parties actually had intended to establish a CTA, but simply failed to use the proper language.  Ultimately, the auditor went with door number two, which, legally, was the correct result.  The parties’ poor terminology and documentation, however, caused what should have been a simple audit to turn into a very expensive one.

[3]               To add to the confusion, in the context of a CTA, either team member also may have subcontractors of its own.  But that’s an article for another time.

Happy Federal Fiscal New Year!

October 3rd, 2014

Happy Federal Fiscal New Year!  The Coalition wishes everyone in the procurement community a Successful Fiscal Year (FY) 2015!  Success for all is ultimately measured as to whether the procurement system delivers best value mission support for customer agencies and the American people.  We are all stakeholders in that effort!

Of course, the next month will highlight the Coalition’s 35th Anniversary Celebration, the Excellence in Partnership (EIPs) Honors, and the 2014 Fall Conference.  At the center of the 35th Anniversary Celebration Dinner is our silent auction to support the Coalition endowment for veterans enrolled in the George Washington University’ Law School or Master’s Degree program in government contracting.  For information about the celebration dinner and 2014 Fall Conference please check here.

But there is much more to come.  As we move into FY 2015, the Coalition’s agenda will continue to have a laser like focus on procurement policies, procedures and programs that deliver best value solutions for customer agencies through sound business opportunities for small, medium and large businesses.  Here is a quick snap shot of our FY 2015 agenda:

  • Strategic Sourcing. In Spring 2014 the Coalition established a Strategic Sourcing Working Group to share information and best practices regarding strategic acquisition.  The Coalition will be sharing a draft strategic sourcing white paper with members at the Fall Conference.  This white paper will be informed by GSA’s recent response to the Coalition’s Freedom of Information Act (FOIA) seeking all documents relating to claimed savings via the Federal Strategic Sourcing Initiative.
  • VA Schedule Pricing Policies and Procedures.  The Coalition will be supplementing our September 2013 White Paper: GSA Multiple Award Schedule Pricing: Recommendations to Embrace Regulatory and Commercial Market Changes.  The supplement will address current VA schedule pricing practices, procedures and policies as well as current commercial market trends and best practices.
  • Coalition Innovation Task Force (CITF).  In calendar year 2015, the Coalition will launch the CITF.  The CITF will identify opportunities to streamline acquisition procedures and embrace requirements development and contracting techniques that leverage commercial solutions and innovation.
  • Promoting the Results of OMB’s Open Dialogue:  As you know, eight of the top ten recommendations to reform the procurement system that OMB received were suggested by the Coalition.  Among the recommendations are reforming the Price Reduction Clause and addressing “Other Direct Costs.”  In addition, the Coalition provided GSA with a list of contracting fixes to reduce transactional costs and increase value for customer agencies. We look forward to a Myth-Busters dialogue with GSA and OMB on these reform opportunities.
  • Alliant 2 Working Group: The Coalition has established an Alliant 2 working group through our GWAC/MAC Committee to support engagement and dialogue between GSA and industry members regarding this vital follow on procurement.
  • FSSI HR Services & Training Working Group:  Coalition has established a working group to support engagement and dialogue between GSA and OPM regarding the follow on procurement for human resources and training program support. This government-wide procurement vehicle will replace OPM’s TMA contract program.  Just this week the working group met with officials from GSA and OPM to discuss the procurement.

Each day we will continue to focus on common sense operational policies and procedures that foster competition, reduce transactional costs and enhance value for customer agencies and the American people. Beyond the items listed above, we will continue to discuss, highlight and address contract duplication, data reporting requirements, and government-unique requirements where the costs outweigh the benefits.  If you have feedback and/or items that you believe we should be focusing on please do not hesitate to contact me at (202) 331-0975.

