More Recommendations for Contract Reform

Yesterday we alerted you to a recently published report from POGO (Project on Government Oversight) entitled "Baker's Dozen: 13 Policy Areas that Require Congressional Action". One of the 13 areas involve contract reform. Within the area of contract reform, POGO made six recommendations, one of which we discussed yesterday; the idea of creating a Federal Contract Audit Agency to replace the myriad of organizations - both public and private - now tasked with contract audit oversight.

Today we will briefly describe the other five recommendations that fall under POGO's contract reform initiative. Recommendation No. 3 below seems to run counter to current trends in Government contracting where the Government is pushing commercial item acquisition to the extent that justification is often required when an acquisition is not a commercial item.

1. Need for more information on service contracts. Congress should commission a study of the federal government's use of service contracts and the performance results achieved through them. Service contracting information must be used to inform budgeting and manpower decisions as well as mission and readiness capabilities.

2. Limit the definition of non-traditional contractors. Congress needs to restore the original intent of bringing innovation to the public from non-traditional government contractors, rather than throwing billions of dollars with no oversight controls to the government's top vendors. The definition of non-traditional contractors should be revised and the rules should be changed to prohibit any contractor who has accepted a FAR contract from being eligible to receive on OTA (Other Transaction Agreement).

3. Limit when agencies can use the "commercial item" acquisition process. Congress should redefine a "commercial item" to mean goods or services that are actually sold to the general public in like quantities. Congress should also require manufacturers to share certified cost or pricing data with the government when the government is acquiring commercial goods or services on a sole-source basis, even if the awarded contract contains no flexible pricing provisions. Without such data, there is no assurance that prices are fair and reasonable.

4. Require better preparation for responding to the new normal in disasters. Congress needs to oversee improved inter-agency coordination and more realistic budgeting that allows for expanded pre-established supply stockpiles and properly vetted contracts for rapid effective disaster response. Congress should also strengthen the federal suspension and debarment system so taxpayer money is not wasted on awards to poorly performing or corrupt vendors. Finally, Congress must engage in ongoing oversight of disaster-related spending to ensure timely and effective spending and to safeguard the money from fraud and improper diversion.

5. Improve federal spending data on USASpending.gov. Congress should work with the Department of the Treasury and the Office of Management and Budget to ensure the agencies have the authority , resources, and guidance necessary to improve USASpending. Congress should also closely review the data quality and level of detail for awards reported into USASpending and demand that agencies meet higher standards for critical information around data points such as award descriptions, place of performance, and sub-recipient awards.

Congressman Wants Agencies to Compile More Data

Are contractors (and subcontractors) harmed financially because the Government can't (or won't) definitize change orders in a reasonable amount of time? Are small business contractors more harmed than non-small businesses? That seems to be the case based on legislation recently introduced in the House by Congressman Bacon (Nebraska).

According to Bacon:

Time is money for all businesses, but even more so for small businesses. Requests for equitable adjustments to a contract, more commonly known as change orders, are abundant on federal construction projects. Contractors and subcontractors currently lack visibility into agencies' change order processes prior to submitting a bid. This lack of transparency makes it difficult for federal contractors to prepare for the inevitable burden of change orders during the life cycle of the construction project. Federal construction contractors are increasingly frustrated by the slow approval process and lack of payment for change orders. While change orders wait to be made definite, contractors and subcontractors must pay their own bills - payroll, material costs, and even taxes - while payments from the federal government are delayed.

Bacon's bill is intended to provide prospective federal construction contractors and subcontractors with the information needed to plan their operations prior to submitting a bid on a contract. It would require the contracting agency to provide details on their change order procedures and their historical performance data as part of the solicitation.

Specifically, the following information must accompany solicitations for construction contracts anticipated to be awarded to small businesses. It must cover the prior three-year period.

• Information about the agency's policies or practices in complying with FAR requirements relating to the timely definitization of requests for an equitable adjustment and
• Information about the agency's past performance in definitizing requests for equitable adjustments.

While we can empathize with the cash flow concerns of small businesses, we do not believe such information will have an impact on whether a small business contractor decides to bid or forgo a bid on a construction contract. Most companies do not enter into a contract with the expectation that equitable adjustments will naturally follow. And if something occurs that would necessitate an equitable adjustment, will a small business contractor forgo the opportunity just because an agency takes 90 days instead of 60, or 30?  We think not.

This will create more work for acquisition agencies to compile and keep current and seems contrary to the work of the Section 809 Panel.

Annual Performance Report on the Defense Acquisition System

Last week, the Department of Defense issued its 2014 annual report  on the performance of the Defense Acquisition System. For a full copy of the report, click here. The focus of this year's report was "incentives" - particularly those from contract types and profits (or fees). Ever wonder how the Government selects the type of contract to use in a given situation. Typically, its based on what the Government thinks will incentivize the contractor to perform effectively and economically. This well-written and informative report will provide some insights into the selection process. The conclusions are very interesting and for the most part, something we always knew intuitively but never had the facts and data to back it up. Here then are the report conclusions.

Not all incentives work. Contractual incentives are effective if (i) we use them, (ii) they are significant, stable, and predictable; and (iii) the are tied directly to our objectives.

Cost-plus versus fixed-price is a red herring. The distinction between cost-plus and fixed-price contracts is not the divide on effectiveness. Rather, the emphasis should be on matching incentives to the situation at hand instead of expecting fixed-price contracting to be a magic bullet. Fixed-price contract have lower costs because they are used in lower-risk situations, not because they control costs better. Moreover, prices on fixed-price contracts are only "fixed" if the contractual work content and deliverables remain fixed, which is often no the case. Our analysis showed that objectively determined incentives were the factors that controlled costs, not selecting cost-plus or fixed-price contract types.

CPIF and FPIF contracts perform well and share realized savings. These contract types control cost, price, and schedule as well as, or better than, other types - and with generally lower margins. We pay for the technical risks on our development systems - unlike the private sector, where companies pay for R&D on new products. This is partly due to the fact that we are, to some degree, the only customer for new military products . Thus it makes sense to use incentives that (i) link profit to performance, (ii) control price, and (iii) share in cost savings, especially in production when the risks are low. Specific incentive structures may not be appropriate in certain cases, so professional judgment is needed as always in matching contract type and incentives to the desired outcome.

FFP contracting requires knowledge of actual costs. FFP contracts provide vendors a strong incentive to control costs, especially in production, where they are most common. However, taxpayers do not share in those cost savings, unless the negotiated price took into account actual prior costs and margins, as well as the contractor's anticipated ability to continue cost reduction. Thus, to use FFP contracts effectively, we must fully understand actual costs when negotiating subsequent production lots.

Competition is effective - when viable. Competed contracts perform better on cost, price, and schedule growth than new sole-sourced or one-bidder contracts in development. Thus, we must continue our efforts to seek competitive environments in creative ways. Unfortunately, direct competition on some contracts is not viable - especially in production, where significant entry costs, technical data rights, or infrastructure may be barriers. In response, we are seeking ways in which competitive environments and open-system architectures will allow us to introduce competitive pressures.

Production margins may help minimize development time. Our analysis indicates that the prospect of high margins in production may motivate contractors to complete development as soon as possible. Unfortunately, this assertion is hard to test quantitatively given the predominance of higher margins in all production contracts. However, we did find significant examples where production margins were smaller when development schedules slipped despite an explicit policy to this effect.