Senate Discusses Health of the Defense Industrial Base
On May 3, 2011, the U.S. Senate Committee on Armed Services, Subcommittee on Emerging Threats and Capabilities, held a hearing on the status of the defense industrial base. Six VIPs offered testimony, and today we want to look at their written testimony.
Frank Kendall (Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics) offered the following interesting sound bites (word bites?).
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To understand this increasing dynamism and complexity the Department is pursuing multiple, concurrent efforts to map and better understand the defense industrial base. This approach is in contrast with other more traditional narrow program-focused and product-focused assessments. The Department will replace intuitive judgments about the impacts of changing domestic demand, globalization, commercial-military integration, emerging sources of innovation, and other issues with data-driven industrial base evaluations. By continuously assessing the industrial base on a sector-by-sector, tier-by-tier basis, the Department will develop a reservoir of critical and actionable information. … Our efforts to encourage competition in the industrial base build on our commitment to gain insight about the state of the base’s health before dictating oversight – insight that the Department has historically lacked, especially about the companies at the lower tiers of the industrial base. We have undertaken an aggressive effort to map and assess the industrial base sector-by-sector, tier-by-tier (S2T2). The goal is to understand the gross anatomy of the industrial base. Just as doctors do not seek to understand the functioning of every individual neuron in the central nervous system, the Department does not seek to know the exact details and reasoning behind every supplier relationship. But we do need to better understand the industrial base’s nervous system, circulatory system, and bone structure.
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… For example, the Department expects to reward prime contractors for successful supply chain management, efforts that add value to DoD by reducing the costs of the components integrated further up the product stream. Understanding subtier-level connections between the Department’s programs will improve our own supply chain management, helping the Department’s efforts to maintain economical and stable production rates at multiple tiers. A better baseline of industrial base data will assist programs’ market-research efforts, including in the area of contracted services, where market research needs particular attention and where the Department tends to pay rates above commercial rates. Comprehensive information about industry’s deeper structure will help program managers develop strategies to increase competition, as directed under the Better Buying Power initiative.
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The Department is very conscious that the top tiers of the defense industry have already consolidated significantly, and we do not anticipate it to be in the best interest of the warfighter or taxpayer to see additional merger activity among the top prime contractors. But we do expect some increased activity at the middle and lower tiers, activity that we will monitor closely.
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The new S2T2 repository of industrial base data will also serve as a jumping off point for future assessments by all Defense Components, ensuring that data collection and analysis cumulates, thereby increasing the value of all industrial base assessment efforts. Having one office in the Department leading this effort will prevent duplication of effort that wastes the Department’s resources and harasses overworked program offices and contractors with multiple, redundant requests. Sustaining and strengthening the data over time will also contribute required insight to the Department’s merger, acquisition, and divestiture reviews and other industrial base policies.
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The commercial base has become increasingly global in nature. It maintains global supply chains, gets financing from global investors, and employs a global workforce. Globalization poses numerous advantages and challenges. … On the other hand, the benefits of globalization are tempered by potential risks. Some foreign nations and non-state actors are constantly trawling global supply chains, trying to gain access to critical US technologies and information on US defense systems. Similarly, the U.S. needs to address risks that counterfeit parts or even components intentionally designed to subvert crucial defense systems could slip in through the increasingly complex, global supply chain. … Globalization also poses unique risks of supply chain disruptions. Natural disasters can happen anywhere in the world, and even an entirely domestic defense supply chain could face disruptions. But if a disruption occurs at a domestic supplier, the Department can use Defense Priorities and Allocation authorities under the Defense Production Act to compel US industry to prioritize DoD critical orders. Those authorities do not extend overseas, so when disruptions occur at foreign suppliers, the Department may have a more difficult time adjusting. We are working to alleviate this challenge by increasing the use of bilateral defense trade agreements and security of supply agreements with our allies.