 

Roger Waldron

President

Data, Data, Data

September 26th, 2014

The current procurement passion for collecting data, in particular prices paid data, raises many policy questions.  Coalition members have, on a number of occasions, indicated that data is not a free good!   Shifting the burden of data management and reporting to federal contractors increases costs for industry, and therefore, government; costs that are ultimately borne by the American people.   The passion for data reporting can overshadow the fundamental purpose of a government contract, which is the delivery of products, services and solutions to meet customer agency missions.  Contracts should be structured to maximize the potential for contractors to deliver best value to customer agencies.  The impetus must be on contract structures that maximize performance of mission requirements rather than data reporting.

It is time for a comprehensive dialogue between government and industry regarding data collection.  Among the questions to be discussed are the following:

  • How can government and industry work to together towards common sense management of data?
  • What does the Federal Acquisition Regulation (FAR) say about determining a “fair and reasonable” price?
  • What will the information be used for?
  • What data is relevant?
  • Can the government collect its own transactional data?
  • What information will be in the prices paid portal?
  • When does the Paperwork Reduction Act apply to new contract provisions seeking additional data?

A dialogue around these fundamental questions is the first step towards government and industry working together towards common sense management of procurement data.

The FAR guidance regarding determining a “fair and reasonable” price should inform the collection, management and use of prices paid information.  As a threshold matter, FAR 15.404-1(b)(2)(i) states that “[n]ormally, adequate price competition establishes a fair and reasonable price.”  As such, under the GSA Schedule program or any other multiple award IDIQ (e.g. Seaport-e, Alliant, NASA SEWP, Networx), adequate price competition at the task order level for agency specific requirements is sufficient to determine fair and reasonable pricing.  Agency specific requirements and commitments at the task order level drive competition and pricing.  Accordingly, what role will the prices paid portal data play?

Price alone is incomplete data.  The FAR provides guidelines for comparing proposed prices to historical prices paid, for the same or similar items. Notably, FAR 15.404-1(b)(2)(ii)(A)(B) states:

(A) The prior price must be a valid basis for comparison. If there has been a significant time lapse between the last acquisition and the present one, if the terms and conditions of the acquisition are significantly different, or if the reasonableness of the prior price is uncertain, then the prior price may not be a valid basis for comparison.

(B) The prior price must be adjusted to account for materially differing terms and conditions, quantities and market and economic factors. For similar items, the contracting officer must also adjust the prior price to account for material differences between the similar item and the item being procured.

Does the prices paid portal include sufficient information for contracting officers to comply with the above guidance?  Are contracting officers sufficiently trained to identify, understand and reasonably consider and adjust prior prices based on materially different terms, quantities, and market and economic factors?

The underlying concern across industry is that the prices paid portal will be used to drive contract level prices to the lowest reported point, regardless of terms and conditions, quantities, market and economic factors.  This type of pricing is not sustainable by industry over the long term.  Such an approach may make for a short term “gain” or headlines regarding savings by the government.  However, such an approach will compromise the government‘s long term, strategic interests in fostering competition, ensuring best value mission support and access to “priceless” commercial innovation.

Roger Waldron

President

Healthcare Spotlight

By: Donna Lee Yesner, Partner, Morgan Lewis & Bockius LLP and Stephen E. Ruscus, Partner, Morgan Lewis & Bockius LLP

The U.S. Department of Veterans Affairs and Department of Defense are major buyers of medical devices and supplies. Companies wishing to sell in this multibillion dollar market, however, must be aware of an important federal procurement requirement regarding country of origin, which is inapplicable to nonfederal sales, and understand the risk of noncompliance.

Government contractors must agree that the products they sell to the U.S. government under contracts valued in excess of $204,000 comply with the Trade Agreements Act, unless the TAA requirement is waived by a federal agency. Failure to comply with this requirement has provided grounds for whistleblower actions under the False Claims Act, particularly against companies that sell commercial items under Federal Supply Schedule contracts or through Distribution and Pricing Agreements, which require compliance with the TAA.

