Audit upheaval

Dinged reputations, valuationsamid the havoc contractors face

Unisys Corp. weathered a rocky couple of days in mid-October ? a news leak of a federal audit with allegations of overbilling on a major Homeland Security Department contract was followed the next day by a 19 percent drop in its stock price.

The company recovered most of its market valuation in the next several days. The amount of alleged inappropriate billing is relatively small, about 2 percent of the $1 billion contract, and company officials maintain they have done nothing wrong.

It's still an episode most contractors would like to avoid. Unfortunately, such disputes about billing are no longer unusual.

Federal contracts have become increasingly complex and, in cases related to homeland security, contracts often are negotiated with urgency. That combination increases the possibility of ambiguity, according to several procurement experts.

"We see many of these types of billing issues. They are common," said Alan Chvotkin, senior vice president of the Professional Services Council, a Washington advocacy group for the government professional and technical services industry.

Ironing out ambiguities about rates in advance can be difficult, Chvotkin said. "If there is urgency, you can see where it could be a factor," he said.

Chvotkin and other experts declined to speak about allegations concerning Unisys, because they said they are not privy to all the facts of the case.

However, they said they frequently encounter government contracting and billing disagreements in their work.

Unisys' roller coaster ride began Oct. 23, when The Washington Post reported findings of an audit by the Defense Contract Audit Agency alleging that the contractor overbilled taxpayers for as much as 171,000 hours worth of labor and overtime, charging up to $131 an hour for employees who were paid less than half that amount.

The Pentagon auditors questioned Unisys' hourly billing rates, including the $131 per-hour rate for a technical writer who should have been paid $46 per hour, The Post said.

The $1 billion contract calls for creating computer networks that will link federal employees at airports with networks run by the Transportation Security Administration.

Based on figures in The Post story, the amount of alleged overbilling would be about $22 million.

In its defense, Unisys said in an Oct. 24 statement that the concerns were being resolved.

"It is not unusual in complex government contracts for the government and the contractor to have issues arise regarding contract obligations," the statement said. "Working collaboratively over the past few months, Unisys believes most of the issues are being addressed ? to the initial satisfaction of our customer, TSA ? and with DCAA's review of the action plans."

The Post obtained the audit independently; it was not officially released by the audit agency.
A DCAA spokesman said agency officials declined to comment because DCAA had not released the report.

Unisys spokeswoman Lisa Meyer also declined to comment until the company receives the audit report.

"We don't have the full audit report," she said. "Portions that The Post has are not in our version."

On Oct. 24, Unisys stock price fell from $5.55 per share to $4.48 per share, a drop of 19 percent. By week's end, it was trading at $5.05 per share.

Contracting experts said the Defense Department audit agency's role is to advise a contracting officer. As such, its audit findings often raise concerns that are subject to revision, and even reversal, after additional investigation.

"In the Defense Contract Audit Agency reports, it's not at all uncommon for there to be flaws in their analysis," said Rand Allen, who is a partner at Wiley, Rein & Fielding, a law firm in Washington. "It is the first step on the path toward resolution, and it is not uncommon for the resolution to be inconsistent with the audit agency's report.

"The audit reports should be thought of as raw data," he said. "It's not fair to the contractor" to be judged on such reports, he added, which is why the audits should not be leaked to the press.
Disputes over allowed costs are frequent, and contract officers often overturn auditors' findings, said John Chierichella, partner at Sheppard, Mullin, Richter & Hampton, a law firm in Washington.

"There is a big gap between what is questioned and what is disallowed," he said. "You have to make that distinction."

Many time-and-materials government contracts involve disagreements over what types of costs are allowed and whether people were fully qualified for their pay categories, said Karen Manos, partner with Howrey, Simon Arnold & White, a law firm in Washington.

"Those are the classic sorts of disputes. A lot of the time, it's a judgment call," she said.

When an audit report ? particularly a draft report without apparent input from the contractor ? is released unofficially to the press, it can have a large negative impact, Chierichella said. Although such leaks are prohibited, and in cases of releasing company trade secrets they may be treated as criminal offenses, such cases rarely are prosecuted, he said.

"The damage is done," Chierichella said. "And it's hard to quantify damage to a reputation."

Staff Writer Alice Lipowicz can be reached at alipowicz@postnewsweektech.com.

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