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DoD reimburses approximately 1200 firms in the industrial base for IR&D efforts, thus providing opportunities for innovation to both the large primes and the smaller mid and lower-tier firms. The IR&D funding is critical to ensure a healthy talent base in industry and to keep industrial design team skills sharp over the long term. The Department has recently launched initiatives to increase communication with industry regarding technology needs and operational requirements to ensure maximum return on industry’s IR&D efforts, which the Department reimburses as an allowable cost. For example, the Department is preparing Vendor Communication Plans which provide clear guidance and encourage communication between industry and government about requirements and technology objectives. The Department is also reaching out to industry to find new ways to collaborate through sharing of detailed information about their IR&D projects and the Department’s technology roadmaps.
We were next going to recap the testimony of Mr. Brett Lambert, Deputy Assistant Secretary of Defense, Manufacturing and Industrial Base Policy. But his written testimony was virtually verbatim—essentially word for word, that of Mr. Kendall, above. If you read Kendall’s stuff, then you already know Lambert’s points.
Norm Augustine, venerated former CEO of Lockheed Martin, offered the following points—
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Unrealistic initial estimates of the size of the total production buys and production rates—which lead to excessive tooling costs and amortization penalties.
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Cutbacks in planned annual purchases—which diminish the significant gains that can otherwise be realized by moving down the learning curve.
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Uncertainty in year-to-year funding—which precludes efficient purchasing quantities, discourages contractor investment in productivity measures, and leads to cancellation or renegotiation of sometimes thousands of subcontracts.
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Failure to discount future cash flows—something that would never be permitted in the private sector.
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Failure to provide reserves in proportion to the risk entailed in a task—again, something that could never be tolerated in the private sector.
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National defense today depends not only on companies generally associated with national security but also on the thousands of sub-contractors and suppliers who provide the larger firms with everything from castings and forgings to microchips and lasers. Many of these smaller firms do not possess the financial staying-power or resiliency of the larger firms and are thus even more vulnerable to turbulence in the procurement process. Viewing the environment in which both large and small U.S. firms operate today, the outlook for our nation’s security, let alone the economy as a whole, is not reassuring.
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American firms spend over twice as much on litigation as on research. They commonly spend more on healthcare for their employees and retirees than on the basic material that go into their products. … The patent system is ponderous and the export laws were designed for another era. The immigration laws discourage much-needed talent from remaining in our country. The prevailing tax and market structure encourages a short-term outlook and disincentivizes long-term investment—for example, research. The demise of the iconic Bell Laboratory, home of the laser, transistor and many Nobel Laureates, is but one example of the latter. If current plans are carried out the government will soon have the equivalent of two Army divisions overseeing defense procurement. While oversight is indispensable, the question of balance is nonetheless present—particularly when industry’s response is likely to be to match that number of overseers within its own firms as a defensive measure.
We’re not done yet. Here are the thoughts of Dr. Jacques Gansler—
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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.]
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Since ‘changing the way the government does its business’ and, correspondingly, ‘transforming the National Security industrial base for 21st century needs,’ is basically a ‘cultural change,’ the literature is clear— for successful implementation of a cultural change it requires leadership (with a vision, a strategy, a set of actions, and a set of metrics).
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I have written and testified frequently about the benefits (in cost and performance) of competition. But, there are … right and wrong ways to perform a competitive acquisition …. Weapon systems are not interchangeable commodities (so you can not just ‘open the envelope’ and pick the low bidder) the decision must be based on a combination of risk (based on ‘past performance’ of the firm and current status of the proposed technology) and the proposed performance, cost, and delivery (i.e. ‘best value’); as well as the probability of maintaining these ‘ promises’ in the presence of the large number of future changes (that are unavoidable in this rapidly-changing world). So, incentives are required (to achieve high performance at low cost); and the best one (over the long run) is the presence of, or a credible option for, continuous competition among two sources (known as ‘competitive dual-sourcing’). The usual counterargument is that ‘we can’t afford the second-source start-up costs;’ and ‘this time will be different’—‘We will manage the sole-source contractor, and allow no government-imposed changes.’ But this just doesn’t have any credibility!
