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Actually It’s About Ethics in Aluminum Production

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Most readers won’t get the humor in the headline; and that’s okay. (If you feel a burning need to understand the joke, go to the "Know Your Meme" website.)

Actually this article isn’t about humor; it’s about mandatory contractor disclosures made pursuant to the requirements of the FAR contract clause 52.203-13. As you may know (because we’ve spoken on the subject), the majority of contractor disclosures submitted pursuant to that clause are related to timekeeping and labor charging irregularities. (In GFY 2017, 83% of all contractor disclosures made to the DoD OIG were related to timekeeping issues.)

The contractor disclosure statistics are counter-intuitive and perhaps not what the promulgators of the rule intended in 2008, when the mandatory disclosure regime replaced the previous voluntary disclosure regime. At the time, “The DOJ expressed frustration that Defense Department contractors were not keeping pace with other industries in terms of self-governance.” (Link to 2009 Crowell & Moring article.) Ironically, the other industries with which the defense contractors were not keeping up, in terms of self-governance and transparent disclosure, includied both the banking and securities industries. (Why is that ironic? Think about the timing.) The promulgators of the new disclosure rules were convinced that defense contractors were hiding something and only a mandatory disclosure rule would compel them to report it. The focus was on violations of Federal criminal law “involving fraud, conflict of interest, bribery, or gratuity.” Certainly, nobody would have thought that the big contractor secret was that personnel weren’t properly recording labor charges.

Actually this article isn’t about the mandatory disclosure rule; it’s about false product certifications. You know, the kind of stuff that the contract clause was intended to force contractors to disclose. Specifically, this article is about allegedly false test certifications at an aluminum extrusion plant in Portland, Oregon. More specifically, its about an allegation that the former production manager at that plant had falsified “tensile test results on hundreds of occasions, which were typed onto test certificates provided to the manufacturing facility’s customers.” Those customers, according to the indictment, included both NASA and the Missile Defense Agency.

Even more specifically, the Department of Justice filed a major fraud indictment against Dennis Merkel, 71, of Portland, Oregon.

“What is aluminum extrusion?” you may be asking. We found a website that stated “An aluminum extrusion is produced by pushing heated metal through a press to produce a desired form or shape. Typical applications for extruded products include window and door frames, store fronts, auto body frames, solar panel mounting systems, and heating, ventilation and air conditioning (HVAC).” In addition, the DoJ press release (link in previous paragraph) stated that “Aluminum extrusions are manufactured for a variety of applications, including aeronautic uses such as rockets and military hardware.”

According to that DoJ press release—

There are industry-set specifications for measuring the mechanical properties of extrusions, which are determined by conducting a tensile test. Merkel allegedly sent and caused to be sent testing certifications containing falsified mechanical properties test results in connection with government contracts for NASA and the Missile Defense Agency. The indictment alleges that Merkel and others carried out the scheme to conceal failing tensile test results, increase profits and productivity, and obtain bonuses, which were calculated in part based on a production metric.

Merkel was the production manager at the Portland area contractor and the indictment alleges that he falsified the aluminum test results from May 1996 to December 2006. That’s a ten-year duration. But the alleged scheme ended more than ten years ago. The press release did not state why the government waited more than a decade to file its indictment.

Actually this article isn’t about whether the government can reach back 10 years when the statute's language itself says the statute of limitations for major fraud against the United States is “7 years after the offense is committed, plus any additional time otherwise allowed by law.” (Perhaps the DoJ thinks it has found the “additional time” noted in the statute.)

What is this article about? Actually we’re not sure! Perhaps it’s about the kind of (alleged) fraud that the contractor mandatory disclosure rule was intended to force contractors to disclose. If so, that rule didn’t work so well in this case, since it took more than a decade for the (alleged) wrongdoing to come to light.


Last Updated on Tuesday, 24 April 2018 18:28

Thornberry Tackles Acquisition Reform

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SisypheusRepresentative Mac Thornberry (R-TX) has emerged over the past few years as one of the House’s most vocal advocates for defense acquisition reform. Earlier this week, his office released two pieces of “draft legislation” that would significantly impact the Pentagon and how it buys goods and services in support of U.S. warfighters.

The first piece—the one that’s getting the lion's share of the press—focuses on eliminating seven Pentagon agencies in order to cut $25 billion (or 25%) from the Pentagon’s “fourth estate.” According to one article (link in previous sentence) “the Fourth Estate is comprised of 28 agencies that are not part of a military service and employs 200,000 civilian personnel and nearly 600,000 contractors.” Another article quoted Thornberry as saying, “To summarize the whole thing from my perspective, it is reduce the overhead to put more resources at the tip of the spear.”

