On April 18, 2018, in another step signaling increased transparency for federal contractors, OFCCP issued a release describing its methodology for selecting and scheduling federal contractors for audit in 2018. 

Although OFCCP’s release still leaves questions unanswered, it brings some clarity to an audit selection process that has long been a source of confusion and, sometimes, consternation for contractors.  As noted below, the publication also offers some important insights into practices and procedures that can minimize organizations’ exposure and improve compliance.

Background

The Office of Federal Contract Compliance Programs (OFCCP) is the federal agency responsible for implementing the affirmative action requirements applicable to government contractors and subcontractors.  OFCCP enforces these requirements through an annual program of compliance reviews (audits) of randomly selected contractors. 

For years, OFCCP’s methodology for selecting entities for compliance review has been opaque to contractors.  OFCCP had shared some information, including its use of data from the Federal Procurement Data System, EEO-1 information, and Dun & Bradstreet data to identify eligible establishments.  However, it did not provide details into how each data source was used or how its use generated the pool of contractors for random audit selection.  Thus, this year’s voluntary publication of OFCCP’s methodology supplies greater insight for contractors and their related corporate families.

OFCCP’s Audit Selection Methodology Explained

OFCCP’s audit selection process commences with the download of federal contract information from the preceding three years from the Federal Procurement Data System – Next Generation (FPDS), a publicly available and searchable database of federal contracts maintained by the U.S. General Services Administration (GSA) that identifies contracting bodies, contractors, the value and term of federal contracts, and other pertinent information.  Each contract on the FPDS was reduced to a single record containing:

• Contract number,
• Contractor name(s),
• Establishment address,
• Contract-related dates,
• Contract-related dollar amounts,
• Contracting agency,
• Data Universal Numbering System (DUNS) number,
• North American Industry Classification System (NAICS) number, and
• Contractor employee count.

From this list, OFCCP removed cancelled contracts, contracts associated with debarred companies, contracts that expired by January 31, 2017, contracts valued at less than $50,000, and contracts awarded to state, local, municipal, tribal, city, and foreign governments, school districts, or construction companies.  Contracts that did not have any modification in the last 15 months were also deleted, based upon an assumption that they had been closed or cancelled.  OFCCP considered the remaining records as “active contracts within OFCCP’s jurisdiction.”

From the contract records, OFCCP identified establishments and parent entities over which it would seek to exercise jurisdiction.  For every contractor with only one active contract on OFCCP’s list, that contract was deemed the “Establishment Record.”  For contractors with multiple active contracts on OFCCP’s list, the contract with the longest expiration date was deemed the “Establishment Record.”  From the Establishment Records, OFCCP identified the entities it deemed “Direct Establishments,” which it matched against EEO-1 records administered by the Equal Employment Opportunity Commission.  Establishment Records that could be matched to EEO-1 records were supplemented with additional information, including parent corporation, headquarters, employee count, and contact information.  Parent companies matched to multiple Establishment Records were consolidated under the Establishment Record with the furthest contract expiration date, which then became the Parent Record under which all Establishment Records were consolidated.

Consistent with OFCCP’s 2014 Directive, entities with only TRICARE contracts (resulting from the provision of health care to uniformed service members and their families covered under the TRICARE program) were excluded from consolidation at the parent level.  As a result, no TRICARE providers were included in the scheduling list for 2018.

For each Parent File, OFCCP extracted all establishments with 100 or more employees from the EEO-1 database and added them to the Establishment file, regardless of whether the individual establishments actually held or performed work on any federal contracts.  OFCCP asserts jurisdiction over these additional establishments based on their parent entity’s covered direct contracts.  OFCCP refers to such establishments as “Associate Establishments.”  OFCCP also added to the Establishment file all functional units of organizations with active Functional Affirmative Action Programs (FAAP), whether or not included in the FAAP agreement. 

All of these records combined created the “Available Pool,” which consisted of Direct Contract Establishments, Associate Contract Establishments, Corporate/Division Headquarters, FAAP Functional Units, and Universities.  OFCCP then removed from the Available Pool establishments currently under review, those that completed a review within the last five years, those under monitoring pursuant to an ongoing conciliation agreement/consent decree, those with separate facility exemptions, those with a contract expiring before March 31, 2018, and those available for scheduling from an earlier list.  OFCCP also removed from the Available Pool establishments with fewer than 70 employees.  It also reviewed available Lexis-Nexis corporate structure and Dun and Bradstreet Family Tree data in an attempt to remove from the Available Pool independent subsidiaries of corporations that did not have contract coverage. 

