The Government Contracting Environment:
Emerging Issues, Enforcement Trends, and
Latest News
Presented by:
Bill Bressette, Principal
Baker Tilly’s Government Contractor Advisory Services
September 19, 2014
© Baker Tilly Virchow Krause, LLP
Baker Tilly refers to Baker Tilly Virchow Krause, LLP,
an independently owned and managed member of Baker Tilly International.
Agenda
• Government Contracting Environment
- Environment, Budgets and Sequestration
- Shifting Priorities and Procurement Trends
- Impact to Contractors
- Competition and Pricing
• Compliance and Enforcement Trends
- Environment
- Regulatory Changes
- Enforcement Activity
• Looking Ahead
- Thoughts for new and established
contractors
2
Government Contracting Environment
3
General Environment
“I guess the question I'm asked the most often is:
"When you were sitting in that capsule listening to
the count-down, how did you feel?" Well, the answer
to that one is easy. I felt exactly how you would feel
if you were getting ready to launch and knew you
were sitting on top of two million parts -- all built by
the lowest bidder on a government contract.”
~ John Glenn
4
General Environment
Current Trends
• Continued debate over government spending in general
• Concerns over size of debt and fiscal deficit
• Budget cuts and sequestration
• Wars winding down / focus is turning inward
• Contractors pressured to do more with less
• Competition over price pressure and not overall value (LPTA)
• High scrutiny on compliance related issues
5
Shrinking Budgets
Total Budget Authority (in Trillions)
4.20
4.00
3.80
3.60
3.40
3.20
3.00
2009
2010
2011
2012
2013
Government Fiscal Year
6
Shrinking Budgets
Budget Authority: Top 10 Contracting Agencies (in Millions)
Department/Unit
Department of Health and Human Services
Department of Defense
Department of the Treasury
Department of Veterans Affairs
Department of Homeland Security
Department of State
Department of Justice
Department of Energy
NASA
General Services Administration
FY2012
FY2013
$ 874,458 $ 873,330
655,397
585,239
442,633
440,900
124,030
135,984
45,911
61,873
30,122
29,584
31,412
28,106
22,721
21,160
17,773
16,868
-977
-1,255
Increase /
Decrease
↓
↓
↓
↑
↑
↓
↓
↓
↓
↓
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Defense Spending
• Defense spending projected to return to near pre-2001 levels
8
Sequestration
Annual and Cumulative
Spending Cuts Under $1.2
Trillion BCA Sequester
• Sequestration came into effect resulting
from a compromise in the Budget Control
Act of 2011
• Congress needed to produce a deficit
reduction bill with at least $1.2 trillion in
cuts by 2021 to raise the debt ceiling by
the same amount
• Congress failed to put a plan in place,
triggering across-the-board cuts called
sequestrations
2013 2014 2015 2016 2017 2018 2019 2020 2021
$0B
-$50B
Medicare
Other Mandatory
-$100B
Defense Discretionary
Domestic Discretionary
Interest
-$150B
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OMB Advice
The Office of Management and Budget recommended that
agencies:
• Consider de-scoping or terminating for convenience contracts that are no
longer affordable
• Enter into new contracts or exercise options when they support high-priority
initiatives or where failure to enter into the contract would expose the
government to significantly greater costs in the future
• Utilize parts of contracts that allow for flexibility or any kind of termination
• Prioritize funds based on importance and long-term considerations
10
Sequestration
The Future of Sequestration
• The 2014 Midterm Elections are being / will be watched closely by
government contractors
• Republicans taking control of the senate will give them the ability to pass a
“clean” debt-ceiling bill in March of 2015
- Will likely include additional cuts to government spending
• Even with the sequester in effect, congress appropriated discretionary
spending budgets will continue to increase
• This trend may reverse as mandatory spending on entitlement programs
such as Social Security and Medicare continue to outpace discretionary
spending
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Shifting Priorities
Information Technology
• Traditional IT services are fading; movement towards the cloud
Homeland Security
• Growth in areas that support protection against biological, nuclear and terrorist
threats
Cybersecurity
• Focus on improving cybersecurity defense and readiness (e.g., protecting the
U.S. electrical grid)
R&D
• Renewed focus on the United States as a global hub of innovation
Infrastructure
• Investment in the aging infrastructure including roads, bridges, tunnels, and
airports
12
Procurement Trends
2013 Contract Obligations (in billions)
Top 10 Contracting Agencies
