Thursday, April 30, 2015

Value Engineering Change Proposals (VECPs)

Value Engineering (VE) refers to a systematic process of reviewing and analyzing the requirements, functions and elements of systems, project, equipment, facilities, services, and supplies for the purpose of achieving the essential functions at the lowest life-cycle cost consistent with required levels of performance, reliability, quality, or safety.

Value Engineering Change Proposals (VECPs) are proposals submitted by contractors, pursuant to the VE clause in contracts (e.g. FAR 52.248-1) that, through a change in the contract, would lower the project's life-cycle cost to the Government without impairing essential functions, characteristics, or performance. VECPs are applicable to all contract types.

VECPs are voluntary but when the proposal is accepted by the contracting officer, contractors must share in the net acquisition savings. The share is significant. For a fixed-price contract for example, the contractors receives 50 percent of the net acquisition savings. Contractors and contracting officers often have a difficult time agreeing upon the calculation of net acquisition savings.

According to the OMB (Office of Management and Budget), value engineering has generated billions of dollars of savings and cost avoidance. The House Armed Services Committee in the 2016 National Defense Authorization Act however noted that the use of value engineering has waned in recent years but sees great potential for shared savings in the Department of Defense's current and future acquisitions to the extent that VE is effectively implemented.

To that end, the House Version of the 2016 NDAA contains a provision that directs DoD to conduct a review on the extent to which it is taking advantage of the opportunities for shared savings through greater use of value engineering in the acquisition of goods and services, the benefits it has achieved, barriers to effective implementation, and any unintended consequences.

Many contractors are unaware of the VECP clause in their contracts, the incentives that are available to them. Contractors who are aware of the program are sometimes reluctant to spend the effort, cost, and resources necessary to "engineer" new processes or functionality because of past experience where the Government did not seem to receptive to their efforts. Perhaps this provision in the new NDAA will help change the Government's attitude.

Wednesday, April 29, 2015

Use of Corporate Aircraft

Government contractors that use company aircraft must maintain logs of flights containing specified information as required by FAR 31.205-46, Travel. Such information would include:

  • Date, time and point of departure
  • Destination, date, and time of arrival
  • Name of each passenger and relationship to the contractor
  • Authorization for trip, and
  • Purpose of trip.

Regardless of the cost of trips using corporate aircraft, the amount that is reimbursed under Government cost-type contracts is limited to "the lowest priced airfare available to the contractor during normal business hours". Exceptions apply including travel by such aircraft that is specifically required by contract specification, term, or condition, or a higher amount approved by the contracting officer. A higher amount is justified when accommodations require circuitous routing, require travel during unreasonable hours, excessively prolong travel, result in increased cost that would offset transportation savings, or are not reasonably adequate for the physical or medical needs of the traveler.

The manifest information required by FAR 31.205-46(c) is used by auditors and contracting officers to ensure that costs of owned, leased or chartered aircraft are properly charged against Government contracts and that directly associated costs of unallowable activities are not charged to such contracts.

The FAR Council estimates that there are about 6,000 trips per year on corporate aircraft where some or all of the costs are charged to Government contracts.  That might seem like a small number for the hundreds of thousands of Government contractors, but the number of Government contractors with corporate aircraft is relatively small. We don't know what that number is but if the top 25 contractors utilized private aircraft, the 6.000 trips would equate to 240 tips per year each.

Some contractors utilizing corporate aircraft don't bother to charge the Government for the use, even if the travel is allocable to a contract. To them, the cost of compliance far outweighs the amount that would otherwise be reimbursable under a contract (i.e. the lowest priced airfare available to the contractor during normal business hours).

Tuesday, April 28, 2015

Improving the Efficiency of the Defense Contract Audit Agency

The Chairman of the House Armed Services Committee, Rep Thornberry, yesterday released the FY16 NDAA (National Defense Authorization Act), The full committee will meet tomorrow to consider the proposal. Someone in Congress is listening to the cries of contractors who, at the minimum, are suffering cash flow disruptions because of DCAA's inability to complete audits in a timely manner. The proposal contains a provision designed to improve the efficiency of the Defense Contract Audit Agency (DCAA). Here is the provision, in full, without comment:

The committee continues to believe that more must be done to improve the efficiency of the Defense Contract Audit Agency (DCAA). In 2012, the committee learned that DCAA had not been subject to a peer review since 2006, despite the fact that according to generally accepted government auditing standards (GAGAS), a peer review of government audit agencies should be conducted at least every 3 years. As a result, the committee included section 1614 in the National Defense Authorization Act for Fiscal Year 2013 (Public Law 112-239), which assigned responsibility to the Inspector General of the Department of Defense for conducting peer reviews of Department of Defense audit agencies, including DCAA, in 2014.
As a result of that peer review, the Inspector General released a report on August 21, 2014, which found that 11 of 92 DCAA engagements reviewed during a 6 month period did not contain sufficient evidence for Inspector General reviewers to understand DCAA's auditing decisions. The Inspector General attributed these findings to an "absence of effective control measures in DCAA’s policies and procedures” for compliance with GAGAS. Additionally, the Inspector General found that DCAA had yet to correct its performance despite being aware of issues identified in a September 2009 Government Accountability Office report (GAO-09- 468) and, previously, by DCAA’s own quality assurance procedures. 
Furthermore, the committee is aware that the Inspector General released a report on September 8, 2014, on its review of audits issued by DCAA in fiscal years 2012-13. In conducting this review, the Inspector General examined a cross section of 16 DCAA audits completed between October 2011 and February 2013, including 5 audits of forward-pricing proposals and 11 audits of incurred costs and other audit types. The Inspector General identified 1 or more significant inadequacies on 13 of the 16 selected DCAA audits and found deficiencies in compliance with GAGAS in the areas of audit planning, evidence, working paper documentation, and supervision. Furthermore, the Inspector General review uncovered instances of auditors not obtaining adequate cost or pricing data. In addition to these findings, the committee continues to be concerned by the slow audit processes and extensive backlog at DCAA, which, according to the DCAA’s annual Report to Congress dated March 24, 2014, included roughly 23,000 incurred cost submissions at the end of fiscal year 2013. 
The committee recognizes that the DCAA has taken steps to improve its performance. However, the committee believes that its substandard performance impairs the defense acquisition process by incurring avoidable delays and by raising costs for the Government. The committee believes that much work remains to be done to ensure that DCAA is capable of fully meeting applicable standards and of promoting the smooth and transparent functioning of the defense acquisition system. 
Therefore, the committee directs the Secretary of Defense to take immediate steps to address substandard performance by DCAA, to reduce its audit backlog, and to minimize costs and other harmful consequences for the Federal Government and defense industry contractors that are the result of DCAA delays. The committee further directs the Secretary to provide a briefing to the House Committee on Armed Services not later than March 1, 2016, on the steps taken to address DCAA deficiencies, along with recommendations for any changes to statutory or regulatory guidance that may enable the DCAA to satisfy all applicable Federal and professional audit standards, to complete audits within a reasonable period of time, and to avoid placing unnecessary burdens on the Government or industry.

