End of the Road Looming for Cost-Type Construction Projects

The Department of Defense is proposing a change to its Federal Acquisition Regulation Supplements (DFARS) that will prohibit any form of cost-plus contracting for military construction projects or military family housing projects. This prohibition will appear at DFARS 216.301-3. Currently, the prohibition applies to Cost-Plus-Fixed-Fee contracts. The new regulation broadens that to include all form of Cost-Plus contracting.

It seems to us that this is rather a DoD formality because cost-type contracts for military construction has been pretty much taboo for a long time. According to the Federal Procurement Data System, DOD awarded only 15 cost-reimbursement construction contracts in Fiscal Year 2015. 

The Hanford Waste Treatment Plant project illustrates the dangers of cost-plus contracting for construction projects. The Department of Energy (DOE). DOE has watched the cost of its Hanford Waste Treatment Plant balloon from $4.3 billion in 2000 to now over $12 billion and the project is still not finished. That latest estimate is going higher. Cost-type contracts for construction are not good for whoever is paying the bill and everyone knows it.

This new rule comes as a result of a provision in the Fiscal Year 2012 National Defense Authorization Act. Although it doesn't significantly change existing practices, the fact that it is not based on Statute (Public Law 112-81 and 10 USC 2306(c) makes it more difficult for DoD to seek a waiver or to otherwise find a way around the prohibition.

Contracting Deficiencies at DHHS (Department of Health and Human Services)

Everyone is aware of of the troubled launch of HealthCare.gov. The Office of Inspector General (OIG) for the Department of Health and Human Services (DHHS) set out to find out the causes and has just released a report noting that the root causes were primarily contract related (no surprise there).

The Federal Marketplace at HealthCare.gov was designed to enable millions of Americans to select health insurance in a "one-stop shop" environment. A project of that magnitude required the development, integration, and operation of multiple information technology (IT) systems and Government databases. The CMS (Centers for Medicare and Medicaid Services) was the organization within DHHS responsible for the project. CMS acquisition planning and procurement activities were among the first steps critical to ensuring the success of this project. CMS awarded 60 contracts to 33 different companies to perform the work. The fractured launch of the Federal Marketplace raised a number of concerns, including questions about the adequacy of CMS's planning and procurement efforts for the project.

In its report, the OIG noted that CMS did not always meet contracting requirements. For example,

• CMS did not develop an overarching acquisition strategy for the Federal Marketplace
• CMS did not perform all required oversight activities
• CMS missed opportunities to leverage all available acquisition planning tools and contracting approaches to identify and mitigate risks
• CMS did not exercise the option to plan for a lead systems integrator to coordinate all contractors' efforts prior to the launch of the Federal Marketplace.
• CMS did not perform thorough reviews of contractor past performance when awarding two key contracts.
• CMS made contracting decisions that may have limited the number of acceptable proposals for much of the key work.
• CMS selected contract types that placed the risk of cost increases for this work solely on the Government (i.e. CMS awarded cost-reimbursable contracts).

And, of course, CMS made a number of dutiful recommendations corresponding to these identified deficiencies but such recommendations are pretty much meaningless - its like closing the barn door after the cows have left the barn. CMS may never have another program of the size and magnitude of the Federal Marketplace  - and if they do, perhaps it would be wise to ask for help from an agency that has experience in major systems acquisition planning and contracting.

It always amazes us that after some major flare-up like the roll out of HealthCare.gov, the agency's Inspector General arrives for an audit, spends a lot of time, and issues reports stating the obvious - you didn't follow policies and procedures. Agency responses are always the same - oops, you're right and it will never happen again because we're going to do this, that, and the other thing. The OIG then says something like "good response, your proposed corrective action will work", then go home and collect their paychecks.

You can read the entire OIG report here.

What are "Letter Contracts"?

A "Letter Contract" (also known as an Undefinitized Contract Action or UCA) is a type of contract. Its a temporary contract that allows contractors to get started on a project before a "real" contract can be negotiated. Letter contracts are used rarely and only when the Government's interests require that work start immediately because there is insufficient time to negotiate a definitive contract. We see these used in contingency operations (e.g. Iraq & Afghanistan) or in natural disasters (Katrina) to get supplies or relief rolling. Letter Contracts are also used to allow contractors to procure "long lead" items that need to be ordered immediately in order to complete production by a specified due date.

