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Hanford Clip Show

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It’s called a “clip show” in the television biz. According to Wikipedia—

A clip show is an episode of a television series that consists primarily of excerpts from previous episodes. Most clip shows feature the format of a frame story in which cast members recall past events from past installments of the show, depicted with a clip of the event presented as a flashback. Clip shows are also known as cheaters, particularly in the field of animation. Clip shows are often played before series finales or once syndication becomes highly likely. Other times, however, clip shows are simply produced for budgetary reasons (i.e. to avoid additional costs from shooting in a certain setting, or from casting actors to appear in new material).

In other words, there isn’t much new in a clip show. If you’ve watched the series, you’ve already seen all the flashback bits. That doesn’t keep the networks from churning them out, though.

Similarly, auditors churn out “clip show” audit reports from time to time. Most of us have seen them, particularly with respect to business system “reviews.” Instead of performing a lot of new work, the auditors simply piece together snippets of previous reports—as if those reports were somehow appropriate evidence to reach a new conclusion. A good example of a “clip show” Estimating System review report would be one that pieced together findings from forward priced proposal audits conducted over the past year or two. Never mind that the contractor has already corrected the process or people problems that led to those findings; they are presented once again as if they are evidence of a currently deficient business system.

“Clip show” audit reports are an unfortunate fact of life in the compliance environment. So long as all the reviewers sign off on them, they are considered to be just as valid as an opinion based on current and valid evidence. There’s no sense getting upset about them; that’s just the way it is.

Recently, the Department of Energy Office of Inspector General published a “clip show” audit report regarding the DOE’s site in Hanford, Washington. In fairness, the DOE OIG clearly labeled it as such. No, they didn’t call it a “clip show;” they called it a “compilation.” In fact, they called it “Compilation of Challenges and Previously Reported Key Findings at the Hanford Site for Fiscal Years 2012-2018.”

Hey, at least they were honest about it.

Why did the DOE OIG feel compelled to issue the compilation of previously issued reports, each one previously issued over the past six years? According to the report itself: “The Office of Inspector General’s objective is to highlight management challenges and key findings that were identified in its previous audits, inspections, and investigations related to the Hanford Site.” Our interpretation of that sentence is that the OIG feels their previous reports weren’t taken seriously enough, and they are making another attempt to get somebody’s attention.

Our interpretation may be supported by the words of the report. It states:

The Hanford Site has been plagued with mismanagement, poor internal controls, and fraudulent activities, resulting in monetary impacts totaling hundreds of millions of dollars by the various contractors involved at the site. As many of the weaknesses continue, without more aggressive oversight of contractors and subcontractors, millions of dollars will continue to be at risk for inappropriate charges and potential fraudulent activities. We are hopeful that the consolidated summary of the previously issued significant Office of Inspector General findings from FYs 2012–2018 provided in this report will serve as evidence of systemic internal control weaknesses and fraudulent activities and ultimately result in the Department strengthening its oversight of Federal operations and contractors.

Although we recognize that the Department has implemented improvements in response to prior Office of Inspector General findings, weaknesses continue with the management of contractors and subcontractors at a level that, in our opinion, results in an unacceptable level of risk of inappropriate charges to the Government.

The compilation report then continues with about 35 pages of “flashback” audit findings and press releases relating to various Hanford contractors, subcontractors, employees, and vendors. It’s great reading if you want to see the kind of (illegal) shenanigans that fraudsters can commit; but perhaps not so great reading if you are one of the entities or individuals mentioned within the body of the report. If you are a DOE employee charged with contractor oversight/compliance, we suspect it's very depressing reading indeed.

What’s the value of such a report? Well, it can serve to highlight historical compliance challenges and, to the extent those challenges have not been resolved, it can serve as an additional spur to action. As the DOE OIG stated in the report summary—

As many of the weaknesses continue, without more aggressive oversight of contractors and subcontractors, millions of dollars will continue to be at risk for inappropriate charges and potential fraudulent activities. We are hopeful that this consolidated summary of the previously issued significant Office of Inspector General findings from fiscal years 2012–2018 will serve as evidence of systemic internal control weaknesses and fraudulent activities and ultimately result in the Department strengthening its oversight of Federal operations and contractors.

