DOD Inspector General Criticizes DCMA for Excluding DCAA from EVMS Reviews
Recently
the DOD Inspector General (DOD IG) released a July 28, 2010 audit
report that criticized the Defense Contract Management Agency (DCMA) for
“unsatisfactory conditions” related to how the oversight agency
performed reviews of a defense contractor’s Earned Value Management
System (EVMS). The DOD IG criticized DCMA for three specific failings,
as follows—
During
two reviews of a DoD contractor in 2008, the Earned Value Management
Center failed to (1) allow the Defense Contract Audit Agency (DCAA)
sufficient time to perform an audit of the contractor’s system, (2)
adequately resolve the DCAA findings, and (3) demonstrate independence
and objectivity in fulfilling its oversight responsibilities.
Let’s peel the onion back a bit, shall we?
Both
DOD oversight agencies (DCMA and DCAA) have been criticized heavily for
both their dysfunctional relationship and their failure to accomplish
their oversight missions. We’ve posted several articles on the
Commission on Wartime Contracting and its criticism of the agencies.
See, for example, here or here. We even posted speculation that the two agencies might merge together.
We said at the time—
Reports
are beginning to come out regarding the Commission's latest 2-day
hearing on contractor business systems and DOD oversight -- and those reports
indicate that the Commission thinks DCMA has failed in its oversight
role and should possibly merge with DCAA in order to eliminate
‘dysfunctionality’ between the two DOD agencies.
For example, GovExec.com reports
that ‘a lack of cooperation’ between DCMA and DCAA ‘is hindering the
oversight of contractors' business systems.’ The
article states that ‘members of the commission accused DCMA ... of
almost uniformly ignoring recommendations from DCAA with regard to the
business systems of logistical support contractors,’ and always siding
with contractors by ignoring DCAA audit findings. …
The
Commission called for the dysfunctional relationship between DCAA and
DCMA to come to an end and, according to the report, put the onus on
DCMA to resolve the problems. Co-Chair
Shays was quoted as saying, ‘both of you up there, you're on the same
team, but it doesn't sound like it and it doesn't look like it. ... With
no disrespect to [DCMA], we think there needs to be more adjustment on
DCMA's part than on DCAA's part. I think that's fairly clear.’
Recent proposed FAR revisions
would affect how the DOD evaluates the adequacy of contractors’
“business systems.” If the proposed rule is implemented as drafted (and
rumors/gossip seem to indicate that some changes will be made), then
there would be six (6) official business systems: (1) Accounting, (2)
Earned Value Management, (3) Estimating, (4) Material Management and
Accounting (MMAS), (5) Property Control, and (6) Purchasing. Some of
those business systems would be the exclusive purview of the DCMA—e.g.,
property control and purchasing. Others would seem to be the purview of
the DCAA—e.g., Accounting and MMAS. (Though it would appear that DCMA
would retain the authority to issue final determinations of system
adequacy—as it should.) The authority/responsibility over the
assessment of the other systems—notably Estimating and EVMS—would seem
to be somewhat ambiguous. And perhaps those two systems do
require a joint approach to the assessment of adequacy, since costs and
cost reporting accuracy play a prominent role within them.
But remember, DCAA has admitted publicly
that “In fiscal 2008, the average time to complete a contractor pricing
review was 28 days, compared with 72 days in fiscal 2010.” For those
in the know, DCAA reviews of contractor cost proposals are “demand
audits,” and thus given the agency’s highest priority. It used to be
that such audits were to be completed in 30 days … but now they take
more than twice as long as they used to—and that’s for the highest
priority audits. How long do you think DCAA takes to complete an
assessment of contractors’ internal controls related to their business
systems?
And
remember that area for which DCAA has received the most criticism has
been its review of contractor internal controls. For example, in
October 2009, we reported
that the Government Accountability Office (GAO) reported “widespread
audit quality problems” at DCAA. As we reported at the time, “The GAO
report stated that ‘we found audit quality problems … with all 37 audits
of contractor internal controls and the 4 incurred cost and the 2
request for equitable adjustment audits we reviewed at 7 FAOs across the
5 DCAA regions ….’” The Commission on Wartime Contracting reported
that—
As
a result of personnel shortfalls, DCAA system reviews and follow-ups
are not always timely; therefore, the real-time status of contractor
business systems cannot always be determined. As noted in our Interim
Report to Congress, DCAA has not performed timely reviews of many
contractor business systems.
The gadfly watchdog group, POGO, went so far as to send a letter
to influential Senators saying, “We worry that these problems are
indicative of a systemic strategy for reform that seeks to decrease
congressional pressure rather than to institute meaningful reform.” So
given DCAA’s recent implementation of multiple layers of management
review, its deferral of new system reviews—pending upcoming changes in
how such reviews are to be performed—we invite readers to ask themselves
how long DCAA actually takes to perform its evaluation of contractor
internal controls related to business systems. Perhaps you’ve
experienced that duration first hand, as we have (many, many times).
Let’s ask how long DCAA should take to perform such reviews, how long DCMA should give DCAA to perform its share of joint system evaluations. What’s reasonable?
A month? Maybe a year? How about a decade?
We
can tell you, based on first-hand experience, that DCAA can’t perform
such reviews in a month. We don’t believe that anybody should expect those
reviews to be performed in a month. But certainly six months would
seem reasonable, yes? Most of us would expect DCAA to plan its work,
perform its field work, and get a report reviewed within six months.
That seems reasonable—at least to us.
So when we tell you that you’ll be lucky
to see a DCAA report evaluating the adequacy of a contractor’s internal
controls related to a business system—a full scope audit—within the
span a year, believe us.
A year is good. A year is nominal. Eighteen months would be highly
probable. Two years would not be out of the question. Three years
might be stretching it a bit. Within five years? Yeah, you’ll pretty
much be certain of seeing that report within five years. Virtual 100%
certainty--but not quite 100%. There may be some outliers….
