Customer Concerns with Cost/Schedule Problems
We’ve been thinking about how customers handle programs that are experiencing cost growth and/or schedule delays.
On April 26, 2011, DefenseNews reported that the Pentagon was implementing “should cost” program analyses on 14 major defense acquisition programs (“MDAPS”) in order to “make the weapons' projected price tags more realistic and save money.” The article discussed an April 22, 2011 memo from Dr. Ash Carter, in which he wrote—
It is essential that we eliminate cost overruns and begin to deliver programs below budget baselines that are set using independent Will-Cost estimates. I believe this is achievable if Program Managers continuously perform Should-Cost analysis that scrutinizes every element of government and contractor cost.
Meanwhile, Dr. Carter testified before the Senate that the F-35 Lightning II Joint Strike Fighter (JSF) program is going to cost at least twice as much “in real terms” as was originally estimated, according to this Reuters report.
According to the Reuters article, “This [situation] was ‘unacceptable and unaffordable,’ he told the panel, while voicing confidence the government would succeed in cutting excess costs in the coming months and years.”
Senators weren’t happy with the continued spiral of cost-growth. The story reported—
Committee chairman Carl Levin said new estimates of ‘life-cycle’ F-35 costs, including development, operation and maintenance, now top $1 trillion. The committee has been a strong supporter of the program, but he asked Carter to present alternatives as a ‘backup’ option within a week.
‘People should not conclude that we will be willing to continue that kind of support without regard to increased costs resulting from a lack of focus on affordability,’ the Michigan Democrat said.
Senator John McCain of Arizona, the panel's top Republican, described the F-35 program as ‘incredibly troubled’ and a ‘train wreck.’ He suggested the Pentagon think of alternatives to the F-35 program if its costs cannot be brought down.
Carter, the undersecretary of defense for acquisition, responded that there were no good alternatives to the F-35, a multirole aircraft due to replace various aircraft in the military fleets of both the United States and its partners.
The Senate was unhappy with program problems of the high-visibility program, but what could they do? As Dr. Carter testified, there were “no good alternatives” and thus no credible threat to hold over the head of Lockheed Martin. All the DOD can do is deploy teams of “should-cost” analysts to harass the program team and (by the way) distract the team from its focus on execution.
Nice.
The U.S. is not the only country with such issues. The U.K. has had its own share of weapon system problems, as this article reports. As the result of its cost and schedule problems, the U.K. MoD cancelled the Nimrod UAV programme, after spending £3.6 billion. As one article reported—
The RAF Nimrod MRA4 project was aimed at updating the earlier Nimrod MR2 aircraft and dates back many years. As detailed today by Mr Cameron, the programme is now running eight years behind schedule and 200 per cent over-budget, with an initial requirement for 25 airframes reduced to nine.
The Defence Review calls for the Nimrod MRA4 to be cancelled altogether: an unfortunate end to a troubled development. [Emphasis added.]
Even Russia is not immune from cost growth and schedule delays. The Seattle Times reported that—
The Kremlin says that President Dmitry Medvedev has fired several weapons plants chiefs and Defense Ministry officials over the industry's failure to deliver new weapons on time.
Medvedev also has reprimanded a dozen of other officials. Tuesday's move follows his recent meeting with arms manufacturers at which he criticized them for failing to meet last year's weapons orders and jacking up prices.
Here’s another take on the same story.
… the president demanded answers: ‘If high-level decisions are made, if funding is released, why are the weapons not delivered?’ Medvedev quoted his presidential message—delivered to a joint session of parliament in November 2009—that in 2010, the Russian military would receive more than 30 land and sea-based long-range ballistic missiles, five Iskander ballistic rocket systems, 300 modern armored vehicles, 30 helicopters, 28 warplanes, three nuclear submarines, a naval corvette and 11 new military satellites in orbit. ‘Why is this not done? This is absolutely unacceptable,’ barked Medvedev, ‘I did not invent the figures—you all sitting here approved them.’
Recalling the times of Josef Stalin’s terror and the Gulag, Medvedev announced: ‘In previous times, half of those present would already be doing hard physical labor in the fresh air.’ [Emphasis added.]
We have consistently noted that effective program execution is absolutely critical—especially in these economically troubled times. But it’s interesting—at least to us—at the varied customer reaction to program execution problems.
In the U.S., politicians express grave concerns and the DOD scrambles to look like it has a plan to correct the situation, while admitting that it really has little alternative other than staying the course.
In the U.K., troubled weapon systems have been cancelled.
And in Russia, people are getting fired while President Medvedev fondly reminisces about the good old days, when leaders would be sent to the gulag for failing to deliver weapon systems on time, for the budgeted amounts.
How will your customer react to your bad news?
Fraud in the U.S. Marshals Service
As our long-time readers know, we often point out that lax internal controls and poor segregation of duties take place within the U.S. Government as well as within government contractors. It’s just that fraud and abuse perpetrated by contractor employees makes for a better sound bite. Seemingly nobody cares especially much about Government employees—or military servicepersons—who steal directly from taxpayers (or from their fellow service members). But here’s yet another story about lax internal controls within the U.S. Government, and how a government employee was able to take advantage of the lax control environment to steal more than $100,000.
