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Welcome to Apogee Consulting, Inc.

Directed Subcontracting

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We’ve all been there.

The phone rings, or an email arrives, and it’s the COTR or the PCO and they want you, the prime contractor, to acquire a thing for the contract. You will acquire it and they will take title, and you can bill the cost along with your other costs and it will be paid.

Only you know and they know the item has nothing to do with the contract’s SOW.

They want a personal computer or a cell phone or an iPad, or maybe even a hibachi, because they have a need and they can’t get the item approved through normal government channels. So they do an end-run and have you acquire it for them.

They have the authority. The COTR and/or the CO have the authority to direct you to acquire stuff, and so you probably will, even though you know and they know they really shouldn’t be asking you to take these actions. But you do, probably in the name of customer relationships. After all, why would you want to upset these folks for such a trivial amount of money—even though there’s a risk that if anybody looks hard enough, you may have some ‘splaining to do.

What’s the harm? After all, the government ends up paying for it one way or another. Either through your contract or through some other agency appropriations. At the end of the day, there’s no harm and therefore no foul.

Right?

It’s not like somebody entirely unconnected to the contract, somebody in the Government agency finance function, called you up and directed you to acquire the thing and charge it to the contract. Because that would be weird, right? It would be weird to have this stranger call you, or email you, and tell you to go to a specified vendor and issue that vendor a P.O. to acquire a thing or two, and then pay the vendor for those things and then bill the prime contract for the cost.

That would be weird and you probably wouldn’t do it.

It’s one thing when the PCO or COTR ask you do to something, but it’s quite another thing when some stranger unconnected with your prime contract asks you to do something. So you probably wouldn’t do it.

Probably.

In completely unrelated news, a former Comptroller for the Navy’s Norfolk Ship Support Activity (NSSA) was recently sentenced for accepting illegal gratuities. (Ed. Note: Are there any other kind of gratuities for government employees?) According to the Department of Justice press release

William R. Hutsenpiller, 57, of Mount Dora, Florida, oversaw the $200 million operating budget for the NSSA while serving as the civilian GS-15 Financial Department Head/Comptroller from October 2009 through November 2013. During this time, Hutsenpiller conspired with others to essentially force a government prime contractor to use a specified subcontractor—Global Services Corporation, based in Fayetteville, North Carolina—that he knew would collaborate with him to misuse government funds. As part of the scheme, Hutsenpiller directed the prime contractor to pass government funds to Global, a defense subcontractor, and in turn, Hutsenpiller directed Global to withhold unexpended funds that should have been returned to the government or to the prime contractor.

Apparently Global used the funds to, among other things, pay “illegal gratuities” to Mr. Hutsenpiller. The DOJ press release stated—

From 2010 through 2014, Hutsenpiller made numerous requests that Global provide him with various items of value and services for his personal use, which Global agreed to purchase with government funds. The gratuities that Global provided to Hutsenpiller included a variety of personal electronic items and accessories for Hutsenpiller and his family, such as cell phone service and accessories, multiple iPads, a computer, home thermostat, and streaming television boxes.

So this GS-15 guy told the prime contractor to award a P.O. to Global for stuff, and they did. (Possibly they alerted somebody, because the guy was caught. But the article doesn’t say how he was caught so we don’t know.) For four years, the prime contractor followed the direction of this stranger and funded a subcontract.

Why?

Why would you do that?

As noted above, we don’t know why and we don’t know if they tipped somebody off—but four years seems like kind of a lot to keep on following the direction of this stranger who was completely unconnected with the prime contract and who didn’t have authority to order the prime contractor to do anything. But that’s what the prime contractor did.

And now Mr. Hutsenpiller has been sentenced to 40 months in Federal prison and sentenced to pay approximately $70,000 to the taxpayers.

No word on fines or penalties to be paid by Global.

No word on fines or penalties to be paid by the unnamed prime contractor, who was just following directions from the government.

Last Updated on Wednesday, 18 October 2017 16:56
 

Acquisition Reform in the Trump Administration

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EinsteinFrom time to time we like to pontificate on acquisition reform.

You know what acquisition reform is, right?

It’s the attempt to change the way the Federal government buys goods and services.