Long-time readers may recall similar words from former SECDEF Robert Gates, when he spoke about cutting DoD overhead by $100 billion in order to move “tail to tooth”. See this 2010 article. Or perhaps this one. Several constituencies supported the Gate’s “efficiency” initiative, including the Defense Business Board. In addition, President Obama gave public support to it as well.

Despite the support from the top and the support from the DBB (and from some think-tanks), the Gates plan didn’t seem to go anywhere. Not much seems to have been accomplished. It took us about six years to understand that the effort was sabotaged by Dr. Ash Carter (who became SECDEF at the end of the Obama administration) and his subordinate, Frank Kendall. Those two individuals foiled the Gates initiative by attempting to bury a McKinsey study (commissioned by the DBB), a study that had concluded that the Pentagon could save up to $125 billion (over five years) by better managing its Fourth Estate Bureaucracy.

$125 billion over five years. Or about $25 billion per year. Or about the same amount that Mac Thornberry’s draft legislation purports to save.

Coincidence? We think not.

But enough of that. We want to focus on Thornberry’s second piece of draft legislation. As the Federal News Radio article (authored by Jared Serbu, link in previous sentence) reports, “most of the changes Rep. Mac Thornberry (R-Texas) is proposing were first recommended by the Section 809 Panel, an 18-member team of acquisition experts Congress commissioned in 2017 to provide advice on how to streamline the system.”

Readers will note that we’ve been talking about the Section 809 Panel for some time. Our article discussed recommendations from the Panel’s first Report. We heartily agreed with those “bold recommendations for reform.” Among the 24 official recommendations (many of which had multiple subparts), the first four addressed how the Pentagon acquired “commercial” goods and services. We noted some aspects of the issue in this article about DoD’s attempts to reform its commercial item buying practices.

More recently, we have been skeptical that the Section 809 Panel’s recommendations would survive attack by entrenched stakeholders. We are pleased to be proven wrong, at least to the extent that Rep. Thornberry (and his staff) have taken the Panel’s recommendations on commercial item acquisitions and proposed them as draft legislation. As Mr. Serbu’s article summarizes—

The bill also takes aim at another of the main focus areas the 809 panel addressed in the first full volume of its report, which was released in January. The panel found that DoD has been backtracking on what is supposed to be a preference for commercial items, and the use of simplified procedures to buy them. The percentage of its dollars spent on commercial goods and services dropped 29 percent between 2012 and 2017. That’s partially because both Congress and the department itself have made the process for buying commercial items increasingly complex over the past 20 years, including by increasing the number of government-unique contract clauses they impose on commercial firms by 188 percent, and quintupling the number of requirements that flow down to those companies’ subcontractors.

The panel found DoD’s regulations include upward of 40 sometimes-contradictory definitions of what constitutes a commercial item. The Thornberry bill attempts to revert to Defense Department to just two: one for commercial goods, another for commercial services.

Contractors that have struggled to convince contracting officers that their goods and services meet the definition of “commercial item” will no doubt welcome reform efforts in this area. We know of at least one small business that gave up after nearly a year of trying to convince a skeptical CO that its item met the definition (and it did). So anything that streamlines this area is fine by us.

Another area in which the draft Thornberry legislation borrows heavily from the Section 809 Panel recommendations in the area of small business contracting. The Section 809 Panel made a couple of recommendations, including:

Rec. 21: Refocus DoD’s small business policies and programs to prioritize mission and advance warfighting capabilities and capacities.

21a: Establish the infrastructure necessary to create and execute a DoD small business strategy, ensuring alignment of DoD’s small business programs with the agency’s critical needs.

21b: Build on the successes of the SBIR/STTR and RIF programs.

21c: Enable innovation in the acquisition system and among industry partners

David Drabkin, who replaced Dee Lee as the Panel’s Chair, was quoted in Serbu’s Federal News Radio article as saying, “we looked at the various activities that the department has to reach small businesses, we found that they had lots of folks who went to various meetings in places that tend to be attended by people who already do business with a government. They really didn’t have a focus on going to programs, shows, associations where there were people who didn’t do business with the government. And when we looked at DoD’s industrial base office, while they had a mission to look at the whole industrial base and try to identify the department’s needs, they really weren’t focused on small businesses.”

Although details of Thornberry’s exact small business reforms are a bit sketchy at the moment, we believe they implement the spirit (if not the letter) of the Section 809 Panel’s recommendations.

It's gratifying to see that at least one member of Congress is taking the Section 809 Panel’s work seriously. The problem, of course, is moving from a “draft legislation” to a final bill to signed public law. As the Washington Post reported: “His legislation will probably be met with resistance from lawmakers who are fiercely protective of military-related jobs in their congressional districts, as well as from parts of the Pentagon itself, which has a track record of defeating or slow-rolling restructuring proposals.”