Thus,
contractors and other oversight agencies—notably DCMA—get frustrated at
the slow pace of DCAA audits. And DCMA starts looking to cut corners.
Does a Contracting Officer really
need to see the DCAA audit report on the contractor’s proposed costs
before sitting down at the negotiating table? Can s/he afford to even
wait that long before agreeing to a price and getting some weapon into
the hands of warfighters in Southwest Asia who might desperately need
it? And can the DCMA functional specialists—the system
evaluators—afford to hold up their official reports (the same reports
that identify system deficiencies that require contractor corrective
actions) for that period of time? Or should they just go ahead and
issue their report anyway? After all, they have the final say in
contractor business system adequacy.
Ponder
those questions as we turn to the DOD IG report. (Yeah, you were
wondering when we would get back to the topic, weren’t you? But we
trust you’ll see how it all ties together.)
The
DOD IG took DCMA to task for cutting DCAA out of their EVMS evaluation
process. First, a little background on that evaluation process,
courtesy of the IG report:
The
DCMA Contract Management Office … is one of 47 such offices established
throughout the United States [with the authority and responsibility of
determining the acceptability of the DoD contractor earned value
management system under their cognizance.] In addition, DCMA has
established an Earned Value Management Center (the Center) to conduct
initial ‘compliance’ reviews of DoD contractor systems for compliance
with the ANSI/EIA-748 guidelines. The Center is currently comprised of a
team of approximately 31 earned value management specialists who
perform compliance reviews across the United States on a full time
basis. The Center also performs follow-up reviews of significant
deficiencies until they are corrected. Once the Center makes an initial
determination that a contractor complies with the guidelines, the
Contract Management Office will recognize such compliance through the
issuance of either an Advance Agreement or a Letter of Acceptance.
Thereafter, the Contract Management Office conducts ‘surveillance’
reviews on an ongoing basis to verify a contractor’s continued
compliance with the guidelines. If a surveillance review detects
significant noncompliances, the Contract Management Office may request
that the Center perform another compliance review of all or parts of the
contractor’s earned value management system and could withdraw
acceptance of the system until the contractor reestablishes compliance.
The
DOD IG reviewed two DCMA EVMS evaluations. The first was an April 2008
compliance review and the other was a follow-up review conducted in
August of that same year. “The April 2008 compliance review disclosed
several noncompliances with the ANSI/EIA-748 guidelines. The contractor
took corrective actions … and the DCMA follow-up review determined that
those actions were adequate.” DCAA participated in the initial
compliance review but not the follow-up review.
Somebody at DCAA didn’t like the way they were treated, so they made an Inspector General Hotline report.
(Note
that DCAA audit guidance encourages auditors to make such referrals
when they encounter “mismanagement, a failure to comply with specific
regulatory requirements or gross negligence in fulfilling his or her
responsibility that result in substantial harm to the Government or
taxpayers, or that frustrate public policy.” See MRD 09-PAS-004(R),
dated March 13, 2009, available at www.dcaa.mil, under “open audit guidance.”)
The DOD IG “substantiated” the allegations. Specifically, the DOD IG found—
The
Earned Value Management Center did not allow sufficient time for DCAA
to meaningfully participate in the April and August 2008 reviews. The
unreasonably short time frames effectively prevented DCAA from
fulfilling its participation responsibilities … The Center established a
2-week time frame to complete a comprehensive review of the
contractor’s system for compliance with all 32 ANSI/EIA-748 guidelines.
As requested, DCAA participated in the review by auditing the
contractor’s compliance with 8 of the accounting and financial related
guidelines. Before receiving the DCAA audit results, DCMA held an exit
conference with the contractor on … the last day of the 2-week period to
advise them of the review results and provide a list of deficiencies.
DCAA issued its audit report 6 weeks later … which reported additional
noncompliances with 2 of the guidelines. The Center should have waited
for the DCAA audit report before holding the exit conference with the
contractor and providing a list of deficiencies. While
the Center did consider an April 2008 draft of the DCAA report, the
Center failed to adequately document its rationale for not upholding the
DCAA findings … the Center should not have established an arbitrary and
inflexible time frame to conduct reviews at all major DoD contractors.
The established time frame should be based on a careful consideration of
the risks and circumstances at each contractor location.
The
Center established a 4-day time frame to complete the follow-up review.
On August 12, 2008, DCAA notified the Center that it could not
participate in the follow-up review because (i) the scope of the review
had been restricted to the specific programs where the deficiencies were
initially identified, (ii) the programs, cost reports, and period of
time subjected to review had been selected and pre-announced to the
contractor, and (iii) DCAA could not complete a follow-up review within
the 4-day time frame established by the Center. Nevertheless, DCAA
offered to perform a follow-up review in a timely manner that would
still allow for incorporation into the final DCMA report. The Center did
not adjust the 4-day requested due date for completing the DCAA
follow-up. Rather than utilize DCAA, the Center used an ex-DCAA auditor
on its staff to follow-up on the DCAA-reported noncompliances.
Let’s
pause for a moment and consider whether the DOD IG might be on to
something. Was it unreasonable, as well as “arbitrary and inflexible”
for DCMA to force DCAA to perform its share of the joint review within 2
weeks. Well, yes. There’s no way DCAA can comply with its existing
audit guidance (both published and unpublished) in a 2-week period.
Either DCAA needs to change the way in which it performs its joint
system reviews or DCMA needs to perform the reviews without the
participation of DCAA.
In fact, we mustered the gumption to recommend
to DCAA Director Fitzgerald that he might want to consider exempting
some of DCAA’s audits from the rigors of GAO-interpreted GAGAS, just to
avoid some of these issues. We boldly recommended that Mr. Fitzgerald—
… consider whether all DCAA audits need to be subject to GAGAS.
