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DEFENSE CONTRACT AUDIT AGENCY AUDIT REPORT NO. 1271-2004D17200004
August 6, 2004 PREPARED FOR: Federal Bureau of Prisons (BoP) ATTN: Mr. William Robinson, Assistant General Counsel Office of General Counsel Commercial Law Bureau 320 First Street, N.W. Ninth Floor Washington, DC 20534 PREPARED BY: DCAA Tampa Bay Branch Office 14450 46th Street North, Suite 106 Clearwater, FL 33762-2921 Telephone No. (727) 533-2120 FAX No. (727) 535-9966 E-mail Address [email protected] Report on Audit of Price Adjustment Claim Contract No: J200C-397 Claim No: 01-639c, Count 8 Relevant Dates: See Page 10 DCAA Chron No: 4-4051 Bannum, Inc. 8726 Old County Road 54, Suite E New Port Richey, FL 34653-6464

SUBJECT: REFERENCES:

CONTRACTOR:

REPORT RELEASE RESTRICTIONS: See Page 11 CONTENTS: Subject of Audit Executive Summary Scope of Audit Results of Audit Contractor Organization and Systems DCAA Personnel and Report Authorization Audit Report Distribution and Restrictions Appendix ­ Chronology of Significant Events Page 1 1 1 2 9 10 11 12

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Audit Report No. 1271-2004D17200004 SUBJECT OF AUDIT As you requested on March 19, 2004, we performed an examination of the Bannum, Inc.'s (BI) $339,412 price adjustment claim (Claim No. 01-639c; Count 8) for alleged damages suffered as a result of the Government's dealing with the Montgomery transportation issue and the alleged improper non-exercise of options to determine if the claimed costs are acceptable as a basis for settlement. The claim was submitted pursuant to the Contract Disputes Act of 1978, 41 U.S. C. 601-613. BI submitted the claim, dated September 12, 2002, under Contract No. J200C-397 for community correction center services. During the course of our audit, Bannum, Inc. provided a revised claim totaling $371,918. We audited the revised claim. The price adjustment claim and related cost or pricing data are the responsibility of the contractor. Our responsibility is to express on opinion on the claim based on our examination.

EXECUTIVE SUMMARY Our examination of the $371,918 revised claim disclosed $371,918 of questioned costs, including the following significant element of cost. Lost Overhead & Profit $293,892

The revised claim is acceptable for negotiation of a fair and reasonable price. However, the significant issues described below should be considered in the negotiation process. SIGNIFICANT ISSUES: We questioned the total Lost Overhead & Profit amount of $293,892 because BI's Montgomery Contract No. J200c-397 was replaced with a new Contract No. J200c-562 and there was no interruption of BI's revenues for this facility and no loss of revenues. Additionally, the BoP was under no obligation to exercise any options under the original contract.

SCOPE OF AUDIT We conducted our examination in accordance with generally accepted Government auditing standards. Those standards require that we plan and perform the examination to obtain reasonable assurance that the price adjustment claim is free of material misstatement. An examination includes: x x x evaluating the contractor's internal controls, assessing control risk, and determining the extent of audit testing needed based on the control risk assessment; examining, on a test basis, evidence supporting the amounts and disclosures in the price adjustment claim; assessing the accounting principles used and significant estimates made by the contractor;

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Audit Report No. 1271-2004D17200004 x x evaluating the overall price adjustment claim presentation; and determining the need for technical specialist assistance.

We evaluated the claimed costs using the applicable requirements contained in the: x x x Federal Acquisition Regulation (FAR) Justice Acquisition Regulation (JAR) Bureau of Prisons Acquisition Policy (BPAP)

The contractor claims exemption under 48 CFR 9903.201-1(b)(3) from the practices required by the Cost Accounting Board rules and regulations because it considers itself a small business concern. The contractor is a small business with limited resources to be applied to compliance procedures and testing. We have not reviewed Bannum's accounting system and its related internal controls. The scope of our examination reflects this assessment of control risk and includes those tests of compliance with applicable laws and regulations that we believe provide a reasonable basis for our opinion. Entitlement is a legal matter; therefore, we did not consider entitlement issues in our audit of the contractor's price adjustment proposal. A legal review is required to determine whether the contractor has been impaired by government action or inaction and therefore has a right to a monetary adjustment. Our audit was limited to review of the amount of the proposed monetary adjustment in the event that the allegation of entitlement is proven.

