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First Interim Report of the Section 809 Panel

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You review the NDAA in great detail because it tells you what’s coming.

Each year we post an article linking to Bob Antonio’s WIFCON analysis of the NDAA, and we point out things we believe to be of interest.

What’s the NDAA? It’s the annual National Defense Authorization Act, a piece of legislation passed every year that tells the Department of Defense what Congress expects and requires it to do. In Government Fiscal Year 2016, the NDAA (at Section 809) directed the Under Secretary of Defense (AT&L)—a position that was subsequently eliminated by the GFY 2017 NDAA—to establish “an advisory panel on streamlining acquisition regulations.” We noted this requirement in our article on that NDAA, and we wrote that we hoped it went better than other recent USD (AT&L) efforts at acquisition reform.

The quality of the panel’s results will be largely driven by the quality of panelists. With that thought in mind, let’s provide a link to the Panel’s team. The Panelists, aided by a professional staff, have established nine Teams to address acquisition reform ideas—the nine teams are described here. (For example, Team 9 is focused on “modernizing” the Federal Cost Accounting Standards.

The Section 809 Panel has been active for roughly eight months, and just issued its first Interim Report. Along with the Interim Report came a Supplemental Report containing four recommendations at regulatory roll-backs—four “quick wins” or four pieces of “low-hanging fruit” if you will.

We have provided a number of links in this article so that you can see for yourself what the Section 809 Panel is up to. Here are a couple of quotes from the Interim Report that readers may find to be of interest (all emphases in original, internal footnotes omitted):

  • DoD’s focus must be on mission readiness and performance results. The current acquisition system is designed to achieve too many competing ancillary good policies, sacrificing innovation and technological dominance yet adding complexity, cost, and time.

  • The time for superficial conversation and insubstantial changes to regulations and statutes has passed. The global threat is rapidly changing, the relevance of the unique defense industrial base is waning, the processes for acquisition are no longer efficient or effective, and implementing these processes is left to a workforce that is mired in constricted thinking and risk aversion.

Sounds like quotes taken directly from this blog—but they are from the official Interim Report.

Obviously, we shall all have to wait and see what recommendations the Panel ultimately puts forward, and which ones are accepted. We will be looking for those recommendations that create the most push-back from the DoD bureaucracy, which has a strong history of resisting change. We will also keep our eyes on the Team 9 Sub-Panel, to see if they can assist in untangling the Gordian knot that the Federal Cost Accounting Standards have become.

More to follow on this ....

 

 

H.R. 2511 – Defense Acquisition Streamlining and Transparency Act

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Shot_Across_the_Bow_2Normally we don’t discuss pending legislation. Most bills that are introduced don’t get past Committee, and those that do are amended. Then there are further amendments during the floor vote. In the case of a National Defense Authorization Act (NDAA), both the Senate and House of Representatives have to reconcile their individual versions of the bill in order to arrive at the final public law language. So it’s almost always premature to get torqued about somebody’s bill, and normally we refrain from torqueing our readership.

Normally.

But as everybody knows, we are not living in normal times (if we ever were) and what was normal yesterday is no longer the norm.

So let’s discuss H.R. 2511, introduced by Representative Thornberry, Chair if the House Committee on Defense Reform. What makes this bill stand out from others recently introduced is the fact that Thornberry has issued similar bills over the past two years—and the language in those bills survived a lot of challenges and attempts to amend and House/Senate reconciliation meetings to arrive (relatively intact) in those NDAAs. Thus, we should take this bill seriously.

And what a bill!

Basically, it has three parts that caught our eye (Sections 101, 102, 103). There are other Sections but those are the ones we want to discuss here. The first Section would require the DoD to “contract with one or more commercial online marketplaces for procurement of certain commercial-off-the-shelf [COTS] products.” DoD would be required to accept the standard commercial terms and conditions offered by each marketplace. Contracts with the online marketplaces would be exempted from competition requirements.

The third section would modify statutory requirements to obtain certified cost or pricing data, raising the floor to $2.5 million for new contract actions, including modifications and subcontractor awards. It would also change the thresholds to index them to inflation. In addition, the third section would impose additional reporting requirements on DCAA. It would require DCAA to submit an annual report that reported separate statistics for different audits, including number and associated dollar value of audits performed and audits pending, sustained questioned costs, the costs of performing audits, and the return on investment of performing those audits.

