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Welcome to Apogee Consulting, Inc.

Calm in the Midst of Chaos

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Take_a_BreathHello. It’s been a while, hasn’t it? If you are one of the people who keep coming back to this site, to see if I’ve blogged anything new—or maybe to check out one of the far-too-many articles in the News Archive—then thank you. I’m writing this for you, because I have something to say.

I haven’t blogged about the problematic CAS cost impact guidance issued in late 2023 by DCAA and publicly endorsed by DCMA. If you’re dealing with that, you have my sympathies. And my apologies, because I was one of those who pointed out to DCAA that their then-current audit guidance didn’t comport with the 2015 Raytheon decision at the ASBCA. Well, I got what I wanted—and then some. DCAA updated their audit guidance and took that opportunity to take a little extra along the way. But I didn’t write about that because what can one do except hope that some contractor wronged by inapt audit guidance takes the DOD to court.

I haven’t blogged about recent CAS Board activity, because why get all hot and bothered about things that may never come to pass or things that may be overtaken by events (clears throat **Executive Order**). CAS 404, 408, 409 and 411 are in play at the CAS Board but, as most everyone knows, the Board is currently adrift, waiting for direction and, dare I say, leadership that is currently lacking. The many Staff Discussion Papers, Advance Notices of Proposed Rulemaking and Notices of Proposed Rulemaking may someday result in regulatory action. Maybe. But until then, it’s business as usual. So, I didn’t write about all that CAS stuff.

I haven’t blogged about the recently announced DCAA reorganization, which seems to affect only the very largest of DOD contractors, the ones that my friend John used to call “the Five Families.” And the auditors, of course. They are impacted. But the rest of us? Not so much. So what could I have said?

I haven’t blogged about cyber-security and the recent updates in requirements, nor have I blogged about CMMC and are you ready to be assessed? because, at this point, if you don’t know you have already lost the race. I mean, it’s not like I have ignored the topic. For more than a decade I have been beating the drums of cyber-security and secure supply chains. I’m tired now; my arms hurt from all that drumming and I don’t have the energy to keep telling people what they should already know.

Today’s blog article is about FAR 2.0 and regulatory reform. Many people are anxious about what FAR 2.0 will look like and how it might affect them. What does government contract compliance look like in an environment where all the regulations—which have been growing and evolving and changing since 1984—are eviscerated into something that looks nothing like what we thought we knew? What will that be like? So, there is anxiety and nervousness.

I want to suggest that we all calm down. Relax. Wait and see. Not knowing makes us nervous—true. I get that. The uncertainty can be hard on one’s nerves. But consider: don’t worry about the unknown future because we have quite enough on our plates right now. Deal with today and let tomorrow take care of itself.

Here are some absolute truths that you may wish to consider as you contemplate what may transpire:

  1. You have existing contracts. They have clauses in them and those clauses impose requirements. They will exist until the work is physically complete and delivered and accepted. They will exist until the final billing rates are calculated and submitted and audited and negotiated. They will exist until the final invoices are submitted and paid. In other words, they will exist for a long time and, at least for those contracts, nothing is going to change. Nothing. All the risks are still the same: compliant timekeeping, compliant accounting, compliant billing, compliant purchasing. Et cetera. The False Claims Act and The Truthful Cost or Pricing Data Act still apply.

  1. You have proposals in the pipeline. Some of those competitions may be cancelled, especially if you are at one of those contractors that perform touchy-feely work not aligned with current Washington, DC, priorities. True. But many others will not be cancelled, especially for those DOD contractors that provide critical weapon systems. Those contractors actually may experience a bit of an uptick. (Historical analog: the defense buildup under Reagan.) Those RFPs still have their provisions in place; the evaluation factors are still the evaluation factors. For current proposals, nothing is going to change. Nothing.

  1. Future contracts and future proposals may look different—true. But how different? What will they look like? We don’t know … so try not to worry about it. There are bills being discussed in Congress that may change things, but those bills still have to go through Committee votes and reconciliations and all the other things that make the actual lawmaking impenetrable to most humans. There may be legal challenges to whatever final laws emerge from the morass of Congressional lawmaking. We don’t know what the end-product will look like or what parts will be voided by the courts … so let’s wait and see what emerges, if anything.

  1. I listen to some smart and experienced people, such as Vern Edwards and Jim Nagle. They’re not worried. They’ve been through this before. (Implementation of FASA in the mid-nineties comes to mind.) Most people do not think much is going to come of the current FAR 2.0 efforts. They are, let’s say, dubious. Vern said (in a podcast which is available at WIFCON 2.0) that he doesn’t think anything significant is going to happen “but it’s going to be fun watching.” That’s a good attitude to have, if you can get there.

So … those are four truths that I hope will help calm you and your work teams.