Acquisition reform happens nearly every year, as Congress or the Secretary of Defense or the Office of Management and Budget (OMB) make speeches about how broken the current system is and how they intend to fix it.

Frequently such efforts are aimed at the Department of Defense, that multi-billion dollar acquirer of goods and services in support of the warfighters and national security. Almost every time, such efforts are described as “streamlining” or “fixes” or “efficiencies”—but, in reality, they are based on the input of some constituency or another. Annual constituencies include the Department of Defense itself (or components thereof) as well as the lobbyists of the contractors themselves. Input is provided to Congressional staffers who put forth draft language to other Congressional staffers; and then the input is massaged and negotiated until an acceptable compromise—one that most everybody can live with even if nobody is particularly thrilled with it—is reached.

As we noted in prior articles on this topic, the Clinton Administration was focused on acquisition reform and managed to convince Congress and the various constituencies that it was a topic worth working on. (The alignment is commonly credited to the lessons learned from the First Gulf War (Desert Shield/Desert Storm) when everybody saw how broken the system had become. We have no evidence that the common wisdom is wrong about that origin.) In contrast, the Obama Administration was late to the game and what reform efforts occurred were found largely within the Department of Defense itself—although (as we noted in several other articles) SECDEF Gate’s reform efforts were largely stymied by his own team and those who followed him. We bottom-lined the Obama Administration efforts as being primarily focused on undoing the Clinton-era reforms; whether that was a good or bad thing likely depends on where you’re sitting.

So now we have the Trump Administration and we have renewed calls for acquisition reform. “Something must be done!” is the cry. But the cry is without irony and the irony should be there, because haven’t we been through all this hoopla before?

“Something must be done!” doesn’t seem to acknowledge that “something is always being done and it almost always never works, but you keep on doing it, over and over—making Einstein’s observation about the definition of insanity sadly apropos.”

It doesn’t matter which party is in office or which party has the Congressional majority or whether budgets are tight or free-flowing. The fact of the matter is that this country has undertaken acquisition reform over and over and over for at least 50 years, and we have yet to address the fundamental problems in any meaningful way.

So here we are at the end of 2017 (or the beginning of GFY 2018, if you like) and the 2018 NDAA will introduce a new set of acquisition reforms. Meanwhile, according to this article at National Defense magazine (authored by Vivienne Machi), the Army is so focused on acquisition reform that it is going to set up a new Command “to help the service streamline its acquisition priorities.” According to the article, “While details remain vague, the command will prioritize six areas of procurement through cross-functional teams. They are in order: long-range precision fires; the next-generation combat vehicle; future vertical lift platforms; network mobility; air and missile defense capabilities; and soldier lethality.”

People more cynical than we are might say that the real purpose of the new Army acquisition command is to obtain funding for Army pet projects, funding that has been lacking since the Air Force got its F-35 program funded. But we would never say that.

Meanwhile, the (last) USD (AT&L), Ms. Ellen Lord is reforming the Pentagon bureaucracy, according to another article at National Defense (authored by Stew Magnuson). The article reported that—

Her first order of business will be returning oversight of most major acquisition programs from the office of the secretary of defense and the AT&L back to the four services. … The role of her office, which will be broken up into two entities in February — Research and Engineering and Acquisition and Sustainment — will be to simplify the acquisition process. That is where the velocity comes in. It takes too long to make decisions and the bureaucracy must be pared down, she said.

(Lack of quotes in the original.)

So, essentially, the Pentagon is restarting the SECDEF Gates initiative, the one that was blocked by the former USD (AT&L), among others.

Meanwhile, current SECDEF Mattis wants to “reform the business practices of military departments and the DoD itself,” according to this Pentagon press release. Quoting from the press release—

On reforming business practices, Mattis said the department must make more effective use of the people's treasury.

‘The heart of our competitive edge … is reforming the department and its business processes and gaining full value from every taxpayer dollar,’ he said.

Reforming the department is going to require that the acquisition enterprise is transformed, he said. … Transforming the enterprise, the secretary said, ‘will require delegating decision authority in many cases to the outer edges of the enterprises to unleash the great ideas we find among our bright and committed airmen. It's also important to integrate this across the joint force, because the real strength we've exhibited over 16 years of war is jointness.’

