Matsushita Elec. Zenith Radio Corp. United States, 99 Fed. Transcript, ECF No. United States, 58 Fed. In order to determine the allowability of the deferred compensation costs, the Court first looks to the plain language of the contract.
See Hercules Inc. Allowability Under FAR A, A See 26 U. The Federal Circuit has previously interpreted the scope of the section deductibility-timing rules in the following way: 1 Contract number FC was executed on July 10, and the FAR subpart Avon Prod. United States, 97 F. The accompanying regulations specify that deferred compensation subject to section is deductible in the year of payment and not in the year of accrual, as long as the payments were made more than two and one-half months after the end of the taxable year in which the services were rendered.
It is undisputed that the compensation in question was received more than two and one-half months after the end of FY However, Quimba argues that even if the section deductibility-timing rules apply, 26 C. Application of 26 C. Those temporary regulations, which have since been codified, were in effect during FY The paragraph immediately following b 1 establishes an exception to the presumption for cases in which the deferral was discernibly unavoidable.
A-2 b 2 emphasis added ; Avon Prod. Section 1. While the presumption of the deductibility-timing rules in section of the IRC is well-founded, this case is one in which the evidence plainly overcomes the presumption. As such, Quimba could not have anticipated that future payments would not follow this form and that they would not have received interim payments throughout FY While Quimba understood the company would be required to update its accounting system, there was no reason to believe that the updating and approval process would take the entirety of FY and continue through a significant part of FY OHA's positon is that compliance with the Limitation on Subcontracting provision is a question of responsibility that falls within the purview of the contracting officer.
As to how a contracting officer will view this, the answer is probably as varied as the number of contracting officers. I have not found any CDA decisions addressing this issue. Thus, contracting officers are left with little more than the language of the clause. However, there is one thing that we can count on and that is how DCAA will look at this question. Because the clause uses the word cost, DCAA will examine a contractor's accounting records to determine the costs that have been allocated to a contract.
If a contractor's cost records do not indicate compliance with the clause, it is almost a given that DCAA will cite the contractor for a contract non-compliance, particularly if the contract is a cost reimbursement contract. Any DCAA audit report on this topic is likely to substantially influence the contracting officer on the issue.
The current subcontracting limitation clause, FAR Interpreting that language reasonably, it seems to me that the "cost of the contract" is the contractor's actual cost of contract performance, excluding materials, not the contract price or the estimated cost upon which the proposed price was based. Thus, the prime's performance obligation is a percentage of the proposed, estimated, or actual cost of contract performance, excluding materials.
I have not fully checked the case law on this, but it seems pretty skimpy and does not seem to have addressed this issue. The fact that he did not pay himself means only that he took a loss to that extent. I think that disputes over compliance with the limitations on subcontracting clause are handled by the BCAs and the Court of Federal claims pursuant to the Contract Disputes Act. I also don't know what audit role DCAA would or could play with respect to a fixed-price construction contract.
I think you have found a reasonable approach that would definitely be rejected by DCAA because there were no "actual" costs incurred. In fact, I suspect that if any contractor tried this reasonable approach without footnoting the heck out of it to ensure absolute transparency, that same contractor might be setting itself up for a nice investigation regarding alleged violations of the False Statements Act and perhaps the False Claims Act.
Let me reiterate that I think your approach is sound and reasonable. I just do not think the government auditors will buy it and that might lead to a fraud referral. I'm thinking of a related matter over at Quimba Software, whose blog details the company's long legal battles over deferred salary costs.
Auditors tend to take a black-and-white approach to these sorts of things. Granted, the contractor is not claiming costs not actually paid in an invoice; but I think the situation sufficiently related to cause me to advise much caution. As I stated several times the root cause of the poster's problem is a failure to establish a salary and then allocate it. Without that basic accounting taking place, in my opinion the owner would be skating on thin ice in following your approach.