Reasonable people will disagree with GAO’s stringent definition of
“independence” under GAGAS, but you can avoid the issue altogether if
you make certain audits subject to GAGAS while others are not. There is precedent for this change: the AICPA has Consulting Standards that differ from Auditing Standards.
Since DCAA performs both financial advisory services and audits, it
would seem to make sense to apportion each type of audit into
GAGAS-compliant and non-GAGAS-compliant groupings.
And, by the way, DCMA really wants DCAA to participate in the process
as an advisor; it wants your audits to offer value-added advice and to
support the acquisition process.
Contractors want to hear from auditors as well; they want to know where
they need to improve and what should be done to fix system
deficiencies.
Your auditors can’t do this if GAO will allege they’ve compromised
‘independence’ whenever this happens—so change the rules of the game to
eliminate the issue altogether.
What else did the DOD IG find? The DOD IG found that DCMA compromised its own independence/ objectivity “by appearance” during the performance of the EVMS review. The DOD IG reported—
First,
the Center notified the contractor well in advance which programs and
related cost reports it selected for review. As a result, the
contractor’s compliance efforts could have focused exclusively on those
pre-selected programs. Second, the Center did not vary the selection of
programs reviewed. DCMA reviewed the same five programs during the April
and August 2008 reviews as it did in a prior December 2006 review.
Therefore, the Government has no reasonable assurance of the
contractor’s compliance on other programs.
The
[DCMA] representatives held joint activities with the contractor on two
separate occasions which could have compromised DCMA’s independence and
objectivity. In January 2007, following a December 2006 DCMA compliance
review, DCMA … representatives participated in a week-long contractor
review to identify root causes of various deficiencies and to develop a
corrective action plan. In December 2007, representatives from DCMA …
attended the contractor’s internal audit of its system in preparation
for the April 2008 DCMA compliance review. DCMA officials charged with
determining system compliance should not participate with the contractor
in developing corrective action plans or performing internal audits.
Participation in such activities may compromise the ability of DCMA to
independently determine system compliance and continued acceptability of
the earned value management system.
Moreover,
the DOD IG asserted that “DCMA should not plan or conduct joint
surveillance reviews with the contractor,” even though it admitted that
“DCMA Instruction ‘Earned Value Management System (EVMS) System-Level
Surveillance,’ January 2008, strongly encourages contractor
participation in planning and conducting DCMA surveillance reviews.”
We
have to disagree with the DOD IG on that one. First, DCMA isn’t
subject to rigid interpretations of “independence” under GAGAS and the
IG shouldn’t hold the agency to such an inapplicable standard—especially
when DCMA’s actions clearly fall within its own agency policy
guidance. Second, contractors and DCMA need
to interact together, in order to identify root causes and appropriate
corrective actions. We wish DOD oversight agencies and their industry
partners did more of that sort of behavior! Finally, the IG report
glosses over the fact that the same EVMS criteria that provide the
standards for an adequate EVMS business system, the ones against which
DCMA and DCAA were reviewing, were developed jointly by both industry and DOD officials, back in the days when such an approach was deemed to be in the public interest.
Talk
about an independence problem! Hey DOD IG—how about you deal with the
historical fact that the “adequacy criteria” used for the reviews that
you would like to subject to GAGAS-controlled independence were developed by the same people being reviewed, in concert with the people doing the reviewing.
There’s a reason that’s not considered to be a real issue—and the
reason is that none of the parties ever intended the oversight process
to be subject to GAGAS—nor should it be. Oops. Missed that one, did
you?
We
aren’t the only ones to believe that the DOD IG missed the mark on this
report. The Director of DCMA, Mr. Charlie Williams, Jr., did not
concur with much of the report either. He told the IG—
- DCMA’s
reviews lose their effectiveness and impact if DCMA’s results are
presented to the contractor long after the review has been completed.
- The
DCMA Director agreed that the DCAA findings of noncompliance were
valid. However, DCMA did not consider the issues systemic. Therefore,
the DCMA Contract Management Office worked with DCAA to correct the
issues as part of the contractor’s Corrective Action Plan.
- DCMA
has established and maintains a cooperative Government-contractor
relationship that does not compromise the independence of their
decisions. A Review for Cause is a focused review of specific elements
of the contractor’s earned value management system in order to confirm
the acceptability of the system. Advance notification to the contractor
is necessary to ensure the contractor can support a review during the
time period, key employees are available for interview, and the data
requested is provided to the review team before the review.
- DCMA
agrees with and is committed to ensuring that the decisions which
result from its surveillance and compliance reviews represent an
independent DCMA decision. DCMA does not agree that the only way to achieve this independence is by isolating the contractor from the review process.
Well,
that was a breath of fresh, reasonable, air. There yet may be hope for
the DOD oversight process. Oh, you want to see the DOD IG report for
yourself? Find it here.
UPDATES: The Good, the Bad, and the Ugly
From time to time we post a piece that updates readers on prior articles. This is one of those times.
The Good
NASA received some criticism
from GAO regarding its satellite programs. GAO reported that nine of
15 large-scale unmanned NASA programs it reviewed had “experienced
significant cost and/or schedule growth from their project baselines.”
In another GAO report, eight DOD satellite
programs were assessed, and the auditors were concerned about potential
capability gaps stemming from misalignment of satellites, ground control
systems, and user terminals.
We
tackled a more in-depth look at one such program—the Advanced Extremely
High Frequency (AEHF) defense communication satellite—here. In that article, we opined as follows—
Like many high-tech developmental programs, the AEHF program has been the victim of Pentagon budget wars.
While the program undoubtedly suffered from many of the pains
associated with trying put a highly secure, classified payload into
space, it also suffered from a lack of firm strategic leadership from
the Pentagon. The
fluctuations in the number of satellites and budgetary uncertainty
clearly impacted the contractors at least as much (if not more) than the
technical challenges.
While it might serve as a good example of out-of-control defense
programs, it might also serve as a good example of the impacts of failed
leadership.