Monday, April 27, 2015

Doctrine of Exhaustion of Administrative Remedies - Part 2

Last week we discussed the "Doctrine of Exhaustion of Administrative Remedies" which holds that Government contractors must exhaust all reasonable administrative remedies for settling a dispute before filing a lawsuit. Today we will discuss a recent case where this doctrine was applied.

The case involves a pre-award bid protest. In February 2014, the NIH (National Institute of Health) issued an RFP (Request for Proposal) as a small-business set-aside under NAICS (North American Industry Classification System) Code 541712 which limited offerors to small businesses of 500 employees or fewer. A prospective offeror appealed the NAICS designation to the SBA (Small Business Administration) who ordered the contracting officer to amend the solicitation to change the NAICS Code from 541712 to 541611, presumably allowing more companies the opportunity to bid.

Palladian Partners filed suit in the Court of Federal Claims seeking declaratory and injuctive relief to prevent NIH from accepting and evaluating proposals under the new code, which rendered Palladian ineligible to compete. The Court of Federal Claims granted Palladian's motion for judgment finding that the contracting officer's NAICS code amendment was arbitrary and capricious. Specifically, the court found that NAICS code 541611 did not best describe the statement of work for the solicitation. Based on this conclusion, the court remanded for NIH to make a proper NAICS code selection, given the current statement of work, or to determine who other wise to proceed.

NIH appealed the Court of Federal Claims judgment to the Court of Appeals for the Federal Circuit. Among other things, the Government argued that the Court of Federal Claims should have dismissed Palladian's suit for failure to exhaust administrative remedies with OMB (specifically OMB's Office of Hearings and Appeals or OHA). The Court of Appeals agreed that Palladian failed to exhaust its administrative remedies and because that failure warrants dismissal of Palladian's protest, the Court of Appeals reversed the Claims Court's decision.

When the first potential offeror appealed the NAICS Code assignment, Palladian had the opportunity to intervene and participate in that proceeding. Palladian did not do so. By regulation, when SBA issued its NAICS code determination for the solicitation, it became a final decision. Therefore, by not participating in the code determination process, Palladian lost the opportunity to file suit.

You may read the decision in its entirety by clicking here.

Friday, April 24, 2015

What is the Doctrine of Exhaustion of Administrative Remedies?

Simply stated, the "doctrine of exhaustion of administrative remedies" prevents contractors or prospective contractors from seeking a remedy in court until all claims or remedies have been exhausted in the original one. The doctrine of exhaustion of administrative remedies provides that no one is entitled to judicial relief for a supposed or threatened injury until the prescribed administrative remedies have been exhausted. Exhaustion stems for the notion that simple fairness to those who are engaged in the tasks of administration, and to litigants, requires as a general rule that courts should not topple over administrative decisions unless the administrative body not only has erred but has erred against objection made at the time appropriate under its practice.

Exhaustion of administrative remedies serves two main purposes. First, it protects administrative agency authority. On this point, the Supreme Court has explained that the exhaustion doctrine recognizes the notion, grounded in deference to Congress' delegation of authority to coordinate branches of Government, that agencies, not the courts, ought to have primary responsibility for the programs that Congress has charged them to administer. Exhaustion gives an agency an opportunity to correct its own mistakes before it is haled into federal court.

Secondly, exhaustion promotes judicial efficiency. Claims generally can be resolved much more quickly and economically in proceedings before an agency than in litigation in federal court. In come cases, claims are settled at the administrative level, and in others, the proceedings before the agency convince the losing party not to pursue the matter in federal court. Even if litigation ensues, however, exhaustion of the administrative procedure may narrow the issues and produce a useful record for subsequent judicial consideration.

Exhaustion may be required by statute, regulation, or judicially-created common law. It is common for an agency's regulations to require issue exhaustion in administrative appeals. The fact that the administrative remedy was provided by a regulation rather than by a statute does not make the exhaustion doctrine inapplicable or inappropriate. Where a regulation requires exhaustion, a party's failure to exhaust administrative remedies precludes judicial review of its claim. When a regulation provides for exhaustion, courts reviewing agency action regularly ensure against the bypassing of that requirement by refusing to consider issues that have not been exhausted.

Under this doctrine, contractors (or prospective contractors) cannot appeal an Agency's actions or inaction until all administrative actions have been exhausted.

