Defense Department Preference for Fixed-Price Contracts

Section 829 of the 2017 NDAA (National Defense Authorization Act) directed DoD to establish a preference for fixed-price contracts (including fixed-price incentive contracts) when determining contract types and also to establish a required for "higher-level" approval for certain cost-type contracts.

How did DoD implement this directive? To comply with the fixed-price preference directive, DoD added the following words to its FAR Supplement (DFARS) through its class deviation process:

Contracting officers shall first consider the use of fixed-price contracts, including fixed-price incentive contracts, in the determination of contact type.

There, fixed that. That was easy. What about the higher-level approval requirement? DoD fixed that one as well by stating "heads of contracting activities" must approve cost-reimbursement contracts in excess of $25 million (which many contracting activities require now anyway).

Fixed that one as well.

Some statutes are really easy to implement.

What is a Non-Traditional Contractor?

This week we've been discussing Sec 820 of the fiscal year 2017 NDAA (National Defense Authorization Act) which deals with Cost Accounting Standards, the Defense Cost Accounting Standards Board (DCASB) and privatizing some of DCAA's (Defense Contract Audit Agency) contract audit functions.

Sec 820 makes references to "nontraditional defense contractor" in a couple of places. First, in describing the makeup of the new Defense Cost Accounting Standards Board (DCASB), one of the members of the Board must be a representative of a "nontraditional defense contractor". Second, is a reference to Cost Accounting Standards being a barrier to participation by nontraditional contractors.

There is a definition for  "nontraditional defense contractor" found in 10 U.S.C. 2302 (9) which states:

The term "nontraditional defense contractor", with respect to a procurement or with respect to a transaction authorized under section 2371(a) or 2371(b) of this title, means an entity that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards prescribed pursuant to section 1502 of title 41 and the regulations implementing such section.

This definition is about to become more restrictive because the 2017 NDAA includes a provision that will revise the definition to the following:

The term "nontraditional defense contractor", with respect to a procurement or with respect to a transaction authorized under section 2371(a) or 2371(b) of this title, (A) means a specific business unit or function with a unique entity identifier that is not currently performing and has not performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards prescribed pursuant to section 1502 of title 41 and the regulations implementing such section and (B) does not mean a business unit that received a transfer of procurement or transaction from another business unit within the same corporate entity that is currently performing or performed, for at least the one-year period preceding the solicitation of sources by the Department of Defense for the procurement or transaction, any contract or subcontract for the Department of Defense that is subject to full coverage under the cost accounting standards prescribed pursuant to section 1502 of title 41 and the regulations implanting such section.

The key difference in these two definitions is that if a contractor is getting work from another division under a Government contract, it cannot be a nontraditional defense contractor simply because it doesn't have its own prime contracts.

The other thing to note in this definition is that if a contractor had Defense contracts at one time but has gone a year without any Government work, it re-qualifies as a nontraditional defense contractor.

Defense Cost Accounting Standards - Part 4

We've spent this week covering most of the provisions of Sec 820 of the fiscal year 2017 National Defense Authorization Act (NDAA). On Monday we discussed how Congress intends to rejuvenate the CAS (Cost Accounting Standards) Board. On Tuesday, we discussed the new Defense Cost Accounting Standards Board (DCASB) and yesterday, we discussed the impending privatization of a significant portion of DCAA's (Defense Contract Audit Agency's) workload, e.g. audits of contractor indirect costs.

The whole idea of a Defense Cost Accounting Standards Board (DCASB) began with the Senate version of the 2017 NDAA. The House version did not have a similar provision. The Senate had no confidence in the current CAS Board structure. It wrote:

The committee is disappointed that the Federal Cost Accounting Standards Board does not currently have a quorum of members and has not met in over three years. Due to this situation, it is doubtful that any credible reform will emanate out of the board in the future and the committee believes that a DOD board will be better suited to meet national security needs.

The Senate also expressed the following concern:

...the current cost accounting standards favor incumbent defense contractors and limit competition by serving as a barrier to participation by non-traditional, small business, and commercial contractors. To level the competitive playing field to access new sources of innovation it is in the governments interest to adopt more commercial ways of contracting, accounting, and oversight.

When the bill went to compromise committee, the Senate version prevailed although it was somewhat watered down from what the Senate had proposed initially. Instead of giving up on the CAS Board, the compromise language seeks to improve the workings of the CAS Board and supplement it with a Defense CAS Board (DCASB) to address DoD-unique cost accounting standards (whatever those might be). Instead of promulgating new standards under the Senate version, the final NDAA allows the DCASB to advise the CASB on cost accounting standards that need changing.