Recently, Smith & Nephew Inc., a medical device manufacturer, settled what may be the first such case involving allegations that a company knowingly sold medical devices manufactured in a country not compliant with the TAA to the company’s government customers. See United States ex rel. Cox v. Smith & Nephew Inc., No. 2:08-cv-02832 (W.D. Tenn., order of dismissal, Sept. 4, 2014).

Trade Agreements Act Requirements

The TAA is intended to remove barriers to government procurement of foreign-sourced items and to incentivize countries to become signatories to the World Trade Organization Government Procurement Agreement and other international trade agreements. When a contract is subject to the TAA, the Buy American Act and its preference for end items manufactured in the U.S. is waived, creating more opportunity for companies selling foreign-made products. At the same time, the TAA prohibits the U.S. government from acquiring end items other than those made in the U.S. or countries that have signed the WTO GPA (referred to as “designated country end products”), unless the agency determines that offers of eligible items are unavailable or insufficient to fill the agency’s needs. If a contract is below the threshold amount, the agency may acquire an item made in a nondesignated country, such as India or China, under that contract. For contracts in which the quantity of items that may be ordered is indefinite, the estimated contract value is used in determining whether the applicable threshold has been exceeded. As a policy matter, the TAA applies to all FSS contracts, including those covering medical supplies and devices administered by the VA.

The TAA is implemented through mandatory contract clauses in government contracts over the threshold amount and country of origin representations and certifications made by companies responding to a federal contract solicitation, as prescribed by the Federal Acquisition Regulation Part 25.4 and FAR 52.225-3 through 52.225-6. A product’s country of origin must be disclosed when it is manufactured in a nondesignated country. If the TAA applies, the contracting agency, in its discretion, may make a nonavailability determination or may request a categorical waiver of the TAA from the Office of the U.S. Trade Representative. The agency also may order small amounts of the product under individual contracts below $204,000 in value without regard to the TAA. Unless the TAA has been waived or is, by law, inapplicable to a transaction, the acquisition of end items from a nondesignated country violates the TAA. Accurate representations by the contractor are thus necessary for a federal customer to adhere to procurement law and regulations.

The test the government uses for determining country of origin under the TAA is the “substantial transformation” test applied by U.S. Customs and Border Protection when assessing import duties under Section 304 of the Tariff Act of 1930, and implementing regulations. Customs’ regulations define “country of origin” as “the country of manufacture, production or growth of any article of foreign origin entering the United States” and also provide that “[f]urther work or material added to an article in another country must effect a substantial transformation in order to render such other country the ‘country of origin’ within the meaning of this part.” 19 C.F.R. 134.1(b). In general, a substantial transformation occurs when an article emerges from a process with a new name, character or use different from that possessed by the article prior to processing, but will not result from minor manufacturing or combining process that leaves the identity of the article intact. Determining where a product has been substantially transformed into the end item acquired by the government often requires a fact-intensive analysis of the manufacturing process.

For example, in a July 2014 decision regarding the country of origin of a medical device that interfaces with a breath monitor, Customs considered the country of origin of the item’s components, the extent of the processing that occurred within a country and whether such processing rendered a product with a new name, character and use. The device consisted primarily of tubing from Israel, cut to length in China and combined there with various connectors, filters and adaptors sourced from several countries. The decision noted that the “key issue is the extent of operations performed and whether the parts lose their identity and become an integral part of the new article,” that “factors such as the resources expended on product design and development, extent and nature of postassembly inspection and testing procedures and the degree of skill required during the actual manufacturing process may be relevant,” and that “assembly operations that are minimal or simple, as opposed to complex or meaningful, will generally not result in a substantial transformation.” Holding that the tubing imparted the essential character to the end product and that this tubing was not substantially transformed by the cutting and assembly operations in China, Customs, in this case, held that the country of origin of the finished product was Israel.