RESULTS OF AUDIT In our opinion, the cost or pricing data submitted by the offeror are inadequate in part (see comments in the Explanatory Notes). However, the inadequacies described are considered to have a limited impact on the subject proposal. Because the inadequacies are considered relatively insignificant, we believe the proposal is an acceptable basis for negotiation of a fair and reasonable price. We have questioned the revised claimed amount of $371,918 in its entirety. The detailed conclusions and recommendations resulting from our examination are presented below.

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Audit Report No. 1271-2004D17200004

Element of Claim Lost Overhead & Profit Estimated administrative effort Estimated clerical labor, etc Bannum Labor Costs: Facility Staff Mid-Mgmt (G&A) Clerical (G&A) Exec Mgmt D. Lowry (G&A) Exec Mgmt A. Rich (G&A) Telephone, mail, copies, etc Unamortized Leasehold Improvement Legal Fees-Camardo Legal Fees-Piliero Travel Total Claimed

Contractor's Claim 9/12/2002 6/21/2004 Complaint Revision (Note 1) $293,892 $293,892 19,615 1,400 211 9,615 736 8,800 4,800 798 22,588 20,096 8,426 1,956 $371,918

Results of Audit Quest. Revised Claim Note $293,892 2

22,588 1,917 $339,412

211 9,615 736 8,800 4,800 798 22,588 20,096 8,426 1,956 $371,918

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Explanatory Notes 1. Contractor's Revised Claim

During the course of our audit, Bannum, Inc. (BI) provided a revised claim. We audited the revised claim. 2. Lost Overhead & Profit a. Summary of Conclusions:

We questioned the total claimed amount of $293,892 because BI's Montgomery Contract No. J200c-397 was replaced with a new Contract No. J200c-562 and there was no interruption of BI's revenues for this facility and no loss of revenues. Additionally, the BoP was under no obligation to exercise any options under the original contract. We also consider the contractor's claimed lost overhead and profit to be a contingency, which would be unallowable under FAR 31.205-7. b. Basis of Contractor's Cost:

According to BI, the BoP withheld the exercise of Option Years 2 and 3 of the Montgomery Contract No. J200c-397 because the BoP improperly and wrongfully alleged that BI was not meeting the transportation needs of the program participants.

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Audit Report No. 1271-2004D17200004 BI computed the claimed amount as follows: Option Yr 2 & 3 Lost Revenue Lost Profit and Overhead @ 28% $1,049,612 $ 293,892

The contractor did not provide any verifiable actual cost data to support the claimed estimated 28 percent profit and overhead rate. c. Audit Evaluation:

The unexercised option years were for GFY 2002 and 2003 with a total of 20,805 estimated man-days @ $50.45 per man-day. We noted that this contract was replaced by Contract No. J200c-562 with a base period of GFY 2002 through 2003, with 21,900 estimated man-days at $60.45 per man-day. Thus, BI did not have a loss of revenue. In fact, it appears the replacement contract provided for more revenue than would have been realized if the option years were exercised. In addition, the BoP was under no obligation to exercise any options under the original contract. We also consider the contractor's claimed lost overhead and profit to be a contingency which would be unallowable under FAR 31.205-7. According to BI's representative, Mr. David Lowry, there was no interruption of revenues for the Montgomery facility. 3. Bannum Labor Costs a. Summary of Conclusions: We questioned the total revised claim amounts because: x x BI did not have any verifiable data, including timesheets or time logs that identify the claimed effort, to support the claimed hours. According to Mr. Lowry, Executive Director, none of Bannum's payroll costs were increased as a result of any alleged effort regarding the claim. All employees were paid the same annual salaries or wages, regardless of whether the employee was doing any work associated with the claim or other work. Thus BI did not have any increased labor costs and we questioned the claimed amount. The claimed hours include an indeterminable number of estimated hours to support the claim, which are unallowable per FAR 31.205-47(f)(1).

x

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Audit Report No. 1271-2004D17200004 b. Basis of Contractor's Claim: Claimed Hours Rate Total 10 $ 21.07 $ 211 405 40 80 40 575 23.74 18.41 110.00 120.00 9,615 736 8,800 4,800 $24,162

Bannum Labor Facility Staff G&A Labor: Mid-Management Clerical D. Lowry, Exec. Dir. A. Rich, Chairman Total Bannum Labor

According to BI, the BoP withheld the exercise of Option Years 2 and 3 of the Montgomery Contract No. J200c-397 because the BoP improperly and wrongfully alleged that BI was not meeting the transportation needs of the program participants and is claiming estimated labor costs for the alleged added/abnormal contractual work effort. The claimed hours are based solely on estimates. The claimed labor rates for facility staff, mid-management, and clerical labor are based on the actual base labor rates, plus an approximate estimated 49 percent loading factor (for payroll and unemployment taxes, Workman's Compensation, medical insurance, and vacation, holiday, and sick pay) and an estimated 28 percent rate for G&A/Profit. The claimed labor rates for D. Lowry and A. Rich are estimated rates. According to BI, "Considering that the Office of Federal Procurement Policy allows compensation for senior executives under Government contracts to be $186.00 per hour, Lowry and Rich's rates of $110.00 and $120.00, respectively, are extremely reasonable." c. Audit Evaluation:

BI did not have any verifiable data, including identification of the dates the alleged labor was incurred and timesheets or time logs that identify the claimed effort, to support the claimed hours. In addition, according to Mr. Lowry, Executive Director, none of Bannum's payroll costs were increased as a result of any effort regarding the claim. All employees were paid the same annual salaries or wages, regardless of whether the employee was doing any work associated with the claim or other work. Thus BI did not have any increased labor costs and we questioned the claimed amount. We also noted that BI's revised claimed labor costs were substantially higher than in the September 12, 2002 amended complaint. We asked the contractor's representative, Mr. David Lowry, Executive Director, why there was an increase. Mr. Lowry's written response was "In the REA's and claims which Bannum filed, we estimated, based on the best information available at the time, the number of hours which executive and middle management spent on each count, to include central office clerical support and support of staff at the facility level. Obviously, the extra work effort involved in each count did not stop at the time of filing the REA 5 FOR OFFICIAL USE ONLY

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Audit Report No. 1271-2004D17200004 or claim. In fact, several of the claims involved extra contract work several years after the REA and claims were filed. In preparing for the DCAA audit, Bannum staff reviewed all the REA's and claims and voluminous correspondence, documents and costs associated therewith. Accordingly, we determined that more hours were expended by middle and executive management and central office clerical staff and facility staff than were originally estimated in the majority of cases. Therefore, Bannum has now provided what we believe to be a more accurate estimate of hours". The indeterminable estimated hours that Bannum included for supporting the claim are unallowable per FAR 31.205-47(f)(1). We found that the estimated 49 percent loading factor is based on inflated estimates. In addition, the claimed G&A labor costs (excluding G&A/Profit) are duplicated in BI's G&A expenses, which are included in the claimed 28 percent G&A/Profit rate. BI did not provide any actual cost data to support the claimed 28 percent rate, including separate identification of the G&A and profit rates. Also, BI did not provide an appropriate G&A rate which excludes the G&A expenses claimed as direct costs including labor costs, travel, and legal expenses. Should the BoP determine there is entitlement to claimed labor hours, we computed recommended average labor rates, shown below, based on: x x x Actual hourly base labor rates. A 23.3 percent fringe rate based on BI's recorded costs for salaries, payroll and unemployment taxes, workman's compensation, and medical from CY 1998 to CY 2000. A 10 percent G&A rate based on BI's recorded allocation bases (operating expenses) and G&A expenses (adjusted for unallowable interest expense, G&A labor costs claimed as direct costs, and the total legal expenses which are either claimed as a direct cost or have no causal/beneficial relationship to the subject claim) from CY 1998 to CY 2000. Facility Staff G&A Mid-Mgmt G&A Clerical D. Lowry A. Rich $12.08 $15.52 $13.10 $33.91 $81.14

x x x x x 4.

Telephone, Mail, Copies etc. a. Summary of Conclusions:

We questioned the $798 claim because we could not determine from the documentation provided that the costs were incurred for this claim.

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Audit Report No. 1271-2004D17200004 b. Basis of Contractor's Claim:

The $798 claim purportedly represents telephone, shipping, and copy costs related to the door replacement issue. c. Audit Evaluation:

BI's support consisted of a list of charges for $698. BI did not provide any support for the remaining $100 of the claim. We could not determine that the costs were incurred for this claim from the documentation provided. 5. Unamortized Leasehold Improvement a. Summary of Conclusions:

Since there was no loss of revenue, there were no unamortized leasehold improvement costs. Therefore, we questioned the total claimed amount of $22,588. b. Basis of Contractor's Cost:

According to BI, since the two option years were not exercised, BI's leasehold improvement costs were not amortized for the two year period and estimated $22,588 for the claimed unamortized leasehold improvement costs. BI did not provide any verifiable cost data to support the claimed amount. c. Audit Evaluation:

Since there was no interruption in BI's revenues from this facility (See Note 2 above), it had no unamortized leasehold costs and we questioned the entire claimed amount. 6. Legal Fees-Camardo a. Summary of Conclusions:

We questioned $18,171 of the $20,096 claim for legal fees for protests of Federal Government solicitations which are unallowable per FAR 31.205-47(f)(8). Since all of the other claimed elements were questioned for the reasons stated in the above notes, we consider the remaining $1,925 claimed attorney's fees unreasonable and questioned the claimed amount. b. Basis of Contractor's Cost: The claimed amount represents paid attorney invoices associated with the transportation issue.