Thursday, April 23, 2015

Reform of the Defense Acquisition System

Earlier this week we completed our series on DoD's latest acquisition reform initiatives, collectively referred to as BBP (Better Buying Power) 3.0. Acquisition reform within DoD is a tiresome subject - since the 1960s, that have been at least 27 major studies of defense acquisition by DoD, Congress, the White House, and think tanks, all proposing various reforms. Its no wonder that the those with long-term experience in acquisition hear of the latest bright ideas, just shrug, and go about doing what they've always been doing.

Yesterday, the Subcommittee on Readiness and Management Support of the Senate Armed Services Committee held a hearing on procurement reform. There were three witnesses, one each from the Army, Navy, and Air Force. Here are some excerpts from prepared testimony.

Acquisition reform has proven elusive...Nearly each effort has attempted to define legislative solutions, create new processes and propose additional oversight to challenges that are, in many respects, endemic to defense acquisition. The objectives of reform are all too familiar: tackling cost and schedule growth ..., addressing unrealistic program requirements, streamline a process that is bureaucratic, ponderous and slow, and addressing the need for a skilled and professional acquisition workforce....Prior efforts at reform have mostly resulted in greater oversight, added bureaucracy and the associated prolixity of statutes and regulations, slowing down the process substantially (ARMY).
...history and experience have demonstrated that programs succeed when they adhere to basic principles: (a) get the requirement right; (b) perform to a stable plan; (c) make every dollar count; (d) rely on an experienced acquisition workforce; and (e) foster a healthy industrial base (NAVY).
... laws upon laws will not improve the acquisition process.. While we believe these laws were created with the best intentions, as our processes increase in complexity, many of the statutory requirements continue to grow, resulting in duplicative and often overly cautious requirements whose burdens outweighed their values (AIR FORCE).
Seems like everyone understands the difficulties in trying to reform acquisition in DoD (and the Government in general). While the testimonies offered similar perspectives, none provide a clear path forward to procurement reform.

You can read the full testimonies and watch the actual hearing by clicking here.

Wednesday, April 22, 2015

Contractor Claimed Deferred Compensation Disallowed by ASBCA

Earlier this month, the ASBCA handed down a ruling that may impact a lot of small businesses - businesses whose owner forgoes some compensation in order to keep a project going financially.

The case relates to a company called Accurate Automation Corporation (AAC) and only involves a minuscule $54 thousand. But it may have far-reaching consequences.

The appeal involves AAC's performance on two SBIR (Small Business Innovative Research) contracts back in 2007. Both were CPFF (cost-plus-fixed-fee) contracts. When DCAA (Defense Contract Audit Agency) audited costs for 2007, they identified claimed labor cost for hours worked but not paid.

DCAA questioned the costs on the basis that the costs were never paid. AAC asserted that the costs were deferred compensation paid to the employee in a later year by issuance of AAC stock. The president of AAC (and principle shareholder) claimed that he had made a decision not to pay himself so that the company could pay suppliers and other employees by electing to take the wages as deferred compensation at a later date.

The contracting officer agreed with DCAA and rendered a final decision demanding payment of $54 thousand.

There was no dispute that the president worked those hours he was not paid. The dispute is over whether the president was ever paid for the work. AAC argued that costs are allowable because there was a deferred compensation agreement in place in 2007 and the debt under that agreement was liquidated in 2008 bu the issuance of stock. This, AAC argued, satisfies the requirements under FAR 52.216-7 (allowable cost and payment) and FAR 31.205-6 (allowable compensation costs).

The Board did not find AAC's arguments persuasive. It ruled that AAC failed to meet its burden of proof that such a plan was in place before or during 2007 or that the issuance of stock evidences liquidation of AAC's debt to the owner. There was never a written plan and the stock certificate was undated and does not indicate on the face why it was issued. Furthermore, there were no entries in the accounting records of a deferred compensation liability.

The Board ruled that the government had been prejediced by AAC billing and being reimbursed for costs it did not incur. AAC's appeal was denied.

There are a lot of small companies out there that are in similar circumstances - forgoing compensation owed to the owner in order to cover other, more pressing needs. If there is no "true" liability for those deferred costs, then they may be treated as unallowable.

Click here to read the entire Board decision.

Tuesday, April 21, 2015

BBP 3.0 - Increase Small Business Participation

Today we conclude our five-part series on DoD's latest Better Buying Power procurement reform initiatives (BBP 3.0). This is not a comprehensive series on the matter. To read the full implementing directive, click here. Rather, our aim is to highlight those initiatives that will have a direct (and hopefully positive) impact on the small to medium sized firms desiring to do business with the Government. Today we look at the initiative to increase small business participation. What has this initiative have to do with reform? That has been the goal in Government contracting forever - the Government already tracks such matters and can never seem to realize its small business contracting goals already. Has someone got a better idea all of a sudden? And how does increasing small business participation lead to procurement reform in the first place when it is generally acknowledged that in the case of contracting with small and disadvantaged companies, the Government is willing to pay increased costs to further socioeconomic programs?

Well, the premise here in this initiative is that there is a lot of small businesses out there that could be solicited for work if only Government acquisition personnel had better market research tools. With the proper "tools", the Government could perform market research and ferret out those small businesses that are disengaged or not aware of Government contracting opportunities. With the proper "tools", the Government's acquisition corps could find small businesses to produce "innovative solutions for the Department". So, if some company has a better, more efficient, or more cost effective method of providing goods and services, the Government's market research activities will find them and bring them under contract. Pardon the skepticism but, yeah right.