Let’s be honest here. There have already been significant changes at the government workforce and funding levels. Those changes are starting to have ripple effects at the contractors. Those impacts will definitely continue. I’m not blind to them and, for many (especially those in civil service) it’s going to be tough. But you can get through this, especially if you are flexible and willing to take some risks.

There are jobs aplenty, especially in the manufacturers of weapon systems. But the jobs might not be available near you, especially if you had a nice remote work gig. You may have to move in order to find employment. So what? I’m not trying to trivialize the pain of moving one’s family, because it is a pain. I know. (I’ve moved my family three times and that doesn’t count my move from LA to Fairfax, VA when I was single.) But you can do it—especially if you need to.

Almost everyone who reads this blog has skills that are important to government contractors. Get out there: polish your resume; update your LinkedIn profile. And start applying. Will you have mixed results? Probably. But don’t give up because I know—I know—that contractors are looking for good people with skills and experience. I work at one of them and we are desperate for the right people to apply to our career site.

Think about the priorities in DC right now, which is where the funding will be. Where do your skills fit into those priorities? More FMS cases, more international contracts. Border security; “Golden Dome” (which sounds to me like “Star Wars,” which we called “Peace Shield,” which was among the first projects I worked on when I started in this crazy business.) There is work to be found, so go find it.

All right. Stop rolling your eyes. I don’t know how this article morphed into a rah-rah session. Sorry. But I hope I’m communicated something here: sure, all is chaos. Okay. But if you stay calm and deal with what’s in front of you, you’ll be fine.

Last Updated on Thursday, 29 May 2025 19:49
 

F-35 and Beyond

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From time to time I report on significant events related to certain Major Defense Acquisition Programs. One of those programs is the F-35 Lightning II joint strike fighter, a stealthy multi-role fighter intended to be sold to allies throughout the globe, including the United Kingdom, Italy, the Netherlands, Turkey, Australia, Norway, Denmark, Israel, Singapore, and Canada. It is a big deal—the program is funded in billions. When life-cycle sustainment (MRO) costs are added, the program cost is north of two trillion US dollars. (Source: GAO, May, 2024.)

It the F-35 worth the cost?

I don’t know if the jet is “worth” its price tag. I don’t have the necessary expertise to have an opinion. What I do know is that each jet currently is priced at $82.5 million (per Audrey Decker’s July, 2024, article at DefenseOne). However, the price may rise for future lots being negotiated now. Per BreakingDefense (Valere Insinna, September, 2024) negotiations are not going well. DoD and Lockheed Martin have been trying to settle on a price for more than a year. Originally, the parties anticipated shaking hands before the end of 2024; however, it now appears that won’t happen—prompting Lockheed Martin to warn shareholders of a hit to both forecasted revenue and cash flow.

Not to mention, the program has been significantly delayed. For much of 2023 and 2024, “completed” aircraft have been piling up on runways because DoD would not accept them. The contractor was unable to finish “Technology Refresh 3” in time and DoD refused to accept aircraft without the required TR3 updates. Citing a GAO report, Defense One reported that “the Pentagon has refused delivery of so many F-35s that Lockheed Martin is running out of places to put them.” News reports state that the Pentagon was withholding $7 million per undelivered plane. Even when deliveries started to be accepted (with incomplete or “truncated” TR3 updates), the Pentagon continues to withhold $5 million per jet (source: Defense One).

Speaking of deliveries, that same Defense One article reported that Lockheed Martin estimates it will take 12 to 18 months to “unwind” the backlog of undelivered aircraft. The article quoted Lockheed Martin executive Greg Ulmer as saying “The company plans to ‘unwind’ by delivering about 20 aircraft a month—13 newly-built aircraft and seven of the jets that were in storage.”

We may have heard this before.

From articles on Apogee Consulting’s website (available via keyword search)—

August 2009: “In its August 13, 3009 edition of Flight Daily News, Flight International magazine asks whether Lockheed Martin can actually ramp-up production of its F-35 “Lightning II” Joint Strike Fighter (JSF) from its current pace of one aircraft per month to an unprecedented pace of 20 aircraft per month, assembling three production variants on the same line while managing a global supply chain. … Flight International notes that ‘current acquisition plans call for dramatically raising output until a new fighter is delivered every working day, excluding holidays and weekends, or about 240 jets in a year.’”

April 2010: “… on April 16, 2010, InsideDefense.com reported to its subscribers that the Air Force had halted plans to increase JSF production to 110 aircraft per year, and has decided to ‘top-out’ its purchases at 80 planes per year, starting in GFY 2016. The article quotes Air Force Chief of Staff General Norton Schwartz as saying, ‘As the program continues to progress, we will analyze production capacity and available funding for potential production rate adjustment beyond the 80 aircraft per year rate reflected in the current program.’ The article further notes that Lockheed Martin stated ‘that once its … assembly line reaches its optimal production rate in 2016, it could build as many as 230 jets per year’—so LockMart is ready ‘to build more jets if requested.’