But the second Section is the killer. Section 102—

  • Requires DoD to adopt “commercially accepted standards of risk and materiality” with respect to performance of “performing an incurred cost audit of costs” associated with a DoD contract.

  • Requires DoD to accept “without performing additional audits or reviews” a summary of audit findings on indirect costs of a contractor that “were prepared by a commercial auditor,” if the contractor is not peforming on a majority of cost-type contracts.

  • Gives DCMA the authority to select either DCAA or “a qualified private auditor” to perform audits of contractors’ indirect costs, and requires that no less than 25 percent of such audits be performed by those private auditors.

  • Requires that DCAA’s current “multi-year” audit approach be limited to contractor final billing rate proposals current in backlog as of the date of the final legislation.

  • Requires DoD to award at least two ID/IQ contracts by 2020 to “qualified private auditors” to perform “incurred cost audits” of DoD contracts, and permits DCMA contracting officers to issue task orders under those contracts.

  • Prohibits DCAA from performing any audits or reviews of “incurred cost audits” performed by private auditors pursuant to task orders awarded under those DoD-wide ID/IQ contracts.

  • Prohibits DCAA from issuing unqualified audit opinions after 2022, unless the audit agency is peer reviewed “by a commercial auditor” and passes that review.

  • Clarifies that the cognizant contracting officer—and no other entity or individual—has the sole authority to accept or reject an audit finding related to direct costs charged to a contract.

  • Establishes that materiality standards (effective 2020) for an “incurred cost audit of costs” of an amount less than $100,000 will be 4 percent. Period.

  • For amounts between $100,000 and $500,000, the materiality standard will be $2,000 plus 2 percent of costs between those values.

  • For amounts between $500,000 and $1,000,000, the materiality standard will be $5,000 plus 1 percent of costs between those values.

  • For amounts between $1,000,000 and $5,000,000, the materiality standard will be $8,000 plus 0.9 percent of costs between those values.

  • For amounts between $5,000,000 and $10,000,000, the materiality standard will be $13,000 plus 0.8 percent of costs between those values.

  • For amounts between $10,000,000 and $50,000,000, the materiality standard will be $23,000 plus 0.7 percent of costs between those values.

  • For amounts between $50,000,000 and $100,000,000, the materiality standard will be $73,000 plus 0.6 percent of costs between those values.

  • For amounts between $100,000,000 and $500,000,000, the materiality standard will be $153,000 plus 0.52 percent of costs between those values.

  • For amounts greater than $500,000, the materiality standard will be $503,000 plus 0.45 percent of costs between those values.

  • Requires DoD to perform “incurred cost” audits in a “timely manner,” including providing an adequacy determination within 30 days after receipt, and issuance of audit reports within 1 year after receipt. Failure to issue audit findings within 1 year of receipt shall mean that the DoD has accepted all contractor claimed costs.

  • Requires (by 2025) the Comptroller General to issue a report evaluating performance of such audits by both DCAA and the private sector, to include the costs that contractors incur in supporting those audits.

Whew!

Somebody in Congress is seriously concerned about DCAA’s performance of its “incurred cost” audits, and they are fixing to do some serious reform on the audit agency. We are fascinated by the concept of DCAA competing in the open market against public accounting firms. We are interested to see how the two approaches to conducting and performing such audits play out (though it seems we may have to wait a long time for the official decision).

One is tempted to feel a bit sorry for DCAA leadership right now. But the temptation passes swiftly. In point of fact, it is the decisions made by DCAA leadership—many of whom are still in place after the 2008/2009 agency criticisms—that have put the agency squarely in the crosshairs of acquisition reformers. It’s not like we haven’t seen this coming for a long time. If you’ve been reading this blog, you surely know we’ve been complaining about DCAA leadership for years. Along with many, many others.

So here we are. Will the bill as drafted become part of the 2018 NDAA? We shall have to wait and see. But in any case, you cannot have a clearer and louder shot across the bow warning Fort Belvoir that the status quo is completely unacceptable, and that radical reform is required.

 

 

Let’s Play Public Procurement Fraud Again – Government versus Contractor

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Gameshow

 

This is the second in what may prove to be a continuing series of competing government and contractor against each other to see who has the most reported corruption. As always we based our competition on reported findings from the US Department of Justice and the DoD Office of Inspector General. And as always, allegations and indictments are not the same as findings of guilt; individuals are considered to be innocent until proven guilty in a court of law.

