SC defense contractor pays $1M to resolve dispute

A South Carolina defense contractor has agreed to pay the U.S. government more than $1 million to resolve fraud allegations related to a contract with the Defense Department.

U.S. Attorney Bill Nettles said Wednesday the Defense Department paid nearly $435,000 to Columbia-based FN Manufacturing LLC to mentor minority-owned companies. But the government says FN never provided some of the mentoring and contracted out some of the services, an action that violated the company’s contract.

FN is a subsidiary of FN Herstal of Belgium. The company makes the popular M-16 rifle, which is carried by almost every soldier.

— The Associated Press – August 4, 2010

Oversight of war zone subcontractors is lacking, panel finds

Prime contractors in Iraq and Afghanistan are not managing their subcontractors’ performance and fees consistently, the Defense Department’s top auditing official told the Commission on Wartime Contracting on Monday.

A Defense Contract Audit Agency review of prime contractors’ billing and cost records identified several situations in which they failed to award fixed-price subcontracts based on fair and reasonable prices, often leading to unreasonable or unallowable costs.

“Prime contractors must be held accountable for establishing fair and reasonable subcontract prices,” Patrick Fitzgerald, director of DCAA told commission members.

Subcontractors comprise about one-third of the roughly 200,000 contractor employees in Iraq and Afghanistan, according to the commission’s data. But federal regulations limit government officials’ visibility into the activities of in-theater subcontractors.

Federal agencies enter into agreements with the prime contractors and have no direct business relationship, known as privity of contract, with subcontractors. Prime contractors are legally responsible for managing subcontractors, but many lack the internal controls or oversight mechanisms to carry out that role, the panel suggested.

For example, DynCorp International billed the government roughly $6 million for work performed by Kuwaiti-owned subcontractor Al-Shora International General Trading and Contracting Co. The cost-type subcontract terms required Al-Shora to provide cost data to support its invoices. When DCAA requested that Al-Shora open its books to document its costs, the company declined, citing Kuwaiti law. DCAA has since suspended payment for DynCorp’s billed costs from Al-Shora.

“If foreign companies want to be in business with this government, they ought to play by our rules,” said commission member Dov Zakheim.

DCAA plans to recommend that Pentagon officials consider adding a contract clause that would require primes to manage its subcontractors more closely.

“Prime contractors should have systems or processes in place to review subcontractor billing processes to ensure [they] are in accordance with subcontract terms and conditions,” Fitzgerald said.

In addition, the Defense Contract Management Agency has yet to approve the purchasing systems of two of the three prime contractors — DynCorp and Fluor — for the Army’s multibillion-dollar LOGCAP IV logistical-support contract for operations in Iraq and Afghanistan. The government relies on data from prime contractors’ purchasing systems to ensure subcontract costs are reasonable.

Commission members cited ethical, security and logistical concerns with wartime subcontractors, including allegations of exploitation of unskilled foreign laborers, human trafficking and excessive costs from tiering contracts, or adding layers of subcontractors to obscure fees and credentialing.

“Subcontracting is a normal business practice,” said commission co-chairman Christopher Shays. “But what makes sense for an office renovation project in Maryland can create some unique risks when the contractor is hiring subcontractors in a combat zone half a world away.”

The daylong hearing included officials from four federal agencies, four prime contractors and six subcontractors. Each agreed that subcontracting in a wartime environment presents unique security and operational concerns.

“We recognize the risks of contracting in a contingency operation,” said Edward Harrington, deputy assistant secretary of the Army for procurement. “We must ensure that America’s integrity is not harmed by the actions of our contractors and subcontractors.”

Both State Department and U.S. Agency for International Development officials said prime contractors must obtain their contracting officers’ written consent prior to the award of a subcontract.

Prime contractors told the panel that oversight of subcontractors was lacking at the start of the wars in Iraq and Afghanistan, in part, because relatively few foreign-owned firms in the region had any experience working with the U.S. government. They said the environment has improved considerably in recent years, but challenges remain.

For example, the federal government frequently prevents local citizens from working on U.S. bases, where much of the subcontract work is performed, said John Supina, DynCorp’s senior vice president of business administration.

“Vetting of host country employees to ensure that they do not support insurgents, will not divert funds to insurgent causes, or pose a threat to U.S. and allied personnel is very difficult,” he said.