May 2016: “… according to … Defense One, ‘F-35 production is slated to hit full steam in 2019, and Lockheed Martin is reshaping its final assembly line to get ready. … By 2020, one year after the Fort Worth plant hits its full 17-jet-per-month stride, there will be more than 600 F-35s, including nearly 180 sent to U.S. allies.’”

March 2019: “… Lockheed Martin delivered 91 aircraft in 2018, which was about double its production of only two years before. Looking ahead, the JSF will enter ‘full rate production’ and LockMart has committed to deliver 130 aircraft before the end of 2019.”

Then COVID hit.

From Air & Space Forces Magazine.com, February, 2024: “Lockheed Martin expects that F-35 production will remain at about 156 aircraft per year through 2028…” according to executive Greg Ulmer.

So, what’s the point? The point is … nobody knows. Nobody knows what production at full capacity looks like for the F-35. Early (perhaps optimistic) forecasts said that number was 240 aircraft per year. More recently, Lockheed Martin said that number was 156 aircraft. However, now it seems as if we are back to 20 per month (240 per year), though only seven of those 20 will be “new” fresh off the line aircraft. Seven per month is 84 per year.

So … who knows? The Full Rate Production at full capacity number is all over the place.

No wonder it takes more than a year to negotiate the next buy.

Okay. Now to the reason I wrote this blog article.

I tracked F-35 contract actions during Government Fiscal Year 2024 (ending 30 Sept 2024). Each day, the Pentagon reports contract actions exceeding $5 million in value. I watched for F-35 activity, and I recorded what I saw in a spreadsheet.

Based on DoD reports, the Pentagon awarded $16.232 billion to Lockheed Martin and other F-35 contractors through 61 individual contract actions.

Lockheed Martin received the most, of course, at $12.972 billion. But RTX (including Raytheon and Pratt & Whitney) received $3.212 billion in that same period. BAE Systems received $77 million. And HDR Engineering received $16.4 million.

In one year.

Of the 61 reported contract actions, 18 were new contract awards. The remaining 43 actions were modifications to existing contracts. The new contract awards included Undefinitized Contract Actions (UCAs) as well as orders against previously placed Basic Ordering Agreements (BOAs). New contract awards were primarily focused on international program customer needs, though $348.5 million was awarded for Lot 18 spares—even though Lot 18 hasn’t been negotiated yet. Nothing like long-lead money, am I right?

Modifications included $70 million for TR-3 redesign efforts. One might have thought TR-3 was included in previous prices, since that is the reason DoD refused to accept new aircraft. Oh, well. Another mod (for $111.9 million) was to extend the period of performance for Block Four flight testing. It seems the more one delays, the more one gets paid.

Let’s wrap this up. The largest defense program in the history of the United States continues to move forward, albeit with schedule and technical delays, as well as with cost growth that stems from many causes, including (apparently) schedule and technical delays.

I will be happy to report on a stable, sustainable program, once one shows up.

 

Inflation and Your Supply Chain

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I’m getting too old for this stuff.

I’ve seen too much, and now I’m seeing too much stuff repeat. There’s no reason this stuff has to repeat except for incompetence. Not you. You’re good. It’s your boss. And their boss. Those folks are clowns and, if they weren’t so great at politics, they would be deservedly booted out from Executive Row on their well-padded derrieres.

So … here we go.

Nearly six months ago I published a blog article about inflation. Here’s a link to it. You remember that time, don’t you? Inflation was running at historic highs and everyone was concerned.

First Rant: “Historic highs” if you discount all the other times inflation was at similar—or even higher—rates. But since we have memories that are hazy about last week, it’s not really surprising that almost nobody remembers history. Hello? Whip Inflation Now? Anybody? Yeah, like that. History is dead. Nobody has any historical context anymore. Trust me, 8.5% inflation isn’t too bad in historical terms. In 1917, annual inflation almost hit 18%. In 1946, annual inflation did hit 18%. In the 1970’s inflation sucked. So, there is plenty of “lessons learned” related to managing contracts and suppliers in an inflationary environment. But none of you—and none of your bosses—implemented any of those lessons. How do I know that? Keep reading.

So, anyway. I published that article. I thought it had some interesting and potentially useful content. I even spoke on the topic to a fairly well-attended Government Contract Pricing conference. Well, the conference was well-attended. My presentation? Not so much. Everybody seemed to be at the other session, where DCAA and DCMA were talking about inflation using government-approved talking points that didn’t offer much in the way of new, innovative, thinking. (Okay. Do I sound bitter about that? I’m not. Not really. I mean, I understand the thought. Who is Nick Sanders, anyway? Nobody of any consequence.)