It will be interesting to see if anything changes. Will Congresspeople express concern or even anger with the situation? Will DOE invest more money and personnel to Hanford contractor oversight? Will the prime contractors invest more money and personnel into their operations?

Our experience tells us that the answers to the foregoing questions probably will be “no.” Nobody cares about investing in controls and oversight unless forced to by litigation and/or settlement terms. For example, we don’t see Congress appropriating another $100 million for Hanford contractor oversight; nor do we see DOE moving $100 million from Savannah River to Hanford for the same reason. And until somebody puts money where mouth currently is, we don’t see much impetus to significant change in the control environment.

Sorry to be so cynical, but there it is.

In the meantime, we get OIG reports that provide a compilation of audit findings, like flashbacks in a clipshow. If you’ve never seen the show before, then they might look like new findings. But if you’ve been watching for a while, then you’ve seen it all before.

Last Updated on Tuesday, 13 November 2018 18:59
 

DCAA Delivers New Accounting System Audit Procedure

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Way back in 2011/2012, the world changed.

Suddenly, contractor “business systems” were in the spotlight; and the larger contractors were subject to punitive payment withholds if any of their six business systems were found by government reviewers to have “significant deficiencies”—which was a code word for any failure to satisfy those reviewers with respect to overtly subjective criteria that were not actually very auditable.

The government quickly realized that it lacked resources to implement, in any effective manner, the necessary process steps envisioned by Congress and the DAR Council. Consequently, the six business systems were divided into two groups, with one group (Purchasing, Property, and Earned Value) being reviewed by DCMA and the other group (Estimating, MMAS, and Accounting) being reviewed by DCAA. To be clear: DCMA always retained the authority and responsibility for determining whether or not contractor business systems were “adequate,” but each agency was given three business systems for which it had the “lead” role in evaluating.

DCAA has struggled since that time to fulfill its commitments with respect to the three business systems for which it has the lead role. Things had gotten so bad for the resource-limited (or management limited) audit agency that, in 2014, a proposed rule would have pushed the evaluation burden to contractors and “independent” outside entities. (That proposed rule crashed and burned; which was unfortunate for both DCAA and those outside entities that would have cashed in from it.)

One of DCAA’s challenges has been development of an audit program that would facilitate a timely review of a contractor’s accounting system. The early “pilot” programs took as long as three years to issue a draft audit report, which was no good for GAGAS compliance. GAGAS (at 6.60, 2011 version) requires that audit evidence must be “appropriate” to support any conclusions reached. The term “appropriate” is defined to include the concepts of relevance, validity, and reliability. As GAGAS states (at 6.60b, 2011 edition), “Validity refers to the extent to which evidence is a meaningful or reasonable basis for measuring what is being evaluated. In other words, validity refers to the extent to which evidence represents what it is purported to represent.” Accordingly, if DCAA collected evidence in Year 1 of the audit but didn’t reach (or publish) an opinion until Year 3 (or Year 4), then there was a reasonable chance that the evidence was no longer valid, and thus was not appropriate … meaning that there was likely to be a GAGAS deficiency with respect to that opinion. Not good for an agency that has struggled to comply with GAGAS for the past decade, and only received a passing grade on its last external peer review by having that reviewer (the DoD OIG) determine that a 15 percent deficiency rate was good enough for government work. (Seriously. See our 2014 article on the topic, which prompted us to suggest publicly that the DoD OIG had an independence problem and should no longer perform external quality reviews of DCAA.)

Anyway, DCAA has struggled with GAGAS compliance and it has struggled with issuing timely audit reports of decent quality to its customers. In a perfect world, DCAA would like to audit its three contractor business systems once every three years, but if it takes three years (or more) to audit an accounting system, then that goal is going to be hard to attain.

What’s an audit agency to do?

Answering that question has been hard, which is one reason that DCAA has been without an audit program that would tell auditors how to audit a contractor accounting system for quite some time.