DoD has established a number of specific actions under this initiative; improved suite of market research tools, study the feasibility of a rationalized approach to market research, study the feasibility of establishing a "superior supplier program" for small businesses, hold small business outreach events, and others. We appreciate DoD's goal to increase small business participation. We just don't understand how that initiative can be called "procurement reform" or how trying to find small businesses with innovative ideas is going to differ much from the already robust SBIR programs.

Monday, April 20, 2015

BBP 3.0 - Provide Clear and Objective "Best Value" Definitions

Last week we began a series on DoD's latest acquisition reform initiatives collectively referred to as Better Buying Power (BBP) 3.0. In total, there are 34 initiatives packaged into BBP 3.0 and you can see all of them in DoD's April 9, 2015 implementing directive. Some of these initiatives are internal to DoD like strengthening contract management. Our purpose is this series however is to focus on five that could impact a lot of Government contractors or prospective contractors. So far we've discussed (i) removing unproductive requirements imposed on industry, (ii) increasing the number and quality of should-cost reviews, and (iii) increasing the use of CPIF and FPIF contracts. Today we will discuss DoD's initiative to provide clear and objective "best value" definitions.

Included in the listing of initiatives to "Incentivize Innovation in Industry and Government", is a goal to provide clear and objective "best value" definitions to industry. This would make a lot of contractors very happy, if they can pull it off. Everyone understands awards made to the lowest bidder. But when other factors are introduced into the award criteria, a lot of bidders wonder whether the deck is stacked against them, that the Government has already decided on the "winner" and is using subject factors to make sure the award goes the way they want it to go. Many bid protests appealed to the GAO involve the Government's application of the "best-value continuum".

Under a best-value continuum, there is a recognition that the Government seeks to obtain the best value using different source selection approaches. At one end of the continuum there is the lowest price technically acceptable (LPTA) strategy. At the other end is the higher-price technically superior strategy. Factors such as price, past performance, and technical considerations are weighed to identify the quote that provides the Government with the best value. Part of the best value trade-off analysis involves conducting a risk analysis to consider whether the Government is willing to pay for achieving socioeconomic objectives, better past performance, better technical approach, or better management capabilities. When the Government decides to use non-price factors, which means that other than LPTA, the ordering activity must clearly state the priorities in the solicitation.

The BBP 3.0 initiative is to provide industry with information on the value, in monetary terms, of higher levels of performance than minimally acceptable or threshold levels. So, for example, if "minimally acceptable" is the baseline, what price premium will "good" or "outstanding" or "superior" add. Will it justify a price that is 5% higher, 10% higher, or what? With such information, contractors (and prospective contractors) will know what the competitive effect of offering higher performance will be and can bid accordingly. Not only will the information be useful to the bidding process but DoD expects that the practice will create incentives to encourage industry to innovate.

DoD plans to publish a Best Value process manual by May 2015. In the meantime, the Department has instructed its acquisition folks to ensure that best-value definitions for above threshold performance levels are transparent and objective and stated in monetary terms as much as possible.

Friday, April 17, 2015

BBP 3.0 - Increase the Use of Incentive Type Contracts

We continue our discussion of DoD's latest acquisition reform initiatives that are collectively referred to as Better Buying Power (BBP). The latest version is referred to as "3.0" to distinguish it from earlier amalgamations of initiatives called "1.0" and "2.0". We wonder when this will end - probably not until there's a new administration. By then we'll be up to "5.0" if the pace continues.

One of DoD's BBP 3.0 initiatives is to increase the use of Cost Plus Incentive Fee (CPIF) and Fixed Price Incentive Fee (FPIF) contracts, "where appropriate". BBP 3.0 doesn't explain when and where and under what circumstances such type of contracting is appropriate. The Department does tell us however that studies have shown a high correlation between these types of contracts and better cost and schedule performance. (By the way, if you are unfamiliar with the characteristics and differences between FPIF and CPIF contracts, we will address that subject following this series).

In both FPIF and CPIF contracts the impact of contract overruns and underruns are shared between the contractor and the Government based on a formula specified in and by the contract. In either case, there is incentive for the contractor to control costs (and schedules) because contractors can earn more profit or fee.

It is sometimes a tricky maneuver to design incentive structures that work well. The Department is cautioning its acquisition corp against setting incentive structures that substantially eliminate contractor incentives to reduce cost.

DoD expects to update its guidance for employing CPIF and FPIF contracts later this year.

Thursday, April 16, 2015

BBP 3.0 - Expand "Should Cost" Reviews

We are into a series where we are exploring aspects of DoD's Better Buying Power (BBP) initiatives that will have direct and significant impacts on contractors. Of course, in the abstract, the entire BBP 3.0 impacts contractors to one degree or another but our focus here is on initiatives within the BBP umbrella that contractors will notice. In Tuesday's installment, we discussed the initiative to get rid of regulations that don't serve a useful purpose or where the benefits are not commensurate with the cost of compliance. Today we're going to discuss the department's initiative to enhance their should cost review capability.

DoD has been conducting should-cost reviews or similar analyses forever. We recall participating in one during the early 70s but they had been performed before then. However, those reviews have been done infrequently and with mixed results. Should-cost reviews evaluate the economy and efficiency of the contractor's existing work force, methods, materials, equipment, real property, operating systems, and management. The objective of should-cost reviews is to promote both short and long-range improvements in the contractor's economy and efficiency in order to reduce the cost of performance of Government contracts. The reviews require a mix of people with such skills as cost estimating, pricing, and contracting and subject-matter expertise in manufacturing or other areas relevant to the particular program being reviewed.

Finding people within DoD with the requisite skills to perform should-cost reviews on a temporary basis poses challenges and diverts the individuals from their primary tasks. While proponents of should-cost reviews say they can identify inefficiencies and potential savings during their analyses, the procuring organization must have the ability and willingness to use the results of the analysis in contract negotiations to achieve lower contract prices. And the procuring organization must also be wary of cost growth and future modifications negatively impacting the originally negotiated contract price.