In that now aged and forgotten-in-the-sands-of-time article, I wrote—

That’s a nice legal position, but when your mid-tier and lower-tier suppliers—and your small business suppliers—begin to go bankrupt because the costs of performing the contracts exceed their available cash flow, and your “reprocurement costs” associated with Terminations for Default are meaningless because the suppliers are bankrupt and can’t pay—and in many cases there will be no other suppliers to perform in any case—and when your programs start to fall behind schedule and now you have to report Nunn-McCurdy breaches to Congress … well. At that point you will realize—far too late—that your lawyers’ advice wasn’t so smart after all, because you didn’t deliver your weapon systems and your contractor services to your warfighters, even though you adhered to contractual policies and procedures.

Not incidentally, delivering goods, services and weapon systems to the warfighters is, fundamentally, the entire job of the Department of Defense’s back office.

The memo seemingly ignores history, when inflationary pressures (among other factors) led to the United States Government bailing-out Lockheed via an Act of Congress. Don’t believe us? Google it. One salient fact was the imminent insolvency of Rolls-Royce, maker of aircraft engines. One report summarized the situation thusly: “If the engine supplier for the L-1011 was bankrupt, the contract for the RB.211-22 engine would be nullified.” Now, perhaps the crisis was driven by technical challenges in fixed-price development contracts, but the salient fact is that the contracts were fixed-price, and the contractors couldn’t absorb the associated losses. If the supply chain collapsed, the prime contractor (i.e., Lockheed) was toast.

Now, I’m watching my prediction come true.

People’s Exhibit A: “Lockheed, Howmet Price Fight Over F-35 Titanium Goes Public.” (Source) As Michael Bruno wrote on 04 December 2023 in Aviation Week Online

Lockheed’s lawsuit—filed in U.S. District Court for Northern Texas—alleges Howmet in November demanded a ‘massive price increase’ on titanium materials used in the Joint Strike Fighter (JSF) and other systems, beyond the numbers specified in their underlying contract. The Fort Worth Star-Telegram reported that when Lockheed and other subcontractors refused to meet Howmet’s request, the company stopped supplying.

There’s more.

For its part, Howmet on Dec. 1 said it has complied with its contractual and regulatory obligations to Lockheed. The cornerstone supplier painted a picture of rising prices for materials, in part due to Russia’s invasion of Ukraine in February 2022.

‘Since 2022, Howmet has been transparent with Lockheed Martin about these challenges and has acted in good faith to attempt to reach a reasonable resolution for the benefit and long-term health of the F-35 Program,’ Howmet said in a public statement. ‘While such discussions were still ongoing, Lockheed Martin unfortunately chose to file a meritless lawsuit seeking to compel Howmet to continue to supply product at prices that no longer reflect commercial reality and on terms that Howmet believes it is not contractually obligated to provide.’

It’s ironic that Lockheed must contend—once again, 50 years later—with a supply chain issue that threatens the single largest defense contract currently being performed. Alanis Morissette should add a new lyric to her song.

Anyway, the latest news on the dispute is that Lockheed Martin attempted to invoke “national security” to force Howmet to provide titanium but the Judge said no to that.

The point I tried to make six months ago is that the subcontract language may be unenforceable—or winning the lawsuit may be a Pyrrhic victory for LockMart. What do I mean? If they force Howmet into bankruptcy then it doesn’t matter what the contract says. LockMart just becomes another creditor in the bankruptcy proceeding. Meanwhile: no titanium. No F-35 production. Other companies in the F-35 supply chain—those who rely on the raw titanium to process into bulkheads and suchlike—they have no input and therefore no output. They start to go under, as well. And for LockMart, they don’t have any more planes in shape to deliver to their customers. They start to incur liquidated damages or other penalties found in the prime contract. It’s not a pretty picture. In other words, LockMart can win and still lose everything.

Second Rant: They did this to themselves, quite frankly. I ain’t got no sympathy for them. You simply cannot expect to enforce a fixed-price subcontract in a highly inflationary environment. Airbus figured that out relatively quickly when it’s A380 supply chain was threatened. What did Airbus do? Did they drag their suppliers into court? Nope. What they did was to renegotiate the contracts so that it was economically feasible for the suppliers to perform. Lockheed Martin could have done that same thing, if they’d looked around for some historical lessons learned and implemented them. Lockheed Martin could have acted like smart business people and negotiated a solution. They might have had to eat some planned profit, but at least they’d keep their program intact. Instead, they listened to their lawyers. I ain’t got no sympathy for them. None.

People’s Exhibit B: “Bankrupt Co. Asks Court To Reject Gulfstream Supply Deal” (Source: Alyssa Aquino, Law360)

Incora, a bankrupt aerospace supply chain management company, urged a Texas court to immediately end a Gulfstream supply contract that became unprofitable during the COVID-19 epidemic, contesting Gulfstream’s claims that a contract termination clause must be honored for Incora to reject that deal.