Ms. Sno Rush, age 40, residing in Upper Marlboro, Maryland, was employed by the U.S. Marshals Service (USMS) as an “administrative officer” in the District of Columbia Superior Court. According to this Dept. of Justice press release, Ms. Rush’s duties included “handling payroll-related matters for the USMS, authorizing payment to USMS employees and outside entities, drafting and signing U.S. Treasury checks for USMS expenditures, and directing and supervising other USMS employees to draft and sign such checks.”
Okay. Let’s stop right there and look at that quote detailing Ms. Rush’s responsibilities. She both drafted and signed checks payable to outside entities, and supervised other employees as they both drafted and signed checks. In addition, she both “handled” payroll-related matters and authorized payments to employees. Yeah. We know where this is going, don’t we?
Hopefully, none of our readers think this commingling of what are properly severable responsibilities is a good thing. In fact, it’s pretty much about as lax as you’d ever want to see, isn’t it?
So how did Ms. Rush—and we’re going to call her “Sno” for the rest of this article—handle the temptation provided by the lax control environment at the Superior Court in which she worked? Not well. Not well at all.
According to the DOJ announcement—
Rush admitted that between April 2006 and February 2009, she unlawfully used a USMS credit card for personal expenses totaling approximately $15,000. In addition, Rush admitted creating a fictitious employee in the USMS payroll system and submitting falsified time-and-attendance records for the employee, resulting in fraudulent payments totaling $31,000 between November 2007 and October 2008, which Rush converted to her personal use. Rush also admitted that between June 2007 and November 2008, she caused to be issued $51,000 in U.S. Treasury checks to pay down the balance on a personal credit card, disguising the theft with fraudulent business invoices she created to make the payments appear legitimate. According to the plea agreement, Rush converted an additional $7,000 in U.S. Treasury checks used to pay the balance on another personal credit card. In total, Rush admitted stealing approximately $104,000 in USMS funds.
So, Sno pretty much took advantage of every opportunity she saw, didn’t she?
Let’s enumerate:
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She created a fictitious employee and submitted false timekeeping records for that fictitious employee. That “ghost” employee received $31,000 in wages, which she pocketed.
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She generated $58,000 in fraudulent checks that was used to pay down her personal credit card balances.
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She ran up $15,000 in inappropriate personal expenses on her government purchase card.
We don’t know how Sno was caught—which would have been helpful. But we do know that she was caught and pleaded guilty. For her transgressions, Sno was sentenced to 21 months in prison and will be making full restitution (somehow).
In the meantime, we wonder what other USMS employees are getting away with?
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Falsified Test Certifications Hurt Contractor and Put Lives at Risk
On May 6, 2011, Robert Ruks, age 34, a former quality inspector at Huntington-Ingalls Shipbuilding (formerly Northrop Grumman Shipbuilding) (formerly Newport News Shipbuilding), pleaded guilty to two counts of making false statements in connection with inspections of welds on submarines constructed at the shipyard.
According to this report at DefenseNews, Ruks inspected and certified more than 10,000 welds during his 4 year tenure as a “non-destructive testing weld inspector.” He performed inspections on the submarines New Mexico, Missouri, California, Mississippi, New Hampshire, and the North Carolina. All of the subs in question are of the Virginia-class nuclear powered fast attack type—the U.S. Navy’s latest.
About 10 percent of the welds that Ruks inspected (or more accurately failed to inspect) were classified as SUBSAFE, meaning that they were hull integrity or other safety critical welds. As the DefenseNews story noted, “A defective pipe joint weld on a submarine that Ruks had certified as properly done could have caused the loss of the submarine.”
Another article stated that, “In May 2009, the Navy announced that an investigation was under way after an inspector at the Newport News shipyard admitted falsifying three weld inspections, saying he had done them when he had not.” Apparently, that investigation led to Ruks, after his co-workers reported him to shipyard management. As the DefenseNews article reported—
Questioned on May 14 of [2009] by his supervisors, Ruks admitted he had falsely certified inspecting three lift pad welds on a submarine although, according to a statement of facts filed with his plea agreement, the inspections were not performed. Ruks lied again on May 22, 2009, when he was questioned by agents from the Naval Criminal Investigative Service. According to the statement of facts, while Ruks admitted falsifying the lift pad weld certifications, he lied to the agents about the number of other ship and submarine hulls he had failed to inspect. … As a result of Ruks' false weld certifications, Northrop Grumman was forced to expend 18,906 man-hours to complete the reinspections, at a cost of $654,000 ….
It was reported that the reinspections found that 14 structural welds and two pipe welds were unsatisfactory—which (as we noted) may have put Navy lives at risk during submarine maneuvers.
The articles report that—
Ruks' guilty plea was accepted Friday by U.S. District Judge Mark S. Davis in federal court in Newport News. Ruks faces a maximum penalty of five years in prison and a fine of $250,000 for each count, as well as three years of supervised release on top of any prison term he may receive.