But -- hey! This might well be that rare time. Vern, I agree that SBA does not have jurisdiction to determine if a contractor complied with the Limitation on Subcontracting clause. As for DCAA auditing a FFP construction contract, they certainly could do so if certified cost or pricing data was required for the contract. Also, they could attempt to do so at the special request of the contracting officer to verify compliance with the clause, although I do not know of any clause that permits this.
However, lack of a specific clause giving the government audit rights has not stopped DCAA or contracting officers from trying to audit aspects of FFP contracts before. All this raises the question of how contracting officers are to verify compliance with the clause. Share More sharing options Followers 0. Start new topic. Prev 1 2 Next Page 1 of 2. Recommended Posts. Posted January 30, Link to comment Share on other sites More sharing options Hi ohnoyoudidnt14, I have worked with several small businesses in similar situations.
Hope this helps. FederalContractor Posted January 30, Posted January 31, FederalContractor, As I interpret the original post, the interlocutor is not looking to subcontract, but instead how to comply with the D-B payroll reporting requirements, where the owner not only runs the business as a whole but also performs direct contract work. C Culham Posted January 31, There is a natural, human, tendency to puffery in such things—but that tendency must be tempered with the knowledge that an intent to deceive could have catastrophic consequences for the company that far exceed the award or incentive fees earned.
Those consequences could and, in this case, did extend to individual employees. Second, note that, once again, a contractor was heavily fined for an inadequate compliance program and associated internal controls.
Contractors who have accepted contracts that contain FAR clause The money you save by implementing a robust compliance program and associated internal controls may be sufficient to repay your investment, several times over. Recently, Draper entered into a settlement agreement with the U. However, the DoJ press release did offer the following additional information—.
The audit also found that Draper lacked sufficient internal accounting controls concerning Opportunity Investments. When the Department of Defense requested additional information about the costs flagged by the audit, Draper, for months, did not reveal that it lacked documentation to support charging some of the Opportunity Investments to the government. That additional bit points to some other issues that Draper allegedly had.
If a contractor does not have robust and documented internal controls, then it will likely not do particularly well in its audits. Readers are reminded that FAR A contractor is responsible for accounting for costs appropriately and for maintaining records, including supporting documentation, adequate to demonstrate that costs claimed have been incurred, are allocable to the contract, and comply with applicable cost principles in this subpart and agency supplements.
The contracting officer may disallow all or part of a claimed cost that is inadequately supported. Gosh, we wonder how many internal controls could have been established and documented for that kind of money?
So there you go. At times, Patel confronted and berated Suppliers who cheated on the agreement, often at the direct behest of another Supplier, and threatened to punish nonconforming Suppliers by taking away valuable access to projects. In addition, as the complaint alleges, Patel and co-conspirators recognized the mutual financial benefit of this agreement — namely, reducing the rise in labor costs that would occur when aerospace workers were free to find new employment in a competitive environment.
Reading between the lines a bit, it seems that Patel felt pressure to hold down the labor costs of providers of outsourced engineering services. Was that cost-control pressure if it existed exerted on him from above, or was it created in his mind in order to justify his value-add to the company? Patel was arrested. Patel was arrested and he appeared before a Judge. The maximum fine may be increased to twice the gain derived from the crime or twice the loss suffered by the victims of the crime if either amount is greater than the statutory maximum fine.
So, yes, individuals can and will be charged when the Federal government believes that circumstances warrant doing so. So, yeah, other aerospace companies doing business in the Northeast might want to perform a bit of diligence in this area, to make sure that they themselves are not exposed to allegations of Sherman Act violations. Reminder: A criminal complaint is merely an allegation, and all defendants are presumed innocent until proven guilty beyond a reasonable doubt in a court of law.
More than a year ago, we first wrote about the issues at Bradken. As part of its Deferred Prosecution Agreement, Bradken agreed to make a public statement. We wrote about that public statement in a follow-up article. We believe that public statement is well worth reading, and we recommend you follow the link to it.
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