DoD is well on its way to expanding should-cost reviews to its major programs. Nearly 100% of ACAT (Acquisition Category) 1 programs already have should cost targets and, according to the BBP 3.0 guidance, are managing them and achieving significant savings across the Department. (ACAT programs are categorized according to ACAT 1, 2, and 3. ACAT 1 covers the most significant programs while ACAT 2 and 3 categories cover progressively lesser dollars. The goal of the Department is to expand should-cost reviews until 100 percent of all ACAT programs are covered.

How do they plan to expand the number of should-cost reviews. Why the Department plans to institute an annual Should Cost and Innovation Award program to recognize organizations, groups, and teams who have displayed outstanding should cost commitment, innovation, and results for acquisition programs. Yep, that ought to do it.

Wednesday, April 15, 2015

Man Convicted of Time-card Fraud Going to Prision

We were planning to continue our series on BBP 3.0 (Better Buying Power) today but have chosen instead to highlight an news article appearing in yesterday's Tri-City Herald about an individual going to jail on account of timecard fraud. Its not that this particular employee engaged in timecard fraud mind you - the Judge stated his crime was one of omission, not commission. He was in a position where he should have known that timecard fraud was occurring and he had a responsibility to report it, but didn't.

This case is an old one involving a lot of employees working for a contractor performing cleanup work at one of DOE's clean-up sites. We've reported on it several times as individual cases have moved through the legal system. The essence of matter was employees charging overtime for hours never worked. One of the most troubling aspects of this case, in our mind, was that Government investigators installed GPS devices on employee vehicles to track where their actual locations when they should have been at their work site. It is somewhat surprising to us that the Government's GPS caper hasn't gotten more publicity.

In any event, according to the news article, one of the supervisors of the 10 defendants who have pleaded guilty and awaiting sentencing was sentenced to 30 days in prison, three months of home detention and a fine of $34 thousand after pleading guilty to timecard fraud.

The Judge in the case said she was surprised that the Justice Department reduced its recommendation from the federal sentencing range of eight to 14 months. Then she added that the supervisor's crime was one of omission rather than commission. He know there was a high probability of timecard fraud occurring at the Hanford tank farms. Workers are required to report suspected fraud involving federal funding.

Last December, the Justice Department dropped criminal charges on another manager at this contractor in a plea deal where he agreed to pay $44 thousand in civil penalties.

Contractors need to understand that the Government can be very serious about timecard accuracy - especially when it comes to large dollar cost-type contracts. Costs under those contracts are passed right along to the Government so the expectation is that contractors will have robust internal controls, policies, procedures, practices, and monitoring to preclude this type of fraud, and other types of irregularities from occurring in the first place.

Read more here:

Tuesday, April 14, 2015

BBP 3.0 - Removing Unproductive Requirements Imposed on Industry

Last week, DoD issued its implementation directive for BBP 3.0 (Better Buying Power Initiative). Although 3.0 was announced last September, the specific implementing instructions took awhile to develop. The Department is concerned that the technological superiority of the US is being challenged by potential adversaries in ways not seen since the cold war. Dollars spent on readiness (e.g. fighting wars) is reducing dollars available for research and development. BBP 3.0 attempts to reverse that trend by partnering more with industry to bring innovation into the Department.

Over the next few days, we will be presenting aspects of the implementing guidance that might have the most direct impact on Government contractors. The guidance itself is 33 pages and much of it pertains to internal affairs. However, there are some tantalizing tidbits that should improve life for Defense contractors.

The first initiative we want to address is the removal of unproductive requirements imposed on industry.

  1. Industry has longstanding concerns about statutory requirements to submit and resubmit cost and pricing data. DoD has identified some pilot approaches that it will test to reduce the need for unnecessary cost and pricing data submissions.
  2. Industry has indicated uncertainty in their transactions with the Department on commercial item acquisitions. DoD has initiated several actions to streamline and accelerate the Commercial Item Determination process, including issuing policy guidance, increasing training and implementing analytical support tools.
  3. In the area of EVM (Earned Value Management) industry has raised concerns that EVM is sometimes applied to inappropriate contract types. Industry has also requested that the dollar threshold for compliance reviews be increased. DoD has now increased that threshold to $100 million which is expected to save contractors $5 million per year as well as allow the Government to re-position some of its staff to more important things.

Some of the specific actions that DoD will undertake to reduce unproductive requirements imposed on industry include

  • Initiate a pilot program to demonstrate and quantify impacts of reducing repeated submissions of cost or pricing data (need to weigh reductions against the fear of defective pricing)
  • Revise FAR 15.407-1(c) to eliminate the requirement that a contracting officer shall request an audit if a  contractor voluntarily disclosed defective pricing (less work for DCAA)
  • Submit a legislative proposal to revise the definition of the term "commercial item" to eliminate items and services merely offered for sale, ease, or license.
  • Develop an actionalbe plan to establish Cost and Pricing Centers of Expertise to facilitate Commercial Item Determinations (these Centers of Excellence will reside within DCMA)
  • Develop an actionable plan to assess the benefits of streamlining EVMS operations and centralizing EVMS competency and improve consistency of EVMS implementation. 

Monday, April 13, 2015

Work Sampling

Most Government contractors with cost-type contractors are all too familiar with "floorchecks" - where the contract auditor comes in to your facility and interviews employees about their time charges and the tasks they are currently working. It is considered intrusive, disruptive, and often upsetting to the staff.