To be clear, DCAA has had a pre-award accounting system procedure (audit program 17740), and it has had a post-award audit system procedure for “non-major” contractors (i.e., the small fish not subject to the full contractor business system oversight regime) (audit program 17741); but the audit program for the major contractors—the ones subject to the punitive payment withholds for any “significant deficiencies”—has been missing in action for a couple of years.

DCAA rectified that gap in October, 2018, when it posted audit program 11070 (“Accounting System Audit” or, more formally and correctly, “Compliance with DFARS 252.242-7006 Accounting System Administration Requirements Audit”). Here’s a link to that audit program.

As described in the audit program, its purpose and scope are as follows:

The compliance with DFARS 252.242.7006, Accounting System Administration requirements audit is conducted to examine contractor compliance with the system criteria as prescribed in section (c), System Criteria. As a part of the examination, auditors will:

  • Obtain an understanding of the contractor’s compliance with DFARS 252.242-7006(c);

  • Determine if the contractor is compliant with the accounting system criteria prescribed in DFARS 252.242-7006(c); and

  • Report both significant deficiencies/material weaknesses and less severe than significant deficiencies/material weaknesses that require the attention of those charged with governance.

The first question that comes to mind is: what if a contractor is not subject to the DFARS accounting system adequacy criteria? For example, what if a contractor has only EPA or DOE contracts? How will DCAA audit those contractors? The audit program answers that question. It states:

Contractors that do not have DoD contracts … are not contractually required to comply with the DFARS criteria. Nevertheless, the DFARS criteria are suitable standards to use in determining the acceptability of any Government contractor’s system for the accumulation and billing of cost under Government contracts.

If this audit program is used for contractors that have only non-DoD contracts, the language in the audit report shell will need to be tailored accordingly. FAOs needing assistance in tailoring the audit report should coordinate with the regional/CAD technical programs division and Headquarters PAS.

Well, shoot. There you go. Even if you are not subject to the 18 accounting system criteria established by the DFARS, you are still subject to them—according to DCAA.

Part of the new audit approach is to have DCAA auditors request any other audits or studies that may be relevant to the accounting system—to expressly include internal audit reports and external audit reports of financial statements. As the audit program states, “The purpose of this question is to discover any new audit leads that could affect the scope of current audit.”

Another aspect of the audit program that interested us was how it mashed prior DCAA audit approaches into a new framework. In the historic days before 2011/2012, DCAA had 10 contractor internal control systems it evaluated, including such systems as Billing and Labor Accounting. Those systems were eliminated and replaced by the six DFARS business systems.

But we noticed that they are back in the new accounting system audit program. For example, Section D-1 is entitled “Billing System” and Section E-1 is entitled “Labor Accounting.” Apparently, everything old is new again.

Even though the audit program looks familiar, there are some new focus areas worth noting. Perhaps the most challenging of the new focus areas is the emphasis on Information Technology (IT) and IT-related controls. For example, audit steps to be performed include:

  • Have contractor provide overview of IT Organization Structure to demonstrate its ability to act independently. For example, the overview should fully discuss IT management and organization (e.g., centralized or decentralized, shared services, business unit, geographical organization, etc.).

  • Have contractor provide overview of computer operations to include computer processes and control points for system integrity and reliability of all activities impacting the system’s physical operations.

  • Have the contractor provide an overview of the ERP Data Flow Architecture (process map). The presentation should include descriptions of all ERP modules, submodules, subsystems, other applications, databases, external data warehousing system, interface tables, etc., and controls, processes and interface tools for ensuring integration. If Legacy environments exist, include index of modifications contained within system documentation record.

  • Have the contractor demonstrate all third party IT service providers, type services, and the controls and processes for monitoring performance. Obtain IT service providers’ contract agreements and service level agreements covering the roles and responsibilities, expected deliverables and policy and procedures for monitoring third party IT service providers.

  • Have the contractor demonstrate the security techniques and related management procedures (e.g., network topography, to include identification of firewalls, security appliances, gateways, DMZs, network segmentation, intrusion detection, etc., and the identification and location of hardware and software) to authorize access and control information flows from and to networks that provide assurance of processing and data integrity associated with the contractor’s accumulation, processing, recording and reporting of Government costs.