Astute observers of history may recall that streamlining bureaucracy and decentralizing decision-making was the hallmark of Clinton-era acquisition reforms. (Remember “A government that works better and costs less”?) Under the Obama Administration, DCMA blamed those reforms for the loss of skills (including cost/price analysis), and moved to reorganize and create more central decision-making, including Review Boards that micro-manage the decisions of many warranted Contracting Officers.

Now it seems we are headed back toward decentralized decision-making, in a streamlined environment. The pendulum is swinging back.

And somewhere Einstein is smiling and shaking his head sadly.

Last Updated on Monday, 16 October 2017 17:13
 

Managing DoD Supply Chain Risk

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The Government Accountability Office (GAO) released a very recent report that addressed the Department of Defense’s attempts to manage risk in its programs’ supply chains. The 2016 National Defense Authorization Act (NDAA) required GAO to report back to the House of Representatives regarding “single sources of supply” for DoD’s major weapon programs (MDAPS). This topic is important because contractors can compare their efforts to manage supply chain risk to the government’s efforts, and perhaps even learn a thing or two in the process.

The first thing that GAO found is that DoD’s 2016 report to the Senate was incomplete. It was supposed to have four elements and it fully addressed only two of them. The other two elements (“Identify risk management actions with associated implementation plans and time lines DOD will take to prevent negative operational impact in the event of a loss of such suppliers” and “Identify severity of operational impact of the loss of such suppliers”) were not fully addressed.

Next GAO found that DoD’s report was without value; most people interviewed didn’t know it existed and wouldn’t know how to use it if they were aware of it. GAO wrote—

… program officials GAO spoke with were not aware of DOD’s 2016 report, and thus did not have information about parts from single-source suppliers that are considered to be most critical, which could provide important focus for managing these risks. Second, program offices often rely on the prime contractor to identify single source of supply risks, among other types of risks, and GAO found that program offices in some instances had limited information to manage those risks because DOD does not have a mechanism to ensure program offices obtain complete information from contractors. Without such a mechanism, program offices may not be aware of risks early enough to take proactive actions to understand and, as appropriate, mitigate those risks.

It is commonly understood that the DoD’s program office is responsible for program risk management. GAO noted that several programs had risk management committees that met on a regular basis. However, GAO found that proactive risk management actions were limited, primarily because most (but not all) program offices relied on prime contractors. GAO wrote –

During our interviews at the selected program offices, numerous officials stated that they expect the prime contractor for their program to identify risks related to a single source of supply and to bring that information to the attention of the program office. However, they acknowledged that they do not have a way to ensure this information-sharing and that they are not fully aware of risks that exist in the sub-tiers of contracts. In contrast, officials from two programs, both of which manage older systems that have long been in the sustainment phase of their life cycle, told us they did not rely on contractors for information on supply risks. Officials from one of these program offices stated that while a contractor can be an important partner, the government should not rely on a contractor to understand and manage risks to the federal government. Also, these officials stated that independent analysis is critical to appropriately manage risk.

GAO found that, although DoD was moving toward addressing DMSMS issues, it was not addressing its other supply chain risks—especially those associated with single sources of supply. (“DOD has efforts under way to obtain better information from contractors on obsolescence risks but not for other types of related risks, such as those stemming from a single source of supply.”)

GAO made six recommendations. Two of the six are as follows:

  • The Under Secretary of Defense for Acquisition, Technology and Logistics, in conjunction with the military departments, should develop a mechanism to ensure that program offices obtain information from contractors on single source of supply risks.

  • The Under Secretary of Defense for Acquisition, Technology and Logistics, in conjunction with the military departments, should issue department-wide DMSMS policy, such as an instruction, that clearly defines requirements of DMSMS management and details responsibilities and procedures to be followed by program offices to implement the policy.