The idea of privatizing some of DCAA's workload was retained in the final NDAA even though the Executive Branch opposed it, stating that audits by both DCAA and commercial audit firms would create burdens and inefficiencies for both contractors and Government agencies.

Although not part the of the NDAA, the conferees included language in its explanation of the compromises to "encourage the Director, Defense Contract Audit Agency (DCAA) to examine the potential for electronic quality management systems to improve the ability of DCAA to conduct thorough and timely audits." Not sure what the conferees had in mind here but perhaps we'll learn more later.

Defense Cost Accounting Standards - Part 3

This week, we've been covering various provisions of Sec 820 of the 2017 NDAA (National Defense Authorization Act). Monday we covered how the new law is designed to get the CAS (Cost Accounting Standards) Board moving once again. Yesterday we discussed the formation and duties of a new Defense CAS Board (DCASB). Today we another aspect of Sec 820 that moves to privatize some of the contract auditing function by moving certain audits from DCAA (Defense Contract Audit Agency) to commercial firms.

Under the new provisions, DoD contractors may present and the Defense Contract Audit Agency shall accept without performing additional audits, a summary of audit findings prepared by a commercial auditor if

1. the auditor previously performed an audit of the allowability, measurement, assignment to accounting periods, and allocation of indirect costs of the contractor; and
2. such audit was performed using relevant commercial accounting standards (such as Generally Accepted Accounting Principles) and relevant commercial auditing standards established by the commercial auditing industry for the relevant accounting period (presumably this means audits conducted according to GAAS (Generally Accepted Auditing Standards) and not according to GAGAS (Generally Accepted Government Auditing Standards) or "Yellow Book" audits).

Further, Sec 820 states that DCAA may audit direct costs of DoD cost contracts and shall rely on commercial audits of indirect costs without performing additional audits, except that in the case of companies or business units that have a predominance of cost-type contracts as a percentage of sales, DCAA may audit both direct and indirect costs.

These provisions will have a major impact on DCAA's workload. In recent years, DCAA has concentrated a significant portion of its manpower on performing incurred cost audits. Take that responsibility away and DCAA may not need its current staffing level. Contractors will have to go out and find their own independent auditors to perform the indirect cost effort at additional cost to them. However, to the extent they can charge this to Government contracts, the cost will be reimbursed. A lot depends upon the contract mix and the indirect rate structure as to how much will be reimbursed. Contractors who choose the privatization approach to indirect cost auditing will probably be able to close out contracts much quicker than they do currently.

Tomorrow we will conclude this series on Sec 820 with a few miscellaneous provisions and comments.

Defense Cost Accounting Standards - Part 2

We are continuing to unpack the Defense Const Accounting Standards provision (Sec. 820) included in the 2017 NDAA (National Defense Authorization Act). Yesterday we discussed Sec 820's provisions designed to reinvigorate the CAS (Cost Accounting Standards) Board (See Part 1). Today we discuss the section dealing with the creation of a Defense Cost Accounting Standards Board (DCASB), its purpose and composition.

The DCASB is to be established as an independent board in the Office of the Secretary of Defense. There will be seven members, chaired by DoD's Chief Financial Officer. The remaining six members, all of whom must have experience in contract pricing, finance, or costs accounting include three representatives from the Department of Defense and three from the private sector. The private sector representatives must include one member who is a representative of a nontraditional defense contractor and one of whom is a representative from a public accounting firm.

Don's confuse DCASB with CASB. DCASB is the newly constituted Defense Cost Accounting Standards Board. CASB is the regular Cost Accounting Standards Board which has been around since the early-1970s.

Duties of the DCASB. The DCASB -

1. shall review cost accounting standards established by the CASB and recommend changes to such cost accounting standards to the CASB.
2. has exclusive authority with respect to the Department of Defense to implement such cost accounting standards to achieve uniformity and consistency in the standards governing measurement, assignment, and allocation of costs to contracts with the DoD, and
3. shall develop standards to ensure that commercial operations performed by Government employees at the Department of Defense adhere to cost accounting standards (based on cost accounting standards established by the CASB) or GAAP (Generally Accepted Accounting Principles) that inform managerial decision-making.

We have no idea of the intent of item 3 above but we'll figure it out and let you know once we do.

