Debarment | The Contracting Education Academy

October 31, 2011 By AMK

Fraud continues in small business preference programs

Contractor fraud in small business set-aside programs is difficult to detect and prove, but its annual costs to government are significant in dollars and damage to legitimate business that deserve the work, two federal watchdogs told a House panel Thursday.

In fulfilling the Obama administration’s goal of giving 23 percent of prime federal contracts to small business, agencies need to do better at making a public example of “bad actors” and at vetting contractors that misrepresent their qualifications for minority advantages through self-certification, according to Peggy Gustafson, inspector general for the Small Business Administration, and Brian Miller, IG for the General Services Administration.

They spoke at a hearing of the House Small Business Subcommittee on Investigations, Oversight and Regulations called by Chairman Mike Coffman, R-Colo., who sought to learn why much contractor fraud goes unpunished and unprosecuted.

“Just as we all benefit from small business prime contracting, we all suffer when fraud rears its ugly head,” Coffman said. “Legitimate small businesses lose the ability to perform when contracts go to firms that do not qualify for, or who are not following the rules associated with, the small business contracting program. The government suffers from this fraud because bad actors give all small businesses a bad name, so contacting officers are more reluctant to use the small business programs, which in turn results in less competition and a less vibrant industrial base.”

The set-aside programs consist chiefly of preferences for section 8(a) business development, Historically Underutilized Business Zones, women-owned businesses and the service-disabled veteran-owned program. Both inspectors general testified that their own agencies had fallen victim to fraud. SBA and the HUBZone certification program played a role in the sensational case exposed with the arrests earlier this month involving $20 million in fraud allegedly committed by contractors and two employees of the Army Corps of Engineers, Gustafson noted.

Miller described a recent $6 million contract awarded to a company that claimed to be run by a disabled veteran whose documents said he served three tours of duty during the Vietnam War and received medals and citations. It turned out, Miller said, he was a mechanical engineer serving stateside in the National Guard.

“It’s difficult to prove a monetary loss to the government because it did receive the goods and services,” Miller said. “But the real loss is to program integrity, to the legitimate small businesses that didn’t get the contract.” He added that fraudulent self-certification is difficult to detect and agencies rely on such information in the majority of the preference contract awards because their resources are limited.

“Strong penalties are needed to deter” the fraud, he said. “The tougher it is to detect, the tougher penalties must be,” though the rules should avoid punishing innocent companies simply because of a clerical error, he said.

Gustafson said each type of set-aside has its own level of vetting and the Section 8 program is the hardest for contractors to qualify for. She agreed that agencies could deter more fraud by publicizing their reviews of such programs, which in one instance prompted “contractors to drop out in droves.” It is acknowledged by all IGs, she added, “that the federal government doesn’t use suspension and debarment enough — that hits contractors in the pocketbook.”

Miller noted that GSA has an interactive map on its website providing other agencies with links to state databases reporting contractors that have been suspended or debarred.

Coffman asked whether agencies should take more responsibility for policing fraud. “It’s hard to draw simple rules,” Gustafson said. “Overburdened” agencies focused on awarding contracts are “not expected to know all the ins and outs” of the set-aside programs. Also, “the more difficult the rules are to administer, the harder it is to present the case to a jury,” she said.

But the issue “needs more discussion in the executive branch and guidance from Congress since it’s not always clear who’s minding the store,” she said. “If the programs don’t have integrity, we might as well throw them open to open competition.”

— by Charles S. Clark – Government Executive – October 27, 2011 – http://www.govexec.com/story_page.cfm?articleid=49156&dcn=e_gvet

October 13, 2011 By AMK

Agencies can improve suspension and debarment process, says GAO

Too many federal agencies are insufficiently protecting against contractor fraud or incompetence by using the suspension and debarment process, the Government Accountability Office reported Thursday. Agencies with records of scant use of the practice should beef up dedicated staff and commit to greater use of the interagency committee designed for this purpose, the auditors said.