The remaining entities in the Available Pool were separated out among OFCCP’s district offices based on each establishment’s physical address.  The scheduling list was capped at 1,000 establishments, and each OFCCP district office’s share of the total list was computed based on its relative budget.  OFCCP then applied the following criteria to select the specific establishments to be audited:

• Establishments with higher employee count were given priority, regardless of Direct or Associate establishment status.
• No more than 10 establishments of a parent company were included in the entire scheduling list.
• No district office audited more than four establishments of the same company.
• No more than two functional units of each FAAP company were scheduled for audit.
• No district office was to review more than two corporate/regional headquarters, two FAAP units, and one university.

When all establishments in the Available Pool were identified, they were randomly ordered and uploaded to OFCCP’s Case Management System for processing by its district offices.  OFCCP does not purge unscheduled cases from prior lists before releasing the new scheduling lists.

Impact for Federal Contractors and Subcontractors

Contractors should view OFCCP’s methodology as a significant insight into OFCCP’s audit selection process.  Key takeaways for employers include the following:

• Employers that do not believe they are federal contractors should nonetheless take advantage of the publicly available and searchable FPDS, accessible by anyone at www.fpds.gov, in order to learn whether they have contracts in the database and will, therefore, appear on OFCCP’s initial data pull for annual compliance reviews.  This is particularly important for employers that are not certain of the extent or dollar value of their federal contracts.
• OFCCP’s use of the FPDS also provides insight for federal subcontractors, which are not listed on the FPDS.  As a result, federal subcontractors are generally at a much lower risk of being targeted by OFCCP’s annual compliance review procedures.  However, OFCCP also conducts compliance reviews in other circumstances that may apply to some subcontractors, including focused reviews based on alleged violations, pre-award evaluations in response to requests for pre-award clearance from federal contracting officers, and reviews based on the monitoring of conciliation agreements and consent decrees.
• OFCCP’s list of “active contracts within OFCCP’s jurisdiction,” derived from FPDS, does not exclude any “contracts” based on an analysis of whether they were, in fact, contracts as opposed to grants or other federal funding.  Accordingly, entities receiving Corporate Scheduling Announcement Letters (CSAL) should not neglect to review the agreement under which OFCCP asserts jurisdiction to determine whether it meets the legal definition of a federal “contract.”
• Although OFCCP indicated it made some effort to remove from the audit pool “independent subsidiaries” based on available Lexis-Nexis corporate structure and Dun and Bradstreet Family Tree analyses, it is not clear how this analysis was undertaken or what criteria were used for exclusion of a given subsidiary from the Available Pool. Thus, independent entities over which OFCCP seeks to exercise jurisdiction based on contracts held by another establishment in their corporate family should be prepared to argue in response to an attempted audit that they are not a “single entity” with the contractor.
• The contact on entities’ EEO-1 reports is likely to be the initial point of contact for OFCCP compliance audits, so EEO-1 filers should be made aware of possible receipt of a CSAL or other audit correspondence, and prepared to forward such communications to the appropriate individuals within their organization.
• Although TRICARE providers were excluded from the OFCCP’s scheduling list in 2018, health care providers should be aware that OFCCP’s temporary moratorium on TRICARE audits, commenced in 2014, is scheduled to conclude in 2019.  Thus, at this time OFCCP is expected to recommence its efforts to exercise jurisdiction over TRICARE providers as soon as next year.  Thus, health care providers that intend to develop and implement affirmative action programs in advance of OFCCP’s exercise of jurisdiction should act immediately to do so.
• Evident throughout OFCCP’s process is the importance of EEO-1 filings to an organization’s exposure to compliance audit.  Thus, organizations should take extreme care to ensure their structure is represented as accurately as possible in their EEO-1 filings, and entities that are not federal contractors should, as always, take extraordinary care to ensure their EEO-1 filings do not indicate otherwise.
• Although OFCCP shared its criteria for weighting the “random” selection of establishments for audit, the random selection process itself otherwise remains unexplained.
• Although OFCCP has shared its process for developing the 2018 scheduling list, these practices may vary from year to year, and OFCCP also conducts additional compliance reviews, such as focused reviews based on alleged violations, pre-award evaluations in response to requests for pre-award clearance from federal contracting officers, and reviews based on the monitoring of conciliation agreements and consent decrees.
• OFCCP’s cap of 10 establishments within a corporate family and exclusion of establishments that have been audited in the last five years are self-imposed by the agency, and there is no legal limitation to OFCCP scheduling more establishments in a corporate family or scheduling a recently evaluated establishment for audit.  However, OFCCP’s current policy is to forego audit of an entity for two years after a prior review was closed, or after monitoring under a conciliation agreement or consent decree was completed.