The use of a letter contract must be approved, in writing, by the head of the contracting activity (HCA). This approval must include a finding that no other contract is suitable (see FAR 16.603-3). The letter contract must also include a NTE (not-to-exceed) price. Herein lies the risk for both the Government and contractor. If the Government does not have time to negotiate a contract, the contractor probably doesn't have sufficient time to prepare an adequate estimate of costs. Significant oversights could lead to unanticipated financial burden. On the other hand, since the contractor does not have sufficient time to prepare an adequate estimate, the tendency is to throw everything including the kitchen sink into the NTE price (defective pricing does not apply at this point in the contracting process). If any of those costs have been incurred at the time of contract definitization, the Government is hard -pressed to question them.

The Government and the contractor are required to definitize  a letter contract (agree upon contractual terms, specifications, and price) by the earlier of

• 180 day period after the date of the letter contract, or 
• The date on which the amount of funds obligated under the contract action is equal to more than 50 percent of the negotiated overall ceiling price for the contractual action.

Letter contracts do not obligate the Government to pay up to the amount of the NTE price. The maximum liability of the Government is the estimated amount necessary to cover the contractor's requirements for funds before definitization, but shall not exceed 50 percent of the estimated cost of the definitive contract unless approved in advance by the official who authorized the letter contract.

There are a few restrictions on the use of letter contracts. They cannot be used to

• Commit the Government to a definitive contract in excess of funds available at the time of contract.
• Be entered into without competition when required.
• Be amended to satisfy a new requirement unless that requirement is inseparable3 from the existing letter contract.

Prohibition on Contract Awards to Scofflaws

The Department of Defense issued a directive last Tuesday that prohibits the award of any contract, using funds made available by the 2013 Continuing Appropriations Resolution (Public Law 112-175) to companies that have unpaid Federal taxes and companies convicted of felony criminal violations within the preceding 24 month period.

Specifically, the prohibitions are worded as follows:

• Has any unpaid Federal tax liability that has been assessed, for which all judicial and administrative remedies have been exhausted or have lapsed, and that is not being paid in a timely manner pursuant to an agreement with the authority responsible for collecting the tax liability, where the awarding agency is aware of the unpaid tax liability, unless the agency has considered suspension or debarment of the corporation and made a determination that this further action is not necessary to protect the interests of the Government, or
• Was convicted of a felony criminal violation under any Federal law within the preceding 24 months, where the awarding agency is aware of the conviction, unless the agency has considered suspension or debarment of the corporation and made a determination that this further action is not necessary to protect the interest of the Government.

Its unlikely that an agency would be aware of these events in the regular course of business so there is the added provision that requires bidders to make affirmative responses to representations to the effect that these situations do not apply. Those representations are found in DFARS (the DoD FAR Supplement) 252.209-7996 and 2523209-7997.

Contracting officers are directed to consult with agency debarring and suspending officials if and when they receive affirmative responses from bidders. As a practical matter however, there doesn't seem to be any value in submitting a bid in the first place for contractors that admit to not paying taxes or have been convicted of a criminal violation; their offers will be tossed out of the competition anyway.

Cuts Coming in Management Support Service Contracts

Last summer, the OMB (Office of Management and Budget) announced a goal of reducing spending on management support service contracts across all agencies by 15 percent. Until recently however, we didn't know what this meant in terms of absolute dollars. Earlier this month, OMB provided that information.

According to OMB, the Federal Government spends about $44 billion a year on management support services such as engineering and technical services, acquisition planning, information technology services, and program management. Ten years ago, that figure was only $11 billion. Many of these contracts are awarded on a "time-and-material" basis which OMB believes put agencies at greater cost risk than when fixed price contracting is used. Also, OMB believes that magnitude of these contracted services creates a potential risk of overreliance on contractors for critical activities related to agencies' missions and operations. By September 30, 2012, OMB wants to reduce spending in this area by $6.7 billion.

To achieve this goal, OMB is requiring agencies justify in writing that their support service contracts are essential and the justification must be accompanied by "high level" approval. Agencies will also need to justify the contracting type used, if not firm-fixed price.

These reductions, if they actually happen, will have a significant and direct impact on many Government contractors, including small businesses who have benefited from support service contracting over the years.

Justification and Approval (J&A)

Justification and Approval (J&A) is a document used to justify and obtain appropriate level approvals to contract without providing for full and open competition as required by the Federal Acquisition Regulation (FAR).  J&As are required for contracts over $550 thousand except for those awarded to 8(a) small businesses (including Native Enterprises). The threshold for 8(a) small businesses is $20 million.