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Audit Report No. 1271-2004D17200004 c. Audit Evaluation:

The claim was submitted April 9, 2001. We found that the claimed costs include $18,171 for protesting the Montgomery re-solicitation. $10,916 of the $18,171 claimed amount was for fees subsequent to filing of the claim. All of the re-solicitation protest fees are unallowable per FAR 31.205-47(f)(8). We verified the $1,925 pre-claim fees to the attorney invoices. However, since all of the other claimed elements were questioned for the reasons stated in the above notes, we consider the remaining $1,925 claimed attorney's fees unreasonable and questioned the claimed amount. We also noted that there was no mention of claimed costs for the re-solicitation protest fees in the complaint. 7. Legal Fees-Piliero a. Summary of Conclusions:

Since all of the claimed elements were questioned for the reasons stated in the above notes, we consider the $8,426 claimed attorney's fees unreasonable and questioned the claimed amount. In addition, we could not determine what the services were for from the documentation provided. FAR 31.205.33 states that, to be allowable, fees for services rendered must be supported by evidence of the nature and scope of the service furnished. b. Basis of Contractor's Cost:

The claimed amount represents paid attorney invoices allegedly associated with the transportation issue. c. Audit Evaluation:

We reviewed BI's supporting documentation and could not determine what the services were for. FAR 31.205.33 states that, to be allowable, fees for services rendered must be supported by evidence of the nature and scope of the service furnished. Since all of the claimed elements were questioned for the reasons stated in the above notes, we also consider the $8,426 claimed attorney's fees unreasonable. It is also noted that there was no mention or claimed costs for this effort in the complaint. To date, only $2,000 was paid on this subject $8,426 invoice. 8. Travel a. Summary of Conclusions:

We questioned the entire $1,956 because it is not supported by documentation describing the purpose of the claimed trips which is required by FAR 31.205-46(a)(7). b. Basis of Contractor's Claim:

The claimed costs represent alleged travel incurred by Mr. Dave Lowry in connection with this claim. 8 FOR OFFICIAL USE ONLY

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Audit Report No. 1271-2004D17200004 c. Audit Evaluation:

We reviewed the contractor's supporting documentation which consisted solely of travel receipts. The claimed costs for the executive director, Mr. Lowry were not supported by documentation describing the purpose of the trips which is required by FAR 31.205-46(a)(7) and is therefore unallowable.

We discussed the results of our examination with Mr. David Lowry, Executive Director and Mr. John Rich, Corporate Counsel, during an exit conference held on August 4, 2004. At the request of Tom Dinackus, DoJ Attorney, a copy of our draft report was not provided to Bannum. We did, however, discuss with Bannum, our summary audit findings by cost element claimed. Bannum was informed that our report addressed their final revised claimed costs. Bannum was advised that a copy of our report could be requested through the DoJ. The contractor reserved comment pending receipt and review of the final DCAA audit report.

CONTRACTOR ORGANIZATION AND SYSTEMS 1. Organization

Bannum, Inc. provides Community Correction/Comprehensive Sanction Center services for the Federal Bureau of Prisons. Bannum, Inc. currently has 137 employees. Bannum, Inc. currently has 12 Community Correction/Comprehensive Sanction Centers at various locations in the United States. Bannum, Inc.'s calendar year 2003 revenues were approximately $8,000,000 all of which were for BoP contracts. 2. Accounting & Estimating Systems

Bannum's accounting period is from January 1 to December 31. We have not performed any reviews of the contractor's systems.

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Audit Report No. 1271-2004D17200004 DCAA PERSONNEL Telephone No. Primary contacts regarding this audit: Walter A. Schminky, Supervisory Auditor Joseph Schillace, Technical Specialist Other contact regarding this audit report: Gary R. Ricketts, Branch Manager (727) 533-2120 FAX No. (727) 535-9966 E-mail Address [email protected] (727) 533-2133 (727) 533-2121

General information on audit matters is available at http://www.dcaa.mil/.

RELEVANT DATES Request for audit dated March 19, 2004 and received March 22, 2004.