The traditional floorcheck is designed to test compliance with written policies and procedures. There is another type of "floorcheck" that the auditor (namely DCAA or Defense Contract Audit Agency) undertakes from time to time that is not necessarily designed to test compliance but is designed to evaluate effectiveness. Its called "work sampling". Work sampling is a commonly used industrial engineering technique designed to estimate how resources such as people, machines, facilities, or equipment are being utilized. For the contract auditor, the objective of work sampling is to assess the workforce utilization of a selected portion of an organization's operations. If an operation is to be audited, work sampling is a low cost alternative to continuous monitoring, just as sampling in the audit context is a low cost alternative to 100 percent evaluation of an account. The cost of continuous monitoring of an entire operation is generally prohibitive, and work sampling can yield a reasonably accurate estimate at a fraction of that costs

Work sampling studies are most often used used by auditors to evaluate a contractor's labor utilization. When performing a work sampling study, the auditor makes a specified number of observations of contractor personnel involved in the operation being audited. Each observation is classified according to type of activity, the activity types being specified prior to sampling. Using information gathered during the study, the auditor can estimate the percentage of time that the workers actually spend in each activity.

With minimal specialized training, an auditor can identify various worker actions and determine whether a contractor's management practices yield reasonable and acceptable levels of working activity. Work sampling may disclose underutilized workers, poor work practices, over-staffing, inadequate training, inefficient plan layout, excessive delays (caused by poor planning, material scheduling, or tooling), or other deficiencies.

In one case of work sampling, the auditor designed observations to validate whether widespread rumors of employees sleeping on the job, leaving early, taking long lunches, playing pool and table tennis, playing card games, etc were substantive. Based on their work sampling observations, the auditors estimated that employees were not working 27 percent of their paid hours. The contracting officer used this information to (i) get the contractor to improve its management practices and (ii) to reduce the amount of award fee paid to the contractor.

Friday, April 10, 2015

Higher Price Not Unreasonable

Many times, the lowest bidder doesn't win. You have to check the evaluation factors to understand why.

The GAO just released a bid protest decision that illustrates this reality. The Army Corps of Engineers issued a solicitation to award five IDIQ (Indefinite delivery/indefinite-quantity) contracts for construction services. It was to be a two-phased procurement where the initial complement of round 1 bidders would be pared down to not more than ten best qualified to participate in round 2.

Round 2 bids were evaluated under the following factors; technical, schedule, design drawings, design narratives, and price. According to the solicitation, the overall design technical factors were equal in importance to price.

Under the solicitation, no less than three and no more than five contracts were to be awarded. Nine bidders made the cut for round 2. At the conclusion of the evaluation, six offerors were included in the best value trade-off. Four of the six were clearly among the five best. The trade-off decision came down to numbers 5 and 6. The Corps decided to go with one over the other and the losing bidder, TMG Services, filed an appeal to the GAO on the basis that its price was significantly lower than that of the other company who's price was "unreasonably high".

The GAO disagreed stating that the selection was made according to the evaluation factors delineated in the solicitation. While TMG's price might have been lower, the other bidder won out in technical, schedule and design narratives. In fact, for "design narratives", the winner was rated outstanding while TMG's was rated only "acceptable". The GAO also looked at basis for the Corps rating system and found no inconsistencies or discriminators. The GAO concluded that  "...TMG has not shown that the agency's determination that (the winning bidder's) overall price was reasonable given its technical approach was inconsistent with the solicitation or otherwise unreasonable."

Selections always come down to the evaluation factors. If price was the only factor, contract awards would be easy. However, there are usually other factors that come into play. Prospective contractors need to know and understand those factors and prepare their proposals accordingly.

Thursday, April 9, 2015

"Towards a More Inclusive Contracting Workforce"

Yesterday, the President's executive order (EO) banning discrimination against lesbian, gay, bisexual, and transgender (LGBT) in the workplace went into effect. The EO prohibits federal contractors from discriminating on the basis of sexual orientation or gender identity when hiring and also prohibits companies that receive contract(s) from the Federal Government from discriminating against their LGBT employees.

According to Anne Rung, Administrator for Federal Procurement Policy under the Office of Management and Budget, this EO "not only assures that LGBT Americans have a more inclusive environment to work and flourish, but also better positions our contracting community to attract and retain the best talent."

Rung also noted that a majority of federal contractors already have policies on the books on LGBT workplace equality. Of the largest 50 federal contractors, representing half of all procurement dollars, 43 of them (86 percent) prohibit sexual orientation discrimination and 31 of them (61 percent) prohibit discrimination based on gender identity. With coverage this good, one wonders why the need for an EO in the first place.

The EO applies to Federal contractors, federally-assisted construction contractors, and subcontractors who perform more than $10 thousand in Federal Government business in any one year. Penalties for noncompliance with the EO could include contract termination.

You can read more about this EO and its implementing regulations by clicking here.

Wednesday, April 8, 2015

Allowablility of Costs Not Specifically Mentioned in FAR

Some Government contractors believe that if a particular cost is not specifically mentioned in a FAR Part 31 cost principle, or is mentioned but not specifically prohibited by those cost principles, they are allowable costs under a contract. That is not the case. FAR 31.204, Application of Principles and Procedures, contains a provision that states "Failure to include any item of cost does not imply that it is either allowable or unallowable." The determination of allowability, in the absence of specific coverage for a particular cost, shall be based on the principles and standards in FAR Part 31 and the treatment of similar or related selected items.

Application of this principle however requires matters of judgment, interpolation, and persuasiveness which many in the Government contracting community are ill-equipped to promote - especially given the relative inexperience of audit and contract administration staffs. Far too many in the acquisition corp, to contractors' delight, take the easy road, reasoning that if a cost is not specifically prohibited, it must be allowable (presuming that the cost also meets the "reasonableness" test).