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Since the mid-90s, as the dollars and actions for DoD acquisitions were rising dramatically, the acquisition workforce was being cut. (Twenty-five percent of this was by Congressional mandate.) Even more critical than the numbers being cut, were the senior positions. For example, in 1990 the Army had five General Offices with Contracting experience; in 2007 they had none. In this same time period, the Defense Contract Management Agency went from four General Officers to none (while their workforce went from 25,000 to 10,000). And the Air Force had cut both their acquisition General Officers and their SES acquisition personnel in half. Without smart, well-trained, experienced acquisition buyers and managers, making the required changes in DoD buying practices, and achieving the required transformation of the industrial base (for 21st century National Security) will simply be unachievable.
In our next article, we’ll discuss the implications of these statements.
Internal and External Auditors Under Fire by Defense Contractors
Here are a couple of stories about auditors—both internal and external—and how they can impact a company’s operations in somewhat unexpected ways. Both stories involve Big 4 auditor Deloitte—currently ranked the “biggest of the Big 4” audit and professional service firms—but there are also other players, as you shall see.
First, we want to discuss the case of two Boeing whistleblowers. Unlike the typical whistleblower we discuss on our blog, their allegations had nothing to do with violations of the False Claims Act or defective pricing. Instead, these two Internal Auditors were concerned with Boeing’s “potential Sarbanes-Oxley violations”. According to this story at ComplianceWeek.com, the two Boeing employees alleged that—
[Boeing] feared its external audit firm, Deloitte & Touche, would find a material weakness in internal control over financial reporting. The two [whistleblowers] told the court that managers created a hostile work environment and pressured internal auditors to issue positive findings.
More specifically—
The [two internal] auditors said they began expressing their concerns over potential Sarbanes-Oxley violations to supervisors in February 2007, especially their discomfort with the authority given to PricewaterhouseCoopers, which was hired to support the internal audit function. Neumann and Tides believed PwC auditors were too deep in the design and audit of controls, and they believed the software system for recording audit results wasn't adequately secure.
Apparently, Boeing did not heed their concerns. Frankly, if that’s all they had, we would have turned a deaf ear as well. If Deloitte was the external auditor, then we can’t see how having PwC (or pwc as it’s now branded) involved in the company’s SOX preparations would have caused any conflicts for Boeing.
(Though we note one of the issues was that PwC was acting both as Boeing’s outsourced internal auditor and as the company’s SOX controls documenter at the same time, which might be construed as a potential conflict of interest—but we think only if PwC was going to test the SOX controls as part of its internal audit work. Otherwise, not too big of a deal in our view.)
Having failed to persuade company management to heed their concerns, the two internal auditors next turned to the public media, “which led to a news article in July [2007] asserting the company threatened employees, manipulated audit results, and was susceptible to theft and fraud.”
We Googled the three 2007 articles in the Seattle Post-Intelligencer. What’s rather unusual about the articles is that two of them consist of Boeing’s written responses to questions posed by the reporters. Here are some links in case you are interested:
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Boeing’s responses, Round One.
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Boeing’s responses, Round Two.
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The newspaper discusses 5,000 Boeing documents it reviewed
In the third Seattle P-I article linked to in the above list, the newspaper reported—
Among the problems the P-I found:
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Boeing's internal audit findings were so poor -- meaning that so many computer system controls were failing or evidence was missing -- that external auditor Deloitte & Touche decided not to rely on the results for three consecutive years.
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Boeing exposed sensitive information about computer systems' holes to employees who did not need access to all of the data, according to e-mails and interviews.
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An internal complaint was filed with the company's ethics board that audit results had been manipulated. The company decided last September that the allegation was unsubstantiated.
