Dispute over government audit rights in hybrid contracts

Tom Temin HCM’s contract with the Department of Energy was mixed. Parts of it were a fixed price and parts of it were a surcharge. So when it wanted the Department of Energy to see its internal records, the company was apparently concerned that the Department of Energy would see its fixed-rate records, which is not the government’s business. Is this the essence of all this?

And Ramesh correct. Tom HPM had a mixed contract and the Government believed it was entitled to see costs on the House cost side and on the House fixed price side. The Board did not fully respect this line of separation, which they should have followed under the terms of the FAR in question. There was a proxy clause that could have been the basis for ownership, but the board went further and muddied the waters as to what records the government could obtain.

Tom Temin The Defense Contract Audit Agency was the arbitrator here. Why was DCAA involved in a civil contract or was it with a nuclear energy lab?

And Ramesh So sometimes civilian agencies hire DCAA to act as auditor because of its expertise in this field, even though the contract is with civilian agencies. So, in 2019, the Department of Energy did just that using HPM. HPM was here a contractor providing professional medical services at the Hanford, Washington, location.

Tom Temin right. There is a fourth agency that I did not attend, which decided that this is the Civilian Board of Contract Appeals. DCAA and DoE were somewhat cooperative. HCM didn’t like what they were doing between these two and took the matter to the Civilian Contract Appeals Board.

And Ramesh correct. So we actually talked about this over the summer, Tom. There was a question about non-cash claims. So this is a non-monetary claim by the contractor. The DOE was seeking cost records related to the fixed-price portion of the hybrid contract. There were actually two different audits. One was done by DCAA in 2019, and then the auditor, Cohen Resnick, reviewed their contract records for 2020 and the DOE contracting officer said, Hey, I want to see everything you’re presenting to the auditors. HPM said: No, these are company records. Records relating to the fixed-price portion of the contract You have no business to see. As I said, there is no right under the terms of the contract. This resulted in a non-monetary claim being submitted to the DOE Contracting Officer. The contracting official denied the allegation and said the DOE was entitled to the records on the fixed price side as well. At that point, the contractor appealed to the Civil Contract Appeals Board.

Tom Temin The records were to be provided to the Department of Energy by the Defense Contract Audit Agency.

And Ramesh Well, that was another kind of controversy here. Dio said the contractor should provide the records directly to the agency’s contracting officer, and HPM said, well, to the extent DCA needs to provide or identify them to DoE. If he needs to know some of this information, we agree to pass it on, but we have no obligation to provide it to the Department of Energy.

Tom Temin But the Department of Energy said we need to see everything. So DCAA said okay.

And Ramesh Yes. This is certainly not an uncommon position on the part of government auditors.

Tom Temin certainly. Well, when dealing with another fellow government agency, they are almost as cooperative. We’re talking to Dan Ramesh. He’s a purchasing attorney at Heinz Bohn. So, what did the Civil Contract Appeals Board actually decide next?

And Ramesh The Civil Board of Contract Appeals therefore first had to decide whether this was a valid non-monetary claim. Therefore, most claims are for financial damages under the Contract Disputes Act. And the agency here said, well, this is really a cash claim because based on the denial of access to these fixed rate cost records, we’re going to remove all of the contractors’ unsupported costs and indirect costs and temporary billing rates. Ultimately, it comes down to that money and whether we are entitled to recover some of it or refuse to pay it. And the civic council said, well, that’s not really the case. This deals with the issue of performance of the contract. If we decide in favor of contractors, they will not have to provide these records. This is an appropriate basis to support a non-monetary claim. It is an important and non-critical outcome of the claim. So the board said we have jurisdiction over this cashless issue. Then they looked at the contract and the government’s audit rights under the contract, and there were three different provisions. Two of them are standard clauses dealing with the government’s right to access records, and the permissible cost and payment clause, which is intended for flexible price contracts, cost-plus contracts, time and materials contracts and other contracts with flexible prices, audit and evaluation. Records Negotiation Clause, which provides various audit rights. But the audit rights involved under this clause relate to flexibly placed contracts. And then there was a third provision which was specifically DEAR or Department of Energy provision 975.2043, which the agency said, well, this provision also provides us with access to those records. The contractor disagreed. The two standard provisions of the FAR only apply to the cost type portion of this hybrid contract, not the fixed-price contract, HPM said. When you have a fixed price, part of the contract is treated completely separately in these hybrid contracts and there are no audit rights extending to the fixed price part. And then they said in terms of the DOE provision, that was really for EHS records and not just anything under the contract. The council generally disagreed with the contractor’s position. They said that while the DEAR clause may be somewhat specific to EHS records, the language of the clause gives the government broad rights to access different types of records without those types of restrictions. So they could have stopped there and said, we’ll deny the appeal for failure to state the claim because this specialized DOE provision provides access to records that the government wants. But instead, the Board said, “In fact, we are not prepared to say that the Standard Allowable Cost and Payment Clause or the Order Records Clause do not allow the government access to any records related to the fixed-price portion of the contract.”

Tom Temin Therefore, the government would have the right to obtain the records under the fixed-price portion of the contract.

And Ramesh correct. These three provisions would potentially give access to fixed price records, which is a big problem because there is already a dividing line, the board said. This is a fundamental aspect of fixed price contracting that the government doesn’t have unless you’re talking about a certified cost for pricing data scenario, which was clearly not the case here. Other than in this scenario, the government does not have access to cost records related to fixed price contracts, and the fixed price claimed in a hybrid contract is the same thing.

Tom Temin What would motivate an experienced contracting employee to believe that he or she could have records on a fixed-price contract in the first place?

And Ramesh This is a great question. So HPM had a theory as to why DOE wanted these cost records for the fixed price portion. They said the DOE did not request costs to verify the costs and that they were calculated correctly, but they did want the information to help with a new follow-up contract request for fixed-rate services that HPM was providing. So they wanted their cost data to be competitive with other contractors.

Tom Temin Yeah, that’s really on the edge of kosher, isn’t it?

And Ramesh The board looked into it and was not sympathetic to the contractor, but I think most contractors would be very upset about that. The idea that the government is going overboard and demanding cost records on a fixed-price contract without proper access, and also that they’re doing it for this kind of nefarious purpose.

Tom Temin Yes. Did the Department of Energy obtain those records?

And Ramesh Ultimately, the Civilian Board of Contract Appeals denied the appeal. So the Department of Energy could have had the ability to obtain the records or they could have taken the remedial measures that they were talking about and recovered some of the costs or refused to pay some of the indirect costs to the contractors.

Tom Temin So the lesson for contractors is to not do fixed-price work for DOE thinking they can’t go fishing in your internal books.

And Ramesh Well, Tom, I think there’s a good argument to be made that the language about audit clauses, record books, allowable costs and payment clauses wasn’t really necessary for ownership. The Civilian Council could have kept the matter in compliance with the DOE’s specialty provision. So I think this is the position that contractors are likely to take in future disputes. But anytime, you know, boards move away from the standard interpretation of FAR provisions, it creates uncertainty, confusion and risk for contractors.