US contractor fined $3.1M for outsourcing work to India | Hacker News Reader

US contractor fined $3.1M for outsourcing work to India

sakshipost.com

172 pointsknown59 comments

For those who prefer primary sources:

"STATE CONTRACTOR TO PAY MORE THAN $3 MILLION IN PENALTIES FOR ILLEGAL AND COVERT OUTSOURCING OF MILLIONS OF FINGERPRINT RECORDS TO INDIA FOR DATA ENTRY", New York State Inspector General Catherine Leahy Scott, 24 March 2016 (Press Release)

https://ig.ny.gov/sites/default/files/pdfs/IGFocusedTechRepo...

"Investigation of Improper Outsourcing of Confidential Records", New York State Inspector General Catherine Leahy Scott, March 2016 (contains report and agreement/order by state IG)

https://ig.ny.gov/sites/default/files/pdfs/FocusedTechnologi...

"The agreement arises from a USD 3.45 million contract..." "Focused paid the Indian company just over USD 82,000..." "Overall, the Indian company performed approximately 37.5 per cent of the work on the contract”.

The Indian company handled 16m out of 22 million documents. Not sure what other work there was which led to the 37.5% overall figure, otherwise last I checked 16/22=73%...

From what I got from the article, there were two steps to the process. The first being the scanning, which the company seemed to do correctly, the second being the indexing, which gets you 36% of the work if you count each card in indexing and scanning.

It goes by tasks. Each contract is broken into a series of tasks (CLINs) and assigned a value. The "prime" contractor typically has to perform 51% of the work by value and task when some sort of set-aside preference is used (like Veteran-owned, etc.).

Wait, what? 37.5% of the work was completed for $82k? Meaning profit would have been over $3m on a $3.45m contract?

My read is that the title here is a bit misleading. The article implies that the illegality is not outsourcing to India, but rather that the Indian contractor was not approved to handle the data it indexed. Am I misreading this?

I think it would be cool if the clickbait title could be edited.

It would be great if you can remove India from title it make it clickbait. It could have been any country.

It could have been but it was not any other country, so why have it removed?

Because we only read the titles nowadays.

I wish but gotta keep the outsourcing in there atleast give it a hint haha

Well that and "the failure of Focused to adhere to a requirement that over 50 per cent of the labour hours of the contract be performed by individuals with disabilities"

When you sign a contract to employ disabled people, and get a subsidy to do so, outsourcing to India is a contract violation.

> Given the confidential nature of the information of the fingerprint cards, Focused was required to perform all of the work in New York and it could only use employees that had passed a criminal background check. It was also prohibited from subcontracting any of the work to any other entity.

(Breaching your contract is only illegal (as opposed to a tort) when the other party is the government)

I am not a lawyer.

The contractual terms probably reflected statutory or regulatory requirements...in my experience that's pretty much the case with all government contracts. It's a two way street, those statutes and regulations place obligations on the awarding party as well.

Not necessarily.

In this case, the contract involved a vendor bidding with/through NYS Industries for the Disabled, which is a "preferred source" contractor that is supposed to employ disabled people to perform work. Typically this is light manufacturing work, although operating scanners for a purpose like this is also common.

As a preferred source contractor, they have preference over any other competitor -- if you bid on the contract and offered to perform the services for $1, the preferred source vendor would win.

The issue is that this is a serious fraud, not just a case of violating some contract term. I'm curious as to why the principles aren't facing criminal prosecution.

> "To advance special social and economic goals, certain providers have preferred source status under the law. The acquisition of commodities and/or services from preferred sources is exempted from statutory competitive procurement requirements. All state agencies, political subdivisions and public benefit corporations (which includes most public authorities), are required to purchase approved products and services from preferred sources in accordance with the procedures and requirements described in the Preferred Source Guidelines.

https://www.nyspro.ogs.ny.gov/content/buying-preferred-sourc...

This is why the road to hell is paved with good intentions. It seems to me that the people who should face criminal prosecution are the people who came up with this nonsense "preferred source" scheme.

You prefer welfare for blind people vs giving them meaningful work?

If that means a level playing field, yes. Positive discrimination is discrimination and should be banned outside of education.

Why the downvote? Is that for disagreeing?

I didn't downvote you, but I would if I could. I both disagree with your view and think that you haven't really argued your point very well.

Blind people aren't born on a level playing field.

I believe that a society should take care of people who are unfortunate, and this method seems like a reasonable way to allow market mechanisms to improve their life.