To be clear, the supply contract with Gulfstream did not cause Incora to go bankrupt; but it was certainly a factor. Let’s dive a bit deeper.

June 9, 2023—about seven months ago—Ben Unglesbee, writing in SupplyChainDive, said—

Incora’s bankruptcy sends a warning signal to aerospace supply chains: Over the past year, the dollar value of late shipments from Incora’s suppliers has increased by ninefold, with on-time deliveries at around 50%.... Average lead time for shipments of parts has doubled to 18 months from nine months. That caused a major problem for Incora, ‘because its role in the aerospace industry (and some of its contracts) require it to maintain substantial inventory that manufacturers and maintenance service providers can call upon at any time,’ Carney noted.

Incora has taken on added costs because of shortfalls, in part by buying alternative supply at higher costs to fill gaps, leaning on expedited freight to move goods more quickly, and because of labor costs to turn late-arriving inventory faster, according to Carney.

Moreover, the company has had to pay higher prices for inputs as inflation spiked for raw materials, costs that Incora can’t pass on to its customers because of the timing of its contracts. Carney also said that ‘many suppliers of proprietary parts have exploited their position to raise prices in excess of general inflation rates.’ …

As for Incora, the company is looking to address its debt burden — partly a legacy of its leveraged buyout by Platinum Equity. The company also aims to use the Chapter 11 process to, as Carney put it, bring ‘unprofitable customer contracts’ in line with ‘current economic and commercial reality.’

Tip of the iceberg time, gentle readers. Tip of the iceberg. Two stories about different companies, both facing the economic realities of fixed-pricing contracts in a time of high inflation. Two suppliers with inflexible prime contractors. Two prime contractors with supply chain problems.

I bet you have some of those same challenges. What are you going to do? Are you going to enforce strictly the terms of your subcontracts, even if that means destroying your suppliers? Is that the hill you are going to die on?

Or are you going to negotiate some compromise that preserves your supply chain at the cost of short-terms profits?

Well, I bet I already know your answer. Here’s what you’ll say: “I’ll do what my boss tells me to do.”

And therein lies the true root cause of the problem.

Last Updated on Monday, 22 January 2024 19:53
 

It’s the People

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Hi there! It’s been a minute. Thanks for coming back here.

I have so much to write about—prominently the recent CAS Board activities. Not to mention, DCAA’s CAS cost impact audit guidance that was clearly written by lawyers instead of, you know, accountants or auditors. I’m going to get to all that stuff when time permits. But today I want to talk about people.

It’s crystal clear (in my mind, at least) that when we are discussing the triumvirate “people, process and technology,” people are the most important component. I know not everyone agrees. In June, at the Deltek/ProPricer Government Contract Pricing Summit (where I spoke on the topic of evaluating and negotiating profit), I heard a very well-known speaker assert that technology was the most important component. He said (paraphrasing) “technology is always moving forward; people and process both struggle to catch up.” Okay. He was a former Assistant Secretary of the Air Force and now CEO of an innovative start-up that has a very cool Lord of the Rings-related name, and I’m just me. Who am I to argue with him?

But he’s wrong.

People are the most important thing. Always and forever.

Corporations look to reduce costs wherever possible. All things being the same, reduced costs leads to greater margins. Investors like increasing margins and the increasing profits that result from cost-cutting. We know that’s not always true in the government contracting market space—especially in developmental efforts—where cost-type contracts mean that (generally speaking and with many exceptions), more costs equal more revenue. All things being equal, more revenue leads to a higher bottom-line profit. But most government contractor executives don’t have a clue about government contract accounting rules so they base decisions on what they’ve been taught in business school, which is that cost-cutting is a good thing.

As a result of that logic, they locate their engineering centers and factories in low-cost states, where employee compensation will be lower than in other states. That’s not the only reason—obviously. Political realities ensure that locating facilities in the states of certain politicians gives contractors a boost during budget time. There’s also the matter of locating facilities in states that are not friendly to unions, or that offer lower corporate taxes, or even full-on tax breaks for the right companies. But we don’t talk about that in the 10-K management discussions. Instead, we talk about cost-cutting.

Employee compensation (among other factors discuss noted) is why Lockheed Martin has so much work in Texas, Florida, and Georgia. (LockMart is in many other states, including California and Colorado, but that’s not the point.) Where does Lockheed Martin make the most money? In its Aeronautics Division. Where is that Aeronautics Division headquartered? Fort Worth, Texas.