Department of Defense
308.0
Department of Energy
23.9
Health and Human…
19.9
Veterans Affairs
18.2
NASA
15.6
Homeland Security
12.7
GSA
8.5
Department of State
7.3
Department of Justice
7.1
Department of the Treasury
6.9
0.0
100.0
200.0
300.0
400.0
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Procurement Trends
% Change in Spending from 2012 to 2013
Department of the Treasury
Department of Justice
Veterans Affairs
Health and Human Services
Homeland Security
NASA
Department of Energy
Department of State
GSA
Department of Defense
-20.0%
-10.0%
0.0%
10.0%
20.0%
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Procurement Trends
Spending by Category (in billions)
Category
Carriers
Knowledge Based Services
Facility Related Services
Technology
Research & Development
Medical Services & Supplies
Logistics & Equipment Services
Transportation Services & Fuel
Other
Construction Services
Weapons and Ammunition
Food
Drones
2012
82.6
72.7
63.0
64.5
50.7
33.1
31.8
34.0
27.5
23.9
18.4
11.8
2.2
2013
75.3
68.7
60.8
60.3
43.8
33.1
27.0
25.1
22.4
18.4
18.2
6.7
2.3
% Change
-9%
-6%
-3%
-7%
-14%
0%
-15%
-26%
-19%
-23%
-1%
-43%
5%
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Impact to Contractors
Environmental Shift
• Creating uncertainty for contractors
Previously
Today
Reasonable Margins
Pressure on Margins
Predictability / Stability
Uncertainty
Moderate Competition
High Competition
5-8 Year Vision
2-4 Year Plan
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Impact to Contractors
Budget Pressure
• Declining budgets have reduced profitability and forced companies to
reduce costs, often in contracts and compliance
• Intense competition in nearly every sector of the government contracts
market
• Contractors are finding ways to leverage technology to reduce headcount
17
Impact to Contractors
Price Pressure
• Competition driving increased pressure on prices
• Government increased use of lowest price technically acceptable
(LPTA) source selection methods. This is a huge industry concern
• Increase in the number of claims and bid protests as a result
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Competition
GSA Examples
• GSA Future Plans for Fewer Contracts, Better Flexibility and Prices
- GSA modernization efforts to overhaul the nearly 60-year-old program, including
the standardization of labor categories among service contractors and allow for
better horizontal price comparison
- Standardized labor categories and potential consolidation of services Schedules
threaten to limit the ability of MAS contractors to offer the array of capabilities
needed to meet the customers’ needs
- Extreme pricing pressure and lack of flexibility during negotiation
• Strict Interpretation and Implementation of Pricing Regulations
- Price Reductions Clause (PRC)
- Most Favored Customer Clause (MFC)
• GSA Reverse Auction
- GSA Reverse Auction initiative intended to drive prices and costs down as a
result of sellers bidding to win business from agencies
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Compliance and Enforcement Trends
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Compliance
Increased Compliance Complexity
•
Increased oversight and scrutiny from government auditors
•
Ability to make sense of all the new rules and guidance coming out from
DCAA/DCMA
•
Significant changes affecting supply-chain security
•
Acquisition workforce demographics present a number of challenges (RFPs,
Negotiation, Protests, Audits, Compliance & Enforcement)
21
Enforcement: Environment
Government skepticism towards contractor products and
pricing
• As usual in a post-war environment, assumption that contractors and warprofiteers are attempting to defraud the government
• Historically, stems back to the “Lincoln Law”
-
Enacted during the Civil War to combat fraud committed by companies selling supplies
to the Union Army
-
Lincoln advocated passage of the False Claims Act (FCA), which contained “quit tam”
provisions allowing citizens to sue, on the government’s behalf, companies and
individuals defrauding the government – Passed by Congress on March 2nd, 1863
-
Remained virtually unchanged until 1943, when amendments weakened the act and it
fell into almost complete disuse
-
FCA revisited in the mid-1980’s; DoD reported that 45 of the largest 100 defense
contractors (including nine of the top 10) were under investigation for multiple fraud
offenses
-
Focus again shifted to the FCA more recently, with changes made in 2009 & 2010
22
Enforcement: Environment
FCA Cases Brought by U.S. or Relators (First 14 years)
600
547
493
500
468
400
343
365
280 269
300
Government
Relator
234
285
224
233
243
200
210
138
87
100
84
114
30
0
341