As part of Ruks' plea deal, he agreed to a "restitution order" that could require him to pay the U.S. government all of the $654,000 that it cost to reinspect and rework some of the 9,506 welds he certified on six submarines, court records show.
The final amount, however, is yet to be determined.
We too often focus on cost accounting and other issues, or on the mundane corrupt actions associated with procurement. It behooves us all to remember that fraud and corruption can spring from almost any source, and that there are people out there who think little of putting lives at risk in order to make their own lives easier.
Pentagon Outsources Supplier Development
We’ve recently reported testimony regarding the status and health of the defense industrial base. Readers may recall that Jacques Gansler told the Commission on Wartime Contracting that—
We are now 17 years beyond the 1994 passage of the Federal Acquisition Streamlining Act, and faced with the reality that application of FAR Part 12 principles has been problematic for services: only 18 percent of DoD’s services are sourced using commercial practices. The entry barriers remain the same: concerns over intellectual property and data rights, cost-accounting requirements, profit and overhead policies—to name just a few.
In a similar vein, Mr. Gansler subsequently testified before the Senate Armed Services Committee (Emerging Threats and Capabilities Subcommittee) that—
To meet the 21st Century National Security environment, the industrial base must be flexible, adaptable, agile, responsive, and innovative; and it must provide high-quality goods and services at affordable prices, in the quantities required. To achieve this, requires the government to change the way it does its business, i.e. reform its laws, regulations, policies and acquisition/procurement practices. It must remove the current barriers—created through overregulation and detailed “input” specifications—and shift to an emphasis on creating incentives for industry to achieve the desired output results. [Emphasis in original.]
Perhaps the DOD has given up the fight to transform its acquisition practices along the lines Mr. Gansler has advocated. Perhaps it has given up efforts to emphasize flexibility, adaptability, agility, responsiveness and innovation when there are so many barriers—internal, external, cultural, and legal—to such an evolved state. Perhaps not. History may be the final judge.
But National Defense magazine reported in its May 2011 edition that DOD has begun to look outside the Pentagon walls to search for nontraditional defense suppliers to fill niche needs for green energy, wireless communications, cybersecurity and data mining products. As the magazine article reported, “Some of the technologies on the Pentagon’s wish list exist in the larger [non-defense] marketplace, but are supplied by companies that shy away from government contracting or may not be aware that the Defense Department is in need of their products.”
To that list of supplier concerns we would add—
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Don’t have an approved accounting system
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Don’t have an approved timekeeping system
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Are afraid of hostile DCAA auditors writing adverse audit reports condemning perfectly acceptable commercial practices
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Are afraid of Truth-in-Negotiation Act requirements
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Are afraid of being accuse of False Claims Act violations because of inadvertent mistakes
In other words, all the barriers that Mr. Gansler told his Governmental listeners keep companies from entering the DOD marketspace.
Anyway, the DOD thinks it has found a way to identify and encourage/incubate its next generation of suppliers, to assist them in developing innovative products, to create opportunities for future competitions. It calls its efforts the Defense Venture Catalyst Initiative—or DeVenci, for short.
DeVenci “focuses on increasing Department of Defense (DoD) awareness of emerging commercial technologies developed by non-traditional DoD procurement sources, and on increasing the awareness of DoD needs and requirements within these sources.”
DeVenci accomplishes its objectives by having potential suppliers pitch their products to a government panel that includes 26 outside venture capitalists, who provide their services to DOD on a pro bono basis. Suppliers may self-nominate (via FedBizOpps) or may be nominated by the venture capitalists (VCs). Suppliers who make successful pitches must then survive a DOD review and (DOD-funded) test of their products—a process that can last “from six to 18 months.” Survivors of that vetting process are then evaluated by DOD personnel via a process that excludes the VCs. The survivors are connected with DOD users/buyers and (presumably) receive contract awards.
In the words of the DOD—
Interactive participation of the venture capital community, small innovative companies, and potential DoD customers is a proven way to accelerate the identification of emerging commercial technologies relevant to DoD needs. The DeVenCI model is to broker interactions that transfer knowledge and understanding between DoD participants with specific capability needs and small innovative companies. The goal is to find emerging technologies aimed at commercial market driven needs that also could be applied to DoD needs.
How’s the program doing?
The magazine article reported that—
Over the past year and a half, 376 companies were nominated. Defense Department subject matter experts reviewed their submissions, and 99 of them were invited to give a 25-minute presentation to an audience of government officials and VCs. Out of the 99 firms, 25 received government funds to have their products tested. Of those, 10 companies reached the ‘operational capability’ holy grail.
If the odds seem daunting, consider that a 10/376 chance of a contract award is not that much different than the odds faced by the average DOD bidder; in fact, the odds may be better than those experienced by bidders in many competitions.
If you are a small business, offering a cutting-edge product, and have been looking for a way to break into the DOD marketplace, then DeVenci may be your ticket to success. Moreover, if you are a large prime with a mentor-protégé agreement, you may want to consider pointing your protégé firm towards this program.
After all, nothing ventured, nothing gained.
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