By: Thomas A. Lemmer, Partner, McKenna Long & Aldridge LLP; Steven M. Masiello, Partner, McKenna Long & Aldridge LLP; Tyson J. Bareis, Associate, McKenna Long & Aldridge LLP
The Defense Contract Audit Agency has issued new audit guidance on the important topic of labor qualifications under time and material contracts. See MRD 14-PPD-008(R). This guidance matters to contractors because it relates to the common DCAA position (based on FAR 52.232-7(a)(3)) that contractors should not be paid any amount for effort performed by employees that fail to meet contractual qualification requirements.
The audit guidance clarifies that contracting officers have authority to approve the use of non-qualifying labor both before and after the labor is provided and directs auditors to coordinate with contracting officers before issuing audit findings in this area. Even in circumstances where contracting officer approval has not and will not be given, the guidance recognizes that:
[I]n many cases, the contracting officer is not going to withhold payment of all labor costs when an employee does not meet the labor qualifications if the work delivered did adequately complete the scope of work. In these cases, the contracting officer will need to modify the contract for a new rate or contract line item to reimburse the costs. Auditors should assist the contracting officer to help in arriving at a rate that is more appropriate than the rate charged by the contractor (e.g., a rate based on the fully burdened rate of pay for the unqualified employee, or the labor category where that employee truly fits).
The above language is helpful to contractors because it emphasizes the need to communicate with contracting officers and contractors to resolve this type of labor issue. This approach is consistent with the fact that, when DCAA questions billings due to employee qualification issues, the agency is not questioning the allowability of costs and, instead, is questioning whether amounts paid to the contractor are appropriate under the terms of the contract. As the DCAA guidance implicitly recognizes, such issues are more akin to contract administration matters, which are within the purview of the relevant contracting officer to address and resolve.
Predictably, the audit guidance also directs auditors to consider whether contractor failures meet labor qualification requirements represent business systems issues. Specifically, the guidance notes:
If the audit team determines that the contractor has a material amount of T&M billings that include hours that do not meet the labor qualifications specified in the contract, a significant deficiency related to DFARS 252.242-7006(c)(12) should be reported. The contractor has failed to establish adequate internal controls to exclude from costs charged to Government contracts, amounts that are not allowable in terms of contract provisions in the FAR 52.232-7 T&M Payment Clause. An adequate accounting system would include procedures for a contractor to ensure that they get the Contracting Officer’s specific authorization prior to the delivery and billing of hours that do not meet the qualifications specified in the contract.
(Emphasis added). By failing to direct auditors to consider whether the conduct observed results from a systemic issue or has a material impact on the reliability of contractor billings, the above guidance vastly oversimplifies the analysis necessary to determine whether conduct represents a significant deficiency under the Business Systems Rule. Unfortunately, this simplistic view of the Rule is consistent with the level of analysis often provided by auditors when determining that a significant deficiency exists in a contractor’s business system. Contractors should continue to be skeptical of these auditor assertions and, when appropriate, resist such assertions as inconsistent with the definition of “significant deficiency” in the Business Systems Rule.
If you have any questions concerning this recent audit guidance, please contact the authors of this alert or the McKenna Long attorney with which you typically work.