“Agencies that fail to devote sufficient attention to suspension and debarment issues likely will continue to have limited levels of activity and risk fostering a perception that they are not serious about holding the entities they deal with accountable,” William Woods, GAO’s director of acquisition and sourcing management, told a hearing of the House Oversight and Government Reform Subcommittee on Technology, Information Policy, Intergovernmental Relations and Procurement Reform. But “we need to keep the process informal to avoid red tape, because agencies need to move quickly to protect the government’s interest,” he added.

GAO examined the number of suspensions and debarments imposed under the Federal Acquisition Regulation of 10 major contracting agencies over five fiscal years. Most active were the Defense Logistics Agency, the Navy, the General Services Administration and Homeland Security Department’s Immigration and Customs Enforcement.

Agencies with little or no use of the procedure were the Commerce, Health and Human Services, Justice, State and Treasury departments, as well as DHS’ Federal Emergency Management Agency.

“The mountains of federal forms are frustrating” for many good contractors, said panel chairman Rep. James Lankford, R-Okla., “but certain contractors try to defraud, or are chronically poor performers. We need to find out why some agencies uncover the abuse and others don’t” so the government can enforce a process that “strengthens the integrity of overall contract system.”

The Defense Department has far and away the highest raw number of suspensions and debarments (1,616 over five years), but when viewed as a percentage of contracting dollars, as ranking member Rep. Gerry Connolly, D-Va. noted, the Environmental Protection Agency has a far higher rate.

HHS, Connolly and Republican members pointed out, did not post a single contractor suspension or debarment in the past five years, despite a 2010 budget that included $368 billion in grants and $19 billion in contracts.

GAO’s Woods said he was surprised by the numbers at HHS. His report does not recommend any new legislation on suspensions (which are temporary) and debarments (which are long term), but calls for the agencies deemed inactive to mimic the organizational approaches of the active ones. That means assigning full-time dedicated staff and resources, developing detailed implementation guidance, and promoting a case referral process.

In addition, GAO recommends that the administrator of the Office of Federal Procurement Policy issue governmentwide guidance to ensure that agencies are aware of the elements of an active suspension and debarment program and the importance of cooperating with the Interagency Suspension and Debarment Committee. Witnesses at the hearing suggested that many agencies lack full commitment to that panel, which was created in 1986.

Under the Federal Acquisition Regulation and a parallel set of rules for nonprocurement contracting, agencies are responsible for examining contractors and uncovering fraud or nonperformance and then posting the companies on the website of the Excluded Parties List System maintained by the General Services Administration. Contractors’ rights are supposed to be protected through established procedures for challenging the listing through a timely meeting with top agency officials and a “mini trial” in which they can present evidence defending their record.

Nearly 84 percent of suspensions and debarments are required by statute — such as past violators of the 1970 Clean Air or 1972 Clean Water acts — according to GAO, which focused its study on the 16 percent that are discretionary.

The agencies deemed inactive generally accepted GAO’s conclusions. Nick Nyack, chief procurement official at Homeland Security Department, said, “We get this. We’re going to get it right and will be a best practices agency in short order.” Under questioning, he said it could be done within three months.

Three months was also the estimate for making changes the members elicited from Nancy Gunderson, suspension and debarment official at HHS. She said the department had terminated numerous grants and contracts for reasons such as questionable scientific integrity. But HHS efforts thus far on the issue have focused on promoting an electronic desk reference, staff training and looking at other agencies’ procedures, she said.

Agencies considered models were represented by Richard Pelletier, a suspension and department official at EPA, who said his agency since 1981 has maintained a “robust” approach that involves two offices with full-time staff.

Steven Shaw, deputy general counsel of the Air Force, stressed the importance protecting contractors’ rights by having officials who aren’t in the procurement chain “examine evidence, not just the fact of an indictment.” He favors a carrot-and-stick approach that includes regular meetings with important contractors and not mandatory debarments. The overall dollar figures, rather than the number of suspensions or debarments, he added, might be a better metric on agency activity than raw numbers.