Sometimes more than one cost principle applies to a contractor cost. A contractor's website might be a good example. Websites can be used for advertising (unallowable), public relations (probably unallowable), employee information (allowable), selling (probably allowable), supplier information (allowable), or dissemination of financial information like 10K reports (allowable). When a cost is subject to one or more cost principles, it should be apportioned among the various principles for allowability considerations and determinations. Where a cost cannot be apportioned, the determination of allowability shall be based on the guidance contained in the subsection that most specifically deals with, or best captures the essential nature of the cost issue. Here again, judgment is required and one would expect that the parties (i.e. the contractor and the Government) might have differing opinions. In the case of websites, is it primarily advertising or primarily some other form of allowable activity?

Contractors should not take the position that costs not addressed in FAR are automatically allowable. Such costs should be evaluated in consonance with these provisions found in FAR 31.204.

Tuesday, April 7, 2015

Boeing Employee Charged With Accepting Kickbacks

Well, we suppose that if it can happen at Boeing, it can happen anywhere.

Boeing has long been known for its exceptional Code of Conduct, not only in the words but in the implementation - setting the proper tone at the top, ensuring that all employees are routinely and frequently trained and reminded of ethical conduct, and even certifying each year that they have read and understood the code. A code of ethical conduct is integral to all internal control systems including accounting, billing, estimating, and purchasing (to name some that the Government is interested in). And the Government has reviewed these internal control systems and found them adequate ("Adequate" is the best a contractor can hope for - systems are either adequate or not adequate).

The Boeing code of conduct includes provisions such as "In conducting its business, integrity must underlie all company relationships, including those with customers, suppliers, communities and among employees." Or, how about this one; "Employees will not engage in conduct or activity that may raise questions as to the company's honesty, impartiality, reputation or otherwise cause embarrassment to the company." Employees certify annually that they will not take advantage of their Boeing position to seek personal gain through the inappropriate use of Boeing or non-public information or abuse their position.

Regarding procurement practices, Boeing likes to think that all procurement actions are based on conformance with all applicable laws, regulations and contractual obligations and all suppliers and their representatives are treated fairly and impartially. Boeing stresses the importance of competitive bidding as a good business practice and considers ability, capacity, integrity, financial status, etc in evaluating a potential supplier before and during a purchase contract.

Boeing's program of ethical conduct must be working pretty well. The Department of Justice just announced that a Boeing employee has been charged with receiving hundreds of thousands of dollars in kickbacks from suppliers in exchange for steering contracts their way (yeah, we know, the guy has only been charged and he's innocent until proven guilty but every one knows the guy's a crook - four people that paid the guy off have already plead guilty). Boeing said it discovered the scheme after receiving a tip from its internal ethics program. It launched its own investigation and later alerted the Government that it suspected the employee was receiving kickbacks. The Government investigated and sure enough, the employee was receiving kickbacks. This is a strong testimony for the effectiveness of internal hot line systems.

At the center of the scheme was a subcontractor to Boeing that specializes in machining, welding and producing sheet metal. In a classic "pay to play" scheme, the subcontractor paid kickbacks to the Boeing buyer in exchange for confidential information  that gave the subcontractor an improper advantage in bidding and ensure that it would receive a contract from Boeing.

The subcontractor evidently specialized in poor quality  because Boeing fired them for poor quality and poor performance. That didn't really stop anyone - they just brought in a "front" company to take over the work. The principles remained the same. In the end, the subcontractor got $4.5 million worth of work from Boeing in exchange for $750 thousand in kickbacks.

You can read DoJ's press release here.

Monday, April 6, 2015

Federally Funded Research and Development Centers (FFRDCs)

Federally Funded Research and Development Centers ((FFRDCs) are organizations established to meet special long-term research and developments needs for the Federal Government that cannot be effectively met by existing federal or contractor resources.

At present, there are 40 such FFRDCs in existence. Each FFRDC has a sponsoring agency and an operating organization. Sponsoring agencies include Defense, Energy, National Science Foundation, FAA (Federal Aviation Administration), the IRS, the National Institute of Health, and NASA.Operating organizations include commercial organizations, nonprofit organizations and educational institutions. Sponsoring agencies generally contract with operating organizations under long term contracts. Within DoD, these contracts are generally for five years. As a practical matter however, once a operating organization has the contract, it has it forever. We don't know of any recent cases where a sponsor agency switched operators. FFRDCs are exempt from the Competition in Contracting Act which allows FFRDCs to receive sole-source contracts.

Some of the more well-known FFRDCs include:

  • The Aerospace Corporation
  • Center for Naval Analyses
  • RAND Corporation 
  • JPL (Jet Propulsion Laboratory)
  • Lawrence Livermore
  • Los Alamos
  • Oak Ridge
  • Sandia

The Government wide policies for establishing, using, auditing, and terminating FFRDCs are contained in FAR 31.017. Sponsors are required to conduct comprehensive audits of the use and need for FFRDCs before renewing a contract or agreement for the FFRDC. The detailed examination must include an assessment of the FFRDC's management controls.

Costs incurred by FFRDCs are generally subject to the cost principles applicable to the type of entity operating the FFRDC. Thus, an FFRDC operated by an educational institution would be subject to the cost principles in OMB Circular A-122 while those operated by non-profits would be subject to the cost principles in OMB Circular A-21. All FFRDCs (including those operated by non-profits and educational institutions, are subject to Cost Accounting Standards (CAS). OMB Circular A-133 (Audits of Non Federal entities that expend Federal awards) is applicable to non-profit and educational operators of FFRDCs. (Note, all of these "circulars" are being superseded by the so-called "Super Circular" for awards made in 2015.

 to the FAR 31.2 cost principles (see Appendix A-300). f. All FFRDCs, including those operated by a nonprofit organization or educational institution, are subject to the CASB rules, regulations, and standards for commercial companies. g. OMB Circular A-133, “Audits of States, Local Governments, and Nonprofit Organizations,” is applicable to an FFRDC operated by an educational institution or nonprofit organization (see 13-205). 13

Friday, April 3, 2015

Inspector General Blasts "Spares" Buying Process

The DoD Inspector General (DoD-IG) issued a report late last month criticizing the Department for ineffectively managing its spare-parts inventories. The report itself has not been made public but a synopsis of the report is available on the IG's website.

