Friday, June 14, 2019

DoD Removes "Reasonable Expectation" Rule from Adequate Price Competition

The FAR (Federal Acquisition Regulation) has been amended to eliminate the so-called "Reasonable Expectation" rule when it comes to awarding contracts based on adequate price competition for DoD, NASA, and the Coast Guard procurements.

The Reasonable Expectation rule provided that a price is based on adequate price competition when there was a reasonable expectation, based on market research or other assessment, that two or more responsible offerors, competing independently, would submit priced offers in response to the solicitation's expressed requirement, even though only one offer is received from a responsible offeror. There's more to the rule but that covers the essence of it. Agencies other than DoD, NASA, and the Coast Guard can still use the "reasonable expectation" rule in awarding contracts based on price competition.

This tightening of the adequate price competition rules was brought about by the FY 2017 National Defense Authorization Act. Evidently, Congress had some concerns over the potential abuse of the reasonable expectation rule and took action to eliminate it - at least for DoD, NASA, and the Coast Guard. Our limited research did not uncover any anecdotal evidence of abuse of the reasonable expectation rule. In fact, one commentator writing in response to the rule after it was first proposed stated that it was unclear what problem this rule was trying to resolve. The respondent urged reconsideration of the regulation until the actual problem can be identified and targeted with an expected outcome that proves an acceptable solution.

The Defense Department is working on a rule to implement this at the subcontractor level.

Thursday, June 13, 2019

DoD Proposes to Double the CPSR Threshold

The Defense Department has issued a proposed rule to increase the CPSR (Contractor Purchasing System Review) threshold from $25 million to $50 million in sales to the Government.

Currently, there are about 670 defense contractors that are subject to DCMA's (Defense Contract Management Agency) CPSR reviews (at least) once every three years. Increasing the threshold from $25 million to $50 million will reduce that number by 20 percent or 133 contractors.

The Defense Department maintains that the $25 million threshold has not been increased since 1996 and by doubling it now, roughly equates to inflation over that same time period. Under the proposed rule, contracting officers will retain the flexibility to lower that threshold if determined to be in the best interest of the Government.

The proposed rule will certainly reduce the burden on small contractors and, according to DCMA, will allow a more efficient and effective use of CPSR resources at larger contractors where more taxpayer dollars are at risk. Larger contractors, we're certain, are thrilled at the prospect of additional oversight. We guess that its too much to expect that if DCMA's work goes down by 20 percent that there would be a commensurate reduction in DCMA staffing.

There is one downside for small contractors. There could be additional requirements for those firms to request consent to contract from ACOs (see FAR 52.244-2, Subcontracts). With approved purchasing systems, the consent to subcontract requirement does not apply.

Wednesday, June 12, 2019

Recommendations to Prevent Overcharging by Sole-Source Contractors

For the past two days, we have been discussing the TransDigm case where the DoD contractor significantly overcharged the Government for spare parts. Parts 1 and 2 can be accessed here and here, respectively.

To recap, the House Committee on Oversight and Reform requested the Defense Department OIG (Office of Inspector General) to look into concerns brought to their attention concerning potential overcharging by TransDigm. The OIG pulled a sample of contracts and determined that 46 of 47 contracts were overpriced by $16 million. Ultimately, TransDigm paid back the $16 million but now, the House Committee has requested the OIG to perform a comprehensive review of all TransDigm contracts with the DoD.

The OIG pointed out a number of regulations that contributed to the overcharging including the fact that contracting officers had no recourse when contractors refuse to provide requested cost or pricing data needed to determine price reasonableness. The OIG also made a number of recommendations to avoid future occurrences including the following:

  1. Examine the US Code, FAR, DFARS, and other guidance to determine changes needed in the acquisition process of parts produced or provided from a sole-source to ensure that contracting officers obtain uncertified cost data when requested and that the DoD receives full and fair value for its expenditures.
  2. Immediately revise the policy on access to records to expand reporting requirements to all contractor denial of cost data for acquisitions of parts produced by one manufacturer, as well as for other sole-source acquisitions, regardless of whether the requirement is urgent. Disseminate the new guidance and update the DFARS as appropriate.
  3. Establish a team of functional experts to analyze data reported. The team should assess parts and contractors deemed to be at high risk for unreasonable pricing and identify trends and perform price analysis and cost analysis of high-risk parts to identify lower cost alternatives or fair and reasonable pricing for future procurements.

DoD's response was fairly non-committal. DoD essentially stated that it would look into the matter but didn't address specifics of when and how the recommendations would be implemented. Therefore, from the OIG's perspective, the recommendations remain unresolved.