— by Charles S. Clark – Government Executive – October 6, 2011 – http://www.govexec.com/story_page.cfm?articleid=49011&dcn=e_tma

October 12, 2011 By AMK

Suspension and debarment could discourage rebate schemes

The federal government should consider suspending and debarring food service contractors who exploit invoice loopholes to overcharge the Agriculture and Defense departments, witnesses told a Senate panel Wednesday.

Agriculture Department Inspector General Phyllis Fong suggested threatening to prevent contractors from doing business with the government either temporarily (suspension) or over the long-term (debarment) to deter rebate schemes, in which companies that receive rebates from food manufacturers for large-volume purchasing leave them off invoices and pocket the difference. The IG has been investigating contractors providing food purchasing services for the National School Lunch Program since 2002, and has found omitting information on rebates to be a frequent issue.

Withheld rebates account for between 5 percent and 50 percent of the price charged to the school districts participating in the lunch program, John Carroll, assistant attorney general for New York, told the Senate Homeland Security and Governmental Affairs Subcommittee on Contracting Oversight.

“Every dollar that’s being lost through rebate schemes is a dollar we cannot use to feed our soldiers and our children who need nutrition,” said Sen. Claire McCaskill, D-Mo., chairwoman of the subcommittee.

Previous USDA audits found a service management company overcharged school districts more than $8 million through inflated invoices in 2003, and another company received $1.3 million in hidden rebates in 2005.

Agriculture’s inspector general is starting a new investigation this month to assess the effectiveness of the recommendations issued after previous audits.

Similar fraud occurs with contractors working with the Defense Department to provide food to soldiers serving overseas, witnesses said.

Public Warehousing Co. is reportedly in talks to reach a settlement with the Justice Department after allegedly violating its prime vendor contract with the Defense Logistics Agency, overcharging the agency for food costs by $8.5 billion in 2009.

Charles Tiefer, a former member of the Wartime Contracting in Iraq and Afghanistan Commission and a law professor at the University of Baltimore, suggested revising contracts to allow auditors more access and requiring companies to identify any rebates on invoices. Tiefer also recommended conducting a survey of contractors to determine the extent of rebate schemes.

McCaskill announced that the subcommittee intends to submit document requests to investigate the issue more. “I think there’s real money here if we pull this thread,” she said.

– by Caitlin Fairchild – Government Executive – October 6, 2011 – http://www.govexec.com/story_page.cfm?articleid=49010&dcn=e_tma

September 21, 2011 By AMK

Defense department contractors may see new hiring regulations

A proposed Defense Department regulation, if implemented, will substantially change how contractors hire, oversee and track certain former civilian and military personnel. As proposed, it will also establish a new suspension and debarment risk for contractors that hire former personnel.

On June 6, the department issued a proposed rule — DFARS Case 2010-D020 “Representation Relating to Compensation of Former DoD Officials” — to require all offerors to submit a representation, upon submission of the offer, that all employees who are former Defense Department “covered officials” (defined in DFARS Clause 252.203-7000), to the best of the offeror’s knowledge and belief, comply with:

Defense Federal Acquisition Regulation Supplement (DFARS) 203.171-3 that
states that covered Defense Department officials must have received or requested
an ethics opinion on post-government employment restrictions;

18 U.S.C. 207 and 5 C.F.R. Part 2641, which is the statute and regulations
affecting post-government employment of ex-government civilian personnel and
military officers; and
Federal Acquisition Regulation (FAR) 3.104-2, which implements the
Procurement Integrity Act.

This proposed rule would likely have the several effects. For example, it will share responsibility for compliance with post-government employment laws and regulations between ex-government personnel to defense contractors. Current post-government employment laws impose criminal and civil liability on ex-government personnel violations.

It will also require defense contractors to implement new compliance measures. To ensure compliance, defense contractors must establish systems and processes to identify, track, educate, and obtain periodic certifications from all employees, consultants, and others who receive compensation and who are former “covered officials.”