Sec 820 does not set term limits for DCASB board members except for the provision that Government members can no longer serve after leaving Government service. Private sector members will be compensated at around $80 per hour for the time spent engaged in the actual performance of duties vested in the Board. Government members receive no extra pay.

Tomorrow we will look as specific provisions within Sec 820 affecting DCAA (Defense Contract Audit Agency) and the opportunities for contractors to reduce DCAA oversight.

Defense Cost Accounting Standards - Part 1

Late last Friday, when everyone had left work for the Holidays, the President signed the 2017 NDAA (National Defense Authorization Act). The President's signature was not unexpected though perhaps the timing of it took some by surprise. Today and in the next few postings, we will take a look at some of the provisions that are most likely to impact Government contractors. Of course the $618 billion spending will lead to a lot of work for contractors but after award, then what. We want to look as some of those provisions that not too many are focusing on right now.

The first topic we will discuss is Sec. 820 of the NDAA, Defense Cost Accounting Standards. This section has three main purposes: (i) revive the Cost Accounting Standards Board, (ii) establish a Defense Cost Accounting Standards Board, and (iii) privatize some of the audit work being performed by the Defense Contract Audit Agency.

Revive the Moribund Cost Accounting Standards Board. The Cost Accounting Standards Board (CASB) has been dormant for at least three years. The new provision establishes additional duties for the Board, requires them to meet periodically, and issue reports on their activities.

New duties of the CASB. The new rule establishes three new enumerated duties for the CAS Board:

1. The Board must ensure that the cost accounting standards used by Federal contractors rely, to the maximum extent practicable, on commercial standards and accounting practices and systems.
2. Within one year after the date of enactment (October 1, 2019) and on an ongoing basis thereafter, review any existing Cost Accounting Standards and conform them, where practicable, to Generally Accepted Accounting Principles, and
3. Annually review disputes involving such standards brought to the ASBCA or CBCA or Federal courts, and consider whether greater clarity in such standards could avoid such disputes.

Periodic Meetings. The new rule requires the CASB to meet not less than once each quarter and publish in the Federal Register notice of each meeting and its agenda before such meeting is held.

New reporting requirements. The new rule requires the CASB to submit a report to the congressional defense committees, the Committee on Oversight and Government Reform of the House of Representatives, and the Committee on Home land Security and Governmental Affairs of the Senate describing the actions taken during the prior year to (i) conform the cost accounting standards to GAAP and (ii) to minimize the burden on contractors while protecting the interests of the Federal Government.

Tomorrow we will look at Sec 820's provisions for a new Defense Cost Accounting Standards Board (DCASB).

Unlikely the 2017 NDAA Will Pass Before Fiscal Year End

With Congress getting ready to recess later this week, many are wondering about the status of the Fiscal Year 2017 National Defense Authorization Act (NDAA). Right now, the versions of the Act that passed the Senate and House are being worked by a compromise committee to iron out the differences. If one trusts internet reporting, the only remaining obstacle to a bill for the President's signature is whether to block the sage grouse from being listed as an endangered species. What that has to do with national defense is anyone's guess. Other reporting however speculates that even if Congress passes something, the President is likely to veto it for a variety of reasons - many of which were delineated in the Administration's June 7, 2016 Statement of Administration Policy.

Right now however, Congress seems to be focused on little else than a continuing resolution to keep the Government (and states) running until Congress re-convenes on December 9th. Such a resolution would likely fund the Government at fiscal year 2016 levels. As a result, no one believes that the 2017 NDAA will be passed before Congress recesses or even by September 30th.

Here we go again.

Senate Wants DoD to Cut Senior Executive Positions by 25 Percent

One provision in the Senate's version of the fiscal year 2017 NDAA (National Defense Authorization Act) would require the Department of Defense to cut the number of Senior Executives (SES positions) by 25 percent before January 1, 2019. There are currently 1,000 such positions in the Defense Department so the cut would mean 250 positions. The House version of the 2017 contains no such provision and the two bills are now in compromise committee so the fate of this provision is unknown at this time.

That didn't stop the Secretary of Defense from sending a 23 page letter to the Senate (and a similar letter to the House) objecting to the provision. The Secretary called the provision arbitrary and without justification and would have widespread negative consequences on the Department's mission-critical programs and services. It would demoralize the DoD's civilian workforce when opportunities for promotion to SES are severely eliminated. The Secretary also noted that the Department has already cut the size of its SES workforce by 100 positions since 2010.