So we’re happy to report some good news
on the AEHF front. On August 15, 2010, a United Launch Alliance Atlas 5
rocket successfully launched the first AEHF satellite into orbit. As this article at Aviation Week reported—
Following
a four-min., 19-sec. burn of the Russian-built RD-180 booster engine
and two burns of the Centaur’s Pratt & Whitney Rocketdyne RL10
engine, the satellite was released at 7:58 a.m. as it flew over the
Indian Ocean.
Over
the next three months, AEHF-1’s orbit will be circularized so that it
flies about 22,300 mi. over the equator at 90 deg. West longitude for
satellite checkout and calibration. It will then be relocated to an
operational orbit, which will be determined based on needs at the time,
officials said. AEHF-1 should be ready to be put into service in early
2011.
The
military says one AEHF spacecraft has more capacity than the entire
five-member Milstar satellite constellation, with faster data rates to
enhance tactical military communications by providing higher-quality
maps, targeting data and live video transmissions.
In
addition to secure, jam-resistant communications for multiple branches
of the U.S. military, AEHF is the first protected satcom to include
partner nations, Air Force Capt. Jonathan Pellum says.
‘It’s a game-changing moment,’ Pellum said during a webcast of the launch.
Congratulations to the United Launch Alliance team!
More Good News—or Is It?
We previously reported
on the competition for the Small Diameter Bomb Increment II (aka
GBU-53/B) development contract in the context of DOD’s return to the use
of fixed-price development contracts. The Air Force was going to
choose the winner from two competing teams: Raytheon and Lockheed
Martin/Boeing. We said at the time—
What
we are left with is the distinct impression that use of a fixed-price
contract type on developmental programs is a mistake, one that will not
lead to good financial results for the ‘winning’ contractor. And the
Pentagon will have yet another program with ‘cost growth’ to explain to
Congress.
Certainly
the Raytheon team had to be considered the underdog, going up as it was
against the team of the two largest defense contractors in the U.S. So
Raytheon had to be elated to be awarded the $451 million contract. As noted in the Defense Industry Daily article (link above)—
Raytheon’s
GBU-53/B seeker features 3 modes of operation: millimeter-wave radar,
uncooled imaging infrared, and semiactive laser. The millimeter wave
radar will operate through any weather, and is used in weapons like the
Hellfire Longbow missile to give them ‘fire and forget’ capability.
Their uncooled imaging infrared (IIR) seeker uses high-resolution
thermal scans to a similar end, and is better against some kinds of
targets like humans. By combining these 2 fire and forget scan modes,
the GBU-53 makes it much more difficult to use countermeasures, or
decoys. By using an uncooled IIR seeker, the bomb lowers its cost and
maintenance requirements. The 3rd guidance mode, semi-active laser, is
standard for a wide range of missiles and rockets, and offers the best
accuracy and assurance. Its flip side is problematic performance in
heavy fog, sandstorms, etc.
So congratulations to Raytheon! (But be careful what you wish for….)
The Bad
We
have reported, several times, on the story of Public Warehousing
Company KSC—now called Agility. We first reported the story here, and subsequently followed the original story with an update. Despite winning more than $8 billion worth of logistics support work from DOD, the company was indicted in late 2009 for “conspiracy
to defraud the United States, committing major fraud against the United
States, making false statements, submitting false claims and wire
fraud.” Subsequently, in April, 2010, the Defense Logistics Agency
(DLA) announced it was “replacing” Agility and awarding a $2.2. billion
follow-on contract to Dubai-based ANHAM FZCO.
So it was interesting to learn via published reports that the DLA had “decided
to extend Agility’s prime vendor contract for six months starting in
September, after the current contract ends.” No details were given, so
we can only speculate as to the cause(s) for the action. For whatever
reason, the DLA seems to have trouble kicking-off its contract with the
successor firm.
Why
is this “bad” news? Well, it’s bad for Agility, who is still facing
serious charges. And it’s bad for ANHAM FZCO, who is losing out on some
quite a bit of revenue. And it’s bad for DLA and the Army, who seem to
have trouble getting their act together. We’re guessing, though, that
it’s good news for the service men and women who depend on Agility and
other logistics support contractors to put food on their tables at chow
time.
The Ugly
Early in 2010 we reported
on complex and rather arcane allegations regarding Boeing’s entitlement
to at least $271 million in payments related to its Evolved Expendable
Launch Vehicle (EELV) program. As we opined at the time—
So as with many government contract cost accounting matters, the truth is both complex and hard to fathom. Will Boeing have to concede $271 million in payments to which it believes it is contractually entitled?
We’ll look forward to the final DCAA audit report(s), and hope that
they ignore any political pressure and focus solely on the facts, which
(apparently) even the DOD IG seems to have gotten wrong.
This
is a great example of how the facts matter, and how easy it is to
allege a problem, and how hard it is to refute an allegation.
Clearly, Boeing’s entitlement to the $271 million depends on its ‘Lot
Accounting’ practices, why the PM&HS costs were not fully absorbed
by prior launch contracts, and how Boeing intended to amortize its
production costs under future programs (and whether it would be
permitted to do so under FAR and CAS parameters).
Finally, nearly eight months later, DCAA’s position was announced
to the media via a nearly unprecedented e-mail statement from Director
Fitzgerald. Director Fitzgerald called on the Defense Contract
Management Agency (DCMA) to notify the United Launch Alliance team (of
which Boeing is one of two team members, along with Lockheed Martin)
that the costs are in non-compliance “with federal accounting standards”
and are “unallowable.” According to the Bloomberg article (link
above)—
Debra
Bingham, a spokeswoman for the Defense Contract Management Agency,
which is reviewing the audit recommendations, said that the agency’s
Boeing manager in Huntington Beach, California, plans to render a final
decision in November.
The official will review the audit agency’s analysis and recommendation, as well as Boeing’s rebuttal, she said.
