The Costs of Unmet Contractual Obligations: $100 Million in Questionable Costs

When contracting errors become public, contract professionals have an opportunity to learn how to avoid similar mistakes. A recent example: As reported in the Washington Post*, a United States Defense Department inspector general’s report found that a "major defense contractor 'did not properly charge labor rates' for a counter-narcoterrorism contract, and that the Army agency in charge of the contract did not ensure that the people performing the work had the necessary qualifications." Over $100 million in questionable costs were charged to the government, according to the report.

Unpacking and unraveling the many sources of alleged overbilling is beyond the scope of this blog. However, several aspects of the report remind us of problems that all contract managers face regarding managing their contractual obligations, problems that contract management software  is designed to reduce or eliminate.

More specifically:

Problem: Millions of dollars in improper billing by the defense contractor are directly related to inadequate qualifications of the employees who billed for the work. Of 460 employees working under the contract, 360 “did not meet the specified labor requirements, leading to $91.4 million in questionable costs." In one case, an employee who lacked a bachelor’s degree, a requirement for the position, was responsible for over a million dollars in alleged improper billing.

Solution: Either party – the service provider or the contracting agency – needs a way to properly manage the contract, surface the obligations, and ensure that the obligations are met. The purchasing party (the Army), at a minimum, needs to identify proof or assurance of employee qualifications as an obligation of its counterparty. The counterparty (Northrup Grumman and its subcontractors) must record the certifications of employees and contractors, and flag those individuals whose qualifications are undetermined, and in turn, fulfill its own obligation to provide assurance of employee credentials. In this case, the obligation is with respect to managing qualifications and billing rates, but obligations can be anything – from reporting on spend under the contract to completing work by a certain date.

With limited time to check on the sub-contractors and contracted employees, managers need contract management software that can capture and track this type of contractual obligation. At a minimum, the requirement to provide properly credentialed employees can be memorialized in an obligation that the service provider meets and the contracting agency checks. In some cases, scans of the relevant proofs of qualifications (such as degrees or certificates) can even be entered into contract management software as evidence that an obligation of this kind has been met. Ordinary construction contractors track certificates of insurance for their subcontractors every day, often with contract management software. School systems and social service agencies capture credentials and background information for thousands of employees working with children, again using electronic tools that allow for reporting and transparency. Sophisticated defense operations, employing similar tools, can do the same.

At a higher level of analysis, according to the same Washington Post article, the Defense Department inspector general’s report "faulted the contracting agency, the Army Contracting Command-Redstone Arsenal, for not verifying that minimum labor requirements were being met and instead relying on Northrop Grumman 'to verify that those employees were qualified to accomplish the required work.'" This criticism points to a fact of life in any contractual relationship: both sides need to track obligations, their own and their counterparty’s. Undoubtedly this kind of mistake keeps many contract managers up at night. With limited time and resources, how many obligations must be verified as complete or met, and how many can be safely assumed to have been met?

Obviously, a robust contract management staff with experience and detailed reviewing policies has a better chance of catching this missed obligation than, say, a stretched staff of reviewers with multiple responsibilities. But since time and experience are always in limited quantity, in every organization, it is vital to gain a technological edge on contractual obligations with contract management software. At a minimum, the software should serve as a single repository for contracts (and also for related documentation from subcontractors and the subcontractors’ employees as they relate to the contract). Ideally, the software should allow contract managers to track obligations in a dashboard and be alerted to unmet employee qualifications (such as proof of employee qualifications).

By keeping contractual obligations in front of contract managers with assigned ownership and due dates, all parties to a contract stand a better chance of living up to the agreement.

f your business counts on contracts to function, it makes sense to consider getting Contract Management Software. If you’d like to learn more about our Contract Management Software for businesses that run Microsoft 365, please don’t hesitate to reach out to us or even better, request a demo, and we can show you how it works in real-time.  

* "Northrop Grumman improperly charged government more than $100 million, IG says," by Christian Davenport, Washington Post online edition, May 19, 2014.