Contractor

  1. Michelle Cho, an officer of Far East Construction Corporation (Far East) and other construction companies, was sentenced on April 26, 2017, to six months in prison and 24 months of supervised release on a federal charge of conspiring to commit wire fraud. Cho was also ordered to pay forfeiture in the amount of $169,166 and pay a criminal fine in the amount of $35,000. Cho was an initiator and mastermind of a scheme lasting more than five years to defraud a disadvantaged persons’ business assistance program of tens of millions of dollars. Cho utilized two straw companies, including Far East, to conspire with MCC Construction Company (MCC) and others to defraud the SBA. Cho’s two companies were eligible to receive federal government contracts that had been set asides for small, disadvantaged businesses under the SBA 8(a) program. Cho and MCC understood that MCC would illegally perform all of the work on these contracts and pay three percent of the proceeds to Cho’s companies rather than have Cho’s companies perform at least 15 percent of the work as required by the SBA 8(a) program. In so doing, MCC was able to win 27 government contracts worth over $70 million from 2008 to 2011. The scope and duration of the scheme resulted in a significant number of opportunities lost to legitimate small, disadvantaged businesses.

  2. On April 27, 2017, U.S. District Judge Marvin J. Garbis sentenced John Wilkerson, age 51, of Moultrie, Georgia to five years in prison, followed by three years of supervised release, for a wire fraud conspiracy and for paying illegal gratuities to a government official, in connection with the award of more than $53 million in federal government contracts. Judge Garbis also ordered Wilkerson to pay forfeiture and restitution in the amount of $9,441,340.11. (See our article discussing this case here.)

  3. A federal grand jury returned an indictment on May 8, 2017, charging a former contractor at the Military Sealift Command for his role in a bribery and fraud conspiracy through which he received nearly $3 million in bribes. According to the indictment, Scott Miserendino, Sr., of Stafford, was charged in a five-count indictment with one count of conspiracy to commit bribery and honest services mail fraud, one count of bribery, and three counts of honest services mail fraud. According to the indictment, Miserendino was a government contractor at MSC, an entity of the U.S. Department of the Navy that provided support and specialized services to the Navy and other U.S. military forces. The indictment alleges that Miserendino and Joseph P. Allen, the owner of a government contracting company, conspired to use Miserendino’s position at MSC to enrich themselves through bribery. Specifically, beginning in 1999, Miserendino allegedly used his position and influence at MSC to assist Allen and his company in obtaining and expanding a commission agreement with a telecommunications company, which sold maritime satellite services to MSC, according to the indictment. For more than a decade, Miserendino allegedly used his influence at MSC to take official acts to benefit the telecommunications company, which through the commission agreement, also benefited Allen and his company. Among his actions, the indictment alleges that Miserendino: advised officials at MSC and on their ships about using the telecommunications company’s services; authorized Allen and his employees to perform services on MSC ships and ensure that the equipment on those ships defaulted to the telecommunications company’s services rather than that of an alternative provider; and facilitated payment to the telecommunications company for the services it rendered to MSC. Unknown to MSC or the telecommunications company throughout the scheme, Allen paid half of the commission payments from the telecommunications company to Miserendino as bribes. In total, between approximately 1999 and approximately 2014, Allen received more than $6 million from the telecommunications company, and in turn, he paid more than $2.8 million to Miserendino in bribes.

  4. Two former executives of a foreign defense contractor pleaded guilty in federal court on May 9, 2017, for participating in a conspiracy to submit bogus bids, claims and invoices to the U.S. Navy in an effort to steal tens of millions of dollars as part of a years-long corruption and fraud scheme. Neil Peterson, 39, and Linda Raja, 44, both Singaporean nationals, each pleaded guilty to one count of conspiracy to defraud the United States with respect to claims. Both defendants were arrested by authorities in Singapore at the request of the U.S. government and were extradited on Oct. 28, 2016. Sentencing for Peterson and Raja is set before the Honorable Janis L. Sammartino of the Southern District of California on Aug. 11, 2017. Peterson and Raja worked for Singapore-based Glenn Defense Marine Asia (GDMA). Peterson served as the Vice President for Global Operations, and Raja served as General Manager for Singapore, Australia and the Pacific Isles. According to their pleas, Peterson and Raja conspired with Leonard Glenn Francis, the owner of GDMA, to defraud the U.S. Navy in order to financially benefit GDMA. As part of their pleas, Peterson and Raja admitted that they and other members of GDMA’s management team created and submitted fraudulent bids. These bids were either entirely or partially fictitious. This ensured that GDMA’s quote would be selected by the U.S. Navy as the supposed lowest bidder. As a result, GDMA could control and inflate the prices charged to the U.S. Navy without engaging in any competitive bidding, as required. Additionally, Peterson, Raja admitted that they and others knowingly created fictitious port authorities with fraudulently inflated tariff rates and approved the presentation of these fraudulent documents to the U.S. Navy. As a result, GDMA charged inflated prices to the U.S. Navy, rather than what GDMA actually paid to the port authorities. (Note: Here’s a link to our latest article on the far-reaching GDMA “Fat Leonard” scandal.)