We will be surprised if this issue isn’t litigated.
|
DFARS Class Deviation Offers Ray of Hope for Defense Contractors
One
of the biggest gripes about the results of DCAA’s current truculent
attitude is the withdrawal of “direct billing authority” for most—if not
all—defense contractors.
For
those who don’t know, the authority to submit requests for provisional
payment (via Public Voucher) directly to the Defense Financial
Accounting Service (DFAS) payment office—without the delay caused by
DCAA audit of said Public Voucher—was a boon to contractors,
accelerating cash flow by several days. But the authority to do so was
entirely in the hands of DCAA. As the DFARS said—
242.803 Disallowing costs after incurrence.
*****
(b) Auditor receipt of voucher.
(i) The contract auditor is the authorized representative of the contracting officer for—
(A) Receiving vouchers from contractors;
(B)
Approving interim vouchers for provisional payment (this includes
approving the fee portion of vouchers in accordance with the contract
schedule and administrative contracting officer instructions) and
sending them to the disbursing office;
(C)
Authorizing direct submission of interim vouchers for provisional
payment to the disbursing office for contractors with approved billing
systems;
*****
The June 2010 edition of the DCAA Contract Audit Manual (CAM) says (at 6-1007)—
It
is Agency policy to obtain the maximum contractor participation in the
direct submission (direct billing) of interim vouchers program. FAOs
should actively work with contractors to eliminate billing system
deficiencies and encourage contractor participation in the direct
billing program. The direct billing program will reduce the
administrative effort (both Government and contractor) related to
interim public vouchers processing for contractors with adequate billing
systems.
Regardless
of the foregoing, in April, 2009, DCAA issued audit guidance (via MRD
09-PPD-0006(R)) that contained the following direction to auditors—
FAOs cognizant of major contractors with billing systems that have been
approved for direct billing should ensure that those systems have not
been significantly modified or the contractor has not implemented a new
system since issuance of the latest adequate audit opinion. In addition,
the accounting system and billing system may be so interconnected that a
major change to the accounting system will impact Government billings.
If a billing system or accounting system that affects the billing system
has been significantly modified or a new system has been implemented,
the following steps should be taken:
• Auditors should immediately provide verbal and written
notification to the appropriate contractor level (e.g., the Chief
Financial Officer) that their authorization to participate in the Direct
Bill Program will be rescinded in 30 days.
• The
FAO should ensure that it has a documented sampling plan and procedures
for reviewing a sufficient number of public vouchers as part of its
review plan (CAM 6-1008).
• The
FAO should ensure that an appropriate number of FAO personnel are
authorized to approve interim vouchers in Wide Area Workflow (WAWF).
• Auditors should immediately commence a billing system audit.
• Upon
completion of the billing system audit of the new or modified system,
the contractor may be authorized to direct bill if the auditor
determines that the new or revised system is adequate.
The
foregoing audit guidance not only conflated accounting system adequacy
with billing system adequacy, with respect to permitting contractors to
utilize the direct billing program, it also acted to undercut the policy
that directed DCAA to “encourage” contractors to participate in the
program. As a result of the revised DCAA audit guidance, many
contractors had their participation in the program ended, impacting
their cash flow. In addition, DCAA has had to redirect resources from
audits of high-risk areas to audits of interim vouchers—which are low
risk because of their provisional nature. (I.e., costs paid to
contractors are subject to future adjustment based on audit findings.)
To
be clear, at a time when DCAA has testified that its current funding
and headcount only permit it to address 65 percent of required audits,
it has devoted a significant amount of its limited resources to the very
low value activity of auditing contractor interim vouchers.
So this DFARS Class Deviation,
issued on August 17, 2010, seemed to offer both DCAA and defense
contractors a ray of hope in the dark cloud of the current audit
environment. Its words may be short and simple, but we are encouraged
that they portend something profound: a shift in the DOD oversight
environment.
The class deviation said—
Effective
immediately, this class deviation deletes the words “for contractors
with approved billing systems” from DFARS 242.803(b)(i)(C). This
deviation eases the requirements, especially for small businesses, to
qualify for direct billing, thereby reducing DoD administration and
conserving resources in processing low risk payment vouchers.
We
can only speculate on the effect of the class deviation. But since it
eliminates the requirement to have an “approved” billing system in order
to participate in the program, we believe that it will act to undercut
the unfortunate DCAA audit guidance quoted above, and may lead to
contractors regaining their ability to participate in the direct billing
program.
It
may lead to improved contractor cash flow, and permit DCAA to return
badly needed audit resources to more value-added and high-risk areas.
It is good news—about the best news we’ve heard in some time.
SECDEF Gates Gets Serious About DOD “Efficiency”
Every
time we sit down to write about the Pentagon’s latest “efficiency”
initiative, more content comes in and we have to start over again.
Well, no more. We’re drawing the line here and anything that happens after today is fodder for a future article.
To
level-set, between “affordability” and “efficiency” this is becoming a
cornucopia of news-worthy content. If SECDEF Gates has his way (and
early indications are that he will), then these initiatives are going to
shape the Defense acquisition environment for years to come … or at
least until the next Administration charts a different course. If you
need to get up to speed, we recommend this article as a good starting place.
Now that you’re ready to go, let’s get started, shall we?
McAleese Points
Early
on, Jim McAleese published some very cogent points in his mid-July 2010
presentation to NCMA’s World Congress, based on his analysis of
SECDEF’s Eisenhower Library speech and initial DOD discussions. He said—
- Secretary
Gates’ Eisenhower Speech primarily targeted both excess Flag Officer
& Headquarters costs within ‘Military Personnel’ Account, plus
excessive recent growth within separate ‘Operations & Maintenance’
Accounts, to generate 2%-3% real growth per year for COIN-intensive
Force Structure, plus Modernization Accounts.
- Secretary Gates did not formally-target large cost savings within RDT&E and Procurement Accounts.
To the contrary, those Modernization Accounts were intended to be the
beneficiary from cuts to manpower-intensive Headquarters, plus O&M.