  • Have the contractor demonstrate controls and processes for monitoring IT security implementation, infrastructure and related events for prevention, detection and timely reporting of unusual and/or abnormal activities and maintaining logs to enable the reconstruction, review and examination of the time sequences of operations and the other activities surrounding or supporting operations.

  • Have the contractor provide overview of logical security controls for protection of computer resources against unauthorized use, modification, damage or loss, user levels are controlled and identified, logical access restrictions are controlled by passwords and logical access is recorded and monitored).

  • Have contractor provide policies and procedures for process of software acquisition, development, and modification for maintaining data integrity.

The foregoing steps may be new but they are not really unexpected, are they? The government’s recent emphasis on cybersecurity (see, e.g., the new DFARS contract clause 252.204-7012) means that DCAA should emphasize it as well. The point is: be prepared for inquiries into the above areas.

We will have to see whether or not the new audit program can be performed timely. Our opinion—based on past experience with similar audits—is that the long-pole in the tent is going to be all the new IT-related stuff we listed. Our experience tells us that DCAA auditors with sufficient qualifications to both understand and evaluate contractors’ IT systems and controls are in short supply. Consequently, the audit schedule will need to take into account obtaining those scarce audit support resources and keeping them focused on the audit assignment in front of them, while fending off attempts to “steal” those resources away to support other audits.

Anyway, we’ll see how it goes.

Last Updated on Sunday, 11 November 2018 07:59
 

ID/IQ Contract Challenges

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Indefinite Delivery/Indefinite Quantity (ID/IQ) contracts are hard.

ID/IQ contracts are a subset of indefinite-delivery contract types. Indefinite-delivery contracts are used “to acquire supplies and/or services when the exact times and/or exact quantities of future deliveries are not known at the time of contract award.” FAR 16.501-2 states, “There are three types of indefinite-delivery contracts: definite-quantity contracts, requirements contracts, and indefinite-quantity contracts.” FAR Part 16.5 also makes the following points:

  • A definite-quantity contract provides for delivery of a definite quantity of specific supplies or services for a fixed period, with deliveries or performance to be scheduled at designated locations upon order.

  • A requirements contract provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period (from one contractor), with deliveries or performance to be scheduled by placing orders with the contractor.

  • An indefinite-quantity contract provides for an indefinite quantity, within stated limits, of supplies or services during a fixed period. The Government places orders for individual requirements. Quantity limits may be stated as number of units or as dollar values.

Thus, an ID/IQ contract is one where a variable quantity of goods or services may be ordered at any time during a fixed period. We will adopt Vern Edward’s terminology and call that “fixed period” the “ordering period.” Contractors don’t know when and they don’t know how much, until they receive a task or delivery order that tells them.

FAR 16.504(c) tells contracting officers that they “must, to the maximum extent practicable, give preference to making multiple awards of indefinite-quantity contracts under a single solicitation for the same or similar supplies or services to two or more sources.” The upshot of this direction is that contractors may have to compete for the award of individual task/delivery orders, at unpredictable times during the ordering period. For unpredictable quantities.

In other words, ID/IQ contracts are risky. Even when you have one in hand, you may not get much work. In fact, the government is not required to order any more than the specified minimum quantity.

Competition typically is fierce. While there are specified exceptions, “The contracting officer must provide each awardee a fair opportunity to be considered for each order exceeding $3,500 issued under multiple delivery-order contracts or multiple task-order contracts…” The contract’s competition procedures must be specified in the contract; but often a contractor may believe there was a bias because it did not receive an opportunity to bid or perhaps consistently lost on the bids it submitted.

Unfortunately for most contractors who believe they have been treated unfairly, the FAR prohibits protests of task or delivery order awards, except in limited (and specified) circumstances. Consequently, contractors that may believe they have not received sufficient orders under their multiple-award ID/IQ contracts have very little opportunity to do anything about it.

