Government Disapprove's Bechtel's Purchasing System

FAR Part 44 lays out the case for Government reviews of contractor purchasing systems. The objective of a "Contractor Purchasing System Review" (CPSR) is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when purchasing and subcontracting. CPSRs provide the contracting officer a basis for granting, withholding, or withdrawing approval of a contractor's purchasing system.

The Defense Contract Management Agency (DCMA) is the organization with primary responsibility for reviewing contractor purchasing systems. DCMA has a CPSR review team that specializes in performing these reviews. The basis threshold for performing CPSRs is $25 million in cost type contracts during the next twelve months but that is somewhat fluid. The ACO (administrative contracting officer) determines the need for a review and considers other risk factors beyond the $25 million. Generally, CPSRs are conducted once every three years (Note, DCMA's Guidebook for performing CPSR's is available here).

The CPSR team conducting these reviews perform a deep dive into the policies, procedures, and practices for purchasing and subcontracting. It's not often that the team finds issues with policies and procedures as most contractors have had years to develop and evolve those documents. It is very easy for them to find non-compliance issues however. No one or no company is perfect and its not uncommon to overlook a checkbox, omit some documentation, or fail to obtain a required signature. The CPSR team writes up these infractions, the contractor promises to do better, and everyone goes on with business as usual for the next three years when the cycle begins again. If the deficiencies are significant enough, the contracting officer can withhold approval of the purchasing system which then requires contractors to obtain contracting officer approval prior to purchasing materials or entering into contracts.

It is very uncommon for CPSR reports to become public but it happened recently as at least two newspapers ran stories about a CPSR review performed at Bechtel National Industries that resulted in the Government pulling the contractor's procurement authority. Bechtel is the prime contractor on a $17 billion project to design, construct and commission a plant to turn radioactive waste into glass logs (the process is called vitrification). The plant was initially budgeted at less than $5 billion but that is a different story.

Without an approved purchasing system, Bechtel must obtain consent from a Energy Department contracting officer to award any fixed price contracts in excess of $150 thousand. The Energy Department stated that the new process will stay in effect as long as Bechtel's purchasing system remains "disapproved". Purchasing system deficiencies reported in the press include:

• Missing paperwork to document that the subcontractor had not been suspended or debarred.
• Missing certifications that subcontracted funds would not be used for lobbying
• Missing information as to how subcontractor was selected.
• Failing to notify the Energy Department 24 hours in advance of awarding a subcontract.

Bechtel, for its part, promised to conduct additional oversight on its practices to ensure compliance but indicated the added burden of obtaining Energy Department approval for every new purchase would not affect the construction schedule. 

Is Your Purchasing System Adequate?

How do you know whether your purchasing system is good enough for Government contracting? There are guidelines in the FAR (Federal Acquisition Regulations) and various FAR supplements (e.g. the DoD FAR Supplement or DFARS) to help contractors make self-assessments as to whether their purchasing systems are adequate for Government purposes. Often, when people hear about purchasing systems they have subcontracting in mind. However, the term purchasing system can also encompass the full range of material purchases. Ultimately, the Government is most concerned that contractors spend Government funds most efficiently and effectively. To the extent that your purchasing system can provide that assurance, you should be good to go.

Perhaps the most comprehensive listing of the characteristics of a purchasing system are found in DFARS 252-244-7001. There are 24 of them but we'll just examine a few.

The most important thing about a "system" is its documentation. There needs to be a system description that includes policies, procedures, and purchasing practices. These policies, procedures, and practices must comply with FAR and DFARS (or other Agency supplements, although many Federal agencies defer to DoD anyway). If you don't have a system description, you will fail right out of the gate. Your purchasing system will not be adequate because no one will have the road map.

Flow-down clauses. Many of prime contract clauses are required to be flowed down to subcontracts. This is not as easy as it sounds because there is no centralized listing of what needs to be flowed down for each type of contract. At a minimum, contractors need to identify the mandatory clauses but that would not be sufficient for most purposes. For example, the Government's termination for convenience clause is not a required flow-down clause but a contractors would certainly want that clause in any subcontract that it awards if it is in their prime contract.

Lines of authority. Does the purchasing organization have clear lines of authority and responsibility? Is there a division of responsibility that reduces the likelihood of fraud in the purchasing organization? Many of the reported fraud investigations were the result of someone messing with the purchasing function. Many frauds could have been avoided with the proper internal controls, lines of authority, and division of duties.

Are purchase orders based on authorized requisitions and include a complete and accurate history of purchase transactions to support vendor selections, and prices paid. The Government will, at some point, request PO/Subcontract files and would expect to see this information/data.

Does the system show evidence that price, quality, delivery, technical capabilities, and financial capabilities of competing vendors were considered and properly evaluated to ensure fair and reasonable prices? Or, to state it differently, how do you prove to the Government that you got the best price?

Regardless of whether a company has Government contracts, the purchasing function is critical to the organization and will ultimately affect its bottom line.

New DCMA Guidebook on Purchasing Systems

UPDATE 2: The May 9, 2017  CPSR Guidebook discussed below has been replaced with a March 1, 2018 version.

UPDATE: The January 18 2017 CPSR Guidebook referenced below has been replaced with a May 9, 2017 version.