Nearly
a month later, Sandra Erwin (writing in National Defense magazine)
echoed Jim’s prescient points as she discussed the Pentagon’s “winners and losers”. She wrote—
Winners: Troops in uniform, ship programs, weapons systems that are needed to fight current and future wars.
Losers: Bloated defense and intelligence
agencies, redundant bureaucracies, four-star generals and admirals
guilty of ‘brass creep,’’ report writers, white-collar contractors.
After
SECDEF Gates’ August 9, 2010 press conference (more on that in a bit),
Jim “was fortunate enough” to have been invited to participate in a
“small group meeting” with the Secretary of Defense. Following are some
of the discussion points, pulled from Jim’s personal notes (and thus
cannot be officially attributed to SECDEF Gates). Astute readers may
notice certain points that echo what we’ve been saying and/or
forecasting on this blog for the past two years.
Throughout
the meeting, the Secretary's relentless focus on high Headquarter
costs; excessive O&M Growth; and excess Program Requirements,
genuinely-resonated. There is strong probability that Secretary's personal outreach will result in: (1) increased White House reluctance to target immediate DoD Funding; (2) increased public support; and (3) increased Investment Community support.
Secretary Gates is personally-targeting ‘Fat’; ‘Underperformance’; ‘Poor Business Practices’; and is particularly-sensitive to Congressional & White House perception of poor Acquisition Program Management.
OSD
will propose significant Defense Health Program modifications in 2012
Budget, given doubling, and expected tripling, of DoD's Health Care
costs. (Paraphrase: ‘The
good news is there is increasing recognition within Congress, that
Defense Health Care costs are eating us alive.’)
… the Secretary was adamant, given the COIN strain on current Force Structure, plus need for continued Modernization. (Paraphrase:
‘I strongly believe that today's world of terrorist threats, cyber
threats, failing states and militarizing peer competitors, is just as
dangerous, if not more dangerous, than traditional conventional
scenarios. I must make my best case to the President. I am not currently prepared to concede any reduction in current topline DoD Base Funding.’)
As
a practical matter, Secretary Gates' targeting of JFCOM; Business
Transformation Agency; and Network & Information Integration (NII)
will establish a de facto mandate for each Service to eliminate 1-3
Headquarters or lower-value Commands.
Secretary
Gates refused to be drawn into discussion of potential changes to
specific Modernization Programs, ranging from Army Requirements in GCV,
to USMC EFV. However, Secretary Gates made several positive references to specific actions being taken by USD(AT&L) Carter, and specifically-authorized USD(AT&L) to continue growth of Defense Acquisition Workforce.
Previously,
Secretary Gates withheld public announcement of 2010 & 2011 Budget
decisions until formal release of Budget in February. This
preemptive targeting of excess Headquarters Overhead; lower-value
O&M; and excess Program Requirements, on the eve of FY2011, is
clearly anticipated to achieve two purposes. First,
is to generate immediate savings in 2011, presumably with or without
2011 Defense Authorization Act, and under Continuing Resolution in
absence of 2011 Defense Appropriations Act. Second,
Secretary Gates has clearly undertaken a genuine ‘earnest negotiations’
approach with the Services, to provide incentives for them to make
their own internal cuts, to redirect Savings from ‘Generating Forces’
into Combat Operating Forces. This
increased Service discretion, plus immediate public transparency, is
likely to significantly-increase probability of success of Secretary's
‘Efficiency’ Initiative.
That’s
quite a bit of “inside scoop” that most readers won’t see in the
mainstream media. Why don’t you read those points again? In fact, you
should Google McAleese & Associates and go check out Jim’s
consultancy—because he is clearly an insider. (Our thanks to Jim for
keeping us “in the loop”.)
Jim was interviewed in early August by Federal News Radio – and here’s a link to his interview.
Lexington Institute Points
Even before the Pentagon undertook its “efficiency” and “affordability” initiatives, Dr. Loren Thompson was concerned about budgetary pressures on the Pentagon, including “insourcing” efforts and the costs of government personnel. Here’s a link to his article on “the perils of insourcing” and here’s a link to another, similar article where he posits that “Pentagon insourcing undercuts search for savings.” In the latter article, published in mid-June, Dr. Thompson wrote—
Against
this backdrop, its seems obvious that the Obama Administration will
have to revisit plans announced last year to ‘insource’ tens of
thousands of defense jobs previously contracted out to the private
sector. The administration argued that civil servants could carry out
many of the contracted tasks more cost-effectively and that the
capabilities of the civil service needed to be bolstered, especially
for roles deemed to be ‘inherently governmental.’ However, undertaking
such conversions requires the government to make long-term financial
commitments to federal workers in place of short-term contracts with
companies -- commitments that may extend several decades into the
future.
A case
in point is the plan to expand the Pentagon acquisition corps by adding
10,000 new government workers and converting an additional 10,000
contractor positions to civil-service jobs. It is hard to see why such a
move is necessary when policymakers are cutting weapons programs left
and right, and the joint force is preparing to reduce the pace of
overseas contingency operations. This plan will greatly increase the
fixed overhead costs of the defense department at a time when Secretary
Gates says those costs need to come down. Relying on contractors has
advantages and disadvantages, but at least when their services are no
longer needed it is easy to get rid of them and save some money.
Dr. Thompson has written several other relevant articles, which can be found at this link.
Defense-Aerospace.com reprinted
one of the Lexington Institute’s commentaries with the headline,
“Defense Business Board Warns DoD is Heading for Chapter 11.” The
commentary made some good points, as follows—
The
DBB’s characterization of the situation all but likens DoD to Greece.
Military retirement requires that the government pay veterans and their
families for sixty years based on only twenty years of service. Not only
do veterans receive generous, indexed pensions but also lifetime
medical care. Almost 25 percent of active duty military personnel serve
in commercial activities. Despite fighting two wars, some 40 percent of
those in uniform have never deployed anywhere overseas.