In a shocking coincidence, DoD just announced that it wants its contractors to report to them their supply chain weaknesses. According to this article at Defense News (authored by Aaron Mehta), John McGuinn, (acting deputy assistant secretary of defense for defense, manufacturing and industrial base policy) “is hoping industry will volunteer information on weak spots in their industrial supply chains, as part of a broader review and war-gaming effort to discover potential failure points for America’s defense industrial base.” The article quoted McGuinn as saying “We’re looking for industrial base risks, and those risks include foreign dependency, sole source, single source, fragile suppliers, suppliers that may not be looking to stay in the market….”

The article stated: “To help the study, the Pentagon will shortly release a questionnaire to the defense industry to try and gather information about potential weak spots. The questionnaire, which will be entirely voluntary, will go out with help from trade associations and major industry players.”

Thus, if you are a major industry player, you should expect to receive a questionnaire about vulnerabilities in your programs’ supply chains. The amount of effort you put into your response—indeed, whether you decided to respond at all—is completely up to you. It is not a requirement, which is why should you not expect to be reimbursed for by DoD for your efforts. We wonder about the quality of the information DoD will receive back from its contractors, remembering the old adage that “you get what you pay for.”

So GAO says DoD needs to do more, and that it should ask its prime contractors for information. DoD says it will ask its prime contractors for information, on a voluntary basis. This entire situation was predictable and—indeed!—we predicted it here in this blog.

First of all, and not to toot our own horn overmuch, we have been discussing supply chain risk here for many years. For example, in 2010 we ranted about the importance of supply chain management in this piece. In another, more recent, piece, we discussed counterfeit electronic parts and how effective supply chain management (should) work to proactively manage that risk. So we believe our bona fides are solid in this area. We’ve been sounding the alarm for years, and if effective action hasn’t yet been taken by DoD or its contractors, don’t point any fingers of blame in this direction.

Second, DoD itself has had the action to map out its programs’ supply chains for several years. Remember S2T2? Sure you do! We wrote about it several times…

In May, 2011, Frank Kendall testified before a Senate Subcommittee that—

We have undertaken an aggressive effort to map and assess the industrial base sector-by-sector, tier-by-tier (S2T2). The goal is to understand the gross anatomy of the industrial base. Just as doctors do not seek to understand the functioning of every individual neuron in the central nervous system, the Department does not seek to know the exact details and reasoning behind every supplier relationship. But we do need to better understand the industrial base’s nervous system, circulatory system, and bone structure. … The new S2T2 repository of industrial base data will also serve as a jumping off point for future assessments by all Defense Components, ensuring that data collection and analysis cumulates, thereby increasing the value of all industrial base assessment efforts.

We offered our opinion of Mr. Kendall’s testimony in a separate piece that followed on the report above. We wrote—

… we have our doubts about DOD’s ability to accomplish its stated goals. We have yet to encounter very many DOD contractors that have actually mapped their entire supply chains, program by program, and identified where lower tier suppliers support multiple programs. The burden to execute the S2T2 strategy will likely fall on the DCMA—and we don’t think they’re prepared for it. That said, we agree with DOD that it’s a laudable—and even important—objective that needs to be accomplished.

A year later, we offered a perhaps controversial opinion that the S2T2 initiative—while being well-intended—was flawed. We suspected it might be intentionally flawed. We wrote—

We thought—and still think—that it’s a back-office type approach to doing what is really needed, which is to have every single prime contractor map individual program supply chains via a common format, and then aggregate those program supply chains in a secure database. … It has not yet come to pass because it’s not finished yet. It’s not finished yet because … well, the Report doesn’t say. We assert it’s not finished yet—and may never be finished—because it’s not the right approach. Or because it’s not in the best interest of the (former) IP Directorate to actually complete the initiative. …

So what was formerly the Industrial Policy Directorate is now the Deputy Assistant Secretary for Defense (DASD) for Manufacturing and Industrial Base Policy (MIBP). The office has been promoted up in the DOD hierarchy, the office lead has been promoted, and the “realigned” organization now has a long-term “priority” mission that it can use to drive funding requests.

This, readers, is what success looks like at the DOD.

The fact that the DOD bureaucracy is growing in a time of budget cut-backs, and that there is no tangible output from this long-term “comprehensive process” for identifying weak points in the defense industrial supply chain—and, indeed, that no S2T2 completion date has even been set—should not be used to judge these individuals. They are winning by their own applicable criteria.