So what would a 250 person cut to the Defense's top executive ranks mean to Defense contractors? Well, it means fewer people to handle the same workload. There is nothing in the NDAA that would relieve the Department from some of its existing responsibilities. In the abstract, that means response times will increase. How's the responsiveness of your contracting officers working out for you now? It could get worse, if that's possible. What about the "demoralizing" statement. The opportunities for promotion are strong motivators to perform well. Take those opportunities away and the Secretary is concerned that the Department cannot continue to attract and retain experienced workers.

This provision is more than just an internal cat-fight. It could have a direct impact on the Department's ability to effectively and efficiently award and administer contracts.

Small Exception for Prohibition against Reimbursable Audit Wrok

The National Nuclear Security Agency (NNSA) is a semi-autonomous agency within the U.S. Department of Energy responsible for enhancing national security through the military application of nuclear science. NNSA maintains and enhances the safety, security, and effectiveness of the U.S. nuclear weapons stockpile without nuclear explosive testing, works to reduce the global danger from weapons of mass destruction, provides the U.S. Navy with safe and effective nuclear propulsion, and responds to nuclear and radiological emergencies in the U.S. and abroad.

As we reported on these pages, the 2016 National Defense Authorization Act included a provision that prevented the Defense Contract Audit Agency (DCAA) from performing any services (both audit and non-audit services) for any reimbursable customers until it cleared out its backlog of incurred cost audits of defense contractors. Reimbursable customers in this case is any agency that is not part of the Department of Defense.

One of the unfortunate side-effects of that new statute is agencies having an obvious defense mission, like the National Nuclear Security Agency, were suddenly bereft contract audit services. NNSA, because it had been tucked under the Department of Energy rather than the Department of Defense, was one of those Agencies.

The Senate version of the Fiscal Year 2017 National Defense Authorization Act (NDAA) seeks to remedy that situation, at least as it pertains to NNSA. DCAA is continues to be precluded from performing any reimbursable audit services except for the NNSA. The specific exception reads:

(2) Exception for National Nuclear Security Administration. Notwithstanding paragraph (1), the Defense Contract Audit Agency may provide audit support on a reimbursable basis for the National Nuclear Security Administration.

We have heard (unofficially, of course) that DCAA is making steady progress in reducing its incurred cost backlog. If so, DCAA may soon be back performing reimbursable audit services.

Possible Exemption for DoD Contractors from the Fair Pay and Safe Workplace Executive Order

The President's Fair Pay and Safe Workplace Executive Order 13673 has, to say the least, been very controversial, not for what it tries to achieve, but for the extreme record-keeping and reporting burden it places on businesses doing work for the Government. One of the recurring criticisms is its application to all contractors including those who have never had issues with of violations of pay and safety regulations. The implementing regulations by themselves are extensive. The Department of Labor's is 103 pages. The FAR Council's draft is 131 pages on top of Labor's. Other Agencies of the Federal Government have their own.See our post from last March, Fair Pay and Safe Workplaces with links to other postings on our coverage of the subject.

The 2017 NDAA (National Defense Authorization Act) is attempting to overturn much of this Executive Order. There is a provision in both the Senate and House versions of the 2017 NDAA that will exempt most Defense contractors from the provisions of the Executive Order and its implementing regulations. One could probably call this NDAA provision "contentious" because the President has already threatened a veto of the NDAA if it remains.

Specifically, Section 829H of the Senate Version states:

APPLICABILITY OF EXECUTIVE ORDER 13673 4 ‘‘FAIR PAY AND SAFE WORKPLACES’’ TO DEPARTMENT OF DEFENSE CONTRACTORS.

(a) LIMITATION.—The Secretary of Defense shall apply any acquisition regulations promulgated pursuant to Executive Order 13673 or any successor executive order only to contractors or subcontractors who have been suspended or debarred as a result of a Federal labor law violations covered by Executive Order 13673.

(b) COMPLIANCE REQUIREMENTS.—The Secretary shall ensure that Department of Defense contractors or subcontractors who are not described under subsection (a) are not compelled or required to comply with the conditions for contracting eligibility as stated in any acquisition regulations promulgated to implement Executive Order 13673.

Based on this provision, only contractors (and subcontractors) that have been suspended or debarred as a result of a Federal labor law violation will be required to comply with any acquisition regulations promulgated as a result of the Fair Pay and Safe Workplaces Executive Order.

We wonder whether any contractor has been suspended or debarred as a result of Federal labor law violations. There can't be many.