The size of headquarters and staffs is increasing
relative to the number of warfighters as are their salaries. Like
Greece, modern business practices have not been applied to major
overhead areas so as to improve efficiencies and reduce costs. Congress
has made the problem even worse by increasing the generosity of benefits
packages and expanding eligibility.
The DBB proposes a set of modest corrections to
what is a massive problem. … Much more is needed. … We could not only
cut the number of overseas bases -- like the automobile companies
canceling dealer franchises -- but even eliminate low payoff
territories. Finally, we could seek a partial merger of capabilities or
functions with allied nations. Ultimately, we could even agree to a new
division of geographic responsibilities in the world. For example, the
EU takes over all responsibilities for Europe short of major war and we
assume the burden in East Asia.
Boards and panels with ties to the organizations
they are assessing often have a difficult time telling their ‘employers’
the unvarnished truth. The DBB has done an excellent job of telling DoD
it must reform or go out of business.
As
we previously told readers, the entire DBB “pre-decisional” briefing is
available on our website under “knowledge resources”—but only for our
members.
Obama Announces Support
On August 9, 2010, as SECDEF Gates was holding his press conference (we’re getting to it), the Pentagon issued a press release touting President Obama’s support for SECDEF Gates’ efficiency initiative. President Obama’s statement said—
Today’s
announcement by Secretary Gates is another step forward in the reform
efforts he has undertaken to reduce excess overhead costs, cut waste,
and reform the way the Pentagon does business. The funds saved will help
us sustain the current force structure and make needed investments in
modernization in a fiscally responsible way. Change is never easy, and I
applaud Secretary Gates and his team for undertaking this critical
effort to support our men and women in uniform and strengthen our
national security. These reforms will ensure that our nation is safer,
stronger, and more fiscally responsible.
SECDEF Gate’s 8/09/2010 Press Conference (Finally)
The
press conference seemed designed to announce that this was not just
another in a long line of failed reform efforts, that this time the
change was for real.
In this article, Gates discussed the need for a cultural change. The article announced—
‘My
hope and expectation is that the efforts we have launched will lead to
the kind of cultural changes that over time become a part of the
department's DNA and institutional memory.’ … The only way the
department can make such a persuasive case is if it tackles poor
acquisition practices, poor business practices, excessive reliance on
contractors, waste and abuse, Gates said. ‘We need to be able to show
that we are actually doing something about these programs in a
systematic way that affects every part of the department,’ he said. ‘I
think under those circumstances, we have a pretty good opportunity to
make our case.’
Another Pentagon press release
“article” discussed the actual cuts Gates had already made, and would
continue to make, to DOD expenditures. Here’s some verbiage from the
announcement—
Today,
Secretary of Defense Robert M. Gates announced a series of initiatives
designed to reduce overhead, duplication, and excess in the Department
of Defense, and, over time, instill a culture of savings and restraint
in America’s defense institutions.
These initiatives represent the latest of the
secretary’s efforts to re-balance the priorities of the department and
reform the way the Pentagon does business.
As part of the fiscal 2010 budget, the department
curtailed or cancelled nearly 20 troubled or excess programs - programs
that if pursued to completion would have cost more than $300 billion.
Additional program savings have been recommended in the defense budget
request submitted this year.
In May, the secretary called on the department to
take a hard, unsparing look at how it is staffed, organized, and
operated. The purpose was not to reduce the department’s top line budget
- which he considers the minimum needed to sustain a military at war
and prepare for future threats - but to significantly reduce its excess overhead costs and apply the savings to force structure and modernization. …
Earlier
this summer, the department began a comprehensive effort along several
tracks to gain efficiencies, reduce costs, and improve the effectiveness
of the DoD enterprise, the results of which will be rolled out as part
of the fiscal 2012 budget request. The secretary believes the department
can take the following actions immediately rather than waiting for the
normal budgeting and programming cycle.
-- The secretary directed a reduction of funding
for support contractors by 10 percent a year for each of the next three
years. The goal is to reduce the number of contractors that are
performing functions that are inherently governmental.
-- To address the personnel growth in the Office
of the Secretary of Defense (OSD), the defense agencies, and Combatant
Command (COCOM) staffs, the secretary of defense has directed a freeze
in the number of OSD, defense agencies and COMCOM billets at the fiscal
2010 levels for next three years.
* With regard to in-sourcing, no more full-time
OSD positions will be created after fiscal 2010 to replace contractors
except for critical needs.
* These measures are part of a comprehensive
re-base lining of OSD, defense agency and COCOM staffing and
organization. Starting essentially from scratch, we will conduct a clean
sheet review to determine what our people should be doing, where, and
at what level of rank in light of this department’s most urgent
priorities by Nov. 1.
* As a result of the re-base lining, there will be
a minimum reduction of 50 percent of total growth in billets since
2000. This reduction in civilian senior executive and general and flag
officer billets shall be achieved over two years.
-- The secretary directed a freeze at fiscal 2010
levels on the number of civilian senior executives, general and flag
officer, and PAS positions. By Nov. 1, we will also assess the number
and locations of senior positions as well as the overhead and
accoutrements that go with them.
-- To achieve greater benefits in cost and
efficiency through “economies of scale,” the secretary of defense
directed the consolidation of our information technology infrastructure
facilities. This action will allow the increased use by the department
of common functions and improve our ability to defend defense networks
against growing cyber threats.
-- To combat the enormous amounts of taskings for
reports and studies both from Congress and from OSD, the secretary of
defense directed starting now:
* Freeze in the number of all DoD-required oversight reports;
* Immediate cut in the dollars allocated to advisory studies by 25 percent;
* Track and publish the actual cost of preparation
of each reports and studies prepared by DoD in the front of each
document; and
* A comprehensive review of all oversight reports
and use the results to reduce the volume generated internally while
engaging the Congress on ways to meet their needs while working together
to reduce the number of reports by Oct. 1.