Under certain conditions, the Government may contract without providing for full and open competition. This authority is found in 10 U.S.C. 2304(c) for the Department of Defense, Coast Guard, and NASA and in 41 U.S.C. 253(c) for all other executive agencies. Contracting without providing for full and open competition or full and open competition after exclusion of sources, is a violation of these statutes unless permitted by one of the seven exceptions listed in FAR 6.302. These exceptions include;

1. Only one responsible source and no other suppliers or services will satisfy agency requirements
2. Unusual and compelling urgency
3. Industrial mobilization, engineering, developmental, or research capability or expert services
4. International agreement
5. Authorized or required by statute
6. National security
7. Public interest

JUSTIFICATION FOR NON-SMALL BUSINESSES

Each justification must contain, at a minimum, the following 12 elements,

1. Identification of the agency and the contracting activity, and specific identification of the document as a “Justification for other than full and open competition.”
2. Nature and/or description of the action being approved.
3. A description of the supplies or services required to meet the agency’s needs (including the estimated value).
4. An identification of the statutory authority permitting other than full and open competition.
5. A demonstration that the proposed contractor’s unique qualifications or the nature of the acquisition requires use of the authority cited.
6. A description of efforts made to ensure that offers are solicited from as many potential sources as is practicable,
7. A determination by the contracting officer that the anticipated cost to the Government will be fair and reasonable.
8. A description of the market research conducted and the results or a statement of the reason market research was not conducted.
9. Any other facts supporting the use of other than full and open competition,
10. A listing of the sources, if any, that expressed, in writing, an interest in the acquisition.
11. A statement of the actions, if any, the agency may take to remove or overcome any barriers to competition before any subsequent acquisition for the supplies or services required.
12. Contracting officer certification that the justification is accurate and complete to the best of the contracting officer’s knowledge and belief.

JUSTIFICATION FOR SMALL BUSINESSES

The justification requirements for 8(a) small businesses are greatly reduced. Contracting officers need to address only five elements:

1. A description of the needs of the agency concerned for the matters covered by the contract
2. A specification of the statutory provisions providing the exception from the requirement to use competitive procedures in entering into the contract
3. A determination that the use of a sole-source contract is in the best interest of the agency concerned,
4. A determination that the anticipated cost of the contract will be fair and reasonable,
5. Such other matters as the head of the agency concerned shall specify.

The aforementioned Statutes require that J&As must be made available to the public within 14 days after contract award. If you believe that you have been inappropriately excluded from consideration, you should check with FedBizOpps to see whether a J&A has been issued.

Contracting Officer Representatives (COR)

Litigation involving Government contracts sometimes results, not infrequently by the way, from a contractor doing something at the direction of the Government and finding out later that it is not going to be compensated for the extra work. It is very important for contractors to keep in mind that only the contracting officer has the authority to make any commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contract. While there may be a host of other Government representative that look and act like they have such authority, they do not. The contracting officer representative (COR) is one of those that do not have such authority. The COR position, because they are usually on-site and very knowledgeable about the project, is often at the heart of these disputes.

Contracting officer representatives (CORs) are individuals appointed by the contracting officer (CO) to assist in the technical monitoring or administration of a contract. Although CORs can be employed on all types of contracts, they are more common in complex and long term services, supply, and/or construction contracts.

The responsibilities of a COR vary with the type of contract and complexity of the acquisition. Typical among those responsibilities are

• Monitoring the contractor's progress and performance, including the submission of required reports or other documentation.
• Perform necessary inspections, including documenting the inspection with a report concerning performances of services rendered under the contract.
• Verify that the contractor has corrected all correctable deficiencies
• Perform acceptance for the government of supplies and services received, including certifying receipt of supplies/services.
• Maintain liaison and direct communications with both the contractor and the contracting officer
• Recommend to the CO contract modifications and termination actions.
• Assist in meeting the Government's contractual obligations to the contractor.
• Provide technical interpretation of the requirements
• Perform Government property surveillance.
• Report any instance of suspected conflict of interest or fraud, waste, and abuse.

A COR does not have the authority to make any commitments or changes that affect price, quality, quantity, delivery, or other terms and conditions of the contract. They may not make agreements with a contractor requiring the obligation of public funds, they cannot sign any contract, delivery order, purchase order, or modify a contract.

Here's where things get sticky and litigation ensues. CORs may not encourage the contractor by words, actions, or a failure to act to undertake new work or an extension of existing work beyond the contract period; interfere with the contractor's management prerogative by supervising contractor employees or otherwise directing their work efforts. CORs may not authorize a contractor to obtain property for use under a contract; allow government property accountable under one contract to be used in the performance of another contract; issue instructions to the contractor to start or stop work order or accept goods or services not expressly required by the contract.

