During the review of a client's forward pricing rate package that supported the proposed indirect cost rates on several outstanding proposals, government auditors questioned the allowability of several hundred thousand dollars of costs in indirect cost pools. The questioned costs lowered indirect cost rates by over a percentage point and since the client performed only negotiated defense contracts, it had a dollar for dollar reduction to the client's proposed contract prices.
While the government's arguments had intuitive appeal, they were contrary to applicable cost principles and regulations. We prepared the narrative submitted by the client that rebutted the government's arguments and resulted in having the allowability of the costs reinstated.
Our narrative reviewed the five tests of costs allowability along with applicable FAR 31 cost principles, Cost Accounting Standards (CAS) and relevant Generally Accepted Accounting Principles (GAAP). (back to top)
A proposal by a top 10 defense contractor contained questioned costs as a result of a CAS 401 noncompliance. The allegation stalled progress on proposal negotiations until the increased costs were removed. After several months without resolution we were consulted.
We recognized the issue as an estimating technique and not a cost accounting practice. As such the contractor's quantification method was not a CAS 401 violation.
We prepared an opinion with relevant citations and justifications explaning why the methodology was an estimating technique and not a cost accounting practice. The opinion was presented to the Contracting Officer and the auditor. The questioned costs were withdrawn and negotiations moved forward. (back to top)
The solicitation instructions for an indefinite quantity contract required submission of an automated pricing model where each incremental increase in quantity reflected changes in variable costs only.
We employed analytical techniques to measure and quantify behaviors of the client's fixed and variable costs. It then developed algorithms and created software that used these algorithms for computing unit prices at any quantity level within the solicitation's requirement range. (back to top)
A Defense 100 contractor was selected for review of its Material Management and Accounting System (MMAS). We performed a compliance review to evaluate weaknesses in the contractor's current systems, policies and procedures.
A work plan was developed for implementing recommended shortcomings and we updated policies and procedures and worked with key client personnel in tuning existing systems.
We prepared and presented the demonstration in order to obtain interim approval pending further audit and analysis. We then participated in the subsequent system review and audit to answer questions and demonstrate system compliance with regulatory requirements. (back to top)
A first tier subcontractor received a multi-million dollar, Not-to-Exceed (NTE) contract to manufacture certain hardware pending final negotiation of a fixed price contract. By contract completion an agreement still had not been reached on the final contract value.
The final audit took exception to various cost elements and allocation methods claimed by the subcontractor. It concluded that the manufactured cost was less than half of the NTE value.
We recognized errors in the auditor's assessment of cost allowability. It also employed accepted quantitative techniques for evaluating fixed and variable costs as well as their appropriate allocation bases. We were able to use these results with regulatory requirements to show that the subcontractor's claimed costs and allocation methods were appropriate and that the actual costs incurred were slightly higher than the NTE value.
The final contract value was settled for the full NTE value. (back to top)
When a Fortune 500 defense manufacturer had the design requirements for its hardware changed the resulting development effort delayed manufacture of the delivered hardware for three years. Remarkably, the most significant of the many design changes, transformed the hardware's qualification requirements from state-of-the-art to beyond state-of-the-art and commercially impractical.
Quantification of damages began with proof of entitlement resulting from the changed requirements caused by customer imposed new requirements, breach of implied warranty of specifications, and differences in interpretation. While the increased engineering effort caused by the design changes was challenging, the consequence of those changes on quantification of delay damages was very complex and required proof of fixed versus variable costs, justification of unmitigated costs, justification of standby and proof that replacement volumes were not complete substitutes for the delayed work.
We quantified the delay damages as high as $36 million. He used his advanced cost modeling capabilities to develop a parametric approach that calculated the effect of the nearly 400 changes on the design effort was to add more than three years and 100,000 man-hours to the design and development process. We selected this approach after demonstrating that more traditional methods, such as CPM [Critical Path Method], were inappropriate in this particular circumstance.
The results of engineering calculation were then linked to another model designed by us that replicated the company's manufacturing system and calculated the extended period fixed cost consequence of the engineering changes and related damages. (back to top)
We prepared the termination settlement proposal for a Defense 100 contractor after the client’s cost plus award fee contract was terminated for convenience after three years of performance but after only achieving the first milestone award.
We had been one of several selected for a presentation to management about their assessment of the best means to recover the client's profit. After all, as a cost type contract the client had received their costs but not any fee beyond the first milestone. Since the profit was back loaded on contract performance the first milestone award fee had been minimal.
Our approach was very different than the other presenters but then we were the only presenter who knew that recent court decisions on terminated award fee contracts were contrary to the approaches proposed by the other presenters.
When justifying the client's entitlement to additional profit, we recognized that the project had been delayed about three years as a result of customer directed design changes and delinquent customer deliveries of design data. The changes and delinquent customer deliveries entitled the client to equitable adjustments in the contract price and schedule under various contract adjustment clauses.
We quantified the amount of delay damages under the Eichleay formula, which is currently the exclusive means for quantifying delay damaging in Federal contracts, to be about $2 million. Because of the nature of delays, these costs would not have been recovered in the client's normal cost based billings. So, in addition to additional profit from the equitable adjustment the client was also entitled to additional costs.
With respect to the changed work itself, while the client had received the costs for the various design changes as part of the reimbursable cost of the cost plus award fee contract, the client had not been compensated for any fee that would be part of that equitable adjustment. We quantified the additional fee at about another $2 million for the additional profit that was part of the "equitable adjustment" provided for under the various entitling contract clauses.