On the other hand, the ASBCA has provided contractors with limited success, where they have alleged that the contracting officer breached the contract by failing to give the contractor a fair opportunity to compete for a task/delivery order, as the contract promised. (Note the Court of Federal Claims has rejected the assertion that a prohibited bid protest can be “re-characterized” as a Contract Disputes Act (CDA) claim.)

But the government would prefer that contractors not bother the courts with their concerns. Instead, the government would prefer that aggrieved contractors first discuss their concerns with the cognizant contracting officer. In fact, we would suggest that this is good advice for contractors in many circumstances, not just those associated with ID/IQ contracts. Your first call should be to your CO, in order to get an understanding of their side of the story.

If that doesn’t work, there is an alternative. The contractor can call the contract’s Ombudsman. Each multiple-award ID/IQ contract is required to identify the cognizant Ombudsman. See FAR 16.505-(b)(8)—

The head of the agency shall designate a task-order and delivery-order ombudsman. The ombudsman must review complaints from contractors and ensure they are afforded a fair opportunity to be considered, consistent with the procedures in the contract. The ombudsman must be a senior agency official who is independent of the contracting officer and may be the agency’s advocate for competition.

If you have a multiple-award ID/IQ contract, then it must “include the name, address, telephone number, facsimile number, and e-mail address of the agency task and delivery order ombudsman.” The government wants you to call the Ombudsman, who is supposed to impartially hear your concerns. (Also: the government wants you to ignore its inconsistent capitalization of the term in its regulations.)

In fact, a recent proposed rule on the topic was issued “to implement a new clause that provides the agency task- and delivery-order ombudsman's responsibilities and contact information for use in multiple-award indefinite-delivery, indefinite-quantity (IDIQ) contracts.” According to the promulgating comments, lack of a standard FAR clause has led several agencies to create their own individual clauses; and thus it would be nice if there were a standard FAR clause that would supersede those agency-unique clauses.

Importantly, the proposed contract clause includes Alternate 1 language that would be used if multiple agencies are ordering from the same ID/IQ contract. It would state “This is a contract that is used by multiple agencies. Complaints from Contractors concerning orders placed under contracts used by multiple agencies are primarily reviewed by the task-order and delivery-order Ombudsman for the ordering agency.”

So: ID/IQ contracts are risky and one way to manage the risk is to understand the communication hierarchy the government wants you to be using. Litigation should be a last resort, as is true in so many areas of government contracting.

Last Updated on Tuesday, 06 November 2018 18:30
 

DFARS Rule Changes

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It’s a veritable flurry of DFARS rule changes!

Repealed stuff:

  • Goodbye DFARS clause 252.211-7000, Acquisition Streamlining

  • Goodbye DFARS clause 252.236-7009, Option for Supervision and Inspection Services

  • Goodbye DFARS provision 252.228-7004, Bonds or Other Security

Each of those foregoing requirements has been determined to be obsolete or otherwise not necessary by the DoD’s Regulatory Reform Task Force.

In addition to the above, the DAR Council amended the DFARS to remove an obsolete requirement from the clause at DFARS 252.219-7009, Section 8(a) Direct Award. The clause required 8(a) contractors to obtain written approval from the Small Business Administration (SBA) and the contracting officer prior to subcontracting the performance of any contract requirements, but that requirement “no longer exists in SBA's regulations on the 8(a) Business Development Program.”

Finally, the DOD Mentor-Protégé Program was modified to implement section 1823 and paragraph (b) of section 1813 of the National Defense Authorization Act (NDAA) for Fiscal Year (FY) 2017. So if that’s your thing, then follow the link and scope out the changes.

But that’s not all.

Two new proposed rules were published for public comment.

The first rule would “amend the DFARS to implement sections of the National Defense Authorization Act for Fiscal Year 2018 by expanding the definition of other competitive procedures, and extending the term and increasing the dollar value under the contract authority for advanced development of initial or additional prototype units.”

The second rule would “amend the DFARS to implement a section of the National Defense Authorization Act for Fiscal Year 2017 that requires the use of brand name or equivalent descriptions or proprietary specifications or standards in solicitations to be justified and approved.”