Payment of Costs for Denied Protests

Yesterday we discussed the study that Congress wants performed on the impact of bid protests to the Government procurement process and particularly, the impact on DoD. If you missed that post, be sure to read it here. There is another provision in the Senate version of the 2017 NDAA that may have a profound impact on the number of protests. It's found in Section 821 and is entitled "Government Accountability Office Bid Protest Reforms.

There are two elements to the provision, contractors who loose the bid protest and incumbent contractors who lose the bid protest.

Contractors who lose a bid protest.

A contractor who files a protest with the Government Accountability Office (GAO) on a contract with the Department of Defense shall pay to the GAO costs incurred for processing a "covered" protest. A covered protest is one where all of the elements being protested are denied in an opinion issued by the GAO and filed by a party with revenues in excess of $100 million during the previous year. Because of the $100 million in revenue threshold, most small businesses will not have to pay processing costs, even if they lose their bid protests.

The proposal does not state how "processing" costs will be determined but attorneys (including GAO attorneys) are not inexpensive.

Incumbent contractors who lose a bid protest.

There is a feeling within the Government that incumbent contractors protest awards to successor contractors simply to pro-long their revenue streams. This provision applies to incumbent contractors without regard to revenue thresholds.

Contractors who file a protest on a contract on which they are the incumbent contractor shall have all payments above incurred costs withheld on any bridge contracts or temporary contract extensions awarded to the contractor as a result of a delay in award resulting from filing a protest.

All payments shall be released to the protesting incumbent contractor if the solicitation that is the subject of the protest is cancelled and no subsequent request for proposal is released or planned for release or the GAO issues an opinion that upholds any of the protest rounds filed under the protest.

If the protest is not sustained, all payments above incurred cost shall be released to the contractor that was awarded the protested contract prior to the protest.

If no contract is awarded, the withheld payments shall be released to the GAO and deposited to an account that can be used by the Office to offset costs associated with GAO bid protests in which the GAO issues an opinion in favor of a small business concern, either as a direct or third party beneficiary.

We've read some speculation that this Senate provision will not survive to final passage of the 2017 NDAA. There would seem to be a lot of implementation issues. What happens if a GAO decision is appealed? How does one calculate "processing costs". How does one determine "profit" on a competitively awarded contract? And so on.

Study to Determine the Impact of Bid Protests on Government Contracting

Its the time of the year when House and Senate committees are considering next fiscal year's National Defense Authorization Act. Right now, there are differences between the House and Senate versions and various committees are doing their "markups". Its impossible to predict the final version but it is interesting nonetheless to peer in and see what Congress is thinking.

One of the provisions that appears in the markup of the Senate Armed Services Committee is a requirement to study the GAO bid protest process. There's no doubt that some firms and individuals have abused the process and that it is costly from the Government's standpoint. However, there have been many "wrongs" that have been "righted" by the process.

Section 822 requires the Defense Department to contract out for a comprehensive study on the prevalence and impact of bid protests on DoD acquisitions including protests filed with contracting agencies., the GAO (Government Accountability Office), and the Court of Federal Claims (wouldn't it be ironic if the contract to perform the study was protested by an unsuccessful bidder?)

The study and accompanying report is to include the following elements.

1. A description of trends in the number of bid protests filed and the rate of such bid protests compared to contract obligations and the number of contracts.
2. An analysis of bid protests filed by incumbent contractors including (i) the ratee at which such protesters are awarded bridge contracts or contract extensions over the period that the protest remains unresolved, and (ii) an assessment of the cost and schedule impact of successful and unsuccessful bid protests filed by incumbent contractors on contracts for services with a value in excess of $100 million.
3. A description of trends in the number of bid protests filed and the rate of such bid protests on (i) contracts valued in excess of $3 billion, (ii) contracts valued between $500 million and $3 billion, and (iii) contracts valued between $50 million and $500 million and (iv) contracts valued under $50 million.
4. An assessment of the cost and schedule impact of successful and unsuccessful bid protests filed on contracts valued in excess of $3 billion.
5. An analysis of how often protesters win the protests contract.
6. A summary of the results of protests in which the contracting agencies took unilateral corrective action including (i) average time for remedial action and (ii) determination as to what extent such unilateral action was a result of a violation of law or regulation by the agency, or such action was a result of some other factor.
7. A description of the time it takes agencies to implement corrective actions after a ruling or decision

The report and related recommendations must be completed within one year of enactment of the NDAA. Although its possible that this provision of the draft NDAA may not make the final cut, it seems likely that it will since, at this point, its only a study.