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Some employees involved in the compliance process perceived a threatening culture. A late 2006 internal report said that employees felt they were being told that their jobs and salaries were "on the line," and they were being pressured to produce evidence for audits "ahead of events occurring normally.
The newspaper reported that—
In 2006 alone, Sarbanes-Oxley compliance cost Boeing $55 million, according to the company -- about the list price of one new 737 plane. A lot of that money has gone to the external auditor, Deloitte, and other large accounting firms that helped with its internal audit, including PricewaterhouseCoopers and Jefferson Wells.
Despite all the fees paid (or perhaps because of the fees?), the newspaper reported that Deloitte gave Boeing’s SOX controls “a clean bill of health.” In the next breath, the newspaper noted that—
When it comes to telling shareholders all that it should, Deloitte does not have a spotless record, according to government records.
The Public Company Accounting Oversight Board, which was created by the Sarbanes-Oxley Act, inspects audit firms by reviewing samples of their work.
In the three reports the board has published on Deloitte, it has questioned dozens of decisions that made audit results appear rosier. In 2006, the board criticized one Deloitte audit for certifying information technology controls that the firm had not sufficiently tested. The company being audited was not identified, and Boeing said it was not the firm.
Based on the internal details reported in the Seattle Post-Intelligencer articles, it seems self-evident that one or more Boeing employees had provided quite a bit of company documents. The two Boeing Internal Auditors (Neumann and Tides) were fired for violating the company’s communication policy.
The Ninth Circuit Court of Appeals found that, although the Sarbanes-Oxley Act does protect whistleblowers, it only protects disclosures to certain recipients—and the public news media was not one of the three recipients listed in the statute. Thus, the two Internal Auditors could not avail themselves of the SOX whistleblower protections.
Whew. Despite the newspaper’s insinuations, we cannot find any indication that Deloitte or Boeing engaged in any wrongdoing. But stay tuned for the next story, and then we’ll try to tie it all together.
The second story also involves Deloitte. In this story, defense contractor Navistar reportedly sued Deloitte on April 27, 2001, for $500 million in damages, alleging “fraud, fraudulent concealment, breach of contract and malpractice” related to audits performed between 2002 and 2005.
What’s the real issue? Well, according to the story—
‘Deloitte lied to Navistar and, on information and belief, to Deloitte's other audit clients, as to the competency of its audit and accounting services,’ the Warrenville-based truckmaker alleged in its complaint.
Deloitte, to no one’s surprise, denied the allegations. The story reported—
Jonathan Gandal, a spokesman for Deloitte, said Navistar's claims lack merit and that the firm would vigorously defend itself.
‘A preliminary review shows it to be an utterly false and reckless attempt to try to shift responsibility for the wrongdoing of Navistar's own management. Several members of Navistar's past or present management team were sanctioned by the SEC for the very matters alleged in the complaint.’
The U.S. Securities and Exchange Commission last year said the truck company had resolved an agency investigation into its accounting practices under which Navistar wasn't required to admit or deny the SEC's findings.
‘Navistar had numerous deficiencies throughout its system of internal controls during the relevant period, including fifteen material'
weaknesses during 2005-06 that were attributable, in part, to the company's failure to dedicate sufficient resources to those controls,’ according to the SEC.
Chief Executive Officer Daniel Ustian agreed to surrender to Navistar shares worth $1.3 million, while former Chief Financial Officer Robert C. Lannert consented to repay $1.05 million, each sum reflecting monetary bonuses they'd received during the restatement period, the SEC said. Four other company executives paid civil penalties without admitting liability.
To clarify, in addition to making trucks, Navistar also makes about $2 billion per year from selling mine-resistant ambush-protected (MRAP) vehicles to the DOD. In 2008, it was ranked as the 10th largest defense contractor in America.
But let’s get back to Navistar’s allegations of Deloitte wrongdoing. In this opinion piece over at “Fraud Files,” Tracy Coenen explores the issue. She writes—
The lawyers say Deloitte lied about its competency in performing audits, and the company ultimately restated its financial statements for 2002 through 2005. Whose fault is it that Navistar overstated its pre-tax income by $137 [million] during those years? According to them, Deloitte.