Busy DAR Council!

Last Updated on Tuesday, 06 November 2018 19:48
 

Investment or Buy-in

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I’ve told the story before about that one DOE contractor that kept winning contract after contract after contract. Its secret? The solicitation stated that the government intended to award a cost-reimbursement contract, but the contractor proposed to accept a firm, fixed-price contract for the same scope of work. The government was delighted to reduce its cost risk associated with an otherwise capable contractor, and gladly awarded that contractor a FFP contract.

The contractor knew it was going to take a loss on the work. It was willing to make an “investment”—knowing that, as its business base grew through new contract awards, that additional work was going to absorb fixed costs, reducing total costs on all contracts. The logic was: the investment was going to be reduced as the indirect cost rates came down.

Well, reality didn’t correspond to the plan.

The fact was that the government knew that the proper contract type was cost-reimbursement, because the scope of work wasn’t fully known. The government knew what it didn’t know, and it guessed there might be quite a bit of scope creep. The contractor’s “investment” didn’t take the possibility of scope creep (without corresponding equitable adjustment to contract price) into its FFP philosophy. As a result of unforeseen cost overruns on its FFP contracts, that contractor become a former contractor.

But the key point here is that the government was pleased to accept the contractor’s “investment” at the time. It seemed like a great decision from the government’s perspective, even though we wonder if it still seemed like a great decision a few years later, when contracts were terminated and the work needed to be reprocured.

There is nothing inherently wrong with a proposing a price lower than the contractor believes it will take to do the job. In fact, so long as the contractor does not intend to “get well” downstream, there is nothing improper with the practice. FAR 3.501 prohibits the practice of “buying-in” but that practice is expressly defined as “submitting an offer below anticipated costs, expecting to—(1) Increase the contract amount after award (e.g., through unnecessary or excessively priced change orders); or (2) Receive follow-on contracts at artificially high prices to recover losses incurred on the buy-in contract.” So long as the contractor avoids either of those two practices, it is free to propose at whatever price it wants to.

Boeing is perhaps the contractor that most obviously practices the concept of investing to win. In fairness, many other contractors do it as well; though we suspect Boeing practices it more consistently (or is better at it).

Now before we get into this topic any deeper, a couple of caveats. First, I own Boeing stock! Not a lot of it, true. But some. It’s been a good stock to own. Second, I work full-time for a company that recently lost out to Boeing in a major competition (MQ-25). Consequently, you may believe that I’m not entirely objective about this topic. So be it.

Frank Kendall, former USD (AT&L) kicked off the discussion in September, 2018, in his article at Forbes entitled “Boeing And The Navy Place A Big, Risky Bet On The MQ-25 Unmanned Air Vehicle.” In that article, Mr. Kendall discussed risks that both Boeing and the Navy were accepting when the Navy let Boeing’s bid—which was significantly below its two competitors’ prices—sway it to awarding the contract to Boeing. Importantly, with respect to the risks that the Navy was taking on, Mr. Kendall wrote—

[The Navy] cannot transfer all the program risk to Boeing; if Boeing fails to execute the program, the Navy customer will not get the UAVs it wants. If Boeing can deliver the aircraft but runs over on costs, claims against the Navy can be expected. Under the fixed price incentive contact, the Navy will also share at least a fraction of the financial risk of development.

…..

There is no doubt that Boeing went into the competition for MQ-25 with its eyes open, but that doesn’t eliminate the risk. Competitive pressures, as in the case of the MQ-25, also incentivize aggressive bids.  In this case, because Boeing has not won a major new program for some time, the pressure on management to win can be assumed to have been very strong.

Indeed, recent reports state that Boeing has already recorded a $691 million charge against earnings related to its recent MQ-25 and T-X training jet contract awards. This means that for one or both of those contracts, Boeing has officially forecasted an at-completion overrun that burns through its FPIF cost share, the Navy’s FPIP cost share, any profit it may have proposed—plus an additional $700 million on top of that. That’s a lot of money.