Based on its audit, the DoD-IG found that DoD maintained excess inventories of $1 billion and did not effectively manage its spare-parts inventories because of the following:

  • DoD did not review other existing sources and enforce inventory reduction before it purchased spare parts from private sources.
  • DoD did not verify proper spare-part requirements were established for weapon systems.
  • DoD did not include essential inventory management metrics and use accurate metric data and calculations established in the contract requirements.
  • DoD did not provide sufficient oversight and enforce contract requirements.
  • DoD did not report the inventory on its annual financial statements.

There are myriad problems with spare parts inventories not only within the Government but in private industry as well. When spare-parts inventories are dispersed as they are within the DoD, the inefficiencies in managing them become magnified. Every deployment requires spare parts and the military cannot wait around for spare-parts to arrive from a centralized warehouse somewhere in the world. Also, once a unit has spare-parts, it is reluctant to share those with others, even though someone else might have a more pressing need.

DoD has undertaken new strategies to reduce spare-parts inventories. The Department, of course, issued an inventory management improvement plan. They also formed a working group to establish inventory management metrics. They issued new policies. And, they also "drafted" guidelines to manage and account for Government-owned spare-parts inventories controlled by contractors (lets blame the contractors, shall we?)

No one really expects these significantly improve spare-parts management. The DoD-IG, since 1999 has issued 36 reports related to spare-parts inventories. In 33 of those 36 reports, the DoD-IG reported the same finding; DoD did not effectively manage its spare-parts inventories. The correcting action plans were of the same ilk; issue a memo,

Thursday, April 2, 2015

Confidentiality Agreements - Do They Stifle Whistleblowers?

The Securities and Exchange Commission (SEC) yesterday announced its first enforcement action against a company for using improperly restrictive language in confidentiality agreements that have the potential to stifle the whistleblower process. The action was taken against a Government contractor.

The SEC charged Houston-based KBR Inc. (Kellogg Brown & Root) with violating whistleblower protection rules enacted under the Dodd-Frank Act. KBR required witnesses in certain internal investigations interviews to sign confidentiality statements with language warning that they could face discipline and even be fired if they discussed the matters with outside parties without the prior approval of KBR's legal department. Employees were warned that if they violated the terms of the agreements, they could face disciplinary action up to and including termination of employment. Since these investigations included allegations of possible securities law violations, the SEC found that these terms violated a rule that prohibited companies from taking any action to impede whistleblowers from reporting possible securities violations to the SEC.

KBR paid a $130 thousand fine and amended its confidentiality statement by adding language making clear that employees are free to report possible violations to the SEC and other federal agencies without KBR approval or fear of retaliation.

By requiring employees and former employees to sign confidentiality agreements imposing pre-notification requirements before contacting government officials, KBR potentially discouraged employees from reporting fraud, waste, abuse, securities violations, and other wrongful acts. Whistleblower protections prohibit confidentiality agreements, severance "packages" or any other type of agreement that may silence potential whistleblowers before they can reach out to the Government.

According to the SEC, there are no apparent instances in which KBR specifically prevented employees from communicating the the Government however the company's blanket prohibition against witnesses discussing the substance of the interview has a potential "chilling" effect on whistleblowers' willingness to report illegal conduct.

The SEC is recommending that all employers review and amend existing and historical agreements that in word or effect stop their employees from reporting potential violations.

KBR for their part, stated that it only wanted to protect attorney-client privilege and it never intended to stifle whistleblowers.

The SEC press release can be viewed here.

Wednesday, April 1, 2015

DCAA Issues Guidance on What To Do With Overdue Indirect Rate Proposals

DCAA (Defense Contract Audit Agency) has a backlog of about 10,000 incurred cost submissions needing to be audited. Last year, it knocked off about 2,500 of those but another 2,500 were added during the year so the backlog is not dwindling. In a February 12th 2015 audit guidance memorandum, DCAA announced its plan to jettison another 1,000 potential submissions - those that are delinquent and for which the contracting officer has not granted an extension.

The guidance came with an attachment of 1,000 contractors (the list has now been removed from public access) for which auditors need to validate its accuracy. Once validated, the list goes to the respective contracting officers who will do one of two things; obtain an adequate incurred cost submission within 30 days or establish unilateral contract costs as authorized by FAR 42.703-2(c)(1) and FAR 42.705(c)(1).

Whether to apply a unilateral cost decrement and how much to apply are judgments at the discretion of the contracting officers, not DCAA. Upon request however, DCAA is prepared to offer support to assist contracting officers in figuring out a basis for unilateral determination. This would include information such as billing deficiencies, incurred cost audit experience, and other internal control information.

As a last resort (e.g. where no relevant historical information exists for a particular contractor), DCAA is recommending that the contracting officer apply a Agency-wide decrement factor to total contract costs. That factor currently sits at 16.2 percent. This percentage would completely wipe out the profit on most Government contracts and even though temporary (until delinquent contractors submit their claims), it would have potentially disastrous effects on contractor cash flows.

It is imperative then for contractors, when contacted by the contracting officer regarding delinquent incurred cost submissions, to prioritize the preparation and submission of incurred cost submissions.