I'm assuming that you disagree that this is a role society should take. However, the consensus of of most societies in history is that blind people should be taken care of in some way.

I think it's reasonable that you should be expected to make a better argument to overturn that view than you have.

I don't know that I agree with your suggestion, but here's an upvote for contributing an unpopular but non-trollish idea.

> > Given the confidential nature of the information of the fingerprint cards, Focused was required to perform all of the work in New York and it could only use employees that had passed a criminal background check. It was also prohibited from subcontracting any of the work to any other entity.

> (Breaching your contract is only illegal (as opposed to a tort) when the other party is the government)

In Australia, breach of a contract is a breach of contract law and is not a tort. Presumably America is different though.

I think you're right, but on the other hand I wouldn't mind for it to be a violation of something to subcontract work and resell it to the government with a 10x profit markup. 37% of the work for 2.4% of the price they charged, what a perfect example of the pitfalls of government contracts.

It is at least for DoD contracting. If I remember correctly we weren't allowed to have a higher profit margin than about 13% or near that. That's why in the DoD contracting space there is a huge emphasis of butts-in-seata because that's the only way they make more money.

There is no limit on the profit a company may take, though on Cost-Plus contracts the government may explicitly state the profit margin a company is allowed based upon performance metrics. The government CAN, however, audit your books for DCAA compliance on T&M (time and materials) and Cost-Plus contracts to ensure what's being charged to them isn't overly inflated.

On fixed-price contracts, however, companies can pull in 20-25% net margins sometimes. The average net margin on all contracts is between 8% and 12%. You can verify this by looking at the financials of the publicly traded contracting firms like Booz Allen and Leidos who are all in that 8% to 12% net margin range. There is no limit on these margins set by the government, however, just guidelines on what is "acceptable" to them to be included in your pricing (costs and profits passed on in the form of billed fully-loaded labor rates for hourly work).

It's actually more profitable for companies to do contractor-facilities (remote) work on a fixed-price basis, contrary to what people outside of the industry think.

Can you provide more detail about this? I'm really curious, a defense contractor I know of is moving to a fixed-price contract and there's a lot of messaging about how they just won't be able to afford a lot of folks and so forth. It would be highly interesting to me if they came out of it with a higher profit margin. Anything I should look out for to determine if that's the case?

I think you're right, but on the other hand I wouldn't mind for it to be a violation of something to subcontract work and resell it to the government with a 10x profit markup.

Why? If anything, it should be a violation by the department to pay x10 times for the same work they could get by going directly to the subcontractor.

That falls under "violation of something". But the department has plenty of buying power, they can easily put "promise not to do this" into the spec.

Sometimes they can explicitly tell you what margins you can make in a Cost-Plus type contract. The thing is, when they dangle a 5-year long $75,000,000 contract in front of you, you'll basically take any margin at all since the amount is so large that companies will work to undercut each other drastically and even work at a loss just to get the past performance, which is treated as an asset (like cash itself) in the federal market.

They can also audit you any time they want to determine the "reasonableness" of your pricing based on overhead, margins, etc.

Government contracting can be tricky. If the government pays $1m to an american company, they'll recover a significant amount of that through taxes. So the actual cost to the government wasn't actually $1m. If it's paid to an indian company, they won't.

This is exactly true. Not only in corporate taxes, but payroll taxes as well. So, literally, up to 35% of each contract goes back to the government in one form or another (whether directly or through overhead personnel salaries), hence the "buy American" thing in contracting with the government.

What's the opportunity cost? If the contractors would have been sitting on their hands, then the 35% argument rings true.

If they would have had taxable earning anyway, it doesn't matter.

(Of course, that's from a purely economic point of view. We are talking about politics here.)

This doesn't happen very often because, as a government contractor, you are subject to audit at any time and anything they deem unreasonable can make you non-competitive in that market.

The only time this (high margins) really happens is in the no-bid cleared (black ops) type contracts let by the intel community and such. Those margins can be huge, but it is because of the level of clearance and company expertise required to perform the work.

However, even in that case, it's not 10x. Maybe 30-40% margin, but not 10x.

The website's sidebar also has a headline that says "North Korea Nukes Washington" so take it with a grain of salt.

"New York State Contractor Is Said to Threaten Privacy of Millions With Outsourcing", New York Times, 24 March 2016

http://www.nytimes.com/2016/03/24/nyregion/new-york-state-co...

But the DPRK did ... "in a new propaganda video", as the article itself says in its first sentence.

An allowable fudge if you're going for short, albeit click-baity, article headlines.

