Court revives false claims lawsuit against Triple Canopy for unqualified Ugandan guards at Al Asad Airbase, Iraq

January 19, 2015 | Justice Abroad, The Danger Zone

Last week brought a new development in a nearly four-year-old fraud lawsuit accusing private security firm Triple Canopy of providing security guards in Iraq who lacked basic firearms proficiency.

In March 2011, former Triple Canopy employee Omar Badr filed a False Claims Act (FCA) lawsuit alleging the company billed the government for hundreds of Ugandan guards at Al Asad Airbase who did not meet the U.S. Army’s qualifying marksmanship score. The Justice Department intervened in Badr’s lawsuit in October 2012.

Continue Reading ▼

Supreme Court denies KBR, Inc. claim to be reimbursed $41M for unpaid dining facility services in Iraq (LOGCAP III)

January 16, 2015 | Justice Abroad

Supreme Court of the United States (“Supreme Court”) denied Kellogg Brown & Root, Inc.’s (“KBR“) fight to recover $41 million in disallowed subcontractor costs incurred in performance of dining services in Iraq, bringing an end to KBR‘s longrunning claim litigation.

Of significance for other contractors, the Supreme Court’s denial leaves intact the decision by the Federal Circuit, Kellogg Brown & Root Servs., Inc. v. United States, opinion corrected on denial of reh’g, 563 F. App’x 769 (Fed. Cir. 2014) and cert. denied, 13-1558, 2014 WL 2919328 (U.S. Oct. 6, 2014) (KBR I), wherein the Federal Circuit discussed at length the significant regulatory discretion invested in the Government when assessing cost reasonableness. KBR I has caused a great deal of concern in the contracting community because it undermines contractors’ real-time business judgments about cost reasonableness.

Continue Reading ▼

The underlying dispute stemmed from a cost-reimbursement contract between KBR and the DOD, under which KBR was required to provide dining services for up to 50,000 troops in support of military operations in Iraq. As the military action escalated, however, the dining service requirements quickly and dramatically expanded to supporting 200,000 soldiers at 56 sites throughout Iraq.

After a “disastrous” attempt to self-perform certain portions of the expanded contract, KBR engaged a subcontractor, Tamimi Global Company, (“Tamimi”) to provide dining services at one of the Army camps and sought payment for those subcontractor services. The Defense Contract Audit Agency (“DCAA”) subsequently audited KBR and determined that KBR incurred $41 million in unreasonable subcontractor costs between July and December 2004. Acting on DCAA’s audit report, the contracting officer then withheld $41 million from payment to KBR. KBR filed a claim against the agency, which the Government denied, and then filed its claim appeal with the COFC. The COFC denied KBR‘s claim, adopting DCAA’s position that the costs were unreasonable because KBR did not engage in effective bargaining with Tamimi. The Court noted that although KBR‘s failed attempt at self-performance undermined its negotiating position, that complication did not mitigate KBR‘s failure or inability to negotiate better service rates with Tamimi.

Before the Federal Circuit, KBR argued that DCAA, the contracting agency, and the COFC impermissibly second-guessed KBR‘s business judgment in a wartime environment, contending that contractor’s cost of performance should be presumed reasonable unless the result of “gross misconduct,” “arbitrary action,” or “a clear abuse of discretion.” In substance, KBR advocated for application of the “business judgment rule” (a fundamental corporate law doctrine) to cost reasonableness determinations. The Federal Circuit rejected KBR‘s position, noting that earlier precedent deferring to contractor cost judgments does not outweigh the regulatory flexibility embodied in the cost principles contained in Federal Acquisition Regulation Part 31.

Now that the Supreme Court has denied certiorari and the Federal Circuit’s decision is final, contractors, subcontractors, accountants, auditors, and counsel must adapt to the newly recognized regulatory discretion held by all agency contracting personnel who are called upon to make cost reasonableness determinations. A few important aspects of theKBR decision may prove helpful to that adaptation process:

Documentation. Well-documented subcontractor price negotiations and flowdown provisions. KBR‘s exposure resulted from subcontract terms negotiated in and around the exigencies of a war zone at a time when performance was urgently needed. These unique circumstances left KBR without a comparable private marketplace benchmark for establishing cost reasonableness. KBR was forced to rely solely on its record of subcontract negotiations and the subcontract itself to establish reasonableness. Taking KBR‘s lessons learned to heart, cost-reimbursement contractors that are considering subcontracting should (i) look early (even at the time of proposal preparation) for a commercial market benchmark against which to make outsourcing price comparisons, and where no such counterpart exists, (ii) develop and pursue a robust plan for conducting and documenting subcontract negotiations, to include specially tailored clauses that enable the contractor to claw back costs paid and subsequently disallowed by the agency.

Burden of Proof. KBR I preserves the fundamental tenet that the burden to prove cost reasonableness always falls on the contractor. To meet that burden, contractors performing on large complex cost reimbursement contracts should expect and prepare for cost controversies and claims with the Government by meticulously documenting costs in order to justify their claim.

No Business Judgment Rule. The KBR I court took a dim view of KBR‘s argument that the costs were not unreasonable and were not the result of gross negligence.