  5. Eugene Sickle, the former deputy executive director of a South African research institute, pled guilty on May 9, 2017, to a scheme in which he stole more than $200,000 in grant funds originating with the U.S. Agency for International Development (USAID). Sickle, a chemist and a citizen of South Africa, pled guilty in the U.S. District Court for the District of Columbia to a charge of theft concerning programs receiving federal funds. The plea, which is contingent upon the Court’s approval, calls for an agreed-upon sentence of six months to 12 months and a day of incarceration. The plea agreement requires Sickle to pay $206,250 in restitution. He is to be deported upon completion of his sentence. … Sickle was deputy executive director of the Wits Reproductive Health and HIV Institute, a South African research institute focusing on sexual and reproductive health as well as vaccine-preventable diseases. Its primary source of funding is USAID, and Sickle administered grant funds for projects. One such project involved a mobile electronic device software application, in connection with the South African National Department of Health, which would help facilitate safer childbirth deliveries in South Africa. On October 2, 2015, according to the statement of offense, Sickle and the institute’s chief executive officer signed a contract with a company called Alzar Consulting Services Ltd. to develop the childbirth app. Likewise, an individual named ‘Dr. Carla Das Neves’ Alzar’s purported director, signed the contract. Pursuant to this contract, the institute made two payments to Alzar totaling $206,250. However, the childbirth app has never been developed. Subsequent investigation revealed that Sickle created Alzar in the British Virgin Islands. Unbeknownst to anyone at the research institute, he was the sole owner of the company. Sickle also created e-mail accounts for Alzar and fake Alzar employees, including ‘Carla Das Neves.’ He created a fake LinkedIn page for ‘Carla Das Neves,’ which had a beach scene for a picture, and falsely claimed that “Carla Das Neves” was a trained expert in aid/relief work. Sickle shepherded the research institute’s contract with Alzar through the approval and compliance process. He signed the contract both as himself and also as ‘Carla Das Neves.’ … Sickle did not perform any of the work required under the contract, nor did anyone else. None of the USAID money was used for its intended purpose to facilitate safer childbirth in South Africa. Instead, Sickle diverted the money to himself personally, and an associate.

  6. On May 10, 2017, Matthew Barrow, age 43, of Toledo, Ohio, pleaded guilty to bribery charges related to contracting at the U.S. Army Communications-Electronics Command headquartered at Aberdeen Proving Ground (APG), in Harford County, Maryland. According to his plea agreement, in March 2006, the U.S. Army Contracting Command at APG awarded a 10-year, $19.2 billion contract to seven prime contractors to provide technology services to support the integrated engineering, business operations, and logistics needs for the Army. Former Army officials John and Danielle Kays each had leadership positions related to this contract. From September 2006 through April 2011, a series of task orders for services pursuant to the contract were placed. John and Danielle Kays were civilian employees who represented the Army on these types of multi-year contracts. From January 2011 until his resignation from government service in July 2014, John Kays held the position of Deputy Project Manager for Mission Command, in effect the number two position for Mission Command. From June 2009 through June 2012, Danielle Kays was the Deputy Director of the Technical Management Division, and from 2012 until her resignation from government employment in October 2015, Danielle Kays was the Product Director of Common Hardware Systems. Barrow was the President and owner of MJ-6, LLC, a company which he and his wife formed in Ohio in 2008 to obtain military subcontracts. From June 2008 through August 2010, Barrow was also employed as a procurement manager by a glass company in Ohio. From August 2008 to June 2014, John and Danielle Kays agreed to take official actions favorable to Barrow and MJ-6 in return for Barrow paying them a total of approximately $800,000. Specifically, the Kays used their official positions to add MJ–6 as a subcontractor acceptable to the Army, to steer potential employees for government contractors to work for MJ-6, to approve MJ-6 employees to work on various TOs, and to approve the pay rates, status reports, and travel reimbursements for MJ-6 employees. The Kays steered subcontracts worth approximately $21 million to MJ-6. In order to conceal their corrupt relationship Barrow caused the glass company he worked for to purportedly enter into contracts and make payments to Transportation Logistics Services, LLC, a company incorporated by John Kays; and later made payments to the Kays in cash, which Barrow allegedly withdrew from his personal accounts and from MJ-6 accounts. Barrow withdrew the money in amounts less than $10,000 to avoid bank reporting requirements. [Note: We believe this is called “structuring” and it is a crime in and of itself.] To further conceal the scheme, John and Danielle Kays made false statements on the government ethics forms that they were required to file by failing to disclose the cash payments received from Barrow. Barrow faces a maximum sentence of 15 years in prison.