With respect to the termination itself, in keeping with accepted quantification methods, we identified about another $2 million of unamortized indirect fixed costs and included those as settlement expenses.
With a termination settlement proposal exceeding $6 million, including undefinitized constructive changes, the client was able to settle its proposal for several million dollars which was considerably more than the client had expected after receiving its termination notice. (back to top)
A Fortune 500 defense manufacturer had seen its fixed price production contract switch from profitable to a loss position at around the midpoint of performance when an engineering design review had also occurred.
Although the design review occurred prior to the manufacture of any equipment, the evaluation was conducted at a level for reproducible, manufactured products and resulted in over 11,000 review comments from the customer's design review team. we used statistically sound methods to select a sample, review the comments and project their results to the population. Through this method we determined that over 90 percent of review comments exceeded the inspection standards applicable to the product at that point in development
The result of the excessive inspection increased the client's review and formal disposition of the comments. It also caused needless engineering effort since as actual production of the early prototypes occurred the results of numerous comments had to be totally redone.
The effect on engineering was not the only consequence of the excessive inspection. The customer's design review and creation of the 11,000 comments took several months longer than allowed under the contract's performance schedule. In fact, a stop work order was issued to provide the customer with time to create the 11,000 comments.
After release of the comments and resumption of performance no schedule extension was issued for the months of delay while conducting the design review. In fact, the work was even resequenced by the customer so that manufacture of completed units occurred prior to design completion and qualification acceptance testing. The lack of schedule extension was a constructive acceleration and the resequencing of the manufacturing prior to final design qualification caused considerable rework of completed units.
we quantified the consequence of these constructive changes and their related delays, disruptions and inefficiencies at around $13 million for which the client was able to negotiate a substantial settlement. (back to top)
In a Federal False Claims case involving prescription fills and refills by a pharmacy benefits manager traditional analysis methods had proved ineffective at finding instances of non-compliance. Fordham advised counsel about how computerized auditing techniques could be used to perform a hundred percent audit and find the non-compliant transactions without having to use the defendant's software or duplicate its computer systems. In the process Fordham advised counsel on the forms of ESI that would be required and how such data should be described and requested in Rule 34 production requests for electronic data.
The data that was produced as a result of the production requests, involved more than 30 database tables containing over 1 billion rows of data and representing production data for more than 100 million prescription fills and refills with their related billing data.
Fordham reviewed contract requirements to understand the performance requirements, the basis for penalties and establish an auditing baseline. As a result of his review, Fordham designed software tools to:
- review the produced data and reverse engineer its relationships and dependencies, since the defendant claimed that documentation of its custom developed software systems and data structures did not exist;
- determine the extent of data omissions in the produced population that were contrary to the government's production requests as well as the contract's data retention requirements; and
- develop computerized techniques for auditing each fill and refill for compliance with the contract terms.
While the defendant had claimed its compliance errors were few and amounted to only about $8,000 in penalties, Fordham's computerized audit uncovered several hundred thousand compliance failures that resulted in a settlement of over $150 million, which, at that time, was one of the ten largest healthcare recoveries under the False Claims Act. (back to top)
In a $60 million construction claim involving an EPA Superfund cleanup site, Fordham reviewed the documentation produced by the remediation contractor to support their claims for contract changes and delays and advised counsel on the forms of Electronically Stored Information (ESI) likely used by the contractor to quantify its claims and produce the related documentation that supported each of their claims. Fordham also advised counsel about how the data should be described and requested in discovery requests for the contractor's ESI at the corporate level, the project level and for other organizational subsidiaries that had participated on the project.
When the requested ESI data was produced Fordham determined that the productions of electronic data were incomplete. Fordham advised counsel about the indicators of the incomplete data and the kinds of deposition questions, interrogatory questions and request for admissions that should be asked in order to support motions to compel for production of the missing data along with source code and object code for the contractor's specially developed quantification system.
Analysis of the complete ESI data along with source and object code used by Plaintiff's custom claim quantification system revealed that the data had not been prepared contemporaneously as represented by the Plaintiffs and characterized as business records. In addition, Fordham's examination of the software code revealed that certain costs claimed were not based on costs incurred as claimed. Rather, they were based entirely on calculation and were over and above costs actually incurred. In addition, Fordham found that certain costs had also been claimed up to 9 different times as part of disputes that had been settled with other parties on the project, including the contractor's subcontractors, and that the amounts included in claims against the owner included the difference between total amount that had been claimed against the other parties and the amounts that had been reached in settlement with these other parties.
When examining the produced copies of certain source documents there were frequently obvious differences in presentation of the data. When these documents were compared to the corporate ESI, it became obvious from system metadata that the presentation differences corresponded to accounting entries made years after the fact during the claim development process and not contemporaneously as the contractor had represented.
Fordham devised a means to use the Plaintiff's own ESI claims data to perform a 100 percent audit of their claim quantification. Fordham's computerized audit identified claimed costs that were considered unallowable by the contract terms. The audit also reconciled costs claimed to actual costs incurred and corrected for costs that were "double counted". Fordham also noticed that costs allocated to the base contract work were not work related at all. Instead, the base contract had simply become the cost objective to which unallowable administrative costs had been allocated--presumably under the notion that since base contract effort was not in dispute it would never be analyzed. So, the contractor had essentially characterized allowable costs as changed work while characterizing unallowable administrative costs as base contract in order to sustain a higher claim recovery when only the type of costs was considered.
As a result of Fordham's computerized audit work, the Plaintiff's claim was reduced from 60 to 20 million dollars before consideration of liability and causation issues. (back to top)