Navistar employees buried their fraud in accounts that are easy to manipulate, and the task of hiding the fraud from the auditors isn’t too hard either. The fraud was hidden in accounts such as vendor rebates, warranty reserve, vendor buybacks, and other income. …
Navistar’s story about the fraud seems to keep changing. Early on in the case, the company denied wrongdoing and said the problem was with ‘complicated’ rules under Sarbanes-Oxley. I’m not sure how SOX is to blame for management having secret side agreements with its suppliers who received ‘rebates.’ Or improperly booking income from tooling buyback agreements, while not booking expenses related to the tooling. Or not booking adequate warranty reserves. Or failing to record certain project costs.
And now the company says Deloitte is to blame. …
In the case of Navistar, each of the fraudulent accounting schemes above are nearly impossible to detect. The company failed to book items or provide information about them to the auditors, yet they are suing the auditors for failing to find the items.
Ouch! Tracy does have a way with words, doesn’t she?
Superficially, these are two stories involving (if only tangentially) Sarbanes-Oxley, Deloitte, and internal control issues. And they both involve auditors of one sort or another. But to us, the real connection is what’s missing from each of the stories.
Where was DCAA?
Boeing is the largest aircraft maker in America and one of the perennial Top 3 defense contractors. Navistar was a Top 10 defense contractor. Each had allegations of failed internal controls. Navistar had a public restatement of its financial statements and some of its executives were fined by the SEC. To us, that sounds “high risk” and, potentially, a control environment that would make one wonder how the company could qualify as a “responsible” contractor eligible for new contract awards.
We have internal auditors involved in (unprotected) whistleblowing. We have investigative journalism. We have SEC investigations. Yet we never hear or read about DCAA uncovering these (alleged) control failures or secret supplier rebates. We never hear about DCAA auditors making Form 2000 referrals to the Department of Justice. We don’t hear about suspension or debarment proceedings. In fact, POGO’s Federal Contractor Misconduct Database has zero listings regarding any fines or penalties (or settlements) related to Navistar’s DOD contracts. Nothing. There is no report of Navistar having any problems with DOD.
Just to be sure, we did a quick review of Navistar’s 2010 Annual Report, and we did not notice any listing of pending litigation related to the U.S. Government. Nada.
(And for that matter, we are unaware that DCAA has ever alleged that Boeing has an inadequate Information Technology system because of its long-lived IT control “deficiencies”. But we also have to admit we probably wouldn’t know of any issues unless they came to light during litigation.)
We see these two stories as being illustrative of huge, neon-colored red flags that one would expect would bring DCAA down on these contractors—especially Navistar—like the proverbial ton of bricks. And perhaps, in the background, DCAA auditors are even now quietly and patiently waiting for their management to give them the approval to issue the audit reports or Forms 2000 that will address these issues. But right now it seems like the DCAA auditors, whose job it is to protect taxpayers from fraud and waste connected with DOD contracts, are missing in action.
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Fraud in the Construction Industry
The Society of Corporate Compliance and Ethics (SCCE) tipped us to a story reported by the New York Times on fraud in the New York construction market. Let’s get things started with a quote from the NYT story—
The district attorney’s office and industry experts say that corruption generally adds 10 percent to the already-high cost of construction in New York, making the city less hospitable to business than other places.
Corruption is so endemic to the construction industry, said John E. Osborn, who specializes in construction law and represents property owners, “that it’s part of regular business practices.”
Yes, you read that correctly. One plaintiff’s attorney asserted that fraud and corruption is “part of the regular business practices” of the New York construction industry. It’s business as usual. It’s expected.
But it’s not always tolerated.