Okay – that’s six for the contractor side. We note for the record that several of the “contractor corruption” stories also involved government personnel, but we chalked them to the contractor side based on the individual who was the subject of the story.

Government

  1. On April 19, 2017 a federal jury found Cordera Hill (Tampa) guilty of one count of conspiracy and two counts of offering to pay and paying illegal kickbacks in connection with a federal health care benefit program. He faces a maximum penalty of five years in federal prison on each count. [Note: We understand readers may consider this to be a health-care related story, but it’s really not. It doesn’t involve FCA violations by a healthcare provider.)

  2. On April 26, 2017, a federal jury convicted a lieutenant colonel in the U.S. Army Reserves for fraudulently supplying hundreds of thousands of Chinese-produced baseball caps and backpacks to the Army Recruiting Command, despite receiving millions of dollars under contracts stating the items ‘MUST BE 100 % U.S. MADE.’ Following a seven-day trial before U.S. District Court Judge Sharon Lovelace Blackburn, the jury found FREDERICK LAMAR BURNETT, 48, of Madison, guilty on three counts of wire fraud. The jury deliberated for less than two hours before convicting Burnett, who took the stand in his own defense. … Burnett used his Huntsville-based company, Lamar International Inc., in a scheme to defraud the Defense Department on three contracts, worth $6.2 million, between 2005 and 2009. All the contracts, two for baseball caps and one for backpacks, were for promotional items to be given to Army recruits. Burnett certified for all three contracts that he would meet the requirements of the Buy American Act, the Berry Amendment and federal regulations that require the government to buy domestic products and materials, according to the indictment. The Buy American Act requires the federal government to buy domestic articles, materials and supplies, primarily to protect American labor. The Berry Amendment prohibits the Defense Department from buying clothing, fabrics, fibers and yarns that are not grown, reprocessed, reused or produced in the United States. The purpose of the Berry Amendment is to protect the viability of the textile and clothing production base in the United States. These statutes are incorporated and made applicable to government contractors through the federal acquisition regulations. Instead of providing American-made products, however, Burnett negotiated and contracted with suppliers directly from China and with American companies who he knew were procuring the products from China. He used Chinese-made products to fill orders under all three contracts and hid their foreign manufacture by hiring workers on a cash basis to remove all the Chinese labels and repackage the items he sent to the Army Recruiting Command. After award of the third contract, a competitor protested the bid, claiming Burnett could only bid so low if he were using foreign suppliers. The government allowed Burnett to proceed with the contract after he promised that he would use only American-made products and that he would comply with all aspects of the Buy American Act and the Berry Amendment. [Note: This one could have gone either way. Certainly, Burnett was a contractor. But the fact that he was an Army Reserve O-5 (i.e., a member of a military service) tipped it toward the government side. Your protest to the Judges has been heard and, unfortunately, denied.]

  3. On May 11, 2017, former U.S. Congresswoman Corrine Brown was convicted by a federal grand jury for her role in a conspiracy and fraud scheme involving a fraudulent scholarship charity. Brown, of Jacksonville, Florida, was convicted on 18 counts of an indictment charging her with participating in a conspiracy involving a fraudulent education charity, concealing material facts on required financial disclosure forms, obstructing the due administration of the internal revenue laws, and filing false tax returns.

Clear winner in this round: Contractor.

Please note, readers, that this list excluded healthcare-related fraud. Had we included those matters, the list would have been much longer. Further, this is less than one month’s worth of stories. Think about that for a second.