Tuesday, June 11, 2019

TransDigm - How Overcharging Was Allowed to Occur

Yesterday we discussed the House Committee on Oversight and Reform's role in securing a $16 million return of excess profits by TransDigm on its DoD contracts. Today we want to take a closer look at the DoD Office of Inspector General's (OIG's) audit report that disclosed the overcharging to see how existing regulations allowed the overcharges to occur. If  you missed yesterday's installment, you can access it here.

The OIG determined that TransDigm earned excess profit on 46 of 47 parts purchased by the Defense Department even though contracting officers followed the FAR (Federal Acquisition Regulations) and DFARS (DoD FAR Supplement) when they determined that prices were fair and reasonable. How does that happen? Under what circumstances does FAR allow profit margins up to 4,451 percent (that percentage is not a typo - TransDigm really earned profit of 4,451 percent on one of the purchases. On average, profit on the 46 parts was more than 100 percent.

Contracting officers used FAR and DFARS-allowed pricing methods, including historical price analysis, competition, and cost analysis to determine whether prices were fair and reasonable. The OIG however concluded that historical price analysis and competition were unreliable in identifying when TransDigm was charging excess profit because,

  • prices for parts had become inflated over time, and some parts appeared to be inflated at the time the Government first purchased the part, further compounding the excess profits and
  • TransDigm was the only manufacturer at the time for the majority of the parts competitively awarded, giving TransDigm the opportunity to set the market price for those parts because the other competitors planned to buy the parts from TransDigm before selling them to the Government.
 According to the OIG, performing cost analysis using certified or uncertified cost data is the most reliable way to determine whether a price is fair and reasonable. Contracting officers are required to obtain certified cost data before awarding contracts above the TINA threshold and can request uncertified cost data for those below the threshold. However, contracting officers are often prevented from obtaining uncertified cost data because of the following reasons:
  • FAR enables sole-source providers and manufacturers of spare parts to avoid providing uncertified cost data, even when requested, because of the less stringent requirements for awarding small dollar value contracts and commercial item contracts.
  • There is no specific requirement in FAR that requires or compels contractors to provide certified or uncertified cost data to the contracting officer when requested before the contract is awarded
  • Statutory and regulatory requirements discourage contracting officers from asking for uncertified cost data when determining whether a price is fair and reasonable.

In many of the contracts awarded to TransDigm, contracting officers justified the price as 'the best obtainable price' because TransDigm refused to submit cost or pricing data and the contracting officers had exhausted other methods of determining price reasonableness and the need was urgent.

Tomorrow we will look at the OIG's recommendations for preventing future occurrences of price gouging.

Monday, June 10, 2019

Congress Calls for Comprehensive Audit of Contractor's Sales to Defense Department

Background. Last February, the Defense Department's Office of Inspector General (OIG) issued a report on its audit of purchases from TransDigm Group. The audit was conducted in response to several letters from Congress to determine whether purchases were made at fair and reasonable prices.

The OIG reviewed a small sample of 47 parts totaling $29.7 million purchased by DoD from TransDigm between January 2015 and January 2017. Specifically, the OIG set out to determine how contracting officers established fair and reasonable prices for the required parts.

As a result of the audit, the OIG concluded that TransDigm had overcharged the Government by $16.1 million beyond a reasonable profit. That works out to a figure greater than 100 percent profit.
How does a contracting officer determine that prices were fair and reasonable when at those exorbitant rates? There were a number of factors that left contracting officers hamstrung in the process, the most prevalent being denial of access to cost or pricing data. The Defense Department needed critical parts and TransDigm pretty much gave the Defense Department a 'take it or leave it' offer. In fact, of the 47 contracts audited by the OIG, 46 were overpriced and TransDigm denied the Government access to cost or pricing data. The only one of the 47 contracts not overpriced was one in which TransDigm was required to furnish cost or pricing data because the value exceeded the threshold for cost or pricing data requirement. The OIG report has many more details concerning problems that contracting officers faced.

New Development. Late last month (May 24th), the House Committee on Oversight and Reform announced that TransDigm had agreed to refund the $16 million in overcharges.
Today's decision by TransDigm to refund millions of dollars in blatant overcharges would not have happened without the hearing in the Oversight Committee last week. This is solid, bread-and-butter oversight that helps our troops and the American taxpayers. We saved more money today for th American people than our Committee's entire budget for the year. ... While this is a good first step, we must do even more in the future to prevent unscrupulous contractors from holding us hostage through abusive monopoly contracts.
TransDigm's problems did not end with the $16 million repayment. The House Committee on Oversight and Reform has now requested the OIG to perform a comprehensive audit of all TransDigm's contracts from January 2015. These contracts totaled $782 million and if overstated by the same percentage that the OIG's found in its initial sample, would return an additional $350 million to the Treasury.