And if they ever do issue a comprehensive S2T2 analysis, their importance in the Pentagon foodchain will diminish. Which is, perhaps, one reason that the initiative may not ever make as much progress as we think it should.

So while the DOD bureaucrats are reorganizing, so is the industrial base they are supposed to be analyzing. The industrial base is reorganizing and evolving quickly, in response to the endemic forces of the marketplace. In contrast to the nimble movements of the market, the bureaucrats are progressing far more slowly than we think they should be. And they are perhaps sauntering down the wrong path.

What’s interesting to contemplate is the impact of the market reorganizations on the S2T2 analysis. By the time DOD gets the S2T2 data input into the database (using the approved template), we predict that data is going to be largely obsolete, overtaken by real-life events such as mergers, acquisitions, divestitures, spin-offs, and bankruptcies. By the time the S2T2 analysis is completed—if it ever is—it will describe an industrial base that no longer exists.

But that’s okay.

We’re quite sure that the good folks at DASD (MIBP) will be willing to undertake a new S2T2 analysis, if more resources and funding can only be made available to them.

In conclusion, here we are, more than six years after DoD initiated its critical S2T2 initiative. The last substantive thing we could find on S2T2 is right here. One of the PowerPoint’s conclusions is that “DoD will never have complete Industrial Base visibility.” We agree. The only way to get visibility is to have the prime contractors map their program supply chains – and pay them to do it and to provide that information into a database. DoD: if you want to do this right, you need a new contract clause.

Meanwhile, GAO and DoD act as if S2T2 never existed.

But we remember….

 

Last Updated on Wednesday, 04 October 2017 11:50
 

Bribery and Kickbacks at the DoDOIG

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Here’s a story, told by the U.S. Department of Justice, as documented in this Department of Justice press release.

We didn’t write the story. The DoJ did. So we will just quote from it.

Two companion indictments were unsealed today charging four men with participating in a bribery and kickback conspiracy involving a contract for the Department of Defense’s Office of Inspector General … According to allegations in the indictments, William S. Wilson, 52, of Florida, paid hundreds of thousands of dollars in kickbacks to Timothy R. Donelson, 56, of Georgia, and Ronald A. Capallia, Jr., 37, of Alabama, in return for Donelson and Capallia providing favorable treatment to Wilson’s companies in connection with prime government contracts. At the time of the kickbacks, Donelson and Capallia were employed by a telecommunications company that had been awarded a prime contract to provide an array of voice and data services to the DOD OIG and other federal agencies.  In return for the kickbacks, Donelson and Capallia provided favorable treatment to Wilson’s companies, including Donelson’s award of a subcontract to one of Wilson’s companies to provide information-technology related support services to the DOD OIG, notwithstanding that Wilson’s company focused on construction and construction management, and had no relevant expertise in information technology. Capallia similarly caused his employer repeatedly to order items such as computer software and hardware and routine office moving services from Wilson’s construction company despite the lack of any legitimate business or economic reason to do so.

So two employees of the prime allegedly accepted kickbacks and, in return, awarded a subcontract to a company that had no relevant expertise.

But wait. There’s more.

The indictment further alleges that Wilson paid tens of thousands of dollars in bribes to Matthew Kekoa LumHo, 42, of Fairfax Station, then employed at the DOD OIG, in return for LumHo taking official acts that benefitted Wilson’s companies. According to the indictment, these actions included LumHo placing numerous fraudulent orders through the prime contract awarded to the telecommunications company employing Donelson and Capallia, thereby causing a continued flow of revenue from that telecommunications company to Wilson’s company as its subcontractor.  … LumHo, along with Wilson and Capallia, repeatedly caused the DOD IG to issue fraudulent service orders that were used to conceal that the co-conspirators were arranging for Wilson’s company to buy standard, commercially available items such as computer software, hardware, and accessories, and routine office moving services, significantly inflating the price, and then falsely billing the government as through it had been supplied with various professional services.  As the indictment alleges, by doing so, the co-conspirators enabled Wilson’s company to reap substantial profits from transactions where there was no legitimate business or economic reason to involve Wilson’s company, and where Wilson’s company provided virtually no value to the United States.