Those of us who deal with government audits tend to roll our eyes when the auditors ask questions about fraud matters (as they are required to do). We tend to think the auditors have been trained to consider all contractors to be crooks and that, instead of approaching each audit objectively, the auditors are looking to “get the crooks.” Well, maybe some auditors are, indeed, out to get contractors. But before you simply dismiss an auditor’s skepticism, consider how much corruption there is in the public procurement system. The fact of the matter is—too many contractors and too many contractor employees are engaging in corrupt behaviors.

For that matter, what are YOU doing to detect and prevent corrupt behaviors at your company? We are willing to bet the answer is “not enough.”

 

Last Updated on Sunday, 14 May 2017 09:31
 

Dynamic Delegations of Authority

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A Google search of “delegation of authority” leads to many upon many results. It’s a complicated topic and one that is too broad and too deep for a blog. But if we focus our attention on the delegation of authority for a government contractor, assuming a corporate structure—and ignore the issues associated with a LLC, or with a JV, or with a partnership, and then also ignore all the myriad matters within the government itself—we can hopefully fit our thoughts into one article.

In general, a delegation of authority is a formal assignment of somebody’s authority to a subordinate. Officially, only corporate officers can bind a corporation, and the authority of the corporate officers is itself delegated from the Board of Directors. Typically the BoD delegation is quite specific; it identifies what agreements may be signed by which officer without BoD approval. Often, the BoD delegations come with certain dollar thresholds, in order to protect the corporation (and its shareholders) from an overzealous officer who takes on more risk than the BoD is comfortable with.

In turn, corporate officers can, and almost always do, delegate certain parts of their authority to other individuals. Again, the delegation is almost always tied to certain types of agreements and to dollar thresholds—such that the delegated authority is specific and limited. For example, perhaps a Purchasing Manager can sign a standard Purchase Order for supplies up to (but not exceeding) $25,000 in value. Any purchasing action over that value requires a higher-level signature. Any purchasing action that deviates from standard P.O. terms and conditions requires a higher-level signature, regardless of dollar value. Any purchasing action other than firm, fixed-price may require a higher level signature. Any purchasing action that involves financing payments (e.g., progress payments) may require a higher level signature. Et cetera, et cetera.

The authority continues to be delegated downwards to the organization’s lowest level, where perhaps somebody has authority to use a P-Card or to make a petty cash transaction up to, but not over, a certain dollar value for certain things.

Quite often the delegation of authority is a formalistic document, maintained on a company intranet. That document identifies authority levels for different transactions as well as associated dollar value thresholds. In some cases, authority to approve decisions is also identified. For example, perhaps the approval authority for an employee to attend an external training seminar is retained at the Vice President level; and thus managers and directors lack the authority to send their employees to external seminars without first obtaining an approval from a VP. For another example, perhaps the approval authority to fly at other than lowest available airfare is retained at the CFO level, and thus nobody can fly business or first class (at cost) without first obtaining that approval. At some companies, delegations of authority are reviewed and refreshed every year, even if nothing has changed.

Delegations of authority are common, but very few look alike. If you want to understand a corporation’s culture, check out what authority has been delegated and what authority has been retained. If you think you have an entrepreneurial spirit, you may not enjoy working at a company where all authority has been retained at the highest levels. Conversely, if authority is delegated then that implies some level of accountability for how that delegated authority is used. Some people may not be comfortable making decisions, knowing they will be held accountable for negative consequences that spring from those decisions.

In our view, too many of the delegations of authority we’ve seen have been overly rigid. Too many are based solely on dollar value, without considering other factors. The better ones take into account various corporate risks, and reserve (or delegate) authority based on those risks. We like to call the risk-based delegations of authority “dynamic” delegations of authority, because the delegation analysis is based on the circumstances and risks, and can vary depending on how those circumstances and risks change.

For example, a firm, fixed-price Purchase Order using standard Terms and Conditions may be judged to be low risk, and thus authority is delegated to a low level. However, consider a firm, fixed-price Purchase Order issued under a development contract whose design is not yet complete. Because of anticipated engineering changes, that P.O. may well be subject to considerable post-award modification activity, and potential requests for equitable adjustment that could ripen into disputes/claims. Thus, perhaps that P.O. is not as low-risk as it first appears.

Further, standard corporate Ts & Cs may not be sufficient to address the impact(s) of engineering changes. They may need to be tailored, if only to flow-down prime contract clauses. Who has the authority to tailor standard corporate Terms & Conditions? Where is that delegation of authority documented?