Contractors will do well to understand the duties and responsibilities of both COs and CORs.

It Takes Time and Money to Win Government Contracts

We came across an interesting survey not long ago from the small business division of American Express. Last April, American Express released a government contracting survey of 1,500 small businesses. These businesses include active contractors, inactive contractors, and some that are simply registered in the CCR but have not yet landed a contract.

This survey revealed some best practices for small businesses to succeed in government contracting. The two most important pieces of advice that successful contractors offered are to start with small contracts since they can lead to larger opportunities, and to be persistent.

According to American Express, active contractors are more successful in winning government contracts in part because they are more vigorous in the bidding process. They take an average of 1.7 years to win their first federal contract, submit an average of nearly 7 federal prime contracting bids and win almost 3 contracts per year.

Active contractors made an estimated $86,000 investment in time and money in 2009 seeking federal contracts. The median sales for active small business contractors was between $1 and $4.9 million, and federal contracts accounted for 38% of their revenues.

Many small business owners who have not yet won their first prime contract are just getting started. Four in ten (42%) non-contractors have started pursuing federal contracting only recently, having registered on the CCR (a necessary first step in the federal procurement process) in 2008 or later. Thus, many of them will become successful -- if they keep bidding -- over the next year.

The survey also found that getting on the General Services Administration (GSA) Schedule can be an important strategy for winning federal government business. The GSA Schedule is a list of approved vendors for the products and services the government procures. One-third (34%) of active small business contractors are on the GSA Schedule while only 13% of currently inactive contractors are on it. There is a significant gender difference in the firms who are seeking procurement opportunities through the GSA Schedule: 40% of women business owners who are active contractors are on the GSA Schedule versus 31% of men business owners.

In another marker of success, fully 80% of active small business contractors who are on the GSA Schedule have annual revenues of $1 million or more and derive 47% of their annual revenues -- at least $500,000 per year -- from federal contracts.

If you wish to read more about this survey, go here.

DoD Stepping All Over Itself With Reforms

The Federal Times published an article this week on the plethora of reforms going on within DoD that are contradictory and have a propensity to undermine others. You can read the article here. First there was reform to ensure that contractors were not doing work that the Government should be doing. Then came a campaign to reduce reliance on contractors through in-sourcing. After that, the Secretary of Defense announced reforms to ferret out $100 billion in five years in excess overhead spending. In September, the Secretary  proposed measures to improve affordability and productivity. The article points out that the drive for affordability contradicts the campaign to reduce reliance on contractors and in-sourse work. Affordability, the Federal Times contends, means managing to cost and schedule, two things that government has never been good at but which are hallmarks of the American free enterprise system. (We're not so sure of that statement. Take a look at Lockheed's F-35 program - over budget and behind schedule and the company just had its EVMS certification withdrawn). Regardless, the article makes some very good points. You'll need a scorecard to track the progress of these reforms.

Continuation of Essential Contractor Services

DoD has amended the DFARS (the DoD FAR Supplement) to require contractors, that provide essential contractor services (as determined by the requiring activity) be prepared to continue such services during periods of crisis. The requirement will be mandatory in contracts awarded after October 29, 2010 but can be added to existing contracts with "appropriate consideration".

This rule is necessary to ensure that essential contractor services are not interrupted. According to DoD, the current changing threat environment, particularly under the additional challenges caused by such potential crises as destructive weather, earthquakes, or pandemic disease, has increased the need for continuity of operations capabilities and plans that enable agencies to continue their essential functions during a broad range of emergencies and crises.

DoD established this requirement for contractors to submit their plans to ensure continuation of essential contractor services that support mission-essential functions during a crisis situation. As a general rule, the designation of services as essential contractor services will not apply to an entire contract but will apply only to those service function(s) that have been specifically identified as essential contractor services by the functional commander or civilian equivalent.

DFARS 252.237-7024, Notice of Continuation of Essential Contractor Services, to require the submission of the plan as part of the offeror's proposal. The associate provision prescription is added at 237.7603. The contractor's continuity of essential services plan shall be considered and evaluated as part of the technical evaluation of offers. The functional managers of the services will most likely be consulted to determine the sufficiency of these plans. The contractor's Mission-Essential Contractor Services Plan, in the resultant contract, will remain active in accordance with the clause at DFARS 252.237-7023, Continuation of Essential Contractor Services.

Equitable Adjustment. If costs increase due to the continuation of services during an event that would create an excusable delay, contractors should be entitled to an equitable adjustment to the terms of the contract.