The new requirement will burden both smaller contractors that must establish a new compliance program to meet this requirement, as well as larger defense contractors that must levy the requirement on subsidiaries, joint ventures and affiliates, even those entities that are non-government contractors. Any new compliance system obviously will increase contractor overhead costs, which often are passed on to the government.

It will also impose on defense contractors a new liability over which they have no control. Because the proposed regulation does not limit the certification to the activities of the former “covered employees” on a Defense Department contract or even related to employment by the contractor, the contractor will be required to certify compliance of its employees even as to their personal, off-duty activities.

Consultants and part-time employees working for other companies or organizations may violate their restriction in pursuit of other activities wholly unconnected to the certifying contractor. For example, an ex-military officer employed by a contractor may violate her representational restrictions under 18 U.S.C. 207 by contacting the government on behalf of another company for which she is consulting, or even as a volunteer for a civic,
charitable or scouting organization.

The proposed regulation may also deter smaller companies from bidding on Defense Department contracts. Smaller commercial contractors with less sophisticated employee screening and tracking systems may view this requirement as too costly to introduce across their enterprise in order to seek new defense business.

Another result may be that contractors will be deterred from hiring ex-military and Defense Department personnel. The proposed rule imposes both a new risk of non-compliance, which could lead to suspension and debarment or liability under the False Claims Act, as well as a new requirement for a compliance system to mitigate the risk. Thus, defense contractors likely will be deterred from hiring ex-military and department personnel. Ironically, this proposed rule red flags former department personnel — including Title 10 reserves and National Guard personnel — as potential burdens for Defense contractors.

The proposed regulation applies only to “covered officials,” but the difficulty in identifying who qualifies as a “covered official,” may cause defense contractors, especially smaller contractors, to simply close the door to all former department personnel.

Another potential consequence is that it may deter civilian federal employees from working in the Defense Department. Since the restrictions apply only to former department personnel, civilian employees, especially procurement and senior program managers who qualify as “covered employees,” may choose to serve in other federal agencies instead of Defense, if they envision post-government employment in the commercial sector. This obviously would frustrate Defense Department efforts to build a world-class acquisition work force.

The bottom line is that the proposed regulation offers several dysfunctional, expensive, and possibly unintended consequences that the Defense Department hopefully will address as it considers whether it should be implemented.

– by Steve Epstein, chief counsel for ethics and compliance at The Boeing Company. The views expressed are solely those of the author. Published by National Defense magazine, October 2011 at http://www.nationaldefensemagazine.org/archive/2011/October/Pages/DefenseDepartmentContractorsMaySeeNewHiringRegulations.aspx

September 15, 2011 By AMK

OMB announces final guidance on inherently governmental functions

Long-anticipated final guidance on “inherently governmental functions” is set for publication on Monday and should clarify confusion over blurred lines in agencies’ understanding of which types of work should be outsourced, top officials at the Office of Management and Budget told reporters on Friday.

The final policy letter, said Chief Performance Officer Jeffrey Zients, “helps agencies do better at balancing contracting out with management by federal employees. The mix was out of balance and we think this protects the public interest. Given our fiscal situation today, it is important more than ever that taxpayer money be well spent.”

With a few exceptions, the guidance, which takes effect Oct. 12, is similar to the draft released in March 2010, said Dan Gordon, administrator of the Office of Federal Procurement Policy. “But it is a milestone” that follows up on a memorandum of understanding about reducing waste in contracting issued by President Obama in March 2009.

The document includes lengthy lists of functions that are clearly inherently governmental and separate lists of “functions closely associated with the performance of inherently governmental functions” — where agencies can use more discretion.

One difference in the new guidance is a provision intended to “clarify the confusing and controversial” policy on the contracting out of military security operations, Gordon said. If a function is part of combat or could evolve into combat, then contractors can’t be used. “We benefited on this issue from public comments from the private sector, agencies, nonprofits and the Hill,” he added.

A second departure is a provision intended to help small businesses. “It places a lower priority on in-sourcing if the function is not inherently governmental,” Gordon said. “Insourcing is not a goal, but agencies need to understand that if an inherently governmental function is improperly contracted,” they can lose control of the work.