-- The Office of the Secretary of Defense funds 65
boards and commissions at an annual cost of $75 million. Therefore, the
secretary of defense directed a review of all outside boards and
commissions, for the purpose of:
* Eliminating those no longer needed;
* Focusing the efforts of those that continue to be relevant;
* Cutting overall funding available for studies tasked by remaining boards and commissions by 25 percent in fiscal 2011.
-- The secretary directed a zero-based review of
all of the department’s intelligence missions, organizations,
relationships, and contracts with the goal to eliminate needless
duplication to be completed by Nov. 1. In addition, the secretary of
defense directed an immediate 10 percent reduction in funding for
advisory and assistance contractors in this area and a freeze of the
number of senior executive positions in defense intelligence
organizations.
-- In addition to flattening and trimming
structures, the secretary of defense over the next six to 12 months will
eliminate two organizations and recommend the closure of another that
perform duplicative functions and/or outlived their original purpose.
* Elimination of the assistant secretary of
defense networks integration and information, and J6 function, which
deal with enterprise information technology and hardware issues. Their
essential missions will be performed by other organizations. A
re-fashioned Defense Information Systems Agency will perform the
department’s CIO function.
* Elimination of the Business Transformation
Agency (BTA), which performs day-to-day oversight of individual
acquisition programs, a function largely performed by a number of other
organizations. BTA’s essential responsibilities will be shifted to the
deputy chief management officer.
* Recommend the closure of Joint Forces Command
(JFCOM) which was established to infuse jointness into everything the
military does, especially the training and providing of forces for
operations. Over time, it has created an unneeded extra layer and step
in the force management process. JFCOM’s force management and sourcing
functions will be assigned to the Joint Staff while the remaining
responsibilities will be evaluated and those determined to be essential
will be re-assigned to other entities.
* As a result of closing or consolidating these
three organizations, a number of civilian employees and contractors will
no longer work in the department.
-- To see these initiatives through from
announcement to action to measurable results over the next 90 to 120
days, the secretary has appointed a task force chaired by his chief of
staff. This task force will develop action plans and oversee their
implementation and eventual transition to the appropriate department
leadership.
The initiatives announced today represent the last of a four-track effort begun earlier this summer:
-- In June, the military services were assigned
the task of finding more than $100 billion in overhead savings over the
next five years. The services will be able to keep any of the savings
they generate to invest in higher priority warfighting needs.
-- At the same time the department began seeking
ideas, suggestions and proposals from other than official channels,
including outside experts, think tanks and DoD employees who are being
asked to solicit ideas directly via the Internet.
-- The secretary directed a comprehensive
assessment of every aspect of how this department is organized and
operated to inform the fiscal 2012 budget request.
“Instilling habits of restraint, of subtracting as
well as adding, of elevating affordability on a par with desirability,
is a project of years in the making,” the secretary concluded in his
statement today. “This will reflect itself in ways large and small,
substantive and symbolic. My hope and expectation is that the efforts we
have launched will lead to the kind of cultural changes that over time
become part of this department’s DNA and institutional memory.”
(Apologies
for the formatting of the foregoing cut’n’paste. The “emdash” indicates
a high-level bullet point, while the asterisk indicates a lower-level
point.) Here is a link to the transcript of his press conference.
Another
DOD press release described the press conference as “putting meat on
the bones of his initiative to reform the way the Pentagon does business
and to eliminate duplicative, unnecessary overhead costs.”
Reactions
Predictably, critics were quick to attack the initiative. Our friends at the Lexington Institute said—
Using
the Secretary’s own figures, cutting reports, boards and defense
organizations will save, at best, $1 billion. This piddling amount will
only be realized if everyone in the named organizations were fired and
the gates of the facilities padlocked. But this will not be the case, as
the Secretary admitted. Many of the functions of those star-crossed
organizations will be transferred to other parts of DoD, requiring
people to perform them. So, at best the savings will only be a small
fraction of their total budgets.
The
only way to save real money is to close offices, stop performing their
functions and show the people employed there the door. One of the
problems with past efforts to save money through base closure and
realignment is that the functions performed on the facilities being
closed were moved to other facilities along with the personnel slots to
perform them. People either moved to the new facility and organization
or new people were hired. Because of the increase in people and
workload, the bases receiving these functions built additional
facilities. Just look at all the building going on in places like Fort
Belvoir, Virginia, and Huntsville, Alabama, both of which are
experiencing major influxes of people from facilities being closed as a
result of the last round of base closures. So, in the end, very little
will be saved.
We note that Gates’ decision to curtail “insourcing” should lead to some real savings. Why? Check out this article.
In another piece, the Lexington Institute wrote that the efficiency initiative faced “insurmountable obstacles” because of lack of Congressional support.
Indeed, almost immediately members of Congress sought to keep Gates from cutting any part of the DOD bureaucracy—at least in their districts. This Washington Post
article reports that at least one Virginia Senator (who’s a former
Secretary of the Navy) thinks that Gates cannot actually reduce his
headcount without going through the arduous base realignment and closure
(BRAC) process. The Post article quotes Senator Webb as saying, "a
strong legal case can be made that the base-closure statutes are
applicable because this involves a reduction of more than 1,000 civilian
personnel." That same article quotes Virginia Congressman Robert Scott
(D) as saying, “Even if it's not technically the letter of the law, the
spirit of the law is clearly implicated" by the secretary's action.
According to the article—
Scott,
Webb and other members of the Virginia congressional delegation -- Sen.
Mark Warner (D) and Reps. Glenn Nye (D), J. Randy Forbes (R) and Rob
Wittman (R) -- sent a letter to Gates on Friday expressing their ‘deep
disappointment and concern’ over his plan, saying it would result in
‘the dismissal of thousands of highly skilled civilians and defense
contractors.’
The dance is only beginning. Stay tuned for the rest of the show.
|