Second-Guessing — the New Standard. Cost-reimbursement contracts are now even more susceptible to agency second-guessing. Contractors should consider stepping up their administrative efforts to justify and document costs to mitigate the risk of material second-guessing during audit and closeout actions.

Department of State critized for not implementing accountability initiatives for Private Military Contractors

January 12, 2015 | Justice Abroad

Despite the volume of accountability initiatives and the involvement of various governmental bodies, it is still unclear what will guide the selection of armed contractors for future conflicts. Back in May 2012, for example, the then US Deputy Assistant Secretary of State for Democracy, Human Rights, and Labor, Daniel Baer, gave a speech at a conference in London hosted by the UK Foreign and Commonwealth Office and the Security in Complex Environments Group (SCEG).

Continue Reading ▼

In the question and answer period, he was asked directly whether the United States Department of State, on whose contracts most of the major scandals of the Iraq and Afghanistan wars had occurred, had any intention of using the various regulatory initiatives in which it was participating as a prerequisite for its own procurement. He could not respond in the affirmative and was unable to shed light on how the State Department would proceed to incorporate accountability measures.
Two years later, following extensive internal and external discussions, the State Department has said it will incorporate PSC.1 compliance and ICoCA membership into its next major contract, but it has not yet done so.

In contrast, the 2011 US National Defense Authorization Act (NDAA) mandated that the Department of Defense develop and implement business and operational standards for private security contractors. Given that the Department funded the ANSI PSC Standards Series, it is not surprising that conformance to the Standards is now a prerequisite for procurement.

This is a significant change from the approach of the last decade. Lowest Price Technically Acceptable (LPTA) is the regulatory requirement often invoked for selecting contractors on government contracts. In many ways, LPTA contracting is the bureaucratic response to concerns about waste in government expenditure. Ironically, it restricts the focus to cost, rather than quality or accountability, under the guise of “value.” The great advantage of the NDAA 2011 requirement that private security companies be certified to a standard in order to be eligible for procurement is that it mitigates the LPTA requirements. Prior to that requirement, if fifty companies bid on a contract, under the LPTA metric the government might have been forced to choose the contractor technically able to perform most cheaply, but likely to perform badly on other important but harder-to-measure dimensions, such as incorporation of international law and human rights norms into operating procedures. Today, on an identical contract, there may only be three or five companies that have managed to go through the certification process to even be able to bid. The legal requirement of NDAA 2011 has infused quality and accountability into the procurement process while still emphasizing “value.”

This schism between US State Department and Defense Department contracting brings up the first issue that the next wave of wartime contracting will face. Governments are not homogenous entities. So while a country may be participating in the Montreux Document, may hold a spot on the Montreux Document Forum, may hold a seat on the ICoCA and may publicly advocate the UN Guiding Principles, differences of process and priority among different government departments may lead to a cluttered battlefield with higher price, higher quality, more accountable contractors alongside low cost, low quality, unaccountable contractors working for the same government.

The second issue, as has been noted, is that these initiatives do not comprehensively address all the issues that have arisen to date. The various initiatives have been and will continue to be extremely helpful in raising the professionalism, quality, accountability and reliability of the industry, but they will not resolve murky areas of legal twilight. Even under the accountability initiatives, there is still a chance that issues will arise that are simply not covered. There is the potential, therefore, that incidents involving “certified” contractors will carry substantial backlash against all the accountability initiatives. Legal issues not addressed by the regulatory initiatives could lead to some or all of the initiatives being tarnished or even abandoned for ineffectiveness, reverting the process of selection back to a simple determinant of lowest cost.

Finally, many of these regulatory initiatives were designed to address what happened in Iraq and Afghanistan between 2001 when the Coalition entered Afghanistan and 2010 when the ICoC was completed. They do not address future issues that may arise. As noted, the current initiatives form a disconnected patchwork plagued by gaps and uncertainties. As new operations unfold, the initiatives will need to be revisited to make sure that the standards being set match the operation of the industry. Otherwise, a government may be selecting based on quality, but quality for the wrong job.

TO BE CLEAR

The proliferation of private armed contractors in zones of armed conflict was followed by a proliferation of initiatives aimed at establishing accountability for the industry. Some of those initiatives, paired with new procurement rules for government departments in several countries, have shifted the focus from cost to accountability in selecting companies to provide armed security.

As the world faces a likely upsurge in this sort of contracting, it remains to be seen whether the extensive regulatory, governance, and oversight efforts of the last decade will prove effective in ensuring higher quality, more responsible armed contractors, or whether gaps in the system will lead to the rejection or circumvention of those accountability measures in favor of the lowest priced contractors. Failing to address these foreseeable complications may prove detrimental to the private security industry, to the credibility of governments employing armed contractors, and to the overarching aims of international security.

Article by: Dr. Ian Ralby is a recognized expert on the regulation, governance and oversight of private security companies and has been advising governments on the subject for over five years — "Accounting for Armed Contractors" at FLETCHER SECURITY REVIEW

Addtional Sources: Ike Skelton National Defense Authorization Act of 2011, Pub. L. No. 111-383, available at http://www.gpo.gov/fdsys/pkg/PLAW111publ383/pdf/PLAW111publ383.pdf