— By Robert Brodsky – – July 26, 2010

Government contractors must report subcontractor and executive compensation information

On July 8, 2010, an interim rule was published (75 Fed. Reg. 37414-20) that requires government contractors to report information about their first-tier subcontractors and to report executive compensation for themselves as well as their subcontractors. This information will then be made publicly available at

Under the interim rule, contractors are subject to these new reporting requirements:

  1. Information (name, address, etc.) relating to first-tier subcontractors and the amount of each subcontract must be reported. The only exceptions are for classified contracts, contracts to individuals or contracts to those with a gross income of less than $300,000 in the previous year. There are no exceptions for small companies, privately-held companies or companies producing commercial off-the-shelf items.To ease the burden of complying with this requirement, it will be phased in.  Through September 30, 2010, the subcontractor reporting will only be required on newly awarded subcontracts if the prime contract is expected to be worth $20 million or more. From October 1, 2010 through February 28, 2011, reporting will be applicable to newly awarded subcontracts under prime contracts expected to be worth over $550,000. After March 1, 2011, the rule will apply to all non-exempt contracts expected to be over $25,000.The subcontract reporting is to occur by the end of the month following an award, and annually thereafter, by the prime contractors submitting reports to the Federal Funding Accounting and Transparency Act Subaward Reporting System.
  2. The names and total compensation (not just limited to salary) from the previous fiscal year of contractors’ and first-tier subcontractors’ top five executives also must be reported. However, this compensation information is required only if the company (prime contractor or first-tier subcontractor): 1) received at least 80 percent of its annual gross revenue from federal contracts, grants and loans; 2) received $25 million from federal awards; and 3) doesn’t already report executives’ compensation publicly (e.g., filed with the SEC).The salary data is to be reported annually as a part of annual updates to the Central Contractor Registration (CCR).

This interim rule is the result of the Federal Funding Accountability and Transparency Act of 2006, co-sponsored by then Senator Barack Obama, which was later amended in 2008. Although some contractors are already required to report this information as a condition of receipt of American Reinvestment and Recovery Act (“ARRA”) funds, the new rule now applies to all federal contracts with the extremely limited exceptions noted above. To enforce these rules, all federal agencies are required to review reports quarterly and use remedies available under the contract to require contractors to comply.

Besides the effort to actually comply with these new reporting requirements, it becomes paramount for prime contractors to flow down provisions to all first-tier subcontractors, including vendor purchase orders, so they can obtain the information needed to satisfy their reporting obligations or to establish any exception to the reporting requirement.

Contractors must report the required information to the Federal Funding Accountability and Transparency Act Sub-award Reporting System (FSRS) at  The subcontract award data will be posted on the Government’s U.S.A. Spending website. Contractors who fail to comply with the Interim Rule may be subject to contractual remedies, including contract termination.

Administration to require subcontractor reporting

Nearly four years after the passage of legislation that mandated the disclosure of all federal contracting awards, the Obama administration is requiring agencies to report data on its subcontracts.

Beginning immediately, agencies must post information on their first-tier subcontracts, according to an interim rule published on Thursday in the Federal Register. The long-awaited rule, which would amend the Federal Acquisition Regulation, also would require contractors to report the names and salaries of their five highest paid executives.

“The objective of the rule is to empower the American taxpayer with information that may be used to demand greater fiscal discipline from both executive and legislative branches of government,” the notice stated.

The subcontracting provision will be phased in slowly to minimize the burden on agencies and contractors, the administration said.

Until Sept. 30, newly awarded subcontracts must be reported only if the prime contract amount was $20 million or more. From Oct. 1, 2010 to Feb. 28, 2011, the threshold for reporting new subcontract awards will be lowered to $550,000 or more. Beginning on March 1, 2011, all subcontracts for prime contracts of $25,000 or more must be publicly reported.

The rule will be required for all commercial item contracts and actions below the $100,000 simplified acquisition threshold that meet the $25,000 threshold. The clause, however, is not required in classified solicitations and contracts with individuals. Companies with less than $300,000 in annual revenue also would be exempt.

The rule has been a long time in the making. In September 2006, President George W. Bush signed the Federal Funding Accountability and Transparency Act, which created, a public database on all prime contract awards of more than $25,000. The bill was co-sponsored by then-Sen. Barack Obama, D-Ill.

The Transparency Act required federal agencies begin posting subcontracting awards by the start of 2009. The Bush administration conducted a brief pilot program to test the collection of some high-dollar subcontracting awards. But the government terminated the pilot on Jan. 1, 2009, and it was never revived.

The impetus for the law’s revival appears to be the vast breadth of reporting the 2009 American Recovery and Reinvestment Act mandates. The stimulus requires contractors to provide detailed information on their subcontracts, including many of the same data elements that are called for under the Transparency Act. Similar to the Recovery Act, the new rule will apply only to first-tier subcontracts.

Contractors will provide their subcontract reports to the Federal Funding Accountability and Transparency Act Sub-Award Reporting System. The data will be posted later on

The salary provision, meanwhile, stems from the 2008 Government Funding Transparency Act, which requires contractors and subcontractors to annually disclose the names and total compensation — including bonuses and stock options — of their five highest paid officers from the preceding fiscal year, the notice said.

The executive compensation rule, which is required for Recovery Act contractors, applies to awards of at least $25,000. Companies must report the salary data to the Central Contractor Registration.

The 2008 law applies to companies earning at least 80 percent of their revenue from federal contracts, grants and loans and that have received in excess of $25 million in total federal funding during the previous year. Companies would be exempt if they already report the salary data through Securities and Exchange Commission reports, or if they earned less than $300,000 in gross income the year before.

The administration is accepting public comments on the interim rule through Sept. 7.


— By Robert Brodsky- – July 9, 2010