Although required to certify TAA compliance, a reseller of an item acquired from its manufacturer may be unable to validate country of origin independently. Recently, however, the D.C. Circuit affirmed in another whistleblower case that resellers may reasonably rely on their suppliers’ country of origin representations, and, absent evidence that would make such reliance unreasonable, need not conduct independent evaluations before they provide their own certifications in order to shield themselves from FCA liability. See United States ex rel. Folliard v. Gov’t Acquisitions Inc., No. 13-7049 (D.C. Cir. Aug. 29, 2014).

This was an important decision for wholesalers and distributors that contract directly with agencies like the DOD and VA to supply medical devices that they purchase from device manufacturers. In such cases, the contractor may not be liable if the product is a nondesignated country end item, but misrepresentation concerning country of origin by the manufacturer supplying the contractor could still be potentially actionable against the manufacturer.

Once a company represents that an item is a U.S. or designated country end product and it is placed on the company’s FSS contract, the company must ensure that units manufactured in nondesignated countries are not delivered to government customers ordering under the FSS. If a manufacturer of medical supplies sources a product in a nondesignated country for sale to commercial customers, because it is more economical to do so, it must have a second, designated-country source before it sells the product to the federal government under its FSS contracts and must have inventory controls designed to ensure that shipments to government customers conform to the representations and certification of TAA compliance. The VA has explicitly advised manufacturers sourcing from nondesignated countries of the need to implement such inventory controls. See Dear Manufacturer Letter here.

Smith & Nephew Settlement

In the Smith & Nephew case, the company allegedly imported items from Malaysia, a nondesignated country, repackaged them in the U.S. and failed to segregate them from products sourced in designated countries that could be sold to the government. Thus, the company could not ascertain whether units shipped to customers that ordered under its medical/surgical FSS contract or the GSA Advantage website were TAA compliant. The company voluntarily disclosed to the DOD Office of Inspector General and VA National Acquisition Center that it may have violated procurement law and the terms of its contracts and took corrective action. However, three months later, a former employee filed a whistleblower action against the company for knowingly violating the TAA, and the court declined to dismiss the case on the grounds that the FCA public disclosure bar applied to the voluntary disclosure.

Reducing the Risk of Liability in TAA Whistleblower Suits

The Smith & Nephew case highlights the vulnerability of device manufacturers that source products from nondesignated countries to potential FCA liability and the need not only for diligence in ascertaining country of origin, but also for controls to prevent products manufactured in nondesignated countries from being supplied to the government when such sales are not permitted.

Reasonable controls could include: (1) a system that identifies country of origin, and segregates and tracks inventory from import to shipment if items are purchased from both designated and nondesignated countries; (2) a system that monitors sourcing decisions before changes are made to ensure the item continues to be substantially transformed in the U.S. or a designated country; (3) a policy requiring country of origin representations of vendors if the components are not later substantially transformed into the delivered end item; and (4) a procedure for obtaining legal opinions when the country of origin is unclear or, in some cases, an opinion from Customs.

Purchasing items made in nondesignated countries may substantially reduce production costs and make economic sense, and a company’s sales to the federal government may be very small compared to its commercial business. However, the risk of exposure to a whistleblower suit and the consequences for failing to implement measures to avoid violating the TAA are likely considerably greater than the cost of compliance.

In the Smith & Nephew case, the company was forced to defend an action that settled for millions of dollars even though it disclosed the situation to the VA, and the department neither referred the matter to the U.S. Department of Justice nor intervened in the whistleblower case after it was unsealed.

Judicial precedent is currently divided over the application of the public disclosure bar to such voluntary disclosures. In the Smith & Nephew decision, it is unclear whether the company’s disclosure to the VA affected the settlement negotiations in which the VA participated, or the department’s decision not to intervene, but it is also noteworthy that the VA’s policy has been to encourage self-disclosure. Thus, although the company’s actions did not shield it from a whistleblower suit, they may have protected the company from greater harm.


