Better Buying Power 3.0 Initiatives On Their Way

We've been following DoD's Better Buying Power (BBP) Initiatives for several years. BBP 1.0 introduced in 2010 included initiatives to

• Target affordability and control cost growth
• Incentivize productivity and innovation in industry (tie profits into performance)
• Promote real competition
• Improve tradecraft in services acquisition
• Reduce non-productive processes and bureaucracy (most contractors would have a lot of ideas for this one)

In late 2012, the Department introduced BBP 2.0. The initiatives in BBP 2.0 included:

• Achieve affordable programs
• Control costs throughout the product lifecycle
• Incentivize productivity and innovation in industry and Government
• Eliminate unproductive processes and bureaucracy
• Promote effective competition
• Improve tradecraft in acquisition of services
• Improve the professionalism of the total acquisition workforce

Last week, the DoD announced the projected release of BBP 3.0;, the latest iteration of initiatives designed to achieve more with less. Although the specific initiatives within BBP 3.0 will not be announced until October, the Undersecretary of Defense for Acquisition Technology and Logistics indicated that the focus will be on the "product" side - moving innovation into the hands of the war-fighter. Some of the initiatives include:

• Achieving affordable programs and dominant capabilities
• Providing greater incentive to the commercial sector to better leverage technology
• Introducing a variety of contract types, business skills, incentive structures and different ways of doing business to be mutually beneficial to government and industry.
• Prototyping at the system level to advance technology, preserve design teams and reduce lead time to future capabilities
• Ensure insertion points in programs to bring new technology in as a product in service over its lifetime
• Emphasize better feedback to industry
• Build stronger cooperation and partnerships 

A big difference in 3.0 from the other iterations is a focus on cooperation between the Government and contractors. That would be a good thing. One initiative that BBP 1.0, 2.0, and 3.0 have in common is "affordability" and "controlling costs". That's really the bottom line when it comes to procurement.

Inventory Management

One area that doesn't get a lot of attention in Government contracting discussions is the issue of effective inventory control. Inventory control is a significant management challenge at all companies, not just Government contractors, but at Government contractors in particular, the Government often ends up paying for inefficient inventory control - especially at contractors with significant cost-reimbursable effort. That is why sometimes, contract auditors will poke around and review contractors' inventory management policies, procedures, and practices. Ineffective inventory management results in too much inventory on-hand and where the carrying cost of inventory is significant, can represent a drain on company profits. Where the excess inventory becomes Government property (as in the case where purchases are made under cost reimbursable contracts), cost to the Government are increased.

There are a number of policies and procedures that a contractor can effect to help ensure effective inventory management. Most of these apply to non-Government contractors as well.

1. Test for indications of overbuying. Overbuying ties up funds in excess inventories. Excess inventories require investment of funds and do not contribute directly to current programs, projects, or deliverables.
2. When establishing inventory requirements, consider whether frequent change orders have the potential of obsoleting items. Obsolete items are often worthless.
3. Establish a program for standardization of component parts as a means of reducing the need for separate buying for individual contracts/projects/deliverables.
4. Examine the causes for items that become excess and obsolete. Examine the causes for items in short supply and adjust inventory purchases accordingly.
5. Determine whether there are effective procedures for evaluating repairability of production rejects. 
6. Determine whether there are effective procedures for disposing scrap. Are classification procedures adequate to determine what is usable, salvageable, or scrap? Are competitive bids secured for the sale of scrap?

Contractors do not want to lose money by tying up funds in excess inventory or by purchasing too much inventory that may become obsolete. The Government does not want to pay for it either.

Unequal Discussions?

Federal Acquisition Regulation (FAR) 15.306 in general, covers exchanges between the Government and companies that submit proposals after the Government receives those proposals. The emphasis here is on fair and consistent treatment among all offerors. FAR 15.306(d)(3) requires agencies to address during discussions, “[a]t a minimum . . . deficiencies, significant weaknesses, and adverse past performance information to which the offeror has not yet had an opportunity to respond. Although discussions may not be conducted in a manner that favors one offeror over another, and offerors must be given an equal opportunity to revise their proposals, discussions need not be identical among offerors; rather, discussions need only be tailored to each offeror’s proposal.

Concerning a discussion on proposed prices, unless an offeror’s proposed price is so high as to be unreasonable or unacceptable, an agency is not required to inform an offeror during discussions that its proposed price is high in comparison to a competitor’s proposed price, even where price is the determinative factor for award.