The plot gets more complicated! Now we have an employee of the DoDOIG who allegedly placed orders against the prime contract, which led to additional work for the allegedly fraudulent subcontractor.

But wait. There’s more.

According to the indictment, Wilson paid the bribes and kickbacks in several forms, including hundreds of thousands of dollars paid from Wilson’s companies to a side business owned by Donelson that were masked through fake invoices for non-existent work, hundreds of thousands of dollars in supposed payroll payments to Capallia’s spouse, who was nominally placed on the payroll at Wilson’s company despite doing virtually no work, and tens of thousands of dollars of supposed payroll payments to a relative of LumHo, for a job that LumHo’s relative never actually held.  Wilson further paid bribes and kickbacks by paying for part of the purchase price of two vehicles bought by Donelson, by buying two vehicles outright for Capallia, paying for more than $60,000 worth of Caribbean cruises, hotel accommodations, and flights for Capallia, his family members, friends, friends’ children, and on at least one occasion, babysitters to watch Capallia’s children on one of the cruises, and paid bribes to LumHo by supplying him with electronics and high-end photography equipment.

The story includes salacious allegations of padded payrolls, fraudulent invoices, and cruises. That about covers it, right?

So let’s wrap it up with the traditional conclusion to such stories.

Each defendant has been charged with conspiracy to commit wire fraud and wire fraud.  The companion indictments further charge Wilson, Capallia, and LumHo with False Claims Act violations, charge Wilson and LumHo respectively with bribery and acceptance of bribes, and charge LumHo and Donelson with false statements. The conspiracy to commit wire fraud and wire fraud charges each carry a maximum sentence of imprisonment of 20 years; the False Claims Act violations each carry a maximum sentence of imprisonment of 5 years; the bribery charges each carry a maximum sentence of imprisonment of 15 years; and the false statement charges each carry a maximum sentence of imprisonment of 5 years. 

And so ends our story for today.

We are quite sure that we’ll be back with similar stories in the future, because that’s how things seem to roll these days.

 

 

Contract Closeouts

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Contract closeouts—or the lack thereof—are on the minds of many in government contracting these days. The backlog of contracts awaiting official closeout is mind-boggling on the government side. Government contracting officers are awaiting contractor action, and they are losing patience. On the contractor side, the amount of work and the lack of resources to accomplish that work is a daunting challenge.

The problem is gigantic and it’s government-wide.

Despite the magnitude of the problem, everybody has an excuse for the situation. Everybody has a finger to point at somebody else.

As noted, the government points at its contractors. Prime contractors have a number of reasons for their lack of contract closeout, including (but not limited to): lack of subcontract closeouts, lack of personnel, challenges in reconciling payments made to funding ACRNs, and the general lack of paperwork to help understand the financial status of a contract that was physically completed literally years ago. With respect to those old-dog contracts, personnel turnover has not helped either the government or its contractors; often there’s nobody left who has first-hand knowledge of the contractual situation. We know of at least one contract where the security certification couldn’t be completed because there was literally nobody left who had the clearance to check.

All in all, it’s a huge challenge that both contracting parties are moving to address, albeit in different ways.

The U.S. Government Accountability Office (GAO) recently issued a report that addresses the challenges of contract closeout across the Federal government. GAO staff reviewed the closeout status at five different Federal agencies (including DoD). A telling finding:

None of the five agencies we reviewed had all of the following: (1) centralized data on the number of contracts needed to be closed out; (2) information on where the contracts were in the closeout process; (3) established agency-wide contract closeout-related goals; and (4) established performance measures to assess progress toward achieving these goals.

The expectation is that the agencies will follow the FAR requirements with respect to accomplishing contract closeout. As the GAO noted—

Contracts are generally considered to be physically complete once all option provisions have expired, the contractor has completed performance, and the government has accepted the final delivery of supplies or services. Physically completed contracts should then be closed within time frames set by the FAR—6 months for firm-fixed-priced contracts and 36 months for flexibly-priced contracts. The FAR prohibits the closing of contract files if the contract is in litigation, under appeal, or where the contract is being terminated and termination actions have not been completed. Flexibly-priced contracts take longer to close because additional steps must be taken during the closeout process; for example, audits on costs incurred and settlement of the contractor’s final indirect cost rates.

