2017 NDAA Creates New Defense CAS Board

The National Defense Authorization Act for Fiscal Year 2017 (PL 114-328) establishes a new Cost Accounting Standards Board specific to the Department of Defense. Section 820 of the NDAA adds 10 USC 190 to create a seven-member panel chaired by DoD’s chief financial officer. The duties of the Defense Cost Accounting Standards Board include reviewing DoD’s application of existing cost accounting standards and recommending changes to the CAS Board. The Defense CAS Board has exclusive authority, with respect to  DoD, to implement cost accounting standards to achieve uniformity and consistency in the standards governing measurement, assignment, and allocation of costs to contracts with DoD. The Board is also charged to develop standards to ensure that commercial operations performed by DoD employees adhere to cost accounting standards that inform managerial decision making.

Existing Board

The NDAA also amends 41 USC 1501 to specify additional duties for the current CAS Board, which include ensuring that the cost accounting standards used by contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems. The Board must also address problems identified by cases presented to the boards of contract appeals and federal courts. In addition, the Board is directed to meet at least once a quarter and annually submit a report to the specified congressional committees describing the actions taken during the prior year to conform the cost accounting standards with generally accepted accounting principles, and to minimize the burden on contractors while protecting the interests of the government. The amendments made by section 820 go into effect on October 1, 2018.

DFARS Rule Clarifies Allowability of Costs Related to Counterfeit Electronic Parts

The Department of Defense has finalized its proposed rule addressing the allowability of costs of counterfeit electronic parts or suspect counterfeit electronic parts and the cost of rework or corrective action.

The final rule in DFARS Case 2016-D004 amends the Defense Federal Acquisition Regulation Supplement at DFARS 231.205-71 to provide that these costs may be allowable if the parts were obtained by the contractor/subcontractor in accordance with the clause at DFARS 252.246-7008, Sources of Electronic Parts.

More specifically, DFARS 231.205-71 now provides that the costs of counterfeit electronic parts and suspect parts, and the costs of rework or corrective action, are unallowable unless:

  • the contractor has a DoD-approved system (see DFARS 244.303(b)) to detect and avoid counterfeit electronic parts and suspect counterfeit electronic parts;
  • the parts are government-furnished property, as defined in FAR 45.101, or were obtained by the contractor in accordance with DFARS 252.246-7008;
  • the contractor becomes aware of the counterfeit parts through inspection, testing, and authentication efforts through a Government Industry Data Exchange Program alert, or by other means; and
  • the contractor provides timely notice to the cognizant contracting officer and GIDEP.

The proposed version of the rule did not include the notice requirement.

The effective date of the rule is August 30, 2016. For the text of the rule, see 81 FR 59510.

Executive Compensation Benchmark Amount Increased

An Office of Management and Budget, Office of Federal Procurement Policy, notice sets the maximum executive compensation benchmark amount allowable under government contracts for fiscal years 2013 and 2014 at $980,796 and $1,144,888, respectively. As required by Section 39 of the Office of Federal Procurement Policy Act, as amended (41 USC 1127), the benchmark compensation amount limits the allowability of compensation costs under government contracts in accordance with FAR 31.205-6(p). However, the cap does not limit the compensation an executive may otherwise receive. The benchmark compensation amount applies to both defense and civilian procurement agencies for contracts awarded before June 24, 2014. The notice includes a memorandum from the OFPP Administrator to the Heads of Executive Departments and Agencies providing additional information on this compensation cap.

Negligent Audit Claim Barred by Discretionary Function Exception

The District Court for the District of Delaware granted the government’s motion to dismiss for lack of jurisdiction because a contractor’s allegations the Defense Contract Audit Agency violated the Federal Tort Claims Act were barred by the discretionary function exception. The contractor alleged FTCA violations arising from a negligent DCAA audit. The FTCA waives the government’s sovereign immunity with respect to tort claims for money damages (28 USC 1346(b)(1)). However, the discretionary function exception limits that waiver and eliminates jurisdiction for claims based on the exercise of a discretionary function by a government employee (28 USC 2680(a)).

Pursuant to the Supreme Court ruling in Berkovitz v. U.S. (486 U.S. 531), to determine whether the discretionary function exception applies, a court must consider whether the action “involves an element of judgment or choice” and whether the judgment exercised “is of the kind that the discretionary function exception was designed to shield.”

Here, both the contracting officer and DCAA performed functions with significant discretionary elements. The CO’s interpretation of the contract involved professional judgment and therefore constituted a discretionary decision. The CO’s decision was “inextricably tied” to the DCAA audit, which also involved professional judgment and consequently was a discretionary action.

In addition, the CO’s disallowance of the contractor’s claimed costs and DCAA’s audit involved substantial public policy considerations that the exception “was designed to shield.” In particular, DCAA conducted the audit in direct response to a congressional investigation of the contractor’s costs, and the audit was intended to protect the government from fraudulent contract claims. (Kellogg Brown & Root Services, Inc. v. U.S.)

DoD Issues Forward Pricing Rate Proposal Adequacy Checklist

A final rule issued by the Department of Defense amends the Defense Federal Acquisition Regulation Supplement to provide guidance to contractors on submitting forward pricing rate proposals.

The DFARS Case 2012-D035 rule seeks to ensure that FPRPs are thorough, accurate, and complete.

Revised DFARS 215.403-5 directs contracting officers to obtain FPRP adequacy checklists from contractors when they submit their FPRPs.

DFARS 215.403-5 applies to contractors following the contract cost principles in FAR Subpart 31.2, Contracts With Commercial Organizations. It instructs administrative COs following the procedures in FAR 42.1701(b) to direct the contractor to comply with the submission items in the checklist to ensure the FPRP is submitted in an acceptable form in accordance with FAR15.403-5(b)(3).

Table 215.403-1—Contractor Forward Pricing Rate Proposal Adequacy Checklist contains 24 items.  It instructs the contractor to complete the checklist and either provide the location of requested information or explain why the requested information is not provided.

The form of the checklist can be found within the text of the rule.

The effective date of the rule is December 11, 2014.