Legal Corner

By: John Horan, Partner, McKenna Long & Aldridge LLP 

Contractors will have to provide another written representation to do business with the government.  On July 31, 2014, President Obama issued an Executive Order called Fair Pay and Safe Workplaces intended to ensure that contractors comply with the following labor laws:

  • Fair Labor Standards Act;
  • Occupational Safety and Health Act;
  • Migrant and Seasonal Agricultural Worker Protection Act;
  • National Labor Relations Act;
  • Davis-Bacon Act;
  • Service Contract Act;
  • Equal Employment Opportunity requirements (Executive Order 11246);
  • Rehabilitation Act (Section 503);
  • Vietnam Era Veterans’ Readjustment Assistance Act;
  • Family and Medical Leave Act;
  • Civil Rights Act (Title VII);
  • Americans with Disabilities Act;
  • Age Discrimination in Employment Act;
  • Federal Contractor Minimum Wage Requirements (Executive Order 13658); and
  • any equivalent State laws.

The less than stellar showing of government contractors in a Government Accountability Office study on whether contractors comply with labor laws likely provided at least some motivation for the President.  See FEDERAL CONTRACTING: Assessments and Citations of Federal Labor Law Violations by Selected Federal Contractors, GAO-10-1033 (Sep 17, 2010).  After reviewing Federal labor law actions from 2005 through 2009, GAO found that the Department of Labor made 25 of the 50 largest wage assessments against 20 contractors and OSHAassessed eight of the 50 largest workplace health and safety penalties against seven other contractors.  In addition, the government awarded fifteen contractors cited for violations of wage and hour determinations, OSHA laws, and National Labor Relations Board requirements over $6 billion in government contracts in 2009.

The President justified his Order by finding that complying with labor laws will “increase efficiency and cost savings in the work performed by government contractors” because compliant contractors are more likely to have “workplace practices that enhance productivity and increase the likelihood of timely, predictable, and satisfactory delivery of goods and services to the Federal Government.”  He determined that his Order would also help agencies “avoid distractions and complications that arise from contracting with contractors with track records of noncompliance.”

New Requirements for Contractors, Subcontractors, and Agencies

The Executive Order imposes the following additional requirements for contracts exceeding $500,000, currently without an exception for commercial items (GSA and VA FSS) contracts:

Pre-award Representation with Updates

A contractor will have to provide a representation prior to award of any contract exceeding $500,000 that, to the “best of the offeror’s knowledge and belief,” it has not had an administrative merits determination, arbitral award or decision, or civil judgment, within the preceding three-year period, for violations of labor laws listed above.  Where there has been a violation, the CO will provide the contractor with an opportunity to disclose any steps taken to correct the violations or improve compliance with the labor laws.  The CO must consider the violation and mitigation information provided by the contractor in making the responsibility determination required for award of the contract.  In addition, the contractor must also represent that it will require the same representation for subcontracts exceeding $500,000 (except subcontract for COTS items) and consider disclosure and any mitigating information prior to making any subcontracting decision.

A contractor must update its representations and information every six months for the duration of the contract.  Upon receiving an update of a violation, the CO must consider whether to require remedial measures and provide compliance assistance, and whether to exercise an option, terminate the contract, and refer the contractor to the agency suspension and debarment official.  In turn, the contractor must consider taking action against a subcontractor that has had a violation whether disclosed by subcontractor or “obtained through other sources.” Likely to ensure that contractors and subcontractors are providing accurate representations and to provide another source of information to COs, the Department of Labor must inform contracting agencies of its investigations of contractors and subcontractors.

Referral to Suspension and Debarment Officer

In addition to taking action under the contract, the CO must forward any adverse information of compliance with labor laws by contractors and subcontractors to the agency suspension and debarment officer.