Nonetheless, it is inherently within an agency’s discretion to inform an offeror during discussions that its price appears to be high in comparison to other offeror's proposed prices, should an agency choose to do so. This is true without regard to whether the offeror’s price is higher or lower than the agency’s independent government estimate (IGE).

In a recently published Comptroller General case, a (losing) bidder complained that the agency conducted unequal discussions when it learned during the debriefing stage that it had informed it that its price was too high in relation to the other bidder but did not inform the other bidder of the same.

The Comptroller General (CG) did not agree. The CG noted, as discussed above, that it was within the agency's discretion during discussion to inform an offeror that its price is high in comparison to other offeror's proposed prices. As a matter of fact, both bids were higher than the IGE. The CG found no unequal or unfair treatment in the agency's decision to inform the protestor that its bid was too high.

You can read the entire case by clicking here.

DCAA Passes Peer Review of Quality Control Practices

The other day, we alluded to the recent peer review report issued by the DoD-IG (Inspector General) on the quality, adequacy, and sufficiency of the contract audits performed by DCAA's (Defense Contract Audit Agency). DCAA passed - sort of. The actual rating was "Pass with Deficiency". But, it was a "pass" nevertheless and DCAA, though not entirely pleased, can at least hold out that they have now passed a peer review.

A triennial peer review is required for any Government agency or private firm that conducts audits in accordance with Generally Accepted Government Auditing Standards (GAGAS). Entities are required to develop policies and procedures that will provide it with reasonable assurance of conforming with GAGAS.

Except for a lack of documentation in 11 of 92 audits reviewed, the IG peer review concluded that DCAA's system of quality control has been in compliance and suitably designed to provide the Agency with reasonable assurance of performing and reporting in conformity with applicable professional standards in all material respects.

What does this mean for the contractor's that DCAA audits? As a practical matter, not much. Their audit reports will no longer contain a qualification that the Agency does not have a current peer review but that fact never seemed to bother the contracting officers to whom reports were addressed nor contractors who were the subject of audit reports.

You can read the entire Peer Review report by clicking here.

Applications - CAS 404 - Capitalization of Tangible Assets

Over the years, we've covered all of the CAS (Cost Accounting Standards) Standards to some extent. Usually, the postings have been high-level summaries of the fundamental requirements of the particular standard. We have produced an index of those summaries here. These CAS summaries continue to be some of our most popular postings. Sometimes, we receive comments - questions really - on how to apply these requirements to specific fact situations  Today begins a periodic series on applying CAS standards to real-life situations. These postings should be read in concert with the overview series and we will be adding these to our CAS index as we go.

Today we begin with CAS 404, Capitalization of Tangible Assets. The overview of the standard can be found here. Essentially, this standard allows contractors to establish minimum capitalization policies for purchased assets. These minimums cannot exceed a useful life of two years or a value of $5 thousand, although they may be lower. The Standard also requires contractors to establish minimum dollar amounts for the capitalization of original complements of low cost equipment and for betterments and improvements. While it doesn't establish specific minimum thresholds, the aggregate represents a material investment.

Here are some examples of how this Standard should be implemented.

A contractor that has a policy of capitalizing tangible assets which have a service life of more than one year and a cost of more than $6 thousand, would be in noncompliance. The contractor would have to modify its policy to conform to the $5 thousand minimum established by CAS 404.

A contractor that has a policy of capitalizing assets with a service life of more than one year and a cost of $250 would have to capitalize an asset with an 18 month service life and a cost of $300. Note, the Standard requires that capitalization be based on the contractor's written policy and capitalization policies may be less than the 2 year/$5,000 thresholds above which purchased assets must be capitalized.

A contractor has an established policy of capitalizing tangible assets which have a service life of two years and a cost of $500. The contractor acquires an asset with a useful life of 18 months and a cost of $5 thousand. This asset does not need to be capitalized because the service life is less than that required by CAS and required by its capitalization policy.

Labor Day 2014

The other day, we reported on the revised FAR cost principle that implemented a Presidential Executive Order (EO) that disallows any costs associated with preventing or discouraging employees from organizing and joining unions. See: Rights to Organize and Bargain Collectively. Did you ever wonder just how many workers are represented by unions? We did. 

Based on data published earlier this year by the Department of Labor, Bureau of Labor Statistics (BLS), the union membership rate in 2013 was 11.2 percent. However, for private sector, the percentage was only 6.7 percent. Public-sector workers had a union membership rate that was five times higher than that of the private sector at 35.3 percent.

This means that more than half of unionized workers in the US get their paychecks from the government.