Government prime contractors have the responsibility of managing their purchasing program. DCMA (Defense Contract Management Agency) and specifically DCMAs' CPSR (Contractor Purchasing System Review) teams is responsible for evaluating the contractor's overall purchasing system to ensure that it is efficient and effective in the expenditure of Government funds and in compliance with contract requirements.

CPSRs are conducted at contractors where annual sales to the Government (including subcontracts) are expected to exceed $50 million in a 12 month period. The ACO determines the need for a CPSR based on various factors such as past performance, volume, complexity and dollar value of subcontracts. The ACO must perform a risk assessment at least once every three years to determine whether a CPSR is needed.

The requirements for an adequate purchasing system are found in FAR 44.3, 44.202-2, and DFARS (DoD FAR Supplement) 244.3. DFARS 252.244-7001(c) contains a listing of 24 criteria that a system must meet in order for it to be considered adequate.

DCMA performs various levels of review. First there is the Initial/Comprehensive review which is exactly what the title states. Both reviews cover the 24 criteria. The next level down is a "Special Review" which investigates specific weaknesses identified during contract performance. Finally, there is the "Followup  Review" which examines the sufficiency of contractor corrective action to previously disclosed purchasing system deficiencies.

DCMA recently published an update to its CPSR Guidebook (January 18, 2017). The first fifteen or so pages deal with internal policies for performing and reporting on CPSRs. The good stuff is in the 25 Appendices which takes up the bulk of the 100 page Guide. These appendices roughly correspond to the 24 DFARs criteria for an adequate purchasing system but go much deeper into the fundamental requirements. For example, the appendix on "Limitation on Pass-Through Charges" includes an introduction, a section citing regulatory references, the applicability, exemptions, contractor practices, policies and procedures, and best practices.

The DCMA CPSR Guidebook can be a very valuable resource for contractors (and subcontractors) for establishing their own purchasing systems and for evaluating existing systems against DCMA criteria for adequacy. Download it here.

Estimates for Complying with Government Regulations

From time to time, the FAR Councils publish notices asking for public comments regarding an extension to a previously approved information collection requirement. These notices are required under the provisions of the Paperwork Reduction Act.

These are primarily formalities and most of the time, no one from the public bothers to comment. We don't pay much attention to them either except when they pertain to matters that we write about in this blog and even then, we read them only to learn what the Government's estimate for contractor hours required to comply with the collection requirements.

As an example, today the FAR Councils published a notification pertaining to purchasing systems. FAR Part 44 discusses contractor purchasing system reviews (CPSRs), the objective of which is to evaluate the efficiency and effectiveness with which a contractor spends Government funds and complies with Government policy when subcontracting.

A CPSR provides the administrative contracting officer (ACO) a basis for granting, withholding, or withdrawing approval of a contractor's purchasing system. A review is generally required for contractors expected to receive $25 million or more in the upcoming 12 months but that threshold can be raised or lowered depending upon perceived risk to the Government.

A CPSR covers such things as market research accomplished, price competition obtained, pricing policies and techniques, methods of evaluating subcontractor responsibility, implementation of small business goals, compliance with Cost Accounting Standards, management controls systems, and more.

The FAR Councils estimate that the Government will perform 1,580 CPSR reviews per year. That estimate doesn't sound out of line. But here is what's laughable. They estimate that contractors will expend an average of 25 hours preparing for and supporting each CPSR. We have been involved in many CPSR reviews, primarily as Government auditors in support of DCMA (Defense Contract Management Agency) review teams and have never experienced one where the contractor expends only 25 hours. Contractors are more likely to spend ten times that number of hours by the time the review is completed.

How Long Do You Spend Preparing for a CPSR?

The objective of a contractor purchasing system review (CPSR) is to evaluate the efficiency and effectiveness with which the contractor spends Government funds and complies with Government policy when buying materials and for subcontracting some of the required effort. The review provides the administrative contracting officer a basis for granting, withholding, or withdrawing approval of the contractor's  purchasing system.

DCMA (Defense Contract Management Agency) is the Agency responsible for conducting CPSRs. Among other things, the Agency looks at the adequacy of the system description (e.g. policies, procedures, and operating instructions) and that those policies and procedures are being followed.

These CPSR reviews are far from routine or perfunctory. DCMA's own guidebook for performing CPSRs is 40 pages by itself. The DCMA Instruction adds another 40 pages. DCMA's notification of a pending review also requests that the contractor compile and submit reams of data prior to the initiation of fieldwork. Understandably, a CPSR notification begins a flurry of contractor activity to prepare for the review.

With this background, we were amused at the Government's estimate of the time required by contractors to prepare for and support such a review. The FAR councils estimate that it takes an average of 25 hours of contractor time for "reading information and preparing for a CPSR". That estimate is laughably and significantly understated, perhaps intentionally so. In our own past involvement in CPSR activities, both as team members on the Government side and support for the contractor's side, we know that contractor effort alone will run into the hundreds of hours by the time the review is completed.

When promulgating regulations, it seems to us that the FAR councils consistently underestimate the true cost of compliance. Perhaps if the estimates were more realistic, someone might question the cost/benefit of these regulations.