Employee compensation is why Boeing builds its 787 Dreamliner in Charleston, South Carolina. From Wikipedia—

Boeing announced in October 2009 that it would build a new 787 Dreamliner final assembly and delivery line in North Charleston. Boeing said that the second production line was necessary to ‘meet the market demand for the airplane,’ but it came amid tense negotiations between the company and the International Association of Machinists and Aerospace Workers (IAM) union representing workers in Everett who had recently gone on strike. South Carolina's unionisation rates, the lowest in the country at 2.7%, were stated by Boeing management as a reason to transfer production to there. IAM said the decision was retaliatory and National Labor Relations Board agreed, filing a lawsuit against the company in April 2011. The lawsuit was dropped in December after IAM withdrew its complaint as part of a new contract with Boeing, clearing the way for production to begin in South Carolina. Since then, Boeing has continued to challenge the rights of unions to organize at the plant, and is alleged to have fired workers for their attempts to unionize.

(Footnotes omitted.)

Companies—particularly those who manufacture MILSPEC products—that have an unhealthy, misplaced focus on people tend to have long-term consequences from that manifest years later, long after the executives who made critical blunders in workforce management have left the companies, taking with them millions of dollars of incentive compensation.

Recently, the NASA Inspector General released report number IG-24-015, discussing the management of the Space Launch System (SLS) Block 1B development. The IG had many criticisms of NASA and its lead contractor, Boeing. The one we are going to focus on is NASA’s blunder to locate SLS core stage manufacturing at the 85-year-old plant in Michaud, Louisiana—located in New Orleans.

The SLS program is under cost pressure. In 2011, Congressional testimony estimated that SLS development costs through 2017 would be roughly $18 billion. As of 2017, $11.9 billion has been spent, of which 40% was spent developing the core stage. As of 2021, development of the core stage was expected to have cost $8.9 billion, twice the initially planned amount. (Source: Wikipedia.) The program is behind schedule and faults have been found in the welding of the core stage.

Let’s talk about the welding. The SLS core stage uses a brand-new welding method: friction stir welding. We don’t know that FSW is. All we know is what Wikipedia tells us; we are told that the new process can create unique risks, which can be mitigated by the quality of the tool design.

Okay. NASA decided to build a new core stage for a new rocket at an 85-year-old plant, and to do it with a new welding technology where attention to detail and tooling design is critical for success. What could go wrong?

The NASA IG answered the question in its report.

According to Safety and Mission Assurance officials at NASA and DCMA officials at Michaud, Boeing’s quality control issues are largely caused by its workforce having insufficient aerospace production experience. Michaud officials stated that it has been difficult to attract and retain a contractor workforce with aerospace manufacturing experience in part due to Michoud’s geographical location in New Orleans, Louisiana, and lower employee compensation relative to other aerospace competitors. Safety and Mission Assurance officials advised that Boeing provides training and work orders to its employees in an attempt to mitigate the challenges associated with an inexperienced workforce and help ensure that its workers comply with quality control standards. However, given the significant quality control deficiencies discussed above and our observations during a site visit to Michoud, we found both these efforts to be inadequate.

The NASA IG report added a footnote to the above. The footnote referenced AS9100D, Section 7.2, Competence. The inference is clear: Boeing’s Michoud assembly workforce management does not comply with the requirements of AS9100D. Our research indicates that Boeing has never been certified to be compliant with the requirements of AS9100—even though it requires its suppliers to hold that certification. Only in the past two months has the aerospace giant indicated that obtaining AS9100 certification is something its leadership wants to pursue. Ya think? (Source: Sean Broderick’s article in Aviation Week, 28 June 2024.)

So … you get what you pay for. If you want low-cost employees then don’t ask them to participate in innovative things. If you want to attract and retain a skilled workforce, then be prepared to pay for it. Don’t cheap-out on the hired help. It you want the best, then pay for the best. Learn to accept and to work with a unionized workforce. Your employees are not your enemy.

This issue is not confined to US aerospace/defense contractors. It is global.

Last week, I received an email from Kevin Craven, Chief Executive of ADS, the industry group that represents aerospace and defense companies in the United Kingdom. (Why am I part of a UK industry group? Long story but it’s also why my picture is on file at the MoD.) Mr. Craven had a simple topic he wanted to discuss, “everyone’s favourite subject: skills.”

We are all acutely aware of the difficulties we have as businesses to recruit the right talent, at the right time. Our industries employ - at last calculation - some 427,500 people throughout the country into well-paid, highly skilled, manufacturing, engineering and digital services jobs. Our success in recruiting, however, is mixed.

We know that there are 10,000 vacancies in our industries, as a minimum. We hear from our larger members that they can be oversubscribed in some roles - a fantastic achievement - while our smaller businesses, no less pivotal to our economy, can struggle. To address this imbalance, we’re actively seeking practical solutions to increase engagement across the board - to get those roles filled, capability delivered, and to secure the UK’s advanced manufacturing advantage.

… at ADS we are actively seeking partnerships - whether that’s through STEM events, widening participation schemes, mentoring programmes, policy agendas, practical job finding support, or partnerships with organisations who are leading the way in this area.