We are reminded of a major development program at one of our clients. (This is a decade ago, though the program is still extant.) The program was in trouble – a significant “watch program” – and every two weeks the executive leadership team reviewed program status in a major program review. (We’ve all been through those, right? Think 50 or more people in a room, with those program managers in the “hotseats” gathered around a table to present their slides, and the rest of the supporting cast of characters sitting in chairs against the walls, just in case a question might be asked that requires some level of detailed knowledge.) Every two weeks the executive leadership team grilled the PM team, reviewing actual costs by WBS, CPI/SPI, at-completion estimates, etc. It was painful. (“The beatings will continue until morale improves.”)

One significant pain point was the lack of subcontractor EV data. The executives were upset that they were getting old data at their reviews. “The values are always the same!” they complained to us, and told us to go figure out why the PM team couldn’t deliver good subcontractor data at the executive reviews. It didn’t take us long to realize the answer: the subcontracts specified that EV data was to be refreshed monthly, not every two weeks as the executives desired.

What was to be done? If the subcontracts were modified to require EV data refreshes every two weeks, then that was going to be expensive (assuming it could even be done, since many contractors don’t refresh actual costs until the books close). An alternate choice – one that we recommended – was to dial back the executive reviews to once per month, and time them to take place after fresh subcontractor EV data had been received and incorporated into the program’s tracking system. (Do we have to tell you that our recommendation was not accepted?)

The point of that anecdote is that things change, and the “standard” approach to P.O.’s and subcontracts may not actually be the better approach. A dynamic delegation of authority tries to take into account risks and executive “wants,” and bases authority on the situation at hand.

Obviously, no delegation of authority can take into account every situation. But there are common situations that can (and should) be addressed.

On the buy side:

  • If direct, nature of prime contract and risks. A development contract is riskier than a stable production contract. A program without sufficient reserves to cover problems is riskier than one that has them. An incrementally funded contract is riskier than a fully funded contract. A contract with negative CPARS is riskier than one with positive CPARS.

  • If indirect, P.O. type and purpose. A T&M award to a consultant is riskier than a catalog purchase from a commercial manufacturer. Any award for an unallowable purpose is riskier than one for an allowable purpose. Any award to a foreign concern is riskier than one to a domestic concern.

  • Payments to outside entities can be risk-ranked based on such factors as (1) cost object to be charged, (2) purpose of payment, and (3) budget environment. For example, an accountant taking a required CPE class, charged to their home department’s cost center, is probably low risk. Whereas an engineer attending a technical seminar in Europe, charged to an IR&D project, is probably a higher risk. Technical seminars charged to customer contracts in Q4 (when indirect budgets are tight) may need to be scrutinized more than in Q1 (when indirect budgets are loose).

On the sell-side:

  • Development is riskier than production. But a cost proposal submitted “with sharpened pencils” may lead to a riskier program, regardless of type or purpose. If the customer is tight on funds, there is less margin for error.

  • Selling an immature product is riskier than selling a mature one. What’s the maturity level?

  • What’s the story on obsolescence and/or diminishing sources? Can you sell the product at the historic price point, if you have to find new parts or new sources? A program facing obsolescence challenges is riskier than one with a robust supply chain of current parts.

  • A $10 million project is not as risky as a $500 million project, in terms of potential impact to the bottom line if things go south. But a $10 million project with a $10 million overrun can be a huge problem.

  • A contract with a commercial entity is less risky than a contract with a Federal entity, from a compliance standpoint. But a contract with a commercial entity may have more financial risk than a contract with a Federal entity. Some of the biggest write-offs we’ve seen have some from state/local programs.

A dynamic delegation of authority attempts to address the true risks of the contractual action, and reserves authority when risks are higher. These are hard things to create, but companies that are trying to manage risk should perhaps consider moving in that direction.

 

DCAA Has Plans to Improve Its Statistics

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In our recent review of DCAA’s GFY 2016 Annual Report to Congress, we ended on a fairly snarky note, writing—

Regardless of headcount, we have confidence in DCAA’s ability to manipulate numbers, change metrics, and execute other bureaucratic tricks to make the audit agency seem like it is a great value for the U.S. taxpayer.

Go back and read that article, if you haven’t yet done so. It will inform the rest of this article.

We were commenting on how DCAA spun the numbers to show the audit agency in the most favorable light. Of course, DCAA is not alone in that regard. Nearly every organization wants to be seen in a favorable light, and if there is a way to spin facts and figures to accomplish that goal, then that is what’s going to happen. There’s not necessarily anything wrong with that phenomenon—unless you think it’s being done to protect those at the top from being held accountable for their decisions.