The NYT article reported that, on May 4, 2011, four executives of the Lehr Construction Corporation were arraigned “on charges that they systemically stole tens of millions of dollars from investment firms, insurance companies and law firms as they built corporate offices in buildings across Manhattan.” Allegedly, they “routinely inflated mechanical, electrical and other subcontractors’ costs by 10 percent to 13 percent on office projects they supervised.” Prosecutors asserted that the wrongdoing cost the company’s customers about $30 million over the past 12 years—which is good money even by Manhattan standards.
In support of the earlier assertion that fraud and corruption may be endemic to the New York construction marketplace, the NYT reported that—
It is the second time in 13 years that executives at Lehr, which at its peak had roughly $500 million a year in billings, have been charged with fleecing their corporate customers, and the third corruption case involving a member of the Lazar family, which founded Lehr.
How did the scheme work? According to the NYT article—
According to the district attorney, on jobs in which Lehr served as construction manager, the men created a document known as the ‘bid package,’ and required subcontractors to inflate their bids by 10 percent or more.
After the subcontractor was selected by Lehr and the client, it would then secretly negotiate with Lehr executives about the real price for the work, with the inflated bills submitted to the client …
Prosecutors said Lehr would reap the illicit profit by underpaying the contractors by the same amount on other jobs, so the illegal sums would not show up in an audit. …
Prosecutors said that Mr. Lazar’s son Jeffrey, who oversaw the sales, estimating and purchasing departments, and Mr. Phillips, who shared responsibility for day-to-day operations, met weekly at their Broadway offices with Mr. Halper and Mr. Wasserman to work out the details of their scheme. All the men, and the company, were charged with enterprise corruption, scheming to defraud and grand larceny; Mr. Halper and the company also were charged with money laundering.
We like that part about the owner’s son who “oversaw the sales, estimating and purchasing departments.” Yeah, no segregation of duty issues there, for a firm that at one point had $500 million in annual sales.
In what was perhaps an unsurprising conclusion to its story, the NYT reported that the Lehr Construction Corporation filed for bankruptcy protection last year.
Can One Commit Defective Pricing on a “No-Bid” Contract?
This one is a puzzler ….
Headquartered in Newark, New Jersey, Ultralife is a multi-national engineering and manufacturing firm specializing in high-tech power and communications systems, as well as more prosaic battery and battery charger products. On April 29, 2011, the company filed a Form 8-K with the Securities and Exchange Commission (SEC), in which it announced that it had recorded a $2.7 million charge against First Quarter 2011 earnings, based on reaching an “settlement-in-principle” with the U.S. Department of Justice related to what appears to be allegations of defective pricing on three “exigent, non-bid contracts with the U.S. government.”
The Form 8-K reported that—
In September 2005, the Defense Contracting Audit Agency presented its findings related to its audits of the three exigent contracts and suggested a potential pricing adjustment of $1.4 million related to reductions in the cost of materials that occurred prior to the final negotiation of these contracts. … Under applicable federal law, the Company may have been subject to treble damages and penalties associated with the potential pricing adjustment. In light of the uncertainty, the Company decided to enter into discussions with the government in April to negotiate a settlement.