Back in the States, Huntington Ingalls Industries announced July 6 that it plans to add 2,000 heads to its current Pascagoula, Mississippi, workforce of 11,300. That’s about a 20 percent increase. On May 24, the VP of Human Resources (Xavier Biele) at HII’s Newport News Shipbuilding site in Hampton Roads, Virgina, announced that the shipbuilder needs to find more employees. Magan Eckstein’s article at Defense News reported:

The yard plans to hire 3,000 skilled tradespeople this year, but it needs to bring in 19,000 over the next decade, Beale said, adding that the existing training pipelines in the Hampton Roads region is unable to funnel enough new employees toward Newport News.

Beale said volume is only one issue when it comes to recruiting. When the COVID-19 pandemic struck the United States in 2020, a wave of highly experienced workers retired. Replacing those master tradespeople with recent high school graduates has affected productivity.

While it’s difficult to find talent with decades of shipbuilding experience, the next best thing might be finding talent with years of experience as welders or electricians outside of the shipbuilding-industrial base, Beale said.

Where I live in San Diego, we have trouble recruiting employees because of the insanely high cost of living. Everybody knows about California housing prices. And utility prices. And high state taxes. What fewer people know is that salaries tend to be commensurate with the cost of living, and the property taxes are relatively low in comparison to other states. (Hello, Texas: I’m looking at you.)

Aerospace and defense companies need to get over the notion that employee compensation cuts lead to lower prices. Maybe they do; but they also lead to production inefficiencies and delays, and potentially to serious quality issues. The US government can help by removing the “ceiling” on allowable employee compensation (FAR 31.205-6(p))—though almost no direct-charging employee is ever going to come close to that limit; it impacts executives, which may not be a bad thing if they keep on blundering around trying to increase shareholder value by attacking their own employees.

We need to get serious about attracting and retaining good people. If that means paying the rank-and-file more, then so be it. You can cover the costs of wage increases by cutting multi-million-dollar executive bonuses. (Ha! Like that’s ever going to happen.)

In addition, we need to reevaluate certain employee labor classes based on the true value they add in the 21st century. As noted above, skilled tradespeople are in high demand. It is absolutely viable to skip college (and student debt) in order to join an apprenticeship program that leads to a career in the trades. Touch labor is critical.

And what about our supply chain specialists, our buyers and source inspectors? Given the importance of the supply chain to program success, wouldn’t you think you would want to hire the best, train them, and keep them around for a long time? Sure. But if that’s true, why do you keep hiring former buyers from Sears, thinking they will make already trained supply chain specialists with deep FAR expertise. Let’s not be silly.

Think of a workforce as an inverted pyramid, with the direct-charging touch labor folks on the top and the executives on the bottom. There’s your true value-added illustration.

Why don’t we start managing that way?

Last Updated on Monday, 26 August 2024 17:02
 

Allowable Cost and Payment, Unilateral Decrement Factors: What We Now Know

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Here’s what we now know:

Item One: The Government cannot unilaterally impose an arbitrary decrement factor on a contractor that fails to submit its annual proposal to establish final billing rates, even if DCAA recommends that factor, unless it can support that factor. The Government has the burden of proof to show why any decrement factor is reasonably related to its risks that the contractor has overbilled its indirect cost rates.

Item Two: When dealing with Time & Materials (T&M) contract types, any DCAA-recommended decrement factor—no matter how calculated or supported—can only apply to indirect cost rates. Those indirect cost rates are applied to the reimbursable (“M”) side of the T&M contract costs. That factor simply cannot apply to the contractor’s fixed labor billings, the “T” side of contract costs. Nope. Can’t do it—those rates are fixed by contract terms and are simply not affected by any changes to allowable indirect cost rates.

Item Three: The Allowable Cost and Payment clause (52.216-7) applies to T&M contracts whether or not the clause is found in the contract at hand. Yes, readers: the clause will be read into the contract by operation of the Christian Doctrine.

Now, how do we know the foregoing?

We know about this stuff because Allard Nazarian Group, Inc., dba Granite State Manufacturing, appealed a contracting officer’s final decision to the ASBCA and Judge Stinson (writing for the Board) made those determinations in July, 2023.

A short history:

Scandia Manufacturing Company, Inc. (Scandia), had several government contracts—including three ID/IQ contracts that permitted issuance of only T&M task orders. In 2008, Allard purchased Scandia and all its contracts. A Novation Agreement was prepared and signed by an Administrative Contracting Officer. So far, so good.

In 2009, Allard was awarded a fourth contract of a similar nature: ID/IQ with T&M task orders. Unlike the other three, this contract incorporated clause 52.216-7 (“Allowable Cost and Payment”). Because T&M Task Orders were contemplated by the parties, all four contracts contained clause 52.232-7 (“Payments under Time-and-Material and Labor-Hour Contracts”). Okay so far?

Now it gets weird.