The administration “is sensitive” to realities of the current budget crunch, Gordon acknowledged. “We need to demonstrate fiscal responsibility on both sides” of the contracting process, he said. “We don’t want to dramatically increase [full-time equivalent] levels on the federal side, but in today’s fiscal world, the solution is not massive contracting out,” nor is it massive insourcing.

Zients presented the letter in the context of the administration’s two-and-a-half-year-old effort to trim waste by curbing contracting “after its uncontrolled growth under the prior administration.” One in six federal dollars is contracted out, and the rate, mostly in services, doubled since 2008, he said. But 2010 marked the first time in a decade that the level of contracting decreased, by $80 billion.

Examples of smarter contracting, Zients said, include “strategic sourcing,” such as pooling purchases of office supplies, which can save as much as 40 percent. “Rather than buying like 100 medium-sized businesses, take advantage of the fact that the United States is the world’s largest purchaser,” he said.

Another means is cutting spending on management support, which quadrupled over the past 10 years, he added. “In information technology and acquisition, management support produces many wasteful and unnecessary consultants’ reports that sit on a shelf.” That approach will reduce expenses by 15 percent, or $7 billion in fiscal 2012, he said.

Focusing on interaction with contractors, the administration also has “strengthened suspension and debarment” processes, Zients said, stressing, however, that “contractors do valuable work and will continue to do so.”

Over the past year and a half, Gordon said, the outsourcing-insourcing issue has been reviewed most thoroughly by the Defense and Homeland Security departments, a process now largely complete. Most agencies have already been working under the principles of the final guidance, he said, so its release won’t prompt major shifts.

Critical functions differ by agency, Gordon said, but the letter provides “clear direction to managers responsible for policy on the closely associated functions to make sure that the agency can control it and that the work doesn’t expand.”

The problem, he said, though “now largely corrected,” has been that some agencies, for example, would have a contractor write a statement of work and then award the contract to that same company. In managing IT functions, he added, he’s heard federal managers say that “no one in-house understands the work and that they’re completely dependent on the contractor. It’s intolerable.” The solution, he said, might be limited insourcing, adding two to three people, or simply applying more attention.

The guidance’s definition of inherently governmental, as in the draft, is based on the 1998 Federal Activities Inventory Reform Act, and Zients said the letter’s other changes, though small, would require adjusting the Federal Acquisition Regulation to conform.

Dozens of interest groups had been following the evolution of final guidance on what is inherently governmental. “We are pleased OFPP has retained flexibilities for agencies to determine what functions are considered closely associated with inherently governmental functions or are critical functions to agency missions and to provide for these functions in a way that best meets their needs and capabilities,” said Stan Soloway, president of the industry group the Professional Services Council. “However, we are concerned that the list of closely associated functions could be misconstrued as a ‘do not contract’ list, even though it is not the case, nor OFPP’s intent. The checklist that identifies closely associated functions must not become a barrier to contracting for work where it is appropriate to do so.”

Scott Amey, general counsel of the watchdog group the Project on Government Oversight, said he is impressed with the guidance. “The policy comes clean about the government’s over-reliance on contractors and improves the categories of activities and functions that shouldn’t be performed by contractors,” he said. “Private security in combat areas was never a good policy, and OFPP’s changes will ensure that properly trained and mission-responsible government personnel conduct such work.” He wonders, however, whether agencies will actually retain or insource work that his group believes should be performed by public servants.

Steve Amitay, federal legislative counsel of the National Association of Security Companies, said on Friday that absence of any mention of “building security” in the guidance “validates the continued successful use of contract security by federal agencies. Furthermore, given the decades of effective and efficient use of contract security by federal agencies, any agency that is considering insourcing security jobs should, as the policy states, be required to conduct an in-depth, comprehensive cost-analysis of such a move.”

— by Charles S. Clark – Government Executive – September 9, 2011 – http://www.govexec.com/dailyfed/0911/090911cc1.htm?rss=getoday&oref=rss

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