“Transparency” Requirements

The Order also imposes two requirements on contractors that have a potential for significantly affecting a contractor’s exposure to litigation based on labor laws, which the Order describes as “transparency” requirements.  First, contractors must provide employees covered by any of the wage rate labor laws with a weekly statement of hours worked, overtime hours, pay, and any additions made to or deductions made from pay.  These disclosures ensure that covered employees have the information required to assess the contractor’s compliance with the wage rate requirements.

Second, for contracts exceeding $1 million, contractors are precluded from obtaining an agreement from employees or independent contractors to arbitrate claims arising under Title VII or any tort related to or arising out of sexual assault or harassment until after the claim arises.  Thus, contractors that view arbitration as a protection from costly litigation or verdicts will have a much more difficult time obtaining arbitration agreements from employees.

Flow Down Requirement

The Order also imposes representation requirements on subcontractors.  Prime contractors must include the pre-award representation requirement in subcontracts exceeding $500,000 (except subcontracts for COTS items).

Labor Compliance Advisor

The Order requires each agency to designate a senior agency official as a Labor Compliance Advisor.  The Labor Compliance Advisor has the responsibility to support the agency, COs, and contractors in complying with the Order, coordinating with the Department of Labor, assist in the development of regulations, send information to the agency suspension and debarment officer, and publicly report annually a summary of “agency actions taken to promote greater labor compliance.”

Regulations to Follow

The Order requires the FAR Council to propose “regulations, rules, and orders” required to carry out the requirements of the Order.  In addition, the FAR Council must “propose to amend the [FAR] to identify considerations for determining whether serious, repeated, willful, or pervasive violations of the labor laws . . . demonstrates a lack of integrity or business ethics.”  In short, the Order is placing primary responsibility on the FAR Council to ensure a uniform consideration of the effect of labor law violations on responsibility determinations government-wide.

What Does this Mean?

Although the Order does not create new labor law compliance obligations, it imposes obvious additional administrative obligations for contractors and subcontractors.  In addition, these requirements will likely create new, fertile grounds for False Claims Act cases.  31 U.S.C. §§ 3729 – 3733.  The required representations and potential for submission mitigation information (and continual updates) create new opportunities for contractors to make errors that will be subject to attack as false information submitted to the government knowingly, recklessly, or with deliberate ignorance of its accuracy under the False Claims Act.  Moreover, the explicit requirement that COs consider this information in award and administration decisions, such as responsibility determinations, option exercises, and terminations, will provide qui tam relators and the government with a basis to argue that this “false information” was material to the government’s decision to award the contract, permit the contractor to continue performance, and to pay the contractor for its performance.

FAR and Beyond Blog

In last week’s article I detailed our upcoming 35th Anniversary Black Tie Gala and Excellence in Partnership Awards (nominations close October 3rd!).  This week I want to go into a bit more detail about the tentative agenda for our 2014 Fall Training Conference, 35 Years of Commonsense in Government Procurement: Looking Back and Moving Forward, taking place at the JW Marriott in DC on November 6th.

Morning Session

Registration, breakfast,  and networking will begin at 7:00am and I will open the conference at 8:00am with an outline of the day’s events, thank you to our sponsors, and updates on current CGP initiatives.  Shortly after, we will hear from our keynote speaker, The Honorable Thomas M. Davis – former Virginia Congressman and Chairman of the House Government Reform Committee – who now serves as the Director of Federal Government Affairs for Deloitte where he continues his commitment to effective, common-sense solutions to government.  Mr. Davis will continue our conference theme and be discussing Looking Back and Moving Forward – Post Elections.

The mid morning sessions will include Jeff Koses, Senior Procurement Executive at GSA, discussing GSA Schedules – Retooling for the Future, as well as Brad Medairy, Senior Vice President of Booz Allen Hamilton, discussing Cybersecurity – A Game Changer. The morning will wrap up with our Town Hall session that will give attendees the opportunity to ask questions directly to our panel which will include Anne Rung, OFPP Administrator; Steve Schooner, Professor and Co-Director of the Government Procurement Law Program, George Washington University; Christine Harada, Associate Administrator for Government-wide Policy at the General Services Administration; and representatives from DPAP (Defense Procurement and Acquisition Policy), which is responsible for all Contracting and Procurement policy matters including e-Business in the Department of Defense (DoD).  The panel will be discussing a variety of topics such as Innovative, Streamlined, Cost Effective Acquisition – Where Are We, What Needs To Change And How Do We Get There?