But that has been Boeing’s strategy, according to its CEO, Dennis Muilenburg. According to a US Naval Institute article (written by Ben Werner). The USNI article quoted Boeing's CFO as follows—

“Our T-X and MQ-25 investments are based on deliberate and intentional decisions to create long-term valuable products and services franchises,” Smith said. “In selective key market opportunities such as these, we are taking into account the considerable market potential in our business cases, and not just the initial order quantity with the contracts.”

That article also discussed the possible downside of Boeing’s strategy. It stated—

Analysts, though, voiced some concerns over the expense of creating the bids and fears Boeing executives did not accurately measure the risk to the company’s bottom line when developing bids lower than what competitors offered.

The article also noted that Boeing—a company that reportedly has a warchest of $8 billion in cash on hand—has the resources to make such investments. Not every government contractor has such resources, which is one reason that Boeing keeps winning new contracts.

In fact, Lockheed Martin’s CEO, Marilyn Hewson, clearly stated that LockMart doesn’t have those same resources and cannot compete if the competition is based on the size of the contractor investment. Another USNI article by Ben Werner discussed the situation and possible consequences for future competitions. He wrote—

Lockheed Martin officials say their loss to Boeing in three recent aircraft competitions indicates that Pentagon weapon buyers are valuing low price tags over high-tech capabilities, which may lead the company to question its participation in some future competitions. … “We believe our proposals represented outstanding technical offerings at our lowest possible pricing,” Hewson said. “Had we matched the winning prices and been awarded the contracts, we estimate that we would have incurred cumulative losses across all three programs in excess of $5 billion; an outcome that we do not feel would have been in the best interest of our stockholders or customers.”

LockMart CFO Tanner had some further thoughts, according to the article, which quoted him as follows—

“Those [losses] were disappointing for a lot of reasons. But the fact they really decided, all three, on an LPTA (lowest price technically acceptable) basis, didn’t help the situation,” Tanner said. “It’s not getting the best capabilities for the warfighter in the hands of the warfighter.”

The Lockheed Martin executives’ comments frame the question as one of cost versus capability. When developing new weapon systems, should the Pentagon acquire the “technically acceptable” solution for the lowest price, or should it pay a premium to acquire more (and better) capability?

In addition, we would frame the question in terms cost versus innovation. When developing new weapon systems, should the Pentagon acquire a workable solution based (as much as possible) on nondevelopmental technology, or should it encourage contractors to propose the most innovation possible?

And what about big versus small contractors? If the Pentagon is going to award contracts based on the amount of investment that contractors are willing to make, then only the largest of contractors will win awards. The smaller contractors will be locked out of the “pay for play” competitions.

To sum up these thoughts, it seems that certain larger contractors are willing to pay to play in long-term Pentagon contracts, betting that they will earn back developmental losses over the lives of the programs. They may be right; but we remember the story of that DOE contractor, whose program investments turned out to be larger than it ever dreamed of.

In related news, Boeing announced on October 24, 2018, that it was taking another $179 million in charges related to its KC-46a FPIF tanker program.

Last Updated on Thursday, 01 November 2018 15:20
 

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Newsflash

In March 2009, Nick Sanders’ article “Surviving Government Audits: Have the Rules of Engagement Changed?” was published in Government Contract Costs, Pricing & Accounting Reports (4 No. 2 GCCPAR P. 11). Apogee Consulting, Inc. is proud to announce that Mr. Sanders’ article was selected for reprint and publication in Thomson West’s The New Landscape of Government Contracting.  Mr. Sanders, Apogee Consulting’s Principal Consultant, joins such distinguished contributors as Professors Steven Schooner and Christopher Yukins, Luis Victorino and John Chierachella, Joseph West and Karen Manos, Joseph Barsalona and Philip Koos and Richard Meene, and several others.  The text covers a lot of ground, ranging from the American Recovery and Reinvestment Act (ARRA) to Business Ethics and Corporate Compliance, and includes several articles on the False Claim Act and the Foreign Corrupt Practices Act.  In addition, the text includes the full text of many statutory and regulatory matters affecting Government contract compliance.

 

The book may be found here.