304
72
218
185
140
185
120
95
43
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Enforcement: Environment
FCA Cases Brought by U.S. or Relators (Last 13 years)
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Enforcement: Regulatory
Changes
Counterfeit Electronic Parts
• Prevents the use of counterfeit electronic parts in products sold to the
government
• Current applicability thresholds:
-
Full or modified contractors covered under the Cost Accounting Standards (CAS)
-
All subcontractors to CAS-covered prime contractors
-
Commercial items and COTS items if those items are subcontracted by a CAScovered contractor
-
Counterfeit electronic parts, suspect electronic parts, and obsolete electronic
parts, including any embedded software or firmware
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Enforcement: Regulatory Changes
Counterfeit Electronic Parts
• DoD passed a final ruling on May 6th, 2014 imposing new requirement that
contractors must “establish and maintain an acceptable counterfeit
electronic part detection and avoidance system”
• On June 10th, 2014, the federal government proposed a new rule to
expand coverage to include any product sold to the government
-
Would apply to all prime and subcontractors regardless of CAS status
26
Enforcement: Enforcement
Activity
Mandatory Disclosure Program
• Requires all federal government contractors to report fraud and significant
overpayments in connection with their government contracts to the federal
government
• Created by the DOJ and OIG community as an initiative to fight fraud with the
knowledge of the limited benefits provided by voluntary disclosure
• Effective as of December 12, 2008
• As of June 2014, GSA OIG reports 134 disclosures, with approximately $47M
in recovery
-
Over one-third of disclosures relate to pricing issues
• DOD and GSA IG offices receiving the vast majority of disclosures
-
DOD OIG: 114 disclosures reported in the most recently reported six months
-
GSA OIG: 131 disclosures total reported as of April 2014
• The resolution process has recently slowed
27
Enforcement: Enforcement
Activity
Mandatory Disclosure Program (Continued)
• Majority of disclosures to the GSA OIG to-date are related to contractors billing
over the contract price, or being in violation of defective pricing and the Price
Reductions Clause (PRC)
• Majority of disclosures to the DOD OIG to-date are related to labor mischarging
• GSA and DOD are working together on multi-agency disclosures, while DCAA
is often also getting involved
• All disclosures audited or investigated; some are more in-depth, which others
are simply to ensure accurate repayment
• Contractors frustrated by overly aggressive nature of DCAA, lack of clarity
regarding disclosure requirements, and increasing involvement of the US
Attorney’s Office
28
Enforcement: Enforcement
Activity
False Claims Act (FCA) Updates
• Total recoveries under the FCA over the past five years is over $17B
• In FY2013, more than 846 new cases filed under the FCA
-
752 of these case (or 89%) were filed by “qui tam” or whistleblowers
-
More whistleblower lawsuits filed last year than in any year of the FCA’s history
• Relators have earned more than $387M in share awards over the past year
• Notable 2013 settlements and judgments included:
-
A $500M settlement with a pharmaceutical company accused of making false
statements to the FDA regarding the quality of its drugs
-
A $473M settlement ($364M of which constituted damages under the FCA) with a
provider of high-tech products and services to the global aerospace and building
systems industries
29
Enforcement: Enforcement
Activity
Total FCA Recoveries (in Millions)
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Looking Ahead
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A Few Thoughts
• New potential contractors looking expand into the Federal marketplace
- Understand what you’re getting yourself into
• Established contractors
- Stay abreast of new developments and enforcement activity
- Be thoughtful and think long-term when approaching cost reductions
• All Contractors
- Focus on fundamentals of contracts management and compliance
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Questions?
Bill Bressette, Principal
Government Contractor Advisory Services
Baker Tilly
Tel: (703) 923-8624,
Bill.Bressette@bakertilly.com
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TO-Do’s
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Slide Notes
Depth on Sequestration and a couple other issues
Ditto for some examples (audit trends?)
Stories – highlight a few main points
Dry run it – might already be too long
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