(Footnotes omitted.)

Four of the five agencies reviewed by GAO used DCAA for contract audit support services. As readers may guess, lack of timely DCAA audit reports was cited as a cause of the inability to timely closeout flexibly priced contracts. For the period in which DCAA was prohibited from performing audit services for civilian agencies, those agencies had to find audit support elsewhere. At DHS, private auditors were put under contract. However, according to GAO, as of July, 2017, DHS had not actually issued any orders to those auditors to perform work. At the Department of State, work was issued to private audit firms and, as a result, two incurred cost reports were received. However, both State and DHS stated that they intended to stick with DCAA as their primary source of contract audit support, regardless of the lack of timely audits. According to GAO, “HHS officials stated that some of their components use DCAA for incurred cost audits, but others are using alternate options such as conducting the audit work internally or contracting out to private firms for audit support services.”

GAO also noted that the civilian agencies have formed a working group to address the issue. As part of its efforts, the working group identified that the civilian agency market for contract audit services is roughly $100 million annually. According to GAO, “the working group is preparing an ordering guide to assist agencies with placing contracts for contract audit related services. The guide, expected to be completed by August 2017, will also identify best practices to address concerns regarding the quality of audits.”

As noted, four of the five agencies in the GAO review use DCAA to perform audit services related to establishing allowable costs and final billing rates for flexibly priced contracts. GAO acknowledged that DCAA has made progress in reducing its gargantuan backlog of incurred cost audits, writing “DCAA has reduced its overall inventory of incurred cost proposals awaiting audit from about 31,000 in fiscal year 2011 to about 14,000 as of the end of fiscal year 2016. Over that same time period, DCAA reduced what it characterizes as its backlog of old incurred cost proposals—those proposals submitted for fiscal year 2013 and prior—from 21,000 to below 5,000.

However, GAO delivered some bad news in the very next sentence, writing—

DCAA did not, however, meet its original goal of having a 2-year inventory of audit proposals—eliminating its backlog of proposals older than 2 years—by fiscal year 2016 and acknowledged that meeting its revised goal to do so by the end fiscal year 2018 will be challenging. DCAA policy officials stated that they were unable to meet the goal of eliminating the backlog due to resource constraints, including workforce challenges, such as hiring freezes. Overall, as of the end of fiscal year 2016, DCAA’s total inventory included 14,208 incurred cost proposals, representing approximately $825 billion in auditable dollar value (ADV).

GAO noted that DCAA’s “low-risk” initiative has contributed to the backlog reduction. The number of “low-risk memorandums” [memoranda?] issued by DCAA is significant. According to GAO, “Since the risk-based initiative was implemented in 2012, DCAA issued a total of 18,292 low-risk memorandums to close out proposals, compared to a total of 9,641 incurred cost audit reports.” In other words, for every official incurred cost audit report that DCAA has issued, it’s issued two low-risk memoranda—i.e., documentation that no audit whatsoever was conducted. DCAA justifies its lack of audits by noting that performing them on smaller final billing rate proposals is a money-loser. GAO wrote that “DCAA reported that even under its risk-based approach, it conducted 767 audits on incurred cost proposals with ADVs of $1 million or less from fiscal years 2014 through 2016, but expended approximately $18 million more in staff resources than the government received by identifying unallowable or questioned costs.” In other words, from a bottom-line perspective such audits should not be performed.

But DCAA is not a for-profit entity. Why is it performing such bottom-line calculations?

Another DCAA initiative is the use of multi-year audits, which DCAA asserts results in a reduction of up to 40 percent of audit staff hours. “DCAA reported that it used multi-year audits to close 1,232 and 1,536 incurred cost proposals, in fiscal years 2015 and 2016, respectively, which constituted about 13 percent and 19 percent, respectively, of the total number of incurred cost proposals closed in those years.” Not reported is the additional cost that contractors may incur in supporting those multi-year audits.