Still, we can hope, can we not?

The defense acquisition environment is widely thought to be in dire need of reform. Some say it’s broken completely; others say it’s so broken it cannot be fixed. But we say we have to keep on trying to fix it, no matter if the efforts are ultimately Sisyphean, in that the efforts are endless and, ultimately, without significant result. To give up is to surrender hope that the system can be rationalized.

Last Updated on Sunday, 22 April 2018 06:31

DoD Changes Micro-Purchase and Simplified Acquisition Thresholds

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The 2018 National Defense Authorization Act (NDAA) changed the micro-purchase threshold—increasing it from $3,500 to $10,000. It made the change by revising Section 1902(a)(1) of Title 41, United States Code. Further, the 2018 NDAA changed the Simplified Acquisition Threshold (SAT), increasing it from $150,000 to $250,000 by revising 41 U.S.C. Section 134. The NDAA applies primarily to the Department of Defense, but the statutory change meant that the two acquisition thresholds in the FAR were out of sync with their authorizing statutes. Thus, the Civilian Agency Acquisition Council issued a Class Deviation that permitted civilian Agency level Class Deviations to implement the threshold changes in advance of official rule-making.

Is this a big deal? Maybe.

FAR 2.101 provides the official definition of “micro-purchase threshold” and “simplified acquisition threshold.” We note that both of those definitions are somewhat complex and driven by circumstance; the exact circumstances determine what the exact threshold is. So when we state “$10,000 and $250,000” those are the general thresholds that apply in most circumstances; but you need to know that the exact threshold that applies to your circumstances may be different.

FAR Part 13 discusses the acquisition procedures used by government buyers/contracting officers for purchases below each of those thresholds. Generally, micro-purchases are made via government purchase card and purchases between the micro-purchase threshold and the SAT are made via purchase order. The point is that Part 13 procedures are fast and easy and relatively uncomplicated, especially compared to the Part 15 procedures used for negotiated procurements. So raising the thresholds means that more acquisitions will be subject to the less intrusive and less burdensome procedures. This is a good thing.

On April 13, 2018, the DoD issued a Class Deviation implementing the higher thresholds. Interestingly, DoD chose to raise the micro-purchase threshold to $5,000, not $10,000 as the NDAA demanded. (The $10,000 threshold was implemented only for certain limited circumstances that do not seem to be envisioned in the NDAA language.)

That same Class Deviation raised the SAT to the full $250,000 (except when a higher SAT is authorized by certain circumstances).

All this is good news.


DoD Changes TINA Threshold

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The 2018 National Defense Authorization Act (NDAA) changed the threshold at which certified cost or pricing data was required to be obtained. We told you about it. Several times. We ranted about it. Several times. The statute was revised such that the threshold was increased from $750,000 to $2 million.

On April 13, 2018, the DoD issued a Class Deviation that aligns the FAR with the revisions to the underlying statute. The Class Deviation also acknowledges that the CAS coverage threshold is now $2 million as well.

All this is good news.

As we have urged (several times), you should revise your policies and procedures to require certified cost or pricing data only from subcontractors whose proposals are in excess of the new threshold. You should administer CAS only on subcontracts whose value is in excess of the new threshold.

The changes go into effect for DoD on July 1, 2018, according to the Class Deviation.


Training Auditors

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As busy season winds down and financial statements are signed-off, efforts to prepare the annual proposal to establish final billing rates get going in earnest. For many of us, we have to finish the final cost scrubs and get our ICE Schedule information together while at the same time supporting audits of prior years’ costs.

While supporting financial statement audits.

While supporting other audits and taskers from management.

We don’t complain about the multi-layered workload; it’s just business as usual, right? Do the work while supporting audits of the work that was previously done. That’s our world—especially in Q1 of any fiscal year. We deal with auditors—who are often performing multiple concurrent audits—while working to meet submission deadlines so that our submissions can become the focus of future audits. It’s what we do.

Now seems an appropriate time to reflect on the training of auditors.

We all train auditors, don’t we? We train our external financial statement auditors and we train our government contract auditors, and some of us train the internal auditors. Most people know how to audit but fewer people know what they’re auditing. We have to help them along.

It’s part of the deal.

Let’s take DCAA, for example. The auditor(s) show up and they need to understand how you do business. They can’t assume they already know your company’s practices, because every contractor is a bit different: every ERP system implementation is a bit different; decisions regarding what costs are direct and what costs are indirect are different. Pools and allocation bases differ. Practices and procedures and guidance differ. So the auditors ask for your policies and your procedures, and you give them the documents (assuming you have them). Then they ask for a “walk-through” which, to be honest, is of minimal value, but it’s a required step. Then (in theory) the auditors pick some transactions and test those transactions against what you’ve told them you do.