Lunch Session

Lunch will begin at approximately 12:30, where we will be joined by our lunchtime speaker, Mike Causey.  Mike writes a daily column for Federal New Radio, Mike Causey’s Federal Report, and can be heard daily on the radio as well.  Mike’s presentation will be on The Changing Federal Workforce – what it means for government, industry and America.  As always, we fully expect his remarks to be  thought provoking, insightful, and entertaining!

Afternoon Breakout Sessions

We will be having our ever popular breakout sessions in the afternoon, offering four different topic areas you can choose between at 2:00 and 3:15.  Our 2:00 session will allow you the opportunity to attend one of the following:

1.)    Electronic Platforms and Social Media – From EMALL to GSA Advantage! to the Common Acquisition Platform – an explanation of how current systems connect and where the government is headed with electronic platforms and the use of social media in the acquisition process.

2.)    Global Supply Update – Update on strategic sourcing initiatives ,transitioning from GSA warehouse to Direct Delivery, and more!  This breakout will be lead by Shaloy Castle-Higgins, Director, Greater Southwest Acquisition Center; Janet Haynes, Acting, Schedules Acquisition Director, Center for Facilities Maintenance and Hardware (CFMH); Peter Han, Director, National Administrative Services and Office Supplies Acquisition Center; and Brian Knapp, Director, GSA, Integrated Workplace Acquisition Center (IWAC).

3.)    Customer Users of Government-wide Vehicles – How do major customers use government-wide vehicles?  What are the opportunities and challenges of various vehicles?

4.)    OASIS and beyond – Changes in the Acquisition of Professional Services – Topics will include Consolidated Schedules and the future of GSA Schedules, pricing tools, update on OASIS, and use of OASIS as a model for future acquisitions – what works and what doesn’t?  Jim Ghiloni, Acting Director of Acquisition Operations, will be leading this breakout, among others.

Our 3:15 session will allow you the opportunity to attend one of the following:

1.)    DOD Acquisition Update – Impact of the DOD waiver for Schedules Pricing, changes to commercial acquisition, and significant acquisitions of the military services.

2.)    Update on Government-wide IT Acquisitions – A highlight of major acquisition programs supporting the acquisition of government wide IT programs, including CIO-SP3, Alliant, NASA SEWP and more.  Don’t miss this opportunity for information and best practices that helps enhance your performance in the IT market.  This breakout will be led by Casey Kelly & Team, Integrated Technology Service, GSA; Joanne Woytek, Program Manager, NASA SEWP; Robert Coen, Acting Director, NIH Information Technology Acquisition and Assessment Center (NITAAC); and Kay Ely, Director, IT Schedules Acquisition Center.

3.)    Strategic Sourcing –  What’s ahead in furniture, managed print services, OPM Training and Management Assistance (TMA), and  IT FSSI.

4.)    Coming Soon in the Federal Market – Business Analysis.  This breakout will be led by Ray Bjorklund, President, Birchgrove  Consulting, and Cameron Leuthy, Bloomberg Government.

We will wrap up the day back in the main ballroom for a quick report out from the afternoon breakout sessions and be done around 5:00.

We will have more announcements in the near future regarding newly confirmed speakers, but it is certainly shaping up to be a must attend event and we hope to see you there!  Plan on attending?  Please visit our website or click here to register– we look forward to your participation!  Lastly, thank you again to AvKARE for being our Title Sponsor at this year’s Fall Conference!  For a list of sponsorship opportunities, please click here.

Thanks,

Roger Waldron

President

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