I think most people would disagree that this is behavior they would accept from a journal wishing to be taken as a serious / primary source of information

Outsourcing outside the U.S. for federal contracts is typically illegal unless explicitly allowed by the Contracting Office most times, especially for defense work where all contractors must be U.S. citizens. Exceedingly rarely do federal agencies allow outsourcing outside of the U.S., both for security and political reasons. This mostly applies to services, but some products are also affected. The biggest exception to this, at times, is in the case of Overseas Contingency Operations such as in a warzone or other hostile areas where local contractors and companies might be used.

However, there have been instances that bypass this in a sort of "gray area". For example, I knew a company that was outbid on a job by over $200k to convert 11,000 documents to web pages and re-design an entire series of agency websites. The government themselves acknowledged it would take about 3 full time people (developers) 9-12 months to do the work, but the winning bid for the whole thing was from an outsourcer who bid less than $60k total. The agency in question turned a blind eye to the minimum wage requirements for technical labor categories written directly into the contract. Had this been a larger procurement with more money at stake, it would have easily been overturned and resulted in legal action against both the agency and the winning bidder (the outsourcer).

There is also the whole "buy American" thing written into most contracts nowadays, but which mostly applies to construction.

> There is also the whole "buy American" thing written into most contracts nowadays, but which mostly applies to construction.

Interestingly, both TPP and TTIP make that illegal.

No, they don't. Not for federal contracts, which is governed by a whole different set of rules from the rest of commerce (the FAR vs. UCC).

Wait, so we in Germany can't demand "buy all German" anymore, but the US can demand "buy all American"?

Seriously, I feel like this deal is getting worse all the time.

For illegally outsourcing a government contract

Exactly. It's like immigration vs. illegal immigration. It's easy to drop the "illegal" part and stir up racial emotion and thus divert attention away from the real topic.

can someone with more knowledge of the legal code explain why no criminal charges?

$3.45m - $3.1m - $0.082m = $268k profit

Also getting to hold onto $3.4 million for the 8 year time period since 2008 would net some good returns as well.

There's also the expenses for the other 62.5% of the contract, the taxes paid on the profits, and the business development to get the contract in the first place.

I don't actually know how these things are calculated, though.

Good points. They are certainly not making out after the fines. Now I wonder, if the fine is tax deductible?

It shouldn't be in general - http://www.nolo.com/legal-encyclopedia/business-expenses-tha...

I can't explain why there were no criminal charges (likely because it's a breach of contract, which is not a criminal affair), but the remote company only performed about 35% of the work. If the actual contractor still had to do 65% of the work, the costs of that would be substantially higher than the 268K they have left after the fine.

I know the US Government isn't super-efficient, but I cannot imagine that, even if they'd performed 100% of the work, it would only cost $412K - that would leave such a massive amount of room for competitors to come in and under-bid them. Or maybe it really did only cost them that much, and the Government is fining them 100% of the profits they made.

Sounds like 'business as usual' to me.

Small company is granted preferential treatment on the contract reward because the company fits under a 'special class'. For example SDVOSB.

The company doesn't actually have the skill/ability to fulfill the contract requirements so they outsource a significant portion of the work; either by picking up one of the bidders who lost as a subprime or bynoutsourcing to a third-party. Passing off the responsibility violates the 'protected class' certification threshold but there's no oversight to verify compliance so the contractor is never held accountable.

Many/most small business defense contractors are simply administrative companies that work the 'special class' certification process, pocket a significant percentage of the funds, and either outsource most of the actual work or hire people and provide substandard pay and provide little/no resources to do the work.

Source: I used to work for one such company. Never again...

I love that kind of stories: http://www.bbc.com/news/technology-21043693

Capitalism! :)

It's like life imitates satire: https://www.youtube.com/watch?v=rYaZ57Bn4pQ [Onion video]

This reminds me of the story from a while back about a contractor who took jobs and farmed them all out to Indian companies for a small percentage of his take.

How did they catch them?

Contracting with the government means you open your books to them, essentially whenever they want. They can audit you at any time.

Because the defrauded organization was the New York State Division of Criminal Justice Services.

man, that was messed up!

So have these guys essentially lost $40k plus time involved? This doesn't sound like much of a deterrent. There should really be criminal charges for these blatant fraudulent behaviours. While I believe prison should primarily be a rehabilitation, giving white collar criminals actual time will work as a deterrent rather than a 'don't get caught' mentality.

Don't forget lost future business too - good luck winning the next contract bid with this kind of track record (hopefully). If that effect is strong enough, it could potentially even put a place out of business.

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