As readers may have guessed, GAO thinks DCAA can do better—and that if DCAA did better then that would help the contract closeout conundrum. For example, GAO wrote—

DCAA’s data for fiscal year 2016 indicate that once a contractor submits an adequate incurred cost proposal, it took DCAA on average 885 days—or nearly 2 and a half years—before DCAA completed the incurred cost proposal audit. Further, our analysis found that DCAA’s backlog of contractor proposals submitted for 2013 and prior years includes 51 adequate proposals that have $1 billion or more in ADV submitted by at least 15 of DOD’s largest contractors for which audits have not been completed. The number of days from the date these 51 proposals were determined adequate ranged from 78 to 2,206 days at the end of fiscal year 2016, meaning that a contractor submitted an adequate cost proposal more than 6 years ago but DCAA has not yet completed the audit. According to DCAA policy officials, staff availability is the primary factor for the delay before starting audit work. For example, proposals closed in fiscal year 2016 waited in DCAA’s queue an average of 747 days before the start of audit work. From the time that DCAA initiated the audit—which it defines as the date DCAA holds an entrance conference with the contractors—it took DCAA about 138 days on average to complete the audit in fiscal year 2016.

(Emphasis added; footnotes omitted.)

GAO concluded that “Assessing and implementing options to reduce the amount of time DCAA takes to begin its incurred cost audit work and establishing performance measures could help DCAA further reduce its inventory.”

GAO noted that about 10 percent of the whiskered proposals are considered to be “inadequate” by DCAA, and about 45 percent of the newer backlog is similarly considered to be “inadequate”. (We put “inadequate” in quotes because the FAR gives contractors considerably more latitude in proposal format and content than the DCAA adequacy checklist does.) GAO wrote “DCAA officials acknowledged that they do not currently have insight into the reasons why DCAA determined that a contractor’s proposal was inadequate, the number of times that a contractor submits revised proposals until it is deemed adequate, or the length of time it takes to receive an adequate proposal ….” However, DCAA reported a couple of initiatives that they thought might help contractors meet DCAA’s expectations in that area. Among the initiatives is a “web-based submission portal for incurred cost proposals that could allow contractors the option to submit their proposals with real time visibility and guidance on common issues.” (Insiders have dubbed this the “Turbo-Tax approach.”)

With respect to multi-year audits, “DCAA would like to continue the use of multi-year audits to gain work efficiencies by combining proposals under one audit. DCAA has not, however, fully evaluated how the process could be improved nor established related performance measures, such as the number of proposals closed, ADV examined, the timeliness of the audits, or its impact on contractors.”

Obviously, GAO focused its attention on Federal agencies and their contract auditors. We’d like to conclude this article by offering some tips to government contractors that might assist them in more efficiently closing-out their government contracts.

1. Start the closeout process 6 months before the expiration of the contracts’ period of performance. Do not let the PMO or the contracts team transfer away before the work is started.

2. See what efforts you can perform on an annual basis. For example, the patent certification should be an annual exercise. Can you similarly make the property certification into an annual analysis? Can you perform the payment to ACRN funding reconciliation on an annual basis?

3. Closing out subcontractors is not as hard as most people want to make it. Technically, you do NOT need official government-audited final indirect rates to closeout a subcontractor’s flexibly priced contract. (See our article on that topic here.) Most of the risks that people are concerned about can be addressed with the proper certifications.

4. With respect to FPIF subcontract, the clause itself says you should not wait for final rates—though if you have them then you should use them. You could also offer an incentive to a subcontractor for prompt closeout: for example, you could offer an additional ½ point of fee if the subcontract is closed within 12 months of physical completion. (You would have to bake this into the subcontract’s terms, but it could be done.) The point is: you can do this if you focus on making it happen.

5. Consider where closeout efforts will be charged. Are they direct costs of the contract or are they indirect costs of the business? If you want to charge them direct, consider how that will impact your ability to close-out the contract. (Hint: you will have to apply indirect rates to those costs.)

All in all, everybody has fallen behind in contract closeouts because it was not a priority for anybody—neither on the government’s side nor on the contractor’s side. So now we are all faced with a mess and it will require an extraordinary effort to clean it up. But it can be cleaned-up, with the right management focus and a little creativity.

 

 

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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.