AUDIT REPORT AUTHORIZED BY:

/signed/ Gary R. Ricketts Branch Manager DCAA Tampa Bay Branch Office

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Audit Report No. 1271-2004D17200004 AUDIT REPORT DISTRIBUTION AND RESTRICTIONS DISTRIBUTION Federal Bureau of Prisons ATTN: Mr. William Robinson, Assistant General Counsel Office of General Counsel Commercial Law Bureau 320 First Street, N.W. Ninth Floor Washington, DC 20534 United States Department of Justice ATTN: Mr. Paul Wellons, Commercial Litigation Attorney 1100 L Street , N.W. Room 11018 Washington, DC 20005 Defense Contract Audit Agency ATTN: OAL ­ Sr. Non-DoD FLA (P. Stephens) 8725 John J. Kingman Road, Suite 2135 Ft. Belvoir, VA 22060-6219 Bannum, Inc. 8726 Old County Road 54, Suite E New Port Richey, FL 34653-6464 E-mail Address [email protected]

[email protected]

[email protected] Telephone No. (202) 287-1540 (Copy furnished thru the DoJ)

RESTRICTIONS 1. Information contained in this audit report may be proprietary. It is not practical to identify during the conduct of the audit those elements of the data which are proprietary. Make proprietary determinations in the event of an external request for access. Consider the restrictions of 18 U.S.C. 1905 before releasing this information to the public. Under the provisions of Title 32, Code of Federal Regulations, Part 290.7(b), DCAA will refer any Freedom of Information Act requests for audit reports received to the cognizant contracting agency for determination as to releasability and a direct response to the requestor. Do not use the information contained in this audit report for purposes other than action on the subject of this audit without first discussing its applicability with the auditor.

2.

3.

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Audit Report No. 1271-2004D17200004 CHRONOLOGY OF SIGNIFICANT EVENTS FOR CLAIM No. 01-639C-Count 8 Filed under Disputes clause

J200c-336 (Beaumont, Texas); J200c-361 (Corpus Christi, Texas); J200c-375 (Laredo, Texas) United States Court of Federal Claims Case No. 01-639c Contractor Name: Bannum, Inc. Trial Attorney Name: Joseph Camardo, Jr. Dates of Contracts Awarded: J200c-336 (Beaumont, Texas) 7/17/97 J200c-361 (Corpus Christi, Texas) 10/15/97 J200c-375 (Laredo, Texas) 11/19/97 Performance dates per contract and Modifications: BEAUMONT (J200C-336) Base Period: 11/1/97 - 10/31/99 Option 1: 11/1/99 - 10/31/00 Option 2: 11/1/00 - 10/31/01 Option 3: 11/1/01 - 10/31/02 Extension Modification #19 11/1/02 - 4/30/03 CORPUS CHRISTI (J200C-361) Base Period: 2/1/98 - 1/31/00 Option 1: 2/1/00 - 1/31/01 Option 2: 2/1/01 - 1/31/02 Option 3: 2/1/01 - 1/31/03 Extension Modification #15 2/1/03 - 4/30/03 Extension Modification #16 5/1/03 - 5/31/03 LAREDO (J200C-375) (Male) Base Period: 1/1/98 - 12/31/99 Option 1: 1/1/00 - 12/31/00 Option 2: 1/1/01 - 12/31/01 Option 3: 1/1/02 - 12/31/02 Extension Modification 20 1/1/03 - 6/30/03 Purchase Order 3R130031: 7/1/03 - 7/31/03. Description: Bannum alleged that it had lost profits and overhead and other costs as a result of the Government's dealing with the Montgomery transportation issue and the alleged improper non-exercise of options. 12 FOR OFFICIAL USE ONLY Telephone: 727-588-2594 Telephone: 315-252-3846

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Audit Report No. 1271-2004D17200004 Dates contracting officer decisions rendered:

* There are two sets of lawsuit "Count" numbers, the primary set being from Bannum's Second Amended Complaint, the secondary being from the CART files that BOP sent DCAA on March 19, 2004. For ease of reference, both are used throughout this document. Count 8 (CART # 15): Deemed Denial Date claims (certified, if over $100,000) filed: Count 8(CART # 15): April 9, 2001 Date audit request received: March 22, 2004 Pertinent Government or Contractor Actions: Count Eight: "Extra-contractual" changes to Transportation Requirements/Failure to Exercise Option (two Montgomery, Alabama contracts) (CART # 15) On March 6, 2001, Bannum submitted an REA, requesting compensation for all costs expended as a result of the transportation issue and for lost profits resulting from BoP not exercising the option because of the transportation issue. On April 9, 2001, Bannum converted its REA into a Claim, demanding $339,411.67. The Contracting Officer did not issue a Final Decision, and from the deemed denial, Bannum appealed. This count deals with BoP requirements about public transportation, including that it be available within one mile of the facility. It is important to note, especially vis-à-vis the lost profits portion of this claim, that after failing to exercise the option, BoP awarded Bannum the subsequent contract.

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