Apparently, Allard never submitted the annual proposals to establish final indirect billing rates (popularly but incorrectly called an “incurred cost submission”). Did it have to? Arguably, nothing in the three contracts it acquired from Scandia required the contractor to do so. With respect to the fourth contract—the one it entered into on its own—yes. Absolutely. 52.216-7 requires submission of a proposal to establish final billing rates.

If one contract requires submission, then that pretty much means you have to prepare a submission for the entire business entity. You’ve got to calculate final pools and bases; you’ve got claim (and certify) indirect costs. You’ve got to fill out the myriad Schedules we’ve all come to know and love. You signed the contract and so you have to submit the proposal and support it through audit.

But Allard never did.

Finally, the government lost patience.

By letter dated November 27, 2019, the Defense Contract Management Agency (DCMA) issued a contracting officer’s final decision and demand for payment of debt ‘resulting from Allard’s/Scandia’s failure to submit indirect cost rate proposals for Fiscal Years 2007-2009,’ stating that the ‘[d]ecision is applicable to all flexibly-priced contracts and subcontracts performed by Scandia/Allard during Fiscal Years 2007-2009’. According to the contracting officer ‘all reasonable efforts have been exhausted to obtain the subject matter final indirect cost rate proposals,’ and, therefore, the government had ‘unilaterally established . . . final indirect rates for Allard/Scandia fiscal years ending 31 December 2007, 31 December 2008, and 31 December 2009’.

(Internal citations omitted.)

In unilaterally establishing the Scandia/Allard final billing rates for FYs 2007, 2008, and 2009, the contracting officer applied a 20% decrement factor, as recommended by DCAA-Baltimore. With respect to the more current years (FYs 2010 through 2014), the contracting officer applied a decrement factor of 16.4%.

Importantly, the contracting officer’s unilateral rate determination did not limit application of the decrement to just appellant’s indirect costs, but rather applied the decrement factor against all invoiced amounts, including appellant’s direct, fixed rate labor costs.

Yeah, that’s gonna hurt.

Allard appealed. The company didn’t try to claim that it had actually submitted the required proposals; instead, it argued that the application of the unilateral decrement factor was flawed. That was the case in front of the Board, the case on which it ruled in a Partial Summary Judgment.

As part of pre-trial motion practice, the parties agreed to drop FYs 2007 and 2008 from the appeal. We’re thinking that was done because, to be honest, nothing in any Scandia/Allard contract required submission of a proposal to establish final billing rates. Whatever the parties intended, you couldn’t find it in the contract terms. So, at the end, the Board’s decision only covered FYs 2009 through 2014.

What did the Board rule?

  • When a government contracting officer unilaterally establishes a contractor’s final indirect billing rates (which, to be clear, is a thing that can be done), then those rate determinations are considered to be a government claim. Because they are a government claim against the contractor, the government has the burden of proof—and it must show its decrement factor is reasonable. “FAR 42.703-2 allows the government to set a unilateral rate aimed at ensuring the government does not reimburse a contractor for unallowable costs. Specifically, FAR 42.703-2(c) provides that any unilateral rate ‘should be - (i) [b]ased on audited historical data or other available data as long as unallowable costs are excluded; and (ii) [s]et low enough to ensure that unallowable costs will not be reimbursed.’ FAR 42.703-2(c)(2).

  • “… the government applied a decrement to appellant’s direct labor rate costs based upon appellant’s alleged failure to submit auditable indirect cost rate proposals. FAR 52.216-7(g) does not provide a proper justification, or regulatory authority, for the government’s actions taken here.” (Emphasis in original.) “The government’s imposition of an indirect cost rate decrement upon appellant’s fixed labor costs is unreasonable as not supported by the regulatory authorities cited by the government and contrary to the traditional demarcation between direct and indirect costs and the separate treatment of those costs.”

  • “… pursuant to the Christian doctrine, FAR 52.216-7 - as a mandatory time and materials contract clause specified in FAR 16.307(a) - is considered inserted into the contract by operation of law.”

  • “The express language of FAR 16.307(a)(1) dictates that FAR 52.216-7 applies ‘only to the portion of the contract that provides for reimbursement of materials (as defined in the clause at 52.232-7) at actual cost’.”

The Board also noted that submission of a proposal to establish final billing rates was not needed to evaluate the propriety of Allard’s direct labor billings. The contract clause 52.232-7 already gave the government audit rights in that area. It did not appear that the government availed itself of its contractual rights before deciding to apply its decrement factors.

So, readers, that’s how we know what we know.

 

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Newsflash

Effective January 1, 2019, Nick Sanders has been named as Editor of two reference books published by LexisNexis. The first book is Matthew Bender’s Accounting for Government Contracts: The Federal Acquisition Regulation. The second book is Matthew Bender’s Accounting for Government Contracts: The Cost Accounting Standards. Nick replaces Darrell Oyer, who has edited those books for many years.