But sometimes that’s not enough, is it?

Sometimes you get a junior auditor who needs a bit more help. Sometimes you get a senior auditor who has made certain assumptions that turn out to be invalid for your company. Sometimes your company’s system is wildly complex and it simply would not be reasonable to expect an outsider to gain an understanding of how it all works in just a few days. (Sometimes your company’s system is so complex that most of the employees don’t understand more than the basics.) You need to do more than walk-them through your system and/or your implementing practices; you need to actually give them training in how the system works. You need to make an investment in your auditors, an investment in terms of time and resources, so that they can understand your system enough to make the right findings.

This situation is not limited to DCAA auditors. It applies to your Big 4 auditors and your next-tier auditors and your internal auditors. It applies to any set of auditors who walk into your company and then have to opine on what they see. If they don’t understand what they see, they can’t reach good opinions; at least, they can’t do so easily.

Sometimes you need to train your auditors in the nuances of your system(s), just so they can pick the right universe from which to pick representative transaction samples. You need to take them beyond Introduction to Our System and into more advanced topics. Which takes more time and resources.

But it’s an investment, right? It’s an investment in your auditors, so as to prepare them to efficiently perform their audits and reach the right conclusions. If they do that, the audit support effort is (generally) lower. Silly disputes are avoided. They get to the right conclusions and they get there faster. And if all that happens, then you have time to work on all the other stuff that's getting moldy in your in-box. That’s the return on the investment of time and resources.

If you train your auditors, you get an ROI.

At least, that’s what we tell ourselves. But is it really true?

The problem with training your auditors is that too often they don’t stick around to use that training.

Let’s take the outside auditors, for example. It’s true that you can get a Staff Associate this year who becomes a Senior Associate in a couple of years, who then (perhaps) eventually becomes an Audit Manager. You meet them in Year 1 and by Year 5 you’re LinkedIn buddies. That is a real possibility: you can get long-term continuity on your audit team. But it won’t last. Sooner or later the audit team is going to turn-over. The Manager is going to get assigned to another audit client. The Partner is going to rotate off. Over time, you will have 100% (or more!) turnover. You will have new auditors. And the new auditors are going to need the same training you gave the old auditors. Further, even if you are lucky enough to get long-term continuity in some of your audit team, the rest of the team will need training. The Manager isn’t going to train the new Staff Associate in the nuances of your system; they don’t have time for that. So it’s going to be your job to train that young person who just graduated from college last year in the intricacies of your system and your implementing procedures and practices.

In other words, it is almost certain that you will be continuously training your auditors. You need to know that when you calculate the ROI. The investment in auditor training is unending. You will never stop training your auditors and therefore the investment is higher than you would like it to be; and the return on that investment is lower than you would like it to be (because a robust proportion of the auditors you trained won’t be there to use that training next year).

The situation is not limited to your financial statement auditors. It applies to any auditors you interact with. Let’s go back to DCAA. You’ve done your walk-throughs and you’ve given the auditors your command media (policies, procedures, practices, instructions). You’ve done the Introduction to Our System thing and perhaps you’ve also done the Advanced System Stuff course and the System Nuances, Exceptions, and Weird Stuff course. You’ve invested considerable time and effort in training your DCAA auditors to understand what they need to know about your system—taking time away from other pressing matters (such as preparing that proposal to establish final billing rates) in order to help them understand what they need to know. The DCAA audit team is as prepared as you can make them.

And then everybody you trained gets reassigned.

The Audit Supervisor gets promoted and transferred to a new FAO. The Audit Lead is pulled-off to work demand assignments. The auditors are reassigned to work different audits that have no overlap with what you just trained them in.

And the new audit team that shows up next year knows zero about your system(s). You get a new Assignment Letter from a new team—and the first thing they want is a walk-through, followed by submission of applicable command media. You have come full circle and are starting fresh with people who want to understand your system(s).

This is the auditor training conundrum.

The more you train, the more you have to train. You will never be done training.

If you are looking for an ROI on that investment in auditor training, it may not be there. By the time you’re done training, it’s time to start training again.

That doesn’t mean you shouldn’t train your auditors. You need to train them. But what it does mean is that you shouldn't train them too much. You shouldn't train them any more than you absolutely need to. Minimal training only. They need to understand the system(s). And that’s about it. Forget the Advanced System Stuff and the nuances and the weird stuff. If that stuff comes up during the audit, then deal with it. But don’t try to prevent it from coming up through deep training. Deep training is a wasted investment without a return.

Again, this situation is not about DCAA or about your Big 4 auditors. We think this situation applies to every auditor with whom you interact. Be careful about giving them too much training because, chances are, they won’t use that training ever again.

Last Updated on Monday, 16 April 2018 17:25

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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.