We looked at the most recent Annual Report available to the public (for FY 2010) and noted that the U.S. Department of Defense comprised 11 percent of Ultralife’s total sales (down from 26% in the prior year). We did not find any discussion of the issue(s) noted above in the financial statement footnotes related to legal matters. However, in the section entitled “Potential Commitments” we found the following discussion—
We had certain ‘exigent’, non-bid contracts with the U.S. government, which were subject to audit and final price adjustment, which resulted in decreased margins compared with the original terms of the contracts. As of December 31, 2010, there were no outstanding exigent contracts with the government. As part of its due diligence, the government has conducted post-audits of the completed exigent contracts to ensure that information used in supporting the pricing of exigent contracts did not differ materially from actual results. In September 2005, the Defense Contracting Audit Agency (‘DCAA’) presented its findings related to the audits of three of the exigent contracts, suggesting a potential pricing adjustment of approximately $1,400 [$1.4 million] related to reductions in the cost of materials that occurred prior to the final negotiation of these contracts. We have reviewed these audit reports, have submitted our response to these audits and believe, taken as a whole, the proposed audit adjustments can be offset with the consideration of other compensating cost increases that occurred prior to the final negotiation of the contracts. While we believe that potential exposure exists relating to any final negotiation of these proposed adjustments, we cannot reasonably estimate what, if any, adjustment may result when finalized. In addition, in June 2007, we received a request from the Office of Inspector General of the Department of Defense (‘DoD IG’) seeking certain information and documents relating to our business with the Department of Defense. We continue to cooperate with the DCAA audit and DoD IG inquiry by making available to government auditors and investigators our personnel and furnishing the requested information and documents. The DCAA Audit and DoD IG inquiry have now been consolidated and the US Attorney’s Office is representing the government in connection with these matters. We recently received a settlement proposal from the US Attorney which was based on the non-acceptance of various positions submitted by us in discussions and exchanges related to these matters. We are now reviewing the settlement proposal for purposes of preparing our response. At this time we have no basis for quantifying any penalties or liabilities we might face on account of the DCAA Audit and DoD IG inquiry. The aforementioned DCAA-related adjustments could reduce margins and, along with the aforementioned DOD IG inquiry, could have an adverse effect on our business, financial condition and results of operations.
Okay. Let’s review and comment on what Ultralife reported.
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The company received three “exigent” contracts. We looked-up “exigent” on the Internet and learned that such contracts are (apparently) issued when there is an emergency or similar compelling urgency. We then looked at FAR Part 18 and learned that a Contracting Officer has certain flexibilities available for use when conducting an “emergency acquisition”—as we assume these were. For example, emergency acquisitions may limit the number of sources sought and need not provide for full and open competition. Contracting Officers may solicit from a single source for contract awards valued up to $1 million, in certain circumstances. Contracting Officers may even request proposals orally under certain circumstances. Letter contracts can be used when appropriate. But with all those flexibilities available, we did not notice that a Contracting Officer had the authority to issue a contract without receipt of a proposal.
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Given the foregoing, we are unsure what Ultralife meant by a “no-bid” contract. We would understand the terms “sole-source” or “single source” but “no-bid” implies that there was no proposal whatsoever. But that can’t be correct, because Ultralife reported that it had actual contracts, and that its contracts experienced “decreased margins” when compared to their “original terms”. Moreover, there had to be some original pricing, because that was what the DCAA audited in its post-award audits. Further, there had to be some negotiations involved, since Ultralife reported that DCAA had alleged that the cost of materials had decreased “prior to the final negotiation” of those contracts.
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So we have to conclude that this was, despite Ultralife’s somewhat unique approach to describing the situation, a rather run-of-the-mill defective pricing allegation.
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But what’s interesting is the implication that there was some sort of False Claims Act violation being alleged as well. The “treble damages and penalties” phrase doesn’t come from a TINA violation; that comes from the False Claims Act.
So we think, based on sheer speculation with absolutely no knowledge of the facts other that those reported herein, that Ultralife found itself facing allegations that it knowingly failed to disclose “cost or pricing data”—which led to a contract price so tainted that Ultralife’s invoices became individual violations of the False Claims Act. Yeah, that could run into a lot of money….
But wait a second. If these were truly emergency acquisitions then who put the “Price Reduction for Defective [Certified] Cost or Pricing Data” clause into the contract? Are you telling us that there were such urgent and compelling circumstances that the Contracting Officer found that it appropriate and justified to only approach one source—but at the same time that there was sufficient time to require Ultralife to submit a proposal, to disclose (certified) cost or pricing data, to negotiate a price, and then to put together a traditional full-clause contract? Really?
Maybe it’s just the tortured description provided by Ultralife … but in our view something doesn’t add up here. Something’s not making sense to us.
And because of this settlement, we’ll never know the details of the full story….
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