We have noted several “tricks” that DCAA has used to cast itself in a more favorable light. First, there is the “low-risk” audit initiative, where certain contractors are lucky enough to escape having their final billing rate proposals audited. The thing is, DCAA counts such non-audits as completed audits in its reported statistics. We noted that, when the initial “low-risk” plan didn’t lead to a sufficient number of completed assignments, DCAA relaxed the qualification criteria to permit more proposals to be included in the non-audit category, thus leading to more completed assignments. We believe that trick tends to mislead Congress and policy-makers into thinking that DCAA is actually accomplishing more audits than it actually is accomplishing.

Second, DCAA recently announced that it was changing the way it measured audit duration. DCAA formerly measured duration from assignment opening to assignment completion; now it plans to measure duration from entrance conference to report issuance. Again, a misleading statistic because it ignores the time associated with risk assessment, which can vary from several days to several months. DCAA wants Congress and policy-makers to believe the audit starts at the date of the entrance conference, but anybody who has supported a DCAA audit in recent years will tell you the audit actually starts long before that date. Any DCAA auditor will tell you that hours spent performing risk assessment will be charged to the assignment. The facts don’t support using that metric, but DCAA is going to use it anyway, because it casts the audit agency in a more favorable light.

After months of not publishing any audit guidance via Memorandum to Regional Directors (MRD), DCAA recently published two! Both are relevant to this topic.

In MRD 17-PIC-005 (May 2, 2017), DCAA told its auditors that “NASA will no longer accept low-risk determinations issued by DCAA on contractors where the preponderance of the work relates to NASA contracts.” In other words, NASA wants its contractors’ final billing rate proposals to be audited. Good for NASA! The MRD also states that “For authorized audits where NASA does not have the preponderance of the work, audit teams must coordinate with NASA, as part of the low-risk determination process, to determine whether any issues/concerns exist on NASA contracts before issuing the low-risk determination.” Thus, it appears that NASA may reserve the right to have DCAA audit certain of its contracts, even if the contractor’s submission would otherwise qualify for the “low risk” treatment of not being audited.

Obviously, if NASA insists on having DCAA audit the final billing rate proposals of its contractors, even when DCAA would prefer not to do so, then that would tend to slow down DCAA’s ability to work down its backlog of such proposals—which is not going to make the audit agency look good.

But don’t worry! DCAA has a plan …

In the second piece of audit guidance (MRD 17-PIC-004, April 25, 2017), auditors are told when to count the entrance conference as being held for contractors final billing rate proposals that qualify for low risk treatment—i.e., no audit. How can you have an entrance conference when no audit is being performed? A reasonable question! Nonetheless, since DCAA has chosen to now measure audit duration from entrance conference to report issuance, every assignment—even assignments where no audit is performed and thus no entrance conference will be held—must have an entrance conference date. The MRD notes “a wide variation” in dates auditors are inputting into the audit tracking system. Some auditors are inputting the date of receipt of the contractor’s proposal, while others are choosing the date on which a sample is run, and while others are inputting the date that the contractor is notified that an audit will not be performed. In an effort to establish consistency, DCAA leadership has directed that none of those dates will be used to date when the (non-existent) entrance conference take place. Instead, “auditors should enter the entrance conference date as the date the auditor begins to actually prepare the low-risk memorandum.”

Why is this such a good thing, from DCAA’s point of view?

Remember that DCAA will henceforth be reporting to Congress that the duration of its audits is based on the period between the entrance conference date and report issuance date. It will report an average duration across all incurred cost assignments for that year. In the case where no audit takes place, if the duration is based on the date the letter of non-audit is started and the date the letter of non-audit is issued, the duration is obviously going to be quite short. Thus, this “trick” will favorably impact the agency average audit duration and we will see this impact in future Annual Reports to Congress.

So while NASA’s unwillingness to accept non-audits as audits will negatively impact DCAA’s ability to reduce its audit backlog, the audit agency will be able to report that it has dramatically shortened the duration of such audits. We predict DCAA leadership will take credit for an innovative audit approach, and will lament that, if the audit agency only had more auditors, it would be in a position to apply that innovative audit approach to the backlog and eliminate it.

Which is what you get when you permit DCAA to use misleading statistics and other tricks to measure the efficacy of its leadership.

Last Updated on Saturday, 06 May 2017 06:59
 

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